FERC v. US Bankruptcy Courts: The Battle Continues
Reprinted with permission from the September 10, 2020 edition of The Legal Intelligencer. © 2020 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited.
The jurisdictional battle between the Federal Energy Regulatory Commission (FERC) and bankruptcy courts around the country remains ongoing and, arguably, is intensifying. In June, FERC issued what was then essentially an advisory order declaring, among other things, that, if Chesapeake Energy Marketing filed for bankruptcy and sought to reject its natural gas transportation agreements—which FERC regulates—then Chesapeake must obtain both the bankruptcy court’s and FERC’s approval under Section 5 of the Natural Gas Act (NGA). As anticipated, Chesapeake filed for Chapter 11 and requested permission from a bankruptcy court in Texas to reject one of its natural gas transportation agreements with ETC Tiger Pipeline. But Chesapeake failed to seek FERC’s approval, too. Instead, it sought a rehearing concerning FERC’s June order.
Unsurprisingly, FERC denied that request at the end of August.
FERC’s recent orders resemble those it issued last year in NextEra v. PG&E and Exelon v. PG&E, two proceedings addressing PG&E’s potential rejection of power purchase agreements through its bankruptcy. Even though a California bankruptcy court later found the NextEra/Exelon orders unenforceable, again, FERC has claimed concurrent jurisdiction with the bankruptcy court over the disposition of “Commission-regulated contracts” in bankruptcy cases. See ETC Tiger Pipeline, 171 FERC ¶ 61,248 (2020), order on reh’g, 172 FERC ¶ 61,155 (2020).
To appreciate the power struggle between FERC and the bankruptcy courts requires some understanding of Section 365 of the Bankruptcy Code and the NGA (or, a similar statute, the Federal Power Act (FPA)).
One of the most useful tools for rehabilitating a bankrupt debtor is Section 365(a) of the Bankruptcy Code. See 11 U.S.C. Section 365(a). It gives the debtor broad discretion to “reject” or, in layman’s terms, cease performing under, those executory contracts it deems too burdensome—subject to the bankruptcy court’s exclusive approval, which is routinely granted. Notwithstanding this broad authority, however, Congress has carved out exceptions to protect non-debtor rights under certain contracts.
While the rejection of Commission-regulated contracts does not appear among the exceptions listed in Section 365, FERC (at least currently), certain courts, and non-debtor counterparties, like ETC Tiger in the Chesapeake proceedings, maintain that rejection of Commission-regulated contracts still requires FERC’s approval because rejection modifies the “filed rate.” Pursuant to the NGA, a natural gas company must file with FERC schedules of all rates provided under any transportation agreement. See 15 U.S.C. Section 717c. Once filed, the contract rate is considered law. If one party wants to alter the contract rate, FERC must—and has exclusive authority to—approve the change. When evaluating proposed changes to filed rates, FERC is tasked with considering whether the change harms the public’s interest under the Mobile-Sierra standard (derived from two U.S. Supreme Court cases). Therefore, FERC and FERC-aligned parties have reasoned as follows: by proposing to reject a Commission-regulated contract, the debtor is seeking to unilaterally terminate or change the filed rate, which triggers FERC’s jurisdiction; the rate change cannot be implemented unless FERC (and FERC alone) conducts its public interest review and approves; and the failure to permit Mobile-Sierra review will potentially harm consumers.
In its petition for rehearing, Chesapeake argued that FERC erred by ignoring the express requirements of the Bankruptcy Code and failing to follow prior precedents and case law on myriad legal issues addressed in the declaratory order sought by ETC Tiger. FERC, however, found these assertions baseless. Although FERC recognized that its perspective has evolved with the uptick in litigation over FERC’s role in bankruptcy cases, FERC considered its current position to be consistent with its prior orders and court rulings—though, as FERC noted, the law in this area is “unsettled.” See Rehearing Order, 172 FERC ¶ 61,155 at 11. FERC also believed that its silence in prior bankruptcy matters was not indicative of anything because, in those cases, rejection was consensual, and the non-debtor counterparties did not seek FERC’s involvement.
FERC began the substantive portion of its denial by explaining how the NGA’s purpose is fundamentally different from the Bankruptcy Code’s. Whereas Congress designed the NGA to protect consumers, thus requiring FERC to consider the “public interest” when reviewing the rates, terms, and conditions of transportation agreements, Congress designed the Bankruptcy Code “to rehabilitate bankrupt debtors.” (And, therefore, bankruptcy courts employ the debtor-friendly business judgment standard to adjudicate rejection motions.) Yet despite contrasting these policy objectives, FERC recognized both as “vitally important” and committed itself to harmonizing them.
To that end, FERC found that fulfilling its mandate under the NGA would not conflict with the Bankruptcy Code, reminding us that, while Section 365 lacks an exception for Commission-regulated contracts, Section 1129(a)(6) expressly provides that a debtor cannot confirm its Chapter 11 plan unless FERC approves any rate change that the debtor intends to implement through the plan. So FERC opined that “executing its exclusive authority to protect the public interest outside of the bankruptcy context [ ] is consistent with Section 1129’s recognition that debtors must seek regulatory approval of rate changes.”
