The Iowa Supreme Court on Friday affirmed a lower court ruling that will make it easier for small-scale solar projects to move forward in Iowa. The up-front cost of installing solar panels has long been a barrier to unlocking Iowa’s huge potential to generate solar power. Now municipalities, home or business owners will be able to have solar panels installed through a “third-party power purchase agreement,” whereby they pay for the electricity generated after installation.

Follow me after the jump for background on this case, key points from the majority ruling, and reaction to the decision. Advocates for solar power in Iowa and elsewhere are enthusiastic about the potential for more small-scale renewable energy projects (sometimes called “distributed generation”). Utility companies are warning that the ruling will drive up electricity costs.  

This case stemmed from the city of Dubuque’s “power purchase agreement” with Eagle Point Solar, under which the company would install solar panels on city property, and the city would buy from Eagle Point any electricity generated by the panels. Midwest Energy News explains the concept behind such arrangements.

The case basically turned on a funding mechanism known as third party financing. It allows a party other than the solar installer or provider to finance, own and operate a solar installation on another entity’s property, providing energy to the property through a power purchase agreement.

Entities without any tax liability – governments, non-profit institutions, some hospitals and schools, for example – cannot collect tax credits for renewable energy. Hence such third party power purchase agreements are often crucial to making the finances of rooftop solar work.

Meanwhile even many people or institutions who can collect tax credits have trouble coming up with capital to install solar panels. Tim Dwight, a solar developer in Iowa, said that the typical residential solar installation now costs in the neighborhood of $16,000. Although almost half of that could be covered by the federal and Iowa state government credits, the remaining funds can be a barrier for homeowners or business owners; and banks are often reluctant to make loans for solar installations. Hence third party financing can be crucial for a wide range of solar and other renewable applications.

The Iowa Utilities Board rejected Dubuque’s power purchase agreement, saying it would make Eagle Point a “public utility” trying to operate “within the exclusive service territory of another electric utility.” The city of Dubuque started leasing the solar equipment rather than paying for the electricity under the original agreement.

Meanwhile, the parent company of Eagle Point sought judicial review of the Iowa Utilities Board’s decision. In April 2013, a Polk County District Court agreed that this kind of “behind the meter” agreement did not make Eagle Point a public utility subject to regulation by the Iowa Utilities Board. You can read the full text of Judge Carla Schemmel’s ruling here.

The board appealed, supported by public utilities and the Iowa Association of Electric Cooperatives. The Iowa Office of Consumer Advocate and a “Solar Coalition” of environmental groups supported the position of Eagle Point’s parent company in the appeal.

Justice Brent Appel wrote the majority ruling, joined by Chief Justice Mark Cady and Justices Daryl Hecht and David Wiggins. You can read the decision in full here (pdf). After going through the facts of the case and background, Appel concluded that the Iowa Utilities Board was not entitled to deference “without some clear indication that the general assembly intended this result [of the agency’s legal interpretation].” In this case, the Iowa legislature has itself defined the terms “public utility” and “electric utility.” He then goes through case law and regulatory decisions from other states, which also considered whether third-party power purchase agreement owners should be regulated as public utilities.

Beginning on page 36, the majority ruling delves into the key question of whether Eagle Point should be considered a public utility. The majority disagrees with the Iowa Utilities Board’s determination that selling electricity by the kilowatt/hour makes Eagle Point a public utility. Excerpts from pages 45 through 47 of Appel’s opinion:

[U]nder the IUB approach, a behind-the-meter solar generating project built by an engineering class at Iowa State University that furnished electricity on a per kWh basis to a nearby farm would be considered a public utility subject to a wide gamut of regulatory requirements. Even if the students obtained a waiver of the territorial exclusivity of the local electric utility, students would be required to stay after class to handle the paperwork associated with filing tariffs with the IUB.

We reject the approach of the IUB in this case. Instead, based on our straight line of cases from Northern Natural Gas I through Northern Natural Gas II and Hawkeye Land Co., we conclude that the proper test 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. We believe the Serv-Yu factors provide a reasoned approach when considering the question of whether the activity involved is sufficiently clothed with the public interest to justify regulation. […]

We also note that the 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.6 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. See Iowa-Illinois Gas & Elec., 334 N.W.2d at 753-54. 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.

On pages 46 through 51, the majority opinion goes through the eight factors from the Serv-Yu case, a 1950 Arizona decision that serves as precedent for this ruling. Using those criteria for analysis, Eagle Point does not meet the definition of a “public utility.”

Over the next three pages, Appel explains why the court does not find Eagle Point to be an “electric utility” either, concluding,

The problem for the IUB, however, is that it has not offered a clear explanation as to why Eagle Point should be considered an electric utility even if it is not a public utility. The IUB asserts that the exclusive territory provisions require that the definition of electric utility should be broader than public utility, but we do not agree. The argument presented by IUB seems to be an effort to evade application of the Serv-Yu factors. We decline to adopt such an interpretation.

