LEGAL MEMORANDUM POWER PURCHASE AGREEMENT (PPA) FINANCING FOR THIRD-PARTYOWNED RENEWABLE ENERGY SYSTEMS IN IOWA This legal

memorandum addresses the legality of using third-party power purchase agreements (PPAs) to finance distributed renewable energy installations in Iowa. The memo concludes that the use of third-party PPAs to finance behind-the-meter renewable energy systems in Iowa is legal and should not result in the regulation of third-party-owned solar systems as public utilities under Iowa law. INTRODUCTION The third-party PPA is an innovative financing tool for renewable energy that has been expanding rapidly over the last few years. Under this mechanism, a developer builds and owns a solar PV or small wind system on a customers property and sells all of the power to the customer under a long-term contact. This allows property owners to avoid upfront costs, take full advantage of renewable energy tax credits, and, often, lock in immediate savings on their electricity bills. Third-party PPAs are quickly becoming the financing mechanism of choice in states where the solar industry is booming. Approximately 161 MW (45%) of new non-residential photovoltaic capacity was installed through a third-party ownership structure in 2010, and this

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number is expected to keep growing.1 PPAs are particularly important financing tools for governments, municipalities, schools, non-profits and other entities that cannot utilize federal or state tax credits for renewable energy. Third-party PPAs have faced regulatory and legislative uncertainty in a few states regarding the question of whether or not third-party owners should be considered public utilities under state law. 2 If state authorities deem third-party owners to be utilities, then the PPA model will fail. However, all states that have recently addressed this issue have found solutions. Seventeen states explicitly provide that third parties may own customer-sited generation without triggering public utility regulation.3 Iowa has not yet formally addressed the issue. This legal uncertainty is impairing the ability of Iowa homeowners, small businesses, municipalities and schools to take advantage of the PPA model to develop distributed renewable energy systems on their properties. This memo examines the legality of the third-party PPA model under Iowa law and concludes that third-party owners delivering energy under long-term PPAs do not have the characteristics of public utilities as defined by the Iowa Public Utilities Act and the cases that have interpreted it. Sales of electricity from on-site renewable energy systems raise none of the underlying reasons for public utility regulation such as the presence of an indispensable service, the fear of a natural monopoly, or unequal bargaining power that could subject the public to exorbitant charges and arbitrary control. See Chas. Wolff Packing Co. v. Court of Indus.
1 2

SOLAR ENERGY INDUS. ASSN & GTM RESEARCH, U.S. SOLAR MARKET INSIGHT, 2010 YEAR-IN-REVIEW 19 (2011).

See NATL RENEWABLE ENERGY LABORATORY, SOLAR PV PROJECT FINANCING: REGULATORY AND LEGISLATIVE CHALLENGES FOR THIRD-PARTY PPA SYSTEM OWNERS,(2010), available at http://www.nrel.gov/docs/fy10osti/46723.pdf.
3

See 3RD PARTY SOLAR PV POWER PURCHASE AGREEMENTS (PPAS), DATABASE OF STATE INCENTIVES FOR RENEWABLES AND EFFICIENCY (DSIRE), available at http://www.dsireusa.org/documents/summarymaps/3rd_Party_PPA_map.ppt.

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Relations of the State of Kansas, 262 U.S. 522, 538 (1923). Thus, the third-party PPA appears to be available as a financing tool for distributed renewable energy projects in Iowa without subjecting the owner of the system to regulation as a public utility. This conclusion is consistent with the policy of the state of Iowa to encourage the development of alternative energy facilities,4 as well as utility commission orders in other states that have explicitly addressed this issue.5 DISCUSSION A. The Iowa Supreme Court requires a case-by-case analysis of the nature of the particular business operation to determine whether a public utility exists. Authorization for third-party PPAs usually lies in the definition of a public utility in state statutes, regulations, or case law. In Iowa, public utilities must comply with the

requirements in Iowa Code Chapter 476 and are subject to the jurisdiction of the Iowa Utilities Board and its rules. See 199 I.A.C. 1.4. In turn, electric utilities are provided with monopoly rights to serve customers within exclusive service areas within the state. IOWA CODE 476.25. Thus, if third-party developers are deemed to be public utilities under state law, then the PPA model will fail.

4 5

IOWA CODE 476.41 (2011).

