Power Purchase Agreement Projects are Now Covered by the California Prevailing Wage Law

Effective January 1, 2012, the legislature expanded the definition of "public project" subject to the California prevailing wage law with criteria meant to cover Power Purchase Agreement ("PPA") projects built on public property, supplying at least half the generated power to the public property owner.

In a typical PPA the local educational agency ("LEA") agrees to lease LEA land, or rooftops, to a private company that will design, build and then own and operate a renewable energy facility. The LEA usually also agrees buy all of the electrical energy generated from the facility for a very long period - typically twenty or more years. The LEA benefits because it is projected to spend less on its electricity over that period than if it just kept buying from the local utility, but it does not have to the building of a solar (or other renewable energy) plant itself.  There are also several key economic components on the private owner's side that make PPAs an attractive business, and make it possible for them to offer low rates for the energy produced from PPA facilities. An argument some PPA providers have pushed is that they can build the plant at lower cost because it would be exempt from the California prevailing wage law, but the law was not clear.

Under Labor Code section 1720, a public project subject to prevailing wages includes construction work done under contract and "paid for, in whole or in part, by public funds." Labor Code section 1720(b) describes the term "paid for… out of public funds" as including, among other things, the "transfer by the state or political subdivision of an asset of value for less than fair market price," and "fees, costs, rents… or other obligations that would normally be required in the execution of the contract, that are… reduced, charged at less than fair market value, waived, or forgiven by the state or political subdivision." Since the rental cost to the private owner was often reflected as an offset in the PPA pricing, and not paid separately by the PPA private owner, the argument for application of the California prevailing wage law was that there was, in essence, some kind of rental subsidy to the private owner, or some kind of waiver of rental fees. However, this was rarely, if ever, clear.

Now, under new Labor Code section 1720.6, a "public project" subject to the California prevailing wage law includes any construction, alteration, demolition, installation, or repair work done under private contract when the following conditions exist:

  1. The work is performed in connection with the construction or maintenance of renewable energy generating capacity or energy efficiency improvements;
  2. The work is performed on the property of the state or political subdivision of the state; and
  3. Either more than 50 percent of the energy generated is or will be purchased by the state or political subdivision of the state, or the energy efficient improvements are mostly intended to reduce energy costs that the state or the political subdivision of the state would otherwise incur.

These factors fit PPA facilities perfectly: they are renewable energy facilities; they are built on public property; and, typically the host agency purchases 100% of the electrical energy (because buying 50% or less of the energy would probably not yield enough cost savings to justify the contract).

While some may be tempted to structure PPAs to avoid some of these criteria, LEAs should take a careful look at the proposed PPAs and ensure that they meet other, interrelated legal requirements. PPAs can offer benefits like those discussed above. However, there are many interrelated economic factors and legal requirements applicable to PPAs requiring careful review and analysis to avoid the potential pitfalls. One new factor is the application of the prevailing wage law, and ensuring any private developer's efforts to avoid prevailing wage law requirements do not result in legally void agreements or potential liabilities for the LEA.

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