Association Petitions FERC to Exercise Jurisdiction over Net Metering

The New England Ratepayers Association (NERA) recently filed a petition with the Federal Energy Regulatory Commission (FERC) seeking a declaratory order that would overturn FERC’s prior decisions disclaiming jurisdiction over “net metering” arrangements for rooftop solar and other electric generation projects located “behind the meter” on the premises of retail electric customers.¹ If FERC were to grant this petition, it could lead to a clash between the policies of FERC and the policies of those states that encourage customer-owned renewable energy installations. It also would likely reduce the value of such facilities.

Background

Net metering is an arrangement under which a retail electric customer with electric generating facilities (such as a rooftop solar installation) on the customer side of its electric meter (often referred to as behind-the-meter generation) nets its generation against its consumption of electric energy. The customer may at any instant either receive energy from its electric utility when its consumption exceeds its generation or deliver energy to its utility company in the opposite circumstance (for example, when the sun is shining and the customer’s demand is low). These instantaneous receipts and deliveries are netted against each other over the monthly billing cycle. This allows the customer to use all of its electric generation during the billing cycle to offset the costs (at the retail electric rate) of its electric energy consumption.

FERC has exclusive jurisdiction under Section 205 of the Federal Power Act (FPA) over sales of electric energy at wholesale in interstate commerce, such that it has jurisdiction over sales by the owner of an electric generation facility who sells electric energy to the local utility for resale to its customers. However, in decisions dating back more than a decade, FERC has disclaimed jurisdiction over deliveries of electric energy by owners of behind-the-meter generation facilities under net metering arrangements² where there is no net sale by the customer over the applicable billing period (typically one month).³ FERC also has explained that, even if there is a net sale by the customer, if the customer’s generating facility is a qualifying facility (QF) under the Public Utility Regulatory Policies Act (PURPA) that is exempt from FERC jurisdiction under Section 205 of the FPA, then the customer may make such sales without having to make any filing with FERC.⁴

NERA Petition

NERA’s petition asks FERC to overturn its Sun Edison precedent and declare that: (1) FERC has jurisdiction over sales from a customer’s behind-the-meter electric generation facilities when a customer’s generation exceeds its demand; and (2) the price for such sales should be at the utility’s avoided cost of energy under PURPA.⁵ NERA argues that current net metering policies overcompensate behind-the-meter generation by paying the retail rate (or something similar) rather than the typically much lower avoided-cost rate. NERA includes with its petition a report from Ashley C. Brown, Executive Director of the Harvard Electricity Policy Group (and former Commissioner of the Public Utilities Commission of Ohio), discussing various reasons why Mr. Brown finds current net metering policies to be adverse to the public interest.⁶ These reasons include encouraging an expensive form of renewable electric generation, forcing the utilities’ other customers to subsidize the behind-the-meter generation, and adversely affecting competitive electric markets.

As the legal basis for its petition, NERA argues that FERC’s previous disclaimer of jurisdiction based on the netting theory was never correct and that this theory has been rejected by the US Court of Appeals for the District of Columbia Circuit (DC Circuit) in cases addressing FERC’s jurisdiction over station service (i.e., energy consumed by electric generating facilities at times when they are not meeting all of their internal electric needs with their own generation). In the station service cases cited by NERA,⁷ the DC Circuit held that FERC exceeded its jurisdiction in requiring that utilities’ FERC-jurisdictional tariffs allow owners of electric generating facilities to net their consumption of energy for station service purposes against their generation of electric energy over the course of a monthly billing cycle. Instead, the DC Circuit held that the electric energy generated in excess of the generator’s station service requirements was being sold at wholesale (subject to FERC’s jurisdiction), but the electric energy consumed by such generators when they are not generating sufficient energy to serve their station service needs is being purchased at retail (subject to state jurisdiction).

