On June 22, 2020, the Federal Energy Regulatory Commission (“FERC”) issued an order concluding that FERC and the U.S. bankruptcy courts have concurrent jurisdiction to review and address the disposition of natural gas transportation agreements that a debtor seeks to reject under section 365(a) of the Bankruptcy Code (11 U.S.C. §§ 101 et seq.). See ETC Tiger Pipeline, LLC, 171 FERC 61,248 (2020), reh’g denied, 172 FERC 61,155 (Aug. 21, 2020). The order was issued in response to a petition filed on May 19, 2020, by ETC Tiger Pipeline, LLC (“Tiger”) in which Tiger asked FERC to issue a declaratory order as to whether Chesapeake Energy Marketing, L.L.C. (“Chesapeake”), a counterparty to Tiger’s natural gas transportation agreements, must obtain FERC’s approval under sections 4 and 5 of the Natural Gas Act, 15 U.S.C. ch. 15B §§ 717 et seq. (“NGA”) prior to rejecting the agreements in an anticipated bankruptcy case. In the order, FERC stated that, “Where a party to a Commission-jurisdictional agreement under the NGA seeks to reject the agreement in bankruptcy, that party must obtain approval from both the Commission and the bankruptcy court to modify the filed rate and reject the contract, respectively.”
FERC has previously taken the position that it shares jurisdiction with the bankruptcy courts to determine whether contracts subject to FERC regulation under sections 205 and 206 of the Federal Power Act, 16 U.S.C. §§ 791a et seq. (“FPA”), can be rejected in bankruptcy (most notably in connection with the chapter 11 case filed by PG&E Corporation). See NextEra Energy, Inc. v. Pac. Gas & Elec. Co., 166 FERC ¶ 61,049 (2019); Exelon Corp. v. Pac. Gas & Elec. Co., 166 FERC ¶ 61,053 (2019), on reh’g, 167 FERC ¶ 61,096 (2019). However, this is the first time that FERC has made such a finding with respect to contracts regulated under the NGA.
The issue was also before FERC in connection with a petition filed on April 29, 2020, by Rockies Express Pipeline LLC (“Rockies”) seeking a declaratory order finding that FERC has concurrent jurisdiction with the bankruptcy courts under the NGA and FERC regulations over any request by an affiliate of Ultra Petroleum Corp. (“UPC”), which filed for a pre-packaged chapter 11 case on May 15, 2020, to reject a natural gas transportation agreement with Rockies. The U.S. Bankruptcy Court for the Southern District of Texas authorized rejection of that agreement on August 6, 2020, noting in its August 21, 2020, written ruling that a bankruptcy court “is not authorized to graft a wholesale exception to § 365(a) of the Bankruptcy Code … preventing rejection of FERC approved contracts.” In re Ultra Petroleum Corp., 2020 WL 4940240 (Bankr. S.D. Tex. Aug. 21, 2020).
Court rulings to date on the jurisdictional turf war between FERC and the bankruptcy courts have been a mixed bag. FERC’s position on the question has evolved—the commission’s current view is that it and the bankruptcy courts have concurrent jurisdiction to determine whether FERC-regulated agreements can be rejected in bankruptcy. Here, we offer a brief discussion of what is likely to remain a disputed issue for some time, especially given the recent spike in oil and gas company bankruptcies.
Bankruptcy Jurisdiction and Rejection of Executory Contracts
By statute, U.S. district courts are given “original and exclusive” jurisdiction over every bankruptcy “case.” 28 U.S.C. § 1334(a). In addition, they are conferred with nonexclusive jurisdiction over all “proceedings arising under” the Bankruptcy Code as well as proceedings “arising in or related to cases under” the Bankruptcy Code. 28 U.S.C. § 1334(b). Finally, district courts are granted exclusive jurisdiction over all property of a debtor’s bankruptcy estate, including, as relevant here, contracts, leases, and other agreements that are still in force when a debtor files for bankruptcy protection. 28 U.S.C. § 1334(e). That jurisdiction typically devolves automatically upon the bankruptcy courts, each of which is a unit of a district court, by standing court order. 28 U.S.C. § 157(a).
