Dear Interested Party:

At the Northwest Power Planning Council January 7th meeting 

in Olympia, Washington, the Council began discussing a planning 

methodology that could deal with the growing uncertainties associated with electrical demand forecasting and resource development. 

The Council continued this discussion at its February 17th meeting 

in Portland, Oregon, and March 4 meeting in Missoula, Montana.

As a result of these Council discussions and working papers 

prepared by the Washington State Energy Office and the Council's 

Central staff, a contractor to the Council has prepared a discussion paper for circulation to the public.

The paper, prepared by Dr. Kai N. Lee of the University of 

Washington, outlines a process for establishing a range of 

electrical energy needs and a program of acquiring resources and 

options to meet that range. The paper also identifies a number of 

questions raised by the planning concept.

The paper is intended to stimulate discussion on a planning 

methodology prior to any formal Council action. The Council would 

appreciate your review and comments on this discussion paper.

The Council is particularly interested in reactions to the 

questions raised on pages 22 and 23 and identification of other 

questions or problems raised by the discussion paper.

The Council would appreciate your comments by April 7th. 

Would you please address your comments to me at the address above. 

If you have any questions, please don't hesitate to contact me or 

Jim Litchfield.

Thank you for your assistance.
THE PATH ALONG THE RIDGE:

REGIONAL PLANNING IN THE FACE OF UNCERTAINTY A

Discussion Paper*

(March 1982)

Northwest Power Planning Council

700 S.W. Taylor Suite 200

Portland, Oregon 97205

(800)547-0134 or (503)222-5161

---------

* The Council welcomes comments on and criticisms of the 

ideas presented in this paper. Please send responses 

to Edward Sheets, executive director, at the Council's 

Portland office.

This paper was prepared by Kai N. Lee, associate 

professor of political science and environmental studies 

at the University of Washington, where he is a Kellogg 

National Fellow. Many of the concepts discussed here 

were initially developed in Richard Watson, Steve Aos, 

John Douglass, and Peter Downey, "Power Planning and 

Uncertainty," an unpublished paper prepared at the 

Washington State Energy office.
DISCUSSION PAPER Planning in the Face of Uncertainty 1

The Path Along the Ridge:

Regional Planning in the Face of Uncertainty 

ABSTRACT

--------

In developing a plan for the regional power system, 

the Northwest Power Planning Council faces critical 

uncertainties, both in forecasting demand and in planning 

for conservation and new generating resources. The risks 

arising from these uncertainties can be managed on a 

reg- ional basis , by selecting a combination of 

programs and resources that yields a risk -resistant 

and cost-effective regional system.

Such an approach is attractive in concept, but it 

differs substantially from established utility practice. 

Discussion and criticism are needed, accordingly, to 

assess the workability of the planning philosophy outlined 

here.

Public Law 96-501, the Regional Power Act, responds to the 

changing circumstances of electric power in the Pacific Northwest by 

defining policy directions and creating new institutional 

arrangements for regional power planning. The Northwest Power 

Planning Council is the agent of the region in meeting the challenges 

of planning under the act. This paper discusses the conceptual 

framework of power planning, a task that confronts a degree of 

uncertainty and risk without historical precedent.

For a quarter-century, electricity demand grew rapidly in the 

Northwest, roughly doubling every 10 years. This growth was readily 

met by the low-cost, abundant supply of hydroelectric energy 

developed by the federal government and Northwest utilities
DISCUSSION PAPER Planning in the Face of Uncertainty 2 

in the Columbia River and its tributaries. Steady growth made 

for simple planning: build more for a brighter tomorrow. And 

when the potential of the region's rivers was fully harnessed, 

it seemed sensible to turn to nuclear and coal, supplies that 

promised to facilitate further growth at higher -- but still 

reasonable -- cost. But even as the Regional Power Act was 

emerging from Congress, the era of steady growth ended, a 

victim of rising power costs and an unstable economy.

