Can a Tennessee solar generating facility that sells power only to the property owners or tenants on the same or adjacent land avoid being treated as a regulated public utility?

Plain-English summary

A representative asked the AG about a recurring problem in distributed solar deployment. If a developer puts solar on a parcel and sells power directly to the owners and tenants there (or on the immediately adjacent parcel), is the developer a "public electric system" caught by Tennessee's geographic-territory restrictions, and a "public utility" subject to Public Utility Commission jurisdiction?

The AG's answer was the standard regulatory-classification answer: it depends. The statute that draws the line is Tenn. Code Ann. § 65-34-102(5), which defines a "public electric system" as any entity that owns or operates electric power equipment in Tennessee "affected by and dedicated to public use." That language is the legal shorthand for the public-utility concept: an entity has dedicated its private property to a use the public has the right to demand from it. The AG declined to give a categorical answer, because the determination is fact-specific.

Selling power "directly and exclusively to owners and/or tenants located on the same or adjacent premises" is one factor in the analysis, but not decisive. Other factors the courts weigh include how the developer actually conducts business, what its corporate documents say, what its stated purpose is, whether the service it provides is one the public has an interest in, whether it accepts substantially all service requests, how its service contracts are structured, and whether it competes with other entities that are public utilities. See 73B C.J.S. Public Utilities § 2; Memphis Natural Gas Co. v. McCanless, 194 S.W.2d 476 (1946).

The opinion also tied the two regulatory regimes together. The "public use" element in § 65-34-102(5) for the geographic-territory rules tracks the "public use" element in § 65-4-101(6)(A) for general public-utility regulation. If a solar facility is a public electric system, it is also a public utility under § 65-4-101(6)(A), unless one of that section's numerous statutory exceptions applies.

Currency note

This opinion was issued in 2017. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Tennessee's framework for distributed generation, behind-the-meter solar, and third-party power sales has evolved with technology and policy. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule mentioned here.

Background and statutory framework

Tennessee's electricity sector is unusual. The state has TVA as a federal supplier, a network of municipal electric systems and consumer-owned rural electric cooperatives, and a relatively small footprint for traditional investor-owned utilities. The 1989 "Geographic Territories of Electric Utility Systems" framework (Tenn. Code Ann. §§ 65-34-101 to 108) was designed to prevent duplication of facilities and to keep existing geographic divisions stable.

The territory restriction (§ 65-34-103). A "non-consumer owned electric system" cannot construct, acquire, or maintain facilities for distribution or sale of electricity outside its current geographic territory, and cannot provide electricity "by sale or otherwise" to any parcel outside its current territory. § 65-34-107(b) also limits municipalities from expanding non-consumer-owned territories. § 65-34-108 lets adjacent systems agree to modify and transfer territories.

The definitional chain. A "non-consumer owned electric system" is a "public electric system" other than a municipal electric system or a community service cooperative (§ 65-34-102(4)). A "public electric system" is any entity owning, operating, managing, or controlling electric power equipment "affected by and dedicated to public use" (§ 65-34-102(5)). So everything turns on the "public use" determination.

The legal meaning of "affected by and dedicated to public use." 73B C.J.S. Public Utilities § 1 captures it: "A distinguishing characteristic of a public utility is a devotion of private property by the owner to service useful to the public, which has a right to demand such service so long as it is continued with reasonable efficiency under proper charges." The Tennessee Supreme Court said in Memphis Natural Gas Co. v. McCanless, 194 S.W.2d 476 (Tenn. 1946), that "the terms 'public use' and 'public utility' are synonyms."

The factual factors.

• How services are made available. Service available "to the public" does not automatically make the provider a public utility. Selling all output under contract to public utilities (which then resell to consumers) doesn't either. A limited number of customers does not preclude public-utility status. An entity providing other goods or services in addition to a public service can still be a public utility.
• How the entity holds itself out. The ultimate question is whether the entity holds itself out (expressly or impliedly) as serving the public or a portion of it. The AG framed it as "engaged in supplying its product or services to the public in general or to a limited portion of the public, as opposed to . . . serving or prepared to serve only particular individuals."
• Specific evidence. Courts look at articles of incorporation and bylaws, stated purpose, whether the goods or services are in the public interest, whether the entity accepts substantially all service requests, how its contracts are structured, and competition with other public utilities. Memphis Natural Gas found a corporate charter conclusive on the public-utility question because the charter expressly authorized public-utility operations.

Application to behind-the-meter solar. The AG declined to apply these factors to any particular facility because the question was framed abstractly. The implication: solar developers selling onsite power should expect a fact-intensive inquiry. A simple two-party contract between a property owner and a developer for exclusive on-site supply might survive scrutiny; an arrangement that looks more like serving "tenants" as a recurring class of customers in a multi-tenant building or campus could go the other way.

