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2 Findings and Recommendations SPATIAL PRICE MODEL AND ESSENCE The report from the Phase I committee stated that neither the Septem- ber 2000 form of the spatial price model nor the results of the ESSENCE model should be used in the feasibility study (NRC, 2001~. That review recommended structural changes in the ESSENCE model and the incorpo- ration of empirically determined coefficients of the elasticity of waterway traffic demand. More generally, the Phase I committee report advocated the development of a suitable spatial price model. In response, the Corps stated that further development of the spatial price model should occur but "in a research and development setting outside the study process" (USAGE, 2003b, p. 1~. This committee did not explore the details of the Tow Cost Model; however, the TCM is not widely accepted by economics experts, or even by the Corps, as a useful tool for modeling water transportation demand for grain. Furthermore, the decision to adopt the Tow Cost Model contradicts advice about demand modeling provided in the NRC Phase I report by an independent group asked for advice in improving the study's economic analyses. The Corps proposes that national economic development (NED) benefits from navigation improvements will be estimated from the Tow 22

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Findings and Recommendations 23 Cost Model and, alternatively, from the ESSENCE model, using two differ- ent but arbitrary values for the N coefficient (elasticity of demand for wa- terway transport). No supporting data have been presented to indicate why these are in fact lower and upper bounds or what might be the best esti- mates of N. Furthermore, the ESSENCE model, in its original form, adopts a functional form that should be regarded as a highly simplified ap- proximation. When used outside a narrow range, it yields implausible re- sults. The nature of the current application across time and space stretches that simplified specification beyond the range in which it might be a useful approximation. Few of the Phase I committee's key recommendations for enhancing the value and credibility of the ESSENCE model have been im- plemented, and this committee finds the absence of a spatial price model unacceptable. There is no useful role for the ESSENCE model in the restructured feasibility study. The Corps is to be commended for initiating the development of a spa- tial price model. This committee, however, finds that the steps taken in the restructured feasibility study represent inadequate responses to the NRC Phase I report. Model development efforts have not adopted, for example, . . . . . . . . . . . tea lStlC assumptions regarc ~mg spatial variation in gram proc suction anc ~ shipping costs, the range of ports that might be accessed by regional grain producers, domestic processing demands and the location of these de- mands, or global grain supplies and demands. The restructured study also assumes that the division of grain exports among available ports will not change, which is an unlikely assumption. As lock congestion builds on the U.S. inland waterway system, domestic markets and alternative ports and toutings become increasingly feasible and likely. For example, overland grain exports to Mexico may increase as lock congestion builds, as may rail shipments to Pacific Northwest ports or shipments to domestic markets now served by Mississippi River basin grain production. Moreover, since 80 percent of U.S. corn production is consumed domestically, some dimen- sion of this demand should be explicitly modeled. With some improve- ments and adjustments, existing spatial grain models could be adapted to give superior insight to the approaches currently considered by the Corps. Appendix A identifies and discusses key factors that should be included in the development of a credible spatial price Codeless. Appendix A also de- scribes a transportation demand model developed for the Panama Canal

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24 Upper Mississippi-Illinois ~aterlYay Restretched Feasibility Study: Interim Report (see Fuller et al., 1999~. This committee has not sufficiently studied the Panama Canal transportation demand model to be able to recommend it specifically for use in the UMR-IW~T study; however, it is a fully developed model that goes a long way toward incorporating the elements of a full spa- tial equilibrium model, and it merits investigation by the Corps. If the Corps develops its own spatial price model, this development could proceed in clearly defined modules. One module should forecast the amount of grain grown in the upper Midwest, which will be a function of the cost of growing grain and other commodities compared to prices at which grains and alternative commodities could be sold. Another module should examine grain production in other grain-producing regions around the world (especially Argentina and Brazil) and associated prices. Another module should focus on world demand for grain, which is a function of population, income, domestic production, and global market prices of meat for import. Appendix A lists additional factors that should be included in a credible spatial price model of UMR-IWW transportation demand. If these types of improvements and adjustments are to be made and incorpo- rated into the feasibility study, the current schedule for study completion will have to be relaxed. Demand Forecasts The Corps should be commended for applying a scenario approach to forecasting future waterway traffic demand. The Corps contracted with Sparks Companies, Inc., of Memphis, Tennessee, to provide a report de- picting a range of future economic scenarios and resulting demand for barge transportation (Sparks Companies, 2002~. Drawing from the Sparks study, the Corps is using Eve scenarios of future grain exports. Four of the Eve scenarios assume substantial increases in exports, and the fifth assumes little to no change in current levels. After exhibiting increasing trends from 1950 to 1980, U.S. grain exports have since shown almost no growth (USDA, various dates). There is little compelling evidence for a substantial increase in world demand for U.S. grain exports over the next decade or two. Indeed, several factors could contribute to declining grain exports. For example, there is an increasing tendency among Asian nations to import U.S. meat products directly, rather