There are no facts about the future, but it is widely believed to be uncertain and risky. If the growth rate differs by only 

0.3 per cent per year from the anticipated rate, the gap between 

anticipated and actual load amounts to the equivalent of a nuclear 

plant in less than 15 years. The ability to forecast demand falls 

considerably short of even this 0.3 per cent criterion. It now 

takes more than 10 years to plan and build a nuclear plant; such a 

major facility costs several billion dollars. The costs to the 

economy of not having enough power are similarly huge.

The planning problem is thus a daunting one: the best one 

can do with current methods seems to entail major risks of either 

building too much or too little, with heavy penalties either way. 

The Northwest is walking along a narrow ridge, in the image of Dan 

Evans, chairman of the Power Planning Council; we can ill afford 

missteps, but we cannot see as far as we stride. Thus, the 

question of developing a regional plan goes beyond selecting 

resources for acquisition by the Bonneville Power Administration: 

it must also include thinking about how resources should be ac-
DISCUSSION PAPER Planning in the Face of Uncertainty

quired, together with careful consideration of what kind of 

resources are suitable for responsible planning in the face of uncertainty. This paper is meant to stimulate discussion of how to 

do this better.

The Uncertain Environment

From the late '40s until approximately 1970, demand for 

electricity in the United States grew in parallel with the gross 

national product. Growth reflected the fact that electric power 

was a good buy. Not only was electricity convenient, but the real 

cost of supplying power steadily declined, as new technology 

captured economies of scale. In the Northwest, the dominant 

resource was (and remains) hydropower, developed on a large scale 

since the federal government launched Grand Coulee Dam during the 

New Deal.' Northwest hydro projects, built during an era of low 

construction costs and low interest rates -- often backed by the 

federal government -- produced the cheapest electricity in the 

nation. As steady economic growth gave way in the '70s to 

stagflation and energy crisis, the conditions underlying utility 

planning changed. Planning should have changed too, but it lagged, 

with serious consequences for utilities and their ratepayers.

Seven conditions shape the futures:

1. Federal sponsorship remains limited in reach. Despite 

the region authority to acquire resources under the 

act, the initiative still rests with utilities, local
DISCUSSION PAPER Planning in the Face of uncertainty 4

governments, and other project sponsors.

2. The marginal cost of power is rising, but its magni tude 

for any given project remains uncertain . The troubles 

of the Washington Public Power Supply System have ignited a 

citizen revolt, drawing attention-to rising rates.

3. Conservation entails the stimulation and coordination 

of activities undertaken by thousands of individuals 

and firms. The utilities have had relatively little 

experience with conservation or decentralized sources of 

supply, and both planning and regulatory oversight have been 

hesitant and often confused.

4 . Although the Northwest has a strong tradition of 

public utility ownership, the open planning process 

created in the Regional Power Act is unfamiliar and 

uncomfortable for the utilities, especially now. 

Openness and a complex agenda make the planning 

process difficult for the council to manage, as well.

5. Forecasting demand has become extraordinarily 

difficult . We’ re the smooth and rapid growth of the ‘50s 

and ‘ 60s allowed planners simply to extrapolate 

historical behavior, the period- beyond the mid-'70s 

continues to be elusive, despite ever more sophisticated 

methods of analyzing past demand patterns.

6 . Large, capital-intensive resource projects now pose 

sub-stantial risks. Costs an schedules have been 

difficult to control. Moreover, with the slowing of 

load growth, arrangements for fully utilizing large 

facilities have become unexpectedly important.

7. A consequence of the last two points is that commitments to 

large resources a decade or more in advance -- standard 

practice now -- are no longer tenable without substantial 

change.

Despite the explosion of uncertainty -- indeed, because of it 

-- it is more urgent than ever to plan on a regional basis. A 

central feature of the Regional Power Act is the ability to plan a 

cost-effective mix of resources on a regional basis. The uncertainties listed above imply a need for regional risk management as 

well -- a process for insuring long-term cost-effectiveness in the
DISCUSSION PAPER Planning in the Face of Uncertainty 5 

face of uncertainty.

Principles for managing risk

Regional planning can be organized around eight 

principles, several drawn directly from the Regional Power Act. 

