Opinion
Case No. 01 B 16034 (AJG)
December 10, 2002
ORDER GRANTING MOTION BY ELECTRIC RELIABILITY COUNCIL OF TEXAS, INC. FOR RELIEF FROM THE AUTOMATIC STAY TO SETOFF MUTUAL OBLIGATIONS
On December 20, 2001, the Electric Reliability Council of Texas, Inc. filed a motion (the "Motion") for relief from the automatic stay to setoff mutual obligations, and noticed a hearing on the Motion for January 15, 2002. On January 10, 2002, Frontera Generation Limited Partnership ("Frontera") filed an Objection to the Motion. Enron Power Marketing, Inc. ("EPMI"), one of the above-captioned debtors and debtors in possession (the "Debtor") filed a limited objection to the Motion on January 24, 2002. The originally noticed hearing date was adjourned from time to time on consent of the parties. The initial hearing on this matter was held on February 20, 2002 (the "February Hearing") at which time, the Court requested further briefing and scheduled a further hearing. The further hearing date was also periodically adjourned on consent of the parties and was conducted on June 11, 2002, at which time the Court took the matter under advisement.
At the February Hearing, the Debtor informed the Court that while it had initially filed a limited objection to the Motion, the objection was based on ERCOT not having provided sufficient information to identify whether the obligations it contended were subject to the Motion were all pre-petition and whether the amounts were accurate. Subsequently, however, that detail was provided to the Debtor which then agreed that the obligations at issue were mutual pre-petition obligations and that the amounts due were accurately reflected. Therefore, the Debtor currently has no opposition to ERCOT's Motion to lift the automatic stay to permit the setoff.
ERCOT is a non-profit corporation that is certified by the Public Utilities Commission of Texas as the Independent Organization charged with the responsibility of administering the power grid which serves the major portion of the electric load for Texas. ERCOT's major functions in this regard are to:
(1) Ensure access to the transmission and distribution systems for all buyers and sellers of electricity on nondiscriminatory terms;
(2) Ensure the reliability and adequacy of the ERCOT Transmission Grid;
(3) Ensure that information relating to a Customer's choice of Retail Electric Provider in the state of Texas is conveyed in a timely manner to the persons who need that information; and
(4) Ensure that electricity production and delivery are accurately accounted for among the Generation Resources and wholesale buyers and sellers in the ERCOT region.
Certain protocols (the "Protocols") concerning the standards and policies of ERCOT have been promulgated to implement ERCOT's function. An entity that engages in the activities that are the subject of the Protocols are defined as Market Participants. Market Participants, who must be qualified by and register with ERCOT, include Resource Entities ("REs"), which are producers or suppliers of energy, Load Serving Entities ("LSEs"), which provide electric service to Customers and Wholesale Customers, and Qualified Scheduling Entities ("QSEs"), which submit balanced schedules and certain Ancillary Service bids and who settle payments with ERCOT.
An RE must operate in accordance with the ERCOT Protocols and guidelines [Protocols § 16.5.1] and must enter into a Standard Form Resource Entity Agreement with ERCOT (the "RE Agreement"). [Protocols § 16.5]. In the RE Agreement, the RE and ERCOT agree to abide by the ERCOT Protocols. [RE Agreement, §§ 5(A), 6(A)]. The RE Agreement provides that for the purposes of determining the parties rights and responsibilities, the ERCOT Protocols govern. [RE Agreement, sec. 2(B)]. Pursuant to the Protocols, an RE must designate and maintain a commercial relationship with a QSE who will represent the RE for purposes of scheduling and settlement with ERCOT. [Protocols §§ 16.5.2, 16.5.2.2].
An LSE must enter into a Standard Form Load Serving Entity Agreement with ERCOT (the "LSE Agreement"). [Protocols § 16.3]. In the LSE Agreement, the LSE and ERCOT agree to abide by the ERCOT Protocols. [LSE Agreement, §§ 5(A), 6(A)]. The LSE must designate and maintain a commercial relationship with a QSE who is responsible for the LSE's scheduling and settlement transactions with ERCOT. [Protocols §§ 16.3.1, 16.3.1.2].