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Findings and Recommendations 25 than to import grain for feed in their own nations. Further, South Ameri- can nations such as Brazil are increasing domestic soybean production lev- els, which could reduce global grain market demands for U.S. exports. Yet despite nearly 25 years of essentially stable U.S. grain export levels, four of the live scenarios in the feasibility study assume substantial increases in ex- port levels. Given the relatively flat level of exports over the past two dec- ades, the committee views the projected increases in four of Eve scenarios with some skepticism. Forecasts of increases in U.S. grain exports should present explanations for likely export trends after 2003 that are consistent with history and with expert opinion on likely future con- ditions in global grain markets. The committee looks forward to dis- cussing the assumptions, methods, and projections with the Corps' consult- ant at our next meeting. MANAGING WATERWAY CONGESTION The Phase I committee report urged the Corps to conduct a "compre- hensive review and assessment of nonstructural options for improving traf- f~c management" (NRC, 2001~. The Corps then requested the Volpe Na- tional Transportation Systems Center to evaluate a number of traffic man- agement measures. In addition, the Corps conducted its own analysis of congestion fees (to be implemented through a lockage fee). This commit- tee commends the Corps for seriously considering a lock usage fee, even though existing legislation prohibits implementation of such a scheme. Economic incentives, including lock usage fees, should produce net eco- nomic benefits. However, a true congestion fee is a contingentiee that is lev- ied only at times of congestion and only on tows that contribute to conges- tion. Although implementing such a fee is admittedly not a simple matter, the resulting benefits should be greater than those obtained from a simple lock usage fee of comparable magnitude. At the committee's September 2003 briefings, it was stated that other traffic scheduling alternatives had been analyzed by the Volpe National Transportation Systems Center and were found infeasible. The report from the Volpe group was not available to this committee at its September 2003 meeting, and details were not provided at that briefing. The committee

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26 Upper M'ssissippi-Illino's Waterway Restretched Feasibility Study: Interim Reporl subsequently received the Volpe report (Dyer et al., 2003), which it looks forwarding to discussing with the authors. In addition to a congestion fee, the Corps should evaluate other nonstructural measures for improving traf- f~c management, such as tradable arrival slots and industry self-help sys- tems. The Corps' feasibility study maintains that the "without-project" condi- tion will include continued use only of the current traffic management sys- tem (mainly a "first come, first served" system). This is contrary to findings of the 2001 NRC report, which stated that the benefits of proposed lock extensions to the existing system cannot be evaluated fully until the existing system is operated more efficiently and recommended that the Corps apply a wider range of options for managing congestion. Like the report from the Phase I committee, this report also finds that meaningful planning of lock extensions must await the time when the existing system is operated at reasonably full efficiency and that the without-project condition should in- clude traffic management measures that achieve more effective operational efficiency of the existing system. Moreover, because improved waterway traffic management should shorten the idle time of tows at locks and be- tween locks, such measures could also reduce environmental impacts such as fish entrainment and increased turbidity. This committee appreciates the challenges of implementing such measures. Developing and implementing an effective nonstructural traffic management systems on the UMR-IWW will not be simple, quick, or in- expensive, and it will clearly entail both progress and setbacks and will re- quire time and resources. The time required to implement and evaluate a nonstructural schemers) suggests that a relaxation of the current feasibility study schedule is in order. Technologies for establishing such a system are available and hold promise for reducing the costs of congestion. The Corps should proceed as soon as practicable toward developing and implementing a nonstructural system to help alleviate waterway traf- fic congestion.

