Intertemporal Allocation of Capital Costs in Electric Utility Capacity Expansion Planning Under Uncertainty

This paper concerns marginal cost pricing in a capacity expansion problem for the electric utility industry. We develop a characterization of equipment selection and marginal capital cost allocation based on an optimal capacity plan, in the context of either a finite, discretely distributed stochast...

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Bibliographic Details
Published in:Management science 1984-01, Vol.30 (1), p.1-19
Main Authors: Sherali, H. D, Soyster, A. L, Murphy, F. H, Sen, S
Format: Article
Language:English
Subjects:
Breakeven analysis
Capacity costs
Capital costs
Cost allocation
Electric utilities
Expansion
Facilities planning
facilities planning-capacity expansion
Linear programming
Load
Marginal costs
Marginal pricing
Mathematical programming
Operating costs
Optimal solutions
Peak load pricing
Production capacity
Supply
Total costs
Transportation
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Summary:This paper concerns marginal cost pricing in a capacity expansion problem for the electric utility industry. We develop a characterization of equipment selection and marginal capital cost allocation based on an optimal capacity plan, in the context of either a finite, discretely distributed stochastic demand forecast, or in the deterministic case of multiple users identified by temporal considerations. In either case, a two stage linear program with recourse is shown to result. The main purpose of this paper is to conduct an analysis in order to determine a marginal cost pricing strategy for sharing capital costs given an optimal capacity plan, and to provide insightful economic interpretations. Our results also generalize a special case previously studied to demonstrate how a marginal cost pricing strategy may result in some of the capacity costs being borne by off-peak users.
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.30.1.1