On Friday, July 11, the Supreme Court of Iowa issued a decision holding that a solar energy company entering into a third-party power purchase agreement (PPA) with an Iowa municipality would not be considered a public utility under state law. The decision affirmed a lower court’s opinion overturning the ruling of the Iowa Utilities Board, which would have prohibited the PPA from going forward. The Iowa Supreme Court’s decision means that Iowa now joins several other states, including solar-heavy California, Nevada, Arizona, New Mexico and Colorado, in allowing developers to enter into third-party PPAs without becoming subject to rate regulation as public utilities under state law.
Eagle Point Solar (“Eagle Point”) proposed to enter into a PPA with the city of Dubuque, Iowa (“Dubuque”), in which Eagle Point would own, install, operate and maintain an on-site (i.e., “behind-the-meter”) PV solar generation system at a municipally owned building. The PPA required Dubuque to purchase the full output of the solar facility on a per-kWh basis. The output would supply some, although not all, of the facility’s power needs, and, therefore, the municipal building would remain connected to the local electric utility, Interstate Power and Light Company, to service the remainder of its load.
The Eagle Point-Dubuque PPA is typical of third-party PPAs that have proliferated in the solar industry in recent years. Under this type of arrangement, a host allows a solar developer to set up and maintain a solar installation on its premises and agrees to purchase all of the output from the facility at an agreed-upon rate. At the end of the agreement, the developer typically transfers ownership of the solar facility to the host. Because the solar developer is responsible for installation and maintenance costs, third-party PPAs are an attractive way for customers to “go solar” without a significant up-front investment.1 However, because the solar developer sells electricity to the retail consumer under these arrangements, some states have argued that the solar developer is performing a public utility function and must be subject to the same regulatory oversight as traditional utilities, including regulation of rates.
If Dubuque had financed and installed the on-site solar facility itself, without the third-party PPA, the arrangement would be considered self-generation and would be permitted under Iowa law. If the third-party solar developer had been considered a public utility, however, the developer would have been prohibited from providing service to customers within the territory of the incumbent utility, thus precluding the PPA.2 The issue before the court was whether a third-party PPA for a behind-the-meter solar generation facility is sufficiently “clothed with the public interest” to trigger regulation. The court concluded that it does not, and in doing so, rejected the Iowa Utilities Board’s use of a bright-line test. The court applied a multifactor test used by other states for many years to decide whether the public interest demands utility-type regulation in certain circumstances. The court’s opinion is also notable for its comprehensive review and analysis of case law and legislative developments in other states regarding third-party PPAs and their regulatory status.