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Findings and Recommendations 27 INTEGRATED SYSTEMS PLANNING River Ecology The initial feasibility study for the UMR-IWW had a narrow focus with regard to environmental concerns and issues of environmental sustainabil- ity. The restructured study is assuming a broader focus on these issues, and the committee commends the Corps for broadening the scope to deal not only with the ecological impacts of lock extensions and other measures for enhancing navigation, but also with the ecological impacts of baseline op- erations of the existing system of locks and dams and navigation pools. Indeed, the Corps' Interim Report (USAGE, 2002, p. 18) acknowledges that economic and ecological needs should be of equal priority. A broad, holis- tic perspective is also necessary because of the significant implications of Mississippi River water quality and sediment transport for downstream re- gions in and along the Gulf of Mexico. The Corps should thus, to the maximum extent feasible, consider factors such as water quality, flood dam- age reduction, and sediment transport in order to reflect a more holistic approach to dealing with the diverse management issues in the UMR-IWW. The Interim Report (USAGE, 2002) describes many management alter- natives that the Corps is considering not only to mitigate effects of pro- posed navigation system expansion, but also to repair environmental dam- ages caused by the existing system of locks and dams and navigation pools. Nonetheless, there may be problems in achieving the environmental goals because as that report noted, "ecosystem restoration is not a specifically authorized purpose of the 9-Foot Channel Navigation Project" (USAGE, 2002~. Congressional action may thus be necessary and appropriate for expanding the purposes of the UMR-IW~t to include environmental sus- tainability. A general observation is that the Corps' analysis regarding river ecology is less advanced than its navigation studies, due largely to the relatively re- cent broadening of the feasibility study to better evaluate and integrate eco- logical concerns. The committee's comments on these aspects of the study are similarly less specific than its comments on the economics of waterway transportation.

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28 Upper M'ssissippi-Illinois ~aterlYay Restretched Feasibility Study: Interim Report Adaptive Management The recommendations from the Phase I committee included a proposal that the Corps implement adaptive management principles within the feasi- bility study. The Phase I committee was concerned with the "adaptive miti- gation" strategy discussed in the feasibility study, which the committee found "inconsistent with the principles of adaptive management articulated in the natural resources management literature" (NRC, 2001, p. 7~. In re- sponding to the NRC (2001) report, the Corps' background summary (USAGE, 2003a) stated that the "mitigation plan will incorporate the prin- ciples of adaptive management." This committee regards that assurance as a positive sign but awaits further evidence of progress. Adaptive management does not apply solely to mitigation, as some sec- tions of Corps reports imply. The approach is equally valuable in planning ecosystem restoration activities (see following section) and in planning and implementing structural and nonstructural solutions to waterway conges- tion. Furthermore, adaptive approaches should aid in developing strategies for large, unanticipated events such as floods. This is especially important in the UMR-IWW context because floods have long posed management challenges along the UMR-IW~T. Flood problems could also be affected by regional changes in climate patterns. An adaptive management approach should help the Corps better understand how to adjust to future changes, and the Corps should consider the possibility of changes such as long-term changes in climate. The adaptive management approach can also help focus attention on nonstructural solutions that avoid, in the words of the Phase I committee, "the trap of irreversibility." Many of the environmental restoration, mitigation, and environmental enhancement actions proposed for the Upper Mississippi reflect a collabo- rative effort between the Corps and the U.S. Fish and Wildlife Service. Many of the ongoing ecological investigations reflect current techniques and current ecological understanding. Although the approaches are under- stood, the probabilities regarding implementation and resulting ecological outcomes are uncertain. Moreover, the Corps has had only marginal suc- cess in gaining support from the administration and Congress for ecological projects of such magnitude. Given these conditions, it is appropriate that this effort be conducted within an adaptive management framework, A1- though this framework is described in the Corps' 2002 Interim Report only

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Findings and Recommendations 29 in the context of mitigation, it features prominently in the draft 2003 report (Lubinski and Barko, 2003) from an environmental science panel formed by the Corps as part of the feasibility study and espoused by the authors as "the overarching theme of future integrated efforts for management of the UMR-IW~T" (p. 1~. Such an adaptive approach will involve carefully and openly crafting experiments, closely monitoring results, and consulting both stakeholders and program objectives to adjust plans accordingly. It will also require the involvement of stakeholders, an organizational structure to oversee the efforts, and a fiscal commitment to support the activities. The Corps' Interim Report and the 2003 draft science panel report de- scribe some processes that might be amenable to adaptive management (e.g., the Corps has undertaken some limited experimentation in the draw- down of Pool 8 to improve ecological conditions), but they also note po- tential difficulties. Given the extent of this effort and the probable need for adaptation in progress, the adaptive management paradigm would none- theless seem ideal. Recent National Research Council reports on the Mis- souri River ecosystem (NRC, 2002) and on Glen Canyon Dam operations (NRC, 1999) describe the use of such adaptive management processes in more detail. The Corps should implement adaptive management con- cepts and approaches throughout all aspects of the planning process. Trade-offs On a river system used as intensively as the UMR-IWW, enjoyment of the system's benefits by one user or sector typically has effects on other users or other sectors. For example, increases in towboat traffic will have negative effects on fish and river ecology; the drawdown of navigation pools is good for river ecology, but these actions can expose sandbars and mudflats, which can be bad for boaters. As a result, management decisions that enhance benefits for one sector without diminishing benefits for an- other (so called win-win scenarios) are likely to be small in number and ex- tent in comparison with more contentious scenarios that involve trade- offs with winners and losers between users and sectors. Many of these latter types of scenarios are underpinned by fundamental differences in values and perceptions, yet traditional planning approaches offer little more

