In recent years, a Detroit-based utility company has seen demand for electricity exceed its generation capacity. The company, which owns hydro and coal plants, has relied mainly on gas-fired boosters and purchases from independent producers to bridge the gap. But prices fluctuate wildly on the spot market, and gas-fired boosters are so expensive that the company uses them only as a last resort. This case teaches students to build a model to analyze whether the company should sign a supply contract with an independent producer. Students consider various contract scenarios, and explore the problem from both the electric company's and the independent producer's perspectives.
Case ID: 080210