New Competition in the Energy Market

Traditionally, electricity production and distribution were exclusively performed by large utility companies who invested heavily in installing power transmission lines and grids, a complicated network of generators and cables that transport electricity from one place to another.[i] As a result, state regulations explicitly favorable to monopolizing the supply of electricity by a particular utility company in an area were enacted. For instance, Iowa Code § 476.25(3) states that “[a]n electric utility shall not serve or offer to serve electric customers in an exclusive service area assigned to another electric utility . . . .”[ii]

The Public Utility Regulatory Policy Act (PURPA) was passed in 1978, partly as a response to the oil crisis.[iii] The law enabled individual states to come up with their own plans on how to promote renewable energy and allow non-utility power producers to enter the electricity market for the purpose of reducing reliance on foreign oil. Now, non-utility generators account for more than 7 percent of the country’s power.[iv] Such “decentralized” energy production offers multiple benefits: consume reliance on a more stable supply of electricity from sources that are closer, reduction of electricity costs through competition, and reduction of carbon emission through higher use of renewable energy.[v]

With the development of efficient systems, even individual households are now capable of producing renewable energy. Even though renewable energy production through solar panels or wind turbines is expensive compared to traditional ways of producing energy with fossil fuels, some states have implemented systems to incentivize individuals to produce renewable energy. For instance, a resident of New Jersey was able to install a rooftop solar power generation system with a $12,000 investment of his own money plus a $38,700 support through New Jersey’s Clean Energy Program.[vi] The system was so efficient that by selling one megawatt hour (kWh) of renewable energy at $200 to $300, the owner was able to make a return of $3,000 per year.[vii]

Entrepreneurial-minded people, if they learn about the investment potential of such systems, may begin to consider the sale of renewable energy as a legitimate business. This is precisely the idea that Eagle Point Solar (Eagle Point) embarked on when the company entered into a business agreement with Dubuque City, Iowa, to install, maintain, and operate a solar panel power generation system at a city-owned building.[viii] The city agreed to pay Eagle Point for any electricity produced by the solar panel on a kWh basis. However, the solar panel was not large enough to fully power the building. The rest of the energy necessary would still come from Interstate Power, the city’s exclusive electric utility in the area.

The agreement first was subjected to approval by the Iowa Utilities Board (IUB). In order to reach a judgment on the issue, IUB relied on Iowa Code section 476.25(3), the old statutory code that gives monopoly to a particular utility company. “An electric utility shall not serve or offer to serve electric customers in an exclusive service area assigned to another electric utility, nor shall an electric utility construct facilities to serve electric customers in an exclusive service area assigned to another electric utility.”[ix] An “electric utility,” according to § 476.22, “includes a public utility . . . .”[x] A “public utility” is further defined in § 476.1 by any entity “[f]urnishing electricity to the public for compensation.”[xi]

IUB decided that since the agreement between Eagle Point and Dubuque involved selling electricity for money, Eagle Point is an “electric utility.” Also, Eagle Point indicated through its promotional materials that it intended to provide its service to other members of the public beyond the city limits. Therefore, IUB held that Eagle Point is a “public utility” and that it would be prohibited from selling its service.[xii]

In order to overturn this decision, the Supreme Court discussed the concept of a third-party power purchase agreement (PPA).[xiii] The concept arose when proponents of alternate energy facilities realized that high initial capital investment, unpredictable fluctuation of electricity prices, and lack of expertise on maintenance were acting as barriers to implementation by individuals. It is even more difficult for government or nonprofit organizations that do not pay taxes to engage in alternate energy activities because they cannot take advantage of the economic benefits of favorable tax treatment in alternate energy investment. Third-party PPA tries to solve these problems by allowing private entities, which can take advantage of tax benefits in initial investment, to build and own a solar panel system on the customer’s site. This private entity also provides expertise on maintenance while securing fixed-rate electricity prices for the customer.

The Court asked whether such third-party PPA would be subject to regulation as a “public utility” in Iowa. The answer was: no. The agreement between Eagle Point and Dubuque was just an “arms-length transaction between a willing buyer and a willing seller . . . . From a consumer protection standpoint, there is no reason to impose regulation on this type of individualized and negotiated transaction.”[xiv]

Even though California, New Jersey, and Colorado have enacted statutes specifically addressing the issue, Iowa failed to do so in 2013 despite the legislature’s attempt to exclude alternate energy related third-party PPA from the scope of “public utility.”[xv]Without a relevant statute, the Court’s decision in this case serves as an important precedent for future suppliers of alternate energy not only in Iowa, but also throughout the nation.

While Eagle Point has won the battle in Iowa, a national struggle for third-party PPAs ensues. Florida, Oklahoma, Georgia, Kentucky, and North Carolina have outlawed PPAs through common law, but such decisions can still be overturned by enactment of statutes by legislatures.[xvi] As efficient renewable energy systems are developed and the fossil fuel energy production is more heavily regulated, it would be interesting to watch how important a role third-party PPAs play in making sustainable energy more economically feasible.

Insung Hwang is a General Member on MJEAL. He can be reached at insung@umich.edu.

 


The views and opinions expressed in this blog are those of the authors only and do not reflect the official policy or position of the Michigan Journal of Environmental and Administrative Law or the University of Michigan.

[i] See SZ Enters., LLC v. Iowa Utils. Bd., 850 N.W.2d 441, 452 (Iowa 2014)

[ii] Iowa Code § 476.25(3)

[iii] See 16 U.S.C.S. §2601

[iv] See Public Utility Regulatory Policy Act (PURPA) (Mar. 5, 2015) http://www.ucsusa.org/clean_energy/smart-energy-solutions/strengthen-policy/public-utility-regulatory.html#.VP235FNJWAs

[v] What is Decentralised Energy? (Mar. 5, 2015) https://www.eonenergy.com/for-your-business/large-energy-users/manage-energy/energy-efficiency/decentralised-energy-experts/What-is-decentralised-energy

[vi] See Selling Power Back to the Grid (Mar. 1, 2015), http://www.bloomberg.com/bw/stories/2006-07-05/selling-power-back-to-the-grid

[vii] . See id.

[viii] See supra note 1, at 444

[ix] Supra note 2

[x] Iowa Code § 476.22

[xi] Iowa Code § 476.1

[xii] See supra note 1, at 446

[xiii] See id. at 453

[xiv] Id. at 466

[xv] See id. at 459-60.

[xvi] See Court Sides With Iowa Solar Installer in Dispute With Utility (Mar. 1, 2015), http://www.midwestenergynews.com/2013/04/12/court-sides-with-iowa-solar-installer-in-dispute-with-utility/

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