NH regulation of solar PPAs, leases

As distributed energy resources like solar panels become more widely adopted, how do typical solar business models like solar power purchase agreements or solar leases match up to state utility laws?  While the answer may vary from state to state, an order issued by the New Hampshire Public Utilities Commission earlier this year found found that offering solar power purchase agreements or solar leases to customers in New Hampshire would not subject a solar company to Commission regulation under any of several theories.  The order finding no regulation required is consistent with other state policy and precedent supporting distributed generation, and could be a model for other states.

Federal law controls some many aspects of the U.S. electricity industry, but states can and do regulate public utilities and competitive electric power suppliers.  Knowing who these state-regulated utilities and suppliers were was straightforward under the dominant utility models of the twentieth century.  But as new technologies like solar photovoltaic panels or other distributed energy resources become more widely adopted, and new business models like solar power purchase agreements and solar leases arise, their regulatory status can be uncertain.  If a solar company installs solar panels on a customer's roofs, and sells that customers the power produced, will it be regulated like a public utility or supplier under state law?  What if the company leases the panels to the customer?

The New Hampshire Public Utilities Commission recently addressed these questions in answering a 2015 petition by Vivint Solar, Inc.  In that petition, Vivint asked the New Hampshire Public Utilities Commission for a declaratory ruling that it would not regulate Vivint as a public utility, competitive electric power supplier, or limited producer of electrical energy under state law, for offering solar power purchase agreements or solar leases to residential customers in New Hampshire.

In a January 15, 2016 order -- Order No. 25,859 -- the Commission granted Vivint's petition.  First, the Commission noted the value of regulatory certainty:

We believe it is important for a party planning to do business in the state to have a vehicle through which it may clarify its regulatory status prior to entering the marketplace, provided that it can describe in sufficient detail its business plans and practices and these plans and practices are not hypothetical or speculative.

Next, the Commission concluded that the operations described by Vivint would not constitute sales to or for the "public" within the meaning of the statutory definition of "public utility."  Key factors recited in the order included the "conditional nature and relative complexity of Vivint’s relationships with its customers."

The Commission then analyzed its rules regarding competitive electric power suppliers, concluding that although Vivint might meet the regulatory definition of a supplier, that definition "should not be read in isolation but in the context of the overall purpose and effect" of the rules in their entirety.  The Commission then noted that those "Puc 2000" rules "seem intended to regulate  a set of relationships and related transactions that is quite different from those undertaken in the context of customer-sited, behind-the-meter, distributed generation development involving sales of electricity directly to the host customers pursuant to the terms and conditions of PPAs."

Finally, the Commission concluded that neither Vivint's PPAs nor solar leases should be subject to Commission regulation under the New Hampshire Limited Electrical Energy Producers Act.  The Commission interpreted that act's retail sales provisions "as applicable to sales of electricity off-site from the generation facilities," not "on-site and behind-the-meter" sales of power as contemplated by Vivint.

The New Hampshire Public Utilities Commission noted that while the petition and briefs in the case focused on the residential solar energy market, its analysis and conclusions "would not be different if the relevant customers were non - residential, assuming that the Systems were installed on the customers’ premises behind the utility retail electric meter, we re sized no larger than necessary to meet the customers’ reasonably anticipated electric consumption, and involved sales of electricity directly to the host customer or leases of the installed Systems to the host customer."

While the ruling technically applies to the company and facts asserted in the petition, it confirms the possibility of an important role for third-party involvement in distributed generation.

NH net metering bills passed

The New Hampshire legislature is acting to expand that state's net metering programs.  Now the question is how much: a 50% expansion, or a doubling?

New Hampshire law requires electric distribution utilities to offer eligible customer-generators a standard tariff for net energy metering. Solar panels are the most commonly net metered type of generation, but other technologies are also used.  Net metering under these tariffs is available "on a first-come, first-served basis within each electric utility service area" until each utility hits its specific cap on net metered capacity.  Under existing law, each utility's cap is effectively its share of a statewide program cap of 50 megawatts.

