Overview
On December 12, 2019, the Sixth Circuit issued an opinion[1] in the ongoing bankruptcy proceedings of FirstEnergy Solutions Corp. The decision upheld the ability of a bankruptcy court to decide whether a power purchaser in bankruptcy proceedings can reject FERC-approved power purchase agreements (PPAs). In exercising that power, the court found that the bankruptcy court must consider the public interest, and must invite FERC to participate and provide its opinion on the issue, but that the bankruptcy court need not defer to FERC. Judge Richard A. Griffin dissented; he agreed with FERC that only it, and not a bankruptcy court, has the right modify or abrogate a filed rate.
Typically, when a company files for Chapter 11 bankruptcy protection, that company is permitted to assume or reject any executory contract to which it is a party. Debtors may reject unfavorable contracts that may be burdening the company and costing it significant money. Here, FirstEnergy sought to reject certain PPAs that it argued had become financially burdensome. Generally, a demonstration that a contract is financially burdensome is sufficient for the contract to be rejected in a Chapter 11 reorganization.
FERC argued that unlike traditional contracts, FERC-approved PPAs are filed rates that, per court precedent, are the equivalent of a federal regulation or statute. Therefore, FERC argued, a bankruptcy court has no authority to reject such filed rates any more than a bankruptcy court would have the right to reject a company’s obligation to comply with other federal regulations or statutes.
The Sixth Circuit disagreed. Finding tension between the Federal Power Act and bankruptcy law, the court held "that the public necessity of available and functional bankruptcy relief is generally superior to the necessity of FERC's having complete or exclusive authority to regulate energy contracts and markets."[2] Therefore, FirstEnergy could reject the PPAs. But the ordinary standard would not apply: "when a Chapter 11 debtor moves the bankruptcy court for permission to reject a filed energy contract that is otherwise governed by FERC, via the FPA, the bankruptcy court must consider the public interest and ensure that the equities balance in favor of rejecting the contract, and it must invite FERC to participate and provide an opinion in accordance with the ordinary FPA approach (e.g., under the Mobile–Sierra doctrine), within a reasonable time."[3]
The decision may be appealed to the Supreme Court, especially given tension between decisions of different courts in this area. Nevertheless, this decision demonstrates the importance to utilities of carefully scrutinizing the creditworthiness of counterparties to PPAs, seeing as the courts increasingly have held that FERC has a very limited role once the debtor chooses to reject a PPA. Steptoe has significant bankruptcy and restructuring experience, and will continue to monitor these proceedings and provide further updates as necessary.
[2] Slip Op. at 16.
[3] Id. at 28.
