Investment-Borrowing Decisions in Natural Gas Transmission

Russell G. Thompson, Michael S. Proctor and R. R. Hocking
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Russell G. Thompson: University of Houston
Michael S. Proctor: Purdue University
R. R. Hocking: University of Houston

Management Science, 1972, vol. 18, issue 10, B544-B554

Abstract: The investment problem in natural gas transmission in a static sense as analyzed by Chenery [Chenery, H. B. 1949. Engineering production functions. Quart. J. Econ. 63(November) 507-531.] and Lehn [Lehn, H. C. 1943. An analysis of gaspipeline economics. Am. Soc. Mech. Engrs. Trans. (July) 445-460.] is reconsidered as a discrete time control problem using a formulation developed by Thompson and George [Thompson, R. G., M. D. George. 1968. Optimal operations and investments of the firm. Management Sci. 15(1, September) 49-56.]. In the model, the objective is to maximize, subject to constraints, the terminal value of the investment in transmission pipe and pumping capacity plus the sum of the terminal value of the net savings and the capitalized value of the dividends paid over a decision-making period of fixed length. The state variables are: pumping capacity, indebtedness outstanding, depreciated value of the transmission pipe, depreciated value of the pumping capacity, and savings. The control parameters are: the inside diameter of the transmission pipe (pipe size), the wall thickness of the pipe (thickness), initial pumping capacity, initial borrowings, and initial savings. The control variables are: investments in pumping capacity and borrowings during the period.

Date: 1972
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