[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]




           OVERSIGHT HEARING ON RURAL WATER PROJECT FINANCING

=======================================================================

                           OVERSIGHT HEARING

                               before the

                    SUBCOMMITTEE ON WATER AND POWER

                                 of the

                         COMMITTEE ON RESOURCES
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                     JULY 29, 1999, WASHINGTON, DC

                               __________

                           Serial No. 106-51

                               __________

           Printed for the use of the Committee on Resources


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                                 ______


                         COMMITTEE ON RESOURCES

                      DON YOUNG, Alaska, Chairman
W.J. (BILLY) TAUZIN, Louisiana       GEORGE MILLER, California
JAMES V. HANSEN, Utah                NICK J. RAHALL II, West Virginia
JIM SAXTON, New Jersey               BRUCE F. VENTO, Minnesota
ELTON GALLEGLY, California           DALE E. KILDEE, Michigan
JOHN J. DUNCAN, Jr., Tennessee       PETER A. DeFAZIO, Oregon
JOEL HEFLEY, Colorado                ENI F.H. FALEOMAVAEGA, American 
JOHN T. DOOLITTLE, California            Samoa
WAYNE T. GILCHREST, Maryland         NEIL ABERCROMBIE, Hawaii
KEN CALVERT, California              SOLOMON P. ORTIZ, Texas
RICHARD W. POMBO, California         OWEN B. PICKETT, Virginia
BARBARA CUBIN, Wyoming               FRANK PALLONE, Jr., New Jersey
HELEN CHENOWETH-HAGE, Idaho          CALVIN M. DOOLEY, California
GEORGE P. RADANOVICH, California     CARLOS A. ROMERO-BARCELO, Puerto 
WALTER B. JONES, Jr., North              Rico
    Carolina                         ROBERT A. UNDERWOOD, Guam
WILLIAM M. (MAC) THORNBERRY, Texas   PATRICK J. KENNEDY, Rhode Island
CHRIS CANNON, Utah                   ADAM SMITH, Washington
KEVIN BRADY, Texas                   CHRIS JOHN, Louisiana
JOHN PETERSON, Pennsylvania          DONNA MC CHRISTENSEN, Virgin 
RICK HILL, Montana                       Islands
BOB SCHAFFER, Colorado               RON KIND, Wisconsin
JIM GIBBONS, Nevada                  JAY INSLEE, Washington
MARK E. SOUDER, Indiana              GRACE F. NAPOLITANO, California
GREG WALDEN, Oregon                  TOM UDALL, New Mexico
DON SHERWOOD, Pennsylvania           MARK UDALL, Colorado
ROBIN HAYES, North Carolina          JOSEPH CROWLEY, New York
MIKE SIMPSON, Idaho                  RUSH D. HOLT, New Jersey
THOMAS G. TANCREDO, Colorado

                     Lloyd A. Jones, Chief of Staff
                   Elizabeth Megginson, Chief Counsel
              Christine Kennedy, Chief Clerk/Administrator
                John Lawrence, Democratic Staff Director
                                 ------                                

               Subcommittee on Water and Power Resources

                JOHN T. DOOLITTLE, California, Chairman
KEN CALVERT, California              CALVIN M. DOOLEY, California
RICHARD W. POMBO, California         GEORGE MILLER, California
HELEN CHENOWETH-HAGE, Idaho          PETER A. DeFAZIO, Oregon
GEORGE P. RADANOVICH, California     OWEN B. PICKETT, Virginia
WILLIAM M. (MAC) THORNBERRY, Texas   ADAM SMITH, Washington
GREG WALDEN, Oregon                  DONNA MC CHRISTENSEN, Virgin 
MIKE SIMPSOM, Idaho                      Islands
                                     GRACE F. NAPOLITANO, California
                  Robert Faber, Staff Director/Counsel
                   Joshua Johnson, Professional Staff
                      Steve Lanich, Minority Staff




                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing held July 29, 1999.......................................     1

Statement of Members:

Statement of Witnesses:
    Antonelli, Angela, Director, Thomas A. Roe Institute for 
      Economic Policy Studies, The Heritage Foundation...........    57
        Prepared statement of....................................    60
    Dougherty, Cynthia C., Director, Office of Ground Water and 
      Drinking Water, U.S. Environmental Protection Agency.......    26
        Prepared statement of....................................    28
    Graves, Thomas P., Executive Director, Midwest Electric 
      Consumers Association......................................    53
        Prepared statement of....................................    55
    Kladiva, Susan, Associate Director, Energy Resources, and 
      Science Issues Resources, Community and Economic 
      Development Division, General Accounting Office............    35
        Prepared statement of....................................    38
    Ludwigson, Jon, Energy Resources and Science Group, General 
      Accounting Office..........................................    66
    Martinez, Eluid, Commissioner, U.S. Bureau of Reclamation....     3
        Prepared statement of....................................     7
    Romano, John, Deputy Administrator, Rural Utility Service 
      (RUS), Department of Agriculture...........................     9
        Prepared statement of....................................    13


 
           OVERSIGHT HEARING ON RURAL WATER PROJECT FINANCING

                              ----------                              


                        THURSDAY, JULY 29, 1999

                  House of Representatives,
                   Subcommittee on Water and Power,
                                    Committee on Resources,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 2 p.m. in Room 
1324, Longworth House Office Building, Hon. John Doolittle 
[chairman of the Subcommittee] presiding.
    Mr. Doolittle. The Subcommittee on Water and Power will 
come to order.
    We're meeting today to hear testimony on rural water 
project financing. Two years ago we held a hearing regarding 
funding options for Bureau of Reclamation projects, and during 
that period we heard from several witnesses that provided 
innovative ways to fund or encourage the private sector to 
become partners with the Federal Government in operating and 
maintaining Bureau of Reclamation facilities.
    As many of you are aware, before our Subcommittee we have 
requests to authorize more than $1 billion for rural water 
projects in the States of Montana, North Dakota and South 
Dakota alone. This number excludes the identified need 
throughout the country to fund tens of billions of dollars 
worth of additional rural water projects.
    We simply must identify the financial basis for proceeding 
with these projects if people are going to be able to live in 
these areas. Because what inevitably happens is that people are 
drinking substandard water, waiting for some promise to upgrade 
their system. The promises are made but, in reality, are rarely 
kept.
    Conditions worsen while the population simply evaporates. 
Citizens need a more honest answer as to what they can expect. 
There is no doubt that there is a need for more and better 
water quality in many of these areas if their population base 
is going to survive.
    A fundamental question is one of funding. We have heard 
from many local individuals and States who have looked into 
their bank accounts and feel they do not have the finances to 
pay for the water systems they need. When we look at the 
reality of the Federal budget, we have to realize that we do 
not have the money there to simply start another new grant 
program to fund the projects requested before this 
Subcommittee. For all you hear in the news about vast Federal 
surpluses, the reality is that we have enough money to maintain 
economic health and pay down a portion of our national debt. In 
effect, we have ransomed our grandchildren's future but may be 
able to get our great grandchildren out of hock.
    Today we have invited several witnesses to provide 
testimony regarding the current mission of the administration 
to provide safe drinking water to rural areas, as well as 
several others to talk about the role the government should 
play in this area. We also want to examine the current and 
future need of the Federal Government to fund these programs, 
as well as what changes may be needed to assist our rural 
constituents in obtaining safe drinking water. Because there is 
a need to upgrade existing drinking water supply systems as 
well as to find ways to reduce costs, it has been necessary to 
identify additional ways to generate the revenue to pay for 
these projects.
    In areas where the Federal Government is increasing 
standards and forcing change, the Federal Government must be 
prepared to help citizens pay for these changes. This 
conclusion is part of taking responsibility. Where the upgrade 
is driven by internal needs, there's a diminished Federal role, 
and that conclusion is also part of taking responsibility. Even 
in those cases, the Federal Government can provide expertise or 
improved financing options where it has a role. However, in 
many cases, the costs may simply remain a local and State 
expense.
    How we go about designing and financing these rural water 
projects will be a test to the Federal Government's ability to 
transition to the more efficient, fiscally responsible mode of 
operation. To expand our operations, we have spent the last 2 
years working to develop alternatives. While much of the answer 
lies in local and State interests turning to the private sector 
for less costly constructive and more expeditiously available 
financing, there may be options for Federal involvement.
    To that end, several alternatives have been explored that 
involve Federal Government participation and funding rural 
drinking water systems. These include, one, the historic 
irrigation method of using Federal power revenues to fund 
projects beyond the water user's ability to pay it; two, 
providing long-term financing at Treasury rates; three, setting 
up a trust fund to pay for rural water projects based on 
surcharges on Federal water and power.
    There are other options that we will discuss today. These 
choices do not represent the universe of alternatives.
    I look forward to hearing from the witnesses; and I will 
recognize our Ranking Member, Mr. Dooley, for his statement.
    Mr. Dooley. Thank you, Mr. Chairman.
    I commend you for holding this hearing and concur with your 
sentiments that there is a need for us really to assess the 
various Federal programs that attempt to provide some 
assistance, financial assistance, for water supply, as well as 
water quality. I appreciate your interest, as I share those 
interests, in terms of trying to determine what is the 
appropriate role of the Federal Government in meeting some of 
the needs that have been presented to Congress in various 
authorization bills. So I look forward to the hearing and the 
testimony.
    Mr. Doolittle. Thank you.
    We will invite our first panel of witnesses to come 
forward. Ask you to please remain standing and raise your right 
hands.[Witnesses sworn.]
    Mr. Doolittle. Thank you. Let the record reflect that each 
answered affirmatively.
    We're very pleased to have you here today. I appreciate 
your arranging your schedules to participate in our hearing.
    We will first begin with our Commissioner of Reclamation, 
Mr. Eluid Martinez.
    Mr. Martinez.

   STATEMENT OF ELUID MARTINEZ, COMMISSIONER, U.S. BUREAU OF 
                          RECLAMATION

    Mr. Martinez. Mr. Chairman.
    Mr. Doolittle. May I--before you begin--remind everyone 
these statements, and everything we say, if the microphones are 
on, goes out over the Internet. So you do have a switch there 
to control that microphone when you aren't wishing to speaking 
to the world.
    Mr. Martinez. Mr. Chairman, I am pleased to provide the 
perspective of the Bureau of Reclamation and our involvement 
and experience with the development of rural water projects in 
the western United States. My written statement has been 
submitted for the hearing record, and I will summarize that 
statement.
    Mr. Chairman, the accessibility of rural America to safe, 
reliable and adequate drinking water supplies is an important 
issue; and I compliment you and the Committee for scheduling 
this hearing to focus attention to this vital issue.
    In the western United States where reclamation is involved, 
reclamation has identified two major categories of need: Indian 
reservations or Pueblos with nonexistent or substandard water 
supply systems and nonIndian rural communities with inadequate 
or declining water supplies.
    Based on an initial and somewhat informal survey of 
reclamation offices, we have identified a need for as much as 
$3 billion in rural water development and construction 
activities throughout the 17 western States. One point seven 
billion dollars of that is for potential Indian projects.
    I'm advised that Congress, according to the 1995 General 
Accounting Office report, has authorized as many as 17 Federal 
programs and 8 Federal agencies to address rural water needs. 
Reclamation, however, has been authorized only by specific 
legislation to develop site-specific rural water projects.
    It has been our experience that project sponsors seeking 
Reclamation's involvement do so because, for various reasons, 
their projects do not meet the criteria established by the 
existing 17 other programs.
    The Department of Interior supports efforts to meet the 
water needs of rural communities. It is concerned, however, 
about contributing to the overlap in the many Federal programs 
now in existence. It is concerned with respect to the number of 
projects being authorized and the impacts on Reclamation's 
ability to efficiently complete projects already under 
construction.
    While Reclamation has been directed in statutes to develop 
specific rural water systems, our policy is that we participate 
in rural water projects in two ways.
    First, we should provide nonIndian rural water supply as a 
component of multipurpose projects, as long as the local 
sponsors reimbursed Reclamation for 100 percent of the costs 
incurred.
    Second is our role to help the Federal Government meet its 
Trust obligations with respect to Indian issues. According to 
long-standing administrationwide policy, single-purpose 
municipal, rural and industrial water supply projects have not 
been considered Reclamation's responsibility.
    At the present time, Reclamation has billions of dollars in 
authorized projects under way. In addition, Congress currently 
has before it proposals to authorize more than $1 billion in 
new or expanded rural water projects for Reclamation to 
undertake, and I will provide a copy of a table breaking this 
out for the record.
    [The information follows:]
    [GRAPHIC] [TIFF OMITTED] T0633.001
    
    [GRAPHIC] [TIFF OMITTED] T0633.002
    
    Mr. Martinez. Reclamation's budget, as you know, is 
declining, while our project operation and maintenance costs, 
our dam safety concerns and other program obligations continue 
to grow.
    Additionally, Mr. Chairman, we have a growing concern with 
the trend towards Reclamation being obligated for operation and 
maintenance costs associated with some of our Native American 
rural water systems that are now under construction. We are 
concerned about the impact this obligation has now and in the 
future to enable us to complete and adequately fund 
construction projects under way. We would like to open a 
dialogue with this Subcommittee on how we can and should 
address this issue. Given this context and experience, 
Reclamation believes that careful consideration should be given 
to the Federal interests in these rural water projects and the 
appropriate level of Reclamation's involvement.
    Mr. Chairman, there is a need to focus attention to the 
drinking water needs of rural America. As such, there may be a 
need to review the coordination of existing Federal programs a 
well as the funding and skills and expertise available to the 
different Federal agencies and a need for greater coordination 
with State and local governments to bring their expertise and 
resources to the table.
    Mr. Chairman, this concludes my testimony. I will be 
pleased to answer any questions.
    Mr. Doolittle. Thank you.
    [The prepared statement of Mr. Martinez follows:]

     Statement of Eluid L. Martinez, Commissioner, U.S. Bureau of 
                Reclamation, Department of the Interior

    My name is Eluid Martinez, I am Commissioner of the U.S. 
Bureau of Reclamation. I am pleased to provide the perspective 
of the Bureau of Reclamation on our involvement and experience 
with the development of rural water projects in the western 
United States.