Justice Edward Mansfield dissented, joined by Justice Thomas Waterman. Mansfield did not engage with the argument over whether Eagle Point could be considered a public utility. Rather, he concluded that the courts should defer to the judgment of the regulatory agency (the Iowa Utilities Board), rather than acting as “experts on the delivery of electrical energy.”

To my mind, the majority opinion is a good case study on the limits of judicial competence and why the legislature wanted us to defer, in large part, to the regulatory agency.

As I read the majority opinion, my colleagues appear to be substituting their expertise on utility regulation for that of the [Iowa Utilities] Board. […]

The basic issue in this case is whether Eagle Point becomes a public utility under Iowa Code section 476.1 (2011) when it goes into the business of installing on-site solar energy facilities on various entities’ properties and selling the resulting electricity to those entities. I can see reasonable arguments on both sides.

The Board, after extensive proceedings, concluded that Eagle Point would become a public utility. […]

These arguments could be wrong. My colleagues believe they are wrong. But I do not believe we should be deciding them. […]

I think it would be hard to conceive of a substantive term more within the special expertise of the Board than whether a company providing electric service is operating as a “public utility.”

Justice Bruce Zager recused himself from the case; some attorneys representing the utility companies are partners of his daughter at a Des Moines law firm.

Speaking to Midwest Energy News,

Joe Bolkcom, an Iowa state senator who has worked hard to advance renewable energy, called the ruling “a very positive decision for the advancement of solar in Iowa. I hope it provides a rationale for the Iowa Utilities Board to make some good decisions about distributed generation.” […]

Bolkcom predicted that today’s ruling could encourage Iowa legislators to take a more supportive position towards renewable energy.

“If there’s more deployment of solar in Iowa, [legislators] are going to be more inclined to make policy that advances distributed generation,” he said.

I hope Bolkcom’s prediction is correct. I expect a small army of lobbyists for investor-owned utilities and electric cooperatives to urge Iowa lawmakers to change the definition of “public utility” or otherwise ban third-party purchase agreements, in response to this Supreme Court ruling.

Any relevant comments are welcome in this thread. I enclose below more reaction to the ruling.

July 11 press release from the Environmental Law and Policy Center:

Iowa Supreme Court Opens Door for Solar Energy Choice

Ruling Affords Iowans Same Options Offered Families in Other States

DES MOINES -Iowans can offer their roof space to solar energy developers and buy the power created from those panels according to an Iowa Supreme Court decision released Friday.

“Today’s decision is a win for Iowans because it gives everyone the option to go solar affordably,” said Brad Klein, senior attorney with the Environmental Law & Policy Center (ELPC), who argued the case last spring on behalf of a large coalition of solar energy and environmental advocates. “Across the country, families, businesses and communities have gone solar with third-party ownership. Now, that opportunity can come to Iowa, too.”

In 2011, Alliant Energy argued that an agreement between Dubuque-based Eagle Point Solar and the City of Dubuque violated the utility’s monopoly territory. Under the agreement, Eagle Point agreed to install and maintain solar panels on the Dubuque City Council building, the City would then pay Eagle Point for the energy created by those panels. The utility argued that the agreement, known as a third-party power purchase agreement (PPA) amounted to the creation of a utility. This claim was rejected by the court.

In his majority opinion, Justice Appel wrote that “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.”

“We are pleased that the court agreed with us that agreements that take place behind the meter cannot be considered utility deals,” said Josh Mandelbaum, staff attorney with ELPC’s Des Moines office.  “The fact that the court agrees with our analysis of the law means good things for the future of solar in Iowa.”

A recent report by the Iowa Environmental Council, Real Potential, Ready Today: Solar Energy in Iowa highlighted the significant potential for solar energy in Iowa. Mandelbaum said that Iowa is already starting to see the rapid growth of solar, which most recently was highlighted by the tripling of funding available for state tax credits for solar energy installation.

“This ruling opens up solar to a larger audience by bringing down up-front costs. This decision will make solar more affordable for Iowa families and businesses, and it also helps cities, churches and other non-profits to get the whole value of clean energy,” Mandelbaum added.

Friday’s ruling upholds an April 2013 ruling by the Iowa District Court.

Excerpts from the July 11 statement from the Iowa Environmental Council:

Victory #2 Protecting Solar Energy Choice and Supporting Small Scale Renewable Energy

In the second of two victories for the Environmental Council, the Court ruled that Iowans can offer their roof space to solar energy developers and buy the power created from those panels. The Council, according to Ralph Rosenberg, “welcomes the decision which held that third party payer arrangements are an important option for expanding renewable energy, along with tax incentives, grants, loans and other financing mechanisms.”

