The Public Utility Regulatory Policies Act (PURPA) of 1978, the federal law that created Qualifying Facilities (QFs), was intended to encourage non-utility development of renewable and alternative energy resources as the nation sought energy independence in a time of artificial shortages of foreign oil.

Under PURPA, the Federal Energy Regulatory Commission (FERC) developed broad regulations that defined QFs as smaller generating units that used renewable resources, such as solar and wind energy, or alternative technologies, such as cogeneration. FERC required state regulators to ensure that electric utilities would interconnect with QFs and purchase QF power based on "avoided cost," the cost that utilities avoided by using renewable and alternative energy instead of a fossil fuel. PURPA left it to state regulators to decide how "avoided cost" would be determined.

The California Public Utilities Commission (CPUC) decided to encourage QF development further by establishing generous "Standard Offer" power purchase contracts that utilities were required to accept from QFs. The CPUC also based avoided cost on the cost of owning and operating a natural gas-fired power plant, which, at the time, was the most costly of fossil fuel plants to run.

In 1983, the bottom fell out of international energy prices and the cost of oil and gas dropped precipitously, but the lucrative terms of the Standard Offer contracts did not change, producing a "gold rush" of new applicants. In response, the CPUC began to phase out the Standard Offer program. By 1986, the CPUC had suspended the availability of new power purchase contracts for QF projects larger than 100 kW.

Today, about 200 QF projects, representing about 4,500 megawatts of generating capacity (enough to serve 4 million homes) are currently on-line with SCE. These QFs supply about one-third of the electricity that SCE customers use. Most power purchase contracts provide for the QF projects to continue beyond 2005.