United States: Administrative Expenses: Are Electrons Movable So That Electricity Is A Good?

Last Updated: April 16 2014
Article by Vicki Harding

In re NE Opco, Inc., 501 B.R. 233 (Bankr. D. Del. 2013)

A municipal utility sought an administrative expense payment for the electricity and natural gas that it provided to the debtors during the 20 days prior to bankruptcy. The issue turned on whether electricity and natural gas constitute "goods."

Under Section 503(b)(9) of the Bankruptcy Code, a claim for the "value of goods" that (1) are received within the 20 days before a bankruptcy is filed and (2) have been sold to the debtor in the ordinary course of business will be allowed as an administrative expense – thus giving the claim better treatment than an ordinary unsecured claim.

It appears that there is a consensus that the definition of "goods" in Article 2 of the Uniform Commercial Code should be used for purposes of this section. When it comes to electricity, that is where any consensus ends. Although a majority of cases hold that electricity is a good under UCC Article 2 (at least according to one opinion), in the context of Section 503(b)(9), the courts are more evenly split.

A critical part of the UCC Article 2 definition is the qualification that it consists of things "which are movable at the time of identification to the contract for sale." Courts have taken a variety of approaches to determining whether electricity meets this requirement.

One court decided to include a primer on the mechanics of generating electricity in its opinion – starting with the concept of atoms, which it described as "little particles that move around in perpetual motion," and proceeding to electrons that can be "knocked out of orbit" and pushed to "flow" from atom to atom. This court decided that electricity was identified to a sale contract when it was measured by a meter, and that it was movable as it travels through transmission lines. So, the key question was whether the electricity was movable at the time it was measured or whether it simultaneously ceased to exist. This particular court concluded that there must be some time "however imperceptible" between "measurement at the meter and use of it at the vacuum cleaner." Thus, electricity was a good entitled to administrative expense status.

A different court took issue with this analysis on the basis that electricity is consumed simultaneously with measurement. However, it nevertheless agreed that electricity was a good because it was moving at the time of measurement "even if the movement was so fast as to be 'non-existent.'" It further concluded that there was no basis for distinguishing between electricity on the one hand and natural gas and water (which are considered goods) on the other.

In determining that electricity was not a good, another court focused on the relationship between the provider and customer, as opposed to the electricity itself. In that case, the court concluded that given the "special relationship" between the parties, the utility was providing service rather than a good under the UCC.

In yet another approach, one utility argued that electricity should be a good because (1) it is considered property, (2) it is distributed commercial for use and consumption, and (3) it can be metered. The court in that case rejected all of these arguments since they would have included things that clearly do not qualify as goods.

Additional considerations in the bankruptcy context include: (1) Section 366 of the Bankruptcy Code addresses "utility services," which suggests that utilities deal with services as opposed to goods, and (2) an argument that goods must be reclaimable under Section 546(c) to qualify for administrative expense treatment under Section 503(b)(9).

After considering this long litany of factors and consideration, the Opco court determined that the concept of "movability" was an important part of the definition, and electricity was not movable at the time of identification. Further, electricity is not comparable to water and natural gas (which are included in the definition of goods). For example, the court commented that storage of electricity is fundamentally different from storage of water or natural gas.

The Opco court did not agree that Section 503(b)(9) should be limited to things that can be stockpiled and reclaimed. Nor was it persuaded that Section 366 regarding utility services was relevant. Similarly, the relationship of the parties was not relevant, and there was no need to strictly construe 503(b)(9) because of a public policy in favor of narrowly construing priority claims.

Thus, after an interesting journey, the court concluded that electricity was not a good, and the claims based on providing electricity did not qualify as an administrative expense.

Turning to the natural gas portion of the claim, the court agreed that natural gas constituted a good. This raised the question of whether a claim that involves both goods (natural gas) and services (electricity) should be allocated based on the "predominant purpose" or application of an "apportionment" test. Although most courts follow the predominant purpose test in the context of the UCC, Section 503(b)(9) addresses only the "value of the goods" – which does not support the predominant purpose test.

In considering whether charges attributable to natural gas constituted an administrative expense claim, the court excluded the costs of distribution, transportation and other fixed charges. Further, since the 20 day period did not correspond to a normal billing cycle, the utility created an artificial breakdown of the two bills to identify its claim for supply within the 20-day period. The court allowed the portion of one bill that was allocated based on meter readings, but rejected allocation of the second bill on the basis that it was not adequately supported.

  • Prior to the bankruptcy, the utility was billing the debtors between $130,000 and $180,000 per month, or over $1.7 million a year (which was ~3% of the utility's annual revenue).
  • As of the bankruptcy filing, the utility claimed that the debtor owed ~$346,000, of which it alleged ~$93,000 was attributable to the 20-day period prior to bankruptcy.
  • After subtracting all charges relating to electricity, charges not directly related to the cost of natural gas, and a portion of the amount claimed for the cost of natural gas due to insufficient support, the court approved an administrative expense claim in the amount of $78.08. (It then rejected the utility's request that this amount be paid immediately, noting that immediate payment requires more than just a showing that the debtor has the ability to pay.)

Considering this outcome, it is not hard to imagine why utilities might be inclined to aggressively collect bills from companies that are in trouble.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Vicki Harding
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