Mirant Corp. v. Potomac Electric Power Co. (In Re Mirant Corp.)

                                                          United States Court of Appeals
                                                                   Fifth Circuit
                                                                 F I L E D
          UNITED STATES COURT OF APPEALS
                                                                 August 4, 2004
                   FIFTH CIRCUIT
                                                            Charles R. Fulbruge III
                        ____________                                Clerk
                      Case No. 04-10001

                      Consolidated with
                      Case No. 04-10004
                       ____________


In The Matter Of: MIRANT CORP

                           Debtor

(Matter of Debtor’s Motion for Order Authorizing the Debtor to
Reject the Back-to-Back Agreement Dated December 19, 2000, and
Amendments Thereto, With Potomac Electric Power Company as
Executory Contracts)

-------------------------

MIRANT CORP; MLW DEVELOPMENT LLC; MIRANT
AMERICAS ENERGY MARKETING LP; MIRANT AMERICAS
GENERATION LLC; MIRANT MID-ATLANTIC LLC; ET AL and
OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF
MIRANT CORPORATION,


                           Appellants,

versus


POTOMAC ELECTRIC POWER CO; FEDERAL ENERGY
REGULATORY COMMISSION,


                           Appellees.

and

OFFICIAL COMMITTEE OF EQUITY SECURITY HOLDERS
                                     Intervenor
             ______________________________________________________

                                      Case No. 04-10094

             In the Matter of: MIRANT CORPORATION; ET AL

                                             Debtors

             -------------------------

             MIRANT CORP; MLW DEVELOPMENT LLC; MIRANT
             AMERICAS ENERGY MARKETING LP; MIRANT AMERICAS
             GENERATION LLC; MIRANT MID-ATLANTIC LLC; ET AL and
             OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF
             MIRANT CORPORATION

                                             Appellants,

             versus

             POTOMAC ELECTRIC POWER CO; FEDERAL ENERGY
             REGULATORY COMMISSION

                                             Appellees

             and

             OFFICIAL COMMITTEE OF EQUITY SECURITY HOLDERS

                                             Intervenor.


                         Appeals from the United States District Court
                             For the Northern District of Texas



Before BARKSDALE, EMILIO M. GARZA, and PICKERING, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

      The issue in this case is whether a district court may authorize the rejection of an executory


                                               -2-
contract for the purchase of electricity as part of a bankruptcy reorganization, or whether Congress

granted the Federal Energy Regulatory Commission (“FERC”) exclusive jurisdiction over these

contracts. Mirant Corporation, its various subsidiaries, the Official Committee of Unsecured

Creditors of Mirant Corporation, and the Official Committee of Equity Security Holders as an

interveno r (collectively “Mirant”) argue that the district court’s jurisdiction over Mirant’s

reorganization under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101 et seq. (the “Bankruptcy

Code”), allows it to authorize the rejection of certain power contracts. In contrast FERC and the

Potomac Electric Power Company (“PEPCO”) maintain that because the Federal Power Act, 16

U.S.C. § 792 et seq (the “FPA”), grants FERC the exclusive authority to regulate the wholesale rates

in contracts for the interstate sale of electric power, any rejection of those contracts must occur in

a FERC administrative proceeding. The district court in this case agreed with FERC’s position,

found the disputed contract to be within FERC’s jurisdiction, and held that it lacked jurisdiction to

authorize Mirant to reject this contract. Instead the district court held that a FERC proceeding was

the proper forum for Mirant to seek relief from any of its power contracts. For the reasons described

below, we find that the district court’s jurisdictional ruling is erroneous, and that the district court

may properly authorize the rejection of an executory power contract in bankruptcy.

                                                    I

        Mirant is one of the largest regulated public utilities in the United States. It generates, buys,

and sells electricity for use by utilities, municipalities, electric-cooperative utilities, and generators

across the country. PEPCO is also a regulated public entity responsible for servicing the power needs

of residential and commercial consumers in the District of Columbia and Maryland.

        Pursuant to state deregulation legislation, PEPCO agreed to sell its electric generation


                                                   -3-
facilities and assign most of its purchase power agreements (“PPAs”)1 to Mirant in June 2000 for

approximately $2.65 billion in the Asset Purchase and Sale Agreement. The Asset Purchase and Sale

Agreement allowed PEPCO to assign all of its PPAs to Mirant, however, a number of the PPAs

contained contract language that required PEPCO to obtain the PPA supplier’s consent before it

could assign that particular PPA. The Asset Purchase and Sale Agreement addressed the possibility

that some PPA suppliers would not consent to the assignment of their contracts with PEPCO. The

parties agreed to reduce the purchase price by almost $260 million if PEPCO could not obtain

consent to assign certain PPAs. They also agreed that any unassigned PPAs would be governed by

the terms of a schedule attached to the Asset Purchase and Sale Agreement (“Schedule 2.4”). Under

the terms of that schedule, PEPCO would comply with the terms of any unassigned PPAs listed in

Schedule 2.4, and Mirant agreed to purchase from PEPCO an amount of electricity equal to PEPCO’s

obligation under those unassigned PPAs at the rates set in those contracts.

