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Electricity As a Good Or a Service: Some “Shocking” Developments

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Electricity As a Good Or a Service: Some “Shocking” Developments Selected topic BruCe NaThaN, esq. aNd eriC ChafeTz, esq. Electricity as a Good or a Service: Some “Shocking” Developments Credit providers may be shocked to learn that the courts have reached conflicting decisions over whether elec- n a T i o n a l a s s o c i a T i o n o F c r e d i T M a n a g e M e n T tricity is a “good,” entitled to Bankruptcy Code Section 503(b)(9) priority status1, or a service that is not entitled to any priority protection. The United States Bankrupt- Ccy Court for the District of Puerto Rico in In re PMC Marketing Corporation, and the United States District Court for the Southern District of New York in Hudson Energy Services, LLC v. The Great Atlantic & Pacific Tea NOVEMBER/DECEMBER 2013 Company, Inc. (A&P) both recently considered whether The PublicaTion For crediT & Finance ProFessionals $7.00 electricity is a “good” or a “service.” The PMC Court held that electricity is a “service” and Court held that electricity is movable and identifiable not a “good,” because it was provided by a government because it can be measured at the point it passes through owned utility. On the other hand, the A&P District a customer’s meter. Section 2-105(1) defines goods as Court vacated and remanded the order of the United “all things...which are movable at the time of identifica- States Bankruptcy Court for the Southern District of tion to the contract for sale.” The Erving Court rejected New York, rejecting the A&P Bankruptcy Court’s hold- Erving’s argument that electricity ceases to be movable ing that electricity is a “service” and not a “good” and when it is measured by the meter because identification directing that an evidentiary hearing be conducted on and consumption occur simultaneously. Instead, elec- this issue. tricity does not simply cease to exist when it reaches a customer’s meter, but moves through the meter and the united states Bankruptcy Court for continues to move throughout the customer’s electrical the district of Puerto rico and the united wiring until the customer ultimately uses it. states district Court for the southern TheErving Court also focused on Constellation’s role as a wholesale energy supplier and the relevant terms of district of new York both recently the parties’ contract. Constellation had purchased elec- considered whether electricity is a tricity from third parties and resold that electricity to Erving and other consumers. Moreover, Constellation “good” or a “service.” was not a “utility” because it was not subject to govern- mental regulation, did not possess a monopoly as the In re Erving Industries, Inc. sole source of electricity available to Erving, and was ThePMC Court and the A&P District Court focused on not included in the list of utilities maintained by the rel- the District of Massachusetts Bankruptcy Court’s hold- evant state agencies. TheErving Court also relied on the ing in In re Erving Industries. In Erving, Constellation terms of the parties’ contract that described a purchase/ NewEnergy, Inc., an electricity reseller, timely asserted a sale relationship, and not the provision of a “service.” Section 503(b)(9) priority claim in the amount of $281,667.88 on account of electricity delivered to the The PMC Marketing Corporation Case debtors Erving Industries, Inc. and two affiliates (col- PMC Marketing Corporation filed a Chapter 11 peti- lectively, Erving) within 20 days of Erving’s bankruptcy tion on March 18, 2009. PMC’s case was converted to a filing. Erving objected to Constellation’s Section 503(b) Chapter 7 case on May 21, 2010. P.R. Electric Power (9) claim and argued that electricity was a “service” and Authority (PREPA) filed a motion seeking payment of a not a “good.” Section 503(b)(9) claim in the amount of $89,336.42. PREPA argued that it was entitled to Section 503(b)(9) The Erving Court held that the electricity Constellation priority status because its claim was based on its sale of, had resold to Erving was a “good.” First, applying the and PMC’s receipt of, electricity during the 20-day peri- definition of “goods” contained in Section 2-105(1) of od (February 26, 2009 and March 17, 2009) before the Uniform Commercial Code (UCC), the Erving PMC’s bankruptcy filing. 