What is the basis for taking Buy or Sell decisions by Southern Company?
Southern Company is the nation’s third largest Electric Utility firm. The company uses a computerized and automated method to generate and dispatch electricity to its customers. This automated Load dispatching method is also known as the “Early Bird” system.
The “Early Bird” continuously calculates the marginal cost of delivering additional Kilowatts of electricity to its customers anywhere in the company service area. Marginal cost can be understood as the change in total cost that arises when the quantity produced (power in this case) changes by one unit.
Sothern Company has several power generating units. Each unit is tested to see how much fuel labor and other variable inputs are required to generate electricity. In this way a continuous production function can be created. This information is then fed to the early bird; so combined with the production function along with price of input variables one can calculate the marginal cost for particular unit at whatever rate it is operating.
Now if electricity demand increases then the “Early Bird” generates more electricity, the “Early Bird” is programmed to compare the marginal cost of producing electricity in all its units. The unit with the lowest Marginal Cost is then used to generate electricity. Additionally Southern’s power system control center is equipped to forecast short term loads, thus the cost of producing electricity to power this short term load can be estimated in advance. This estimated Marginal cost is then compared with the estimated marginal cost of adjacent electric companies or firms.
If the Marginal cost of producing the same block of electricity by Sothern Company is more costly than the other firms, then Sothern Company finds it more economical to buy electricity from adjacent firms. However if the Marginal cost of producing the same block of electricity by Southern Company is less costly than the other...
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