

[Federal Register: January 10, 2006 (Volume 71, Number 6)]
[Notices]               
[Page 1527-1530]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10ja06-29]                         

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. EL06-30-000]

 
 California Electricity Oversight Board; People of the State of 
California, ex rel., Bill Lockyer, Attorney General of the State of 
California, and California Department of Water Resources v. Calpine 
Energy Services, L.P.; Calpine Corporation; Power Contract Financing, 
and Gilroy Energy Center, L.L.C.; Order Providing Interim Guidance

Issued January 3, 2006.

Before Commissioners: Joseph T. Kelliher, Chairman; Nora Mead 
Brownell, and Suedeen G. Kelly.

    1. On December 19, 2005, the California Electricity Oversight 
Board, the California Attorney General, and the California Department 
of Water Resources (California State Parties) filed a Petition for 
Emergency Declaratory Order Requiring Continuing Performance of 
Jurisdictional Power Purchase Agreement and Complaint Requesting Fast 
Track Processing (Petition). The Petition seeks a Commission order 
requiring Calpine Energy Services, LP, and Calpine Corporation 
(Calpine) to continue to supply power, and otherwise perform, under a 
Master Power Purchase and Sale Agreement (Calpine 2 Contract). As 
explained in more detail below, because of a recently issued Ex Parte 
Temporary Restraining Order (TRO) against the Commission, we cannot 
grant the relief requested. However, in the event the Commission 
participates in the bankruptcy proceedings, we hereby provide interim 
guidance to the parties regarding the standard to be applied in this 
case, and require certain additional filings.

Background

    2. The California State Parties state in their Petition that they 
expect Calpine to file for reorganization under Chapter 11 of the 
United States Bankruptcy Code and, when it does, to request that the 
Bankruptcy Court reject the Calpine 2 Contract. The California State 
Parties state that, if the Commission does not act to require 
performance of the

[[Page 1528]]

Calpine 2 Contract, the Bankruptcy Court may enjoin the Commission from 
so acting. The Petition states that a similar result occurred when 
Mirant Corporation filed for bankruptcy and the Bankruptcy Court 
enjoined the Commission from taking certain actions with respect to 
Mirant.
    3. The California State Parties argue that the Commission should 
grant the relief requested because ``rejection of the Calpine 2 
Contract would: (1) Force California consumers to bear significantly 
higher costs; (2) undermine the parties' 2002 global settlement entered 
in order to resolve the State's claims arising in its 2000-01 energy 
crises; (3) jeopardize the State's efforts to put in place protections 
to ensure that the health, safety and welfare of California ratepayers 
are not adversely affected by a similar crisis in the future; and (4) 
threaten the stability of California electricity markets and 
potentially undermine the reliability of the California electricity 
grid, particularly during summer 2006.'' Petition at 6. The California 
State Parties state that an order granting this relief would be 
consistent with the Commission's action in Blumenthal v. NRG Power 
Marketing, Inc., 103 FERC ] 61,188 (2003), reh'g denied, 104 FERC ] 
61,211 (2003) (orders requiring performance), and Blumenthal v. NRG 
Power Marketing, Inc., 104 FERC ] 61,210 (2003) (order upholding 
contract) (NRG).
    4. On December 21, 2005, Calpine filed for bankruptcy in the United 
States Bankruptcy Court in the Southern District of New York. The 
Bankruptcy Court immediately issued an Ex Parte Temporary Restraining 
Order Against Federal Energy Regulatory Commission (TRO) that prohibits 
the Commission from taking any action ``to require or coerce the 
Debtors to continue performing under the executory contracts identified 
in Schedule 1.'' One of the contracts identified in Schedule 1 of the 
TRO is the Calpine 2 Contract.

Authority To Act

    5. Although the Bankruptcy Code provides that the filing of a 
bankruptcy petition automatically stays certain actions against the 
debtor,\1\ the Code also provides an exception from this automatic stay 
for:
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    \1\ 11 U.S.C. 362(a)(1).

