Fifth Circuit Says FERC Can’t Stop Rejection of Filed-Rate Contracts in Bankruptcy
On July 19, 2022, the U.S. Court of Appeals for the Fifth Circuit held that debtors in bankruptcy may reject regulated energy contracts, vacating two Federal Energy Regulatory Commission (FERC) orders to the contrary, in Gulfport Energy Corp. v. FERC. The question turned on how a party’s ability to reject executory contracts in bankruptcy interacts with FERC’s ability to determine whether a party can abrogate or modify contracts that constitute filed rates under a doctrine referred to as Mobile-Sierra. The court found that FERC cannot use its Natural Gas Act authority over contract abrogation and modification to countermand a debtor’s bankruptcy-law rights or the bankruptcy court’s powers.
The question came before the court on a petition for review of FERC orders and denials for rehearing in a proceeding where FERC asserted exclusive jurisdiction over the rejection of transportation service agreements (TSAs) between an interstate natural gas pipeline and its shipper on grounds that the contract constituted a “filed rate.” Anticipating the shipper would declare bankruptcy, the regulated natural gas pipeline had sought a declaratory order from FERC announcing and asserting exclusive jurisdiction over the TSAs and asking for a paper hearing to determine whether continued performance of the TSAs would harm the public interest — the standard for abrogating or modifying a filed-rate contract under the Mobile-Sierra doctrine.
FERC determined that it had parallel, exclusive jurisdiction over the TSAs with the bankruptcy court. FERC then determined that the public interest did not require abrogation or modification of the TSAs as the currently filed rates in effect remained just and reasonable. Therefore, the shipper was to continue its performance under the TSAs. FERC denied the shipper’s rehearing requests. The shipper then sought review at the Fifth Circuit, arguing that FERC lacked statutory authority to issue the orders and that the orders were unlawful.
The court found that while FERC did have authority to issue the orders, the orders where based on FERC’s misunderstanding of rejection of an executory contract in bankruptcy. The court explained that rejection does not rescind or change a contract. Rather it breaches the contract, thereby excusing the debtor’s performance while allowing for a claim for damages. The court noted that its understanding of rejection aligned with Supreme Court precedent, federal circuit court precedent, the Bankruptcy Code, and bankruptcy treatises and scholars. FERC, in contrast, can decide whether modification or abrogation of a filed-rate contract would serve the public interest.
Gulfport is the result of one of several FERC proceedings initiated during the early months of the COVID-19 pandemic seeking to apply the Mobile-Sierra doctrine to contracts rejected in bankruptcy.