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

H. D. Sherali, A. L. Soyster, F. H. Murphy and S. Sen
Additional contact information
H. D. Sherali: Virginia Polytechnic Institute and State University
A. L. Soyster: Pennsylvania State University
F. H. Murphy: Temple University
S. Sen: University of Arizona

Management Science, 1984, vol. 30, issue 1, 1-19

Abstract: 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.

Keywords: facilities; planning-capacity; expansion (search for similar items in EconPapers)
Date: 1984
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:30:y:1984:i:1:p:1-19

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