Iowa Supreme Court Rules on Solar Power Purchase Agreement
by James Pray
Sunday, August 3, 2014
On July 11, 2014, the Iowa Supreme Court issued a long-awaited ruling on the legality of a power purchase agreement (“PPA”) between Eagle Point Solar and its customer, City of Dubuque, for the sale of electricity from solar panels. The case was handled by Phil Stoffregen, who argued the case at all levels, and James Pray and Jonathan Gallagher, who also worked on the District Court and Iowa Supreme Court briefs. Leanna Whipple assisted with the brief filed with the Iowa Utilities Board (“IUB”).
In summary, the Court held that the “behind the meter” direct sale of electricity generated from solar power (photo voltaic) arrays and using a power purchase agreement that sold the electricity on a cents-per-kWh basis did not automatically render the seller a “public utility.” SZ Enterprises, LLC, d/b/a Eagle Point Solar v. Iowa Utilities Board, ___ N.W.2d. ____ (July 11, 2014). The Court issued its ruling in a 4-2 decision and affirmed a district court decision by the Polk County District Court that had overruled an earlier decision by the IUB.
The immediate and most narrow impact of the decision is that companies offering solar power installations can use this decision to help fashion their contracts to sell the power from those solar power installations directly to a customer “behind the meter” as a way to finance the array. Prior to this decision, buyers had to either buy the systems outright or enter into long term leases. In either case, the efficiency of system was not certain, and this caused problems for buyers that were unsure if the cost of the system might outweigh the value of the electricity that would be generated. This was especially true for buyers who could not offset the cost with tax credits, such as non-profits.
By structuring the transaction as a sale of electricity, a buyer can rest assured that the cost will not exceed what has already been budgeted for the purchase of power — unless of course the buyer agrees to pay more per kWh than the existing utility charges.
In the Eagle Point Solar decision, Eagle Point Solar was in the business of providing design, installation, maintenance, monitoring, operational, and financing services with respect to solar electric generation systems in Iowa. The City of Dubuque was interested in pursuing the development of a renewable energy resource in the form of an on-site solar power system to satisfy a portion of the electric power needs of a single city building. Dubuque sought to enter into a long-term financing agreement with Eagle Point Solar to accomplish that goal. Eagle Point Solar proposed to finance, install, own, operate, and maintain the solar system and to charge the City on a cents-per-kWh basis for the electrical output. Under the proposed PPA, Eagle Point Solar would be entitled to the incentives associated with the solar power system, including tax credits and accelerated depreciation, and would credit Dubuque with one-third of any revenues received from the sale of the credits. The city-owned building is located within the exclusive electric service territory of Interstate Power and Light Company (“IPL”). The building would continue to remain connected to the electric grid, and Dubuque would continue to purchase electricity from IPL to satisfy some of the electric energy needs of the building.
Eagle Point Solar petitioned the IUB for a declaratory order determining that under Iowa law Eagle Point Solar was neither a “public utility” subject to regulation by the IUB under Iowa law nor an “electric utility” subject to the exclusive service territory provisions of Iowa law. On April 12, 2012, the IUB issued an order finding that Eagle Point Solar would be a “public utility” subject to regulation by the IUB and an “electric utility” subject to the exclusive service territory provisions of Iowa law. This decision was based on a “bright line test” developed by the IUB that prohibited all sales of electricity from any entity other than regulated utilities. The IUB ignored Eagle Point Solar’s argument that the IUB was bound by prior Iowa case law in Northern Natural. Based on these findings, the IUB order declared that Eagle Point Solar would be prohibited by Iowa law from offering the services described in its petition because it had no right to sell power to customers in IPL’s exclusive service territory.
