oversight

Rural Water Projects: Identifying the Benefits of the Proposed Lewis and Clark Project

Published by the Government Accountability Office on 1999-05-28.

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

                  United States General Accounting Office

GAO               Report to the Chairman, Subcommittee
                  on Water and Power, Committee on
                  Resources, House of Representatives


May 1999
                  RURAL WATER
                  PROJECTS
                  Identifying the Benefits
                  of the Proposed Lewis
                  and Clark Project




GAO/RCED-99-115
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548

                   Resources, Community, and
                   Economic Development Division

                   B-282187

                   May 28, 1999

                   The Honorable John T. Doolittle
                   Chairman, Subcommittee on Water and Power
                     Committee on Resources
                   House of Representatives

                   Dear Mr. Chairman:

                   This report responds to your July 22, 1998, request regarding legislation
                   that would authorize the construction of and funding for the Lewis and
                   Clark Rural Water Project. The purpose of the proposed project is to
                   provide a water supply for cities and rural areas in southeastern South
                   Dakota, northwestern Iowa, and southwestern Minnesota to address the
                   dual problems of inadequate quantities of water and poor quality of water.
                   The cost of the project is estimated to be $282.9 million (in 1993 dollars).
                   While a specific estimate of the project’s costs was developed, no
                   definitive estimate of the value of its benefits was developed. As a result,
                   you requested that we conduct an economic evaluation focusing on the
                   direct economic benefits that could come from constructing such a
                   system. The focus of the evaluation was to determine the relative benefits
                   to local water users, cities and communities, the respective states, and the
                   federal government. You expressed interest in using this information to
                   provide guidance on allocating the respective cost shares for the
                   participants. To determine the relative benefits, we obtained information
                   on the following questions: (1) What benefits could derive from the Lewis
                   and Clark project? (2) Who could receive these benefits? (3) How are
                   these benefits valued?


                   The potential benefits from the Lewis and Clark project generally fall into
Results in Brief   three categories: (1) societal benefits, such as the improved health, safety,
                   and lifestyle of residents; (2) economic benefits, such as an increase in the
                   value of the national or regional goods and services produced because of
                   the project (for example, increases in hog production); and (3) fiscal
                   benefits, such as higher tax revenues because of increased economic
                   activity or increases in the value of taxed properties.

                   Local water users such as households and businesses would be the major
                   beneficiaries of the Lewis and Clark project. They would benefit from
                   lower water-related expenditures and costs as well as higher income
                   because of increases in local economic activity and transfers of economic




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             activity into the Lewis and Clark service area from outside the region.
             These transfers could include moving slaughterhouses or food processing
             plants from other states or counties. Concerning fiscal benefits, local and
             state governments would be the principal recipients of any net increases in
             sales and income tax revenues that would result from increases in
             economic activity. Counties and school districts could benefit if there
             were increases in property taxes. Conversely, the federal government
             would realize little fiscal benefit from the Lewis and Clark project.
             However, the federal government could realize nonfinancial benefits by
             making progress toward the objectives of improving the lifestyle of rural
             residents, investing in the development of the infrastructure of rural
             America, and ensuring compliance with federal drinking water standards.

             The benefits from municipal and industrial water projects are difficult to
             value. Specifically, societal benefits cannot be monetarily measured with
             reasonable accuracy. Economic benefits are difficult to measure because
             of the difficulty in attributing increases in economic activity directly to
             changes in the quantity and quality of water. At the national level, there
             would be little change in net economic activity, but transfers of economic
             activity into the Lewis and Clark service area could result in increased
             regional economic activity. For a given water district, the cost of its
             reasonable alternative to constructing a particular water project, such as
             drilling additional water wells or replacing a water treatment plant, can
             produce an approximation of the value of the project’s economic benefits
             so long as the alternative yields the same quantity and quality of water. For
             the water districts that would be served by the Lewis and Clark project,
             we estimated that the sum of the alternative costs that would be avoided if
             the Lewis and Clark project was built to be between about $71 million and
             $81 million in 1998 dollars. These figures should be considered the
             minimum value of the economic benefits to the area served because few of
             the alternatives would produce the same quality of water as the Lewis and
             Clark project and because two of the water districts in the area that have
             reasonable alternatives to the project did not estimate the cost of their
             alternatives.


             The 300,000 people in 14 counties near the junction of South Dakota, Iowa,
Background   and Minnesota use groundwater as their principal municipal and industrial
             water source. The 100,000 urban residents of Sioux Falls, the largest city in
             the area, obtain water from the city’s municipal water system, while rural
             residents of the area obtain water primarily from smaller rural water
             districts. A number of rural residents obtain their own water from private



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wells. Good-quality water, however, is in short supply in this area. Shallow
aquifers, a major source of water in the area, often hold insufficient
quantities of water for expanding populations and economic activity, and
quantities can be limited during times of drought. Also, the groundwater
commonly obtained from these shallow aquifers is vulnerable to
contamination from nitrates and pesticides from the intense agriculture
that is the main economic activity of the area. Groundwater is often
plentiful in deeper aquifers, but it is highly mineralized and, thus, requires
expensive treatment.

