More than 20 states now require their investor-owned utilities to serve a certain percentage of their load with renewable energy by a date certain. Other states are considering following suit. Failure to meet its "renewable power" mandate can subject a utility to financial and other regulatory penalties.
If structured and supervised correctly, these initiatives should achieve their objective—accelerated development of renewable power. Unfortunately, one aspect of utilities' implementation of the programs is actually retarding development: the passing through to renewable power producers of the regulatory risks associated with renewable power mandates. For example, Pacific Gas and Electric Co.'s 2006 renewable energy solicitation proposes that the supplier of renewable power accept the following indemnity: "Seller shall indemnify Buyer for all penalties assessed against Buyer by the [California Public Utilities Commission] pursuant to the [California] Renewable Portfolio Standard . . . to the extent caused by Seller's failure to deliver the Product."
Who should bear the risk?
Contracts for the sale of both renewable and nonrenewable capacity impose financial penalties on suppliers for failing to meet their contractual obligations, particularly during peak periods. We do not take issue with these direct performance requirements. Like any other commercial party, the renewable supplier must deliver as agreed to or suffer the financial consequences. However, the effort by utilities to "flow through" any regulatory penalties assessed against them to renewable power suppliers:
- Deviates from accepted commercial practice.
- Contravenes the standard contract risk-allocation rule (that is, the party best able to manage a risk should assume the responsibility for that risk).
- Increases the cost and impedes the broader development of renewable power, undermining the overriding purpose of their renewable mandates.
The regulated utility's obligation to satisfy its renewable mandate—which some utilities would portray as a garden variety contractual performance requirement readily assignable—remains fundamentally a regulatory requirement whose satisfaction is ultimately determined by policy-driven regulatory standards. Regulatory requirements, by definition, are designed for regulated utilities, which are in a unique position to respond to requirements and risks imposed by their regulator.
What should happen to a utility that fails to meet its renewable mandate through no fault of its own, as a result of a renewable power seller's failure to perform? The utility should be able to present evidence of the failure to its regulator, to demonstrate how the generator's failure prevented the utility from meeting its obligation, and to argue that—in this circumstance—the imposition of a financial or regulatory penalty would retard, rather than advance, the proliferation of renewable power.
Converting the utility's regulatory responsibility to comply with the renewable mandate into a performance requirement forces a renewable power supplier to adjudicate its possible breach of a commercial term within the regulatory arena, which is ill-equipped to resolve commercial disputes. What's more, addressing the utility's non-compliance with a regulatory requirement via a one-off breach of contract determination diverts focus from the overriding regulatory objective: the advancement of renewable power.
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