Tie-in with general public-utility status. § 65-4-101(6)(A) defines "public utility" to include "all individuals and entities that own, operate, manage or control" various utility-like services "affected by and dedicated to the public use." The AG noted the parallel language. So if a solar facility is a public electric system under § 65-34-102(5), it is also a public utility under § 65-4-101(6)(A), unless one of that section's many exceptions (§ 65-4-101(6)(A)(i) through (B)(ii)) applies.

Common questions

Q: I'm putting solar on my own property and selling the power only to my tenants. Am I a public utility?
A: According to this opinion, maybe. The fact that you're selling only to your tenants on the same premises is one factor, but the analysis is fact-specific. How you structure the business, what your corporate documents say, and whether you hold yourself out as serving a class of customers all matter.

Q: Why does this matter?
A: A "public electric system" is barred from selling outside its territory, which is hard to define for a small solar developer. And a "public utility" is subject to PUC (now TPUC) regulation, including rate review.

Q: What factors push toward public-utility status?
A: Holding the service out to a recurring class of customers, structuring contracts like utility-type service contracts, advertising broadly, accepting substantially all service requests, competing with other public utilities.

Q: What factors push away from public-utility status?
A: A specific bilateral arrangement with a single property owner, no holding out to others, limited customer base by design rather than by business limitation, contracts that look like ordinary commercial arrangements rather than utility service.

Q: Does selling power only to a single landlord matter?
A: Selling to a single counterparty is a weight against public-utility status but not dispositive on its own. The totality of the arrangement controls.

Q: What if I'm a community service cooperative or a municipal electric system?
A: Those are expressly excluded from the "non-consumer owned electric system" definition under § 65-34-102(4), so the geographic-territory restrictions in § 65-34-103 do not constrain them in the same way.

Citations and references

Statutes:

• Tenn. Code Ann. § 65-34-101
• Tenn. Code Ann. § 65-34-102(4), (5)
• Tenn. Code Ann. § 65-34-103
• Tenn. Code Ann. § 65-34-107(b)
• Tenn. Code Ann. § 65-34-108
• Tenn. Code Ann. § 65-25-102(4)
• Tenn. Code Ann. § 65-4-101(6), (6)(A)

Cases:

• Memphis Natural Gas Co. v. McCanless, 194 S.W.2d 476 (Tenn. 1946)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2017/op17-025.pdf

Original opinion text

STATE OF TENNESSEE
OFFICE OF THE ATTORNEY GENERAL
April 10, 2017
Opinion No. 17-25
Sale of Electricity by a Solar Electricity Generating Facility

Question 1
Is a solar electricity generating facility that provides power directly and exclusively to owners and/or tenants located on the same or adjacent premises "affected by and dedicated to the public use," such that the facility would be prohibited from selling the power to those owners and/or tenants under Tenn. Code Ann. § 65-34-103?

Opinion 1
A solar electricity generating facility that comes within the statutory definition of "public electric system" is prohibited from selling power in certain geographical territories. Tenn. Code Ann. § 65-34-102(4), § 65-34-102(5), and § 65-34-103. The question assumes that a solar generating facility meets all of the Tenn. Code Ann. § 65-34-102(5) definitional elements of a "public electric system" save only the element that its property be "affected by and dedicated to public use." Whether its property is "affected by and dedicated to public use" will depend on a variety of factors, specific to each case. The fact that it provides power "directly and exclusively to owners and/or tenants located on the same or adjacent premises" is just one of many factors to be considered but is not alone determinative of whether or not its property is affected by and dedicated to public use.

Question 2
Is the owner of the solar facility described in the previous question a "public utility" as defined in Tenn. Code Ann. § 65-4-101(6)?

Opinion 2
If the owner of a solar electricity generating facility is a public electric system as defined in Tenn. Code Ann. § 65-34-102(5), it would likewise be a public utility as defined in Tenn. Code Ann. § 65-4-101(6)(A) unless it were to come within one of the many statutory exceptions detailed in Tenn. Code Ann. § 65-4-101(6)(A)(i) through (B)(ii).

ANALYSIS

In 1989 the Tennessee Legislature enacted a statutory scheme entitled the "Geographic Territories of Electric Utility Systems." Tenn. Code Ann. §§ 65-34-101 through 108. That legislation was designed to prevent duplication of electric system facilities because the Legislature found that such duplication results in excessive consumer costs and environmental and aesthetic problems. Tenn. Code Ann. § 65-34-101. To avoid duplication of electric system facilities and to protect consumer investment in those facilities, the Legislature deemed it in the public interest to keep in place geographic territories it had established in 1968 for electric utilities and to limit "utilities that are not consumer owned" from expanding "service into areas already served by consumer-owned municipal and cooperative electric system." Tenn. Code Ann. § 65-34-101.

