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Iowa Supreme Court Clears Regulatory Path for Rooftop Solar Providers, Concluding They Are Not Regulated "Public Utilities"

July 16, 2014 posted by Eric Christensen

Last week, in a decision that is likely to have far-reaching consequences both for the solar power industry and for traditional utilities, the Iowa Supreme Court found that a solar rooftop leasing company is not a "public utility" subject to regulation by the Iowa Utilities Board. The Iowa Court is the first to address whether a company leasing solar panels on a customer's rooftop is a regulated "public utility" under state utility laws. If followed in other states, the court's conclusion will greatly reduce the regulatory burdens faced by sellers of solar rooftop systems, especially those using innovative leasing/PPA arrangements, while intensifying pressure on traditional utilities from the growing market for customer-owned solar power. (SZ Enterprises, LLC d/b/a Eagle Point Solar v. Iowa Utilities Board, No. 13-0642 (Iowa Sup. Ct., issued July 11, 2014). As noted previously, the Washington Utilities and Transportation Commission ("UTC") last year cleared some regulatory roadblocks for third-party owners of distributed generation systems such as rooftop solar generators. However, it reserved the question whether such third-party owners are "public service companies" subject to UTC regulation, and has yet to issue an guidance on that question. The Iowa court's conclusion therefore may hold particular sway in this state. The arrangement reviewed by the Iowa courts involves financing innovations that have become widespread in the solar industry in recent years. Eagle Point Solar, the petitioner in the Iowa courts, entered a long-term financing/lease arrangement with the City of Dubuque, Iowa, under which Eagle Point would construct and own a solar generator on a city-owned building. Electricity produced by the solar array would be sold to the City on a twenty-year contract and the City would receive a share of the revenues generated from Eagle Point's sale of renewable energy credits from the project. If the City owned the solar array itself, it would have clearly fallen within Iowa's exemption for small renewable generators that produce electricity "primarily for the [owner's] own use," a provision typical of many state laws intended to encourage small-scale renewable generation. But Eagle Point's ownership of the facility disqualified it from this exemption. Therefore, Eagle Point petitioned the IUB, seeking a declaration that its ownership arrangement does not subject it to IUB regulation. The IUB rejected the petition, finding that Eagle Point's sale of power to the City made it a "public utility" under Iowa law. A reviewing court rejected the IUB's view. IUB then appealed to the Iowa Supreme Court. Relying on a multi-factor test, the Iowa Supreme Court found that Eagle Point was neither a "public utility" nor an "electric utility" subject to IUB regulation. Although many different factors were considered, the court's conclusion turns on two primary factors. First, unlike a typical public utility, which generally provides an essential service and faces little competition because of high barriers to entry, Eagle Point had no particular economic leverage over the City of Dubuque. Second, Eagle Point's solar installation sold power directly to the City on a "behind the meter" basis. Eagle Point did not put power on the electric grid for sale to the general public. Accordingly, Eagle Point, in the court's view, was properly viewed as a provider of solar panels to the City rather than a seller of electric power holding itself out as a power provider to the public at large. Notably, the court rejected the IUB's argument that Eagle Point's entry into the electricity market could undercut the "regulatory compact," by allowing Eagle Point to "cream skim" profitable customers, leaving the regulated utility to recover its costs from a smaller customer base. Although the court found "considerable appeal" in these arguments, it ultimately rejected them, both because of a lack of record evidence and a variety of mitigating factors identified by the court, such as solar's tendency to generate during heavy load hours. If you have any questions about the UTC, renewable energy development, solar energy, or other matters involving the energy or environmental law, please contact a member of GTH's Energy, Telecommunications, and Utilities or Environment & Natural Resources practice groups. We're proud that our partner Jim Waldo was recently named 2013 Lawyer of the Year for Energy and Natural Resources Law, and six practice members were recently recognized as Washington Super Lawyers.