Load Forecasting in a Competitive Environment

Georg Shultz, Chief, Energy Forecasting Branch, RUS

Load Forecasting – What’s New

A Discussion of the New RUS Load Forecasting Regulation

Remarks by Georg Shultz, Chief, Energy Forecasting Branch, Electric Staff Division,

Electric Program, Rural Utilities Service at the RUS 2000 Electric Engineering Seminar

on March 14, 2000.

The 2 topics for discussion are the ‘new’ RUS regulation on load forecasting and my

thoughts on the impact of ‘competition’ on load forecasting.

The New Load Forecasting Regulation

RUS has developed and proposed a new load forecasting regulation to reduce

the reporting burden for load forecasts required to be submitted to RUS consistent with

the Agency’s need for information. We anticipate the publication of a final rule

sometimes this spring. While RUS is reducing the reporting burden, the load forecasts

are still an integral part of electric utility planning and are probably even more important

than in the past.

To develop the regulation needed to accomplish this reduction RUS set up a

working group with representatives from each major functional unit in the electric

program. The regional offices, the Power Supply Division, the Electric Staff Division

and the field staff were all represented. Jim Ruspi, the director of the Southern

Regional Division chaired the group. As is the usual case with developing a load

forecast, even this small group had conflicting opinions and ideas as to how to best

accomplish the goal.

A major stumbling block in meeting the new goal was criteria for approval of a

borrower’s Power Requirements Study in the existing regulation as stated below:
Load Forecasting 2 of 14

1) “The borrower used valid and verifiable analytical techniques and models.”

and

2) “The borrower adopted methods and procedures in general use by the

electric utility industry to develop its load forecast.”

To meet these 2 criteria it was necessary to develop a PRS with a significant level of

support and documentation. Our challenge was to meet the government policy

mandate to reduce reporting burden while keeping an acceptable level of information to

support the credit decisions made by the commensurate with the Agency’s credit

exposure, the business risk of our borrowers and overall utility practice.

The approach finally adopted by the Agency stands on several principles. The

first was to expand the overall approval criteria to increase flexibility by allowing

subjective forecasting approaches. The second was increase the thresholds for loans

that do not require a formal load forecast. The third was to expand the Agency’s

administrative discretion with regard to load forecast approval extensions and waivers.

The fourth was to reduce certain prescriptive requirements regarding scenario analysis

and consumer surveys. The final principle was to unequivocally place the responsibility

for the development of the forecast on the General Manager.

Another important change, but not fundamental to our goals, is dropping the use

of the term “ power requirements study” in favor of the term “load forecast.”

Principle 1 - Expand the overall approval criteria to increase flexibility

Central to this change is the establishment of two types of load forecasts acceptable to

RUS. One forecast is that outlined in the current regulation. For our discussion we will

call this forecast a “basic level forecast”. It is still the cornerstone of RUS policy with

regard to load forecasting. We will call the second forecast a “minimum level forecast.”

It is a subset of the basic level forecast. So we must spend a few minutes considering

the basic level forecast.
Load Forecasting 3 of 14

The proposed regulation states:

§ 1710.208 RUS criteria for approval of all load forecasts by power supply borrowers

and by distribution borrowers required to maintain an approved load forecast on an

ongoing basis.

All load forecasts submitted by power supply borrowers and by distribution borrowers

required to maintain an approved load forecast must satisfy the following criteria:

(a) The borrower objectively analyzed all known relevant factors that influence

the consumption of electricity and the known number of customers served at the time the

study was developed;

(b) The borrower considered and identified all loads on its system of RE Act

beneficiaries and non-RE Act beneficiaries;

(c) The borrower developed an adequate supporting database and analyzed a

reasonable range of relevant assumptions and alternative futures;

(d) The borrower adopted methods and procedures in general use by the electric

utility industry to develop its load forecast;

(e) The borrower used valid and verifiable analytical techniques and models;

(f) The borrower provided RUS with adequate documentation and assistance to

allow for a thorough and independent review; and

(g) In the case of a power supply borrower required to maintain an approved load

forecast on an ongoing basis, the borrower adequately coordinated the preparation of the

load forecast work plan and load forecast with its member systems.