To that end, the "Geographic Territories of Electric Utility Systems" statutory scheme prohibits a "non-consumer owned electric system" from constructing, acquiring, and maintaining facilities and equipment for the "distribution or sale of electricity outside its current geographic territory," and from providing, "by sale or otherwise, electricity to any parcel of land located outside its current geographic territory." Tenn. Code Ann. § 65-34-103. It also prohibits municipalities from expanding the territories of non-consumer owned electric systems. Tenn. Code Ann. § 65-34-107(b).

If a solar electricity generating facility is a "non-consumer owned electric system" these statutory prohibitions would apply to it. But even if it does meet the definition of a non-consumer owned electric system (i.e., even if it is a public electric system), it may still enter into an agreement with another public electric system serving an adjacent geographic territory to modify the territories and transfer the right to provide service from one to another. Tenn. Code Ann. § 65-34-108.

A "non-consumer owned electric system" is a "public electric system" (other than a municipal electric system or a community service cooperative). Tenn. Code Ann. § 65-34-102(4). A "public electric system" is any entity or individual that owns, operates, manages, or controls any electric power system, plant, or equipment in Tennessee "affected by and dedicated to public use." Tenn. Code Ann. § 65-34-102(5).

Question 1 assumes that a solar generating facility meets all the definitional elements of a "public electric system" save only the element that its property be "affected by and dedicated to public use." The phrase "affected by and dedicated to public use" is legal shorthand for the concept that "[a] distinguishing characteristic of a public utility is a devotion of private property by the owner to service useful to the public, which has a right to demand such service so long as it is continued with reasonable efficiency under proper charges." 73B C.J.S. Public Utilities § 1 (2016).

Whether an entity should be deemed to have dedicated its property to public use is a question that turns on the specific facts of each particular case. Just because its services are available to the public does not necessarily make the service provider a public utility. Similarly, an entity that sells all its product or services under contract to public utilities (which in turn sell that product to consumers) is not by that fact alone a public utility. On the other hand, the number of customers is not controlling; a facility is not rendered non-public just because a limited number of customers may have occasion to buy its services. And an entity that does other business in addition to providing a public service may nevertheless be a public utility subject to regulations. See cases cited in 73B C.J.S. Public Utilities § 2 (2016).

The ultimate question is whether the utility conducts its business in a way that makes it a public concern. Put in a more concrete way, the question is whether the utility holds itself out (expressly or implicitly) as engaged in supplying its product or services to the public in general or to a limited portion of the public, as opposed to holding itself out as serving or prepared to serve only particular individuals. To answer this question, courts will consider the totality of the particular circumstances, including how the company actually conducts business, what the company's articles of incorporation and bylaws provide for, what its stated purpose is, whether it is providing a good or service in which the general public has an interest, whether it accepts substantially all requests for its services, how its service contracts are structured, and whether it is in actual or potential competition with other entities that are public utilities. See cases cited in 73B C.J.S. Public Utilities § 2 (2016). See also Memphis Natural Gas Co. v. McCanless, 194 S.W.2d 476, 480 (1946) (charter conclusively authorized gas company to do business as a public utility).

In sum, whether the property of any particular solar electricity generating facility is "affected by and dedicated to public use" will depend on a variety of factors, specific to each case. The fact that it provides power "directly and exclusively to owners and/or tenants located on the same or adjacent premises" is just one of many factors to be considered but is not alone determinative of whether or not its property is affected by and dedicated to public use.

The "public use" element in the statutory definition of "public electric system" in Tenn. Code Ann. §§ 65-34-102(5) is common in — indeed integral to — most statutory definitions of "public utility." Not surprisingly, "public use" appears as a key element in the statutory definition of "public utility" in Tenn. Code Ann. § 65-4-101(6)(A). The §101(6)(A) definition of "public utility" encompasses providers of other services in addition to providers of electric services, but is otherwise essentially the same as the definition of "public electric system" in Tenn. Code Ann. § 65-34-102(5). A "public utility" includes all individuals and entities that

own, operate, manage or control, within the state, any interurban electric railway, traction company, all other common carriers, express, gas, electric light, heat, power, water, telephone, telegraph, telecommunications services, or any other like system, plant or equipment, affected by and dedicated to the public use . . . .

Tenn. Code Ann. § 65-4-101(6)(A) (emphasis added).

Thus, if the owner of a solar electricity generating facility is a public electric system as defined in Tenn. Code Ann. § 65-34-102(5), it would likewise be a public utility as defined in Tenn. Code Ann. § 65-4-101(6)(A) unless it were to come within one of the many statutory exceptions detailed in Tenn. Code Ann. § 65-4-101(6)(A)(i) through (B)(ii).

HERBERT H. SLATERY III
Attorney General and Reporter

ANDRÉE SOPHIA BLUMSTEIN
Solicitor General

Requested by:
The Honorable Gerald McCormick
State Representative
206A War Memorial Building
Nashville, Tennessee 37243