The opinion of the court was delivered by: Denise Cote, District Judge
Algonquin Gas Transmission, LLC ("Algonquin"), a counterparty to a contract for the transportation of natural gas with the one of the debtors in a Chapter 11 bankruptcy action currently proceeding in bankruptcy court in this jurisdiction,*fn1 has moved to withdraw the reference to the bankruptcy court with respect to two motions pursuant to 28 U.S.C. § 157(d). For the following reasons, the motion to withdraw the reference with respect to the Rejection Motion, defined below, is granted. The motion to withdraw the reference with respect to the Sale Motion, defined below, is denied.
A. The HubLine Service Agreement
Fore River, one of the Debtors, owns a power plant in Massachusetts ("the Fore River Plant"), which burns natural gas to generate electric power. In 1999, Algonquin entered an agreement with Sithe Power Marketing, L.P. ("SPM") to construct a natural gas pipeline to serve the Fore River Plant. At the same time, Algonquin and SPM entered into a service agreement pursuant to which SPM paid Algonquin for the transportation of natural gas over the pipeline to the Fore River Plant. In 2000, Algonquin and SPM entered into additional agreements to build an expansion of the pipeline and to transport natural gas over the expanded pipeline.
On January 31, 2001, Algonquin, SPM, and Fore River*fn2 entered into an agreement pursuant to which SPM assigned its rights and duties under its prior agreements with Algonquin to Fore River. At the same time, Algonquin, Fore River, and SPM entered into the HubLine Service Agreement ("HSA"), which superseded the previous service agreements between Algonquin and SPM. It is the HSA, and the Debtors' efforts to reject the HSA, which are at the heart of these motions to withdraw the reference to the Bankruptcy Court.
Pursuant to the HSA, Algonquin agreed to reserve capacity in its pipeline and to provide transportation service for natural gas for the Fore River Plant on a "firm basis" for a term of twenty years. Algonquin does not supply Fore River with any natural gas under the HSA; the HSA only provides Fore River with priority use of the transportation capacity of the pipeline from two points of origin on the pipeline to the Fore River Plant and sets the rates for using that capacity to transport gas through the pipeline.
The rates that Algonquin charges Fore River are contained in a rate schedule that is subject to the regulatory authority of the Federal Energy Regulatory Commission ("FERC"). FERC is an independent agency that regulates the interstate transmission of electricity, natural gas, and oil. The rate schedule that applies to the HSA was approved by FERC on November 7, 2003; and later modified and re-approved in February 2008. Under the current terms of the contract, Fore River pays Algonquin a fixed monthly charge of approximately $719,000*fn3 to reserve the capacity within Algonquin's pipeline and a variable charge based on its usage of the reserved capacity.
B. Transporting Natural Gas to the Fore River Plant
The Fore River Plant went into service in August 2003. The only means by which the Fore River Plant obtains natural gas is through Algonquin's pipelines; there are no other pipelines that deliver natural gas to the Plant. Although the Debtors originally planned to use both natural gas and low-sulfur diesel fuel to generate power at the Plant, the ability to operate the Plant with diesel fuel was never perfected, and only natural gas has been used to operate the Plant.
Based on FERC rules, transportation capacity on the Algonquin pipeline is available to competing companies called "shippers" on a non-discriminatory basis. Thus, several shippers may, and do, transport gas using Algonquin's pipelines. Under the HSA, the Fore River Plant has highest priority access to capacity on Algonquin's pipeline for transportation of volumes of natural gas up to 140,000 dekatherms (Dth) per day. The HSA also makes assurances regarding the pressure of the natural gas that it delivers to Fore River. But when Fore River purchases natural gas from its suppliers, it can arrange to use either the transportation capacity made available to it in the HSA, or it can use transportation capacity available from any shipper. Fore River prefers to purchase transportation capacity from shippers where it can do so most cheaply. It has also found that the two receipt points specified in the HSA are less reliable than the supply from other points on the pipeline. Between the beginning of 2008 and August 2010, 76% of the gas that Fore River purchased was bought without using the transportation capacity guaranteed to it by the HSA.
1. Bankruptcy Proceedings
The Debtors filed for bankruptcy pursuant to Chapter 11 on August 18, 2010. On August 19, the Debtors filed a motion in the Bankruptcy Court requesting the court's approval and authorization of several procedures, the result of which would be to allow them to sell substantially all of their assets to an identified stalking horse bidder, including the Fore River Plant, free and clear of all claims, liens, or encumbrances pursuant to 11 U.S.C. § 363 ("the Sale Motion").*fn4 The Sale Motion also identifies several contracts that the bankruptcy estate is seeking to "assume," i.e., to continue to perform. The HSA was not listed among the contracts to be assumed.
On August 27, the Debtors filed a motion in the bankruptcy court asking the bankruptcy court to authorize them to reject the HSA pursuant to 11 U.S.C. § 365(a) ("the Rejection Motion").*fn5
The legal effect of rejection is discussed below, but the gist is that the Debtors are asking the bankruptcy court to allow them to cease performing under the HSA. In the Rejection Motion, the Debtors explain that Considering the significant monthly costs associated with maintaining the Service Agreement, the Debtors have determined, in the exercise of their sound business judgment, that continuation of the [HSA] is not in the best interests of the Debtors' estates or their creditors and that ...