Capital budgeting process for electric power utilities – an analytic hierarchy process approach

Currently, the electric power industry in the U.S.A. is undergoing substantial regulatory and organizational changes with respect to market economics as well as pollution. Under these changing circumstances, in this paper, we utilize the concepts of analytic hierarchy process (AHP) and integer programming (IP) to model the capital budgeting process under both finance and pollution considerations. In particular, first we show how a decision maker can simultaneously incorporate the hard-to-quantify factors (pollutants) as well as easy-to-quantify factors (finance factors) into a hierarchy. Next, we show how priority weights derived from the hierarchy can be used to determine the optimal set of projects to be constructed. Also, we show how the entire capital budgeting process can be performed via an illustrative numerical example. It is hoped that the comprehensive, systematic, and consistent approach shown in this paper will provide the electric power utilities an additional decision support tool in their capital budgeting process.