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FERC Rules It has Concurrent Jurisdiction Over the Rejection of FERC-Regulated Midstream Gas Contracts

Industry - Midstream Oil and Gas

On June 22, 2020, the Federal Energy Regulatory Commission (“FERC” or “Commission”) issued an order concluding that the Commission and the United States Bankruptcy Courts have concurrent jurisdiction to review and address the disposition of natural gas transportation agreements (“FERC-jurisdictional agreement”) sought to be rejected through bankruptcy. This order is significant in that it affirmatively states the Commission’s position that FERC has the right to approve or deny the modification or abrogation of the filed rate that occurs when a party rejects a FERC-jurisdictional agreement in bankruptcy.

This order arose from a petition filed on May 19, 2020 by ETC Tiger Pipeline, LLC, which requested that the Commission find that it has concurrent jurisdiction with the Bankruptcy Courts under sections 4 and 5 of the Natural Gas Act (“NGA”) when a shipper proposes to reject a FERC-jurisdictional gas transportation agreement subject to the NGA. ETC Tiger Pipeline, LLC, 171 FERC ¶ 61,248 (2020) (“ETC Tiger”).

Concurrent Jurisdiction

Making it clear that the Commission’s jurisdiction over FERC-jurisdictional gas transportation agreements is not superior to that of the Bankruptcy Courts, the Commission found that natural gas transportation agreements subject to the NGA filed with FERC reflect filed rates approved by FERC pursuant to its exclusive jurisdiction under the NGA and that a party seeking to reject the agreement in bankruptcy must obtain approval from both the Commission and the Bankruptcy Court to modify the filed rate and reject the contract, respectively. In ETC Tiger, the Commission found that FERC-jurisdictional agreements are filed rates that are not typical commercial contracts, but rather establish public obligations that carry the force of law. The Commission further concluded that rejection of a FERC-jurisdictional gas transportation agreement alters the “essential terms and conditions of a contract that is also a filed rate,” and therefore, the Commission’s approval is required to modify or abrogate the filed rate.

However, the Commission declined to hold that a shipper to a FERC-jurisdictional gas transportation agreement must receive Commission approval before moving to reject a contract in Bankruptcy Court. The Commission states that its approval to modify the public law duties set forth in the filed rate and a Bankruptcy Court’s approval are necessary in order to reject a FERC-jurisdictional agreement, but made clear that both approvals are required and neither is superior to the other. The order also makes it clear that a reorganization plan that includes the abrogation or modification of a FERC‑jurisdictional gas transportation agreement cannot be confirmed unless the Commission agrees to any rate change provided in the reorganization plan, which can only occur via a Commission order.

Industry Implications

Both FERC-jurisdictional natural gas pipelines that have shippers at risk for filing a petition in bankruptcy and shippers considering rejection in bankruptcy of FERC-jurisdictional agreements need to consider ETC Tiger when analyzing their respective strategies for contract rejection and the ultimate timing issues and likely outcome when both the Bankruptcy Court and the Commission consider the proposed contract rejection. The parity between the Federal Power Act and the NGA extends to the filed rate doctrine, which is the primary doctrine underlying the Commission’s analysis in ETC Tiger. A Commission order interpreting the filed rate doctrine in the context of rejection of agreements subject to the Federal Power Act is currently pending at the Ninth Circuit Court of Appeals. Oral argument at the Ninth Circuit is set for August 14, 2020, on the appeal of the Commission’s finding that both the Commission and the Bankruptcy Court must approve modification of the filed rate and rejection of the agreements subject to the Federal Power Act prior to the modification or abrogation of such agreements. Similarly, the ETC Tiger decision may be appealed to a U.S. Circuit Court of Appeals. Both FERC-jurisdictional pipelines that have shippers at risk for filing a petition in bankruptcy and shippers considering rejection of FERC‑jurisdictional agreements subject to the NGA may be impacted by the ultimate outcome of these proceedings.

Should you have any questions about FERC’s holdings in ETC Tiger or its implications for your company, please contact one of the V&E attorneys listed below.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.