January 28, 2019

FERC Asserts Its Authority to Review Rejection of Wholesale Power Agreements Days Before PG&E Files Bankruptcy

Holland & Knight Energy and Natural Resources Blog
Robert J. Labate

On Jan. 25, 2019 – just days before Pacific Gas and Electric (PG&E) proposes to file its bankruptcy case – the Federal Energy Regulatory Commission (FERC) issued an order asserting its concurrent authority to approve proposed rejection of wholesale power purchase agreements under the Bankruptcy Code. The order, issued in NextEra Energy, Inc. v. Pacific Gas and Electric Company, 166 FERC ¶ 61,049 (Docket No. EL 19-35-000), concludes that FERC and the bankruptcy courts have concurrent jurisdiction to address the disposition of wholesale power contracts that a bankruptcy debtor, like PG&E, seek to reject. The issue is significant, as PG&E is expected to file bankruptcy on or about Jan. 29, 2019. and, in that bankruptcy, is likely to seek court approval for rejecting above-market wholesale power agreements. The order also sets up the potential for regulators of PG&E, including the FERC and California Public Utilities Commission (CPUC), to assert concurrent jurisdiction to approve power contracts PG&E may seek to reject or retain as part of its bankruptcy reorganization plan.    

The FERC order resulted from a petition for declaratory judgment filed by NextEra Energy Partners L.P. (NextEra)  requesting FERC to find that, in bankruptcy, PG&E may not "abrogate, amend, or reject" wholesale power purchase agreements without first obtaining approval from FERC. NextEra's petition was based on FERC's exclusive jurisdiction over the rates, terms and conditions in a wholesale electricity contract. 

PG&E responded that granting NextEra's petition would violate both the Federal Power Act (FPA) and the Bankruptcy Code. First, PG&E argued, NextEra's petition was speculative in advance of a PG&E bankruptcy and exceeded FERC jurisdiction which applies to the sale, but not the purchase, of power. Thus, PG&E argued, FERC cannot order a buyer to continue to purchase power.

Second, citing the Fifth Circuit opinion in In the Matter of Mirant Corp., 378 F.3d 511 (5th Cir. 2004), PG&E asserted that rejection of a contract in bankruptcy is simply a breach of contract and that, pursuant to Mirant, a debtor may reject wholesale power contracts without FERC approval, and address the contractual remedies set forth in such contracts. Third, PG&E claimed that every NextEra contract at issue either expressly disclaims Mobile-Sierra protection – which gives FERC a role in ensuring that contract rejection is consistent with the public interest -- or includes a waiver of FERC modification of the power agreements at issue. Finally, PG&E alleged that exercise of FERC jurisdiction would be inconsistent with FERC's standards for exercising its authority because: (1) the dispute does not require FERC's special expertise; (2) FERC involvement would create regulatory uncertainty; and (3) the dispute was "unimportant" to FERC's regulatory responsibilities. 

After a review of cases concerning FERC's concurrent jurisdiction in Bankruptcy rejection of contracts, FERC concluded that rejection of a FERC-jurisdictional contract alters the essential terms and conditions of such a power contract. The terms and conditions of such contracts were previously approved by the FERC. Thus, based on the concurrent jurisdiction of FERC and Bankruptcy Courts, a party to a FERC-jurisdiction wholesale power agreement "must obtain approval from both the Commission and the bankruptcy court to modify the filed-rate and reject the contract, respectively." As to PG&E's argument that the Mobile-Sierra doctrine does not apply to power purchase agreements with NextEra, FERC concluded that its order explained FERC's position regarding concurrent jurisdiction with the bankruptcy courts and that it was not reviewing the specific agreements between NextEra and PG&E.

The FERC order is likely to be challenged soon after PG&E files bankruptcy, as PG&E is expected to seek an injunction against FERC review of bankruptcy court rejection orders. Such jurisdictional issues between the FERC and the court, and the CPUC and the court, have the potential to be litigated in the appellate courts, which will undoubtedly lead to a protracted bankruptcy for PG&E.

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