[Federal Register Volume 61, Number 244 (Wednesday, December 18, 1996)]
[Rules and Regulations]
[Pages 66754-66826]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-31904]



[[Page 66753]]

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Part II





Department of the Interior





_______________________________________________________________________



Bureau of Reclamation



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43 CFR Parts 426 and 427



Acreage Limitation and Water Conservation; Final Rule and Advance 
Notice of Proposed Rulemaking

  Federal Register / Vol. 61, No. 244 / Wednesday, December 18, 1996 / 
Rules and Regulations  

[[Page 66754]]



DEPARTMENT OF THE INTERIOR

Bureau of Reclamation

43 CFR Parts 426 and 427

RIN 1006-AA32


Acreage Limitation and Water Conservation

AGENCY: Bureau of Reclamation, Interior.

ACTION: Final rule.

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SUMMARY: This final rule retitles and revises the Rules and Regulations 
for Projects Governed by Federal Reclamation Law and moves the water 
conservation provisions to a new part. These rules replace prior rules 
on the administration of the Reclamation Reform Act of 1982 (RRA). The 
final rule, among other things, incorporates existing policies that are 
not included in the prior rules and raises certain certification and 
reporting thresholds. Reclamation has rewritten and reorganized these 
regulations to make them clearer and less administratively burdensome, 
while maintaining compliance with and achievement of programmatic 
goals.

EFFECTIVE DATES: The effective date of revised part 426, Acreage 
Limitation Rules and Regulations, and the new part 427, Water 
Conservation Rules and Regulations, is January 1, 1998. The amendment 
to current Sec. 426.10 is effective on January 1, 1997. The text for 
the amendment is located at the end of this document.

ADDRESSES: A copy of all comments received on the proposed rules are on 
display to the public in the Bureau of Reclamation Library, Denver 
Federal Center, Building 67, Room 167, 6th and Kipling, Denver, 
Colorado 80225-0007.

FOR FURTHER INFORMATION CONTACT: Austin Burke, Director, Program 
Analysis Office, Bureau of Reclamation, P.O. Box 25007, Mail Code D-
5000, Denver, Colorado 80225-0007, telephone (303) 236-3292.

SUPPLEMENTARY INFORMATION: Pursuant to 5 U.S.C. Sec. 553(d)(1) and (3) 
the amendment to Sec. 426.10, which pertains to submittal of 
certification and reporting forms, may take effect less than thirty 
days after the date of publication in the Federal Register. Section 
553(d)(1) permits a substantive rule, which grants or recognizes an 
exemption or relieves a restriction, to take effect less than thirty 
days after the date of publication. Section 553(d)(1) applies to the 
provisions amending current Sec. 426.10, as the amendment excepts 
certain individuals and entities holding only a relatively small amount 
of land from having to submit forms to Reclamation.
    Moreover, Sec. 553(d)(3) could also permit the amendment to take 
effect on January 1, 1997. Section 553(d)(3) of the Administrative 
Procedure Act permits final rules to take effect less than thirty days 
after publication upon a showing of good cause. For many farmers in the 
western United States, including many landholders who receive 
Reclamation project water, the water year begins on January 1, 1997. If 
the amendment to the forms provisions was to take effect thirty or more 
days after the date of publication, these landholders would have to 
submit reporting forms which other landholders, whose water year begins 
later in the year, would not. Thus, in order to apply the same rules 
and regulations to all landholders receiving Reclamation project water 
and to ensure fairness, the amendment to the forms provisions will take 
effect on January 1, 1997.

Table of Contents

    This section provides the following information:

 Introduction
 Summary of Changes
 Background
 Litigation Concerning the RRA Rules and Regulations
 Additional Proposed Rulemaking
 Public Involvement
 Public Comments and Responses on General Issues
 Part 426--Summary of Changes; Public Comments and Responses
 Part 427--Summary of Changes; Public Comments and Responses
 Environmental Compliance
 Executive Order 12866, Regulatory Planning and Review
 Regulatory Flexibility Act
 Paperwork Reduction Act
 Executive Order 12612, Federalism
 Executive Order 12630, Takings
 Unfunded Mandates Reform Act of 1995
 Authorship
 List of Subjects in 43 CFR Part 426 and 43 CFR Part 427

Introduction

    These rules and regulations govern the Bureau of Reclamation's 
(Reclamation) westwide implementation and administration of the 
Reclamation Reform Act of 1982. The rules retitle and revise prior 
rules on acreage limitation and place water conservation rules in a 
separate CFR part.

Summary of Changes

    These final rules implement and interpret the Reclamation Reform 
Act of 1982, as amended, consistent with Reclamation's role of managing 
and protecting water resources. The final rules, among other things, 
incorporate existing policies that are not included in the prior rules 
and raise certain certification and reporting thresholds. Reclamation 
has rewritten and reorganized these regulations to make them clearer 
and easier to administer.
    Reclamation published proposed rules in the Federal Register (60 FR 
16922, Apr. 3, 1995).
    This section summarizes the most significant differences between 
the prior rules, proposed rules, and final rules. A section-by-section 
analysis, found later in this preamble, provides a more detailed 
description of the changes.

Certification and Reporting Thresholds

    Landholders whose total westwide landholding is equal to or less 
than the certification and reporting thresholds, as presented below, 
are exempt from the annual RRA forms submittal requirements.

----------------------------------------------------------------------------------------------------------------
                                                                    Proposed rule              Final rule       
           Acreage limitation status              Prior rule ---------------------------------------------------
                                                               Category 1   Category 2   Category 1   Category 2
----------------------------------------------------------------------------------------------------------------
Prior law......................................           40           40           40           40           40
Qualified recipient............................           40          240           80          240           80
Limited recipient:.............................  ...........  ...........  ...........  ...........  ...........
Received water before 10/1/81..................           40           80            5           40           40
Did not receive water before 10/1/81...........           40            5            5           40           40
----------------------------------------------------------------------------------------------------------------

    Both the proposed and final rules provide that all districts will 
be Category 2 unless certain criteria are met. Under the proposed rule 
criteria, the district had to: (1) Be subject to the discretionary 
provisions of the RRA; (2)

[[Page 66755]]

enter into a resources management ``partnership'' with Reclamation; and 
(3) not have delinquent financial obligations owed to the United 
States. Under the final rule criteria, the district must : (1) be 
subject to the discretionary provisions of the RRA; and (2) not have 
delinquent financial obligations owed to Reclamation. The 
``partnership'' criterion is not included in the final rule.

Application of the Nonfull-Cost Entitlement

    Under the prior rule, the following were examined to determine if a 
farming arrangement was considered to be a lease for acreage limitation 
purposes:

    Who assumes the economic risk in the farming operation?
    Who retains the right to the use or possession of the land being 
farmed?
    Who is responsible for payment of the operating expenses?
    Who is entitled to receive the profits of the farming operation?

