Prepared by the Independent Economic Analysis Board
of the Northwest Power Planning Council:
Joel R. Hamilton, Chair
Dan Huppert, Vice Chair
Ken Boire
Ken Casavant
Lon Peters
Jack Richards
Anthony Scott
Paul Sorensen
EXECUTIVE SUMMARY
"The movement toward a more normative river ecosystem involves policy decisions that include trade-offs between salmon and important regional social and economic factors. — Steps ranging from watershed level restoration in subbasins, manipulation of mainstem flows, permanent drawdowns and dam removal should be evaluated in terms of the social and economic costs to the region." (Return to the River, PrePublication Copy. p. 7)
Rivers are a challenging arena for the economic study of natural resources, an area of study that seeks an understanding and explanation of the use, allocation, and conservation of scarce resources. Because fresh water, fish habitats, and forests are scarce, hard choices must be made. Such choices involve trade-offs between Columbia `River fish and wildlife projects versus hydropower, river navigation, and irrigated agriculture. Each mix of river uses presents a unique set of costs and benefits, with economic impacts distributed across various communities and economic sectors.
To evaluate the magnitude of costs, benefits, impacts, and the distribution of these impacts, economists study human behavior, emphasizing individual and group responses to changing economic conditions, institutions, and rules. An understanding of behavioral responses of people and institutions facilitates assessment and forecasting of economic effects of alternative projects and policies. The role of economic information is, therefore, to narrow and focus the discussion of alternatives, allowing non-economic forces to be evaluated with more clarity. If the analysis can clarify the magnitude and incidence of economic trade-offs, the decisions become clearer, but not necessarily easier. While economics does not "show the path," it does clarify important consequences of choosing alternative paths. Analysis of these consequences can suggest new and more effective ways to design and implement resource conservation policy.
The Independent Economic Analysis Board was established to review existing information and to advise the Northwest Power Planning Council, and thereby the region represented by the Council — the states of Idaho, Montana, Oregon and Washington — about economic effects of fish and wildlife recovery projects, policies and changes in the hydroelectric system. This report establishes a conceptual foundation concerning the economics of alternative Columbia River fish and wildlife recovery measures, seeking to put the economic information into perspective. The paper describes when and why economic information should influence decisions of resource policy. And it offers a frank reminder of the limitations and shortcomings of economic information.
The formal role of economics in regional fish and wildlife decisions is guided and limited by the statutes governing the Power Council. First, the Council's program must protect fish and wildlife while assuring the region an "economical" power supply. Second, the Council, when choosing among equally biologically effective measures, is to select "the alternative with the minimum economic cost." Finally, an amendment to the Northwest Power Act states the Council "shall determine whether the projects employ cost effective measures to achieve program objectives." These charges force the consideration of economics into planning for both hydropower operations and fish and wildlife preservation.
There are a wide range of economic tools and concepts that have been and can be applied to Pacific Northwest fish and wildlife issues. Some are quite straightforward, while others are more complex, controversial, often misunderstood, and sometimes misused. The simplest tool is cost analysis, which quantifies the value of things given up in the pursuit of a particular project or policy. These costs are made up of two components, the direct costs incurred by the operating agencies and the opportunity cost of foregone alternatives. When a specific project outcome or project budget is predetermined, alternative project designs or elements may be considered using cost-effectiveness analysis. A cost-effectiveness analysis identifies the least-cost method for providing a given level of output, or it determines how much output could be achieved within a given budget. A benefit-cost analysis includes the full cost analysis and devotes equal attention to quantification of project benefits. The successful application of cost-effectiveness or benefit-cost analysis depends upon a solid scientific understanding of the underlying biological and ecological processes. When the science is deficient, economic information serves to help decision-makers move toward reasonable decisions by assessing the costs of alternative projects and assessing the probable benefits of prospective outcomes.
Economic information is one set of information that informs decision-making. An understanding of the nature, strengths and weaknesses of economic information is necessary before decision-makers can correctly weigh this information along with other information in making decisions about fish and wildlife issues. The role of economic analysis is limited by at least three circumstances. First, prior commitments (property rights, contracts, legal rules, etc.) may leave only a small role for economic analysis in the decision process. Second, overarching social or ethical concerns may overshadow the economic consequences for some project decisions. Third, inadequate data and problems with estimating costs or benefits may make the results of some economic analyses so uncertain and unreliable as to obviate their usefulness. Although these constraints limit the role of economics in natural resource decisions, making it less formal or explicit, economics should not be ignored in the decision-making process. Laws and institutions that currently limit the role of economics do evolve over time, and economics can and should influence that evolution.
After developing the relevant tenets of economics, this report concludes with eight propositions that encapsulate important generalizations about the roles for economic analysis in Northwest Power Planning Council fish and wildlife decisions and for the region's planning process. The first proposition reminds us that the structure of the Pacific Northwest economy has been changing and is no longer dominated by resource-extraction industries. Growth is occurring in high technology and service industries, partly reflecting the changing values held by people in the region. Natural resources are increasingly being viewed as an asset to be preserved and enjoyed, rather than something to be exploited. However, some communities remain dependent on resource-based industries, and citizens of these communities may view themselves as losers in the value changes being witnessed in the region.
The next five propositions deal with the measurement and context of costs and benefits for decision-making. The gains and losses associated with different resource management policies vary widely across geographical and cultural landscapes. Non-market values are increasingly recognized as important components of the economic benefits. The uncertainty of ecological responses and impacts affects both the nature of and role of economic analysis in project decision-making. Short-term "economic impact" estimates usually overstate the long-term magnitude of those impacts because people and communities usually make substantial and ameliorative adjustments. The property rights and liability rules associated with river resources can either frustrate or facilitate the economic rationing of scarce resources for fish and wildlife conservation. All of these propositions help to focus the correct use of economic analysis in measuring and understanding costs and benefits in a decision.
More simply stated, important decisions should be evaluated for their long- and short-term consequences because people and economies adjust to policies and their consequences, substantially mitigating the consequences overtime. Unfortunately, short-term effects often dominate policy decisions.
Information relating to "existence" or "non-use values" should be of particular interest to the Council and the region. The value that people place on natural resources and wildlife species, even when they do not expect to use the resources directly, may be the dominant benefit when the protection of endangered species is involved. Further, information relating to property rights is important since the establishment of clear property rights wields a powerful influence, for good or ill, on the magnitude and character of economic response affecting all resources and habitats associated with the Columbia River.
The final two propositions are concerned with cost-allocation rules and the uncertainty inherent in economic activities associated with the river. Project cost-allocation rules determine who pays the costs of federal projects: Bonneville Power Administration ratepayers, all federal taxpayers, or the resource users themselves. Cost-allocation rules can affect both economic efficiency and perceived equity of an action.
We recommend that economic assessment of projects, such as benefit-cost analysis, be framed independently of the project-cost distribution, but that the economic effects of cost-allocation rules be explicitly considered in project selection and accounting. Uncertainty is an unavoidable element of the economic analysis of fish and wildlife issues, partly because the underlying physical and biological processes are poorly understood. When the underlying processes are poorly understood the ecological outcomes of projects or policies will be uncertain, and the economic analysis should reflect that uncertainty. Individuals and agencies commonly deal with uncertainty, but this is costly, and opportunities to reduce these costs should be fully considered in fish and wildlife policy development.
Finally, the goal of this report on river economics is to provide information useful to the Northwest Power Planning Council. While the information presented here is the conceptual foundation of economic analysis and is consistent with the technical aspects of economic theory, we hope that our attempt to avoid the technical language of economics makes this document more directly helpful to Council members and the interested public.
River Economics: Evaluating Trade-offs in
the Columbia River Basin Fish and Wildlife Program
"The movement toward a more normative river ecosystem involves policy decisions that include trade-offs between salmon and important regional social and economic factors. " Steps ranging from watershed level restoration in subbasins, manipulation of mainstem flows, permanent drawdowns and dam removal should be evaluated in terms of the social and economic costs to the region." (Return to the River, PrePublication Copy. p. 7)
1. Introduction
The economic study of natural resources seeks an understanding and explanation of the use, allocation, and conservation of scarce resources. Because fresh water, fertile land, fish habitat, forests, minerals, and energy are scarce, we have limited ability to produce related goods and services, such as municipal and industrial water supply, irrigated crops, commercial and recreational fish, wood products, and electricity. Seeking more of one use requires sacrifice of other uses. Where the natural resources are consumed or altered in producing commodities, the principle economic concerns are the costs of production, and the magnitude and distribution of economic benefits. Each alternative mix of river uses presents a unique mix of costs and benefits. Recent economic analyses of Columbia River hydropower and wildlife projects examine the economic trade-offs among hydropower production, river navigation, irrigated agriculture, river recreation, salmon fishing, and preservation of unaltered landscapes. The balance among these uses of the river is constantly debated and re-designed, with recent emphasis being focused on preservation of threatened and endangered fish species.
Economists study more than benefits and costs of river projects, and trade-offs among competing uses. They also study human behavior. To understand the consequences of policy, economists study individual and group responses to changing economic conditions, institutions, and rules. For example, residential and industrial electricity consumption responds to changes in the retail price, to changes in regional income and employment, and to changes in technology for insulating buildings. Recreational fishermen respond to changes in fish abundance, in accessibility of fishing sites, and in travel costs. Agricultural irrigators modify cropping and harvesting plans in response to changed commodity prices, weather predictions, and costs of inputs. Individual decision-makers also respond to changes in rules, and laws, and especially to changes in the institutional arrangements that relate to the ownership and use of property. As a consequence, economic studies of resource management often focus on the pattern of incentives and disincentives created by property institutions, subsidies and taxes, and regulations on the use of water, fish, land or other public resources. Anticipating and predicting behavioral responses is a difficult task, requiring substantial attention to concept, data collection, and statistical interpretation. Analysis of these responses can suggest new and more effective ways to design and implement resource conservation policy.
