[Federal Register: January 10, 2006 (Volume 71, Number 6)]
[Notices]
[Page 1527-1530]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10ja06-29]
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
[Docket No. EL06-30-000]
California Electricity Oversight Board; People of the State of
California, ex rel., Bill Lockyer, Attorney General of the State of
California, and California Department of Water Resources v. Calpine
Energy Services, L.P.; Calpine Corporation; Power Contract Financing,
and Gilroy Energy Center, L.L.C.; Order Providing Interim Guidance
Issued January 3, 2006.
Before Commissioners: Joseph T. Kelliher, Chairman; Nora Mead
Brownell, and Suedeen G. Kelly.
1. On December 19, 2005, the California Electricity Oversight
Board, the California Attorney General, and the California Department
of Water Resources (California State Parties) filed a Petition for
Emergency Declaratory Order Requiring Continuing Performance of
Jurisdictional Power Purchase Agreement and Complaint Requesting Fast
Track Processing (Petition). The Petition seeks a Commission order
requiring Calpine Energy Services, LP, and Calpine Corporation
(Calpine) to continue to supply power, and otherwise perform, under a
Master Power Purchase and Sale Agreement (Calpine 2 Contract). As
explained in more detail below, because of a recently issued Ex Parte
Temporary Restraining Order (TRO) against the Commission, we cannot
grant the relief requested. However, in the event the Commission
participates in the bankruptcy proceedings, we hereby provide interim
guidance to the parties regarding the standard to be applied in this
case, and require certain additional filings.
Background
2. The California State Parties state in their Petition that they
expect Calpine to file for reorganization under Chapter 11 of the
United States Bankruptcy Code and, when it does, to request that the
Bankruptcy Court reject the Calpine 2 Contract. The California State
Parties state that, if the Commission does not act to require
performance of the
[[Page 1528]]
Calpine 2 Contract, the Bankruptcy Court may enjoin the Commission from
so acting. The Petition states that a similar result occurred when
Mirant Corporation filed for bankruptcy and the Bankruptcy Court
enjoined the Commission from taking certain actions with respect to
Mirant.
3. The California State Parties argue that the Commission should
grant the relief requested because ``rejection of the Calpine 2
Contract would: (1) Force California consumers to bear significantly
higher costs; (2) undermine the parties' 2002 global settlement entered
in order to resolve the State's claims arising in its 2000-01 energy
crises; (3) jeopardize the State's efforts to put in place protections
to ensure that the health, safety and welfare of California ratepayers
are not adversely affected by a similar crisis in the future; and (4)
threaten the stability of California electricity markets and
potentially undermine the reliability of the California electricity
grid, particularly during summer 2006.'' Petition at 6. The California
State Parties state that an order granting this relief would be
consistent with the Commission's action in Blumenthal v. NRG Power
Marketing, Inc., 103 FERC ] 61,188 (2003), reh'g denied, 104 FERC ]
61,211 (2003) (orders requiring performance), and Blumenthal v. NRG
Power Marketing, Inc., 104 FERC ] 61,210 (2003) (order upholding
contract) (NRG).
4. On December 21, 2005, Calpine filed for bankruptcy in the United
States Bankruptcy Court in the Southern District of New York. The
Bankruptcy Court immediately issued an Ex Parte Temporary Restraining
Order Against Federal Energy Regulatory Commission (TRO) that prohibits
the Commission from taking any action ``to require or coerce the
Debtors to continue performing under the executory contracts identified
in Schedule 1.'' One of the contracts identified in Schedule 1 of the
TRO is the Calpine 2 Contract.
Authority To Act
5. Although the Bankruptcy Code provides that the filing of a
bankruptcy petition automatically stays certain actions against the
debtor,\1\ the Code also provides an exception from this automatic stay
for:
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\1\ 11 U.S.C. 362(a)(1).
An action or proceeding by a governmental unit * * * to enforce
such governmental unit's or organization's police and regulatory
powers, including the enforcement of a judgment other than a money
judgment, obtained in an action or proceeding by the governmental
unit to enforce such governmental unit's or organization's police or
regulatory power.[\2\]
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\2\ 11 U.S.C. 362(b)(4).
6. As noted earlier, the TRO entered on December 21, 2005 by the
Bankruptcy Court in the Southern District of New York precludes the
Commission from granting the relief requested. However the TRO does not
preclude the Commission from issuing this Interim Guidance Order.
Accordingly, this order provides guidance to the parties regarding the
standards that will be applied in this case. It does not ``require or
coerce'' Calpine to continue performing its executory contracts.