        PEPCO did not receive consent to assign two of its PPAs and invoked its Schedule 2.4 rights.

The parties filed Schedule 2.4, and FERC approved the rates contained therein. The Schedule 2.4

payments relating to these unassigned PPAs are referred to by the parties, the bankruptcy court, and

the district court as the Back-to-Back Agreement. We adopt that term for the sake of consistency.

The parties agree that the Back-to-Back Agreement’s rate for electricity is higher than the market

rate, causing Mirant significant financial losses.

        In July 2003, Mirant filed for Chapter 11 bankruptcy.         As part of its Chapter 11

reorganization, Mirant filed two motions in an adversary proceeding against FERC and PEPCO.



        1
        The PPAs are long-term fixed-rate contracts to purchase electricity from outside suppliers
that PEPCO used to supplement its energy needs before deregulation.

                                                     -4-
First, Mirant filed a motion to reject the Back-to-Back Agreement, but not the Asset Purchase and

Sale Agreement, as an executory contract. Second, Mirant sought, and received, an ex parte

temporary restraining order preventing FERC or PEPCO from taking any actions to “require or

coerce [Mirant] to abide by the terms of the Back-to-Back Agreement.” Mirant subsequently

initiated a second adversary proceeding to obtain another temporary ex parte injunction, which

prevented FERC from “taking any action directly, or indirectly, to require or coerce [Mirant] to abide

by the terms of any Wholesale Contract” on which Mirant either was substantially performing or was

not performing pursuant to a court order without giving Mirant ten days advance notice. As this

second injunction applied to all of Mirant’s wholesale electric contracts and not just to the Back-to-

Back Agreement, the parties recognize that this order would implicate hundreds of power contracts

that are subject to FERC regulation.

       After a hearing before the bankruptcy court, it held that it had the power to enjoin FERC; the

authority to authorize Mirant to reject the Back-to-Back Agreement; and that an injunction was

necessary in this case to protect its jurisdiction. Specifically, the bankruptcy court recognized that

it was not the proper forum to challenge a FERC order, but found that an injunction was needed to

protect the reorganization process because any regulatory action FERC took with regard to a

particular contract would divest the court of its jurisdiction over that contract. Consequently, the

bankruptcy court converted both temporary restraining orders into preliminary injunctions, but did

not rule on the merits of Mirant’s motion to reject the Back-to-Back Agreement.

       The district court then withdrew the reference to the bankruptcy court and held new hearings.2


       2
          While the district courts have original jurisdiction over all cases under title 11, 28 U.S.C.
§ 1334, these cases are generally referred to the bankruptcy court. See 28 U.S.C. § 157(a). The
district court, however, shall withdraw the reference, upon a party’s timely motion, in cases where

                                                 -5-
It concluded that FERC has exclusive authority to determine the reasonableness of the wholesale

rates charged fo r electric energy sold in interstate commerce, and that those rates can only be

challenged in a FERC pro ceeding, not through a collateral attack in state or federal court. The

district court found that the only business justification supporting Mirant’s motion to reject the Back-

to-Back Agreement was the losses it suffered because the rate for electricity that FERC approved for

that agreement exceeds the market rate. Based upon this analysis, the district court found that

Mirant’s rejection motion was a prohibited “attempt to avoid their electric energy purchase payment

obligations under the Back-to-Back Agreement at the filed rates FERC has found to be just and

reasonable.” The district court then held that the Bankruptcy Code does not provide an exception

to FERC’s authority under the FPA and that Mirant must seek relief from the filed rate in the Back-

to-Back Agreement in a FERC proceeding. Based upon this analysis, the district court denied

Mirant’s motion to reject the Back-to-Back Agreement as well as its request for permanent injunctive

relief. In a subsequent order, the district court vacated the bankruptcy court’s injunctive relief

because it would interfere with the performance of FERC’s regulatory oversight functions. It then

dismissed the case for failure to state a claim upon which relief could be granted. Mirant appeals each

of the district court’s orders.

                                                   II

        “Questions concerning jurisdiction are questions of law. We therefore review the actions of

the district court de novo.” In re Moody, 41 F.3d 1024, 1026 (5th Cir. 1995). When faced with a

conflict between two statutes, courts must attempt to interpret them so as to give effect to both



“resolution of the proceeding requires consideration of both title 11 and other laws of the United
States regulating organizations or activities affecting interstate commerce.” 18 U.S.C. § 157(d).

                                                  -6-
statutes. See Morton v. Mancari, 417 U.S. 535, 551 (1974) (“The courts are not at liberty to pick

and choose among congressional enactments, and when two statutes are capable of co-existence, it

is the duty of the courts, absent a clearly expressed congressional intention to the contrary, to regard

each as effective.”).

