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TRANSFORMER REPLACEMENT AT MOUNTAIN STATES ELECTRIC SERVICE ountain States Electric Service is electrical utility company serving several States in thc 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 incident such as a fire, and PCB contamination caused harm either to neighborig businesses or farms or to the environment, thc company would be liable for damages. Recent court cases have shown that simply meeting utility regulations does not relicvc a utility of liability if an incident causes harm to Others. Also. courts have been awarding large dam- ages to individuals and businesses harmed by hazardous incidents. If the utility replaces the PCB transformer. no PCB incidents Will occur. and the only cost will be the cost of the transformer. $85,000. Alternatively. if the company decides to keep the existing PCB transformer, then Inan- agcment estimates that there is a 5050 chance of there being a high likelihood of an incident or a low likelihood Of an incident. For thc case in which there is a high likeli- hood 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 tire will 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 approv imately S90 million for the cleanup, whereas there is an .80 probability that thc fire Will bc minor and cleanup can be accomplished at a low cost Of approximately S8 mil lion. If no tire occurs, no cleanup costs will occur. For the case in which there is a low likelihood that an inei dent Will occur. there is a .001 probability that a fire Will occur during thc life Of thc existing transformer and a probability that a fire will not occur. If a fire does occur. the same probabilities exist for the incidence Of high and low cleanup costs, as well as the same cleanup costs, as indicaled for the previous case. Similarly, if no tire occurs. there is no cleanup cost. Perform a decision tree analysis Of this pmblem for Mountain States Electric Service and indicate the recom- mended solution. Is Ihis the decision you believe the com- Pany should make? Explain your reasons, This i, W. J. and D. "using Risk 'o Manage Risk." 22. 1992):