Public Utility Regulatory Policies Act

The first move toward restructuring of U.S. electricity markets occurred in 1978, when Congress passed PURPA. Passed during the 1970s energy crisis, PURPA required, among other things, that electric utilities connect with and buy capacity and energy from any facility meeting the criteria for a qualifying facility (QF). PURPA also required that the utility pay for the purchased power at the utility’s own "avoided cost" of production. The avoided cost refers to the price the utility would have otherwise paid to generate that power itself. The criteria for becoming a QF included the requirement that the facility be either a cogeneration facility with a certain defined efficiency level or powered by renewable fuels. Other criteria included limits on utility ownership percentages and size of the units.

Although Congress mandated that utilities purchase QF power, the details were left to the states to implement. Utilities were left to set interconnection requirements (rules about how QF facilities could be connected to the utility system), determine how to calculate avoided costs, lay out the contractual terms for operation of the facilities, determine the mechanism and cost responsibility for any necessary system upgrades to accept the power, and determine the appropriate gas rate to charge these facilities. Some states were favorable to QF power, creating beneficial payment schedules and pushing the utilities to foster QF connections. Others were less favorable and allowed utility rules that impeded development of QFs. Thus in some states like California and New York significant QF development occurred, while in others very little developed.