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The Federal Energy Regulatory Commission said Tuesday it can't legally grant a request made by California authorities to block Calpine Corp. (CPNL) from reneging on power contracts with the state.
Energy supplier Calpine last month sought Chapter 11 protection in U.S. Bankruptcy Court in Manhattan and filed a request to reject its power contracts in California. If Calpine were allowed to reject the contracts, consumers would experience electricity supply disruptions starting in the summer, according to state officials.
In an order issued late Tuesday, FERC pointed out that the court has already issued a restraining order that prohibits the commission from requiring Calpine to honor its power contracts with California.
"We cannot grant the relief requested," FERC said, emphasizing that the order "does not 'require or coerce' Calpine to continue performing its executory contracts."
The order marks a change of position for the commission, which has previously held that even if an electricity company files for bankruptcy, it is still required under the Federal Power Act to continue to meet the terms of its power contracts.
Instead of arguing that the FPA supersedes the bankruptcy court this time, FERC has decided to seek public comments from state officials on whether termination of the Calpine contracts would hurt consumers and public utilities.
The order represents a much lighter-handed approach, but one the commission said falls more in line with a ruling by the U.S. Court of Appeals for the Fifth Circuit in New Orleans. That court in 2004 found that a federal district court - not FERC - had the authority to determine whether Mirant Corp. (MIR) could reject two power purchase agreements with a Pepco Holdings Inc. (POM) utility unit.
Based on that ruling, "the commission is precluded from taking action under the FPA that impacts a debtor's ability to reject an executory contract," FERC said.
The Public Interest Test
The court also found that the bankruptcy court cannot reject a contract that falls under FERC's jurisdiction without taking into account the impact it would have on the public interest.
The commission decided to seek feedback on whether rejection of the Calpine power contracts would be harmful to California consumers. FERC said the comments would help it assist the bankruptcy court in scrutinizing the impact that rejection of the contracts would have on consumers.
"The commission will then be in a position to inform the Bankruptcy Court, as necessary, of the impact on the public interest of a potential rejection of the Calpine 2 Contract, or take such other action as may be appropriate," said FERC.
State officials, who petitioned FERC to require Calpine to continue supplying power under its power purchase agreements, already argued in their filings that allowing Calpine to reject the power contracts would leave consumers with higher electricity costs and threaten the stability of California electricity markets and undermine the reliability of the power grid this summer.
The commission directed the officials - the California Electricity Oversight Board, the state attorney general, and the California Department of Water Resources as well as grid operator California Independent System Operator - to submit by Jan. 18 a new filing to address the impact that rejection of the Calpine contract would have on the state.
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