Like many businesses, energy companies face strategic decisions that require them to make significant financial commitments under conditions of uncertainty. For example, given the amount of time that it takes to site and construct a new power generating plant, electric utilities must make decisions regarding site, capacity, fuel-type, pollution control and waste disposal issues well in advance of actual need, based on highly uncertain, long range projections.

Or consider decisions involving fuel purchases, which represent a highly significant expense for an electric power generating plant. Given the impact of fuel costs, how should the company manage fuel purchases? Should the utility enter into a fixed rate supply contract for all fuel requirements? If not, for what percentage of requirements? And how can it determine the contract's optimal duration?