This fight is for the heart and soul of regulation everywhere. The Federal Energy Regulatory Commission (FERC) won the first round on February 22, but I think there's more to come.

The fight involves incentives for nonutility generators (NUGs). It also touches on PURPA (em the Public Utility Regulatory Policies Act of 1978 (em which guarantees a market to cogenerators or power producers (QFs) who qualify. But more important, this battle involves regulatory philosophy. It pits electric utilities on the East and West coasts against the two commissions traditionally viewed as most supportive of NUGs.

In California

You may recall last April, when the California Public Utilities Commission (CPUC) released its "Blue Book" proposal for electric restructuring, that the CPUC acknowledged conflict over the way electric utilities acquire generating resources. Thus, the CPUC proposed to eliminate the Biennial Resource Plan Update (BRPU) (em the process by which it requires major investor-owned electric utilities (IOUs) to buy power from renewable or favored generating sources, such as solar, geothermal, or wind energy. The CPUC said the BRPU would place utilities at risk for revenues from electric generation. All of this implied that before California embarked on a serious attempt at electric restructuring, including a competitive market for generation, it would at least consider ending regulatory incentives given out to NUGs for some resource categories.

So you can imagine the disappointment of California's IOUs late last year when the CPUC essentially upheld bids in its most recent BRPU auction (except for wind energy and nonfirm power). See, Re FlowWind, I. 89-07-004, Decision 9412051, Dec. 21, 1994 (order denying rehearing). The auction would stand, despite objections that the winning bids exceeded current market prices. And what about competition? Well, the CPUC put the onus on industry. It said that both utility and nonutility parties "have the primary responsibility to shape their response to perceptions of a changing market for electric services ... and to renegotiate the key factors in these contracts." Buy your way out.

The order didn't sit lightly with Southern California Edison or San Diego Gas & Electric (SDG&E). In January, Edison petitioned the FERC to block the auction. See, Re So. Calif. Ed. Co., FERC Dkt. No. EL-95-16-000, filed Jan. 6, 1995. SDG&E followed suit on January 18 in Docket EL-95-19-000. Both petitions claimed that the CPUC violated PURPA and FERC rules that impose a mandatory avoided-cost ceiling on utility payments to QFs. SDG&E said the auction would burden its customers with $511 million in higher electric costs over the life of the offending contracts. Edison predicted an extra $4 billion in potential stranded costs, and asked the FERC to force the CPUC to suspend its auction.

In New York

On St. Valentine's Day, New York State Electric & Gas Corp. (NYSE&G) took up where California left off. It filed its own petition asking the FERC to cut certain prices that NYSE&G pays to buy power from NUGs (em or force the New York Public Service Commission (PSC) to cut the rates. The NYSE&G case involves two specific QFs: Lockport Energy Associates, L.P., and Saranac Power Partners, L.P. NYSE&G alleged that state policy under PURPA would force it to incur some $2 billion in excess purchased-power costs (over the life of the projects, 1992-2009). See, Re NYSE&G, FERC Dkt. No. EL95-28-000, filed Feb. 14, 1995.

NYSE&G has more to explain than the California utilities. Its long-term contracts with Lockport and Saranac mandate purchased-power prices at about 6 cents per kilowatt-hour (rising to 7 cents next year; later by about 4 percent per year), or about double the utility's claimed alternative cost. The blame apparently lies with escalator clauses. The utility says it is "well aware" that the case looks like a private contract dispute, but claims the PSC "compelled" it to sign the deals: "Although [we] could not have shown definitively at the time [we signed the contracts] that ratepayer interests were jeopardized, the passage of time has made that situation abundantly clear."

At the FERC

The fight at the FERC puts a lot at stake. It asks federal regulators to oversee state-level energy planning. It also opens PURPA to scrutiny.

In one sense, the FERC started the fight. Earlier this year, in a case involving a resource recovery (municipal waste) generating plant, the FERC preempted a Connecticut law that imposed a rate floor that could allow a QF to charge rates above avoided cost. See, Conn. Light & Pwr. Co., FERC Dkt. No. EL93-55-000, Jan. 11, 1995, 70 FERC  61,012.

Some reporters say the CL&P case banned any QF rates that exceed the PURPA avoided cost. But some lawyers voice caution. They feel the case might have turned out the other way if the state had deemphasized PURPA and instead passed a law that stressed resource planning. That strategy, the lawyers say, might have given the FERC enough slack to uphold the law. In that sense, the California and New York cases are different. Out West, the BRPU philosophy extends beyond PURPA. It confers incentives for renewable energy. But that distinction may prove small consolation to NUGs. The egg is broken.

Ed Guiles, SDG&E's senior v.p. of energy supply, seized the moment in January. He noted that incentives "contradict the CPUC's own proposal to enhance competition in the electric utility industry." James Carrigg, chairman, president, and CEO of NYSE&G, questions whether PURPA makes sense "at a time when Congress is moving aggressively to cut taxes and streamline federal regulation." Vikram Budhraja, Edison's v.p. of planning and technology says his company will use "all appropriate means, including regulatory and legal actions and negotiations," to avoid the QF auction prices. In January he noted that Edison had already negotiated (bought out) agreements with six of the 10 "winning" bidders, representing 558 of the 686 megawatts mandated under the BRPU auction.

By mid-February, the Edison Electric Institute, the National Coal Association, and others had intervened to support Edison's FERC petition. But the Electric Generation Association (EGA) filed a protest on February 6. EGA argued that the two-stage CPUC auction allowed nonqualifying (non-PURPA) power producers to participate. It added that the FERC's PURPA regulations grant the states wide latitude in resource planning.

On February 15, the Independent Power Producers of New York, Inc. (IPPNY) entered the fray to counter arguments that PURPA forces NYS&G to "overpay" for wholesale power. Carol E. Murphy, executive director of IPPNY, challenges utility claims of low-cost power: "Three-cent utility power is a myth. [That's] the variable cost of running plants, but does not include taxes, insurance, or the debt service." Murphy adds that a true comparison should include avoided costs for both energy and capacity. "That's what avoided cost truly means," she says.

Later I spoke with Stephen Lewis, communications manager at the National Independent Energy Producers (NIEP). Lewis notes that NIEP has filed for rehearing in the CL&P case. Lewis also echoes the view that the New York case is more directly involved with the PURPA cost ceiling.

On February 22, the FERC ruled against the CPUC. It faulted the way California set avoided costs. In my view, the FERC can't do that. It shouldn't micromanage state PUC cost calculations. Yet it's hopeless to try to preserve subsidies for certain flavors of electrons. This fight goes far beyond PURPA.

Editor

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