A nonprofit advocacy group recently asked FERC to overturn a policy that has been in effect for more than a decade and assert jurisdiction over energy sales from rooftop solar facilities and other distributed generation located on the customer side of the retail meter.
The New England Ratepayers Association (NERA) submitted a petition for declaratory order on April 14, asking the Federal Energy Regulatory Commission (FERC or Commission) to find the Commission has jurisdiction (1) whenever the output of behind-the-meter generators exceeds the customer’s demand or (2) where the energy from such generators is designed to bypass the customer’s load and therefore is not used to serve demand behind the customer’s meter.
NERA’s petition places a long-debated issue back into the spotlight and challenges FERC’s views on its own jurisdiction over net-metering transactions, claiming the agency’s policies have resulted in skewed pricing for behind-the-meter generation and inappropriate cost shifting for retail customers.
Net-metering programs allow for a public utility’s retail customers to measure both energy delivered by the utility and energy produced by approved small-scale generation systems, and to offset those two quantities for the purpose of determining the customers’ “net” electricity usage. Through such “netting,” the customer is effectively compensated for the electricity it produces at the retail electric rate. If the energy produced by the retail customer’s generation system exceeds the customer’s load at any given time, then that excess energy could be placed back onto the grid and resold by the local utility to other customers.
Whether those transactions are wholesale sales, and therefore subject to FERC jurisdiction, or retail sales, and therefore subject to state jurisdiction, has been hotly debated over the years. FERC’s position has been that those transactions are typically retail transactions subject to state commission jurisdiction, unless the customer sells more power back to the utility than it consumes in the applicable retail billing period (usually a month). In those instances, FERC’s prevailing view is that such “net sales” are wholesale sales subject to federal jurisdiction.
FERC held that net sales from a qualifying facility (QF) must be priced at the purchasing utility’s avoided cost, consistent with the pricing requirements of the Public Utility Regulatory Policies Act of 1978 (PURPA), whereas net sales by a non-QF would be subject to Federal Power Act requirements and require a rate schedule on file with the Commission. These policies are largely attributed to FERC’s MidAmerican and Sun Edison declaratory orders, which established the “netting theory” at issue in NERA’s petition.
NERA’s petition places the issue of jurisdiction over behind-the-meter sales squarely before the Commission again. The petition asks FERC to endorse the view that a wholesale sale occurs when customer-sited, behind-the-meter generation either exceeds the retail load behind the same meter or is designed to bypass the customer’s load entirely and be transmitted to the grid for resale. NERA argues that, because the interconnected utility comingles that electrical output with other energy on its system and resells it to other customers, those transactions are wholesale sales that should be priced at the utility’s avoided cost of energy if the sale is being made by a QF pursuant to PURPA or pursuant to a just and reasonable wholesale rate if the sale is pursuant to Section 205 of the Federal Power Act. In that regard, the petition claims state net-metering frameworks designed to set the rates of such energy deliveries intrude on FERC’s exclusive jurisdiction and are preempted by the Federal Power Act and PURPA.
Turning to the Commission’s prior net-metering decisions, the petition argues the “netting theory” developed in MidAmerican and upheld in Sun Edison was rejected in Southern California Edison v. FERC and Calpine v. FERC , a pair of opinions issued by the US Court of Appeals for the DC Circuit that dealt with the price of “station power” used for on-site use by generating facilities. The petition argues that, in those opinions, the court effectively barred FERC from relying on netting periods to determine jurisdiction over the transactions at issue. Therefore, NERA claims, the jurisdictional rationale developed under MidAmerican and Sun Edison under the same theory is no longer legally sound.
The petition goes further and argues the practice of offsetting the utility’s retail sale with the customer’s wholesale sale amounts to an exchange transaction. In other words, NERA posits the original energy sale (i.e., from the customer to the utility) and the return of the energy (i.e., from the utility to the customer) are treated as separate wholesale sales as to which payment is made in kind. The petition claims FERC and court precedent make clear that such exchanges should be considered wholesale sales, subject to FERC’s jurisdiction, and that FERC cannot disclaim its jurisdiction over those transactions.
As far as pricing is concerned, the petition argues most customer-sited, net-metered sales to utilities are made by small renewable power production facilities that qualify as QFs. Therefore, the petition states, wholesale sales from such facilities to the grid should be consistent with avoided-cost pricing under PURPA. That pricing scheme, NERA argues, will be significantly lower than existing retail rates for net-metered output sold back to the grid, and thus prevent cost shifting to other customers that do not partake in such transactions.
The petition states that enforcing avoided-cost pricing under PURPA will not be administratively burdensome because FERC’s regulations implementing PURPA provide key Federal Power Act exemptions for most small net-metered facilities. Most notably, facilities that qualify as QFs and that are under 20 megawatts are exempt from most requirements under the Federal Power Act, including the need to obtain market-based rate authority to engage in wholesale sales. In addition, QFs smaller than 1 megawatt need not self-certify their status with FERC—they are QFs by operation of law.
From a policy perspective, the petition argues FERC’s disclaimer of jurisdiction over net-metered transactions harms consumers and distorts investment decisions in favor of “less efficient renewables over more efficient renewables.” The petition claims the commission’s existing policies on net-metered output place firmer capacity at a disadvantage because overpayments by the utility for net-metered output results in overinvestment in the production of the variable, non-dispatchable energy, thereby suppressing market prices and reducing investment in firmer resources needed to support reliable grid operations.
The NERA petition asks FERC to overturn the policies espoused in MidAmerican and Sun Edison and assert jurisdiction over transactions that have largely been left to the states to regulate. Even if FERC were to agree with NERA, it remains unclear as a practical matter how the agency would be able to effectively regulate the millions of small, net-metered resources that are sited on the distribution grid.
If FERC were to act on the petition, it could create a significant ripple effect across multiple industries. The primary focus of the petition is customer-sited rooftop solar installations, but a commission order favorable to NERA could impact the rate structure, construction, and financing of other behind-the-meter distributed generation, such as battery storage systems. In addition, many states would likely be forced to drastically alter existing programs and rate structures to account for the regulatory change.
Comments to the NERA petition are due by May 14, but FERC could extend the deadline further in response to intervener requests. Although NERA has asked for FERC to rule promptly on its petition, FERC is not bound to act on the petition by a statutory timeframe.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers: