M

ountain States Electric Service is an electrical utility

company serving several states in the Rocky Mountains

region. It is considering replacing some of its equipment

at a generating substation and is attempting to decide

whether it should replace an older,existing PCB trans-

former. (PCB is a toxic chemical known formally as poly-

chlorinated biphenyl.) Even though the PCB generator

meets all current regulations,if an incident occurred,such

as a fire,and PCB contamination caused harm either to

neighboring businesses or farms or to the environment,

the company would be liable for damages. Recent court

cases have shown that simply meeting utility regulations

does not relieve a utility of liability if an incident causes

harm to others.Also,courts have been awarding large

damages to individuals and businesses harmed by haz-

ardous incidents.

If the utility replaces the PCB transformer,no PCB in-

cidents will occur,and the only cost will be the cost of the

transformer,$85,000.Alternatively,if the companyde-

cides to keep the existing PCB transformer,then manage-

ment estimates that there is a 5050 chance of there being

a high likelihood of an incidentor a low likelihood of an

incident. For the case in which there is a high likelihood

that an incident will occur,there is a .004 probability that

a fire will occur sometime during the remaining life of the

transformer and a .996 probability that no firewill occur.

If a fire occurs,there is a .20 probability that it will be bad

and the utility will incur a very high cost of approximately

$90 million for the cleanup,whereas there is an .80 prob-

ability that the fire will be minor and cleanup can be ac-

complished at a low cost of approximately $8 million. If

no fire occurs,no cleanup costs will occur. For the case in

which there is a low likelihood that an incident will occur,

there is a .001 probability that a fire will occur during the

life of the existing transformer and a .999 probability that

a fire will not occur. If a fire does occur,the same proba-

bilities exist for the incidence of high and low cleanup

costs,as well as the same cleanup costs,as indicated for

the previous case. Similarly,if no fire occurs,there is no

cleanup cost.

Perform a decision tree analysis of this problem for

Mountain States Electric Service and indicate the recom-

mended solution. Is this the decision you believe the com-

pany should make? Explain your reasons