Analysis of FERC-Jurisdictional Contracts in Bankruptcy
This article originally appeared in the Spring 2021, Vol. 2, Issue 1 of the EBA Brief: A Quarterly Publication of the Energy Bar Association
Can FERC and the Bankruptcy Courts Have Concurrent Jurisdiction Over the Rejection of FERC-Jurisdictional Contracts in Bankruptcy?
By: John Paul Floom, Managing Member and Shereen Jennifer Panahi, Associate Attorney
The natural gas industry experienced a period of unprecedented demand reduction and depressed commodity prices during 2020. As a result, several companies that hold contracts for service on interstate natural gas pipelines regulated by the Federal Energy Regulatory Commission (FERC or Commission) have recently filed, or have publicly disclosed the possibility of filing, a petition for corporate reorganization under Chapter 11 of the United States Bankruptcy Code (Code) with the United States Bankruptcy Courts. (N.1). This increase in bankruptcy activity from customers of interstate pipelines that operate under the Natural Gas Act (NGA) (N.2) has given rise to growing concern among pipeline owners over their customers’ continued performance under existing firm transportation service agreements once a bankruptcy proceeding has been initiated. Specifically, the concern lies in the tension between, on the one hand, the jurisdiction of U.S. Bankruptcy Courts to allow rejection of executory contracts pursuant to the Code, (N.3) and the Commission’s exclusive jurisdiction over filed rates approved pursuant to the NGA and subject to the longstanding Mobile-Sierra doctrine. (N.4)
Recent Commission orders (N.5) related to shipper bankruptcy proceedings have highlighted this tension, leading pipeline owners to conjecture that “rejection” of an executory contract in bankruptcy constitutes abrogation and/or modification of a “filed rate,” which FERC has the authority to abrogate or modify under the Mobile-Sierra doctrine. The Commission’s recent affirmations of its concurrent jurisdiction over jurisdictional transportation agreements paves the way for discord between FERC and bankruptcy courts, (N.6) and may undermine the efficacy and efficiency of the bankruptcy process. This article describes the purpose of Chapter 11 proceedings and the Commission’s NGA jurisdiction. Next, it challenges the notion that rejection amounts to abrogation and demonstrates that the Commission’s recent decisions are inconsistent with federal appellate court and FERC precedents. Finally, this article describes the role that FERC can, and must, play when a shipper seeks to reject a FERC-jurisdictional agreement in bankruptcy court.
The Code provides U.S. District Courts—and the bankruptcy courts—with “original and exclusive jurisdiction of all cases under title 11.” (N.7) Bankruptcy itself represents a fundamental public policy goal of providing “‘the prompt and effectual administration and settlement of the [debtor’s] estate.’” (N.8) To do so, it is critical “to centralize disputes . . . in one forum, thus protecting both debtors and creditors from piecemeal litigation and conflicting judgments.” (N.9) Hence, “[e]ase and centrality of administration are . . . foundational characteristics of bankruptcy law.” (N.10)
Embedded into the framework of the Code are the bankruptcy court’s powers of equity and law. (N.11) Guided by equitable doctrines, (N.12) bankruptcy courts may “grant or deny relief upon performance of a condition which will safeguard the public interest.” (N.13) In this regard, bankruptcy courts are not merely ministerial registers for security holders. Rather, they are responsible for scrutinizing creditor claims, and confirming reorganization plans only after independently balancing debtor and creditor equities. (N.14) Even so, bankruptcy courts may not “enforce [their] view of sound public policy at the expense of the interests the Code is designed to protect.” (N.15)
As part of the Chapter 11 process, the Code authorizes bankruptcy courts to allow debtors-in-possession (DIP) to assume (reaffirm) or reject (breach) executory contracts. (N.16) Assumption allows DIPs to continue performance under the agreement after curing all outstanding pre-bankruptcy defaults. (N.17) Rejection allows DIPs to stop performance under an unfavorable contract. (N.18) If rejected, the counterparty’s recourse is limited to filing an unsecured claim for damages arising from the pre-petition amounts owed and from rejection. (N.19) Like other unsecured creditors of the estate, such counterparties may receive only a fraction of the value of their claim. Exceptions to the bankruptcy court’s sole authority over rejection exist, but neither FERC, nor FERC-approved contracts, are included in the Code’s list of limitations on the bankruptcy court’s authority.
