In Pennsylvania and many other states, customers can install distributed generation facilities (e.g., solar panels) behind their electric meters and receive credits to their electric bills for the amount of electricity generated by those facilities. This process, commonly known as net metering, has been largely regulated by the Pennsylvania Public Utility Commission (PUC) since the Alternative Energy Portfolio Standards (AEPS) Act of 2004 was enacted.

However, the PUC's authority to regulate net metering is under attack. The Commonwealth Court's recent decision in Hommrich v. Pennsylvania Public Utility Commission (PUC) struck down several of the PUC's net metering regulations, and a Petition for Declaratory Order filed with the Federal Energy Regulatory Commission (FERC) by the New England Ratepayers Association (NERA) in April 2020 sought to completely undo state regulation of net metering. This article will outline these challenges to the PUC's authority and explore the potential implications for customers, electric utilities and the PUC.

Background

Net metering in Pennsylvania is permitted by the AEPS Act, which was originally enacted in 2004 and was subsequently amended in 2007. See 73 P.S. Sections 1648.1-1648.8. By participating in net metering, a customer-generator can use the electricity produced from eligible alternative energy systems to offset all or a portion of the customer-generator's electric usage. Essentially, the customer-generator's meter runs backwards whenever the alternative energy system is producing more electricity than the customer-generator is using. If a customer-generator ends up supplying more electricity to the electric utility's distribution system than the electric utility delivers to the customer-generator in a given billing period, the excess generation is carried forward and credited against the customer-generator's usage in subsequent billing periods at the "full retail" value. If the customer-generator has any banked excess generation at the end of the year, the banked excess generation is "cashed out" at the electric utility's "price to compare" rate, which is lower than the "full retail" value.

The PUC has been the primary regulator of net metering in Pennsylvania since the enactment of the AEPS Act. Specifically, under Section 1648.5 of the AEPS Act, the PUC was required to "develop technical and net metering interconnection rules for customer-generators intending to operate renewable onsite generators in parallel with the electric utility grid, consistent with rules defined in other states within the service region of the regional transmission organization that manages the transmission system in any part of this commonwealth." Pursuant to that authority, the PUC promulgated regulations governing net metering and customer-generators' ability to interconnect alternative energy systems with the electric utilities' electric distribution systems. See 52 Pa. Code Sections 75.1, 75.11-75.17, 75.21-75.51.  In turn, electric utilities incorporated net metering provisions in their tariffs, which were approved by the PUC.

Even before the AEPS Act was passed, issues arose before FERC as to whether state net metering programs infringed on FERC's jurisdiction to regulate "wholesale" sales of electricity (i.e., sales for resale in interstate commerce). However, in MidAmerican Energy, FERC saw "no reason … to interfere" with the Iowa Utilities Board's "determination to permit net metering."  See 94 FERC ¶ 61,340 (2001). FERC held that there is "no sale" within its jurisdiction "when an individual homeowner or farmer (or similar entity such as a business) installs generation and accounts for its dealings with the utility through the practice of netting." But, the Public Utility Regulatory Policies Act (PURPA) and the Federal Power Act (FPA) impose certain requirements when there is a "net sale" of electricity. If the generator is a qualifying facility (QF) under PURPA, such a "net sale must be at an avoided cost rate consistent with PURPA and [FERC's] regulations implementing PURPA." In contrast, a non-QF generator that provides a "net sale" to the utility needs to "comply with the requirements of the Federal Power Act." Later, in SunEdison, FERC reaffirmed its holding MidAmerican and found that there is no FERC-jurisdictional wholesale sale when a generating facility sells electric energy directly to an end-use customer that is participating in net metering, so long as there is no "net sale" to the electric utility.

The Energy Policy Act of 2005 (EPAct 2005) also reinforced state regulation of net metering.  Although state regulatory authorities retained discretion over whether to implement net metering under the EPAct 2005 (16 U.S.C. Section 2621(a)), the act directed each state regulatory authority that regulates electric utilities' rates to "make a determination concerning whether or not it is appropriate to implement" the various federal standards outlined in Section 2621(d). Those standards included the EPAct 2005's standard for net metering, which provides the following:

Each electric utility shall make available upon request net metering service to any electric consumer that the electric utility serves. For purposes of this paragraph, the term "net metering service" means service to an electric consumer under which electric energy generated by that electric consumer from an eligible on-site generating facility and delivered to the local distribution facilities may be used to offset electric energy provided by the electric utility to the electric consumer during the applicable billing period.

