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February 16, 2016

Pennsylvania's New Net Metering Cap May Be Vulnerable

On February 11, 2016, the Pennsylvania Public Utilities Commission (PPUC) issued a long-awaited final order (Order) in a proceeding to amend its regulations that implement the state’s Alternative Energy Portfolio Standards Act of 2004 (AEPS Act).[1] The AEPS Act, among other things, requires Pennsylvania utilities to buy excess energy at full retail rates from customer generators who enter into net-metering arrangements, and sets maximum nameplate capacity limits for these customer generators of 50 kW for residential service, 3 mW at other service locations and up to 5 mW under certain circumstances.

The Commission was concerned that these limits might not prevent merchant generators from masquerading as customer generators, in order to be able to sell their output at full retail rates rather than wholesale rates, to the detriment of retail customers who subsidize those high rates. Accordingly, the Commission amended its rules to impose the additional limit on eligibility that energy systems for net metering henceforth must be sized to generate no more than 200 percent of the customer generator’s annual electric consumption.

While the Commission took pains to defend the limit as a reasonable exercise of its statutory authority, its decision drew dissents from two of its five members, who contended that the Commission exceeded that authority by imposing a limit that differs from the statutory nameplate limits. The arguments of those dissents, as well as a recent appellate decision striking down another PPUC attempt to restrict net metering, suggest that, if challenged, the 200 percent limit might face difficulty surviving judicial review.

The 200 percent limit was significantly higher than the limit initially proposed by the PPUC. In its February 20, 2014 order initiating the rulemaking (2014 Order), the Commission suggested a limit of 110 percent of annual consumption as one of several provisions designed to clarify eligibility for net metering arrangements under its existing rules.  The 110 percent figure came from a 2012 Policy Statement that the Commission had adopted for net metering of third-party-owned and operated systems, again to limit the possibility of merchant generators posing as customer-generators, contrary to the intent of the AEPS Act.[2]  While the PPUC noted that it had previously declined to extend the application of that limit to systems owned by a customer generator,

we now believe that this same reasonable and balanced approach should apply to all new customer-generators as it more appropriately supports the intent of the AEPS Act.  … [t]he AEPS Act defines net metering as a means for a customer-generator to offset part or all of the customer-generator’s requirements for electricity.  In addition, it ensures that the customer-generator is not acting like a utility or merchant generator, receiving excessive retail rate subsidies from other retail rate customers.

…[T]he 110 percent limit is a design limit to be based on historical or estimated annual system output and customer usage, both of which are affected by weather that is beyond the control of the customer. …  We believe that this approach appropriately captures the intent of the AEPS Act regarding net metering and is consistent with how net metering is treated in other states.

2014 Order at 12-13; footnotes omitted.

On April 23, 2015, the PPUC issued an Advance Notice of Final Rulemaking (ANFR). In response to comments that the 110 percent limit was overly restrictive, the Commission proposed to raise it to 200 percent, stating that “This proposal will increase the number of systems that can qualify for net metering, while at the same time meeting the intent of the AEPS Act to exclude generation utilities and merchant generators from obtaining customer-generator status.” ANFR at 11. The Commission reiterated that its proposal was consistent with the approach taken by other states, referring to a Maryland PUC decision setting a 200 percent limit. Id. at 12 n. 5.

Response to the 200 percent limit was almost uniformly negative. Utilities and customer interests opposed it as overly generous and not in keeping with the notion of limiting eligibility for net metering to entities that were genuinely producing power primarily for their own consumption. Others argued that the Commission had not conducted a sufficient analysis of the need for the cap; that a cap would needlessly deter investments in renewable energy; and that the Commission lacked the authority to impose a percentage generation cap, given that the legislature had specifically addressed size limits when it imposed the 50 kW and 2 and 3 mW nameplate restrictions.[3]

In deciding to incorporate the 200 percent limit in its final rule, the Commission rejected the argument that it lacked the necessary statutory authority.  The Commission’s authority, it claimed, derives both from its general authority under the Section 501 of the Pennsylvania Utility Code to make “such regulations, not inconsistent with law, as may be necessary or proper in the exercise of its powers or for the performance of its duties,” and from its “broad rulemaking authority to implement the AEPS Act.” Order at 52. The Commission quoted the statement in the AEPS Act that “The Commission will carry out the responsibilities delineated within [the Act].” Ibid.  As the two Acts refer to each other and both relate to the purchase of generation supplies for retail customers, the Commission stated that under Pennsylvania law they must be “construed together as one statute.” Order at 53; citation omitted.  From this it followed that “the Commission has broad and explicit legislative rulemaking authority…to promulgate these regulations.” Ibid.

