Current Issues Affecting Utility Bankruptcies

Abstract

The purpose of reorganization under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) is to allow an individual, partnership, or corporation engaged in a business to reorganize its affairs, while at the same time maximizing the entity's value for its creditors. The Bankruptcy Code grants businesses in bankruptcy extraordinary powers aimed at helping debtors achieve these goals. As discussed in this article, such powers sometimes conflict with the traditional regulation of electric utility companies. The article focuses on the interplay between utility regulations and the Bankruptcy Code and its effect on the ability of debtor utilities to sell assets, reject contracts, and develop and confirm plans of reorganization. The precise impact of utility regulations on a debtor's operations and reorganization strategy remains unclear, due in large part to the tendency of interested parties to settle such issues as they arise, and thus dispense with the need for court resolution of such issues. As a result, utility companies in bankruptcy often face significant uncertainty as to what they can and cannot do within a Chapter 11 proceeding. Although it is impossible to avoid such uncertainty once in bankruptcy, careful bankruptcy planning, such as using ring-fencing techniques to isolate healthy utility assets from failing non-utility businesses, can help a utility avoid bankruptcy altogether.