Because of the insufficient quantities of good-quality water, 22 water
districts within the area in 1990 formed what became known as the Lewis
and Clark Rural Water System. The Congress provided funding to the
water system for a feasibility study to identify alternative sources of
drinking water. This water is not intended to be used for irrigation but
would be used for drinking and for other domestic activities such as
laundry, fire fighting, and lawn watering. Engineering firms under contract
with the Lewis and Clark Rural Water System recommended the diversion
of up to 23.5 million gallons daily of Missouri River water to be treated and
dispersed through an extensive pipeline system in the tristate area. This
diversion project became known as the Lewis and Clark project.

The proposed Lewis and Clark project will consist of a diversion system,
water treatment plant, and distribution system that will account for about
$231.5 million (or 82 percent) of the project’s expenditures. The
recommended diversion system consists of a series of wells that will pump
water through gravel and sand adjacent to and beneath the Missouri River
near Vermillion, South Dakota. A nearby plant will treat this water. A
distribution system consisting of about 400 miles of pipeline, five ground
storage reservoirs, and nine pump stations will then deliver water to serve
connection facilities within each of the 22 member districts (see fig. 1).
Engineering costs will amount to about $25.4 million (9 percent) of the
project’s expenditures, while legal costs, administrative costs, easements,
and land acquisitions will total about $13.9 million (5 percent). The
remaining $12.1 million (4 percent) will consist of environmental
expenditures: $2 million (in 1993 dollars) will be spent to mitigate
environmental damage caused by the construction of Lewis and Clark, and
another $10.1 million (in 1993 dollars) is suggested for environmental
enhancements of wetlands.




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Figure 1: Map of the Proposed Lewis and Clark Rural Water Project




                                                                    Minnesota




                                                  South Dakota




                                                                            Iowa




                                    Minnesota

                                      Iowa

       South Dakota




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As we reported in May 1998, the construction of the proposed Lewis and
Clark project does not qualify for federal funding–through either outright
grants or repayable loans–under any of the established federal water
programs.1 For example, the inclusion of Sioux Falls’ 100,000 residents in
the Lewis and Clark project excludes outright grants from the U.S.
Department of Agriculture because the Department does not fund water
projects in communities with populations exceeding 10,000. Although the
Bureau of Reclamation and the Environmental Protection Agency provide
repayable loans to fund 100 percent and 80 percent, respectively, of water
projects, an ability-to-pay study found that the water districts in the Lewis
and Clark service area would be unable to repay these loans because the
cost would exceed their resources.

Consequently, the Lewis and Clark project’s sponsors are requesting
legislation that would authorize a federal grant to cover construction. The
proposed legislation provides a formula for the federal and nonfederal
sharing of the costs of this construction. With the exception of the city of
Sioux Falls, the federal government would fund 80 percent of the project’s
planning and construction costs, and nonfederal interests would fund the
remaining 20 percent. For the city of Sioux Falls, the federal government
and nonfederal interests would each provide 50 percent “of the
incremental cost to the city of participation in the project.”

“Incremental cost” is not defined in the proposed legislation, and there is
more than one way to interpret those words. For purposes of this report,
we read the “incremental cost” that would be subject to 50/50 federal
funding to be Sioux Falls’ proportionate share of the project’s capital costs
based on its water demand as cited in the project’s feasibility study. This
proportionate share is 42.6 percent of the $282.9 million project’s total cost
less a small amount (about $8.5 million), which we interpret the federal
government would pay for environmental enhancements. Hence, we
estimate cost shares as follows: the federal government would be
responsible for $192.9 million; Sioux Falls’ nonfederal cost share would be
$58.5 million; and the other than Sioux Falls’ nonfederal cost share would
be $31.5 million. These amounts represent 68.2, 20.7, and 11.1 percent,
respectively, as displayed in figure 2.




1
 See Rural Water Projects: Federal Assistance Criteria (GAO/RCED-98-204R, May 29, 1998).



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Figure 2: Allocation Among the
Participants of the Lewis and Clark                                           Sioux Falls nonfederal share:
Project’s Costs (in 1993 Dollars)                                             $58.5 million

                                                                              11.1%
                                                                              Other than Sioux Falls nonfederal
                                                                              share: $31.5 million




                                                   •


                                         • 20.7%


                                                            68.2% •           Federal share: $192.9 million




                                      The Bureau of Reclamation concurred that our interpretation of
                                      incremental costs is reasonable but pointed out that other interpretations
                                      may exist. According to the Executive Director of the Lewis and Clark
                                      Rural Water System, for example, the project’s sponsors interpret the
                                      wording in the proposed legislation,“incremental cost to the city of
                                      participation in the project,” as the amount of savings if Sioux Falls was
                                      dropped from the project. That is, the sponsors equate incremental cost to
                                      an estimated savings from downsizing the pipelines, treatment plant, and
                                      wells to account for water that no longer would be delivered to Sioux
                                      Falls. According to the Executive Director, the same engineering firm that
                                      designed the Lewis and Clark project estimated that this savings would be
                                      $55.2 million, and the nonfederal cost share for Sioux Falls would be 50
                                      percent of this amount, or $27.6 million.

                                      Although the Bureau of Reclamation provided technical assistance and
                                      oversight to the Lewis and Clark project, the project was never advanced



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                         B-282187




                         for authorization by the Bureau and does not meet the Bureau’s funding
                         criterion of having water users repay 100 percent of the costs of projects.
                         Hence, the Bureau opposes the use of its appropriations to fund the
                         construction of the Lewis and Clark project. Although the Bureau did not
                         conduct a cost-benefit study, as it would for a Bureau-sponsored project,
                         the Bureau did conduct studies, at the request of the project’s sponsors, to
                         determine the willingness and ability of the water users to pay the
                         additional costs for water from the project. Willingness-to-pay is regarded
                         by economists as one alternative method for estimating the economic
                         benefits from these types of projects.


