Page 44 - Sustainable Cities and Communities Design Handbook

The Green Industrial Revolution Chapter j 2 21

economists do not like the fact that some of the decisions in the regulatory
process reflect political priorities that turn out to have higher costs and add
nonmarket factors into production decisions. This includes for California the
contracts with QF producers that were priorities of the regulators and the QF
industry, not the regulated utilities. The utilities would have preferred to
remain in control of all of their generation, but PURPA opened up the supply
to other providers, and this political decision led to inefficiencies. Contracts
based on faulty assumptions led to problems, but also to system advantages.
Clearly, the fact that regulatory commissions are public bodies means that
they are under pressure from the public to reflect political priorities rather than
just private priorities. From a regulatory perspective, one can see the danger
that too many public good priorities for the power sector can divert from its
primary mission and cause costly dysfunction. For example, in India, subsidies
to farmers (virtually free power) was a political promise one political party
offered to gain support for public investment in rural electrification, and now
the farmers getting the subsidy are such a large political force that any reform
of the power system is politically impossible. The goal of helping farmers by
policies that affect the electricity industry was a shortsighted solution to their
real needs.
However, most regulatory bodies do not have as much of an overtly
political aim that would undermine the electricity industry as they did in India.
The examples of regulatory involvement generally have to do with natural
resource issues such as air pollution, water management, nuclear waste, and
other sitting issues, or with equity issues such as assuring low rates for poor
customers, reliable service in rural areas, and safety. In addition, regulators
may be concerned with economic development and the use of power for public
purposes such as street lighting and streetcar service in urban areas. In
developed countries it is true that regulators have political agendas for shaping
the efficiency and cost of power, and to some extent this is true in all countries.
Critics of the high price of power in California have been unhappy with the
decision of California following PURPA to open generation to small qualified
producers by offering long-term standard offer contracts to facilitate new
suppliers’ entry into the power market. Without long-term contracts, QF
producers could not get the long-term financing they required to enter the
market. The opening of the closed vertically integrated utility system to other
producers was a first break in the utility monopoly, and the utilities were
distrustful. Although the QF contracts were supposed to be neutral to consumer
and utility, all parties were involved in miscalculating fuel costs, which led to
overly expensive long-term contracts with the QF providers.
The QF standard offers were negotiated between the utilities and the
independent producers, and the rates were based on data provided by the
utilities, presumably the same data on which they would make internal facility
sitting decisions. In addition, none of the parties anticipated that there would
be much interest by QF providers in the standard offer contracts. While all