Risk Management Strategies for Electric Utilities

Abstract

The Pacific Northwest has gone through an enormously expensive lesson in both the uncertainty and risk associated with power planning. The difficult lessons we have learned may benefit other parts of the country. In the 1970s, utility planners in the Pacific Northwest, using their experience from the past assumed that they could predict the future. They developed an energy forecast for the region and started planning and constructing a total of 10 nuclear plants and 17 coal plants. As recently as 1980, utility forecasters were predicting brownouts or worse in the mid 1980s in the Pacific Northwest. Today, the Pacific Northwest has a surplus of electricity that could last five to twenty years. Two of the nuclear plants have been completed, two are on hold in partially completed state, and six have been terminated. The total investment in terminated and mothballed nuclear plants exceeds $7 billion. Thirteen of the coal plants have been completed, two are nearing completion, and four have been put on hold. Nowhere has the lesson been more dramatic of the tremendous risk involved in trying to match long lead time resources to uncertain energy needs than in the Pacific Northwest. There are high costs associated with building too many resources as well as too few resources.