San Francisco Judge Slaps Down FERC on Rejection of Power Purchase Agreements

In a blistering opinion, Bankruptcy Judge Dennis Montali of San Francisco held that the Federal Energy Regulatory Commission, or FERC, has no jurisdiction — not even concurrent jurisdiction — to rule on the right of California power utility giant PG&E Corp. to reject executory power purchase agreements.

In his June 7 opinion, Judge Montali used memorable words to describe what he saw as FERC’s unauthorized jurisdictional power grab. Saying that FERC had acted before and after PG&E’s bankruptcy outside of its statutory authority under the Federal Power Act, or FPA, he characterized the agency’s actions as absurd, Kafkaesque, “bold and unfounded.” The agency’s rulings, he said, were “toothless advisory opinions” amounting to an “unauthorized . . . power play.”

“In a few days,” Judge Montali said, he will issue a certificate authorizing a direct appeal to the Ninth Circuit.

FERC’s Preemptive Attack

On January 14, 2019, PG&E announced it would be filing a chapter 11 petition in 15 days, as required by state law. Counterparties to power purchase agreements, or PPAs, immediately went to the FERC, asking the agency to rule that it too must approve the rejection of PPAs.

Just before PG&E’s chapter 11 filing on January 29, FERC entered orders declaring that it had concurrent jurisdiction to review decisions on the rejection of PPAs. On the day of filing, PG&E initiated an adversary proceeding in bankruptcy court seeking a declaratory judgment and injunctions enforcing the automatic stay, because the debtor alleged that FERC was interfering with the company’s ability to reject PPAs.

Several power generators quickly moved in district court to withdraw the reference under 28 U.S.C. § 157(d). The district court denied the withdrawal motion on March 11, predicting that Judge Montali would rule “in short order” on whether the debtor was entitled to an injunction. To read ABI’s report on denial of the motion to withdraw the reference, click here.

In late February, PG&E sought FERC’s rehearing of its January orders. On May 1, FERC denied rehearing. In denying rehearing, Judge Montali said that FERC “made two remarkable statements.”

First, FERC said that the PPAs “implicate the public’s interest . . . .” Second, Judge Montali said, FERC claimed it was not “seeking to arrogate the role of adjudicating bankruptcy proceedings.”

In ruling on the motion for rehearing, Judge Montali said that FERC was purporting “to settle the law by announcing its own interpretation of bankruptcy law and decree something found nowhere in the statute . . . .”

On April 10, Judge Montali held a hearing on PG&E’s motion for a preliminary injunction in the adversary proceeding to declare that FERC has no jurisdiction over contract rejection under Section 365. In view of intervening events narrowing the issues, Judge Montali said he only needed to declare whether the bankruptcy court has exclusive jurisdiction over the rejection of PPAs and whether FERC has concurrent jurisdiction to deny rejection of a PPA.

Judge Montali’s Emphatic Counterattack on FERC

Judge Montali was evidently inclined to rule against FERC in any event, but the Supreme Court’s recent decision on contract rejection bolstered his conclusion. See Mission Product Holdings Inc. v. Tempnology LLC, 587 U.S. ___, 203 L. Ed. 2d 876 (May 20, 2019).

Tempnology teaches that rejection of a contract under Section 365 is just a breach giving rise to a prepetition claim, not rescission of the contract. The Supreme Court also pointed out that Congress made several exceptions to the general rules regarding contract rejection, citing Sections 365(h), (i), (n) and (o), along with Section 1113.

Given the statutory exceptions to the rejection power, Judge Montali said that “Congress knew how to grant exceptions to the power to reject executory contracts . . . . FERC and the FPA are not mentioned in any exceptions.”

Judge Montali therefore concluded, “Section 365’s lack of an exception for FERC simply means that FERC has no jurisdiction over the rejection of contracts.”

FERC’s opinion, holding that the agency has concurrent jurisdiction, is not binding on the bankruptcy court, Judge Montali ruled. By opining on issues under the Bankruptcy Code, he said that “FERC acted outside its statutory authority . . . . Nothing in the FPA or the Bankruptcy Code grants FERC concurrent jurisdiction with this court over Section 365 motions to reject executory contracts covering federal power matters . . . . The rejection of an executory contract is solely within the power of the bankruptcy court, a core matter [that is] exclusively this court’s responsibility . . . . The Bankruptcy Code is the proper and only authority to apply and not any aspect of the FPA.”

Judge Montali said that FERC’s rulings to the contrary were “at best toothless advisory opinions” that he declared to be void because “FERC has no jurisdiction over the rejection of contracts.”

Public Policy

FERC and the power producers believe that public policy considerations must be evaluated when a debtor seeks to reject PPAs.

Judge Montali dodged the issue, for the time being. The primary tests for granting or denying a motion to reject an executory contract are, he said, the business judgment rule and the benefit for unsecured creditors.

The public interest, Judge Montali said, “may need to be considered in the context of a specific rejection of a specific PPA. That outcome will be fact-driven based on the particular motion to reject.”

Because PG&E had not yet filed any motions to reject PPAs, Judge Montali said that the consideration of public interest, if any, “is for another day.”

Judge Montali’s Rulings

Judge Montali therefore declared that FERC does not have concurrent jurisdiction and that FERC’s rulings “are of no force and effect and are not binding on the Debtors in these cases.”

Judge Montali indicated that he would consider entering an injunction if FERC were to continue asserting jurisdiction.

Appealability

It is not immediately clear whether Judge Montali’s judgment on June 7 is a final order giving rise to a right to appeal. The judgment did not include an injunction. Clearly, further proceedings are contemplated, because PG&E must file motions to reject specific PPAs.

On the other hand, Judge Montali’s declaration is his final word on FERC’s jurisdiction.

Because Judge Montali did not rule on the extent to which he will consider public policy in the future, the Ninth Circuit might deflect an appeal until he has granted a motion to reject a PPA. That way, all of the relevant issues will come to the circuit court in one appeal.