ALGONQUIN GAS TRANSMISSION, LLC'S SUPPLEMENTAL BRIEF REGARDING SALE HEARING ISSUES

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1 Irena M. Goldstein DEWEY & LEBOEUF LLP 1301 Avenue of the Americas New York, New York Tel: (212) Fax: (212) Bennett G. Young (admitted pro hac vice) Paul S. Jasper (admitted pro hac vice) DEWEY & LEBOEUF LLP One Embarcadero Center, Suite 400 San Francisco, CA Telephone: (415) Facsimile: (415) Charles A. Moore (admitted pro hac vice) DEWEY & LEBOEUF LLP RRI Energy Plaza 1000 Main Street, Suite 2550 Houston, TX Tel: (713) Attorneys for Algonquin Gas Transmission, LLC UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK In re: Boston Generating, LLC, et al., 1 Debtors. Chapter 11 Case No (SCC) Jointly Administered ALGONQUIN GAS TRANSMISSION, LLC'S SUPPLEMENTAL BRIEF REGARDING SALE HEARING ISSUES 1 The Debtors in these chapter 11 cases, along with the last four digits of their federal tax identification number, include: Boston Generating, LLC (0631); EBG Holdings LLC (3635); Fore River Development, LLC (7933); Mystic I, LLC (0640); Mystic Development, LLC (7940); BG New England Power Services, Inc. (0476); and BG Boston Services, LLC (6921).

2 TABLE OF CONTENTS Page Table of Authorities... ii I. JUDGE COTE CONDITONED THE SALE OF THE FORE RIVER PLANT ON THE FERC S DETERMINATION UNDER THE NGA OF WHETHER THE DEBTORS CAN REJECT THE HSA...1 A. Procedural Background...2 B. Judge Cote Conditioned The Sale On FERC Approval Of Rejection Of The HSA...3 II. THE FERC HAS EXCLUSIVE JURISDICTION UNDER THE NGA OVER INTERPRETATION OF THE ALGONQUIN TARIFF...7 A. Background...7 B. The Court Must Defer To The FERC For Interpretation of The Tariff...8 III THE THREE POSSIBLE OUTCOMES IN THE FPA SECTION 203 PROCEEDING AND THEIR EFFECT ON THIS COURT'S DECISION...13 A. Potential Outcome #1: The FERC Conditions its Approval on, or Defers its Decision Until, an NGA Proceeding...15 B Potential Outcome #2: The FERC Approves the Application and Either States That it Does Not Have Jurisdiction in the Section 203 Proceeding to Consider Issues Related to the NGA or Remains Silent About the Same...16 C. Potential Outcome #3: The FERC Approves the Application and Expressly Terminates the HSA...17 IV CONCLUSION...18 i

3 TABLE OF AUTHORITIES Page Nos. Am. Mun. Power - Ohio, Inc. v. FirstEnergy Corp., 2008 WL , at *4 n.4 (S.D. Ohio 2008)...10 Ark. La. Gas Co. v. Hall, 7 FERC 61,175 (1979)...12 Bay Gas Storage Co., Ltd., 131 FERC P 61,034 (2010) Boston Edison Co., 87 FERC 61,034 (1999) Cal. Dep t of Water Res. v. Calpine Corp. (In re Calpine Corp.), 337 B.R. 27 (S.D.N.Y. 2006)...1 Distrigas of Mass. Corp. v. Boston Gas Co., 693 F.2d 1113 (1st Cir. 1982)...9 Enron, 02 FERC 61,316 (2003)...15 Great N. Ry. Co. v. Merchants Elevator Co., 259 U.S. 285 (1922)...9 In re Daufuskie Island Props., LLC, 431 B.R. 626 (Bankr. D.S.C. 2010)...8 Interstate Commerce Comm n v. Atlantic C.L.R. Co., 383 U.S. 576 (1966)...9 James A. Goodman, As Receiver For Certain Assets of PMCC Calpine New England Invs., LLC, 115 FERC 61,346 (2006)...16 Maritimes & Ne. Pipeline and Algonquin Gas Transmission, 95 FERC 61,077, final determination, 97 FERC 61,345 (2001)...12 Miss. Power & Light Co. v. United Gas Pipe Line Co., 532 F.2d 412 (5th Cir. 1976)...9, 11, 13 NRG Power Mktg., Inc. v. Blumenthal (In re NRG Energy, Inc.), No , 2003 WL , at *3 (S.D.N.Y. June 30, 2003)...1 ii

