consideration to alternatives capable of meeting 

 system loads within established criteria of system 

 reliability. Base the comparison on the basis of cost 

 and other factors to determine the most likely alter- 

 native, i.e., the structural and/or nonstructural 

 measures that will be implemented if the project 

 under consideration is not implemented. 



(2) If institutional obstacles to implementation are 

 noted, an alternative plan should still be considered 

 the most likely if the barriers are substantially within 

 the power of the affected users to correct. A de- 

 tailed description of the institutional obstacles 

 should be included, with a discussion of the basis 

 for the conclusion that the obstacles cannot be 

 overcome. 



(3) If the most likely alternative includes new 

 thermal plants, use those plants' capacity costs (in- 

 cluding amortized investment costs, transmission 

 costs, and fixed operating and maintenance (O&M) 

 costs) as the measure of the value of the hydro- 

 power project's generating capacity, and use the 

 thermal plants' energy costs (primarily variable 

 O&M costs and fuel costs) as the measure of the 

 value of the hydropower project's energy produc- 

 tion. 



2.5.8 Evaluation procedure: Compute benefits. 



(a) Compute hydropower plant annual benefits. 

 .Compute annualized benefits based on the costs of 

 the most likely alternative for each hydropower de- 

 velopment and installation component. 



(1) Alternative costs, (i) Base the calculation of 

 alternative costs to be used as a measure of NED 

 benefits on the following: (A) calculate all interest 

 and amortization costs charged to the alternative 

 on the basis of the Federal discount rate; (B) 

 charge no costs for taxes or insurance to the alter- 

 native; and (C) in calculating costs of the most 

 likely alternative, use assumptions and procedures 

 that parallel those used to calculate the costs of 

 the plan being evaluated. 



(ii) In many cases, benefits may vary over the life 

 of a project. This may be due to such factors as 

 staged development of the hydropower project, 

 changes in operation of the hydropower project re- 

 sulting from changes in the resource mix in the 

 total generating system, and real escalation in fuel 

 costs (if the most likely alternative system includes 

 a thermal plant). Compute project benefits by time 

 intervals and discount these values to derive an- 

 nualized power benefits. 



(iii) When applicable, the evaluation shall reflect 

 differences in the cost of transmission, distribution, 

 and other facilities compared to the most likely al- 

 ternative. 



(iv) Occasionally, the initial output of a hydro- 

 power project is large compared to annual growth 

 in system load; two or more years may be required 

 to fully absorb its output into the load. In these 

 cases adjust the credit (benefit) to reflect the gen- 

 erating capacity and energy actually used in the 

 load in the early years of project life. 



(2) Energy value adjustment. Account for the 

 effect on system production expenses when com- 

 puting the value of hydroelectric power. Adding 

 structural or nonstructural measures of a plan to a 

 system instead of adding an alternative power 

 source may result in greater or lesser system pro- 

 duction expenses than if a particular thermal capac- 

 ity were added; the effect on production expenses 

 can be determined by performing a system analy- 

 sis. If there is a difference in system production ex- 

 penses, adjust the energy value in the economic 

 analysis of the plan. If the alternative plan would 

 lower system production costs, the adjustment 

 would be negative. If the alternative plan would in- 

 crease system production expenses, the adjust- 

 ment would be positive. Consider system produc- 

 tion expenses in determining the most likely alter- 

 native. 



(3) Capacity value adjustment The physical oper- 

 ating characteristics of hydropower projects differ 

 significantly from alternative thermal plants. Appro- 

 priate credit may be given to hydropower projects 

 to reflect their greater reliability and operating flexi- 

 bility. When the value of these characteristics 

 cannot otherwise be quantified, an adjustment can 

 be made to the alternative plant capacity costs. 

 Typically, the adjustment per kilowatt of capacity 

 ranges from 5 to 1 percent of the cost per kilowatt 

 of thermal capacity, depending on the operating 

 characteristics of the hydropower project and alter- 

 natives that include thermal capacity. The adjust- 

 ment may be applied by increasing the capacity 

 cost of the most likely alternative by the appropri- 

 ate percentage determined by the Federal Energy 

 Regulatory Commission (FERC). 



(4) Intermittent capacity adjustment The depend- 

 able capacity of a hydropower project is based on 

 the load-carrying capability of the project under the 

 most adverse combination of system loads, hydro- 

 logic conditions, and plant capabilities. This very 

 conservative approach is unrelated to the depend- 

 able capacity of a hydropower project's alternative 

 if thermal capacity is included and given no credit 

 for the value of capacity that is available a substan- 

 tial amount of the time. When power system oper- 

 ation studies show that there is an intermittent ca- 

 pacity value to the system, a capacity adjustment 

 should be made. 



(5) Price relationships. Assume relative price rela- 

 tionships and the general level of prices prevailing 



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