A massive restructuring of the electric industry in America is well underway. The initial green light was given by the Federal Energy Regulatory Commission (FERC), which has jurisdiction over electricity sold at the wholesale level in interstate commerce.¹ Since then, a number of state legislatures have enacted legislation deregulating the sale of electric power at the retail level. One of the first and most significant change was restructuring legislation approved in California in 1996 and became effective on March 31, 1998. The size of the electric power market in the United States is estimated to be $220 billion per year underpinning a $7.2 trillion national economy.² By comparison, the direct economic benefit that is believed to be derived from electric restructuring is estimated to be anywhere between $25-50 billion a year.³ With dollars like these at stake, existing players and new entrants have much to gain, or lose.

Congress has not ignored this major deregulatory change in America’s economic landscape. Numerous bills have been introduced designed to encourage deregulation yet impose various restrictions on the timing and nature of the growth of this new market-based approach to how electricity is delivered to consumers. For example, most bills require states to permit retail customer choice by a date certain (e.g., December 15, 2000), assuring reliability and providing universal service. The Clinton administration also has weighed in with its own approach to restructuring of the electric industry.⁴ However, with only a limited number of legislative days left in this session of the 105th Congress, only the most optimistic see any chance for enactment of federal electric restructuring legislation in 1998.

Notwithstanding the lack of federal legislation, participants in the new emerging electricity market are charging full speed ahead. Traditional, stodgy investor-owned utilities have become aggressive, innovative market players spinning off unproductive assets, starting up or acquiring power marketing firms and generally reconfiguring themselves to compete in the new electricity market-place. "Competition" is the new buzzword, and it is driving this redistribution of assets, the increase in mergers and development of new marketing programs. "Ratepayers" are now "customers," and the race is on to protect the ones you have and acquire new ones. "Green power," which is electricity generated by resources other than fossil fuels or hydropower, (e.g., solar panels or wind turbines), marketed at premium prices to consumers who want to be seen as sensitive to the environment.

However, as this new electric power marketplace takes shape, there are a number of pitfalls that lie in the path of both new entrants and existing players. One of the biggest is what to do with the stranded costs⁵ that will be incurred by many utilities in a deregulated environment. For the moment, both the FERC and Congress seem inclined to let the issue of stranded costs be sorted out at the state level, where most of the impact on individual consumers, bondholders and state and local taxing authorities is felt. Both Congress and the FERC have said, moreover, that stranded costs may be recovered only if they are prudently incurred, legitimate and verifiable retail stranded costs that cannot be reasonably mitigated.

Other pitfalls that may prevent certain utilities from making a smooth financial transition to a competitive market are unrecovered costs of large nuclear plants that have yet to begin commercial operation and substantial outstanding loans from the federal government held by rural electric generation and transmission cooperatives.⁶ In recent years, these liability problems have been the overriding reasons for entities seeking protection under chapter 11. Chapter 11 can provide a way for utilities to continue providing electric power to wholesale purchasers and retail customers while sorting out regulatory and financial problems with the goal of emerging as viable, but slimmed-down energy providers.

For some utilities that fail to make the transition to a competitive market, a bankruptcy-related strategy may be beneficial. Many utilities have labor agreements, power purchase agreements, fuel contracts and other executory contracts that were entered into years ago in a regulatory regime that assured cost recovery. Certain independent power producers are especially vulnerable to efforts by utilities with which they have Public Utility Regulatory Policies Act (PURPA) contracts⁷ to exercise "regulatory out" clauses based on their alleged inability to recover the costs of power required to be purchased under the contract since market-based rates are much lower. Independent power producers have been successful in convincing the Congress and the Clinton administration to include provisions in proposed legislation to protect existing contracts, but efforts by utilities to avoid these contracts leave some independent power producers facing the prospect of foreclosure and even bankruptcy.

The Bankruptcy Code itself offers little guidance to utilities that seek protection. Section 366 gives consumer debtors protection from a cut-off of service by a utility once a bankruptcy case is filed.⁸ This provision was included to protect consumer debtors at a time when utility providers were considered monopolies and a debtor could not easily obtain comparable service from another utility. While a utility can receive some adequate assurance of payment, the new electric power marketplace may change the relationship between consumers and energy providers and make §366 obsolete.

The other section of the Code that frequently applies in chapter 11 utility reorganizations is §1129(a)(6),⁹ which, when read in conjunction with §1123(a)(5)¹⁰ requiring that there be adequate means for implementation of a proposed reorganization plan, adds the requirement that any governmental regulatory commission with jurisdiction, after confirmation of a plan, over the rates of the debtor must approve such rates or condition a rate change on plan approval. Courts that have dealt with these types of cases continue to wrestle with the issues of public interest, regulatory exemption and "circularity of valuation" that arise when a regulated entity seeks to emerge from reorganization.¹¹ With the prospect of more utility bankruptcies on the horizon these and other issues will undoubtedly bedevil courts trying to exercise their judicial role in the midst of a rapidly changing economic and regulatory environment.

How ever bankruptcy courts deal with these difficult issues, it is quite likely that as old players exit and new entrants emerge, many will do so through the bankruptcy process. Is the present Code up to the task or will new amendments to the Code be required to enable the courts to better deal with this significant restructuring of our national economy? Only time will tell.

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Footnotes

¹ Order No. 888, FERC Stats. & Regs. ¶ 31,048 (1997). Return to Text

² Kurt Yeager, President and CEO, Electric Power Research Institute (EPRI), in Remarks to DOE/NARUC Forum, December 9, 1997, Washington, DC. Return to Text

³ Id. at 1. Return to Text

⁴ Administration’s Comprehensive Electricity Competition Plan announced by Secretary Frederico Pena, March 25, 1998. Return to Text

⁵ Costs incurred by a utility for investment in plant or facilities, power purchase agreements, or regulatory costs that may no longer be recovered in market-based, deregulated rates. Return to Text

⁶ GAO Report (GAO/T-AIME-98-123). Return to Text

⁷ Power contracts authorized by the federal Public Utility Regulatory Policies Act, P.L. 95- 617 (92 Stat. 3117), 1978. See 26 U.S.C. 2601 et seq. Return to Text

⁸ 11 U.S.C. §366. Return to Text

⁹ 11 U.S.C. §1129(a)(6). Return to Text

¹⁰ 11 U.S.C. §1123(a)(5). Return to Text

¹¹ In re Public Service Company of New Hampshire, 108 B.R. 854 (Bankr. N.H., 1989). Return to Text