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Estimating the Economic Value of Recreation Resources:
A Legal and Policy Perspective 1
Stewart D.
Allen
2
Federal
Energy
Regulatory
Commission
hearing
on
A recent
proposed
hydroelectric
development
in
Montana
shows
how
decision-makers can perceive recreation economics.
This case
study examines testimony presented on the estimated value of
recreation at the darn site, how these analyses were questioned,
and their role in the hearing's unusuAl outcome.
INTRODUCTION
In 1978, Northern Lights, Inc., a rural
electric cooperat~ve, applied to the
Federal Energy Regulatory Commission
(FERC) for a license to construct a
run-of-the-river hydroelectric darn on the
Kootenai River in northwestern Montana. To
be located at the crest of Kootenai Falls,
the darn would have an average generating
capacity of about 59 megawatts and cost
about $225 million.
Following completion of state and
federal environmental impact statements,
FERC held hearings on the project from
·
August, 1982 until April, 1983. Among the
intervenors in the hearinos were the
Montana Department of Nat~ral Resources
and Conservation (DNRC), to present
information contained in the State's own
EIS, and a coalition of groups opposing
issuance of a license.
The hearing, which required 67 days of
oral testimony in addition to written
testimony already filed, dealt with
diverse and complex issues; .. the 68 volumes
of transcripts contained nearly 10,000
pages and 740 exhibits.
The·
Administrative Law Judge presiding over
the hearing then reached a decision,
summarized in nine findings and
conclusions.
1
Paper presented at the First North American
Riparian Conference, Tucson, AZ, April 16-18,
1985.
2
Stewart D. Allen, formerly staff Recreation
Specialist, Montana Department of Natural
Resources and Conservation, is now a private
consultant in Helena, MT.
426
This paper discusses Montana's testimony
estimating the economic value of
recreational losses that would result from
the project, how those estimates fared in
the hearing, and how they were interpreted
by the Judge in his decision.
THE PROPOSED PROJECT
The proposed 925-foot long, 30-foot tall
darn would span ~he Kootenai River just
above Kootenai Falls, located near the
town of Libby in northwestern Montana. An
intake structure upstream from the darn
would funnel water from the reservoir to
an underground powerhouse before returning
it to the river downstream from the Falls.
The average annual flow of water over
the Falls is about 13,000 cubic feet per
second (cfs). Water flows fluctuate
because of varying releases from Libby
Darn, a 400-foot high structure 26 miles
upstream that inundates about 90 miles of
the Kootenai in the U.S. and Canada.
The Applicant plans to maintain a
minimum flow of 750 cfs over the top of
the darn (and hence over the Falls) at all
times.
Irregular concrete structures
would be placed in the current between the
darn and the Falls, to direct water over
portions of the Falls that would normally
be dry at this flow, which is less than
the recorded minimum.
The Falls do not have a continuous
vertical drop such as Yellowstone or
Niagara Falls, but consist of an initial
plummet of 15 to 30 feet followed by a
series of smaller falls and cascades
through a two-mile long canyon.
Access to the Falls area is provided by
State Highway 2, which parallels the river
for many miles.
A dirt road leads to an
overlook, but the view is partially
obscured and the Falls are several hundred
yards away.
Rough trails lead down a
steep hillside and across a flat area to
the crest of the Falls.
Other trails lead downstream along the
water's edge above the rocky canyon
walls.
A swinging footbridge crosses the
river one-half mile downstream from the
Falls, providing access to the undeveloped
Forest Service lands on the other shore.
Most of the 64,000 or so people who
visit the area annually come to view the
Falls. Trout fishing is popular in the
swift-flowing waters and rapids stretching
several miles above the Falls, where the
fishery is rated as a Blue Ribbon (highest
value) trout stream.
Other activities
include picnicking, hiking, and boating.
Few people raft or kayak the canyon below
the Falls, which is Class IV and tougher
whitewater.
The project is controversial among local
residents.
A mail survey of Lincoln
County residents conducted by DNRC found
that s~ightly more people oppsed the dam
than favored it, with only 16 percent
neutral.
STATE TESTIMONY ON RECREATIONAL VALUE
The State gained its information on
recreational use of the Falls from three
surveys: two onsite recreational use
surveys; and a mail survey of county
residents.
This data, combined with many
site visits and secondary research, formed
the basis for DNRC's description of the
existing environment and impact analysis.
