A federal appeals court has allowed a bankrupt Atlanta power company to move forward with its effort to cancel unprofitable contracts with Pepco, the utility that serves the District and suburban Maryland.

Mirant Corp., which filed for Chapter 11 protection from its creditors last year, wants to abandon the contracts to help pay its creditors. Before its bankruptcy, Mirant had agreed to take on two of Pepco's long-term contracts that have now become a financial burden because of a drop in prices in the electricity market.

The case stems from the 2000 sale of Pepco's power plants to Mirant for $2.65 billion. As part of that deal, Mirant agreed to assume the cost of electricity that Pepco was buying under two long-term contracts from electricity generators in Ohio and Maryland. Mirant reimburses Pepco for the cost of the power, then sells the power on the market.

But the market price for electricity is now lower than when the contracts were originally signed between Pepco and the power generators. One contract runs through 2021 and the other ends in 2005.

In March, Pepco estimated that for 2005, selling the electricity from the two contracts would result in a loss of $94 million -- the difference between the price of the long-term contracts and the going rate for electricity.

On Wednesday, the U.S. Court of Appeals in New Orleans sent the case back to U.S. District Court in Fort Worth, Texas, for further consideration. The appeals court decision overturned the district court's ruling that the matter fell under the jurisdiction of the Federal Energy Regulatory Commission. The commission argued that it should rule in the matter.

In deciding the case, the district court should consider Mirant's Chapter 11 debt burden and whether canceling the contracts would be against the "public interest," according to the appeals court.

Bryan Lee, a spokesman for the commission, praised the decision, saying it "appears to recognize the commission's concern that the public interest and not just creditors' interests should apply."

But at the same time the decision appears to give bankruptcy courts more authority than the commission when electricity suppliers seek protection from creditors.

James Peters, a spokesman for Mirant, called the appeals decision "positive."

"We'll continue to work through the legal process to seek the rejection" of the contracts, Peters said.

Pepco issued a statement noting that the appeals court did not decide on the underlying issue of canceling the contracts and that it only resolved the question of whether the commission needed to hear the case.

Bill Torgerson, vice chairman and general counsel of Pepco Holdings Inc., the utility's parent company, said that if Mirant is successful in canceling the contracts, Pepco may seek to pass on the added costs to its 725,000 customers. However, he said Pepco would pursue the case in court and would seek to recover money as part of the bankruptcy proceedings if the contracts are canceled.

Asked how much of the cost could be passed on to customers, Torgerson said, "It's just way too early to know if there would be any amount or, if so, how much it would be."