Is electricity goods or services?  That seemingly simple yet confounding question is illustrated by three recent bankruptcy cases (all of which consider whether an electricity provider is entitled to an administrative expense priority under Bankruptcy Code Section 503(b)(9) for “the value of goods received by the debtor” in the ordinary course within 20 days prior to the automatic stay):

  • In Hudson Energy Services, LLC v. Great Atlantic & Pacific Tea Co, Inc., 2013 WL 5212141 (S.D.N.Y. Sept. 16, 2013) (A&P), the court held that because electricity is consumed only after it is measured (at the customer’s meter), electricity is a “thing that is movable at the time of identification” (UCC 2-105) and accordingly should be characterized as goods under the UCC, which is the reference standard for Section 503(b)(9).
  • The bankruptcy court in In re NE OPCO, Inc., 501 B.R. 233 (Bankr. D. Del. 2013), agreed withA&P that the meaning of goods under Section 503(b)(9) “is primarily informed by the meaning of goods under the UCC,” but disagreed with A&P  that electricity is goods, holding that because “the period between identification and consumption must be meaningful,” the “infinitesimal delay” between those acts in the case of electricity makes it unidentifiable and thus not goods.
  • In contrast to A&P and OPCO, the lower bankruptcy court in Puerto Rico Electric Power Authority v. Rentas, B.A.P. 1st Cir. No. PR 13-050 (Sept. 23, 2014) (PREPA), rejected the UCC definition as controlling § 503(b)(9) and relied instead on the public utility’s monopoly status as the basis for denying the administrative expense priority.  The First Circuit Bankruptcy Appellate Panel rejected that reasoning and remanded with instructions to determine whether furnishing electricity is goods, but declined to instruct the lower court to use the UCC definition (with the exception of PREPA, nearly all bankruptcy courts have agreed that the UCC controls the §503(b)(9) definition of “goods”).

This lack of agreement on a seemingly elementary question is not confined to bankruptcy — it existed before Section 503(b)(9) was enacted (2005) and continues.  Courts peering into the sub-atomic qualities of electricity have reached opposite conclusions whether electricity is goods or services.  Other courts have gone the opposite direction, eschewing quantum physics and comparing the “common understanding of electricity” (which is to say the common misconception that an electricity customer is buying a “stream of electrons”) to severed oil, gas and other things that are UCC goods in hopes of finding the UCC equivalent of a “unified field theory” (as in physics, that search continues).  Still other courts have concluded that electricity in “its raw state” is a service, but when it passes the end user’s meter it becomes goods.

This leaves lawyers with the quandary of identifying (a) which state’s laws do or should apply to the power purchase transaction (keeping in mind that not always will the forum court enforce a contractual choice of law if that foreign state’s substantive law fails to bear a reasonable relationship to the transaction) and (b) whether that state’s laws will treat the power purchase agreement as a contract for sale of goods or as a services contract.  Then, the power purchase counterparties must presciently evaluate which permutation of outcomes (UCC goods or common law services) will most likely benefit their respective positions. Resolution of the goods-versus-services issue can lead to different construction of a contract for the sale of electricity in at least five respects:

  • Contract formation—common law requires mirror acceptance, while the UCC permits additional terms to be added by acceptance;
  • Contract administration—common law seldom recognizes modification of an existing contract without new consideration, while the UCC foregoes the need for new consideration;
  • Contract interpretation—common law only sometimes admits trade practices and the parties’ past conduct to interpret terms, while the UCC always admits such evidence;
  • Contract enforcement—common law can require impossibility to excuse performance, while the UCC recognizes the lesser standard of commercial impracticability; common law does not always recognize anticipatory repudiation or the right to demand adequate assurances, while the UCC recognizes both; and
  • Contract rights and remedies—common law statutes of limitations for breach of contract often differ from the UCC’s four-year statute of limitations; common law does not generally recognize cover, while the UCC requires cover.

Even if electricity is initially characterized as goods, when electricity is bundled with services (such as transmission/distribution services), yet another issue arises: should the predominant factor test be applied to assess whether the provision of electricity is predominantly goods or services, or should the apportionment test apply as it did in the OPCO case, which treated natural gas deliveries as goods entitled to the administrative expense priority and electricity deliveries as services not so entitled.  Further, even if the parties to a power transaction can agree on the substantive law to be applied — UCC or common law — their agreement must clearly identify that choice as the court held in Lockheed Electronics Company, Inc. v. Keronix, Inc., 114 Cal. App.3d 304 (1981).