                         The benefits associated with a rural municipal and industrial water project
Nature of the Benefits   such as the Lewis and Clark project are a result of increases in both the
of the Lewis and Clark   quantity and quality of water. These benefits can generally be categorized
Rural Water Project      as (1) societal benefits, (2) economic benefits, and (3) fiscal benefits. The
                         societal benefits include improvements in the health, safety, and lifestyle
                         of residents served by the project. Health improvements could result from
                         the Lewis and Clark project because of the improved quality of the water.
                         For example, the Environmental Protection Agency’s research reveals that
                         a reduction in sulfate concentration in a community’s drinking water could
                         result in fewer gastrointestinal illnesses and reductions in nitrate
                         concentrations in drinking water could result in fewer infants being at risk
                         of serious illness or death. The project could improve safety in the region
                         by making more water available for fighting fires in the smaller
                         communities. Lifestyle improvements could result from more water being
                         available for landscaping or from a better quality of water being available
                         for drinking, bathing, and washing clothes. The societal benefits also
                         include contributing to the federal government’s efforts to pursue its goal
                         of furthering economic development in rural America.

                         The economic benefits are increases in the economic value of the national
                         or regional output of the goods and services produced as a result of
                         increases in the quantity or quality of water. The Lewis and Clark project
                         could have an impact on hog and cattle production, milk production, and
                         other agricultural products made from soybeans, corn, and eggs that are
                         processed by local plants. For example, farmers have reported increased
                         weight gains in hogs when rural areas have switched to water having
                         lower sulfates and hardness. Similarly, dairy farmers have attributed
                         increased milk yields to better quality water. Although the water from the
                         Lewis and Clark project will not be used for irrigation, community officials
                         stated that an increased availability of water could provide opportunities



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                        for economic development of industries whose processes require large
                        amounts of water, such as ethanol plants and food processing plants, in
                        the Lewis and Clark service area. In addition, the improved quality of the
                        water would increase the longevity of water heaters, water softeners, and
                        other appliances by reducing mineral deposits and thereby saving
                        residents repair and replacement costs.

                        The fiscal benefits are net increases in government revenues that result
                        from an increase in economic activity. Proposed construction projects
                        such as the Lewis and Clark project would have an impact on fiscal
                        revenues. Should the Lewis and Clark project be built, increased sales tax
                        revenues could result from an increase in economic activity, and increased
                        income tax revenues could result from the higher earnings associated with
                        this economic growth, particularly in the agricultural sector. Increases in
                        the quantity and quality of water could lead to increases in property
                        values, which in turn could increase property tax revenues. However, the
                        net fiscal benefit to the various levels of government would depend also
                        on the impact of the project on various government expenditures,
                        including increases in infrastructure spending or increases in government
                        outlays to meet increased demands for government services.


                        The local water users, such as households and businesses, would receive
Beneficiaries of the    most of the benefits from the Lewis and Clark project. Thus, the project’s
Lewis and Clark Rural   22 member districts would not benefit directly because, as nonprofit water
Water Project           providers, they function as their customers’ agents in obtaining water and
                        deliver water to users at or near cost. The benefits accruing to local water
                        users could include (1) higher personal income resulting from the increase
                        in economic activity; (2) decreased costs for replacing water heaters,
                        maintaining water softeners, and servicing other appliances; and
                        (3) societal benefits, such as improved health and lifestyles.

                        State and local governments would benefit primarily from the increases in
                        tax revenues resulting from an anticipated increase in the production and
                        sales of goods and services. State and local governments could also benefit
                        from increased sales and income taxes generated from the construction
                        activities of the Lewis and Clark project. County governments and school
                        districts could be the beneficiaries of increased property tax revenues.

                        The federal government would realize only minimal financial benefits from
                        the Lewis and Clark project. Increases in federal income tax revenues
                        resulting from increased economic activity attributable to the project



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                      would likely be minimal. However, the project would benefit the federal
                      government to the extent that it will be a means of achieving such
                      objectives as meeting federal drinking water standards, improving the
                      quality of rural life, and investing in the infrastructure of rural America.


                      The societal benefits, such as meeting federal drinking water standards,
How Benefits From     improvements in health and lifestyle, and investing in the development of
the Lewis and Clark   the infrastructure of rural America, cannot be measured monetarily with
Rural Water Project   reasonable accuracy. For example, water experts we interviewed stated
                      that improved public health is a major benefit, but the benefit is difficult to
Are Valued            measure. Improvements in health were also cited by district
                      representatives as a major benefit of the Lewis and Clark project.
                      However, neither the reduction in illnesses nor the subsequent reduction
                      in health care costs that might be attributable to better quality water can
                      be valued with precision.