On January 20, 2016, utility Eversource announced it had reached its cap, and that it would place new projects going forward on a wait list.  But New Hampshire is home to significant interest in expanding net metering.  In the same announcement, Eversource described its work with the state legislature "to enact an expansion to the net metering program."  As the utility said, "Such an expansion would alleviate much of the uncertainty being faced by customers and developers, and would provide time for stakeholders to investigate all of the various costs and benefits of distributed generation and to provide for a sustainable evolution of the net metering program."

Meanwhile, Eversource also indicated a request that state regulators "develop a more permanent solution to the challenge of fairly compensating developers of new distributed generation in a manner that does not shift costs to other customers."

In February, the New Hampshire Senate voted to increase the net metering cap from 50 megawatts to 75 megawatts.  That bill, S.B.333, also directed the New Hampshire Public Utilities Commission to develop a net metering tariff for all generation above the 75 megawatt cap.

This month the New Hampshire House passed H.B.1116, a bill that would double the cap, to 100 megawatts.

Under New Hampshire legislative process, these two bills must be reconciled before a proposal can be sent to Governor Maggie Hassan.  But she has expressed strong support for reconciling the bills and expanding net metering:

Lifting the cap on net metering is essential to the continued success of New Hampshire’s solar industry, and I applaud the House for its bipartisan vote to pass this critical measure. The Senate has already supported this legislation, and I urge them to concur with the version passed by the House and send this bill to my desk as quickly as possible so that we can lift the cap on net metering.

The New Hampshire House and Senate now have the opportunity to reconcile the bills and present them to Governor Hassan for her signature.  Assuming this happens, New Hampshire will significantly expand its net metering program in the near term.

Court ruling cuts demand response uncertainty

Yesterday the U.S. Supreme Court issued an opinion upholding federal regulation of the compensation paid for wholesale electricity demand response.  The Court's opinion, FERC v. Electric Power Supply Assn., hinges on the distinction between wholesale and retail sales of electricity.  It provides the latest look at the boundary between federal and state jurisdiction over the electric grid.

Under the Federal Power Act, the Federal Energy Regulatory Commission is authorized to regulate "the sale of electric energy at wholesale in interstate commerce."  Its jurisdiction under the Federal Power Act does not extend to "any other sale of electric energy," such as a retail sale.  Traditionally, sales of energy directly to users are viewed as retail sales subject to state ratemaking jurisdiction, while sales of energy for resale are viewed as wholesale sales subject to federal ratemaking jurisdiction.

The case before the Supreme Court arose from a challenge by a group of generators to FERC Order No. 745.  Through that order, FERC adopted a rule requiring wholesale market operators to compensate cost-effective demand response resources for their performance at the same price paid to generators.  Last year, the D.C. Circuit Court of Appeals vacated FERC Order No. 745 on the ground that FERC lacked jurisdiction to set rates for this kind of demand response.  The D.C. Circuit implied that "wholesale" demand response was really retail in nature and thus subject only to state ratemaking jurisdiction.  FERC appealed this decision to the Supreme Court.

As described in the Supreme Court opinion, the appeal presented two legal issues:

First, and fundamen­tally, does the FPA permit FERC to regulate these demand response transactions at all, or does any such rule impinge on the States’ authority? Second, even if FERC has the requisite statutory power, did the Commission fail to justify adequately why demand response providers and electricity producers should receive the same compensa­tion? The court below ruled against FERC on both scores. We disagree.

In analyzing the first issue, the majority found that compensation for demand response directly affects wholesale prices -- "Indeed, it is hard to think of a practice that does so more."  The majority found, "A FERC regulation does not run afoul of section 824(b)’s prescription just because it affects―even substantially―the quantity or terms of retail sales."  The Court finally noted that FERC had offered substantial reasoning and arguments in support of its conclusion that demand response should be paid comparably to generation, and thus that FERC's actions satisfied the applicable standard that they not be "arbitrary and capricious."