MAGNITUDE OF THE NEED

    According to a 1995 needs assessment conducted by the U.S. 
Department of Agriculture's Rural Development Office, more than 
1 million people in the United States had no water piped into 
their home, and a total of 2.4 million people were considered 
as having critical drinking water needs. Many rural residents 
carry heavy containers of water from cisterns, purchase bottled 
water or pay a water for hauling service. Recently released 
Environmental Protection Agency (EPA) data indicates that to 
meet the need nationwide for small systems serving 3,300 people 
or less could cost more than $37 billion.
    In the Western United States, where Reclamation is 
involved, rural needs are identified in two major categories--
Indian reservations with nonexistent or substandard water 
supply systems and non-Indian communities with inadequate or 
declining water supplies. Based on an initial survey of 
Reclamation offices conducted recently, we have identified a 
need for as much as $3 billion in rural water development and 
construction activities throughout the 17 western states. Of 
that amount approximately $1.7 billion were estimated for 
potential Indian projects and $1.3 billion for non-Indian 
Projects.
    In addition, the Indian Health Service (IHS), which 
publishes an annual report on Tribal water needs, found that 
more than 2,000 homes on Indian reservations are without 
potable water supplies. While many of those homes are on the 
Navajo Nation and in Alaska, the larger need is identified by 
the approximately 146,000 Indian homes which have substandard 
or inadequate potable water supplies or systems. IHS has 
estimated that it would cost approximately $950 million to 
address their identified needs.

Existing Federal Programs

    In response to the need and demand for assistance on this 
issue, Congress has, according to a 1995 General Accounting 
Office report, authorized as many as seventeen Federal programs 
in eight Federal agencies including the EPA, IHS, Department of 
Commerce and the USDA. The primary programs are the EPA 
Drinking Water State Revolving Fund, USDA's Rural Utilities 
Service Program, and the Department of Housing and Urban 
Development's Block Grant Program. For the most part, these 
were authorized as ``programs'' to address the needs of 
communities that meet the specific criteria established by 
statute, regulation or policy within the constraints of 
available appropriations.
    While Reclamation has been directed in statutes to develop 
specific rural water systems, our policy is that we participate 
in rural water projects in two ways. First, we should provide 
non-Indian rural water supply as one component of a multi-
purpose project, as long as the local sponsor reimburses 
Reclamation for 100 percent of the costs. Second, to help the 
Federal Government meet its Trust responsibilities to Indian 
Tribes, our policy states that, in appropriate cases, we will 
provide Indian communities with rural water supply assistance. 
According to long-standing Administration-wide policy, single-
purpose municipal, rural and industrial water supply projects 
have not been considered Reclamation's responsibility.
    In the past several years, there have been numerous 
proposals to authorize Reclamation to develop single-purpose 
municipal rural and industrial (MR&I) water supply projects for 
rural communities throughout the western United States. While 
the Department supports efforts to meet the water needs of 
rural communities, we remain concerned both about contributing 
to overlap in the myriad of Federal programs and projects 
already authorized, the impacts of the projects on 
Reclamation's overall budget, and our ability to address 
current obligations and to work with rural communities in the 
future to identify and assist them in addressing their water 
management needs.
    At the present time, the Bureau of Reclamation has billion 
of dollars in authorized projects that are underway. In 
addition, Congress currently has before it proposals to 
authorize more than $1 billion in new or expanded single 
purpose rural projects for Reclamation to undertake--all at a 
time when Reclamation's budget is declining and the operation 
and maintenance, dam safety, and other Reclamation program 
obligations continue to grow.
    Given this context and experience, we are concerned about a 
number of issues associated with the proposals and programs 
involving Reclamation's participation in these projects 
currently before Congress:

          First, careful consideration should be given to the Federal 
        interest in the projects and the appropriate level of Federal 
        involvement--especially given the role that state and local 
        governments can play.
          Second, the level of non-Federal cost share for Reclamation 
        rural water components in multi-purpose projects needs to be 
        significantly greater than has been proposed in the past. Most 
        of the proposals which we have provided testimony or comments 
        on in recent years have included minimal non-Federal 
        contributions--some with Federal cost shares as high as 85 
        percent. It is our long-standing policy that MR&I components, 
        particularly those that are non-Indian components, should be 
        fully reimbursable with interest.
          Third, I would like to bring to your attention a growing 
        concern within Reclamation for the trend toward Reclamation 
        being obligated for operations, maintenance and replacement 
        (OM&R) costs for MR&I projects. Paying the OM&R costs, as is 
        proposed in some case and as has occurred in the case of the 
        Mni Wiconi Project and others, could ultimately limit the 
        ability of the Reclamation program to help Native American 
        Tribes and others to address the water resources problems 
        throughout the west. The Administration believes that as a 
        general policy, Tribes where possible and other project 
        beneficiaries should be responsible for the OM&R expenses of 
        their projects. We would like to open a dialog with the 
        Committee on how this can and should be addressed.
    Mr. Chairman, this is an incredibly important issue, that I hope 
gets more attention in the future. The number of proposals before this 
Committee and the multiple demands for funding make it clear that there 
is a need for attention to the need to address the water supply needs 
of thousands of Americans in rural areas. As I stated earlier, a 1995 
GAO study identified eight Federal agencies with seventeen programs 
designed specifically for use by rural areas to construct or improve 
water and wastewater facilities. Given that, there may need to be a 
review of the coordination of the programs, funding, and skills and 
expertises of the Federal agencies, as well as greater coordination 
with the state and local governments which have expertise and resources 
dedicated to this purpose.
    That concludes my testimony. I would be pleased to answer any 
questions.

    Mr. Doolittle. Our next witness will be the Deputy 
Administrator of the Rural Utilities Service, RUS, the U.S. 
Department of Agriculture, Mr. John Romano. Mr. Romano.

 STATEMENT OF JOHN ROMANO, DEPUTY ADMINISTRATOR, RURAL UTILITY 
            SERVICE (RUS), DEPARTMENT OF AGRICULTURE

    Mr. Romano. Mr. Chairman, Mr. Ranking Member, we appreciate 
the opportunity--good afternoon, we appreciate the opportunity 
to be here to talk about a subject that is of great everyday 
importance to us and, obviously, is important to the 
Subcommittee, the financing of rural water systems.
    I'm happy to be here on behalf of Secretary of Agriculture 
Dan Glickman to talk about USDA's water and waste disposal loan 
and grant program, which has been making loans and grants to 
the rural water and wastewater system since 1940. The goal of 
the program has been safer and cleaner water for rural 
communities, particularly distressed rural communities. In 
short, we finance the construction, expansion and improvement 
of rural water and wastewater systems, with a premium on 
modesty in size, design and construction.
    We are proud of the results we and our customers have 
achieved over these almost 60 years through the water and waste 
disposal program. And we are very well aware of the continuing 
pressing needs, as we have documented in our own assessments 
and our colleagues at the EPA have particularly strongly 
documented, for improved water quality, quantity and 
dependability in the economically distressed parts of rural 
America that we work to serve.
    By law, regulation and policy, it's our job to target our 
limited loan and grant resources to communities that need them 
most in terms of economic distress and serious public health 
challenges. We are a unique public bank. Sixty percent-plus of 
our total funds go out as loans. However, we target the 
remainder, almost 40 percent, as grants that effectively buy 
down the loan rates for the most financially strapped of our 
borrowers.
    The result is reasonable, affordable water rates for the 
customers of the rural water systems we finance and debt 
service our borrowers can reasonably handle. The evidence of 
this is something we are very proud of, a 99.9 percent 
repayment rate on the more than $16 billion of water and waste 
disposal loans that have been made over this period of almost 
60 years.
    Here's the capsule summary of our loan portfolio as of 
September 30th, 1998, the end of the last fiscal year: 7,557 
borrowers, 15,915 loans, approximately 60 percent of the loans 
were made for drinking water projects, the rest were made for 
sanitary sewer and a relative small handful of solid waste 
disposal projects, outstanding principal of $5.89 billion, 1/10 
of 1 percent, as I noted earlier, of the total loan principal 
delinquent--I should say only 1/10 of 1 percent of the total 
loan principal is delinquent.
    And here is the capsule summary of our fiscal year '98 
investment activity: $1.33 billion committed to 1,072 projects 
nationwide, just over 60 percent of them drinking water 
projects. Of the $1.33 billion we committed, $800 million went 
out as loans and $530 million as grants. The average loan size 
was $840,000; the average grant size was $590,000. The average 
median household income for a family served by our water 
projects in FY '98 was just under $20,000. By comparison, the 
national poverty rate for a family of four is $16,500.
    Our total FY '98 commitments will serve approximately 1.3 
million people with new or expanded or improved drinking water 
or wastewater disposal facilities. Our total annual commitment 
leveraged, in FY '98, more than $250 million, $250 million in 
loans and grants from other sources.
    The principal other sources included community development 
block grants, HUD funds that go through State agencies; State 
revolving loan funds, through the States, that's EPA dollars; 
Appalachian Regional Commission Grants administered directly by 
our people in the field under an agreement with the Appalachian 
Regional Commission and Indian Health Service Grants for tribal 
projects. And we are funding an increasing number of tribal 
projects, five times as many as we did 6 years ago. State-
appropriated funds and economic development administration 
grants, once again under an agreement that's almost 30 years 
old, the cooperative agreement with the EDA where our staffs 
work together on this.
    Here is a quick portrait of a high-priority customer, a 
hypothetical high-priority customer.
    It's eligible for our program; it's a small town or city or 
it's a rural county or nonprofit water association or Indian 
tribe. The population is under 5,500, eligible population is 
under 10,000, but we're particularly looking for the very 
small, distressed communities with limited resources that have 
nowhere else to turn. They're unable to obtain credit for the 
improvements from private commercial sources. They have water-
related health and safety concerns, as evidenced by a mandate 
or threat of a mandate from a State or Federal regulatory 
agency.
    Mr. Chairman, I have about 2 more minutes. Should I wrap it 
up or----
    Mr.  Doolittle. Go ahead and just finish your statement.
    Mr. Romano. I appreciate it.
    The median household income on this average project of ours 
for the service area is less than 80 percent of the Statewide 
nonmetropolitan median household income, which is typically 
almost always lower than the Statewide median household income 
overall.
    This project would merge two or more small water systems to 
maximize operating and cost efficiencies. The project would not 
just improve water service to existing users but would also 
bring some new users, very important to us, new users in the 
system. The project financing would consist of at least 20 
percent of the total development costs, and ideally more than 
50 percent, to get the maximum score under our priority scoring 
system from financing sources, such as the ones I mentioned 
earlier, from sources other than the USDA.
    We believe our track record is notable and our impact deep 
and broad throughout rural America.
    I want to note, and I can make these summaries available, 
that over the past 5 years, talking about broad coverage in the 
districts of the 15 members of the Subcommittee over the last 5 
years, and I have that information for the Committee, we funded 
138 water and wastewater disposal projects.
    Over the last 5 years, we've also made the following 
improvements in the way we operate: Done a major overhaul of 
our program regulations. We've eliminated 40 percent of their 
volume. We've cut a major step out of our application process. 
We've created more incentives for small water systems to join 
together. We've created more incentives for our customers to 
use other funds to leverage funds from other sources, and our 
leveraging percentages are going up every year.
    We've pushed more project responsibilities into the field, 
where we have about 350 employees on the ground in the States, 
compared with Washington, where we are down to 27 employees 
working on our water and waste disposal program. We have beefed 
up the delivery of technical assistance and training to our 
customers and potential customers through a network of hands-on 
nonprofit circuit riders, especially through the State rural 
water associations.
    These circuit riders are proficient in fixing pumps, 
setting water rates, working out management problems, and 
they're particularly proficient in training water system 
operators to be independent and to run their systems better and 
more efficiently.
    During that 5 years we have renewed an almost 20-year-old 
cooperative agreement--I have a copy for the Subcommittee--with 
the Appalachian Regional Commission, whereby, in 1998, our 
people directly administered almost 17 million of their project 
funds. Their staff does very little. They have given complete 
authority to our people to administer their funds.
    We regularly consult with the IHS and EPA on the funding of 
water projects in Indian country; and, in fact, this year we 
have jointly funded several projects with the IHS, most 
notably, very recently, in the last month, the Shoshone-Bannock 
project in Idaho in the district of Mr. Simpson.
    I have a copy for the Subcommittee of a memorandum between 
us and the IHS on specific project funding.
    Finally, and perhaps most notably, in 28 States, 28 states, 
our staff and the staffs of other key water infrastructure 
agencies meet on a regular basis as part of formal or informal 
groups. In some places, they're called water assistance 
councils; in other places, they're called infrastructure 
financing councils in 28 States. Basically, our people get 
together on a regular basis with other public employees to 
broker projects, to discuss projects and the best way to fund 
them, either singly or jointly.
    By our estimate, 5 years ago that was only happening in 13 
States. So that's more than doubled. And I have a copy of an 
infrastructure survey done by the Council of State Community 
Development Agencies of what the status of those infrastructure 
councils in the States is right now.
    There is still a great deal to do in the way of targeting 
investment in rural America to improve public health, fire 
protection and economic opportunity through improved drinking 
water. The Department of Agriculture is pleased to play a very 
active role in increasingly, with other public partners, State 
and Federal, to assist the many communities that turn to us as 
their primary investor.
    One last pile of paper for the Subcommittee, 14 pages 
single-spaced, both sides of the page, of our present backlog 
of preapplications for water and waste disposal financing, 
$2.28 billion in loan backlog, $1 billion in grant backlog 
available to the Subcommittee.
    Thank you for this opportunity.
    Mr. Doolittle. Thank you.
    Mr. Romano. And for the extra time.
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    Mr. Doolittle. Our next witness is Cynthia C. Dougherty, 
the Director of the Office of Groundwater and Drinking Water 
within the U.S. Environmental Protection Agency. Ms. Dougherty.