4 Old Dominion Elec. Coop., 119 FERC 61,253 (2007)...15 Pub. Util. Dist. No. 1 of Grays Harbor County. Wash. v. IDACORP, Inc., 379 F.3d 641 (9th Cir. 2004)...10 Ricci v. Chi. Mercantile Exch., 409 U.S. 289 (1973)...11, 13 Startrans IO, LLC, 122 FERC 61,307 (2008)...14 Sw. Sugar and Molasses Co. v. River Terminals Corp., 360 U.S. 411 (1959)...9, 10, 11 Tenn. Gas Pipeline Co., 28 FERC P 61,313 (1984)...9 Texaco Refining & Mktg. Co., 112 FERC P 63,020 at (2005)...9 Transcon. Gas Pipe Line Corp., 8 FERC P 61,186 (1979)...9 U.S. v. Radio Corp. of Am., 358 U.S. 334 (1959)...12 United States v. W. Pac. R.R. Co., 352 U.S. 59 (1956)...9, 11, 12, 13 W. Oil & Fuel Co. v. Great Lakes Pipe Line Co., 210 F.2d 490 (8th Cir. 1954)...10 Wabash Valley Power Ass n, Inc. v. FERC, 268 F.3d 1105 (D.C. Cir. 2001)...17, 18 Williams Pipe Line Co. v. Empire Gas Corp., 76 F.3d 1491 (10th Cir. 1996)...10, 11 iii

5 Statutes 5 U.S.C. 706(2)(A) U.S.C. 363(f)...8, , 6 15 U.S.C. 717 et. seq c c(a) c(d) d(a) a et seq U.S.C. 824b b(a)(1) b(a)(3)...14 iv

6 As requested by the Court during the course of the proceedings on November 19, 2010, Algonquin Gas Transmission, LLC ( Algonquin ) submits its supplemental brief to address certain of the issues discussed with the Court during Algonquin s opening argument. This supplemental brief will address (1) Algonquin s position regarding the proper construction of District Judge Cote s Opinions and Order of November 1, 2010 (the November 1 Opinion ) and the Memorandum Opinion and Order of November 12, 2010 (the November 12 Opinion ); (2) the scope of this Court s jurisdiction to interpret the Algonquin Tariff; and (3) a matrix of possible outcomes of the proceedings at the Federal Energy Regulatory Commission ( FERC ) together with an explanation of what each of these outcomes means for this Court's adjudication. I. JUDGE COTE CONDITIONED THE SALE OF THE FORE RIVER PLANT ON THE FERC S DETERMINATION UNDER THE NGA OF WHETHER THE DEBTORS CAN REJECT THE HSA Judge Cote s November 1 Opinion and November 12 Opinion must be read against the backdrop of the filed rate doctrine. Pursuant to the filed rate doctrine, the FERC has exclusive jurisdiction to determine whether the Debtors can cease performance under the HSA and, thus, the District Court and the Bankruptcy Court lack subject matter jurisdiction over the HSA. See Cal. Dep t of Water Res. v. Calpine Corp. (In re Calpine Corp.), 337 B.R. 27, 32 (S.D.N.Y. 2006); NRG Power Mktg., Inc. v. Blumenthal (In re NRG Energy, Inc.), No , 2003 WL , at *3 (S.D.N.Y. June 30, 2003). Judge Cote remedied the filed rate doctrine issues by conditioning rejection of the HSA upon FERC approval under the NGA. Notwithstanding Judge Cote s orders, the Debtors contend that they can proceed with the sale of the Fore River Plant without obtaining FERC approval under the NGA to reject the HSA. This is incorrect. Implicit in Judge Cote s decision is that the Sale 1

