More Obstacles Ahead for Pa. Net Metering Restrictions

Christopher A. Lewis

On the heels of high-profile solar regulatory decisions in Nevada and Hawaii last year and in California earlier this year, Pennsylvania took center stage last week in the ongoing battle over net metering policy. Pennsylvania’s Independent Regulatory Review Commission (IRRC) disapproved a Pennsylvania Public Utility Commission (PUC) rulemaking that would have imposed additional limitations on the size of systems that qualify for net metering credit. IRRC’s disapproval of the rulemaking means that further attempts to reform net metering policy in Pennsylvania will likely have to come through legislative action.

Net metering is a billing system that enables electric utility customers with distributed generation (DG) systems to earn credits for any excess energy they produce by selling the excess power to their electric utility. While policies vary by state, typically net metered customers are credited for the power they sell at the full retail electricity rate, which includes not only the generation and transmission costs but also the cost to distribute the electricity, including costs for poles, wires, meters and other fixed infrastructure.

With the substantial decline in the cost of producing solar power and the widespread proliferation of DG systems, state legislatures and utility regulatory commissions are becoming increasingly concerned that their net metering policies are unfairly shifting costs from customers with DG systems to other utility ratepayers. Although net metered customers rely on the electric utilities’ distribution systems for backup power and to transmit energy to others, they effectively avoid paying the distribution charges imposed by utilities to sustain the distribution systems. In addition, electric utilities argue that net metering forces them to pay the retail rate for electricity when the utilities could have instead purchased the electricity from other generators at wholesale rates, resulting in an added cost that gets passed on to other ratepayers.

In December 2015, the Nevada Public Utilities Commission stunned the rooftop solar industry by approving a new solar net metering rate that decreases the rate paid to rooftop solar customers and further increases fixed charges and decreases the volumetric charge in an attempt to recover costs from net metering customers. Notably, the new rate applies to both new and existing rooftop solar users. In October of 2015, the Hawaii PUC ended net metering in the state for new solar customers. Systems installed before the Oct. 12 decision will be allowed to earn retail rate credits for exported electricity through the life of their contracts, but new rooftop solar users will have to choose from two less remunerative options.

By contrast to the rollback of net metering in Nevada and Hawaii, in January of this year, after intensive lobbying from both the solar industry and the state’s investor owned utilities, the California Public Utility Commission in a narrow 3-2 decision voted to retain that state’s net metering credit at the retail rate until 2019. The California PUC took the solar industry’s position that concerns about cost-shifting are overstated and financial incentives are required to spur investment in solar generation, which provides environmental benefits to all ratepayers.

PA PUC’s Proposed Size Limit

In Pennsylvania, the Alternative Energy Portfolio System (AEPS) Act provides that excess generation from net metered customer generators — defined as nonutility owners or operators of a net metered distributed energy systems — are to receive full retail value for all energy produced on an annual basis. 73 P.S. § 1648.5. The types of alternative energy sources affected include solar, wind, hydropower, geothermal, biomass, methane from anaerobic digestion, landfill methane gas, fuel cells, waste coal, and coal mine methane. The AEPS Act places a limit on the full retail value allowance by restricting the definition of customer generator to distributed generation systems with a nameplate capacity of not greater than 50 kilowatts if installed at a residential service, not larger than 3,000 kW at other customer service locations, and up to 5,000 kW in limited circumstances. 73 P.S. § 1648.2.

In its final rulemaking order entered on Feb, 11, 2016, the Pennsylvania PUC proposed to limit the size of net metered systems eligible for full retail rates to those that are sized to generate no more than 200 percent of the customer generator’s annual electric consumption. Systems that exceeded this size limit would be paid for power at the wholesale rate. Although the rulemaking exempted many anaerobic digesters from the 200 percent limit, it did not provide a similar exemption for landfill gas, and it would have required an alternative energy system with a nameplate capacity of 500 kW or more to receive approval from the PUC before net metering.

Two groups of businesses that would have been particularly impacted by the rulemaking are alternative energy system development companies and alternative energy system installation companies. The PUC acknowledged that, for these approximately 100 companies, “the changes may impact the size of some of the alternative energy systems these entities develop and install for customer generators seeking net metering subsidies.”

While the AEPS Act entitles net metered customer-generators to full retail value for all excess energy produced, 73 P.S. § 1648.5, in defending the proposed rulemaking, the PUC pointed out that it also has a statutory duty under the Public Utility Code to ensure that default service is provided at the least cost to customers over time, 66 Pa. C.S. § 2807(e), and that rates are just and reasonable, 66 Pa. C.S. § 1301. The PUC stated that the 200 percent size limit strikes a balance between these mandates.