 STATEMENT OF CYNTHIA C. DOUGHERTY, DIRECTOR, OFFICE OF GROUND 
 WATER AND DRINKING WATER, U.S. ENVIRONMENTAL PROTECTION AGENCY

    Ms. Dougherty. Thank you, Mr. Chairman, for the opportunity 
to testify before you today on Federal financing of rural 
drinking water projects. I'm from EPA's Office of Groundwater 
and Drinking Water, which oversees implementation of the Safe 
Drinking Water Act.
    Through the Safe Drinking Water Act, the Environmental 
Protection Agency is charged to protect the health of people 
who drink water from public water supplies. Three years ago, 
President Clinton signed amendments to the Safe Drinking Water 
Act, which were passed by Congress, that made significant 
changes to the Act to focus it and our work on the greatest 
risk to human health so that America's drinking water will 
continue to be of high quality.
    Those 1996 amendments provided a new source of financial 
assistance for all public water systems to help pay for the 
costs of the national standards that we would be setting in the 
future, as well as for other drinking water treatment needs.
    Between fiscal years 1997 and 1999, Congress appropriated 
nearly $2.8 billion for that program, the Drinking Water State 
Revolving Fund. States use these resolving funds with a 20 
percent State match to provide financial assistance to systems 
to protect public health and ensure compliance with the Safe 
Drinking Water Act objectives.
    The State revolving funds provide low-cost loans to 
publicly- and privately-owned water systems as well as 
nonprofit, noncommunity systems, with repayment terms of up to 
20 years. The Nation's public water systems must make 
significant investments to continue to ensure delivery of safe 
drinking water to their customers over time.
    In 1997, EPA's survey of drinking water infrastructure 
needs concluded that more than $138 billion will be needed over 
the next 20 years to fund necessary drinking water treatment 
improvements, including $37 billion for systems serving fewer 
than 3,300 people. This treatment need is large because of the 
size of the drinking water universe. There are 55,000 community 
water systems, serving 250 million Americans. The vast majority 
of these systems serve fewer than 3,300 people. These 
approximately 46,000 small community water systems provide 
water to 25 million people in both rural and suburban America.
    The drinking water SRF was created to address drinking 
water quality needs. States determine which projects are funded 
within their State by using a priority system which ranks 
projects primarily based on three criteria--the risks to human 
health, the necessity of the project to ensure compliance with 
the Safe Drinking Water Act, and the economic needs of the 
system.
    Eligible projects include expenditures to upgrade or 
replace drinking water treatment infrastructure, treated water 
distribution or storage facilities, and system consolidation. 
States are prohibited from providing loans to finance growth, 
dams and most reservoirs and water rights.
    EPA is committed to ensuring that all Americans served by 
regulated water systems receive the public health protection 
benefits envisioned in the Safe Drinking Water Act. EPA fully 
supports financing of drinking water treatment projects for 
smaller and rural systems to address public health concerns, 
since many of the systems in greatest needs are small water 
systems.
    States have made funding small water systems projects a 
priority. As of the beginning of July, 1999, States have made 
637 loans--we're actually a much younger program since we've 
only been in place 3 years--637 loans totalling $1.3 billion to 
eligible water systems for drinking water projects. More than 
3/4 or 497 of these loans went to small systems.
    While the Safe Drinking Water Act requires that at least 15 
percent of the funds be made available to small systems, States 
have provided almost 41 percent of the funds loaned to date to 
small systems. This is particularly notable because many States 
have found these loans can take a significant amount of 
administrative assistance to finance.
    EPA also recognizes the need to coordinate with other 
agencies to better serve rural America. EPA has worked with 
other funding agencies, including the Rural Utility Service and 
HUD's community development block grant program, to coordinate 
activities to address small systems' needs. In 1997, the three 
agencies issued a joint memorandum to foster cooperation among 
our agencies as we administer our grant and loan programs and 
to encourage State administrators of our programs to do the 
same.
    This coordination is taking place at the State level. In 
Washington State, nine projects from the first round of 
drinking water SRF applications were cofunded from various 
sources including RUS, CDBG and the State Public Works Trust 
Fund. Several States, including Oregon and Arizona, have 
developed one-stop meetings that bring funding agencies 
together in one place with applicants for funding. We will 
continue to work with rural funding organizations at the 
Federal and State level to provide coordinated assistance to 
rural water systems.
    Separate from the drinking water SRF, some communities, 
small and large, have sought financial assistance for water and 
wastewater projects as line items in EPA's budget. EPA is 
responsible for managing grants to these projects which are 
administered as direct grants with a 45 percent cost share by 
the grant recipient.
    EPA remains concerned that the funding of these projects 
undermines the authority of States, as established by Congress 
in creating both the drinking water and clean water SRF 
programs--to decide which projects will provide the greatest 
public health and water quality benefits, and to fund those 
projects that the State determines, under statutory criteria, 
represent the greatest public health, environmental and 
economic need priorities across the State as a whole.
    Loans given out through the drinking water SRF address the 
highest priority public health needs of the water systems in 
each State, including those in rural areas. State priority 
lists are developed through a responsive public process which 
allows citizens within the State to participate in deciding on 
public health priorities.
    EPA and the States are coordinating their drinking water 
SRF funding activities with other agencies to ensure that these 
priority drinking water treatment needs of rural America can be 
met in the most efficient manner possible.
    Thank you.
    Mr. Doolittle. Thank you.
    [The prepared statement of Ms. Dougherty follows:]

Statement of Cynthia C. Dougherty, Director, Office of Ground Water and 
          Drinking Water, U.S. Environmental Protection Agency

    Thank you, Mr. Chairman, for the opportunity to testify 
before you today on Federal financing of rural drinking water 
projects. I am Cynthia Dougherty, Director of the Environmental 
Protection Agency's (EPA's) Office of Ground Water and Drinking 
Water, which oversees implementation of the Safe Drinking Water 
Act.
    The Safe Drinking Water Act (SDWA) is the principal Federal 
statute governing drinking water quality in the United States. 
Through the Act, the Environmental Protection Agency is charged 
with protecting the health of persons who drink water from 
public water supplies. EPA works with the States, drinking 
water suppliers, and the public to set health standards for 
drinking water, and to ensure that these standards are met by 
the public drinking water suppliers, so that the finished, 
treated water will be of high quality. Three years ago 
President Clinton signed into law amendments to the Safe 
Drinking Water Act, passed by Congress, that focus our efforts 
on the greatest risks to human health. Congress and the 
Administration agreed to make some significant changes in the 
Act to increase public health protection while controlling 
costs, and EPA and its partners in the drinking water community 
have spent the last 3 years making those changes a reality.
    The drinking water universe is large--55,000 community 
water systems serve 250 million Americans--and the vast 
majority of these systems serve fewer than 3,300 persons. These 
approximately 46,000 small community water systems provide 
water to 25 million persons in both rural and suburban America. 
Rural water systems face significant challenges as they work to 
provide safe drinking water, as low population densities 
increase the fixed costs of drinking water distribution while 
offering a limited consumer base to spread out costs.
    EPA is committed to ensuring that all Americans served by 
regulated water systems, regardless of the size of their water 
system or their location, receive the public health protection 
benefits envisioned in the SDWA. The nation's public water 
systems must make significant infrastructure investments to 
continue to ensure the delivery of safe drinking water to their 
consumers. A 1997 EPA survey of drinking water needs identified 
that more than $138 billion will be needed over the next 20 
years to fund necessary infrastructure improvements, including 
$37 billion for systems serving fewer than 3,300 persons. 
Historically, many water systems, particularly small systems, 
found it difficult to obtain affordable financing for those 
infrastructure improvements.
    The Administration and Congress worked to address the needs 
of rural drinking water systems in the 1996 Amendments to the 
SDWA through technical assistance, flexibility in Federal 
requirements, and funding. The SDWA Amendments provided a new 
source of financial assistance for public water systems to 
address public health protection needs. Between fiscal years 
1997 and 1999, Congress appropriated nearly $2.8 billion 
through the Drinking Water State Revolving Fund (DWSRF) for 
States and Tribes to address their drinking water needs. States 
are required to provide a 20 percent match on DWSRF grants they 
receive. States use the funds received from EPA grants to 
capitalize their own drinking water revolving funds and finance 
other activities that support drinking water protection. States 
then use these revolving funds to provide financial assistance 
to systems to protect public health and ensure compliance with 
SDWA objectives. The State revolving funds provide low-cost 
loans to publicly and privately owned water systems, as well as 
nonprofit non-community ones, with repayment terms of up to 20 
years. Interest rates on loans can be at, or below, market 
interest rates.
    A recognition of the special needs facing small systems is 
the SDWA requirement that States target a minimum of 15 percent 
of the funds available to provide systems serving under 10,000 
persons with financial assistance. Also, for many rural 
communities, even the low interest rate for loans available 
through the DWSRF may be too high to make loans affordable. To 
help address this challenge, a State has the option of 
providing additional subsidies, including forgiveness of 
principal, to systems that meet the State's definition of 
``disadvantaged.'' ``Disadvantaged'' systems can also receive 
extended loan repayment terms of up to 30 years.
    EPA fully supports the financing of small drinking water 
projects to address public health concerns through the DWSRF, 
since many of the systems in greatest need are small water 
systems. States have made funding small water system projects a 
priority. As of the beginning of July 1999, States' revolving 
funds had made 637 loans totaling $1.3 billion dollars to 
eligible water systems for drinking water projects. More than 
three-quarters (497) of these loans went to small systems. 
While the SDWA requires that 15 percent of the funds be made 
available to small systems, States have provided almost 41 
percent of the funds available to small systems. This is 
particularly notable because many States have found that these 
loans can take a significant amount of administrative 
assistance to finalize.
    EPA has worked with other funding agencies, including the 
Rural Utilities Service (RUS) and the Department of Housing and 
Urban Development Community Development Block Grant (CDBG) 
Program, to coordinate activities and to address rural systems' 
needs. In 1997, EPA, RUS, and HUD issued a joint memorandum to 
foster cooperation between the agencies as they administer 
their grant and loan programs, and to encourage State 
administrators of our programs to do the same. This 
coordination is taking place. In Washington, nine projects from 
the first round of DWSRF applications were co-funded from 
various sources, including RUS, CDBG, and the State Public 
Works Trust Fund. In Maine, monthly meetings are held between 
the State staff administering DWSRF, CDBG and RUS funds to 
identify projects and optimize use of funds. Several States, 
including Oregon and Arizona, have developed one-stop meetings 
that bring funding agencies together in one place with 
potential applicants for funding. We will continue to work with 
rural funding organizations at the Federal and State level to 
provide coordinated assistance to rural water systems. The 
Department of Commerce advises us that, through its Economic 
Development Administration, it also provides financial 
assistance to rural communities to improve their water supply 
systems.
    Examples of projects that have been funded include $36,000 
to the city of Mitchell, Oregon to make improvements in its 
chlorination system in response to colifom bacteria 
contamination, and $1,030,000 to the city of South Bend to fund 
construction of a new membrane treatment facility. In addition, 
the Bangor [Maine] Water District used a $556,000 loan through 
a DWSRF set-aside to purchase 725 acres of land in the direct 
watershed of Floods Pond, the District's source of water, which 
will add protection from microbial contamination.
    The DWSRF was created to address drinking water quality 
needs. States determine which projects are funded by using a 
system that ranks projects, giving priority to those projects 
that: address the most serious risk to human health, are 
necessary to ensure compliance with the requirements of the 
SDWA, and assist systems most in need on a per household basis. 
Eligible projects include expenditures to upgrade or replace 
drinking water infrastructure, treated water distribution or 
storage facilities, planning and design, and system 
consolidation. States are prohibited from providing loans to 
finance growth, economic development, dams, and most reservoirs 
and water rights.
    States also have the option of setting aside funds from 
their DWSRF grants to support a number of SDWA priority 
initiatives including capacity development, operator 
certification, and source water protection. All of these 
activities can help water systems, including small rural 
systems, improve their ability to provide public health 
protection. One of the set-asides is specifically targeted to 
benefit small systems. This set-aside, which provides funding 
for technical assistance for small systems, has been popular 
among States, which reserved 1.6 percent (of a maximum 2 
percent) of FY 1997 grants or $20.2 million to conduct 
activities. States that have received FY 1998 funds have 
reserved approximately the same percentage of their grants for 
this particular set-aside.
    Some communities, small and large, have sought financial 
assistance for water projects as line items in EPA's budget. 
EPA is responsible for managing grants to these projects which 
are administered as direct grants with a 45 percent cost share 
by the grant recipient. EPA remains concerned that the funding 
of these projects undermines the authority of States--as 
established by Congress in creating the DWSRF (and the Clean 
Water State Revolving Fund under the Clean Water Act)--to 
decide which projects will provide the greatest public health 
and water quality benefits, and to fund those projects that the 
State determines to fund, in accordance with the applicable 
statutory criteria.
    Loans given out through the DWSRF address the highest 
priority public health needs of water systems in each State, 
including those in rural areas. State priority lists are 
developed through a responsive public process which allows 
citizens within the State to participate in deciding on public 
health priorities. The Administration and Congress intended for 
the DWSRF to be the primary vehicle to fund drinking water 
treatment improvements, and EPA supports assistance to rural 
water systems under the DWSRF.
    This concludes my prepared remarks. I would be happy to 
address your questions at this time.