The case now returns to the D.C. Circuit for further proceedings consistent with the Supreme Court's opinion. The most widespread direct impact of the Supreme Court in FERC v. EPSA will likely be a reduction to the uncertainty that has hung over the markets since the D.C. Circuit decision.  Market participants, consumers, aggregators, and grid operators have all been awaiting the ruling.  Some market changes, such as ISO New England's implementation of full integration of demand response, had been delayed pending a decision from the Court, as regional wholesale demand response programs hinge on FERC approvals under the Federal Power Act.  With the jurisdictional question resolved, these changes, and other refinements to regional transmission organizations' wholesale demand response programs, can now get back on track.

Small hydro helped by Hydropower Regulatory Efficiency Act of 2013

Hydropower in the United States may soon expand thanks to recently enacted federal legislation.  The Hydropower Regulatory Efficiency Act of 2013, signed into law on August 9, 2013, is designed to promote hydropower by streamlining the Federal Energy Regulatory Commission's process for developing and operating hydroelectric projects.

The Hydropower Regulatory Efficiency Act of 2013 is predicated on the value of hydropower in providing renewable electricity - and on hydropower's estimated growth potential.  Congressional findings in the Act include that "hydropower is the largest source of clean, renewable electricity in the United States", producing about 7 percent of the nation's power and about 100,000 megawatts of capacity, and employing approximately 300,000 workers across the country.  Yet only 3 percent of the 80,000 dams in the United States generate electricity, highlighting substantial potential for adding hydropower generation to nonpowered dams.  According to one study, by utilizing currently untapped resources, the United States could add approximately 60,000 megawatts of new hydropower capacity by 2025.

To promote the use of these "currently untapped" resources, the Act enhances and streamlines the regulatory framework for some hydropower projects.  For example, the Act exempts certain so-called "conduit" hydropower facilities from the licensing requirements of the Federal Power Act.  Conduit facilities generate electric power using only the hydroelectric potential of a non-federally owned conduit, such as a tunnel, canal, pipeline, aqueduct, flume, ditch, or similar manmade water conveyance that is operated for the distribution of water for agricultural, municipal, or industrial consumption, and is not primarily for the generation of electricity.  To qualify, conduit facilities must have an installed generating capacity that does not exceed 5 megawatts (MW), and must not have been licensed or exempted from the licensing requirements of Part I of the Federal Power Act on or before August 9, 2013.  While qualifying conduit hydropower facilities are not required to be licensed or exempted by the Commission, developers of qualifying facilities must file a Notice of Intent to Construct a Qualifying Conduit Hydropower Facility with the Commission.

The Act also streamlines other regulatory procedures.  For example, it amends Section 405 of the Public Utility Regulatory Policies Act of 1978 to define "small hydroelectric power projects" as having an installed capacity that does not exceed 10,000 kilowatts.  The Act also authorizes the Federal Energy Regulatory Commission to extend the term of preliminary permits for hydropower development for up to 2 additional years beyond the 3 years previously allowed under Section 5 of the Federal Power Act.  It also directs the Commission to investigate the feasibility of a 2-year licensing process for hydropower development at non-powered dams and closed-loop pump storage projects.

The Commission is moving forward with the implementation of the Act.  The conduit, 10-megawatt exemption, and preliminary permit processes are already underway.  On October 2, 2013, the Commission will hold a workshop to launch its investigation of the feasibility of a two-year process for issuing a license for hydropower development at non-powered dams and closed-loop pumped storage projects.

Will the Act lead to the development of more hydropower in the U.S.?  While the Act eases regulatory burdens on project developers and operators, the rate of project development is also driven by market forces.  The intersection of regulations and these market forces will determine the addition of new hydropower capacity.  Nevertheless, the reductions in regulatory burden and uncertainty appear poised to support the buildout of hydroelectric generation from previously untapped resources.