The State's EIS said that opportunities
for viewing the falls, currently the most
popular recreational activity at the site,
would change substantially if the dam were
built.
The falls would not be inundated,
but the amount of water flowing over them
would decrease greatly, lowering the
Falls' visual appeal and the s~unds of
crashing water present at higher flows.
altered because the setting would take on
a more developed, utilitarian atmosphere
detracting from existing, more-natural
conditions.
The State believed that recreational
opportunities that would be created by the
project were already available on the
Kootenai River, while opportunities that
would be damaged were unique.
Northern Lights' proposed mitigation for
impacts to recreation, the State
testified, would not be effective.
Upgrading the primitive existing
facilities and improviqg access to the
falls would not make up for changing
aspects of the falls area that visitors
value the most.
Proposed visual mitigation--redirecting
flow with concrete "rocks," would be
ineffective given the small amount of
water, the State said.
Fewer people would
be motivated to walk down to the Falls
and many of the site's amenities would,be
lost or reduced.
The State also conducted an inventory of
waterfalls because of debate over whether
Kootenai Falls was the last undeveloped
waterfall on a major river in Montana.
This was found to be the case and
moreover, the State concluded tha~
Kootenai Falls was the largest remaining
undeveloped waterfall on a major river in
the entire Pacific Northwest.
This increased the significance of the
expected impacts to recreation, because
the adverse changes would affect a unique
recreational resource.
Having described the existing
recreational setting, impacts, and the
resulting losses in recreational
opportunities, the State attempted to
place a dollar value on these losses.
We
believed that this effort required
estimating not only direct use values
(those associated with on-site
recreational use by current visitors)
but
~ndirect values (those not dependent ~n
current site use).
Opportunities for fishing the popular
stretch of water above the falls would
decrease as the run-of-the-river dam
slowed water velocity and created more
habitat suitable for non-game fish
species.
Based on past studies, the State
classified indirect values into three
categories: option value--individuals'
desire to preserve the resource for their
own possible future use; bequest
value--the desire to preserv~ the resource
so it can be experienced by future
generations; and existence value--the
benefit of just knowing that the resource
exists.
Other recreational activities available
in the area, ranging from whitewater
boating to picnicking and hiking, would be
The State estimated values using several
different methods, each designed to
measure a different type of value.
These
427
were the travel cost ~pproach and two
types of contingent valuation methods:
willingness-to-pay (with either a utility
fee or entrance fee payment vehicle); and
willingness-to-sell, or compensation.
So~e respondents were also asked to
complete a willingness-to-drive measure,
indicating how far out of their way they
would drive visit the Falls.
the methods attempted to estimate the
indirect values to current non-users of
Kootenai Falls, an amount that could
greatly increase estimated value
(Sutherland 1982). The State had hoped to
conduct a broad regional survey of
non-users, but budget constraints did not
permit it.
The travel cost method, which estimated
demand functions for the site from
observed visit rates corresponding to the
travel costs from origins at varying
distances from the falls, was used to
estimate direct use values associated with
the falls area.
For the contingent valuation methods,
visitors to the falls were requested to
participate in an iterative bidding game.
In one variation, respondents were asked
how much they would be willing to pay for
an entrance fee (or how much could be
added to their monthly utility bills) to
preserve the falls.
In the other,
respondents indicated how much they would
have to be paid (via a reduction in
monthly utility bills) to compensate for
development at the falls.
Describing the many intricacies of the
methods used and the variations in
findings is beyond the scope of this
paper, but the State used many techniques
to control for strategic, hypothetical,
and informational biases.
For example,
starting bids and jump bids were varied
systematically, and respdndents were given
one of four levels of information on the
project before asked the economic
questions.
Duffield (1984) contains a more complete
discussion of the estimation techniques
and Allen (1982) provides more detail on
the use of surveys in recreation impact
analysis.
In summary, the State said that the
project would cause irreversible and
irretrievable damage to a unique, valuable
recreational resource, and that the
economic value of these impacts was
quantifiable and
significant--conservatively estimated at
over seven million dollars annually.
Respondents also were asked to place a
value on the Falls if the dam were built.
This figure was subtracted from the
existing value amount they had bid, to
approximate losses in recreational value.
The State believed that compensation was
the most appropriate measure of
recreational losses accompanying the
project, because both direct and indirect
values were included.