Thus, until recently, the PUC's authority to regulate net metering was well-established on many fronts.

Court Cases Limiting the PUC's Authority to Regulate Net Metering

The PUC's authority over net metering was first limited by the Commonwealth Court's decision in Sunrise Energy v. FirstEnergy, 148 A.3d 894 (Pa. Cmwlth. 2016) (Sunrise), appeal denied, 169 A.3d 1025 (Pa. 2017). In October 2010, Sunrise Energy entered into an electric service agreement with the electric utility, West Penn Power Company (West Penn), under which Sunrise Energy would sell West Penn the excess electricity generated by its solar facility for a five-year term. In May 2014, West Penn determined that Sunrise Energy was ineligible to net meter its facilities because Sunrise Energy was not a customer-generator under the AEPS Act. As support, West Penn pointed to the PUC's proposed amendments to its regulations, which clarified that net metering participants must have electric load independent of their generating facilities.  Because Sunrise Energy lacked electric load independent of its solar facility, West Penn maintained that Sunrise Energy was simply an electric generation supplier, not a customer-generator. As a result, West Penn terminated the electric service agreement.  Sunrise Energy subsequently filed a complaint against West Penn in the court of common pleas on various grounds. West Penn filed preliminary objections, arguing that the PUC had exclusive jurisdiction to rule on whether Sunrise Energy was an eligible customer-generator under the AEPS Act.  After the trial court denied those preliminary objections, West Penn appealed to the Commonwealth Court.

On appeal, the Commonwealth Court agreed with the trial court. In rejecting West Penn's argument that the PUC had exclusive jurisdiction over the dispute, the Court held that "the PUC does not have the power to adjudicate the subject matter of the amended complaint, i.e., whether Sunrise Energy meets the statutory definition of 'customer-generator.'" The court also rejected West Penn's alternative argument that the PUC had primary jurisdiction over aspects of the dispute. Although the AEPS Act "authorized the PUC to develop 'technical and net metering interconnection rules,'" the court found that "this limited authority does not give the PUC jurisdiction to decide eligibility for net metering."

The court later clarified the scope of its Sunrise decision. In Moyer v. PPL Electric Utilities, Docket No. 882 C.D. 2016, 2017 Pa. Commw. Unpub LEXIS 167 (Pa. Cmwlth. 2017), a customer-generator filed a formal complaint against his electric utility with the PUC. His complaint raised several issues, including: whether the utility properly credited his account for the excess generation produced by his solar facility; and whether the company erred in briefly removing him from the net metering program due to the lack of independent load at his solar facility. In the proceeding below, the PUC found that the customer's eligibility to participate in net metering was moot because the utility granted him a waiver of the independent load requirement. The PUC also directed the utility to allow the customer to continue participating in net metering without independent load. Nevertheless, on appeal, the customer-generator tried to challenge the PUC's authority to determine his eligibility to net meter. The court held that "before the PUC entered its final order, the issue of Moyer's eligibility … became moot when PPL agreed to allow Moyer to participate in the program." However, "at a minimum, the remaining issues" raised by the customer-generator "were within the PUC's jurisdiction." Thus, the court clarified that the PUC still had jurisdiction to adjudicate many issues related to net metering, except for a customer's eligibility under the AEPS Act to net meter.

In May 2020, however, the Commonwealth Court squarely addressed the legality of the "independent retail load" requirement and other provisions in the PUC's AEPS Act regulations.  In Hommrich v. Pennsylvania PUC, Docket No. 674 M.D. 2016, 2020 Pa. Commw. LEXIS 389 (Pa. Cmwlth. 2020), the court struck down several of the PUC's AEPS Act regulations, specifically:

• Section 75.1's definitions of "customer-generator" and "utility";
• Section 75.2's definition of "virtual meter aggregation," including its independent load requirement; and
• Section 75.13(a)(1)'s independent load requirement.

