What’s the issue?

FERC and the bankruptcy courts, particularly those in Texas, are in a fight over who decides whether a bankrupt shipper can void its long-term contracts with pipelines.

Why does it matter?

Pipelines occasionally assert that shippers walking from their contractual obligations pose an existential threat or at least could trigger a downward spiral of increasing rates and falling usage. Non-bankrupt gas producers complain that they are competitively disadvantaged when bankrupt competitors are able to lower their operating costs through such actions. However, for the bankrupt producers, being able to adjust their portfolio of pipeline capacity to reflect their post-bankruptcy production is viewed as an essential element of the reorganization process.

What’s our view?

FERC’s assertion of authority seems to be ill-founded, and has been rejected by the bankruptcy courts and will likely be rejected on appeal. FERC could address a key concern raised by Rockies Express by amending its own credit policies and may want to consider that avenue rather than pursuing a turf battle with the courts.

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