    Mr. Doolittle. Commissioner, why isn't the Bureau part of 
the April '97 joint memorandum between HUD, EPA and RUS to 
involve coordination amongst the agencies involved in funding 
or providing technical assistance for rural water projects?
    Mr. Martinez. Mr. Chairman, if I may, let me try to place 
this in context. There's no question that there's a multitude 
of rural water systems all over the west. Some are small, some 
are larger than others.
    For the most part, these systems access a local water 
supply that, for most purposes, is adequate for drinking 
standards. They need assistance either to enlarge the system or 
if they've got some local groundwater problems they take care 
of these issues, and probably that's what these programs and 
these other agencies, are geared to help with.
    But the projects that have been coming before the Bureau of 
Reclamation, at least the while I've been commissioner of 
Reclamation, are these projects that are much larger in scope. 
These are projects that are taking water from one location, 
where it's available in quantity and quality, and moving it 
across large distances and tying together existing rural 
systems where water quality is lacking or inadequate into a 
much larger component.
    And if you look at what's before you, it's these large 
infrastructure systems that are coming before this 
Subcommittee. It's not the small rural systems that are trying 
to improve their pipelines and so forth.
    So I think that, from that perspective, Reclamation has 
never been in this business of helping these small rural water 
projects and probably it's appropriate that they didn't join 
this memorandum, which I wasn't even aware existed. But, at any 
rate, these projects that have been funded by Congress or that 
the Bureau of Reclamation has become involved in are not what I 
would consider the small rural water projects but rather they 
are combining these projects into much larger systems.
    The Bureau of Reclamation's history on developing projects 
that deliver water for municipal, industrial needs has always 
been, under Reclamation law, reimbursable with interest. 
Basically that follows our position that any of these projects 
that are funded through Bureau of Reclamation should follow 
Reclamation law and should be reimbursed at 100 percent with 
interest.
    Notwithstanding that, Congress in the last few years has 
approved legislation and the Bureau of Reclamation today is 
helping build projects in North and South Dakota and in Montana 
for these large regional systems. I am aware of at least two 
projects being proposed or in the pipeline in the State of New 
Mexico. So the issue is, is there a Federal role in building 
these systems that are not addressed by these other programs 
and, if so, which Federal agency or agencies should be 
responsible and how should they be financed?
    So, you know, maybe I'm going a bit overboard, but I'm 
trying to sort of isolate the differences in the systems and 
the issues that are before this Subcommittee with respect to 
the proposals that have come before you in the last 2 or 3 
years.
    That's a long answer to--maybe it wasn't a direct answer to 
your question, but I sort of wanted to set the tone for what I 
believe could help the Subcommittee in its deliberations.
    Mr. Doolittle. Well, I think you've crystallized the issue 
very well. And in a minute I would like you to express what you 
think is the right thing to do on this, since it's obviously, 
for the people that live in these areas, it is a problem. But, 
you know, is there a Federal role, and if there is, what is it, 
and how much it would be?
    Let me just ask you if you could, with your staff, to look 
at that memorandum, perhaps, and maybe you can send word after 
you further consider the issue, if you think there might--does 
BOR--does it make sense to have them be part of that 
memorandum?
    Mr. Martinez. I will do that.
    Mr. Doolittle. Okay. Now, I know the yellow light is there. 
You posed those questions very articulately. What do you think 
the answers ought to be?
    Mr. Martinez. Well, let me just share some thoughts with 
you. I think that there's no question that there should be a 
Federal role, and there is a Federal role. Congress has spoken 
with respect to its funding of programs for both the rural, 
small systems and the need for these large, interconnecting 
systems.
    It has already approved six or seven projects that the 
Bureau of Reclamation is engaged with, to the extent of a total 
cost of $750 million. The administration has gone on record 
supporting delivery of adequate water supply to the rural 
communities. The question is now, how do we crystallize the 
resources and the legislation to provide this service that 
apparently is lacking? Because these project sponsors are 
trying to figure out where they need to go.
    Now, the question, how do you finance that? Well, the 
concern I have as the Bureau of Reclamation commissioner, as I 
expressed to you before, is, given our budget resources and the 
needs for continuing to upgrade and maintain our existing 
facilities, I cannot, you know, in all due conscience say here 
that I support the Bureau of Reclamation engaging in these 
activities in the absence of additional resources being brought 
to the table in terms of additional funding.
    On the other hand, I cannot sit here and support that those 
resources should be siphoned up from some other program, 
particularly if those programs are delivering a need that 
exists and is being utilized by the American public. So I don't 
know--there's no easy answer to this, but it appears to me that 
the Congress and the administration, with the resources 
available to the Federal Government or the support of the 
States, need to put together a program for funding reclamation 
activities like they did back in 1902. Together we can surely 
come up with an approach to address this issue.
    I would refer you to the other program that the Bureau of 
Reclamation is involved in, which is our development of 
wastewater reuse projects. If you recall, the original projects 
that were funded by Congress were site specific. Then Congress 
revisited that issue a few years ago and redid its wastewater 
reuse law, set some criteria, directed the Bureau of 
Reclamation to set up some criteria, which projects they would 
support and not support and recommend to Congress for funding. 
They set a cap on the amount going to each project.
    So I think there's precedent, and I would defer to you in 
your judgment as to how Congress should react on this issue.
    Mr. Doolittle. Well, thank you.
    Mr. Dooley, I will recognize you for your questions.
    Mr. Dooley. Thank you, Mr. Chairman.
    I guess, just to try to help me frame this issue, is if we 
look at a specific project that's been proposed, the Lewis and 
Clark project, which I had the chance to review the GAO report 
that was prepared on that, and basically my assessment of it is 
there really is not one Federal program out there, any one 
agency that really is authorized to participate in a manner 
that would I guess lead to the construction of or the 
completion of this project. And would you concur with that, 
Commissioner Martinez?
    Mr. Martinez. That is my understanding, if I recall the 
testimony of the project sponsors, is that they tried going to 
the different programs and weren't able to put a project 
together and had come to this Subcommittee and the Bureau of 
Reclamation because they were aware that the Bureau of 
Reclamation was involved in a similar project that the 
subcommittees had authorized and that the Bureau of Reclamation 
had that expertise for the project in question, which we're 
talking about these large trunk lines and processing 
facilities.
    Mr. Dooley. I guess, Ms. Dougherty, in terms of the EPA's 
involvement on this, when you have a project like this, which 
the proponents are advocating or arguing that it is one which 
is critical to meeting water quality standards, what is the 
opportunities for EPA's participation in a project of this 
nature?
    Ms. Dougherty. I talked to the people who had come to town 
to engage people in the project and both John and I did 
together--and the size of that project dwarfs the money that's 
available from the drinking water SRF with the three States 
that would be involved. It would take all of their money every 
year for several years to go to that one part of their State, 
and they wouldn't be able to deal with the needs that they have 
in other parts of their State. So it really overwhelms what's 
available at the State level from the drinking water SRF.
    The total national DWSRF budget each year is around $800 
million, so that project is just very large when you look at 
that. Some of the issues that we were also looking at were 
drinking water standard related and some were drinking water 
issues that we--that related to the specific standards that we 
have right now.
    Mr. Dooley. I guess have we basically in some ways almost 
made a de facto decision because there isn't the ability of the 
local participants or the States to finance a significant share 
of this and there's not the available Federal resources nor the 
policy that would necessarily require Federal participation, 
that this is just one that there's not a home for?
    Ms. Dougherty. Not in the program that we have at EPA; 
because of size but also because it goes beyond what we 
normally would be funding.
    Mr. Dooley. Mr. Romano, as far as USDA is concerned, would 
your response be very similar to that?
    Mr. Romano. My response would be very similar, Congressman, 
except that we would tend to look at a project like that as 
several potential phases of projects. We would tend to look at 
a project like that as in cooperation with other agencies; and, 
as you heard in my statement, we're working more and more 
closely with other agencies. We would try to look at the 
possibility there.
    If a larger project like that was built over several phases 
to look at piece by piece, the communities that could 
potentially apply for our assistance as part of a phase. If it 
were a community along that system--if somehow the wherewithal 
could be found to develop the treatment plant and the 
transmission line or the beginning of the transmission line, we 
might be able to help with specific communities that were 
income eligible, that were population eligible, along the way.
    In fact, we've been doing that with the Southwest Pipeline 
Project in the State of North Dakota, which is part of the 
bigger Garrison Diversion Project.
    Now, you might look at 5 percent of what's been spent over 
the past 13 years as insignificant, but, you know, as I look at 
that funding, it's been pretty good gap or linchpin funding 
along the way to make it possible. Apparently, $160 million 
from various public sources have been spent there in various 
phases over 13 years. Eight million dollars of that, mostly in 
grants, but partly in loans, have come from our program. We 
would expect to continue to participate with that Southwest 
Pipeline Project in the future.
    I mentioned our average loan and grant size. Our average 
loan size is $800,000. Occasionally, we do somewhat bigger 
loans. Last year on a pipeline project, well, not out west but 
in Louisiana, an all loan deal, we came in with a loan of 
around $7 million. It's a couple of phases, but there's several 
other financing sources. As I recall, we're slightly over 50 
percent of that Project.
    The Shoshone-Bannock Project, it's not one of these 
macroprojects, if you will, in terms of a couple hundred 
million dollars in Idaho, but the projected cost is $15 to $20 
million. We look at that as a potential three or four phase 
project with funding from us, from IHS, and from EPA.
    Now, if the BOR were involved--and BOR already has, I 
believe, a half million dollars in there for a feasibility 
study, not the part we've already funded, which is in the 
village where things--where homes are concentrated but out in 
the rural areas--BOR already has feasibility study money in 
there. It may be an appropriate role for the BOR later if that 
study shows a feasibility for their programs to join the other 
three funding sources--us, EPA, and IHS--to make that four- or 
five-phase project a two- or three-phase project.
    Mr. Dooley. Thank you.
    Mr. Doolittle. Mr. Pombo.
    Mr. Pombo. No questions.
    Mr. Doolittle. Let me ask you, Mr. Romano, with what you 
know about the various programs and the people you serve, do 
you think the Bureau should be part of that agreement?
    Mr. Romano. The agreement----
    Mr. Doolittle. This 1997 joint memorandum involving HUD and 
the EPA and RUS.
    Mr. Romano. Probably, from what I know of their activities 
and, you know, there certainly is the opportunity to amend it.
    Mr. Martinez. Mr. Chairman.
    Mr. Doolittle. Yes, Mr. Martinez.
    Mr. Martinez. If I may, and, again, if I'm wrong, I'll have 
the record corrected, but because Reclamation has no general 
authority to engage in these kinds of projects, and I'm 
assuming that these two agencies to my left have general 
authority, they're working under a general authority, under a 
memorandum, it might be somewhat difficult for us, quite 
frankly, to join into that kind of memorandum unless it's site 
specific for each of the projects. So there might be some 
problems there.
    And I guess this goes to the question of what is 
Reclamation's role in this area and what should be the role. To 
date, we have moved forward in these activities with planning 
efforts directed by Congress and authorized, because before we 
can go into a certain level of study we have to have authority 
and then we have to have authority for the specific projects.
    The question that remains is, for Congress and the 
administration to work through, is what should be the 
appropriate role of the Bureau of Reclamation in these 
activities? Should we have a role in terms of no role at all, 
continue the way things are working, or should we become more 
actively engaged in this initiative?
    Thank you.
    Mr. Doolittle. Well, thank you.
    Let me ask, Ms. Dougherty, what are the estimated costs, if 
you know, for providing a reliable source of drinking water to 
rural communities throughout the rural areas in the United 
States? Do you have a figure for that?
    Ms. Dougherty. I just have a figure for the small systems 
that serve less than 3,300 people, which I assume----
    That's the $37 billion.
    Mr. Doolittle. That's your policy criteria?
    Ms. Dougherty. That's the $37 billion, right.
    Mr. Doolittle. How much is it?
    Ms. Dougherty. $37 billion over 20 years, the needs over 
the next 20 years. That doesn't simply include the costs to 
comply with the Safe Drinking Water Act, but also includes 
other necessary infrastructure upgrades that people would need 
to just supply water to replace equipment or to replace pipes 
or to replace storage towers.
    Mr. Doolittle. But over 20 years for rural communities or 
just communities.
    Ms. Dougherty. For existing rural public water systems.
    Mr. Doolittle. Of less than 3,300 population.
    Ms. Dougherty. Less than 3,300.
    Mr. Doolittle. $37 billion?
    Ms. Dougherty. Yes. And we actually have a needs survey, 
which I didn't bring with me, that we would be happy to provide 
to the Committee.
    Mr. Doolittle. I think that would be useful.
    [The information follows:]
    Mr. Doolittle. Well, what do you think I should tell these 
people that come to this Subcommittee with these big projects? 
I mean, obviously they have a need, but obviously we don't--I 
don't think we have the money to do it in the way, you know, 
they would have us do it.
    I'm kind of looking to the administration to work with us 
to figure out, what people can reasonably expect of this 
Subcommittee? What is the right policy for us to sit down to 
help people work through these problems? Any suggestions?
    Mr. Martinez. Mr. Chairman, here we're dealing with Bureau 
of Reclamation and the oversight responsibility you have with 
respect to authorization language for Bureau of Reclamation 
issues. Given the budget limitations that the Bureau of 
Reclamation has and, again, given the constraints on our budget 
based on existing needs, I see no other alternative in the 
Committee than to say, in the absence of a unified program, 
Federal program, it's very difficult for us to fund these 
projects. That's a practicality, because you're going to be 
robbing Peter to pay Paul.
    Mr. Doolittle. Well, we've been saying that. Then, the 
Senate passes something out that undermines our position a 
little bit.
    I do believe the need is legitimate, but I do think we've 
got to find a different way to do this. And I appreciate your 
coming before us.
    I want to give Mr. Dooley an opportunity----
    Mr. Dooley. No questions.
    Mr. Doolittle. I think what we will do is recess the 
Committee, we will excuse this panel, and thank you very much 
for coming, and ask you to respond expeditiously to 
supplementary questions we put to you.
    And with that, we will excuse the panel. We will recess the 
Committee, and we will come back after this vote.
    [Recess.]
    Mr. Doolittle. Well, the Subcommittee will reconvene. We 
have Panel II, and we will ask our members of the panel--let's 
see, we don't have--it was a rather long break; we had several 
votes. I think we will just begin with the two witnesses we 
have and pick up our third one when she arrives.
    Let me ask, please, you two if you will rise and raise your 
right hands.
    [Witnesses sworn.]
    Mr. Doolittle. Thank you. Each answered affirmatively. We 
are very happy to have you here, and we will recognize, as our 
first witness, the Associate Director of Energy Resources and 
Science Issues Resources--these are long titles--within the 
Community and Economic Development Division of the General 
Accounting Office. That is Ms. Susan Kladiva.