FERC revisited this point to dispel Chesapeake’s notion that FERC’s declaratory order was inherently inconsistent in that it simultaneously recognized the bankruptcy court’s exclusive jurisdiction to determine rejection motions and FERC’s exclusive jurisdiction to approve filed-rate modifications. As FERC stated, “A bankruptcy court may render its determination on the rejection of the private obligations involved in a contract; the public law duties involved with a filed rate are solely the province of the Commission. As noted above, this system of concurrent jurisdiction is explicitly contemplated in Section 1129(a)(6) of the Bankruptcy Code.” In other words, the Bankruptcy Code itself sanctions concurrent jurisdiction, and it is understood that the bankruptcy court and FERC will have distinct duties, each of which can be fulfilled without excluding the other, when reviewing the disposition of Commission-regulated contracts. Therefore, there was no inconsistency that FERC should have addressed in its declaratory order.
Likewise, FERC rejected the argument that it misconstrued Section 365 of the Bankruptcy Code by creating an exception for Commission-regulated contracts not found in the statute. The logic of Chesapeake’s argument was that, had Congress intended to limit rejection of Commission-regulated contracts, it would have done so expressly—as it did for other types of contracts. Yet FERC disagreed. Citing the U.S. Supreme Court’s Mission Product decision, FERC explained that the exceptions in Section 365 are not exclusive, and Congress added them “in response to discrete rulings attempting to limit the survival of contractual rights post-rejection …” Rehearing Order, 172 FERC ¶ 61,155 at 11. Therefore, FERC determined that the absence of a delineated exception for Commission-regulated contracts in Section 365 was not dispositive of whether FERC’s approval was required.
FERC also made the following legal determinations—extrapolated mostly from precedents and court cases involving the FPA—that informed its denial of Chesapeake’s rehearing request.
First, the rejection of a Commission-regulated contract abrogates, modifies, or amends the filed rate. It is hornbook law that the rejection of an executory contract is treated as a breach that occurred immediately before the bankruptcy filing, rather than a termination, and the non-breaching party is afforded a general unsecured claim against the debtor’s estate for damages arising from the breach. From this general premise, Chesapeake (and some courts) reasoned that rejection of a Commission-regulated contract leaves the filed rate intact because the contract survives rejection. But as FERC had done in NextEra, it distinguished Commission-regulated contracts from ordinary, private contracts and noted that their rejection is not an ordinary breach. As FERC explained, these agreements “implicate the public interest and, as filed rates, carry the force of law.” Further, relying on NextEra again, FERC reiterated that rejection of a Commission-regulated contract is a court-sanctioned, perpetual breach, which unilaterally terminates the debtor’s regulatory obligation to pay the filed rate. So regardless of the legal fiction of a “breach,” as a practical matter, the debtor’s obligations under the contract terminate with rejection. (And the rejection damages that the nondebtor receives may differ from the filed rate.) FERC noted that Mission Product did not compel a different conclusion as Chesapeake had argued because the Supreme Court in that case recognized that, notwithstanding rejection, a debtor does not shed all burdens imposed by “generally applicable law,” which FERC deemed to include the regulatory framework created under the NGA, (quoting Mission Prod. Holdings v. Tempnology, 139 S. Ct. 1652, 1665 (2019)) (internal quotation marks omitted).
Second, FERC’s Arkla test for determining whether to exercise jurisdiction over contract matters was deemed inapplicable because, as FERC previously explained, the Chesapeake matter involved a contract dispute that was more than a “simple breach in the typical sense.” Nonetheless, FERC determined that the Arkla test, which is a tripartite, fact specific analysis (and, therefore, compelled different outcomes in different cases), would be satisfied if applied. According to FERC, FERC has special expertise conducting Mobile-Sierra review of proposed rate changes; courts are split on the issue of FERC’s jurisdiction vis-à-vis the bankruptcy courts’; and the Chesapeake matter is important to FERC’s regulatory responsibilities because only FERC may approve unilateral alterations to the filed rate.
FERC concluded by making ancillary findings regarding the purported implications of ETC Tiger’s tariff, which prevents ETC Tiger from taking any actions under certain sections of the tariff that conflict with a bankruptcy court order. Chesapeake maintained that ETC Tiger’s petition would conflict with an imminent rejection order from the bankruptcy court and that FERC should have addressed this in the declaratory order. FERC, however, affirmed its prior determination that Chesapeake’s argument was premature because there was no order authorizing rejection yet.
FERC’s latest opinions show that there are miles to go before this jurisdictional fight with the bankruptcy courts is resolved. Possibly, only a ruling by the U.S. Supreme Court or statutory intervention will create peace. For now, however, given the current crisis in the energy patch, we can expect the battle to rage on.