These principles form a coherent framework for dealing with the 

uncertainties facing the Pacific Northwest. To facilitate 

exposition, they are first listed briefly:

1. In place of deterministic planning, there should be a 

regional risk-management process that stresses flexibility.

2. In particular, the planning process should prepare the 

region to meet a wide range of loads in all the years 

encompassed by the plan, instead of relying upon a mostlikely demand forecast.

3. The regional plan should shift the burden of risk from 

individual project proponents to the region as a whole, as 

a form of regionwide insurance.

4. The act establishes a fundamental priority for resource 

planning: to minimize expected cost, giving first priority 

to conservation; second, to renewable resources; third, to 

resources utilizing waste heat or generating methods of 

high fuel conversion efficiency; and fourth, to "all other 

resources."

5. The act also creates an institutional structure for decentralized implementation of a centrally written plan.

6. In place of the conventional bias toward economies of 

scale in power generation, planners should search for 

cost-effective combinations of conservation and resources 

that can provide planning flexibility. When comparing 

projects that are equally costly to the region, those 

available on short notice should be given priority over 

those with long lead-times; small projects should be 

preferred to large ones; and programs that can be slowed, 

halted, or reversed should be more useful than those 

entailing inflexible commitments.
DISCUSSION PAPER Planning in the Face of Uncertainty 6

7. The planning process should manage the burdens of financing, licensing, and institutional change by making 

regional commitments on a schedule that reflects the 

slower load growth that characterizes a period of rising 

real rates.

8. The integrated hydro system has been augmented with 

thermal generation developed on a piecemeal basis. The 

Regional Power Act -- and the risk-management approach in 

particular -- seems to lead to a substantially more 

complex regional power system, one encompassing activities 

and actors unfamiliar to the utility community. The 

challenge of this additional complexity must be taken 

seriously in the planning process.

The paradox of regional planning and decentralized execution 

can be resolved in two somewhat different, but complementary, 

ways. First, there should be liberal use-of markets and market--

like incentives. Second, the plan and planning process should be 

instruments of political leadership, articulating purposes and 

mobilizing the energies of the diverse interests whose partly 

independent activities constitute the implementation of the plan. 

Decentralized execution will not be easy to achieve, but there is 

an important opportunity for council leadership in the fact that 

the economic interests of the region parallel the goals of the 

act.

The shift from deterministic planning to regional risk management is fundamental. This paper focuses on planning, but a 

flexible approach implies significant changes in the way that 

projects are developed and programs managed. Regional risk management also requires coordination of operations with planning, in 

order to permit adjustment of both plans and operational policies 

to respond to emerging conditions. The broad ramifications of a
DISCUSSION PAPER Planning in the Face of Uncertainty 7

risk-management philosophy should not obscure its essential 

simplicity, however: in an unpredictable world, the ability to 

adapt is valuable. This is an accepted, even conventional notion 

in finance, where the sharp economic fluctuations of the past 

decade have demonstrated the value of flexibility.

A planning concept that provides flexibility in the utility 

context is the resource option. The Regional Power Act provides a 

mechanism for acquisition of conservation and generating 

resources. A resource option is an acquisition contract that 

explicitly provides for regional control of the timing and 

magnitude of the project.

In order to be usable in planning an option can be no less 

real than any other resource in the plan. The experience of the 

last 15 years indicates that resource plans regarded by the 

utilities as "real" cannot be counted on. If the regional planning 

process cannot improve upon this record, one of the main hopes in 

the Regional Power Act will have been dashed. Thus, if there are 

unresolved technical questions -- like the feasibility of stackgas scrubbers on coal plants -- a credible research and 

development program should be underway to settle them. If there 

are uncertainties in cost and schedule, these must be managed on 

the same basis for an option as for an acquired resource. If there 

are institutional hurdles -- such as approval of a site by a state 

licensing authority -- these must be addressed in a timely fashion 

whether the project is an option or an acquired resource. In 

short, a resource option should be no different from an ac-
DISCUSSION PAPER Planning in the Face of Uncertainty 8

quired resource except in the way it is handled by the Bonneville 

Power Administration and the council.

