PURPA and PUHCA Edge Closer To Repeal

PURPA and PUHCA Edge Closer To Repeal

June 01, 2002

Electric utilities will no longer have to buy electricity from “qualifying facilities” under the national energy plan that the Senate passed in April. Existing contracts with QFs are not affected. However, if an existing contract is amended in the future, there is a danger that the utility will be freed from any obligation to buy power.

The Senate also voted to repeal the Public Utility Holding Company Act of 1935 — called “PUHCA.” Repeal of PUHCA will have far-reaching effects on how the electric and gas utility industries are structured in the United States.

Changes to PURPA

The Senate voted in April to terminate any requirement under the “Public Utility Regulatory Policies Act,” or “PURPA,” for utilities to buy electricity from cogeneration facilities and small power plants that burn renewable fuels at the “avoided cost” the utility would pay to generate the electricity itself. However, the termination is conditioned on the Federal Energy Regulatory Commission finding that the power plant, or “qualifying facility,” in question has “access to independently administered, auction-based day ahead and real-time wholesale markets for the sale of electric energy.” Given FERC’s open access rule, Order No. 888, requiring all public utilities to transmit for other sellers, including QFs, many QFs should be viewed as already meeting the test of having access to such markets. For these QFs, the utility purchase obligation will in fact disappear. However, for those QFs that do not have access to such markets, the purchase obligation will remain.

Existing QF contracts should not be affected. A “grandfather” provision in the Senate bill says that the bill “shall not affect” the rights or remedies of any party under any QF contract in effect upon enactment, including the right to recover costs of purchasing electric energy or capacity.

In a move to help utilities that buy power from QFs, the Senate also made clear that utilities are allowed to recover all “prudently incurred” QF costs in the retail rates that the utilities charge their customers. Such recovery of QF charges in retail rates has already been recognized by the courts. For example, in Freehold Cogeneration Associates v. BRC of New Jersey, 44 F.3d 1178 (3d Cir. 1995), cert. denied sub nom. Jersey Central Power & Light Co. v. Freehold Cogeneration Associates, 116 S.Ct. 68 (1995), a US appeals court made it clear that a utility must be allowed to pass through in retail rates the charges that it pays under a QF contract approved by a state commission. The court also noted that the QF charges were prudently incurred, since the one possible exception to the mandatory passthrough of federal rates under the supremacy clause of the US constitution has been the potential ability of state commissions to deny imprudently incurred costs. The Senate bill effectively codifies this case law and ensures that utilities can pass through QF charges in retail rates.

The Senate also voted to remove any restriction on utility ownership of QFs. Utility interests in QFs are limited currently to no more than 50%, because Congress in PURPA considered it unwise to have utilities on both sides of the bargaining table, both selling and purchasing from QFs, particularly if utilities are required to purchase QF power. The Senate bill allows utilities to own 100% of QFs.

In an interesting twist, a utility might conceivably be required to buy from itself (from its QF affiliates) in the future if the affiliates lack access to an independently-administered, auction-based day ahead and real-time wholesale market. Utilities that do not promote such access might benefit by being forced to buy from their own affiliated QFs and have the costs passed through to their retail ratepayers.

One of the aspects of PURPA that allowed QFs to succeed originally, in addition to the long-term contracts, was the limitation on utility ownership, which required “non utilities” or independent power producers to have a place in the developing industry. Without long-term contracts and with full utility ownership, it will remain to be seen whether anyone without the credit rating and resources of franchise utilities will be able to finance the building of new QFs.

Finally, the Senate voted to eliminate the obligation under current law for utilities to sell retail electric power to QFs, but only if competing retail electric suppliers are “able” to provide it. The assumption appears to be that, if there is retail competition, then suppliers who are able to supply energy will do so at competitive prices.

A potential problem with this language is that utilities were always “able” to provide retail power to QFs, but preferred not to, which is why PURPA required it and required that the rates for retail service not discriminate against QFs. The new language should probably require that retail suppliers be “able and willing” to provide retail service at a reasonable, non-discriminatory price.

Repeal of PUHCA

The Senate bill repeals the entire “Public Utility Holding Company Act of 1935,” which, for better or worse, has dictated and controlled the structure and regulation of the electric industry in the US over the last seven decades. This broadsweeping statute has been replaced with a requirement that companies that are affiliated with utilities must open up their books and records to regulators.