    An action or proceeding by a governmental unit * * * to enforce 
such governmental unit's or organization's police and regulatory 
powers, including the enforcement of a judgment other than a money 
judgment, obtained in an action or proceeding by the governmental 
unit to enforce such governmental unit's or organization's police or 
regulatory power.[\2\]
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    \2\ 11 U.S.C. 362(b)(4).

    6. As noted earlier, the TRO entered on December 21, 2005 by the 
Bankruptcy Court in the Southern District of New York precludes the 
Commission from granting the relief requested. However the TRO does not 
preclude the Commission from issuing this Interim Guidance Order. 
Accordingly, this order provides guidance to the parties regarding the 
standards that will be applied in this case. It does not ``require or 
coerce'' Calpine to continue performing its executory contracts.

Discussion

    7. In NRG, the Commission addressed ``an issue of first impression: 
Whether a bankruptcy court's approval of a public utility seller's 
request to reject a contract between it and a buyer precludes the 
Commission from making an independent determination, pursuant to the 
Federal Power Act (FPA), as to whether that seller must continue [to] 
fulfill its contractual obligations to provide service to the buyer.'' 
\3\ In answering that question, ``[t]he Commission found that, even if 
a public utility files for bankruptcy, the utility still must meet its 
obligations under the FPA.'' \4\ The Commission then proceeded to 
address in a paper hearing whether NRG could meet the Mobile Sierra 
standard applicable to a request to terminate the contract under 
section 205 of the FPA. The Commission held that NRG could not do so 
and therefore ordered it to perform under the contract.\5\
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    \3\ 104 FERC ] 61,210 at P1.
    \4\ Id.
    \5\ NRG, 104 FERC ] 61,210.
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    8. Subsequently to our decision in NRG, the United States Court of 
Appeals for the Fifth Circuit decided Mirant Corp. v. Potomac Electric 
Power Co. (In re Mirant).\6\ In Mirant, the 5th Circuit addressed the 
same fundamental issue decided in NRG, namely whether a Bankruptcy 
Court has the authority to reject a Commission-jurisdictional contract 
without the seller first obtaining approval from the Commission to 
terminate that contract under section 205. The court held, in pertinent 
part, as follows:
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    \6\ 378 F.3d 511 (5th Cir. 2004) (Mirant).

    It is clear that FERC has the exclusive authority to determine 
wholesale rates, see Mississippi Power & Light, 487 U.S. at 371, and 
Mirant does not contest that it would need FERC approval to either 
modify the rates in the Back-to-Back Agreement or to completely 
abrogate that agreement. Cf. 11 U.S.C. 362(b)(4) (creating exception 
from automatic stay for agencies acting to enforce their regulatory 
power). Under the Bankruptcy Code, however, Mirant's rejection of 
the Back-to-Back Agreement is a breach of that contract. See 11 
U.S.C. 365(g) (``The rejection of an executory contract * * * 
constitutes a breach of such contract * * *.''); see also In re 
Continental Airlines, 981 F.2d 1450, 1459 (5th Cir. 1993) 
(``[section] 365(g)(1) speaks only in terms of `breach.' The statute 
does not invalidate the contract, or treat the contract as if it did 
not exist.''). Thus, whether the FPA preempts a district court's 
jurisdiction over a bankruptcy rejection necessarily depends upon 
whether the FPA generally preempts a district court's jurisdiction 
over claims of breach related to executory power contracts.
    Outside of the bankruptcy context, the FPA does not provide FERC 
with exclusive jurisdiction over the breach of a FERC approved 
contract. While the FPA does preempt breach of contract claims that 
challenge a filed rate, district courts are permitted to grant 
relief in situations where the breach of contract claim is based 
upon another rationale.
* * * * *
    We conclude that the FPA does not preempt Mirant's rejection of 
the Back-to-Back Agreement because it would only have an indirect 
effect upon the filed rate. When an executory contract is rejected 
in bankruptcy, the non-breaching party receives an unsecured claim 
against the bankruptcy estate for an amount equal to its damages 
from the breach. See 11 U.S.C. 365(g)(1), 502(g). If Mirant's 
rejection of the Back-to-Back Agreement was approved, then PEPCO's 
unsecured claim against the bankruptcy estate would be based upon 
the amount of electricity it would have otherwise sold to Mirant 
under that agreement at the filed rate.
* * * * *
    The FPA does not preempt a district court's jurisdiction to 
authorize the rejection of an executory contract subject to FERC 
regulation as part of a bankruptcy proceeding. A motion to reject an 
executory power contract is not a collateral attack upon that 
contract's filed rate because that rate is given full effect when 
determining the breach of contract damages resulting from the 
rejection. Further, there is nothing within the Bankruptcy Code 
itself that limits a public utility's ability to choose to reject an 
executory contract subject to FERC regulation as part of its 
reorganization process.

