Probability Problem An electric utility is experiencing a difficult time obtaini

Question

Probability Problem

An electric utility is experiencing a difficult time obtaining natural gas for electric generation. Fuels other than natural gas (called fuel-mixes) are purchased at an extra cost, which is transferred to the customer. Total monthly fuel expenses are now averaging $7,750,000.

An engineer with the city-owned utility has calculated the average revenue for the past 24 months using three fuel-mix situations –

Gas Plentiful

< 30% other fuels purchased

>=30% other fuels purchased

The table below indicates the number of months that each fuel-mix situation occurred (i.e Gas Plentiful occurred 12 out of the last 24 months).

Can the utility expect to meet future monthly expenses based on the 24 months of data, if a similar fuel-mix pattern continues? (i.e. what is the expected EMV?) You can use Excel (show formulas) or do this by hand

Revenue & Fuel Mix Data

Fuel-Mix Situation

Months in Past 24

Average Revenue,

$ per Month

Gas plentiful

12

5,270,000

<30% other

6

7,850,000

>= 30% other

6

12,130,000

Revenue & Fuel Mix Data

Fuel-Mix Situation

Months in Past 24

Average Revenue,

$ per Month

Gas plentiful

12

5,270,000

<30% other

6

7,850,000

>= 30% other

6

12,130,000

Explanation / Answer

Revenue & Fuel Mix Data Fuel-Mix Situation Probability (P) Average Revenue,$ per Month (A.R.) EXPCTED PAY OFF =A.R.*P Gas plentiful 12/24 =0.5 52,70,000 2635000 = 30% other 6/24=0.25 121,30,000 3032500                                      EMV= 7630000 EXPECTED MONETARY VALUE = EMV= $763000        ANSWER

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