Incorporating uncertainty into electric utility projections and decisions

This paper focuses on how electric utility companies can respond in their decision making to uncertain variables. Here we take a mean- variance type of approach. The ``mean`` value is an expected cost, on a discounted value basis. We assume that management has risk preferences incorporating a tradeoff between the mean and variance in the utility`s net income. Decisions that utilities are faced with can be classified into two types: ex ante and ex post. The ex ante decisions need to be made prior to the uncertainty being revealed and the ex post decision can be postponed until after the uncertainty is revealed. Intuitively, we can say that the ex ante decisions provide a hedge against the uncertainties and the ex post decisions allow the negative outcomes of uncertain variables to be partially mitigated, dampening the losses. An example of an ex post decision is how the system is operated i.e., unit dispatch, and in some cases switching among types of fuels, say with different sulfur contents. For example, if gas prices go up, natural gas combined cycle units are likely to be dispatched at lower capacity factors. If SO{sub 2} emission allowance prices go up, a utility may seek to switch into a lower sulfur coal. Here we assume that regulated electric utilities do have some incentive to lower revenue requirements and hence an incentive to lower the electric rates needed for the utility to break even, thereby earning a fair return on invested capital. This paper presents the general approach first, including applications to capacity expansion and system dispatch. Then a case study is presented focusing on the 1990 Clean Air Act Amendments including SO{sub 2} emissions abatement and banking of allowances under uncertainty. It is concluded that the emission banking decisions should not be made in isolation but rather all the uncertainties in demand, fuel prices, technology performance etc., should be included in the uncertainty analysis affecting emission banking.