I think javierR's explanation for the 2nd approach doesn't go to the core of the problem. F in P=Fv is not simply mg (even if you drop a single block down onto the bottom, not to mention the complicated case of continuous water flow). F is greater than mg, and may even be way greater, if the height is so high. When the block falls down onto the bottom, the job of the bottom is to exert an impulse to stop the block (or to reduce the block's momentum to zero), i.e. F=dp/dt. After that, when the block's speed is already zero, if the block remains on the bottom, the force on the bottom = mg; otherwise, if the block goes away to somewhere else (which is the case of water), the block no longer exerts any force on the bottom, and the bottom waits for another block to come and stops it and so on.
But there is another problem: v in P=Fv is not the velocity of the block (or water). It is the velocity of the bottom, since P is the mechanical energy rate that the bottom (or turbine) receives. If the water falls onto the ground, v=0 and so, the ground receives zero mechanical energy, and it doesn't move. This is intuitive, right? So all of the energy of water goes to heat: the temperatures of both water and the ground rise. However, in the case of the dam, it's simply impossible to determine v with so few information.
Some more things about the power: We have 2 equations:
(1): P=\frac{\Delta E}{\Delta t}=\frac{\Delta (mgh)}{\Delta t}
(I write E instead of W to discriminate energy and work)
(2): P=Fv
There is a difference between P in (1) and P in (2).
1/ P in (1) is deduced from the condition "maximum power". In order to achieve max power, all of the energy of water must goes to the bottom. So in 1 second, the bottom receives an amount of energy equal to the energy of the water E=mgh. So P in (1) means the max energy rate that the bottom receives.
2/ P in (2) is actually the amount of mechanical energy that the bottom receives in 1 second. You know that the mechanical work = Fds. If we divide that by the time dt, we get: Fds/dt = Fv = P. So P in (2) arises from mechanical work, which corresponds to the mechanical energy. But energy can be thermal energy, not just mechanical energy.