    Under the proposed rule, a farming arrangement would have been 
considered to be a lease for acreage limitation purposes if possession 
of the lessee's land was partially or wholly transferred to the 
``lessee.'' Economic risk was relegated to simply be an indicator of 
possession.
    In the final rule, the criteria found in the prior rule are 
restated and clarified. Any farming arrangement under which the 
economic risk and the use or possession of the land has partially or 
wholly transferred to a party other than the landowner will be 
considered to be a lease. Once again, who is responsible for payment of 
operating expenses and who is entitled to receive the profits from the 
farming operation have been highlighted as indicators of use or 
possession and economic risk. Unlike the prior rule, this provision is 
included in the definitions section rather than in the leasing and 
full-cost pricing section.

Nonresident Alien and Foreign Entity Entitlements

    Under the prior, proposed, and final rules, certain applications of 
the acreage limitation provisions for nonresident aliens and entities 
not established under State or Federal law (foreign entities) are 
constant. Specifically:
     Nonresident aliens and foreign entities are eligible to 
receive Reclamation irrigation water on directly held land in prior law 
districts only as prior law recipients.
     Land held directly by nonresident aliens and foreign 
entities in discretionary provision districts is ineligible to receive 
Reclamation irrigation water.
    The difference in application between the three versions of the 
rule is centered on land held indirectly by nonresident aliens and 
foreign entities, primarily in discretionary provision districts. Under 
the prior rules, a nonresident alien could hold up to 960 acres 
indirectly in a discretionary provision district and receive 
Reclamation irrigation water. The prior rules do not address holdings 
by foreign entities. Reclamation policy has been that any land held by 
a foreign entity in a discretionary district is ineligible to receive 
Reclamation irrigation water.
    Under the proposed rules, both nonresident aliens and foreign 
entities would be limited to qualifying as prior law recipients with 
the associated acreage limitations even if they held land indirectly 
through a domestic entity.
    Under the final rules, the prior law entitlements still serve as 
base entitlements for all nonresident aliens and foreign entities. 
However, if a nonresident alien is a citizen of, or a foreign entity is 
established in, a country that has certain treaty or other 
international agreements with the United States, they will be treated 
as a United States citizen or as an entity established under State or 
Federal law for acreage limitation purposes. Accordingly, they may 
elect to conform to the discretionary provisions and receive the 
entitlements applicable to qualified and limited recipients for land 
that they hold indirectly.

Type of Contracts Considered To Be Additional and Supplemental Benefits

    Under the prior rules, the general criteria for determining whether 
a contract action will be considered an additional or supplemental 
benefit are provided. The provision also lists specific types of 
contract actions which Reclamation does not consider to provide such 
benefits. If a district's contract action provides an additional or 
supplemental benefit, then the district must conform to the 
discretionary provisions.
    Under the proposed rules, the general criteria would have been 
modified to include specific types of contract actions which 
Reclamation would consider as providing supplemental or additional 
benefits. Under the prior rule, some of these contract actions did not 
require conformance to the discretionary provisions, while for others 
application of that requirement was not clear.
    The final rules retain the more general criteria provided in the 
prior rules with modifications to remove provisions that are no longer 
applicable. No policy change is intended.

Application of the RRA to Religious or Charitable Organizations

    Under the prior rule, a subdivision of a religious or charitable 
organization that is subject to the discretionary provisions is treated 
as an individual qualified recipient if certain RRA criteria are met. 
If any of the criteria are not met by either the central organization 
or any of its subdivisions, the entire organization, including all 
subdivisions, is treated as one limited recipient.
    Under the proposed and final rules, a subdivision of a religious or 
charitable organization that is subject to the discretionary provisions 
is treated as an individual qualified recipient if the same criteria as 
found in the prior rules are met. If any of the criteria are not met, 
only that subdivision, and any subdivision of it, will be affected. 
Reclamation will determine the acreage limitation status (qualified or 
limited recipient) of such a subdivision based on the total number of 
members of that subdivision.

Application of Class 1 Equivalency

    Under the prior, proposed, and final rules, Class 1 equivalency 
factors are based on the productive potential of Class 2 or 3 land as 
compared to Class 1 land within the same district. The proposed rule 
added a study of potential toxic or hazardous return flows to any 
reclassification or Class 1 equivalency factor determination activity. 
Under the proposed rule if Reclamation determined that soils could 
contribute to toxic or hazardous return flows, then the land so 
identified would not be eligible for application of the Class 1 
equivalency factors. The final rule continues the policy of the prior 
rule. The final rule does not include the proposed rule provision to 
conduct a study of potential toxic or hazardous return flows and use 
the results of that study as a factor in determining Class 1 
equivalency. However, Reclamation will undertake a review of its land 
classification and soils review procedures, and will implement 
appropriate changes in those procedures.

Future Operation of Formerly Excess Land by Excess Land Sellers

    Under the prior rule, if a landholder sells his/her excess land, 
the landholder can immediately become the lessee of that land and 
continue to farm it with Reclamation irrigation water. This provision 
allows a landholder to avoid

[[Page 66756]]

the intent of the anti-speculation provision of the RRA.
    Under the proposed rule, landholders would be prohibited from 
receiving Reclamation irrigation water on land which they previously 
held as excess. The only exceptions would be if the landholder became, 
or contracted to become, a direct or indirect landholder of the land 
prior to July 1, 1995, or such land becomes exempt from the acreage 
limitation provisions.
    Under the final rule, landholders will be prohibited from receiving 
Reclamation irrigation water on land which they previously held as 
excess only for the term of the deed covenant associated with the sale 
of the excess land (10 years). In addition, other changes were made to 
the list of exceptions to this prohibition. The date for having 
contracted to become the landholder was changed from July 1, 1995, to 
December 18, 1996. While this date is prior to the effective date of 
this section, Reclamation has determined it is appropriate to set such 
a date, since the public was already notified that the date was going 
to be in advance of the effective date of the final rulemaking, July 1, 
1995, in the proposed rule. Also a broad exception was provided for 
landholders who pay the full-cost rate for Reclamation irrigation water 
delivered to land that they formerly held as excess.

Involuntary Acquisition of Formerly Excess Land by Excess Land Sellers

    Under the prior rules, no distinction was made between landowners 
who involuntarily acquired land that had previously been excess in his 
or her landholding or under recordable contract and those for which the 
land had not previously been excess or under recordable contract in 
their landholding. Any involuntarily acquired land that had been 
nonexcess before the acquisition and was designated as excess by the 
involuntarily acquiring party was eligible to receive Reclamation 
irrigation water for 5 years. In addition, such land could be 
redesignated as nonexcess by the involuntarily acquiring party or sold 
at full market value at any time.
    Under the proposed rule, the landholder could not take advantage of 
the involuntary acquisition provision and receive water for 5 years, if 
the land involuntarily acquired had been excess or under recordable 
contract in his or her landholding. In order for such land to become 
eligible to receive Reclamation irrigation water, it had to be sold to 
an eligible buyer at a price approved by Reclamation. In addition, once 
designated as excess by the landholder who involuntarily acquired the 
land, the land could not be redesignated as nonexcess.
    Under the final rule, two exceptions have been added to modify the 
prohibition on delivering Reclamation irrigation water to landholders 
who involuntarily acquire land that had been excess or under recordable 
contract in his or her landholding. Specifically, financial 
institutions have been defined and are excluded from this application 
and landholders that meet certain criteria listed in Sec. 426.12 (deed 
covenant has expired, they pay the full-cost rate for the water 
delivered, etc.) may take advantage of the involuntary acquisition 
provision and receive water for 5 years. Financial institutions have 
also been fully exempted from the prohibition of selling the land at 
full market value.
    In addition, the final rule provides that involuntarily acquired 
excess land may be redesignated as nonexcess, as long as the landowner 
follows the normal procedure for redesignating excess land and pays 
Reclamation any difference between the rate paid for the delivery of 
Reclamation irrigation water and what would have been paid if the land 
had initially been declared nonexcess when the land was involuntarily 
acquired.

