Duke Energy manufactures and distributes electricity to customers in the United States and Latin America. Duke recently purchased Cinergy Corporation, which has generating facilities and energy customers in Indiana, Kentucky, and Ohio. For these customers Cinergy has been spending $725 to $750 million each year for the fuel needed to operate its coal-fired and gas-fired power plants; 92% to 95% of the fuel used is coal. In this region, Duke Energy uses 10 coal-burning generating plants: 5 located inland and 5 located on the Ohio River. Some plants have more than one generating unit. Duke Energy uses 28–29 million tons of coal per year at a cost of approximately $2 million every day in this region.

Managerial Report

Prepare a report that summarizes your recommendations regarding Duke Energy’s coal allocation problem. Be sure to include information and analysis for the following issues:

1. Determine how much coal to purchase from each of the mining companies and how it should be allocated to the generating units. What is the cost to purchase, deliver, and process the coal?

2. Compute the average cost of coal in cents per million BTUs for each generating unit (a measure of the cost of fuel for the generating units).

3. Compute the average number of BTUs per pound of coal received at each generating unit (a measure of the energy efficiency of the coal received at each unit).

4. Suppose that Duke Energy can purchase an additional 80,000 tons of coal from American Coal Sales as an “all or nothing deal” for $30 per ton. Should Duke Energy purchase the additional 80,000 tons of coal?

5. Suppose that Duke Energy learns that the energy content of the coal from Cyprus Amax is actually 13,000 BTUs per pound. Should Duke Energy revise its procurement plan?

6. Duke Energy has learned from its trading group that Duke Energy can sell 50,000 megawatt-hours of electricity over the grid (to other electricity suppliers) at a price of $30 per megawatt-hour. Should Duke Energy sell the electricity? If so, which generating units should produce the additional electricity?