NERA argues that the DC Circuit’s findings regarding station service apply equally to behind-the-meter generation and prevent FERC from requiring netting over the monthly billing cycle, as FERC did in its Sun Edison decision. Instead, NERA argues that the calculation of net delivery or consumption of electric energy by customers should be determined over the interval used for other measurement purposes in electric markets, which generally is one hour or less. Accordingly, NERA argues that FERC must exercise its jurisdiction over sales of electric energy at wholesale and compel states to comply with PURPA’s avoided-cost pricing rules for amounts of energy generated by rooftop solar and similar projects in excess of the consumer’s consumption over the applicable measurement interval (one hour or less).

Apparently anticipating an argument that may be raised in response to its petition, NERA addresses the interpretation of Section 1251 of the Energy Policy Act of 2005,⁸ which requires states to decide whether or not to implement a standard under which utilities must offer net metering. NERA’s position is that this addresses net metering only with respect to “electric energy,” which NERA argues includes only the amount of energy that the utility does not need to purchase as a result of the amount of net energy received from the behind-the-meter generation, thereby supporting the view that the generator should be compensated at the avoided-cost rate. NERA also presents a number of policy arguments in favor of its position, stating that even if FERC were to determine that it has discretion not to exercise its jurisdiction as advocated by NERA that it, nevertheless, should use its discretionary authority to require avoided-cost pricing for generation in excess of consumption during the shortest applicable measurement interval.

Implications

Any decision by FERC to grant the NERA petition would have significant effects on the market for rooftop solar and similar behind-the-meter electric generation projects. In general, such a decision would reduce the amount of credits deducted from the electric bills of commercial or residential consumers who host rooftop solar or other behind-the-meter generation projects, because these credits would be calculated based on their utilities’ avoided-cost wholesale electric rates instead of their retail electric rates during intervals when the amount of generation exceeds consumption. The magnitude of this effect would vary by state, depending on each state’s current net metering policies and the policies the state may implement in response to such a decision by FERC. For projects that have already been installed (or are being installed under binding agreements), such a decision would be contrary to the expectations of the retail electric customers, developers, and investors who decided to host, develop, or invest in such projects. The reduction in credits likely would be borne primarily by the hosts (retail customers) for projects owned or leased by such hosts but, depending on how their contracts are written, may be borne by the developers for projects with power purchase agreements between the host and the developer.

Such a decision by FERC also would reduce the economic incentive for development of future rooftop solar and similar behind-the-meter electric generation projects. Of course, for both existing and new projects, the host would continue to benefit from offsets against its retail electric bills, but these benefits would be smaller. In addition, federal investment tax credits would remain available for such projects, although the amount of these credits will step down from 30% for projects that began construction by the end of 2019 to 26% for 2020, 22% for 2021, and 10% for 2022, after which they will be eliminated (unless legislation is enacted to extend the credit, as has been proposed in connection with economic stimulus packages in response to the COVID-19 pandemic). Finally, these projects would continue to receive the benefit of renewable energy credits in many states, which can vary significantly depending on the state.

To mitigate the consequences of any decision by FERC to grant this petition, the hosts of rooftop solar and similar behind-the-meter projects could take several actions. The consumers could install battery storage systems so that such consumers could physically offset their energy production against their own consumption at a later time instead of needing to net across a monthly business cycle. They also could shift more of their consumption to daytime hours when their projects are generating energy (by, for example, charging an electric vehicle or operating certain appliances such as electric clothes dryers or dishwashers). These measures, however, involve additional costs, or inconvenience, for the consumer.

In addition, it is likely that some states, particularly those with ambitious programs for encouraging renewable electric generation, would seek to implement new policies in response to any FERC decision to grant the NERA petition. In any event, such a decision would focus more attention on states’ policies for implementing avoided-cost pricing under PURPA. FERC has previously ruled, including in a recent declaratory order issued in response to another petition from NERA, that states may not require utilities to purchase energy from QFs at a rate that is higher than the utilities’ avoided costs.⁹ Moreover, a rulemaking proposal currently pending before FERC would provide more flexibility to states with respect to determining the avoided-cost prices and may change the obligations of utilities to purchase energy from certain QFs.¹⁰ States’ responses to these developments likely will be the subject of further legal challenges at both the state and federal levels.

