Electricity: good or service?

Issue January 2013 By Robert M. Granger

The Uniform Commercial Code governs the sale of "goods," as distinguished from the sale of services, which is governed by other statutory or case law. Under the UCC, a good is any "tangible thing" that is "moveable." In addition to manufactured products, goods include -- among other things -- growing crops and timber, the unborn young of animals, and minerals.  However, courts across the United States are split on whether electricity constitutes a good under the UCC.

Courts holding that electricity is a good tend to use a simple analysis of the definition of "goods" under the UCC. The UCC defines "goods" as "all things … which are movable at the time of identification to the contract for sale." Parsing this definition, these courts find electricity to be a "thing movable" which is identifiable when measured by the customer's electric meter.

Courts on the other side of the divide generally hold that the provision of electricity is a service, not the sale of a good. Historically, electricity has been manufactured or generated as needed, transmitted over high voltage lines to population centers, and then distributed over lower voltage lines to individual customers. All of these functions were often performed by a single vertically integrated electric utility company. Courts holding that that electricity is a service tend to focus on the transmission and distribution of electricity, i.e., the delivery of the electricity over wires, instead of the electricity itself.

The applicability of the UCC could significantly impact or even determine the outcome of a case involving the sale of electricity. For example, the UCC imposes a four-year statute of limitations on actions, as compared to Massachusetts' general contract and tort statutes of limitation, which are six years and three years, respectively. Other significant differences between the UCC and the otherwise applicable law include the warranties of merchantability and fitness for a particular purpose; and the doctrine of adequate assurances, which allows an insecure party, whether buyer or seller, to demand adequate assurances of performance from the other party.

Massachusetts appellate courts have yet to address directly whether electricity is a good under the UCC. A 1995 Massachusetts Superior Court case ruled that electricity is not a good on policy grounds. The court was "troubled by the sweeping implications that this analysis may have on public utilities." It left to the legislature "the decision to expose public utilities to liability for their 'products.'"

Electric utility companies in Massachusetts at that time were vertically integrated: they engaged not only in the transmission and distribution of electricity but also its generation and its sale. The sale of electricity and its delivery to the customer were bundled and provided as monopoly services at rates regulated by the Department of Public Utilities (DPU).

Two years later, however, the Massachusetts legislature deregulated the sale of electricity. Electric companies subsequently divested themselves of their generation facilities and became distribution (or "wires-only") companies. A customer can now choose to purchase electricity from a competitive supplier at rates that are not regulated by the DPU. Distribution companies continue to provide transmission and distribution of electricity. They also act as default suppliers, selling electricity to consumers who do not choose a competitive supplier. A consumer's electric bill is itemized and includes separate charges for transmission and distribution services and electric energy usage.

In 2009, the Massachusetts Appeals Court held that electricity is a "personal chattel" (or personal moveable property) which may be subject to larceny because it may be stored and conveyed. Commonwealth v. Catalano, 74 Mass. App. Ct. 580, 584 (2009). The Appeals Court also found that the quantity of electricity consumption is measurable and its value may be subject to testimony and exhibits. This case supports a finding that electricity is a "thing which is moveable." After all electricity moves from the generation facilities where it is produced over transmission and distribution lines to the customer's meter. The court's holding that electricity is measureable also supports a finding that electricity can be identified at the meter at the time of sale.

Even more recently, in 2010, the bankruptcy court for the District of Massachusetts held that electricity is a good under the UCC. In re Erving Industries, Inc., 432 B.R. 350, 370 (Bankr. D. Mass. 2010). Citing theCatalano case as well as cases from other jurisdictions, the court held that electricity is both "property" and a "product" and easily meets the "movability" requirement, which distinguishes goods from real property. The court identified the issue under the UCC as whether the electricity is movable at the time it is identified to the contract, i.e., when it is measured by the meter. Some courts have concluded that electricity is consumed at the time it is identified by the meter and is therefore no longer movable. However, the Massachusetts bankruptcy court held that that electricity does not cease to exist when it reaches the meter, but passes through it and remains movable through the customer's wiring until it is ultimately put to use. Therefore the Massachusetts bankruptcy court held that electricity is a good under the UCC.

The debtor in Erving Industriesargued that the electricity supplier did not sell anything but merely provided a service. The court emphasized that the electricity supplier was a competitive supplier and not a provider of monopoly services. As such it was not a "utility" and was not subject to government regulation. Also, the electricity supplier did not generate the electricity but resold electricity it purchased from others.

As a result of the regulatory structure in Massachusetts, consumers have "retail choice" such as the option of purchasing electricity from competitive suppliers. In fact, even if a Massachusetts consumer opts to purchase electricity directly from the distribution company, the electricity supplied will probably be purchased by the electric company from a competitive supplier. Distribution companies own few, if any, generating facilities. They purchase most of the electricity they sell and distribute to customers.

Given the deregulation of the electric industry in Massachusetts, and the current state of the law, it can be argued that the UCC should apply to the sale of electricity, at least in cases where Massachusetts law governs.

Until the appellate courts address whether electricity is a good or a service, however, parties cannot be certain whether the UCC will apply. Attorneys representing buyers and sellers of electricity in the meantime should be prepared to argue whether electricity is a good or a service. Likewise, until the courts definitively determine whether the UCC applies to sales of electricity, parties negotiating electricity sales contracts should consider including provisions which address explicitly issues such as statute of limitations, warranties, adequate assurance and other differences between the UCC and the otherwise applicable law.

Robert M. Granger is a managing shareholder with Ferriter Scobbo & Rodophele PC in Boston. He advises business and government clients in the boardroom and represents them in the courtroom. His practice focuses on regulated industries including energy and insurance.

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