Central to the court's holding was that the PUC's definitions of "customer-generator" and "virtual meter aggregation" did not exactly match the definitions of those terms in the AEPS Act.  Similarly, the AEPS Act does not contain a definition of the term "utility" or make any explicit reference to independent load. Therefore, despite the PUC having the authority to develop "technical and net metering interconnection rules," the Court found that the PUC was prohibited from imposing requirements on customer-generators that conflicted with, or were not explicitly set forth in, the AEPS Act.  Notwithstanding its holding, the court rejected Hommrich's challenge to three of the PUC's other AEPS Act regulations (i.e., Sections 75.13(a)(5), 75.16, and 75.17), finding that they were technical and net metering interconnection rules within the PUC's authority. Both the PUC and Hommrich have appealed the Commonwealth Court's decision to the Pennsylvania Supreme Court, and those appeals are currently pending.

NERA's Petition Filed With FERC That, If Granted, Would Undo State Regulation of Net Metering

Approximately a month before the Commonwealth Court's decision in Hommrich, a Petition was filed with FERC to completely undo state regulation of net metering. Specifically, the New England Ratepayers Association (NERA) filed a Petition for Declaratory Order requesting that FERC: "declare that there is exclusive federal jurisdiction over wholesale energy sales from generation sources located on the customer side of the retail meter"; and "order that the rates for such sales be priced in accordance" with PURPA or the FPA, "as applicable." See New England Ratepayers Association, Docket No. EL20-42-000 (Apr. 14, 2020) (Petition for Declaratory Order), available at https://elibrary.ferc.gov/idmws/common/OpenNat.asp?fileID=15510254. According to NERA, FERC incorrectly ruled in MidAmerican and SunEdison that FERC lacks jurisdiction of sales by a net metering customer-generator to an electric utility unless there is a "net sale" of electricity. As alleged support, NERA cited Southern California Edison v. FERC, 603 F.3d 996 (D.C. Cir. 2010) and Calpine v. FERC, 702 F.3d 41 (D.C. Cir. 2012) and claimed that those decisions "held that the existence of wholesale or retail sales is not determined by netting intervals." Therefore, NERA contended that any sale by a net metering customer-generator to an electric utility, regardless of whether it is a "net sale," is within FERC's exclusive jurisdiction.

NERA's Petition ignited a firestorm, with thousands of comments being filed in opposition to its request.  See FERC Docket No. EL20-42-000; Devin Hartman, Federalizing Net Metering Is Unequivocally Anti-Conservative, Utility Dive, June 30, 2020, https://www.utilitydive.com/news/federalizing-net-metering-is-unequivocally-anti-conservative/580682/ (stating that 49,360 comments were filed against NERA's Petition, with only 21 comments filed in support). Notably, the PUC filed a Protest to NERA's Petition, maintaining that it should be dismissed because: the petition "fails to present a proper controversy for [FERC's] review"; "net metering is a retail billing practice within the states' exclusive jurisdiction"; and "net metering transactions are not wholesale sales in interstate commerce." See New England Ratepayers Association, Docket No. EL20-42-000 (June 15, 2020) (PUC's Protest), available at https://elibrary.ferc.gov/idmws/common/opennat.asp?fileID=15558526. Moreover, although some electric utilities intervened in the proceeding, none of them filed comments on the Petition. See FERC Docket No. EL20-42-000; Catherine Morehouse, Utilities Remain Mute on FERC Net Metering Petition, Leave Filing to Face Overwhelming Opposition, Utility Dive, June 16, 2020, https://www.utilitydive.com/news/utilities-remain-mute-on-ferc-net-metering-petition-leave-filing-to-face-o/579866/.

On July 16, 2020, FERC denied NERA's Petition on procedural grounds. New England Ratepayers Ass'n, 172 FERC ¶ 61,042 (2020). Specifically, FERC held that "the issues presented in the Petition do not warrant a generic statement from the Commission at this time." FERC noted that "a petition for declaratory order depends on the 'specific facts and circumstances' presented to the commission." While NERA made "general assertions" about other states' net metering policies and how those policies "improperly intrude on the commission's authority under the FPA and PURPA," NERA failed to "identify a specific controversy or harm that the commission should address in a declaratory order to terminate a controversy or to remove uncertainty."  By comparison, "MidAmerican and SunEdison related to the implementation of specific net metering programs or the participation in such programs by specific parties." Thus, in those cases, there were specific controversies to be resolved by FERC. Finally, "to the extent NERA is concerned that certain state regulatory authorities in New England are not pricing sales from QFs in accordance with PURPA," FERC declared that "the Petition d[id] not meet the requirements for enforcement under PURPA section 210(h)."