The literature also
contains support for using compensation to
measure damages to amenity resources
(Knetsch 1980) and to measure lost
benefits (Dwyer et al.
1976; see also
Philip Meyer's paper in this
proceedings).
The different methods, as expected,
yielded different value estimates.
The
travel cost approach resulted in an
estimated annual value of $355,600 for
direct use of the falls.
The
willingness-to-pay an entrance fee
estimated annual direct use values as
$85,200. The willingness-to-pay on monthly
utility bills resulted in an annual value
of $1,060,700; this estimate was assumed
to include some indirect values .•
Finally, the compensation approach, also
assumed to include indirect values,
estimated annual recreational value of the
falls as $7,680,000.
The State said that these values were
conservative because they assumed minimal
increasing use levels at Kootenai Falls
and that the value. of the falls would not
increase over time.
In addition, none of
428
In a later brief, the State said the
estimate of recreational value lost should
be treated as a risk, given professional
debate over the best estimate of the
amount.
NORTHERN LIGHTS'
RECREATION TESTIMONY
The project developers
testified before
FERC that the proposed dam would not have
such a dramatic effect on recreation at
Kootenai Falls.
Their prediction that the project would
not damage recreation opportunities at the
Falls, and would improve them in some
ways, was grounded in their definition of
the setting, which differed from the
State's. The company's recreation
specialist said the Falls served primarily
as a rest stop to travelers passing by and
as a social gathering area for local
residents.
He testified that "Kootenai
Falls, while scenic, is not in my opinion
a place people will visit to gain a high
quality natural experience."
He said that planned improvements in
recreational development at the Falls,
such as more picnic tables, better trails
and access, and opportunities to tour the
powerhouse, would attract more visitors.
Existing opportunities would not be
affected because there would still be
water flowing over the falls.
Mitigation,
he testified, would include placing
concrete structures between the dam and
falls, to divert water over the steepest
ledges closest to viewers.
Northern Lights questioned the survey
methodology and findings of the State's
two onsite surveys.
Their attorneys also
disputed the waterfall inventory, claiming
that the geographic boundaries were
inadequate, that some undeveloped
waterfalls were omitted from the
inventory, and that Kootenai Falls was not
a unique resource.
The Applicant did not conduct economic
analyses of recreational opportunities,
but its lawyers questioned the State's
testimony on several grounds.
They said
that the most serious flaw with this
testimony was its mischaracterization of
Water Resources Council guidelines for
economic valuation.
The use of
compensation, they stated, was not
reliable.
Much testimony and cross-examination, in
fact, centered on whose interpretation of
the Water Resources Council guidelines was
correct--even though everyone agreed that
they didn't strictly apply because the
proposed dam was not a federal project.
The Applicant also said that because
compensation survey respondents did not
know much about the proposed project, they
didn't have an adequate basis for giving
dollar bids.
The large proportion of
first-time visitors from out-of-State knew
they would not likely be affected so the
entire procedure was too hypothetical.
Moreover, the Applicant said, the
difference between the compensation
willingness-to-pay methods, both of
attempt to value the same resource,
that estimating dollar values was
unreliable.
large
and
which
showed
Northern Lights' ultimate argument,
however, was that indirect recreational
values could not be described as economic
values: "Applicant maintains that it is
not possible, in either theory or
practice, to convert indirect values into
economic values, and any analysis which
purports to do so is inherently flawed •.•
The indirect use value of a resource
cannot be bought and sold in the market
place and therefore cannot have an
economic value."
The few impacts to recreation, the
company said, could be mitigated, and
planned recreational development would
improve recreation at the Falls. The
company said the dollar value claimed by
the State to represent recreational losses
was therefore unfounded.
TESTIMONY OF THE FERC STAFF
At the hearings, FERC provided its own
testimony on the value of recrearion.
Its
staff economist used a variation of the
Unit Day Value method (~n approach the
State claimed was "crude at best") to
estimate the direct use values of the
Falls at $130,000 annually.
The proposed
dam, he said, would reduce this value to
about $50,000 annually.
During the intensive cross-examination
of witnesses, FERC maintained a low
profile, leaving most of the
cross-examination to the State, the
Applicant, and the groups opposed to the
project.
These parties were therefore
interested in how the FERC staff would
view the project in its initial brief.