“Today’s decision is a win for Iowans because it gives everyone the option to go solar affordably,” said Brad Klein, senior attorney with the Environmental Law & Policy Center (ELPC), who argued the case last spring on behalf of a large coalition of solar energy and environmental advocates. “Across the country, families, businesses and communities have gone solar with third-party ownership. Now, that opportunity can come to Iowa, too.”

In 2011, Alliant Energy argued that an agreement between Dubuque-based Eagle Point Solar and the City of Dubuque violated the utility’s monopoly territory. Under the agreement, Eagle Point agreed to install and maintain solar panels on the Dubuque City Council building, the City would then pay Eagle Point for the energy created by those panels. The utility argued that the agreement, known as a third-party power purchase agreement (PPA) amounted to the creation of a utility. This claim was rejected by the court.

In his majority opinion, Justice Appel wrote that “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.”

Rosenberg, the Council director, noted that like the Farm Bureau case, this decision was thoughtful, well-reasoned and supported Iowa values and priorities of the Council-in this case, increasing the use of energy efficiency and renewable energy, while decreasing reliance on carbon based fuels.

A recent report by the Iowa Environmental Council, Real Potential, Ready Today: Solar Energy in Iowa highlighted the significant potential for solar energy in Iowa. Iowa is already starting to see the rapid growth of solar-highlighted by the bi-partisan support for tripling of funding available for state tax credits for solar energy installation.

Tim Dwight spoke to Radio Iowa about the ruling:

Dwight owns Integrated Power, which is based in California, but says he does most of his core work in Iowa. “You know this phototaic solar technology is starting to scale to become more cost effective and now we are really starting to understand the benefits of the technology and how we implement it,” Dwight says. ” I see this decision by the Supreme Court of Iowa as a huge step foward in the adoption of photovoltaic, in the adoption of more clean energy on our grid.”

Dwight spoke to Radio Iowa while at an event promoting his company’s products in Mason City. He says the solar industry is going to continue seeing a lot of uses, from the type in the court case to the use at private homes. “Because it’s all different for everybody. Some people might want to own their system and have the means to buy a full system for their house. Some people might have trees in their back yard that are blocking their southern exposure, so they are going to have to look at community solar options,” Dwight says. He says people may look to a solar cooperative that buys and leases solar panels that generate electricity that is then pushed out to the utilities.

Dwight says there is room for multiple types of power generation. “That’s what’s important about the industry, is making sure that we structure things appropriately and correctly. That one, everybody is winning in the market, not just the solar installer, not just the customer, but the ratepayer as a whole and the utility,” Dwight says. “And do it in a way where your are maximizing the benefit of what the technology is.”

From Grant Rodgers’ report for the July 12 Des Moines Register:

The ruling will help tip the scales for solar by legalizing another way for people and governments to pay for solar projects, said Barry Shear, president and CEO of Eagle Point Solar.

“This ruling now makes other solar projects like this viable,” he said in a statement. “We can go to any municipality, any university, any wastewater treatment plant, churches … and we can put solar on their roof or on their property – and they have to come up with zero dollars to do this.”

Iowa’s main public utility companies, Alliant Energy and MidAmerican Energy, have fought power purchase agreements, arguing that state regulations give them exclusive rights to sell energy in defined territories. […]

If energy customers increasingly use electricity purchased through third-party agreements, all ratepayers could suffer when public utilities are forced to make up costs elsewhere, said Justin Foss, a spokesman for Alliant Energy.

Foss also reiterated a hypothetical argument that the company’s attorneys made in legal briefs to the court: The ruling in favor of Eagle Point Solar could open power purchase agreements to companies offering less environmentally friendly options.

“This ruling opens it up for this type of generation; does it also apply if somebody wants an electric generator that runs off of whale oil and fluffy kittens?” he said.

From Ben Jacobson’s story for the Dubuque Telegraph-Herald:

Alliant spokesman Justin Foss said the ruling won’t impact the company’s dedication to supporting renewable energy. More than 670 Alliant customers in Iowa are generating renewable energy, either through solar power or another source, he said.

However, if PPAs become prevalent, it could create a financial strain that might have to be passed to the consumer, according to Foss.

“The financing model, and the rate model, that Iowa utilities use is that the costs for the entire system are divided out among all the kilowatt hours that the customers use,” he said.

A customer’s bill not only covers generation costs, but employee and infrastructure expenses as well.

“When people use less of those energy units, you have a smaller pool by which to divide all of those costs for the power pole, for the power line, for the power plant, for the employee,” Foss said. […]

With the PPA nixed [by the Iowa Utilities Board], the city has been leasing the solar equipment and owns the electricity it produces. City officials now have the option to reinstate the PPA.

No city of Dubuque officials were available Friday to comment. According to Public Information Officer Randy Gehl, solar panels on the Municipal Services Center saved the city $5,104.52 in 2013.