Bankruptcy Battle Looms over PG&E’s Renewable Energy Contracts

Amid the blizzard of first-day motions when PG&E Corporation filed for bankruptcy on January 29 was a complaint against the Federal Energy Regulatory Commission (FERC) over its contention that it has “concurrent jurisdiction” with the bankruptcy courts to review any wholesale power contracts the utility might try to cancel or renegotiate as part of the bankruptcy process.

 

The multi-billion-dollar question of who gets the final say over whether PG&E can modify its old and often expensive power-purchase agreements (PPAs) – federal regulators or the bankruptcy court – could have profound implications for the myriad of renewable energy producers in California that supply PG&E. The utility is widely expected to use the bankruptcy process as an opportunity to relook at gigawatts’ worth of renewable energy PPAs that it is locked into but are costing it money, in its effort to deal with up to $30bn-plus of liabilities related to the 2017 and 2018 Northern California wildfires.

 

In the complaint filed on January 29, PG&E requested the US Bankruptcy Court Northern District of California San Francisco Division, which is hearing its second bankruptcy case in as many decades (case number: 19-30088), issue a declaratory judgment confirming the court’s exclusive jurisdiction over the right to reject FERC-regulated PPAs and as well as declaring that FERC does not have “concurrent jurisdiction” over whether the debtors can modify PPAs. 

 

While stressing that it has not yet made any decisions over whether it is looking to cancel or change any of its 387 PPAs, which represent contractual commitments totaling approximately $42bn, PG&E stated: “Due to the incontrovertible economic significance of the Debtors’ PPAs, as well as the continuously evolving competitive and regulatory factors affecting these agreements, the Debtors’ PPA rejection and assumption decisions under section 365 of the Bankruptcy Code will play a vital role in the reorganized Debtors’ post-emergence operations and financial profile. As such, it is vital to a successful reorganization that the Debtors’ determinations regarding whether to assume or reject their PPAs be assessed by this Court pursuant to the business judgment standard to which any other debtor is subject.”

 

“The Debtors’ PPAs are executory contracts and are property of the estate, over which this Court has exclusive jurisdiction,” it continued. “FERC’s exclusive authority under the Federal Power Act, on its face, does not extend to a debtor’s rights to reject PPAs under section 365. In rejection proceedings, the Bankruptcy Court simply determines whether the debtor has properly exercised its business judgment in seeking to cease performing executory agreements such as the Debtors’ PPAs here. The Bankruptcy Court does not determine whether the rates in contracts subject to rejection are just or reasonable, nor does it attempt to modify any other terms or conditions of any such agreements. Rather, a debtors’ rejection of an executory contract results in its breach, resulting in a damages claim against the estate like any other general unsecured creditor.”

 

The complaint is in response to a FERC ruling on January 25 which sided with power producers that supply PG&E with vast amounts of solar and wind power. In response to petitions from NextEra Energy and Exelon Corporation, which have numerous contracts with PG&E, to declare that the utility cannot modify its wholesale power contracts without the commission’s approval if it files for bankruptcy, FERC concluded that it and the bankruptcy courts have “concurrent jurisdiction” to review and address the disposition of FERC-jurisdictional contracts sought to be rejected through bankruptcy. Therefore, any party to a FERC-jurisdictional wholesale power agreement must first obtain approval from both FERC and the bankruptcy court to modify the filed rate and reject the filed wholesale power contract, respectively.

Thus, FERC appears to be arguing that it does share authority with bankruptcy courts over breaching PPAs, although over different aspects of the contracts. Specifically, FERC declared that parties to PPAs it regulates must get its permission to “modify the filed rate” of the contracts, while the bankruptcy court has jurisdiction over whether or not to reject the contract.

As Meghan Mandel of Troutman Sanders LLP explains: “While acknowledging the unsettled state of the law, FERC concluded that FERC and the bankruptcy courts have concurrent jurisdiction to address wholesale power contracts sought to be rejected through bankruptcy. FERC explained that the filed-rate doctrine empowers FERC, and FERC alone, to judge whether a change to the filed rate is reasonable before the modified rate may be charged. FERC found that a bankruptcy court’s rejection of a FERC-jurisdictional contract alters the essential terms of that contract, i.e., the filed rate, which triggers FERC’s jurisdiction and requires FERC’s approval.”

High stakes

 

Big money and in cases the very survival of these suppliers is at stake. According to Credit Suisse, renegotiating its more than 7 megawatts (MW) of pre-2012 solar PPAs could save PG&E about $2.2bn a year. Credit Suisse back in November 2018 was already looking at the effects a PG&E bankruptcy could have on Consolidated Edison and other owners of large-scale solar and wind projects selling power under these PPAs. PG&E is the largest offtaker for Con Ed’s renewable energy portfolio, at about 29% of contracts, and the average PPA rate for those projects is about $197 per megawatt-hour (MWh), “significantly above market rates for new solar” that are closer to $25-30 per MWh, the analysts noted. Con Ed could see as much as 10% of its earnings at risk if its PPAs with PG&E are threatened, the bank forecasts.

 

So which side is likely to prevail? The past doesn’t offer much clarity. When PG&E last filed for bankruptcy, in broad terms most of the PPAs were upheld, with the court applying the principle that they were providing an essential service and so takes precedence over bondholders. Also, in 2003, FERC was able to successfully enforce a PPA for NRG Energy to provide power to Connecticut Light and Power after it declared bankruptcy. However, Rob Rains, analyst for Washington Analysis, cites in a recent investors note the 2004 case of Mirant v. Potomac Electric Power, where the 5th Circuit US Court of Appeals “concluded that FERC’s authority under the Federal Power Act did not allow it to supersede the bankruptcy proceeding.”