                      Similarly, it is not possible to accurately assign a monetary value to an
                      improved lifestyle attributed to better-tasting water. However, the
                      Congress has recognized the long-standing need to improve the quality of
                      water in rural America. For example, the Rural Utility Service, through its
                      water and wastewater loan and grant program, has helped fund almost
                      17,000 water and sewer projects serving more than 12,500 rural
                      communities in the last 30 years. Also, the objective of the Environmental
                      Protection Agency’s Drinking Water State Revolving Loan Fund program is
                      to ensure that the nation’s drinking water supplies remain safe and
                      affordable.2

                      The economic benefits of water projects such as the Lewis and Clark
                      project are, for the most part, difficult to quantify because of the difficulty
                      in attributing with any precision an increase in economic activity directly
                      to an increase in water. Water is rarely the sole factor responsible for
                      economic change, but water can facilitate economic expansion. For
                      example, hog farmers are unlikely to decide to raise more hogs based
                      solely on the availability of better quality water. Instead, they are also
                      likely to consider the cost of feed, the amount of available space in their



                      2
                       The Safe Drinking Water Act Amendments of 1996 (P.L. 104-182, sec. 130) authorized a Drinking
                      Water State Revolving Loan Fund to help public water systems finance the infrastructure needed to
                      achieve or maintain compliance with the act’s requirements and to promote public health protection
                      objectives. Section 1452 authorizes the Administrator of the Environmental Protection Agency to make
                      grants to states to capitalize drinking water state revolving loan funds, which in turn can provide
                      low-cost loans and other types of assistance to eligible water systems.



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sheds, and the market demand as reflected in the price paid for their
product by slaughterhouses.

Despite the difficulty of measuring the economic benefits, increases in the
value of the output of goods and services resulting from the Lewis and
Clark project can be viewed from either the national or regional
perspective. Although both perspectives are measures of changes in the
value of goods and services produced, the regional benefits could be
significantly different from the national benefits because regional benefits
capture the transfer of economic activity into the project’s service area
from outside the region. Regional transfers will result in no net national
benefits.

At the national level, we believe the increases in the value of goods and
services due to the Lewis and Clark project would be minimal. Increases in
the output of goods and services do not necessarily result in an increase in
their value. For example, hog production, one of the major industries in
the tristate area, was initially expected to increase locally because of the
anticipated improvements in the quantity and quality of water. However,
production exceeded the demand of slaughterhouses in 1998, resulting in
plummeting prices. The hog price in December 1998 was $14.70 per 100
pounds, down from an average price of $52.90 in 1997. Additional
production would probably only lower prices further and would not
necessarily increase the total value of hog production nationally. Because
of this decline in hog prices, smaller family farms are selling hogs at a loss.
Similarly, the December 1998 beef cattle price of $55.80 per 100 pounds
was down from an average price of $63.10 in 1997, resulting in lower
incomes.

From the regional perspective, however, the economic benefits of water
projects are greater. The regional benefits reflect not only the increase in
value of the goods and services produced in the region but also the
regional economy’s gain from transfers of industries into the area. For
example, local planners expect that on completion of the Lewis and Clark
project, food processing and ethanol plants may relocate to their region.

Because of the difficulty of identifying and directly attributing changes in
economic activity to the quantity and quality of water, analysts have
developed other methods that, for the most part, can approximate the
value of benefits accruing from a water project. One method, called a
willingness-to-pay study, surveys water users and asks them how much
they are willing to pay for an increase in the quality and quantity of their



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water. The Bureau of Reclamation analyzed a survey conducted by the
Lewis and Clark project’s sponsors in 1992 and estimated that residents in
the project’s service area were only willing to pay an additional
$3.34 million per year to ensure a safe and reliable future water supply.
Over the 40-year life expectancy of the Lewis and Clark project, this
amounts to about $87 million in 1998 dollars.3 As a result, the Bureau
concluded that from a purely economic standpoint, the Lewis and Clark
project does not pay for itself since the cost of the proposed project is
$282.9 million. However, if the project is required to meet future water
quality standards or solve reliability problems that must be dealt with
regardless of cost, the Bureau concluded that the Lewis and Clark project
may be the most cost-effective way to reach such goals. Moreover,
economists that we contacted said that figures reported by respondents in
willingness-to-pay studies may underestimate total benefits because
respondents may fear that their water bills would be increased by the
amounts they report.

Another method used by economists in estimating the value of a water
project’s benefits is estimating the cost of reasonable alternatives that
would be avoided if the project is built. In other words, how much the
beneficiaries are willing to pay for an alternative water system provides an
estimate of the value they would place on the benefits they expect to
receive from the increase in the quality and quantity of their water. At the
water district level, this cost represents the value of the project’s benefits
to all water users in the district, including households, farms, and
businesses. This method can approximate the value of benefits if the
alternative will produce the same quantity and quality of water as the
proposed project.

To that end, we asked the 22 individual water districts to identify and
estimate the cost of reasonable alternatives that would be avoided if the
Lewis and Clark project is built. Reasonable alternatives for the water
districts in the project’s service area include drilling additional wells,
modifying or building treatment plants, and purchasing water from other
water districts. A summary of these alternatives and their individual costs
appears in appendix I.

We estimate that the sum of these alternative costs for Lewis and Clark
members ranges between about $71 million and $81 million in 1998
dollars. However, these figures should be considered minimum values
because many alternatives would not produce the same quality of water as

3
 Discounted at 3 percent.



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                  the Lewis and Clark project and because two districts did not estimate the
                  cost of their alternatives. In addition, only 5 of 16 alternatives that would
                  require large capital investments were based on detailed written cost
                  estimates or engineering studies, so several of the verbal estimates we
                  obtained may lack accuracy. It should be noted that for many of the
                  districts, the proportionate nonfederal share of the Lewis and Clark
                  project adjusted to 1998 dollars would be less than the cost of their
                  reasonable alternatives because the federal government would assume
                  most of the costs. A notable exception is the Sioux Falls component
                  whose nonfederal proportionate share of about $64 million (in 1998
                  dollars) is more than double the cost of its alternative (in 1998 dollars).

