In February, we highlighted the ongoing showdown between the Federal Energy Regulatory Commission (“FERC“) and bankruptcy courts regarding jurisdiction over the rejection of power purchase agreements (“PPAs“). Since then, there have been some notable rulings that provide further clarity on the subject.
In March, the Sixth Circuit Court of Appeals solidified its ruling that bankruptcy courts have the final word over whether utilities in chapter 11 can reject PPAs by denying requests for en banc review of its earlier decision.1 Thus, bankruptcy courts in the Sixth Circuit will continue to have primary, albeit not exclusive, jurisdiction to decide whether debtors may reject PPAs—as long as they consider the public interest, balance the equities, and allow FERC to weigh in on the issue.2
More recently, a judge of the United States Bankruptcy Court for the Southern District of Texas seemed to reaffirm that the bankruptcy court’s jurisdiction is not exclusive. In June, Chesapeake Energy Corporation, an oil and gas exploration company, filed for chapter 11 relief in the Southern District of Texas.3 The debtors immediately sought a declaratory judgment against FERC that the bankruptcy court had exclusive jurisdiction over the debtors’ right to reject certain natural gas transportation service agreements.4
In response to the adversary complaint, FERC agreed not to issue any ruling requiring the debtors to obtain its approval to reject service agreements during the pendency of the bankruptcy proceedings without obtaining relief from the automatic stay,5 but balked at the notion that bankruptcy courts should have the lone voice on the subject. Specifically, FERC took issue with language from a July Order, agreed to by the contract-counterparties, authorizing the rejection of service agreements that stated, “[t]he [Bankruptcy] Court retains exclusive jurisdiction with respect to all matters arising from or related to the implementation, interpretation, and enforcement of this Order.”6 FERC filed a motion for reconsideration, relying on the Fifth Circuit’s decision in In re Mirant Corp.7 for its assertion that “[t]he Court made a fundamental error in law in purporting to deprive other tribunals of concurrent jurisdiction.”8
Bankruptcy Judge David R. Jones found that FERC’s motion had “some merit” and amended the Order to limit its scope to “the maximum extent allowed by law under the applicable circumstances.”9 This appears to mean that lower courts in the Fifth Circuit will continue to apply a heightened standard when considering rejection motions and permit FERC to weigh in on the issue of equity balancing, as advised by the Fifth Circuit.10
Lastly, on August 14, the Ninth Circuit Court of Appeals heard oral arguments from Pacific Gas and Electric Company (“PG&E“) and FERC in a dispute involving the sustainability of a 2019 FERC order regarding PPA rejection.11 Although the specific issue of jurisdiction over PPAs was mooted by PG&E’s exit from chapter 11 proceedings, the parties disputed whether FERC’s opinion—claiming concurrent jurisdiction over the rejection of PPAs and requiring its approval before a debtor could reject a PPA in bankruptcy—should be vacated.
FERC argued that PG&E forfeited its ability to challenge the commission’s authority upon confirmation of a reorganization plan wherein it pledged to honor all existing PPAs. FERC also stressed that the order’s survival is important because it is FERC’s “most authoritative pronouncement about how [FERC] expect[s] to interact with the [bankruptcy] court” and the foundation from which subsequent FERC orders have issued. On the other hand, PG&E argued that mootness based on the plan’s assumption of all PPAs should result in the order being vacated. Otherwise, PG&E contended that FERC would rely upon the order as precedent, despite it never having been subjected to judicial review.
The court expressed concern that vacating the agency order could allow PG&E and other utility companies to point to it as a ruling on the merits of the underlying jurisdictional controversy. Judge Consuelo Callahan even went so far as to make PG&E counsel affirm on the record that, were the court to rule in PG&E’s favor, PG&E would not claim the court’s decision was a ruling on the mooted jurisdictional questions. Meanwhile, the court—particularly Judge Lawrence VanDyke—expressed concern that if FERC’s “self-interested” order was not vacated, it would remain in effect despite contrasting opinions from every Circuit to have considered the issue.
Regardless of the case’s outcome, the jurisdictional control over PPAs in the Ninth Circuit will still be an open issue. And, with details still being ironed out even in Circuits that have squarely ruled on the jurisdictional issue, energy and pipeline companies should continue to carefully navigate this still mostly uncharted terrain. Seward & Kissel LLP will continue to monitor this issue closely.