The Public Utility Regulatory Policies Act of 1978 ("PURPA") has been, and continues to be, a net benefit for the natural gas industry. The gas industry should only support amendments to, or repeal of, PURPA if other statutory or regulatory steps are taken to ensure competition in the electric generation industry.
The impact of PURPA on the natural gas industry can be divided into three major categories.
1. PURPA allowed for the establishment of "qualifying facilities" (" QFs") to generate electricity. These QFs, the beginning of the independent power industry, introduced competition in the electric generation industry and became the primary market for new gas-fired generation projects.
2. PURPA included provisions aimed at encouraging the use of renewable energy sources, which compete with natural gas, potentially reducing demand for gas.
3. PURPA included incentives for energy conservation, which would also have had the effect of reducing demand for gas.
Although statistics allowing a precise measurement of the effects are not available, the benefit to the gas industry of the development of the independent power market outweighs the negative consequences of PURPA’s provisions regarding renewable energy sources and conservation.
The strongest argument of proponents of PURPA relates to the role PURPA plays in ensuring competition for generation opportunities. Before enactment of PURPA, there was no competition in generation. The adoption of PURPA radically changed this environment. To encourage the development, construction and operation of more efficient cogeneration technologies, Congress decided to allow entities other than traditional electric utilities to generate electricity. The competition to provide generation services led to the development of the independent power industry, over half of the capacity of which is run using natural gas.
PURPA continues to serve as a "guarantor" for a competitive generation market, and thus is a positive factor for the gas industry. Competition in wholesale electric markets has been good for the gas industry, which has been the lowest cost supplier in many markets. PURPA, alone provides essential but limited protection of competition. PURPA, however, has proved to be a weak weapon against the defensive tactics of utilities strongly committed to build rather than buy new capacity.
Risks of PURPA Repeal for the Natural Gas Industry
As discussed above, the natural gas industry has benefitted, and appears to be situated to continue to benefit, from competition in generation. The repeal of PURPA could result in reducing generation competition, to the detriment of the natural gas industry.
A further substantial risk for the gas industry if PURPA were repealed would be efforts to cancel existing QF contracts with payments above existing avoided cost. The natural gas industry supplies gas to cogeneration facilities on the basis of long term supply contracts. If repeal or modification of PURPA were to lead to reopening or cancellation of these contracts, the ability of affected QFs to continue to make payments to their natural gas suppliers would be jeopardized.
Repeal or modification of PURPA could have an indirect effect on the pace of retirements of existing rate-based nuclear and coal-fired power stations. If the effect of repeal of PURPA is to shield utilities from competition by third parties by reducing competition, utilities are more likely to extend the life of existing coal facilities or repower them. This will be even more likely if environmental externality adders were imposed only on new rather than existing facilities, as is the current State practice. Such a result would clearly be to the detriment of the natural gas industry.
These risks to the natural gas industry are substantial.
Benefis of PURPA Repeal for the Natural Gas Industry
As discussed above, PURPA repeal would remove statutory preferences for renewable energy and conservation efforts, which have had the effect of reducing demand for gas. Since these preferences have had a limited impact on the natural gas industry, their elimination would result in only a modest gain for the industry.
PURPA repeal may also lead to the elimination of the "market segmentation" approach to QF participation in the wholesale market, under which States are free to require utilities to pay "differential" avoided cost rates for power from different technologies. In many markets, a uniform market rate for QF purchases would result in more sales of lower cost natural gas. It is possible, however, that the market segmentation approach may be phased out even if PURPA is not repealed.
These benefits of PURPA repeal seem minimal compared to the risks of repeal.
