Fed. Energy Regulatory Comm'n v. FirstEnergy Solutions Corp. (In re Firstenergy Solutions Corp.)

Decision Date12 December 2019
Docket NumberNos. 18-3787/3788/4095/4097/4107/4110,s. 18-3787/3788/4095/4097/4107/4110
Citation945 F.3d 431
Parties IN RE: FIRSTENERGY SOLUTIONS CORP., et al. Debtors. Federal Energy Regulatory Commission (18-3787); Ohio Valley Electric Corporation (18-3788 & 18-4095); Duke Energy Ohio, Inc. (18-4097); Office of The Ohio Consumers’ Counsel (18-4107); Maryland Solar Holdings, Inc. (18-4110), Appellants, v. FirstEnergy Solutions Corp.; FirstEnergy Generation, LLC ; Official Committee of Unsecured Creditors; Ad Hoc Noteholders Group; Pass-Through Certificateholders, Appellees.
CourtU.S. Court of Appeals — Sixth Circuit

ALICE M. BATCHELDER, Circuit Judge.

FirstEnergy Solutions Corp. (FES) and a subsidiary filed Chapter 11 bankruptcy and initiated an adversary proceeding to enjoin the Federal Energy Regulatory Commission (FERC) from interfering with its plan to reject certain electricity-purchase contracts that FERC had previously approved under the authority of the Federal Power Act (FPA), 16 U.S.C. § 791a, et seq ., and/or the Public Utilities Regulatory Policies Act (PURPA), 16 U.S.C. § 2601, et seq . FERC opposed the action. Several other parties intervened to oppose the action as well, including three counterparties to those contracts (Ohio Valley Electric Corp. (OVEC), Duke Energy, and Maryland Solar Holdings Inc.) and the Ohio Consumers’ Counsel.

The bankruptcy court decided that it had exclusive and unlimited jurisdiction, while FERC had no jurisdiction, and enjoined FERC from taking any action relating to the contracts. The bankruptcy court then applied the ordinary business-judgment rule and found that the contracts were financially burdensome to FES, so it permitted FES to reject them, rendering the contracts "breached" and the counterparties unsecured creditors to the bankruptcy estate. Each of the opponents appealed and sought leave to appeal directly to the Sixth Circuit, which we granted. We consolidated the appeals, which arise from both the injunction and contract-rejection orders.

The questions here concern the status of these federal-agency-endorsed contracts in bankruptcy proceedings, the nature and extent of jurisdiction as between the bankruptcy court and the federal agency (FERC), and the proper standard for deciding a Chapter 11 debtor’s request to reject such contracts. We conclude that the bankruptcy court has jurisdiction to decide whether FES may reject the contracts, but that its injunction of FERC in this case was overly broad (beyond its jurisdiction), and its standard for deciding rejection was too limited. Therefore, we AFFIRM in part, REVERSE in part, and REMAND to the bankruptcy court for further consideration.

I.

FES distributes electricity, buying it from its fossil-fuel and nuclear electricity-generating subsidiaries and selling it to retail clients, corporate affiliates, and in the PJM1 spot market. FES has 1.3 million customers in six states and a total capacity of 10,000 megawatts (MW).

Since at least 2003, regulations have required FES to buy a certain amount of "renewable energy credits" (RECs). But back in 2003, and until at least 2011, three things were very different than they are now: (1) FES’s retail electricity sales were much greater, so its REC requirements were correspondingly greater; (2) the supply of RECs was more limited, so FES was compelled to enter long-term contracts to get enough RECs at an agreeable price; and (3) electricity prices were much higher and were expected to remain high. To ensure a long-term supply of RECs, FES signed eight power purchase agreements (PPAs), totaling 500 MW of gross capacity (though an effective capacity of only 75 MW because renewable energy capacity is more intermittent2 ). Under these PPAs, FES purchased the RECs (and the power, capacity, and ancillary services) from wind- and solar-based generating facilities, such as Duke and Maryland Solar. Also, FES signed three of the PPAs (93 MW of energy) to satisfy a subsidiary’s consent decree with the United States Environmental Protection Agency (USEPA).3

In recent years, however, the government has relaxed the REC requirements; there is an abundance of RECs available for purchase; and energy and capacity prices are much lower. These market changes rendered the PPAs financially burdensome to FES, which is in the process of selling (or has sold) its entire retail business and has no commercial or regulatory need for the RECs from these PPAs—it estimates that it is losing $46 million per year on these PPAs.4