378 F.3d at 519-522 (emphasis in original).
    9. Moreover, as the Mirant court recognized, the Commission has a 
number of regulatory responsibilities under the Federal Power Act that 
continue while a bankruptcy case is pending, that do not necessarily 
impact a debtor's ability to reject a contract.\7\
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    \7\ See also Louisiana Pub. Serv. Comm'n v. Mabey (In re Cajun 
Elec. Power Coop., Inc.), 185 F.3d 446, 453 (5th Cir. 1999) (noting 
that Bankruptcy Code `` `indirectly suggests continued governmental 
regulatory jurisdiction' during the pendency of the bankruptcy 
proceeding'') (citation omitted), cited in Mirant, 378 F.3d at 523; 
FCC v. Nextwave Personal Communications Inc., 537 U.S. 293, 307 n.5 
(2003) (on review of FCC's regulatory decisionmaking, in case 
involving both Bankruptcy Code and Communications Act, Court noted 
that Second Circuit had, on appeal from bankruptcy court, denied 
subject matter jurisdiction to decide whether FCC's regulatory 
decision was proper exercise of its discretion, and that D.C. 
Circuit, on petition for review of FCC decision, had ``recognized 
and seemingly approved that distinction [between regulatory and 
bankruptcy matters]'').

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[[Page 1529]]

    10. The 5th Circuit also provided guidance on the standard to be 
applied in determining whether rejection of an FPA-jurisdictional 
contract by a bankruptcy court is appropriate. The court noted that the 
standard ordinarily applicable is the ``business judgment rule,'' but 
it found that the Supreme Court had given greater protection to certain 
contracts affected with the public interest, such as collective 
bargaining agreements. NLRB v. Bildisco & Bildisco, 465 U.S. 513 
(1984). The 5th Circuit therefore held that a higher standard may be 
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appropriate for FPA-jurisdictional contracts, reasoning as follows:

