Commission Watch

The commission's power grab over bankruptcy courts condemns merchants to a corporate netherworld.

Since we last visited the conflict between the Federal Energy Regulatory Commission (FERC) and bankruptcy courts over who decides whether a debtor can terminate unprofitable power contracts,¹ a new district court decision out of Texas has come down tilting the field in favor of FERC's assertion of exclusive authority. For merchant energy companies struggling with dwindling capital and mounting credit risks, this change could mean bankruptcy is no longer a viable option for reorganizing.

This latest decision, from , casts doubt on the ability of merchant energy companies in bankruptcy to reject economically burdensome contracts with load-serving entities without FERC approval. Section 365 of the Bankruptcy Code² ordinarily allows a debtor to reject unprofitable contracts. But for energy merchants that section could lose all meaning as applied to forward wholesale power agreements with load-serving entities if courts elsewhere follow this Mirant decision. Under this new paradigm, FERC would have to bless any rejection even if the bankruptcy court finds the contract is a loser for the energy merchant. Complicating matters, FERC has shown little interest in understanding the balance of debtor and creditor rights in the Bankruptcy Code provisions dealing with rejected contracts.