On December 12, 2019, the US Court of Appeals for the Sixth Circuit issued a highly anticipated ruling in theFirstEnergy Solutions Corp. bankruptcy case, regarding the efforts of FirstEnergy Solutions Corp. (FirstEnergy or FES) to reject certain wholesale power purchase contracts.

In In re FirstEnergy Solutions Corp., 2019 WL 6767004 (6th Cir. Ct. App.), the United States Court of Appeals affirmed in part, reversed in part, and remanded to the bankruptcy court for further consideration, the determination that the bankruptcy court held exclusive and unlimited jurisdiction and therefore could enjoin FERC from taking action regarding energy contracts because under the BJR they were financially burdensome on FES and as such could be rejected.

Facts

Introduction

Developers and other sellers of electricity have traditionally viewed utilities as creditworthy counterparties. Utilities are longstanding institutions that provide a public service and receive a regulated rate of return.

Climate change, and the resulting legal and regulatory responses, however, are beginning to change the core business model of utilities. These changes have the potential to affect the structure of the wholesale electricity market and drastically impact sellers, particularly renewable generation developers.

On December 12, 2019, the Sixth Circuit issued an opinion^[1] in the ongoing bankruptcy proceedings of FirstEnergy Solutions Corp. The decision upheld the ability of a bankruptcy court to decide whether a power purchaser in bankruptcy proceedings can reject FERC-approved power purchase agreements (PPAs).

On December 12, 2019, the United States Court of Appeals for the Sixth Circuit (“Sixth Circuit”) issued an opinion affirming in part and reversing in part a bankruptcy court’s assertion of exclusive and unlimited jurisdiction over certain of FirstEnergy Solutions’ (“FES”) power purchase agreements that FERC had previously approved under the Federal Power Act (“FPA”) and that FES sought to reject in bankruptcy.

U.S. Bankruptcy Judge Dennis Montali recently ruled in the Chapter 11 case of Pacific Gas & Electric (“PG&E”) that the Federal Energy Regulatory Commission (“FERC”) has no jurisdiction to interfere with the ability of a bankrupt power utility company to reject power purchase agreements (“PPAs”).

The recent chapter 11 filings by PG&E Corp. and its Pacific Gas & Electric Co. utility subsidiary (collectively, "PG&E") and FirstEnergy Solutions Corp. have reignited the debate over the power of a U.S. bankruptcy court to authorize the rejection of contracts regulated by the Federal Energy Regulatory Commission ("FERC"). Only a handful of courts have addressed this thorny issue to date, and with conflicting results in a controversy that may ultimately need to be resolved by the U.S. Supreme Court or legislative action.

When a business entity that is regulated by the Federal Energy Regulatory Commission (FERC) is closely related to another business entity, FERC takes the position that under some circumstances it may treat the two different legal entities as if they were one single entity.

With the May 1 order, the Commission reaffirms its view that it has concurrent jurisdiction over debtors’ efforts to reject their FERC-jurisdictional contracts in bankruptcy. Further developments in judicial proceedings in the Sixth and Ninth Circuits are expected.