Optimal Hedging Rules for Reservoir Flood Operation from Forecast Uncertainties

Abstract

This paper develops optimal hedging rules for reservoir flood control operation under hydrological uncertainty using hydroeconomic and mathematical analysis. The capacity to convey flood flows is sometimes a scarce resource. Hedging for flood operations uses reservoir storage to allocate the expected flood-safety margin (EFSM, i.e., the gap between expected flood volume and flood-conveyance capacity) optimally between present and future periods. Optimal flood-operation hedging falls into three cases, namely, (1) for large expected floods, all flood storage and almost all channel-conveyance capacity are used in the current period to cope with the current, more certain, and urgent flood risk; (2) for medium expected floods, the available EFSM is balanced between the current and future periods, but a larger portion of the total EFSM remains allocated to the current stage; and (3) for small expected floods, the future stage receives greater EFSM allocation by keeping reservoir space empty in the current period. Optimal hedging for flood operation is illustrated by a curve similar to that of hedging for water supply. The physical implications of hedging highlight the economic significance of this practice for balancing the marginal value of scarce flood-management resources under uncertainty.