SZ Enters., LLC v. Iowa Utils. Bd. - 850 N.W.2d 441 (Iowa 2014)

Rule:

The proper test to determine whether an operation is a public utility under Iowa Code § 476.1 is to examine the facts of a particular transaction on a case-by-case basis to determine whether the transaction cries out for public regulation. The factors in Natural Gas Service Co. v. Serv-Yu Cooperative, Inc., provide a reasoned approach when considering the question of whether the activity involved is sufficiently clothed with the public interest to justify regulation.

Facts:

Eagle Point proposed to enter into a business relationship known as a third-party power purchase agreement (PPA) with the city that would provide the city with renewable energy. Under the PPA, Eagle Point would own, install, operate, and maintain an on-site PV generation system at a city-owned building to supply a portion of the building's electric needs. The city would purchase the full electric output of Eagle Point's solar power generation facility on a per kWh basis, which escalated at a rate of three percent annually. The payments by the city would not only provide consideration for the electricity provided by the project, but would also finance the cost of acquiring the generation system, monetize offsetting renewable energy incentives related to the system, and cover Eagle Point's costs of operating and maintaining the system. Eagle Point would also own any renewable energy credits associated with the generation system but would credit to the city one third of any revenues received from the sale of those credits. At the conclusion of the agreement, Eagle Point would transfer all ownership rights of the PV generation system to the city.

Eagle Point filed a petition for a declaratory ruling with the IUB. Eagle Point sought a declaration from the IUB that it was not a public utility under Iowa Code section 476.1 and was not an electric utility under Iowa Code section 476.22. If Eagle Point was not a public utility or an electric utility under these Code provisions, its proposed relationship with the city would not run afoul of Iowa's statutory scheme that provides for exclusive service territories for Iowa's electric utilities. On the other hand, if Eagle Point were operating as a public utility and an electric utility under these Code provisions, its proposed arrangement with the city would be an unlawful incursion into the exclusive service territory of Interstate Power. The IUB held that under the proposed arrangement, Eagle Point would be acting as a public utility under Iowa Code section 476.1.  Eagle Point sought judicial review of the IUB ruling. As a preliminary matter, the district court ruled that IUB's interpretation of the relevant statutes was not entitled to deference under NextEra Energy Resources LLC v. Iowa Utilities Board, 815 N.W.2d 30, 36-38 (Iowa 2012) and Renda v. Iowa Civil Rights Commission, 784 N.W.2d 8, 14-15 (Iowa 2010). On the merits, the district court concluded that Eagle Point would not be operating either as a public utility or as an electric utility.

Issue:

Should Eagle Point be considered a public utility under Iowa Code section 476.1?

Answer:

No.

Conclusion:

In Natural Gas Service Co. v. Serv-Yu Cooperative, Inc., he Arizona Supreme Court has announced eight factors to be considered in determining whether an entity was "clothed with a public interest" and subject to regulation as a public service corporation because it is indispensable to the population. The eight factors are: (1) What the corporation actually does. (2) A dedication to public use. (3) Articles of incorporation, authorization, and purposes. (4) Dealing with the service of a commodity in which the public has been generally held to have an interest. (5) Monopolizing or intending to monopolize the territory with a public service commodity. (6) Acceptance of substantially all requests for service. (7) Service under contracts and reserving the right to discriminate is not always controlling. (8) Actual or potential competition with other corporations whose business is clothed with the public interest.

Re: Factor 1 —  The transaction may be characterized as a sale of electricity or a method of financing a solar rooftop operation. Neither characterization is inaccurate. But most importantly, the court had little doubt that the transaction is an arms-length transaction between a willing buyer and a willing seller. There is no reason to suspect any unusual potential for abuse. From a consumer protection standpoint, there is no reason to impose regulation on this type of individualized and negotiated transaction. Further, IUB would not seek to regulate behind-the-meter solar installations that are owned by the host or which operate pursuant to a standard lease. If this is true, the actual issue here is not the supplying of electricity through behind-the-meter solar facilities, but the method of financing. Yet, financing of renewable energy methods is not something that public utilities are required to do. As pointed out by the Consumer Advocate in this case, if providing financing for renewable energy is not required of public utilities, the converse should also be true, namely, that providing financing for solar activities should not draw an entity into the fly trap of public regulation.