The Commission augmented this analysis with several points. First, it claimed, the 200 percent limit gives effect to both of the statutes, since it authorizes net metering for facilities that meet the statutory nameplate criteria so long as the customer has annual electrical demand equal to or greater than the annual output of the facilities. It also ensures that owners or operators of eligible systems are in fact customers and not merchant generators, in keeping with the intent of the AEPS Act, since “[a] system that produces more than double the electricity needed at that service location is doing so more as a merchant generator than as a customer intending to offset part or all of their requirements for electricity.” Order at 54.

Next, the Commission asserted that the 200 percent limit provided adequate incentives for alternative energy development without overly penalizing ratepayers “who would be asked to finance the difference between the retail and wholesale price of the electricity produced by …oversized systems.” Ibid. The Commission noted that eligible systems often last two or more decades, which is plenty of time to recover their costs, and that the systems often also benefit from tax credits and the sale of alternative energy credits. Ibid.

 Third, the Commission said that the 200 percent limit “is reasonable as it is the same or higher than similar limits imposed by other states in the region.” Order at 55. It mentioned the Maryland regulation cited in the ANFR, as well as 110 and 100 percent limitations in Delaware and New Jersey, respectively.  “No commentator,” the Commission added, “ has demonstrated that these same or similar limitations imposed in other states has prevented or restricted the development of alternative energy systems….” Ibid.

 Fourth, the PPUC noted that Pennsylvania law requires that all energy purchased to provide default service must ensure adequate and reliable service at least cost. The PPUC deemed this requirement satisfied in finding that the limit “will ensure that rates default service customers pay for generation is the least cost to customers over time and that they are just and reasonable, in compliance with [the PUC Code], while at the same time permit the payment of full retail value for all excess energy produced on an annual basis….Setting the limit at 200% of historical load allows for future load growth, while at the same time limiting excessive oversizing of systems….” Id. at 56.

Fifth, the PPUC concluded that the limit would also satisfy the requirement of Pennsylvania law that rates received by a utility be just and reasonable, based on its findings that (a) “permitting customer generators to install systems without any limits on the amount of energy [they] produce, and receive above-market prices for that unlimited excess, results in unjust and unreasonable rates paid by all other default service customers…” and (b) limiting net metered customer generator systems to a size that will generate no more than 200% of the customer generator’s annual electrical consumption will place a reasonable limit on the amount of excess generation [utilities] must purchase and the amount default customers must pay for, at above market rates.” Order at 57-58.

As noted, the Order drew dissents from two Commissioners, both of whom cited the statutory size limits as precluding the Commission from imposing a separate limit if its own. In her dissent, Chairman Brown acknowledged that the rationale for the 200 percent limit “is noble in that it recognizes that any above market payments made to customer generators are paid for by the rest of the rate paying class of customers.”[4] However, she explained, “Because the AEPS Act very precisely provides that customer generators may size up to 50kw for residential systems and up to 3 or 5 MW for non-residential systems, this Commission commits legal error by imposing a different size limitation in or regulations.” Chairman Brown cited Utility Air Regulatory Group v. EPA, 134 S. Ct. 2427, 2445 (2014)  for the proposition that “An agency has no power to ‘tailor’ legislation to bureaucratic policy goals by rewriting unambiguous statutory terms. Agencies exercise discretion only in the interstices created by statutory silence or ambiguity; they must always ‘give effect to the unambiguously expressed intent of Congress.’”[5]

The viability of any agency decision would be undermined by the existence of multiple dissenting votes.  In this case, however, the majority should have additional reasons for concern. Most significantly, the majority offers no direct rebuttal to the dissenters’ legal argument (also put forward by several commenting parties in the rulemaking) that the existence in the AEPS Act of specific limits on the size of customer generators precludes the Commission from adding a size limitation of its own. Instead, the majority skirts the issue by arguing that the AEPS Act, read in conjunction with the PUC Code, confers broad rulemaking authority, and that the 200 percent limitation is reasonable and necessary to give effect to the various statutory objectives.

