Risk Costs for New Dams: Economic Analysis and Effects of Monitoring

This paper presents new developments and illustrations of the introduction of risk and costs in cost‐benefit analysis for new dams. The emphasis is on a method of evaluation of the risk costs based on the structure of the local economy. Costs to agricultural property as well as residential, commercial, industrial, and public property are studied in detail. Of particular interest is the case of sequential dam failure and the evaluation of the risk costs attributable to a new dam upstream from an existing one. Three real cases are presented as illustrations of the method: the Auburn Dam, the Dickey‐Lincoln School Project, and the Teton Dam, which failed in 1976. This last case provides a calibration tool for the estimation of loss ratios. For these three projects, the risk‐modified benefit‐cost ratios are computed to assess the effect of the risk on the economic performance of the project. The role of a warning system provided by systematic monitoring of the dam is analyzed: by reducing the risk costs, the warning system attenuates their effect on the benefit‐cost ratio. The precursors, however, can be missed or misinterpreted: monitoring does not guarantee that the risks to human life can be reduced to zero. This study shows, in particular, that it is critical to consider the risk costs in the decision to build a new dam when the flood area is large and densely populated.