Solar City May Be Subject To “Light-Handed” Retail Regulation In Arizona

Interpreting a provision of the Arizona Constitution that classifies companies that furnish gas, air or electricity as public service corporations, an Arizona Corporations Commission (“ACC”) Administrative Law Judge (“ALJ”)  recommended in a May 28, 2010 ruling that the ACC require Solar City Corporation to apply for a certificate of convenience and necessity and secure an authorization for its Solar Service Agreement where Solar City retains ownership of the photovoltaic panels and power inverter equipment and charges the end user  a service fee based upon kilowatt-hours of energy produced. The ALJ suggested that Solar City might be able to secure a certificate predicated upon less than full rate, financial and service regualtion--so-called “light-handed" regulation. The ACC may reject, affirm or modify the recommended decision later in the summer.

The ALJ’s decision specifically addressed a structure offered by Solar City Corporation where the solar energy supplier is neither selling nor leasing the solar panels and inverter to the end-user, but is instead offering it production on a per kilowatt-hour generated basis. The ALJ determined that the Solar City structure constituted selling or “furnishing” electricity within the meaning of the Arizona constitution even though each installation may have only one customer and that customer may be supplying the location for that facility only. One Arizona public utility, Arizona Public Service, indicated that it had no objection to this structure provided that is was limited to a single customer and  a single facility served from each installation, yet both the Staff and other parties argued that the ACC was required to regulate Solar City and its proposed structure. The Solar City is designed to allow the vendor to retain tax advantages that public and no-for-profit end users are not able to use. 

In the event the ACC asserts jurisdiction over Solar City and other providers of Solar Service Agreement services, the condition of its regulation may be a source of controversy.  In a decision addressing Arizona’s effort to restructure electricity supply, an Arizona Court of Appeals held in 2004 that the ACC was not wholly free to waive its rate regulatory authority, and the other aspects of “light-handed” regulation would need to be decided in the context of certificate applications or ACC rules, unless the ACC determines not to adopt the recommended decision. The Staff of the ACC asserted the ACC should assert customer protection and health and safety jurisdiction.  Other issues that would need to be addressed are the extent of ACC financial regulation and the circumstances under which utilities with existing certificates of authority may object to service by a solar provider that does not eliminate the service obligation under the incumbent’s certificate but reduces the incumbent’s opportunities for energy sales.

In the event it substantially affirms the ALJ decision, the ACC may find itself again addressing many of the issues it attempted to address in its aborted effort to restrict the retail supply of electricity in Arizona. Arizona is not alone in efforts to address the regulatory status of solar generation that supplies end-users with power on a distributed generation basis. New Mexico, like Arizona, at first undertook to restructure its electricity markets, but then returned to reliance upon retail supply vertically integrated electric utilities. In December of 2009 the New Mexico Public Regulation Commission ruled that a solar generator that supplies supplemental electricity to one or more public utility customers  is not a public utility within the meaning of New Mexico law, finding that supplying energy supplemental to public utility service does not render one a public utility.