Legal analysis aims to clear the air on third-party solar in Wisconsin, Minnesota

Wisconsin has become known nationally as a state hostile to distributed solar energy, with a Public Service Commission that has supported utility policies making rooftop solar installations difficult to finance and develop.

Minnesota, meanwhile, is generally known as a state where policies and officials are friendly to solar energy.

But in both states, a lack of clarity around the legality of third-party ownership, an important solar financing arrangement, has jeopardized or slowed the prospects for solar development, industry backers say.

Third-party ownership is a way that schools, government agencies and other non-profit organizations can finance solar installations and ensure that they can take advantage of tax credits.

In response to the situation, the Environmental Law & Policy Center has recently released legal memos making the case that in both states, statutes and case law clearly indicate such arrangements are fully legal (the ELPC is a member of RE-AMP, which publishes Midwest Energy News).

The Wisconsin memo, released in mid-October, is meant to help change the prospects for distributed solar in the state and jump-start a local solar industry that has been on hold because of what backers call hostile decisions and actions from utilities and regulators. In Minnesota, the memo released today is meant to bolster and protect a generally vibrant distributed solar outlook.

Wisconsin situation

The Wisconsin Public Service Commission’s rulings in three major rate cases last year put a serious chill on distributed solar installations by, among other things, increasing fixed charges on utility bills and adding new fees for solar installations.

The commission did not adopt one of the most extreme utility proposals – We Energies’ bid to essentially outlaw third-party ownership of solar installations.

However, that proposal continues to stall solar development in the state, since the commission did not clearly reject the concept and commission members have released informal letters indicating opposition to third-party ownership.

With the possibility seemingly looming that third-party ownership in Wisconsin could be prohibited in the future, solar developers have been largely unwilling to embark on projects in the state, industry leaders say.

Matt Neumann, president of Sunvest Solar in suburban Milwaukee, says his company does not do third-party ownership deals in its home state because of the uncertainty.

Amy Heart is senior manager of public policy for the national solar company Sunrun.

“It’s a gray area, and when it’s a gray area you don’t get companies testing the waters, you don’t get investment from companies when that’s one of their business models, you get people doing business in other states instead,” she said.

“We hear from companies that, ‘We’re not considering going to Wisconsin’ because of that uncertainty. And companies like Sunvest that are headquartered in Wisconsin are doing the majority of their business in surrounding states.”

A public utility?

Third-party ownership is essentially when one company owns and operates solar panels located on the roof or property of another entity, including a private individual, business, government agency or non-profit organization. The owner or tenant of the property often buys power from the company owning and operating the solar panels, through a PPA, or power purchase agreement.

Similar arrangements can also be made for small wind power projects or biogas installations, like those on many farms. In another form of third-party ownership, the property owner or tenant can lease the solar installation or other distributed generation from the entity that owns it, in which case there is no sale of power.

Third-party ownership arrangements often makes solar installations much more affordable, since the property owner or resident does not have to put all the capital up front. These arrangements are especially attractive for non-profit institutions like government agencies, schools and many hospitals, since they are tax-exempt and cannot on their own take advantage of tax breaks that are meant to make solar more affordable.

The main argument against third-party ownership with a power purchase agreement is that the company owning the solar panels is acting like a utility by generating and selling electricity, and that it should be regulated as a utility and only allowed to exist if it meets the requirements put on utilities. That argument was used unsuccessfully by Madison-based Alliant Energy in a recent Supreme Court case in Iowa.

In Wisconsin, state law prohibits public utilities from providing service to customers already receiving service from a utility. That means designating third-party installations as public utilities would essentially outlaw the arrangements, if the customer was also connected to the grid as most people with solar panels are.

“That confusion and uncertainty has really been hindering the development of the [solar] market in Wisconsin,” said ELPC attorney Brad Klein, co-author of the memos. “Customers and municipalities and others that might be interested in investing in solar have not been willing and able to go forward with this type of financing model because they don’t know if the commission is going to uphold it.”

