Consideration of Environmental Externality Costs in Utility Buy Back (PURCHASE) Rates

Abstract

The business of electric power generation which was once the nearly exclusive domain of investor owned and public utilities is now open to a more diverse group of participants on a competitive basis. The passage of the Public Utility Regulatory Policies Act (PURPA) in 1978 was instrumental in cracking the utility monopoly and opening opportunities for diverse forms of electric generation by independent power producers (IPPs). One of the purposes of PURPA is to reduce dependence on fossil fuels through the use of renewable energy resources and more efficient use of non renewable resources which were not a significant part of the utility resource mix. To achieve its objective, the PURPA required the utilities to purchase power from certain IPPs at a price equal to the utility’s avoided cost--the levelized life-time cost in cents/kwh that the utility would incur if it had to produce the energy itself. The price offered by the utilities for power purchases from the IPPs and its own customers is labeled as the “buy back rate” in utility jargon.