                  The net fiscal benefits attributable to the Lewis and Clark project would
                  depend largely on changes in the economic activity in the region as well as
                  on changes in the governments’ outlays for services and infrastructure.
                  The Bureau of Reclamation estimated the tax revenue increases expected
                  from the construction activities of the Lewis and Clark project to be about
                  $16.5 million in 1992 dollars. Its estimate included the excise, fuel, sales,
                  and income taxes expected to be collected by South Dakota, Iowa, and
                  Minnesota from the contractors and laborers. However, the estimate did
                  not include increases in tax revenues anticipated from an increase in
                  regional economic activity.


                  We provided a copy of a draft of this report to the Lewis and Clark
Agency Comments   project’s representatives and the Bureau of Reclamation for their review
                  and comments. We met with Bureau officials, including the Manager of the
                  Bureau’s Dakotas Area Office. In general, the Bureau agreed with the
                  findings in our report but clarified certain issues involving its participation
                  in the Lewis and Clark project. For example, the Bureau stressed that it
                  does not advocate any specific interpretation of the “incremental cost to
                  the city of Sioux Falls” for allocating the project’s construction costs and
                  emphasized the importance of clarifying the language in the proposed
                  legislation if the Congress decides to fund this project. The Bureau also
                  emphasized that the project is not being advanced for authorization by the
                  Bureau. The Bureau explained that planning studies were primarily funded
                  from nonfederal sources and that the Congress appropriated funds into
                  the Bureau’s General Investigative Program for oversight and technical
                  assistance to the project’s sponsors. The Bureau also clarified the
                  willingness-to-pay study, explaining that the $3.34 million cited in the
                  study represents an annual amount that households are willing to pay, not
                  a total over the life of the project. Hence, the annual amounts over the



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40-year life of the project, according to Bureau representatives, should be
discounted to present value and summed. We revised the report in
response to these comments and made other minor technical corrections
as appropriate.

The Director of the Lewis and Clark Rural Water System commented on
behalf of the water system. The Director disagreed with our interpretation
of the “incremental cost to the city of Sioux Falls” being based on water
usage. Instead, the Director interprets Sioux Falls’ incremental cost to be
the difference between the cost of the project built with a water supply for
Sioux Falls and the cost of the project built without Sioux Falls. The
Director also wrote that by mentioning lawn watering, car washing, and
fire fighting, our representation of societal benefits “trivializes” the need
for a safe and reliable drinking water source. The Director also disagreed
that the Lewis and Clark project could result in higher personal incomes
or in the transfer of economic activity into the Lewis and Clark service
area from other areas. This report presents both our interpretation of
Sioux Falls’ cost share and the Lewis and Clark Water System’s
interpretation. With regard to the comments on how the water would be
used and changes in personal income, the report includes analysis to
support our findings, and we made no changes to the report. The
Director’s comments and our responses appear in appendix II.


We performed our review from August 1998 through April 1999 in
accordance with generally accepted government auditing standards. Our
scope and methodology are discussed in appendix III.




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We will provide copies of this report to the member districts of the Lewis
and Clark project. We will also make copies available to others on request.
If you or your staff have any questions, please call me at (202) 512-3841.
Major contributors to this report are listed in appendix IV.

Sincerely yours,




Susan D. Kladiva
Associate Director, Energy,
  Resources, and Science Issues




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Page 15   GAO/RCED-99-115 Rural Water Projects
Contents



Letter                                                                                              1


Appendix I                                                                                         18

Alternatives Avoided
by the Lewis and
Clark Project
Appendix II                                                                                        23

Comments From the
Lewis and Clark Rural
Water System
Appendix III                                                                                       28

Scope and
Methodology
Appendix IV                                                                                        29

Major Contributors to
This Report
Table                   Table I.1: Member Districts’ Alternatives to the Lewis and Clark           20
                         Rural Water Project Compared With the Project’s Commitments

Figures                 Figure 1: Map of the Proposed Lewis and Clark Rural Water                   4
                          Project
                        Figure 2: Allocation Among the Participants of the Lewis and                6
                          Clark Project’s Costs




                        Page 16                                   GAO/RCED-99-115 Rural Water Projects
Page 17   GAO/RCED-99-115 Rural Water Projects
Appendix I

Alternatives Avoided by the Lewis and Clark
Project

               In determining the cost of reasonable alternatives to the Lewis and Clark
               project, we contacted representatives of the 22 member water districts
               and asked what courses of action they would take if the Lewis and Clark
               project is not built. Specifically, we asked them how they would obtain the
               same amount and quality of water to which they had committed from the
               Lewis and Clark project. We requested that their responses be alternatives
               that would be economically feasible and, hence, likely to be implemented.

               Representatives of the water districts reported that they would drill
               additional wells, update or build treatment plants, obtain water from
               nearby water districts, or engage in a combination of these alternatives.
               Thirteen districts had plans that involved drilling additional water wells.
               Seven said their plans included building or updating treatment plants, and
               five had investigated obtaining water from nearby districts.4 One district
               reported that its only alternative would be to adopt stringent water
               conservation, while two districts said they had no alternatives to the Lewis
               and Clark project. To determine the cost of these alternatives, we asked
               representatives for their written estimates and supporting documentation,
               including cost proposals and engineering studies. Sixteen of the 22
               member districts reported alternatives involving significant capital
               expansions, such as drilling more wells, updating treatment plants, or
               building extensive water lines. Only 5 of these 16 districts had detailed
               written cost estimates. Eight of the 16 member districts reported rough
               estimates of their costs, one gave us information that we could use to
               estimate its alternative cost (because it was comparable to other members’
               alternatives), and 2 of the 16 member districts could not supply enough
               information to estimate the cost of their alternatives.