The Independent Economic Analysis Board was established to review existing information and to advise the Northwest Power Planning Council about economic effects of fish and wildlife projects and changes in the hydroelectric power system. This paper is intended to establish a conceptual foundation concerning economics of Columbia River fish and wildlife alternatives. In particular, it explores the economic effects of changes in river projects; and the role of economics in fish and wildlife decisions as recommended in the introductory quote from "Return to the River." Rather than produce a manual of detailed rules for project assessment — plenty of those are available, and the Council staff has prepared an excellent guide to economic methods — this report seeks to help place the economics information into perspective. We need to establish why and when economics information should influence hydropower or fish and wildlife decisions and to understand the limitations and shortcomings of economics information. The remainder of this introduction summarizes our main conclusions about these two questions and ends by offering eight propositions that encapsulate what the Independent Economic Analysis Board finds to be the most important generalizations about the roles for economic analysis in the Northwest Power Planning Council's planning process. The same principles would apply to decisions of other agencies, and to proposals by nongovernmental organizations. Subsequent sections of this report elaborate on those propositions.
The Formal Role of Economics in Fish and Wildlife Decisions
Economic analysis of river development and management before the 1970s focused on the assessment of federal and local hydropower, navigation, and irrigation projects. During the 1970s, more attention was given to the economic values of fisheries and unaltered rivers. More recently, as competition for scarce resources continued to grow, the role of economic analysis has expanded to include more explicit evaluation of fish and wildlife preservation and recovery. The Council needs a systematic approach to economic analysis of alternative fish and wildlife measures to meet its obligations under the Northwest Power Act.
The Council has long used economics in its hydropower planning and decision-making roles. Now, in order to reconcile hydropower operations with fish and wildlife preservation, the Council must extend its use of economics in the following ways.
First, under the Northwest Power Act, the Council is charged to develop a Columbia River Basin Fish and Wildlife Program that will "protect, mitigate and enhance fish and wildlife affected by the development, operation, and management of the [the basin's hydroelectric] facilities while assuring the Pacific Northwest an adequate, efficient, economical, and reliable power supply." The Council must be able to assure that the program guarantees the region an "economical" power supply.
Second, if "equally effective alternative means of achieving the same sound biological objective exist," the Council is to include in the program "the alternative with the minimum economic cost."
Third, a 1996 amendment to the Northwest Power Act provides that when making project funding recommendations to the Bonneville Power Administration to implement the Council's Columbia River Basin Fish and Wildlife Program, the Council "shall determine whether the projects employ cost-effective measures to achieve program objectives."
The logical role of economic analysis, described here, is not limited to decisions of the Northwest Power Planning Council. All federal, state, and local agencies should follow analogous principles. The analysis of the Snake River drawdown under the Lower Snake River Juvenile Salmon Migration Feasibility Study, and fisheries policy proposals would benefit from the same analytical framework.
Tools of Economic Analysis
These official requirements for analysis correspond roughly to three ways of presenting economic consequences of fish and wildlife projects. The simplest is acost analysis, which calculates the economic costs of a particular project policy. These costs are made up of two components, the direct costs incurred by the operating agencies and the opportunity costs of foregone alternatives. A project that converts a free-flowing stream to a reservoir for hydropower and navigation consumes valuable inputs (labor, energy, materials, land) and sacrifices other uses of the stream (whitewater recreation, certain types of fishing, a "natural" landscape). When the sacrifices involve trading recreation, aesthetics, or cultural tradition, the process of estimation is especially challenging, often involving surveys of users to determine how people will react to or place value on the changes.
When a specific project outcome or project budget is predetermined, alternative project designs or elements may be considered using cost-effectiveness analysis. A cost-effectiveness analysis identifies the least cost method for providing a given level of output or it determines how much output could be achieved within a given budget. For example, The National Marine Fisheries Service sets jeopardy standards for survival of endangered salmon. Survival standards are met if the projected probability exceeds 0.7 that spawning abundance will exceed a pre-defined survival threshold over 24 or 100 years. Cost-effectiveness analysis could identify the lowest cost project that meets these standards. If there are two projects with an equal chance of meeting the jeopardy standards, the decision is simple — choose the least-costly alternative. If there are several inter-dependent alternatives (such as artificial propagation, habitat restoration, harvest management, flow augmentation, and structural devices), the cost-effectiveness analysis would seek to identify the costs and biological effectiveness of relevant mixtures of these projects. This would facilitate selecting the mix of projects that optimizes biological output within a limited budget. This latter technique is known as incremental cost-effectiveness analysis.
A benefit-cost analysis includes the full cost analysis and devotes equal attention to quantification of project benefits. Being the opposite of costs, the benefits reflect the increased value of market goods and services and increased value of non-market recreational, esthetic, and cultural values attributable to a project. For a river development project, the benefits often include the value of enhanced agricultural harvests (for irrigation projects), reduced flood damage (for flood control projects), increased hydroelectric energy supply, and enhanced river navigation. For a habitat restoration project, the benefits would include improved recreational and commercial fishing, improved aesthetic values in riparian areas, and value of improved water quality. Benefit-cost analysis is commonly summarized in the form of a benefit-cost ratio, with a ratio of greater than 1 signaling the economic advisability of the project.
The successful application of cost-effectiveness or benefit-cost analysis depends upon existing scientific understanding of the underlying processes. Hydrology, river ecology, and engineering help us to understand what is feasible to do, economics helps us to understand some human consequences of choosing among the feasible alternatives. When the science is deficient, an economic assessment cannot fill in the gaps. But economics can help decision-makers move toward reasonable decisions by assessing the costs of alternative projects and assessing the benefits of prospective outcomes.
Economic analysis cannot predict in detail all the economic consequences of changes in river management because the linkages between the economy and ecosystem and the many market responses to those changes can be very complex. Nevertheless, economic analysis can address some major concerns associated with proposed changes in the system: What systematic changes in industrial and agricultural sectors will result from changing policies? How will these changes affect employment and incomes in specific communities? Will the general economic welfare of the region or nation likely rise or fall as those in the region balance and re-balance the pattern of economic production? How do legal requirements and historical commitments affect the menu of management options and at what cost in terms of economic well-being?
Limitations to the Role of Economics
The role of economic analysis in fish and wildlife decision-making is limited by at least three circumstances. First, prior commitments may leave only a small role for economic consequences in the decision process. Such commitments are created, for example, through property rights, contracts, and legal rulings. Second, overarching social or ethical concerns may overshadow the economic consequences for some project decisions. Third, inadequate data and problems with estimating costs or benefits may make the results of some economic analyses so uncertain and unreliable as to obviate their usefulness. It is important that decision-makers be clear about each of these circumstances, because it is unwise to spend substantial amounts on economic analysis when unnecessary and it is equally unwise to ignore economic consequences for lack of understanding or ability to communicate these ideas.
The laws governing decision processes of the Northwest Power Planning Council, the operating agencies (Bonneville Power Administration, U.S. Army Corps of Engineers, U.S. Bureau of Reclamation), and fish and wildlife agencies create legal restraints on their actions. The Endangered Species Act, for example, prohibits economic consequences from influencing the decision to list a species as threatened or endangered. The Endangered Species Act provides very little room for considering economics in determining the critical habitat for endangered species. And it reserves decisions not to protect and recover an endangered species to a Cabinet-level Endangered Species Committee. While that committee may decide against species protection if the economic consequences are too burdensome, it has never actually decided against species protection. Similarly, the treaties signed between the U. S. government and American Indian tribes in the Pacific Northwest create certain legal obligations on the government to provide opportunities for salmon fishing and other traditional fishing and hunting activities. Some legal scholars conclude that economic consequences of carrying out these obligations (benefit-cost analysis, cost-effectiveness analysis) are irrelevant in the face of historic rights and congressional intent. And the federal courts have focused attention on fishing rights and procedural issues rather than economic trade-offs.
While these legal constraints do limit the strength of economic analysis in decision processes, they do not eliminate its relevance. When there are alternative means of achieving species protection or of providing treaty-guaranteed opportunities, cost-effectiveness analysis can be useful. Further, the complex bargaining among agencies and the in-depth analysis of alternative systems operations that accompany decisions for the Columbia River Hydroelectric System often do use economic information.
Second, there is a conflict of "values" that, beyond legal and procedural issues, reflects a fundamental conception of nature and humankind's role in nature. The existence of disparate ethical stances complicates the economic analysis of the fish and wildlife program and muddies the communication of that analysis to the public and decision makers. Biocentric ethical views challenge the relevance of economic analysis (or any other human-centered view of policy) for fish and wildlife projects, as they view human concerns as no more important that those of other species and consider the economists? focus on human preferences and economic values to be immoral. When fish and wildlife preservation competes with industry and agriculture for use of the river and its habitats, these views raise broader moral issues and fuel a social competition between environmental protection and established economic interests. Between these opposing views is the more moderate view that tries to reconcile economic concerns and goals with the longer-term social goal of species conservation.
Third, quantitative economic assessments suffer from perceptions of inaccuracy or unreliability when analytical techniques have been insufficiently developed to inspire wide support, and when the scientific information supporting the economic assessment is inadequate or controversial. Examples of these problems are easy to find in the Columbia River system. Much of the economic value derived from species preservation and habitat conservation is derived from amenities, or aesthetics or other non-market expressions of value. The method for estimating such values — the contingent value method — uses survey techniques and statistical models that are not fully understood or accepted even in the economics profession. Hence, the influence of such information is often blunted by controversy. Similarly, assessment of species protection actions requires that scientists understand and quantify biological consequences of alternative projects and restoration strategies. Much of the research evaluating the effects of flow rates, fish passage devices at dams, and smolt transportation in the Columbia River raises questions that cause scientific controversy and blunt the influence of that research.
