SAN JOSÉ STATE UNIVERSITY
ECONOMICS DEPARTMENT
Thayer Watkins
The Tennessee Valley Authority TVA
The Tellico Dam Project
The Tellico Dam on the Little Tennessee River was approved and funded by
Congress in 1966. TVA did a benefit cost analysis of the Tellico Dam
in 1968 and declared the dam was economically worthwhile. The land which
would be submerged had already been purchased and construction was
scheduled. But in 1973 Congress passed the Endangered Species Act and
it was determined that the Tellico Dam would be a danger to a tiny fish
called the "snail darter." Construction was stopped while the issue of
the snail darter was resolved. The dam was completed in the late 1970's.
There were two cost benefit studies carried out for the Tellico
Dam, the first by TVA in 1968 and a second for the Endangered Species
Committee. Their results are shown below:
Cost Benefit Analyses
for the Tellico Dam
on the Little Tennessee River |
| | TVA 1968 | ESC 1978 |
| Benefits |
| Electrical Power | $0.9 million | $2.7 million |
| Navigation Benefits | $0.9 million | $2.7 million |
| Flood Control | $1.1 million | $1.0 million |
| Recreation Benefits | $3.7 million | $2.5 million |
| Water Supply (agric.) | $0.2 million | $0.15 million |
| Employment Created | $8.1 million | $0.0 million |
| Enhanced Land Value | $1.6 million | $0.0 million |
| Costs |
| Annualized Dam Cost | $5 million | $3.2 million |
| Annualized Land Costs | $0.0 million | $4.0 million |
| Net Benefits |
| Net Benefits | $11.5 million | -$0.75 million |
There were some major conceptual errors in the TVA1968 estimates. These
include:
- Inclusion of the income from the employment created by the dam.
The benefit of job creation would only be valid in the case of chronic
unemployment. In effect, the inclusion of such benefits says there is no
opportunity cost for the labor used in the project.
- The lack of a cost for the land which would be submerged by the project
on the basis of the fact that the land had already been purchased.
- TVA used a nominal interest rate of 10 percent whereas it should have
used the real interest rate in computing the annualized costs.
- The inclusion of enhanced land values represents a duplication or
double counting of the benefits from flood control, recreation and so forth.
- The recreation value of the project was overestimated because the
availability of alternate recreational opportunities in the area was
not taken into account.
TVA's estimate of the value of the power generated was low. This was
not a conceptual error. TVA did not and could not have anticipated the
increase in the price of energy in the 1970's. TVA also did not anticipate
the decline in barge traffic and hence overestimated the value of
navigation resulting from the project.
The conclusion of the
Endanged Species Committee is that the net benefit of the project was
negative and therefore it was not worthwhile. This is in contrast to
TVA's conclusion that it was worthwhile. Nevertheless the Tellico Dam
was completed.
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