Application of Compensation Rate and Administrative Fees in Cases of 
Irrigation of Ineligible Excess Land

    Under the prior rule, actions that will be taken if Reclamation 
irrigation water is delivered to excess land are not addressed, other 
than such deliveries will be terminated. Current Reclamation policy is 
to also charge the compensation rate (full-cost rate) for such 
deliveries.
    Under the proposed and final rules, Reclamation's existing policy 
on charging the compensation rate for any deliveries of water to 
ineligible excess land is incorporated. In addition, the proposed and 
final rules apply an administrative fee ($260) for such deliveries.

New Procedures for Administrative Appeals of RRA-Related Determinations

    Under the prior rule, a two-step process is provided to appeal 
final RRA determinations made by Reclamation regional directors. The 
first level of appeal is to the Commissioner of Reclamation. The second 
level of appeal is to the Office of Hearings and Appeals (OHA).
    Under the proposed rule, the Commissioner's review of the regional 
director's decision would have been eliminated. In its place was the 
right of the district or the landholder to request that the regional 
director reconsider his or her final determination. After the regional 
director reconsidered a determination, a direct appeal to OHA was 
provided. The proposed rule also required Reclamation to wait 10 days 
before implementing a regional director's decision to terminate 
delivery of water and allowed the Commissioner to stay decisions 
pending appeal to OHA.
    Under the final rule, the two-step appeals process of the prior 
rule is retained, while the proposed rule step of requesting regional 
directors to reconsider their final determination is removed. The final 
rule allows the Commissioner to stay decisions pending and during 
appeal to OHA. The final rule also establishes time periods for 
affected parties to request stays and to submit supporting briefs to 
the Commissioner.

Language Changes

    Throughout part 426 regulations, language has been redrafted for 
readability and clarity. The preamble of these regulations explains all 
intended substantive changes. Where no change is explained, the new 
language is intended only for clarity and no substantive change is 
intended.

Water Conservation

    The prior rule required all districts to prepare and submit to 
Reclamation water conservation plans that contain definite objectives 
that are economically feasible, and a time schedule for meeting those 
objectives.
    The proposed rule required districts to prepare and submit water 
conservation plans to Reclamation for approval, but provided some 
exceptions and opportunities for alternative compliance. The proposed 
rule required that plans set forth definite goals, identify actions for 
achieving the goals, and establish a reasonable time schedule for 
meeting the goals. The proposed rule also required that a plan contain 
the following four critical measures: (1) A water measurement and 
accounting system, (2) a water pricing structure designed to encourage 
increased efficiency of water use, (3) an information/education 
program, and (4) the designation of a district water conservation 
coordinator. The proposed rule also linked a district's progress in 
development and implementation of water conservation plans with the 
allocation of future discretionary Reclamation program benefits.
    The final rule is the same as the prior rule regarding preparing 
and submitting a plan to Reclamation. There is no requirement for plan 
approval by

[[Page 66757]]

Reclamation in the final rules. Reclamation intends to encourage and 
assist districts in the development of quality water conservation 
plans, the demonstration of innovative conservation technologies, and 
the implementation of effective energy efficiency measures. Reclamation 
also recognizes the need for coordination with State and other Federal 
conservation programs.
    Reclamation has the responsibility under Section 210(a) of the RRA 
to encourage water conservation. Districts have the responsibility 
under Section 210(b) to develop water conservation plans. Reclamation 
is presently implementing a Water Conservation Field Services Program 
(WCFSP) to actively encourage water conservation, assist districts with 
their responsibility to develop plans, and complement and support State 
and other conservation programs. The WCFSP will emphasize effective 
water conservation planning, the demonstration of innovative 
conservation technologies, and the implementation of effective 
efficiency measures.
    Through the WCFSP, Reclamation Area Offices will work directly with 
districts to provide technical assistance in the preparation of 
effective water conservation plans, including how to incorporate 
appropriate environmental considerations into the planning process. 
Reclamation will review each water conservation plan submitted by a 
district, and provide advisory comments and recommendations on their 
identified goals and measures. Within available resources, Reclamation 
will also provide technical guidance in water conservation planning and 
implementation in the form of handbooks, workshops and training 
opportunities to ensure all districts an opportunity to develop and 
implement effective water conservation plans. Reclamation recognizes 
that a transition period will be required to receive updated plans from 
all affected districts and re-establish the 5-year cycle for all plans. 
Each fiscal year, Area Offices will develop a schedule for water 
conservation planning activities with districts, and annually report on 
the status of plan updates.
    The main objective in water conservation planning is to accomplish 
water conservation on the ground. Reclamation will monitor the 
implementation of water conservation plans to determine whether water 
conservation planning has facilitated water conservation.

Background

    The RRA (43 U.S.C. 390aa, et seq.) was signed into law on October 
12, 1982. It was the culmination of an effort to modernize Federal 
reclamation law that began with the 95th Congress. The RRA made a 
number of changes to prior Federal reclamation law while retaining the 
basic principle of limiting the amount of land in ownership which may 
receive water deliveries from Reclamation projects. The RRA also made a 
major change to prior law by introducing the concept of full-cost 
pricing for some water deliveries.
    Rules and regulations for implementing the RRA were published in 
the Federal Register (43 FR 54768, Dec. 6, 1983) and became effective 
on January 5, 1984. In 1987, the rules and regulations were amended, 
primarily to implement Section 203(b) of the RRA. The provision was 
intended to encourage Districts to amend contracts to conform to the 
discretionary provisions which were not addressed in the 1983 
rulemaking. Revisions also were made to those provisions of the rules 
and regulations pertaining to submission of certification and reporting 
forms, trusts, nonresident aliens, water transfers, covenant 
restrictions, and religious and charitable organizations.
    The 1987 rules and regulations and three alternatives were 
evaluated in an Environmental Assessment (EA) published by Reclamation 
in April 1987. The EA concluded that the impacts of the proposed 
rulemaking were primarily economic in nature and that no significant 
impacts to the environment would result from the rulemaking. A Finding 
of No Significant Impact concerning the 1987 rulemaking was therefore 
issued by Reclamation on April 8, 1987. Final rules and regulations 
were published in the Federal Register (52 FR 11954, Apr. 13, 1987) and 
became effective on May 13, 1987.
    The Omnibus Budget Reconciliation Act of 1987, enacted on December 
22, 1987, included amendments to the RRA. The amendments addressed 
revocable trust agreements, provisions for audits by Reclamation of 
compliance with reclamation law, application of full-cost water rates 
for lands under extendable recordable contracts, and interest on 
underpayments or nonpayments. Consequently, further proposed amendments 
to the rules and regulations were evaluated in a supplemental EA 
published by Reclamation in September 1988. The supplemental EA 
concluded that the impacts of the proposed rulemaking were primarily 
economic in nature and that no significant impacts to the environment 
would result from the rulemaking. A Finding of No Significant Impact 
concerning the 1988 rulemaking was therefore issued by Reclamation on 
September 23, 1988. Final rules and regulations were published in the 
Federal Register (53 FR 50535, Dec. 16, 1988) and became effective on 
January 17, 1989.
    Final rules and regulations were published in the Federal Register 
(60 FR 10030, Feb. 23, 1995) and became effective on March 27, 1995, 
revising part 426 to impose administrative fees to recover costs 
incurred by Reclamation when irrigation water has been delivered to 
landholders who have not complied with the information collection 
requirements of the RRA, as amended.

