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The Bankruptcy Protector

March 18, 2019

Dispute Over Rejection of PG&E Contracts to Stay in Bankruptcy Court

By Graham Mitchell

A dispute over whether the Federal Energy Regulatory Commission (“FERC”) can order one of Northern California’s largest natural gas and electric companies –  Pacific Gas & Electric Company (“PG&E”) – to reject wholesale power purchase contracts  (“PPCs”) will be decided by the United States Bankruptcy Court for the Northern District of California (“Bankruptcy Court”), instead of the United States District Court for the Northern District of California (“District Court”).

PG&E filed an adversary proceeding (“AP”) against the FERC on the day it filed chapter 11, arguing that FERC was interfering with its ability to reject the PPCs; the FERC had previously taken the position that it had concurrent jurisdiction to order rejection of the PPCs.  After the adversary proceeding was filed, several power suppliers that are parties to the PPCs moved in the District Court to withdraw the Bankruptcy Court’s reference over the AP. 

On March 11, 2019, Judge Gilliam of the District Court denied the motion to withdraw the reference in a short opinion.   Judge Gilliam explained that mandatory withdrawal was not necessary because the issues in the AP – mainly, whether the FERC has exclusive jurisdiction over the terms of the sale of electricity – did not involve a substantial and material consideration of non-bankruptcy law. Judge Gilliam also did not find any grounds for permissive withdrawal, noting that the plain language of Bankruptcy Code 365 says whether FERC can “second guess” the bankruptcy court’s decision as to whether the PPCs can be rejected. Judge Gilliam also noted that denying the motion to withdraw would promote judicial economy.

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