The ELPC memos cite precedent and make legal arguments to assert that third-party ownership does not make the owner of solar panels a utility.

The main reasons are clear and simple, the ELPC memos say: third-party installations are not monopolies, they do not devote property to public use, they do not use public infrastructure or investments, they operate in a competitive environment and do not exert political influence on decision-makers.

Utility regulation as we know it was developed specifically to protect ratepayers from unfair treatment by privately-run utilities that are essentially granted monopoly power by the government. In other words, in situations where customers have little choice over what utility provides their services, and when utilities are in part supported by taxpayer funds.

By contrast, companies that offer third-party solar or other installations operate in a highly competitive environment. There is no pressure on consumers to enter into these agreements at all, and if they do, they have choices of which companies to partner with.

Ironically, if utilities are able to convince utility commissions in Wisconsin or elsewhere to effectively prohibit third-party ownership, these virtual monopolies will have succeeded in doing what regulation was meant to curb: taking away choices from consumers.

Encouraging precedent

The ELPC Minnesota memo notes that the state’s Supreme Court has in the past decided whether something is a utility on a case-by-case basis depending on what it “actually does.”

For example, it ruled that a closed-circuit educational television network at the University of Minnesota did not pose the “usual monopolistic evils” that true telecommunications utilities could. It decided the closed circuit TV network did not qualify as a utility subject to regulation.

The ELPC Wisconsin memo cites various state Supreme Court decisions that would also seem to clearly affirm that third-party solar installations are not utilities – for instance, cases where a property owner built a steam plant to serve tenants in several buildings, where neighbors built their own small electric line and where a Ford plant built a hydroelectric dam to power its operations.

The memo cites a Wisconsin Supreme Court ruling in saying that: “Solar developers are much more like vendors of ‘merchandise . . . like soap, candles or hats’ than railroad barons or gas company monopolists.”

Third-party solar installations, the memos stress, are “behind-the-meter” arrangements resulting in on-site electricity generation, with the “sale” of the electricity being only incidental.

Possibilities for relief

The memos, which the ELPC produced as part of its participation in the U.S. Department of Energy’s SunShot Initiative promoting solar energy, have not been filed with any specific agencies or in any formal capacity.

But Klein said he hopes they will influence state lawmakers and judges, public service commissioners and utility officials in their future proposals and decisions. Klein noted that public service commissions could make proactive declaratory rulings that would affirm the legality of third-party ownership.

State legislatures could also pass legislation affirming the legality of third-party ownership. Neumann would like to see this happen.

“I do believe that third-party ownership is legal in Wisconsin, both leases and PPA’s which are the most common structures,” he said. “I would like to have the legislature pass legislation to make it clear, rather than having the utilities challenge the issue in front of the public service commission.

“Clean solar energy is supported by over 85 percent of Americans, our laws should support the desires of the constituents. A legislative bill for solar free-market financing would be the best way to do this.”

Lawsuits possible

If a third-party project is ever torpedoed by a utility or commission in the future and a lawsuit is filed challenging that move, the legal arguments laid out in the memos could inform attorneys’ arguments or judges’ decisions.

In Iowa, third-party ownership was essentially declared legal and valid thanks to a case that went to the state Supreme Court, wherein a utility had tried to prevent Eagle Point Solar from owning an installation on a municipal building. The state Supreme Court ruled in favor of allowing the installation, in a move seen as an important victory for solar installations.

Klein helped defend Eagle Point’s interest in the Iowa case, and said that Wisconsin case law is even more clear than Iowa law in affirming the legality of third-party ownership. That’s because previous court decisions in Wisconsin have, he said, been very clear in establishing that private contracts are not sales to the “public.”

“A key question when determining whether a public utility exists is whether there are any sales to the public,” Klein said. “The Wisconsin [court decisions in past] cases are very clear that sales to a very limited or restricted class of people like we have here is not a sale to the public. That’s a private contract involving a sale to that particular person – it’s not available to the public at large.”

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