May 26, 2020

May 26, 2020

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PG&E Seeks Declaratory Judgment Confirming Bankruptcy Court's Exclusive Jurisdiction To Determine Rejection Of Power Purchase Agreements

PG&E Corporation and its utility subsidiary Pacific Gas & Electric Company (PG&E) recently filed the largest utility bankruptcy in U.S. history, and the sixth-largest corporate bankruptcy ever. As we noted prior to PG&E’s bankruptcy filing, one of the critical issues, in this case, is how PG&E intends to address its contracts with energy suppliers, including the solar and wind farms that sell energy to PG&E under long-term power purchase agreements (PPA).

These PPAs represent PG&E’s contractual commitments to approximately 350 counterparties totaling $44 billion, which is approximately three times PG&E’s 2017 gross revenues. Many of these PPAs are significantly above-market today, as they were entered into years ago when solar and wind power was much more expensive. A crucial issue in the PG&E case, and one that typically arises in utility bankruptcies, is whether a bankruptcy court alone has jurisdiction to approve a PPA rejection, or whether the Federal Energy Regulatory Commission (FERC) must also approve such rejection.

In order for a utility to adjust rates or otherwise modify PPAs outside of bankruptcy, approval must be obtained from FERC. The Federal Power Act grants FERC exclusive jurisdiction over the rates, terms and conditions of such contracts, and FERC is prohibited from modifying contractual rates unless the rate “seriously harms the public interest.” In a bankruptcy, however, a debtor is permitted to reject contracts subject to bankruptcy court approval and render each contract counterparty as merely the holder of a general unsecured claim – for which recovery is often uncertain.

Importantly, the standard for bankruptcy court approval of a debtor’s contract rejection is a much lower standard than the FERC standard outside of bankruptcy. A bankruptcy court will approve a debtor’s contract rejection if the debtor exercised “sound business judgment,” and this lower standard usually results in bankruptcy courts approving contract rejections.

FERC asserted its position in the days prior to PG&E filing for bankruptcy protection by issuing an order finding that both the bankruptcy court and FERC have “concurrent jurisdiction to review and address the disposition of wholesale power contracts sought to be rejected through bankruptcy.” In response, PG&E filed an adversary proceeding in bankruptcy court seeking (1) a declaratory judgment confirming the bankruptcy court’s exclusive jurisdiction over PG&E’s ability to reject any of its PPAs, and (2) injunctive relief against FERC prohibiting any further action FERC might take. PG&E’s complaint also seeks a ruling that FERC has no jurisdiction and that PG&E does not need FERC’s approval to reject any PPAs.

Bankruptcy courts across the country have ruled different ways in prior utility bankruptcies, with some finding that a bankruptcy court has exclusive jurisdiction to approve a PPA rejection and others finding that FERC must also approve a rejection. It is uncertain how the court will rule in the PG&E bankruptcy. Thus it is critical that PPA counterparties engage as active participants to preserve and enforce their rights, so as to maximize the value of their PPAs and ultimate monetary recovery.



About this Author

James Van Horn Bankruptcy lawyer Barnes Thornburg

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...

Ralph Dudziak Corporate & Finance Attorney

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.

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William Ewing Energy Industry Tax Attorney

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...