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Appeals court rules FERC has limited say over power contracts in bankruptcy case

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Appeals court rules FERC has limited say over power contracts in bankruptcy case

A federal appeals court has ruled that the Federal Energy Regulatory Commission has a say, albeit a limited one, on whether FirstEnergy Solutions Corp., or FES, may reject certain wholesale power contracts as part of the company's bankruptcy proceeding.

The question is important not only for the FES reorganization effort but also in a similar case being decided by the U.S. Court of Appeals for the 9th Circuit involving the reorganization of bankrupt PG&E Corp.

On Dec. 12, the U.S. Court of Appeals for the 6th Circuit determined that FERC and the bankruptcy court have concurrent jurisdiction, and that the bankruptcy court overseeing FES' reorganization exceeded its authority by enjoining FERC "from 'initiating or continuing any proceeding' or 'interfer[ing] with [its] exclusive jurisdiction.'"

As part of its Chapter 11 bankruptcy proceeding, FES in March 2018 sought to prevent FERC from interfering with its plan to reject certain electricity purchase contracts previously approved by the agency. Some of the contracts at issue involved the purchase of power, capacity and ancillary services from wind- and solar-powered generating facilities, while others involved multi-party power purchase agreements.

In total, the contracts would have cost FES more than $1.0 billion over their remaining terms. And the company argued that it had no use for the power, related renewable energy credits or capacity because it was leaving, or trying to leave, the retail business entirely. It further insisted that the contract counterparties could easily sell their electricity to other wholesale purchasers or into the PJM Interconnection's wholesale markets.

Over the objections of three counterparties to those contracts — Ohio Valley Electric Corp., Duke Energy Corp. and Maryland Solar Holdings Inc. — and the Ohio Consumers Counsel, the bankruptcy court in May 2018 decided that it had exclusive and unlimited jurisdiction over the matter and enjoined FERC from taking any action related to the contracts.

The bankruptcy court further determined that FES could breach the contracts because they were too burdensome financially, leaving the counterparties as unsecured creditors to the bankruptcy estate. FERC and each of the opponents then appealed directly to the 6th Circuit.

The 6th Circuit's opinion

The court first addressed the rather technical legal question of whether the contracts at issue are "ordinary contracts" susceptible to rejection by the bankruptcy court instead of "regulations" subject to FERC's exclusive jurisdiction.

Citing the "public necessity of available and functional bankruptcy relief," the 6th Circuit found that need is generally superior to FERC's need to have exclusive authority to regulate energy contracts and markets. Therefore, "bankruptcy reasonably serves as an 'overriding necessity' to permit such contracts to be treated as ordinary contracts," wrote Judge Alice Batchelder, who penned the court's opinion.

However, the 6th Circuit further determined that the bankruptcy court's jurisdiction is not exclusive. The appeals court ruled that given the public interest in both "necessities," FERC and the bankruptcy court have concurrent jurisdiction. But it further ruled that the bankruptcy court's jurisdiction was "primary or superior to FERC's position." Thus the 6th Circuit said the bankruptcy court can decide whether FES can reject the contracts and FERC cannot do anything to prevent the abrogation of those contracts.

That said, the 6th Circuit said the bankruptcy court went too far by enjoining FERC "from doing anything and everything — from entering any orders or even holding its own hearing." Rather, given FERC's Federal Power Act responsibilities, Batchelder wrote that the bankruptcy court "may not enjoin FERC from risking its own jurisdictional decision, conducting its (otherwise regulatory mandated) business, or issuing orders that do not interfere with the bankruptcy court."

Thus, Batchelder explained that FERC should be allowed to investigate or hold a hearing on whether the rejection of the contracts would be in the public interest, which "would have been appropriate and might have been valuable or beneficial to the ultimate determination."

In conclusion, Batchelder said when a Chapter 11 debtor asks a bankruptcy court to allow it to reject a filed energy contract that is otherwise governed by FERC, "the bankruptcy court must consider the public interest and ... it must invite FERC to participate and provide an opinion in accordance with the ordinary FPA approach ... within a reasonable time."

The 6th Circuit therefore reversed and remanded in part the judgment of the bankruptcy court.

Partial Dissent

In a partial dissent, Judge Richard Allen Griffin said that the majority used a "flawed understanding of how filed rates operate under the FPA" in finding that FERC does not have exclusive jurisdiction to decide whether to modify or abrogate a filed rate.

Griffin insisted that the U.S. Supreme Court has made clear that a filed rate is not the same as a contract for the sale of power, yet the majority "brushes this precedent aside and conflates the filed rate with the private contract."

"This holding conflicts with Congress's decision to deny federal-court jurisdiction over the abrogation or modification of a filed rate," Griffin asserted. He went on to say that, "No one may change the filed rate or engage in commerce at anything other than the filed rate without first making a filing with FERC."

Under this so-called "filed rate doctrine," Griffin continued, the Supreme Court has made clear that when FERC enforces a regulated entity's obligations under a filed rate, it acts "under statutory authority" and not "under the authority of private contract terms." Moreover, he noted that both the 1st Circuit and 8th Circuit have stated that once a rate has been filed with FERC, it "is to be treated as though it were a statute," and other circuits have recognized the same.

To Griffin, case law clearly indicated that while a bankruptcy court has sole jurisdiction to decide whether to grant the rejection of the power purchase contracts, "the decision of whether to abrogate or modify the filed rates lies solely with FERC."

"A filed rate either has the independent force of law or it doesn't — and the Supreme Court has told us in no uncertain terms that it does," Griffin concluded. And despite the majority's conclusion to the contrary, the judge said bankruptcy law is neither special nor different enough to justify a bankruptcy court invading FERC's exclusive jurisdiction over wholesale power sales.

Judge Bernice Donald joined Batchelder in the majority opinion. FERC v. FirstEnergy Solutions (No. 18-3787, et al.)