Some state net energy metering (NEM) programs cause cost shifts to a degree that perhaps was never intended by FERC. Sun Edison LLC, and MidAmerican Energy Co., remain the seminal cases on how FERC determines whether a wholesale sale of energy has occurred under a state’s NEM program. As explained below, many state commissions may be implementing MidAmerican and SunEdison in a manner contrary to what FERC intended when it decided those cases.
FERC has jurisdiction over all wholesale sales (i.e., sales for resale), although, due to PURPA and its implementing regulations, rates for certain wholesale sales by qualifying facilities (QFs) are set pursuant to state oversight. Arguably, then, any time a NEM customer sells power back to a utility, who would then re-sell it to another customer, such sale would be a FERC-jurisdictional sale or a sale under PURPA, depending on the eligibility rules for NEM customers’ resources. However, in SunEdison and MidAmerican, the Commission held that there may be, over the course of a billing period, either a net sale from the NEM customer to the utility, or a net purchase by the NEM customer from the utility. In both cases, FERC ruled that where there is a net sale to a utility at the end of the billing period, the sale is considered to be wholesale. In short, in these cases, FERC delegated its jurisdiction to determine when a wholesale sale occurred to the states, but indicated that it would defer to the states’ billing period. Because eligibility for NEM programs are typically limited to renewable resources well under 1 MW that are automatically QFs, the state may only mandate a utility to pay an avoided cost rate for such sale, consistent with PURPA.
Of course, virtually every utility in the country bills its customers monthly. If these rulings are applied literally, and it is assumed that the NEM customer’s resource is a QF, as is nearly always the case, any compensation for excess energy after a monthly billing period ends should be set at an avoided cost rate. That is, if kWh, or the retail value of kWh, are rolled over for use in future months by the NEM customer, the compensation in that future month likely far exceeds an avoided cost rate. Recognizing this, many, if not most, states have divorced the “billing period” from the “netting period,” sometimes referring to this netting period as the “annual billing period” to avoid confusing it with the monthly billing period. Under many such regimes, the amount of retail energy purchased is determined monthly, while the amount sold at wholesale is determined over an entirely different period in order to minimize or eliminate the wholesale sales that are priced lower than the retail rate credit.
In some states, for example, a NEM customer may roll over any excess energy indefinitely, thereby always receiving the retail rate value for the excess energy. In other states, a NEM customer may roll over excess energy for a period of time and then receive “cash” compensation from the utility at the end of a netting period and/or when they close their account, which cash compensation is set at an avoided cost rate. (As to those states that mandate that such cash compensation to be at an above avoided cost rate, their NEM programs are clearly vulnerable to legal challenges.) Under both systems, in any month that the NEM customer is net positive and thus has excess energy (or its retail value) being rolled over for usage in another month, the customer is receiving its compensation at a retail rate, rather than at an avoided cost-based rate in that future month. A few examples of states that have adopted NEM programs that divorce billing periods from netting periods, such that “net positive customers” receive compensation (i.e., a credit) based on excesses accrued over a netting period that is longer than the monthly billing period, are Arkansas, Colorado, Connecticut, Delaware, Wyoming, and California.
States employing this practice may be vulnerable to a utility or stakeholder challenge arguing that such state program is inconsistent with MidAmerican and SunEdison. It is unlikely that FERC would step into this debate absent the issue being brought before it. FERC, by merely allowing the states to set the time period that determines how much power is sold at wholesale already is deferring to the states on an issue arguably within its jurisdictional reach. The Commission might be deferential to the practice of states using time periods different than the actual (i.e., monthly) billing period to determine if a wholesale sale occurs. Indeed, in the recently issued Final Rule on Storage, FERC recharacterized its decision in Sun Edison, stating that “the Commission’s jurisdiction would arise only when a facility operating under a state net metering program produces more power than it consumes over the relevant netting period.” In any case, utilities appear hesitant to challenge their retail regulators as to this issue, despite their willingness to fight for demand charges, time of use rates, value of solar, and similar measures in recent NEM skirmishes. That said, as NEM penetration increases, the billing period versus netting period issue may eventually be litigated. And, there are legal arguments that would support such a challenge, including the argument that any netting is improper.