- The capacity expansion investment decisions on the provision
of municipal sewerage are the central aspects of this analysis.
The purpose is to present a methodology, utilizing a dynamic demand
and supply model of sewerage, for recommending a set of values for
the investment and pricing decision variables. The outcome of the
investment decisions is an economically efficient time sequence of
capacity expansions. The pricing decisions involves a departure
from an economically efficient set of user charges, i.e. from marginal
The model consists of a cost function, i.e. amount of capacity
and variable operating factors used per period times price; a set of
production process equations transforming influent to effluent water
quality standards; and a set of factors affecting influent, cost, and
production. The factors taken into consideration are: Economies of
size in capacity expansion costs, technological change, inflation,
deterioration of capacity and economic life of capacity, discounting
to present value, time horizon of model, changes in effluent water
quality standards, and changes in the flow of influent due to an
increase in users, price elasticity of the flow of influent and
changes in water consumptive habits, formation of substitutes through
technological change, as well as rainstorm drainage and infiltration.
It is the investment decisions on timing of capacity expansions
and mix of capacity types in each expansion which are of concern.
These investment decisions must be considered simultaneously with
those on economic amortization of capacity expansion costs and economic
life of capacity, as well as use of, variable operating factors
in the production process. Furthermore consideration for pricing in
By simultaneously solving a set of necessary marginal conditions
associated with the investment decision variables and use of variable
operating factors, the timing of capacity expansions and mix of
capacity types in each expansion may be derived. With the existence
of several capacity types, several variable operating factors, numerous
feasible times for a capacity expansion, and a set of complex
equations representing the production process; the use of a simulation
analysis is imperative. Formulation of a simulation model
should be on the basis of the equations developed in this analysis.
Though the values of the decision variables resulting from a Simulation
analysis may not be optimal, i.e. minimize present value cost
subject to a production output constraint, the present value cost
for a set of feasible time sequence of capacity expansions may be
compared under various influent, cost, and production conditions.