Finally, even when economic issues are clearly significant, sufficient data is available, and procedures encourage consideration of economic trade-offs, the economic analysis may fail to make a clear statement about issues and problems of interest to decision-makers. To be successful in both communicating and focusing the economic analysis for decision-makers, the work must be done in consultation with decision-makers (the Council, Indian tribes, and state and federal agencies), allied technical analysts (Independent Scientific Review Panel or Independent Scientific Advisory Board), and key regional interest groups. This report aims to improve the communication of economics information by providing a framework for understanding and gauging the economic dimensions of fish and wildlife planning in the Columbia Basin. This should facilitate the broader discussion of economics in the planning process, while clarifying the nature of trade-offs between salmon conservation and other economic interests in the Pacific Northwest region.
Eight Propositions Regarding the Economics
of the Columbia River Basin Fish and Wildlife Program
Proposition 1. The Pacific Northwest's natural resources — rivers, forests, minerals, water, and fish and wildlife — provide raw materials and energy for economic development, but, in some communities, the natural landscape supports the economy by attracting new industries, retired people, and outdoor recreation.
Proposition 2. The economic gains and losses caused by fish and wildlife projects may be spread unevenly across the region. Like the river developments of past decades, fish and wildlife projects will create pockets of distinctly negative and positive effects, raising issues of economic fairness.
Proposition 3. Economic values that are not reflected in markets, such as recreational and amenity values of wildlife and their habitats, may be a major part of a project's economic benefit. Hence, despite the difficulty of estimating non-market values, identification and weighing of these values may be crucial to rational fish and wildlife project selection.
Proposition 4. Cost-effectiveness analysis relies upon definitive scientific information about the biological effects of project alternatives. When competing scientific theories and interpretations are unresolved, great uncertainty surrounds the biological effects and ultimately the evaluation of cost-effectiveness. Even with a scientific consensus on biological effects, the analysis must deal with effects stretching over long periods of time and subject to statistical risks.
Proposition 5. When a regional economy is disturbed by a policy change or new project, the economy goes through an adjustment process involving changes through space and time. Failure to account for peoples' ability to adjust to a disturbance, or for the changing opportunity costs as resources move between uses and regions, can distort estimates of benefits or costs of a project.
Proposition 6. Property rights for goods and services exchanged in markets create economic incentives that play a crucial role in fish and wildlife policy. Careful structuring of key property rights can facilitate the economic rationing of scarce resources for fish and wildlife conservation. Greater reliance on market processes depends upon the creation of explicit rights for water, salmon and other wildlife in the Columbia Basin.
Proposition 7. Cost allocation rules are used to assign responsibility for funding multipurpose river projects. The allocation rule may not affect a benefit-cost analysis, which accounts for aggregate benefits and aggregate costs, but it does distribute the burden of project costs among users and taxpayers. Further, as individuals and agencies make decisions that respond to costs, cost allocation rules have a potent influence on the net project benefits.
Proposition 8. Uncertainty about the economic consequences of fish and wildlife projects can cause people to make inappropriate and costly decisions. Opportunities to reduce the "costs of uncertainty" should be fully considered in fish and wildlife policy development.
Proposition 1. The Pacific Northwest's natural resources — rivers, forests, minerals, water, and fish and wildlife — provide raw materials and energy for economic development, but, in some communities, the natural landscape supports the economy by attracting new industries, retired people, and outdoor recreation.
The history of human settlement and economic development is shaped by availability of resources, human technology, and culture. Historian Richard White notes that people in the Columbia River Basin have always worked and altered the rivers to meet their needs. On a small scale, the earliest inhabitants of the Columbia Basin transformed plants, fish, roots and game animals into foodstuffs, clothing, weapons and shelter. Fishing sites were modified via construction of weirs, traps, and platforms. In the early 19th Century, a native population of 61,000 people in the Columbia Basin consumed an estimated 22.3 million pounds (Hewes 1947) to 41.8 million pounds (Shalk 1987) of salmon per year. As native cultures were overtaken by western industrial culture, engineering technologies were applied to divert rivers for irrigation of arid lands, and to impound rivers behind dams for flood control, navigation, and hydroelectric power production. Federal and local river projects improved river transportation, facilitated agricultural irrigation projects, protected flood-prone areas, and generated low-cost electricity. Populations in rural and urban areas grew. Later, as elsewhere, economic development in the Columbia Basin led to increasing productivity in agriculture, followed by reduced farm populations and increased urbanization. Growth in manufacturing was driven by access to raw materials, to Asian trade routes, and to consumer markets for products. Industries were also attracted by subsidies, cheap land, and government-supplied services. For example, the aluminum smelting and aircraft industries were attracted to the region in part by low-priced electrical power available from the Bonneville Power Administration.
Historians, journalists and policy advocates writing on the economic development of the Columbia River Basin focus on this conversion of free-flowing rivers into impoundments, channels, and industrial sites as a major cause for the decline of salmon populations in the basin. Some claim that the river was destroyed, the salmon sacrificed for short-run greedy interests. In contrast, White's history shows that when the big federal dams were built, beginning in the 1930s, the social agenda was just the opposite of greed. Cheap electricity was made available to rural and urban residents alike. Small farmers were to become self-reliant and prosperous. Thinkers and writers of the progressive era saw these river projects as a democratization of American's economic wealth. It was an optimistic and idealistic program, consistent with Lewis Mumford's vision of a neotechnic society in which hydropower "would purify polluted industrial cities "promote independence and decentralization — and free human labor and nature." The public objectives of these projects were anything but greedy and self-serving.
In the Columbia Basin, perhaps more than in other regions in the United States, the economy was shaped by investments in federal, state, local and private dams and irrigation projects. Since the 1930s, some 255 federal and non-federal dams have been built in the basin. Federal agencies built 30 major multipurpose projects, 18 of which are mainstem dams on the Columbia and Snake rivers. Just as the location of fish, wildlife, and native plants shaped the economy of indigenous people, the river projects had a guiding influence on the growth and location of towns, farms, and manufacturing industries.
In recent decades, economic growth in the Pacific Northwest has shifted from the traditional farming, forestry and mining sectors to focus on services, construction, and finance. As indicated in Figure 1 and the supporting Tables, income from farming decreased in absolute value between 1969 and 1995, and farming's share of regional income fell from 4.6 percent to 1.2 percent. While income earned in mining increased slightly over the same period, the share of regional income from mining fell from 0.5 percent to 0.3 percent. Similarly, while income from manufacturing increased, its share of regional income fell from 18.8 percent in 1969 to 12.1 percent in 1995. In contrast, construction, agricultural services, finance, and other services show increased shares of regional income over that 26-year period.
The interior Columbia Basin sub-region (defined here as counties of Idaho, western Montana, and Oregon and Washington east of the Cascade Mountains) would be expected to differ from the Coastal part of region because it is more agricultural and natural-resource based. However, the interior experienced similar trends as the Pacific Northwest region as a whole. The fastest growing sectors in the interior were agricultural services, financial services and other services, and real estate (Table 2).
Another major trend in both the Pacific Northwest and the interior Columbia Basin sub-region is a substantial increase in non-labor incomes, which includes dividends and "transfer payments" (private pensions and government payments like social security). Much of this transfer income represents a return from past investments and saving (dividends and interest), pensions, and rents on property. The increase in proportion of incomes from this category means that a larger fraction of the population is living off its capital, a trend associated with an aging population. Increased services and non-labor incomes means that there is a growing fraction of the population (working and non-working) that is not tied to location by the need to obtain raw materials, to work the land, or to reside near jobs in urban areas.
Further, William Conerly declares that "There is less "stuff" in the stuff that we buy today. Wood products, for instance, used to mean plywood and dimensional lumber. Today it means oriented strand board, I-beams, trusses and other engineered products. Less of the total value of the product comes from wood, and more of the value comes from engineering."This helps to explain why more and more of the total value of production, and personal income generated, occurs in the amorphous category "services" rather than in manufacturing, agriculture, and transportation sectors.
In accordance with these trends, regional economic development is focusing more on attracting footloose industries — firms that are not closely tied to natural resources for use in production, to fertile land, to bulk supplies of hydropower, or to river transportation. These include financial services, high-technology industries, tourism, and retirement communities. To some degree, firms in these industries can locate where the workers prefer to live, and the workers often prefer areas with clean environments and rivers, forests, and fish for recreation. Some economists in the Pacific Northwest have declared that "in many instances, the highest-value use of a forest, river, or other resource will be to protect and enhance it so that it reinforces the region's natural environment because doing so also will strengthen one set of forces that is creating new jobs and higher incomes."
But the attraction of natural environments is only one of several major forces. A number of other important factors — such as tax policy, transportation networks, local markets for products, and the quality of the local workforce — continue to influence the location choices of firms. Many regional economists conclude that a clean and natural environment is replacing natural resource production as a source of economic growth.Balancing the two competing visions of the economic future — one based on traditional resource uses and manufacturing, the other focused on environmental amenities and protection — should be a major theme in fish and wildlife planning. Economics information can help to identify where and under what circumstances environmental protection or river development is economically more beneficial.
Resource based, or extractive industries were once a dominant economic force in the Pacific Northwest. Industries such as lumber and wood products, paper, agricultural products and, fisheries were the focal point of economic policy and concern. In 1970, these industries accounted for half of the region's manufacturing employment. As described above, they are still important activities, especially in small communities where they may be the main source of employment and a way of life. However, the largest manufacturing sectors in this region are now the high technology and transportation equipment sectors. In addition, the non-manufacturing or service sector accounts for the bulk of employment in the region. A high quality environment and recreational opportunities are seen as important qualities that make the region an attractive location for high technology, service, and recreational industries. Many communities are also attempting to develop a diversified portfolio of jobs, melding traditional resource businesses with recreation or amenity-driven opportunities. The economic interest of the region is shifting toward preservation of these amenities. During this transition, both extraction and preservation are important economic concerns, and that creates substantial conflict within the region regarding appropriate resource policies.
