Impacts of the Pacific Northwest Electric Power Planning and Conservation Act on the Development of Energy Resources in the Pacific Northwest: An Analysis of the Resource Acquisition Priority Scheme

Impacts of the Pacific Northwest Electric Power Planning and Conservation Act on the Development of Energy Resources in the Pacific Northwest: An Analysis of the Resource Acquisition Priority Scheme* Preston Michie** I. INTRODUCTION Pascal's1 analytical approach to a universally perplexing problem provides important clues to understanding why modern utilities believe that acquiring new energy resources is unavoidable. Pascal was concerned with the problem of whether to believe in God. Unable to prove or disprove God's existence, he examined the consequences of selecting the wrong option. To Pascal, the consequences of mistakenly believing that God did not exist far outweighed the consequences of wrongly believing that God existed, particularly if God were retributive and condemned nonbelievers to eternal damnation. Pascal's conclusion that it was safer to believe in God is commonly known as "Pascal's Wager." The logic of Pascal's Wager applies to the construction of electric power resources because, like God's existence, the future demand for electric power is unknown.' Utilities attempt to predict future demand, s however, their forecasts' 4 accuracies are * The opinions presented here are solely those of the author and do not necessarily represent the views of the Bonneville Power Administration or the United States Department of Energy. ** J.D. Northwestern School of Law of Lewis and Clark College, 1980; B.S. University of Wisconsin-Madison, 1972; member, Oregon State Bar; Attorney, Office of General Counsel, Bonneville Power Administration, United States Department of Energy. 1. Blaise Pascal was a 17th century French mathematician, scientist, and philosopher. His major accomplishments involved fluid mechanics and algebraic expansions. 2. See PACIFIC NORTHWEST REGIONAL COMMISSION, ENERGY FUTURES NoRmwzs'r NORTHWEST ENERGY POLICY PROJECT FINAL REPORT 66 (1978) [hereinafter cited as ENERGY FUTURES]. 3. For a general discussion of forecasting, see BONNEVILLE PowER ADMINISTRATION DEPARTMENT OF THE INTERIOR, THE ROLE OF THx BONNEVILLE PoWxx ADMINISTRATION IN THE PACIFIC NORTHWEST POWER SUPPLY SYSTEM, INCLUDING ITS PARTICIPATION IN THE 300 University of Puget Sound Law Review [Vol. 4:299 uncertain. Utilities often develop two or more precise forecasts HYDRO-THERMAL POWER PROGRAM: A PROGRAM ENVIRONMENTAL STATEMENT AND PLANNING REPORT (DRm ROLE ENVIRONMENTAL IMPACT STATEMENT) part 1, at IV-1 to -110 (1977) [hereinafter cited as DREIS]. Forecasts may be hourly, daily, weekly, monthly, yearly or longer. Utilities use short-term forecasts for operational purposes, while long- term forecasts are used to plan new generating facilities which may require a decade or more from planning to completion. Id. at IV-1. There are three general techniques of forecasting: simulation, time series projection, and holistic analysis. Id. at IV-16. The validity of the simulation technique depends on the premise that the whole is equal to the sum of its parts. The theory is that if the basic components of a system can be identified and their individual effects on future energy demand estimated through statistical analysis, the sum of the estimated component effects yields the total forecasted demand. Id. at IV-22 to -29. This process, called econometric modeling, is a commonly used simulation method of analyzing the relationship between known economic variables. The econometric model's advantage is that it provides an estimate of the forecast's reliability in addition to the demand estimate. Id. at IV-25 to -26. The econometric model's disadvantage is that it requires an extensive and accurate data base. Id. at IV23. Even though econometric modeling is based on sound mathematical theory, a recent study indicates that: [T]he field of econometric estimation invariably harbors a multitude of obstacles and complexities which, if unaccounted for, can trap the unwary practitioner. The validity of those assumptions which justify the use of one or the other method of estimation is often questionable in practice. Even the validity of statistical tests which normally indicate the presence of econometric difficulties can be nullified under certain fairly common conditions. [T]he application of econometrics should proceed only with great caution. NORTHWEST ENERGY POLICY PROJECT, ENERGY DEMAND FINAL REPORT 15 (1977). MODELING AND FORECASTING The time series projection technique involves selection of a series of historical data based on the analyst's judgment that the series approximates future behavior and extrapolation of the data to make predictions. The analyst may consider past demand trends, seasonal variations, cyclical variations such as fluctuations in business activity, pattern identification such as shifts in life-styles, and the probability of various future outcomes. The accuracy of time series projection depends on the truthfulness of the adage history repeats itself. See DREIS, supra, at IV-16 to -21. See also NORTHWEST ENERGY POLICY PROJECT, supra, at 4-6. The basic premise for a holistic analysis is that the whole is greater than the sum of its parts, thus demonstrating that econometric models produce unreliable forecasts. See THE AMERICAN HERITAGE DICTIONARY OF THE ENGLISH LANGUAGE 628 (1976). A holistic analysis attempts to identify broad systemwide factors influencing demand rather than focusing on the individual components' effects. Analysts then combine the systemwide factors to form scenarios based on expert opinions. In short, holistic analyses are analogous to educated guesses. See DREIS, supra, at IV-21 to -22. In developing load forecasts for the Pacific Northwest, the Pacific Northwest Utilities Conference Committee (PNUCC), a voluntary organization of utilities, totals the individual load forecasts for each utility service area. The PNUCC does not attempt to standardize forecasting methods; each utility uses any technique it wishes. Thus, the PNUCC forecast is a potpourri of forecasting techniques, and the uncertainty in the total forecast is equal to the sum of the uncertainties of each forecast. See generally S. MEYER, DATA ANALYSIS FOR SCIENTIS'S AND ENGINEERS 39-48 (1975). 4. Demand forecasters use statistical techniques to estimate their forecasts' errors. A common technique is the standard deviation which is an estimate of the probability that the true demand will fall within a specified tolerance. See, e.g., S. MEYER, supra note 3, 1981] Impact of Northwest Power Act predicting widely divergent increases in future demand.' When utilities produce inconsistent forecasts, three questions arise: first, should the utility meet the projected demand?; second, which demand forecast should the utility believe?; and third, which resources should be constructed? Most utilities' have answered the first question, whether to meet the projected demand, affirmatively. In exchange for monopoly status, state legislatures have burdened investorowned utilities and public and (...truncated)