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30 Upper M'ssissippi-Illinois Waterway Restr~c~red Feasibility Study: Interim Reporl than analytical results for solution. Better guidance from Congress and the administration on how to prioritize river uses and to weigh major trade-offs would be useful to the Corps, which is limited in its ability to allocate fed- eral resources among competing objectives and users. Even in the absence of new guidance, some things can be done to fa- cilitate trade-offs between users of the benefits from the Mississippi and Illinois Rivers. Some aspects of environmental restoration are amenable to quant~cat~on and monetization, such as instances In which restoration ob- viates the necessity of costly mitigation or where the public may exhibit measurable willingness to pay for the improvement. In the latter case, re- vealed preference methods, such as the travel cost method or hedonic price analysis, may be employed in specific instances. Stated preference methods, such as contingent valuation analysis, can be applied in most if not all in- stances. There is a rich literature on these topics, with hundreds of pub- lished texts and papers, including some published by the Corps. Although these approaches may be partial in coverage or subject to some error, there are instances in which even partial information is sufficient to resolve a trade-off. However, the committee is not aware of any environmental valuation studies being performed in conjunction with the feasibility study, so the Corps may be left with only qualitative approaches at its disposal. DECISIONS, IMPLEMENTATION, AND INSTITUTIONS Timing The Corps is on an aggressive timetable for finishing its feasibility study, especially in regard to its ability to consider this committee's recom- mendations, the bulk of which may be issued only months before a "Chief's Report" is scheduled (November 2004~. Not only does the current schedule provide the Corps with a short amount of time to respond to the present and subsequent reports from this committee in general, but imple- mentation of this report's recommendations cannot be adequately com- pleted on the current feasibility study schedule. Although the committee is prepared to conduct its review and provide advice to the Corps with due speed, and likewise respects the need to move forward with the feasibility study, the study schedule should allow adequate time for credible analysis to

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Findings and Recommendations 31 be conducted and concluded. The Corps should extend its schedule for completing the feasibility study and issuing a Chief's Report. Prioritization and Sequencing In the September 2003 discussions with this committee, Corps staff members outlined progress on an environmental restoration plan, devel- oped in collaboration with federal and state partners. This progress is commendable and addresses the Phase I committee report recommenda- tion that the Corps recognize that "environmental concerns have become a core issue in the operation of inland waterways systems" and therefore should "adapt its planning, engineering design, operations, and analysis ac- cordingly" <(NRC, 2001~. During the September 2003 briefing, the Corps presented a map of a representative navigation reach that displayed the proposed restoration pro- jects developed by the Corps and its partners. Virtually every square meter of the reach was identified as needing some type of rehabilitation, and it became obvious that some criteria and a process will be essential for priori- tizing and sequencing these projects. One such criterion might be to give priority to projects that would restore natural processes, with the expecta- tion of triggering self-repair and self-maintenance over large areas at rela- tively modest cost. For example, operating dams to restore a more natural flood pattern (spring flood followed by stable, low water levels during the summer growing season) would build on successes already achieved in pool drawdown experiments. The compaction and drying of sediments, and the recovery of vegetation itself, then would help stabilize the banks and bot- toms of backwaters, and the plants might fulfill their functions of taking up nutrients and providing food and shelter for wildlife. Priority might also be given to projects that meet multiple objectives, including (as suggested above) flood damage reduction. For example, flood easements or outright buyouts of selected levee districts might reduce future flood damages and flood heights, reduce the time during floods when the river has to be closed to navigation, and provide fish and wildlife habitat. A fundamental princi- ple of adaptive management is evaluating the outcomes of management actions (evaluation builds upon and draws lessons from data gathered from