Published in August, 1983, the brief was
highly critical of the project, stating,
"Staff strongly believes that the issuance
of a license to the Applicant in the
instant proceeding is not in the public
interest and, accordingly, recommends that
the Applicant's request for a license be
denied •.. The record shows that, on
balance, the preservation of the Kootenai
Falls area far out-weighs the need for the
project."
FERC said that the project would have
significant and unavoidable impacts on
visual and recreational resources, in part
because of the greatly reduced flows over
the Falls. It did not believe that
proposed mitigation would be effective,
saying "The net result of Licensee's
proposal is the destruction of (one of)
the last remaining waterfalls in the
Pacific Northwest and its replacement with
an outdoor water fountain."
The brief argued that both the level and
quality of recreational use at the Falls
would decrease, and that planned
recreational development, the need for
which was not shown, would not offset
these losses.
In summary, Northern Lights believed it
had designed an environmentally sound,
efficient run-of-the-river dam that would
minimize effects to the aesthetic and
recreational setting, which was not a
unique or particularly valuable resource.
429
those values are to be given ..• However, as
discussed hereafter, these indirect values
are an important aspect of the decision
that no license should issue."
THE ADMINISTRATIVE LAW JUDGE'S DECISION
After considering the sum of written and
verbal testimony, the Judge denied the
application for license.
His decision was
based both on the lack of need for the
energy and on the project's
impacts--particularly those to recreation
and aesthetics at the Falls.
His order specified that, "The
conflicting interests instrumental in the
denial of the application are the changes
in the sensual and recreational values
that would be caused to the Kootenai Falls
by the proposed project ••. "
The Judge did not accept Northern
Lights' position that the quality of
recreation at the Falls would not
decrease.
Similarly, he accepted the
State's view that proposed mitigation
would not reduce recreational and visual
impacts.
He also agreed with the State
that the Falls was a unique resource,
although he didn't agree entirely with the
State's waterfall inventory.
In interpreting the decision, it is
important to remember that the Judge's
standard was whether or not construction
of the project would be in the public
interest.
A central concern was whether
the expected impacts would outweigh the
benefits of hydroelectric power, and he
decided that the current need for the
project had not been demonstrated.
The Judge based his interpretation of
the testimony on indirect economic values
on several of the Applicant's criticisms
of the State's estimation methods.
He
agreed that because the majority of
visitors were from out-of-State and were
seeing the Falls for the first time, their
dollar bids should carry little weight.
He felt they were not sufficiently
informed about the project and its effects
to make accurate judgmen.ts about value,
and that they were not personally and
economically involved enough for their
views to be considered.
Perhaps more importantly, the Judge
questioned the difference between the
compensation and willingness-to-pay value
estimates: "Anyone is going to be
skeptical of methodologies that purport to
measure the same subject and get results
sometimes as much as twenty times
different •.. (the) opinion that these
surveys should not be given great weight
by decision makers is persuasive."
The
State's argument that it was appropriate
for the two methods to obtain different
values was not accepted.
In the Judge's Findings and Conclusions,
he put it more strongly: " •.. it is not
possible to put a dollar value on the
principal indirect costs that would result
from construction of the Kootenai Falls
project."
If the need for power had been clearly
shown, the Judge may have taken a closer
look at the some of testimony (or asked
for additional information).
An example
of this was the Judge's view of the
IMPLICATIONS FOR RECREATION ECONOMICS
waterfall inventory.
The Judge believed
that the Falls' indirect values stemmed
from their unique nature, but said, "If
the need for this potential power were
more pressing than it is, it might be
important to assess in a detailed manner
just how unique the Falls are."
Having denied the license, in part on
predicted impacts to recreation, the Judge
discussed his impressions of the economic
testimony.
The Judge first decided that
the direct use values were relatively
small, and would not in themselves block
issuance of a license.
The issue then
became the level of indirect values.
He said, "(the State) gave credible
evidence as to the direct use value of
Kootenai Falls, but there is no credible
dollar estimate of the indirect values.
This does not mean that those values are
unimportant.
It only means that a
judgment has to be made as to what weight
430
The Judge's perceptions of indirect
recreational values should leave
recreation economists with mixed
feelings.
The good news was that the
Judge understood and accepted the concept
of indirect values.
However, his refusal
to accept dollar estimates of those values
suggests it may be difficult for them to
be accepted implicitly in cost-benefit
analyses.
The case has several implications for
recreation economists attempting similar
analyses in contested case hearings and
other situations.
1. Economic analyses may have value even
if the actual estimates are subject to
professional debate.