Discussion
7. In NRG, the Commission addressed ``an issue of first impression:
Whether a bankruptcy court's approval of a public utility seller's
request to reject a contract between it and a buyer precludes the
Commission from making an independent determination, pursuant to the
Federal Power Act (FPA), as to whether that seller must continue [to]
fulfill its contractual obligations to provide service to the buyer.''
\3\ In answering that question, ``[t]he Commission found that, even if
a public utility files for bankruptcy, the utility still must meet its
obligations under the FPA.'' \4\ The Commission then proceeded to
address in a paper hearing whether NRG could meet the Mobile Sierra
standard applicable to a request to terminate the contract under
section 205 of the FPA. The Commission held that NRG could not do so
and therefore ordered it to perform under the contract.\5\
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\3\ 104 FERC ] 61,210 at P1.
\4\ Id.
\5\ NRG, 104 FERC ] 61,210.
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8. Subsequently to our decision in NRG, the United States Court of
Appeals for the Fifth Circuit decided Mirant Corp. v. Potomac Electric
Power Co. (In re Mirant).\6\ In Mirant, the 5th Circuit addressed the
same fundamental issue decided in NRG, namely whether a Bankruptcy
Court has the authority to reject a Commission-jurisdictional contract
without the seller first obtaining approval from the Commission to
terminate that contract under section 205. The court held, in pertinent
part, as follows:
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\6\ 378 F.3d 511 (5th Cir. 2004) (Mirant).
It is clear that FERC has the exclusive authority to determine
wholesale rates, see Mississippi Power & Light, 487 U.S. at 371, and
Mirant does not contest that it would need FERC approval to either
modify the rates in the Back-to-Back Agreement or to completely
abrogate that agreement. Cf. 11 U.S.C. 362(b)(4) (creating exception
from automatic stay for agencies acting to enforce their regulatory
power). Under the Bankruptcy Code, however, Mirant's rejection of
the Back-to-Back Agreement is a breach of that contract. See 11
U.S.C. 365(g) (``The rejection of an executory contract * * *
constitutes a breach of such contract * * *.''); see also In re
Continental Airlines, 981 F.2d 1450, 1459 (5th Cir. 1993)
(``[section] 365(g)(1) speaks only in terms of `breach.' The statute
does not invalidate the contract, or treat the contract as if it did
not exist.''). Thus, whether the FPA preempts a district court's
jurisdiction over a bankruptcy rejection necessarily depends upon
whether the FPA generally preempts a district court's jurisdiction
over claims of breach related to executory power contracts.
Outside of the bankruptcy context, the FPA does not provide FERC
with exclusive jurisdiction over the breach of a FERC approved
contract. While the FPA does preempt breach of contract claims that
challenge a filed rate, district courts are permitted to grant
relief in situations where the breach of contract claim is based
upon another rationale.
* * * * *
We conclude that the FPA does not preempt Mirant's rejection of
the Back-to-Back Agreement because it would only have an indirect
effect upon the filed rate. When an executory contract is rejected
in bankruptcy, the non-breaching party receives an unsecured claim
against the bankruptcy estate for an amount equal to its damages
from the breach. See 11 U.S.C. 365(g)(1), 502(g). If Mirant's
rejection of the Back-to-Back Agreement was approved, then PEPCO's
unsecured claim against the bankruptcy estate would be based upon
the amount of electricity it would have otherwise sold to Mirant
under that agreement at the filed rate.
* * * * *
The FPA does not preempt a district court's jurisdiction to
authorize the rejection of an executory contract subject to FERC
regulation as part of a bankruptcy proceeding. A motion to reject an
executory power contract is not a collateral attack upon that
contract's filed rate because that rate is given full effect when
determining the breach of contract damages resulting from the
rejection. Further, there is nothing within the Bankruptcy Code
itself that limits a public utility's ability to choose to reject an
executory contract subject to FERC regulation as part of its
reorganization process.
378 F.3d at 519-522 (emphasis in original).
9. Moreover, as the Mirant court recognized, the Commission has a
number of regulatory responsibilities under the Federal Power Act that
continue while a bankruptcy case is pending, that do not necessarily
impact a debtor's ability to reject a contract.\7\
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\7\ See also Louisiana Pub. Serv. Comm'n v. Mabey (In re Cajun
Elec. Power Coop., Inc.), 185 F.3d 446, 453 (5th Cir. 1999) (noting
that Bankruptcy Code `` `indirectly suggests continued governmental
regulatory jurisdiction' during the pendency of the bankruptcy
proceeding'') (citation omitted), cited in Mirant, 378 F.3d at 523;
FCC v. Nextwave Personal Communications Inc., 537 U.S. 293, 307 n.5
(2003) (on review of FCC's regulatory decisionmaking, in case
involving both Bankruptcy Code and Communications Act, Court noted
that Second Circuit had, on appeal from bankruptcy court, denied
subject matter jurisdiction to decide whether FCC's regulatory
decision was proper exercise of its discretion, and that D.C.