Litigation Concerning the RRA Rules and Regulations

    In 1988, the Natural Resources Defense Council (NRDC) and others 
filed a lawsuit challenging the validity of the 1987 and 1988 rules and 
regulations (NRDC v. Underwood, No. Civ. S-88-375-LKK). On July 26, 
1991, the United States District Court for the Eastern District of 
California (Court) granted NRDC's partial motion for summary judgment. 
The Court ruled that Reclamation had not complied with the requirements 
of the National Environmental Policy Act (NEPA) in preparing the EA and 
the Findings of No Significant Impact in the promulgation of the 1987 
rules and regulations.
    Reclamation appealed the Court's decision to the Ninth Circuit 
Court of Appeals. In September 1993, while the appeal was still 
pending, the Department of the Interior (Interior), the Department of 
Justice, and NRDC entered into a Settlement Contract which required 
Reclamation ``to propose new rules and regulations implementing, on a 
westwide basis, the * * * [RRA] as part of a new rulemaking proceeding 
that comprehensively reexamines the implementation of the RRA.'' 
Reclamation published a proposed rulemaking on April 3, 1995.
    The Settlement Contract also required Interior to prepare an 
environmental impact statement (EIS) considering the westwide impact of 
the proposed rules and regulations and alternatives. The Settlement 
Contract does not require the Department to change its existing rules. 
The required EIS has been published separately and notice of its 
availability was published in the ``notice'' section of the Federal 
Register (60 FR 4677, Feb. 7, 1996). A Record of Decision was

[[Page 66758]]

signed by the Assistant Secretary--Water and Science on December 10, 
1996.

Advance Notice of Proposed Rulemaking

    During the rulemaking process, the Department received a number of 
comments regarding the compliance of certain large trusts with the 
acreage limitation provisions of the RRA. Comments expressed a variety 
of viewpoints, including the assertion that some trusts with 
landholdings (owned and leased land) in excess of 960 acres total may 
circumvent the requirements of Reclamation law.
    In response to these comments, the Department intends to publish an 
advance notice of proposed rulemaking in the Federal Register 
accompanying the final rules and regulations described here. This 
advance notice of proposed rulemaking addresses and builds upon the 
widely divergent views and comments received from the public regarding 
trusts holding more than 960 acres. Some comments alleged that water 
users employ certain devices, such as the creation of trusts, as a 
means to avoid the acreage limitation provisions of the RRA.
    The treatment of various trust arrangements under the RRA can 
significantly affect how much acreage in a given farm arrangement is 
entitled to the delivery of subsidized water. Many family farms, trust 
departments of financial institutions, and others use trusts for estate 
planning and other purposes. The Congress included Section 214 in the 
RRA, which provides that lands held in trust are eligible under certain 
circumstances to receive subsidized water from Reclamation projects. 
Following the enactment of RRA and relying on Section 214, some large 
farms reorganized as trusts, and continue to receive nonfull-cost 
water.
    The proposed rulemaking sought to address these concerns by 
changing the definition of what constitutes a lease for the purposes of 
the acreage limitation provisions. To prevent circumvention of the RRA, 
Reclamation has treated farm operators as lessees subject to the 
acreage limitation provisions if the operator assumes the economic risk 
of the farming enterprise and has use or possession of the land. The 
proposed rulemaking focused on possession of the land. Under that 
proposed change, if someone other than the landowner has possession of 
the land, then Reclamation would determine that a lease subject to the 
acreage limitation provisions existed regardless of whether that person 
or entity also assumed the economic risk. One of the effects of that 
proposal may have been to treat certain operators of land held in trust 
as lessees.
    Based upon comments on the proposed rulemaking, Reclamation has 
determined that the proposed provision altering the definition of a 
lease is an inadequate means of addressing the concerns about 
compliance with the acreage limitation provisions of the RRA and could 
have produced unintended consequences. Many comments from the public 
raised concerns about the effects of such a change on custom service 
providers, specialty services, and lenders among others. Many comments 
noted that modern farm operators often provide the necessary equipment 
and services to farming operations that cannot be economically provided 
to only 960 acres if the farmer is to cover expenses and make a 
reasonable return on investment. Other comments noted that the proposed 
change would not work and could be easily avoided. As a result of its 
review of the proposed rulemaking and the widely divergent comments 
received from the public, the Department has determined that seeking 
further public comment to an advance notice of proposed rulemaking is 
appropriate.
    Reclamation's comprehensive February 1991 review of RRA 
implementation contains the most recently published data on 
administration and enforcement of RRA through 1990. According to this 
review, out of a total of 550 trust arrangements, only 35 trusts 
(primarily in California, Arizona, and Washington) held more than 960 
acres. Thus, the vast majority of the 550 trusts were found to be well 
within the RRA's acreage limitations.
    Through the advance notice of proposed rulemaking, the Department 
will invite comments and suggestions on: (1) Whether to limit nonfull-
cost water deliveries to large trust arrangements that exceed 960 
acres; (2) the criteria used to determine whether landholdings (owned 
and leased land) in excess of 960 acres total, operated under a trust 
agreement, should be eligible to receive non-full cost water 
deliveries; (3) whether Reclamation project non-full cost water 
deliveries to such large scale trusts are consistent with the 
principles of Federal reclamation law; (4) the appropriate criteria and 
standards to be applied to such trusts, implementation of the criteria 
and standards; and (5) the extent of the Department's statutory 
authority to address this issue. For example, what is the extent of the 
Department's legal authority to regulate: (a) Future trusts, (b) trusts 
established from 1982 to the present, and (c) trusts established prior 
to 1982. Suggested approaches should ensure fairness for those farming 
operations which are subject to acreage limitation provisions, while 
eliminating the use of arrangements which are inconsistent with the 
acreage limitation provisions of Federal reclamation law.

