oversight

Bonneville Unit's Irrigation and Drainage System Is Not Economically Justified

Published by the Government Accountability Office on 1990-09-18.

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

,                        United States General Accounting Ofllce   / q ,J%?J
                                                                               I
                         Testimony
I   GA!!0

    For Release          'Bonneville   Unit's   Irrigation and
    On Delivery           Drainage'System     Is Not Economically
    Expected at
    9:OO a.m. EDT         Justified
    Tuesday
    September 18, 1990




                         Statement of
                         James Duffus III,    Director
                         Natural Resources Management Issues
                         Resources, Community, and Economic
                         Development Division
                         Before the
                         Subcommittee on Water and Power
                         Committee on Energy and Natural Resources
                         United States Senate




                                                       ,




    GAO/T-RCED-90-108                                                  GAO Form 160 (12/m
Mr. Chairman and Members of the Subcommittee:


        We are pleased       to be here today to participate                       in this        hearing
on S. 2969, "The Centrai               Utah Project          Completion       Act."       This act
would authorize         $150 million        in federal            funds for    construction             of
the Irrigation        and Drainage         (I&D) System of the Central                    Utah
Project's     (CUP) Bonneville           Unit.         According      to estimates            by the
Department       of the Interior's          Bureau of Reclamation,                 the currently
authorized       CUP cost    ceiling      will       be insufficient          by fiscal         year
1992 to construct         the I&D system.


       At your request,         we prepared            a benefit-cost         analysis         of the
I&D system to determine           whether        its     construction         is economically
justified.


SUMMARYOF RESULTS


       The Bureau did not calculate                    a separate       benefit-cost           ratio        for
the I&D system.         To calculate         this       ratio,      we extracted        from the
Bureau's     1988 benefit-cost           analysis        of the Bonneville             Unit     only
those benefits       and costs         associated        with      the I&D system.             This
resulted     in annual      benefits      of $10.2 million              and annual       costs         of
$12.1 million,       or a benefit-cost               ratio       of .84 to 1.         This means
that   for   every   $1 of project         costs,        the U.S. economy would realize
a benefit     of only     84 cents.



                                                 1
          We then adjusted               this      ratio        to bring     the Bureau's           analysis       in
line      with     standard        economic principles.                      For example,           we evaluated
all     benefits         and costs        from a national              economic development
perspective.               We treated           taxes      as a governmental             benefit      and
included          salinity        impacts        as a project          cost.         We also       adjusted       for
indirect         profits         and farmers'           labor      costs.          As a result       of these
adjustments,             the annual benefits                    decreased         to $5.2 million        and
annual      costs        rose to $17.5 million.                      Accordingly,           the benefit-cost
ratio      was reduced to .3 to 1, or,                           in other      words the U.S. economy
would realize              a benefit        of only         30 cents        for     every    $1 of project
costs.


          Thus,        from a strict            benefit-cost          analysis         standpoint,
construction             of the I&D system is not justified.                                In the final
analysis,          the decision           whether          to approve the project                  is a policy
judgment         for     the Congress,            and factors          in addition           to the benefit-
cost      analysis,          such as regional               development            contributions       and
construction             costs     already        incurred,          may be considered.               To assist
the Congress in its                 deliberations,                we are beginning,             at your
request,         to analyze         the financial                impacts     of not completing              the
system,       as well         as alternatives               to its     construction.


BACKGROUND


          The Colorado           River     Storage          Project        Act of 1956 authorized                 the
Buteau to construct                 the CUP.            The CUP consists              of five       separate

                                                            2
units,       the largest          of which is the Bonneville                  Unit.          Of the five,
construction           of two has been deferred,                   two have been completed,                        and
the Bonneville            Unit      is presently          under construction.                     (Attachment        I
provides        a graphic         presentation       of the five           CUP units.)


         Basically,        the Bonneville          Unit      is divided            into     six     systems
that     are designed            to collect      water      in the Uintah            Basin and
transport        it    through       the Wasatch Mountains                to the Bonneville                  Basin
through       a complex system of aqueducts,                       tunnels,         and canals.
Construction           of the unit        began in 1966, and is expected                           to be
completed        in 1996.           (Attachment      II     shows the geographic                    layout     of
the Bonneville            Unit      systems.)


