Pennsylvania Office of Consumer Advocate

 

 

Pennsylvania Office of Consumer Advocate
555 Walnut Street
5th Floor Forum Place
Harrisburg, PA 17101-1923

Phone: 717-783-5048 or toll free 800-684-6560
Fax: 717-783-7152

Email: consumer@paoca.org

Testimony before the United States House of Representatives
Committee on Commerce
Subcommittee on Energy and Power

Public Utility Regulatory Policies Act of 1978 (PURPA)

February 1, 1996

SUMMARY OF TESTIMONY

The National Association of State Utility Consumer Advocates (NASUCA) supports efforts to ensure that consumers are not burdened with excessive electric generation costs in the future, whether those costs come from expensive utility-owned power plants or overpriced PURPA contracts. The best means to achieve lower generation costs in the future is through a competitive electric generation market. Barriers that would prevent the transition to fair competition in the electric generation industry, a transition that can bring lower cost power to all consumers, should be removed.

 

NASUCA submits, however, that the mere repeal of the mandatory purchase obligation of PURPA -- without more -- is insufficient to achieve this goal. Indeed, if PURPA is repealed prematurely, then the result could be a step backward, toward reestablishing the utilities' monopoly dominance over the generation industry. Under the current electric generation market structure, PURPA is needed to ensure that utilities do not favor their own (or their affiliates') generation resources over more economical alternatives. The mandatory purchase obligation of PURPA should be repealed only if it is replaced by a competitive electric generation industry structure that would prevent a return to the monopolization of electric generation by electric utilities

 

PURPA has provided an essential check on the monopoly power of utilities over generation by insuring that utility planners could not confine their resource planning to power plants built by the utilities themselves or their own affiliates. Unfortunately, PURPA, as implemented, often went far beyond providing a check on utilities' monopoly power and created its own set of uneconomical resources. In some states, the estimates of utility avoided cost on which PURPA contracts were based were excessive and in some states, policies and laws effectively required utilities to pay more than the affected utility's avoided cost. As representatives of utility ratepayers, NASUCA members do not support any attempts by state or federal regulators to impose costs on ratepayers for PURPA projects that exceed the cost of the utility's own least cost future resource plan, including the least cost resources that can be purchased on a competitive basis from all other utility and non-utility providers. As long as PURPA remains on the books, NASUCA submits that it should be implemented in a competitive manner which ensures that ratepayers receive the benefit of least cost generation resources.

Finally, PURPA has played an important role in the development of cost-effective renewable energy resources. NASUCA submits that federal policy must seek to maintain a role for cost-effective renewable resources as part of the electric generation industry in the next century.

 

 


CHAIRMAN SCHAEFER AND MEMBERS OF THE SUBCOMMITTEE ON ENERGY AND POWER:

 

My name is Irwin A. Popowsky. I am the Consumer Advocate of Pennsylvania and I am also the Vice President of the National Association of State Utility Consumer Advocates (NASUCA). NASUCA is an association of 42 consumer advocate offices in 38 states and the District of Columbia. Our members are designated by laws of their respective states to represent the interests of utility consumers before state and federal regulators and in the courts.

On behalf of NASUCA, I wish to thank you for the opportunity to testify before this Committee on the future of the Public Utility Regulatory Policies Act of 1978 (PURPA).

I previously had an opportunity to testify on this matter in June, 1995, before the Senate Subcommittee on Energy Production and Regulation. At that time, that Subcommittee was considering Senate Bill S.708, which would have prospectively repealed the mandatory purchase requirement of Section 210 of PURPA. Shortly before that hearing, NASUCA approved a resolution, which I presented to the Senate Subcommittee, urging Congress not to repeal Section 210 of PURPA, unless protections are in place to ensure effective competition in the wholesale generation market and to ensure that renewable resources are fully considered in that market. A copy of that resolution is attached to this testimony and forms the basis for my comments today.

As I stated last June, I believe that NASUCA members would support any effort to ensure that consumers are not burdened with excessive electric generation costs in the future, whether those costs come from expensive utility-owned power plants or overpriced PURPA contracts. I also believe that most NASUCA members agree that the best path to achieve the lowest costs for future generation is through a competitive electric generation market. Barriers that would prevent the transition to fair competition in the electric generation industry, a transition that can bring lower cost power to all consumers, should be removed.