Public Involvement

    A notice of intent regarding preparation of the EIS and a notice of 
intent regarding the proposed rulemaking were published in the Federal 
Register (58 FR 64277 and 58 FR 64336, Dec. 6, 1993). A press release 
was issued on December 29, 1993, and approximately 3,500 information 
packets were distributed to environmental groups, entities that have 
contracts with Reclamation for project water supplies, the media, and 
other interested parties. Public scoping meetings were held in January 
1994 to receive public input regarding the issues and alternatives to 
be considered in the EIS and rulemaking. Scoping sessions were held in 
Billings, MT; Fresno, CA; Salt Lake City, UT; Phoenix, AZ; Boise, ID; 
Spokane, WA; Portland, OR; and Denver, CO. In addition to the oral 
comments received at the scoping sessions, approximately 150 letters 
were received.
    A notice of availability regarding the draft EIS was published in 
the Federal Register (60 FR 16662, Mar. 27, 1995). Proposed rules and 
regulations were published in the Federal Register (60 FR 16940, Apr. 
3, 1995). A press release was issued on April 3, 1995, and copies of 
the draft EIS and proposed rules were distributed to environmental 
groups, entities that have contracts with Reclamation for project water 
supplies, State and Federal offices, libraries, and other interested 
parties.
    Notices of public hearings on the draft EIS and proposed rules were 
published in the Federal Register (60 FR 20114 and 60 FR 20068, Apr. 
24, 1995). Public hearings on the draft EIS and proposed rules were 
held in May 1995. Hearings were held in Billings, MT; Yakima, WA; 
Denver, CO; Boise, ID; Phoenix, AZ; Sacramento, CA; Salt Lake City, UT; 
and Fresno, CA. One week prior to the public hearings, informational 
public forums were held in Billings, MT; Yakima, WA; Bend, OR; Denver, 
CO; Boise, ID; Phoenix, AZ; Sacramento, CA; Salt Lake City, UT; Fresno, 
CA; Albuquerque, NM; and Palm Desert, CA.
    The public comment period ran from April 3 through June 26, 1995. 
In addition to oral comments received at the hearings, 382 letters and 
80 recorded phone calls were received during the comment period.
    Responses to public comments on the proposed rules are provided 
below.

[[Page 66759]]

Comments on the draft EIS are responded to in the final EIS.

Public Comments and Responses on General Issues

    The following section presents public comments on the proposed 
rules that are general in nature. This section includes comments on 
authority, process, relationship with other documents, relationship 
with other laws and mandates, water rights and contracts, westwide 
action, and other general beliefs and comments that were not 
specifically directed toward parts 426 or 427.

Authority/Settlement Contract

    Comment: Do you have the authority to change these laws without 
going through Congress?
    Response: Only Congress has the authority to change the RRA. 
However, Reclamation has the authority to promulgate and amend rules 
and regulations that implement and interpret the RRA. This rulemaking 
amends the prior rules and regulations, not the RRA.
    Comment: We do not feel Reclamation had legal authority to sign the 
settlement agreement as drafted; therefore, the proposed rules and 
draft EIS which are the product of that contract are invalid. We 
request that Reclamation, in the final EIS, provide a detailed 
description of the sections of the RRA that provide the authority to 
carry out the various provisions found within the settlement contract.
    Response: The Department of the Interior and the Department of 
Justice certainly have legal authority to sign the Settlement Contract. 
Moreover, Reclamation's authority to promulgate new regulations and 
prepare an EIS comes from the Secretary's general authority, NEPA, the 
RRA, and Federal reclamation law in general. In preparing an EIS, an 
agency is required to consider a range of alternatives and is allowed 
to include alternatives that fall outside current authorities. However, 
all provisions included in the final rules and regulations must fall 
within the agency's legal authorities. All provisions in these final 
rules fall within Reclamation's authorities, which are stated at the 
beginning of the regulations.
    Comment: The Settlement Contract between NRDC, Interior, and the 
Department of Justice calls for Reclamation to consider ``alternatives 
designed to achieve the greatest degree of water conservation and 
environmental restoration possible under the RRA and other applicable 
laws and return a maximum amount of revenues to the United States * * 
*.'' While the proposed rules represent significant progress, we feel 
that Reclamation has not yet adequately addressed all of the provisions 
of the Settlement Contract.
    Response: The Settlement Contract requires Reclamation to consider 
specific alternatives in the EIS. Reclamation fulfilled its 
responsibilities under the Settlement Contract by issuing a final EIS 
that considers all alternatives identified in the Settlement Contract. 
Reclamation also reexamined the alternatives discussed in the draft EIS 
and expanded its consideration of environmental impacts of the 
alternatives.
    Comment: It's my understanding it is not necessary that Reclamation 
impose new rules and regulations, but this matter be merely considered. 
I feel that in view of the fact that the prior rules and regulations 
have worked in a generally satisfactory manner, they should not be 
modified.
    Response: The Settlement Contract does not require Interior to 
adopt final rules that are different from the rules in effect on the 
date of the agreement (the prior rules). However, Interior has chosen 
to modify the prior regulations in some areas to clarify some prior 
provisions, include changes which increase Reclamation's effectiveness 
in administering the RRA, or incorporate existing Reclamation policies.

Process

    Comment: As we go through this entire process of public input, what 
priority will be placed on comments from those who are truly impacted 
by these proposed regulations? What will happen if the alternatives 
specified in the Settlement Contract are not met?
    Response: Reclamation gives equal priority to all comments when 
considering proposed rules and writing final rules. The Settlement 
Contract requires Reclamation to prepare an EIS considering the impacts 
of the proposed regulations and specific alternatives included in the 
Settlement Contract. Reclamation fulfilled its responsibilities under 
the Settlement Contract by issuing a final EIS that considers all 
alternatives identified in the Settlement Contract.
    Comment: We ask that Reclamation withdraw and reconsider the 
proposed rules.
    Response: If appropriate, Reclamation proposes new rules or changes 
to rules, reviews public comments on the proposed rules and changes, 
and issues final rules based on the comments received. Reclamation has 
reviewed and considered public comments as part of the rulemaking 
process and has determined that the final rules will improve the 
administration of the RRA.
    Comment: It is necessary for Reclamation to confirm that no 
substantive changes are intended except as specifically noted; 
otherwise farmers will be left guessing whether new words mean 
something different than old words.
    Response: Substantive changes between the prior and final rules are 
summarized in this preamble. In part 426 the regulations have been 
reworded for clarity. In those instances, Reclamation has indicated in 
the preamble where substantive policy change is intended.
    Comment: The timing of these proposed rules is the worst it could 
be for farmers. It requires them to take time from their job of 
planting to address these issues before they become fact.
    Response: The proposed rules were originally scheduled for 
publication in December 1994, which would have avoided this problem. 
Unfortunately, publication was delayed until April 3, 1995. As 
described later in this preamble, most of the final Acreage Limitation 
Rules and Regulations will not be effective until January 1, 1998 (the 
RRA forms submittal threshold is effective January 1, 1997). This 
action is taken to provide time for landholders and districts to 
review, understand, and implement any revisions.
    Comment: The process of reviewing, attending meetings, and 
commenting on these proposed rules has been tremendously time-consuming 
and expensive. The review of just one of these documents can be 
intimidating to an irrigation district manager who has many other tasks 
to perform on a daily basis to keep the district running smoothly.
    Response: During many activities, Reclamation receives comments 
stating that Reclamation is conducting too many public reviews and 
meetings, and receives comments stating that Reclamation is not 
conducting enough public reviews and meetings. Reclamation realizes 
there are many resource management issues facing the public today and 
that many of these issues require substantive input. However, 
Reclamation would rather provide sufficient opportunity for public 
input on each issue, than take steps to minimize the opportunity for 
providing input.
    Comment: We would appreciate a written response to our comments.
    Response: All comments received during the public comment period 
are included in the administrative record. Each comment was considered 
when

[[Page 66760]]

the final rules and regulations were developed. In the preamble to the 
final rules, Reclamation provides a written response to comments 
received. Reclamation does not generally provide individual response 
letters to comments received as part of the rulemaking process.
    Comment: I just called on your toll-free line for commenting on the 
proposed rules--that's the shortest 10 minutes I ever saw in my life--
about 30 seconds.
    Response: There was a short time when the computer software 
connected to our toll-free number malfunctioned and didn't allow a full 
10 minutes for making comments. After fixing the problem, Reclamation 
attempted to contact everyone that had left their names and phone 
numbers before being cut off. The toll-free comment line received 88 
calls, some of which were requests for information. Only one person 
commented on the idea of a toll-free comment line to take public 
comments, stating that it was a very good idea and should be used 
throughout Interior more often.