A bankruptcy court’s exclusive jurisdiction over “executory” contracts or unexpired leases empowers it to authorize a bankruptcy trustee or chapter 11 debtor-in-possession (“DIP”) to either “assume” (reaffirm) or “reject” (breach) almost any executory contract or unexpired lease during the course of a bankruptcy case in accordance with the provisions of section 365 of the Bankruptcy Code. Assumption generally allows the debtor, after curing outstanding defaults, to continue performing under the agreement or to assign the agreement to a third party for consideration as a means of generating value for the bankruptcy estate. Rejection frees the debtor from rendering performance under unfavorable contracts. Rejection constitutes a breach of the contract, and the resulting claim for damages is deemed to be a prepetition claim against the estate on a par with other general unsecured claims.
Accordingly, the power granted to debtors by Congress under section 365 is viewed as vital to the reorganization process. Rejection of a contract “can release the debtor’s estate from burdensome obligations that can impede a successful reorganization.” N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513, 528 (1984) (holding that rejection is allowed for “all executory contracts except those expressly exempted”). Typically, bankruptcy courts authorize the proposed assumption or rejection of a contract or lease if it is demonstrated that the proposed course of action represents an exercise of sound business judgment. This is a highly deferential standard akin in many respects to the business judgment rule applied to corporate fiduciaries.
The Federal Power Act, the Filed-Rate Doctrine, the Natural Gas Act, and the Mobile-Sierra Doctrine
Public and privately operated utilities providing interstate utility service within the United States are regulated by the FPA under FERC’s supervision. Although contract rates for electricity are privately negotiated, those rates must be filed with FERC and certified as “just and reasonable” in order to be lawful. 16 U.S.C. § 824d(a). FERC has the “exclusive authority” to determine the reasonableness of the rates. See In re Calpine Corp., 337 B.R. 27, 32 (S.D.N.Y. 2006). The FPA authorizes FERC, after a hearing, to alter filed rates if it determines that they are unjust or unreasonable. 16 U.S.C. § 824e.
On the basis of this statutory mandate, courts have developed the “filed-rate doctrine,” which provides that “a utility’s right to a reasonable rate under the FPA is the right to the rate that FERC files or fixes and, except for review of FERC orders, a court cannot provide a right to a different rate.” Calpine, 337 B.R. at 32. Moreover, the doctrine prohibits any collateral attack in the courts on the reasonableness of rates—the sole forum for such a challenge is FERC. Id. Applying the doctrine, some courts have concluded that, once filed with FERC, a wholesale power contract is tantamount to a federal regulation, and the duty to perform under the contract comes not only from the agreement itself but also from FERC. Id. at 33 (citing Pa. Water & Power Comm’n v. Fed. Power Comm’n, 343 U.S. 414 (1952); Cal. ex rel. Lockyer v. Dynergy Inc., 375 F.3d 831 (9th Cir. 2004)).
Although FERC has exclusive authority to modify a filed rate, its discretion is not unfettered. For example, FERC may not change a filed rate solely because the rate affords the utility “less than a fair return” since “the purpose of the power given to the Commission … is the protection of the public interest, as distinguished from the private interests of the utilities.” In re Mirant Corp., 378 F.3d 511, 518 (5th Cir. 2004) (citation omitted). In such a case, FERC can change a filed rate only when “the rate is so low as to adversely affect the public interest—as where it might impair the financial ability of the public utility to continue its service, cast upon other consumers an excessive burden, or be unduly discriminatory.” Id.
The NGA regulates interstate sales of natural gas for resale in much the same way the FPA regulates interstate sales of power. The language in the NGA regarding the requirement to file rates and FERC’s power to fix unjust and unreasonable rates is nearly identical to the language in the FPA. Compare 16 U.S.C. § 824(e) (FPA) with 15 U.S.C. § 717c (NGA).
In a series of cases (see United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332 (1956); Fed. Power Comm’n v. Sierra Pac. Power Co., 350 U.S. 348 (1956)), the U.S. Supreme Court articulated what is referred to as the “Mobile-Sierra doctrine.” Under this doctrine, FERC must presume that a rate set by a freely negotiated wholesale-energy contract meets the “just and reasonable” requirement of the NGA and the FPA. That presumption may be overcome only if FERC concludes that the contract seriously harms the public interest. See NRG Power Mktg., LLC v. Maine Pub. Utilities Comm’n, 558 U.S. 165 (2010).
