Jealous guardians in the psychedelic kingdom: federal regulation of electricity contracts in bankruptcy.

• Jurisdiction: United States
• Author: Sur, Indraneel
• Date: 01 May 2004

Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. (1) Science tells us by the way that the Earth would not merely fall apart but vanish like a ghost, if Electricity were suddenly removed from the world. (2) INTRODUCTION

Companies that supply electricity for eventual retail use face an increased demand for stable and reliable power. (3) A rude reminder of this fact came on August 14, 2003, when a massive blackout demonstrated to fifty million people in the United States and Canada that the transmission of electricity along our power grid, though usually dependable, is also fragile. (4) In response to the blackout, some officials called for tighter federal regulations. (5) At the same time, electric utilities are confronting more demanding lenders; over the last five years, several utilities have sought relief from their creditors in bankruptcy court. (6) When a company that sells power in wholesale markets files for bankruptcy, history does not readily answer the question of whether federal energy regulators or bankruptcy courts have higher authority over the debtor-utility's affairs. (7) The answer, insofar as it affects the ability of a utility to stay afloat, is important because people and businesses depend on electric power to function in an electronic age, as illustrated by the August 14th blackout.

When a debtor-utility tries to exercise its right in bankruptcy to escape an unfulfilled power sale contract, the bankruptcy court must confront the issue of whether the Federal Energy Regulatory Commission (FERC or Commission) has greater authority than the court. In 2003, two bankruptcy courts recommended rejection of such contracts, but were overruled by their district courts, who favored FERC. (8) Judges thus appear to be reaching different results on this point. Further, precedent and previous commentary do not entirely resolve the issue. (9) Confusion over whether FERC or a bankruptcy court has clearer jurisdiction over these kinds of disputes results in increased time on jurisdictional arguments, leading to higher litigation costs. Superficially, the effect of increased costs for utilities might appear less problematic than similar effects on individual plaintiffs in, for example, civil rights cases. (10) However, because the utilities in these cases are debtors in bankruptcy, the stakes are high. Costly delays can erode creditor confidence in the debtor and consume resources better devoted to keeping the utility in business. It is unclear who would benefit if FERC ordered a utility undergoing bankruptcy reorganization to perform an onerous electricity contract and thereby drive that utility into liquidation.

The reasoning of the two district courts notwithstanding, there are strong reasons to conclude that bankruptcy courts are capable of resolving these disputes. Beyond their focus on debtor-creditor relations, these courts also have the necessary know-how and the procedural capacity to give life to the important consumer protection policies that underlie federal energy regulation. This Comment draws on theories of administrative law and civil procedure concerning the role of bankruptcy courts and federal administrative agencies to explain why bankruptcy courts are better equipped than FERC to handle these situations.

Part I provides an overview of federal regulation of utility wholesale power contracts as it functions outside bankruptcy. Part II discusses bankruptcy courts' ability to approve a debtor's rejection of executory contracts. Part III contains a synopsis of two recent cases where this ability conflicted with the federal regulation of energy. Part IV presents arguments based on constitutional structure, institutional expertise, and democratic control balanced against procedural capacity to suggest why bankruptcy courts are better than FERC at definitively handling these questions. In particular, this Comment suggests that a bankruptcy court should allow FERC to determine, through a swift proceeding, whether the public interest would be injured if a debtor-utility stopped performance on a financially burdensome, federally regulated power contract. If so, then FERC should present its view by intervening in the bankruptcy case. If the debtor can show by a preponderance of the evidence that performance of the contract would endanger the successful reorganization of the company, then the court should allow the debtor to stop performance. Finally, this Comment concludes that federal regulators, despite jealous guardianship of their authority over interstate power sales contracts, should yield final authority to the bankruptcy courts, whose expertise and access procedures enable proper balancing of public interests with debtor rights under federal bankruptcy law.