See, e.g., Application of Solarcity Corp. for a Determination That When It Provides Solar Service to Arizona Schools, Governments, and Non-Profit Entities It Is Not Acting as a Public Service Corporation Pursuant to Art. 15, Section 2 of the Ariz. Constitution, Decision No. 71795, Docket E-20690A-09-0346, 2010 Ariz. PUC LEXIS 286 (Ariz. Corps. Commn July 12, 2010); Declaratory Order Regarding Third-Party Arrangments for Renewable Energy Generation, Case No. 09-00217-UT (N.M. Pub. Regulation Commn Dec. 17. 2009); Investigation and Rulemaking to Adopt, Amend , or Repeal Regulations Pertaining to Chapters 703 and 704 of the Nevada Admin. Code Regarding Prescribing the Form and Substance for a Net Metering Tariff and a Standard Net Metering Contract and Other Related Util. Matters in Accordance with Assembly Bill 178, Docket 07-06024, 2008 Nev. PUC LEXIS 283 (Nev. Pub. Utils. Commn Nov. 26, 2008).

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The Iowa Code defines a public utility to include: any person, partnership, business association, or corporation, domestic or foreign, owning or operating any facilities for . . . furnishing . . . electricity to the public for compensation. IOWA CODE 476.1. It is not clear from the face of the statute whether or not sales of electricity to individual customers under third-party PPAs constitute sales of electricity to the public as defined by the statute. Therefore, it is important to look to the legislative purpose of the statute and the cases interpreting it. As explained by the Iowa Supreme Court, we ultimately look to the nature of the particular business operation to determine if a public utility exists. N. Natural Gas. Co. v. Iowa Utils. Bd., 679 N.W. 2d 629, 633-34 (Iowa 2004). This practical analysis centers on the nature of the actual operations conducted and its effect on the public interest. Id. The leading case is Iowa State Commerce Commission v. Northern Natural Gas Co., 161 N.W.2d 111 (Iowa 1968) (ISCC). In the ISCC case, the Court examined whether the Iowa Utilities Board had jurisdiction to regulate Northerns retail sales of natural gas from its wholesale gas pipelines to approximately 1,800 direct tap customers in Iowa. The court discussed the legal standard for distinguishing a public from a private service under Iowa law and held that: The real question is: What does the statutory phrase to the public mean? We conclude it means sales to sufficient of the public to clothe the operation with a public interest 161 N.W.2d at 115 (emphasis added). The Supreme Court did not place controlling weight on the number of customers served, but did find that all the prominent factors indicating a public

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utility were present in Northerns business of selling natural gas from high pressure pipelines directly to retail customers: (1) Plaintiff deals in a commodity in which the public as a whole is generally interested. (2) It is actually engaged in business and is supplying its commodity to some of the public. (3) It serves a substantial portion of the public, within the meaning of the cases cited. Id. at 116. In City of Des Moines v. City of West Des Moines, the Court held that public utility regulation turns not only on the character of the service but also of the capacity in which each party contracted and the nature of the contract itself. 30 N.W. 2d 500, 504 (Iowa 1948). The case involved the legality of West Des Moiness contract with the City of Des Moines to dispose of its sewage through the Des Moines sewer system. Although the Court observed that the business of disposing of sewage would seem to fall within the classification of a public service, it held that the specific contract between the two cities was more like a private business contract than a service rendered to the public: The logic of this distinction is apparent. In its relationship to its public, i.e., the users who must depend on it for service and to whom it must render service upon request, the public utility can practice no discrimination. Its rates, like taxes, must be uniform and reasonable. It is a virtual if not an actual, monopoly. Id. In contrast, the court found the Citys contract for services with West Des Moines to be quite distinguishable: It owed no duty to defendant. It could have refused to render it any service or could have exacted any price that defendant would have consented to pay. We must conclude that the agreement is a business contract, in no way subject to legislative rate regulation. In that respect it is private, not public. Id. at 505.

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United States Supreme Court precedent is also helpful in understanding whether a business operation is clothed with a public interest for the purposes of public regulation. See Chas. Wolff Packing Co., 262 U.S. at 537; Munn v. Illinois, 94 U.S. 113, 126 (1877). Like the Iowa courts, the United States Supreme Court has held that public regulation depends on the nature of the business, on the feature which touches the public, and on the abuses reasonably to be feared. Chas. Wolff Packing Co., 262 U.S. at 538. A states power to regulate rates and prices typically arises where there is an indispensable service which would subject the public to the risk of exorbitant charges and arbitrary control without regulation. Id. In Wolff Packing, a Kansas meat packing company challenged a state law regulating the companys rates and terms of service. After an extended discussion of other cases, the Court held that there was insufficient fear of monopoly to justify the State of Kansas attempt to regulate rates and wages: There is no monopoly in the preparation of foods. The prices charged by plaintiff in error are, it is conceded, fixed by competition throughout the country at large [and] the danger from local monopolistic control less than ever. Id. at 538. In sum, the industry was not clothe[d] with a public interest so as to permit regulation of rates or prices. Id. at 537. Under the reasoning of these cases, as discussed further below, third-party PPAs for renewable energy systems are more like private contracts for services than jurisdictional sales of electricity from a public utility. The business is not clothed with a public interest within the meaning of the Iowa and United States Supreme Court decisions discussed above, and the underlying reasons for public utility regulation are not present.