               For members that provided cost estimates, we interviewed representatives
               to ensure that all reasonable costs were included. Based on a
               recommendation from the engineering firm that designed the Lewis and
               Clark project, we assumed the life expectancy of the project to be 40
               years, so we took steps to ensure that all member districts’ alternatives
               would also last 40 years. Engineers suggested that piping, treatment
               plants, and pumphouses should last at least 40 years, but that shallow
               wells that tap surficial aquifers would not be expected to last this long.
               Because such wells often experience plugging from iron and manganese in
               the groundwater, their flow rates often diminish in time until they reach a
               point at which it is no longer practicable to operate them. An engineer
               working on the design of the Lewis and Clark project suggested that such
               wells would need to be replaced after 20 years, so we included additional

               4
                The numbers in this example exceed 22 because some districts have a combination of alternatives.



               Page 18                                                  GAO/RCED-99-115 Rural Water Projects
Appendix I
Alternatives Avoided by the Lewis and Clark
Project




costs for the replacement of these shallow wells. We assumed that
replacement wells would be drilled in 20 years and then discounted their
cost using a real interest rate that we assumed would be 3 percent. We did
not modify cost estimates of deeper wells, such as those drilled in the
Dakota Formation, because district representatives reported longer life
expectancies for these wells.

All member districts that reported purchasing water from nearby water
districts as an alternative to the Lewis and Clark project gave us price
quotes for this water expressed in dollars per 1,000 gallons. To ensure
comparability with the Lewis and Clark project, we assumed that such
arrangements would last 40 years. Because of future uncertainties, we did
not assume any changes in the price of this water over time. To calculate
the value of the water, we assumed that water would be paid for monthly
for 40 years and discounted these payments using a real interest rate that
we assumed would be 3 percent.

We note that the quality and quantity of water that would be supplied by
the alternatives would not necessarily be exactly comparable to that
supplied by the Lewis and Clark project. For example, the Missouri River
water supplied by the project should be of better quality than that
obtained from shallow aquifers; in most instances, Missouri River water is
lower in iron, manganese, sulfates, total dissolved solids, and hardness.
The high cost of treatment often prohibits bringing the quality of
groundwater up to that of Missouri River water. This river water is also
less susceptible to surface contamination from nitrates and pesticides than
water obtained from shallow aquifers. Some member districts’
representatives reported that a single chemical spill or infiltration of
agricultural wastes could shut down their entire wellfields. Of course,
disaster scenarios involving contamination of Missouri River water are
also conceivable. Also, the Lewis and Clark project would not be as
susceptible to drought as the shallow aquifers in the tristate area are.
Lastly, some of the studies of alternatives that recommended drilling
additional wells did not contain sufficient geological information to
guarantee that adequate groundwater would be present at the
recommended locations of their wellfields. These reports suggested
drilling test wells to determine the quantity of water in the underlying
aquifers.

Each member district’s alternative is summarized in table I.1. Because of
the poorer quality of water that would be supplied by alternatives to the
Lewis and Clark project and because two member districts that had



Page 19                                       GAO/RCED-99-115 Rural Water Projects
                                           Appendix I
                                           Alternatives Avoided by the Lewis and Clark
                                           Project




                                           alternatives did not estimate their costs, the costs of these alternatives
                                           should be considered as a surrogate for the minimum benefit of the Lewis
                                           and Clark project. This minimum benefit ranges between about $71 million
                                           and $81 million.


Table I.1: Member Districts’ Alternatives to the Lewis and Clark Rural Water Project Compared With the Project’s
Commitments
                                                       Nonfederal
                                           Lewis and proportionate
                     Average daily               Clark share of Lewis Alternative to   Cost of            Nature of cost
                          water use      commitment and Clark          Lewis and       alternative (1998 estimate for
Member district            (gallons)    (gallons/day) (1998 dollars)a Clark            dollars)           alternative
Lincoln-Pipestone,       3,000,000          300,000b $769,000          None available     Not available      Not applicable
Minnesota
Rock County,               583,000          300,000 769,000            Drill more         $2,887,000         Written estimate
Minnesota                                                              shallow wells in                      prepared by district
                                                                       Rock River                            manager
                                                                       Aquifer
Luverne, Minnesota       1,200,000          500,000 1,282,000          Drill additional   388,000 to         Verbal estimate
                                                                       shallow wells      1,388,000
Worthington,             2,720,000        1,730,000 4,436,000          None available     Not available      Not applicable
Minnesota
Sheldon, Iowa            1,300,000        1,000,000 2,564,000          Drill more wells   6,332,000 to       Written proposal
                                                                       and update         6,832,000          prepared by
                                                                       water lines                           engineering firm
Sibley, Iowa               400,000          650,000 1,667,000          Purchase         2,556,000            GAO estimate based
                                                                       additional water                      on water price
                                                                       from Osceola                          supplied by district
                                                                       Water District
Clay County, Iowa          750,000        1,000,000 2,564,000          Drill more wells   3,102,000          Written estimate
                                                                       and build joint                       based on studies
                                                                       treatment plant                       prepared by
                                                                       with Spencer,                         engineering firm
                                                                       Iowa
Rural Water District     1,725,000        1,000,000 2,564,000          Drill more deep    Not estimated      Not applicable
1, Iowa                                                                wells and
                                                                       upgrade
                                                                       treatment plant
Hull, Iowa                 165,000          300,000 769,000            Join nearby        2,447,000          Written cost estimate
                                                                       district in its                       supplied by nearby
                                                                       expansion and                         district and GAO
                                                                       purchase                              estimate of value of
                                                                       150,000                               water purchase
                                                                       gallons/day
Sioux Center, Iowa       1,000,000          600,000 1,538,000          Drill wells west   560,000            Verbal estimate
                                                                       of town and                           provided by city’s
                                                                       build water line                      utility department
                                                                                                                        (continued)



