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PURPA Redirected

The latest ‘incremental’ policy changes might realign utility financial incentives.

Fortnightly Magazine - February 2008

recovery and investment returns for capital expenditures on smart grid systems, as well as recovery of stranded costs for obsolete equipment being replaced. To sweeten the pot, Title XIII also directs the Secretary of Energy to establish a matching-grant program by December 2008 that will reimburse utilities for 20 percent of the cost of qualifying smart grid deployments.

Finally, Section 571 directs FERC to develop a national action plan for demand response. An allocated $10 million yearly budget ensures FERC will keep the action plan moving forward.

Realigning Incentives

Today’s Congress is not the Congress of 1978. As a result, the language of today’s energy legislation stops short of PURPA’s outright policy directives for state utility regulators. As it did in EPAct, Congress structured EISA in a way that leaves states free to “consider” policy options that will work best for them.

But EISA Section 532 is slightly more prescriptive than EPAct Section 1252 was. While EPAct’s smart-metering requirement gave states and utilities an explicit out clause, EISA’s energy-efficiency section is unequivocal in requiring rate structures to align utility incentives with efficiency priorities. Of course, this language leaves wiggle room in how states will define and meet that standard, but Congress seems to be pushing the envelope slightly further with EISA than it did with EPAct. To wit: if a state’s rate structures don’t seem to be establishing efficiency as a priority, a plaintiff might sue the state for violating PURPA, as amended by EISA.

In any case, PURPA continues its role as a pry bar for dismantling the old utility structure. However, today many utilities and their shareholders welcome that tool—in part because they see the writing on the wall. Facing rising cost pressures and environmental challenges, utilities need lawmakers’ help to overcome the industry’s structural dilemmas. And unlike PURPA’s “avoided cost” ramrod, EISA’s approach to encouraging efficiency and smart-grid investments actually helps ease the transition, by attempting to realign utilities’ financial incentives.

The question now is whether utilities and state regulators will view EISA’s soft leverage as an excuse to let the industry status quo continue for a few more years, or whether they will view it as a Congressional mandate to join in the dismantling—and begin reconstructing the industry to prioritize efficiency rather than throughput.