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

Fortnightly Magazine - July 1 1995

to excessive avoided-cost projections also justified the ratebasing of above-market utility plants. As FERC Chair Elizabeth A. Moler stated when the FERC rejected a move by New York State Electric & Gas Corp. (NYSEG) to cut the wholesale rates it pays to two QFs under fixed-price contracts:

"It has become popular of late to blame the competitive ills of the investor-owned utilities on the QF industry...; what has been totally ignored is the high cost of [the utilities'] own resources."11

Indeed, the stranded costs associated with certain utility plants, especially nuclear units, looms large in comparison to the above-market costs associated with QF contracts.

If Repeal, What Then?

If Congress should repeal PURPA, utilities would be free to return to their pre-PURPA anticompetitive behavior. They could refuse to purchase power from, or sell power to, nonutility generators (NUGs) under reasonable terms, and could deny transmission access to NUGs that managed to find willing buyers. In addition, the loss of their exemption from existing federal and state regulation of public utilities would impose unacceptable burdens on NUGs. When utilities can no longer wield market power, and when wholesale generators no longer face burdensome regulations, then and only then will the PURPA debate be timely.

Proponents of repeal point to the Energy Policy Act of 1992 (EPAct) and argue that the above preconditions have been met.12 They are wrong. Through continued control of transmission services and the bundling of transmission, generation, and ancillary services, among others, utilities continue to wield undue market power. Indeed, the FERC's recent open-access Notice of Proposed Rulemaking (Mega-NOPR) is premised upon that fact:

"In today's electric industry, which is dominated by vertically integrated utilities, an owner or controller of transmission service can exclude generation competitors from the market, thereby favoring the transmission owner's own generation."13

While EPAct's wheeling provisions mark a step in the right direction, they are by no means sufficient to warrant repeal of PURPA. As the FERC states in the NOPR, by the time an individual competitor obtains a wheeling order from the FERC under EPAct, the market opportunity likely is lost.14 In addition, the FERC observes that the patchwork regulation of the nation's transmission grids under EPAct is inefficient and does not permit open and fair wholesale competition.15 The FERC considers 137 electric utilities to be owners of transmission facilities used in interstate commerce, and notes that only 21 currently provide "any form of open access transmission."16

In addition, failure to unbundle transmission, generation, and ancillary services would allow the utilities to subsidize their competitive generation services from their regulated monopoly services. The result would be less competition, with no reduction in end-use rates.

Repealing PURPA would potentially subject all electricity generators (em existing and new (em to public utility regulation under the Federal Power Act and by the states. Many could be subject to the Public Utility Holding Company Act of 1935 as well.17 Such regulation was, and remains, antithetical to vibrant competition by independently owned generators.

Commenting recently upon PURPA repeal efforts, FERC Chair Moler recently put the matter succinctly: "We're not there