                                           Page 20                                            GAO/RCED-99-115 Rural Water Projects
                                         Appendix I
                                         Alternatives Avoided by the Lewis and Clark
                                         Project




                                                     Nonfederal
                                        Lewis and    proportionate
                     Average daily           Clark   share of Lewis    Alternative to     Cost of              Nature of cost
                        water use     commitment     and Clark         Lewis and          alternative (1998    estimate for
Member district          (gallons)   (gallons/day)   (1998 dollars)a   Clark              dollars)             alternative
Boyden, Iowa               55,000         100,000 256,000              Pump existing      Not estimated        Not applicable
                                                                       wells and
                                                                       eventually add
                                                                       new wells
Beresford, South          280,000         250,000 641,000              Replace            2,000,000            GAO estimate based
Dakota                                                                 treatment plant                         on data provided by
                                                                                                               water department
Centerville, South        200,000         220,000 564,000              Hook up to         4,412,000 to         Verbal estimate
Dakota                                                                 nearby rural       5,012,000            provided by city
                                                                       water systems                           official
Harrisburg, South          70,000         250,000 641,000              Drill more wells, 2,153,000             Verbal estimate
Dakota                                                                 construct new                           supplied by utility
                                                                       treatment and                           department
                                                                       softening plants
Lennox, South             200,000         400,000 1,026,000            Drill more wells   1,021,000            Verbal estimate
Dakota                                                                                                         provided by water
                                                                                                               department
Madison, South            800,000       1,000,000 2,564,000            Build a new        0 to 8,040,000       Detailed study
Dakota                                                                 treatment plant                         prepared by
                                                                                                               engineering firm
Parker, South             150,000         490,000 1,256,000            Drill              278,000              Verbal estimate
Dakota                                                                 high-volume                             supplied by water
                                                                       well and build                          department
                                                                       water tower
Sioux Falls, South     15,678,000      10,000,000 64,101,000           Develop Wall       30,000,000           Informal estimate by
Dakota                                                                 Lake aquifer                            city
Tea, South Dakota         150,000         330,000 846,000              Purchase         2,331,000              GAO estimate based
                                                                       balance                                 on data supplied by
                                                                       (180,000                                city
                                                                       gallons/day)
                                                                       from Lincoln Co.
Lincoln County,           533,000         900,000 2,308,000            Purchase           2,762,000            GAO estimate based
South Dakota                                                           shortfall (up to a                      on data supplied by
                                                                       maximum of                              water district
                                                                       800,000
                                                                       gallons/day)
                                                                       from Sioux Falls
Minnehaha, South         1,600,000      2,000,000 5,128,000            Implement          Not applicable       Not applicable
Dakota                                                                 stringent water
                                                                       conservation
South Lincoln,            600,000         150,000 385,000              Drill three wells; 7,650,000            Informal estimate
South Dakota                                                           build booster                           supplied by water
                                                                       station, lines,                         district
                                                                       and softening
                                                                       plant
Total                  33,159,000      23,470,000 $98,638,000          —                  $70,879,000 to       —
                                                                                                              (Table notes on next page)
                                                                                          $81,019,000

                                         Page 21                                              GAO/RCED-99-115 Rural Water Projects
Appendix I
Alternatives Avoided by the Lewis and Clark
Project




a
 These proportionate shares in 1998 dollars are not equal to the proportionate shares shown in
figure 1, which are in 1993 dollars.
b
Lincoln-Pipestone has plans to increase its commitment to 1 million gallons per day.




Page 22                                                  GAO/RCED-99-115 Rural Water Projects
Appendix II

Comments From the Lewis and Clark Rural
Water System

Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




See comment 1.
Now on p. .




                             Page 23   GAO/RCED-99-115 Rural Water Projects
                 Appendix II
                 Comments From the Lewis and Clark Rural
                 Water System




See comment 2.
Now on p.




See comment 3.
Now on p. _.



See comment 4.
Now on p. .




                 Page 24                                   GAO/RCED-99-115 Rural Water Projects
Appendix II
Comments From the Lewis and Clark Rural
Water System




Page 25                                   GAO/RCED-99-115 Rural Water Projects
                 Appendix II
                 Comments From the Lewis and Clark Rural
                 Water System




                 The following are GAO’s comments on the Lewis and Clark Rural Water
                 System’s letter dated April 15, 1999.


