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Smackdown! Round Three - The Bankruptcy Court vs. FERC

The jurisdictional battle over authorizing rejection of wholesale power contracts continues.

Fortnightly Magazine - April 2006

the bankruptcy court for the Southern District of New York. As part of that bankruptcy filing, Calpine sought and obtained from the bankruptcy court a temporary restraining order that prohibited FERC from taking any action to require continued performance of its power contracts. Calpine then proceeded to seek bankruptcy court authorization to reject a number of power contracts including those that impacted the California parties.

On Jan. 3, 2006, in rapid response to developing events, FERC issued its Order Providing Interim Guidance, in which it referred extensively to the 5th Circuit Mirant decision and concluded:

Although the commission reached a different result in NRG, a federal Court of Appeals has now spoken to the issue addressed in NRG and we intend to follow that authority. Under that authority, the commission is precluded from taking action under the FPA that impacts a debtor’s ability to reject an executory contract.

While thus recognizing that the bankruptcy court would have jurisdiction over power contract rejection, FERC further concluded in its Jan. 3, 2006, order that the 5th Circuit decision in Mirant required that a bankruptcy court could not base rejection of a power contract on the business judgment standard, but must apply an enhanced standard that took into account the public interest. The FERC order thus goes on to establish procedures for seeking comments from parties in interest as to whether rejection of the Calpine contracts would impact the public interest.

FERC made clear its purpose in seeking such comments as follows:

By seeking comment on this issue, the commission does not intend to supplant the role of the Bankruptcy Court in considering whether to reject the Calpine II contract. Rather, the purpose of our inquiry is to develop a record on which the commission can, as necessary, make a determination, and then inform the Bankruptcy Court, of its views regarding potential rejection of the Calpine II contract by the Bankruptcy Court.

Meanwhile, the California parties, taking a page from the PEPCO playbook in round two, sought and obtained an order withdrawing the reference over the contract rejection case from the bankruptcy court to the United States District Court for the Southern District of New York. On Jan. 27, 2006, the District Court issued its order holding that FERC had exclusive jurisdiction over Calpine power-contract rejection and that neither the Bankruptcy Court nor the District Court had further jurisdiction to consider the matter. In its order, the District Court expressly noted that it “is aware that its holding here is in obvious conflict with the holding of the 5th Circuit in Mirant and the conclusions of the FERC [Jan. 3, 2006] order.”

The District Court went on to observe that 5th Circuit precedent was not binding on courts in the 2nd Circuit and that factual distinctions between the Calpine contracts and the Mirant contracts were sufficient to justify a different result in any event. With regard to the Jan. 3, 2006, FERC order that had adopted the 5th Circuit Mirant ruling, the District Court held that “FERC does not have the authority to determine the