Supply of Electricity May Constitute Sale of Goods Enabling Electric...

In In re Erving Industries, Inc. et al., the Court held that the supply of electricity constituted the sale of goods so that the electric supplier was entitled to assert a 503(b)(9) administrative expense claim.  The Court’s opinion is very well-reasoned and its opinion along with a substantial appendix on the electric industry can be found here.   

In short, Erving Industries, Inc., along with certain of its affiliates, filed for Chapter 11 on April 20, 2009.  Constellation NewEnergy, Inc. filed an administrative expense claim under 503(b)(9) in the amount of $281,667.88 (the “Claim”).  The Debtors and NewEnergy agreed that the amount sought in the Claim accurately represented the charges for electricity supplied to the Debtors during the relevant 20 day period, but the Debtors objected to the Claim on the grounds that electricity is not a good within the meaning of 503(b)(9).  The Debtors also contended that NewEnergy was a utility provider. 

NewEnergy maintained that it did not perform the traditional service functions commonly associated with electric utilities.  It argued that while regulated utilities are responsible for the ultimate delivery of electricity to customers, NewEnergy says it has no role in the delivery and is involved solely in the sale of electricity as a “competitive supplier.” 

The Court began its analysis by defining “goods” under 503(b)(9).  The Debtors insisted that electricity is not a good because it is an intangible phenomena and devoid of physical form.  This position, according to the Debtors, is supported by the decision in In re Pilgrim’s Pride Corp., 421 B.R. 231 (Bankr. N.D. Tex 2009), where that court analogized electricity to the transmission of television programming, which is considered to be a service (here’s the Pilgrim’s Pride Opinion). 

NewEnergy argued that the term good should be defined as it is under Section 2-105 of the Uniform Commercial Code.  Section 2-105 states that a good is something that is movable at the time it is identified to the contract for sale.  NewEnergy insisted that electricity is movable, and indeed, moves along transmission lines and distribution systems from the location where it is generated, and ultimately arrives at the customer’s location after traveling along those transmission lines and distribution systems.  NewEnergy also noted that electricity is identifiable because it can be measured by a meter upon delivery.  Finally, NewEnergy argued that electricity is tangible because the touching of it can and usually does create a physical consequence (i.e., electrocution). 

After considering arguments by both the Debtors and NewEnergy, the Court analyzed the legislative history of 503(b)(9), the term “good”, the agreement between the parties, and the electric industry, and concluded that electricity is a good under section 503(b)(9).  The opinion (click here) is very well-reasoned, and will likely be persuasive authority in other jurisdictions.  In businesses that use mass amounts of electricity that is purchased from outside suppliers (i.e., not traditional utilities), debtors and debtors’ counsel will have to consider the implications of 503(b)(9) on what they previously would have viewed as just a prepetition general unsecured claim of a utility provider.

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