A decision analysis of the effect of uncertainty upon electric utility planning

During the past 15 yr, electric utilities have learned that forecasts of demands and costs are highly uncertain. Here, a decision tree analysis is performed of the risks in fuel expenses, construction costs, purchased power availabilities, and demands which face three U.S. utilities. In terms of impacts upon electric rates, fuel uncertainties are most important. But planning decisions are severely affected by uncertainties in demand. This fact has two implications: accurate forecasts of demand are worth more than forecasts of other parameters, and the expected cost of ignoring demand uncertainties exceeds the cost of disregarding other sources of risk. We also investigate the effect of pursuing different objectives under uncertainty. The objectives analyzed include: minimization of expected total costs, rates and excess capacity, as well as maximization of consumers surplus and a risk-averse utility function.