The above approval criteria (formally adopted by the Agency with the 1992

promulgation of 7CFR1710 Subpart E – Power Requirements Studies) essentially

defines a “basic level load forecast.” I again want to draw your attention to criterion (d)

and criterion (e). A basic level forecast was often referred to a “full blown PRS.” The

phrase is somewhat incongruous in that the basic level PRS represented the minimum

acceptable load forecast. However, it is inescapable that to meet these criteria is was

necessary to develop a comprehensive historical database, estimate mathematical

models using the historical data, and to develop a comprehensive projected database to

load the models to estimate projections. Model estimation using ordinary least square

regression and econometric theory were acceptable to RUS. While these tasks are not

trivial, it is possible to develop an acceptable load forecast with an unsophisticated

personal computer with a spreadsheet application for database development and

ordinary least squares regression capability, and a basic understanding of economic

theory. Better computers and software are continually becoming available. Indeed

RUS approved forecasts developed using just Excel as recently as last year.
Load Forecasting 4 of 14

Now let’s consider the minimum level forecast.

§ 1710.207 RUS criteria for approval of load forecasts by distribution borrowers not

required to maintain an approved load forecast on an ongoing basis.

Load forecasts submitted by distribution borrowers that are unaffiliated with a

power supply borrower, or by distribution borrowers that are members of a power supply

borrower that has a total utility plant less than $500 million and that is not itself a

member of another power supply borrower with a total utility plant of $500 million or

more must satisfy the following minimum criteria:

(a) The borrower considered all known relevant factors that influence the

consumption of electricity and the known number of consumers served at the time the

study was developed;

(b) The borrower considered and identified all loads on its system of RE Act

beneficiaries and non-RE Act beneficiaries;

(c) The borrower developed an adequate supporting data base and considered a

range of relevant assumptions; and

(d) The borrower provided RUS with adequate documentation and assistance to

allow for a thorough and independent review.

The above approval criteria essentially defines the minimum level load forecast. Gone

is the need the need to develop mathematical models and to develop comprehensive

databases to satisfy the criteria. To illustrate the difference the between a basic level

forecast and a minimum level forecast lets look the following “side by side.”
Load Forecasting 5 of 14

LOAD FORECAST REGULATION

APPROVAL CRITERIA SIDE BY SIDE

ITEM MINIMUM LEVEL BASIC LEVEL

 1

(a) The borrower considered

all known relevant factors that

influence the consumption of

electricity and the known number of

consumers served at the time the

study was developed;

(a) The borrower objectively

analyzed all known relevant factors

that influence the consumption of

electricity and the known number of

customers served at the time the

study was developed;

 2

(b) The borrower considered and

identified all loads on its system of RE

Act beneficiaries and non-RE Act

beneficiaries;

(b) The borrower considered and

identified all loads on its system of RE

Act beneficiaries and non-RE Act

beneficiaries;

 3

(c) The borrower developed an

adequate supporting database and

considered a

range of relevant assumptions; and

(c) The borrower developed an

adequate supporting database and

analyzed a reasonable range of

relevant assumptions and alternative

futures; and

 4

(d) The borrower adopted methods

and procedures in general use by the

electric utility industry to develop its

load forecast;

 5

(e) The borrower used valid and

verifiable analytical techniques and

models;

 6

(d) The borrower provided RUS with

adequate documentation and

assistance to allow for a thorough and

independent review.

(f) The borrower provided RUS with

adequate documentation and

assistance to allow for a thorough and

independent review, and;

 7

(g) In the case of a power supply

borrower required to maintain an

approved load forecast on an ongoing

basis, the borrower adequately

coordinated the preparation of the

load forecast work plan and load

forecast with its member systems.
Load Forecasting 6 of 14

Item 1

The only difference in actual text between the minimum and basic criteria in item 1 is

the word “objectively.” But this is a very important distinction. This means that a

subjective analysis may be used as the basis for a minimum level load forecast. In

other words a judgmental forecast without the benefit of developing mathematical

models or other industry accepted approach.