                                                    A

        Brief descriptions of the general authority that a district court has to authorize the rejection

of an executory contract under Chapter 11 of the Bankruptcy Code, and of FERC’s regulatory

responsibility regarding contracts for the interstate sale of electricity under the FPA are necessary

before we can determine how those statutes i nteract. Congress intended Chapter 11 to permit

troubled enterprises to be restructured so that they could operate successfully in the future. United

States v. Whiting Pools, Inc., 462 U.S. 198, 203 (1983). Congress “presumed that the assets of the

debtor would be more valuable if used in a rehabilitated business than if ‘sold for scrap.’” Id. (citation

omitted). Further, Congress anticipated that permitting a business to reorganize instead of liquidating

would allow it to “continue to provide jobs, to satisfy creditors’ claims, and to produce a return for

its owners.” Id.

        “Congress intended to grant comprehensive jurisdiction to the bankruptcy courts so that they

might deal efficiently and expeditiously with all matters connected with the bankruptcy estate.”

Celotex Corp. v. Edwards, 514 U.S. 300, 308 (1995) (citation omitted). The statute governing a

district court’s jurisdiction over Chapter 11 filings states that the district courts shall have “original

but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to

cases under title 11.” 28 U.S.C. § 1334(b). That section also provides that the district court “in

which a case under title 11 is commenced . . . shall have exclusive jurisdiction of all of the property,


                                                   -7-
wherever located, of the debtor as of the commencement of such case, and of property of the estate.”

28 U.S.C. § 1334(e). Mirant contends that the district court has exclusive jurisdiction under § 1334

over the Back-to-Back Agreement as property of the estate.

       Mirant also relies upon the authority it has under § 365 of the Bankruptcy Code to reject that

agreement : “[T]he authority to reject an executory contract is vital to the basic purpose of a Chapter

11 reorganization, because rejection can release the debtor’s estate from burdensome obligations that

can impede a successful reorganization.” In re Nat’l Gypsum Co., 208 F.3d 498, 504 (5th Cir. 2000)

(citing NLRB v. Bildisco & Bildisco, 465 U.S. 513, 528 (1984)) (alteration in original). Section 365

provides, subject to certain exceptions contained within the Bankruptcy Code, that “the trustee,

subject to the court’s approval, may assume or reject any executory contract or unexpired lease of

the debtor.” 11 U.S.C. § 365(a) (emphasis added).3

       In addition to the Bankruptcy Code, we must also consider FERC’s authority within the

regulatory framework established by the FPA. Congress chose to regulate the interstate sale of

electricity through the wholesale rates that utility companies are permitted to charge. See 16 U.S.C.

§§ 824, 824d. Although utility companies determine electricity rates through private contract

negotiations, those rates must be filed with FERC and certified as “just and reasonable” to be lawful

under the FPA. 16 U.S.C. § 824d(a), (c). FERC has the “exclusive authority to determine the

reasonableness of wholesale [electricity] rates” under the FPA. Mississippi Power & Light Co. v.

Mississippi ex rel. Moore, 487 U.S. 354, 371 (1988). That authority led to the development of the

filed rate doctrine, which states that a utility’s “right to a reasonable rate [under the Federal Power


       3
         Section 365(a) does not define executory contract, but the legislative history of that section
indicates that the term means a contract “on which performance is due to some extent on both sides.”
NLRB v. Bildisco & Bildisco, 465 U.S. 513, 522 n.6 (1984) (citation omitted).

                                                 -8-
Act] is the right to the rate which the Commission files or fixes, and, . . . except for review of the

Commission’s orders, [a] court can assume no right to a different one on the ground that, in its

opinion, it is the only or the more reasonable one.” Id. (quoting Nantahala Power & Light Co. v.

Thornburg, 476 U.S. 953, 963-64 (1986)) (alteration and omission in original).

        Under the filed rate doctrine, “[t]he reasonableness of rat es and agreements regulated by

FERC may not be collaterally attacked in state or federal courts. The only appropriate forum for such

a challenge is before the Commission or a court reviewing the Commission’s order.” Mississippi

Power & Light, 487 U.S. at 375. While FERC has exclusive authority to change a filed rate, this

discretion is not completely unfettered. FERC may not change a filed rate solely because the rate

affords a public utility “less than a fair return” because “the purpose of the power given to the

Commission . . . is the protection of the public interest, as distinguished from the private interests of

the utilities. . . .” Fed. Power Comm’n v. Sierra Pac. Power Co., 350 U.S. 348, 355 (1956). Instead

FERC can change a filed rate only when “the rat e is so low as to adversely affect the public

interest))as where it might impair the financial ability of the public utility to continue its service, cast

upon other consumers an excessive burden, or be unduly discriminatory.” Id.