    STATEMENT OF SUSAN KLADIVA, ASSOCIATE DIRECTOR, ENERGY 
RESOURCES, AND SCIENCE ISSUES RESOURCES, COMMUNITY AND ECONOMIC 
        DEVELOPMENT DIVISION, GENERAL ACCOUNTING OFFICE

    Ms. Kladiva. Thank you, Mr. Chairman. In your request for 
us to testify, you asked that we address questions on the 
funding of rural water projects based on the work that we have 
been doing for the Subcommittee.
    As you know, we have been working on the Lewis and Clark 
rural water projects as a case study. In that connection, we 
have reviewed issues concerning the relative benefits and 
certain alternatives that you recommended for financing the 
project.
    The Lewis and Clark project is a proposed solution to 
insufficient amounts of good water quality near the junction of 
South Dakota, Minnesota, and Iowa. The project would divert and 
treat up to 23.5 million gallons daily of Missouri River water 
that would be piped to 22 cities and rural communities 
throughout the area. The cost of the project in 1993 dollars is 
estimated to be at about $283 million, and the proposed 
legislation provides a formula for Federal and non-Federal 
sharing of planning and construction costs under which the 
Federal Government would be responsible for a grant of about 
$193 million.
    In May of last year, we testified before you that the Lewis 
and Clark project would meet some of the criteria of the USDA 
and EPA rural water programs, but not key criteria relating to 
the population of the service area, economic feasibility and 
priority. Further, its dependence on grants is inconsistent 
with BOR's long-standing policy of having water users repay 100 
percent of costs of projects.
    While officials of USDA, EPA and BOR said that they 
believed that the Lewis and Clark project is worthwhile and 
needed by the communities it would serve, its biggest 
limitation is its high cost relative to their agencies' funding 
availability.
    Today we will provide further testimony on Lewis and Clark. 
My statement will summarize the results of a report that we 
issued to you in May of this year, discussing the benefit that 
could result from the project, who would receive them and how 
they are valued.
    Potential benefits fall into three categories: societal, 
economic and fiscal.
    Societal benefits consist of improvements in the health and 
safety and life-style of residents. Economic benefits include 
increases in the regional output of goods and services or 
transfer of economic activity into the Lewis and Clark service 
area from outside the region. Fiscal benefits are net increases 
in government revenues, such as sales and property taxes that 
result from an increase in economic activity.
    The primary recipients of these benefits would be local 
water users such as households and businesses. They would 
benefit from lower water-related expenditures, as well as 
higher incomes because of increases in local economic activity.
    Local and State governments would be the beneficiaries of 
any increases in sales and income tax revenues. Counties and 
school districts could benefit if there were an increase in 
property taxes. However, the Federal Government would realize 
little fiscal benefit from the Lewis and Clark project.
    We attempted to quantify the benefits of the project, but 
found that benefits from municipal and industrial water 
supplies are difficult to value. Specifically, societal 
benefits cannot be monetarily measured with reasonable 
accuracy. Economic benefits are also difficult to measure 
because of the difficulty in attributing increases in economic 
activity directly to changes in the quantity and quality of 
water.
    Despite this difficulty, we believe that increases in the 
value of agricultural goods and services due to Lewis and Clark 
will be minimal at the national level. At the regional level, 
however, economic benefits should be greater because they 
include not only the increase in the value of regional goods 
and services, but also the transfer of industries into the area 
from outside the region.
    For example, local planners expect that if the project is 
built, food processing and ethanol plants may consider 
relocating to the Lewis and Clark service area. Because of the 
difficulty in identifying and directly attributing changes in 
economic activity to the quantity and quality of water, 
economists have developed other methods that can approximate 
the value of benefits attributable to water projects. One such 
method is estimating the cost of reasonable alternatives that 
would be avoided if the project is built.
    Individual Lewis and Clark water districts reported that 
their alternatives consisted of drilling additional water 
wells, modifying or building treatment plants, and purchasing 
water from other water districts. We estimate that the sum of 
these alternative costs for the Lewis and Clark projects' 22 
member districts ranges between $71 million and $81 million. 
This compares to the 1993 estimate of $283 million to build the 
project, which is about $313 million in today's dollars.
    However, it is important to note that these estimates are 
minimum value because many of the alternatives would not 
produce the same quality of water as Lewis and Clark and 
because two districts did not estimate their alternatives.
    In summary, it is apparent that the Lewis and Clark Rural 
Water Project poses a dilemma. It is deemed to be a worthwhile 
project that is needed to improve drinking water supplies that 
are low in quantity and quality, yet its benefits will be 
minimal at the national level and existing Federal rural water 
assistance programs are not funded at levels to accommodate 
such large projects.
    It is timely therefore, Mr. Chairman, that this 
Subcommittee has begun the dialogue to address options for 
funding rural water projects.
    This concludes our prepared statement. We will be pleased 
to answer questions.
    Mr. Doolittle. Thank you.
    [The prepared statement of Ms. Kladiva follows:]
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    Mr. Doolittle. Our next witness is the Executive Director 
of the Midwest Electric Consumers Association, Mr. Thomas P. 
Graves.
    Mr. Graves.

  STATEMENT OF THOMAS P. GRAVES, EXECUTIVE DIRECTOR, MIDWEST 
                 ELECTRIC CONSUMERS ASSOCIATION

    Mr. Graves. Thank you, Mr. Chairman. Mid-West Electric 
Consumers Association appreciates the opportunity to come and 
testify before this Subcommittee on rural drinking water 
systems.
    Mid-West is the regional coalition of consumer-owned 
electric utilities that purchase power generated at Federal 
dams in the Missouri River Basin. Since 1958, Mid-West has 
represented the interests of more than 3 million consumers that 
depend in part on the Pick-Sloan Missouri Basin program for 
their power supply.
    More than 100 years ago, John Wesley Powell recommended 
that the boundaries of the western States be determined by 
river basin drainages. The scope and vision of the Pick-Sloan 
Missouri Basin program, wittingly or not, followed Powell's 
concept.
    The original Pick-Sloan program provided a variety of 
benefits for the region--flood control, navigation, municipal 
and industrial water, irrigation, and, of course, hydropower. 
Of all the project purposes, only the hydropower function and 
municipal and industrial water supply pay 100 percent of the 
costs allocated to that project purpose with interest.
    As part of the bargain struck that led to the enactment of 
the Pick-Sloan program, Pick-Sloan's power users also agreed to 
shoulder that capital investment in Federal irrigation projects 
beyond the ability of irrigators to repay. This is the only 
instance where hydropower revenues provide financial assistance 
to another project purpose.
    As I noted above, municipal and industrial water users are 
responsible for 100 percent of the capital investment, as well 
as O&M.
    The irrigation support is no small obligation for the power 
users. Currently, Pick-Sloan power users have over $700 million 
in aid to irrigation in their rate base to help repay that 
capital investment. There is another $700 million or so of 
projects that may yet be authorized and built, that were 
envisioned by the original Pick-Sloan program.
    The development of rural drinking water systems was not 
part of the original Pick-Sloan plan. In an effort to see that 
Pick-Sloan can meet contemporary needs of the region as well as 
its historical obligations, Mid-West has developed a policy 
position that recognizes that the contemporary need of the 
region is adequate and safe supplies of drinking water. We 
began working with rural water systems several years ago to 
ensure that they could make use of some of the seasonal Pick-
Sloan power as an important consideration in the operations of 
these systems.
    We are committed to the economic well-being of our region, 
for we are not solely hydropower users. We are the ranchers, 
farmers and small businesses of the region. There are, however, 
limitations on how much support hydropower users can provide.
    First, Pick-Sloan generation is a finite resource. There is 
not going to be any new Federal hydropower development in the 
region. So the size of the canteen is fixed. Pass that canteen 
around to too many people and everyone is still thirsty.
    Already allocations to new consumer-owned electric 
utilities and Native American tribes, which Mid-West has and 
continues to support, will withdraw 4 percent of the current 
firm power customers' allocations. In 2005, firm power Pick-
Sloan customers will have another 2 percent of that resource 
withdrawn for allocation to new customers.
    As a consequence, firm power customers will have to secure 
new resources to make up for that shortfall, which will most 
likely mean higher costs.
    The overall Pick-Sloan hydroresource is not just being 
spread among new customers, but also is a shrinking resource. 
Threatened and endangered species, currently the Piping Plover 
and Interior Least Tern, cost Pick-Sloan Federal power 
customers approximately $2 million a year in lost generation as 
the Corps attempts to operate the dams without harming the 
species. This does not include other costs incurred by the 
Corps to protect these species.
    Additionally, the recovery plan for the Pallid Sturgeon, 
another species on the threatened or endangered list, has not 
yet been finalized and could further affect the ability of 
Pick-Sloan hydropower.
    The Corps of Engineers is also in the final stages of 
revising the master manual which controls the operation of the 
Missouri River, which could have a dramatic impact on 
hydrogeneration. We are also facing additional power 
investments that will have to be made in the near future. 
Turbine replacements, generator staters, rewinds and the like 
are going to add an additional $100 million to the rate base, 
probably within the next 5 to 10 years, and that is only on the 
main stem system. It does not include the costs of similar 
activities being conducted by the Bureau of Reclamation on its 
projects in Montana, Wyoming and Colorado.
    What this means for the rural electric cooperatives, 
municipal electric utilities and public power districts in the 
region is that their resource mix is going to be changing. 
There is going to be upward pressure on electricity rates at a 
time when the industry is restructuring and deregulating.
    We are not talking about developing rural water systems 
here for towns or areas that have not made every effort to make 
the best use of the resource they have. The Upper Great Plains 
is not a region that rewards profligate use of resources. We 
are talking about places such as Worthington, Minnesota, a city 
of some 10,000 people that has already spent over $1 million 
looking for a water supply. This is a community with an average 
residential consumption of 5,000 gallons per month, as compared 
with a national average of 9,000 gallons per month. Losses in 
the city water system have also been well below the national 
average. The two major industries in the city have been able to 
increase their production without additional water consumption, 
but now must have additional water supply.
    The future economic viability of these communities depends 
upon the development of adequate water supplies. They have 
undertaken programs to ensure wise use of the water they 
already have, but face the prospect of losing business 
opportunities and economic growth without further additional 
water supplies.
    The Upper Great Plains region is not, as you know, one of 
the wealthiest regions of the country. The cost-sharing 
mechanisms that Congress has enacted to fund these projects 
recognizes the development of rural water as a substantial 
undertaking for sparsely settled areas, but every American 
should be able to have an adequate supply of clean, safe 
drinking water.
    Surcharging Federal power to pay for rural water systems in 
the region runs the risk of threatening local economies and the 
marketability of Pick-Sloan power. Despite the prosperity 
elsewhere in the region, the Upper Great Plains still struggles 
with the inherent problems of a region dependent upon 
agricultural and natural resources as their economic engine for 
the vagaries of the marketplace can have a devastating impact. 
As of 2 weeks ago, corn sold at 1952 prices, 47 years later. 
Spring and winter wheat were selling at only a few cents above 
1952 levels. The last thing the region needs is increases in 
the price of electricity.
    The economic fragility of this region should not mark it as 
a candidate for abandonment. This is the part of the country 
that usually leads the way in voter turnout and participation 
in the governance of their communities, their States and their 
country. This is a part of the country whose children 
consistently achieve top scores in educational testing and they 
send those children out of the region, bringing their talents 
to the rest of the Nation. This is a part of the country that 
is strongly self-reliant. The cost-sharing mechanisms that 
Congress has crafted over the past decade have served the 
region and the country well.
    Thank you very much.
    Mr. Doolittle.  Thank you.
    [The prepared statement of Mr. Graves follows:]