1 B u s i n e s s C r e d i t n o v e m B e r / d e C e m B e r 2 0 1 3 PREPA argued that its aforementioned claim for the electric- bulk of fungible goods” because it is “simply a stream of elec- ity provided to PMC was entitled to Section 503(b)(9) priority trical energy… identified… at the point of delivery.”4 As such, treatment because the electricity was a “good” within the “it is hard to see that [electricity] is actually moveable at the UCC’s definition of that term. According to PREPA, the elec- time of identification…[and] in essence disappears at that tricity was both moveable (from when it was metered and moment.” afterwards) and identifiable (to a customer’s contract at the time it was metered at the consumer’s place of business).2 Significantly, the A&P Bankruptcy Court disagreed with the Erving Court’s holding that electricity is a “good,” despite the The PMC Court recognized the division among the courts fact that both Hudson and Constellation (the claimant in Erv- over whether electricity is a “good” or a “service.” The court ing) were non-utility suppliers of electricity that did not per- held that the electricity supplied by PREPA, a utility,3 was a form a delivery service. The A&P Bankruptcy Court disre- service, not a good. The court defined the term “utility” as a garded Hudson’s status as a seller of electricity as reflective of provider of a service, such as light, power or water. The court industry deregulation and not determinative of whether the also observed that a utility refers to a “business organization UCC’s definition of “goods” includes electricity. Hudson ([such] as an electric company) performing a public service appealed the A&P Bankruptcy Court’s order to the A&P and subject to special governmental regulations,” that has District Court. “some special position with respect to the debtor,” and has “a monopoly in the area so that the debtor cannot easily obtain PREPA argued that its aforementioned comparable service from another.” claim for the electricity provided to Applying these various definitions and concepts, the PMC PmC was entitled to section 503(b)(9) Court concluded that PREPA was a utility provider because: (i) like other traditional utilities, it is subject to governmental priority treatment because the regulation, (ii) enjoys a “special relationship” with PMC as electricity was a “good” within the PREPA is the only electricity provider in Puerto Rico, (iii) has a monopoly, and (iv) is owned by the government and direct- uCC’s definition of that term. ed by a government board. Accordingly, the PMC Court held that electricity in this specific context was a “service” and Hudson argued that the A&P Bankruptcy Court erred in PREPA was not entitled to an administrative priority claim holding, without any evidentiary support, that electricity is under Bankruptcy Code Section 503(b)(9). not a good. Hudson asserted that the electricity it had pro- vided A&P was movable when it was identified to the contract ThePMC Court distinguished the Erving Court’s holding that at the following two discrete points: (i) when Hudson pur- electricity is a good eligible for Section 503(b)(9) priority sta- chased the electricity and it was subsequently released into tus. The court noted that the claimant in Erving, Constella- the grid5, and (ii) when the electricity exited the grid, was tion, was a private alternative energy provider that sold elec- measured, and passed through a customer’s meter.6 Hudson tricity as a “competitive supplier” and was not a public utility also argued that electricity qualified as “an identified bulk of provider, like PREPA, that was responsible for the ultimate fungible goods” like “oil in a pipeline or grain in an elevator,” delivery of electricity to a customer as a “service.” because any unit of electricity is identical to any other unit and the electricity that Hudson had purchased on behalf of its The a&P district Court decision customers (including A&P) was an undivided share of all the On April 27, 2011, Hudson Energy Services, LLC filed a electricity included in the entire power grid. motion seeking the allowance of a Section 503(b)(9) claim in the amount of $875,943.90 on account of electricity Hudson A&P countered that the electricity it had purchased from had sold to Great Atlantic & Pacific Tea Company, Inc. and its Hudson could not have been identified to a contract of sale as affiliates (collectively, A&P). A&P objected to Hudson’s soon as it entered the power grid. In addition, A&P had motion, arguing that the electricity provided to A&P was not already consumed the electricity when it was identified to its a “good” under Section 503(b)(9). contract with Hudson at the time it was measured at the meter. As such, A&P could not return the electricity to Hud- The A&P Bankruptcy Court had ruled that electricity is a son after it was measured at the meter. Moreover, just because service, and not a good, and, therefore, is not entitled to Sec- A&P could store a de minimis amount of electricity did not tion 503(b)(9) priority status.
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