Brazos bankruptcy judge rejects arbitration over $770 million contract claim

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Overhead power lines are seen during record temperatures in Houston, Texas, U.S., February 17, 2021. REUTERS/Adrees Latif

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  • Brazos walked away from a long-term power purchase agreement with Sandy Creek Energy Associates
  • Companies are co-owners of a coal-fired power plant
  • Brazos said arbitration would have delayed bankruptcy filing for months

(Reuters) – A Texas judge overseeing the bankruptcy of Brazos Electric Power Cooperative Inc has denied a request by one of its creditors to arbitrate a contract dispute worth up to $770 million, saying the arbitration proposed could derail the restructuring of the electricity cooperative and harm consumers in rural areas. Texas at a time when energy prices are already high.

In a hearing on Wednesday in Houston, lawyers for creditor Sandy Creek Energy Associates LP pushed Brazos, Texas’ largest electric cooperative, to arbitrate a contract dispute outside of bankruptcy court.

U.S. Bankruptcy Judge David Jones sided with Brazos, saying Sandy Creek’s proposal could “radically change the landscape” of bankruptcy and ultimately hurt other creditors, including rural customers of electricity.

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“I don’t accept the explanation that it’s going to be faster at all,” Jones said.

Brazos filed for bankruptcy after a historic winter storm in 2021 left millions of Texans without power and sparked a $2 billion battle between Brazos and the state’s power grid operator. The deadly storm sent energy prices up several thousand percent and caused several other energy companies to file for bankruptcy.

Brazos is trying to settle its dispute with the Texas electricity grid operator before proposing a restructuring plan in court.

Sandy Creek said Brazos must pay for its decision to terminate a power purchase agreement at a coal-fired power plant jointly owned by the two companies.

Brazos has agreed to buy fixed amounts of power generated by the coal-fired plant, and arbitration would quickly clarify how much Brazos owes for backing out of the deal, Paul Hastings attorney Ken Pasquale said.

Brazos refuted Sandy Creek’s estimate of $640-770 million in damages and said the dispute should stay in bankruptcy court. Brazos attorney Holland O’Neil of Foley & Lardner argued that the arbitration would stay the bankruptcy until at least February 2023 and could invite other contract partners to make similar demands.

Jones said he’s been “unusually possessive” of the bankruptcy case because of its potential impact on everyday Texans whose energy bills could rise at a time when utility prices gasoline are $5 a gallon.

“They’re unrepresented, they don’t have a lawyer,” Jones said. “These are people who live in small houses and trailers across Texas, who don’t even know this case is going on.”

The case is In re Brazos Electric Power Cooperative Inc, US Bankruptcy Court, Southern District of Texas, No. 21-30725.

For Brazos: Lou Strubeck and Nick Hendrix of O’Melveny & Myers; Jason Boland, Paul Trahan and Steve Peirce of Norton Rose Fulbright; Lino Mendiola, Michael Boldt and Jim Silliman of Eversheds Sutherland (USA); and Holland O’Neil of Foley & Lardner

For Sandy Creek Energy Associates: Ken Pasquale of Paul Hastings

For ERCOT: Kevin Lippman, Deborah Perry, Jamil Alibhai and Ross Parker of Munsch Hardt Kopf & Harr

Read more:

Brazos Electric asks for more time to control bankruptcy in mediation

Lawsuit over Texas co-op’s $2 billion energy bill suspended for mediation

Texas bankruptcy lawsuit begins with energy bill over $2 billion after 2021 winter storm

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Reporting by Dietrich Knauth

Our standards: The Thomson Reuters Trust Principles.

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