        Based upon § 1334 and § 365 of the Bankruptcy Code, Mirant claims that it has the right,

subject to the district court’s approval, to reject any executory contract, including the Back-to-Back

Agreement. FERC argues that the FPA preempts the district court’s jurisdiction in this case because

Mirant’s efforts to reject the Back-to-Back Agreement is actually a collateral attack upon a filed rate.

We address for the first time, a case arising at the intersection of these two statutes. After carefully

examining the authority of each entity, we conclude that the power of the district court to authorize

rejection of the Back-to-Back Agreement does not conflict with the authority given to FERC to


                                                    -9-
regulate rates for the interstate sale of electricity at wholesale.

                                                    B

        It is clear that FERC has the exclusive authority to determine wholesale rates, see Mississippi

Power & Light, 487 U.S. at 371, and Mirant does not contest that it would need FERC approval to

either modify the rates in the Back-to-Back Agreement or to completely abrogate that agreement.

Cf. 11 U.S.C. § 362(b)(4) (creating exception from automatic stay for agencies acting to enforce their

regulatory power). Under the Bankruptcy Code, however, Mirant’s rejection of the Back-to-Back

Agreement is a breach of that contract. See 11 U.S.C. § 365(g) (“[T]he rejection of an executory

contract . . . constitutes a breach of such contract. . . .”); see also In re Continental Airlines, 981

F.2d 1450, 1459 (5th Cir. 1993) (“[Section] 365(g)(1) speaks only in terms of ‘breach.’ The statute

does not invalidate the contract, or treat the contract as if it did not exist.”). Thus, whether the FPA

preempts a district court’s jurisdiction over a bankruptcy rejection necessarily depends upon whether

the FPA generally preempts a district court’s jurisdiction over claims of breach related to executory

power contracts.

        Outside of the bankruptcy context, the FPA does not provide FERC with exclusive

jurisdiction over the breach of a FERC approved contract. While the FPA does preempt breach of

contract claims that challenge a filed rate, dist rict courts are permitted to grant relief in situations

where the breach of contract claim is based upon another rationale. Gulf States Utils. Co. v. Ala.

Power Co., 824 F.2d 1465, 1471-73 (5th Cir. 1987); see also Arkansas Louisiana Gas Co v. Hall,

453 U.S. 571, 579 n.9 (1981) (declining to disturb a state court decision holding that a party breached

a contract that was subject to FERC regulation by failing to comply with state laws that also applied

to that contract). For example, Gulf States held that the FPA would preempt any breach of contract


                                                  -10-
claim where damages were sought because a lower rate would have been filed with FERC absent the

breach, but there is no preemption if damages were sought because the breach caused an increase in

the quantity purchased at the filed rate. Gulf States, 824 F.2d at 1471. Thus, it is clear that the

district court’s authority under the general § 365(a) rejection provision permits it to rule on Mirant’s

motion to reject the Back-to-Back Agreement so long as that rejection does not constitute a challenge

to that agreement’s filed rate.

        Whether rejection of the Back-to-Back Agreement is a challenge to the filed rate, granting

the FPA exclusive jurisdiction, is a closer question. The Supreme Court has held that district courts

are preempted from awarding breach of contract damage awards calculated using a rate other than

the rate filed with FERC. See Arkansas Louisiana Gas Co., 453 U.S. at 584-85. In Gulf States,

however, we held that courts are not preempted from awarding breach of contract damages based

upon a theory that the breach increased the amount that was purchased, so long as damages are

calculated using the filed rate. Gulf States, 824 F.2d at 1472. Furthermore, Gulf States held that

courts may set aside an energy contract that was obtained unconscionably or by fraud without

interfering with FERC’s rulemaking power, so long as that order was not based upon a theory that

the filed rate was too high. Id. While Gulf States recognized that setting aside a contract “would

affect the filed rates by eliminating them,” it held that the FPA does not preempt such indirect effects.

Id. at 1472 n.9.

        We conclude that the FPA does not preempt Mirant’s rejection of the Back-to-Back

Agreement because it would only have an indirect effect upon the filed rate. When an executory

contract is rejected in bankruptcy, the non-breaching party receives an unsecured claim against the

bankruptcy estate for an amount equal to its damages from the breach. See 11 U.S.C. §§ 365(g)(1),


                                                  -11-
502(g). If Mirant’s rejection of the Back-to-Back Agreement was approved, then PEPCO’s

unsecured claim against the bankruptcy estate would be based upon the amount of electricity it would

have otherwise sold to Mirant under that agreement at the filed rate. Thus, the damages calculation

from the rejection of a contract is analogous to the damages calculation we previously approved in

Gulf States because the award calculation is based upon the filed rate. See Gulf States, 824 F.2d at

1471 (damages from breach claims challenging the quantity purchased are not preempted but they

must be calculated using the filed rate).

