RS20146: Electricity Restructuring Bills: A Comparison of PURPA Provisions

Amy Abel
Specialist in Energy Policy
Resources, Science, and Industry Division

Jon Shimabukuro
Legislative Attorney
American Law Division

April 7, 1999

Summary

The Public Utility Regulatory Policies Act of 1978 (PURPA) was enacted in part to augment electric utility generation with more efficiently produced electricity and to provide equitable rates to electric consumers. Section 210 of PURPA requires a public utility to purchase power produced by qualifying facilities at the utility's avoided cost: the incremental cost a utility would have to pay if the utility generated the electricity.

The electric utility industry is moving towards competition, and some argue that §210 of PURPA is no longer needed. Four bills have been introduced in the 106th Congress that would amend or repeal portions of PURPA: S. 282, introduced by Senator Mack on Jan. 21, 1999; S. 516, introduced by Senator Thomas on March 3, 1999; H.R. 667, introduced by Representative Burr on Feb. 10, 1999; and H.R. 971, introduced by Representative Walsh on March 3, 1999. This product will be updated as legislative actions occur. For additional background on PURPA, see CRS Report 98-419, Electricity Restructuring Background: The Public Utility Regulatory Policies Act of 1978 and the Energy Policy Act of 1992.

Overview⁽¹⁾

Electric utilities have been subject to federal and state economic regulation since the enactment in 1935 of the Federal Power Act (FPA)⁽²⁾ and the Public Utility Holding Company Act (PUHCA).⁽³⁾ The regulatory framework set up by PUHCA and the FPA, consisting of states regulating utilities' retail and intrastate activities and the federal government regulating utilities' interstate and wholesale activities, remained virtually unchanged between 1935 and 1978. As a result of the "oil crises" in the 1970s and concerns about energy security, legislation was enacted to encourage alternative sources of power.

In 1978, Congress passed the Public Utility Regulatory Policies Act (PURPA)⁽⁴⁾ as one of five major pieces of energy legislation known as "The National Energy Act."⁽⁵⁾ PURPA was, in part, intended to augment electric utility generation with more efficiently produced electricity and to provide equitable rates to electric consumers. PURPA established several major modifications in the economic regulation of electric power facilities and substantially injected the federal government as a regulator into the domain of the economic electric power regulation formerly held by the states. Under the FPA, federal economic regulation was limited to wholesale rates for power moving in interstate commerce. With PURPA, the federal role became much more involved in state rate policies and in regulating utilities.⁽⁶⁾

The original intent of §210 of PURPA was to encourage alternative sources of electricity beyond traditional generation facilities, without these facilities being subject to all existing federal and state utility regulations. Perhaps the most far-reaching provision of PURPA encourages cogeneration⁽⁷⁾ and small power production with so-called qualifying facilities (QFs).⁽⁸⁾ QFs are not considered to be utilities, and are therefore exempt from regulation under PUHCA and the FPA. To be considered a QF, a cogenerator or small power producer must meet certain FERC rules on fuel use, size, fuel efficiency, and reliability.

PURPA shifted the price basis for wholesale electricity from the seller's cost to the purchaser's cost. PURPA indicates that QF power is to be purchased at the "incremental cost" of alternative energy to the utility.⁽⁹⁾ This rate, referred to as the avoided cost, is the likely costs for both energy and facilities that would have been incurred by the purchasing utility if that utility had to provide its own generating capacity. These rates are not based on actual costs incurred in the production of electricity. The determination of avoided costs has been the responsibility of the states, and procedures to assign avoided costs have varied greatly between states.

An unintended consequence of PURPA was the introduction of competition into a "monopoly" industry. The federal government had opened the electricity generating sector to other entrants and raised questions about the natural monopoly justification of generation ownership and regulation.⁽¹⁰⁾ This first incremental change to traditional electricity regulation started a movement towards a market-oriented approach to electricity supply. Following the enactment of PURPA, two basic issues prompted calls for further reform: whether to encourage nonutility generation and whether to permit utility diversification. As a result, the Energy Policy Act (EPACT)⁽¹¹⁾ was enacted in 1992 to further increase competition in the electric generating sector. The main effect of the debate and enactment of EPACT was to continue a reevaluation of traditional electric utility regulation.

One issue currently before Congress is whether EPACT injected enough competition into the industry so that PURPA is no longer necessary, or is a more comprehensive approach to electricity restructuring necessary before PURPA reform should be considered? Some believe that a repeal of PURPA is necessary before the industry can become truly competitive. However, others argue that because new PURPA contracts are using market-based pricing, and in general, states that have moved toward competition have allowed stranded cost recovery for existing PURPA contracts, federal legislation to repeal or reform §210 of PURPA is unnecessary. In the 105^th Congress, the Administration bill, S. 2287, would have prospectively repealed section 210 of PURPA. The administration has not released its new proposal for the 106^th Congress.

