The electricity sector is beginning an unprecedented move away from networks dominated by large-scale utilities. Peer-to-peer power sharing arrangements and technologies such as rooftop solar are redefining traditional relationships between power companies and consumers. Soon, residents and businesses will be able to produce their own electricity through microgrids, bypassing electric utilities, and sell excess electricity credits through a virtual trading platform.
Consumers who generate electricity in excess of their demand can benefit from net metering, a system that compensates the consumer with a credit for each kilowatt-hour injected into a grid and can identify electricity fed back into the grid. Electricity sales could generate valuable revenue streams for these producers, and lenders financing these projects will want to consider both the related receivables and the electricity produced by such projects as collateral.
But can a creditor obtain a security interest in electricity under UCC Article 9? It covers security interests in fixtures and personal property. Clearly, electricity is not real property or a fixture. But what kind of personal property is it? Article 9 assets fall within certain categories and types (see, e.g., § 9-108). Knowing the correct Article 9 category or type for an asset is critical for determining the proper steps for creating and perfecting a security interest in that asset.
Unfortunately, neither the statute nor Article 9 case law seem to provide guidance here. Article 9 does contemplate security interests in utility products in certain instances. For example, natural gas is considered a “good” after extraction from the ground (see § 9-102(a)(44)). The status of gas prior to extraction is a complex question beyond the scope of this article.
Article 9 also addresses how to file financing statements against “transmitting utilities,” which include a “person primarily engaged in the business of … transmitting or producing and transmitting electricity, steam, gas or water” (see § 9-102(a)(81)). But Article 9 does not address electricity itself as a type of collateral.
Fortunately, there is some precedent on this issue, albeit not in Article 9. Courts in two other contexts have looked at the question of whether electricity should be classified as either a “good” or “service.” Those are § 503(b)(9) of the U.S. Bankruptcy Code, which gives administrative priority to certain claims for the provision of “goods”; and UCC Article 2 (Sales), primarily in the context of product liability claims.
Interestingly, while opinions under the first of these two lines of cases are evenly split among jurisdictions, and the majority view under the second comes out in favor of classifying electricity as a “good,” in both instances New York courts have ruled against finding electricity to constitute “goods.”
In this article, we look at whether electricity is considered “goods” in those other contexts and, if so, whether those decisions can be applied to a similar determination under UCC Article 9.
Is Electricity a Good or Service?
Federal Bankruptcy § 503(b)(9) Cases. 503(b)(9) of the U.S. Bankruptcy Code, enacted in 2005, gives administrative priority status to claims for the value of “goods” received by a debtor within 20 days before its bankruptcy filing. Sellers of “services” do not have a similar priority. The term “goods” is not defined in this section, nor elsewhere in the Bankruptcy Code. Thus, bankruptcy courts construing the rule have turned to UCC Article 2 for guidance, with varying interpretations.
Two early cases highlight the differing results reached by courts concerning whether electrical energy is “goods” in the context of a § 503(b)(9) claim. In re Pilgrim‘s Pride, 421 B.R. 231 (Bankr. N.D.Tex. 2009), a Texas bankruptcy case, was the first published decision on the topic. In that case, Pilgrim’s Pride, one of the largest global producers of chicken products, filed a motion to establish procedures for the submission of payment of claims asserting entitlement to administrative priority under § 503(b)(9). Several creditors filed § 503(b)(9) claims, and the debtor moved to disallow certain claims on the basis that they were not for “goods.”
The court in that case set the precedent of looking for guidance on this question from Article 2 of the UCC, specifically § 2-105. 421 B.R. at 237. UCC § 2-105 defines “goods” as “all things (including specially manufactured goods) that are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities (Article 8) and things in action.” Presumably, bankruptcy courts have looked to that definition, and not a parallel definition under Article 9 (discussed below), because the § 503(b)(9) cases involve sales of assets.
The Pilgrim’sPride court stated that § 503(b)(9) should be construed narrowly and ultimately ruled that electricity “does not fall within the [UCC]‘s definition of ‘goods.’” 421 B.R. at 240. It rested its decision on a factual review of the characteristics of electricity, holding that electricity does not occupy physical space and once identified has been consumed (and so cannot be moved), and is more akin to phone service and Internet bandwidth, even when sold in metered quantities. 421 B.R. at 239. See also In re NE Opco, 501 B.R. 233 (Bankr. D. Del. 2013), and Hudson Energy Servs. v. Great Atl. & Pac. Tea Co. (In re Great Atl. & Pac. Tea Co.), 538 B.R. 666 (S.D.N.Y. 2015).
The opposite result was reached by a bankruptcy court in Massachusetts in In re Erving Indus., 432 B.R. 354, 365 (Bankr. D. Mass. 2010), in what is considered a key early decision determining that electricity is “goods” under UCC § 2-105 and § 503(b)(9). That court specifically differed with the reasoning of Pilgrim’s Pride, stating that television signals and Internet bandwidth are the medium of delivery, but electricity “is the thing the customer seeks to purchase.” 432 B.R. at 368. See also In re Grede Foundries, 435 B.R. 593 (Bankr. W.D. Wis. 2010, In re Wometco de P.R., No. 15-02264, 2016 WL 155393 (Bankr. D.P.R. Jan. 12, 2016), and In re Escalera Res. Co., 563 B.R. 336 (Bankr. D. Colo. 2017.) (In re Escalera, a recent Colorado bankruptcy decision holding that electricity constitutes a “good,” contains a fairly comprehensive review of case law on this issue. The court dismissed the notion articulated in some cases that there must be an interval between identification and consumption.)