    The nature of a contract for the interstate sale of electricity 
at wholesale is also unique. Additionally, Congress found when it 
passed the FPA that the public has an interest in the transmission 
and sale of electricity. 16 U.S.C. 824(a). This includes an interest 
in the continuity of electrical service to the customers of public 
utilities. 16 U.S.C. 824a(g) * * *. Clearly the business judgment 
standard normally applicable to rejection motions is more 
deferential than the public interest standard applicable in FERC 
proceedings to alter the terms of a contract within its 
jurisdiction. Use of the business judgment standard would be 
inappropriate in this case because it would not account for the 
public interest inherent in the transmission and sale of 
electricity.
    Therefore, upon remand, the district court should consider 
applying a more rigorous standard to the rejection of the Back-to-
Back Agreement. If the district court decides that a more rigorous 
standard is required, then it might adopt a standard by which it 
would authorize rejection of an executory power contract only if the 
debtor can show that it ``burdens the estate, [] that, after careful 
scrutiny, the equities balance in favor of rejecting'' that power 
contract, and that rejection of the contract would further the 
Chapter 11 goal of permitting the successful rehabilitation of 
debtors. See Bildisco, 465 U.S. at 526-27. When considering these 
issues, the courts should carefully scrutinize the impact of 
rejection upon the public interest and should, inter alia, ensure 
that rejection does not cause any disruption in the supply of 
electricity to other public utilities or to consumers. Cf. Id. at 
527 (requiring the bankruptcy court to balance the interests of the 
debtor, the creditors and the employees when determining what 
constitutes a successful rehabilitation). The bankruptcy court has 
already indicated that it would include FERC as a party in interest 
for all purposes in this case under 11 U.S.C. 1109(b) and Fed. R. 
Bankr. P. 2018. We presume that the district court would also 
welcome FERC's participation, if this case is not referred back to 
the bankruptcy court. Therefore, FERC will be able to assist the 
court in balancing these equities.

378 F.3d at 525 (footnote omitted).\8\
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    \8\ On remand, the district cout denied the rejection motion on 
other grounds, and responded to the 5th Circuit by articulating a 
heightened standard for rejection, under which the court would have 
to determine whether rejection would compromise the public interest 
(with input from the Commission, after affording it ``an opportunity 
to engage in appropriate inquiry to enable it to evaluate the effect 
* * * on the public interest''). In re Mirant Corp., 318 B.R. 100, 
108 (N.D. Tex. 2004). An appeal from that order is pending before 
the 5th Circuit. See Official Comm. of Unsecured Creditors v. 
Potomac Elec. Power Co., et al. ( In re Mirant Corp.), Case No. 05-
10033 (5th Cir).
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    11. Although the Commission reached a different result in NRG, a 
federal court of appeals has now spoken to the issue addressed in NRG 
and we intend to follow that authority. Under that authority, the 
Commission is precluded from taking action under the FPA that impacts a 
debtor's ability to reject an executory contract. A Bankruptcy Court 
cannot reject a FERC-jurisdictional contract under the business 
judgment rule ``because it would not account for the public interest 
inherent in the transmission and sale of electricity.'' Id. Rather, 
such a court must ``carefully scrutinize the impact of rejection upon 
the public interest and * * * ensure that rejection does not cause any 
disruption in the supply of electricity to other public utilities or to 
consumers.'' Id.
    12. The Commission seeks comment on whether rejection of the 
Calpine 2 Contract would impact the public interest,\9\ including 
whether rejection of the Calpine 2 Contract would cause ``any 
disruption in the supply of electricity to other public utilities or to 
consumers.'' Id.\10\ By seeking comment on this issue, the Commission 
does not intend to supplant the role of the Bankruptcy Court in 
considering whether to reject the Calpine 2 Contract. Rather, the 
purpose of our inquiry is to develop a record on which the Commission 
can, as necessary, make a determination, and then inform the Bankruptcy 
Court, of its views regarding potential rejection of the Calpine 2 
Contract by the Bankruptcy Court. In the Mirant case, the 5th Circuit 
``presume[d] that the district court would * * * welcome FERC's 
participation'' and that ``FERC will be able to assist the court in 
balancing the equities.'' \11\ In order to provide such assistance, we 
need to develop an appropriate record to render a decision.
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    \9\ To the extent any party believes it should seek leave of the 
Bankruptcy Court to submit further pleadings in this case, it should 
do so.
    \10\ In Calpine's Memorandum of Law in Support of Debtors' 
Motion for Declaratory Judgment, Ex Parte Temporary Restraining 
Order, and Preliminary Injunction Against the Federal Energy 
Regulatory Commission, at p. 5, Calpine asserts:
    If the Court permits the rejection of the energy contracts, 
there will be no disruption in the supply of power. For its part, 
Calpine will continue to produce all the energy that it may 
profitably do so, and CDWR and the other counter-parties to the 
contracts could readily obtain power from the national grid or from 
Calpine, albeit at the market rates.
    See also Complaint for Declaratory Judgment, Ex Parte Temporary 
Restraining Order, and Preliminary and Permanent Injunction Against 
the Federal Energy Regulatory Commission, at P 15 (``If the Court 
permits the rejection of the energy contracts, there will be no 
disruption in the supply of power. Calpine will continue to supply 
electricity to CDWR and the other counter-parties to the contracts, 
albeit at the market rates.'').
    \11\ In re Mirant Corp., supra note 6.
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    13. In addressing the effect of rejection on the public interest, 
the parties should not confine their arguments to the factors normally 
considered in a Mobile-Sierra context. As the court in Mirant held, 
rejection of an executory contract constitutes a breach of contract, 
not approval to terminate it under section 205 of the FPA. See 378 F.3d 
at 519 (``rejection of the Back-to-Back Agreement is a breach of that 
contract'' for which damages lie) (emphasis in original). In a section 
205 proceeding, the issue is whether a party can terminate its 
obligations and thereafter have no liability to its counterparty. To 
obtain such approval, a party with a Mobile Sierra clause must meet a 
very high burden under the public interest test. In this case, however, 
there is no request by Calpine to terminate its obligations and 
thereafter be free of liability to the California State Parties. 
Rather, the issue is how the public interest bears on the Bankruptcy 
Court's determination of whether to permit Calpine to breach its 
obligations and, if so, to pay damages for such breach as determined by 
the Bankruptcy Court.
    14. We therefore direct the California State Parties to amend their 
filing within fifteen (15) days to address the standard adopted in 
Mirant. Intervenors shall have fifteen (15) days from the date of that 
filing to file responses. Because we are also concerned whether 
rejection of the Calpine 2 Contract may pose reliability concerns, we 
also direct the California Independent System Operator Corporation 
(California ISO) to address this issue in response to the California 
State Parties' amended filing within 15 days of their amended filing.