Circuit, on petition for review of FCC decision, had ``recognized
and seemingly approved that distinction [between regulatory and
bankruptcy matters]'').
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[[Page 1529]]
10. The 5th Circuit also provided guidance on the standard to be
applied in determining whether rejection of an FPA-jurisdictional
contract by a bankruptcy court is appropriate. The court noted that the
standard ordinarily applicable is the ``business judgment rule,'' but
it found that the Supreme Court had given greater protection to certain
contracts affected with the public interest, such as collective
bargaining agreements. NLRB v. Bildisco & Bildisco, 465 U.S. 513
(1984). The 5th Circuit therefore held that a higher standard may be
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appropriate for FPA-jurisdictional contracts, reasoning as follows:
The nature of a contract for the interstate sale of electricity
at wholesale is also unique. Additionally, Congress found when it
passed the FPA that the public has an interest in the transmission
and sale of electricity. 16 U.S.C. 824(a). This includes an interest
in the continuity of electrical service to the customers of public
utilities. 16 U.S.C. 824a(g) * * *. Clearly the business judgment
standard normally applicable to rejection motions is more
deferential than the public interest standard applicable in FERC
proceedings to alter the terms of a contract within its
jurisdiction. Use of the business judgment standard would be
inappropriate in this case because it would not account for the
public interest inherent in the transmission and sale of
electricity.
Therefore, upon remand, the district court should consider
applying a more rigorous standard to the rejection of the Back-to-
Back Agreement. If the district court decides that a more rigorous
standard is required, then it might adopt a standard by which it
would authorize rejection of an executory power contract only if the
debtor can show that it ``burdens the estate, [] that, after careful
scrutiny, the equities balance in favor of rejecting'' that power
contract, and that rejection of the contract would further the
Chapter 11 goal of permitting the successful rehabilitation of
debtors. See Bildisco, 465 U.S. at 526-27. When considering these
issues, the courts should carefully scrutinize the impact of
rejection upon the public interest and should, inter alia, ensure
that rejection does not cause any disruption in the supply of
electricity to other public utilities or to consumers. Cf. Id. at
527 (requiring the bankruptcy court to balance the interests of the
debtor, the creditors and the employees when determining what
constitutes a successful rehabilitation). The bankruptcy court has
already indicated that it would include FERC as a party in interest
for all purposes in this case under 11 U.S.C. 1109(b) and Fed. R.
Bankr. P. 2018. We presume that the district court would also
welcome FERC's participation, if this case is not referred back to
the bankruptcy court. Therefore, FERC will be able to assist the
court in balancing these equities.
378 F.3d at 525 (footnote omitted).\8\
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\8\ On remand, the district cout denied the rejection motion on
other grounds, and responded to the 5th Circuit by articulating a
heightened standard for rejection, under which the court would have
to determine whether rejection would compromise the public interest
(with input from the Commission, after affording it ``an opportunity
to engage in appropriate inquiry to enable it to evaluate the effect
* * * on the public interest''). In re Mirant Corp., 318 B.R. 100,
108 (N.D. Tex. 2004). An appeal from that order is pending before
the 5th Circuit. See Official Comm. of Unsecured Creditors v.
Potomac Elec. Power Co., et al. ( In re Mirant Corp.), Case No. 05-
10033 (5th Cir).
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11. Although the Commission reached a different result in NRG, a
federal court of appeals has now spoken to the issue addressed in NRG
and we intend to follow that authority. Under that authority, the
Commission is precluded from taking action under the FPA that impacts a
debtor's ability to reject an executory contract. A Bankruptcy Court
cannot reject a FERC-jurisdictional contract under the business
judgment rule ``because it would not account for the public interest
inherent in the transmission and sale of electricity.'' Id. Rather,
such a court must ``carefully scrutinize the impact of rejection upon
the public interest and * * * ensure that rejection does not cause any
disruption in the supply of electricity to other public utilities or to
consumers.'' Id.