7 Motion 2 is subject to the same condition. Otherwise, the HSA could "fall through the cracks" between the Bankruptcy Court and FERC, leading to its de facto rejection without FERC approval. This not only is the precise result Judge Cote forbade, but it raises the very same filed rate doctrine issues Judge Cote had answered. A. Procedural Background On August 18, 2010, the Debtors filed their voluntary petitions for relief under chapter 11 of the Bankruptcy Code, thereby commencing these chapter 11 cases. On August 19, 2010, the Debtors filed the Sale Motion pursuant to which Debtors seek, inter alia, to sell five generating facilities, including the Fore River Plant, to Constellation Holdings, Inc. pursuant to an auction process. The Sale Motion does not seek authority to assume and assign the HSA. On August 27, 2010, the Debtors filed the First Omnibus Motion of Debtors for Entry of Order Authorizing the Debtors to Reject Certain Executory Contracts Nunc Pro Tunc to Their Respective Notice Dates (the Rejection Motion ) seeking authorization to reject, among other executory contracts, the HSA. On September 1, 2010, Algonquin filed its Motion for Withdrawal of Reference With Respect to the Rejection Motion (the Motion for Withdrawal of Rejection Motion ), requesting that the District Court withdraw the reference of the Rejection Motion with respect only to the HSA to resolve the conflict between federal bankruptcy 2 Capitalized terms not otherwise defined herein shall have the meaning ascribed to them in Algonquin s Limited Objection to the Motion of the Debtors for Entry of (I) an Order Approving and Authorizing (A) Bidding Procedures in Connection With Substantially All of the Assets of the Debtors, (B) Stalking Horse Bid Protections, (C) Procedures for the Assumption and Assignment of Executory Contracts and Unexpired Leases in Connection with the Sale of Substantially all of the Assets of the Debtors, (D) the Form and Manner of Notice of the sale and Hearing and (E) Related Relief; and (II) an Order Approving and Authorizing (A) the Sale of Substantially All of the Assets of the Debtors Free and Clear of Claims, Liens, Liabilities, Rights Interests and Encumbrances, (B) the Debtors to Enter into and Perform their Obligations under the Asset Purchase Agreement, (C) the Debtors to Assume and Assign Certain Executory Contracts and Unexpired Leases, (D) the Transition Services Agreement and (E) Related Relief [Docket No. 386] (the Limited Objection ). 2

8 law authorizing the rejection of executory contracts and federal energy law under the Natural Gas Act, 15 U.S.C. 717 et. seq. ( NGA ), requiring FERC approval of the termination or amendment of natural gas transportation agreements. In addition, on September 17, 2010, Algonquin filed a Motion to Withdraw the Reference with Respect to the Sale Motion (the Motion for Withdrawal of Sale Motion ). The Motion for Withdrawal of Rejection Motion and Motion for Withdrawal of Sale Motion were assigned to the Honorable Denise L. Cote, United States District Court Judge. Algonquin argued that the reference of the Sale Motion should be withdrawn on two grounds. Algonquin asserted, based on the NGA, that the Sale Motion was an end run of the filed rate doctrine because a sale of the Fore River Plant without the assumption of the HSA by the purchaser was equivalent to rejection of the HSA. Thus, the Sale Motion raised the same conflict as the Rejection Motion between the Bankruptcy Code and the NGA. Algonquin next argued, based on the Federal Power Act, 15 U.S.C. 791a et seq. ( FPA ), that there was a conflict between the Bankruptcy Court s authority to approve the sale of the Fore River Plant and the FERC s exclusive authority under the FPA. B. Judge Cote Conditioned The Sale On FERC Approval Of Rejection Of The HSA On November 1, 2010, Judge Cote issued the November 1 Opinion, granting the Motion for Withdrawal of Rejection Motion and denying the Motion for Withdrawal of Sale Motion. The Court withdrew the reference of the Rejection Motion because [i]n order to decide the Rejection Motion, a court will have to decide whether Congress has, through the Bankruptcy Code, given the district court power to authorize the Debtors to reject the HSA, or if instead, doing so would run afoul of FERC s exclusive jurisdiction 3

9 over filed rate contracts under the NGA. November 1 Opinion at 12. Judge Cote therefore issued an order to show cause (the OSC ) ordering Algonquin and the Debtors to show cause by noon on November 5, 2010 why the Court should not transfer the Rejection Motion back to the Bankruptcy Court for it to decide the Rejection Motion pursuant to 11 U.S.C. 365, on the condition that the Debtors must also obtain approval from FERC pursuant to the NGA to reject the HSA. OSC, p. 1. In denying withdrawal of the reference of the Sale Motion, Judge Cote focused on the existence of a parallel approval process invoking the concurrent authority of the FERC and the Bankruptcy Court. The Court first analyzed whether a conflict existed between the Bankruptcy Code and the FPA. The Court noted that FERC was considering approval of the sale under its authority under the FPA while the Bankruptcy Court would decide whether to approve the sale under the Bankruptcy Code and determined that This parallel approval structure guarantees that the considerations relevant to each forum s review of the Sale Motion will be fully addressed. November 1 Opinion at 17. The Court therefore concluded that Due to this concurrent authority, the bankruptcy court will not have to engage in any significant interpretation of the FPA. Moreover, because of the dual approval process there is no substantial likelihood that resolution of the Sale Motion by the Bankruptcy Court will generate any substantial or material conflict with the FPA. Id. The District Court then addressed Algonquin s separate argument under the NGA that the Sale Motion represented an end run around the filed rate doctrine. Judge Cote contrasted the existence of a parallel FPA proceeding that could guarantee[] that the considerations relevant to each forum s review of the Sale Motion will be fully 4

