Analysis of Just Energy Group bankruptcy proceedings

January 2023  |  SPECIAL REPORT: ENERGY & UTILITIES

Financier Worldwide Magazine

January 2023 Issue

On 8 November 2022, the Fifth Circuit heard oral argument in connection with the direct appeal of the Southern District of Texas Bankruptcy Court’s order largely denying the Electric Reliability Council of Texas, Inc.’s (ERCOT’s) motion to dismiss the adversary complaint against it filed by Chapter 15 debtors Just Energy Texas LP, Just Energy Holding, Inc. and its Chapter 15 foreign representative (collectively Just Energy).

When Just Energy, a company that purchases electricity and natural gas commodities from certain energy suppliers and wholesalers and resells them to residential commercial customers, received a significantly higher invoice from ERCOT after price increases during winter storm Uri in Texas, it filed insolvency proceedings in Canada and recognition of the proceeding in the Southern District of Texas Bankruptcy Court.

The appeal presents the Fifth Circuit with issues to balance a bankruptcy court’s subject matter jurisdiction against a state’s interest to decide certain issues that relate to state regulatory price-setting utility frameworks. The threshold issue is whether ERCOT, a private company (as characterised in Texas Commercial Energy v. TXU Energy, Inc., 413 F.3d 503, 506 (5th Cir. 2005)), shares the sovereign immunity defence available to state agencies under Buford abstention through its role to “exercise delegated – and closely supervised – regulatory authority to oversee the electricity market” approved by the Public Utility Commission of Texas (PUCT).

Between 13 February and 17 February 2021, winter storm Uri dumped record amounts of snow on Texas, with freezing temperatures and severe weather impacting all 254 counties in the state. The storm challenged the intrastate power grid, thereby incapacitating most of Texas’s power generating facilities. During the storm, ERCOT ordered forced power outages, and the PUCT set prices at the legal maximum of $9000 per megawatt hour (MWh), in an attempt to balance the energy grid and prevent structural damage to the power grid.

According to Just Energy, the price increase caused the state’s wholesale market to consume $55bn in transactions – “a level of volume it ordinarily would take the market four years to realize”. After receiving invoices demanding approximately $335m for the operating days of 13 February to 20 February 2021, Just Energy commenced proceedings before the Superior Court of Justice in Ontario, Canada, under the Canadian Companies’ Creditors Arrangement Act and sought recognition of the foreign proceeding in its Chapter 15 case before the bankruptcy court.

Shortly thereafter, Just Energy filed an adversary complaint against ERCOT which generally seeks to recover losses caused by the alleged regulatory missteps of PUCT and ERCOT (see Just Energy Group, Inc. v. Electric Reliability Council of Texas, Inc., Adv. No. 21-04399 (Bankr. S.D. Tex.)). Just Energy’s complaint asserts five causes of action seeking to claw back payment of the ERCOT invoices and alleging that the PUCT’s orders and ERCOT’s price increase violated Texas law. A series of motions to dismiss, hearings, dismissal orders and amended complaints followed. The bankruptcy court dismissed the PUCT as a party to the proceeding, and ERCOT once again moved to dismiss the operative complaint based on the argument that it is immune from the adversary proceeding. The bankruptcy court largely denied the motion to dismiss, and ERCOT appealed the order.

The Bankruptcy Court certified the following four issues to be heard on direct appeal by the Fifth Circuit: (i) whether the filed-rate doctrine bars the bankruptcy court from determining if rates approved by the PUCT are “unlawful, unjust, or excessive”; (ii) whether the bankruptcy court improperly denied ERCOT’s sovereign immunity defence; (iii) whether dismissal is required due to an inability to join the PUCT, which is “unquestionably immune” to the suit, as a necessary party; and (iv) whether, if not otherwise dismissed, the Burford abstention doctrine should be applied to the suit due to Texas’ “unique interest in regulating its independent electricity grid and market”.

First, a ‘filed rate’ is “one approved by the governing regulatory agency”, and “is per se reasonable and unassailable in judicial proceedings brought by ratepayers”. (ERCOT’s opening brief, quoting Tex. Com. Energy (TCE) v. TXU Energy, Inc., 413 F.3d 503, 508 (5th Cir. 2005)). The filed-rate doctrine in turn “bars judicial recourse against a regulated entity based upon allegations that the entity’s ‘filed rate’ is too high, unfair or unlawful”. (Id. citing TCE, 413 F.3d at 507). ERCOT argued that under the filed-rate doctrine, “[a]ll rate challenges must proceed before the agency and in the designated judicial review proceedings to ensure consistency for all market participants”.

