SLIDE 2 the Facts of the southern Montana electric case Tie debtor, Southern Montana Electric Generation and Transmission Cooperative, Inc., fjled a Chapter 11 petition on October 21, 2011 in the Montana bankruptcy court. A Chap- ter 11 trustee was ultimately appointed in the debtor’s Chapter 11 case, a rare development, but that is a story for another day. Prior to the petition date, the debtor and PPL EnergyPlus LLC entered into a power purchase and sales agreement dated Sep- tember 17, 2004 (the “electricity supply agreement”). Tie elec- tricity supply agreement required PPL to sell and the debtor to purchase fjxed quantities of electric power in individual trans- actions evidenced by confjrmations that they had entered into from time to time. During the 20-day period prior to the petition date, PPL had sold and delivered 49,160 megawatts of electric power to the debtor at an average price, based on the electricity supply agreement, of $50.77 per megawatt, totaling $2,492,412 worth
- f electric power. PPL fjled a proof of claim, which included an
administrative claim under Section 503(b)(9) for its 20-day
- claim. PPL had also fjled an application with the bankruptcy
court for the allowance and payment of the 20-day claim as an administrative claim under Section 503(b)(9). Tie bankruptcy court granted PPL an allowed administrative expense claim in the amount of $2,492,412. However, the Chapter 11 trustee, unsecured creditors’ committee and certain noteholders sub- sequently challenged the court’s order. PPL argued that electricity is a good and is, therefore, entitled to priority status under Section 503(b)(9). PPL relied on Uni- form Commercial Code (UCC) Section 2-105(1) in asserting that anything “movable,” such as electric power, is a good. PPL also argued that it had acted as a goods wholesaler, selling goods, consisting of fjxed quantities of electricity at fjxed pric- es, to the debtor. Tie debtor in turn acted as a goods middle- man by reselling the electricity to others. PPL also denied that it had acted as a traditional utility providing electricity as a service to the debtor as an end user. PPL next argued that the value of the goods to which it was entitled to an allowed Section 503(b)(9) administrative prior- ity claim is presumed to be the contract price of the goods, based on the electricity supply agreement. PPL rejected the debtor’s reliance on lower spot market prices for electricity during the 20-day period prior to the petition date to reduce the amount of PPL’s allowed Section 503(b)(9) priority claim. Tie Chapter 11 trustee and his allies opposed granting PPL an allowed Section 503(b)(9) administrative priority status for the 20-day claim. First, the trustee argued that electricity is a service and not a good and, therefore, is not entitled to prior- ity status under Section 503(b)(9). Tie trustee also argued that the amount of PPL’s 20-day claim should be based on what it would have cost the debtor to have obtained similar goods (electric power) on the open market during the 20-day period prior to the petition date. Tiat would have required a reduction of PPL’s Section 503(b)(9) administrative claim to refmect the lower spot market prices for electric power during the 20-day period prior to the petition date, compared to the contract price PPL had charged the debtor under the electric- ity supply agreement. the Bankruptcy court’s Decision in the southern Montana electric case Tie Southern Montana Electric court held that the electric power supplied by PPL is a good and not a service. Tie court relied on the decision of the United States District Court for the Western District of Wisconsin, in GFI Wisconsin, Inc. f/k/a/ Grede Foundries Inc. v. Reedsburg Utility Commission, which involved utilities asserting Section 503(b)(9) priority claims for electricity provided to a debtor. Tie court in the Grede Found- ries case relied on UCC Article 2 (UCC § 2-105(1)) in deter- mining what constitutes a “good.” Tie court noted that elec- tricity is tangible and satisfjes the identifjcation and movability requirements of UCC Article 2. Electricity is metered (which satisfjes the identifjcation requirement) and moves through a circuit (which satisfjes the movability requirement). Tie court also relied on the fact that the electricity supply agreement provided that the debtor is not an end user of the electric power it had purchased, but was instead purchasing electric power, as a wholesale customer, from PPL. Tie debtor in turn supplied the power it had purchased from PPL to its members, who, in turn, sold the power to their customers. As a result, neither the debtor nor its members were end users or consumers of the electricity that PPL had supplied. Tie court distinguished this case from Pilgrim’s Pride (in the United States Bankruptcy Court for the Northern District of Texas), where the court held that electricity is not a good, sub- ject to Section 503(b)(9) priority status, but instead is a ser- vice, and not subject to Section 503(b)(9). Tie Southern Mon- tana Electric court noted that, unlike Pilgrim’s Pride, Southern Montana Electric was not an end user or consumer of the electricity it had purchased from PPL. In contrast to Pilgrim’s Pride, the debtor in this case was in the business of buying and selling electric power. Tie Southern Montana Electric court also upheld PPL’s calcu- lation of its Section 503(b)(9) administrative priority claim based on the contract price of $2,492,412 that PPL could charge under the electricity supply agreement. Tie court refused to apply the lower market value of electricity based upon spot purchases in the market during the 20-day period prior to the petition date because the debtor had lacked suffj- cient cash to be able to pay for any such spot purchases. conclusion Tie court’s decision in the Southern Montana Electric contin- ues the trend of court holdings (including the courts’ deci- sions in Grede Foundries and In re Erving Industries, a bank- ruptcy case in Massachusetts) that electricity is a good, and not a service, and, therefore, is eligible for Section 503(b)(9) priority status. However, the Southern Montana Electric 2
B U S I N E S S C R E D I T A P R I L 2 0 1 3