Also problematic for the majority is the questionable support for some of its positions. For example, the fact that the Commission initially proposed that the limit be set at 110 percent of the customer generator’s load undermines the Commission’s conclusion that the 200 percent limit is necessary to give effect to the requirement that power purchased for default service be “least cost.” A limit of 200 percent can hardly ensure “least cost” if a lower cost limit of 110 percent could have been imposed. If the Commission had been legally precluded from adopting the 110 percent limit, it could perhaps argue that a lower cost option was not available. However, the decision to adopt the higher limit appears to have been based more on the policy consideration of encouraging more renewable power

Similarly, the Commission bases its authority to impose the 200 percent limit on several “findings” which the Commission puts forward with no record support. These include the findings that permitting customer generators to receive full retail rates for energy produced above the limit results in unjust and unreasonable rates (Order at 58), and that placing a 200 percent constraint will result in a “reasonable limit” on the amount of energy utilities must buy and that default customers must pay for. Ibid.

It is also noteworthy that a Pennsylvania appellate court recently struck  down another Order in which the PPUC attempted to place limits on net metering in the interest of minimizing subsidies paid by retail customers. Dauphin County Industrial Dev. Auth. v. PPUC, No. 1814 (Pa. Commonwealth Court, Sept. 9, 2015). That case involved a challenge by an industrial net metering customer of a PPUC ruling that a host utility was not required to pay time of use rates for the customer’s excess energy. While the statutory provisions involved were slightly different, there, as here, the PPUC contended that its obligation to allow net metering at full retail rates (in that case, including higher, on-peak rates) must be tempered by its obligation to ensure just and reasonable rates to other customers. The court disagreed:

The Commission’s interpretation of Section 2807(f)(5) is not entitled to deference. …. [T]here is no ambiguity in the Competition Act’s mandate. It provides, plainly, that “[t]he default service provider shall offer the time-of-use rates … to all customers that have been provided with smart meter technology.” … Our rules of statutory construction require that words and phrases be read according to their common and approved usages. … The legislature’s unqualified use of the words “shall offer” in Section 2807(f)(5) places the burden on the default service provider, in this case PPL, to offer Time-of-Use rates to customer-generators. The legislature knows the difference between a default service provider and an Electric Generation Supplier. … Simply, Section 2807(f)(5) does not authorize a default service provider to pass along this obligation to an Electric Generation Supplier.

Id., slip op. 17; citations and footnotes omitted.

In sum, the legal path for a reviewing court to overturn the PPUC’s Order in this case is easy to discern. Chairman Brown may have been prescient when she stated in her dissent that the agency is not free to “’tailor’ legislation to bureaucratic goals by rewriting unambiguous statutory terms,” no matter how noble its rationale for doing so.

[1] PPUC Docket No. L-2014-2404361, Implementation of the Alternative Energy Portfolio Standards Act of 2004, Final Rulemaking Order (February 11, 2016).,

[2] PPUC Docket No. M-2011-2249441, Net Metering – Use of Third Party Operators, Final Order (March 29, 2012).

[3] Order at 46-52.

[4] PPUC Docket No. L-2014-2404361, Implementation of the Alternative Energy Portfolio Standards Act of 2004, Statement of Chairman Gladys M. Brown (February 11, 2016).

[5] While Vice Chairman Place’s Dissent differs in its emphasis, he appears to agree with the Chairman’s statutory argument, stating that “it is axiomatic that the Commission, as a creature of the legislature, has only those powers conferred upon it by statute,” and that “I believe that the public, including ‘customer generators’ and retail customers, would be better served if the Commission were to focus on reevaluating ‘retail value’ rather than adding further constraints to those already contained in the statutory definition of customer generators.” PPUC Docket No. L-2014-2404361, Implementation of the Alternative Energy Portfolio Standards Act of 2004,Statement of Vice Chairman Andrew G. Place (February 11, 2016).

[6] While the Commission also purported to rely on the fact that other states in the region have adopted similar limits, in fact only Maryland has a 200 percent limit, while the limits in New Jersey and Delaware are 100 percent and 110 percent, respectively.

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