Economic Analysis Challenges in Watershed Rehabilitation Projects Reno, NV October 21-25, 2002

1. Economic Analysis Challenges inWatershed Rehabilitation ProjectsReno, NVOctober 21-25, 2002 Dale Pekar, Economist National Water Management Center 501-210-8924 Dale.Pekar@ar.usda.gov

2. Public money ought to be touched with the most scrupulous consciousness of honour. It is not the produce of riches only, but of the hard earnings of labour and poverty. It is drawn even from the bitterness of want and misery. Not a beggar passes, or perishes in the streets, whose mite is not in that mass. Thomas Paine, The Rights of Man

3. Why is the Federal Government involved in rehabilitation of these dams? What is the Federal Objective?

4. Federal Objective “The Federal objective of water and related land resources project planning is to contribute to national economic development consistent with protecting the Nation’s environment, pursuant to national environmental statutes, applicable executive orders, and other Federal planning requirements.” P&G, Principles, Section 2

5. What are Contributions to National Economic Development (NED)?

6. “Contributions to national economic development (NED) are increases in the net value of the national output of goods and services, expressed in monetary units.” (P&G Chapter I, Section II(b))

7. “Contributions to NED include increases in the net value of those goods and services that are marketed, and also of those that may not be marketed.” (P&G Chapter I, Section II(b))

8. “Increases in the Net Value…” Increases from what?

9. Increases in Net Value are measured relative to the No-Action Alternative

10. No-Action Alternative or the Future Without Project Plan (FWOP) What is it?

11. The No-Action Alternative (Future Without Project Plan) is the baseline against which all other alternatives are measured. It must be defined consistently throughout the documentation.

12. The No-Action Alternative (Future Without Project Plan) is the most likely future condition absent this federal action.

13. Challenge 1--Sometimes documents do not have a clearly defined No-Action/Future Without Project Alternative as evidenced by different assumptions in different sections, or by inadequate descriptions. For instance, what does the following passage mean? “The dam has already failed.”

14. NED Plan Requirement “A Plan that reasonably maximizes net national economic development benefits, consistent with the Federal objective, is to be formulated.” P&G Principles, Section 5(a)

15. Net NED Benefits In common language: NED Benefits -NED Costs Net Value =Net NED Benefits Net NED Benefits In P&G or Natl Watershed Manual language: Beneficial Annual -Adverse Annual Net Value =Net Beneficial

16. Challenge 2--Sometimes no real attempt is made to generate the NED Plan. For instance, the text describes a reasonable alternative that would generate higher net NED values-- and then fails to develop the alternative in detail.

17. The reason normally given for not developing an alternative is that the sponsors did not want it; and that therefore the alternative did not meet the P&G acceptability criterion: “Each alternative plan is to be formulated in consideration of four criteria: completeness, effectiveness, efficiency, and acceptability.” (P&G Principles 5(d))

18. Is that an adequate reason for eliminating an alternative from detailed study?

21. NRCS has done a good job of exploring alternatives that make good sense and save money. For instance: --Relocate property so a dam can be rehabbed as class “a” rather than the more costly class “c” criteria --Regulate floodplains to reduce the likelihood of future flood damage --Decommission dams no longer needed --Adding purposes during rehab --Raise dam instead of removing sediment --Purchase floodplain easements --Sponsor-swapping

22. Some additional NED considerations during Rehab: --Can the level of flood protection be increased substantially for relatively little cost during Rehab? --Would a lesser level of flood protection be appropriate for a hazard class (a) dam? --If providing sediment storage means the No-Action alternative is the NED Plan, consider providing sedimentstorage for only 25 years.*

23. *NWSM 508.44(c) specifies a minimum evaluated life of 50 years. NWSM 508.00 says projects are planned to function over a period of generally not less than 25 years. Consider whether it would be reasonable to extend the life of a project 25 years rather than 50 years. 25 years from now there may be more cost-effective measures available for addressing the sediment problem. Or the need for the project may have changed.

24. If an alternative with a shorter lifespan were to be evaluated, variation from the manual requirement for an evaluated life minimum of 50 years would need to be acknowledged. P&G requires that alternatives all share the same period of analysis, so the shorter lifespan alternative would have to include the cost of addressing the sediment problem at the later date.

25. P&G makes clear that we must use our imaginations to solve the problems and take advantage of opportunities in a cost-effective way. That need--to identify the NED Plan--becomes especially evident when no alternative generates positive net NED benefits.

26. Challenge 3--Sometimes the NED Plan--the Alternative with the greatest net NED Benefits--is not identified, or is misidentified. Can the No-Action/FWOP Alternative be the NED Plan?

27. Challenge 4--Sometimes assumptions are made which ultimately determine which alternative is the NED Plan. Those assumptions need to be identified and explained. If different assumptions would significantly change the NED account net value rankings of the alternatives, or the NED plan, that needs to be disclosed.

28. Examples of Substantive Assumptions that Need To Be Discussed --Remaining useful life of existing structures --Likelihood of development within the breach inundation zone

29. Challenge 5--Sometimes NED Account information is double-counted or otherwise misportrayed. Normally this is caused by confusion over whether to show NED account information relative to present conditions, relative to the “future without project” alternative, or as totals. Consider the following examples all depicting the same situation.

30. CORRECT NET BENEFITS EXAMPLE A NED Account (Relative to Present Conditions) No-Action Action Benefits -21,000 -0- Costs 1,000 10,000 Net Benefits -22,000 -10,000 CORRECT NET BENEFITS EXAMPLE B NED Account (Relative to the No-Action Altrntive) No-Action Action Benefits -- 21,000 Costs -- 9,000 Net Benefits -- 12,000

31. CORRECT NET BENEFITS EXAMPLE C NED Account (Totals) No-Action Action Benefits -0- 21,000 Costs 1,00010,000 Net Benefits -1,000 11,000 CORRECT NET BENEFITS EXAMPLE D NED Account (Benefit Loss Tracked as a Cost) No-Action Action Benefits -0- -0- Costs 22,00010,000 Net Benefits -22,000 -10,000

32. Examples A, B, C, and D all enable a decisionmaker to make a correct decision vis-à-vis the NED account. The key characteristic of each of these displays is that the Action Alternative has net NED benefits $12,000 greater than the No-Action alternative. Example C is the display which seems to work best in terms of maintaining trackability with the text and providing a clear understanding.

33. Challenge 6--Need for documentation “Steps in a procedure may be abbreviated by reducing the extent of the analysis and amount of data collected where greater accuracy or detail is clearly not justified by the cost of the plan components being analyzed. The steps abbreviated and the reason for abbreviation should be documented.” P&G 1.7.2(a)(4)(ii)

34. Challenge 7--Tracking Land Rights We properly record the cost of acquiring Land Rights in the NED account. We need to recognize that a Decommission Alternative will normally enjoy a benefit because some land may be used for other purposes.

35. Challenge 8--Identifying O&M and Replacement Costs for all Alternatives O&M and Replacement Costs need to be identified for all alternatives.