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B. Third-party PPAs are not clothed with a public interest and the underlying reasons for public utility regulation do not apply. Third-party PPAs are more like private business contracts than a service to the public. All customers remain interconnected to their electric utility and have recourse to the utility for electric service. Thus, just like the sewage contract in City of Des Moines and the preparation of foods in Wolff Packing, the provision of on-site renewable energy is not indispensable to the public, and nobody is dependent upon third-party developers for basic electric service. The underlying economic rationale for public utility regulation is the presence of a natural monopoly characterized by economies of scale or scope and high barriers to entry. In this case, there is substantial competition between developers offering third-party PPAs, and customers are free to negotiate individualized prices and terms of service. Thus, there is no unequal bargaining power or natural monopoly present to justify the regulation of rates. In fact, it would be unreasonable to impose uniform rates and tariffs on third-party developers because each customers site and renewable energy facility is unique. Because third-party owned systems are constructed on the customers side of the meter, there is also no need to eliminate or avoid unnecessary duplication of electric utility facilities. Compare with IOWA CODE 476.25. Further, there is no need for regulation to ensure the safety and reliability of third-party systems, because every installation is subject to the Iowa Utility Boards interconnection standards. See 199 I.A.C. 45. Any surplus energy generated by the system is typically exported to the electric grid under a net metering arrangement, which the Iowa Utilities Board has made clear is not a sale of electricity but is essentially a metering arrangement. In Re: PURPA Net Metering Standard, Docket No. PURPA Standard 11, at 3 (Iowa Util. Bd., Aug 8, 2006). As explained by the Nevada Public Utilities Commission in a 7

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recent case: [p]rivate contracts for the provision of net metering systems between two private parties do not logically involve all the considerations pertinent to the operation of a public utility. Nev. Pub. Util. Commn, supra note 5, at *19. Furthermore, behind-the-meter generation of renewable energy that is used offset a customers own demand is substantially similar to other energy efficiency technologies when viewed from the load-serving utilitys perspective. As observed by the Iowa Utilities Board in another case: The Board can discern no difference between the use of renewable technologies and classic energy efficiency measures when those activities take place on the customers side of the meter. As do classic energy efficiency measures, the use of renewable technologies reduces a customers demand and energy use from the utility. Interstate Power & Light, Final Order, Docket No. EEP-08-1, at 11 (Iowa Util. Bd. June 24, 2009). The Iowa Utilities Board does not regulate providers of energy efficiency services as public utilities. As noted by the Board, third-party developers of renewable energy systems essentially provide customers with the same service, albeit by different means. It would be incongruous to regulate third-party developers as public utilities simply because a municipality, school, or non-profit chose to reduce their demand and energy use from the utility by installing on-site renewable energy instead of (or in addition to) installing energy efficiency measures. In sum, third-party developers operate like private contractors, not public utility monopolies, and the underlying reasons for public utility regulation do not apply. C. Every other state that has recently addressed this issue has concluded that thirdparty sales of renewable energy under a PPA contract do not trigger public utility regulation under state law.

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Determining whether an entity is a public utility turns on each states individual public utility statute and court decisions. However, it is reasonable to give some weight to the fact that every other state that has recently addressed this issue has concluded that third-party owners of renewable energy systems are not public utilities. Some states have clarified this through

legislation. Others have relied on declaratory orders from their state utility commissions. However, all states (with the possible exception of Florida) have reached the same conclusion.6 For example, the Arizona Public Utility Commission observed that third-party developers must compete[] for business and are not monopolies. Thus, the need to regulate rates is not the same as with the traditional monopolistic utility service: Schools, government, and other non-profit entities who sign up for service under a SolarCity SSA do so entirely voluntarily; they are not captive customers, and may elect to own their own solar systems, or simply not to take service from SolarCity under an SSA, choosing to have all of their electricity needs met by the incumbent utility. Ariz. Corp. Commn, supra note 5, at *98-*99, *107. The New Mexico Public Regulation Commission similarly held that third-party renewable developers are not public utilities within the meaning of the PUA: [T]hese renewable developers are offering a supplemental service. If one or more third-party developers refuse to contract for services with a particular customer, whether it is because the customers premises are not well suited for a system, or for any other reason, that customer is not going to be without electric service. There is no obvious public policy basis for the Commission to regulate these third-party developers as public utilities . . . . There is no obvious public policy that would require the Commission to step in and regulate the prices charged by the third-party developers: if a potential customer doesnt like what is being quoted, the customer may shop around or simply continue to rely exclusively on their rate-regulated public utility.

The National Renewable Energy Laboratory report notes that Florida may be the lone exception to this rule. Florida examined this situation in the late 1980s and did not develop a solution; but the issue has not been addressed recently. NATL RENEWABLE ENERGY LABORATORY, supra note 2, at vi.