         The primary         purpose      of the Bonneville               Unit's          I&D system is to
supply       irrigation       water     to farmlands           in central           and southern             Utah.
The I&D system will                 also provide         a small     amount of municipal                     and
industrial        water     to cities         in Juab and Utah Counties.                          According         to
the Bureau,           about 40 percent           of the I&D system's                 water will          provide
supplemental           irrigation       to presently          irrigated        land to offset                 an
existing       water      shortfall,       and thereby          stabilize           existing
agricultural           production.         Most of the remaining                    I&D system water
will     be used to irrigate             presently          unirrigated        land to offset                 land
being taken           out of agricultural            production         by urbanization                and
industrialization.




                                                     3
        The cost       to construct      the I&D system is $328.5 million,                            of
which $150 million           under S. 2969 will               be borne by the federal
government.           The remaining      costs       will     be funded by the Bureau's
cost-sharing          sponsors.       Construction           of the I&D system has not
begun.


CRITERIA USED IN THE BENEFIT-COST ANALYSIS


        At your request,           our benefit-cost                analysis      of the I&D system
applied      the 1983 Economic and Environmental                            Principles      and
Guidelines      for     Water and Related            Land Resources              Implementation
Studies      (P&Gs) that      became effective               July     8, 1983.           These P&Gs were
developed      by the Water Resources                Council         to guide       formulation        and
evaluation      studies      by the major federal                   water     resource      development
agencies,      including      the Bureau of Reclamation.1


        The PtGs summarize methods for                      calculating          the benefits         and
costs      of water     resource     development            alternatives          and are intended
to ensure proper           and consistent        planning            by the water          resource
development      agencies.          They require,            for     example,       that    water
resource      planning      be evaluated      on the basis                  of contributions          to
national      economic development           consistent              with     protecting       the
nation's      environment.


1The Water Resources Council, now inactive,        consisted of the
Secretaries     of Agriculture,  Army, Commerce, Energy, the Interior,
Transportation,     and Housing and Urban Development: and the
Administrator     of the Environmental  Protection   Agency.
                                                 4
        The Bureau incorporated                    the Water Resources                     Council's         P&Gs
into    its    rules         and regulations.              Bureau officials                 informed         us,
however,       that         because the 1988 update was, in their                              view,     a
refinement           of the entire         Bonneville         Unit     plan,         it     was exempt from
the P&Gs.            Instead,      the Bureau used its                1959 rules              and regulations.
These rules           and regulations             provide     guidance         for         economic
evaluations           of multi-purpose             water     resource      projects,                 but do not
require       that     the benefit-cost             analysis         consider             national      economic
development.


        We used the P&Gs to adjust                    the Bureau's             benefit-cost              analysis.
Where they were vague or did not explicitly                                address             the treatment
of specific           aspects      of benefits        and costs,         we supplemented                  them
with    standard            economic principles.


RESULTS OF OUR BENEFIT-COST ANALYSIS


        Mr. Chairman,             I would now like            to discuss         our analysis                 and
results.        We extracted             from the Bureau's             1988 benefit-cost                  analysis
of the entire           Bonneville         Unit     those costs         expected             to be incurred
and those benefits               expected         to be realized         only         if     the I&D system
is built.            This     resulted     in a benefit-cost             ratio             of .84 to 1.
Therefore,       Mr. Chairman,             on the basis         of the Bureau's                  own data and
methodology,           construction         of the I&D system is not economically
justified.
    Y
          We then modified              these benefits                  and costs     to bring      them in
line      with     the PtGs and standard                   economic principles,               making those
adjustments          that     were readily            quantifiable.                We made four
adjustments          relating          to indirect             profits,       farmers'     labor,      taxes,
and salinity          costs.           These adjustments                  resulted     in a $5 million
annual      decrease         in benefits,           and a $5.4 million                 annual      increase      in
costs.           (The Bureau's          benefits       and costs             data and our adjustments
are shown in attachment                    III.)


         Excluding          indirect      profits          resulted          in a $2.6 million          annual
reduction         in I&D system benefits.                        The Bureau defines              these profits
as those         earned by food processors,                        transporters,          and retailers          for
delivering          increased          farm production                  to final     consumers.        Profits
should      be considered              a benefit       only        if     they would not have been
earned elsewhere              in the economy during                       the loo-year      life     of the
project.          Standard       economic principles                      assume that      over a long
period,         such as the loo-year                life        of the CUP, labor           and capital
will     find     employment elsewhere                 in the U.S. economy.                  We assumed,
therefore,         that      the labor        and capital                used to prepare         and deliver
these      farm products           to the consumer would have been otherwise
employed.


