On June 2, 2016, the Independent Regulatory Review Commission (“IRRC”) appropriately voted 5-0 to disapprove the Pennsylvania Public Utility Commission’s (“PUC”) attempt to modify its regulations implementing the Alternative Energy Portfolio Standards (“AEPS”) Act, 73 P.S. §§1648.1, et seq.  The IRRC’s rejection was based primarily on its view that the PUC’s proposed regulations would exceed its statutory authority by limiting net-metering of electricity to entities with alternative energy systems sized to generate no more than 200% of their annual consumption.  The IRRC went on to state that if the PUC decides to proceed with the rulemaking by deleting this limit, it “should ensure that other provisions of the regulation do not limit a customer-generator’s ability to net-meter excess generation it produces.”  The IRRC also found that the PUC had failed to show any need for the modifications and suggested that because the PUC’s proposal appeared to be a change in policy of such a substantial nature consultation with the General Assembly was warranted.

At its June 9, 2016 Public Meeting, the PUC re-issued the previously rejected regulations with two types of revisions.  Implementation of the Alternative Energy Portfolio Standards Act of 2004, Docket No. L-2014-2404361 (Amended Final Rulemaking Order entered June 9, 2016) (“Amended Rulemaking Order”).  The PUC removed the references to the 200% cap on the size of net metering facilities, giving the appearance that the PUC complied with the IRRC’s primary objection.  The PUC also, in an ironic twist, removed the information from the regulatory impact packet that purported to show the need for the regulations, even though the IRRC had found that the PUC had failed to establish a sufficient factual basis of need for the regulations.  The PUC did not address the other portions of the regulation (for example, the definition of “utility,” and the “independent load” and “behind the meter” requirements for virtual meter aggregation) that limit a customer-generator’s ability to net-meter excess generation.  The reissued regulations will be addressed by the IRRC at its next public meeting on June 30, 2016.

No matter what happens at the IRRC meeting, there are only two ways the AEPS regulations will not become effective.  The first is if both of the standing oversight Committees of the General Assembly take concurrent action within 14 days, followed by concurrent action of the full General Assembly and the Governor.  The second is if the PUC were to withdraw the regulations.  Given its recent track record, it seems unlikely that the General Assembly will be able to act to prevent the regulations from going into effect.  Many people however, are concerned that the regulations without the 200% cap are likely to be enforced in a manner that eliminates or seriously and negatively impacts net metering.

The primary reason for the concern of many in the renewables industry is the regulations new definition of “utility.”  The AEPS Act defines “customer-generator” as “[a] nonutility owner or operator of a net metered distributed generation system with a nameplate capacity of not greater than 50 kilowatts if installed at a residential service or not larger than 3,000 kilowatts at other customer service locations….”  73 P.S. § 1648.2.  Because eligibility to be a customer generator is limited to non-utilities, and apparently because it proved worthy as a second tool to prohibit “merchant generators” – a term invented by the PUC – from participating in net metering, the PUC decided that a definition of “utility” was required. The Amended Rulemaking Order shunned the IRRC’s suggestion to add the word “public” before “utility” to make it logical and to eliminate confusion. Instead, the Amended Rulemaking Order undertakes logical gymnastics to contrive a conclusion that because the definition of “public utility” in the Public Utility Code, 66 Pa.C.S. § 102, excludes certain entities from the definition of “public utility”, that the definition of “public utility” is not “synonymous” with the use of “utility” in the definition of “customer generator”—even though “utility” is not defined anywhere in the AEPS Act.  Even more bizarre is the PUC’s contention that the Electricity Generation Customer Choice and Competition Act, 66 Pa. C.S. §§ 2801, et seq., actually supports the notion that because electricity generation is no longer regulated as a “public utility” function, the General Assembly has drawn a distinction between “utility” and “public utility.”  The irony is that in the passage quoted by the PUC, it is clear that the General Assembly uses other terms, such as “electric utility” and “electric distribution utility” interchangeably with “public utility” showing that there was no intended distinction.

Nonetheless, it is clear, even from the Amended Rulemaking Order, that the PUC intends to enforce the definition of utility in a way that excludes customer-generators that it deems to be “merchant generators” from participating in net metering:

Net metering allows the customer-generator to obtain above-market prices for electricity produced by certain alternative energy resources.  This benefit is subsidized by ratepayers and constitutes a transfer of wealth from the utility’s general body of ratepayers to customer-generators in order to promote alternative energy resources.  However, to allow de facto merchant generators to obtain the customer-subsidized benefits of net metering would be, in the Commission’s judgement, an unreasonable interpretation of the statute and would result in unjust and unreasonable rates.

Amended Rulemaking Order at 26.

The PUC goes on to conclude that the definition of “utility” includes entities that provide “electric generation, transmission or distribution services at wholesale or retail, to other persons or entities, and that this term includes within its scope, merchant generators. These are entities that do not qualify for net metering subsidies.” Id. at 27.  Coupled with the newly imposed PUC review and approval of all net metering applications for facilities over 500 KW, it becomes clear that the PUC will not approve what it perceives to be “merchant generators” (an undefined term) to participate in net metering.  This is not a 200% size cap; it is a total ban.  Whomever the PUC determines to be “providing electric generation or distribution service [also undefined terms] to the public or other entities,” will be branded a “merchant generator” and disqualified.  It also appears that the PUC and Pennsylvania’s electric utilities intend to apply this provision retroactively to existing projects, thus raising the very real specter of unconstitutional regulatory takings and/or inverse condemnation actions.

Simply put, the AEPS Act contains no restriction on the ability of merchant generators to participate in net metering.  For the PUC to contrive a definition of utility that allows it to exclude these entities that clearly are not utilities, public or otherwise, in order to effectuate its belief that merchant generator net metering is wrong, is well beyond the statutory mandate.  The General Assembly obviously understood that it was creating an incentive to invest in renewable energy and thus imposing a subsidization regime on ratepayers.  It was the PUC, after all, that decided on the definition of “full retail value” as the basis for payment for net metering, 73 P.S. § 1648.6, when it promulgated its regulations at 52 Pa. Code § 73.13(c).  Despite the fact that the PUC was unable to show any significant cost burden on customers as a result of net metering, if the PUC feels the compensation for net metering is a problem, it should have started with those regulations.  Contriving a definition to exclude a whole class of market participants who already may have made substantial investments in view of what appears to be a straightforward statutory policy in favor of net metering, without even considering the impacts of its new regulation on them, is simply reckless.