An option is treated differently by the region in two 

respects. First, the option agreement authorizes the region to 

decide to accelerate, delay, or cancel the project, as part of a 

cost-effective regional power program. The early stages of 

developing a conservation program or generating resource are 

typically far less costly than the construction or implementation 

phase. An option agreement might therefore schedule a regional 

decision on whether to proceed, and how rapidly to do so, before 

construction begins.

A second way in which the region treats an option differently 

from an acquired resource is that the project sponsor may be 

compensated for the risk that the project will be rescheduled or 

terminated. An option is a form of insurance to the region, since 

it improves the ability of the regional planning process to meet a 

range of loads. The risk payments to the sponsor are insurance 

premiums.

Regional resource options are an important means of improving 

the flexibility of planning, but there are additional ways to do 

so. Smaller projects and resources available on short lead-times 

both make it easier to respond to changing circumstances. Conservation seems unusually flexible because the size of the resource 

can be adjusted; if loads grow more rapidly than anticipated, a 

more aggressive -- and expensive -- conservation effort can be 

pursued with little lead-time, if this possibility has been
DISCUSSION PAPER Planning in the Face of Uncertainty 9

planned for. Renewable resource projects promote flexibility as 

well, when they are smaller than thermal projects. Some uncertainty remains, however, on how much conservation and renewable 

resources can be developed at cost-effective levels.

It is worth noting, moreover, that large central-station 

plants can be made more flexible through institutional changes, 

including option arrangements. Obtaining approval for sites and 

for engineering designs is a time-consuming part of a power plant 

project. If sites and licenses can be approved and then "banked," 

to be used for full-scale development later, the lead-time for 

large projects can be substantially shortened. Similarly, 

marketing part or all the output of a power station to utilities 

outside the Northwest decreases the effective size of the commitment shouldered by the region. If these marketing arrangements 

include contingency arrangements, perhaps along the lines of the 

call-back provisions in the Canadian Storage Power Exchange,, both 

size and timing can be made flexible. Regional control of banked 

sites and callback options enhances the risk-management 

capability.

In addition, there are institutional arrangements with 

consumers that can improve planning flexibility. For instance, 

rate schedules that are implemented only when a shortage looms can 

be used to hold down demand on short notice, if loads surge 

unexpectedly or supplies sag. Such contingent rates would require 

advance approval by public utility commissions, however, to make 

them usable as regional options. The fact that secure power
DISCUSSION PAPER Planning in the Face of Uncertainty 10

supply is more valuable to some industrial customers than others 

can form the basis for a futures market, in which costly resources 

can be developed on behalf of those willing to bear the risk of 

paying for them in order to assure supply. Conversely, there may be 

consumers willing to purchase interruptible power, who have not had 

access to lower-quality power in the past; their purchases can 

provide peakload reserves and flexibility in planning.

The flexible, risk-managing approach differs from deterministic planning in one important economic respect: risk management does not minimize short-run costs. But if the future is 

really uncertain, a flexible combination of projects can lead to 

much lower costs than a least-cost investment that turns out to be 

based upon mistaken assumptions. The concept of portfolio 

diversification -- not putting all one's eggs in the same basket -

- embodies the same risk-managing philosophy. A diversified 

portfolio may not earn the maximum return, but greatly decreases 

the probability of substantial losses.

Of course, one can hedge one's bets foolishly as well as 

wisely. Regional risk management is not self-implementing. But the 

deterministic approach, in the face of the uncertainties that 

confront the region, may guarantee failure.

Putting these principles into a workable planning process 

will require technical, organizational, and governmental changes. 

As a first step it may be sensible to consider a deliberately 

oversimplified example of how a regional plan could be more flexible.
DISCUSSION PAPER Planning in the Face of Uncertainty 11 

An example of flexible planning

In conventional utility forecasting the objective is to 

estimate as accurately as possible the future demand for electric 

power. A common approach is to make high, low, and intermediate 

forecasts, using different demographic variables and assumptions 

about consumer response to rate changes; typically, the intermediate forecast is selected as the planning target. When uncertainty is high, however, there may be insufficient information to 

identify an appropriate intermediate case. That is, the region 

may have to meet a demand for power 10 or 20 years in the future 

that can lie anywhere within a broad range. It is reasonable to 

think, however, that one can still identify a broad range within 

which demand is expected to lie; the question for planning is how 

to use this information.

