In addition to its natural catchment from the Frankland Range, the lake is formed by the 1972 damming of the Serpentine and Huon rivers by the Hydro-Electric Commission for the purpose of hydroelectric power generation.

The aim of this scheme was to increase Tasmania's capacity to generate hydro-electricity in accordance with the Tasmanian Government's policy of attempting to attract secondary industry to the State with the incentive of cheap renewable energy.

The new Huon Serpentine impoundment, which filled after the dams were completed in 1972, drains into Lake Gordon via the McPartlan Pass Canal.

[9] Reece was well known for his staunch support of the HEC and its power development schemes on the Gordon River, which earned him the nickname "Electric Eric".

The thing that was significant was that we had to double the output of power in this state in ten years in order [to] supply the demands of industry and the community.

"A series of photographs in the 1976 Tasmanian Year book illustrated the process of flooding of the Lake Pedder area.

Although increasingly sophisticated economic, environmental and engineering arguments were raised by the opponents of the dam, it was not until the Franklin scheme that either the Hydro or its defenders were even considering the critiques.

In 1972, the Christian activist Brenda Hean perished with pilot Max Price in a tiger moth aircraft they were flying from Tasmania to Canberra to protest the damming of Lake Pedder; it was alleged that pro-dam campaigners had entered the plane's hangar and placed sugar in one of its fuel tanks.

[10]: 280–281 Hesba Fay Brinsmead, an Australian children's author and environmentalist, wrote two books about the damming of Lake Pedder: Concerns over the construction of the dam revolved around the loss of the distinctive pink quartzite beach of the original lake, and an increased understanding of the unique nature of the wilderness quality to the south west of Tasmania.

There is an ongoing low-key campaign with the same goal by the group known as the Lake Pedder Action Committee which remains active.

[24] The Pedder galaxias, an Australian freshwater fish, is considered extinct in its natural habitat of Lake Pedder and its tributaries, although it still exists in captivity and in two translocated populations, one at Lake Oberon in the Western Arthurs mountain range[25] and the other at a modified water supply dam near Strathgordon.