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The Future of Fuel Diversity: Crisis or Euphoria?

The fragmented electric industry structure poses an obstacle to a more stable, diverse, and secure power supply.
Fortnightly Magazine - October 2004
  • time of initial commitment, not subject to subsequent disallowance based on later changes in market conditions.
  • State regulators generally can allow immediate or accelerated expense recovery of spending for approved R&D projects, as well as the costs to obtain site licenses, environmental approvals, and other development costs.
  • State regulators can avoid multi-year rate freezes and rate caps that do not permit periodic adjustment for costs associated with commission-approved capital investments and required costs for environmental compliance. Such rate freezes provide an incentive for utility owners and managers to make do with the and eke out efficiencies in the short run, and to employ lobbying and legal defenses to fend off environmental mandates, while failing to address the public's longer term energy needs.
  • A state may form a power agency or mandate an existing agency to procure specific types of resources and require the customers of load-serving entities or utilities to buy power from the agency. Or the state agency can offer the power to the competitive market or to the regional transmission organization (RTO or ISO), perhaps under a "must-run" contract. California government used a similar means to deal with a power crisis in 2001-2002, enlisting the California Department of Water Resources to purchase power for delivery to utilities' retail customers on an emergency basis. The New York Power Authority also constructed turbines in New York City in 2002 to provide power to the New York ISO.
  • In a region with a multi-state RTO and a program for coordinated state and regional planning, the RTO could theoretically be the entity that enters into a contract for energy from a new source, or that directs all load-serving entities to enter into contracts for energy of a certain type to achieve the desired resource portfolio. However, this is a long shot. To date, no RTO has entered into long-term power contracts on behalf of consumers, and RTO decision-making on transmission matters is already a contentious balance of conflicting interests.
  • The U.S. Congress can enact laws requiring utilities to purchase power from certain sources, as in the Public Utility Regulatory Policies Act of 1978 (PURPA). Congress has in the past directly funded or provided loan guarantees for certain projects, and this approach could be applied to hasten the construction of demonstration plants for new coal gasification and generation technologies, or to increase R&D. Aside from providing direct funding, lawmakers can provide incentives for private investment via investment tax credits, accelerated tax depreciation lives, or production tax credits for specific types of energy investments.
  • Congress can reduce investment risk and lower the cost of capital for new private investments that promote fuel diversity and stable energy supplies by providing a safe-harbor against applying future changes in environmental regulations to these facilities. This would benefit new investments in energy production equipment that meet and exceed current environmental and fuel diversification objectives by removing the necessity to comply with future best available control technologies as those evolve.
  • Before hastening to draft legislation, we should keep in mind that prior national energy mandates and investment incentives to favor specific