To qualify and register as a QSE, an entity must meet certain requirements, including being financially responsible for payment of settlement charges for those entities it represents. [Protocols § 16.2.2(5)]. The Protocols set forth the Creditworthiness Requirements for QSEs [Protocols § 16.2.5.1]. If a QSE meets certain requirements, it is not required to post security [Protocols § 16.2.5.1.1], however, if it does not there are certain alternative means for meeting the creditworthiness requirements, including providing a guarantee, letter of credit, surety bond or escrow account. [Protocols § 16.2.5.1.2].
As testified to by the manager of market rules of ERCOT, the RE and LSE each designate a QSE to represent them in transactions with ERCOT. Therefore, the communications with ERCOT are through the QSE, not directly with the REs or LSEs. On a daily basis, the QSE submits a balanced schedule which projects the energy obligations and supply for the next day, which schedule must have supply equal to demand. As the projections may not always exactly reflect the demand required the following day, ERCOT also procures "Ancillary Services" where they reserve certain capacity or Ancillary Services to meet the "realtime activity" requirements. If the Ancillary Services are required, they are then dispatched throughout the operating day and the QSE must update the Balanced Schedule to reflect the use of the Ancillary Services. ERCOT then engages in the settlement to determine the amount owed by ERCOT to the energy providers and the amounts owed by the Load users. On a daily basis, ERCOT settles with the QSEs and then it is the responsibility of the QSEs to settle with those parties it represents.
EPMI and Frontera were both Market Participants. EPMI functioned as a QSE pursuant to an agreement entered with ERCOT (the "QSE Agreement") which governs the rights and responsibilities between EPMI and ERCOT. In the QSE Agreement, EPMI and ERCOT both agreed to abide by the Protocols. Frontera is a RE and entered into an RE Agreement with ERCOT and an Energy Management Services Agreement with EPMI. Aside from representing Frontera, EPMI represented various additional REs and LSEs. Other REs and LSEs, however, retained other QSEs. In late November 2001, ERCOT sent notice to EPMI requiring it to post security. EPMI's right to operate as a QSE was suspended by ERCOT, pre-petition, after EPMI failed to post the requested security.
The Protocols require EPMI to pay ERCOT for services incurred through ERCOT for the scheduling, settlement and registration of transactions to which EPMI was a party. Section 9.1 of the ERCOT Protocols provides that settlement is the process used to resolve financial obligations for market services procured through ERCOT for registered Market Participants. Pursuant to Section 9.1.1, ERCOT produces daily Settlement Statements which reflect either a negative amount in which case a payment is due to the QSE or a positive amount, reflecting a payment due ERCOT. Only the QSEs can access these statements. [Protocols § 9.2.1]. Section 9.3 of the Protocols provides that Settlement Invoices are issued weekly and prepared on a net basis. The Invoice Recipient must pay the net debit and is entitled to receive a net credit regardless of any dispute concerning the amount.
Section 553 of the Bankruptcy Code permits the setoff of mutual debts that arose before the commencement of the case. In re Bennett Funding Group, Inc., 146 F.3d 136, 138-39 (2d Cir. 1998). The section preserves whatever rights of setoff a party has under applicable non-bankruptcy law. Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 18, 116 S.Ct. 286, 289, 133 L.Ed.2d 258 (1995). The debts are considered mutual when the debtor and creditor each incurred its debt to the other in the same right or capacity. Bennett Funding, 146 F.3d at 139. In Bennett Funding, the Second Circuit found that in considering whether there was mutuality in the context of bank accounts, the proper test required an examination of the total circumstances of the establishment and maintenance of the account. Pursuant to 11 U.S.C. § 362(a)(7), ERCOT's exercise of any setoff rights it has against EPMI were stayed until ERCOT obtains relief from the automatic stay. Id. at 19. Frontera acknowledges that if ERCOT has a right to setoff the debts, the stay should be lifted. In this case, all amount in issue that are due and owing were incurred pre-petition between July 3, 2001 and November 30, 2001. While the Debtor and ERCOT both agree that the debts are mutual and therefore that ERCOT has setoff rights, Frontera argues that the debts are not mutual because ERCOT and EPMI did not each incur a debt to the other in the same right or capacity. In the context of the relationship of the parties to ERCOT as the Independent Organization administering the power grid in Texas, an equivalent test to that applied in Bennett Funding to determine if the debts were mutual requires an examination of the total circumstances surrounding the parties financial arrangements. Bennett Funding, 146 F.3d at 139.