Figure 1 shows a pair of schematic demand forecasts. They 

are limiting cases, chosen on the basis of a consensus within the 

forecasting community that actual demand will lie between the 

lower and upper bound forecasts. Regional risk management proceeds 

this way:

o The regional plan must assure that resources are adequate in 

each year of the planning period to meet the lower bound 

forecast demand. This requires resource acquisitions.

o The regional plan must also assure that a combination of 

resources and options is available to meet the upper bound 

forecast in each year of the planning period. This requires 

development and acquisition of options, as well as resources.

o In order to be included in the plan, an option must meet 

standards developed by the council. These standards should 

insure that the option can, in fact, be converted into a
Figure 1. Upper and Lower Bound Forecasts. 

resource by the year in which it is listed.

o A regional plan developed in this fashion must be reviewed 

frequently -- perhaps annually -- so that the mix of options 

and resources acquired can be adjusted in light of new 

information. Important kinds of new information include 

changes in the existing power system; revised lower and 

upper bound forecasts; data on costs and schedules of 

resources acquired; data on the costs of options and their 

availability for the year planned; and new resources and 

options developed since the last review.
DISCUSSION PAPER Planning in the Face of Uncertainty 13 

How does one fill in the V-shaped space between the lower and 

upper bound forecasts? Figure 2 demonstrates an approach for a 

single target year. Looking at the target year from the vantage of 

the planning year in Fig. 2, the planner ranks resource possibilities in order of increasing expected cost.<1> The resource 

possibilities vary in size, but when assembled they span the range 

from resources in being -- the regional system projected for the 

target year -- up beyond the upper bound forecast.

Lead times for these resources vary. Some projects have 

already been optioned or acquired in earlier planning years, 

though more are needed to reach the lower bound forecast.. Some 

projects do not need to be started yet, such as project 1. In 

three cases -- projects 2, 3, and 6 -- a decision must be made in 

the current planning year. The process concentrates on these 

decisions.

Thus, project 1 does not have to be examined in detail, even 

though, among resources available in the target year, it is 

expected to be lowest in cost. An acquisition decision has to be 

made on project 2, however. Situations like this illustrate the 

tradeoff between cost-effectiveness and flexibility. If project 2 

1. This expected cost should include measures of the technical, 

environmental, and institutional differences among resource 

alternatives. Some of these factors cannot be measured in 

monetary terms, however, although they are clearly relevant 

to a decision. For example, where a given resource is located 

can affect its accessibility to the regional grid, its 

financing, and the political acceptability to local 

populations of proceeding with the project. These factors are 

put aside in this simplified example.
Figure _2. Example of Resource Possibilities for a Target 

Year, with timing of decisions to option (0) and to 

acquire (A).
DISCUSSION PAPER Planning in the Face of Uncertainty 15 

is acquired, an irreversible commitment will have been made, 

before the region has purchased lower-cost power from project 1. 

The dilemma is that the planning process cannot wait for the 

project 1 decision point, for project 2 would no longer be 

available in this target year, and higher cost resources, such as 

project 5, might then have to be developed. How should one value 

project 2? There is, unfortunately, no simple method for gauging 

the relative value of flexibility and cost. Whether to acquire 

project 2 is, nonetheless, a judgment that can be illuminated 

through analysis. For example, it is possible to compare the 

implications of acquisition and deferral of this project. Pulling 

project '2 out of the resource stack -- the result if the project 

is not acquired -- would necessitate the addition of more 

resource possibilities, higher in cost than project 6, so that 

the range between' lower and upper bound forecasts is still 

covered. At the same time, deciding not to acquire project 2 

could mean that it remains available for development in a later 

target year, though probably at higher cost. Of course, foregoing 

acquisition can lead to a lower cost regional system if load 

growth falls in the low part of the range.

