By Jared Whitley
January 17, 2019 at 5:00 am ET
At the risk of alienating any libertarian readers out there, sometimes it’s OK — and even good — for the government to intervene.
While a laissez faire approach from the government is generally best, one exception is when the government steps in to disrupt a monopoly. The free market can’t really be free if one entity has managed to dominate it, and — indeed — one of the many boons of capitalism is that it disrupted the original monopoly: government.
The emergence of a monopoly in most instances is rare, but in some cases it’s almost impossible to avoid. The so-called natural monopoly occurs when high infrastructural costs or other barriers to entry might actually make competition worse for the consumer –such is the case for public works projects, including utilities. Competing subway systems in New York City, for example, created so many problems 100 years ago that the city eventually just bought both and forced them to merge.
A comparable instance happened when the federal government created the Public Utility Regulatory Policies Act in 1978. The goal was threefold: promote energy conservation, increase domestic energy use, and boost renewable energy. These are all great goals.
One key tranche to achieve these was requiring that electric utilities purchase power from qualifying facilities that used renewable energy and cogeneration technologies. Requiring reasonable rates in the public interest, the government intervened to protect the energy consumer with mandatory purchase obligations during a time of crisis.
But a lot has changed in the last 40 years. The law, alas, has not.
PURPA is now causing unintended consequences and encouraging bad actors in electricity markets. The law requires electric companies to purchase energy at “avoided cost” rates from each PURPA facility, which nowadays are frequently far above the market price. This has been driving up the cost of energy for consumers, now that there is greater market-based competition and better technology than Jimmy Carter had in 1978.
Mandatory purchase obligations required by PURPA force electric companies to purchase energy they don’t need, and PURPA incentives benefit project developers at the expense of customers and the energy grid. Some bad actors are building unnecessary PURPA projects even where there already is enough power generation to meet customers’ needs. Some cunning hedge fund managers are gaming the law by disaggregating large, renewable-energy projects and placing them just far enough apart (about a mile) that they circumvent the size caps established by the Federal Energy Regulatory Commission.
The result is excess costs that get passed to customers — remember one advantage of the natural monopoly is when high infrastructural costs are bad for the consumer.
Because PURPA projects carry guaranteed prices, developers focus on what benefits them, regardless of the financial costs to customers and risks to reliability the projects create. Long-term PURPA contracts lock in high costs, regardless of changes to market dynamics or technology.
For example, if you’d been locked into buying your gas according to Obama-era prices, you wouldn’t be getting any savings of the Trump-era energy boom. Some PURPA contracts can last as long as 20 years.
Congress could get involved to update the 40-year-old law. Indeed, Congress updated PURPA in 2013 with a measure making it easier for small hydropower stations to be created; it passed the House 422-0, which shows the kind of consensus that even Congress can come to that PURPA is out of date.
Fortunately, the solution to updating PURPA is even easier than that. FERC already has the authority to make changes. FERC can exercise its discretion to modernize the statute, providing additional guidance to states to determine avoided costs and ensuring that electricity customers are protected.
States should also be empowered to follow market prices or a competitive bidding process to set costs. Because if competition is readily, reasonably available, then there’s no need for a top-down, one-size-fits-all approach from the federal government.
Indeed, the National Association of Regulatory Utility Commissioners recently released a report that found examples of where qualifying facilities invoking PURPA actually worked against competitive solicitation processes in various states.
When products like this are allowed to compete — especially with the host of renewable options available to us now — consumers get what economists call price discovery. This is better than having regulators try to guess or “be a mind reader,” as Montana Public Service Commissioner Travis Kavulla said.
And that should make everyone happy — especially any libertarians still reading this far.
Jared Whitley is a former Senate and White House staffer, and he founded Whitley Political Media LLC after graduating from business school in Dubai.
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