10 addressed, id., with the absence of a parallel NGA proceeding: Because the Debtors have made dual applications to the Bankruptcy Court and to FERC pursuant to the FPA, there is no need to withdraw the reference regarding the Sale Motion. Conversely, because the Debtors have not applied to FERC to exercise its power under the NGA to allow them to reject the HSA, the existence of a material conflict between two federal statutory regimes may exist and cannot be ignored. Id. at 18. On November 12, 2010 Judge Cote issued the November 12 Opinion. In the November 12 Opinion, Judge Cote held that In order to reject the [HSA], the Debtors must also obtain a ruling from FERC that abrogation of the contract does not contravene the public interest.if either the bankruptcy court or FERC does not approve the Debtors rejection of the HSA, the Debtors may not reject the contract. November 12 Opinion at 2, 7. The Court therefore ordered the Debtors to obtain a determination from FERC pursuant to the NGA whether it may reject the HSA. Id. at 7. The thread that ties together the November 1 Opinion and the November 12 Opinion is the existence of a parallel approval process in the Bankruptcy Court and the FERC. Because a dual approval process existed under the FPA, the Court rejected Algonquin s argument based on the FPA. Since there was no parallel approval process pending under the NGA, the Court ordered the Debtors to commence one, thereby avoiding any conflict with the Bankruptcy Code. As a result of these parallel proceedings there is no substantial likelihood that resolution of the Sale Motion by the Bankruptcy Court will generate any substantial or material conflict... November 1 Opinion at 17. 5

11 Judge Cote s reliance on the parallel approval process as a remedy for the conflict between the Bankruptcy Code and the NGA effectively means that the sale is conditioned upon the outcome of the NGA proceeding. In the first place, an NGA condition is symmetric with the express condition of the sale on the existing FPA section 203 proceeding. Judge Cote imported the FPA dual approval process; logic suggests that Judge Cote imported the conditionality as well. Furthermore, the District Court expressly stated that rejection of the HSA is a factor in the Sale Motion inquiry: It bears noting that the appropriateness of any sale of the Fore River Plant will turn on many factors, only one of which is what contracts are being assumed and rejected. The Debtors ability to reject the HSA will be separately determined in the Rejection Motion, which is now before this Court. November 1 Opinion at 18. Judge Cote thus contemplated that rejection of the HSA was implicated in the Sale Motion inquiry, but that rejection should be addressed apart from other Section 363 considerations, i.e. if there is a good business reason for the sale and whether a free and clear sale is authorized under Section 363(f). As such, the ultimate sale of the Fore River Plant is conditioned on authorization to reject the HSA from both the Bankruptcy Court under Section 365 and the FERC under the NGA before the sale can be consummated. Finally, the contrary interpretation nullifies the November 1 Opinion and the November 12 Opinion. If the sale can close without the Debtors obtaining a determination from the FERC pursuant to the NGA of whether the HSA can be rejected, the Sale Motion will again be a sub rosa rejection of the HSA and an end run of the filed rate doctrine. The Court will have come full circle, with the conflict between the 6

12 Bankruptcy Code and the NGA that Judge Cote attempted to remedy front and center. This cannot be what Judge Cote intended. II. THE FERC HAS EXCLUSIVE JURISDICTION UNDER THE NGA OVER INTERPRETATION OF THE ALGONQUIN TARIFF The NGA confers exclusive jurisdiction upon the FERC over "[a]ll rates and charges made, demanded, or received by any natural-gas company for or in connection with the transportation or sale of natural gas subject to the jurisdiction of the Commission, and all rules and regulations affecting or pertaining to such rates or charges." 15 U.S.C. 717c(a). As a result, the bankruptcy court must defer to the FERC's exclusive jurisdiction to interpret provisions in a natural gas company's tariff. A. Background Algonquin operates a FERC-jurisdictional pipeline system that transports natural gas to the Fore River Plant. In order to receive transportation services at the Fore River Plant, Debtors were required to enter into a firm transportation service agreement ("HSA") with Algonquin. The HSA incorporates the Algonquin Tariff, which is on file with the FERC. The Algonquin Tariff contains a successor in interest provision that states "[a]ny company which shall succeed by purchase, merger, consolidation or otherwise to the properties substantially as an entirety, of Algonquin or of Customer, used or intended to be used for rendering gas service authorized by the Commission, shall be entitled to the rights and shall be subject to the obligations of its predecessors in title under a service agreement." Algonquin Tariff, General Terms and Conditions, 13. Algonquin asserts that the successor in interest provision prevents the Debtors from selling the plant free and clear of the HSA. 7

