United States: Fifth Circuit Delineates Boundaries of FERC, Bankruptcy Jurisdiction

In In re Mirant Corporation, issued August 4, 2004, the United States Court of Appeals held that a district court or bankruptcy court may authorize the rejection of an executory contract for the purchase of electricity as part of a bankruptcy reorganization; the rejection was not barred by the filed rate doctrine or the Federal Energy Regulatory Commission’s ("FERC") exclusive jurisdiction over wholesale electricity rates. The Court of Appeals reversed a decision of the District Court for the Northern District of Texas, which had held that the contract was within FERC’s exclusive jurisdiction. Although arising within the confines of a bankruptcy action, the Mirant decision does address broader issues involving FERC’s jurisdiction over breaches of wholesale energy contracts.

In June 2000, the Potomac Electric Power Company ("PEPCO"), pursuant to state deregulation, agreed to sell its electric generation facilities and assign most of its agreements by which it purchased electricity from others, power purchase agreements or PPAs, to Mirant Corporation in an "Asset Purchase and Sale Agreement." Some of the PPAs, however, required the supplier’s consent to the assignment. In the event that the supplier did not consent, the Asset Purchase and Sale Agreement provided, pursuant to Schedule 2.4 of that Agreement, that PEPCO would comply with the terms of any unassigned PPAs, and Mirant would purchase from PEPCO any quantities it was obligated to purchase under the unassigned agreements, at the price established by the PPAs.

PEPCO did not receive consent to assign two of its PPAs. Those agreements became governed by Schedule 2.4, which was filed with and its rates approved by FERC. The parties and the court referred to the two agreements governed by Schedule 2.4 as the Back-to-Back Agreement. That Agreement resulted in significant financial losses for Mirant because its rate was higher than the market rate.

In July 2003, Mirant filed for Chapter 11 bankruptcy, and as part of that proceeding, filed a motion to reject the Back-to-Back Agreement. Mirant subsequently obtained injunctions from the bankruptcy court preventing FERC or PEPCO from taking any actions to require Mirant to comply with the Back-to-Back Agreement, and barring FERC from taking any action to require Mirant to comply with any wholesale electricity contract Mirant was either substantially performing or was not performing pursuant to court order without ten days notice to Mirant. Although the bankruptcy court did not rule on Mirant’s motion to reject the Back-to-Back Agreement, it did find that it had the authority to authorize Mirant to reject that Agreement.

The district court subsequently withdrew the reference to the bankruptcy court and held new hearings. The district court found that the only business justification supporting Mirant’s motion to reject was the losses that it suffered because the rate in the Back-to-Back Agreement, approved by FERC, was above the market rate. The district court held that Mirant’s motion was a collateral attack on FERC-approved rates, and that only FERC could alter the Back-to-Back Agreement rate. It therefore denied Mirant’s motion to reject, and vacated the injunctive relief ordered by the bankruptcy court.

On appeal, the Fifth Circuit held that the district court, or the bankruptcy court, did have the authority to grant Mirant’s motion to reject the Back-to-Back Agreement, but held that the bankruptcy court’s injunctive relief was overbroad and impermissibly interfered with FERC’s exclusive jurisdiction.

The filed rate doctrine bars a collateral attack in state or federal court on the reasonableness of rates and agreements regulated by FERC, and that no court may assume a rate different from that approved by FERC. FERC argued that Mirant’s efforts to reject the Back-to-Back Agreement constituted a collateral attack on a filed rate, a claim rejected by the Court. The Court noted that the filed rate doctrine would bar an attempt to modify the rate set forth the Agreement or abrogate that Agreement entirely. Under the Bankruptcy Code, however, rejection of an executory agreement constitutes a breach of that agreement, and the non-breaching party receives an unsecured claim for damages. The Court held that FERC does not have exclusive jurisdiction over the breach of a FERC-approved contract.

According to the Fifth Circuit, while breach of contract claims seeking to challenge a filed rate are barred, district courts are permitted to grant relief in situations where the claim is based on a different rationale. Rejection of the Back-to-Back Agreement would not constitute a challenge to a filed rate. The non-breaching party, here PEPCO, would receive an unsecured claim equal to the damages from breach of the Back-to-Back Agreement. Those damages would be calculated based upon the filed rate, and therefore the rejection was not inconsistent with the filed rate doctrine.

FERC also argued that the bankruptcy estate, under an approved reorganization plan, might not be required to pay the full amount of the claim, and thus rejection could have an effect on the filed rate. The Court interpreted that argument as an attack not on the rejection of the Back-to-Back Agreement specifically, but a challenge to the application of the terms of a confirmed reorganization plan to the unsecured breach of contract claims. FERC’s exclusive jurisdiction, the Court found, did not preempt whatever indirect effect the approval of a reorganization plan might have on the filed rate.

The Court also held that the structure of the Bankruptcy Code indicates that Congress did not intend to limit the ability of utilities to reject an executory wholesale power contract. The Bankruptcy Code contains numerous exceptions and limitations to general rejection authority, including exceptions prohibiting rejection of certain obligations imposed by regulatory agencies. No such exception was provided by wholesale electricity contracts, however, and the Bankruptcy Code’s other exceptions indicated that the lack of such an exception was not an oversight. The district court, or the bankruptcy court, therefore had the authority to approve Mirant’s rejection of the Back-to-Back Agreement. The Court did note, however, that FERC’s interest in regulating wholesale power contracts might warrant applying a heightened standard when determining whether to approve rejection of a wholesale power contract subject to FERC’s jurisdiction.

Finally, the Court concluded that the injunctive relief ordered by the bankruptcy court was also found to be overbroad, impermissibly interfering with FERC’s ongoing jurisdiction over Mirant’s wholesale power contracts. The Bankruptcy Code, according to the Court, clearly envisioned ongoing governmental regulatory jurisdiction while a bankruptcy proceeding is pending.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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