TY - JOUR
T1 - Impact of Deterioration and Negotiation on Sewer System O&M Contracts from the Real Option Perspective
AU - Park, Taeil
AU - Kim, Byungil
AU - Kim, Hyoungkwan
N1 - Copyright:
Copyright 2012 Elsevier B.V., All rights reserved.
PY - 2012/8
Y1 - 2012/8
N2 - Operation and maintenance (O&M) service contracts for water and sewer systems have increased considerably in the United States over the last 20 years. Successful O&M contract establishment requires a reasonable estimation of the O&M service contract coupled with a reliable risk-hedging mechanism, such as a ceiling agreement. Because the accurate valuation of an O&M contract is substantially influenced by the future O&M cost, which is subject to the future performance of the system, it is crucial that contracting parties develop realistic O&M cost scenarios based on a sound deterioration model. This study provides a real option-based methodology for the valuation of O&M contracts by modeling future O&M cost scenarios using deterioration models. Using sensitivity analyses, this study also investigates how surrounding conditions and negotiation options could affect the valuation of O&M contracts. The proposed methodology is expected to assist contracting parties in developing a fair and attractive O&M service contract.
AB - Operation and maintenance (O&M) service contracts for water and sewer systems have increased considerably in the United States over the last 20 years. Successful O&M contract establishment requires a reasonable estimation of the O&M service contract coupled with a reliable risk-hedging mechanism, such as a ceiling agreement. Because the accurate valuation of an O&M contract is substantially influenced by the future O&M cost, which is subject to the future performance of the system, it is crucial that contracting parties develop realistic O&M cost scenarios based on a sound deterioration model. This study provides a real option-based methodology for the valuation of O&M contracts by modeling future O&M cost scenarios using deterioration models. Using sensitivity analyses, this study also investigates how surrounding conditions and negotiation options could affect the valuation of O&M contracts. The proposed methodology is expected to assist contracting parties in developing a fair and attractive O&M service contract.
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U2 - 10.1007/s11269-012-0059-4
DO - 10.1007/s11269-012-0059-4
M3 - Article
AN - SCOPUS:84862603282
VL - 26
SP - 2973
EP - 2989
JO - Water Resources Management
JF - Water Resources Management
SN - 0920-4741
IS - 10
ER -