13 Although the Debtors agree that the successor in interest provision is incorporated by reference to the HSA, Debtors argue that "[b]ecause Fore River is simply Algonquin s customer and none of the Debtors themselves or their properties 'render gas service,' the designated language contained within the Algonquin Tariff is not... applicable" to the Fore River Plant and, "[a]ccordingly, Algonquin has no 'interest' for purposes of Section 363(f) of the Bankruptcy Code and there is nothing to preclude the approval of the Sale [of the Fore River Plant] free and clear of Algonquin s mere contractual right." Debtors' Omnibus Response at P 71 (citing In re Daufuskie Island Props., LLC, 431 B.R. 626, 643 (Bankr. D.S.C. 2010)). In so arguing, Debtors ask this Court to interpret the Algonquin Tariff and to determine that the successor in interest provision does not apply to customers, notwithstanding the express reference to "the properties... of Customer." Tariff 13. This Court, however, cannot properly interpret the Algonquin Tariff because interpretation of tariffs for the interstate transportation of natural gas is subject to the exclusive jurisdiction of the FERC. Accordingly, this Court must defer interpretation of the Algonquin Tariff's successor in interest provision to the FERC. This Court must either deny Debtors' request to sell the Fore River Plant free and clear of the Algonquin Tariff or condition any free and clear determination upon the FERC's interpretation of the Algonquin Tariff. B. The Court Must Defer To The FERC For Interpretation of The Tariff "It is well established that the interpretation and effect of tariff provisions approved by a Federal regulatory agency are ordinarily uniquely within the agency's primary and exclusive jurisdiction." Transcon. Gas Pipe Line Corp., 8 FERC P 61,186 at 8

14 61,647 (1979) (citing Sw. Sugar and Molasses Co. v. River Terminals Corp., 360 U.S. 411 (1959); United States v. W. Pac. R.R. Co., 352 U.S. 59 (1956)). "The ultimate issue is not what those words mean in some abstract sense, but rather what FERC intended them to mean when it approved the [tariff provisions]." Distrigas of Mass. Corp. v. Boston Gas Co., 693 F.2d 1113, 1118 (1st Cir. 1982); see Tenn. Gas Pipeline Co., 28 FERC P 61,313 at 61,578 (1984) ("When interpreting a provision of a settlement agreement incorporated into a rate schedule on file with and approved by the Commission, the ultimate issue is not what the words mean in some abstract sense, but rather what the Commission intended them to mean."); see also Bay Gas Storage Co., Ltd., 131 FERC P 61,034 at p. 24 (2010) ("there is a need for [tariff] provision[s] to be interpreted in a uniform manner"); Texaco Refining & Mktg. Co., 112 FERC P 63,020 at p. 157 (2005) ("[T]he Commission does not and cannot yield its ratemaking authority to private contracting parties when questions are presented about the justness and reasonableness of contract rates"). "That question is obviously one as to which the agency has special insight, which would shed light on this nominally 'legal' question." Distrigas, 693 F.2d at 1118 (citing Great N. Ry. Co. v. Merchants Elevator Co., 259 U.S. 285, 292 (1922)). Accordingly, "the interpretation and implementation of a tariff is a question properly passed upon in the first instance by the Commission, and reference by a court to a regulatory agency may not even be discretionary on such an issue." Miss. Power & Light Co. v. United Gas Pipe Line Co., 532 F.2d 412 (5th Cir. 1976) (citing Interstate Commerce Comm n v. Atlantic C.L.R. Co., 383 U.S. 576, (1966); W. Pac. R.R. Co., 352 U.S. at 66 ("[W]here words in a tariff are used in a peculiar or technical sense, 9

15 and where extrinsic evidence is necessary to determine their meaning or proper application, so that the inquiry is essentially one of fact and of discretion in technical matters, then the issue of tariff application must first go to the Commission"); see Sw. Sugar, 360 U.S. at 421 ("The court [of appeals] concluded that because the clause was embodied in a tariff filed with the I.C.C. it could not in the first instance declare it invalid, but was bound to give it effect unless and until the Commission, after appropriate investigation, reached a contrary conclusion."); Pub. Util. Dist. No. 1 of Grays Harbor County. Wash. v. IDACORP, Inc., 379 F.3d 641, 648 (9th Cir. 2004) (a contract-based complaint that would require the district court to determine a tariff issue affecting rates is solely within the FERC's jurisdiction); see also Williams Pipe Line Co. v. Empire Gas Corp., 76 F.3d 1491, 1494 (10th Cir. 1996) ("We conclude that the district court should not have itself determined the validity of the [oil pipeline tariff's indemnity] provision in the first instance, but should have stayed proceedings and referred the initial determination to FERC under the doctrine of primary jurisdiction."); Am. Mun. Power - Ohio, Inc. v. FirstEnergy Corp., 2008 WL , at *4 n.4 (S.D. Ohio 2008) ("The FERC has held, however, that where a finding for one party would require the FERC to reform a contract in order for the rate to be just and reasonable, such a dispute falls within the FERC's jurisdiction.") "The courts may not construe technical or abstruse terms appearing in a tariff, the meaning of which requires evidence and the special knowledge of those learned in the vernacular sometimes peculiar to rate experts." W. Oil & Fuel Co. v. Great Lakes Pipe Line Co., 210 F.2d 490, 493 (8th Cir. 1954) (finding that the tariff term "transportation" has a technical meaning). "Courts which do not make rates cannot know with exactitude 10

