oversight

Financial Activities of Missouri River Basin Integrated Projects for Fiscal Year 1969

Published by the Government Accountability Office on 1971-04-12.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

Mr. Harold E. Aldrich
regional  IXrector,   Region 6
Bureau of Recl~atio~
P.0. BQX 2553
BiZlings,   Montana 59103

Dear Mr. Aldrich:

        The General. AccounC.t~g Office has made a review of the operations
of the Ffissouri River Basin (MRB) Project        and the integrated      projects
through June 30, 3.969. The review was performed           in Regilara 6 and Region       7
of the Brnreau of Reclamation,      Department of   the Xnterior,     and  the   On1aha
District,    Corps of Engineers,    Department of the Army,

       fhr revier+ included an examination       of administrative  practices  and
procedures,     an evaluation    of internal.  controJ.c, and such tests of the
financial    trarksacticms    as we considered   necessary.

       The cave~akl resdts    of QUK review relating       to the consolidated
operation    and fimnci.a% position     of the integrated       projects will be
covered in a separate repar% to the Congress.            At iRe,&xk 6 of the
Bureau of Reclamatim       we gewlerally found the administrative        procedures
and controls    tmobe adequate.     I-k?weweP) during our review various matters
which reqlaire carrection     OK resolut;ion   were identified.

       The following   have been discussed with you and ycsur staff.      These
items are being reported     to you since corrective    action had already
been taken or was contem-plated on many of the items and ~7e would        appms-
date goclr comments especially      arj; they relate to accomplished  or proposed
corrective     action.




       %* Preparation     of the Statement of Project       Cost and Repayment;
the Power System Average Rate and Repayment Study; and the computations
of interest    on investment,    provision   for depreciation,      and interest
during construction      a13 take place shortly    after    the close   of the
fiscal   year.   However, inconsistent     rates were used for allocating
       Mr. IlaroPd E. Aldrich
4.     Rep,ional Director 1 Region                 6        -2-

       multipurpose  plant to the purposes served by the project.     For exampk,
       the rates used for allocating    multipurpose plant to power far the Yellow-
       tail Unit during fiscal    year 1969 were as follows:

                          Description

       Statement of Project               Cost and Repayment -
         June 30, 1968

      Average         Rate and Repayment Study - June 30, 1968                   34.57

       Interest         on commercial           power - Ey 1969                  34.57

      Provision           for    depreciation       - I?Y 1969                   62.3

       Interest         during     construction        - FY 1969                 62.16

               Aho, Reclamation   Instructions    116.5.9 states that annual operation
       and maintenance    (O&H), replacement,     and investment      costs    shall be allocated
       concurrently,     We found that the ultimate       development     rates for allocating
       nultiptzrpose  O&Ff to pwrposcs served did in some cases equal the current-
     " use sates but these rates were not those actually           used to allocate         mul'ti-
       purpose plant costs for the sane purpose.           For' example, the Allocation
       of Cosll of Operation    and Fkimtenance of Multipurpose          Facilities      and Qther
       Joint Works, CY 1969-1912,       dated Februasl~ 24, 1969, stated that thle ultimate
       development   rate and the current-use      rate for allocating         multipurpose     O&X
       to power for the Yellowtail       Unit was 42 percent;     yet, this rate equaled
       none of those used above for allocating         plant costs.

             We were tmable to determine which, if any, of the above allocation
      Z"ates used were official.         We believe    that all unit rates for allocating
      multipurpose    plant and O&X for functions          developed as ultimately  planned
      shauld be properly      established,     reviewed,    and communicated to all interested
      parties    for consistent    application      in the accounting   records and reports,

             During our exit conferemce members of your staff                 commented that this
      resulted    from a lack. of communicaeion of official             allocation   rates, but
      advised that steps wctuld be taken to correct              thfs matter.      we %E'E!
                                                                                         c omnlend 9
      in addition,      that the applicable     finance offices        make a review to deterneine
      what effect     the uc of inconsistent         allocation     rates has had OR the accounting
      records and that appropriate         adjustments       be made when the effect       is determined
       to   be    material.

             2. The Allocation       of Cost of Operation   and M8aintenance of Multi-
      purpose Facilities        and other Joint Works, CY 1969-1972, dated February              24,
      1969, indicated       in some cases, that O&PI allocated    to "Other Irrigation"           on
      ultimate    development     should be charged fully   to flood control    in the
      current-use     allocation.
        *     *




            Mr. Harold     E. Aldrich
            Regional   Director,      Region            6                     -3-

                      We believe      that    the charging         of all    "Other    Irrigation"          O&M to flood
            control       may not give proper          distribution          to these       costs    if other     purposes
            currently        benefit     from the use of water ultimately                    planned      for "Other
            Irrigation.'"           We believe     such costs         should    be distributed          to all    active
            purposes       of the unit        or project.