         Including          farmers'      labor      costs         resulted        in a $2.8 million
annual      decrease         in benefits.            Bureau calculations                  of farm profits
om!tted         farmers'      labor      costs.        Assigning            no cost      to farmers'       labor

                                                           6
overestimates                farm profits           because it         assumes that             farmers        could
not be productive                  elsewhere         in the U.S. economy.                     In other         words,
it       assumes that            outside      of farming,            they would be unemployed and
earn no income for                   the duration            of the project's               loo-year       life.


           Including            increased      revenues           to federal,         state,         and local
governments             resulting          from taxing            farm output         increased         benefits         by
$0.4 million             annually.            The Bureau counted                   taxes    only      as a cost         to
farmers,        but not as a benefit                      to the government.                 Taxes simply
transfer        part         of the benefits              realized         by the farmers             to the
government.


           Lastly,       recognizing           salinity           impacts       downstream resulting               from
the I&D system increased                       costs       by $5.4 million              annually.          By
diverting            water       from the Colorado                River,     the I&D system increases
salinity        downstream by concentrating                           salts,        resulting         in lower
agricultural             yields       and higher           farm costs.              The Bureau excluded
these       costs       because under the Colorado                         River     Compact of 1922, the
Bonneville            Unit      has the legal             right     to deplete          the river.             These
resulting            salinity        costs,        however,        are still         a project         cost.


          The net effect              of these adjustments                     is to reduce the I&D
system's        benefit-cost               ratio     to    .3 to 1.            In other      words Mr.
Chairman,            in order        for    the construction                of this        project      to be
economically             justified          with     a ratio        of 1 to 1, project                 benefits

     w


                                                            7
would have to be increased              by 232 percent,        or existing      project
costs    would have to decrease           by 70 percent.


        In summary, Mr. Chairman,            the construction         of the I&D system
from a strict      benefit-cost         analysis     standpoint     is not justified.
However, we recognize            that   in making its      decision     whether     to
approve    the project,      the Congress may consider              other    factors.




        Mr. Chairman,     this     concludes       my prepared     statement.       I would
be pleased      to respond to any questions             that     you or members of the
Subcommittee      may have.
ATTACHMENT     I                                                       CSTTACHMENT I


                                              Units    And Systems
                                                      Of The
                                       . Central       Utah  Project




               Stuvat~onCollrcaon
                    SvrUm

    t+




    I+
                   Municipal and ’
             lndustnal water Systems



                lrrlgatlon and
    +          Drainage System            I




   The Jensen and Vernal   Units have been completed.     The Upalco
   and uintah   Units have been deferred.  The Bonneville    Unit is
   under construction.


                                                        9
YUNICIPAL    AND    INDlJsfiltAL   SVSTEY




                                                                                                                           N.



            IRRIGA   TIOY   AND
            DRAINAGE      STSTEY
                                                                       EXPtANATKm
                                                                                               P
                                                m         LANOS   TO RECIEVE    suPFkEYYrAL   PROJECT   WATER

                                                m         LAN08   TO RECbEVE FULL-SERVICE     PROJECT   WATER
                                                                                                                       i
                                                          REsERVolaS
                                            4
                                                -CANAL0




                                                                                      CENTRAL           UTAH PROJECT

                                                                                        BONNEVILLE              UNIT
    ’       E

.
        .




                A T T A C H M E NIII
                                 T                                                           A T T A C H M E NIII
                                                                                                              T
                                    ESTIMATEDR E M A INING BENEFITS AND COSTS
                                FOR THE CENTRALUTAH PROJECTBONNEVILLEUNIT'S
                                        IRRIGATION AND DRAINAGES Y S T E M
                                          . (Figures in m illions)

                Annual benefits                                              $ 10.2
                GAO adjustments:
                  Indirect  profits                        (   2-6)
                  Farmers' labor                           (   2.8)
                  Farm tax expenses                                 l


                  Subtotal                                 ( 5.40)           _( 5, 1
                Adjusted annual benefits                                     s
                Annual costs1                                                $ 10.8
                Other costs2
                  Subtotal                                                   $ 1,'::
                GAO adjustment:
                  Salinity   costs                             5.4
                Adjusted annual costs
                I&D system benefit-cost          ratio
                  Before adjustment                                        -84 to 1     [$10.2/$12.1]
                  After GAO adjustment                                     . 30 to 1    [$ 5.2/$17.5-J




                lInvestment       cost   annualized      at 3 l/8       percent   for   100 years.
                20ther costs include annual operating,                    maintenance, and
                replacement costs, as well as assigned                    Colorado River Storage
                Project regulatory  facilities' costs.
                Source:     GAO's analysis      based on Bureau of Reclamation               1988 data.
                  Y

                                                               11