16 the factors which go into the rate-making process." W. Pac. R.R.. Co., 352 U.S. at 66. "And for the court here to undertake to fix the limits of the tariff's application without knowledge of such factors, and the extent to which they are present or absent in the particular case, is tantamount to engaging in judicial guesswork." Id.; see also Sw. Sugar, 360 U.S. at 421 ("the parties should be afforded a reasonable opportunity to obtain from the I.C.C., in an appropriate form of proceeding, a determination as to the particular circumstances of the tugboat industry which lend justification to this form of clause, if any there be, or which militate toward a rule wholly invalidating such provisions"); Williams, 76 F.3d at 1498 ("The bottom line is that we are simply not equipped on the record before us, without a solid background understanding of economic and technical facets of the pipeline industry, to declare the instant indemnity provision... unreasonable or discriminatory or otherwise invalid in whole or part."). The Supreme Court has concluded that "the question of tariff construction, as well as that of the reasonableness of the tariff as applied, [is] within the exclusive primary jurisdiction" of the Commission. See W. Pac. R.R. Co., 352 U.S. at 66. "[T]he Supreme Court has required reference to the relevant regulatory agency without even deciding whether that agency has jurisdiction to finally determine the basic dispute in the case." Miss. Power & Light Co., 532 F.2d at 417 (citing Ricci v. Chi. Mercantile Exch., 409 U.S. 289 (1973)). There are two ways to ensure the appropriate agency has considered the proper interpretation of a tariff provision. " Exhaustion applies where a claim is cognizable in the first instance by an administrative agency alone; judicial interference is withheld until the administrative process has run its course." U.S. v. Radio Corp. of Am., 358 U.S. 334, 346 n.14 (1959) (quoting W. Pac. R.R. Co., 352 U.S. at 63-64). 11

17 " Primary jurisdiction, on the other hand, applies where a claim is originally cognizable in the courts, and comes into play whenever enforcement of the claim requires the resolution of issues which, under a regulatory scheme, have been placed within the special competence of an administrative body; in such a case the judicial process is suspended pending referral of such issues to the administrative body for its views." U.S. v. Radio Corp. of Am., 358 U.S. 334, 346 n.14 (1959) (quoting W. Pac. R.R. Co., 352 U.S. at 63-64). "In cases of contract interpretation, the Commission has concurrent jurisdiction with the courts; whether to exercise primary jurisdiction is a matter solely within the Commission's discretion." Bay Gas, 131 FERC P 61,034 at p. 21 (exercising primary jurisdiction to interpret a service agreement). When determining whether to exercise its primary jurisdiction, "[t]he Commission commonly considers the following three factors: (a) whether the Commission possesses some special expertise that makes the case peculiarly appropriate for Commission decision; (b) whether there is a need for uniformity of interpretation of the type of question raised by the dispute; and (c) whether the case is important in relation to the regulatory responsibilities of the Commission." Ark. La. Gas Co. v. Hall, 7 FERC 61,175 at 61,322 (1979). There is no dispute that the Algonquin Tariff is the currently effective filed rate on Algonquin's system. See Maritimes & Ne. Pipeline and Algonquin Gas Transmission, 95 FERC 61,077 at 61,229, final determination, 97 FERC 61,345 (2001). There is also no dispute that the HSA is a service agreement that was approved by the FERC and that the HSA incorporates by reference all Algonquin Tariff provisions, including the successor in interest provision. Debtors' Omnibus Response at P 70 n. 22. Accordingly, as the Supreme Court has held, "the question of tariff construction, as well as that of the 12