The NGA declares that “Federal regulation in matters relating to the transportation of natural gas and the sale thereof in interstate . . . commerce is necessary in the public interest.” (N.20) NGA sections 4, 5, and 7 “reveal a single coherent design,” under which the Commission determines just and reasonable rates for regulated entities consistent with maintaining adequate service in the public interest. (N.21)
Sections 4 and 5 grant FERC authority over the rates, terms, and conditions of service that an interstate pipeline may apply to service on its system. Sections 4(c) and 4(d) require that the rates, terms, and conditions be filed with the Commission and require prior approval to change the filed rates. Section 5 authorizes FERC to determine that a rate is no longer just and reasonable and to determine a new just and reasonable rate. Sections 4 and 5 are silent as to shipper responsibilities under transportation service agreements.
FERC’s recent orders on shipper bankruptcies rely on FERC’s authority and obligations under the Mobile-Sierra doctrine. (N.22) This doctrine holds that FERC may only abrogate or modify a jurisdictional contract if the public interest requires FERC to do so (i.e., if the contract rate “seriously harms the public interest”). (N.23) Commission and court precedent allows the Commission to abrogate contracts where the contract rate may: (1) impair the financial ability of the public utility to continue its service; (2) cast excessive burdens on other consumers; or (3) be unduly discriminatory. (N.24) This authority is necessarily limited because contracting parties are deemed to be sophisticated businesses “enjoying presumptively equal bargaining power,” that can “negotiate a ‘just and reasonable’ rate as between the two of them.” (N.25)
Is Rejection Abrogation (i.e., Does Rejection Implicate the Filed Rate Doctrine)?
The simple and straightforward answer to the question is, “No.” Rejection is merely a breach of an executory contract, which allows the non-breaching party to file an unsecured claim against the bankruptcy estate for an amount equal to the damages from the breach. (N.26) The Supreme Court has held that “a debtor’s rejection of an executory contract in bankruptcy has the same effect as a breach outside bankruptcy. Such an act cannot rescind rights that the contract previously granted.” (N.27) “[B]ecause rejection ‘constitutes a breach’ the same consequences follow in bankruptcy. The debtor can stop performing its remaining obligations under the agreement.” (N.28)
The U.S. appellate courts have similarly indicated that rejection does not implicate FERC’s jurisdiction under the filed rate doctrine. (N.29) In In re FirstEnergy Solutions., Corp., the Sixth Circuit determined that FERC-jurisdictional contracts, once they become part of a bankruptcy proceeding, “are not de jure regulations but, rather, ordinary contracts susceptible to rejection in bankruptcy.” (N.30) The practical effect of this determination is that the trustee or DIP may reject FERC-jurisdictional contracts “subject to proper bankruptcy court approval and FERC cannot independently prevent it.” (N.31) Indeed, the Sixth Circuit held that “the public necessity of available and functional bankruptcy relief is generally superior to the necessity of FERC’s having complete or exclusive authority to regulate energy contracts and markets.” (N.32)
The Fifth Circuit, in In re Mirant Corp., reached a similar conclusion when it held that “FERC must rely upon the provisions of the Bankruptcy Code to limit Mirant’s ability to reject the [FERC-jurisdictional contracts]. The structure of the Bankruptcy Code, however, indicates that Congress did not intend to limit the ability of utility companies to reject an executory contract.” (N.33) Moreover, FERC has previously held that mitigation, which reduces the amount a debtor might have otherwise owed under a contract, “does not change the filed rate; it only changes the net amount owed as an equitable remedy for the breach of contract.” (N.34)
In contrast, FERC’s current position is that rejection implicates the filed rate doctrine because it necessitates contract modification and/or abrogation. (N.35) But the courts and the Code have answered differently, finding that rejection merely allows for an orderly and efficient mechanism for creditors to recover value for their debts without rescinding the rights that the contract previously granted. (N.36)
If rejection is merely a breach, (N.37) and debtors can stop performing under the agreement following rejection, (N.38) then rejection cannot implicate the Mobile-Sierra doctrine. To implicate the doctrine, debtors would need to be seeking modification or abrogation of a FERC-jurisdictional contract. By seeking rejection, however, debtors seek to breach that agreement and place the creditor (i.e., the FERC-jurisdictional pipeline) in the same queue as other unsecured creditors to recover contract damages.
In addition, FERC’s supplemental argument that section 1129(a)(6) of the Code allows FERC to approve a reorganization plan does nothing to advance the notion that rejection alters the filed rate. (N.39) If, following approval of a request to reject an executory contract, the “debtor can stop performing its remaining obligations under the agreement,” (N.40) there is no rate modification under the contract that must be approved. The remedy for breach is mitigation, which, again, “does not change the filed rate; it only changes the net amount owed as an equitable remedy for the breach of contract.” (N.41) Thus, FERC would have no “rate change” to approve in a reorganization plan that includes a rejection of a FERC-jurisdictional contract.
