Bureau of Reclamation: Reclamation Law and the Allocation of Construction Costs for Federal Water Projects

Published by the Government Accountability Office on 1997-05-06.

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

                    United States General Accounting Office

GAO                 Testimony
                    Before the Subcommittee on Water and Power
                    Resources, Committee on Resources, House of

For Release
on Delivery
Expected at
                    BUREAU OF
2:00 p.m. EDT
Tuesday             RECLAMATION
May 6, 1997

                    Reclamation Law and the
                    Allocation of Construction
                    Costs for Federal Water
                    Statement of Victor S. Rezendes, Director,
                    Energy, Resources, and Science Issues,
                    Resources, Community, and Economic
                    Development Division

                    Mr. Chairman and Members of the Subcommittee:

                    We are pleased to be here today to discuss the Bureau of Reclamation’s
                    financing of federal water projects. Since 1902, the federal government has
                    been involved in financing and building water projects, primarily to
                    reclaim arid and semiarid land in the West. Initially, these projects were
                    generally small and built almost solely to provide irrigation. Over the
                    years, however, new projects have grown in size and purpose to include
                    providing for municipal and industrial water supply, hydroelectric power
                    generation, recreation, flood control, and other benefits in addition to
                    irrigation. The Department of the Interior’s Bureau of Reclamation and the
                    U.S. Army Corps of Engineers build most federal water projects. While the
                    Corps operates nationwide, the Bureau conducts its activities only in 17
                    western states.

                    Over the years, in response to issues raised by this Subcommittee and
                    other congressional committees, we have reported on several aspects of
                    water resource management within the Bureau of Reclamation. My
                    testimony today is based primarily on the findings of three of these reports1
                    and focuses on (1) the evolution of reclamation law2 primarily from 1902
                    to 1982 and (2) the allocation and repayment of construction costs for
                    federal water projects among the projects’ beneficiaries.

                    The Reclamation Act of 1902 established the Reclamation Fund and
Reclamation Law     provided for the construction of single-purpose irrigation projects in the
From 1902 to 1982   West. These projects were built primarily to meet the nation’s objective at
                    that time of “developing the West.” Since then, reclamation law has been
                    significantly amended and supplemented.

                    Initially, the federal water project construction program was to be
                    self-sufficient. Although debate occurred on how a reclamation program
                    should be financed, when the Congress passed the Reclamation Act of
                    1902, it clearly intended that the projects’ costs should be repaid by the
                    irrigators using the water delivered by the projects. No appropriated funds
                    were to be used to build these water projects. Under the 1902 act, projects
                    were to be funded through a revolving fund initially capitalized by revenue

                     Bureau of Reclamation: Information on Allocation and Repayment of Costs of Constructing Water
                    Projects (GAO/RCED-96-109, July 3, 1996), Water Subsidies: Basic Changes Needed to Avoid Abuse of
                    the 960-Acre Limit (GAO/RCED-90-6, Oct. 12, 1989), and Reforming Interest Provisions in Federal
                    Water Laws Could Save Millions (CED-82-3, Oct. 22, 1981).
                     Collectively, the federal statutes that are generally applicable to all reclamation water projects and the
                    statutes authorizing individual projects are known as reclamation law.

                    Page 1                                                                             GAO/T-RCED-97-150
generated from the sale of public lands. Upon the completion of a project,
irrigators were to repay the revolving fund for the costs of constructing the
project within 10 years. However, from the beginning, irrigators were not
required to pay interest on their repayment obligation. The act’s legislative
history states that “. . . the Government, interested only in the settlement
of the lands, can well forego any interest on investments and be content
with the return of the principal.”

Early on, it was discovered that the costs of establishing irrigated farming
on previously unfarmed, arid land were much higher than expected and
the costs of building water projects were much higher than originally
estimated. As a result, major funding and repayment changes were made
to the reclamation program between 1902 and 1939. For example, in 1906,
the Congress authorized the sale of surplus power from water projects to
towns and the crediting of the sale revenues to the repayment of irrigation
costs. In 1910, the Congress directed the U.S. Treasury to loan up to
$20 million to the fund to finance completion of the construction of water
projects. Then, in 1914, to ease irrigators’ financial difficulties, the
Congress enacted the Reclamation Extension Act, which extended the
repayment period from 10 to 20 years. Although the irrigators were having
difficulty meeting their repayment obligations, the principle that they
should repay the costs of construction continued. In 1926, the Congress
enacted the Omnibus Adjustment Act, which further extended the
repayment period for all water projects from 20 to 40 years and relieved
some irrigators of parts of their repayment obligations because of
nonproductive lands in certain projects. Repayment for irrigators
remained interest-free.

In 1939, the Congress fundamentally changed the nature of the program by
enacting the Reclamation Project Act of 1939. Under this act, projects
could be authorized for multiple purposes, and the construction costs
would be allocated among the projects’ various purposes: irrigation,
municipal and industrial water supply, hydroelectric power generation,
flood control, and navigation. The legislation allowed the costs of these
multipurpose projects to be shared among the various beneficiaries so that
the projects, including those that provided irrigation, would be
economically viable. The act provided that construction costs allocated to
municipal and industrial water supply and power could be repaid with
interest. The act also gave irrigators additional relief in fulfilling their
repayment obligations by allowing for variable annual payments based on
crop returns and providing for an interest-free development period of up

Page 2                                                     GAO/T-RCED-97-150
                          to 10 years before starting to require repayment. Since 1939, appropriated
                          funds have been used to construct most reclamation projects.