Relationship With Other Documents

    Comment: What is the necessity of having three separate documents 
[proposed regulations, water conservation guidelines and criteria 
(Guidelines and Criteria), and EIS] and what is the connection?
    Response: The proposed regulations contained all the proposed 
Federal regulations for implementing and interpreting the Reclamation 
Reform Act of 1982. The draft and final EIS analyzed the potential 
environmental (including economic) impacts of implementing the proposed 
regulations, and alternatives. The draft Guidelines and Criteria 
contained Reclamation's draft recommendations for a sound water 
management and conservation planning process. Under the proposed rule 
alternative of the draft EIS, the Guidelines and Criteria were 
characterized as a stand-alone document which would be used as the 
standard upon which to approve plans required by the proposed rules. 
Under alternatives B and C, the contents of the Guidelines and Criteria 
were incorporated into the actual rules.
    The final rules contain the same regulatory requirements for 
preparing water conservation plans as the prior rules. The requirement 
for plan approval is not included in the final rules. Reclamation will 
issue advisory guidance relating to its water conservation program. 
Also, a handbook entitled ``Achieving Efficient Water Management: A 
Guidebook for Preparing Agricultural Water Conservation Plans'' will be 
available to aid water conservation efforts. Neither of these documents 
has been incorporated into the final rules, and they do not constitute 
regulatory requirements.
    Comment: The timing of the publication of the proposed rules made 
it impossible for Reclamation staff to benefit prior to the rulemaking 
from the most recent comments on the Guidelines and Criteria.
    Response: Although the proposed rules and draft Guidelines and 
Criteria had some common elements, the two documents served different 
purposes. The draft Guidelines and Criteria were being developed before 
the rulemaking began. The draft Guidelines and Criteria contained 
Reclamation's recommendations for a sound water management and 
conservation planning process and could have been used in conjunction 
with either the prior rules or the proposed rules. Therefore, it was 
appropriate to seek comments separately on the Guidelines and Criteria, 
and prior to publication of the proposed rules.
    Comment: These proposed rules, by incorporating the Guidelines and 
Criteria, are in violation of the Administrative Procedure Act.
    Response: There was a link between the proposed rules and 
Guidelines and Criteria, because the rules proposed to use the draft 
Guidelines and Criteria as the standard upon which Reclamation would 
base its approval of water conservation plans. The final rules contain 
no requirement for plan approval, thus, the final rules do not 
incorporate Reclamation's advisory guidance on water conservation in a 
regulatory fashion.
    Comment: The draft EIS states that ``ultimately, the rules and 
regulations, when published as final rules, will replace the Guidelines 
and Criteria.''
    Response: This statement was true for alternatives B and C, but not 
the proposed rule alternative. Alternatives B and C incorporated 
elements of the draft Guidelines and Criteria as integral parts of the 
proposed rules. Under these alternatives, the final rules would 
eventually replace the Guidelines and Criteria. The proposed rule 
alternative characterized the proposed rules and draft Guidelines and 
Criteria as separate, related documents. Under the proposed rule 
alternative, the Guidelines and Criteria would have provided guidance 
in addition to the rules. The final rules published today do not 
replace the advisory guidance.

Relationship With Other Laws and Mandates

    Comment: The proposed rules document declares:

    * * *any future actions taken pursuant to final rules and 
regulations by the Federal Government or by contracting entities 
(e.g., irrigation districts, drainage districts, municipal and 
industrial water districts, etc.) shall be subject to the 
requirements of all applicable Federal environmental laws including, 
but not limited to, the NEPA, the Endangered Species Act, the Fish 
and Wildlife Coordination Act, the Clean Water Act, and the National 
Historic Preservation Act, and laws relating to Indian treaty and 
trust responsibilities.
    Just this list of compliance requirements alone will paralyze 
districts, defeating Reclamation's purpose.

    Response: The above statement was included in the preamble to the 
proposed rules, but does not add to a district's existing obligations. 
The statement was intended to convey the message that nothing in the 
proposed rules would nullify any applicable requirements of these laws.
    Comment: Both the publication of the rules and the EIS constitute 
major Federal regulatory actions which together will impose massive 
additional unfunded Federal mandates upon local governments and private 
businesses and individuals. Such action violates the spirit and intent 
of Public Law 104-4, which was signed into law on March 22, 1995.
    Response: Reclamation has reviewed these final rules and determined 
that the rulemaking meets all of the requirements set forth in the 
Unfunded Mandates Reform Act of 1995. The final rules do not impose 
additional unfunded Federal mandates and, in fact, reduce some RRA 
forms requirements contained in the prior rules and regulations.

Water Rights and Contracts

    Comment: While farmers have contracts for delivery of water from 
Reclamation irrigation projects, the water users themselves hold the 
rights to the use of the water. It is these private property rights to 
the use of water that could be impaired or essentially taken if the 
water users in the district do not accept or satisfy new contract 
requirements and regulation changes that would be mandated by the 
proposed rules and regulations.
    Response: The final rules contain no provisions that would directly 
affect any privately held property rights to the use of water or that 
would affect contract language with regard to privately held property 
rights to the use of water.
    Comment: We believe that the proposed rules and regulations would

[[Page 66761]]

attempt to exert undue Federal influence through monetary incentives or 
penalties and through contractual requirements for water contract 
renewals in order to reallocate water from traditional uses such as 
irrigation to nontraditional purposes such as instream flow.
    Response: Neither the proposed nor final rules contain any monetary 
incentives, penalties, or requirements for water contract renewals that 
would result in the reallocation of water from traditional uses such as 
irrigation to purposes such as instream flow. The final regulations do 
not adopt any provisions regarding the use or reallocation of conserved 
water.
    Comment: The new rules allow for unlimited charges to be imposed on 
farmers with no studies being done to determine ability to pay.
    Response: The final rules do not allow unlimited charges. The final 
rules do not affect application of the statutory ``ability to pay'' 
concept to project repayment costs.
    Comment: The proposed rules mandate compliance with the water 
conservation plan requirements imposed by the proposed rules and 
Guidelines and Criteria. Failure to comply, according to the proposed 
rules, will result in the cancellation or refusal to renew storage 
contracts, thereby depriving the irrigation water users of established 
rights. Such action will constitute a ``taking'' of a constitutionally 
protected property right in violation of the United States 
Constitution.
    Response: The proposed rules would have provided that Reclamation 
consider a district's progress in development and implementation of 
water conservation plans when prioritizing the allocation of ``future 
discretionary Reclamation program benefits.'' In the proposed rules, 
the description of this type of benefit included future, temporary, or 
short- term contracts and Warren Act contracts that Reclamation has the 
discretion to provide. In the final rules, this provision has been 
deleted. The final rules do not adopt any provisions calling for 
refusal to renew storage contracts.

