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UTILITY AND DECISION MAKING 577

the airport has an expected value of E2.55 million – this is the net return to the city. However, the decision not
to upgrade the airport has a slightly higher expected value of E2.7 million and, based on the information
available, would be the preferred decision. We can also point out to the Development Team that the decision
model allows them to undertake sensitivity analysis and assess the impact that different values would have on
the recommended decision.

MANAGEMENT SCIENCE IN ACTION

Investing in a Transmission System at Oglethorpe Power

glethorpe Power Corporation (OPC) provides that described intermediate calculations. The deci-
O wholesale electrical power to consumer-owned sion tree for the problem had more than 8000 paths
cooperatives in the state of Georgia. Florida Power from the starting node to the terminal branches.
Corporation proposed that OPC join in the building An expected value analysis of the decision tree
of a major transmission line from Georgia to Florida. provided an optimal decision strategy for OPC. How-
Deciding whether to become involved in the building ever, the risk profile for the optimal decision strategy
of the transmission line was a major decision for showed that the recommended strategy was very
OPC because it would involve the commitment of risky and had a significant probability of increasing
substantial OPC resources. OPC worked with OPC’s cost rather than providing savings. The risk
Applied Decision Analysis, Inc., to conduct a com- analysis led to the conclusion that more information
prehensive decision analysis of the problem. about the competition was needed in order to reduce
In the problem formulation step, three decisions OPC’s risk. Sensitivity analysis involving various prob-
were identified: (1) build a transmission line from abilities and payoffs showed that the value of the
Georgia to Florida; (2) upgrade existing transmission optimal decision strategy was stable over a reason-
facilities; and (3) who would control the new facilities. able range of input values. The final recommendation
Oglethorpe was faced with five chance events: (1) from the decision analysis was that OPC should
construction costs; (2) competition; (3) demand in begin negotiations with Florida Power Corporation
Florida; (4) OPC’s share of the operation; and (5) concerning the building of the new transmission line.
pricing. The consequence or payoff was measured
Based on Adam Borison, ‘Oglethorpe Power Corporation Decides about
in terms of dollars saved. The diagram for the prob-
Investing in a Major Transmission System’, Interfaces (March/April
lem had three decision nodes, five chance nodes, a 1995): 25–36.
consequence node and several intermediate nodes

Problems

1 The following payoff table shows profit for a decision analysis problem with two decision
alternatives and three states of nature.
State of Nature

Decision Alternative s 1 s 2 s 3
250 100 25
d 1
100 100 75
d 2

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