                          With the passage of the Reclamation Reform Act of 1982, the Congress
                          increased the number of acres that an individual or legal entity, such as a
                          partnership or corporation, could irrigate with water from federal projects
                          from 160 acres to 960 owned or leased acres. However, owned land above
                          this limit could not be irrigated with federal water, and the act required
                          irrigators to pay the “full cost” for water delivered to leased land over the
                          limit. The concept of full-cost pricing represented a significant departure
                          from prior reclamation law. The full-cost rate is an annual rate intended to
                          repay over time the portion of the federal government’s expenditures for
                          project construction allocated to irrigation, including the operation and
                          maintenance expenses, with interest.

                          In addition to legislation that is generally applicable to all federal water
                          projects, the Congress has also enacted specific authorizing legislation
                          dictating a water project’s purposes, cost reimbursement terms, and
                          repayment period. For example, section 2 of the Tualatin Project Act of
                          19663 authorizes a 50-year period for the repayment of the portion of a
                          project’s construction costs allocated to irrigation and municipal and
                          industrial water supply.

                          Although these legislative provisions include changes in the requirements
                          for repaying costs, they still support the overall principle that the federal
                          costs incurred in constructing a water project for the purposes of
                          irrigation, municipal and industrial water supply, and power should be
                          repaid to the federal government. Appendix I lists some of the significant
                          legislation enacted since 1902 affecting the reclamation project
                          construction program.

                          Reclamation law determines how the costs of constructing reclamation
Allocation of Projects’   projects are allocated and how repayment responsibilities are assigned
Costs and Repayment       among the projects’ beneficiaries. In implementing reclamation law, the
Requirements              Bureau is guided by its implementing regulations, administrative decisions
                          of the Secretary of the Interior, and applicable court cases.

                          Under reclamation law, a project’s construction costs are divided into two
                          categories—reimbursable and nonreimbursable costs. Reimbursable costs
                          are those that are repaid by the project’s beneficiaries. The costs allocated

                           P. L. 89-596, 80 Stat. 822.

                          Page 3                                                        GAO/T-RCED-97-150
to irrigation, municipal and industrial water use, and power generation are
reimbursable. Nonreimbursable costs are those that are borne by the
federal government because certain purposes of the project are viewed as
national in scope. These costs include those allocated to flood control and
navigation, as well as the majority of the costs allocated to fish and
wildlife enhancement, highway transportation, and recreation. For
example, the $108 million Weber Basin project in Utah includes
$18.9 million in nonreimbursable costs allocated to flood control,
recreation, fish and wildlife enhancement, highway transportation, and the
safety of dams.

The amount of reimbursable costs that a water user is responsible for
repaying varies by the type of user. Irrigators are responsible for repaying
their allocated share of a project’s construction costs as limited by a
determination of their ability to pay.4 They are not required to repay the
interest that accrues during construction or during the repayment period.
Municipal and industrial water users and power users are responsible for
repaying their allocated share of the construction costs plus the interest
that accrues during the repayment period. They can also be required to
repay the construction costs that are determined to be above the
irrigators’ ability to pay; however, they pay no interest on these shifted
costs. Appendix II shows how costs are typically allocated for repayment
among a project’s water users.

As of September 30, 1994,5 the federal government had spent $21.8 billion
to construct 133 water projects that included irrigation as a purpose. The
Bureau has determined that the federal government should be reimbursed
for $16.9 billion, or about 77 percent, of the $21.8 billion. Of these
reimbursable costs, the largest repayment obligation—$7.1 billion—was
allocated to irrigation. The Bureau has also determined that under
reclamation law, $5 billion, or about 23 percent, of the water projects’ total
construction costs is nonreimbursable. The largest share of these
nonreimbursable costs, about $1.1 billion, was allocated to flood control.
We did not determine how much of the $16.9 billion of reimbursable costs

 Since 1906, reclamation law has authorized the use of power revenues to assist in the repayment of
irrigation costs. A 1944 opinion from the Department of the Interior’s Office of the Solicitor,
interpreting the provisions of the 1939 act, confirmed the principle of limiting the financial obligation
of irrigators to their ability to pay their share of a project’s construction costs. Costs determined to be
beyond the irrigators’ ability to pay could be repaid from other revenue sources, primarily from
revenues earned from the sale of electrical power generated by the projects. Payments made from
other sources under this interpretation of the law became known as irrigation assistance.
 When we issued our 1996 report, these were the most current data available in the Bureau’s financial
reports for the 133 projects.

Page 4                                                                              GAO/T-RCED-97-150
has been repaid. Appendix III shows how the $21.8 billion is allocated
among specific project purposes.

