Courts remain divided as to whether electricity is a good (resulting in an administrative claim for electricity provided in the 20-day period before a bankruptcy case is filed) or service (no administrative claim).
- Bankruptcy courts rely upon the application of the Uniform Commercial Code (UCC) definition of “goods” to determine whether electricity claims receive administrative priority.
- Expert opinions on the complex physical nature of electricity inform bankruptcy courts’ interpretations.
- The characterization of electricity may have broader implications beyond bankruptcy cases and impact contract-based disputes in which parties seek to invoke the UCC.
Scientists have been puzzling over the nature of electricity since as early as 565 B.C., when the Greek philosopher Thales of Miletus experimented by rubbing amber on fur to attract feathers. Thales, however, did not have to ponder the legal nature of the static electricity he observed.
Modern society has grown more reliant on electricity to “power” all aspects of our lives and businesses. However, despite the prevalence of electricity in our everyday lives, open questions remain as to the proper legal characterization of electricity—is it a good or a service or a little bit of both? This characterization affects the applicability of provisions of the Uniform Commercial Code (UCC) and the status of claims in bankruptcy cases for unpaid electric bills.
Federal courts continue to reach contradictory decisions as to whether electricity is a “good” under Bankruptcy Code § 503(b)(9), which affords administrative priority status to claims for the value of goods, but not services, sold to a debtor in the ordinary course of business, and received within 20 days before the commencement of the bankruptcy case. This question is consequential because administrative priority status usually results in greater recovery on claims, as compared to other general unsecured claims.
The Bankruptcy Code does not define “goods,” and so courts look to the UCC Article 2 definition: “‘Goods’ means all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale” (UCC § 2-105). Many state and federal courts have found that while the transmission and distribution of electricity may be viewed as a service, the electricity itself is a consumable product and thus a “good.” Courts reaching contrary conclusions have focused on the complex physical nature of electricity when applying the UCC definition. Recent amendments to the UCC did not change the definition of “goods,” leaving its interpretation up to courts usually following litigation.
The U.S. District Court for the District of Oregon recently affirmed its Bankruptcy Court’s opinion, which concluded that electric power is not a good under § 503(b)(9) and denied administrative priority treatment of a $206,000 claim asserted by PacificCorp (a public utility supplier of electricity doing business as Pacific Power & Light) in In re NORPAC. PacifiCorp v. N. Pac. Canners & Packers, Inc., No. 6:21-cv-00863-AA, 2023 U.S. Dist. LEXIS 18798, at *12 (D. Or. Feb. 3, 2023), aff’g In re North Pacific Canners & Packers, Inc. et al., 628 B.R. 337 (Bankr. D. Or. 2021). This conclusion had significant impact on recoveries in the NORPAC case where recoveries on allowed administrative claims is 100% versus recoveries on general unsecured claims of only about 38%.
The bankruptcy court on the Pacific coast expressly rejected the contrary conclusion from a bankruptcy court in the Rockies, where PacifiCorp had successfully obtained administrative priority status for a similar claim upon a finding that “electrical energy constitutes ‘goods’ in both ordinary and legal usage.” In re Escalera Res. Co., 563 B.R. 336, 369 (Bankr. D. Colo. 2017) (“To hold otherwise would be contrary to the plain understanding of the term ‘goods’ and would upset established legal meaning across many areas of law.”).
While the bankruptcy court in In re Escalera heard unrebutted testimony from PacifiCorp’s expert, the bankruptcy court in In re NORPAC heard expert testimony from both PacifiCorp’s and NORPAC’s experts.
NORPAC’s expert reported that (1) the supplied electricity was a form of energy transferred via waves carried over the electric utility’s wires; (2) these waves have no mass, nor do they have a solid form, but merely transfer energy; (3) there is no commercially available method for storing electricity in the form that exists in a power grid; (4) once electricity passes through a revenue meter, it can only be consumed by the device that closed the circuit, permitting electricity to flow through the meter; (5) electricity travels near the speed of light, and electricity meters operate at a much slower speed than that, and (6) although all widely used forms of electric meters do measure the amount of electricity that passed through them, they do so only after the electricity was consumed. PacifiCorp, 2023 U.S. Dist. LEXIS 18798, at *5-6 (internal quotes omitted).
PacifiCorp’s expert reported that (1) electricity is identified at the time it passes through the electric meter and that, at that time, the electricity is still movable; and (2) it was possible to store electricity after it passed through the meter as in the case of batteries. Id. at 6. However, in his rebuttal report, PacifiCorp’s expert acknowledged that (1) when electricity is stored in batteries it is stored in a different form, although it is recoverable in its original form; and (2) AC current is theoretically movable even without transformation into another form, but that doing so is not particularly practical, and is therefore not commonly done. Id. at 6-7 (internal quotes omitted).
Informed by NORPAC’s expert and persuaded by the reasoning of another district court (In re Great Atlantic & Pacific Tea Co., Inc., 538 B.R. 666 (S.D.N.Y. 2015)), the In re NORPAC courts found:
“Electricity is not ‘identified’ until it has been recorded by the meter and, because of the speed that electricity moves through the wire and the comparative slowness of the meter, the electricity has been consumed by the time that identification occurs. The electricity is not, therefore, movable at the time of identification.”
PacifiCorp, 2023 U.S. Dist. LEXIS 18798, at *12. Notably, the NORPAC courts did not discuss the state and federal cases from its nearby neighbor, California, that have consistently found electricity to be a “good” under the UCC.
The resulting loss of administrative status for pre-petition claims seems anomalous considering the unique protections afforded to utilities post-petition under § 366. But the ongoing split among courts results largely from differing interpretations of the physical characteristics of electricity and not from differing policy considerations.
Struggling businesses universally require electricity to operate, and electric utilities should be incentivized to keep the pre-petition power on. The stage is set for a circuit court of appeals to turn an eye toward the policy implications of the characterization of electricity under the UCC and the ability to assert claims under § 503(b)(9).