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Reports from the Policy Front:
An Institutionalist Perspective of
Water Resource Economics
Kurt Stephenson
Department of Ag & Applied Economics
Virginia Tech
November 1, 2007
Montana Environmental Standard Upheld
- Amy Beth Hanson, October 22, 2007
Activists again sue over King William Reservoir
- Scott Harper, July 18, 2006
SPOKESMAN REVIEW
Avista criticized over impact of dams:
Activist, company spar over effects on water quality, salmon migration
-- Alison Boggs, May 2005
In the face of fundamental social/value
conflict over conflicting uses of water …
In the absence of markets …
How can we choose/decide?
What can economists contribute?
Disciplinary Perspectives
Austrian Economists: property rights and
markets
Neoclassical Economists: calculate Pareto
improvements through comprehensive
benefit-cost analysis
Institutional Economists: Emphasis/
importance on political negotiation
Shared Concepts
Pareto improvements, efficiency gains
Importance of opportunity costs to public
decision-making
Power and contribution of marginal
analysis and thinking
Analysis and focus on individual
incentives
Some Key Institutionalist Beliefs
Preferences are created and evolve with
experience & learning
Knowledge and know-how is fragmented,
dispersed
Decision-making is simplified, bounded by
institutions (formal & informal)
Social decision-making is not strictly an
analytical exercise, but also social.
Where does that lead me?
Market processes – design and creation of
markets for environmental services
Political, social decision processes –
Design and creation of negotiation
processes to decide between competing
uses.
Reports from the Policy Front:
Two Illustrations of the
Institutionalist Perspective
Federal Energy Regulatory Commission,
Hydropower Relicensing
U.S. Army Corps of Engineers,
Section 404 Permitting for Water Supply
The FERC Story
Among other duties, FERC issues operating
licenses (up to 50 yrs) for nonfederal hydropower
projects under the Federal Power Act (1920)
Nonfederal hydro produces about 5 percent of
nation‟s electric power (2,000 dams) and half of all
the nation‟s hydropower.
FERC issues licenses to operate private dams on
public waters
What is in a FERC License?
Recreational
Enhancements
Fish
Passage
Magnitude,
Timing &
Duration
FERC Hydro Licensing
FERC explicitly required by federal law to
“balance” and give “equal consideration”
to environmental and private (market-
oriented) uses
Traditional Licensing Process
Pre-Filing Consultation Post-Filing (Licensing) Phase
Conduct Conduct
Studies Studies
FERC Issues License
Licensee
Notice Licensee FERC
Conduct FERC Accept
Consultation Draft led NEPA
Studies Review Application
Package Application Process
Agency 90 day Additional Intervener Additional Agency
Comments comment Study Status Study Recommendations
Requests Requests Granted Requests Prescriptions
Traditional Licensing:
How FERC Decided
FERC at center of process in deciding
between licensing alternatives.
Calculate construction and foregone power
costs & quantitative/qualitative estimates of
environmental/recreational enhancements
Based on judgment (not analytical
calculation), FERC staff decides whether
costs are “worth” incremental environmental
enhancements.
Traditional Licensing:
How FERC Decided
Informal “knee-of-the-cost curve” logic
$
MC
Maximum WUA
(forgone
power)
200 400 600 800 1,000
Area of weighted usable habitat (WUA)
Traditional Licensing:
How FERC Decided
By the mid 1990s, the traditional FERC licensing
was becoming dysfunctional. FERC traditional
licensing criticized as:
• making “bad” decisions (often criticized for
deferring to hydropower interests).
• increasingly fragmented – multiple veto points
• lengthy, contentious, and costly
How to better balance
hydropower with
environmental services?
Calls for Analytical Reform
Rationalize decision making -- Some called for
FERC to revise their analytical procedures, for
example stressing more comprehensive benefit-
cost analysis.
Use nonmarket valuation techniques to montetize
people‟s preferences for environmental services
“FERC is faced with trying to
balance „apples and oranges.‟
Benefit cost analysis provides a
framework where all the relevant
power and environmental values can
be put in equivalent terms”
– Loomis and Feldman, 1995
“Does FERC find the socially efficient
balance between hydropower and the
environment?...A normative basis for trading
off hydropower and the environment – such
as the Kaldor-Hicks criterion – is absent in
practice from FERC project evaluation
procedures… A good starting point for FERC
would be to apply the eight principles defined
by Arrow et al. on the appropriate use of
benefit-cost analysis.”
– Moore, Maclin, and Kershner, 2001
What happened?
1.Describe changes in licensing rules
(institutional change)
2.Describe how FERC decides
license conditions under new rules
1. Licensing Reform
FERC‟s initial effort was to implement a
voluntary new licensing process called the
Alternative Licensing Process or ALP
(1997)
Traditional Licensing Process
Pre-Filing Consultation Post-Filing (Licensing) Phase
Conduct Conduct
Studies Studies
FERC Issues License
Licensee
Notice Licensee FERC
Conduct FERC Accept
Consultation Draft led NEPA
Studies Review Application
Package Application Process
Agency 90 day Additional Intervener Additional Agency
Comments comment Study Status Study Recommendations
Requests Requests Granted Requests Prescriptions
Alternative Licensing Process
Pre-Filing Consultation Licensing Phase
FERC Initial Check
Approves Information & Conduct Conduct
ALP Package Advise Studies Studies
FERC Issues License
Licensee Draft
Form NEPA FERC
Contacts & NEPA Final
Solicit Licensing Scoping
Doc &
Team NEPA
Stakeholder Application
Involvement
Agency Agency & Stakeholder Signatories Additional
Stakeholder Participation & Recommendations To Settlement Study
Agreement Agreement Requests
1. Licensing Reform: ALP
• ALP stresses “front-loaded” collaborative
negotiation between licensee and stakeholders
over studies, alternatives, and license conditions
• FERC involvement early, but in advisory role
• FERC takes back seat in determining whether
license alternatives are “worth it” -- routinely
accepts license conditions from negotiated
settlements (after review for statutory consistency).