 Statement of Thomas P. Graves, Executive Director, Mid-West Electric 
                Consumers Association, Denver, Colorado

    Mr. Chairman, my name is Thomas Graves. I am the executive 
director of the Mid-West Electric Consumers Association. Mid-
West appreciates the opportunity to appear before the House 
Resources Subcommittee on Water and Power to testify on rural 
water systems.
    Mid-West is the regional coalition of consumer-owned 
electric utilities that purchase power from Federal dams in the 
Missouri River Basin. Since 1958, Mid-West has represented the 
interests of more than three million consumers that depend in 
part on the Pick-Sloan Missouri Basin Program for their power 
supply.
    More than one hundred years ago, John Wesley Powell 
recommended that the boundaries of western states conform to 
river basins and their drainages. The scope and vision of the 
Pick-Sloan Missouri Basin Program, wittingly or not, followed 
Powell's concept.
    The original Pick-Sloan program provided a variety of 
benefits to the region--flood control, navigation, municipal 
and industrial water, irrigation, and hydropower. Of all the 
project purposes, only the hydropower function and municipal 
and industrial water function pay 100 percent of the costs 
allocated to that project purpose.
    As part of the bargains struck that led to the enactment of 
the Pick-Sloan Missouri Basin Program, Pick-Sloan's power users 
also agreed to shoulder that capital investment in Federal 
irrigation projects beyond the ability of irrigators to repay. 
This is the only instance where hydropower revenues provide 
financial assistance to another project purpose. As I noted 
above, municipal and industrial water uses are responsible for 
100 percent of the capital investment, as well as operation and 
maintenance.
    That is no small obligation. Currently, Pick-Sloan power 
users have over $700 million in their rate base to help repay 
the capital investment in ``used and useful'' irrigation 
projects. There is another $700 million or so of projects that 
may yet be authorized and built under the Pick-Sloan Missouri 
Basin Program.
    For some time, Mid-West and its members have been grappling 
with how to insure the continued viability of the Pick-Sloan 
Missouri Basin Program and its original vision of multi-purpose 
development of resources in the region.
    The development of rural drinking water systems was not 
part of the Pick-Sloan plan. In an effort to see that Pick-
Sloan can meet contemporary needs of the region as well as its 
historical obligations, Mid-West developed a policy position 
that recognized that a contemporary need of the region is 
adequate and safe supplies of drinking water.
    Several years ago, Mid-West began working with rural water 
systems to insure that they could make use of some of the 
seasonal Pick-Sloan power, an important consideration in the 
operations of these systems. We are committed to the economic 
well-being of our region, for we are not solely hydropower 
users. We are the ranchers, farmers, and small businesses of 
the region.
    There are, however, limitations on how much support the 
hydro users can provide.
    First, Pick-Sloan generation is a finite resource. There is 
not going to be any new Federal hydropower development in the 
region. So the size of the canteen is fixed. Pass the canteen 
around to too many people and everyone is still thirsty. 
Already, allocations to new consumer-owned electric utilities 
and Native American Tribes, which Mid-West has and continues to 
support, will withdraw 4 percent of current firm power 
customers' allocations. In 2005, firm power Pick-Sloan 
customers will have another 2 percent of their resource 
withdrawn for allocation to new customers.
    As a consequence, firm power customers will have to secure 
new resources to make up for that shortfall, which will most 
likely mean higher costs for electric utility consumers.
    The overall Pick-Sloan hydro resource is not just being 
spread among new customers, but is also a shrinking resource. 
Threatened and endangered species--the Piping Plover and 
Interior Least Tern--cost Pick-Sloan Federal power customers 
approximately $2 million a year in lost generation to operate 
the dams without harming these species. This does not include 
other costs incurred by the Corps of Engineers to protect these 
species. Additionally, the recovery plan for the pallid 
sturgeon, another species on the threatened or endangered list, 
has not yet been finalized, and could further affect the 
availability of Pick-Sloan hydropower.
    The U.S. Army Corps of Engineers is in the final stages or 
revising the Master Manual for operation of the Missouri River, 
which could have a dramatic impact on hydro generation.
    Pick-Sloan power users also face additional power costs 
that will have to be made in the near future. Turbine 
replacements, generator staters, rewinds and the like are going 
to add an additional $100 million to the rate base, probably 
within the next five to 10 years. And that is only on the 
mainstem dams. It does not include the costs of similar 
activities by the United States Bureau of Reclamation on its 
projects in Montana, Wyoming, Colorado and Nebraska.
    What this means for the rural electric cooperatives, 
municipal electric utilities and public power districts in the 
region is that their resource mix is going to be changing. 
There is going to be upward pressure on electricity rates, all 
at a time when the industry is restructuring and deregulating.
    And we are not talking about developing rural water systems 
for towns or areas that have not made every effort to make best 
use of the resources they have. The Upper Great Plains is not a 
region that rewards profligate use of resources. We're talking 
about places such as Worthington, Minnesota, a city of 10,000 
that has already spent over $1 million looking for additional 
water supply alternatives. This is a community with an average 
residential consumption of only 5,000 gallons per month, as 
compared to the national average of 9,000 gallons per month. 
Losses in the city water system are also well below the 
national average. The two major industries in the city have 
been able to increase their production without additional water 
consumption, but now must have additional water supply.
    The future economic viability of these communities depends 
upon the development of adequate water supplies. They have 
undertaken programs to insure wise use of the water they 
already have, but face the prospect of losing future business 
opportunities and economic growth without additional water 
supplies.
    The Upper Great Plains region is not one of the wealthiest 
in the country. The cost-sharing mechanisms that Congress has 
enacted to fund these projects recognize that development of 
rural water systems is a substantial undertaking for sparsely 
settled areas. But every American should be able to have an 
adequate supply of clean, safe, drinking water.
    Surcharging Federal power to pay for rural water systems in 
the region runs the risk of threatening local economies and the 
marketability of Pick-Sloan hydropower generation. Despite the 
prosperity elsewhere in the nation, the Upper Great Plains 
still struggles with the inherent problems of a region 
dependent on agriculture and natural resources as their 
economic engine, where the vagaries of the market place can 
have a devastating impact. As of two weeks ago, corn sold at 
1952 prices. Spring and winter wheat were selling at only a few 
cents above 1952 levels. The last thing the region needs is 
increases in the price of electricity.
    The economic fragility of the region should not mark it as 
a candidate for abandonment. This is a part of the country that 
usually leads the way in voter turn-out and participation in 
the governance of their communities, their states, and their 
country. This is a part of the country whose children 
consistently achieve top scores in educational testing. In 
North Dakota, 8th graders placed first in math scores three 
times in the 1990's. This is a part of the country where those 
children leave the region, bringing their talents to the rest 
of the nation. This is a part of the country that is strongly 
self-reliant. The cost-sharing mechanisms that Congress has 
crafted over the past decade have served both the region and 
the country well.
    Thank you.

    Mr. Doolittle. Our next witness is Angela Antonelli, 
Director of the Thomas A. Roe Institute for Economic Policy 
Studies of The Heritage Foundation.
    Ms. Antonelli, will you please rise and raise your right 
hand.
    [Witness sworn.]
    Mr. Doolittle. Thank you. You were out of the room when we 
did that for the other two. We are not singling you out.
    Ms. Antonelli. I apologize.
    Mr. Doolittle. That is quite all right. The votes dragged 
us out a little longer than we thought.
    You are recognized for your testimony.