       The district court found that Mirant’s rejection motion was a challenge to the filed rate

because the business justification that Mirant gave for rejecting the Back-to-Back Agreement was that

the filed rate exceeded the market rate for electricity. Mirant has also argued, however, that it does

not need the electricity purchased under the Back-to-Back Agreement to fulfill its obligations to

supply electricity. In that situation, Mirant may choose to reject this agreement as unnecessary to its

reorganized business because it represents excess capacity in its system to supply electricity. Section

365(a) permits the bankruptcy estate to select, within certain limits, which executory contracts it will

reject and which it will assume. See In re Topco, Inc., 894 F.2d 727, 741 (5th Cir. 1990) (“In effect,

Section 365 allows debtors to pick and choose among their agreements and assume those that benefit

their estates and reject those that do not.”). Presumably, a contract’s filed rate will be a relevant

factor to the bankruptcy estate when it makes this determination. A debtor’s use of the filed rate as

a criteria to select for rejection under § 365(a) those contracts which impose the greatest burden upon

the bankruptcy estate does not convert that rejection decision into a prohibited collateral attack on

the filed rate when the electricity purchased under the rejected contract is not necessary to fulfill a

debtor’s supply obligations. Cf. Gulf States, 824 F.2d at 1472 (“The district court would have


                                                 -12-
jurisdiction if [the debtor] claimed that it cannot take [the supplier’s] electricity regardless of price.

If, however, [the debtor] can fulfill its purchase obligations at lower rate, then [the debtor] merely

seeks rate relief not available in district court.”).

         FERC presents an alternative argument to support its claim that Mirant’s rejection motion

is a prohibited collateral attack o n a filed rate. This argument is based upon the amount that the

bankruptcy estate will have to pay to satisfy PEPCO’s breach of contract damages claim. FERC

concedes that the rejection of the Back-to-Back Agreement would not challenge the filed rate if

Mirant guarantees that it would pay PEPCO the full amount of any damages resulting from that

breach. However, FERC maintains that anything less than full payment would constitute a challenge

to the filed rate because then Mirant would have changed the terms and conditions of the Back-to-

Back Agreement by reducing the amount of its contract payments.

        FERC’s argument is unpersuasive because it is entirely dependant upon Mirant’s bankrupt

status. It does not challenge Mirant’s ability to breach the Back-to-Back contract generally, nor does

it challenge the calculation of damages from that breach. Instead, FERC’s argument focuses on the

amount that Mirant’s bankruptcy estate may ultimately have to pay to satisfy PEPCO’s damages

claim. It is true that Mirant’s bankruptcy estate may be able to satisfy PEPCO’s breach of contract

damages claim without paying the full amount of that claim. However, any amount that PEPCO

receives in satisfaction of its breach of contract claim will depend solely upon the terms applicable

to unsecured creditors as a class under the reorganization plan as confirmed by the bankruptcy court.

See 11 U.S.C. § 1129 (describing process for confirming reorganization plan); see also 11 U.S.C. §

1141 (discharging preconfirmation debts not paid as part of the reorganization plan). Thus, under

FERC’s analysis, any effect on the filed rates from a motion to reject would result not from the


                                                   -13-
rejection itself, but from the application of the terms of a confirmed reorganization plan to the

unsecured breach of contract claims.

       In Gulf States, we held that a district court could set aside contracts subject to FERC

jurisdiction that were obtained unconscionably or by fraud. Gulf States, 824 F.2d at 1472. While we

acknowledged that this remedy would affect the filed rate by eliminating it entirely, we held that

Congress did not mean for the FPA “to preempt such indirect effects.” Id. at 1472 n.9. Any effect

that application of a reorganization plan’s terms may have upon the Back-to-Back Agreement’s filed

rate is even further removed from the contract breach than are the effects of setting the contract aside

entirely, and does not cause FPA preemption. Therefore, FERC must rely upon the provisions of the

Bankruptcy Code to limit Mirant’s ability to reject the Back-to Back Agreement.

       The structure of the Bankruptcy Code, however, indicates that Congress did not intend to

limit the ability of utility companies to reject an executory power contract. Section 365, along with

other Bankruptcy Code sections, details a number of specific limitations on and exceptions to the §

365(a) general rejection authority, including exceptions prohibiting rejection of certain obligations

imposed by regulatory authorities. See, e.g., 11 U.S.C. § 365(o) (requiring a trustee to assume “any

commitment by the debtor to a Federal depository institutions regulatory agency . . . to maintain the

capital of an insured depository institution,” and granting priority to any claim of a subsequent breach

of this obligation); 11 U.S.C. § 1113 (setting forth requirements for the assumption or rejection of

collective bargaining agreements); 11 U.S.C. § 1169 (providing special treatment for the rejection

of a railroad lease); 11 U.S.C. § 365(d)(5) (describing the special conditions for deemed rejection of

an air carrier’s unexpired lease of an airport terminal or aircraft gate); cf. 11 U.S.C. § 1110 (setting

forth special requirements for the assumption of executory contracts relating to aircraft equipment


                                                 -14-
and vessels). The Bankruptcy Code does not, however, include an exception prohibiting rejection

of, or providing other special treatment for, wholesale electric contracts subject to FERC jurisdiction.