If a regulated utility files for bankruptcy, FERC’s exclusive discretion in this realm could be interpreted to conflict with the bankruptcy court’s exclusive jurisdiction to authorize the rejection of an electricity supply or natural gas agreement. This thorny issue has been addressed to date by only a handful of courts, including two federal courts of appeals.
Notable Court Decisions and FERC Rulings
In re Mirant Corp., 378 F.3d 511 (5th Cir. 2004). In Mirant, the U.S. Court of Appeals for the Fifth Circuit ruled that the FPA does not prevent a bankruptcy court from ruling on a motion to reject a FERC-regulated rate-setting agreement as long as the proposed rejection does not represent a challenge to the agreement’s filed rate.
The Fifth Circuit noted that, although the Bankruptcy Code places numerous limitations on a debtor’s right to reject contracts, “including exceptions prohibiting rejection of certain obligations imposed by regulatory authorities,” there is no exception that prohibits a debtor’s rejection of wholesale electricity contracts that are subject to FERC’s jurisdiction. Concluding that “Congress intended § 365(a) to apply to contracts subject to FERC regulation,” the Fifth Circuit held that the bankruptcy court’s power to authorize rejection of the agreement did not conflict with the authority conferred upon FERC to regulate rates for the interstate sale of electricity.
The Fifth Circuit, however, imposed a higher standard for rejection of such agreements. It concluded that, in determining whether a debtor should be permitted to reject a wholesale power contract, “the business-judgment standard would be inappropriate … because it would not account for the public interest inherent on the transmission and sale of electricity.” Instead, a “more rigorous standard” might be appropriate, including consideration of not only whether the contract burdens the estate, but also whether the equities balance in favor of rejection, rejection would promote a successful reorganization and rejection would serve the public interest. Such a balancing exercise, the Fifth Circuit noted, could be undertaken with FERC’s input.
In re Calpine Corp., 337 B.R. 27 (S.D.N.Y. 2006). In Calpine, the U.S. District Court for the Southern District of New York denied a chapter 11 debtor’s motion to reject certain FPA-governed power agreements because the court concluded that FERC had exclusive jurisdiction over the modification or termination of such agreements.
According to the court, the requirement that FERC approval be obtained for any alteration of the “rates, terms, conditions, or duration” of a power agreement is not eliminated merely because the power provider files for bankruptcy. The district court found “little evidence” in the Bankruptcy Code of congressional intent to limit FERC’s regulatory authority, remarking that “[a]bsent overriding language, the Bankruptcy Code should not be read to interfere with FERC jurisdiction.”
In re Boston Generating, LLC, 2010 WL 4616243 (S.D.N.Y. Nov. 12, 2010). In Boston Generating, the U.S. District Court for the Southern District of New York ruled that, in order to reject an NGA-governed contract for the transportation of natural gas to one of the chapter 11 debtors’ power plants, the debtors “must also obtain a ruling from FERC that abrogation of the contract does not contravene the public interest.” “If either the bankruptcy court or FERC does not approve the Debtors’ rejection of the [gas transportation agreement],” the court wrote, “the Debtors may not reject the contract.”
PG&E Corp. v. FERC (In re PG&E Corp.), 603 B.R. 471 (Bankr. N.D. Cal. June 7, 2019), amended and direct appeal certified, 2019 WL 2477433 (Bankr. N.D. Cal. June 12, 2019), permission to appeal granted, No. 19-71615 (9th Cir. Sept. 17, 2019), vacated as moot, D.C. No. 3:19-bk-30088 (9th Cir. Oct. 7, 2020). In PG&E, the U.S. Bankruptcy Court for the Northern District of California ruled that the lack of any exception for FERC in section 365 of the Bankruptcy Code “simply means that FERC has no jurisdiction over the rejection of contracts.”
