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Should Rooftop Solar Leasing Companies Be Treated as Utilities?

A solar rooftop company that entered into a long-term contract to supply electricity to a city building in Dubuque, Iowa from solar panels it mounted on the roof is not making retail sales of electricity, an Iowa court said.

The decision could open a hole in retail sale restrictions that prevent rooftop solar companies from entering into power purchase agreements with customers in other states if the logic the Iowa court used were to be adopted more widely. The court said the solar company is really in the business of making energy efficiency improvements that reduce the amount of electricity a customer takes from the grid rather than selling the customer electricity.

Many solar companies retain ownership of rooftop systems and lease them to customers. The customers pay rent that is roughly 85 percent of what they pay the local utility for power. However, it is not a good idea to lease a solar system to a government or tax-exempt entity because equipment leased to such an entity does not qualify for a 30 percent investment tax credit and accelerated depreciation. The only way to preserve the tax benefits is to enter into a power contract rather than a lease with such a customer. A special provision in the US tax code allows an agreement to be written in such a way that it is close to a lease in substance, but is still treated for tax purposes as a power contract. The key is to avoid four “foot faults” in how the agreement is drafted.

Eagle Point Solar signed a power contract to supply electricity to a city building in Dubuque. Interstate Power & Light Company, a regulated utility, has a monopoly to supply electricity to retail customers in the area. Eagle Point asked the Iowa Utilities Board for a declaratory order that it would not violate state law by entering into the arrangement. (Ironically, the power contract was drafted in a way that would have prevented Eagle Point from claiming any tax benefits on the solar system.)

The board said Eagle Point will become a public utility if it enters into the arrangement and will infringe on the IP&L monopoly as the sole authorized retail electricity supplier in the area. Eagle Point filed for judicial review. An Iowa district court said Eagle Point would not be a utility. The key for the court was that Eagle Point was not selling electricity “to the public” as used in the state statute defining a “public utility.”

The phrase “to the public” is not defined. The court relied in part on an eight-factor test that an Arizona court developed in a natural gas case.

The court said it was important to look at what Eagle Point actually does. The company installs solar panels and also provides financing options to its customers in the form of leases or power purchase agreements. These “financing options” are incidental to the company’s main business, the court said.

That business is installing solar panels on the customer side of the utility meter. The company is basically helping the customer reduce its electricity demand just like other energy efficiency installers. “[A] provider of behind-themeter energy efficiency services in not subject to regulation as a public utility,” the court said.

Eagle Point “provides the customer with the same service [as energy efficiency companies that install better insulation, new windows and more efficient lighting, but it does so] by different means.” Eagle Point is not serving the broader public like a utility. Rather, each rooftop system is dedicated to a single customer on a single site. Rooftop solar companies are not natural monopolies and, as such, there is no policy reason to regulate them as utilities, the court said, particularly in view of the state’s policy to encourage use of renewable energy.

The case is SZ Enterprises, LLC d/b/a/ Eagle Point Solar v. Iowa Utilities Board. The court released its decision on March 29.

This article was originally published on Chadbourne & Parke and was republished with permission.

Lead image: Rooftop solar via Shutterstock

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Keith Martin is a transactional lawyer whose principal areas of practice are tax and project finance. He acted for 157 companies last year and worked on transactions in the United States and eight foreign countries. He also lobbies Congress and th...

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