FIGURE 1
FIGURE 2
Table 1. Changes in the Pacific Northwest Economy, 1969 - 1995. Includes Washington, Oregon, Idaho, and Montana. All dollar values are in billions of 1995 dollar equivalents.
| 1969 | 1995 | 1969-95 |
| Category | Billion $ | Share | Billion $ | Share | % Change |
| Total Personal Income | $106.9 | 100.0% | $235.0 | 100.0% | +119.8% |
| Farming | $ 4.9 | 4.6% | $ 2.8 | 1.2% | -42.6% |
| Agric. Services | $ 0.61 | 0.6% | $ 2.1 | 0.9% | +246.7% |
| Mining | $ 0.51 | 0.5% | $ 0.67 | 0.3% | +31.6% |
| Construction | $ 5.8 | 5.4% | $ 11.4 | 4.9% | +96.7% |
| Manufacturing | $ 20.1 | 18.8% | $ 28.5 | 12.1% | +41.8% |
| Transportation,Utilities, and Communications | $ 6.4 | 6.0% | $ 11.4 | 4.8% | +77.9% |
| Wholesale Trade | $ 5.2 | 4.8% | $ 10.9 | 4.6% | +110.5% |
| Retail Trade | $ 10.1 | 9.4% | $ 17.4 | 7.4% | +72.0% |
Finance, Insurance, and
Real Estate | $ 3.9 | 3.7% | $ 9.4 | 4.0% | +135.7% |
| Services | $ 11.7 | 11.0% | $ 43.1 | 18.3% | +267.2% |
| Government | $ 15.8 | 14.8% | $ 28.3 | 12.0% | +78.6% |
| Dividends | $ 15.2 | 14.3% | $ 41.4 | 17.6% | +171.5% |
| Transfer Payments | $ 10.2 | 9.5% | $ 39.3 | 16.7% | +285.9% |
Source: Regional Economic Information System (REIS).
Table 2. Changes in the Interior Columbia River Basin, 1969 - 1995. Includes selected counties from eastern Washington and Oregon, Idaho, and western Montana. All dollar values are in billions of 1995 dollar equivalents.
| 1969 | 1995 | 1969-95 |
| Category | Billion $ | Share | Billion $ | Share | % Change |
| Total Personal Income | $ 29.9 | 100% | $ 62.8 | 100.0 % | % |
| Farming | $ 3.0 | 10.2% | $ 1.8 | 2.8% | -42.0% |
| Agric. Services | $ .18 | 0.6% | $ .58 | 0.9% | +215.1% |
| Mining | $ .38 | 1.3% | $ .50 | 0.8% | +31.6% |
| Construction | $ 1.7 | 5.6% | $ 3.3 | 5.2% | +95.9% |
| Manufacturing | $ 3.9 | 12.9% | $ 6.7 | 10.7 % | +74.4 % |
| Transportation,Utilities, and Communications | $ 1.7 | 5.7% | $ 2.7 | 4.3% | +57.4% |
| Wholesale Trade | $ 1.2 | 4.1% | $ 2.3 | 3.6% | +85.1% |
| Retail Trade | $ 3.0 | 10.0% | $ 4.8 | 7.6% | +59.4% |
| Finance, Insurance, Real Estate | $ 841 | 2.8% | $ 1.8 | 2.9% | +115.5% |
| Services | $ 3.4 | 11.5% | $ 10.5 | 16.7% | +203.8% |
| Government | $ 4.2 | 14.4% | $ 8.0 | 12.8% | +90.4% |
| Dividends | $ 4.1 | 13.7% | $ 10.8 | 17.2% | +164.3% |
| Transfer Payments | $ 3.1 | 10.3% | $11.8 | 18.8% | +282.3 % |
Proposition 2. The economic gains and losses caused by fish and wildlife projects may be spread unevenly across the region. Like the river developments of past decades, fish and wildlife projects will create pockets of distinctly negative and positive effects, raising issues of economic fairness.
The recent trend away from natural resource development and toward footloose industries has not affected all communities equally. The economy of the Pacific Northwest remains largely concentrated in the Puget Sound-Willamette Valley sub-region. Some communities on the east side of the Cascade Mountains have experienced significant growth in footloose industries during recent decades (Bend, Oregon; Idaho Falls and Boise, Idaho; Spokane, Washington). But many other communities remain dependent upon agriculture, forestry, mining and manufacturing. The disparity in economic dependence and prosperity among these communities needs to be considered in evaluating the economic consequences of fish and wildlife policies that have substantial impacts on the use of natural resources. It is not correct to conclude that the expansion of footloose industries will supplant and negate the importance of natural resources and river projects in all communities of the region. While some local economies have come to use the surrounding landscape more as an amenity or as a recreational resource, others continue to depend upon the land, forests, minerals, and water for basic commodity production.
While environmental conservation and fish habitat protection is of increasing importance to the regional economy, an economic assessment of fish and wildlife programs should recognize both sides of this issue. The hydroelectric system provides about two-thirds of the region's electricity supply, even in the driest years, at a lower cost and with less air and water pollution than would occur with thermal energy plants. Commercial water navigation on the Columbia River is an inexpensive and energy-efficient means to transport grain and other bulk products (e.g., pulp, paper, peas and lentils, hay, and other forest and agricultural products) from producing areas in the basin to Portland for export overseas. More than one-third of the wheat and barley arriving in the Lower Columbia for export comes via barge down the Columbia/Snake river system. Most of the rest comes by rail. Irrigation projects sustain farms on approximately 7.3 million acres of arid land. The largest concentration of irrigated agricultural acreage is in Idaho, but there is about the same amount in eastern Washington and Oregon. Nearly all of the region's production of potatoes, sugar beets, hops, fruit, vegetables and mint is from irrigated lands, as well as a large share of hay and grain production. Municipal and industrial water supply systems are also an integral part of the Columbia River system.
The system of dams has also created recreational opportunities in the many reservoirs. Recreational fishing for salmon, steelhead, and other types of fish and hunting for wildlife occur throughout the basin. Recreational activities support local businesses, such as motels, eating and drinking establishments, tackle shops, and guide services. Flood control in the Columbia River system protects communities as far downstream as Portland, Oregon. But, negative cultural and environmental effects accompany these positive economic effects of Columbia River development. Of particular note, are the negative economic effects on commercial, recreational, and tribal fishing for salmon and steelhead due to the declining populations of those species.
Agriculture and the food processing industry still remain a significant economic sector throughout the Columbia River Basin. As shown in Figure 3, this sector represents more than 5 percent of the total personal income in several counties (and more than 15 percent of income in some counties) in Washington, Oregon, Idaho and Montana, especially in those communities located along the Columbia and Snake rivers. In addition to farming, the value-added food processing industry has developed around irrigated lands, especially potato and vegetable processing plants in eastern Washington and Oregon and in Idaho. However, between the years 1980 and 1995, the share of personal income generated by agriculture and food processing has declined in most counties in the four-state Pacific Northwest region. As shown in Figure 4, only a handful of counties have experienced an increase in the share of income from the agricultural sector.
Many counties in the Columbia River basin have significant resource extraction and production sectors. As shown in Figure 5, the personal income from these extraction industries continues to represent 5 percent or more of total personal income in numerous rural counties. Many of these activities are supported in part by the river system:
High-energy users, such as aluminum smelters and chemical plants, were attracted to the area by low cost energy, and
Forest products processing (e.g., lumber, pulp, paper, and other products) is still a significant industry in several rural Pacific Northwest counties.
Through 1995, the share of income from the extraction industries has remained remarkably stable in most counties. (See Figure 6)
Where local economies are dependent upon using the river and surrounding resources, improving fish and wildlife by retarding other uses of the land and water may be viewed as an economic threat. The taking of economic livelihoods from traditional communities through regulatory action or resource planning is often viewed by those communities as unfair and unwarranted. The clash of values and objectives between traditional commodity production and environmental preservation cannot be resolved by the analysis of economic effects. But the estimated magnitudes and spatial distributions of economic impacts can be a useful guide to policy-makers.
For example, the town of Orofino, Idaho, supports outdoor recreation visitors to the Dworshak reservoir. In 1990 and 1991, Dworshak recreation sites attracted about 130,000 visitors per year for fishing, boating, camping, and other activities (Northwest Economic Associates 1995; p. 19). These visitors spent about $2.1 million per year on lodging, food and beverages, and other goods and services in Clearwater County. Drawdowns of Dworshak reservoir in 1992-1994 reduced the attractiveness of many recreation sites and presumably caused the subsequent reduction in numbers of visitors to the reservoir sites. The estimated drop in local business sales in Clearwater county during 1992-1994 was $670,000; and this caused an estimated loss of 20 local jobs (p. 25). Because Clearwater County had at least 4,300 jobs overall, this is a small percentage loss. But the negative economic impact of revised Dworshak reservoir operations on Orofino needs to be balanced against expected increases in recreational expenditures and local economic impacts following increased salmon and steelhead populations in Idaho.
FIGURE 3
FIGURE 4
FIGURE 5
FIGURE 6
Proposition 3. Economic values that are not reflected in markets, such as recreational and amenity values of wildlife and their habitats, may be a major part of a fish and wildlife recovery project's economic benefit. Hence, despite the difficulty of estimating non-market values, identification and weighing of these values may be crucial to rational fish and wildlife project selection.
The standard of living enjoyed by people in the Columbia Basin — the economic benefits of living here — derives from the broad array of goods, services, and experiences enjoyed by people living here. The most easily measured and widely understood are the benefits of goods and services purchased in markets. Supplementing market goods are goods and services provided through government programs, goods that are "purchased" with tax payments. The benefits from both privately purchased goods and governmentally supplied goods are reflected in the level of personal income enjoyed in the region, as summarized in Propositions 1 and 2. Personal income is generated by literally all market and government activities — including the traditional resource industries, the footloose industries, recreational services and eco-tourism, government and scientific research. So, in comparing two recovery projects that compete for use of the river or other resources, one way to judge the better project would be by the amount of net income generated for the region or the nation. However, the value of recreational uses of nature and the aesthetic values associated with preservation of natural environments are not normally accounted for by economic income. For example, the recreational and other non-market values for a catch-and-release wild trout fishery may exceed the values for a hatchery-based, put-and-take trout fishery. The fact that people are employed and income is earned in the hatchery program does not, by itself, signal economic superiority. A project that employs fewer people, and generates less income, could be superior if it provides enough value through non-market uses of resources, or if it satisfies the public's desire to preserve natural environments and species for the enjoyment of current and future generations. To estimate these non-market values is a challenging but necessary element of economic project evaluation.