The bankruptcy court concluded that FERC exceeded its authority by declaring that it shares jurisdiction with the bankruptcy court over the question of whether PG&E Corp. and its Pacific Gas & Electric Co. utility subsidiary (collectively, “PG&E”) can reject FPA-governed power purchase agreements. The court rejected FERC’s argument that, because wholesale power contracts are not “simple run-of-the-mill contracts,” but implicate the public interest in the orderly production of electricity at just and reasonable rates, the modification or abrogation of such contracts by means of rejection should not be subject to a bankruptcy court’s exclusive jurisdiction. According to the court, this argument “is completely contrary to the congressionally created authority of the bankruptcy court to approve rejection of nearly every kind of executory contract,” including “run-of-the-mill types” as well as power purchase agreements and other contracts that implicate the public’s interest, with certain exceptions not relevant in this case (e.g., sections 365(h) (certain leasehold interests), 365(i) (timeshare interests), 365(n) (intellectual property licenses), 365(o) (commitments to federal depository institutions), and 1113 (collective bargaining agreements). Those provisions, the court reasoned, demonstrate that Congress knows “how to craft special rules for special circumstances.” The court added that lawmakers also knew how to condition confirmation of a chapter 11 plan on the approval by a governmental regulatory commission of any proposed rate change, but they failed to condition rejection of a contract on FERC’s approval. See 11 U.S.C. § 1129(a)(6).
The bankruptcy court certified a direct appeal of its ruling to the U.S. Court of Appeals for the Ninth Circuit, where arguments were originally scheduled for August 14, 2020.
However, after the bankruptcy court confirmed PG&E’s chapter 11 plan on June 20, 2020, the Ninth Circuit asked FERC and PG&E to explain the impact of confirmation on the pending appeal. FERC and PG&E agreed that plan confirmation mooted their turf war over power contract rejection in the PG&E bankruptcy, but disagreed as to whether the Ninth Circuit should dismiss FERC’s appeal.
According to PG&E, U.S. Supreme Court precedent dictates that the Ninth Circuit should vacate all of the matters in the dispute, including FERC’s January 2019 orders claiming concurrent jurisdiction, the bankruptcy court’s June 2019 ruling rejecting FERC’s claim of concurrent jurisdiction, and FERC’s subsequent appeal. FERC countered that PG&E ceded its ability to challenge FERC’s authority after confirmation of a chapter 11 plan in which PG&E pledged to honor its existing power purchase agreements.
The Ninth Circuit vacated the bankruptcy court’s ruling as well as FERC’s orders on October 7, 2020.
FERC v. FirstEnergy Solutions Corp. (In re FirstEnergy Solutions Corp.), 945 F.3d 431 (6th Cir. 2019), reh’g denied, No. 18-3787 (6th Cir. Mar. 13, 2020). In FirstEnergy Solutions, a divided panel of the U.S. Court of Appeals for the Sixth Circuit ruled that, although the bankruptcy court had “concurrent” jurisdiction to decide whether chapter 11 debtors could reject certain FPA-regulated wholesale power contracts, the bankruptcy court exceeded its jurisdiction by enjoining FERC from requiring the debtors to continue performing under the contracts or from taking any other actions in connection with them. The Sixth Circuit also held that the bankruptcy court incorrectly applied the “business-judgment” standard to the debtors’ request to reject the contracts. According to the Sixth Circuit:
[W]hen 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 … within a reasonable time.
ETC Tiger Pipeline, LLC, 171 FERC ¶ 61,248 (2020) (Chesapeake Energy), reh’g denied, 172 FERC ¶ 61,155 (Aug. 21, 2020). Tiger owns a 197-mile bidirectional pipeline and has been providing service to Chesapeake since 2016 under two transportation agreements regulated by FERC under the NGA. Chesapeake filed for chapter 11 protection on June 28, 2020, in the Southern District of Texas. In anticipation of the filing, Tiger filed a petition with FERC on May 19, 2020, seeking a declaratory judgment that Chesapeake could not reject the transportation agreements without FERC approval. In its June 22, 2020, order, FERC found that the principles it articulated in connection with the PG&E cases with respect to the FPA apply with equal force under the NGA. FERC concluded that, “Where a party to a Commission-jurisdictional agreement under the NGA seeks to reject the agreement in bankruptcy, that party must obtain approval from both [FERC] and the bankruptcy court to modify the filed rate and reject the contract, respectively.”
