This month’s ‘Giga-thought’: THIRD-PARTY SALES- WHAT TO EXPECT

THIRD-PARTY SALES: WHAT TO EXPECT

by Kurt J. Olson[1]

INTRODUCTION

“Third-party sales” has become a phrase of art in North Carolina’s energy law.  It generally means the sale of electricity to the “public” for compensation by an entity other than the utility authorized by statute to sell electricity to the public in the designated geographic area (the “franchise” area).   In this context, “first-party sales” are sales to the public by the public utility authorized to sell electricity in the franchise area.  The predominant view is that “third-party sales” are prohibited by North Carolina’s Public Utilities Law and only the public utility authorized to operate in the franchise area may sell electricity to the public for compensation within that area.

Franchising markets was deemed necessary when centralized generation of electric power was the dominant model.  Franchising ameliorates the risk associated with large, upfront capital expenditures needed to construct extensive generation and distribution networks.  Franchising also avoids waste potentially caused by under-utilized capacity at centralized generation facilities competing in the same geographic market.

Although providing these safety-nets, franchising also creates monopolies.  The franchise holder is the only “game in town.”  The only restraint on its monopoly power is a regulatory authority, in this case the Utilities Commission that sets rates and otherwise oversees its activities.  Thus, franchising is generally antithetical to a free market system premised on the choices of rational, self-interested consumers.

With the growth of distributed generation the justification for exclusive franchising has been called into question.  Distributed generation typically involves smaller projects and less up-front capital costs.  Advancing technologies have made third-party sales a competitive alternative for consumers.  Consequently, demand for distributed generation and direct third-party sales is emerging and efforts to bring about change are underway.

Initially, the proponents of direct third-party sales have attempted to enter the market by structuring transactions so the product being sold was not “electricity” but rather, was some other commodity or service, e.g., hot water, “solar lighting services” or financing.  Alternatively, transactions were structure between the seller and a consumer who was not part of the “public”; although, this latter approach was rarely successful as the term “public” has been interpreted quite broadly.  Invariably before locking into long-term arrangements, the parties would present the transaction to the Commission for a determination of whether it involved a prohibited third-party sale.  The answer frequently turned on the specific details unique to the transaction and pressure built for a more comprehensive approach involving changes to the franchise system itself.

Not surprisingly changes allowing third-party sales are not embraced universally and some of the staunchest criticism has come from organizations holding themselves out as defending free market principles.  A case in point is embodied in the Resolution Concerning Special Markets for Direct Solar Power Sales, which was promulgated by the American Legislative Exchange Council (“ALEC”) in late 2015.  See, https://www.alec.org/model-policy/resolution-concerning-special-markets-for-direct-solar-power-sales/.   Since the purpose of ALEC’s resolutions is to provide talking points and structure for action, the ideas in this “think-piece” are likely to be on full display if third-party sales become an issue in the 2016 short session of North Carolina’s General Assembly.

DISCUSSION

According to ALEC, third-party sales “creat[e] special markets” and increase “subsidies, electricity costs, and taxes while shifting costs to non-solar customers.”  ALEC claims these problems distort the free market and are aggravated “when solar power alone is given the monopoly right to sell power directly to consumers from on-site equipment.”

Clearly, there is a lot of confusion and misinformation in these statements alone and it would be a lengthy work to clarify ALEC’s resolution point by point.  A few examples below should give provide some sense of what proponents of third-party sales are likely to be up against and some potential responses.

Special Markets  As noted, ALEC contends that allowing third-party sales “create[s] a special market for solar power.”  This assertion mischaracterizes the nature of third-party sales.  Allowing third-party sales does not create a market.  The market for electricity already exists.  Third-party sales merely provide an additional option in that market and will emerge if consumers determine that it is in their economic self-interest to accept third-party sales as an alternative to first-party sales.

Similarly, contrary to ALEC’s assertion, installing equipment at a customer’s location to facilitate third-party sales does not create a monopoly.  At the outset the consumer has a choice to accept the third-party arrangement or reject it.  That phase of the transaction is negotiated at arms-length and placing equipment on-site is merely the manifestation of these negotiations.  After the third-party arrangement has run its course, the consumer is free to renew it or seek out a different arrangement.  If the latter, the equipment will be removed in accordance with the terms of the contract.

Subsidies  ALEC also claims that solar power receives substantially more subsidies than conventional power sources.  On its face this statement seems far-fetched.  Conventional energy receives vast government support and has for years.  ALEC states, however, that federal, state and local subsidies pay for at least 30% of solar power equipment and “often much more”, and that every increment of solar power increases overall taxpayer burdens to pay for the subsidies.  There are several problems with this argument.

First, whether tax credits are good public policy or not has nothing to do with whether markets should be open.  Indeed, ALEC’s point seems to be punitive in nature --- because the installation of solar power facilities can generate tax credits, sales from solar power facilities should be prohibited.  The only real connection between tax credits and third-party sales is that opening the market to third-party sales could lead to economies of scale that eventually would make solar power increasingly competitive with or without a tax credit.

Second, ALEC’s position fails to recognize the real cost of conventional fuels or the economic engine the solar industry represents.  Indeed, data tends to show that on the whole tax credits paid out for solar installations are more than offset by tax revenue collected from businesses and jobs created in a the emerging solar industry.  Third party sales would boost the revenue producing side of that equation substantially.

Finally, ALEC claims that third-party sales take existing “subsidies” away from individual business and homeowners with solar equipment and give them to the solar power industry.    This assertion is simply an unfounded scare tactic.  Third-party sales provide an option.  If, after conducting its analysis, a buyer determines it will benefit more from owning the equipment and claiming the tax credit, it simply can go that route.[2] On the other hand, if the buyer determines that third-party sales provide the best result, it can choose to negotiate an agreement involving the direct purchase of electricity from a third-party provider.   Allowing third-party sales does transfer or eliminate subsidies, it merely provides choice.

CONCLUSION

The proponents of third-party sales will encounter arguments against third-party sales like those discussed above.  While in most cases these arguments lack substance they do touch upon “hot-button” topics and issues.  Any proposal characterized as a subsidy or as “picking winners and losers” will have an uphill battle right out of the gate and proponents will need to be able to address these labels with clear, simple fact-based arguments.  It is best to anticipate and prepare now.  Waiting until a member of the General Assembly espouses arguments about monopolies or subsidies may be too late.