1. Licensing Reform, ITF
• Interagency Task Force formed in 1998
• Members: FERC, Interior, Agriculture, EPA,
Commerce, & Energy
• Initially divided up into 4 workgroups:
1) Coordinating fed and state statutory obligations
2) Review of ex parte regulations
3) Collaborative process issues
4) Economic Analysis: Methods and Procedures
1. Licensing Reform, ITF
Department of
Interior ITF
preparation
included efforts
to assess and
evaluate
analytical
options
1. Licensing Reform, ITF
Economics workgroup met several times
and produced a draft “Phase I” report.
Eventually, reporting of economics
workgroup efforts disappeared from
public record by 2000.
1. Licensing Reform, ITF
• ITF issued 7 reports in 2001
• Reports focused almost exclusively on
procedural improvements
• No report included any recommendations
on FERC analytical methods
1. Licensing Reform, cont.
• Energy Policy Act, 2000
• Interagency Hydropower Committee –
(continuation of ITF involving gov‟t
agencies)
• National Review Group (EPRI) –
Industry, govt agencies and
environmental interest groups
1. Licensing Reform, ILP
Efforts culminated into the development of the
Integrated Licensing Process (ILP) (2004)
Integrated Licensing Process
• Maintains ALP emphasis on collaborative
negotiation, but
• Adds timelines and dispute resolution
processes
• No requirements or guidelines for technical
anlaysis.
• Currently the default licensing process
2. How To Decide License
Conditions Under New Rules?
What type of analyses are licensing
participants using in collaborative
processes to reach licensing agreements?
ALP and ILP are not prescriptive –
licensee and participants are free to
produce and use any analysis they deem
necessary to reach an decision.
2. How To Decide License
Conditions Under New Rules?
Conducted a review of all 35 project
EIS/EAs settled under the ALP and ILP
process 1997-2005.
EIS/EAs are not decision documents, but
rather are records of decision.
What type of analysis produced to support
these negotiations?
Analyses produced Under ALP &
ILP Licensing Processes 1997-2005
# of Licensing
Cases
Incremental Flow, Habitat Analysis 30
Entrainment, Fish Passage Analysis 12
Recreational Use Studies 21
Nonmarket Valuation Studies 0
Power Analysis 35
2. How To Decide License
Conditions Under New Rules?
TLP and ALP/ILP produce very similar analyses
Vast majority of analytical efforts devoted to
identifying physical and biological relationships
Participants are reaching agreements on
licensing conditions in the absence of monetized
estimates for environmental services.
Outcomes of Reforms
Although no quantitative data is available, support
and satisfaction with new licensing reforms and
licensing decisions appears solid.
• Environmental NGOs & Industry express
public support for ALP / ILP
processes/decisions.
• Licensing times reduced by about 40%.
• FERC produced favorable reviews of process
Institutionalist
Interpretation of the
FERC Story
1.Collaborative negotiations are a social
valuation process between competing
uses/users. New licensing processes
acted as a substitute, not complement, for
comprehensive benefit-cost measurement.
2.Collaborative negotiations requires sound
technical analyses, but must be
instrumental to participants.
3. Collaborative negotiations can be
transformative (for individual and group)
4. Process matters – how people are
organized and negotiate with each other
alters outcomes.
The Corps Story
Federal involvement in water supply
decisions increasingly being asserted by
Corps of Engineers under Section 404
permitting of the Clean Water Act.
Increasingly contentious, litigious, and
lengthy conflict over local water supply
projects.
The Corps Story
Give short synopsis to illustrate the
interests and activities of an applied
institutional economic perspective
Section 404 and Water Supply
Can collaborative negotiation process
improve regulatory decision-making?
1.How can technical analysis more
effectively support negotiation over
water supply alternatives
2. Identification of obstacles and
opportunities in permitting process to
identify Pareto improvements/
integrative bargaining.
1. Effective Technical Analysis
“It is inconceivable that more scientific and
technical work has ever been performed for
a project of this size. It is also hard to
imagine that any project has been through
more intensive review”
- David Morris writing about the proposed King
William Reservoir, December 2001
1. Effective Technical Analysis
“The most fundamental flaw in
contemporary water policy is that many
value questions in which ordinary
citizens have a great interest are being
framed as technical questions”
-- Helen Ingram and Anne Schneider, Water
Resources Update 1999
1. Effective Technical Analysis
Investigating opportunities collaboratively built
and used technical models. Called..
• Computer-aided negotiation (CAN)
• Computer-aided dispute resolution (CADRe)
• Mediated modeling
• Shared vision planning
1. Effective Technical Analysis
Such collaboratively constructed models
aim to simulate outcomes of different
alternatives and demonstrate trade-offs
between alternatives.
Goal not to identify or calculate “best”, or
“efficient”, alternative…
But still huge role for standard economic
thinking/tools.
2. Obstacles/Opportunities for
Permitting Reform
Structure of current permitting not
conducive to bargaining (limited ability to
make tradeoffs)
Analysis of permitting institutions (formal
and informal) to identify and target areas for
possible behavior or institutional change.