FERC began the ruling by stating that the filed-rate doctrine and the Mobile-Sierra doctrine apply equally to contracts regulated under sections 4 and 5 of the NGA and contracts regulated under sections 205 and 206 of the FPA. It explained that the Mobile-Sierra doctrine is in fact derived from the Supreme Court’s twin decisions issued the same day under the NGA and the FPA. Consistent with this precedent, FERC found that “the Bankruptcy Code does not displace [FERC’s] jurisdiction over filed rate contracts under the NGA.” As filed rates, FERC wrote, NGA-regulated contracts “are not typical commercial contracts but rather establish public obligations that carry the force of law.”
FERC cited Mission Product Holdings, Inc. v. Tempnology, 139 S. Ct. 1652, 1665 (2019), for the proposition that a debtor cannot grant itself an exemption from “all the burdens that generally applicable law … imposes” by rejecting a contract through the bankruptcy process. FERC accordingly concluded that a debtor cannot “extinguish its filed rate obligations under the NGA by rejecting a contract in bankruptcy.” According to FERC, the “[r]ejection of a [FERC]-jurisdictional contract in a bankruptcy court alters the essential terms and conditions of a contract that is also a filed rate; therefore, the Commission’s approval is required to modify or abrogate the filed rate.”
On July 1, 2020, the bankruptcy court entered an agreed order authorizing Chesapeake to reject its negotiated rate natural gas transportation agreements with Gulf South Pipeline Co. (“Gulf South”). Prior to Chesapeake’s bankruptcy filing, Gulf South had also filed a petition requesting declaratory relief from FERC to insulate its agreements against rejection. The agreed order provides that Gulf South’s rejection damage claims are the “full and final remedy available” and that Gulf South will withdraw its FERC petition and “not pursue any additional rights or remedies” before FERC.
Another pipeline company having agreements with Chesapeake, Stagecoach Pipeline and Storage Co. LLC (“Stagecoach”), submitted a separate petition to FERC for a similar declaratory order on June 9, 2020. Chesapeake responded by filing an adversary proceeding against FERC in the bankruptcy court seeking a declaratory judgment confirming the court’s exclusive jurisdiction to determine Chesapeake’s right to reject the relevant agreements. Chesapeake also filed a motion to reject its transportation agreements with Gulf South, Tiger, and Stagecoach Pipeline.
On July 10, Chesapeake and FERC agreed that, during the pendency of Chesapeake’s chapter 11 cases, FERC would not: (i) issue any ruling requiring Chesapeake to obtain FERC’s approval to reject the agreements with Tiger, Gulf South, or Stagecoach; or (ii) issue any orders in response to Stagecoach and Gulf South’s prepetition FERC petitions without obtaining relief from the automatic stay to do so.
On July 14, FERC asked the bankruptcy court to reconsider its July 1 agreed order authorizing the rejection of the negotiated rate gas transportation agreements with Gulf South. According to FERC, the language in the order providing that the bankruptcy court “retains exclusive jurisdiction with respect to all matters arising from or related to the implementation, interpretation, and enforcement of this Order” impermissibly intrudes upon FERC’s authority under the NGA. On reconsideration, the bankruptcy court amended its order to provide that the court retains jurisdiction to “the maximum extent allowed by law under the applicable circumstances.”
On July 24, Tiger filed an objection to Chesapeake’s motion to reject its transportation agreement with Tiger and moved to withdraw the reference with respect to the rejection motion from the district court. In opposing rejection, Tiger argued that the bankruptcy court lacks exclusive subject matter jurisdiction over rejection of the transportation agreement, which is regulated by FERC, and “obtained the force of a regulation” under the NGA when the agreement was filed with FERC in 2016. In addition, Tiger contended that rejection would result in “significant harm to the public interest.”