Obama: renewable energy tax credit reforms

President Obama's proposal to reform the way the U.S. taxes businesses includes making the soon-to-lapse production tax credit (PTC) for generating renewable electricity both permanent and refundable.  If enacted, this proposal would support the renewable energy industry, but could lead to a change the way projects are financed.

Earlier this month, the President and the Department of the Treasury issued a joint report entitled, "The President's Framework for Business Tax Reform" (25-page PDF).  The report presents a plan to reform America’s system of business taxation.  It labels the U.S. tax system "uncompetitive and inefficient", noting that the U.S. has a relatively narrow corporate tax base further reduced by loopholes, tax expenditures, and tax planning, and that the nation has a high statutory tax rate.

The cure proposed in the report is presented as supporting the "competitiveness of American businesses and increasing incentives to invest and hire in the United States by lowering rates, cutting tax expenditures, and reducing complexity, while being fiscally responsible."  It offers five key elements of business tax reform:

• Eliminate dozens of tax loopholes and subsidies, broaden the base and cut the corporate tax rate to spur growth in America
• Strengthen American manufacturing and innovation
• Strengthen the international tax system, including establishing a new minimum tax on foreign earnings, to encourage domestic investment
• Simplify and cut taxes for America’s small businesses
• Restore fiscal responsibility and not add a dime to the deficit

Each of these elements is treated in some depth in the report.  In the section presenting the President's "Framework for Reform" for the second element, strengthening manufacturing, the report says that the Framework would "[e]xtend, consolidate, and enhance key tax incentives to encourage investment in clean energy":

The President’s Framework would make permanent the tax credit for the production of renewable electricity, in order to provide a strong, consistent incentive to encourage investments in renewable energy technologies like wind and solar. As with the R&E Tax Credit, the United States has to date provided only a temporary production tax credit for renewable electricity generation. This approach has created an uncertain investment climate, undermined the effectiveness of our tax expenditures, and hindered the development of a clean energy sector in the United States. In addition, the structure of renewable production and investment tax credits has required many firms to invest in inefficient tax planning through tax equity structures so that they can benefit even when they do not have tax liability in a given year because of a lack of taxable income. The President’s Framework would address this issue by making the permanent production tax credit refundable. 

Several features of this proposal are worth noting.  First, the production tax credit would become permanent.  To date, the PTC has been enacted, expired, and re-enacted multiple times, although occasionally with breaks in between periods of eligibility.  The PTC soon faces expiration yet again.  Renewable energy developers say that the uncertainty over its future significantly chills interest and development in the renewable sector.  President Obama's plan to make the tax credit permanent would be a positive improvement from their perspective because it represents a longer-term commitment to stable tax treatment.  From the national perspective, this longer-term commitment may spur investment and jobs, although it faces challenge from those who do not believe permanent tax credits should be ever used to support renewable energy, let alone permanently.

Second, the PTC would be refundable.  This roughly means that if you qualify for the credit, you don't need any taxable income to be able to use the credit as an offset against tax liability; when a tax credit is refundable, you can often receive its value in the form of a check from the Treasury.  The non-refundable nature of the PTC and the related investment tax credit (ITC) at present has led to business structures that allow multiple entities to invest in a project while allocating specific tax benefits to those investors capable of using them.  According to the report, the result of the widespread use of these tax equity structures has been investment in inefficient tax planning.  President Obama's plan would eliminate one of the key reasons behind the tax equity structure commonly used today, and could change the scope of developers interested in proposing renewable energy projects.  For example, a developer with low or no U.S. tax liability would be able to reap the tax incentive without partnering with income-rich tax equity investors.  Tax equity structures may still have value even if this proposal passed, but it could lead to a change in the way renewable energy projects are financed.

The President's tax reform plan has yet to be fully reviewed by Congress, and many observers believe it nearly impossible that it would pass as currently conceived.  The renewable energy tax incentives at issue here may or may not be part of a final enacted tax reform plan.  For now, in an election year, this proposal has strengthened the President's alliance with the renewable energy industry, as he has cast himself as their best hope for extended and improved tax credits if reelected.