Public Utilities Regulatory Policy

The landmark Public Utilities Regulatory Policy Act (PURPA) of 1978, passed under the National Energy Act, was a response to market uncertainties that started a long, slow trend toward the break-up of the vertical integration of electric utilities by opening up generation to qualifying facilities (QFs), which were cogenerators and other small independent power producers (IPPs).

PURPA established a class of QF self-generators that were exempt from regulation under the Public Utilities Holding Company Act (PUHCA) and most sections of the Federal Power Act (FPA), Securities Exchange Commission (SEC), and state utility regulations. While QFs could be small power production facilities using renewable resources, they could also be cogeneration facilities using oil, gas, or coal and meeting the applicable operating and efficiency standards. However, the total ownership of the facility by one or more investor-owned electric utilities (IOUs) was limited to 50%.

One of the principal goals of PURPA was to promote energy independence following the oil embargo and energy crises of the 1970s. In this, the methods encouraged by PURPA included conservation of electric energy, efficient use of fuel and utility generation plants, and equitable pricing for non-utility generated electricity. PURPA led to a series of orders from FERC that required electric utilities to encourage — or at least not discourage — cogeneration and small power production.

Before PURPA, utilities could refuse to serve facilities that generated their own power. Instead of being able to size on-site generation systems for optimal energy efficiency and economic performance, a facility often had to provide for all of its power requirements all of the time. Further, redundant equipment had to be installed because the utility would not provide back-up power. These systems were referred to as total energy systems because they provided for all of the facility's energy requirements. Opportunities for self-generation, however, were extremely limited as the need for redundancy and complete power independence severely affected potential project economic performance.

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