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Missed Opportunity: What's Right and Wrong in the FERC Staff Report on the Midwest Price Spikes

Fortnightly Magazine - November 15 1998

to forecast. Rather, utilities do not want to build new plants in the current in-between state of regulation and deregulation. The easiest way to avoid the need is to claim it does not exist. The greatest need to avoid appearances of impending shortages has emerged in the regions where this problem is most acute.

The state regulatory authorities have acquiesced in this situation for three main reasons. First, they do not want to have to raise customer rates to pay for new capacity. Second, they do not want to admit that the conservation estimates from their investments in demand-side management were exaggerated. Third, no one is really in charge in the mixed-up regulatory structure we currently have.

The FERC points out the problem in its own quotable argot, "The FERC does not have primary jurisdiction over all matters that may affect whether future spikes occur." Yet the grid is by its physical nature the supreme example of interstate commerce. If FERC does not take the lead, how can we expect anything but a very messy transition?

Reliable Information: Still Lacking

Where has FERC been on this issue of load forecasts? Not only has it been silent over these past few years; even today, the FERC remains relatively silent in the face of a transition crisis. In its staff report, the FERC failed to emphasize appropriately the essence of the problem: a chronic abuse of the public's need to have access to fair, independent forecasts from authorities with responsibility for grid generation reliability.

Another cause of this problem is the lack of transparent information from independent sources that reports the true state of the grid. The FERC staff did not address in its report the following issues:

• Blackouts (em There is a significant chance of blacking out %n6%n Midwest firm customers. In the jargon of the industry, there is a significant loss of load probability (LOLP) in many U.S. markets, especially in the Midwest. There is no mention of the term "loss of load probability" anywhere in the report (even in the footnotes or glossary).

• LOLP Analysis (em The report provides no explanation of the relationship between LOLP and high prices. Since wholesale prices explode because of the lack of capacity, it is impossible to separate a discussion of price spikes and reliability of firm load.

• Public Data (em The report should have demanded published, transparent LOLP planning estimates and for the supply of related information on plant availability, line capacity, and demand uncertainty.

• ISOs (em The report made no clear demand for accelerating the creation of independent system operators. How could the report not attribute the poor functioning and surprising character of the market in any way to the fact that there was no ISO in the Midwest? Even today, there are no clear boundaries set for regional Midwest ISOs.

Significantly, the appropriate analytic structure for analyzing June 1998 was completely ignored in the report.

First, loss of load occurs when firm demand exceeds supply. This is assessed probabilistically, accounting for uncertainty in supply and demand, including transmission limits. (See Figure 2.)