Re: Factor 2 — It cannot be said that the solar panels on the city's rooftop are dedicated to public use. The installation is no more dedicated to public use than the thermal windows or extra layers of insulation in the building itself. The behind-the-meter solar generating facility represents a private transaction between Eagle Point and the city.

Re: Factor 4 — It seems clear that the provisions of on-site solar energy are not an indispensable service that ordinarily cries out for public regulation. All of Eagle Point's customers remain connected to the public grid, so if for some reason the solar system fails, no one goes without electric service. Although some may wish it so, behind-the-meter solar equipment is not an essential commodity required by all members of the public. It is, instead, an option for those who seek to lessen their utility bills or who desire to promote "green" energy. You can take it or leave it, and, so far, it seems, many leave it.

Re: Factor 5 — This factor relating to monopoly clearly cuts against a finding that Eagle Point is a public utility. See id. 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. Indeed, the nature of the third-party PPA suggests the opposite, as the city has entered into what amounts to be a low risk transaction—it owes nothing unless the contraption on its rooftop actually produces valuable electricity.

Re: Factors 6 and 7 — These relate to the ability to accept all requests for service and, conversely, the ability to discriminate among members of the public. These twin factors cut in favor of finding that Eagle Point is not a public utility. Eagle Point is not producing a fungible commodity that everyone needs. It is not producing a substance like water that everyone old or young will drink, or natural gas necessary to run the farms throughout the county. More specifically, Eagle Point is not providing electricity to a grid that all may plug into to power their devices and associated "aps," or, more prosaically, their ovens, refrigerators, and lights. Instead, Eagle Point is providing a customized service to individual customers. Whether Eagle Point can even provide the service will depend on a number of factors, including the size and structure of the rooftop, the presence of shade or obstructions, and the electrical use profile of the potential customer. Further, if Eagle Point decides not to engage in a transaction with a customer, the customer is not left high and dry, but may seek another vendor while continuing to be served by a regulated electric utility. These are not characteristics ordinarily associated with activity "clothed with a public interest."

Re: Factor 8 — Under the eighth factor, the actual or potential competition with other corporations whose business is clothed with the public interest is considered. Here, the IUB strenuously argued that allowing third-party PPAs will have decidedly negative impacts on regulated electric utilities charged with providing reliable electricity at a fair price to the public. The position of the IUB has considerable appeal. Certainly, the case can be made that if Eagle Point is allowed to "cream skim" the most profitable customers, there may be impacts on the regulated utility. If the third-party-PPA movement gets legs in Iowa, it is conceivable that demand for electricity from traditional utilities will be materially impacted in the long run. There is nothing in the record of this administrative proceeding, however, to gauge the likelihood or degree of material impact, and there was no suggestion that the integrity of the grid or economic health of regulated providers has been adversely affected in states such as California, Nevada, Arizona, and Colorado, where third-party PPAs are not considered public utilities for purposes of regulation. There are also mitigating factors. As pointed out by Eagle Point, it does not seek to replace the traditional electric supplier but only to reduce demand. Although an Eagle Point sale brochure promoting its services is in the record, there is nothing to suggest that its services will be attractive to, or even practical to, many customers of the traditional electric supplier. Further, the parties to third-party PPAs have the ability to convert their business arrangements into conventional leases which are outside the scope of regulation. Indeed, in this case, Eagle Point and the city have done just that to avoid unnecessary legal entanglements. In addition to mitigating factors, there are also countervailing positive impacts. Behind-the-meter solar facilities tend to generate electricity during peak hours when the grid is under the greatest pressure. Further, Iowa Code section 476.8 requires regulated electric utilities to provide reasonably adequate service, and such service must "include[] programs for customers to encourage the use of energy efficiency and renewable energy sources." Thus, third-party PPAs like the one proposed by Eagle Point actually further one of the goals of regulated electric companies, namely, the use of energy efficient and renewable energy sources.