Transaction Structuring Matters: North Carolina Rejects Third-Party Rooftop Solar Power Purchase Agreements

by Stoel Rives - Renewable + Law
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A North Carolina appeals court has reminded energy developers in the state of the importance of structuring a transaction so as not to trigger the state’s utility franchise laws. For one unfortunate developer, that reminder came in the form of disgorged revenues and potential monetary penalties.

Earlier this month, on September 19, 2017, a North Carolina appeals court (in a 2-1 decision) upheld a decision of the North Carolina Utilities Commission (“NCUC”), which found that an environmental non-profit organization (NC WARN) was impermissibly operating as a North Carolina “public utility” when NC WARN entered into a power purchase agreement to own and operate solar panels on a church’s property and to charge the church based on the amount of electricity generated by the solar panels. (State of North Carolina ex rel. Utilities Commission et al. v. North Carolina Waste Awareness and Reduction Network, Case No. COA16-811). The North Carolina court found that such service by NC WARN infringed on the franchised utility’s electric service territory, contrary to North Carolina’s policy prohibiting retail electric competition and establishing regional monopolies on the sale of electricity. According to the court, NC WARN’s activities (in owning and operating the solar panels on the church’s roof and selling electricity from those solar panels to the church) were in direct competition with the franchised utility’s services as both entities were selling electricity to the franchised utility’s customer.  

The court’s analysis concentrated on whether NC WARN, through its ownership of and sale of power from the solar panels on the church’s roof, was producing electricity “for the public.” The majority found that, even though NC WARN only owned solar panels on the roof of one church, this qualified as service to the “public,” especially since NC WARN also sought to provide such rooftop solar service and power purchase agreements to other entities in North Carolina. The majority also noted that it is the responsibility of the North Carolina legislature to act if it wants to permit these type of third-party rooftop solar power purchase agreement sales. The dissent disagreed with the majority’s conclusions, arguing that NC WARN is not a North Carolina “public utility” since the solar panels on the church’s roof are not serving “the public” as the solar panels only generate power for a single customer from the customer’s property.

This decision keeps North Carolina in the minority of U.S. states that disallow such third-party power purchase arrangements for rooftop solar. According to the Database of State Incentives for Renewables & Efficiency’s (DSIRE) April 2017 analysis, at least 26 states, as well as Washington DC and Puerto Rico, authorize or allow these type of arrangements.

Third-party power purchase agreements for rooftop solar facilitate a wider range of customers accessing solar. Self-installing rooftop solar panels often involves high upfront capital costs, and customers can avoid these upfront costs by having third-parties shoulder the installation costs in exchange for long-term payments for the power generated by the rooftop solar panels. In fact, NC WARN argued before the NCUC that its power purchase agreement was simply a funding mechanism that should not be subject to regulation by the NCUC (an argument that was rejected by the NCUC). By prohibiting third-party power purchase agreements as a financing mechanism for rooftop solar, this court decision will likely inhibit the growth of rooftop solar in North Carolina. While North Carolina explicitly allows “customer-owned” generation, not everyone interested in rooftop solar will be able to pursue that route.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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