On judicial review of the IUB’s decision, the Polk County District Court agreed with Eagle Point Solar and held that the IUB erred by applying an incorrect legal standard in determining whether Eagle Point Solar would be a “public utility” under Iowa law. In lieu of the “bright line test” that prohibited all sales of electricity from any entity other than regulated utilities, the district court held that the proper standard was whether the transaction was “clothed with a public interest” under the statutory definition of a public utility. To determine whether the public interest was involved, the court looked to the eight-factor test from Natural Gas Service Co. v. Serv-Yu Cooperative, Inc., 219 P.2d 324, 325–26 (Ariz. 1950) that had been approved by the Iowa Supreme Court in Iowa State Commerce Commission v. Northern Natural Gas Co., 161 N.W.2d 111, 115 (Iowa 1968).
The IUB and IPL appealed the district court decision to the Iowa Supreme Court. They were joined in their appeal by MidAmerican Energy Company and a consortium of other utilities. On appeal, the IUB argued that any sale of electricity on a cents-per-kWh basis, even if it was not on the utility “grid,” automatically qualified the seller as a regulated utility. Because any such utility would not have an approved sales territory, the sale would therefore be illegal. The utilities trotted out a parade of horribles should Eagle Point Solar be allowed to sell electricity directly to the City of Dubuque, even if the transaction was wholly “behind the meter.” Eagle Point Solar argued that the statute defined a “public utility” and that Eagle Point Solar did not meet that definition. Eagle Point Solar also argued that the District Court was correct in applying well-established Iowa law and that before a company can be deemed to be a “public utility,” its actions must be “clothed in the public interest.”
The Iowa Supreme Court agreed with Eagle Point Solar and the district court. First, it held that the IUB was entitled to no deference in defining the term “public utility” as that the definition was already set out in Iowa law. This holding struck down the IUB’s own bright line test. This test ignored prior Iowa Supreme Court precedent that dealt with the clear statutory definition of a public utility.
Indeed, under the IUB approach, a behind-the-meter solar generating project built by an engineering class at Iowa State University that furnished electricity on a per kWh basis to a nearby farm would be considered a public utility subject to a wide gamut of regulatory requirements. Even if the students obtained a waiver of the territorial exclusivity of the local electric utility, students would be required to stay after class to handle the paperwork associated with filing tariffs with the IUB.
By eliminating the IUB’s bright line test, the Supreme Court opened the door to the more nuanced analysis based on the Serv-Yu eight-factor test that had been urged by Eagle Point Solar and adopted by the district court and used in previous Iowa Supreme Court cases.
The first factor requires an assessment of “what the corporation actually does,” or, as the Court put it, “what is actually happening in the transaction.” The Court noted that the transaction was an arms-length transaction between a willing buyer and seller. The Court also found that the IUB would not try to argue that behind the meter installations owned by a host or subject to a lease would not by itself be regulated. It was, therefore, the method of financing that was at issue, and utilities are not in the business of financing renewable energy. Accordingly, it held: “From a consumer protection standpoint, there is no reason to impose regulation on this type of individualized and negotiated transaction.”
With respect to the second factor the Court agreed with the district court that it cannot be said that the solar panels on the city’s rooftop involves a “dedication to public use.” “The installation is no more dedicated to public use than the thermal windows or extra layers of insulation in the building itself. The behind-the-meter solar generating facility represents a private transaction between Eagle Point Solar and the city.”
The Court, like the district court below, ignored the third factor as inconclusive. The fourth factor is whether the activity is “[d]ealing with the service of a commodity in which the public has been generally held to have an interest.” Here, the Court found that it “seems clear that the provisions of on-site solar energy are not an indispensable service that ordinarily cries out for public regulation and behind-the-meter solar equipment is not an essential commodity required by all members of the public.”
The fifth factor is whether the transaction is “[m]onopolizing or intending to monopolize the territory with a public service commodity.” The Court held that this factor “clearly cuts against a finding that Eagle Point Solar is a public utility.” “There is simply nothing in the record to suggest that Eagle Point Solar is a six hundred pound economic gorilla that has cornered defenseless city leaders in Dubuque.” The Court held that the nature of the third-party PPA suggests the opposite, “as the city has entered into what amounts to be a low risk transaction—it owes nothing unless the contraption on its rooftop actually produces valuable electricity.”