Frontera's objection to the setoff of these claims is based on its contention that the claims are not mutual because the claims stem from these entities' capacities as agents for the REs and LSEs. Frontera contends that the amount which ERCOT wants to setoff is payable as the result of energy provided by Frontera to LSEs who maintained a commercial relationship with a QSE other than EPMI, while the amounts that EPMI owes ERCOT resulted from energy provided by REs represented by QSEs other than EPMI and those amounts are owed by LSEs represented by EPMI. As such, Frontera argues that EPMI and ERCOT merely functioned as agents with regard to the collection of these funds and the debts are not mutual. Rather, Frontera maintains that ERCOT holds the money for Frontera.
ERCOT argues that there is mutuality of debt between EPMI and ERCOT as a result of the relationship between EPMI, as QSE, and ERCOT. The terms of that relationship are detailed in the Protocols and the QSE Agreement. Frontera is not a party to the QSE Agreement. ERCOT contends that the Protocols and the QSE Agreement show that the legal financial obligations incurred in the settlement process are directly between ERCOT and EPMI.
ERCOT acknowledges that, as set forth in the Protocols, with respect to the "provision, procurement, purchase, deployment or dispatch of energy or Ancillary Services," ERCOT acts as the agent of the Market Participants," including Frontera. [Protocols § 1.2]. This is to insure that the Protocols are not construed as causing ERCOT to obtain either title to the energy or control over the energy producing facility. [Id.] In addition, pursuant to the terms of section 7 of the Standard RE Agreement, Frontera appointed ERCOT as its agent with respect to any funds transferred directly between ERCOT and Frontera.
The fact that the Agreement limited the agency concept to certain roles of the parties underscores the fact that ERCOT does not act as Frontera's agent for other purposes. Moreover, the same section 7 of the RE Agreement that expressly provides for ERCOT operating as Frontera's agent concerning direct transfers of funds, specifically provides that "ERCOT shall not have any duties, responsibilities, or fiduciary relationship with [Frontera] . . . except as expressly set forth herein or in the ERCOT Protocols." (Emphasis added).
The limited area in which ERCOT acts as agent for all of the Market Participants is concerning the provision and procurement of energy. The Court's attention has not been directed to any express provision in the Protocols or any of the relevant agreements that provides for an agency relationship between the parties regarding financial obligations, other than those concerning direct transfers of funds between ERCOT and the respective parties. The testimony elicited at the evidentiary hearing established that there were no direct transfers of funds between ERCOT and Frontera. Rather, EPMI transacted all business with ERCOT as Frontera's representative. Relevant to the motion before the Court, the only party with which ERCOT directly transferred funds was EPMI, and the QSE Agreement expressly provided that "[f]or the transfer of any funds under this Agreement directly between ERCOT and [EPMI] . . . (A) [EPMI] appoints ERCOT to act as its agent with respect to such funds transferred." The direct payments were only required after setoff was exercised and a balance remained owing. Thus, with respect to the direct transfers of funds between EPMI and ERCOT in either direction, they each maintained the same capacities and the respective debts were mutual.
Frontera next argues that the Protocols set forth and limit the remedies available to ERCOT if it does not receive payment from a QSE. Section 9.4.4 of the Protocols sets forth procedures in the event there were a partial or short payment from an Invoice Recipient. The Protocols call for ERCOT to try to collect that day from the Invoice Recipient, to draw on any available security posted by that QSE, and to draw on any available line of credit. If after attempting these methods, there is still insufficient receipt to pay amounts due in full, ERCOT will, after deducting its administrative fee, reduce payments, on a pro rata basis, to all those Invoice Recipients entitled to payment. The purpose of these procedures is to insure revenue neutrality for ERCOT. Pursuant to this settlement process, ERCOT is then to pursue "all reasonable collection efforts" in order to collect the past amounts due. The goal is to collect enough to repay the previously short-paid entities on a pro rata basis which is done once ERCOT has collected the past due amounts. If the collection efforts by ERCOT prove unsuccessful in collecting the total past amounts due, the amounts will be collected by ERCOT from the LSEs, on a Load Ration Share basis, and paid to the QSEs that were previously paid short.
