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Sixth Circuit Considers Rejection of a Filed Power Purchase Agreement
The provisions of the Bankruptcy Code sometimes conflict with other federal laws and regulations. A debtor that operates in a highly regulated industry often faces additional hurdles in administering its bankruptcy case that would be routine in other Chapter 11 proceedings. Conversely, a regulated debtor might find the Bankruptcy Code enables it to avoid an otherwise inevitable regulatory consequence. The U.S. Court of Appeals for the Sixth Circuit Court recently considered whether an energy company debtor could reject a power purchase agreement as an executory contract that had been filed with the Federal Energy Regulatory Commission (FERC). Outside of bankruptcy, the debtor's ability to address the contract would fall under FERC's exclusive jurisdiction. Here, the bankruptcy court ruled that FERC had no jurisdiction, and the bankruptcy court had exclusive jurisdiction to adjudicate the matter. The Sixth Circuit court rejected that position, and ruled that the bankruptcy court and FERC have concurrent jurisdiction. The opinion was issued on Dec. 12, 2019, in the case of In re FirstEnergy Solutions, Case Nos. 18-3787/3788/4095/4097/4107/4110.
Rejection of the PPAs
The debtor, FirstEnergy Solutions (debtor) and a subsidiary filed a bankruptcy case in March 2018. The debtor's business was the purchase of electricity from its subsidiaries and resale to retail clients, corporate affiliates and a wholesale energy market. According to the opinion, regulations from the early 2000s required the debtor to purchase a certain amount of renewable energy. However, the marketplace and regulatory mandates had changed, and regulations had been relaxed resulting from a drop in energy prices and an abundance of available renewable energy. These changes rendered the contracts burdensome on the debtor, which sought to sell its entire retail business. As a result, at the time of its bankruptcy filing, the debtor determined it had no use for the contracts. In fact, it alleged the debtor was losing an estimated $46 million per year under one set of power purchase agreements and another $248 million by the year 2040 under another intercompany power purchase agreement.
One day after the petition date, the debtor and its subsidiary initiated an adversary proceeding that sought to enjoin FERC from interfering with the debtor's planned rejection of the power purchase agreements. The debtor argued that it needed to reject the PPAs because they had become financially burdensome and, in light of the debtor's plan to exit the retail energy market, it no longer had a need for the renewable PPAs. The debtor also argued that the contract counterparties could easily sell their electricity to other wholesale purchasers on into the wholesale marketplace.
FERC had previously approved the contracts under the Federal Power Act and the Public Utilities Regulatory Policies Act. FERC, certain contract counterparties, and an Ohio Consumers Council (appellants) argued that the Federal Power Act (FPA) gave FERC exclusive jurisdiction over energy contracts. Once a contract has been filed with FERC, only FERC can modify or abrogate the terms of the agreement. Further, under these acts, FERC may only modify or abrogate the agreement "… if it finds that the contract is not just and reasonable, in that it seriously harms the public interest." FERC also argued that the Bankruptcy Code's automatic stay did not apply because FERC met the "regulatory powers" exception, which authorizes certain government actions to proceed notwithstanding a bankruptcy filing.
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