The opening salvo in the electric-restructuring debate was the "Blue Book" proposal of the California Public Utilities Commission, released in April 1994.²⁵⁰ The ironic but predictable result of the dramatic CPUC about-face was that the rate crisis occurred in the very state proclaiming to be the world's leader in renewable energy and subsidized energy efficiency. A review of California's high-cost renewable and conservation commitments shows the state achieved:

• 88 percent of the nation's wind-generation capacity (1,749 of 1,977 MW);²⁵¹

• 97 percent of the nation's solar-power capacity (360 of 373 MW;)²⁵²

• 65 percent of the nation's geothermal power capacity (2,081 of 3,197 MW;)²⁵³

• 8 percent of the nation's biomass capacity (927 of 11,168 MW);²⁵⁴ and

• 46 percent of the nation's demand-side management peak-load capacity reduction (11,562 of 25,001 MW).²⁵⁵

With electricity prices at 150 percent of the national average and nearly double those of neighboring states, rates and total bills rising faster than the national average and prospective stranded costs potentially greater than the net worth of the state's investor-owned utilities, California's energy diversity and energy efficiency programs can be called a failure.²⁵⁶

The Public Utility Regulatory Policies Act of 1978 (PURPA) required utilities to purchase power from independent "qualifying facilities" at the utility's "avoided cost" of self-generation or self-procurement. So-called QF contracts have given small energy projects a long subsidy run and literally spawned the nonhydro renewables industry.

While achieving its purposes of promoting independent power and renewable generation, PURPA significantly contributed to overcapacity in the electric generation market and higher electric rates overall.²⁵⁷ Utilities, while concerned about increasing rates, acquiesced so long as state commissions allowed them to pass through QF costs to consumers and so long as their customers could not bypass the system. But with electric utility restructuring raising the specter of "stranded costs" that might not be recoverable, utility concern turned into legal challenge.

In California, the PURPA capital of the nation with nearly 10,000 megawatts of operational capacity subscribed between 1982 and 1986,²⁵⁸ two of the state's largest three utilities -- Southern California Edison and San Diego Gas & Electric -- petitioned the Federal Energy Regulatory Commission to void a 1993 California PURPA auction. The companies claimed that the CPUC had forced them to accept several hundred megawatts of renewable energy (geothermal and wind) priced at above 6 cents per kwh compared to available new gas-fired capacity below 4 cents per kwh, a 35-40 percent premium.²⁵⁹

In a landmark decision issued in February 1995, FERC agreed with the utilities that, given the emerging competitive landscape, avoided-cost determinations had to be open to all sellers to accurately measure the utility's avoided cost. FERC summarized:

It is incumbent upon regulators, Federal and State, to avoid the creation of transition costs where possible. California's decision to consider a major restructuring of its retail electricity market significantly heightens our concern with stranded costs arising from above avoided-cost rates. We believe it is inconsistent with our obligation under PURPA to ensure just and reasonable rates, and our goals to encourage development of competitive bulk power markets, to permit the use of PURPA to create new contracts that do not reflect market conditions for new bulk power supplies.²⁶⁰

In its rehearing order upholding its previous decision, FERC added that "in promoting greater fuel diversity . . . Congress was not asking utilities and utility ratepayers to pay more than they otherwise would have paid for power."²⁶¹ Rejecting the charge that its decision would ruin the renewables industry, the FERC reminded the CPUC and eco-energy planners that renewable energy goals could be met outside of PURPA through tax incentives and capacity mandates. Still, the high-cost power industry, led by renewable interests, were stunned. Complained Randall Swisher of the American Wind Energy Association:

FERC has turned PURPA on its head. Legislation that was intended to encourage renewables has instead been used to throttle the domestic market for wind and other renewables. . . . This decision effectively closes the door to domestic markets for renewable energy.²⁶²

The early returns of the marketplace reflected the concerns of renewable interests. PURPA auctions are on hold, and a DOE forecast for electric generation by fuel source out to the year 2015 eliminated 927 megawatts of new wind generating capacity, citing FERC's PURPA decision.²⁶³ National Economic Research Associates similarly concluded, "A growing realization that expensive `alternative energy' schemes cannot survive in a competitive environment suggests that electricity generation using renewable energy will increase slowly during the next 10 years."²⁶⁴

What's more, Congress has shown interest in repealing PURPA. Even if the law is not repealed, it faces a de facto demise from a restructured industry where electric generation from all sources, utility and independent, will be deregulated to compete on a variable-cost basis. An emerging forward market [JARGON, SHOULD BE DEFINED] in "black-box" capacity commitments was another indication that absent a new round of government intervention, a generation-blind electric market would make PURPA and renewable quotas obsolete.

As the clock ticks, renegotiations and contract buyouts of uneconomic QF contracts are occurring,²⁶⁵ and the California Energy Commission is allocating a new round of subsidies to at-risk renewable projects.