Fifth Circuit Rejects FERC Regulated Filed-Rate Contracts

Fifth Circuit Rejects FERC Regulated Filed-Rate Contracts

On March 14, 2022, the United States Court for the Fifth Circuit re-examined the issue of the rejection of filed-rate contracts in bankruptcy, where such contracts were governed by the Federal Energy Regulatory Commission (“FERC”). Federal Energy Regulatory Commission v. Ultra Resources, Incorporated, No. 20-20623 (5th Cir. Mar. 14, 2022) (In re: Ultra Petroleum Corporation). This marks the first time that the Fifth Circuit has addressed the stated issue since its 2004 decision in In re Mirant Corp. 378 F.3d 511 (5th Cir. 2004) (“Mirant”).

The present issue revolved around a filed-rate contract between Ultra, the respondent, and Rockies Express Pipeline LLC (“REX”). Pursuant to the contract, the respondent was liable to pay REX a total of $169 million from December 2019 till December 2026, as consideration for reserved capacity on a REX pipeline. The reserved capacity was provided irrespective of the respondent’s utilization of the same. In response to the decline in the commodity prices for oil and gas, the respondent had to suspend its drilling program in September 2019, thus, implying non-utilization of its reserved space on the REX pipeline.

REX anticipated that the respondent might file for bankruptcy, and it thereby petitioned FERC for a declaration that the respondent could not reject the filed-rate contract without FERC’s approval. However, before FERC could decide on the matter, respondent filed for bankruptcy and moved a motion before the bankruptcy court to reject the contract before FERC could decide on the matter.

The bankruptcy court relied on the Mirant case and held that it had the authority to approve the rejection of the contract. It further stated that the rejection of the same did not tantamount to a rate change which would conflict with FERC’s undivided authority relating to rate changes under the Natural Gas Act. It found that rejection of the contract would not imply any rate change which would require FERC’s approval under Section 1129(a)(6) of the Bankruptcy Court prior to the confirmation of a Chapter 11 plan that states that

“(a) [t]he court shall confirm a plan only if….:
(6) [a]ny governmental regulatory commission with jurisdiction, after confirmation of the plan, over the rates of the debtor has approved any rate change provided for in the plan, or such rate change is expressly conditioned on such approval.

An appeal was made before the Fifth Circuit that addressed the issue as a “clash of two congressionally constructed titans”, viz. FERC and the bankruptcy courts. It said, “today’s battlefield lies in the shadow of our precedent in [Mirant]” and, in light of the holding in Mirant, “what FERC casts as a pitched battle is actually a settled truce.”

FERC in its argument challenged the language in the Mirant judgment. The Court ruled that the Mirant judgment would fit fine in the present matter for certain propositions, which are as follows:
a. the power vested in the bankruptcy courts to authorize rejection of a filed-rate contract does not conflict with FERC’s authority to regulate the rate, as such rejection would not imply a rate change;

b. while adjudicating upon rejection motions, the bankruptcy court must take into account whether such rejection harms the public interest or disrupts the supply of energy and then weigh those effects against the burden on the bankruptcy estate;

c. rejection is not a collateral attack on the contract’s filed rate and thereby FERC’s jurisdiction, as long as the rejection is approved for reasons beyond the fact that the debtor would prefer a lower rate. This is because the rate is given full effect when deciding on the damages resulting from the rejection.

The Fifth Circuit found that Mirant held the water in the present case and that “each element [of Mirant] is satisfied here”. It rejected FERC’s argument that the Mirant judgment required a bankruptcy court to hold its judgment until FERC releases an opinion on the public-interest-related consequences of rejecting a filed-rate contract. The Court refuted the argument and cited the need for speedy proceedings in Chapter 11 bankruptcy. Thus, the Court affirmed the findings of the United States Bankruptcy Court for the Southern District of Texas, which were a) FERC cannot require the respondent/the debtor to continue performance of the rejected filed-rate contract, and b) FERC’s approval was not required pursuant to Section 1129(a)(6) of the Bankruptcy Code prior to the Bankruptcy Court confirming respondent’s Chapter 11 plan of reorganization.

The judgment delivered by the Court would guide the contract parties who anticipate bankruptcy of their counterparties in the near future, to approach FERC in order to receive a favorable decision well before commencement of the bankruptcy. Further, the Court has clearly stated that FERC should be considered a party-in-interest, and thus a favorable ruling from it could establish early that the public interest from reject of a filed-rate contract would be adversely affected. However, it should be noted that a ruling from FERC would not have any res judicata effect.

Also, the judgment might get disagreements from other circuits over the extent of FERC’s involvement in the rejection process. In the matter of Calpine Corp., 337 B.R. 27 (S.D.N.Y. 2006), the bench at the Southern District of New York opined that while deciding on the rejection of a FERC-regulated contract, the “executive agency, FERC, should determine that interest”. Thus, this can also lead to a state of a conundrum as FERC would be the deciding agency in relation to the effect on the public interest in New York, but in Fifth Circuit, a bankruptcy court would only have to “extend the invitation” to FERC to participate in the bankruptcy proceedings as a party-in-interest.

Research and Writing By: Team Draft n Craft

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