People enjoy recreation and leisure activities in both constructed and natural environments. Economic benefits flowing from use of the river and riparian habitats for boating, fishing, picnicking, and other activities are not accounted for by income statistics. Measurement of recreational benefits usually follows a procedure called the "travel cost method," in which participation in outdoor recreation is observed along with variations in cost of taking recreational trips and characteristics of those trips. The outcome of a travel cost analysis is an estimated demand curve for recreation. Properly conducted, a recreational benefit evaluation is conceptually equivalent to a market benefits analysis for a standard good. For example, the System Operation Review (Appendix O, p. 3-27) summarized a series of recreational salmon fishing studies completed between 1983 and 1992. The estimated net benefits (i.e. benefit to anglers minus out-of-pocket costs) per day of anadromous fish angling from these studies averaged $62.90. Recreational values vary widely across locations, as illustrated in Olsen, et al. (1991) who estimated recreational values for salmon and steelhead fishing ranging from a low of $9.58/day for steelhead fishing in coastal rivers to $111.46/day for salmon fishing in the Columbia River Basin.
Another category of economic benefit comes from "existence values" (also known as "non-use values," or "passive use values"). This is value to people of simply knowing that species are preserved, habitats protected, and resources conserved. In principle, the existence value could be held for any object or condition that people are attentive to, including hydroelectric dams, wild salmon, reservoirs, Caspian terns, democratic government, etc. Generally, we expect existence values to be greatest for unique "public goods," such as the Grand Canyon, endangered species, and clean air. Hence, while existence values may pertain to almost all natural and man-made objects, they are usually given serious consideration only when managing unique resources or making irreversible decisions. For example, existence values were estimated for natural features of Prince William Sound as part of the natural resources damage assessment for the Exxon Valdez oil spill.
Recent economic studies demonstrate convincingly that people do place high value on some natural assets. For example, they are willing to pay to protect endangered salmon, to restore rivers, and to protect areas with unique natural features. The existence values expressed in these studies represent an amount that people are willing to sacrifice even if they do not intend to visit or use the protected areas or natural features. Research to quantify these values requires rigorous, and often expensive, surveys and field data collection methods. The existence value for a doubling of the Columbia River salmon runs from a baseline of 2.5 million fish/year under the Northwest Power Planning Council's 1987 Columbia River Basin Fish and Wildlife Program was estimated by Olsen, Richards, and Scott (1991). Based upon survey responses from over 2,000 regional residents, the net benefit for doubled salmon runs per household is estimated to be $26.52 per year. If we extrapolate this over all 3.4 million Pacific Northwest households we get roughly $90 million per year. Loomis (1996) estimates the value of removing two dams and restoring the Elwha River for salmon production is worth about $138 million/year to residents of Washington. But the procedures for estimating non-market values are relatively new and still developing, and some of the theory remains controversial.
Economists and others have debated whether existence values are conceptually valid and whether the methods of estimating these values are accurate. The conceptual argument concerns whether values that derive from people's expressed feelings about the environment, not from observed expenditures and behavior, are a useful and logical extension of standard and accepted economic values. Rosenthal and Nelson (1992), for example, argue that existence values may stem from basic social disagreements that economists are not capable of resolving, and that existence values apply to such a wide range of things (from democratic institutions, to equal opportunity, to preservation of species and habitats) that we could never adequately incorporate them into a benefit-cost analysis. Proponents note that values associated with the existence of natural assets and special social institutions are logically equivalent to values for marketable goods. Existence values reflect individual preferences as constrained by income. They represent the willingness of individuals to sacrifice income in exchange for an increased amount of the public good or social condition. As with standard economic goods, the magnitude of existence value depends upon the individual's income, the amount of the valued good available, and the availability of close substitutes for the good (Kopp 1992). While opponents claim that we can never adequately incorporate the values for all items having existence value, proponents of existence value hold that economists have a duty to incorporate as many relevant values as possible in the information used to make decisions.
Because existence value estimates depend upon surveys seeking responses to hypothetical questions, estimated existence values are subject to problems of inadequate survey sampling and methodology. The wording of questions can slant the results, and the selection of a representative sample of the public is difficult and expensive to accomplish. Hence, the accuracy of values, such as those estimated by Loomis and by Olsen, et al., are often challenged. One problem, called "embedding," occurs when survey respondents express broad values associated with a general conservation issue even when they are questioned about a specific project. For example, when asked about the value of restoring the Elwha River, a respondent might give a value for salmon restoration in general. That is, the value for the specific case is embedded in a much broader conservation concern. If respondents make this shift from specific to general, the existence value estimates will exceed the actual values held by the public for the specific project. This and other problems of estimating existence values have been thoroughly researched and considered by specialists, and specific recommendations to avoid common problems have been agreed to. For example, the National Oceanic and Atmospheric Administration has published rules, based upon review by a blue ribbon panel, for estimating existence values claimed in law suits seeking to recover damages from oil and chemical spills (Arrow, et. al 1993, and National Oceanic and Atmospheric Administration 1994). These rules emphasize the importance of adequate survey sampling methods, the need to test for the "embedding problem" in sub-samples of the survey, and the need to define carefully the good being valued and the budget constraints facing the individual respondents. Rules like these provide a useful screening device to determine whether specific studies can accurately estimate existence values for fish and wildlife projects.
Because the non-market values for resources affected by fish and wildlife projects can rival in magnitude the values of traditional goods and services provided by the Columbia River system, it is important that decision-makers be informed by accurate and comprehensive value estimates for proposed projects. To accomplish this, the non-market evaluation efforts must focus on specific modifications to the resources and environment that are likely to occur under prospective fish and wildlife projects. The associated non-market values can be an important part of the economic rationale for fish and wildlife projects, but, because of the estimation problems discussed above, they should be displayed and explained separately from the more conventional values associated with marketed goods.
Proposition 4. Cost-effectiveness analysis relies upon definitive scientific information about the biological effects of project alternatives. When competing scientific theories and interpretations are unresolved, great uncertainty surrounds the biological effects and ultimately the evaluation of cost-effectiveness. Even with a scientific consensus on biological effects, the analysis must deal with effects stretching over long periods of time and subject to statistical risks.
"Cost-effectiveness analysis seeks to maximize the extent of achievement of a given beneficial goal within a predetermined budget or, equivalently, to minimize the expenditure required to achieve a pre-specified goal." (Jones-Lee 1994). Hence, by definition, a cost-effective fish and wildlife project enhances fish and wildlife more (however defined) per unit of cost incurred than alternative projects. Alternative projects being considered for Snake River chinook salmon recovery include improved passage at the dams, enhanced barging, increased stream flow, and dam removals. Each of these alternatives will incur a sequence over time of direct implementation costs and opportunity costs. The present value of costs for each project or mix of projects could be compared to the predicted biological effectiveness. For Pacific salmon recovery projects, common measures of biological effectiveness include water particle travel time, smolt migration survival, smolt-to-adult survival, total adult returns, and total sustainable catch. A cost-effectiveness analysis could be performed for each of these effectiveness measures, thus displaying alternative project effectiveness and project cost. Relatively simple cost-effectiveness analysis could display, for example, the cost per hour reduction in water particle travel time, the cost per 1 percent increase in smolt migration survival, the cost per 1 percent increase in smolt to adult survival, the cost per returning adult, or the cost per additional sustained catch. When there are several alternative measures of biological effectiveness, different projects may be ranked most cost-effective by different biological criteria.
The economic analysis depends crucially on the accuracy of the available measures of biological effectiveness. In many ways, anadromous fish biology is a lot like economics. Both disciplines study huge and incredibly complex systems, where everything is related to everything else. Controlled experiments are impossible, since the many variables can never be held constant. In fact, even getting permission to experiment on endangered species may be at least as difficult as getting approval to experiment on humans. The Northwest Power Planning Council's Independent Scientific Advisory Board acknowledged this dilemma in its recent evaluation of the U.S. Army Corps of Engineer's proposal to spend $40 million to install extended-length screens at John Day Dam:
"... evaluations of smolt to adult survival in Columbia River salmon generally lack statistical power sufficient to have a reasonable chance of detecting the effects of small, incremental increases in downstream survival of juveniles at a project such as John Day Dam." (Memo from ISAB to NWPPC, June 9, 1998)
In practice, the biologists often envision complicated recovery trajectories over time. Scientists participating in the Plan for Analyzing and Testing Hypotheses (PATH) under the Lower Snake River Juvenile Salmon Migration Feasibility Study examined (1) the probability that spawning escapement exceeds a survival threshold over 24 or 100 years, and (2) the probability that the average spawner escapement exceeds a specified level over the last eight years of a 48-year period. (October 9, 1998) The long time periods over which the cost and effectiveness measures will occur in these hypothetical recovery trajectories makes the treatment of time a crucial aspect of the analysis. The Drawdown Economic Workgroup chose to use 0 percent, 4-3/4 percent, and 6-7/8 percent discount rates to calculate present values of costs incurred under alternative projects. It needs to be resolved whether the biological effectiveness measures should be discounted also. If they are discounted, then a project that achieves recovery sooner would be assigned a higher cost-effectiveness rating, all else equal.
Standard project evaluation procedures require that opportunity costs of capital, as well as operating costs, be included in the project costs. The capital costs reflect the return to private capital investments that are displaced by the project. For public projects, the displacement occurs when citizens are taxed to fund the project. The appropriate rate of return is approximated by the rate paid by the U.S. government to borrow funds. Over the past 10 years, the nominal interest rate paid on U.S. Treasury obligations averaged 5.4 percent for 3-month bills and 6.9 percent for 10-year bonds. The real, inflation-adjusted rates of interest on 3-month and 10-year Treasury obligations are 2.2 percent and 3.6 percent. When estimated project cost over future years are adjusted to reflect expected inflation, a nominal interest rate should be used for calculating opportunity costs of capital. When project costs are measured in constant base-year prices, a real rate of interest would be appropriate.
