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The Folly of PURPA RepealJerry R. Bloom and Joseph M. Karp

Fortnightly Magazine - July 1 1995

just, reasonable, and nondiscriminatory prices.

s Duty to Serve. Utilities must sell backup, standby, or maintenance power to QFs at nondiscriminatory rates.

s Deregulation. QFs are exempt from most federal and state regulations concerning public utilities.7

In implementing PURPA, the Federal Energy Regulatory Commission (FERC) mandates that QFs receive the purchasing utility's full "avoided costs" for power. In other words, under PURPA the utilities pay QFs what the utilities would otherwise spend to generate or procure the power in the absence of the QFs.8 Thus, electric ratepayers are indifferent, from a short-term price perspective, as to whether power is purchased from QFs or otherwise generated or procured by the utilities. From a broader perspective, ratepayers benefit significantly from QF purchases, because increased use of cogeneration and renewable technologies conserves energy, promotes resource diversity, enhances reliability, benefits the environment, and increases competition (em to name but a few of the benefits. The FERC left it to the states to determine the utilities' avoided costs.9

Has it Worked?

It is undisputed that PURPA has been a dramatic success in bringing competition to the electricity generation market and reducing electricity costs. More than half of all new generation resources are nonutility resources. The FERC has found that utilities no longer dominate the market for new generation capacity.10 QFs also comprise large amounts of existing generation capacity in certain markets; one-third of Southern California Edison Co.'s (SCE's) generation capacity in southern California, for example, is QF capacity.

As a result of this increased competition, utilities have been forced to become more efficient in their own generation practices, which has in turn led to lower avoided costs and lower rates to consumers. Short-run avoided-energy payments to QFs by SCE and Pacific Gas & Electric Co., for example, have declined by well over 50 percent since 1982.

In proposing to repeal PURPA in The Electric Utility Ratepayer Act, Sen. Don Nickles (R-OK) asserts that one-quarter of existing QF capacity is renewable, while three-quarters is cogeneration. The fact that cogeneration makes up three-quarters of the independent power developed under PURPA does not indicate a failure; rather, it is part of the PURPA success story. First, the stated goal of PURPA was to encourage both cogeneration and renewable technologies, not simply the latter. Second, cogeneration is extremely efficient, inexpensive, and environmentally benign generation. Cogeneration has been and should be encouraged. Further, that one-quarter of all existing QFs are renewable is in itself a resounding success, considering that renewable technologies only now are becoming competitive with fossil plants from a price perspective. Without PURPA, much of the renewable capacity in existence today would not exist. Similarly, it is likely that the further development of renewable capacity will be hampered significantly if PURPA is repealed.

It cannot be denied that mistakes have been made in implementing PURPA. A number of states established long-term forecasts of utility avoided costs in the early 1980s based upon overstated predictions of increasing fuel prices. States also failed to limit access to attractively priced contracts, resulting in overcapacity in certain markets. But the same forecasts that led