Reported / Citable
Background
For more than three decades, California has used a net energy metering (NEM) tariff that allows utility customers with rooftop solar and other renewable generating systems to receive credit on their electric bills for excess energy they export to the grid. The first generation of the tariff, adopted under Public Utilities Code section 2827, credited customers at the full retail rate, including the fixed costs of delivering electricity. Over time, this resulted in what the Legislature recognized as a substantial subsidy from non-NEM customers, who continued to pay the costs of maintaining the grid, to NEM customers, who effectively reduced their share of those costs.
In 2013, the Legislature enacted section 2827.1 directing the Public Utilities Commission to develop a successor tariff that better aligned credit with system costs and benefits and prevented further cost shifting. After years of proceedings, the Commission adopted Decision 22-12-056 in late 2022, often called NEM 3.0. The new tariff sharply reduced export credits for residential customers and aligned credits more closely with the avoided cost of energy at different times of day.
Environmental groups led by Center for Biological Diversity, Environmental Working Group, and The Protect our Communities Foundation filed a writ of review challenging the Decision. In an earlier round of litigation, the Court of Appeal upheld the tariff. The California Supreme Court granted review and reversed, holding that the highly deferential Greyhound Lines standard does not apply to the Commission’s interpretation of the Public Utilities Code. The Supreme Court remanded for the Court of Appeal to apply the contextual deference framework of Yamaha Corp. of America v. State Board of Equalization.
The Court’s Holding
On remand, the First District Court of Appeal, Division Three, again affirmed the Decision. Applying the Yamaha framework, the court considered the degree of deference owed to the Commission’s interpretation based on factors such as agency expertise, the Commission’s interpretive consistency, and the technical nature of the issues. The court concluded that even under more searching review than Greyhound, the Commission’s interpretation of section 2827.1 was both reasonable and supported by the legislative history.
The court rejected the petitioners’ argument that section 2827.1 required the Commission to maintain a tariff structure favorable to rooftop solar growth. The statute requires that the successor tariff be based on the electrical system costs and benefits received by nonparticipating customers, prevent cost shifting to non-NEM customers, and ensure customer-sited renewable generation continues to grow sustainably. The Commission balanced these requirements and concluded that the prior tariff design had outlived its usefulness and was creating an unsustainable subsidy.
The court also held that the Commission’s methodology for valuing exported energy and quantifying benefits to the system was within its broad ratemaking expertise. The petitioners’ arguments about “societal” benefits not fully captured in the avoided-cost methodology did not show that the Commission failed to proceed in the manner required by section 2827.1, particularly given the absence of evidence quantifying those benefits in the record before the Commission.
Key Takeaways
- The Public Utilities Commission’s interpretations of the Public Utilities Code are reviewed under the Yamaha standard, not the highly deferential Greyhound standard.
- Even under Yamaha, the Commission’s technical ratemaking decisions about renewable export credits receive substantial respect when grounded in agency expertise and a record-based balancing of statutory factors.
- Section 2827.1 does not lock in any particular subsidy level for rooftop solar; the Commission has authority to revise the tariff structure to reflect cost shifting and changing system needs.
- Petitioners challenging Commission decisions must point to specific quantifiable benefits the Commission failed to consider, not merely abstract policy arguments.
- Future revisions are possible: the opinion notes that nothing prevents the Commission from updating the tariff if new evidence emerges about benefits to customers and the electrical system.
Why It Matters
This is a major decision for California energy and ratemaking law. By affirming the NEM 3.0 successor tariff under the more demanding Yamaha standard, the court signals that the Commission can implement significant policy shifts in renewable energy compensation as long as it grounds those shifts in evidence and the relevant statutory factors. The opinion is likely to influence how parties brief and argue future Commission decisions on storage incentives, electrification programs, and other ratemaking matters.
For the rooftop solar industry, the affirmance confirms that the new export-credit framework will remain in effect, with the cost-effectiveness of new installations heavily dependent on time-of-export pricing and storage. For utilities and non-NEM ratepayers, the case validates the Commission’s authority to address what it found to be a significant cost shift. Environmental groups now face a harder path challenging Commission decisions, but with a clearer roadmap for what evidentiary showing they must make.