Reconsidering PURPA


How relevant is a law enacted 40 years ago in response to the oil shocks of the 1970s? Especially given today’s electricity markets where inexpensive renewable energy resources rapidly supplant the old coal-fired workhorses of the industry. Perhaps it is time to revisit the law and ensure consumers see the best results as rapidly changing economic forces rock the electricity sector.

That’s the argument of U.S. Sen. John Barrasso, R-Wyoming, and others in Congress calling for passage of legislation to modernize the 1978 law known as the Public Utility Regulatory Policies Act, or PURPA. Energy markets were “drastically different” when PURPA was first enacted, the Wyoming Republican argues, calling it critical to modernize the law to reflect a rapidly changing energy market in which clean, renewable resources have become increasingly economical.

But let’s take a step back and look at the environment in which PURPA was passed. PURPA was the first of several laws enacted by Congress to promote competition in the production of electricity for consumers. Yes, electricity markets were dramatically different before PURPA’s enactment since there was no market for electricity produced by entities other than monopoly-protected utilities.

PURPA was intended to promote investment in small, renewable energy facilities by non-utility generators. Amid spiraling inflation, long lines at gasoline stations and massive cost overruns in the construction of nuclear power plants, Congress sought to promote the type of investment that utilities were reluctant to undertake. At the time, PURPA was successful at jump-starting the creation of an independent generation industry and led to more pro-competition legislation enacted in a bipartisan fashion in 1992.

Today, regional electricity markets are determining the price of electricity for two-thirds of U.S. GDP. They’re not perfect, but have proven better than rate regulation at promoting the lowest costs for consumers, and have helped drive the development of ever-cleaner generation resources and cleaner air. 

So perhaps it is time to reconsider PURPA. After all, at the heart of concerns about the law is a regulatory artifice known as “avoided cost” rates. In other words, PURPA directs utility regulators to guess what the utility’s avoided costs would be had the utility – rather than a PURPA qualifying facility – produced the same amount of energy. It’s another form of failed utility ratemaking that competitive markets have made obsolete. 

But addressing PURPA’s rapidly obsolescent avoided-cost ratemaking process in isolation will do little to help consumers or promote development of a 21st electricity system. Congress should instead look at PURPA in a holistic context. The past 20 years have demonstrated that states with competitive markets have seen electricity costs better contained than in states that maintained the monopoly rate-setting method. Monopoly states today are a regulatory battleground as rooftop solar, consumers and other interests seek to break down barriers to competition and innovation.

In a genuinely competitive electric industry that quarantines monopoly utilities from the market, PURPA is unnecessary. Rather than tinker at the margins of the problems confronting today’s electricity consumer, Congress should confront the elephant in the room by completing the stalled transition to competition.

Only with real competition in electricity markets in which utilities can no longer serve as barriers to entry by new, innovative and cost-competitive suppliers, will consumers genuinely benefit. Such a transition to competitive markets will also help address increasing environmental concerns in the process. It’s a win-win.