**River Economics: EvaluatingTrade-offs in****Columbia River Basin Fish and WildlifePrograms and Policies****IEAB 99-1**
**February 2, 1999****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
- Introduction
- Proposition 1
- Proposition 2
- Proposition 3
- Proposition 4
- Proposition 5
- Proposition 6
- Proposition 7
- Proposition 8
- References

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a *cost 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Economicsof 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.**  196919951969-95CategoryBillion $Share Billion $Share% ChangeTotal Personal Income$106.9100.0%$235.0100.0%+119.8%Farming$ 4.94.6%$ 2.81.2%-42.6%Agric. Services$ 0.610.6%$ 2.10.9%+246.7%Mining$ 0.510.5%$ 0.670.3%+31.6%Construction$ 5.85.4%$ 11.44.9%+96.7%Manufacturing$ 20.118.8%$ 28.512.1%+41.8%Transportation,Utilities, and      Communications$ 6.46.0%$ 11.44.8%+77.9%Wholesale Trade$ 5.24.8%$ 10.94.6%+110.5%Retail Trade$ 10.19.4%$ 17.47.4%+72.0%Finance, Insurance,      and Real Estate$ 3.93.7%$ 9.44.0%+135.7%Services$ 11.711.0%$ 43.118.3%+267.2%Government$ 15.814.8%$ 28.312.0%+78.6%Dividends$ 15.214.3%$ 41.417.6%+171.5%Transfer Payments$ 10.29.5%$ 39.316.7%+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.**  196919951969-95CategoryBillion $ShareBillion $Share% ChangeTotal Personal Income$ 29.9100%$ 62.8100.0 %%Farming$ 3.010.2%$ 1.82.8%-42.0%Agric. Services$ .180.6%$ .580.9%+215.1%Mining$ .381.3%$ .500.8%+31.6%Construction$ 1.75.6%$ 3.35.2%+95.9%Manufacturing$ 3.912.9%$ 6.710.7 %+74.4 %Transportation,Utilities, and      Communications$ 1.75.7%$ 2.74.3%+57.4%Wholesale Trade$ 1.24.1%$ 2.33.6%+85.1%Retail Trade$ 3.010.0%$ 4.87.6%+59.4%Finance, Insurance,      Real Estate$ 8412.8%$ 1.82.9%+115.5%Services$ 3.411.5%$ 10.516.7%+203.8%Government$ 4.214.4%$ 8.012.8%+90.4%Dividends$ 4.113.7%$ 10.817.2%+164.3%Transfer Payments$ 3.110.3%$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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