18 reasonableness of the tariff as applied, [is] within the exclusive primary jurisdiction" of the Commission, W. Pac. R.R. Co., 352 U.S. at 66, and "requires reference to the [Commission] without even deciding whether that agency has jurisdiction to finally determine the basic dispute in the case." Miss. Power & Light Co., 532 F.2d at 417 (citing Ricci v. Chi. Mercantile Exch., 409 U.S. 289 (1973)). Accordingly, to the extent this Court believes the Algonquin Tariff is open to interpretation, it must condition any sale order making a free and clear determination upon the FERC's construction of the Algonquin Tariff. III. THE THREE POSSIBLE OUTCOMES IN THE FPA SECTION 203 PROCEEDING AND THEIR EFFECT ON THIS COURT'S DECISION Algonquin believes that there are but three potential outcomes on the pending joint request of the Debtors and Constellation for FERC approval under section 203 of the FPA of the sale of the Fore River Plant: (1) the FERC will either condition its approval on, or defer its decision until, an NGA proceeding; (2) the FERC will approve the Application and either state that it does not have jurisdiction to consider issues related to the NGA or remain silent about the same; or (3) the FERC will approve the Application and expressly terminate the HSA. Underlying Algonquin s analysis of the potential outcomes is that the scope of the FERC s jurisdiction and the standard for its action is separate and distinct under the NGA and under the FPA. Under the NGA, the FERC has exclusive jurisdiction to set rates, terms and conditions of natural gas service agreements and to adjudicate applications to modify or terminate such service agreements. 15 U.S.C. 717c. The NGA prescribes that no change shall be made to any "rate, charge, classification, or service, or in any rule, regulation, or contract relating thereto, except after thirty days notice to the Commission 13

19 and to the public." 15 U.S.C. 717c(d) (emphasis added). After notice has been provided, the Commission will hold "a hearing" to determine if "any rate, charge, or classification,... or contract affecting such rate, charge, or classification is unjust, unreasonable, unduly discriminatory, or preferential,... and shall fix the same by order." 15 U.S.C. 717d(a) (emphasis added). By contrast, under the FPA, the FERC has jurisdiction only to grant or deny authority to sell certain FERC jurisdictional assets, such as facilities required for the transmission and generation of electricity and wholesale power purchase agreements with customers. 16 U.S.C. 824b; see also Startrans IO, LLC, 122 FERC 61,307 at P 25 (2008) (holding that the FERC cannot even rule on electricity rates in a section 203 proceeding, stating that [o]ur analysis of rate effects under section 203 of the FPA differs from the analysis of whether rates are just and reasonable"). "Upon receipt of an application for such approval [under FPA section 203] the Commission shall give reasonable notice in writing to the Governor and State commission of each of the States in which the physical property affected, or any part thereof, is situated, and to such other persons as it may deem advisable." 16 U.S.C. 824b(a)(3) (emphasis added). As opposed to the NGA's requirement that the Commission change rates by order, a section 203 "application shall be deemed granted" "[i]f the Commission does not act within 180 days," unless the Commission "issues an order tolling the time for acting on the application for not more than 180 days." 16 U.S.C. 824b(a)(3) (emphasis added). Thus, the FERC s jurisdiction in an FPA section 203 is limited and does not extend to assets not used to generate or transmit electricity. On the other hand, FERC s jurisdiction in an NGA proceeding is subject to procedural requirements not present 14

20 under the FPA. Thus, in order to obtain authority from the FERC to terminate the HSA and then sell the Fore River Plant, the Debtors would have to file successful separate applications under both the NGA and the FPA. See, e.g., Enron, 102 FERC 61,316 at PP 1-2 (2003) (in an order requiring Enron to show cause why it did not manipulate prices in electricity and gas markets, ordering that a proceeding be properly noticed and docketed under section 206 of the FPA, and ordering that a separate proceeding be properly noticed and docketed under sections 5 and 7 of the NGA). A. Potential Outcome #1: The FERC Conditions its Approval on, or Defers its Decision Until, an NGA Proceeding Algonquin submits that, in light of the limitations on FERC s jurisdiction in an FPA section 203 proceeding, the most likely outcome in the section 203 proceeding is that the Commission either approves the Application conditioned on the outcome of an NGA proceeding, see Old Dominion Elec. Coop., 119 FERC 61,253 at P 22 (2007) (noting that it is "statutorily obligated to consider whether any conditions of any kind are necessary and appropriate on the basis of the particular facts demonstrated by substantial evidence in the record of that case."), or extends the statutory deadline by 180 days to defer deciding the Application until after Debtors have completed an NGA proceeding. See, e.g., Boston Edison Co., 87 FERC 61,034 at 61,128 (1999) (deferring ruling on a section 203 application because issues regarding the transaction's effect on the public interest were unresolved). If the FERC either conditions or defers its decision, its approval will not be forthcoming and the sale will remain unapproved under the FPA. See 16 U.S.C. 824b(a)(1) (public utilities are prohibited from selling, leasing, or disposing of their facilities without first having secured an order of the Commission authorizing it to do 15

