A new paper released by Professor David Dismukes at the Louisiana State University Center for Energy Studies highlights the need for reforming outdated provisions of the Public Utility Regulatory Policies Act (PURPA) passed in 1978. The paper demonstrates how PURPA ultimately forces ratepayers to pay inflated prices for new renewable generation regardless of whether the electricity is needed and examines state level efforts to protect ratepayers from these negative impacts.

The paper focuses on the provisions of PURPA intended to promote independent energy generation. At the time of passage, utilities were all vertically integrated; all generation, transmission and sales were handled by the same monopoly in a given area. PURPA sought to inject competition into this system. It did this by requiring utilities to buy any electricity produced by a “qualifying facility.” A QF is a smaller, independent generation facility. These purchases are made at an administratively determined price called “avoided cost.” This is meant to approximate the cost for a utility to produce that unit of electricity.

Whatever the merits of that competition effort in the 70’s and 80’s, the paper shows that these provisions are hopelessly outdated now. Numerous states have varying levels of competition in the electricity market. FERC and the regional interconnection grids also promote and regulate interstate competitive markets pursuant to federal law. While some states remain largely monopoly systems, in general there are outlets for competition to varying degrees nationwide.

PURPA, though, continues to require utilities to purchase electricity from any QF, regardless of whether that electricity is even needed. And since electricity demand has been essentially flat for more than a decade, most new PURPA development is in fact not needed. On top of that mandate, the system for setting “avoided cost” is a hopeless mess, mainly because it is administratively set by regulators, not market based. The paper notes a few examples of a commonly seen situation where the “avoided cost” rate is far more than the actual cost of the generation. While this is a great deal for small wind and solar developers because utilities are required to buy their product at artificially high prices, it leaves ratepayers holding the bag paying excessive rates for unneeded electricity generation. This extra PURPA generation additionally wrecks the economics of existing generation, with those costs also passed on the ratepayers.

Among the main conclusions of the paper are:

  • An estimated $108 billion in PURPA renewables payments have been charged to ratepayers in the last 10 years.
  • While it is impossible to estimate exactly how much of that new generation was unnecessary, given that electricity demand in the US has not been growing over that decade, it is likely that a large proportion of that was not needed.
  • Various efforts at state-level reforms in states such as Montana, North Carolina, and Idaho have run into regulatory and legal hurdles largely due to the antiquated structure of the federal PURPA laws and regulations.

The paper further calls for specific reforms to PURPA to address some of the law’s worst failures:

  1. Eliminating the requirement for utilities to purchase unneeded electricity
  2. Eliminating requirements for long-term contracts unless there is a demonstrated need for such a contract.
  3. Eliminating loopholes like the “one-mile” rule that allows large generation developments through careful spacing to masquerade as a series of small PURPA qualifying facilities.

What this paper ultimately highlights is that, although “PURPA reform” sounds like an arcane fight between utilities and independent generators, ultimately the ratepayers pay all the costs of the rent-seeking from this broken regulatory system. Inflated “avoided cost” payments, which have nothing to do with the actual cost of electricity generation, are locked into long term contracts that leave ratepayers paying far more than the wind or solar generation actually costs. Furthermore, these over-market payments are for new electricity supplies that are not needed. The only way to halt this fleecing of electricity consumers is through urgently needed reforms to the underlying law. The full paper is avaliable here.

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