The Federal Energy Regulatory Commission has ruled that if any party to a FERC-jurisdictional wholesale power purchase agreement proposes to reorganize under the Bankruptcy Code, such party, “must obtain approval from both this Commission and the bankruptcy court to modify the filed rate and reject the contract, respectively.” NextEra Energy, Inc., 166 FERC ¶ 61,049 (2019); see also, Exelon Corp. v. Pacific Gas and Electric Company, 166 FERC ¶ 61,053 (2019).

Pacific Gas and Electric Company (PG&E) has announced that it expects to file a petition for reorganization under Chapter 11 of the Bankruptcy Code in the near future. The FERC’s order are intended to preserve the FERC’s jurisdiction over power purchase agreements such as those to which PG&E is a party, and to deter a bankruptcy court from permitting PG&E to reject or modify such contracts without FERC authorization.

Conflicting Precedent Regarding the Authority of the Bankruptcy Courts vs. FERC

There have been conflicting court decisions regarding the authority of bankruptcy courts to permit public utilities to reject executory wholesale power purchase agreements without first obtaining FERC authorization under the Federal Power Act. In anticipation of the possibility that PG&E might seek to have a bankruptcy court enjoin the FERC from exercising its authority over rates for sales of electricity at wholesale, NextEra Energy Inc., Exelon Corp., and EDF Renewables Inc. each asked the FERC to affirm that if PG&E files a petition for bankruptcy, PG&E may not abrogate, amend, or reject in bankruptcy any of the rates, terms and conditions of its wholesale power purchase agreements subject to FERC jurisdiction without first obtaining FERC approval under Sections 205 and 206 of the Federal Power Act.

In its decisions, the FERC acknowledged that the law regarding its authority over modification of wholesale power purchase agreements where a party to such agreements has sought protection of the bankruptcy courts is unsettled. The FERC also noted that it has broad authority under the Federal Power Act over rates and charges for the sale of electricity at wholesale, and exclusive authority to determine the reasonableness of such rates. After review of both the Federal Power Act and the Bankruptcy Code, the FERC concluded that the “Commission and the bankruptcy courts have concurrent jurisdiction to review and address the disposition of wholesale power contracts sought to be rejected through bankruptcy.” The FERC further explained that “rejection of a Commission-jurisdictional contract in a bankruptcy court alters the essential terms and conditions of the contract and filed rate; thus, this Commission’s jurisdiction is implicated and our approval is required.”

FERC Assertion of Authority May Mitigate Impact of PG&E Bankruptcy

The potential impact of a PG&E bankruptcy on its existing power purchase agreements is not entirely clear. PG&E’s announcement of its intention to seek bankruptcy protection stated that one of its goals is to “support the orderly, fair and expeditions resolution of PG&E’s potential liabilities resulting from the 2017 and 2018 Northern California wildfires.” There was no suggestion that PG&E might be using the bankruptcy process to reduce its wholesale purchased power expense.

Each of the petitioners noted that in bankruptcy proceedings, the debtor has initial responsibility to determine which contracts should be rejected, and its decision generally is reviewed by the bankruptcy court under the “business judgment rule.” In contrast, the FERC has authority under the Federal Power Act to consider whether modification or termination of a wholesale power purchase agreement is in the public interest. The FERC’s ruling that it and the bankruptcy court have concurrent jurisdiction to review and address the disposition of wholesale power contracts sought to be rejected through bankruptcy may be expected to give sellers additional protections against premature termination of their power sales agreements.

Since other power suppliers may be in the same position as NextEra and Exelon, the FERC stated in a footnote to the NextEra order that its jurisdictional position is the same with regard to other wholesale power contracts that PG&E may seek to terminate or modify through bankruptcy.

Exelon and EDF Renewables noted in their respective petitions that rejection of existing power purchase agreements by PG&E would put the continued financial viability of the electricity suppliers from which it is purchasing electricity at risk, and could have a chilling effect on investments in new generating facilities. Therefore, the FERC may have been concerned with the potential adverse impact on wholesale electricity markets in the West if PG&E was able to modify or terminate significant long-term power purchase agreements without first obtaining FERC authorization.

QF Contracts Not Addressed

A significant issue not addressed in the FERC orders is whether FERC approval will be required for modification or termination of power purchase agreements to which PG&E is a party where the seller is a Qualifying Facility under the Public Utility Regulatory Policies Act of 1978. The FERC explained in the orders that it sought to protect the authority over rates and charges for sale of electricity at wholesale which was granted to it under Sections 205 and 206 of the Federal Power Act. However, the FERC regulations state that certain agreements under which QFs sell electricity to electric utilities are exempt from FERC scrutiny under those sections of the Federal Power Act. Because the FERC relied on Sections 205 and 206 of the Federal Power Act as authority to assert jurisdiction over modification or termination of power purchase agreements of a bankrupt utility, it is at least arguable that the bankrupt utility may reject agreements which are not subject to FERC scrutiny under those provisions without first obtaining FERC authorization to do so.