Note that Project 2 has a decision point for an option after

it is acquired. This indicates the possibility of a sales option 

-- a contractual agreement with a wholesale power purchaser for 

sales beginning in the target year. A sales option protects the 

possibility of selling power at a given price. The sales-option 

decision point is an opportunity to evaluate progress just before
DISCUSSION PAPER Planning in the Face of uncertainty 16

the bulk of the money is spent on construction; if a sales option 

can be obtained by that time, the region can proceed, knowing that 

there is an assured market for part of the project when it comes 

on line in the target year. At the same time, an option to sell 

also decreases one's flexibility, since the option is likely to 

include an assurance that the power will be available to sell in 

the target year. Without such an assurance, the price of the 

option would probably be so high that the Northwest would gain 

little from having it.

Project 3, like project 1, provides the possibility of a 

purchase option: an agreement to initiate a project with regional 

financing, subject to later review. The point of no return, 

economically speaking, occurs soon after the acquisition decision 

indicated. Project 4 was optioned in an earlier planning year, and 

the final acquisition decision is still some way off; no decisions 

need to be made in the current planning year. Note, however, that 

information obtained since the last planning year may have shifted 

the costs and schedule of project 4® its position in the stack may 

thus be different from a year earlier. Project 5 is also a 

resource possibility for which no decision need be made. It is 

high enough in the cost stack, however, that -- on the basis of 

current information -- a future sales option may not permit the 

Northwest to recover the full cost of the project; this is clearly 

information with a significant bearing on the acquisition 

decision. Finally, project 6 requires an option decision in the 

current planning year. As with project 2, payment to keep project
DISCUSSION PAPER Planning in the Face of Uncertainty 17

6 available will have to be made out of order in the costeffectiveness stacking. The questions that arose earlier in the 

discussion of project 2 are thus relevant. The answers to these 

questions may be different, however; both the high expected cost 

of project 6 and the fact that no sales option may be available 

for it decrease its desirability.

These resource possibilities have been discussed in the 

abstract. Considerations such as the geographical location of the 

projects, how they fit into the priority classes mandated by the 

Regional Power Act, and the operational characteristics of the 

overall resource mix if these projects should be acquired have all 

been put aside in this schematic example. These complications 

matter, of course, and would need to be analyzed in detail, using 

information developed by SPA, the council, the utilities, and 

other project sponsors and analysts.

It is also important to keep in mind that the regional risk 

management process is a dynamic one. As new information comes in 

about resources and about the outlook for demand, it should be 

used to adjust plans and commitments.

Consider what is likely to happen in the next planning year. 

There is now more information about each target year, though it is 

still incomplete. Upper and lower bound forecasts have shifted; 

usually, the distance between upper and lower bounds will have 

narrowed, since each target year is now closer to the point of the 

V. Second, the expected resources in being may have changed; 

changes in one target year affect the resources in being in later
DISCUSSION PAPER Planning in the Face of Uncertainty 18

years. Third, the costs, sizes, and availability of resource 

possibilities have changed; projects that have been delayed are no 

longer available in the original target year. This plethora of 

alterations illustrates the need for frequent review of the plan.

Regional risk management emphasizes the development of 

options. Resource possibilities whose costs remain in the costeffectiveness range spanned by the upper and lower bound forecasts 

are likely to be acquired at some point, though slow demand growth 

may delay them for a time. On the other hand, if the economics of 

power supply change dramatically, an option may be priced out of 

the evolving market. For instance, federal hydro projects 

introduced an extremely low cost resource to the Northwest, 

lowering the cost of electricity substantially; the escalating 

cost of Projects 4 and 5 of the Washington Public Power Supply 

System, in contrast, undermined their viability in the regional 

market.