And because Just Energy’s adversary proceeding asks the bankruptcy court to declare the rates unlawful, unjust or excessive, Just Energy’s complaint “impermissibly seek[s] to modify a filed rate and achieve a discriminatory rate that benefits only them”. In support of the ERCOT brief, the PUCT’s amicus brief asserted that deciding the issues in Just Energy’s complaint necessarily requires the bankruptcy court “to make determinations the Texas Legislature intended to be made exclusively by the PUCT or, as appropriate, the Texas judiciary”, in state court.

Just Energy, on the other hand, argued that the claims in its adversary complaint relate to ERCOT’s charges that were not “filed rate” because ERCOT did not comply with the PUCT’s market-rate protocols. “Instead, ERCOT manually adjusted the rate, relying on the load shed findings in the PUCT Orders..., which at the time indisputably excluded ‘load shed’ as a trigger for scarcity pricing.” In so doing, “ERCOT forced the [high-system-wide offer cap] on market participants through PUCT Orders entered without any evidentiary basis showing that the market’s scarcity pricing signals were not working or that the inflated prices would accomplish their apparent intended purpose of stimulating power generation”.

Finally, Just Energy argued that “even if the PUCT Orders somehow are found to be valid, there can be no argument the $9000/MWh price imposed by ERCOT for the 33 hours after the PUCT Orders expired by their own terms constitutes a ‘filed rate’”.

The second issue was whether ERCOT shares the PUCT’s sovereign immunity defence and is immune from suit under the Eleventh Amendment as an “arm of the state”. ERCOT argued that it is an arm of the state under the six-prong test, because among other things, it is “exercising delegated – and closely supervised – regulatory authority to oversee the electricity market”.

After explaining that some courts have determined that the state can waive its Eleventh Amendment defence by knowingly participating in a federal proceeding, ERCOT asserted that “ERCOT has not waived its immunity nor has its immunity been abrogated, and Appellees’ adversary proceeding, seeking monetary relief from ERCOT under foreign law in an ancillary Chapter 15 proceeding, is particularly offensive to state sovereignty”.

In response, Just Energy argued that the bankruptcy court properly concluded that ERCOT cannot invoke sovereign immunity because the Supreme Court’s Katz decision makes clear the sovereign immunity of states – if ERCOT can be called that – has been waived with respect to Just Energy’s preference and turnover claims that fall within the Bankruptcy Court’s in rem jurisdiction or are matters necessary to effectuate its in rem jurisdiction. As it pointed out, a state court cannot decide Just Energy’s bankruptcy claims. In any event, “ERCOT waived any immunity defense when it appeared in the Chapter 15 Cases to get its invoices paid”.

The third issue on appeal is whether the adversary may proceed without the PUCT, which ERCOT alleges is a necessary party. Although ERCOT and PUCT contend that it is a necessary party because its order is at issue, Just Energy argues that it seeks no remedy from the PUCT and ERCOT is the party that issued Just Energy the invoices (i.e., caused the harm).

Finally, ERCOT argues that the Fifth Circuit should order the bankruptcy court to abstain from deciding the issue under Burford abstention because Texas has a unique interest in regulating its independent electricity grid and market, and that comprehensive scheme should not be disrupted by one-off proceedings in bankruptcy. Just Energy argued that these are exactly the types of claims that Congress decided bankruptcy courts should decide as evidenced by the amendment to 28 USC section 1334 that limited bankruptcy courts’ ability to abstain to ensure disputes involving insolvency proceedings would be concentrated in the federal system.

At the oral argument, the parties’ arguments largely tracked their briefs. ERCOT’s counsel pointed out that a favourable ruling for ERCOT on any one of the four issues would resolve the entire appeal and require dismissal of Just Energy’s bankruptcy adversary proceeding. Among other questions, the Fifth Circuit panel asked whether any of the issues are before the Texas Supreme Court, and one of the judges even noted that the abstention argument was the most interesting of the issues. Counsel was able to clarify that the abstention issue was currently pending before the Texas Supreme Court and answer additional questions about distinctions in cited case law.

At the end of the oral argument, the panel took the matter under submission. The resolution of the appeal will likely provide additional colour to the oft-litigated issue of bankruptcy court subject matter jurisdiction as well as a private company’s ability to share a regulatory agency’s sovereign immunity – both noteworthy issues for companies involved in the volatile utilities industry.

 

Justin Bernbrock is a partner and Ali Lattner is an associate at Sheppard Mullin. Mr Bernbrock can be contacted by email: jbernbrock@sheppardmullin.com. Ms Lattner can be contacted by email: alattner@sheppardmullin.com.

© Financier Worldwide

BY

Justin Bernbrock and Ali Lattner

Sheppard Mullin

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