        The fact that Congress did not create an exception from § 365(a) rejection for contracts

subject to FERC regulation does not appear to be an accident or oversight. It is clear from other

Bankruptcy Code provisions that Congress was aware that a debtor’s bankruptcy reorganization

could implicate the authority of a regulatory rate-setting commission with jurisdiction over that

debtor. See 11 U.S.C. § 1129(a)(6) (permitting the confirmation of a reorganization plan only when

“[a]ny governmental regulatory commission with jurisdiction, after confirmation of the plan, over the

rates of the debtor has approved any rate change provided for in the plan, or such rate change is

expressly conditioned on such approval”); see also 11 U.S.C. § 362(b)(4) (creating exception from

the automatic stay for government agencies acting to enforce their regulatory power). Obviously,

Congress knew how to craft specific provisions to protect the rate setting authority of regulatory

commissions when it wanted to do so.

        In light of the numerous specific exceptions to the general § 365(a) authority to reject

contracts that Congress chose to include in the Bankruptcy Code, including those for other contracts

subject to extensive regulation, and the absence of any exception for contracts subject to FERC

jurisdiction, it is clear that Congress intended § 365(a) to apply to contracts subject to FERC

regulation. Cf. NLRB v. Bildisco & Bildisco, 465 U.S. 513, 522-23 (1984) (“Obviously, Congress

knew how to draft an exclusion for collective-bargaining agreements when it wanted to; its failure

to do so in this instance indicates that Congress intended that § 365(a) apply to all collective-

bargaining agreements covered by the NLRA.”). “When Congress provides exceptions in a statute,


                                                 -15-
it does not follow that courts have authority to create others. The proper inference, and the one we

adopt here, is that Congress considered the issue of exceptions and, in the end, limited the statute to

the ones set forth.” United States v. Johnson, 529 U.S. 53, 58 (2000); see also TRW Inc. v. Andrews,

534 U.S. 19, 28 (2001) (where Congress includes specific exceptions to a statute, additional

exceptions should not be implied).

        The FPA does not preempt a district court’s jurisdiction to authorize the rejection of an

executory contract subject to FERC regulation as part of a bankruptcy proceeding. A motion to

reject an executory power contract is not a collateral attack upon that contract’s filed rate because

that rate is given full effect when determining the breach of contract damages resulting from the

rejection. Further, there is nothing within the Bankruptcy Code itself that limits a public utility’s

ability to choose to reject an executory contract subject to FERC regulation as part of its

reorganization process. Therefore, the district court erred by dismissing Mirant’s motion to reject

the Back-to-Back Agreement.

                                                   C

        As part of its order dismissing Mirant’s motion to reject the Back-to-back Agreement, the

district court also vacated all of the injunctive relief that the bankruptcy court entered in this case.

Mirant now requests that we enter injunctive relief sua sponte using substantially the same form as

the bankruptcy court. Fashioning appropriate injunctive relief depends upon the particular facts and

circumstances of a situation, and we leave the task of crafting the language of any injunctive relief

in this case to the bankruptcy court. In the interest of judicial efficiency and to provide guidance on

remand, however, we will consider whether the bankruptcy court acted within its authority when it

previously entered injunctive relief.


                                                 -16-
       The bankruptcy court issued two separate injunctions in this case that were subsequently

vacated by the district court. First, it prohibited either FERC or PEPCO from taking any action to

require Mirant to abide by the terms of the Back-to-Back Agreement. Second, it prohibited FERC

from taking any action to require Mirant to abide by the terms of any contract subject to FERC

regulation with which it was either complying or was not complying subject to a court order without

giving Mirant ten days advance notice. We recognize that some injunctive relief is necessary to bring

finality to Mirant’s rejection decisions and allow the reorganization process to proceed, but the

injunctive relief as previously entered was overly broad.

       The bankruptcy court issued both of its injunctions under 11 U.S.C. § 105(a), which allows

the court to issue any order “that is necessary or appropri ate to carry out the provisions” of the

Bankruptcy Code. Id.; see In re Cajun Elec. Power Coop., Inc., 185 F.3d 446, 453 n.9 (5th Cir.

1999). The bankruptcy court relied upon its § 105(a) equitable authority because FERC is exempt

from the Bankruptcy Code’s automatic stay provision. See 11 U.S.C. § 362(b)(4) (providing

exemption for the “commencement or continuation of an action or proceeding by a governmental unit

. . . to enforce such governmental unit’s . . . police and regulatory power”). While § 105(a) permits

bankruptcy courts to enjoin actions that are excepted from the automatic stay by § 362(b)(4), see In

re Cajun Elec. Power, 185 F.3d at 457 n.18., this authority is typically used to stop proceedings

excepted under § 364 only “in exceptional circumstances.” Id. (citing Corporacion de Servicios

Medicos Hospitalarios de Fajardo v. Mora. 805 F.2d 440, 449 n.14 (1st Cir. 1986)).

