federal-state tensions currently affecting energy regulatory policy in America.
Sen. Johnston was reflecting on state implementation of PURPA when he said (and I'm paraphrasing), "What do we (federal policymakers) do about California, where their decisions have driven up energy costs and electric consumers are paying more than they should?"
I happen to agree with Sen. Johnston that we should repeal PURPA. However, I am not quite as convinced that we need to concern ourselves in a global, systematic sense with what individual states are doing.
As a front-line regulator, and an elected official myself, I am very aware of the political pressure to keep energy costs down. I suspect I have taken more calls from constituents angry over a 60-cent-per-month increase in their gas bills than the entire U.S. Senate has received over the generally inefficient and costly PURPA legislation. Federal policymakers ought to concern themselves with removing distortions from the marketplace and giving individual states greater latitude to develop energy regulatory policies that reflect each one's individual needs and biases.
As an example of market distortions, one need only look at Oklahoma's experience with PURPA. Since PURPA was enacted, we have had three cogeneration contracts approved in Oklahoma (em two in 1985. One was with a cogenerator that provides steam to a carbon dioxide plant near Poteau, OK. Another was with a
cogenerator that provides steam to the Bridgestone-Firestone tire plant in Oklahoma City.
The avoided costs of these two cogeneration contracts have left Oklahoma ratepayers paying 7.5 percent more than they should for the electricity. These avoided costs were set artificially high as a result of the now-repealed Fuel Use Act, which banned the use of natural gas as a baseload fuel for electric utilities, but allowed cogenerators the additional fuel choice.
As enacted, PURPA does not require a cogeneration facility to produce a specified minimum level of thermal energy, such as steam or other non-electric cogenerated power, to be designated as a qualifying facility (QF). The statute leaves minimum levels to administrative discretion. The current regulations on file at the Federal Energy Regulatory Commission (FERC) require only 5 percent steam or useful thermal output for industrial purposes. The Poteau cogeneration facility has a steamload of 20 to 25 percent, and the Oklahoma City cogeneration facility has a steamload of 5 to 7 percent. The FERC's low thermal standard has had the effect of reversing the original objectives of PURPA. It encouraged and mandated cogeneration facilities designed, not to produce thermal energy tailored to meet the needs of an industrial user, but as electric power plants that take advantage of PURPA to avoid regulation, secure a guaranteed purchaser, and avoid competition. In the name of efficiency, it produces inefficient, high-cost power. These low-steam-output cogenerators produce power at a greater cost to consumers than if the utility had generated the power itself.
Conversely, Oklahoma's third cogeneration contract, in place since 1988, was just recently renewed. This cogeneration facility provides steam for the Pryor Industrial Park in Pryor, OK, and has a steamload of 90 percent. That is incredibly efficient. As a matter of fact, the Pryor QF is now the most efficient electricity generator in Oklahoma. In addition, the Pryor cogeneration facility does not raise costs to ratepayers through avoided costs.
Some argue that we do not need to repeal PURPA because the same decisions wouldn't be made today. After all, avoided costs are much lower today than in 1985. Well, avoided costs are lower today in Oklahoma primarily because the Fuel Use Act was repealed and we can once again consider natural gas as a baseload fuel choice. Not an insignificant change when you consider that our largest electric utility was completely gas fired until the mid-1970s and today 45 percent of its generating capacity is fired by coal (em a result of the Fuel Use Act. Hopefully, I won't be a member of the Corporation Commission when they try to calculate and pass through the Phase II Clean Air Act compliance costs to ratepayers.
What then is the appropriate role for the federal government? I would argue that Congress and the FERC should focus their efforts on creating a seamless transmission system that will allow electricity to flow freely from market to market without governmental or regulatory barriers. It should function, in theory, like the interstate transportation of natural gas. As a producer, I can sell my natural gas to virtually any end user in the country. My net proceeds will depend upon market forces, but as long as I have open access to the transportation system, I more or less control my own destiny.
If Congress is truly interested in opening up the electric industry to competitive market forces, then it must make sure that electric consumers in New York have access to generation capacity in Oklahoma or Maine or Minnesota.
Gradually, over time, it will become less important to regulators how the electricity is generated. Cost will most likely become the overriding factor. That is not to say that some regulators and segments of the market won't recognize and reward fuel choice on some basis other than price (e.g., "green" fuels). Those choices are most appropriately made by state regulators. If given the choice in 1978 or 1982 or 1985, I suspect that most Oklahomans would have opted to expand generation with Oklahoma natural gas rather than imported coal. That is just the sort of option states should have.
If a state legislature or regulatory body makes a bad decision, then they suffer the consequences, whether it be a downturn in their economy or defeat at the ballot box. If they make good decisions then they reap the benefits. Either way, states should not be held to an overly broad or overly restrictive federal standard that does not reflect operational or political realities.
Which leads us back to Sen. Johnston's question. If members of the California Public Utilities Commission (CPUC) choose to implement policies that raise the price of electricity to their consumers, then let them do so. California policies should not concern any member of the U.S. Senate, with the possible exceptions of Dianne Feinstein and Barbara Boxer. Where is it written that Washington must protect utility ratepayers from excessive costs?
If anything, recent history has shown that Congress is particularly ineffective when it comes to making fuel-choice decisions for the utility industry that result in net savings to ratepayers. If the decisions of the CPUC bother the ratepayers of California, they have the ability to effect a change in policy in a timely fashion. My colleagues on the various state commissions should be given every tool possible to deal with the unique circumstances presented by their state's social and economic demographics. Let's allow states to stand or fall on the basis of their own decisions, not choke on misguided federal policies. t
Cody L. Graves is chairman of the Oklahoma Corporation Commission.
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