The risk management approach also uses the information 

produced by forecasting in a novel way. The stress now lies on 

using the bounding estimates to define the range of resources and 

options needed in each target year. The traditional reliance on 

best-estimate forecasts has meant that high and low cases were 

selected casually. There is considerable room for improvement in 

choosing defensible upper and lower bound forecasts. Asking 

experienced forecasting modelers for consensus judgments on input 

data is a first step: what is the range within which the 

population trend is nearly certain to lie? how much and little
DISCUSSION PAPER Planning in the Face of Uncertainty 19

can electric energy users respond to changes in rates? Additional 

information comes from analyses of the relative costs of over- and 

under-building. A power shortfall of, say, 3000 megawatts does not 

have the same impact as a 3000-megawatt surplus. One could choose 

bounding forecasts so that the upper and lower bounds reflect 

equivalent costs to the regional economy. Using economic 

forecasting to set limits for planning is a more modest task than 

identifying a precise target. There is reason to hope that 

approaches such as those sketched here would lead to estimates that 

are more scientifically sound and less burdened by political 

ideology.

In sum, the schematic risk management approach illustrated 

here replaces the concept of a single best forecast with an 

iterative three step process:

1. Use the best forecasting data and methods available to 

project the highest and lowest plausible cases. These 

upper and lower bound forecasts should reflect a range of 

demand broad enough that the actual demand can be confidently assumed to fall between the bounds.

2. Develop a stack of resource possibilities to fill the 

span between the lower and upper bounds for each year in 

the plan. The region should retain the right to delay 

acquisition in light of additional information about 

expected costs and demand. Options to sell part of the 

output of large facilities, together with purchase 

options -- regional financing of project initiation costs 

-- can facilitate the development of resource possibilities while retaining flexibility.

3. Make decisions as necessary on resource possibilities, so 

that there will be resources acquired to meet the lower 

bound forecast, and so that there will be a combination 

of resources and options capable of covering demand 

ranging as high as the upper bound forecast in each

target year. Acquisitions should be trade following the
DISCUSSION PAPER Planning in the Face of Uncertainty 20

cost-effectiveness and resource priorities set forth in 

the Regional Power Act.

Regional risk management brings to the fore the question of 

whether it is possible to put a great deal more flexibility into 

the acquisition process. Before discussing some of the practical 

issues raised by the idea of options, one should pause to observe 

that flexibility may not be desirable in all cases, nor may it be 

obtainable on favorable terms. First, electric power planning does 

not take place in a vacuum; there are costs and benefits to 

others, and these costs and benefits depend upon how utility 

resources are scheduled. For example, Northwest electroprocess 

industries invest large sums in capital equipment on the 

assumption that. power will be available to utilize it. The 

Regional Power Act recognizes the value of secure supply to the 

direct-service industrial customers. More generally, flexible, 

risk-oriented planning benefits some and imposes risks and costs 

on others.

Second, a flexible, incremental approach encounters the 

problem of "second best": that is, incremental decisions, each of 

which is rational, may lead to a suboptimal outcome. Second best 

is the economists' version of the road paved with good intentions. 

For instance, vigorous attempts to improve the accuracy of 

forecasts -- a rational program -- may lead planners to have an 

inappropriate confidence in their estimates of future demand; 

thus, incremental improvements in the single best forecast do not
DISCUSSION PAPER Planning in the Face of Uncertainty 21

lead one to the rather different approach suggested here. On 

account of both the external effects of planning and the problem 

of second best, it is wise to be cautious about the value of flexibility. But a flexible approach has obvious merit in the 

uncertain environment faced by the Northwest.

Practical questions

Regional risk management is clearer conceptually than 

practically. The ideas discussed in this paper are familiar and 

well-established in business, especially in finance and other 

cyclical industries. Yet applying them to the complex web of 

technological and institutional relationships that constitute 

electric power in the Northwest will be challenging. The promise 

of the risk-management approach is large: it is the one conceptual 

framework that offers significant, and achievable, strengths in 

facing uncertainty.

The council will be served best by a vigorous critique of 

the regional risk management concept. What are the barriers that 

stand in the way of using these ideas to structure the regional 

plan? What special advantages might accrue from using a risk-management approach, and what special disadvantages are attached to 

using it? Who will benefit, and who will lose, if a risk-management philosophy is adopted? Most of all, is flexible planning 

practical given the regional power system as it is, and will a 

system shaped by regional risk management be a better one for the
DISCUSSION PAPER Planning in the Face of Uncertainty 22

 ratepayers of the Northwest?