                     We recommend          that    the current        distributions           of O&M ultimately    allo-
            cated      to "Other      Irrigation       " be re-exa&ined              to   consider    distribution   of such
            costs      to all    other       purposes    currently          benefiting         from the use of water
            ultimately        planned        for “Other     Irrigation.           II

   i        INTEREST       ON INVESTMENT

                   Under provisions       of the Reclamation        Act of 1939 interest     expense     shall
            be charged     on that    part of the construction         costs allocated     to municipal
  ‘I
,-?I1
            water   supply    or other    miscellaneous      purposes,    if the Secretary    determines
 I
,,,.
            an interest
            expense
                            rate   to be proper.
                        had been charged
                                                        However,    as of June 30, 1969, no interest
                                              OR any of the applicable         MRB Project   units.
 I
                   After      bringing     this  to th'e attention          of Finance       officials,        interest
            expense      of $93,494      for the Helena         Valley     Unit  (which      includes       the Canyon
            Ferry    Unit     for M&l water)       and $60,416         for the Oahe Unit-James              Section      was
            charged      into     the accounts     during      FY 1970, including          the retroactive            adjust-
            ments through           FY 1969.    Subsequently,          in FY 1971,     interest         expense     of
            $453,219       for the Rapid Valley           Unit   was charged      to interest           expense.

                    Since    the other     units       are either     exempt    or interest     being     deferred--
            Dickinson       was said to be exempt because                an interest      component      had not been
            included      in the M&I rates          approved      by the Secretary        and Yellowtail         interest
            expense      was being    deferred         under provisions       of the Water Supply           Act of 1958
            until     the water    supply      is actually        used--we    are making      no further
            recommendations        at this       time.

            INTEREST       DURING      CONSTRUCTION

                    1.     Computations      of IDC          in the     Missouri-Souris          Projects   Office
            contained       errors     as discussed            below:

                         a.    In computing      IDC for FY 1964, the amount recorded             on line      13c
            of the Report      on Budget    Status   was inadvertently          used instead    of current
            year disbursements       for the Transmission        Division.         As a result,   the amount
            used as current      year disbursement       was understated         by $2,210,747.      Therefore,
            IDC for FY 1964 was understated            by $22,301      computed     as follows:

                             $2,210,747        + 2 = $1,105,374

                             $1,105,374        x 80.7%      x 2.5% = $22,301
.   p’k. Hardd    E. Aldrich
    Regioml    Director,     Region          6             -4-

                   b.   In    33 1965     and subsequent                  years    IDC has       been    incorrectly
    computed      due to:

                         1*    The   carry       forward         affect       of   a.   above,

                         2.    Use of 81.3 percent to coalpute comercial                                   power
                               rathex- thaxt 80,7           percetat      as set forth             in the
                               Repcmg: om Finmcial              Position,       December             1963,        and

                         3.    Nonrecognition         of the 83-17 percentage   basis    for
                               ccmputing       YIRC at the 2.5 and 3 percent    rates    as
                               provided       by ehe Regiotzal   Office  letter dated
                               June 9, 1.966.         All of the LDG was computed     at
                               2.5 percent.

            We recommend   tzhat appropriate                adjustments             be made       to    correct         IDC
    fur   fiscal   year 1964 IX date.

            2.  lh accordance     with    the Actitag       Regioolal     Director”s     letter    of
    June 3, 1956,     to the Pmjcct         Manager-Bismark           axed Hurcx~, IDC far FY I.966
    and subsec~ucut    years   for the Transmission             Division       was computed      at 2.5
    percent    cm 83 percent     af the anntd.         disbursements         and at 3 percent       on
    the 17 percent     balance    associated      with      the Bureau.         But,  Itu mention
    was made of the rate to be used on the Bureau’s                       production     plauzt,

            Subsequently          IDG ltas been computed          at 2,5 percent          for the YeLllow-
    flail   Mmi.1: production          plant.      We bekieve     that     the use of 2.5 percent            fom
    IDC for the Bureau              procluctiorn    plant   is inconsistene          with    the application
    Qf 3 percent         for IDC for rhe Bureau’s              share of Transmission             D:Lvlsion.
    We recommend         thar: the Bureau          adjust   the XIX for the Yel.Lo~ta:il.             Unit
    production       plant      since      F”Y 1966 to reflect         3 percent     for JDC and to be
    consistent       with     the June 9, 1966, Iet:ter             ciiked    above,

         During   our exilt    conference     we ‘were advised    that XeX1ow~G.l    was the
    only project   affected     and corrective      action   would be taken   %o reflect
    IRC at 3 percent      on production      plant.



