SEC Probes Solar Companies Over Customer Cancellations

Federal regulators are investigating whether solar-energy companies are masking how many customers they're losing, according to a person familiar with the matter.

The Securities and Exchange Commission is examining whether San Francisco-based Sunrun Inc. and Elon Musk's San Mateo, Calif.-based SolarCity Corp. have adequately disclosed how many customers have canceled contracts after signing up for a home solar-energy system, the person said.

Investors use that cancellation metric as one way to gauge the companies' health. Companies typically give customers a few days after signing a contract, or even up until the time of installation, to back out of a deal.

Some solar-energy companies have recently disclosed in public filings and earnings calls that increasing numbers of customers are canceling, but the companies have provided few details about the number of cancellations or their impact on the companies' business.

The SEC recently issued a subpoena to Sunrun and interviewed current and former employees about the adequacy of its disclosures on account cancellations, said the person familiar with the investigation. The SEC is also looking at SolarCity, the person said.

An SEC spokesman declined to comment. Representatives for Sunrun didn't respond to multiple requests for comment. A spokeswoman for SolarCity said in a statement that the company "has remained focused on reporting the quality of our installed assets, not pre-install cancellation rates. Our growth projections have always been based on actual deployments."

For years, solar companies -- which number about 4,000 private and public firms in the U.S. -- have enjoyed explosive growth, transforming a fledgling sector into a $33 billion industry that generates electricity for more than 1.5 million homes nationwide.

To generate business, solar companies have long relied on thousands of salespeople who knock on doors, make hundreds of cold calls and even trail people as they shop at retailers like Home Depot Inc., according to salespeople, executives and homeowners.

Hundreds of complaints have been filed against solar companies to attorneys general in Texas, Oregon, California and Florida, with customers saying they are paying more on their utility bills, not less as they were promised, and have been sold expensive systems they can't afford, according to Freedom of Information Act requests filed by the Campaign for Accountability, a consumer-watchdog group, and according to lawsuits filed by customers.

Some customers say they were strong-armed into buying solar-energy systems by sales representatives who threatened to sue them if they didn't proceed with a project or to place a so-called mechanic's lien on their homes -- a measure used to force a homeowner to pay for a home-improvement project. Others say they didn't realize they had actually signed contracts. Many said they believed they were just giving permission for a consultation.

"In the residential solar industry, integrity and word of mouth recommendations are paramount," the Solar Energy Industries Association, a trade group, said in a statement in response to questions. "Our investigation of state public records suggests that the number of complaints represents a very small fraction of the number of successful solar installations nationwide."

In its statement, SolarCity said: "We strongly encourage our sales team to pursue only customers who are truly interested in moving forward, and they earn commissions only on systems that are actually installed."

Tesla Inc., which bought SolarCity in November, said on Friday it would stop making door-to-door solicitations, a shift of the company's longtime sales strategy. The electric-car company said the decision reflects "what most of our prospective customers prefer, and will result in a better experience for them."

The SEC investigation and other problems now facing solar companies are the latest example of troubles surrounding companies that say they help homeowners "go green."

A fast-growing loan program, known as Property Assessed Clean Energy, or PACE, to finance renewable-energy home improvements has been dogged by similar problems and now faces congressional legislation that would tighten industry oversight. PACE lenders partner with solar companies to offer financing for homeowners.

The solar industry lately has suffered from a series of problems: greater competition from smaller players that has led to price cuts for services, falling prices for solar panels and more stringent regulations in some states.

Nationwide, companies are expected to increase the number of solar-electricity systems installed by less than 3% in 2017, according to the Solar Energy Industries Association. That is down from an increase of 16% last year and about 64% in 2015.

Diminished growth expectations have hit shares of solar-panel installers. Sunrun's stock is trading at about $5, down more than 60% since their peak in December 2015.

Two smaller providers, Sungevity Inc. and Verengo Inc., recently filed for bankruptcy protection.

Cancellations grew to be so large at SolarCity that in early 2016, before the company was sold to Tesla, about half of its customers were backing out of contracts before solar panels could be installed, according to people familiar with the matter.

At Sunrun, that cancellation figure grew to be as high as 40% earlier this year, according to people familiar with the figure. The cancellation rates were especially high among customers who were approached by salespeople at their doorstep or while they were shopping at big-box stores, these people say.

The increase in cancellations caused Sunrun to halve its growth expectations in 2016 from 80% to 40%, one of these people said.

Most of those figures weren't disclosed to investors. Instead, the companies have provided limited transparency.

In its annual report in March, Sunrun said, "We have experienced increased customer cancellations in certain markets during 2016." The company does report how many systems it has installed net of cancellations, but it doesn't break out the number of cancellations.

SolarCity said the number of cancellations increased last year, but didn't say by how much.

Company executives, salespeople and homeowners blame the rise in cancellations on what they describe as aggressive sales tactics used by the industry.

Katarzyna Herink, 35, said she listened to a persuasive pitch from a Sunrun salesman at her house in Long Island, New York, last year and considered moving forward with installing solar panels on her roof.

Days later, the company told her she had signed a contract and they were going to start installation, without providing her any details about the cost or showing her the contract, Ms. Herink said.

When she complained, Sunrun told her a document she had initialed on the salesman's iPad during his initial visit constituted the contract, Ms. Herink said.

Ms. Herink immediately canceled the deal.

"We actually wanted to do it, but it was such a scary experience," she said. "Now we've decided to stay away from it."

Write to Kirsten Grind at kirsten.grind@wsj.com