                 1. H.R. 297 and S. 244, which would authorize the construction of the
GAO’s Comments   Lewis and Clark project, contain budget and financing terms for the
                 project. These terms refer to the project’s feasibility study for clarification.
                 With regards to the allocation of construction costs among participating
                 water districts, the feasibility study allocates construction costs according
                 to each member’s proportionate share of water use. For example, Sioux
                 Falls is estimated to use 42.6 percent of the average daily water, so the
                 Sioux Falls component is allocated 42.6 percent of the construction costs,
                 or about $120.5 million of the total $282.9 million construction budget. The
                 feasibility study does not make reference to allocating costs based on a
                 definition of incremental cost that involves the difference between
                 constructing the project with a Sioux Falls component and constructing
                 the project without a Sioux Falls component. Since we discussed both
                 approaches in the draft report, we did not revise the report in response to
                 this comment.

                 2. Our intent was not to trivialize the need for Lewis and Clark by citing
                 lawn watering, car washing, clothes laundering, or fire fighting, but rather
                 to provide a thorough discussion of the benefits of the proposed system.
                 We believe all of these to be important activities, although not as
                 important in sustaining life as the consumption of water, which we also
                 discuss in this report. Nevertheless, human consumption of water only
                 accounts for a small percentage of actual domestic water use. In addition,
                 representatives from the city of Sheldon, Iowa, stressed that they need
                 access to additional quantities of water for fire prevention—a critical
                 safety issue for any community. H.R. 297 and S. 244 do indeed make
                 funding for the Lewis and Clark project dependent on the development
                 and implementation of a water conservation program, and it is also
                 important to note that representatives of several water districts stressed
                 their communities’ watering restrictions during conversations with us.
                 Therefore, we did not revise the report in response to this comment.

                 3. Personal incomes may rise because of an increase in economic activity
                 associated with water projects in two ways. First, building the Lewis and
                 Clark project would generate construction jobs. Second, representatives
                 from Lewis and Clark’s member districts reported that water from the
                 project is needed to attract additional businesses. Because the project is
                 expected to increase economic activity in the region and we expect that



                 Page 26                                      GAO/RCED-99-115 Rural Water Projects
Appendix II
Comments From the Lewis and Clark Rural
Water System




the value added will remain in the region, we concluded that regional
income will increase. We did not revise the report in response to this
comment.

4. We agree with the Director’s statement that the availability of water is
not the sole factor considered by a business in deciding whether to locate
in a region. In fact, our report addresses this point. However, if everything
else is the same between regions, the quality and quantity of a regional
water supply will give any region a competitive advantage in attracting
industries, especially water-intensive industries. Representatives from
Lewis and Clark also agreed that the project should attract businesses to
the region. Even though the purpose of the project is not to lure
businesses to the Lewis and Clark service area from other regions, new
businesses may choose to locate in the Lewis and Clark service area
because of the better quality of the water. However, the net national
benefit would still be minimal. Therefore, we did not revise the report in
response to this comment.




Page 27                                     GAO/RCED-99-115 Rural Water Projects
Appendix III

Scope and Methodology


               To determine the nature of the benefits that would accrue from the Lewis
               and Clark project and to identify its beneficiaries, we obtained documents
               on the economy of the tristate area and interviewed Lewis and Clark
               project officials and business leaders in the area. We also interviewed
               water experts in government, academia, and industry and reviewed
               relevant publications on the benefits of water projects, including the
               “Economic and Environmental Principles and Guidelines for Water and
               Related Land Resources Implementation Studies” published by the U.S.
               Water Resources Council. We gathered information on how water is
               currently used, limitations to its use, and how water will be used if the
               project is constructed. We reviewed information on the populations,
               incomes, businesses, and industries within the 14 counties and 3 states of
               the area to be served by the Lewis and Clark project. We also reviewed
               publications on groundwater resources of the tristate area published by
               the U.S. Geological Survey, the Minnesota Department of Natural
               Resources, the South Dakota Geological Survey, and the Iowa Department
               of Natural Resources.

               To determine how the benefits of a municipal and industrial water project
               are valued, we reviewed economic literature, studies by the Bureau of
               Reclamation, and the guidelines of the U.S. Water Resources Council.
               When available, we obtained and examined written cost estimates and
               engineering studies on alternatives to constructing the Lewis and Clark
               project. We interviewed representatives, including public officials,
               engineers, and water superintendents, of all 22 member districts and made
               site visits to 17 of these districts to clarify cost data, tour well fields,
               examine treatment plants, and observe agribusiness. We also consulted
               with Banner and Associates, the principal engineering firm involved in the
               design of the Lewis and Clark project, for information on the life
               expectancy of water wells, treatment plants, pipelines, and hardware. We
               tabulated cost estimates and compared costs among the 22 districts to
               ensure that they were reasonable and in certain instances adjusted costs
               upwards to reflect the longer life expectancy of the Lewis and Clark
               project. Representatives of the member water districts told us that the
               alternatives cited are likely to be implemented if the Lewis and Clark
               project is not built. More specific information on our methodology for
               calculating cost alternatives is in appendix I.




               Page 28                                    GAO/RCED-99-115 Rural Water Projects
Appendix IV

Major Contributors to This Report


                        Ronald M. Belak
Resources,              Brad Hathaway
Community, and          Mehrzad Nadji
Economic                Rudolfo G. Payan
                        Victor S. Rezendes
Development Division
                        Doreen S. Feldman
Office of the General   Kathleen A. Gilhooly
Counsel




(141230)                Page 29                GAO/RCED-99-115 Rural Water Projects
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