Court says FERC overstepped in PG&E bankruptcy cases

The bankruptcy court presiding over the Pacific Gas and Electric Corp. Chapter 11 bankruptcy reorganization cases issued a decision on June 7 striking a blow against a "fundamental assault on the bankruptcy court's exclusive jurisdiction." PG&E v. FERC, adv. proc. no. 19-03003. The Federal Energy Regulatory Commission had ruled prior to the commencement of PG&E's Chapter 11 case that FERC has concurrent jurisdiction with the bankruptcy court over PG&E's right to reject a power purchase agreement. The bankruptcy court found that FERC's ruling "is completely contrary to the congressionally created authority of the bankruptcy court to approve rejection of nearly every kind of executory contract." Further, the court stated "FERC must be stopped and the division and balance of power and authority of the two branches of government restored."

PG&E announced its intent to commence a Chapter 11 case in January. Under California law, it was required to provide a 15-day notice before entering bankruptcy. Cal. Pub. Util. Code Section 854.2. In response, counterparties to various power purchase agreements brought administrative actions before FERC against PG&E. They were concerned that PG&E would seek to reject the agreements in its upcoming bankruptcy case and requested that FERC rule that both FERC and the bankruptcy court would have to approve rejection of an agreement in order for rejection to be effective. FERC subsequently announced "that this Commission and the bankruptcy courts have concurrent jurisdiction to review and address the disposition of wholesale power contracts sought to be rejected through bankruptcy." NextEra Energy, Inc. v. Pac. Gas and Elec. Co., 166 FERC ¶ 61,049 (2019); Exelon Corp. v. Pac. Gas and Elec. Co., 166 FERC ¶ 61,053 (2019).

PG&E had unsuccessfully opposed the requests of the counterparties and commenced an adversary proceeding against FERC in its bankruptcy case on Jan. 29, the day the Chapter 11 case was commenced. FERC and several power purchase agreement counterparties sought to withdraw the adversary proceeding to the district court under 25 U.S.C. Section 157(d). The district court denied these motions and ruled that the adversary proceeding was a core proceeding for purposes of bankruptcy court jurisdiction. In the adversary proceeding, the bankruptcy court identified the issues before it as "a matter of first impression: Is an order issued by a federal agency purporting to affect (arrogate) a decision by a bankruptcy court in a future bankruptcy case binding on that bankruptcy court or the parties before it?" The court further characterized the dispute as "a quintessential controversy -- the clash of two competing policies and goals."

It is an elementary principle of bankruptcy law that, under Section 365 of the Bankruptcy Code, a debtor in possession has the power to assume or reject most executory contracts. Contracts are viewed as executory where neither party has completed performance. In Mission Product Holdings v. Tempnology, LLC, 203 L. Ed. 2d 876 (2019), the U.S. Supreme Court recently addressed the rights of parties to a trademark license rejected in bankruptcy. With regard to the fundamental power to assume or reject, the Supreme Court stated "Section 365(a) enables the debtor ... , upon entering bankruptcy, to decide whether the contract is a good deal for the estate going forward. If so, the debtor will want to assume the contract, fulfilling its obligations while benefiting from the counterparty's performance. But if not, the debtor will want to reject the contract, repudiating any further performance of its duties. The bankruptcy court will generally approve that choice, under the deferential 'business judgment' rule."

FERC was created under the Federal Power Act. 16 U.S. Code Chapter 12. "FERC is a creature of statute, having no constitutional or common law existence or authority, but only those authorities conferred upon it by Congress." Atl. City Elec. Co. v. FERC, 295 F.3d 1, 8 (D.C. Cir. 2002). The bankruptcy court recognized "the broad scope of FERC's statutory jurisdiction over rates, terms and conditions of wholesale electricity sales and power contracts, including changes to those contracts." PG&E entered bankruptcy with $42 billion of wholesale power purchase agreements. The bankruptcy court explained that it was not considering the Federal Power Act or any FERC decisions regarding any matter within FERC's exclusive jurisdiction. Rather, the court stated that while FERC could continue to do what it usually does with regard to the power purchase agreements, "[n]othing in the FPA or the Bankruptcy Code grants FERC concurrent jurisdiction with this court over Section 365 motions to reject executory contracts covering federal power matters." The court further found that "[t]he rejection of an executory contract is solely within the power of the bankruptcy court, a core matter exclusively this court's responsibility." 28 U.S.C. Sections 157(b)(2) and 1334(a).

The bankruptcy court perceived that FERC's attempt to insert itself into the rejection determination "is completely contrary to the congressionally created authority of the bankruptcy court to approve rejection of nearly every kind of executory contract." Moreover, while Congress knew how to grant exceptions to the power to reject executory contracts, Section 365 does not contain any such exception for power purchase agreements governed by the Federal Power Act or FERC. In addition to being unauthorized, the court determined that FERC's interference with the bankruptcy court's jurisdiction had the effect of undermining the bankruptcy court's "role of ensuring that the goals and purposes of bankruptcy law and policy are properly served and properly executed." FERC's public policy goals could readily conflict with the reorganization goals underlying Chapter 11. The court explained that "[i]f and when either Debtor moves to reject any PPAs they need to know promptly whether this court will grant or deny such requests. If they are forced to seek a second and possibly dispositive decision from FERC based on FERC's stated policy goals, and not just those found in the Bankruptcy Code, there could be a real and significant impact on the reorganization effort and the millions of Northern Californians adversely affected by it."

Finding that FERC had acted outside its statutory authority, the bankruptcy court held that FERC's rulings "were at best toothless advisory opinions that had no effect on anyone, especially debtors contemplating but not then having filed bankruptcy." FERC's rulings were also harmful because the reorganization of PG&E was "immediately impacted by the cloud of FERC's assertion of concurrent jurisdiction and its presumption that it could override a bankruptcy court's PPA executory contract rejection decision based upon policies embodied in the FPA, principally protection of the public interest." The court ruled that the Bankruptcy Code and the related jurisdictional statute "clearly lead to the inescapable conclusion that only the bankruptcy court can decide whether a motion to reject should be granted or denied, and under what standards." Accordingly, the court rejected FERC's rulings and found them to be void attempts to divest the court of jurisdiction provided by Congress. The court concluded that FERC's decisions "were unauthorized acts of the power regulator executing a power play (to use a hockey term) to curtail the role of the court acting within its authorized and exclusive role in these bankruptcy cases." 