Fifth Circuit Triples Down: Filed-Rate Natural Gas And Power Contracts Can Be Rejected In Bankruptcy Without FERC Approval

• Published date: 08 December 2022
• Subject Matter: Energy and Natural Resources, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Energy Law, Oil, Gas & Electricity
• Law Firm: Jones Day
• Author: Mr Paul Green and Mark Douglas

In Gulfport Energy Corp. v. FERC, 41 F.4th 667 (5th Cir. 2022), the U.S. Court of Appeals for the Fifth Circuit tripled down on its nearly two-decades-long view that filed-rate contracts regulated under the National Gas Act (the "NGA") and the Federal Power Act (the "FPA") can be rejected in bankruptcy without the consent of the Federal Energy Regulatory Commission ("FERC"). Reaffirming its previous rulings in In re Mirant Corp., 378 F.3d 511 (5th Cir. 2004), and In re Ultra Petroleum Corp., 28 F.4th 629 (5th Cir. 2022), the Fifth Circuit was highly critical of FERC's "bizarre view" that the consequences of rejection of filed-rate contracts should be viewed differently than the consequences of rejection of other types of executory contracts in bankruptcy. According to the court, as in its previous rulings, it rejected FERC's argument because it "patently contradicts the [Bankruptcy] Code's text and established interpretation."

The Fifth Circuit summarized its decision as follows:

FERC can decide whether actual modification or abrogation of a filed-rate contract would serve the public interest. It even may do so before a bankruptcy filing. But rejection is just a breach; it does not modify or abrogate the filed rate, which is used to calculate the counterparty's damage. So FERC cannot prevent rejection. It cannot bind a debtor to continue paying the filed rate after rejection. And it cannot usurp the bankruptcy court's power to decide [the debtor's] rejection motions.

Gulfport, 41 F.4th at 685. With its third such ruling in the last 18 years, the Fifth Circuit has unequivocally staked out its view on this issue, which is aligned with the position adopted by the only other court of appeals that has addressed it'the Sixth Circuit, in In re FirstEnergy Solutions Corp., 945 F.3d 431 (6th Cir. 2019), reh'g denied, No. 18-3787 (6th Cir. Mar. 13, 2020).

More detailed descriptions of the long-running dispute between FERC and the bankruptcy courts regarding the rejection of filed-rate contracts in bankruptcy are available here and here.

Mirant

In Mirant, the Fifth Circuit ruled that the FPA does not prevent a bankruptcy court from ruling on a motion to reject a FERC-regulated rate-setting agreement as long as the proposed rejection does not represent a challenge to the agreement's filed rate.

The Fifth Circuit noted that, although the Bankruptcy Code places numerous limitations on a debtor's right to reject contracts, "including exceptions prohibiting rejection of certain obligations imposed by regulatory authorities," there is no exception that prohibits a debtor's rejection of wholesale electricity contracts that are subject to FERC's jurisdiction. Concluding that "Congress intended ' 365(a) to apply to contracts subject to FERC regulation," the Fifth Circuit held that the bankruptcy court's power to authorize rejection of the agreement did not conflict with the authority...