The Court treated the sixth and seventh factors together. The sixth factor is an “[a]cceptance of substantially all requests for service” and the seventh is that “[s]ervice under contracts and reserving the right to discriminate is not always controlling.” The Court found that both factors relate to the ability to accept all requests for service and, conversely, the ability to discriminate among members of the public. The Court held that these twin factors cut in favor of finding that Eagle Point Solar is not a public utility. The Court noted that Eagle Point Solar was “not producing a fungible commodity that everyone needs” and that it is “not producing a substance like water that everyone old or young will drink, or natural gas necessary to run the farms throughout the county.”
The eighth Serv-Yu factor, “[a]ctual or potential competition with other corporations whose business is clothed with public interest” was found to be “perhaps the most interesting” by the Court. However, the Court found that: “There is nothing in the record of this administrative proceeding, however, to gauge the likelihood or degree of material impact, and there was no suggestion that the integrity of the grid or economic health of regulated providers has been adversely affected in states such as California, Nevada, Arizona, and Colorado, where third-party PPAs are not considered public utilities for purposes of regulation.” The Court added that Eagle Point Solar “does not seek to replace the traditional electric supplier but only to reduce demand.”
The Court added that behind-the-meter solar facilities offered positive impacts in keeping with Iowa’s mandate that utilities support customer programs to use renewable energy sources:
Behind-the-meter solar facilities tend to generate electricity during peak hours when the grid is under the greatest pressure. Further, Iowa Code section 476.8 requires regulated electric utilities to provide reasonably adequate service, and such service must “include programs for customers to encourage the use of energy efficiency and renewable energy sources.” Thus, third-party PPAs like the one proposed by Eagle Point actually further one of the goals of regulated electric companies, namely, the use of energy efficient and renewable energy sources.
The Court concluded by holding:
In the end, whether an activity is sufficient to draw an entity within the scope of utilities regulation is a matter of assessing the strength of the Serv-Yu factors on a case-by-case basis. The weighing of Serv-Yu factors is not a mathematical exercise but instead poses a question of practical judgment. See Northern Natural Gas II, 679 N.W.2d at 633. In our view, in this case, the balance of factors point away from a finding that the third-party PPA for a behind-the-meter solar generation facility is sufficiently “clothed with the public interest” to trigger regulation.
The decision by the Iowa Supreme Court will provide buyers of electricity new options when weighing whether to try renewable power. In addition to lease or outright purchase arrangements, they may be able to consider buying renewable power by the kilowatt. Again, the details of the deal will matter. Regardless, the broad holding of this decision will allow new buyers more options to better budget electrical costs and to support renewable energy at the same time. By buying power by the kilowatt, the risk actually shifts to the seller, because if the array does not work as advertised, then the buyer will pay less.
From a more practical standpoint, the decision is a rebuke to the IUB and its regulated utilities and signals that the Iowa Supreme Court will not be swayed by unsupported arguments based on the fears of monopolies worried about losing their iron grip on their service territories. Also, the decision did not open the door completely to all forms of power. The Iowa Supreme Court applied the Serv-Yu factors to this specific set of facts. The Iowa Supreme Court looked to the proposed agreement in particular when making its decision. Not every new power source will necessarily qualify under the Serv-Yu factors analysis.
For more information, please contact BrownWinick, whose attorney Philip Stoffregen argued the case before the Iowa Supreme Court on behalf of Eagle Point Solar. James Pray and Jonathan Gallagher were on the briefs as co-counsel.
James L. Pray
A copy of the case can be found here: http://www.iowacourts.gov/About_the_Courts/Supreme_Court/Supreme_Court_Opinions/Recent_Opinions/20140711/13-0642.pdf