Power Purchase Agreements in Bankruptcy: Competing Interests Under the Bankruptcy Code and Federal Power Act

Description

The recent Chapter 11 filing by Pacific Gas and Electric Co. in California has brought the treatment of PPAs in bankruptcy back into the spotlight. Bankruptcy Code Section 365 gives a debtor the power to "reject," or to cease performing under, an ongoing contract. The rejection of a contract is treated as a court-authorized breach of contract as of the date the bankruptcy is filed and limits the non-debtor counterparty to asserting a claim for the breach against the debtor.

For most contracts, a debtor only needs to show that the rejection is an appropriate exercise of its business judgment because the contract is financially burdensome. The treatment of PPAs, however, is more complicated because the Federal Energy Regulatory Commission (FERC) has jurisdiction over the sale of wholesale electric energy. And given conflicting precedent from prior bankruptcy cases in a variety of jurisdictions, there is considerable uncertainty and debate on the role and jurisdiction of FERC in the context of any proposed rejection of PPAs in the PG&E bankruptcy.

In the Calpine proceedings, a district court in the Southern District of New York held that FERC has exclusive jurisdiction over a debtor’s exercise of its statutory rejection powers to disaffirm certain PPA obligations. In the Mirant proceedings, the Fifth Circuit indicated that bankruptcy courts can approve a rejection of a PPA by a debtor in bankruptcy without FERC approval, but that a bankruptcy court should nonetheless apply a heightened standard that takes the public interest into account.

And most recently in the First Energy Solutions proceedings, the bankruptcy and U.S. District Court for the Northern District of Ohio held that a bankruptcy court need only consider whether rejection of a PPA is consistent with the debtor’s business judgment, just like any other contract. As there is no controlling precedent on this specific issue in the Ninth Circuit, it is not clear how the PG&E bankruptcy court or any appellate court will rule as to applicable jurisdictional rules and legal standards if the debtor there seeks to reject any PPAs.

Listen as our authoritative panel of bankruptcy practitioners discusses the divergent law on these challenging issues if an energy industry debtor attempts to reject its PPAs and provides bankruptcy counsel with an understanding of how it might affect the treatment of PPAs in the PG&E bankruptcy proceedings.