Reflecting on the
case, one of the State's lawyers believed
that the primary value of the economic
testimony was to structure the Judge's
thinking about recreation impacts, giving
him a framework to acknowledge indirect
values.
Without the actual estimates, the
Judge would not have had a range of values
to consider.
2. Estimates of recreational value must
be firmly grounded in a description of the
resource being valued.
The State first
had to convince the Judge of the
recreational importance of the Falls, and
then of the project's damaging effects,
before he could consider indirect values
and dollar estimates.
Analyses that produce dollar estimates
without first systematically describing
the recreational attributes and uses that
are being valued may be rejected.
If a
survey is conducted, for example, one
would be wise not to simply ask visitors
the minimum number of questions necessary
to derive demand curves, or provide
contingent valuation estimates.
Suppportive data are needed.
In the Kootenai Falls hearings, the fact
that a recreation planning, management,
and behavior specialist was working in
conjunction with an economist greatly
aided the State's case.
Neither was
familiar with the methods and approaches
of the other, and the resulting exchange
of information necessary probably helped
both individuals.
3. Good research does not necessarily
make good testimony.
The many
questionnaire variations designed to test
for biases probably confused the Judge,
and the Applicant tried to capitalize on
this.
The use of several different
methods to estimate different types of
economic values also limited the Judge's
acceptance.
This is not to say that in
retrospect the State would have only used
one method (such as compensation) to
estimate values, but one should be
prepared to deal with the complexities
involved.
4.
Northern Lights' position that
values cannot be quantified is a
topic that merits further research.
More
studies that attempt to actually test the
validity and reality of individuals'
dollar bids for recreational opportunities
would help to persuade others that such
procedures are not entirely hypothetical.
Of course, as more compensation studies
are conducted and applied to similar
situations, they may gain acceptanc~
ind~rect
A survey of non-users of Kootenai Falls,
had it found that regional residents would
be willing to pay to have a more expensive
energy source developed to preserve the
Falls, could have anchored the State's
estimates of indirect values.
Such
studies should be seriously considered,
especially because the values involved
could be significant.
431
5. Some of the problems encountered are
perhaps inherent in recreation economics
testimony.
A State lawyer pointed out
that if the Judge had accepted the
indirect dollar estimates for recreation
losses, a case could have been made that
the indirect values of the hydroelectric
energy should also be considered.
Perhaps people place a value on knowing
that an energy source is located closer to
their homes, or that the source is cleaner
than a coal-fired power plant, or that
future generations will be able to depend
on renewable energy.
Needeless to say,
this really throws the economic analyses
for such projects wide ~pen, creating a
potentially uncomfortable situation for
decision makers.
Also, a full analysis would ideally
consider the indirect values and losses
present at alternative energy sites--a
monumental task for the typical EIS
budget.
CONCLUSIONS
Hydroelectric projects may yield very
large, credible economic value in terms of
the energy produced.! If recreation (or
other resources) would be adversely
affected, the value of impacts to direct
use may not be sufficient to outweigh the
power benefits unless the affected
resource is both unique and extremely
popular.
The value of indirect benefits may
therefore be crucial to future development
decisions, and is worthy of attention by
lawyers, economists, and recreation
professionals alike.
Finally, the tale's not over.
Northern
Lights appealed the Judge's decision to
the full Commission claiming, in part,
that the State had failed to convince the
Judge that indirect values could be
quantified.
FERC's decision is due this
summer.
LITERATURE CITED
Allen, S.D. 1982. Evaluating the impacts of
resource development on recreation: A case
study. Proceedings of the Intermountain
Leisure Symposium, Brigham Young University,
November, 198~.
Duffield, J. 1984. Travel cost and contingenl
valuation: A comparative analysis. Advances
in Applied Micro-Economics 3: 37 - 50.
Research for Parks and Recreation in the 80s.
University of Victoria, Canada.
Dwyer, J.F., Kelly, J.R., and Bowes, M.D. 1976.
Improved procedures for valuation of the contribution of recreation to national economic development. Research Report 128, University of
Illinois, Urbana-Champaign.
Knetsch, J.L. 1980. Disparities between alternative
measures of economic values. Proceedings, Applied
432
Sutherland, R.J. 1982. Recreation and preservation
valuation estimates for Flathead River and Lake
system. Kalispell, MT: Flathead River Basin
Commission.