Pricing and Expansion of a Water Supply System

Abstract

A general model for constrained optimum water pricing and capacity expansion is applied to the twin cities of Kitchener‐Waterloo (KW), Ontario. The model identifies the water price and water supply capacity, which maximizes the present value of net economic benefits over a planning horizon. Constraints on the rate of price change and financial cost recovery are included. Results for KW indicate that significant economic benefits can be achieved by jointly optimizing decisions about water pricing and capacity expansion. It is also shown that optimum policies are compatible with the goal of financial cost recovery on the part of the supply authority. The benefits of optimum pricing and capacity expansion are likely to be greatest in water supply systems which exhibit economics of scale or in cities where the rate of population growth is small.