1. FERC's AUTHORITY OVER WHOLESALE POWER CONTRACTS: A JEALOUS GUARDIANSHIP

   Like so many other important entities in our administrative state, FERC has its origins in the New Deal. The agency's predecessor, the Federal Power Commission, (11) took jurisdiction over interstate power sales in 1935 with Congress's revisions to the Federal Power Act (FPA). (12) Congress's decision to mandate federal oversight of the power companies when they act in interstate commerce stemmed from legislative hostility toward the massive utility holding companies that dominated the electrical power market into the mid-1930s. (13) FERC's "'[statutory jurisdiction] over sales of electric energy extends only to wholesale sales,'" (14) while the statute leaves to state regulation "'sales of electric energy at retail.'" (15)

   Outside bankruptcy, (16) one of the linchpins of public oversight over the private power market participants contained in the FPA is the requirement that electric utilities file their rates and contracts with FERC, which is called the "filed rate" doctrine. FERC is responsible for "the business of transmitting and selling electric energy for ultimate distribution to the public." (17) The FPA allows a regulated utility to raise its rates, but only with FERC's permission, and the statute mandates that FERC ensure all rates are "just and reasonable." (18) The statute further requires that "all contracts which in any manner affect or relate to such rates, charges, classifications, and services" for the transmission or sale of electricity by public utilities be filed with FERC and are subject to its approval. (19) The implementing regulations specify that utilities may not deviate from their contracts within FERC's jurisdiction unless they obtain the Commission's approval. (20)

   FPA's requirement that FERC guard the public interest is both a critical mandate to the Commission and, often, a justification for the Commission's actions in proceedings that challenge it. (21) When a company wants to modify a contract filed with FERC, for example, it must make a showing concerning the public benefit of that modification. Two cases involving FERC's powers in the 1950s formed the basis of what is now called the Mobile-Sierra doctrine, (22) which "'represents the Supreme Court's attempt to strike a balance between private contractual rights and the regulatory power to modify contracts when necessary to protect the public interest.'" (23) FERC undertakes Mobile-Sierra review of a proposed rate change in a power contract, as long as the private parties have not expressly established that an alternative standard of review should apply to any changes in the contract. (24) The D.C. Circuit has explained the doctrine this way:

   In Mobile, the Supreme Court recognized that intervening circumstances may create a situation in which contractual terms and conditions that were just and reasonable at the time the contract was executed are no longer just and reasonable. But concluding that a utility is not typically "entitled to be relieved of its improvident bargain," the Sierra Court required that FERC's predecessor, the Federal Power Commission, show more than that the contract was unjust and unreasonable--the Commission had to find that contract modification was in the public interest. (25) The Mobile-Sierra public interest determination is exemplified by, although not limited to, inquiry into whether the existing contract rate is so low that it "might impair the financial ability of the public utility to continue its service, cast upon other consumers an excessive burden, or be unduly discriminatory." (26) Although the only recent commentator to study the doctrine, Carmen Gentile, characterizes it as a "dark and arcane science," (27) at least two things are clear. First, as the "financial ability" phrase indicates, a significant part of FERC review focuses on "whether performance of the contract in accordance with its terms might result in bankruptcy or insolvency of the utility, so that its retail customers might suffer an interruption in their service." (28) Thus, it requires FERC to examine financial information at the heart of bankruptcy law. Second, under the doctrine, the Commission has historically been reluctant to permit contract modifications. Consequently, the Mobile-Sierra barrier has been called a "practically insurmountable" (29) one that can leave a firm supplying power at a less-than-advantageous rate under a filed contract.

   In ordinary life--that is, outside bankruptcy--FERC's supervision of power sale or transmission contracts allows it to protect power customers in at least two important ways: by preventing certain inequalities in pricing to different users of electricity, (30) and by ensuring some uniformity of regulation, even though utilities are also subject to state oversight for many of their activities.

   FERC's rate regulation has the advantage of preventing states from setting unfairly low in-state electricity rates at the expense of utilities. As Nicholas Fels and Frank Lindh have explained, under...