Next Steps

FERC established a due date of May 14, 2020 for interventions, comments, or protests in response to the NERA petition. A number of parties already have filed motions to intervene, and it is likely that many proponents of rooftop solar and other behind-the-meter generation projects (including solar manufacturers and project developers, trade associations, certain environmental or other public interest groups, and some states) will file protests. On the other hand, many utilities, sponsors of competing generation, other trade associations and consumer-interest groups, and some states likely will file comments in support of the petition. FERC’s decision in response to this petition will be subject to rehearing by FERC, and FERC’s decision on rehearing may be appealed to the US Court of Appeals.

There is no specific timeframe for FERC to act on this petition. The timing could be significant, given that the composition of the Commission is likely to change. FERC currently has only four Commissioners (out of its full complement of five), of which three are from the Republican Party and one is from the Democratic Party. No more than three may be from either Party. The term of Commissioner Bernard McNamee, from the Republican Party, ends on June 30, 2020, and he has announced that he will not seek another term. This means that that there will be two open positions to fill through a nomination by the President and confirmation by the Senate. It is possible that by the time FERC issues its decision, Commissioner McNamee may have left the Commission and one or more new Commissioners will have joined the Commission.

¹ New England Ratepayers Ass’n., Petition for Declaratory Order Concerning Unlawful Pricing of Certain Wholesale Sales, Docket No. EL20-42-000 (filed Apr. 14, 2020) (available at: https://elibrary.ferc.gov/idmws/common/opennat.asp?fileID=15510255).

² As discussed below, behind-the-meter generating facilities usually are QFs under PURPA. This status entitles the owners of such facilities to compel utilities to purchase their output at an avoided-cost rate, based on the costs that the utilities otherwise would have incurred to purchase energy. In the rare case that such a facility is not a QF, NERA states that the sales must be at a rate that is just and reasonable under the FPA.

³ Sun Edison LLC, 129 FERC ¶ 61,146 (2009); see alsoMidAmerican Energy, 94 FERC ¶ 61,340 (2001); Standardization of Generator Interconnection Agreements and Procedures, Order No. 2003-A, FERC Stats. & Regs. P 31,160 at P 744 (2005).

⁴ SunEdison at P 18. Most net metering facilities are QFs that are exempt from FERC jurisdiction under Section 205, because this exemption applies to renewable energy facilities with a capacity of 20 MW or less; such facilities with a capacity of 1 MW or less can be QFs without making any filing with FERC.

⁵ NERA describes itself as a non-profit organization established to advocate for ratepayers throughout every state in New England, focusing on a range of regulated services, including energy, water, and telecommunications. Its advisory board includes former Vermont Governor James Douglas, New Hampshire State representative and former New Hampshire Public Utilities Commissioner Michael Harrington, and Principal, Capital Economic Advisors and Senior Fellow at the Pacific Research Institute, Wayne Winegarden.

⁶ Mr. Brown contrasts typical net-metering programs, referred to in NERA’s petition as “Full Net Metering,” to “True Net Metering,” where the behind-the-meter generator is compensated at the unbundled energy component of the retail rate (as is done in Texas), which Mr. Brown argues is economically appropriate. Some states have implemented measures to reduce the compensation to behind-the-meter generators to a level below the retail rate or to allow utilities to charge a fixed or minimum fee to such generators in an effort to cause such generators to bear a higher portion of the utilities’ fixed costs than under a “Full Net Metering” approach.

⁷ Southern Cal. Edison Co. v. FERC, 603 F.3d 996 (D.C. Cir. 2010); Calpine Corp. v. FERC, 702 F.3d 41 (D.C. Cir. 2012).

⁸ Citing 16 U.S.C. §§ 2621(a), 2621(d)(1) (2012) (amending section 111(d) of PURPA).

⁹ See New England Ratepayers Ass’n, 168 FERC ¶ 61,169 (2019).

¹⁰ For our prior client alert on this subject, please see: https://www.omm.com/resources/alerts-and-publications/alerts/ferc-regulations-rates-energy-generating-facilities/.