How should electric utilities make decisions regarding whether to stock spare equipment? A risk-based approach to this question would address both the probability and the financial impact of the failure of a specific piece of equipment. A "decision tree" can be used to quantify the expected financial loss to the company as a result of: (1) the decision whether or not to stock spare equipment, (2) the probability that the equipment fails in service, and (3) the financial consequence of failure. The decision tree enables financial accounting for each scenario, showing the expense to the company of stocking spare equipment, and the expense in the event of a failure in service. It can be demonstrated that a break-even point exists, beyond which the cost associated with investment in spare equipment is financially justified. This risk-based approach gives utility operations personnel a valuable tool for decision making under unclear and uncertain circumstances.
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