Public Utility Regulatory Policy Act (PURPA)

Published Jul 15, 2002 Updated Oct 26, 2002

The Public Utility Regulatory Policy Act (PURPA) was passed in 1978, in the midst of the energy crises that ripped through industrial world economies. Faced with predictions that the price of oil would rise to $100 a barrel, Congress acted to reduce dependence on foreign oil, to promote alternative energy sources and energy efficiency, and to diversify the electric power industry.

One of the most important effects of the law was to create a market for power from non-utility power producers, which now provide 7 percent of the country's power. Before PURPA, only utilities could own and operate electric generating plants. PURPA required utilities to buy power from independent companies that could produce power for less than what it would have cost for the utility to generate the power, called the "avoided cost."

PURPA has been the most effective single measure in promoting renewable energy. Some credit the law with bringing on line over 12,000 megawatts of non-hydro renewable generation capacity. The biggest beneficiary of PURPA, though, has been natural gas-fired "cogeneration" plants, where steam is produced along with electricity.

Much has changed since PURPA was implemented. The price of oil has declined and supplies of natural gas have increased, driving down the cost of electricity. Many independent power producers signed contracts in the 1980s with prices that are higher than current spot market prices. Critics of PURPA say it is unfair to make utilities honor those contracts, and they blame independents for high power prices. In fact, all of these contracts were based on the avoided cost of electricity at the time; in other words, if utilities had built their own power plants, prices would be even higher now.

Critics also complain that PURPA is not compatible with an increasingly competitive power market. The Energy Policy Act of 1992 encouraged wholesale power competition, and recent rules by the Federal Energy Regulatory Commission (FERC) opened up transmission lines to all generators equally. But utilities are still able to generate wholesale power and compete unfairly with independents. And there is no other law that requires utilities to use competitive bidding to find the lowest power prices.

PURPA is the only existing federal law that requires competition in the utility industry and the only law that encourages renewables. Both of these goals must be preserved. But despite its benefits, PURPA is no longer much help for renewables. Due to current low avoided costs, few renewables are able to compete with new natural gas turbines. Technically, PURPA only calls for renewable energy if it is cost competitive with conventional polluting resources. Many of the benefits of renewables are not included in the price, such as clean air, but PURPA makes no provision for including these. By strictly interpreting the law, FERC has expressly forbidden non-price factors in PURPA decisions. Moreover, as the guaranteed prices of PURPA contracts signed in the 1980s expire, many renewable power generators are going out of business.

The bottom line is that as long as fossil fuel price forecasts are low, there will be very little development of new renewable energy. What is needed is a new law that accounts for the full range of benefits of renewable energy, like reduced pollution, less global warming, domestic and local economic development, and reduced dependence on foreign energy sources. Such a law must be part of electric industry restructuring legislation. The renewables portfolio standard can move large amounts of clean energy into the mainstream; the system benefits fund can support new and emerging energy sources; and closing loopholes in the Clean Air Act for old coal plants will reduce the unfair advantage those gross polluters enjoy.

In short, PURPA can only be replaced with a better law, not with no law. Any legislation must create an equal playing field for utilities and independent power producers, and must protect the environmental benefits of renewable energy and cogenerators.


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