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32 Upper M'ssissippi-Illino's Waterway R~str~c~red Feasibility Study: Interim Report monitoring programs). Since the Corps intends to implement the feasibility study with an adaptive management approach, outcomes of early restora- tion projects should be evaluated carefully. The results of these evaluations will be useful in determining the costs and benefits associated with different restoration approaches. Priority should be given to restoration projects that aim to restore natural processes and those that aim to achieve multiple objectives. The sequencing of projects should also be considered. For example, restoration of more natural hydrology throughout an entire navigation pool might restore vegetation in some areas without restoration projects or might require less expenditure on levees and pumps to promote favorable water levels within constructed floodplain impoundments. In this case, it might be useful to modify dam and pool operations before constructing or renovating wildlife management areas within the floodplain. Cost Sharing and Funding In addition to prioritization and sequencing, there are important issues related to funding and cost sharing. Several speakers at the committee's September 2003 meeting cited a previous history of Corps, administration, and congressional failure to concurrently fund navigation improvements and ecological protection and recovery. The general concern was that navi- gation projects are completed but the related environmental nrolects are funded at low levels or not at au. The best environmental plan (under the new dual-track planning process) will be of little use if it is not imple- mented. Suggestions for securing funding for ecosystem restoration in the UMR-IWW include a program similar to the Land and Water Conservation Fund or a trust fund similar to the Inland Waterways Trust Fund. The Corps has identified the potentially high costs of implementing proposed restoration and adaptive management efforts as part of the feasibility study. In order to maintain the study's credibility and ensure integration across sectors, it is important that efforts to enhance environmental benefits be carried out concurrently with efforts to improve navigation. There is less federal land along the Mississippi River in the downstream states (e.g., Missouri and Illinois) than in the upper basin. Floodplains in Iowa, Illinois, and Missouri are mainly privately held, whereas much of the

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Findings and Recommendations 33 Mississippi River floodplain in Minnesota and Wisconsin is part of the U.S. federal Upper Mississippi River Fish and Wildlife Refuge system. On fed- eral lands, the federal share of restoration projects is 100 percent; on private lands, however, local sponsors are responsible for part of the costs. In the basin's downstream states, most of the restoration projects will thus require local sponsors to provide 35 percent of the planning and construction costs and all of the long-term maintenance. Some observers have called for changes in cost-sharing arrangements to ensure that worthy restoration pro- jects in the downstream states receive similar consideration as restoration projects in the upper basin. Construction costs for extension of the locks and associated environ- mental mitigation are funded with 50 percent of the construction and envi- ronmental mitigation costs coming from the Inland Waterway Trust Fund and the remaining 50 percent from congressional appropriations. In con- trast, environmental restoration components of the project generally re- quire non-federal cost sharing: Environmental Management Program projects as authorized by the Water Resources Development Act of 1986 and amended in the WRDA of 1990 and 1999 provide 100 percent federal funding for EMP projects on National Wildlife Refuge lands and 65 percent federal, 35 percent non- federal funding for projects not located on federal lands. For modification of structures and operations of water resources projects to improve the quality of the environment under Section 1135 of the WRDA of 1986, the cost sharing is 75 percent federal, 25 percent non- federal. For aquatic ecosystem restoration and protection projects devel- oped under Section 206 of the WRDA of 1996, the cost sharing is 65 per- cent federal, 35 percent non-federal. For projects under Section 204 of the WRDA of 1992 for the protection, restoration, and creation of aquatic and ecologically related habitat in conjunction with the dredging of authorized navigation projects, incremental costs of the beneficial use of dredged material for habitat crea- tion are shared 75 percent of the costs are borne by the federal govern- ment, and 25 percent are borne by a non-federal sponsor.

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34 Upper M'ssissippi-Illino's Waterway Rtstr~c~red Feasibility Study: Interim Report Furthermore, there may be limited or no federal funding available to implement nonstructural measures because the Corps lacks the necessary authority to implement and/or fund such measures. This is an analytical concern because if proposed restoration projects are not implemented, the results from analyses assuming that these projects will be implemented (and will deliver benefits) will be discredited in proportion to the extent that the projects are not funded. The Corps should identify instances in which federal cost-sharing rules are likely to restrict or preclude implemen- tation of environmental restoration projects and nonstructural meas- ures. ENGINEERING Construction Cost Contingency The Phase I committee report (NRC, 2001) recommended that the Corps increase its standard contingency factor from 20 to 25 percent be- cause of the uncertainty associated with cost estimates for lock extensions. In its background summary response (USAGE, 2003b), the Corps stated: "Jacobs Engineering, an independent engineering firm, reviewed represen- tative large-scale cost estimates developed in the original study. The review validated that the estimates developed for lock construction alternatives are reasonable." In response to this committee's September 2003 request for the Jacobs Engineering report, the Corps indicated that the report was still being drafted. It will be necessary to obtain and review this report before this committee can comment on the Corps response. Lock and Dam Rehabilitation The NRC (2001) Phase I committee report recommended: "If new waterway traffic demand forecasts are developed, it will be important to revisit the rehabilitation costs analysis to ensure consistency with the revised traffic demand forecasts." The Corps background summary response (USAGE, 2003b) does not reply to this recommendation. This committee

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Findings and Recommendations 35 requests that th C e orps respond to this recommendation from the NRC

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