Legislation

Four bills have been introduced in the 106th Congress that would amend or repeal portions of PURPA: S. 282, introduced by Senator Mack on Jan. 21, 1999; S. 516, introduced by Senator Thomas on March 3, 1999; H.R. 667, introduced by Representative Burr on Feb. 10, 1999; and H.R. 971, introduced by Representative Walsh on March 3, 1999. These bills view § 210 of PURPA as outdated, given the move toward competition in the electric utility industry. These bills are part of a large ongoing debate on electric utility industry restructuring, and comprehensive bills that deal with PUHCA reform, retail wheeling as well as PURPA reform, have been introduced in the 106^th Congress.⁽¹²⁾

Existing Contracts. PURPA requires utilities to execute contracts to purchase power from QFs. As of December 31, 1997, approximately 7% of the U.S. generating capacity was from QFs. Five states account for almost half of all non-utility capacity: California (16%), Texas (14%), New York (8%), Virginia (6%), and Florida (5%).⁽¹³⁾

S. 282, H.R. 667, and S. 516 would not affect existing contracts. However, H.R. 971 would permit a state regulatory authority to amend existing contracts to ensure that they are reasonable to consumers and do not exceed the incremental cost to the utility at the time of delivery. Congress retains the ability to amend existing contracts in this manner. While the Contracts Clause of the Constitution prohibits a state from passing any law that impairs the obligation of contracts, the Contracts Clause should not be applicable here because it does not apply to acts of Congress.⁽¹⁴⁾

A QF may attempt to argue that the amendment of an existing contract would result in a taking of its property. The Fifth Amendment to the Constitution states that private property shall not be taken for public use without just compensation. In this case, a QF would be denied the payment that was agreed upon with the utility. Nevertheless, it is unlikely that the QF would be successful. Taking challenges involving government interference with economic arrangements have generally not been recognized.⁽¹⁵⁾

Alternately, a QF may contend that any amendment to an existing contract would give rise to a claim for breach of contract. It is uncertain whether such a claim would be successful.

Future Contracts. Although S. 282, H.R. 667, and S. 516 would not affect existing contracts, these bills would prospectively repeal §210 of PURPA, the mandatory purchase requirement. Under these bills, utilities would not be required to enter into new contracts with qualifying facilities. As of the date of enactment, H.R. 971 would allow state regulatory authorities to use fluctuating market rates to determine QF contract prices.

Stranded Costs. The issue of stranded costs is one of the larger transitional issues facing the electric utility industry as it moves toward competition. Stranded costs are defined by recovery proponents as those costs that were legitimately and prudently incurred under the "old" regulatory regime that are not economically recoverable under the "new" competitive regime that is being entered. Alternatively, opponents characterize stranded costs as unrecoverable business investments that were known to the utilities. Examples of stranded costs include uneconomic nuclear power plant investments and above-market electricity supply contracts under PURPA.

S. 282 and H.R. 667 provide for a federal mandate for full recovery of PURPA related stranded costs. S. 516 does not include a federal mandate for stranded cost recovery, however, it does allows states to impose transitional charges to recover stranded cost. H.R. 971 does not include a provision to recover stranded costs.

Side-by-Side Comparison of PURPA Provisions

Footnotes

1. ^(back)For additional information on electric utility restructuring, see CRS electronic briefing book.

2. ^(back) 16U.S.C.§791a-825r. For text of the FPA, see http://www.ferc.fed.us/intro/acts/fpa.htm.

3. ^(back)15 U.S.C. § 79 et seq.

4. ^(back)16 U.S.C. §2601, P.L. 95-617 (1978).

5. ^(back)The other parts of the energy package were: 1) Natural Gas Policy Act, P.L. 95-621 (1978); 2) Power Plant and Industrial Fuel Use Act, P.L. 95-620 (1978); 3) National Energy Conservation Policy Act, P.L. 95-619 (1978); 4) Energy Tax Act, P.L. 95-618 (1978).

6. ^(back)For additional discussion on PURPA and restructuring, see CRS Report 98-419 ENR.

7. ^(back)Cogeneration is the production of electric energy along with steam heat or some other useful form of energy.

8. ^(back)16 U.S.C. § 824a-3.

9. ^(back)16 U.S.C.§ 824a-3(b).

10. ^(back)Historically, electricity service has been defined as a natural monopoly, meaning that the industry has (1) an inherent tendency toward declining long-term costs, (2) high threshold investment, and (3) technological conditions that limit the number of potential entrants.

11. ^(back)P.L. 102-486 (1992).

12. ^(back)See CRS Report RL30008 (pdf), Electricity Restructuring: Comparison of H.R. 667 and S. 516.

13. ^(back)Edison Electric Institute. Capacity and Generation: Non-Utility Sources of Energy, 1998 edition. Washington, D.C. p. 5.

14. ^(back)See U.S. CONST. art. I, § 10, cl. 1. See also Yankee Atomic Electric Company v. United States, 112 F.3d 1569, 1577 (Fed. Cir. 1997).

15. ^(back)See Robert Meltz, When the United States Takes Property: Legal Principles, CRS Report 91-339A, March 22, 1991.