NASUCA submits, however, that the mere repeal of the mandatory purchase obligation of PURPA -- without more -- is insufficient to achieve this goal. Indeed, if PURPA is repealed prematurely, then the result could be a step backward, toward reestablishing the utilities' monopoly dominance over the generation industry. In our view, the mandatory purchase obligation of PURPA should be repealed only if it is replaced by a competitive electric generation industry structure that would prevent a return to the monopolization of electric generation by electric utilities. We also believe that it is important for federal policy to seek to maintain a role for cost-effective renewable resources as part of the electric generation industry in the next century.

There is no longer substantial debate over the proposition that the generation of electricity is not a natural monopoly and that competition, rather than regulation, ought to play the greatest role in determining what generation resources are added in the future. It is essential to distinguish, however, between the generation of electricity and the transmission and distribution of electricity, which remain natural monopolies and which must remain carefully regulated in the future. There also remains debate over whether the competition for electric generation resources ought to occur only at the wholesale level, or whether retail customers also ought to be able to shop for generation and utilize their local utilities solely for the purpose of "wheeling" competitively sourced generation from other providers. As I noted above, however, there is little debate that utilities do not need to build and operate all of their own generating resources. If PURPA has proven anything, it has proven that utilities do not and should not have a monopoly over the construction and operation of power plants.

While many utilities properly complain today about PURPA projects that cost six cents per kilowatt hour, when the current market cost is only three or four cents, we cannot forget that many utility rate bases around the country are filled today with costs of nuclear power plants that make some of the worst PURPA projects look like bargains. It must be recalled that early PURPA projects were viewed against the backdrop of a series of catastrophic nuclear generation decisions that cried out for a competitive alternative.

PURPA provided the alternatives that demonstrated that the vertically integrated monopoly electric utility was no longer necessary or appropriate. PURPA helped produce a diversity of resources and technologies that have provided significant benefits to consumers. Perhaps most relevant here, PURPA provided an essential check on the monopoly power of utilities over generation by insuring that utility planners could not confine their plans to the suggestions presented within the utility's own offices.

Unfortunately, PURPA, as implemented, often went far beyond providing a check on utilities' monopoly power and created its own set of uneconomical resources. In some states, the estimates of utility avoided cost on which PURPA contracts were based were excessive and in some states, policies and laws effectively required utilities to pay more than the affected utility's avoided cost. As representatives of utility ratepayers, NASUCA members do not support any efforts by state or federal regulators to impose costs on ratepayers for PURPA projects that exceed the cost of the utility's own least cost future resource plan, including the least cost resources that can be purchased from other utility and non-utility providers. In our attached resolution, we call on the FERC and state commissions to implement PURPA in a competitive manner which ensures that ratepayers receive the benefit of least cost generation resources.

We do not support, however, the immediate repeal of the utilities' obligation to purchase PURPA power in those cases where the PURPA project is equal to or lower in cost than the utilities' own least cost resource plan, including all other competitively provided alternative resources. Our concern is that, in the absence of PURPA, or some other competitive resource requirement, there is still nothing in the current structure of the electric utility industry that would prevent the remonopolization of the generation segment of the industry. While it is true that the Energy Policy Act of 1992 (EPACT) has expanded the number of potential sellers of electric generation through the creation of exempt wholesale generators, that Act has not greatly expanded the number of potential buyers. Under EPACT, an exempt wholesale generator is not permitted to sell power directly to retail consumers. In addition, both EPACT and recent FERC transmission policies have enhanced the ability of wholesale sellers to wheel their power to new markets, but those markets will not exist unless utility buyers are willing to purchase power from those sellers. There can be no competitive generation market unless there are both willing sellers and willing buyers.

Today, utilities remain the monopoly sellers of retail electric power and the monopsony buyers of electric generation within their respective retail service territories. This combination provides the utility with substantial market power in the generation market, which can be used to the detriment of both retail consumers and potential generation competitors. In this existing market structure, PURPA provides an essential competitive check which prevents a utility from favoring its own resources when they are more costly than alternative generation resources.