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N.M. Public Regulation Commn, supra note 5, at 11 (internal citation omitted). The Arizona and New Mexico commission orders cited above are particularly persuasive because those commission orders applied the same legal standard that would be applied by the Iowa Utilities Board under Iowa Supreme Court precedent. For example, the Iowa Supreme Court explicitly referred to Arizona case law in its ISCC decision. See ISCC, 161 N.W. 2d at 114-115 (finding that Arizonas definition of sales to the public is fully applicable here); see also Ariz. Corp. Commn, supra note 5 at *63-*123 (applying same factors as the Iowa Supreme Court). Similarly, the New Mexico Public Regulation Commission cited Iowa Supreme Court precedent and quoted ISCC in its recent declaratory order regarding third-party PPAs. See N.M. Pub. Regulation Commn, supra note 5, at 9 (quoting ISCC). Because the same legal principles apply in Iowa, Arizona and New Mexico, it is reasonable to assume that the Iowa Utilities Board or an Iowa state court would reach the same conclusion that third-party developers providing services to schools, governments or other nonprofit entities pursuant to a PPA have not clothed their operations in the public interest to the extent that public policy demands that they be regulated as public utilities. N.M. Pub. Regulation Commn, supra note 5, at 12; see also Ariz. Corp. Commn, supra note 5, at 122123. In any event, a contrary decision would make Iowa an outlier when compared to every other state that has recently addressed this issue. D. Public policy cuts against regulation of third-party systems as public utilities. Iowas strong legislative policies supporting energy conservation and renewable energy development provide another reason to interpret the Iowa Public Utility Act in a way that does

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ELPC Memorandum Staff Attorney Bradley Klein 09/16/2011

not thwart one of the most promising new financing mechanisms for renewable energy systems. To resolve ambiguity and ultimately determine legislative intent, Iowa courts consider: (1) the language of the statute; (2) the objects sought to be accomplished; (3) the evils sought to be remedied; and (4) a reasonable construction that will effectuate the statutes purpose rather than one that will defeat it. IBP, Inc. v. Harker, 633 N.W. 2d 322, 325 (Iowa 2001) (quoting Voss v. Iowa Dept of Transp., 621 N.W.2d 208, 211 (Iowa 2001) and State v. Green, 470 N.W.2d 15, 18 (Iowa 1991)) (internal quotation marks omitted); see also ISCC, 161 N.W. 2d at 117 (looking to effect the purposes of the chapter when determining whether or not Northerns natural gas business was a public utility service within the meaning of the statute). In this case, the public policy goals incorporated in the Iowa Public Utilities Act strongly support the development of renewable energy systems: It is the policy of this state to encourage the development of alternate energy production facilities and small hydro facilities in order to conserve our finite and expensive energy resources and to provide for their most efficient use. IOWA CODE 476.41. The Iowa Supreme Court has also long recognized the importance of conserving non-renewable energy resources. See Iowa S. Util. v. Iowa State Commerce Comm'n, 372 N.W. 2d 274, 279 (Iowa 1985). The Iowa Utilities Board has also adopted interconnection standards to facilitate the addition of distributed generation at the distribution level. Elec. Interconnection of Distributed Generation, Order Adopting Rules, Docket RMU-2009-0008, at 4 (Iowa Dept of Commerce May 26, 2010). It would be unfortunate to interpret Iowas Public Utility Act in a manner that would undermine these legislative purposes and public policy goals. Other state utility commissions have similarly considered public policy when determining that third-party developers are not public utilities under state law. For example, the Arizona

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Corporation Commission determined that regulation would diminish opportunities for financing, leading to increased transaction costs and greater expense for customers. Ariz. Corp. Commn, supra note 5, at *154. The Commission noted that this would be particularly unfortunate for schools and other municipal bodies which appear ready and eager to implement solar energy systems for the benefit of taxpayers and students. Id. at 155. As explained by the Commission, ratepayers, taxpayers and the public as a whole benefit when schools, governmental entities, and other non-profits are able to lower their operating costs by purchasing lower priced electricity through SSAs. Id. at 155-56. Similarly, the Nevada Public Service Commission concluded that Nevada law is replete with general policy objectives encouraging the development of renewable energy, and thus it would not be reasonable to interpret the Act to include limitations on ownership and financing of third-party systems in contravention of the overall legislative scheme laid out for energy policy in the state. Nev. Pub. Utils. Commn, supra note 5, at *23, 26. CONCLUSION An analysis of the Iowa statutes, the relevant case law, public policy considerations, and the decisions of utility commissions in other states all support the conclusion that third-party owners of behind-the-meter renewable energy systems delivering energy to Iowa customers under long-term PPAs are not public utilities and should not be regulated as such by the Iowa Utilities Board.

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