1. The Council’s Risk Model and The Requirements of the Act Michael Schilmoeller Thursday, December 2, 2010 SAAC

2. 2 Overview Implications of the Act to cost and risk metrics the kinds of information a risk model must track

3. 3 The Act The Northwest Power Act* calls for a plan that assures an “adequate, efficient, economical, and reliable” power supply Economic efficiency determines “good” outcome  expected NPV cost metric What constitutes “bad” outcomes? High NPV cost  risk metric that reflects worst outcomes (TailVaR 90 ) *Pacific Northwest Electric Power Planning and Conservation Act, 16 USC § 839, 12/5/1980

4. 4 The Ratepayer Perspective The regional ratepayer’s cost Use total resource cost (TRC), that is, a societal perspective Identifying short-run costs, the solution is (relatively) easy –Cost of fuel used by regional power plants –Value of sales in the power market to, and costs of purchases from, entities outside the region

5. 5 The Ratepayer Perspective Isolating the ratepayers’ long-run costs can be much more difficult –Different models use different approaches –Depending on the model, power plants are built for profit from market sales, price equilibrium, minimizing total system cost, etc. –Obtaining the optimal solution for a system often does not illuminate the best course for an individual participant

6. 6 Identifying Long-Term Ratepayer Needs Why and for whom is a plant built? –For the market or the ratepayer? –Built for independent power producers (IPPs) for sales into the market, with economic benefits to shareholders? How much of the plant is attributable to the ratepayer? –This is usually a capacity requirement consideration –To what extent does risk bear on the size of the plant’s share ?

7. 7 Implications for a Risk Model Tie resource expansion decisions to the needs of the participant (the region) –Build resources to minimize regional total cost and risk –Know where the boundaries lie between the regional ratepayer and the rest of the system –Recognize uncertainty in wholesale electricity and fuel prices and deal with these as uncontrollable factors WECC simulation is not particularly helpful –Perhaps more accurately, it is unpredictable and –Details about why and how price excursions occur is not as helpful as understanding their impacts –Expectations of likely behavior of others, however, may be informed by system requirements

8. 8 “You need to focus on consequences (which you can know), rather than probabilities, which you cannot know….” Nassim Nicholas Taleb, The Black Swan, The Impact of the Highly Improbable, 2007

9. 9 End