Alternative projects with different patterns of costs over time can be compared in terms of discounted present value. The present value of each project's costs over the relevant period should be calculated using an appropriate social rate of discount. The social rate of discount reflects the rate at which consumers are willing to exchange disposable income today for disposable income in a future year. Because private interest receipts and dividends are taxed as income, the social rate of discount is generally lower than the rate of return on private investments. (Lind 1982) For example, with a marginal income tax rate of 35 percent an interest rate of 5 percent yields only 3.25percent per year in after-tax, disposable income. The lower, after-tax rate reflects the appropriate discount rate. A higher discount rate would be appropriate for investments that involve great risks; a lower rate would be appropriate for investments that have lower risks. These principles should be used to choose an appropriate rate of discount for fish and wildlife projects.
A second issue, again raised in the PATH analysis, is the treatment of probabilistic estimates of biological outcomes. How should we incorporate risk and uncertainty in the cost-effectiveness analysis of a fish recovery program? A simple and straightforward process would be to weigh each potential biological outcome by the probability of that outcome, yielding an "expected outcome" (or mathematical expectation) which could be used as an effectiveness measure. This would be analogous to calculating an expected loss for insurance purposes or an expected gain for a small-stakes gamble. However, economic theory suggests a different ranking process when the value of various outcomes is not proportional to the level of attainment. For example, if achieving 75 percent of the minimum spawning escapement for survival is not 75 percent as valuable as attaining 100 percent of minimum escapement, then a project that achieves 75 percent of the escapement objective should not be ranked 75 percent as effective. It is not appropriate to use probability-weighted expected values of biological effectiveness to select among projects when some of the projects do not meet minimum standards.
The current state of uncertainty about the biological effects of fish and wildlife management measures may diminish the usefulness of cost-effectiveness analysis for fish and wildlife. However, in some circumstances, the poor resolution of the biological prediction for specific projects does not preclude better prediction for aggregations of projects. For example, sampling errors and tag recovery rates may preclude accurate prediction of economic contributions from specific hatcheries or, within hatcheries, from specific rearing practices. But both the biological and economic consequences may be much clearer for hatchery programs in general, or for groups of hatcheries, than for individual hatcheries. If so, the economic analyses should focus on aggregations of projects. It is unclear whether this example would extend in some circumstances to other project types, such as flow augmentation, habitat restoration, or juvenile salmon transportation. Linkages among programs (e.g., habitat doesn't matter if the fish can't access the habitat) can make it difficult to do useful economic analysis at the more aggregate level.
Even with fundamental uncertainty or disagreement regarding the biological effectiveness of proposed projects, cost-effectiveness analysis may provide useful information for rating alternative projects. For instance, there may be a scientific consensus ranking of alternative efforts to preserve fish and wildlife habitats. The ranking could involve evaluation of both the importance of particular fish and wildlife populations affected and the relative likelihood of project success in protecting or enhancing those populations. In this circumstance, the costs of alternatives, along with the biological ranking, can be used to select among the alternatives. In particular, in comparing any two alternatives, one that is ranked lower by biological criteria and also costs more can be eliminated. If all such clearly inferior projects are deleted from the list of alternatives, the remaining ones will be the relatively cost-effective projects. But there remains a need to clarify the meaning of biological effectiveness when a significant degree of uncertainty is a barrier to consensus ranking.
Proposition 5. When a regional economy is disturbed by a policy change or new project, the economy goes through an adjustment process involving changes through space and time. Failure to account for peoples' ability to adjust to a disturbance, or for the changing opportunity costs as resources move between uses and regions, can distort estimates of benefits or costs of a project.
Equilibrium, or stasis, is a fundamental concept in both economics and ecology. It represents the notion that a complex set of forces are in balance against one another, so that the system remains essentially unchanged. Levels of production and income in an economy, or the sizes and behavior of plant and animal populations in ecology, remain constant from year to year. When underlying conditions are "disturbed" (a change in technology or resource supply in the economy, or a change in rainfall or disease organisms in an ecosystem), the forces are no longer balanced, and they generate dynamic changes throughout the system. In a market economy, we expect resources, such as land, labor and capital, to move from their former uses toward newly profitable uses. In equilibrium, each resource has already found its highest-valued use, so that all investment and hiring is geared to merely replacing depreciation and retirement. A disturbance in this economic equilibrium, such as a natural disaster, a new technological development, or a shift in government policy, will affect the profitability of existing resource uses. After the "disturbance" set in motion by the creation of the Federal Columbia River Power System, the aluminum industry migrated to the Pacific Northwest to enjoy low-cost electrical energy. If the price of aluminum, the price of inputs to aluminum processing, and other economic conditions affecting profitability remain constant, we would expect aluminum production, and the size and location of aluminum plants, to remain fairly constant — i.e., in equilibrium.
Neither economists nor ecologists expect these complicated systems to remain literally constant unless disturbed by policy changes. After all, the earth system and the economic system contain random and chaotic driving variables that prevent true stasis from being the rule. The changing mix of industrial activity in the Pacific Northwest, and the changing demographics of our human populations, can be viewed as responses to such disturbances. Resources are constantly moving between firms, between industries, and between regions in search of higher returns. Of course there are also constraints on such movement — relocation costs, labor immobility, institutional constraints, etc. Any discussion of the recovery of endangered salmon provides abundant examples of possible disturbances — possible changes in hydropower generation, loss of barge transportation, loss of the fishery, or recovery of the fishery.
The details of economic disturbance are perhaps most vividly experienced at the local level in the context of "economic impacts." If a community loses a business due to some policy change, this will have predictable impacts on other firms in the community. The business closure will result in less local spending of workers' wages and salaries, and less local spending for business inputs and services. This reduction of spending and re-spending of dollars in the local economy is the well-known "multiplier" impact. Multipliers are often estimated using input-output models. (See Peterson 1997 or Reading 1997.) The resulting "economic impact" calculation has several weaknesses, the most serious being that it will almost always overstate the actual impact. These impact models incorrectly assume that all possible adjustments to disturbance are instantaneous, and that individual responses to disturbance are severely limited. People who lose a job stay unemployed. Firms that lose customers can never find other markets. Producers of goods doggedly never change from standard combinations of labor, capital equipment and resource inputs. In fact, the process of adjustment takes time, as people consider and try alternative occupations, technologies, and locations. The closure of a business doesn't mean that land sits idle, and that workers become unemployed forever. Calculation of economic impacts should account for the time required to make such adjustments because there are real costs involved in retraining, learning to serve new markets, and moving about. But the standard "multiplier" impacts unrealistically inflate these costs.
As a consequence of the dynamic adjustment processes, the impact of a business closure is not correctly measured by the lost income of its workers plus a proportional multiplier effect. Displaced workers may lose some income immediately, but they can earn incomes in their next best employment, whether that occurs in the same community or elsewhere. Similarly, the real economic impact of a new business is the change in earnings as workers shift from one business to the next or migrate from one community to the next. There are direct impacts on income and wages, and multiplier impacts on the rest of the region. To measure the costs or benefits of changes wrought by a fish and wildlife project, the opportunity costs of drawing resources away from their current employment must be subtracted from the benefits. These economic impacts tend to attenuate with distance from the location of the disturbance. Often a project's largest impacts affect local residents. People at greater distance are less strongly affected.
The details of economic adjustment are important, but difficult to predict. As the economy changes, people will learn to enjoy new services and get along without old ones. Individuals will take actions to avoid new costs and to take advantage of new opportunities. People will invest to use the new products, to move to new industries, to work in new occupations and to live in new locations. Each individual response is geared to improving the lot of the individual or family. Behavior changes as people take public and private steps to make the best of their new circumstances. Measuring the benefits and costs of these behavioral responses to disturbance can be perplexing. For example, if a community builds a new water main to distribute newly available water, is the spending on the main a measure of the benefit of the project, or a burdensome cost that it has necessitated? Most kinds of local impact analysis would count such spending as a good result of the project. However, sensible net-benefit measurement, especially when it is to be used to compare and select among alternative projects, will see and treat most such expected adjustment expenditures as adverse effects, known as "implementation outlays." (U.S. Water Resources Council 1983; p.8.)
This proposition suggests two things. First, the net benefits or costs of alternative projects occur as economic adjustments play out over take time — perhaps over a generation. Until these adjustments have been made, the ultimate new net benefits (or costs) will not be fully experienced. They will not be adequately captured in the estimated net benefits or costs of a new project unless the time period for evaluation is very long. Second, adjustment often takes the form of migration between regions. Due to time lags in these adjustments, the full immediate effects of a new project may be experienced and measurable in one set of local communities or zones, but over a longer period, the full migration effect may be spread over a wider, or at least different, set of communities. Full measurement of a project's expected net benefits should include these migration effects.
Given this view of adjustment and migration in response to changing conditions, it is paradoxical that some Columbia Basin community-oriented impact assessments seem to regard out-migration as bad per se. This stance can lead to unwarranted conclusions. A new opportunity that entices some people to seek higher incomes through migration, even when no one in the community specifically loses anything, is treated as bad for the community. This at least seems true of the measurement of "community resiliency" proposed in Horne and Haynes (1997) and the recent discussion of this concept.
