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Renewable Subsidies in the Age of Deregulation

Fortnightly Magazine - December 1997

directly (see sidebar, "Wholesale-Retail Conflicts").

Second, the so-called "filed-rate doctrine" holds that state utility commissions may not second-guess or overrule a wholesale rate determination under federal jurisdiction.fn3 The Supreme Court has upheld the filed-rate doctrine,[fn.4] which extends to nonrate matters as well.fn5

Here is an interesting conundrum: At least in the short term, the "market" is perceived to work against higher-cost renewable technologies whose environmental benefits are not internalized into the price calculation of all technologies. Nevertheless, the new regulatory scheme at the Federal Energy Regulatory Commission promotes competitive least-cost transactions.

Under Section 205 of the Federal Power Act, the FERC cannot allow rates that are unjust, unreasonable or discriminatory. Further, FERC policy for permitting market-based rates [fn6] will not justify wholesale prices for renewable power that diverge from all other resources, absent extenuating circumstances. Any particular higher costs of renewable energy production will not be a factor.

In fact, recent FERC decisions governing wholesale transactions conducted under the Public Utility Regulatory Policies Act have barred the states from either regulating or configuring markets to ensure a higher sales price for renewables in wholesale power transactions than for non-renewable resources.fn7 The price set through a bidding mechanism, must reflect all feasible options for the procurement of power.fn8 While the state can control the portfolio mix of generation and DSM assets, the FERC controls the pricing of any of these wholesale transactions.

All this is not to say that the federal government has shown indifference to renewable power from a policy perspective - as distinct from a regulatory perspective.

Both PURPA (enacted in 1978) and the Energy Policy Act (1992) promote renewable energy projects. At its very core, PURPA was to promote renewable energy to reduce reliance on traditional fossil fuels, as articulated by Congress.fn9 In enacting PURPA, Congress explicitly sought to lessen dependence on foreign oil and other fossil fuels.fn10

Market Sculpting: Problematic or Permissible?

What techniques to promote renewables fall within state authority in a deregulated market?

As of 1993, 32 states had integrated resource planning programs in place, and at least seven more were considering them.fn11 Although not required by the Energy Policy Act of 1992,[fn12] many state public utility commissions have required utilities to recognize environmental externalities when planning to fulfill future resource needs. Some states require utilities to quantify these externalities,[fn13] others require utilities to consider externalities only qualitatively.fn14

The good news is that there are more techniques within the clear authority of state commissions, than outside its authority. The countervailing news is that most states to date have elected the systems benefit charge, which must be deployed with great care.

Some renewable energy promotion techniques, employed at the state level, could be legally suspect in a deregulated market, including controlling the price of wholesale power and pricing the acquisition of wholesale resources through environmental externalities.

Some techniques fall in a legal gray zone - where specific program design could pass or run afoul of legal limitations depending on how they are implemented, such as environmental performance-based rates, net metering[fn15] of renewable resources and system benefit charges.