Bankruptcy Court Cedes to FERC Resolution of Terminated Enron Contract

A New York bankruptcy judge has become the first to implement a provision of the Energy Policy Act of 2005 (EPAct 2005) that prohibits bankruptcy judges from deciding disputes over the fees associated with termination of pre-June 20, 2001, power supply contracts where the seller has been found to have manipulated the market and had its FERC market-pricing authority revoked.  In EPAct 2005 Congress granted to FERC exclusive jurisdiction to decide whether such sellers should be permitted to collect termination fees from their former buyers.  Although this provision of the statute does not mention Enron by name, it nevertheless squarely targets the disgraced energy trading giant.  Enron declared bankruptcy on December 2, 2001, inducing many of its buyers to terminate.  In order to benefit from this provision of the statute, a buyer's objection to payment of a termination fee must be pending and not subject to the final order of any court.

The specific dispute before the bankruptcy judge stemmed from a contract entered into in August 2000, which called for Enron to supply power to Luzenac America Inc.'s talc processing facilities in Montana.  After Enron filed for bankruptcy, its trustee sued Luzenac in the U.S. bankruptcy court for the southern district of New York for contract termination fees.  That suit is still pending.  Based on the EPAct provision, Luzenac petitioned FERC in October to review Enron's claim for termination fees.  In response, Enron asked the bankruptcy court to prevent Luzenac from pursuing its FERC petition.  Judge Arthur Gonzalez, however, denied Enron's motion, and agreed that, as a consequence of EPAct 2005, FERC has exclusive jurisdiction to resolve the dispute.  The judge's ruling will pave the way for other former Enron buyers to petition FERC to relieve them of Enron termination charges, which FERC is expected to do.