12. The Commission seeks comment on whether rejection of the
Calpine 2 Contract would impact the public interest,\9\ including
whether rejection of the Calpine 2 Contract would cause ``any
disruption in the supply of electricity to other public utilities or to
consumers.'' Id.\10\ By seeking comment on this issue, the Commission
does not intend to supplant the role of the Bankruptcy Court in
considering whether to reject the Calpine 2 Contract. Rather, the
purpose of our inquiry is to develop a record on which the Commission
can, as necessary, make a determination, and then inform the Bankruptcy
Court, of its views regarding potential rejection of the Calpine 2
Contract by the Bankruptcy Court. In the Mirant case, the 5th Circuit
``presume[d] that the district court would * * * welcome FERC's
participation'' and that ``FERC will be able to assist the court in
balancing the equities.'' \11\ In order to provide such assistance, we
need to develop an appropriate record to render a decision.
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\9\ To the extent any party believes it should seek leave of the
Bankruptcy Court to submit further pleadings in this case, it should
do so.
\10\ In Calpine's Memorandum of Law in Support of Debtors'
Motion for Declaratory Judgment, Ex Parte Temporary Restraining
Order, and Preliminary Injunction Against the Federal Energy
Regulatory Commission, at p. 5, Calpine asserts:
If the Court permits the rejection of the energy contracts,
there will be no disruption in the supply of power. For its part,
Calpine will continue to produce all the energy that it may
profitably do so, and CDWR and the other counter-parties to the
contracts could readily obtain power from the national grid or from
Calpine, albeit at the market rates.
See also Complaint for Declaratory Judgment, Ex Parte Temporary
Restraining Order, and Preliminary and Permanent Injunction Against
the Federal Energy Regulatory Commission, at P 15 (``If the Court
permits the rejection of the energy contracts, there will be no
disruption in the supply of power. Calpine will continue to supply
electricity to CDWR and the other counter-parties to the contracts,
albeit at the market rates.'').
\11\ In re Mirant Corp., supra note 6.
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13. In addressing the effect of rejection on the public interest,
the parties should not confine their arguments to the factors normally
considered in a Mobile-Sierra context. As the court in Mirant held,
rejection of an executory contract constitutes a breach of contract,
not approval to terminate it under section 205 of the FPA. See 378 F.3d
at 519 (``rejection of the Back-to-Back Agreement is a breach of that
contract'' for which damages lie) (emphasis in original). In a section
205 proceeding, the issue is whether a party can terminate its
obligations and thereafter have no liability to its counterparty. To
obtain such approval, a party with a Mobile Sierra clause must meet a
very high burden under the public interest test. In this case, however,
there is no request by Calpine to terminate its obligations and
thereafter be free of liability to the California State Parties.
Rather, the issue is how the public interest bears on the Bankruptcy
Court's determination of whether to permit Calpine to breach its
obligations and, if so, to pay damages for such breach as determined by
the Bankruptcy Court.
14. We therefore direct the California State Parties to amend their
filing within fifteen (15) days to address the standard adopted in
Mirant. Intervenors shall have fifteen (15) days from the date of that
filing to file responses. Because we are also concerned whether
rejection of the Calpine 2 Contract may pose reliability concerns, we
also direct the California Independent System Operator Corporation
(California ISO) to address this issue in response to the California
State Parties' amended filing within 15 days of their amended filing.
[[Page 1530]]
The Commission will then be in a position to inform the Bankruptcy
Court, as necessary, of the impact on the public interest of a
potential rejection of the Calpine 2 Contract, or take such other
action as may be appropriate under the circumstances.\12\
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\12\ In the Mirant case, the 5th Circuit ``presume[d] that the
district court would * * * welcome FERC's participation'' and that
``FERC will be able to assist the court in balancing the equities.''
Id.
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15. Finally, consistent with the due date established above for
intervenors to submit responses to the California State Parties'
amended filing, interventions shall be due on or before 15 days after
the California State Parties submit their amended filing.\13\
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\13\ On December 22, 2005, the Commission issued a notice of the
California State Parties' filing, with interventions and protests
due on or before January 19, 2006. However, the January 19 comment
date established by that notice is superseded by the comment
procedures established in this order.
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The Commission orders:
(A) The California State Parties are hereby directed to amend their
December 19, 2005 filing within 15 days of the date of this order, as
discussed in the body of this order.
(B) Interventions and responses to the California State Parties'
amended filing will be due within 15 days after the California State
Parties submit their amended filing, as discussed in the body of this
order.
(C) The California ISO is hereby directed to file a response to the
California State Parties' amended filing within 15 days after the
California State Parties submit their amended filing, as discussed in
the body of this order.
(D) The December 22, 2005 notice of filing in Docket No. EL06-30-
000 is hereby superseded by the comment procedures established in
Ordering Paragraphs (A)-(C).
(E) The Secretary shall promptly publish this order in the Federal
Register.
By the Commission.
Magalie R. Salas,
Secretary.
[FR Doc. E6-87 Filed 1-9-06; 8:45 am]
BILLING CODE 6717-01-P