            1.    Plant-in-service,    other    than movable       property,     was depreciated
    using     the compound-interest      method    of deprecia*U.on,         This method     includes
    the c@Entpuraision lof intexest      on1 rshe reserve      for depreciation.        Movable
    property     was depreciated    using    khe straight-line         method.

            When computing    interest       on the reserve      for depreciation      under the
    compound-interest      method,       the Bureau     has nor removed      the reserve     for
    depreciation      for movable      properI:y   before   applying    the interest      factor.
       We believe that the application        of an interest       factor to the reserve
for depreciation    for movable property        violates     the straight-line        depre-
ciation   concept and inflates     depreciation        charges related       to plant-in-
service which results     in creating    a reserve which will. eventually               exceed
the value of the assets being depreciated,

      We recommend that the reserve applicable     to movable property    be
excluded from the computation   of interest   on the depreciation    reserve.

        TJe believe       that this problem could be eliminated             if movable property
were not included            in plant-in-      service but instead identified      separately,
similar     to service         facilities,       We believe   that movable property     would
be better       identified        in its own classification        and we recommend that the
possibility        of excluding          movable property   from plant-in-service     be explored.

            Depreciation
            2.                charges consist of an annuity portion         and a com-
ptltation   of interest     on the reserve.       In computing depreciation     for Canyon
Ferry Transmission       Division    the Regional Office used 3 percent rate factors
in the annuity portion         but interest   on the reserve was computed using
2.5 percent    and 3 percenlt rates after         allocation  of the reserve on the
83-17 percent basis (Pllblic         Law 83-108).

       Proper computations    require  that both the &nuity     portion             and the
interest    on the reserve be camp~ted on the same basis a Thus,                  Transmission
Division    plane: costs being depreciated   should be nI.l.ocated on             the 83-1.7
percent: basis with the annuity portion      al.so computed using the               2.5 and
3 percent rate factors.

        We further    point lout that the Canyon Ferry production       plant is part
 af the Bureau's 3 pbrcr3nnl: illVeStiT!~llt    and not subject to the 83-17 percentage
 allocation.       However 9 in FY 1969 interest     on 'the production  plar~t reserve
~7as   computed by using the proper 3 percenBl rate buk: ,che rate was applied
 to only 53 percent       of the reserve,    instead of I.00 percent,

            ide recommend that   these be corrected    in the future.

      3. Ina. computing the provision  for depreciation  for the Yellowtail
Unit in FY 1968 and 1969, a rate factor of 0,00465358 was used. Recla--
mation Instructions    provided that a rate factor of 0.00225556 was to be
used.

      After we brought this to the attention     of Finance officials     action
was taken to correct depreciation    for FY 1968 and 1969 and an adjustment
0f $283,404 was 392corded. Howezrc%9 in both the original       computation.and
the adjustment  for FY 1969 only 83 percent of the reserve for depreciation
was subjected  to interest,  instead lof 1.00 percent.
&   Mr, Harold E. Aldrich
    RcgfonaL Diarector,   Region      6          -Q-

         Sde recommend that a review          be made to determine        the significance
    of the errors in the depreciation           adjustment and, if        material,    an
    amended adjustment be made.

    --QTHER

              1.Account 107.1, Construction    Work in Progress - Genera1 Construc-
    tion      for
                the HRE, contains $124,164 of investigations     costs for the Trans-
    nzission   Divfsim.      These costs have not c'nanged in amount at least since
    June 30, 1360, and we were told that there is no plan to constrwt         the
    facilities      for which these costs were incurred.

          Ne ~ecaamnend that actim be taken to remove these                  costs from account
    107.1 and charge them to account 116.9 - Investigations                   of Abandoned
    lGork3 .

            2, Cossl Authori:ky    No. 68 flnr the Lower Marias Unit authorized               the
    installation     of perforated    pipe and the repair     of concrete gutters
    on the spillway.        The Cost Az~tho.b*ity c-ited account 107,3 - Operation             and
    tlaintenance    Construc'tion.

         Eiowever p, the completion report          cited account 821.3 - Elaintenance
    of Dams and Waterways and the costs             for Cost Authorit-y K'o. 68 were expensed.

         tk were told that tlzc installation   of drains              was an improvement
    and that the drains did not exise: formerly.