This concludes my statement, Mr. Chairman. I would be happy to respond
to any questions that you or other Members of the Subcommittee may

Page 5                                                    GAO/T-RCED-97-150
Appendix I

Some Significant Changes in Reclamation
Law Regarding the Allocation of Project
Costs and Their Repayment

Statute                                                              Change
Reclamation Act of 1902 (32 Stat. 388)                               •Irrigation projects are authorized.
                                                                     •Construction is funded via a revolving fund.
                                                                     Repayment of costs takes place over 10 years.
                                                                     •Repayment is interest-free.
Town Sites and Power Development Act of 1906 (34 Stat. 116)          •Establishment of towns and provision of water are authorized.
                                                                     • Projects’ surplus power can be sold to towns and the revenues
                                                                     credited to repayment of irrigation costs.
Advances to the Reclamation Fund Act of 1910 (36 Stat. 835)          •U.S. Treasury is directed to loan up to $20 million to the fund to
                                                                     finance completion of water projects’ construction.
Reclamation Extension Act of 1914 (38 Stat. 686)                     •Repayment period is extended from 10 to 20 years.
Fact Finders’ Act of 1924 (43 Stat. 672)                             •Repayment requirements are amended to 5 percent per year of
                                                                     irrigators’ average crop value for the preceding 10 years.
                                                                     •Use of project revenues from nonirrigation activities, such as
                                                                     power sales and surplus water sales, is authorized for repayment
                                                                     of irrigators’ construction costs and payment of operation and
                                                                     maintenance costs.
Omnibus Adjustment Act of 1926 (44 Stat. 636)                        •Repayment period is extended from 20 to 40 years.
                                                                     •Irrigators are relieved of parts of their repayment obligations
                                                                     because of nonproductive land at specified projects.
Five Million Dollar Advance to the Reclamation Fund Act of 1931      •U.S. Treasury is directed to loan up to $5 million to the fund to
(46 Stat. 1507)                                                      finance completion of water projects’ construction.
Reclamation Project Act of 1939 (53 Stat. 1187)                      •Water projects are authorized for multiple purposes, including
                                                                     power, municipal and industrial water supply, navigation, and
                                                                     flood control.
                                                                     •Construction of projects is financed by appropriated funds.
                                                                     •Development period of up to 10 years is added to irrigators’
                                                                     repayment schedule.
                                                                     •Some construction costs are designated as nonreimbursable.
                                                                     • Power costs are to be repaid with interest.
                                                                     •Municipal and industrial water supply costs can be repaid with
                                                                     •Repayment of irrigation costs remains interest-free.
Rehabilitation and Betterment Act of 1949 (63 Stat. 724)             •Repayment of expenditures is authorized for the rehabilitation
                                                                     and betterment of the irrigation systems of existing Bureau
                                                                     projects in installments fixed according to the water user’s ability
                                                                     to pay.
Federal Water Project Recreation Act of 1965 (P.L. 89-72, 79 Stat.   •Up to 50 percent of the separable construction costs for
213)                                                                 recreation and fish and wildlife enhancement are deemed
                                                                     • Reimbursable costs for these purposes are to be repaid with
                                                                     interest over 50 years.
Reclamation Reform Act of 1982                                       •The acre limit that an individual or legal entity can irrigate with
(43 U.S.C. 390aa to zz-1)                                            water from a federal project is increased from 160 acres to 960
                                                                     owned or leased acres.
                                                                     •Owned land above the acre limit cannot be irrigated with federal
                                                                     •Irrigators are required to pay full cost for water delivered to
                                                                     leased land over their acre limit.

                                              Page 6                                                                  GAO/T-RCED-97-150
Appendix II

Typical Allocation of Federal Water Project
Construction Costs

                   Uses to Which Costs
                      Are Allocated                                      What Users Pay

                                                    Share of
                         Irrigation               Construction
                                                 Costs Based on
                                                  Ability to Pay

  Reimbursable        Municipal and            Construction Costs
                                               and Interest During
                                                  Construction       +    Interest

                                               Construction Costs                            Irrigation
                                               and Interest During
                                                  Construction       +    Interest
                                                                                      +     Assistance

                          Fish &

      Costs             Recreation


                                      Page 7                                              GAO/T-RCED-97-150
Appendix III

Allocation of Construction Costs for 133
Water Projects, by Specific Project Purpose
and Amount, as of September 30, 1994

               Type of costs                                                                           Amount
               Reimbursable costs
               Irrigation                                                                            $7,095,702
               Municipal and industrial water supply                                                  3,103,283
               Power                                                                                  6,373,084
               Other                                                                                   292,605
               Subtotal                                                                          $16,864,674
               Nonreimbursable costs
               Flood control                                                                         $1,093,760
               Recreation                                                                              504,149
               Fish and wildlife                                                                       929,980
               Highway improvement                                                                      80,482
               Safety of dams                                                                          750,683
               Cultural restoration                                                                     54,943
               Indian use                                                                              806,615
               Other                                                                                   739,610
               Subtotal                                                                              $4,960,222
               Total costs                                                                       $21,824,896
               Source: Bureau of Reclamation Project Construction Cost and Repayment Reports as of
               September 30, 1994.

(141051)       Page 8                                                                    GAO/T-RCED-97-150
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