Economic Analysis Watershed Rehabilitation Workshop St. Louis, MO August 20-22, 2002 Dale Pekar, Economist National Water Management Center

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

NED-- National Economic Development “The Federal objective…is to contribute to national economic development….” (P&G Chapter I, Section II(a)) “Contributions to national economic development (NED) are increases in the net value of the national output of goods and services, expressed in monetary units.” (P&G Chapter I, Section II(b)) “Contributions to NED include increases in the net value of those goods and services that are marketed, and also of those that may not be marketed.” (P&G Chapter I, Section II(b))

So, What is Net Value?

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

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

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

“Increases in the Net Value…” Increases from what? Increases are measured as changes from the No-Action Alternative

Estimating Benefits --Similar Land Use If the use of the flood plain, and the area surrounding the dam is similar to that present during the original analysis, it may be appropriate within the context of limited resources available to planning and relatively small dollar projects to simply index the benefits to current dollar terms. --Change in Land Use To the extent the use of the flood plain, and the area surrounding the dam is different from that present during the original analysis, further analysis will be involved.

Changes in Property Value (as discussed at P&G ) Some dams, which were originally constructed to benefit agriculture, now serve as landscape elements in residential subdivisions. The impounded reservoirs are commonly recognized as adding substantially to the value of the residences. This benefit can be tracked in the NED analysis using the procedures outlined in P&G The fair market values of the properties would be estimated for each alternative and then annualized for inclusion in the net NED benefits.

National Flood Insurance Program (NFIP) Administration Costs (as discussed at P&G ) It costs money to run the National Flood Insurance Program. That cost is spread over the policies in force. The cost of servicing the policies, including agent commission, costs of servicing, and claims adjusting amounted to some $133 per policy in year 2000 dollar terms. In any given alternative, properties located within the 100-year floodplain could be reasonably assumed to experience this cost, those outside the 100-year floodplain would not.

How do we handle Land Rights? Land Rights will be evaluated for each alternative to determine appropriate cost-sharing and inclusion in net NED benefit estimation.

Land Rights: Cost-Sharing Only landrights acquisition provided by the Sponsor after November 9, 2000 (date of enactment of PL ) will be credited. NWSM [i]

Land Rights: NED Land Rights will vary by alternative. A Rehab Alternative may need very little in the way of new Land Rights. Other alternatives, such as the Sponsor-Breach (FWOP) or the Decommission, may allow holders of Land Rights to use their land for other purposes. For instance, land under the reservoir might now be used for pasture. Those alternatives would show a benefit associated with this change. The benefit would be counted as the fair market value of the land in any given alternative, relative to the fair market value of the land in the FWOP/No-Action alternative.

Expected Change in Land Values by Alternative *May be appropriate to further break out these categories by elevation or susceptibility to flooding. **May be appropriate to further break out this category by pool.

Example Change in Present Land Values by Alternative (Land under the current reservoir)

What if the Sponsors want to rehab the dam from Class (a) to Class (c), but we could achieve the purpose and need at much lower cost by moving homes out of the breach inundation area and keeping a Class (a) Dam?

Evaluate the alternative. An alternative may not be eliminated from detailed study simply because the current sponsors do not like it. Alternatives are evaluated in terms of their responsiveness to P&G criteria for completeness, acceptability, efficiency, and effectiveness. Other potential sponsors may see the worth in an alternative that the current sponsors do not see, for instance.

Discount Rate for Rehabilitation Projects Use the rate established annually for use in evaluating federal water projects. (P&G 2.1.2(f) Currently 6.125%

Period of Analysis1/3 You have three Action alternatives. All require three years for installation. One has an estimated functional lifespan of 60 years, another an estimated functional lifespan of 150 years with periodic (50 year) replacements. The NED plan has an estimated functional lifespan of 100 years. What is the Period of Analysis? (P&G 2.1.2(c)) a.103 years b.63 years c.83 years d.50 years e.100 years f.150 years g.153 years

Period of Analysis2/3 Could you just have different Periods of Analysis for different alternatives? No P&G 2.1.2(c) Identify the alternative with the longest Period of Analysis; Use it for all the alternatives.

Period of Analysis3/3 Time required for implementation + Time period of significant beneficial or adverse effects (not to exceed 100 years) = Period of Analysis So in this example, the period of analysis would be 3 yrs--Time required for implementation yrs--Time period of significant beneficial or adverse effects (not to exceed 100 years) = 103 yrs--Period of Analysis

Differentiate Between the Sponsor-Breach and the Decommission Alternatives Sponsor-Breach Alternative Local sponsor (with limited resources) responding to a state order to quickly eliminate a hazardous condition) Decommission Alternative Hazardous condition is eliminated with proper attention to environmental concerns

Can we use abbreviated procedures for economic analysis?1/2 As P&G 1.7.2(a)(4)(ii) puts it: “Steps in a procedure may be abbreviated by reducing the extent of the analysis and amount of data collected where greater accuracy or detail is clearly not justified by the cost of the plan component being analyzed. The steps abbreviated and the reason for abbreviation should be documented.”

Can we use abbreviated procedures for economic analysis?2/2 P&G (b) describes an instance in which it may be appropriate to use abbreviated procedures--once a BCR>1:1 has been identified. The abbreviated form may be used "...unless it would distort the comparison of alternative projects or the cost allocation and cost sharing in multiple purpose projects.” We could not, for instance, leave out recreation benefits if that distorted the comparison of the alternatives, the cost-allocation, or the cost-sharing.

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

Worksheet Express the total cost and benefit information in Table A as changes in Table B

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

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

Identify the alternative with the greatest net NED benefits as the NED Plan --even if the net NED benefits of that alternative are negative. This is an exception to NREH (c)(8) Tab 6, Consensus Points from the February 19, 2002 Meeting

Does it make sense to request an exception to the NED plan requirement? Exceptions have been granted --to increase the level of protection from flooding, --to benefit disadvantaged communities. Exceptions may be granted to address ANY local, state, national, or international concern. One plan had a BCR of 0.08:1.