The U.S. Court of Appeals for the Sixth Circuit ruled Thursday that the U.S. Bankruptcy Court judge presiding over the reorganization of FirstEnergy Solutions (FES) must reconsider a decision about the status of power purchase agreements in its Chapter 11 reorganization.
Judge Alan Koschik, of the U.S. Bankruptcy Court for the Northern District of Ohio, had ruled in August 2018 that the bankruptcy court could treat a contract requiring federal regulatory approval like all other contracts, allowing FES to walk away from a power purchase agreement approved by the Federal Energy Regulatory Commission with the Ohio Valley Electric Corporation (OVEC) and a smaller contract with a solar energy provider. But a three-judge panel of the 6th Circuit ruled Koschik should have allowed FERC a say in the matter and considered the public impact of breaking OVEC's 21-year contract.
If FES still wants to reject its contract with OVEC, the bankruptcy court would have to listen to FERC's objections in another round of briefs and possibly in another hearing, according to attorneys familiar with the case. Alternatively, FES could appeal the three-judge panel’s decision to the full Sixth Circuit court, a move that would add even more time in the case that has gone on for nearly 18 months.
The appellate panel’s ruling comes as the FES bankruptcy case wraps up and the company prepares to emerge from bankruptcy protection as a newly constituted privately held company operating under a new name, Energy Harbor.
FES sought bankruptcy protection on Mar. 31, 2018, and immediately in a separate filing asked the bankruptcy court to prevent FERC from interfering with its plans to break its contract with OVEC. Koschik ultimately agreed with FES that the contract with OVEC could be treated like any other contract, a decision that made OVEC just another unsecured creditor.
FERC, the Ohio Consumers' Counsel (OCC) and other parties appealed Koschik's ruling. The OCC argued that allowing FES to break the OVEC contract would lead to higher consumer electric rates around the state because OVEC would have to replace the cash shortfall that FES’ departure would create.
FES held 4.85% of the electricity generated by two 65-year-old OVEC coal-fired power plants for a contract that still had 21 years until expiration. The distributor estimated it would lose $268 million over that period. FERC argued that under the Federal Power Act and federal energy case law, the rates FES paid OVEC for its share of power generated by OVEC’s plants were subject to FERC’s jurisdiction.
The appellate panel agreed that the bankruptcy court had the final authority on the issue, FES said in a statement.
"Today’s decision by the Sixth Circuit confirms our assertion that the bankruptcy court is ultimately the decision maker on whether purchase power contacts can be rejected in bankruptcy," the company said in a statement. "We appreciate the Sixth Circuit’s attention and deliberation in their ruling. We are confident, upon remand, the bankruptcy court will find again that the rejection of these burdensome contracts meets the applicable standard."
"With this favorable appellate decision, we will again seek to protect Ohioans from having to subsidize millions of dollars in coal plant costs that bankrupt FirstEnergy Solutions was allowed to stop paying," Ohio Consumers’ Counsel Bruce Weston said in a statement.