21 so ). The condition to closing of FERC approval under FPA section 203 set forth in the Asset Purchase Agreement between Constellation and the Debtors would not be satisfied and the sale therefore could not close. B. Potential Outcome #2: The FERC Approves the Application and Either States That it Does Not Have Jurisdiction in the Section 203 Proceeding to Consider Issues Related to the NGA or Remains Silent About the Same The FERC could determine in the section 203 proceeding that it does not have jurisdiction in a section 203 proceeding to comment on NGA filed rates or else remain silent on the subject. See, e.g., James A. Goodman, As Receiver For Certain Assets of PMCC Calpine New England Invs., LLC, 115 FERC 61,346 at P 13 (2006) (finding that it did not have jurisdiction over gas transportation contracts in a section 203 proceeding); Boston Edison, 87 FERC 61,034 at 61,128 (finding that the transfer of an FPAjurisdictional contract for which the plant was a customer was not a jurisdictional facility requiring authorization under section 203). If the FERC does so, the condition to closing of FERC approval under FPA section 203 set forth in the Asset Purchase Agreement between Constellation and the Debtors arguably would be satisfied. This outcome is the fall through the cracks scenario and would result in a direct conflict between the FERC and the Bankruptcy Court. The FERC has already determined that the Fore River Plant cannot be sold free and clear of the HSA. It did so in 2001 when it approved the HSA, including the provisions in the Algonquin tariff that expressly make any purchaser of the Fore River Plant bound by the HSA as a successor in interest. This determination remains binding and, absent any reconsideration of the FERC, the motion to sell the Fore River Plant free and clear of the successor in interest provisions in the Algonquin tariff directly conflicts with the FERC's ruling that the Fore 16

22 River Plant cannot be sold free and clear of the HSA liability that runs with the Fore River Plant. If the Bankruptcy Court enters an order approving the sale free and clear that is not conditioned upon the outcome of the NGA proceeding ordered by Judge Cote, the practical effect will be for the HSA to be rejected and the tariff to be modified to eliminate the successor liability provisions. This result is contrary to the filed rate doctrine and contrary to Judge Cote s orders. Alternatively, the Court could approve the sale free and clear of all but the HSA and condition the sale free and clear of the HSA on an order of the FERC approving the modification/deletion of the successor liability provisions of the tariff pursuant to the NGA. In this instance, the sale could proceed while reserving for the FERC the issue of whether the purchaser has successor liability under the HSA. C. Potential Outcome #3: The FERC Approves the Application and Expressly Terminates the HSA Algonquin submits that the likelihood that the FERC will approve the Debtors FPA section 203 Application and in that approval expressly terminates the HSA is virtually nil. The jurisdictional and procedural distinctions between the FPA and the NGA, including (i) the NGA's requirement of 30 days notice to the public as opposed to the FPA's requirement of only reasonable notice to affected parties and (ii) the NGA's requirement for a hearing and order to change a filed rate as opposed to the FPA's deemed effective after 180 days policy, makes it highly unlikely that the FERC will terminate the HSA in the section 203 proceeding. For this reason, the decision would be vulnerable on appeal as arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law. 5 U.S.C. 706(2)(A); see generally Wabash Valley Power 17

23 Ass n, Inc. v. FERC, 268 F.3d 1105, 1115 (D.C. Cir. 2001) (discussing the arbitrary and capricious standard). IV. CONCLUSION For the reasons stated above, Algonquin respectfully requests that the Court either except the Algonquin Tariff from any free and clear determination it makes under section 363(f) of the Bankruptcy Code or condition its approval of the sale on either the assumption of the HSA and its assignment to the purchaser or the approval of the rejection of HSA by the FERC pursuant to a determination under the NGA. Respectfully submitted, Dated: November 22, 2010 DEWEY & LeBOEUF LLP By: /s/ Irena M. Goldstein IRENA M. GOLDSTEIN (IG-0736) DEWEY & LEBOEUF LLP 1301 Avenue of the Americas New York, New York Tel: (212) Fax: (212) & Bennett G. Young (admitted pro hac vice) Paul S. Jasper (admitted pro hac vice) DEWEY & LEBOEUF LLP One Embarcadero Center, Suite 400 San Francisco, CA Tel: (415) Fax: (415) Charles A. Moore (admitted pro hac vice) DEWEY & LEBOEUF LLP RRI Energy Plaza 1000 Main Street, Suite 2550 Houston, TX Tel: (713) Fax: (713) Attorneys for Algonquin Gas Transmission, LLC SF