       The Bankruptcy Code clearly anticipates ongoing governmental regulatory jurisdiction while

a bankruptcy proceeding is pending. In re Cajun Elec. Power, 185 F.3d at 453; see also 11 U.S.C.

§ 362(b)(4) (creating exemption from automatic stay for administrative agencies exercising their


                                                -17-
regulatory power); 11 U.S.C. § 1129(a)(6) (requiring approval of any rate change in a reorganization

plan by the government regulatory agency with the appropriate jurisdiction). FERC has a number

of regulatory responsibilities under the FPA that continue while Mirant’s bankruptcy case is pending

that do not necessarily impact Mirant’s ability to reject a contract. See, e.g., 16 U.S.C. § 824a(c)

(permitting FERC to require from public utilities, whenever it determines an emergency exists, “such

generation, delivery, interchange, or transmission of electric energy as in its judgment will best meet

the emergency and serve the public interest”); 16 U.S.C. § 824a(g) (to ensure continuity of service,

FERC shall prescribe rules requiring public utilities to accommodate any shortages of electric energy

or capacity); 16 U.S.C. § 824e(a) (allowing FERC to modify any filed rate that, after a hearing

initiated either upon its own motion or upon complaint, it determines to be unjust or unreasonable).

       A court’s powers under § 105(a) are not unlimited as that section only “authorizes bankruptcy

courts to fashion such orders as are necessary to further the substantive provisions of the Code,” and

does not permit those courts to “act as roving commission[s] to do equity.” In re Southmark Corp.,

49 F.3d 1111, 1116 (5th Cir. 1995) (citations and internal quotations omitted). The bankruptcy

court’s injunctive relief in this case exceeded its authority under § 105(a). The concern that the

bankruptcy court expressed))that FERC could negate Mirant’s rejection of an executory power

contract by ordering Mirant to continue performing under the terms of the rejected contract))is

certainly a legitimate basis for injunctive relief. For example, a bankruptcy court can clearly grant

injunctive relief to prohibit FERC from negating Mirant’s rejection by requiring continued

performance at the pre-rejection filed rate.4


       4
          Prohibiting FERC from ordering a debtor to continue performing under a rejected contract’s
filed rate does not mean that the rejection decision itself was a challenge to the filed rate. We assume
for purposes of our discussion of injunctive relief that the filed rate was given full effect in the

                                                 -18-
       Both of the bankruptcy court’s injunctions, however, attempted to accomplish the narrow

goal of protecting Mirant’s right to reject executory contracts by prohibiting FERC from taking any

action to require Mirant to abide by the terms of those contracts within the scope of its injunctions.

Thus, while the bankruptcy court found that injunctive relief was only warranted to prevent FERC

from negating Mirant’s rejection decisions, t he relief that was actually granted implicated all of

FERC’s regulatory functions with respect to hundreds of contracts. The ten-day advance notice

requirement included in the bankruptcy court’s second injunction is particularly troublesome because

that requirement in effect forced FERC t o clear any regulatory action with the bankruptcy court.

That requirement is inconsistent with the Bankruptcy Code’s assumption that a debtor is subject to

ongoing agency regulation while in bankruptcy. See In re Cajun Elec. Power, 185 F.3d at 453.

Consequently, these injunctions were broader than were necessary to further the purposes of the

Bankruptcy Code’s rejection provision.

                                                  D

       As we hold that a district court may authorize the rejection of an executory power contract,

we must also address Mirant’s argument that we should render judgment on its motion to reject the

Back-to-Back Agreement. The procedural posture of this case counsels against that action. Neither

the bankruptcy court nor the district court has ruled on the merits of Mirant’s motion to reject.

Further, important issues must still be resolved before a decision on the merits would be appropriate.

For example, it is unclear whether or not the Back-to-Back Agreement is a separate agreement from

the Asset Purchase and Sale Agreement for purposes of rejection. See, e.g., Stewart Title Guar. Co.



bankruptcy court’s calculation of the breach of contract damages resulting from the rejection of that
contract.

                                                -19-
v. Old Republic Nat’l Title Ins. Co., 83 F.3d 735, 741 (5th Cir. 1996) (“Where an executory contract

contains several agreements, the debtor may not choose to reject some agreements within the contract

and not others.”). We, of course, express no opinion regarding this issue, and merely note its

existence to indicate the significant work that remains. Developing the factual record necessary to

answer these questions is the work of the trial courts.