    STATEMENT OF ANGELA ANTONELLI, DIRECTOR, THOMAS A. ROE 
 INSTITUTE FOR ECONOMIC POLICY STUDIES, THE HERITAGE FOUNDATION

    Ms. Antonelli. Thank you, Chairman Doolittle. Thank you for 
the opportunity to testify before you today. The views I 
express in my testimony are my own and should not be construed 
as representing the official position of The Heritage 
Foundation.
    This Subcommittee is now considering the Federal financing 
of rural water projects. These projects are controversial 
primarily due to the large share of the costs that would be 
paid for by the Federal Government. An even more fundamental 
question should be asked, however, and that is whether any 
Federal role is justified in this area. Many of the newer 
proposed rural projects reflect a troubling continued expansion 
of the Bureau of Reclamation's mission, one from that of a 
construction agency to that of yet another Economic Development 
Agency and Environmental Protection Agency.
    Unfortunately, Congress can't seem to resist the 
opportunity to seize control of responsibility for water 
resources that belong to States, regions, local communities and 
the private sector. Each time Congress contemplates another 
proposed rural water project, it must face squarely the 
question of what the role of the Federal Government will be in 
developing and managing our Nation's water resources. So far, 
Congress' decisions have been disappointing to many of us.
    Although the Federal Government has been supporting water 
projects since the turn of the century, as GAO has often noted, 
these programs have been based on a long-standing policy of 
full reimbursement for its contributions to the projects. 
Although many of these loans have been forgiven or reduced, the 
original continuing intent was that beneficiaries of the 
program would bear the costs of the program. However, that 
appears to be changing. In the case of the proposed Lewis and 
Clark project, for example, the Federal Government's share, 
depending upon one's definition of cost, could be as much as 80 
percent.
    This increase in nonreimbursable costs certainly appears to 
be a function of the fact that more of these projects have a 
greater proportion of nonreimbursable requirements, 
particularly to meet environmental objectives such as water 
quality, fish and wildlife and conservation requirements.
    It is important to remember that the Federal funding of 
rural water projects in the Upper Great Plains States only 
perpetuates the long-held and mistaken notion that water is not 
valuable enough for people and businesses to own and manage 
wisely. I reject this view. Federally subsidized construction 
of these projects will not fundamentally alter the economic 
base of this region of the country. Indeed, while the infusion 
of Federal dollars may be somewhat of a boost to the region, in 
the end, the boost will not lead to sustained long-term change, 
but rather addiction to more Federal dollars. Ultimately, such 
projects will be added to the myriad of expensive and often 
duplicative special interest projects dressed up as another 
Federal economic development program.
    If we look to the Federal experience with the Economic 
Development Administration, for example, according to the GAO, 
in areas where there have not been incentives to produce 
sufficient private sector investment for economic development, 
Federal interventions consistently proved to be temporary at 
best. Indeed, this history suggests that these latest programs 
are also destined to continue this poor legacy. And as GAO and 
our first panel today indicated and reported on more than one 
occasion, these types of rural water projects do not fit 
Federal funding criteria for programs at USDA, EPA or the 
Bureau, criteria which I would assume are in place to protect 
Federal financial interests, that is, the interests of all 
American taxpayers.
    In addition, according to GAO's work, the people in these 
areas also do not support the project enough to pay for it, 
even though the per capita costs are quite modest. GAO States 
that the cost of the project is $282.9 million in 1993 dollars, 
and it is designed to serve 300,000 people in 14 counties. This 
is equal to $943 per person.
    Even assuming that we use a per family figure and assume a 
five-person family, we are only talking about $4,715 per 
family, much less than the cost of a used car and financed over 
a much longer period of time. But despite this low cost, every 
survey GAO has done in the area demonstrates that the people in 
these communities are unwilling to pay for the system-increased 
water fees.
    Why should taxpayers throughout the Nation be asked to pay 
for a project that the beneficiaries themselves refuse to fund? 
If the potential economic and other benefits that have been 
talked about are indeed real, then you would expect to see an 
interest among local water users. But the local community 
thinks the project is worth less than a used car, so why should 
the Nation's hard-working taxpayers value it more highly? Why 
should Congress take money from hard-working taxpayers to pay 
for life-style improvements, such as landscaping? And it 
certainly doesn't seem as if we are really talking about a 
water shortage, but more about water quality.
    But assuring a supply of clean water doesn't necessarily 
mean that Washington has to take over. Indeed, for the amount 
of money many area residents seemingly are willing to pay, 
according to the GAO, it seems to be a lot cheaper for them to 
contract out privately to some entity to simply truck pristine 
water into the communities that they could use for eating, 
drinking, bathing and so on.
    Indeed, to the extent that the commitments in small rural 
projects are $37 billion over the next 20 years, I would 
suggest for $20 billion of that we probably could get a very 
good contractor to provide the kinds of water that these 
communities would need.
    Over the past three decades, Congress has allowed the 
Bureau to move away from the construction and operation of 
traditional, large, multipurpose water projects. Congress 
should not expand the mission of the Interior Department. These 
new Economic Development-Environmental Protection rules and the 
movement into more States will ultimately just allow Congress 
to justify more federally financed special interest public work 
projects. We do not need another EPA or EDA for the West or for 
anywhere else.
    A June, 1996 GAO report counted more than 72 Federal 
programs or other initiatives cutting across eight departments 
or agencies that either directly or indirectly support water 
quality.
    Similarly, the agency's strategic plan submitted to 
Congress as a requirement of the Government Performance and 
Results Act reveal that there are 342 economic development 
programs managed by 13 agencies with little or no coordination.
    The best way to help support the water supply needs of 
rural areas in this country is for government to look towards 
water markets and privatizing existing assets. This means the 
Federal Government has to get comfortable about the idea of 
doing less, rather than more.
    Today, between 7 and 10 percent of water supply projects in 
the U.S. Are privately held. The trend for an increasing number 
of States, counties and municipalities is to look to the 
private sector to build and maintain necessary infrastructure, 
such as wastewater treatment plants, prisons, schools, highways 
and airports. Indeed, other nations already are way ahead of 
the United States in their privatization of such 
infrastructure. In Britain, 100 percent of water and wastewater 
treatment facilities are privatized, and in France, 75 percent 
are privatized.
    The United States should be a leader and not a follower, 
and this trend toward Federal financing of rural water projects 
moves us in the wrong direction. Instead, Congress should allow 
local communities to determine what their needs are and to work 
cooperatively with private entities to provide what is needed 
and to meet those needs.
    And the Federal Government can certainly play a role in 
facilitating that. The Congress also can work to develop a 
better understanding of the extent to which environmental and 
other policies place constraints on local water resources. 
Congress also should simply resist pressures to reinvent the 
missions of agencies like the Bureau of Reclamation. There is 
no reason why the Federal Government needs to fund the 73rd 
water quality program or the 343rd economic development 
program.
    Congress needs to take steps to get the Federal Government 
out of the business of maintaining water projects. The Federal 
Government should not be in direct competition with private 
entities in providing generous subsidies to special interests 
at great cost to the American taxpayer.
    Thank you.
    [The prepared statement of Ms. Antonelli follows:]

 Statement of Angela Antonelli, Director, Thomas A. Roe Institute for 
            Economic Policy Studies, The Heritage Foundation

    Chairman Doolittle, Members of the Committee:
    Thank you for the opportunity to testify before you today. 
The views I express in the testimony are my own and should not 
be construed as representing any official position of The 
Heritage Foundation.
    This Subcommittee is now considering the Federal financing 
of rural water projects. These projects are controversial 
primarily due to the large share of the construction costs that 
would be paid for by the Federal Government. An even more 
fundamental question should be asked, however; and that is 
whether any Federal role is justified in this area. Many of the 
newer, proposed rural projects reflect a troubling expansion of 
the Bureau of Reclamation's (BOR) mission--from one of a 
construction agency to that of yet another economic development 
agency and environment protection agency.
    Although Congress and the Administration appeared to agree 
some time ago that it makes sense to transfer responsibility 
for some Bureau of Reclamation projects to states, local 
communities and the private sector, the pace of progress on 
this front has been pitifully slow. Moreover, Congress appears 
more than willing to authorize and finance new federally 
controlled rural water supply projects. The era of big 
government water projects is not over.
    Congress cannot seem to resist the opportunity to seize 
control of responsibilities for water resources that belong to 
states, regions, local communities, and the private sector. 
Each time Congress contemplates another proposed rural water 
project, it must face squarely the question of what the role of 
Federal bureaucrats will be in developing and managing our 
nation's water resources, and, more specifically, the role of 
the Interior Department. So far, Congress's decisions have been 
disappointing for many of us.

    A Long History of Federal Water Subsidies

    More than one hundred years ago, the Federal Government 
began to subsidize construction and operation of major water 
storage and delivery projects. The primary goal was to convert 
arid land into productive farmland through irrigation, and 
water was provided to users at highly subsidized prices. 
Although the costs of the construction of these projects are 
supposed to be repaid, few have been, and there is a long 
history of audits by the U.S. General Accounting Office (GAO) 
that address the allocation and repayment of project costs and 
the government's poor track record of recovering those costs. 
Ultimately, much of the costs of these projects are spread over 
all taxpayers, although the benefits are concentrated on well-
defined groups.
    As a consequence of these poorly designed programs, the 
predominant consumer of water today in the West is agriculture. 
As GAO and others have noted, the disparities in the cost of 
water between farmers and urban consumers can be tremendous, as 
much as 100 times more expensive for the urban user. In 
addition to burdening the taxpayer, subsidized prices create an 
insatiable demand for water and encourage inefficient use. With 
low prices, the users have no incentive to consider alternative 
technologies and lifestyle changes that would save water. Many 
irrigation systems use less than half of the water flowing into 
them. The rest runs off fields, evaporates from open canals, or 
percolates into the ground through unlined ditches. The low 
price of water encourages farmers to irrigate even marginal 
lands. In some cases, Federal water subsidies create, rather 
than solve, environment problems. For example, wastewater from 
a farm that drains into a wildlife refuge via a drainage system 
built by the Federal Government.
    Contrary to what the public has been led to believe, our 
nation is not about to run out of clean water. If just 5 
percent of the agricultural water supply could be allocated 
through water markets to municipal uses, the needs of urban 
areas in Western states would be met for the next 25 years, 
according to Terry Anderson and Pamela Snyder, authors of Water 
Markets: Priming the Invisible Pump. Fortunately, predictions 
of natural resource shortages are often wrong because they 
ignore the impact of market forces on supply and demand. There 
is an ample supply of water in this nation to meet the needs of 
farmers, municipalities, and industrial users. The real problem 
is a political system that denies ownership of water rights and 
thus precludes the market from efficiently allocating it. New 
federally funded rural water projects only serve to continue 
and expand such inefficiencies.

Financing Rural Water Projects Continues the Tradition

    Although the Federal Government has been supporting rural 
water projects since the turn of the century, these programs 
have largely been loan based and required a 100 percent 
repayment obligation. Although many of these loans may have 
been forgiven or reduced, the original and continuing intent 
was that beneficiaries of the program would bear the costs of 
the program. However, that appears to be changing. According to 
the Congressional Research Service, for the more recent rural 
water supply projects, the non-reimbursable component has been 
higher than typical for traditional reclamation projects. The 
non-reimbursable share can be as high as 75 to 85 percent or 
more. The increase in non-reimbursable costs may well be a 
function of the fact that more of these projects have a greater 
proportion of non-reimbursable requirements, particularly to 
meet environmental objectives such as water quality, fish and 
wildlife and conservation requirements.
    What is most important to remember is that the Federal 
funding of rural water projects in the Plains states only 
perpetuates the long held and mistaken notion that water is not 
valuable enough for people and businesses to own and wisely 
manage. I reject this view. Federally subsidized construction 
of these projects will not fundamentally alter the economic 
base of this region of the country. Indeed, while the infusion 
of Federal dollars may be somewhat of a boost to the region, in 
the end, the boost will not lead to long-term sustained change, 
but addiction to Federal dollars. Ultimately, such projects 
will just be added to the myriad of expensive and often 
duplicative special interest pork dressed up as a Federal 
economic development program.
    If we look to the Federal experience with the Economic 
Development Administration according to the GAO, in areas where 
there have not been incentives to produce sufficient private 
sector investment for economic development, Federal 
interventions consistently prove to be temporary at best. To 
quote GAO, ``the study found that EDA's program had a very 
small effect on income growth rates during the period the aid 
was received and no significant effect in the years after the 
aid ceased.'' The Subcommittee may want to consider asking GAO 
to do a similar study of the impact of Federal owned water 
projects on economic development.

A New Mission for the Bureau of Reclamation to Justify New 
Projects

    Over the past three decades, the Bureau has been moving 
away from the construction and operation of traditional, large, 
multipurpose water supply projects. And within the past decade, 
the mission of the Bureau has shifted to focus more on 
environmental mitigation and function as another branch of the 
Environmental Protection Agency. Indeed, the Bureau's self-
described mission today is ``to manage, develop, and protect 
water and related resources in an environmentally and 
economically sound manner in the interest of the American 
public.''
    Congress should rein in, rather than expand, the Interior 
Department. These new economic development and environmental 
protection roles allow Congress to justify more federally 
financed, special interest public works projects. And, of 
course, the Bureau's bureaucracy appears more than willing to 
reinvent and expand its budget if given the opportunity. We do 
not need another EPA or EDA for the West. For example, a June 
1996 GAO report counted more than 72 Federal programs or other 
initiatives cutting across 8 departments and agencies that 
either directly or indirectly support water quality protection. 
Similarly, the agency strategic plans submitted to Congress as 
a requirement of the Government Performance and Results Act 
revealed that there are 342 economic development programs 
managed by 13 agencies with little or no coordination among 
them.
    The shift in the Bureau's mission, and Congress's 
willingness to fund projects consistent with this expanded 
mission is detrimental to our nation's water resources. As long 
as a free market does not apply water, no one will have 
incentive to use it wisely or to invest in more advanced 
technologies or lifestyle changes that will conserve it. And 
certainly such policies will make any effort to transfer 
responsibility or to privatize existing assets and develop 
water markets more difficult. For example, the often unexpected 
costs of environment enhancement and mitigation requirements 
that are added to projects (either directly through the Bureau 
or by Federal laws or programs) have the effect of discouraging 
beneficiaries or investors who might otherwise be interested in 
assuming responsibility for the asset because they are afraid 
that there would be no certainty with regards to the costs. The 
tension within the Bureau's budget to pay for these activities 
competes with the need for funds to simply operate and maintain 
existing facilities.

Policy Recommendations

    The best way to help support the water supply needs of 
rural areas of this country is for government to look toward 
water markets and privatization of existing assets. This means 
the Federal Government must get comfortable with the idea of 
doing less rather than doing more. A new Federal water policy 
for the 21st century should be one in which Congress and the 
Administration work together and with state, regional, and 
local governments to develop local and private alternatives 
that will meet their water needs. Ultimately, this will 
significantly reduce, if not eliminate, the Federal role.
    If the true purpose of these rural water supply projects is 
to meet growing needs for water to support municipal and 
industrial needs, then water users should provide the funding. 
A demonstrated need is a signal to the private sector that 
there is a secure revenue stream to justify the financing of a 
project. Successful private investment can minimize the costs 
and the involvement of the Federal Government in many of these 
projects.
    Today, between 7 and 10 percent of water supply projects in 
the United States are privately held. The trend for an 
increasing number of states, counties, and municipalities is to 
look to the private sector to build and maintain necessary 
infrastructure, such as wastewater treatment plants, prisons, 
schools, highways, and airports. Indeed, other nations already 
are way ahead of the United States in their privatization of 
such infrastructure. In Britain, 100 percent of water and water 
treatment facilities are privatized, and in France 75 percent 
are privatized.
    The United States should be a leader and not a follower. A 
trend toward Federal financing of rural water project moves us 
in the wrong direction. Instead, Congress must:

          1.Allow local communities to determine water resource needs 
        and to work cooperatively with private entities to provide what 
        is needed to meet those needs.
          2.Require better information about whether a project is 
        economically viable and produce an expected return on 
        investment before making any decisions.
          3.Develop a better understanding of the extent to which 
        environmental and other policies place constraints on local 
        water resource management.
          4.Resist pressures to reinvent the mission of the Bureau of 
        Reclamation. There is no reason why the Federal Government 
        needs to fund the 73rd-water quality program or a 343rd-
        economic development program.
          5.Act to transfer responsibilities for existing assets to 
        states, local communities and the private sector.
    Congress needs to take steps to get the Federal Government out of 
the business of building and maintaining water projects. The Federal 
Government should not be in direct competition with private entities or 
provide generous subsidies to special interests at great cost to the 
American taxpayer.
[GRAPHIC] [TIFF OMITTED] T0633.031