         We believe that these costs should be capital                 costs and rewmmend
    that the costs assocjiated with drains fnstalla~ion                be capital.ized instead
    of expensed *

             Account 117.3. Settlers
              3,                       Assistance  Costs    (Transitional I?evelopment
    Costs)          for
                the Shoshone I?roject was $616,309,      This sum had not changed
    a~ least since June 30, 1960. Other projects        also have entries   in
    account 1317.                     ,1
           iiJe believe     that a~cclount 137 was not intended to be a permanent
    account for costs originally            charged there.      WE!believe      scttkrs
    assistance       costs and future years capacity prwxisions             should be re-
    moved from account 1117 and charged            to nonreimbursable       expense when it
    is determined        that the project     or project    uni.t on which these costs
    were incurred       will not be developed as planned.             We beliieve     that only
    those cnsts associated with planned. future construction                    should be re-
    tained in account 117 and then only m~til the construction                      is complete.
    Once the cons tsx~tim         is complete, we believe         these costs should be
    capitalized       in the plant-in-service       accounts and their reimbursability
    shssuld be established.
        We recommend           that  a reulew be made of          these   costs and similar      costs
in caller     projects         to determine       their status      and that action   be taken
to transfer        these       costs   to plant--in-@ Jervice       or that authority     be re-
quested     to charge          them off as nonreimbursable.

          4,   A Bill       for Collection       for the costs of 0&N allocated          to the
Angostura        Imjigation       District     was issued     and recorded    in the fiscal
year prior         to the year in ~7hich           these  charges   were due.     In 1ot.u~
opinion      this      action    distorted     the amou3nt of accounts      receivable      and
irrigation         income      in the yeax     the bill    was recorded.

           He recommend     that   these bills  be handled  in            such a manner as to
record       the receivable      and the income   in the year             in ~hE-nich the bill is
actually        due *

            Articles
           5.            5(a) Y S(b) 9 and S(c) of repayment                       contract     No. 14-06-600-1302
with    the Fdest~ern Heart     River      Irrigation        Dfs,trict        staCe in essence        that each
year after      the development        period        the district         wiP1 pay to the United           States
$2.57 foa: each acre irrigated.                  The contract.         states      that    if the $0.57 per
acre is less        than the district’s             ~&are of the total             cost of operation       and
maintenance       for thy supply       works during          any year,          the djiffcrencc     wil.1. be
added to the district’s          next payment.

          The Allocation         of Cost of Opcrati.on       and Naintenance    of Mu3.tipurpose
Facilities          and Other Joint      Warks 9 CY 1969-1972,        dated February   24, 1969,
stated        that   the districl:    ‘s allocation       nE joint  O@X was 1.0 e7 percent     but
that      this     was limited     to $7Gl.M        (SO,30 x 2537 irrigab1.e    acres) 1

        In I.968 and 1969, the Bureau            collected   Sl.,ri46 -09 annually,      which
fs $0,57        for each Qf 2,537 acres;        but in accordance       with    the 0&N alloca-
tion     s tatement      ab owe ?, only $761,10   applies  to payment       of the district     ‘s
13624 evan thoug’rt. the district        “s share iof 0&N. exceeds       the $761.30.       The
additional.        $0 -27 per acre has been applied        %o repayment       of the investment
in the supply          works,

           The    district’s       0&H in excess of $0.30         per acre was allocated              to non-
district          water      users and to nonreimbursable          flood  control  and fish             and
wildlife         +

        We beli.ewc   thait the provisions    of article                5 are not being    properly
applied   0 We ch not believe        that  the contractz              guarantees    $0.27 per ac+e
for repayment       of the supply    works nor does it                limit    the O&X chargeable
to the district:      to $361,lQ,

           It    appears    that  to properly       apply    the contract    provisio~~s        in
article          5, the    Bureau should      first    apply    al.1 the revenues      from     the
distsict     to repay the district"s  share of O&M and then apply       only   the excess
revenue    to repayment of the investment   in the Supply works.

       We recommend that the provisions   of article   5 be PevieT.ed to
determine if these provisions    are properly   applied and that any necessaq
corrective    action be taken.

       We wish to acknotqledge the cooperation  given OUT representatives
duarilag the review.  Pour comments and advice as to the action taken on
the matters discussed above ~2.11 be appreciated.

     A copy of this    letter   is being    sent to the Commissioner,    Bureau
of Reclamation.

                                           Sincerely   yours )