Courts continue to be divided on whether electricity constitutes “goods” in the wake of Pilgrim’s Pride and In re Erving, but, as noted in Escalera, have consistently looked to Article 2 for help.
New York has followed Pilgrim’s Pride, the most recent case being a Southern District of New York decision in the A&P bankruptcy case above (Great Atlantic, 538 B.R. 666). In that case, the court concluded that by the time the electricity was identifiable (by meter) it had been consumed, and further that this was consistent with the policy of construing these exceptions narrowly. Great Atlantic, 538 B.R. at 669.
UCC Article 2 Cases
Article 2 of the UCC is itself the other area of active litigation regarding the definition of “goods.” Article 2, known formally as Uniform Commercial Code-Sales, applies solely to transactions in “goods” (see § 2-102). As noted above, Article 2 defines goods generally as “all things movable at the time of identification.”
Most of the non-bankruptcy cases under Article 2 addressing this issue have involved challenges under UCC § 2-318 to the extension of warranties to third parties — mainly in personal injury cases. In these cases, all courts except those in New York have held that electricity actually metered and delivered to a customer constitutes a “good” under UCC § 2-105. In re Escalera, 563 B.R. at 353.
New York addressed this issue first in the case of Farina v. Niagara Mohawk Power, 438 N.Y.S.2d 645 (1981). Carolyn S. Farina filed an action against Niagara Mohawk Power alleging negligence, strict product liability, breach of warranty, and nuisance after Peter Farina’s (decedent) untimely touching of an antenna he was removing from a residence onto an overhead power line.
The New York trial court held the breach of warranty claim inapplicable under UCC § 2-318. That section provides that “a seller’s warranty whether express or implied extends to any natural person … if it is reasonable to expect that such person may … be affected by the goods and who is injured in person by breach of the warranty.” The court was “unable to conclude that it was intended that electricity be included within the definition of ‘goods’ … ” Farina, 438 N.Y.S.2d at 647. The court provided no basis for its reasoning. However, this decision became the basis for a line of cases in New York determining that electricity is not a good under the UCC. New York courts have also failed to distinguish between electricity actually metered and delivered (unanimously held to fall within the definition of “goods” under UCC § 2-105 by courts in other jurisdictions) from stray electrical current in overhead power lines. See also U.S. v. Consol. Edison Co. of N.Y., 590 F. Supp. 266, 269 (S.D.N.Y. 1984).
Article 2 Versus 9
How well does all of this translate to Article 9?
Article 2 focuses on things that are both movable and identifiable. It includes specially manufactured goods, unborn young of animals and growing groups and other “identified things attached to realty as described in the section on goods to be severed from realty [by the Seller] (Section 2-107).”
Article 9, on the other hand, contains a similar but separate definition of “goods” in § 9-102(a)(44). Under that definition, “goods” are “all things that are movable when a security interest attaches,” including fixtures, standing timber to be cut and removed under a conveyance or contract for sale, unborn young of animals, crops grown, growing or to be grown, manufactured homes and certain computer programs. It specifically excludes certain types of assets, including accounts, chattel paper, general intangibles, instruments, investment property, and oil, gas or other minerals before extraction.
Both definitions require a “good” to be “movable.” Article 2 also requires goods to be identifiable, a notion that is not part of the Article 9 definition. This may be significant, as the ability to identify “goods” has been a key distinguishing factor in a number of court decisions. For example, in the Erving case, the court allowed the priority claim because the electrical energy met both the movable and identifiable requirements under Article 2 whereas Pilgrim’s Pride ruled that electricity has been consumed at the point at which it is identifiable.
Unfortunately, it’s difficult to say whether this is enough to distinguish an analysis of electricity as a “good” for purposes of Article 9 from that under Article 2. The absence of this additional requirement from the Article 9 definition should make it more likely that electricity be viewed as a “good” by courts under Article 9. But New York courts, for example, have been particularly reluctant to consider electricity as a “good” without a substantial explanation as to why.
The nature of electricity as an asset under the UCC will undoubtedly become more of an issue over time. Overall, most courts considering the issue have held electricity to constitute “goods,” although the bankruptcy cases continue to be divided. New York courts are the sole outlier in non-bankruptcy cases. But it is far from certain what effect these decisions would in any event have on a determination of electricity as goods under Article 9, given the difference between the definitions under Articles 2 and 9.
Article 9 does not require an asset to be “identifiable” to be a “good.” Since judges have struggled to determine whether electricity is identifiable at the time of movement (focusing at times on the nanoseconds between meter reading and consumption), it may be that without this condition courts may more readily find electricity to be a good instead of a service under Article 9. But given this uncertainty, practitioners would be well served to assume electricity could be either a good or service (i.e., general intangible) under Article 9 and act accordingly.
***** Barbara M. Goodstein is a partner at Mayer Brown. Maria Josefina Blanco, an associate at the firm, assisted in the preparation of this article, which also appeared in the New York Law Journal, an ALM sibling publication of this newsletter.
The views expressed in the article are those of the authors and not necessarily the views of their clients or other attorneys in their firm.