Item 2

There is no text difference for Item 2

Item 3

Here again the difference allows for the development of a subjective forecast. The

difference between the words “considered’ and ‘analyzed’ is most telling.

Per Webster

consider (verb)- to think about seriously.

analyze (verb) – to separate into elemental parts or basic principles so as to determine

the nature of the whole.

To analyze it was usual for utilities to use either an econometric or end-use approach

coupled with judgment. To consider requires only judgment. A minimum level forecast,

that is a subjective or judgmental forecast, does not require any sort of explicit

mathematical modeling. But to consider and understand your loads and develop a

useful forecast a comprehensive historical database is still necessary. Data is so

important to the development of any forecast that it is included in the new regulation as

part of all load forecasts.

In God we trust, everyone else must use data.
Load Forecasting 7 of 14

Another important distinction is the need to develop alternative futures for a basic level

load forecast that is not needed in the minimum level forecast.

Item 4 and Item 5

There are no parallels between the minimum and basic level forecasts for these items.

Item 6

No difference

Item 7

While this appears to be a difference. In actuality it is not. A minimum level study is not

an option for a power supply borrower.

Principle 2 – Increased thresholds

(Please note that we have moved back to the principle discussion.) I am only going to

discuss major threshold changes.

The first threshold change is the definition of a large borrower. The regulation provides

for any borrower, power supply or distribution, with more that $500 million in total utility

plant (TUP) as large. These borrowers and the members of these borrowers are

required by the regulation to maintain an up-to-date and valid load forecast at all times.

These large borrowers will see little change from the previous regulation.

The second change increases the eligibility criteria for borrowers to opt NOT to prepare

a formal load forecast. A small power supply borrower is required to submit a basic

level load forecast for any request of RUS in the amount of $50 million or larger. This

was increased from $25 million. A ‘small’ distribution borrower is required to submit at

least a minimum level load forecast for any request of RUS greater than $3 million.

Also distribution borrowers not affiliated with a large power supply borrower and with

more that $60 million in TUP can request up to 5% of TUP without a load forecast. This
Load Forecasting 8 of 14

change makes it possible for larger borrowers to exercise the no formal load forecast

option. But we must all remember that a load forecast is always implicit with every

decision made by an electric utility.

Principle 3 – Expanded administrative discretion

The expanded administrative discretion manifests itself in the discretion given RUS to

consider extending time frames regarding the routine development of load forecasts for

large power supply borrowers and their members. The new regulation allows for

Extensions up to 24 months. The old regulation allowed for 12 months.

Principle 4 – Reduce prescriptive requirements

Although the existing regulation had few prescriptive requirements defining how to

prepare the actual forecast, reduction to an absolute minimum was our goal. The most

significant reduction in prescriptive requirements is the elimination of the requirement to

develop scenario analysis as part of a basic level forecast. While never defining the

type of customer survey required the Agency opted to extended the interval between

conducting customer surveys from 3 to 5 years. Obviously there is a significant

reduction in overall requirements between a basic level forecast and a minimum level

forecast.

Principle 5 - Accountability

What the Agency is most interested in while reviewing the actual forecast is that your

cooperative did an objective and reasonable analysis and accepts accountability for the

forecast.

In the past, accountability was addressed primarily through a board resolution approving

the forecast. What is new in the new regulation is that in addition to the board

resolution, a letter to the board from the borrower’s general manager recommending

approval of the load forecast is required. This letter explicitly places the responsibility

for the development and results of the forecast directly on the shoulders of the general
Load Forecasting 9 of 14

manager. With this one change the Agency clearly emphasizes the importance of the

load forecast while introducing increased flexibility and reduced requirements in other

parts of the regulation.

In spite of the changes occurring in the industry the Agency recognized that most

industry accepted techniques to develop load forecasts are not suitable for small rural

electric borrowers. From the credit side of the ledger the Agency also felt that the level

of effort required to develop or review a comprehensive load forecast was not warranted

for small loans. For these borrowers and small loans a formal submittal of any load

forecast to RUS is not required.

If your cooperative is a member of a large generation and transmission cooperative it

will still be necessary to develop on a routine basis a comprehensive load forecast. A

large system is defined as one with over $500 million in total utility plant. But even here

we reduced requirements and added flexibility.