Elimination of PUHCA, if it actually occurs, will have far-reaching effects. (There have been serious efforts to repeal PUHCA since at least the l980’s.) The repeal will open up the electric and retail gas industries to many new players who have been constrained by the statute’s limitation on the geographic spread of utility subsidiaries owned by the same holding company; PUHCA requires that all subsidiaries of a single utility holding company must be “physically integrated.” It will also free these new players from existing restraints on non-utility businesses; PUHCA requires that holding companies divest their non-utility businesses. The elimination of the latter restraint will mean that non-utilities, like oil companies, can acquire public utility systems, and also that registered holding companies that currently own many traditional, monopoly utilities will be free to diversify into other non-utility businesses.

Here are some of the opportunities that repeal of PUHCA will open up:

  • Utility systems, including transmission and distribution systems, can be acquired by a holding company even though they are not capable of physical integration with existing utility systems that the holding company owns or will acquire.
  • There will be no limitations on the geographic separation and spread and, therefore, on the size of electric and retail gas holding company systems, and such companies will not be regulated as utility holding companies.
  • There will be no need to avoid “registration” as a holding company by reincorporating in the state where an acquired utility operates. For example, Enron would not have had to reincorporate in Oregon to own Portland General Electric, thereby subjecting the holding company to Oregon regulation.
  • There will no longer be any limitation on interstate utility holding companies owning both retail gas and electric companies.
  • There will no longer be any limitation on non-utility businesses owning utilities.
  • There will be no PUHCA requirement that interstate utility holding companies get approvals before acquiring new generating companies.
  • There will no longer be any requirement that limits the number or uses of securities issued by a holding company based on subsidiary public utility gas and electric companies.
  • There will no longer be a requirement that states must approve interstate holding company investments in foreign utilities.
  • There will no longer be a federal requirement that interstate utility holding company investments in any business must be approved.
  • There will no longer be a federal requirement that interstate holding companies must get approval to guarantee subsidiary or other loans.
  • There will no longer be restrictions on foreign holding companies owning US public utilities.

There will undoubtedly be many more intended and unintended impacts that will be discovered after PUHCA is repealed. The main effect of repeal is to open the gates to utility consolidation and to allow ownership of public utilities by oil companies and other large players who have not previously been active in the utility sector. At least initially, PUHCA repeal should lead to numerous opportunities for acquisition, merger and disposition of electric utility assets for all current and many new players in the electric, retail gas and independent power industries. Ultimately, the very largest players may again gain consolidated control over the retail gas and electric utility companies as they did in the 1920’s before PUHCA was passed.

Outlook

A different version of the national energy plan passed the House of Representatives last July. Now that the Senate has acted, “conferees” — or senior members from the two houses of Congress — will meet to come up with a common bill to send to the president. The conference is expected to take until October to play out. There is no guarantee that House and Senate negotiators will be able to reach agreement before Congress adjourns for the year before the November elections.

The bill that passed the House last July did not terminate the purchase requirement in PURPA or repeal PUHCA.

However, the House is expected to use as its starting point for negotiations on electricity issues a bill that the chairman of the House energy and power subcommittee, Rep. Joe Barton (R.-Texas), introduced. The Barton bill is similar to the Senate bill on PURPA and PUHCA with one exception. It would not drop the current 50% limit on utility ownership of QFs.

Changes to FERC’s Authority

The widest utility regulatory differences between the Senate bill and the Barton bill may lie in their treatment of FERC’s authority over mergers.

The Barton bill would eliminate FERC’s existing authority to approve certain utility mergers; the Senate bill increases FERC’s authority over mergers.

FERC currently must approve mergers or dispositions of “jurisdictional assets,” which include transmission facilities and wholesale contracts, books and records, but not generation or distribution facilities. If PUHCA is repealed, there will be no federal review of mergers of generation or distribution companies, and the extent of FERC’s authority to approve mergers of utility holding companies is unclear. The Senate bill transfers some of the PUHCA review authority to FERC, although under different standards than PUHCA sets. The Barton bill would eliminate the review altogether, along with FERC’s existing merger approval authority.

The Senate bill also adds a list of factors that FERC must consider before allowing generators to charge market rates. These include market power, the nature of the market and its response mechanisms, and reserve margins. The Senate bill requires FERC to change to a “just and reasonable” rate any market rate that it finds is unjust and unreasonable. The bill provides for refunds of unjust and or unreasonable rates effective from the date that the commission publishes notice of its intention to initiate a proceeding. The bill does not propose to make this refund authority retroactive to sales that occur before enactment.