Whether people will migrate between two places depends on the "push" of unwanted conditions in the place of origin, and the "pull" of expected better conditions at the place of destination. It takes time for people to form their impressions of the push and pull, and more time to consider how to go about making the move. They move over short distances easily, but long distance moves to unfamiliar places take longer. The result is that the new migratory impulse in response to each river-basin recovery project may start very slowly, rise to a maximum rate, and then slow. After decades, many of the effects of a project will be in new communities, sometimes far from the original recovery project. At this distance, however, they will be difficult to measure, being mixed with, and diluted by, other income, output, job, and standard-of-living effects from other sources. The main point, however, is that movement of people between occupations and places is a natural and even desirable feature of the economic system. It allows people to seek better opportunities, and it ensures that resources are used for their highest-values. The costs of transition caused fish and wildlife projects that trigger shifts of economic fortunes should, nevertheless, be considered a real cost of the project. The costs are reflected in temporary unemployment and loss of investments in plants, land, and skills that are no longer needed.
Proposition 6. Property rights for goods and services exchanged in markets create economic incentives that play a crucial role in fish and wildlife policy. Careful structuring of key property rights can facilitate the economic rationing of scarce resources for fish and wildlife conservation. Greater reliance on market processes depends upon the creation of explicit rights for water, salmon and other wildlife in the Columbia Basin.
Satisfactory performance of a market economy relies upon appropriate definition and enforcement of property rights and liability rules. But property rights for salmon, water, and aquatic habitat are diffused and ill-defined, and they are subject to conflicting interpretations of contracts, laws, and treaties. Historically, property rights were poorly defined because water and salmon do not reside in clearly defined geographical areas, and they interact with human and non-human populations in complex and incompletely understood ways. For example, the water that one farmer uses to increase crop yields, becomes run-off and water supply for another junior water rights holder. That same water represents a decrement from river flow that may harm aquatic species. When flow reduction diminishes salmon survival, it imposes a reduced level of economic welfare on the salmon harvester. It is often difficult to conceive and implement a system that would adequately recognize all these effects. But without well-defined rights, the water diversion creates an uncompensated loss to salmon fishing. That loss is not registered in market transactions because no one has explicit rights to the salmon habitat nor to the salmon itself until capture. The development of cost-effective salmon recovery is retarded by these limitations of defined property rights. More precisely defined rights, especially rights that permit free transfer in markets, could improve opportunities to marshal low-cost fish and wildlife conservation measures.
Successful fish and wildlife conservation often requires that people who have some form of right, legal or customary, to some river use be induced to alter their use of the river, thus releasing resources for fish and wildlife. There are two general systems for inducing people to give up or change their use of resources: commands and economic incentives. Command systems depend heavily on regulations, administrative controls, and ordinances. Commands are widely used in fish and wildlife programs to control the timing and magnitude of fishing (harvest management) and the number of licensed commercial fishermen. Commands are used in water rationing systems, such as the "water budget" on the Columbia River.
The commercial fishing license system creates a more clearly defined right to engage in salmon fishing, and these licenses are traded in markets. The market facilitates the entry and exit of fishermen from the industry as individual conditions dictate, but it does not permit individuals to trade in rights to quantities of fish. As a consequence, we find individual licensees investing in excessive fishing capacity in a collectively vain attempt to catch more fish. A further refinement would create salmon fishing quotas as individual tradable harvest rights, permitting re-distribution of fishing rights into the hands of those who harvest most efficiently. With tradable harvest rights, a public decision to reduce salmon fishing could be implemented by purchasing those rights from willing sellers, thus creating a logical mechanism for harvest regulation that assures adequate compensation to those giving up rights. Economists and management theorists have long recognized the benefit of carefully defining fishing rights, but it is only recently being implemented in ocean fisheries management. Similarly, water rights systems do not ordinarily create tradable rights to quantities of water. Hence, the market is not allowed to perform the function of distributing water rights to the highest-valued uses.
For property rights to confer powers on their holder, they must have certain characteristics or features. The rights have outputs (called "powers"), and inputs (called "characteristics"). A freehold right to land has a good deal of all the characteristics, so is often referred to as "complete" or even "perfect." But a right to go fishing has very little of any of the characteristics, so it is referred to as "incomplete" or "attenuated." There are at least five important characteristics of property rights:
Duration. If the duration of the right is short, the holder has little incentive to maintain the land or its value, and vice versa.
Transferability or tradability. Without transferability, we cannot expect markets to shift the rights to those who place the highest value on them. Transferability enhances the right holder's incentive to maintain the value of the resource or land, because it permits the holder to acquire the capital gain associated with conservation.
Divisibility. Some rights may allow the holder to divide them into lesser or smaller rights. Examples of multiple-use divisibility include the leasing of (only) the drilling rights to an oil company, and the issuance of (only) camping rights by a farmer to a traveler.
Reliability, sometimes called quality of title, security, or enforceability. A complete property holder may rely on title, and need not worry that his/her right to title will be ignored or taken away. Investments in using or improving the land will not be made unless the holders' powers are enforceable.
Exclusivity. Complete exclusivity in a property right frees the holder from trespass, restraint, theft, and "spillovers," such as pollution originating elsewhere. Exclusivity of rights varies widely. At one extreme, are landholders with easily enforced and comprehensive rights over land and water supplies. At the other extreme are non-exclusive resource-use rights such as commercial fishing licenses, riparian water rights, and even some tree cutting licenses. Their holders, by adopting new technologies to compete and race to maintain shares of the resource, are often driven to use the resources wastefully or destructively.
Various kinds of property right have their own amounts of each characteristic. Owners whose rights have few characteristics have not much power over any piece of land or water. Whereas, those whose rights combine large amounts of every characteristic probably have long-run powers to plan and manage a parcel of land in all its uses, without unplanned spillovers, and to farm out some of the uses to other persons.
Because of deficiencies in the characteristics of the property rights held by some of its users, a resource may not be allocated to its most valuable use. Two examples elaborate on this.
Example 1: Water Markets
Under state laws in each of the Pacific Northwest states, there are property rights to water (normally called "water rights"). They were originally allotted by appropriation; meaning that on each stream the first user to put a measured amount of water to "beneficial use" had a better right to that amount than any subsequent appropriator. This appropriator's right is specific in terms of its quantity, priority date, specific use or purpose, point of diversion, and point of use. A right holder who respects these terms may use the water, store it, or let it flow away. The right is, generally, appurtenant to a particular parcel of land. Historically, the appropriation doctrine was introduced by gold-rush prospectors in their development of alluvial mining, and then was taken up by western irrigators, ensuring that a subsequent user could not use the irrigators' required water supplies.
The restriction of the prior appropriator's right to its place of diversion, and to the nature and place of its use, serves to protect the flow appropriated by another downstream user (called the third party), one whose water supply is often drawn from the first user's waste water. The complexity of in-stream (and underground) linkages, and the difficulty of identifying one user's wastes and spillovers with another's intakes, makes this dependence difficult to quantify, and so to transfer by lease or sale. Probably for this reason, water rights are usually transferred only by buying the land to which they are appurtenant. However, if the third (downstream) parties aren't significantly affected, or don't object (perhaps because they have been compensated under a side contract), the upstream right holder may be able to change the nature of the water's use or the location of its diversion or use. In summary, the prior appropriator's right is more exclusive than that of later appropriators and downstream parties, but is often subject to their rights. And all parties' rights are transferable with the land to which they are appurtenant, but only partially so otherwise.
This system was put to the test when, motivated by severe drought in 1977, Idaho increased the transferability of water rights by establishing a water bank. Farmers with excess storage water could consign water to the bank, and others on the same stream needing water could withdraw it, paying the consignor an administered price through the bank. Creation of the water bank required changes in state law to assure that farmers committing water to the bank would not lose title to the water under the beneficial-use, "use it or lose it," doctrine. For much of the 1980s, a large part of water bank transfers were actually not to drought-stricken farmers, but to the Idaho Power Company. It used the market to obtain timed water flows from storage, thus optimizing hydropower generation at peak times. In the 1990s, the Bureau of Reclamation increased water transferability by purchasing it for yet another purpose — to augment its effort to secure 427,000 acre-feet of upper Snake water for salmon migration on the lower Snake. This step, requiring further changes in Idaho water law to allow interstate transfers, was highly controversial, and has so far been approved only on an interim basis (through 1998) by the Idaho legislature.
Based only on surplus stored water, and at an administered price, the Idaho water bank is a rickety instrument for introducing a transfer of water between right-holders and from old to new uses. The transfers have uncertain duration, and therefore the bank is an unreliable source of water for fish flow augmentation. Furthermore, the absence of an open market and its replacement by a low administered price fails to encourage farmers to actually cut crop water use in order to sell the water. While it could supply a portion of the 427,000 acre feet required for Snake River flow augmentation by the National Marine Fisheries Service's 1995 Biological Opinion, the bank would contribute little to the 1,427,000 acre feet of flow augmentation called for by some lower Snake River salmon conservation measures currently under study. The bank was almost empty in the drought year of 1992. Allowing price to respond to the forces of supply and demand would increase the willingness of sellers to supply an increased volume and reliability of water bank transactions. However, their willingness is not enough. An actual increase in transfers would still be subject to the rights of third parties downstream, and these rights (to continue to receive waste water and run-off from upstream users) are so imperfectly delineated between the two sets of users as to make direct transactions between them difficult or impossible. Clearly, the extent of the exclusivity of their rights, regarded perhaps as claims on a specified share of the revenues from increased water transfers by the upstream and prior appropriators, needs to be established before such water transfers can be negotiated. As long as the only users were irrigators, the rights functioned quite well to allot each year's streamflow among most senior appropriators and others. But, even with the bank and the new laws on which it is based, that system of rights makes little provision for assembling variable quantities of water from various classes of irrigators for voluntary, profitable transfer to remote locations for new purposes.
Example 2: Water Use and Navigation Lockage
The owner/operator of a small vessel on the Columbia or Snake rivers now has a "right" to be passed through as soon as the vessel arrives at a lock. However, as a property right, this privilege lacks both quality of title and transferability. It is little more than a rule made by the Secretary of the Army, whose responsibilities include the use of navigation locks. As a consequence of this rule, the Columbia-Snake navigation system currently passes lock users, single tow or recreational, on a first-come-first-served basis, without waiting for other vessels to fill the lock. This rule passes more water through the locks, hence making less available for hydropower, than a rule in which vessels are passed through only when the lock is full.
