July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
The Folly of PURPA RepealJerry R. Bloom and Joseph M. Karp
One need only reflect upon the primary sponsors of current efforts to repeal section 210 of the Public Utility Regulatory Policies Act of 1978 (PURPA) to begin to understand the folly of these efforts for the nation. The sponsors do not represent electricity ratepayers, who are claimed to be overpaying billions of dollars as a result of PURPA. Rather, the sponsors are electric utilities, privately owned monopolies that compete with the independent power companies that benefit most directly from PURPA.1
The sponsors of PURPA repeal claim that increasing competition in the electricity generation market has rendered PURPA unnecessary.2 They argue that PURPA is now a hindrance to full and fair competition. To reduce electric rates, the logic goes, we must repeal PURPA. But the real motive behind the attempts to repeal PURPA does not stem from a desire to reduce electric rates. The motive comes from the desire of utilities to improve their competitive position (and that of their affiliates) in the current generation market as well as in what promises to be the increasingly competitive market of the future.
That being said, PURPA repeal is nevertheless unlikely to promote competition and reduce electricity rates. Without underlying structural changes in the electric services market (e.g., unbundled and open-access transmission), repeal will stifle the very competition PURPA was instrumental in creating. Significantly, this competition forms the foundation for further competitive advancements throughout the country. PURPA repeal will retard the progress of competition and thwart related efforts to reduce electricity rates. Many of the other benefits of PURPA, such as increased fuel and resource diversity and increased reliability, will be threatened as well.
Of course, PURPA implementation has not been without its unintended side effects. No one can deny that certain PURPA-based contract payments were premised upon forecasts that proved inaccurate, and that these payments exceed current market values. However, many independent power companies receive prices that are unquestionably competitive in today's markets. The majority of independent generation in California, for example, receives between roughly 4 and 6 cents per kilowatt-hour, all-in (em well below the purchasing utilities' system average cost for power.3
Thus, in considering whether to repeal PURPA, it is essential to weigh its ongoing benefits against its unintended side effects, and to consider whether those side effects can be mitigated or prevented in the future. Analysis reveals that, while certain refinements to PURPA implementation may be warranted, PURPA should not be repealed.
Responding to the energy crisis of the mid-1970s, Congress enacted PURPA to break our nation's dependence on foreign oil and increase domestic energy conservation and efficiency.4 To achieve these ends, Congress sought to limit competition in the wholesale electric generation market by encouraging cogenerators and small power producers.5 It included measures in PURPA to suppress barriers that had prevented independent energy producers from entering the market and competing with the public utilities.6 PURPA removed those barriers to entry for a limited class of independent generators called "qualifying facilities" (QFs). The new law contained three key requirements:
s Duty to Buy. Utilities must purchase power from QFs at