February 2006 Market Clearing in the Energy Industry 59 © Copyright 2006, CCRO. All rights reserved. CL&P's 1.15 million customers at a fixed rate per megawatt hour. As part of a group of regulations meant to standardize operating procedures for regional electric systems, the FERC in December 2002 changed the way transmission-congestion costs to the New England system operator are billed. Now, the expense is borne by the zone in which the congestion occurred instead of across the entire region's power grid. The contract was written before FERC conceived its standard market design. The question then arose as to which company was responsible for $34 million in unpaid transmission-congestion costs to the ISO New England associated with bringing electricity into areas where insufficient transmission capacity exists such as southwestern Connecticut. NRG claims the contract language specified that CL&P was responsible for the costs. NRG threatened to void its contract if CL&P did pay the back charges to ISO New England. In May 2003, NRG and its PMI subsidiary filed voluntary bankruptcy petitions in U.S. Bankruptcy Court in the Southern District of New York. In connection with its bankruptcy filing, PMI sought authority to reject and cease performance on several financially burdensome agreements, including the power purchase agreement with CL&P, which NRG has said was costing PMI about $500,000 a day. In June 2003, PMI received approval from the U.S. Bankruptcy Court to reject the CL&P contract, but was not been allowed to breach the agreement because of a FERC order blocking PMI from rejecting the CL&P contract. In November 2003, PMI reached a settlement in the power purchase contract dispute with CL&P. Under the terms of the settlement, PMI continued to supply power to CL&P at the existing contract price through the remaining term of the power purchase agreement. The settlement also resolved NRG's appeal before the U.S. Court of Appeals, Second Circuit, of a district court ruling that such district court lacked jurisdiction in the matter which in effect supported the FERC order but left unresolved at least for now the issue of whether the federal regulatory powers of FERC jurisdiction authorized through the Federal Power Act or a Bankruptcy Court’s application of the U.S. Bankruptcy Code to insolvency matters involving public utilities takes precedent. The Reform Act does not further address this issue. Mirant Corp. v. Potomac Electric Power Co. (5th Cir): Creating uncertainty of contract law between the U.S. Bankruptcy Court and FERC jurisdiction. The Fifth Circuit Court of Appeals held that while the Federal Power Act (the “FPA”) grants exclusive authority to the Federal Energy Regulatory Commission (“FERC”) to determine the reasonableness of wholesale electricity rates, the FPA does not prevent a Chapter 11 debtor (i.e. Mirant) from rejecting an executory power contract under §365(a) of the U.S. Bankruptcy Code. This case involved the intersection of two federal statutes: the FPA and the U.S. Bankruptcy Code. Mirant acquired various energy assets from Potomac Electric Power Company (“PEPCO”) including certain long-term contracts under which PEPCO was obligated to purchase power from outside suppliers at a fixed rate (the “PPAs”). Several of the PPAs contained provisions preventing assignment by PEPCO absent the supplier’s consent, and two suppliers did not consent. To address this problem, Mirant and PEPCO entered into contracts (the “Back-to-Back Agreements”) whereby Mirant agreed to purchase from PEPCO the energy PEPCO purchased under the PPAs, at the same price PEPCO paid under the PPAs. The rates to be paid by Mirant were set forth on a schedule to the APSA (“Schedule 2.4”) and Schedule 2.4 was filed with, and the rates therein were approved by, the FERC. In July 2003, various Mirant entities filed petitions under Chapter 11 of the Bankruptcy Code. At the time of the filing, the price at which Mirant was obligated to purchase energy was significantly above the market price. In the bankruptcy proceedings, Mirant filed a motion to reject the Back-to-Back Agreements, based