third-party solar in iowaThird party financing of solar energy has become a hot commodity around the country.  Historically, individuals or businesses that wanted solar power had to pay for the system up front and then realize the savings over time. Essentially, the first kWh cost $16,000 or more, but then the electricity is free as long as the panels last.  Solar owners who bought systems this way always got the question, “how long does it take that system to payoff?” (Funny, I’m not aware of any electric utility saying the bill they send you is going down because they’ve “paid off” their power plants, but I digress.)

Third party financing fixed that. By monetizing federal tax credits and any state incentives up front, systems installed and owned by companies like AEE members SolarCity and Sungevity could be leased back to the home or business owner. Providing systems this way dramatically lowered, and in some cases eliminated, the upfront cost of solar energy, allowing property owners to buy the power over time.  With declining costs for solar equipment, many companies around the country are now able to offer solar power at a cost lower than the utility rate for electricity from the grid – providing an immediate payoff for the solar customer.

It turns out that people like saving money as much as they like solar power, if not more.  In states that have authorized third party solar, most distributed systems are being purchased with this method – in Colorado, for example, 80% of the residential systems are third party systems.

In many states, this solar arrangement is not possible without legislation that clarifies that third-party owners are not “utilities,” which would make them subject to a whole set of regulations at the state level as well as put them afoul of utilities’ exclusive franchise rights for selling electricity to customers in their service territories.

However, a ruling by the Iowa Supreme Court in July showed how third party solar might get the go-ahead even without legislation.

In 2011, the city of Dubuque contacted Eagle Point Solar to install a PV system on a city building. Since public entities can’t benefit from tax credits, third-party ownership translates into lower costs. In the absence of authorizing legislation, Eagle Point asked the Iowa Utilities Board to issue a declarative ruling that, as third-party owner, they wouldn’t be treated as an electric utility under state law.

The local utility, Interstate Power and Light Co., protested that since Eagle Point Solar would be selling electricity to the city, it was essentially operating as a utility and should be regulated as one. (Interstate would also be losing about $600,000 per year in electricity sales to Eagle Point.)

The Iowa Utilities Board ruled in favor of the utility but the state District Court reversed that ruling, saying that because the service was behind the meter, it wouldn’t fall under the definition of a “public utility.” This was based, in part, on a previous board decision that found “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.”

The court also applied what they called “Serv-Yu” factors, stemming from a 1950 Arizona case, “Natural Gas Service Company v Serv-Yu Cooperative Inc.”, which focused on whether the entity in question was providing a public service, and thus could be considered a public utility.

Based on these factors, the state court determined Eagle Point could not be considered a public utility because it was primarily in the business of installing and maintaining solar systems, and not primarily in the business of selling electricity – reversing the decision of the Iowa Utility Board.

Interstate Power and Light then appealed the case to the Iowa Supreme Court, which determined that the Serv-Yu factors were a good measure of whether Eagle Point could be considered a public utility.

The court then evaluated each of the factors below to determine whether or not the business is “clothed with the public interest”:

  1. WHAT THE CORPORATION ACTUALLY DOES

Is Eagle Point in the business of selling electricity or are they in the solar business and using the sale of electricity as a financing mechanism for their actual business? The court decided there was a little of both.  But they also found that there was clearly a willing seller and a willing buyer: “From a consumer protection standpoint, there is no reason to impose regulation on this type of individualized and negotiated transaction.”

  1. A DEDICATION TO PUBLIC USE

Was there a “dedication to public use”? The court said, “The installation is no more dedicated to public use than the thermal windows or extra layers of insulation in the building itself.”

  1. ARTICLES OF INCORPORATION, AUTHORIZATION AND PURPOSE

The court decided the articles of incorporation were irrelevant.

  1. DEALING WITH A SERVICE OF A COMMODITY IN WHICH THE PUBLIC HAS BEEN GENERALLY HELD TO HAVE AN INTEREST

In evaluating this issue, the court chose to look at whether or not the provision of solar power was an indispensable service – focusing on choice to the consumer and the need for regulation as a utility. They found: “Although some may wish it so, behind-the-meter solar equipment is not an essential commodity required by all members of the public.”

  1. MONOPOLIZING OR INTENDING TO MONOPOLIZE THE TERRITORY WITH A PUBLIC SERVICE COMMODITY

The court found: “There is simply nothing in the record to suggest that Eagle Point is a six hundred pound economic gorilla that has cornered defenseless city leaders in Dubuque” and rejected this point.

  1. ACCEPTANCE OF SUBSTANTIALLY ALL REQUESTS FOR SERVICE
  2. SERVICE UNDER CONTRACTS AND THE RIGHT TO DISCRIMINATE IS NOT ALWAYS CONTROLLING

The court addressed questions 6 and 7 together and looked at the necessity of solar to provide an indispensible service to the public that every one needs.  The court found that the transaction more resembled the provision of a customized service to an individual customer. Eagle Point could choose not to work with a potential customer for various reasons (shading, roof structure, etc.) and a customer who was denied service would not be “left high and dry” – there were other avenues to get electrical service, or even solar, from another vendor.

  1. ACTUAL OR POTENTIAL COMPETITION WITH OTHER CORPORATIONS WHOSE BUSINESS IS CLOTHED WITH THE PUBLIC INTEREST

On the eighth point, the utility argued that if companies like Eagle Point were to skim off the most profitable customers, it would have a devastating impact on the ability for the utility to operate – in this way, they provide potential competition to the utility. To this, the court looked to states like Nevada, California, Colorado, Arizona – where third party providers are not considered utilities – and noted that there was not any evidence that the economic health of regulated electricity providers had been adversely impacted.

Through the application of this eight-factor test, the Iowa Supreme court determined that Eagle Point was not a utility. It also noted that the Iowa statutes directed utilities to encourage the use of renewable energy and energy efficiency – and that, ironically, Eagle Point was helping Interstate achieve one of its statutory requirements.

This ruling shows the way toward a more open market for third party solar developers, and the benefits of solar for customers, even in states that don’t have legislation specifically exempting them from utility regulation.