We expect the new regulation to be published in the Federal Register and become

effective this spring.

We all realize that most forecasts and plans never come to a precise fruition. Those

that do are often the result of luck more than will. But it is in the process of anticipating

the future, studying our opportunities; developing and implementing plans to meet our

goals that we are prepared to adapt and adjust to what the future actually brings to us

instead of simply letting the wind carry us to wherever.

Keep in mind that RUS will continue to accept valid load forecasts required by and

developed for other parties. Also all utility decisions require a load forecast of one sort

or another. For borrowers not required to submit a ‘formal’ load forecast to RUS in

support of their loan requests, it is still necessary to support their forecast in other loan

support documents such as the financial forecast and construction work plans.
Load Forecasting 10 of 14

This discussion was not intended to answer all questions for all borrowers. But to make

you aware that a change is taking place, the type of changes made and to spur your

interest in finding out how the regulation will actually impact your cooperative. If you

have questions after reading the regulation ask your cooperative’s RUS field

representative or give us a call at 202 720 1920 or email me at gshultz@rus.usda.gov.
Load Forecasting 11 of 14

A brief comment on competition and load forecasting.

An often asked question since the Energy Policy Act of 1992 is what is the impact of

‘competition’ on load forecasting for rural cooperatives.

To begin let me ask you a rhetorical question.

What has changed on the customer side of the meter since the passing of the Energy

Policy Act?

NOT A THING.

Customers still want the same things from their energy suppliers?

Reliability

Low cost

Convenience

Safety

Customers still use energy for the same things.

Lighting

Convenience items

Entertainment

Food Storage

Information handling

Space cooling

Space heating

Water heating
Load Forecasting 12 of 14

Items 1-6 are what I refer to as high quality heat uses. Appliances that use electricity

normally provide these services. Items 7 and 8 are services that can be provided by

appliances that use low quality heat. Appliances that use any number of fuels can

provide these services, fuels such as propane, fuel oil, wood, and natural gas. Most of

which can readily be delivered to rural electric customers. Real competition for

electricity occurs at the margin. Competition is especially important to rural electric

cooperatives since 70% of their total sales are to residential customers where

alternative fuels are readily available as a substitute for electricity. Considering that

50% of the residential customer’s total energy usage is for low quality heat, alternatives

to energy supplied as electricity are already available, if the price is right. Rural electric

cooperatives have been living with real competition since their inception.

Residential space heating and water heating are low quality energy uses that can be

supplied by just about any other fuel, such as wood, propane, natural gas, fuel oil and

coal. In some areas solar collectors are an option. Improved housing envelope

efficiency and improved appliance efficiency are also options. Demand side

management can also be brought into play. Competition! So what is new?

It is my contention that in the large vast majority of rural electric coop cases the cost of

delivered energy to the residential sector by region is already as low as it can go

because of competition from alternative fuels, efficiency options and the cooperative

policy of designing rates to just cover costs.

Changes caused by restructuring are beyond the scope of my talk, but it is my

considered opinion that the cost of wholesale power for any given region will be

relatively consistent within for the various different rate classes in the immediate

geographical area. The electric production and delivery system is still in place and

cannot ignore the laws of physics. Customers energy needs are well established and

respond pursuant to the observed laws of economics. Looking at average revenue

requirements and usage patterns for the last 3 years we can get a feel for the prices
Load Forecasting 13 of 14

and correlated usage levels. At about 9 to 10 cents per kWh usage does drop off

sharply. See attachment 1 and 2.

How does the redefining of competition for energy to include choosing electricity

suppliers effect electricity usage by residential consumers who have little market

power? Keep this thought, the overall costs and therefore the price to the rural

residential sector may rise as the lower cost electricity is aggressively sought by and

contracted to large commercial and industrial customers, but regionally it will rise or fall

together.
BIOGRAPHICAL SKETCH

GEORG SHULTZ

Mr. Shultz is currently the Branch Chief for the Energy Forecasting Branch, Electric Staff

Division. He is a graduate of the University of Maryland with a Bachelor of Science Degree in

Electrical Engineering
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