Failure to Innovate
In Congressional hearings in the early 1970s, precipitated by the oil crisis and major electrical blackouts in the Northeast and Eastern Seaboard in 1965 and 1967, the reliability of the nation’s utility grid came under scrutiny. The cost of retail electricity to the consumer, after decades of decreasing or stable rates, had begun to increase at a rapid rate, increasing an average of 11 percent per year from 1970 to 1980. The perceived failure of the utilities to adequately address these issues became a major public and congressional issue.
After having come under heavy criticism during the course of these hearings, coincidental or not, in 1973, the power utility industry established the Electric Power Research Institute (EPRI), a non-profit coalition of companies involved in the electric utility sector. The organization’s mandate was to foster research and development into technologies and policies affecting the generation and delivery of power in the United States. With over 1,000 members, it represents the majority of electrical utilities.
Risk Not Want Not
The regulatory structure for utilities encourages capital investment and discourages risk. A utility wants to avoid investing in technology or equipment that might not deliver a quantifiable and ongoing benefit to the ratepayer. If it was determined by the regulators that a particular investment did not meet this criteria, it would be quite possible that the regulators would disallow the expenditure being put into the rate base for reimbursement. Expenses incurred in nuclear power plants by utilities have often met this fate, where regulators have refused to allow the full reimbursement of cost overruns, botched repairs or upgrades to be factored into rate bases and the full rate of return allowed. Utilities want expenses covered by rate payers, not their stockholders, and the guaranteed return on their investments under their contract as a monopoly.
The creation of EPRI might have been seen as a good start, but Congress was apparently displeased with the progress of innovation on the part of the utility industry. In 1978, Congress passed the National Energy Act. A major part of this act was Section 210, the Public Utilities Regulatory Policy Act (PURPA). Though PURPA’s genesis can primarily be traced back to the energy crisis of the early 1970s, the utilities’ historic lack of innovation and complacency no doubt was a contributing factor to its passage. The bill’s stated purpose was to address the need to develop a strategy to make the U.S. less dependent upon foreign oil through the following actions: promoting energy conservation, expediting the development of hydroelectric power, improving the reliability of the grid and promoting innovation in the energy sector by opening it up to renewable energy projects and non-utility power generators.
It was the first breach in disrupting the traditional utility monopoly, taking away from them their long held exclusivity of generating electrical power for the grid. It opened up the electricity market to independent power generators, enabling these “qualified facilities” (QFs) to sell their power to the utilities at what was termed “avoided cost,” which Congress vaguely defined as the costs avoided by the utility by purchasing power from these QFs. It was believed that with some outside competition, the utilities would be pressured to innovate and operate more efficiently. The ultimate result of this opening up of the power generation market, was the development of new power sources, from small hydro to wind farms, geothermal and biomass, to cogeneration. The vote for its passage in the Senate was 83 to three, with 11 abstentions.
Implementation of PURPA did not go smoothly. It became the responsibility of the Federal Energy Regulatory Commission (FERC) to oversee its implementation, but its actual implementation was left to the States, and many if not all of the utilities were not anxious to implement it, nor were many of the State regulatory institutions. Both often put a plethora of hurdles in the way of implementation, citing known and unknown technical difficulties in integrating QFs into their systems, as well as legal and accounting difficulties. Claims of federal overreach and questions of jurisdiction arose.
Many legal actions revolved around questioning what constituted “avoided cost” and the utilities wanting to levy standby charges to self-generators. Since it was left to the individual States to implement, the process was extremely laborious and expensive for the QFs. Many utilities fought its implementation in the courts, but most preferred their State PUCs, a forum they often found more receptive, the regulators comfortably familiar with the traditional utility model and uncomfortable with change. One early lawsuit was filed by FERC against the State of Mississippi, which made its way to the Supreme Court, and another was filed by a utility, Electric Power Service Corporation against FERC. In both cases, the PURPA legislation prevailed, FERC v Mississippi in 1982 and Electric Power Service v FERC in 1983. Unfortunately, these two cases and the many to follow did not settle the matter. To this day, there is still litigation going on about its implementation in a number of States.
California Leading the Way
California was the first State to truly embrace PURPA. Jerry Brown was the governor of California (1975 to 1983) at the time, a progressive minded politician with ideological bent towards energy conservation and the development of renewable energy (Deja Vu?), and California had an abundance of renewable energy in wind, hydro, solar, and geothermal. He wanted PURPA implemented in the State and its implementation, particularly renewable energy development became a policy priority. The development of renewable energy and energy conservation in the State became one of his trademark accomplishments.
The California legislature passed generous tax credits to encourage the development of renewable energy projects, echoing those of the Federal government, but the industry still had difficulty attracting capital, primarily due to the lack of financeable power purchase agreements (PPA’s). A serendipitous meeting on February 9th, 1982 at Frank Fats, a Sacramento watering hole/restaurant frequented by politicians and lobbyist, where Governor Brown was having dinner with some of his staff. Board members of the newly formed Independent Energy Producers Association (IEP), were also winding down at the end of the day at a nearby table. Dr. Jan Hamrin, the newly elected Executive Director of this association walked over to Brown’s table and introduced herself. After explaining to Brown who she was and what the IEP was trying to accomplish, i.e., securing financeable PPA’s for renewable energy projects, and the utilities’ recalcitrance to negotiate them, Brown turned to his chief of staff, B.T. Collins, and told him to make it happen.
Under pressure from the Governor’s office, the State’s investor owned utilities (IOU’s), Southern California Edison, Pacific Gas & Electric, and San Diego Gas & Electric were encouraged to hammer out the structure for PPA’s acceptable to the QF’s and the California Public Utilities Commission (CPUC). These agreements became known as the “Interim Standard Offers”. By September of 1983, the CPUC approved the first financeable PPA’s.
In California, wind energy capacity went from a negligible amount in 1982 to over 1,600 MW by 1991. The Geysers in Sonoma, California, which were first developed in 1960 by Pacific Gas & Electric, with the installation of an 11 MW project, had only grown to 500 MW by 1979. From 1980 to 1989, an additional 1,543 MW’s were added, the majority by independent power developers. From 1982 to 1991, independent power producers in California brought online over 92 MW of new run of river hydro power, and 122 MW of landfill gas projects. Prior to this, all hydro power development in the State had been by utilities or irrigation districts.
The rest of the country lagged behind California in bringing PURPA based QF capacity online, its implementation mired in litigation in the courts and before regulators for years. To this day there is ongoing litigation around its implementation.
The passage of PURPA was a seminal event in the evolution of the U.S. electric power industry. For the first time, utilities faced competition in one of their historic monopolistic sectors, power generation, and they did not like it.
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