Westwide Nature

    Comment: The rules should not be implemented in a ``one-size-fits-
all'' manner. The regulations and their enforcement must be flexible 
and adaptable to meet various situations in a practical way. We 
strongly urge that rules and regulations be developed and applied 
locally, rather than on a westwide basis.
    Response: The rules and regulations implement the requirements of 
the RRA. The law contains specific requirements that are to be applied 
in a consistent fashion on a westwide basis. Where the law does allow 
for flexibility, this flexibility has been integrated into the rules 
and regulations.
    Comment: I am concerned that the settlement agreement reached with 
NRDC over litigation on water management practices in California is now 
dictating Reclamation policy westwide, into areas which have very 
different water issues and concerns. All of your water contractors 
outside of California are now having to comply with settlement 
provisions on which they had no opportunity to comment or to 
participate in the development of the conditions.
    Response: The settlement agreement did not require Reclamation to 
consider issues of concern only in California. Neither the proposed nor 
the final rules were written to address specific concerns in California 
or any other geographic area, but were written to implement the 
requirements of the RRA imposed by the Congress on all areas westwide. 
Water contractors and the public were provided ample opportunity during 
the scoping process to provide written and oral comments on what should 
be considered in the proposed rules and EIS.

General

    Comment: Reclamation has the responsibility to protect and restore 
the environment and the authority to allocate water for fish and 
wildlife purposes under a variety of statutes and treaties, including 
the Endangered Species Act, the Northwest Electric Power Planning 
Conservation Act, the Grand Canyon Protection Act, and treaties with 
Native American tribes. Reclamation needs to develop new strategies and 
mechanisms to ensure that efficiency improvements do benefit the 
environment rather than simply increasing consumptive uses.
    Response: Reclamation takes seriously its responsibility to protect 
and restore the environment and has some responsibility to allocate 
water for fish and wildlife purposes under certain statutes and 
treaties. Reclamation will also encourage districts to consider 
environmental uses of conserved water.
    Comment: The rule should have an increased emphasis on important 
nonconsumptive uses of water. While it is necessary to maintain 
flexibility in the rule it is also critical to provide mechanisms that 
strongly encourage water users to provide adequate water flows to 
support fish and wildlife.
    Response: A rule can provide mechanisms to encourage a desired 
response by the affected public, but these mechanisms must fall within 
the intent of the authorities upon which the rules are based. The RRA 
and other referenced authorities provide limited opportunity to develop 
regulatory mechanisms that encourage water users to provide water flows 
to support fish and wildlife. As resources permit, Reclamation will 
provide technical and financial assistance to districts in the 
development and implementation of water conservation plans. As part of 
this assistance, Reclamation will encourage districts to look at all 
water needs including non-consumptive uses and flows to support fish 
and wildlife.
    Comment: The rule should not treat the issues of water spreading 
and incentive pricing as ``beyond the scope.''
    Response: These rules and regulations implement the acreage 
limitation and water conservation provisions contained in the RRA and 
other related laws. ``Water spreading,'' which is generally defined as 
the unauthorized use of project water, may involve acreage limitation 
or reporting issues. Those issues are addressed through the acreage 
limitation provisions of these rules. However, the majority of what is 
considered to be ``water spreading'' is not an acreage limitation or 
water conservation issue and is, therefore, not addressed by this 
rulemaking. Incentive pricing is a water pricing issue, a contracting 
issue, and a water conservation issue. Incentive pricing was included 
as an alternative in the EIS and was considered in this rulemaking.
    Comment: We believe the old rules probably are as workable as is 
possible in trying to put this together on an overall basis. The 
public's best interest would be served if there would be no changes in 
the prior rules and regulations.
    Response: Reclamation received many comments stating that the prior 
rules were acceptable, widely understood, and should be retained. In 
the proposed rule, Reclamation attempted to improve the clarity of many 
regulatory provisions, include current Reclamation policies that were 
not part of the prior rule, and respond to public criticism over past 
interpretation of some provisions of the law. In some cases, public 
comments indicated that the proposed changes could create additional 
problems or could cause problems for entities that should not be 
affected by the changes. Reclamation has reviewed each proposed change 
in light of public comments and has

[[Page 66762]]

addressed those comments in the content of each section. In many cases, 
Reclamation has made changes for clarity while making no substantive 
change in the provision, or merely codifying existing policy.

Part 426 (Acreage Limitation)--Summary of Changes; Public Comments 
and Responses

    This section of the preamble describes changes from the prior 
acreage limitation rules to the final acreage limitation rules, 
provides examples of how the new provisions would be applied, and 
provides responses to public comments received on the proposed rules.

Redesignation Table

    A number of changes have been made to the location and titles of 
the various sections of the Acreage Limitation Rules and Regulations. 
The following provides an overview of these changes. More detailed 
information is provided in the section-by-section analysis.

----------------------------------------------------------------------------------------------------------------
                                                            Revision(s) made to old                             
        Section No.                   Old title                      title                     New title        
----------------------------------------------------------------------------------------------------------------
426.1......................  Objectives.................  Renamed...................  Purpose.                  
426.2......................  Applicability..............  Removed...................  Definitions.              
                                                                                                                