The Policy Implications of FERC’s Recent Decisions
FERC’s above-noted conflation of “modification and/or abrogation” with “rejection,” and its assertion of concurrent jurisdiction with bankruptcy courts has wide-ranging implications for customers of interstate gas pipelines. Bankruptcy proceedings will become inefficient because shippers will exit bankruptcy “hampered by the pressure and discouragement of preexisting debt.” (N.42) Under FERC’s view, FERC would be required to opine whether the shipper-debtor could reject, abrogate, or modify its jurisdictional contracts in each bankruptcy proceeding. This could lead to the creation of an extra-statutory super-class of pipeline creditors that would have their debts paid first, or not extinguished, ahead of all other creditor classes defined in the Code.
In addition, requiring assumption of FERC-jurisdictional contracts significantly increases the possibility that a shipper will exit bankruptcy as a refinanced business, only to face insufficient cashflows from other remaining assets to pay for the charges incurred under such contracts.
The implications of the Commission’s recent orders go far beyond the statutory limits that the Code and the NGA impose on FERC. Thus, FERC should reconsider its approach to shippers entering bankruptcy and allow the bankruptcy courts to manage the bankruptcy process as Congress intended.
11 U.S.C. §§ 101–1532 (2018).
15 U.S.C. §§ 717–717z (2018).
11 U.S.C. § 365(a).
See United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332 (1956); FPC v. Sierra Pac. Power Co., 350 U.S. 348 (1956).
Rockies Express Pipeline LLC, 172 F.E.R.C. ¶ 61,279 (2020); ETC Tiger Pipeline, LLC, 171 F.E.R.C. ¶ 61,248 (2020).
Rockies Express, 172 F.E.R.C. ¶ 61,279 at P 27 (recognizing concurrent jurisdiction under sections 4 and 5 of the NGA and the Bankruptcy Code, while asserting that the Bankruptcy Code does not displace the Commission’s jurisdiction over filed rate contracts), citing ETC Tiger, 171 F.E.R.C. ¶ 61,248 at P 22.
28 U.S.C. § 1334(a)(2018).
Moses v. CashCall, Inc., 781 F.2d 63, 72 (4th Cir. 2015) (quoting Katchen v. Landy, 382 U.S. 323, 328 (1966); Celotex Corp. v. Edwards, 514 U.S. 300, 308 (1995)); Ex parte City Bank of New Orleans, 44 U.S. 292, 312 (1845).
Moses, 781 F.2d at 72 (citing Phillips v. Congelton, L.L.C. (In re White Mountain Mining Co.), 403 F.3d 164, 169–70 (4th Cir. 2005); A.H. Robins Co. v. Piccinin, 788 F.2d 994, 998 (4th Cir. 1986)).
Celotex Corp., 514 U.S. at 328 (citing 28 U.S.C. § 1481 (1982 ed.)).
SEC v. U.S. Realty & Improvement Co., 310 U.S. 434, 455 (1940).
Am. United Mut. Life Ins. Co. v. Avon Park, 311 U.S. 138, 145 (1940).
Midlantic Nat’l Bank v. New Jersey Dep’t of Envtl. Prot., 474 U.S. 494, 514 (1986) (prohibiting expenditure of resources to further environmental agency’s goals) (Rehnquist, J. dissenting); U.S. Realty, 310 U.S. at 455.
11 U.S.C. §§ 365(a), 1107.
See id. § 365(b); In re Wash. Capital Aviation & Leasing, 156 B.R. 167, 173 (Bankr. E.D. Va. 1993); Jay Westbrook, A Functional Analysis of Executory Contracts, 74 MINN. L. REV. 227, 231 (1989) (“‘Assume’ and ‘reject’ are merely bankruptcy terms for the decision to perform or to breach, an election open to any party to a contract outside of bankruptcy.”).
See Aslan v. Sycamore Inv. Co., 909 F.2d 367 (9th Cir. 1990).
NLRB v. Bildisco and Bildisco, 465 U.S. 513 (1984). The creditor has (1) a damage claim for breach of contract, and (2) an administration expense claim for benefits received by the DIP prior to rejection. See, e.g., In re Bridgeport Plumbing Prods., Inc., 178 B.R. 563 (Bankr. M.D. Ga. 1994).