Thus, the Protocols still require ERCOT to attempt to collect the past due amounts and to pursue "all reasonable collection efforts." Therefore, Section 9.4.4 of the Protocols does not limit ERCOT's collection efforts. Rather, it encourages it to attempt all reasonable efforts to collect past due amounts. In Section 8(B)(1) of the QSE Agreement concerning remedies for a default by EPMI, it is expressly provided that ERCOT may pursue any remedies it has under the QSE Agreement, "at law, or in equity." Thus, "all reasonable collection efforts" would include any right to setoff that ERCOT could assert.
Further refuting a finding that ERCOT or EPMI are Frontera's agent with respect to the settlement process of funds transferred between ERCOT and EPMI is the fact that the funds received by ERCOT or EPMI are co-mingled with other funds received by those entities. The Protocols do not require that special accounts be set up to receive funds of individual market participants. Rather, the funds are deposited in an ERCOT account or an EPMI account. [Protocols § 9.3.1(7)]. Moreover, if there were a principal-agent relationship, there would be no netting. [Protocols § 9.3] Instead, funds would pass through the agent to the principal. Further, the REs had knowledge of all of the Protocols and the terms of all of the various agreements and therefore were aware of and consented to the netting. In addition, the Settlement Statements are only accessible by EPMI, as QSE, via secured entry to the Market Information System, [Protocols § 9.2.1], and not directly by Frontera who must obtain its information from EPMI who will communicate the market information provided by ERCOT that is "pertinent to the services EPMI provides as QSE" for Frontera. [Energy Management Services Agreement between Frontera and EPMI, Section 1.2(11)].
As previously noted, to qualify as QSE, an entity must establish the financial wherewithal to pay or post some form of financial security which allows ERCOT to look to these sources of funds rather than the party ultimately liable for payment. This shows that the QSE has a direct financial responsibility to ERCOT.
The section most favorable to Frontera's position is section 1.7 of the Energy Management Services Agreement between Frontera and EPMI, which provides that payments are not due from EPMI to Frontera prior to receipt of such payment by EPMI from ERCOT. Frontera argues that this section shows that EPMI is an agent because it assumes no financial risk as it has no responsibility to pay Frontera until it receives payment from ERCOT. However, when viewed in the context of an examination of the totality of the circumstances surrounding the parties financial arrangements, including
— the netting of the EPMI and ERCOT amounts due,
— the creditworthiness requirement, —
— the co-mingling of funds, —
— the terms of the QSE Agreement which allowed ERCOT, in the event of EPMI's default, to pursue all remedies, at law and at equity, —
— the inability of Frontera, the alleged principal, to access directly accounting records,
— the absence of any clause in the Protocols or any of the agreements establishing an agency relationship between Frontera and ERCOT with respect to financial arrangements, while other agency relationships were provided for expressly and, the express disclaimer in the RE Agreement as to any fiduciary relationship not expressly provided for in the RE Agreement or the Protocols,
the Court finds that the direct financial obligations in issue were between EPMI and ERCOT acting in the same capacities for both obligations. Therefore, ERCOT has a right to pursue setoff. The Court therefore grants ERCOT's motion to lift the automatic stay to allow it to exercise its setoff rights.
Based upon the foregoing, it is hereby
Ordered, that ERCOT's Motion for relief from the automatic stay is granted; and it is further
Ordered, that ERCOT may exercise its rights to setoff mutual obligations; and it is further
Ordered, that the next pre-trial hearing in the adversary proceeding commenced by Frontera against the Debtor (Adversary Proceeding #02-8004) is scheduled for December 19, 2002 at 10:00 a.m.