Rather than immediately repeal the mandatory purchase obligation under PURPA, therefore, NASUCA suggests a more conditional approach. Specifically, PURPA's mandatory purchase obligation should be repealed only if alternative market or regulatory protections are in place to ensure effective competition in the wholesale generation market. Under no circumstances should we permit a return to an industry structure in which utilities can disregard cost-effective alternatives that compete with their own proposed generation resources. In effect, we would condition the repeal of (or exemption from) the PURPA mandatory purchase requirements on the presence of an enforceable set of competitive protections that will prevent the remonopolization of the electric generation industry.

NASUCA submits that all future utility resource procurement should be subject to some sort of competitive test. If a utility is subject to an enforceable competitive procurement standard, whether by market forces or by law, then the PURPA mandatory purchase requirement could be waived or repealed. That is, as long as a utility is prevented from favoring its own (or its own affiliate's) generation resource over more economical and beneficial competitive alternatives, then the PURPA purchase obligation need not apply.

In the interim, as long as PURPA remains on the books in any form, it should be implemented in a competitive manner. In a series of cases last year, the FERC held, quite correctly in my view, that there is absolutely no justification under PURPA for ratepayers to pay any more for power from PURPA projects than the avoided cost of the utility's own least cost resource plan, including purchases from other utilities and non-utility resources. Indeed, to the extent that utilities are already engaging in appropriately structured all-source competitive procurement processes today, PURPA should not result in higher costs to ratepayers. If the avoided cost standard is properly applied, a PURPA project can only "win" a competitive bid if it equals or beats all the other least cost utility and non-utility projects that participate in the bidding program. In effect, PURPA QF status is no more than a "tie-breaker" in a competitive procurement process. If properly applied, therefore, PURPA provides utilities with an obligation to shop, but not an obligation to buy, unless the PURPA project is no more costly than the utility's own least cost generation plan, including the entire universe of competitive alternatives that is available to the utility.

Many states already have implemented competitive procurement procedures to replace the administrative determinations of avoided cost that gave rise to many high-cost PURPA contracts. Some states and some utilities are considering even more fundamental changes in the methods by which electric generation is bought and sold. These include the unbundling of generation service from distribution and transmission services, the divestiture of generation assets by monopoly distribution utilities, the establishment of various types of generation pooling arrangements, and the direct access by retail customers of third party generation resources. Under certain of these industry structures, the mandatory purchase requirement of PURPA may become unnecessary or irrelevant.

It is because of PURPA, however, that I believe we are even in a position to discuss many of the possible alternative competitive generation futures. The premature repeal of PURPA could stifle, rather than advance the transition to a fully competitive electric generation industry that could benefit all consumers. If one of the questions before this Subcommittee, therefore, is whether PURPA should be repealed, my answer is: "not yet." If PURPA is to be repealed, then it is first necessary to ensure that the competitive check on utility monopoly power provided by PURPA is enforced in some other way.

Even assuming that PURPA can be fully replaced by other forms of generation competition, however, one issue remains that should be addressed by federal legislation. That is the role of renewable resources in an increasingly competitive future electric generation industry. To the extent that certain renewable resources already are cost-competitive, all that is necessary is to ensure that renewable resources are given a fair opportunity to participate in the competitive marketplace. To the extent that renewable resources may appear to be more costly than other resources in the short term, however, it is important to consider the full long-term value of renewable resources in terms of the avoidance of risk of fuel price volatility, avoidance of potential future environmental compliance costs, and (when compared to imported oil and nuclear plants) potential safety and national security benefits. PURPA has assisted the development of renewable resources by ensuring that such resources be considered in utility purchasing plans. To the extent that federal policies support the development of cost-effective renewable technologies, then it will be necessary to consider means to ensure that such development continues. Such efforts may take the form of tax policies or research and development support at the federal level, but whatever form they take, NASUCA urges Congress to recognize the need for some such efforts in the future.

Thank you again for the opportunity to appear before this Subcommittee. I would be happy to answer any questions you may have at this time. 

 

 

 

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