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Bankruptcy Court Rules It Has Exclusive Jurisdiction To Determine Rejection Of Power Purchase Agreements

Earlier this year, PG&E Corporation and its utility subsidiary, Pacific Gas & Electric Company (PG&E), filed the largest utility bankruptcy in U.S. history, and the sixth-largest corporate bankruptcy ever. As we previously noted, a crucial issue, in this case, was whether the U.S. Bankruptcy Court for the Northern District of California alone will have exclusive jurisdiction to approve any PG&E rejection of long-term power purchase agreements (PPA), or whether the Federal Energy Regulatory Commission (FERC) must also approve such rejection.

On June 7, 2019, the bankruptcy court ruled that it has exclusive jurisdiction to determine any PPA rejection and that FERC has no jurisdiction over the matter. While the Federal Power Act (FPA) grants FERC exclusive jurisdiction over the rates, terms and conditions of such contracts – which FERC largely relied upon in asserting its right to concurrent jurisdiction – the bankruptcy court found that nothing in the FPA or the U.S. Bankruptcy Code grants FERC concurrent jurisdiction with the bankruptcy court to determine PPA rejections. The bankruptcy court further found that the bankruptcy code is the proper and only authority to apply, and not any aspect of the FPA.

Potentially noteworthy in the bankruptcy court’s decision was its pronouncement that it would adopt a more rigorous standard promulgated by the U.S. Court of Appeals for the Fifth Circuit beyond the usual standard of the debtor’s business judgment in determining PPA rejections. The bankruptcy court stated that if it determines that consideration of a PPA rejection implicates public policy interests as well as reorganizational goals, those interests could be considered. In so doing, the bankruptcy court made clear to all parties that it very well might consider anything it deems to be “public policy interests” in addition to what the debtor’s “business judgment” is in ruling on PPA rejections.

While this is a more rigorous standard than normal for a contract rejection in bankruptcy, it is still arguably lower than the FPA standard which prohibits FERC from modifying contractual rates of PPAs unless the rate “seriously harms the public interest.”

The bankruptcy court’s decision also rather strongly rebuked FERC’s issuing of its own decision before PG&E’s bankruptcy filing in which FERC asserted that it had concurrent jurisdiction with the bankruptcy court in determining PPA rejections. The bankruptcy court found that FERC acted outside of its statutory authority in issuing the decision, the decision had “no impact on anyone,” the effect of this FERC decision “guts and renders meaningless the bankruptcy court’s responsibilities in this area of the law” and, “for this reason, FERC must be stopped and the division and balance of power and authority of the two branches of government restored.”

The bankruptcy court stated it will certify its decision for direct appeal to the U.S. Court of Appeals for the Ninth Circuit. Pending any such appeal, one impact of this decision is that PG&E will not be required to expend additional time and resources seeking FERC approval of any PPA rejections in addition to bankruptcy court approval. Another impact is that PG&E and other stakeholders have been put on notice that the bankruptcy court may consider public policy interests in addition to the debtor’s business judgment in ruling on any PPA rejection.

There is still a great deal of potential uncertainty as to whether PG&E may be successful in rejecting any of its significantly above-market PPAs, and PPA counterparties should consider engaging as active participants to preserve and enforce their rights so as to maximize the value of their PPAs and ultimate monetary recovery.

© 2019 BARNES & THORNBURG LLP

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James Van Horn Bankruptcy lawyer Barnes Thornburg
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James "Jim" Van Horn focuses his practice on restructuring and insolvency law. He is a trusted adviser valued by clients for his practical, results-oriented approach and creative strategies in solving complex matters within the framework of their business goals. Jim is ranked as a Band 1 bankruptcy/restructuring attorney by Chambers USA and is named to The Best Lawyers in America.

Jim has deep experience working directly with senior management, investors, creditors and other stakeholders in matters ranging from out-of-court workouts, prepackaged and prearranged Chapter 11...

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Ralph Dudziak Corporate & Finance Attorney
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Trusted adviser and legal counselor Ralph Dudziak advises on financing and other corporate transactions, with an emphasis on the renewable energy sector. Ralph cares deeply about the clients he serves and the results he cultivates and achieves.

Ralph’s experience includes project finance and development, renewable energy project construction and term lending, tax equity financings, back-leverage financings, additional forms of secured lending, credit warehouses and securitizations, private placements and leasing. He also represents a variety of other business clients in myriad transactional matters.

In the energy sector, Ralph delivers veteran skill in negotiating the sophisticated and specialized project agreements that are inherent to energy projects, such as site control, power purchase, supply, and engineering, procurement and construction (EPC), operations, and maintenance agreements. His clients include sponsors, developers, traditional and alternative lenders, investors, tax equity investors, lessors, private equity firms, manufacturers, leasing companies, insurance companies, and government entities. Ralph also represents infrastructure facilities in solar, wind, biomass, hydro and other renewable energy projects.

Moreover, Ralph advises on equipment finance outside of the energy space. He has represented clients in and closed complex equipment-based finance matters, including aircraft and rolling stock financings, credit warehouses and operating lease term securitizations, transmission equipment financings, manufacturing equipment financings, and ECA-supported financings of transportation and power generation equipment.

In addition, Ralph counsels clients on a broad spectrum of leasing matters, including domestic and cross-border lease and leasehold financings, single investor lease financings, and leveraged, synthetic, terminal rental adjustment clause (TRAC) and operating leases. He has represented clients in various industries in secured privately placed or capital markets-funded financings, including lease receivable securitizations, leveraged financings, debtor-in-possession financings, whole loan sales, double-dip financings, lease portfolio transfers, workouts, ETC and EETC financings, 144A financings, and secured and unsecured private placements. Notably, he has experience with secondary market asset and tax equity trades and back-leveraging transactions.

Thoughtful and considerate, Ralph is appreciated by clients and colleagues alike for finding solutions to tough problems and for retaining a calm demeanor in difficult situations. Ralph is at his best when confronted with change, evolution and the implementation of novel strategies, which is a particularly important quality when advising on matters in renewable energy and other rapid growth markets.

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William Ewing Energy Industry Tax Attorney
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Bill Ewing advises and represents clients in a wide range of transactions with a particular focus on the energy industry. With over 25 years of experience, Bill understands the art of the deal and knows what it takes to close important transactions successfully in the most tax-advantageous manner — all while maximizing his client’s opportunity for success.

Co-chair of the firm’s Renewable Energy group, Bill represents clients in the energy industry in a variety of transactions, including partnership investments, sale/leaseback transactions, financings, acquisitions and sales of...

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