Providing subsidies to select customers within a rate class conflicts with the basic utility ratemaking principle of “cost causation,” that customers should not pay more than their fair share of distribution service charges for use of the grid. In proposing the 200 percent size limit, the PUC stated that the purpose was “to avoid having default service customers pay substantial net metering subsidies to merchant scale alternative energy systems,” which the PUC refers to as “merchant generators,” namely third-party businesses that install distributed energy systems on others’ property and operate the systems for profit. The PUC reasoned that “[a]lternative energy systems that produce over 200 percent of their historic load are more likely to be in the business of selling energy than purchasing energy from the EDC as consumers.” The PUC also pointed to Maryland, Delaware and New Jersey, which each have similar or more stringent size limitations on net metered customer-generators.

On June 2, 2016, the IRRC issued an order disapproving the PUC rulemaking (the disapproval order). In its disapproval order, the IRRC agreed with the solar industry’s position that “the PUC does not have the statutory authority to promulgate the rulemaking” because the AEPS Act already provides size limitations (i.e., 50 kW, 3,000 kW and 5,000 kW) that are intended to address abuse by merchant generators. The IRRC noted that, at the May 19, 2016, meeting, the PUC was unable to identify a specific provision of law that would allow the PUC to impose the limit. Furthermore, the IRRC found that “the PUC has not definitely quantified what the substantial net metering costs will be to customers. The PUC acknowledged at the hearing “that over-sized customer generator systems are not currently a problem in the commonwealth, but could be in the future,” and therefore the IRRC found that the PUC has not established a “compelling need” for the rulemaking.

Independent Load Requirement

Another significant issue raised in the rulemaking was the PUC’s proposal to place limitations on the availability of “virtual net aggregation.” In the AEPS Act, virtual net aggregation is permitted “on properties owned or leased and operated by a customer-generator and located within two miles of the boundaries of the customer-generator’s property and within a single electric distribution company’s service territory.” 73 P.S. § 1648.2. The rulemaking would have required a customer-generator wishing to qualify for net metering to have measurable electric load at each of the customer’s virtually aggregated properties, instead of merely having measurable electric load overall, meaning that a customer generator could not build a system on a noncontiguous property if that property did not have existing load.

The PUC reasoned that the independent load requirement is already a statutory requirement because, “[w]ithout independent electric load, there would be no establishment of a retail electric customer at a residential or other electric service location. The interconnection would simply involve generation service.” Environmental groups countered that “[t]his is an impermissible construction of the term “customer” and that “the common usage of the term [is] that service need not be provided at every possible location to be a customer.”

Prior to disapproving the rulemaking, the IRRC had signaled in its written comments that the proposal to “prevent the development of alternative energy systems on noncontiguous property” posed “possible conflicts with the act.” The IRRC commented that the additional limitation “could alter the landscape of the alternative energy market that, to some degree, relies on the third-party ownership model.” The IRRC did not address this particular requirement at the public hearing or in its disapproval order, except to generally state that, “[i]f the PUC decides to proceed with this rulemaking by deleting the limit included in § 75.13(a)(3) of the final-form regulation, it should ensure that other provisions of the regulation do not limit a customer generator’s ability to net-meter excess generation it produces.”

Conclusion

As a result of the IRRC’s disapproval of the PUC’s rulemaking, customer-generators wishing to receive full retail value through net metering are not currently subject to size limitations on their alternative energy systems other than those under the AEPS Act. At this point, the PUC may either (1) withdraw the rulemaking; (2) take no action, in which case the rulemaking is deemed to be withdrawn; or (3) deliver a report and the rulemaking with or without changes to the IRRC and the General Assembly within 40 days. Under option three, the IRRC would have another opportunity to vote on the rulemaking, and the General Assembly would have the opportunity to pass a current resolution disapproving the rulemaking.

In the end, however, one of the IRRC’s overriding concerns is that “implementation of the proposed rulemaking could potentially curtail the development of alternative energy in the commonwealth in conflict with the AEPS Act,” which caused the IRRC to “question whether this rulemaking is a policy decision of such a substantial nature that it requires legislative review.” If the PUC intends to continue its pursuit of further restrictions on net metering, that road will run through the General Assembly, which you can bet is already receiving pressure to take action.

This article was originally published in Law360 on June 7, 2016. Click here to read the article online.

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