Exclusive or Concurrent Jurisdiction to Reject Power Purchase Agreements in Bankruptcy?

By: Gabriela Zapata

St. John’s University School of Law

American Bankruptcy Institute Law Review, Staff Member

In general, a debtor may reject an executory contract subject to court approval under section 365 of title 11 of the United States Code (the “Bankruptcy Code”). However, courts are split as to whether a bankruptcy court has the power to authorize the rejection of an electric power purchase agreement or whether the Federal Energy Regulatory Commission (“FERC”) has exclusive jurisdiction over these contracts.[1] In In re PG&E Corp. Pacific Gas and Electric Co. v. Fed. Energy Regulatory Comm’n, Adv. (In re PG&E Corp.), the Bankruptcy Court for the Northern District of California held that bankruptcy courts have exclusive jurisdiction in determining whether a bankrupt company can reject executory power purchase agreements (“PPAs”).[2]

PG&E Corporation and Pacific Gas and Electric Company (together "PG&E" or the “Debtors”) faced multibillion-dollar claims following the California wildfires of 2017 and 2018.[3] On January 24, 2019, PG&E announced their intent to file a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.[4] In response to this announcement, several of PG&E’s PPA counterparties asked FERC, a Federal agency that regulates the transmission and sale of electricity, natural gas and oil in interstate commerce,[5] to rule that the bankruptcy court and FERC must both approve rejection of PPA for rejection to have effect.[6] Thereafter, FERC found that it had “concurrent jurisdiction [with bankruptcy courts] to review and address the disposition of wholesale power contracts sought to be rejected through bankruptcy.”[7] Following the aforementioned hearings, the Debtors sought a rehearing, which FERC denied, and thereafter the Debtors filed for bankruptcy on January 29.[8] In response to FERC’s denial, the Debtors commenced an adversary proceeding seeking a judgement declaring that the California Bankruptcy Court has exclusive jurisdiction over the right to reject the Debtors’ PPAs.[9] The bankruptcy court declared that FERC does not have concurrent jurisdiction over decisions to reject or assume executory contracts under section 365 of the Bankruptcy Code.[10]

Section 365(a) of the Bankruptcy Code allows a trustee or debtor in possession to “reject any executory contract,”[11] and to treat rejection as a breach of contract.[12] This provision applies broadly but is subject to specific provisions containing express exceptions,[13] but no exceptions involve FERC. The bankruptcy court interpreted the absence of a reference to FERC and FPA within any of the exceptions, to mean that FERC has no jurisdiction over the rejection of contracts.[14] As a “creature of statute,” FERC is bound to act within the statutory guidelines prescribed by Congress.[15] The court found that FERC ultimately acted outside of its statutory authority by asserting concurrent jurisdiction “and [through] its presumption that it could override a bankruptcy court’s PPA executory contract rejection decision,” once the Debtors filed for bankruptcy.[16]

Although courts can defer to regulatory agencies while analyzing provisions governing the federal agency, the Bankruptcy Court for the Northern District of California held that courts have the final say and the ultimate decision-making authority.[17]  This is similar to the Fifth Circuit’s holding in In re Mirant Corp, stating that the FPA does not prevent a bankruptcy court from ruling on a motion to reject an executory agreement subject to FERC regulation.[18] Similar to the California Court, the Fifth Circuit reasoned that because exceptions prohibiting the rejection of contracts imposed by regulatory agencies existed, there were no exceptions prohibiting the rejection of PPAs subject to the FERC’s jurisdiction, thus the bankruptcy court’s power to authorize rejection of the agreement did not conflict with the FERC’s regulatory authority.[19] In contrast, the United States Bankruptcy Court for the Southern District of New York in In re Calpine Corp., explained that when there “is [jurisdictional] conflict, the power of the bankruptcy court must yield to that of the federal agency.”[20] On December 12, 2019, the Sixth Circuit held that the bankruptcy court does not have exclusive jurisdiction, rather it shares concurrent jurisdiction with FERC, which is “nonetheless primary or superior to FERC’s [jurisdiction]”. [21] The Ninth Circuit will be the next Circuit Court to consider the issue as the In re PE&G Corp. bankruptcy court certified its decision for direct appeal.[22] If the Ninth Circuit upholds the bankruptcy court’s finding of exclusive jurisdiction, it would lead to a circuit split which could prompt the Supreme Court to weigh in on the issue.