1. xkcd.com Using risk to guide decision-making under uncertainty NWHA Annual Conference February 2014 Darin E. Johnson BIS Consulting

2. Upgrade of a hydro-generation facility. Two-unit plant with space for a third.  Option 1 – upgrade the existing units.  Option 2 – upgrade existing and install a third, smaller unit

3. Option 1 looks better by $3 million… …but there is still a lot of uncertainty.

4. Overlap of the curves represents the “cost to reject” an option.  The risk that we will regret selecting one option. Cost to reject Option 2 - $4.6 million. $4.6 million risk

5.  Construction cost estimates  Performance of units - future water and dispatch.  Failure rates and consequences.  Energy prices.  License, regulation.  Fish passage.  Others? Some of these we can improve, others we can’t

6. What we expect to happen: Curve narrows, but stays in the same location. What might happen: Curve narrows and moves to the right. We now prefer Option 2 Solution?: Look at all possibilities; weight them.

7. Where we are now…  Option 1 looks better, but there is a lot of overlap.  Risk from rejecting worse option: $4.6 million. Where we could be…  We do some work to reduce uncertainty for one or both options.  Risk is reduced – in this example, to $1.7 million. If we can do this work for less than $2.9 million, it is worthwhile.

8. 1.As always, spending decisions should be based on whether benefits exceed costs. 2.Develop a problem statement and put it in a cost/benefit framework as soon as possible.  Don’t worry if you’re uncertain. Focus on bounding your uncertainty – ask experts for maximum and minimum values.  Remember – information is a means to an end. 3.Compare the decision you would make today with the range of decisions you might make if you had better information. 4.Pursue further information only if it reduces cost.