To deal with this "waste" of water, the Secretary, through the Corps of Engineers, could change the rule, thus changing the vessels' informal or implicit property right. There are several alternative changes that could be made, each changing the vessels' rights in a different way. At one extreme, the agencies could strengthen the property right by agreeing never to change the rules without compensating vessel operators, and vessel operators could be permitted to exchange their rights for monetary compensation. If the water passed through the lock during a single vessel lockage is worth more to the hydropower system, for example, than is the convenience of single lockage to the vessel operator, the vessel operators would be willing to accept payment in exchange for waiting until the lock is full. In effect, they would be transferring their water use right to hydropower. At the other extreme, the present right of single and small vessels could be weakened, by forcing them to wait until there were enough vessels to fill the lock. In this case, the right to the formerly wasted water would have passed to the other users, who, if the rights were transferable, could sell it to the vessel owners impatiently waiting for enough vessels to arrive to fill the lock. (For a barge that completely fills the lock, this would be effectively no loss of rights at all. For a small boat, it could be a significant loss of rights, leading to significant payments or long waits.)
Between these extremes are a number of intermediate possibilities. For example, the Corps could give recreation craft a transferable right for immediate passage, but only at certain hours. Hydropower interests might hold transferable rights to the water at other times. Then both parties would have strong transferable rights, but only part of the time. Another alternative is for the Corps to charge fees for lock operations. The fee could be scaled to represent the value of a lock chamber full of water if used for hydropower. This change would work similarly to the extreme case where the other users were given transferable rights, encouraging lock users to wait for other boats to arrive and share the fee, thereby reducing the number of lock operations needed for a given traffic load. This market-like mechanism would improve the economic efficiency of water use in river navigation.
Proposition 7. Cost allocation rules are used to assign responsibility for funding multipurpose river projects. The allocation rule may not affect a benefit-cost analysis, which accounts for aggregate benefits and aggregate costs, but it does distribute the burden of project costs among users and taxpayers. Further, as individuals and agencies make decisions that respond to costs, cost allocation rules have a potent influence on the net project benefits.
The federal agencies that build and operate Columbia River dams allocate the construction and operating costs of those projects among purposes authorized by Congress: hydroelectric power production, flood control, river navigation, and irrigation. For example, about 90 percent of the construction and operating costs of Federal Columbia River Hydropower System dams are allocated to hydropower, and these costs are assigned to the Bonneville Power Administration, which incorporates them into electricity rates charged to customers. A second example is the "navigation servitude" doctrine, which holds that, when changes in the Columbia River projects adversely affect non-navigation activities (like irrigation projects), the people suffering damages have no right to compensation from the federal government. This means that some costs associated with hydropower or fish and wildlife projects are not allocated to the agencies carrying out the project, but are incurred by third parties. A third example is the rule associated with allocating costs of "mitigation" versus costs of "enhancement" in projects affecting fish and wildlife. A federal project is expected to fund efforts to mitigate effects on fish and wildlife, and the mitigation costs are allocated to the authorized uses of the project. When a river project enhances fish and wildlife (that is, increases the abundance of fish or wildlife to levels exceeding what would be available without the project), the related costs would be paid by the U.S. Treasury. In all these examples, a rigorous benefit-cost analysis will account for all project costs and benefits, to whomsoever they accrue, and will indicate whether the project contributes to, or detracts from, aggregate national income. In principle, therefore, federal decisions that follow benefit-cost analysis will be unaffected by cost-allocation rules.
However, because cost-allocation rules affect the distribution of economic burdens associated with river projects, they do affect the behavior of people or agencies paying the costs. If most of the construction costs for federal dams were assigned to the federal Treasury rather than to the Bonneville Power Administration, regional electricity rates would be lower, and local power consumers would use more electricity. Taxpayers in the rest of the country would pay slightly higher federal taxes to cover the costs. If more dam construction costs were assigned to irrigation districts, water would be more expensive to farmers and they would tend to use less irrigation water. If fish and wildlife mitigation costs were assigned to fish and wildlife agencies with limited funding, rather than to hydropower, fewer hatcheries and fish passage devices would be constructed. The allocation of costs among users and agencies does have an influence on the use of project-related services and on the structure of the publicly funded river projects. Individuals respond to costs, and agency plans are affected by funding sources.
Cost-allocation rules can result in lower overall economic benefits if they assign excessive costs to project users or if they fail to assign real costs to project users. Hydroelectric operations diminish the anadromous fish runs, resulting in lower commercial and recreational fishery benefits. The assignment of fish mitigation costs to hydropower is a clumsy and inaccurate way of accounting for the lost fishing values because mitigation could cost more or less than the lost fishery values. Water diversions by irrigators reduce both hydropower production and salmon migration survival. However, costs of improving flows for salmon mitigation are assigned to hydropower, not to irrigation districts. When reduced flows have several causes, but only hydropower is charged for remedial actions, this creates a situation in which irrigators act on incomplete cost information. They may choose to divert and use water whose full cost exceeds the value of crops grown simply because they do not have to pay some of the costs. Their individually rational economic decisions may reduce the total net benefits derived from the river. Similarly, fisheries advocates may promote costly enhancement projects paid for by general taxpayers or hydropower customers even when the value of the improved harvests falls short of the costs.
Arbitrary assignment of project costs, or failure to properly allocate costs may send distorted signals to the decision-makers in the affected economic sectors. Hence, the accurate allocation of project costs to attributable uses is a key to economically efficient program administration and operation. However, untangling the costs attributable to different uses of a multipurpose project is a challenging task. When large fixed costs, such as dam construction, are jointly attributable to all project uses, the task contains an element of arbitrariness. A thorough accounting for all costs and benefits from a regional or national perspective will help to improve the economic efficiency of these decisions.
Proposition 8. Uncertainty about the economic consequences of fish and wildlife projects can cause people to make inappropriate and costly decisions. Opportunities to reduce the "costs of uncertainty" should be fully considered in fish and wildlife policy development.
Decision-makers in any economy, both consumers and corporations, always face uncertainty regarding the future. For example, a decision to build a new factory must be based on projections of future demand for the output of the factory, which may or may not prove accurate. Similarly, homeowners face the possibility of fires and burglaries, and drivers must consider the chance of being in an accident. Consumers and companies accommodate to risk in their decision-making by making specific expenditures to moderate the risk, by insuring against potential losses, or by deferring investments or expenditures subject to risk.
An example of spending to reduce risk is the construction of excess electrical generating capacity to reduce the likelihood of a shortage. In the power industry, conservative planning methods, such as protecting against the "largest single contingency," is a form of risk-avoiding behavior. Other examples are the purchase of casualty or liability insurance and the purchase of low-risk bonds that earn a lower rate of return than risky stocks. These kinds of decisions are not free. Insurance premiums are a cost of owning a home, a car, or a business. Reduced expected returns are a cost of avoiding riskier investments. Idle generating capacity is an extra capital cost.
Uncertainty can be created by the administration of the power project licensing system. For example, an electric utility that owns a generating project that may not be re-licensed would rationally defer maintenance activities at the project. In turn, deferred maintenance may reduce output, causing more expensive power to be purchased from other sources to meet a given level of demand. Or deferred maintenance may increase the cost of eventual repair and replacement of equipment. The costs associated with the re-licensing uncertainty constitute an incremental cost of power paid by consumers.
One means to avoid the uncertainty and cost is to commit to specific actions over extended periods. For example, three mid-Columbia utilities have been engaged for several years in the development of Habitat Conservation Plans (HCPs) for their hydroelectric projects. The plans are intended to reduce (a) regulatory risk under current and future Federal Energy Regulatory Commission licenses, (b) the risk of listings of mid-Columbia fish stocks under the Endangered Species Act, and (c) risks under other statutes that govern fish protection. The habitat plans involve commitments by the utilities in terms of expenditures on hatcheries, habitat restoration, and performance (survival) standards at the projects, and are intended to last 50 years. If these commitments reduce uncertainty, they can be viewed as a form of insurance. However, the commitments are not free, and the cost of engaging in the habitat conservation planning effort itself diverts human and other resources from other endeavors. The cost of developing the plans is properly considered part of the cost of restoring fish populations in the Columbia River Basin.
There are numerous instances in which greater uncertainty in sectors of the Northwest economy most connected to the Columbia River system could elicit costly risk-avoidance responses. If utilities are unable to count on certain levels of hydroelectric generation from the Columbia, they may choose to invest in risk-management products, or to purchase their power supplies from other sources. If municipalities are unable to count on the availability of river water for their residents, they may choose to invest in ground water extraction facilities. If recreational users of the reservoirs are unable to count on certain water elevation levels, they may choose to invest in equipment that will permit them to make use of alternative facilities. If irrigation farmers are unable to rely on the continued availability of water piped from Columbia River reservoirs, they may invest in alternative water supply facilities, shift to less water-intensive crops, shift from agriculture to ranching, or abandon farming entirely. All else equal, early resolution of policies for fish and wildlife restoration and protection is economically beneficial because some costs incurred for risk management by agencies, firms and individuals can be avoided.
The cost to people and businesses of uncertainty is relevant to the Columbia River Basin Fish and Wildlife Program when proposed projects or operating conditions affect the ability of people to obtain an expected return from their investments or efforts. Under current circumstances, there is considerable uncertainty regarding: (1) which projects will be chosen to enhance anadromous fish populations in the Columbia River Basin; (2) how those choices will affect water flows, water supply, hydroelectric power production, fishing, recreational use of rivers and reservoirs, and river navigation total costs of these projects; (3) the timing of the impacts and associated costs; and (4) the incidence of the costs (i.e., who will bear them). The continuation of these uncertainties will drive consumers and investors to take a variety of costly actions to avoid or insure against the risks. If policy choices can be narrowed and future direction established earlier, economic sectors affected by those decisions can avoid the costs of the insuring against risks that are associated with indecisive or delayed decisions.
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