The key questions are those that surround measures to 

increase planning flexibility, especially resource options: 

o Who will find it sensible to provide options, and under what 

conditions? What are the legal, economic, institutional, or 

psychological barriers that inhibit the development of 

options?

o Are options compatible with the Regional Power Act? Is the 

language of Sec. 6(f) , providing for reimbursement of resource development expenses, adequate as a legal framework for 

using options?

o Are options compatible with regulatory rules? Approval for 

major generating facilities usually requires a determination 

of the need for power -- a determination that is eschewed in 

flexible planning. State and federal regulations could thus 

be a significant barrier to regional risk management.

o Presumably, the front-end costs of most power supply projects 

are small near the time of initiation: design, siting, and 

licensing are-all activities that require far less expenditure than construction. So an option could be purchased at 

modest cost. But are conservation programs like this? What 

about experimental resources that may involve substantial 

research and development costs? More generally, what 

determines the cost of an option in a technical sense?

o Why would a project sponsor be willing to delay or halt a 

project once it is begun, and do so on the basis of regional 

criteria interpreted by the council or BPA? In part, this is 

a matter of what the region is willing to pay for the option 

in the first place. So, more generally, what negotiating 

factors influence the price of an option?

o How reliable are the cost and schedule estimates of options? 

Can they be made at least as credible as those for projects 

proposed for acquisition or billing credits under the act?

o Some options involve few direct costs beyond those of negotiation, such as contractual arrangements for power sales or 

purchases. What options for the Northwest are to be found in 

the plans of utilities in neighboring regions such as 

California or western Canada? Note that this question is 

similar to that of load diversity, but the focus is on 

planning rather than operations.
DISCUSSION PAPER Planning in the Face of Uncertainty 23 

o Are there institutional arrangements other than contracts 

that can facilitate options? Are there conditions in which 

having shared ownership is advantageous? The aluminum 

industry has played an important role in the Northwest 

power system by providing a market for reserves that had no 

alternative market; are there similar industry-utility 

compatibilities with respect to resource options?

o If options are obtainable, which characteristics are most 

valuable? What is the relative value, for instance, of cost 

as compared to lead-time? of size compared to the 

uncertainties of completion on time? Does putting a high 

value on flexibility lead to unanticipated results?<2> This 

essay has implicitly assumed that cost and flexibility were 

the only relevant variables, but clearly that is not so. 

What would one want from an option? what makes an option a 

valuable form of insurance to the region?<3>

o What sort of options might be helpful if the lower bound 

forecast indicates declining demand in the region?

o This essay has implicitly assumed that central planning for 

the whole region will prevail. But it is likely that large 

utilities will continue to operate autonomously within the 

Bonneville service area. How are they affected by a shift 

to a flexible planning process? Neither their 

technological. or economic ability nor their willingness to 

participate in a centrally directed risk management 

strategy can be assumed.

o Can the fragile and complicated regional utility industry 

structure absorb the complexities of flexible planning? If 

the region's utilities were a single organization, this would 

be a question of corporate strategy. Within the existing 

fragmented situation, there is a danger that this systemlevel institutional question will not be considered seriously

2. For instance, flexibility can be enhanced by choosing 

technologies that have low capital costs and high running 

costs. That way, a project that is little used does not 

exact a high penalty. So- risk management may be an 

unrecognized argument for burning oil in combustion 

turbines, a resource possibility that conflicts with the 

national goal of limiting dependence on imported petroleum.

3. The insurance value of an option should decrease with the 

cost of power. A low-cost option is like y to be developed, 

and thus the ability to delay or terminate it is less 

valuable than for an option that produces power at higher 

cost.
DISCUSSION PAPER Planning in the Face of uncertainty 24

enough.

The risks that face the Northwest are plainly visible. 

Yet surprisingly, technical and institutional means of taking 

account of these risks in regional planning have not been 

clearly articulated. This essay attempts a beginning.