Defending against uncertainty in the electric-utility industry. [Use of computer-simulation model]

Two strategies that utilities could follow in dealing with an uncertain future are analyzed, namely: (1) construction of small coal-fired base-load plants rather than larger coal plants to take advantage of the shorter construction delay associated with the smaller plants; and (2) initiating an amount of construction of expensive, base-load capacity that is different from the amount indicated by the best demand forecast. These strategies are tested through the use of a computer-simulation model designed to mimic the way in which electric utilities expand generating capacity. The model simulates the planning, construction, and operation of coal-fired plants for base-load duty and turbine plants for peaking uses. By exercising the model so that electricity demand grows in an unpredictable fashion, the price penalties associated with under- or overinvestment in generating capacity are established. The effectiveness of the two strategies is measured by calculating the changes in the price penalty to the consumer. The paper concludes with specific recommendations that apply to those states in which construction work in progress is not allowed in the utilities' rate base. 24 references, 9 figures.