N.C. approach to federal law proves costly for electric ratepayers

June 6, 2017

RALEIGH — North Carolina electric ratepayers are spending much more money than they need to spend on their electric bills, thanks to the state’s application of a nearly 40-year-old federal law. The extra costs hit low-income residents especially hard.

Those are two key findings of a new John Locke Foundation Spotlight report. It documents the impact in North Carolina of the Public Utility Regulatory Policies Act of 1978, also known as PURPA. The report offers recommendations to help the state reduce costs.

“North Carolina differs significantly from other states in its approach to PURPA,” said report author Jon Sanders, JLF Director of Regulatory Studies. “Our Utilities Commission and policymakers have made decisions that create special benefits for solar energy facilities, while ultimately driving up costs for electricity consumers in general.”

Combined with other state policies that favor solar energy development, PURPA hits the state’s poorest residents the hardest, Sanders said. “Increases in energy costs act like highly regressive tax increases,” he explained. “Any policy that drives up electricity costs unnecessarily will have a greater impact on those with lower incomes.”

PURPA mandates that utility companies buy any power generated from qualifying renewable energy facilities in their area, at predetermined prices, regardless of market need, Sanders said. “States set the terms as to which facilities can qualify, what the prices are, and how long those prices remain in effect,” he said. “Those state-level decisions have a major long-term impact.”

Congress approved PURPA not too long after a Middle East oil embargo, during a period when some politicians and analysts worried about the world running out of traditional energy sources, Sanders said. It sought to reduce reliance on imported oil, boost domestic coal, and also make utilities buy energy from eligible renewable energy facilities.

“There have been important changes since PURPA became law nearly 40 years ago,” he said. “Fears about dwindling resources have been obliterated by technological innovation. Power markets are also much different. A 2005 federal law helped limit some of PURPA’s mandates in large sections of the country.”

Much of New England, the Midwest, New York, Texas, and parts of California have been freed from key PURPA restrictions, Sanders said. “It still applies to much of the Northwest and Southeast, including North Carolina,” he said. “In fact, PURPA’s strictures affect North Carolina more than most other states.”

North Carolina’s approach to PURPA relies on a combination of terms that are all very generous to solar energy facilities, Sanders said. “The combined effect of these terms and other state policies is that North Carolina alone is home to 60 percent of all PURPA projects in the entire United States,” he said. “This state has more PURPA-qualifying solar facilities than any other state.”

Renewable energy facilities in North Carolina benefit from the Southeast’s highest rates for “avoided costs.” These are the costs utilities supposedly avoid by buying power from renewable energy facilities rather than using traditional facilities. North Carolina also sets the longest fixed-rate contract terms in the Southeast.

Any renewable power facility up to 5 megawatts in size can qualify for North Carolina’s special benefits. Facilities larger than 2 megawatts make up nearly three-fourths of the projects utilities deal with in North Carolina, Sanders said.

“These facilities generate larger expenses for items such as engineering and impact studies,” he said. “Those costs are ultimately borne by ratepayers.”

North Carolina officials compounded PURPA’s impact in 2007 by enacting a state law creating a Renewable Energy and Energy Efficiency Portfolio Standard. That law forces utilities to generate a certain amount of power from renewable sources. The current standard is 6 percent. The number jumps to 12.5 percent by 2021.

“This law essentially layered a new renewable energy mandate on top of the existing PURPA mandate,” Sanders said. “This second mandate continues to expand for the next four years under current law.”

“Since the state’s renewable energy mandate took effect in 2008, North Carolina has seen its electricity rates increase by over twice the regional average increase,” Sanders added. “At the same time, the increase in this state has been nearly two-and-a-half times the national average increase.”

No other Southeastern state has the same combination of factors that prove so highly favorable to solar energy facilities, Sanders said. Those factors contributed to Duke Energy’s assessment that avoided-cost payments linked to PURPA will cost ratepayers an extra $1 billion over a dozen years.

State law directs the Utilities Commission to revisit the avoided-cost rates and contract terms every two years, Sanders said. “Utilities have requested that the state reduce maximum contract lengths from 15 years to five or 10 years, but renewable energy interests have argued against the change,” he said. “The Utilities Commission has not acted on these requests. The decision to make no changes is considered a ‘victory’ for the solar energy industry.”

Sanders recommends that policymakers rein in state PURPA requirements. He also calls for repeal of the state-level renewable energy mandate. His report calls for the end of an 80 percent property tax break for solar energy facilities. It urges lawmakers to resist pressure to reinstate a recently discontinued 35 percent state investment tax credit.

“PURPA and North Carolina’s overbroad interpretation of its mandates are heaping unnecessary costs on North Carolina ratepayers,” Sanders said. “This problem is made worse by other state policies. But the good news is that these costs are driven by policy, so they can be addressed by changing the harmful policies.”

Jon Sanders’ Spotlight report, “Reforming PURPA Energy Contracts: A Guide To Lowering North Carolinians’ Electric Bills,” is available at the JLF website. For more information, please contact Sanders at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].