    Mr. Doolittle.  Thank you.
    Could you make available those studies in Great Britain on 
the water and wastewater plants that are all 100 percent 
privately financed?
    Ms. Antonelli. Sure. These are studies that have been done 
by people at the Reason Foundation. I would be more than happy 
to.
    Mr. Doolittle.  Great.
    Ms. Kladiva, could you tell us, if the Federal share for 
the Lewis and Clark project costs were included in the electric 
rates for the Pick-Sloan program, what would be the impact on 
the rates?
    Ms. Kladiva. Mr. Chairman, we have conducted a preliminary 
analysis into the question. In general, the rate impact would 
depend upon the assumptions that you use.
    On average, the dams that are developed in the Pick-Sloan 
program produce approximately 12 million megawatt hours of 
electricity each year, and in 1998, the electricity was sold at 
an average rate of 1.6 cents per kilowatt hour. These are 
wholesale rates. That includes the transmission cost.
    As an example of how the rates could be affected, in order 
to amortize approximately $193 million, which would be the 
Federal grant portion of the project, at 6 percent interest 
over 50 years, which is the traditional repayment period for 
water projects, it would take about a 6 to 7 percent increase, 
based on the 1998 sales figures. The 6 percent rate increase 
would raise the rate by less than one-tenth of 1 cent in the 
Upper Great Plains area, and it would raise it slightly over 
one-tenth of 1 cent in the Rocky Mountain region. Based on our 
preliminary analysis, we believe that this level of rate 
increase does not appear likely to push the power cost for 
Pick-Sloan generated power above what the prevailing market in 
that area is.
    Our answer is subject to a variety of factors that 
include--such as the directions of the deregulation of 
electricity at Federal and State levels, as well as other 
factors, but this is a preliminary estimate.
    Mr. Doolittle. Thank you. We have talked about increasing 
rates as one alternative method of financing rural water 
projects such as the Lewis and Clark project. However, there 
may be some opportunities to increase the generating capacity 
and electricity generation from some of the Pick-Sloan 
hydroelectric dams.
    Could you discuss some of these?
    Ms. Kladiva. Yes, Mr. Chairman. During the course of our 
work on issues related to the Pick-Sloan program, we 
identified, we believe, some opportunities to boost output from 
some of the existing Federal facilities, in particular the 
large dams that are operated on the Missouri River main stem by 
the Army Corps of Engineers.
    As you know, the Pick-Sloan program was initiated over 50 
years ago. Many of the dams and hydroelectric equipment are now 
in the 30-year-old range, some as old as 50 years. Since the 
time that these generators and turbines have been installed, 
there have been increases in efficiency of equipment, and 
particularly for generators and turbines.
    Again, based on our preliminary analysis, there appear to 
be a number of generators that could be refurbished that could 
add substantial generating capacity and a number of turbines 
that could be refurbished that would offer improved 
efficiencies and other benefits. Under WAPA's current repayment 
guidelines, any increased revenue resulting from such an 
improvement could go toward the repayment of the Federal 
investment in the project. Adoption of legislation mandating 
any other applications would be a policy question for the 
Congress to determine.
    Mr. Doolittle. Thank you. So if I understand what you are 
saying then, this new equipment would pay the entire Federal 
share in this Lewis and Clark project, in other words, the 
increased sales resulting from the new equipment?
    Ms. Kladiva. Well, talking about not reallocating the 
existing firm power that is there now for preference power, but 
if you could increase the amount of capacity, which appears to 
be a possibility, from rewinding the generators and 
refurbishing the turbines, then you get an additional 
generation that is not now committed. And if those funds were 
earmarked, its revenues that were sold, and the revenues were 
earmarked for repayment of the cost of Lewis and Clark project, 
then that is a possibility.
    Mr. Doolittle. What do you think about that, Mr. Graves?
    Mr. Graves. Well, all I can say, Mr. Chairman, I feel a 
little bit like I am between Scylla and Charybbis here. But the 
fact of the matter is, I do disagree with that on several 
bases.
    Number one, the rewinds of the generators and turbines are 
not free. They cost money. That is the $100 million I was 
talking about. That is part of the rate base.
    Pick-Sloan is a cost-based rate. The rate charged is the 
cost of the generation, so there are no extra dollars, unless 
the government wants to invest this and then not put it in the 
rate base.
    Number two, the assumption of increased generation forgets 
that there has been a degradation of generation throughout the 
system because as the equipment ages, it erodes and corrodes. 
The estimates at Fort Randall, for instance, we are talking 
about a 4 to 5 percent increase in the capacity, in generation 
capacity, but that ignores the fact that there has been a loss 
of capacity at those facilities. So we would be merely getting 
back the capacity we had already paid for.
    Number three, it assumes that these units are going to be 
run in a very efficient manner, which they will be by the 
Corps, but at Fort Randall, which is one of the units that is 
there, and Garrison as well, the operation of those facilities 
are constrained by the threatened and endangered species during 
the entire summer season, from about April or March through the 
end of August. So we cannot run those units even today at full 
efficiency.
    So I think much of the increased generation capacity is, 
one, recapturing generation capacity that has been lost, and 
may or may not be there, depending on whether the water is 
there, because the Pick-Sloan averages about 12 billion 
kilowatt hours, I believe--excuse me, 10 billion, not 12--and 
it fluctuates wildly.
    In 1988, the river only ran at 12.5 million acre-feet, 
which is 50 percent of its normal capacity. Generation is not a 
steady, reliable thing on the Missouri River.
    Mr. Doolittle. Well, as you have observed, there are some 
environmental factors thrown in. But actually power users are 
stuck paying for that now in some cases, aren't they?
    Mr. Graves. Oh, to be sure. But I am just suggesting that 
projections of increased capacity are not taking into account 
all of the potential constraints on generation that occur 
either for environmental problems or the lack of water. I mean, 
you have to look at this very closely. And the erosion of our 
capability through the age of the equipment is very real, and 
the Corps of Engineers will tell you that.
    Mr. Doolittle. Ms. Kladiva, did you take into account these 
variables when you were making your assessment about the 
increased opportunities for revenues to be generated by this 
updating of the equipment?
    Ms. Kladiva. Yes, we did, Mr. Chairman. In fact, we made 
visits to WAPA, to the Corps and to the Bureau just within the 
last couple of months. So we have current information from them 
and current contact with them concerning what they believe is 
doable.
    Obviously, if you make an investment in doing the rewinds 
or refurbishing the turbines, then you need to take into 
consideration that you need to recover the cost of those 
refurbishments and that you have to look at what the potential 
payoff for that is going to be, so that it makes economic sense 
to do that.
    At Garrison, for example, where they have done the 
turbine--I am sorry, the generator rewinds, they found that 
they had a 36 percent increase in capacity in the output, based 
on what they had done, and it cost approximately $1 million per 
generator to do the rewinds. The mention of the fact that the 
current equipment, because it is old, there is some degradation 
in its potential to produce power, is true; so you would gain 
from making the investment where it makes sense, you would 
gain, basically getting the equipment back up so it is working 
at full performance, so you would regain efficiencies that have 
been lost because the equipment is old, as well as getting 
increased generation capacity.
    Particularly where the big power opportunities are is on 
the Missouri mainstream, because that is where 80 percent of 
the power generated by Pick-Sloan is available; that is where 
the big dams are, and that is where the cheap power is from the 
standpoint of its capacity.
    When you look at that part, yes, you have to take into 
account--in considering what your potential upside would be in 
the gain, you have to take into consideration Missouri River 
flows. That is why, in fact, only 80 percent of the power 
produced from those dams on the Missouri mainstream are 
currently committed as firm power sales to the preference 
customers, and that is because they take into consideration 
that you are going to have years of high water flow and low 
water, and therefore, the purpose in the contracts is to be 
sure that they will be able to deliver on the contracts.
    So potentially you have in any given year now 20 percent of 
the power that is being sold at market rates. As WAPA tells us, 
it is sold at ``market rates'' and it is generally done through 
bilateral agreements with companies in the area.
    But, yes, we did take those factors into consideration, and 
we do believe that this is an area that is worth pursuing, but 
it needs to be done so that it makes economic sense to proceed.
    Mr. Graves. Mr. Chairman, if I might just try to address 
this issue, they only market 80 percent of the power because, 
like all electric utilities, they are responsible for 
maintaining reserves in the event of the drop of a generator or 
facilities. And the additional power that is ``available'' in 
Pick-Sloan they cannot market as firm power because they are 
committed--they have committed that generation to reserves in 
the event of failure in other dams, as all utilities must do.
    Mr. Doolittle. Well, let's go back to one of the other 
possibilities, which is the 6 percent increase. Was that in the 
retail rate, Ms. Kladiva?
    Ms. Kladiva. That was in the wholesale rate.
    Mr. Doolittle. So what would that translate to the retail 
customer?
    Ms. Kladiva. For the Upper Great Plains, that would be less 
than one-tenth of 1 cent added to the wholesale rate for power.
    Mr. Doolittle. And so----
    Ms. Kladiva. That is looking across both firm and nonfirm 
sales for 1998.
    Mr. Doolittle. So if your power bill were $200 a month, how 
much extra would it be?
    Ms. Kladiva. I don't know what that would translate to in 
terms of the retail sales, because, number one, it would depend 
on the wholesale increase, how much of the increase was passed 
through to the retail customer. It would also depend upon the 
retail customer's power company, how much of their power they 
were getting from the power marketing administration.
    Mr. Doolittle. Well, would it be safe to say that it 
couldn't be more than 6 percent? Do you want to answer that, 
Ms. Antonelli?
    Would that be the upper figure, right?
    Ms. Kladiva. May I invite to the table Jon Ludwigson, who 
is an energy expert with our office?
    Mr. Doolittle. Sure.
    We have to do this. Raise your right hand. I only have 
about 5 minutes, but let's do this.
    [Witness sworn.]
    Mr. Doolittle. Thank you. Will you just identify yourself, 
please, and your position for the record.

STATEMENT OF JON LUDWIGSON, ENERGY RESOURCES AND SCIENCE GROUP, 
                   GENERAL ACCOUNTING OFFICE

    Mr. Ludwigson. My name is Jon Ludwigson. I work at the 
Energy, Resources and Science Group at the U.S. General 
Accounting Office.
    Mr. Doolittle. Okay.
    Mr. Ludwigson. In response, as far as what the effect on 
retail rates would be, it would--as Ms. Kladiva said, it would 
depend on the supply picture for each of the co-ops or 
municipals. If they received 100 percent of their power, for 
example, from the PMA, in this case WAPA, it would not 
necessarily translate to a 6 percent increase in retail rates, 
because the power component of retail rates is only one of 
several including distribution, administrative and customer 
service. The relative importance of these others varies 
depending on the individual municipal.
    It really at this point, is not prudent to estimate the 
percentage impact for any, or all, recipients of PMA power.
    Mr. Doolittle. Let me just ask you this: There is no way it 
could be more than 6 percent, since that is the wholesale rate 
increase, right? It is either that or something less. In all 
likelihood, it is considerably less, right?
    Mr. Ludwigson. All other things being equal, it would be 
something less.
    Mr. Graves. Mr. Chairman?
    Mr. Doolittle. Yes.
    Mr. Graves. I noted in Ms. Kladiva's statement to you that 
they were averaging this over both firm and nonfirm sales. 
There is no set price for nonfirm sales on Pick-Sloan. It is on 
the spot market. The rate that the power customers pay is the 
rate for all of the generation and all of the firm generation 
and all of those costs. To spread the costs of this over 
nonfirm generation is diluting the pie. The costs need to be 
isolated on the firm power. The nonfirm sales vary in price 
widely, depending on the time of year.
    We didn't get any of that really expensive stuff that was 
sold in the Mid-West last summer, but it is the firm power 
sales that set the rate, where the rate is set, and where the 
power repayment is set.
    Mr. Doolittle. Let me just sum up.
    It seems to me in the testimony I am hearing, first of all, 
it seems like there it is no way the Federal Government is 
going to come up with the money to do these vast projects for 
rural areas.
    Secondly, it seems like the seeds are out there for a 
solution to this problem, so that somehow these people can get 
the better quality water they need, and in some cases, the 
greater quantities that they need, without burdening the 
Federal taxpayer. I think we are going to have to look further 
into this when we get into these hearings on this Lewis and 
Clark.
    But I would invite you to be thinking about how--you know, 
Great Britain apparently has--I am interested in your evidence 
there, because we know how expensive these wastewater treatment 
plants are, and it is intriguing to me that those are all 
privately financed there. So I am interested in that.
    I really wish we could prolong this, but if I do, you will 
have to hang around for another series of votes, and I won't 
inflict that upon you.
    So I would like to thank you for your efforts and your 
testimony this afternoon, and we will have further questions, 
keep the record open for hopefully what will be your timely 
response.
    Mr. Doolittle. With that, this hearing is adjourned.
    [Whereupon, at 4:50 p.m., the Subcommittee was adjourned.]