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

Fortnightly Magazine - July 1 1995


If Not, What Next?

While it is clear that the repeal of PURPA would represent a serious error, industry and regulators are not powerless to address some of the problems associated with PURPA implementation. In fact, many of the needed mechanisms for reform already exist or are currently being developed.

For example, regarding utility complaints that the PURPA "obligation to purchase"19 unduly burdens the utilities by forcing them to buy "high-priced" QF power, various jurisdictions have incorporated competitive bidding programs into their PURPA implementation strategy. In such contexts, long-term firm-power contracts are only made available if and to the extent there is an identified need for such power. The contracts also are allocated only to the most efficient providers of such power. In light of the FERC's recent ruling on California's competitive bidding program,20 there is a degree of uncertainty in connection with such programs. Principled and workable resolution of these controversies will be instrumental in reshaping PURPA implementation.

With respect to QF pricing, few dispute that the concept of avoided cost is sound; the controversies have arisen in connection with determining utility avoided costs in practice. As electricity markets continue to develop and become more competitive, however, the cumbersome administrative determinations and forecasts of utility avoided costs will naturally give way to market-based references for avoided cost. Price indices for electricity already exist and more are being developed. NYMEX is on the verge of launching a futures market for electricity. Performance-based ratemaking for utilities, which ties utility cost recovery to how well the utility performs compared to specified market references, is growing in use and sophistication. All of these factors will contribute to the development of more market-sensitive and less controversial avoided-cost determinations.

Utilities complain that states are setting avoided costs too high in order to encourage QFs, or particular kinds of QFs (e.g., renewable generators). But these complaints simply do not warrant PURPA repeal. Other, less draconian measures are available.

Little need be said about long-term forecasts and fixed-price contracts. As the Third Circuit Court of Appeals recently held in the Freehold case,21 and the FERC confirmed in both the NYSEG and West Penn Power Co. cases,22 existing contracts must be honored. A successful transition to a competitive market requires that contract terms be upheld. Above-market QF payments are properly considered transition costs; utilities expect no less with respect to their own assets. For new contracts, utilities and regulators can avoid the long-term forecast errors of the past by adopting more market-sensitive and competitive pricing mechanisms.

Most important, of course, is rapid progress toward a truly competitive generation market in which the entry barriers suppressed by PURPA are eliminated. The FERC's Mega-NOPR and the various state restructuring efforts currently underway hold considerable promise in this respect.

Several preconditions must be satisfied before revisiting PURPA is warranted: 1) All generators must enjoy equal access to competitive markets; 2) The market must properly value the unique characteristics of services offered by different generators, particularly renewable generators; and 3) Regulation must not hamper the development or operation of NUGs. PURPA repeal today