Several years ago, FES also entered into a multi-party intercompany power purchase agreement (referred to in this case as "ICPA," for "inter-company power agreement") with 12 other companies, including Duke, in which each participant agreed to a proportionate stake in the electricity production from and management, maintenance, and ultimate decommissioning of OVEC’s fossil-fuel-based electricity generating plants. As with the PPAs, FES no longer needs the electricity from this contract and these prices are very high. FES’s stake is 4.85%, under which FES expects to lose approximately $268 million over the remaining term (i.e., until 2040).5

In March 2018, FES filed for bankruptcy under Chapter 11 and immediately (the next day) filed an adversary complaint against FERC, seeking (1) a declaratory judgment that the bankruptcy court’s jurisdiction is superior to FERC’s and (2) injunctions prohibiting FERC from interfering with its intended rejection of the ICPA and the PPAs (i.e., forbidding FERC from ordering it to continue to perform under those contracts) and prohibiting FERC from even conducting any proceedings concerning those contracts (i.e., preventing FERC’s regulatory mandated hearings about them). FES argued that this was just a piece of its overall bankruptcy restructuring6 and it was necessary for it to reject these contracts to implement a successful reorganization; but, if FERC prevented (or even delayed) that rejection, then FES could not overcome the ongoing expense of the contracts.

FES emphasized that its problem with these contracts was not just the prices of the electricity and RECs. Rather, FES has no need (or use) for the electricity, the RECs, or the standby capacity from these contracts. FES’s retail electricity sales dictate its regulation-based need for RECs, but it is now selling less than half of the retail electricity it sold in 2013 and is trying to leave (or has left) the retail business entirely. Even if it were not leaving this business, FES has enough surplus RECs in inventory to cover its retail business for years. FES explained that none of FES’s customers—or any consumer—would lose electricity without the ICPA or the PPAs. In 2017, the total electricity bought under these contracts was just 0.2% of the PJM market (i.e., 1.9 of 767 terawatt hours, TWh). And FES insisted that the contract counterparties could easily sell their electricity to other wholesale purchasers or into the PJM regional wholesale electric markets.

Four interested parties (OVEC, Duke, Maryland Solar, and OCC) intervened and joined FERC in arguing against the requested declaratory judgment (i.e., against the bankruptcy court’s having exclusive jurisdiction) and against the injunctions (i.e., against the claim that the automatic stay provision or the bankruptcy court’s power to protect its orders justified the injunction). They argued that the FPA gave FERC exclusive jurisdiction over energy contracts; that once a contract has been filed with FERC, the "filed-rate doctrine" holds that FERC and only FERC can modify or abrogate that contract; and that the " Mobile - Sierra doctrine" holds that FERC may only do so if it finds that the contract is not just and reasonable, in that it seriously harms the public interest. Therefore, they argued, FERC has exclusive jurisdiction to determine whether the contracts could be abrogated; or, alternatively, concurrent jurisdiction to determine the public-interest aspect of FES’s intended rejection. They argued that Chapter 11’s automatic stay provision did not apply because FERC’s authority over these filed contracts fell within the "regulatory powers" exception, nor could the bankruptcy court overcome FERC’s congressionally granted authority to regulate such filed contracts and the parties to these contracts. Basically, if these appellants had their way, FERC would hold a hearing to determine whether rejection of the contracts would harm the public interest and, if so, FERC would either—under an exclusive-jurisdiction theory—forbid the rejection (i.e., compel FES to continue to perform the contracts), or—under a concurrent-jurisdiction theory—provide the bankruptcy court with a statutory-based reason to deny the rejection (i.e., compel FES to assume the contracts in bankruptcy). Of course, if FERC were to determine that rejecting the contracts did not seriously harm the public interest, then, presumably, it would cede the decision to the bankruptcy court.7 FES says that, because time is money, it can neither wait for FERC to conduct such a hearing (and issue a decision) nor risk a FERC order disallowing rejection (and then wait to conclude an appeal of such a FERC decision).

The bankruptcy court acted immediately, issuing a temporary restraining order while it pondered the motions. At a hearing on May 11, 2018, the court recognized that OVEC had already (prior to FES’s bankruptcy filing8 ) moved FERC to assert its jurisdiction over the contracts (as superior to the bankruptcy court’s jurisdiction), confirm the contracts, and order FES to continue performing. The bankruptcy court found that, while OVEC’s request "may incidentally serve the public interest," it would more substantially adjudicate private rights of the counterparties so as to "result in a pecuniary advantage to [them] vis-à-vis other creditors ... contrary to the Bankruptcy Code’s priorities," and that was "the obvious and dominant purpose of the FERC proceeding."9 The court...

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