On June 22, 2020, the Federal Energy Regulatory Commission ("FERC") issued an order concluding that FERC and the U.S. bankruptcy courts have concurrent jurisdiction to review and address the disposition of natural gas transportation agreements that a debtor seeks to reject under section 365(a) of the Bankruptcy Code (11 U.S.C. ' 101 et seq.). See ETC Tiger Pipeline, LLC, 171 FERC 61,248 (2020), reh'g denied, 172 FERC 61,155 (Aug. 21, 2020). The order was issued in response to a petition filed on May 19, 2020, by ETC Tiger Pipeline, LLC ("Tiger") in which Tiger asked FERC to issue a declaratory order as to whether Chesapeake Energy Marketing, L.L.C. ("Chesapeake"), a counterparty to Tiger's natural gas transportation agreements, must obtain FERC's approval under sections 4 and 5 of the Natural Gas Act, 15 U.S.C. ch. 15B ' 717 et seq. ("NGA") prior to rejecting the agreements in an anticipated bankruptcy case. In the order, FERC stated that, "Where a party to a Commission-jurisdictional agreement under the NGA seeks to reject the agreement in bankruptcy, that party must obtain approval from both the Commission and the bankruptcy court to modify the filed rate and reject the contract, respectively."
FERC has previously taken the position that it shares jurisdiction with the bankruptcy courts to determine whether contracts subject to FERC regulation under sections 205 and 206 of the Federal Power Act, 16 U.S.C. ' 791a et seq. ("FPA"), can be rejected in bankruptcy (most notably in connection with the chapter 11 case filed by PG&E Corporation). See NextEra Energy, Inc. v. Pac. Gas & Elec. Co., 166 FERC ' 61,049 (2019); Exelon Corp. v. Pac. Gas & Elec. Co., 166 FERC ' 61,053 (2019), on reh'g, 167 FERC ' 61,096 (2019). However, this is the first time that FERC has made such a finding with respect to contracts regulated under the NGA.
The issue was also before FERC in connection with a petition filed on April 29, 2020, by Rockies Express Pipeline LLC ("Rockies") seeking a declaratory order finding that FERC has concurrent jurisdiction with the bankruptcy courts under the NGA and FERC regulations over any request by an affiliate of Ultra Petroleum Corp. ("UPC"), which filed for a pre-packaged chapter 11 case on May 15, 2020, to reject a natural gas transportation agreement with Rockies. The U.S. Bankruptcy Court for the Southern District of Texas authorized rejection of that agreement on August 6, 2020, noting in its August 21, 2020, written ruling that a bankruptcy court "is not authorized to graft a wholesale exception to ' 365(a) of the Bankruptcy Code ... preventing rejection of FERC approved contracts." In re Ultra Petroleum Corp., 2020 WL 4940240 (Bankr. S.D. Tex. Aug. 21, 2020).
Court rulings to date on the jurisdictional turf war between FERC and the bankruptcy courts have been a mixed bag. FERC's position on the question has evolved'the commission's current view is that it and the bankruptcy courts have concurrent jurisdiction to determine whether FERC-regulated agreements can be rejected in bankruptcy. Here, we offer a brief discussion of what is likely to remain a disputed issue for some time, especially given the recent spike in oil and gas company bankruptcies.
Bankruptcy Jurisdiction and Rejection of Executory Contracts
By statute, U.S. district courts are given "original and exclusive" jurisdiction over every bankruptcy "case." 28 U.S.C. ' 1334(a). In addition, they are conferred with nonexclusive jurisdiction over all "proceedings arising under" the Bankruptcy Code as well as proceedings "arising in or related to cases under" the Bankruptcy Code. 28 U.S.C. ' 1334(b). Finally, district courts are granted exclusive jurisdiction over all property of a debtor's bankruptcy estate, including, as relevant here, contracts, leases, and other agreements that are still in force when a debtor files for bankruptcy protection. 28 U.S.C. ' 1334(e). That jurisdiction typically devolves automatically upon the bankruptcy courts, each of which is a unit of a district court, by standing court order. 28 U.S.C. ' 157(a).
A bankruptcy court's exclusive jurisdiction over "executory" contracts or unexpired leases empowers it to authorize a bankruptcy trustee or chapter 11 debtor-in-possession ("DIP") to either "assume" (reaffirm) or "reject" (breach) almost any executory contract or unexpired lease during the course of a bankruptcy case in accordance with the provisions of section 365 of the Bankruptcy Code. Assumption generally allows the debtor, after curing outstanding defaults, to continue performing under the agreement or to assign the agreement to a third party for consideration as a means of generating value for the bankruptcy estate. Rejection frees the debtor from rendering performance under unfavorable contracts. Rejection constitutes a breach of the contract, and the resulting claim for damages is deemed to be a prepetition claim against the estate on a par with other general unsecured claims.
Accordingly, the power granted to debtors by Congress under section 365 is viewed as vital to the reorganization process. Rejection of a contract "can release the debtor's estate from burdensome obligations that can impede a successful reorganization." N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513, 528 (1984) (holding that rejection is allowed for "all executory contracts except those expressly exempted"). Typically, bankruptcy courts authorize the proposed assumption or rejection of a contract or lease if it is demonstrated that the proposed course of action represents an exercise of sound business judgment. This is a highly deferential standard akin in many respects to the business judgment rule applied to corporate fiduciaries.
The Federal Power Act, the Filed-Rate Doctrine, the Natural Gas Act, and the Mobile-Sierra Doctrine
Public and privately operated utilities providing interstate utility service within the United States are regulated by the FPA under FERC's supervision. Although contract rates for electricity are privately negotiated, those rates must be filed with FERC and certified as "just and reasonable" in order to be lawful. 16 U.S.C. ' 824d(a). FERC has the "exclusive authority" to determine the reasonableness of the rates. See In re Calpine Corp., 337 B.R. 27, 32 (S.D.N.Y. 2006). The FPA authorizes FERC, after a hearing, to alter filed rates if it determines that they are unjust or unreasonable. 16 U.S.C. ' 824e.
On the basis of this statutory mandate, courts have developed the "filed-rate doctrine," which provides that "a utility's right to a reasonable rate under the FPA is the right to the rate that FERC files or fixes and, except for review of FERC orders, a court cannot provide a right to a different rate." Calpine, 337 B.R. at 32. Moreover, the doctrine prohibits any collateral attack in the courts on the reasonableness of rates'the sole forum for such a challenge is FERC. Id. Applying the doctrine, some courts have concluded that, once filed with FERC, a wholesale power contract is tantamount to a federal regulation, and the duty to perform under the contract comes not only from the agreement itself but also from FERC. Id. at 33 (citing Pa. Water & Power Comm'n v. Fed. Power Comm'n, 343 U.S. 414 (1952); Cal. ex rel. Lockyer v. Dynergy Inc., 375 F.3d 831 (9th Cir. 2004)).
Although FERC has exclusive authority to modify a filed rate, its discretion...
