A methodology for time-staged capacity expansion sensitive to short-run pricing and operational policy optimization

Abstract

A significant problem in investment planning for major facilities such as transport systems and public utilities results from the inseparability of capacity expansion decisions and operation control during expansion periods. Short-run pricing and capacity management decisions must be optimized within the context of the longer run decisions to expand productive capacity. In this paper, the time-staged capacity expansion problem is formulated as a dynamic programming problem. Each stage of the program is decomposed into a series of short-run optimization problems ahat solve for an optimal set of prices and operational control policies. The pricing problem is one of determination of a peak-load responsibility price schedule that includes future capacity costs. The operational control policies represent public policy decisions that allocate capacity to distinct categories of consumers.

The general formulation is applied to the particular problem of airport capacity expansion. This problem is characteristic of the class of public utility investment decision problems where demand is growing but is subject to considerable peaking. The output of the airport is consumed by distinct categories of consumers and is therefore subject to a variety of capacity allocation options.