[[Page 1530]]

The Commission will then be in a position to inform the Bankruptcy 
Court, as necessary, of the impact on the public interest of a 
potential rejection of the Calpine 2 Contract, or take such other 
action as may be appropriate under the circumstances.\12\
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    \12\ In the Mirant case, the 5th Circuit ``presume[d] that the 
district court would * * * welcome FERC's participation'' and that 
``FERC will be able to assist the court in balancing the equities.'' 
Id.
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    15. Finally, consistent with the due date established above for 
intervenors to submit responses to the California State Parties' 
amended filing, interventions shall be due on or before 15 days after 
the California State Parties submit their amended filing.\13\
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    \13\ On December 22, 2005, the Commission issued a notice of the 
California State Parties' filing, with interventions and protests 
due on or before January 19, 2006. However, the January 19 comment 
date established by that notice is superseded by the comment 
procedures established in this order.
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    The Commission orders:
    (A) The California State Parties are hereby directed to amend their 
December 19, 2005 filing within 15 days of the date of this order, as 
discussed in the body of this order.
    (B) Interventions and responses to the California State Parties' 
amended filing will be due within 15 days after the California State 
Parties submit their amended filing, as discussed in the body of this 
order.
    (C) The California ISO is hereby directed to file a response to the 
California State Parties' amended filing within 15 days after the 
California State Parties submit their amended filing, as discussed in 
the body of this order.
    (D) The December 22, 2005 notice of filing in Docket No. EL06-30-
000 is hereby superseded by the comment procedures established in 
Ordering Paragraphs (A)-(C).
    (E) The Secretary shall promptly publish this order in the Federal 
Register.

    By the Commission.
Magalie R. Salas,
Secretary.
 [FR Doc. E6-87 Filed 1-9-06; 8:45 am]

BILLING CODE 6717-01-P