In its motion to withdraw the reference, Tiger argued that the district court, rather than the bankruptcy court, must adjudicate the rejection motion because any decision on rejection involves consideration of the relationship between the Bankruptcy Code and the NGA, which is a “federal non-bankruptcy law regulating organizations or activities affecting interstate commerce” within the meaning of the referral withdrawal statute, 28 U.S.C. § 157(d).
In re Ultra Petroleum Corp., 2020 WL 4940240 (Bankr. S.D. Tex. Aug. 21, 2020). UPC filed for chapter 11 protection for the second time in four years on May 14, 2020, in the Southern District of Texas. UPC immediately sought court authority to reject an NGA-governed natural gas transportation agreement with Rockies, which transports natural gas through a natural gas pipeline stretching from eastern Ohio to southwestern Wyoming.
Rockies objected to the motion, arguing that the public interest would be harmed by rejection and that the motion could not be considered until FERC was permitted to “meaningfully participate” on whether rejection would harm the public interest. Otherwise, Rockies contended, any order approving the rejection motion would contravene the Fifth Circuit’s Mirant decision and the “primary jurisdiction doctrine,” which applies when a claim is originally cognizable in the courts but involves issues that fall within the special competence of an administrative agency. According to Rockies, “A rejection standard that does not take into account the importance of stable FERC-regulated agreements, which the U.S. Supreme Court has held to be in the public interest, and the harmful [e]ffect that free-rider activity would have on [Rockies] and the interstate pipeline system as a whole, would create a dangerous discontinuity between the Bankruptcy Code and the NGA, and would be inconsistent with Mirant.”
On August 6, 2020, the bankruptcy court granted UPC’s motion to reject the Rockies gas transportation agreement. Addressing the standard for rejection, the court noted that Mirant is binding authority in the Southern District of Texas. As a consequence, a bankruptcy court should engage in a fact-intensive analysis of whether the rejection of a transportation agreement would lead to direct harm to the public interest through an “interruption of supply to consumers” or a “readily identifiable threat to health and welfare.” According to the court, the evidence submitted by Rockies had “little to do with the contract at issue,” and any identified harm was grounded in market-chilling effects that would stem from a “general ability to reject” FERC-regulated contracts.
Although the general business-judgment standard applicable to contract rejection may be elevated in certain circumstances, the court explained, imposing what would amount to a general bar to rejection (e.g., by requiring that a debtor’s reorganization would fail absent rejection) would be a statutory-type exception that only Congress could create (as it has done with respect to certain other kinds of contracts).
The court found that the record overwhelmingly supported rejection. The evidence showed that there would be no interruption to the supply of gas to consumers, there would be no negative macroeconomic consequences, and UPC would “marginal[ly]” benefit by rejecting the transportation agreement.
The court issued a written opinion explaining its ruling on August 21, 2020. In its opinion, the court wrote that “The Court is not authorized to graft a wholesale exception to § 365(a) of the Bankruptcy Code … preventing rejection of FERC approved contracts.” It further noted that “Public policy may, in certain circumstances, be considered when determining whether to authorize the rejection of a FERC approved pipeline contract.” According to the court, whether the rejection of an executory FERC contract is “good or bad public policy” must be decided by Congress and not by the court or FERC. Finally, the court ruled that the rejection of the contract did not violate section 1129(a)(6) of the Bankruptcy Code because “FERC’s rate setting authority will remain intact following rejection and potential confirmation of the plan.”
On August 21, 2020, the bankruptcy court also confirmed a chapter 11 plan for UPC. FERC appealed the confirmation order to the extent it provided that the bankruptcy court retains “exclusive jurisdiction” over orders authorizing UPC’s rejection of FERC-regulated contracts.
Courts have reached mixed conclusions regarding the power of a bankruptcy court to authorize the rejection of a regulated wholesale power contract or natural gas transportation contract in bankruptcy. However, although the two courts of appeals that have addressed this question disagree over whether it creates a jurisdictional conflict, they agree that FERC should play some role in determining whether such contracts can be rejected. FERC appears to be on board with this approach, expressing the view that it shares jurisdiction with the bankruptcy courts to determine whether a regulated contract can be rejected in bankruptcy. We can only speculate as to whether the Ninth Circuit would also have endorsed this view or a different approach in PG&E had it not vacated the appeal as being moot.