        Although the bankruptcy court did not reach the merits of Mirant’s motion to reject the Back-

to-Back Agreement, its opinion indicated that it may choose to apply a more rigorous standard to

Mirant’s motion to reject than the usual business judgment standard.5 Supreme Court precedent

supports applying a more rigorous standard to this case. See Bildisco, 465 U.S. at 526-27 (applying

a more rigorous standard to the rejection of a collective-bargaining agreement under § 365),

superceded by statute as recognized in Am. Flint Glass Workers Union v. Anchor Resolution Corp.,

197 F.3d 76, 82 (3d Cir. 1999) (Congress overruled Bildisco’s rejection standard for collective-

bargaining agreements by passing 11 U.S.C. § 1113 to control the rejection of those agreements).

The Supreme Court generally required more rigorous scrutiny in Bildisco because of “the special

nature of a collective-bargaining contract.” See Bildisco, 465 U.S. at 524. The Supreme Court also

included a specific negotiation requirement as part of the Bildisco standard to ensure that “the

national labor policies of avoiding labor strife and encouraging collective bargaining” reflected in the

National Labor Relations Act, 29 U.S.C. § 151, were “adequately served” before rejection was


        5
          The rejection decision under § 365 is generally left to the business judgment of the
bankruptcy estate. See Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1309 (5th Cir.
1985) (“It is well established that ‘the question [of] whether a lease should be rejected . . . is one of
business judgment.”) (quoting Group of Institutional Investors v. Chicago, Milwaukee, St. Paul &
Pac. R.R. Co., 318 U.S. 523 (1943)) (omissions in original, alteration added); see also In re Liljeberg
Enterprises, Inc., 304 F.3d 410, 438 (5th Cir. 2002) (applying Richmond Leasing to rejection an
executory contract).

                                                  -20-
permitted See Bildisco, 465 U.S. at 526.6

        The nature of a contract for the interstate sale of electricity at wholesale is also unique.

Additionally, Congress found when it passed the FPA that the public has an interest in the

transmission and sale of electricity. 16 U.S.C. § 824(a). This includes an interest in the continuity

of electrical service to the customers of public utilities. 16 U.S.C. § 824a(g). The FPA and the filed

rate doctrine protect the public interest by imposing severe limitations upon a public utility’s ability

to alter the terms of those contracts after they are certified by FERC. Under the filed rate doctrine,

FERC can only approve a change to a filed rate if “the rate is so low as to adversely affect the public

interest))as where it might impair the financial ability of the public utility to continue its service, cast

upon other consumers an excessive burden, or be unduly discriminatory.” Sierra-Pacific, 350 U.S.

at 355. This doctrine does not allow FERC to change a filed rate based upon the purely private

concern that the rate “is unprofitable to the public utility.” Id. Clearly the business judgment

standard normally applicable to rejection motions is more deferential than the public interest standard

applicable in FERC proceedings to alter the terns of a contract within its jurisdiction. Use of the

business judgment standard would be inappropriate in this case because it would not account for the

public interest inherent in the transmission and sale of electricity.

        Therefore, upon remand, the district court should consider applying a more rigorous standard

to the rejection of the Back-to-Back Agreement. If the district court decides that a more rigorous

standard is required, then it might adopt a standard by which it would authorize rejection of an



        6
         “Before acting on a petition . . . t o reject a collective-bargaining agreement . . . the
Bankruptcy Court should be persuaded that reasonable efforts to negotiate a voluntary modification
have been made and are not likely to produce a prompt and satisfactory solution.” Bildisco, 465 U.S.
at 526.

                                                   -21-
executory power contract only if the debtor can show that it “burdens the estate, [ ] that, after careful

scrutiny, the equities balance in favor of rejecting” that power contract, and that rejection of the

contract would further the Chapter 11 goal of permitting the successful rehabilitation of debtors. See

Bildisco, 465 U.S. at 526-27. When considering these issues, the courts should carefully scrutinize

the impact of rejection upon the public interest and should, inter alia, ensure that rejection does not

cause any disruption in the supply of electricity to other public utilities or to consumers. Cf. id. at

527. (requiring the bankruptcy court to balance the interests of the debtor, the creditors and the

employees when determining what constitutes a successful rehabilitation). The bankruptcy court has

already indicated that it would include FERC as a party in interest for all purposes in this case under

11 U.S.C. § 1109(b) and Fed. R. Bankr. P. 2018. We presume that the district court would also

welcome FERC’s participation, if this case is not referred back to the bankruptcy court.7 Therefore,

FERC will be able to assist the court in balancing these equities.

                                                   III

        The portion of the district court’s order dismissing this case for lack of jurisdiction to

authorize the rejection of a contract for the interstate sale of electricity at wholesale is REVERSED,

the portion of that order vacating the bankruptcy court’s injunctive relief is AFFIRMED, and this case

is REMANDED to the district court for proceedings not inconsistent with this opinion. All

outstanding motions are DENIED.




        7
         Mirant asks that we remand this case to the bankruptcy court, but the district court withdrew
the reference in this case and accordingly we remand to the district court. Nothing in this opinion,
however, should be understood to imply that the district court cannot refer this case back to the
bankruptcy court.

                                                  -22-