15 U.S.C. § 717(a).
N. Nat. Gas Co. v. FERC, 827 F.2d 779, 787 (D.C. Cir. 1987).
See, e.g., Morgan Stanley Capital Grp. Inc. v. Pub. Util. Dist. No. 1 of Snohomish Cty., 554 U.S. 527, 547–48 (2008).
Id.; see also NRG Power Mktg., LLC v. Me. Pub. Utils. Comm’n, 558 U.S. 165, 167 (2010).
Sierra, 350 U.S. at 354–55.
Morgan Stanley, 554 U.S. at 545 (quoting Verizon Commc’ns. Inc. v. FCC, 535 U.S. 467, 479 (2002)).
In re Mirant Corp., 378 F.3d 511, 520 (5th Cir. 2004).
Mission Prod. Holdings v. Tempnology, LLC, 139 S. Ct. 1652, 1666 (2019).
Id. at 1662–63.
See Arkansas Louisiana Gas Co. v. Hall, 453 U.S. 571, 579 n.9 (1981); In re FirstEnergy Solutions., Corp., 945 F.3d 431, 452 (6th Cir. 2019); In re Mirant Corp., 378 F.3d at 520; Gulf States Utils. Co. v. Ala. Power Co., 824 F.2d 1465, 1471–73 (5th Cir. 1987). Notably, in a case involving PG&E Corp., the Ninth Circuit vacated as moot two FERC orders and one bankruptcy court order that dispute FERC’s FPA jurisdiction over PG&E’s power purchase agreements in PG&E’s bankruptcy proceeding without opining on the merits of the jurisdictional claims. 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 re FirstEnergy Solutions., Corp., 945 F.3d at 446.
Id. at 445–46.
Mirant, 378 F.3d at 521.
U.S. Gen. New England, Inc., 116 F.E.R.C. ¶ 61,285 at P 32 (2006) (emphasis added).
See, e.g., 171 F.E.R.C. ¶ 61,248 at P 23 (citing NextEra Energy Inc. v. Pac. Gas & Elec. Co., 166 F.E.R.C. ¶ 61,049 at P 29 (2019); Exelon Corp. v. Pac. Gas & Elec. Co., 166 F.E.R.C. ¶ 61,053 at P 26 (2019)).
See, e.g., Mission Prod., 139 S. Ct. at 1661–63, 1666 (holding that rejection of trademark licensing agreement could not revoke the license or deprive creditor-licensee of its rights to use the trademark, so licensee may continue to do whatever the license authorizes); Mirant, 378 F.3d at 520–21 (finding rejection is merely a breach and does not implicate the “filed rate”).
Mirant, 378 F.3d at 520.
Mission Prod., 139 S. Ct. at 1666.
Section 1129(a)(6) states that the bankruptcy court may only confirm a reorganization plan if “[a]ny governmental regulatory commission with jurisdiction, after confirmation of the plan, over the rates of the debtor has approved any rate change provided for in the plan, or such rate change is expressly conditioned on such approval.” 11 U.S.C. § 1129(a)(6).
Mission Prod., 139 S. Ct. at 1666.
116 F.E.R.C. ¶ 61,285 at P 32. This conclusion is also supported by Mission Products, where the Supreme Court’s analysis found that “breach” has the same meaning in the Code as it does in contract law outside of bankruptcy. Mission Prod., 139 S. Ct. at 1661 (citing Field v. Mans., 516 U.S. 59, 69 (1995)). From there, the Court turned to non-bankruptcy contract law to evaluate the effects of breach. Mission Prod., 139 S. Ct. at 1661–62. Applying its own analysis, the Court arrived at the same conclusion as the Bankruptcy Appellate Panel, which found that “outside of bankruptcy, breach of contract does not eliminate the rights the contract had already conferred on the non-breaching party, so neither could a rejection of an agreement in bankruptcy have that effect.” Id. at 1659. The Court went on to hold that rejection of “any contract” in bankruptcy “operates not as a rescission but as a breach.” Id. at 1659, 1661. Applied here, the right to damages for breach of contract is measured by the value of the would-be performed contract, or the filed rate. Whether the pipeline decides to “continue the contract or walk away” while suing for breach of contract damages in response to a shipper’s rejection does not disturb the pipeline’s right to charge the filed rate or enjoy any other rights granted to it under the contract. Id. at 1662. Indeed, one cannot simultaneously exercise the contractual right to receive damages based on the filed rate while at the same time claiming that abrogation or modification by rejection has terminated that same contractual right to charge the filed rate.
Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934).