However, FERC did not rule on the substantive issues presented by NERA's Petition. As emphasized by Commissioner McNamee in his concurring statement, "the Commission's Order is not a decision on whether the commission lacks jurisdiction over the energy sales made through net metering; nor is it a decision on the merits of the issues raised by and contained in the petition." Such issues likely would have to be resolved in future, case-specific proceedings.

Where Do We Go From Here?

The immediate implications of the Commonwealth Court's decision in Hommrich and FERC's dismissal of NERA's Petition are not entirely clear.  However, we can make some projections.

If the Supreme Court affirms the Commonwealth Court's Hommrich decision, the PUC would need to amend its AEPS Act regulations to conform to the Court's ruling. The PUC's last rulemaking proceeding concerning the AEPS Act was a very complex process, involving over 100 written comments filed by interested parties and taking over two years to complete. See Implementation of the Alternative Energy Portfolio Standards Act of 2004, Docket No. L-2014-2404361 (Order entered Oct. 27, 2016) (Second Amended Final Rulemaking Order). Given the high-profile nature of PUC rulemaking proceedings involving the AEPS Act, it is reasonable to assume that such another rulemaking would be a substantial undertaking as well. Relatedly, electric utilities would need to revise the net metering provisions of their tariffs. Such tariff filings could be subject to litigation and hearings before the PUC. As for prospective customer-generators and the developers of alternative energy systems, the elimination of the independent load requirement could expand the number of net metering participants. At the same time, however, the lack of the independent load requirement could allow merchant generators to qualify for net metering. This was a major concern for the PUC when it instituted that requirement and arguably runs contrary to the whole purpose of net metering—enabling retail electric customers to reduce their bills for electric service by crediting them for the electricity generated by their alternative energy systems.

In addition, the General Assembly could decide to amend AEPS Act so that the PUC has broad authority to regulate net metering. The Commonwealth Court noted in Hommrich how the PUC's authorization to "develop technical net metering interconnection rules for customer-generators" was far more limiting than other statutes' grants of authority to administrative agencies, such as Section 7 of the Alternative Fuels Incentive Act requiring the Pennsylvania Department of Environmental Protection to "promulgate regulations necessary to carry out the purposes of [the] act" and Section 607 of the Alternative Energy Investment Act directing the Pennsylvania Housing Finance Authority to "promulgate guidelines necessary for the administration and enforcement of [the] act." If the General Assembly were to amend the AEPS Act to grant the PUC similar authority, the PUC would have much more flexibility in regulating net metering. This result could be justified on the basis that the PUC: has been the primary agency regulating net metering since the AEPS Act was enacted in 2004; and possesses the requisite technical and regulatory expertise to resolve these complex electric utility-related issues.

At the same time, FERC's Order dismissing NERA's Petition potentially opened the door for a party to assert that Pennsylvania's  regulation of net metering is preempted. In his concurring statement, Commissioner McNamee explained that the "important legal and jurisdiction questions" raised by NERA's Petition are best addressed "when applying the law to a specific set of facts, such as in a Section 206 complaint, or through a rulemaking proceeding."  Commissioner Danly also issued a concurring statement, in which he expressed a concern that "dismissing the petition on procedural grounds may well result in a patchwork quilt of conflicting decisions if the questions raised in the petition are instead presented to federal district courts across the country." Although "the federal courts are more than capable of adjudicating preemption claims, they are not steeped in the history of the Federal Power Act nor in matters of national energy policy." Therefore, Commissioner Danly believes that FERC "will eventually have to address," in some other proceeding, the "questions of profound importance" raised by NERA's Petition.

Based on these statements, an interested party could try to specifically challenge Pennsylvania's regulation of net metering before FERC or in federal court. If FERC or the court ultimately determines that Pennsylvania's regulation of net metering is preempted, FERC would then have to resolve whether and in what form net metering would continue in Pennsylvania. Such an outcome would be extremely disruptive to the electric utility industry and cast a lot of uncertainty as to the rules and requirements for net metering.

Devin T. Ryan is a principal in Post & Schell's energyand utilities practice group and focuses his practice on energy and public utility law, representing electric, natural gas, water, and wastewater utility clients. He can be reached at [email protected].