Michal C' Moore

1
The Role of Modeling in the Regulatory Process

• Nicholas Institute
• July 19, 2007

2
The Thread of This Talk

• Regulatory Responsibilities
• Traditional Forecasting Needs
• Changes and Conflicts
• New Tools

3
Limits

• Electricity and grid operations
• Not liquid fuels (although there may be
  convergence in the future)

4
Legislation vs Regulation

• Legislative branch
• Goals and vision
• Timelines often undefined
• Rules and impacts indistinct
• Regulatory Institutions
• Limited timeframes
• Performance oriented

5
Why Forecast

• Cost or Burden vs Benefit
• Ex post validation of trends
• Cost of service validation and estimates for
  upcoming tariffs

6
Regulatory Goals

• Keep a level playing field, enforce rules
• Achieve fair costs or choice and competitive
  values
• Maintain reliability
• Maintain or foster social goals and access

7
Regulatory Public Interest Goals

• Maintain System Operation
• Reports on Rate of Return, Revenue Requirement
  and Revenue-to-Cost ratio for each function and
  rate class.
• PUBLIC INTEREST GOALS
• 1) inter-and intra-class and intergenerational
  equity)
• 2) the equal treatment of equals (horizontal
  equity)
• 3) balancing long- and short-term goals that have
  the potential to affect intergenerational
  balance
• 4)protecting against the abuse of monopoly power
  
• 5) general protection of the health and welfare
  of the citizens of the state, nation, and world.
  Environmental and other types of social costs are
  subsumed under the equity and health and welfare
  responsibilities.

8
Traditional Model Use

• Short Term
• Dispatch (base load, load following)
• Meteorology
• Imports
• Fuel Price
• Mid Term
• Demography and demand characteristics
• Land use and industrial use changes
• Long Term
• Technology capability and mix
• Capital retirement
• Capital replacement

9
Models and Decision-makingRegulator Concerns

• Accuracy vs precision
• Forecast period
• Implied risk
• Integration

10
Appropriate Time Elements

• Forecast period
• Revisit and refine routines
• Substitute new models and cross validation or
  justification for new approach
• Competition between models

11
The Right Questions

• What is the issue?
• What is the time frame?
• Who benefits?
• What is the right discount rate?

12
The Problem of the Right Discount Rate

• System is dynamic
• Technology changes and is hard to forecast
• Capital is expensive, and generally non-mobile
• Changes in risk make assignment of costs
  difficult
• Most elements are kept longer than their mortgage
  so forecasting the need for new capital
  investment is difficult.
• The social discount rate may not be right, but
  it counts

13
What About Climate and Change

• Electric system is designed for long term
  stability i.e. resistant to change in structure,
  but capable of short term responses to changes in
  demand
• Fuel substitution is difficult long term

14
Role Conflicts
Regulated
De-regulated
Limited Volatility Stable Price
Price Volatility and Competition Lower Average
Price
15
Linkages

• Energy
• Agriculture / Forestry
• Water
• Security

16
Regulatory Conflicts

• Energy
• Supply adequacy
• Technology mix
• Political goals i.e. RPS
• Climate or environmental protection
• Insurance
• Land Use
• Transmission rights of way
• Power plant siting

17
Model Integration

• Access to and competition for water
• Impacts of climate change
• Available ROW
• Greenfield vs brownfield
• Fuel substitution
• Technology cost and substitution

18
Capital Costs and Climate Change
Issues include Capital replacement firming
19
Tools

• Lifecycle Cost Analysis
• Climate Integration
• Cross Tariffs
• Links with Insurance Industry

20
Future Demands on Modeling

• Forecast conflicts in standards
• Federal, State (regional), Local
• Siting timing
• Fuel costs and availability
• Environmental changes and standards
• Role of technology substitution
• Paradygm shifts
• i.e. AC vs DC
• Electric vs hydrocarbon for transportation
• Better decision tools
• Demand management as substitute for load
  following
• Anticipate new markets
• Green or attribute
• International Carbon Trading

21
The Trend in Regulatory Authority and Action
Local
Federal
State and Regional
22
The Changing Role of Regulation

• Incenting rather than fostering change
• Adjudicating siting conflicts
• Changing hedging, ppas and financial tools
• Ensuring the timely replacement of capital
  facilities
• Accounting for changing social goals -
  environmental justice
• Convergence of Legislative Standards (AB 32)
• Linking other regulatory fields
• Agriculture/forestry
• Water
• Transportation and land use