426.3......................  Authority..................  Removed...................  Conformance to the        
                                                                                       discretionary provisions.
426.4......................  Definitions................  Moved to Sec.  426.2......  Attribution of land.      
426.5......................  Contracts..................  Moved to Sec.  426.3 and    Ownership entitlement.    
                                                           renamed.                                             
426.6......................  Ownership entitlement......  Moved to Sec.  426.5......  Leasing and full-cost     
                                                                                       pricing.                 
426.7......................  Leasing and full-cost        Moved to Sec.  426.6......  Trusts.                   
                              pricing.                                                                          
426.8......................  Operation and maintenance    Moved to Sec.  426.23 and   Nonresident aliens and    
                              (O&M) charges.               renamed.                    foreign entities.        
426.9......................  Class 1 equivalency........  Moved to Sec.  426.11.....  Religious or charitable   
                                                                                       organizations.           
426.10.....................  Information requirements...  Moved to Sec.  426.18 and   Public entities.          
                                                           renamed.                                             
426.11.....................  Excess land................  Moved to Sec.  426.12.....  Class 1 equivalency.      
426.12.....................  Excess land appraisals.....  Moved to Sec.  426.13.....  Excess land.              
426.13.....................  Exemptions.................  Moved to Sec.  426.16 and   Excess land appraisals.   
                                                           renamed.                                             
426.14.....................  Residency..................  Removed...................  Involuntary acquisition of
                                                                                       land.                    
426.15.....................  Religious and charitable     Moved to Sec.  426.9 and    Commingling.              
                              organizations.               renamed.                                             
426.16.....................  Involuntary acquisition of   Moved to Sec.  426.14.....  Exemptions and exclusions.
                              land.                                                                             
426.17.....................  Land held by governmental    Moved to Sec.  426.10 and   Small reclamation         
                              agencies.                    renamed.                    projects.                
426.18.....................  Commingling................  Moved to Sec.  426.15.....  Landholder information    
                                                                                       requirements.            
426.19.....................  Water conservation.........  Moved to 43 CFR Part 427..  District responsibilities.
426.20.....................  Public participation.......  Moved to Sec.  426.22.....  Assessment of             
                                                                                       administrative costs.    
426.21.....................  Small reclamation projects.  Moved to Sec.  426.17.....  Interest on underpayments.
426.22.....................  Decisions and appeals......  Moved to Sec.  426.24 and   Public participation.     
                                                           renamed.                                             
426.23.....................  Interest on underpayments..  Moved to Sec.  426.21.....  Recovery of operation and 
                                                                                       maintenance (O&M) costs. 
426.24.....................  Assessment of                Moved to Sec.  426.20.....  Reclamation decisions and 
                              administrative costs.                                    appeals.                 
426.25.....................  Severability...............  Moved to Sec.  426.26.....  Reclamation audits.       
426.26.....................  Not applicable.............  Not applicable............  Severability.             
----------------------------------------------------------------------------------------------------------------

Part 426  General Comments

    Comment: Several commenters noted that the revisions to the acreage 
limitation provisions are not necessary. If revisions are made, they 
should be kept to a minimum; in certain areas such as leases, trusts, 
involuntary acquisitions, etc., no changes should be made.
    Response: Reclamation believes that changes can be made to the 
prior rules that will ease certain burdens placed on districts and 
landholders and will answer questions that have arisen with regard to 
application of the acreage limitation provisions. The prior rule has 
been rewritten to state requirements more clearly and in plain English. 
In addition, certain possible abuses to the system have been addressed. 
Reclamation believes the comments received have allowed these 
regulations to be revised to improve the regulatory effectiveness of 
the program without creating unnecessary burdens.
    Comment: Several commenters asked that Reclamation provide greater 
flexibility in the administration of the RRA. For example, one 
commenter suggested that area offices be allowed to modify the rules to 
meet local needs. Other commenters suggested that Reclamation should 
exercise greater flexibility to reward consistent payment of bills or a 
good environmental record.
    Response: The RRA requires Reclamation to establish westwide 
standards for such things as ownership and nonfull-cost entitlements, 
and RRA forms threshold, (e.g., 43 U.S.C. 390cc through 390ff). 
Therefore, Reclamation must administer the acreage limitation 
provisions consistently westwide. Even if Reclamation could establish 
regulations on a project-by-project basis, the westwide nature of the 
statute and the resultant costs on both Reclamation and districts to 
administer such a program do not allow for such an action.
    Comment: Several commenters wanted assurance that any changes to 
the regulations would not be applied retroactively. In addition, a 
number of commenters wanted any changes to the rules either phased-in 
or accompanied with a grace period.
    Response: Reclamation has taken these comments into account by 
providing for an effective date of January 1, 1998, except for the RRA 
forms submittal threshold, which will be effective January 1, 1997. The 
January 1, 1998, effective date was established to provide all 
interested parties with an opportunity to review the final regulations 
and initiate any actions that would be advantageous for them.
    Comment: The proposed regulations include numerous examples in the 
preamble rather than in the body of the rules. If it is determined 
that, as a matter of style, the examples should be kept physically 
separated from the text of the

[[Page 66763]]

rules, there should be a statement to the effect that the examples are 
incorporated by reference into the text of the final regulations.
    Response: The examples have been included in the preamble of this 
final rulemaking. However, the examples were purposely removed from the 
text of the rule because Reclamation reconsidered its previous position 
and decided that regulations should not be promulgated through 
examples. The examples are included in the preamble strictly for 
illustrative purposes.
    Comment: A forced sale results in a taking of property without 
appropriate compensation.
    Response: Nothing in these regulations results in forcing 
landowners to sell their land or water rights. These rules address who 
may receive irrigation water and what water rate must be paid. In the 
case of recordable contracts, landowners voluntarily agree to sell 
excess land in order to receive a benefit from Reclamation, namely, the 
delivery of irrigation water to land that is otherwise ineligible to 
receive such water.
    Comment: Several commenters noted that training will be needed on 
the new regulations.
    Response: Reclamation plans to hold westwide training for district 
and Reclamation staff.

Section 426.1. Purpose

    The final rule changes the title of this section from Objectives to 
Purpose. The regulatory text has been rewritten to include a 
straightforward statement as to the purpose of these regulations.
    No comments were received concerning this section.

Section 426.2. Definitions

    The prior section on applicability is removed. Because the rule's 
scope of effect is not the same for the various provisions of the 
regulations, Reclamation has determined that the best approach is to 
have each section speak for itself as to its applicability. Section 
426.2 defines terms used in the regulation and replaces Sec. 426.4 of 
the prior regulations.
    Numerous changes are made to the definition section, most with the 
intent of clarifying existing policy. The more significant of the 
changes, that were also included in the proposed rules, are discussed 
as follows in alphabetical order:
    Acreage limitation entitlement, acreage limitation provisions, and 
acreage limitation status are added to the regulations to add precision 
and to replace the compound term ownership limitation and pricing 
restrictions.
    Arable land is deleted because the term's only use is within the 
definition of irrigable land. The term arable land was included in the 
prior rules because the definition of irrigable land is based on one 
more useful for formal land classification purposes. Reclamation has 
determined that a simpler definition of the term irrigable land is 
appropriate for this regulation, and, therefore, a definition of the 
term arable land is unnecessary.
    Commissioner is added to define a term that is used in these 
regulations.
    For conciseness only, the two sentences in the definition of the 
term contract have been merged. In addition, the term agreement was 
added to broaden the definition to ensure all arrangements between 
Reclamation and water users that may be subject to application of the 
acreage limitation provisions are captured.
    Contract rate is changed to reflect awareness of the fact that many 
contracts do not include per acre or per acre-foot rates. For purposes 
of this part, however, contract rate means such a rate on a per acre or 
per-acre-foot basis.
    Direct and indirect are defined in this final regulation because 
they are used in the RRA and are frequently used in the text of the 
regulation. The terms apply in situations wherein land is held directly 
by a landowner or lessee, or indirectly by a party that has a 
beneficial interest in an entity that is a landowner or lessee (such as 
a stockholder, partner, or trust beneficiary).
    Discretionary provisions of Title II is replaced with discretionary 
provisions. Also, Section 203(b) is excepted from this definition, 
since it applies even to prior law districts and landholders. Finally, 
United States Code (U.S.C.) citations are substituted, as they are more 
useful in locating the relevant statutes.
    District is changed to replace the phrase eligible to contract with 
can potentially enter into a contract, in order to avoid the use of the 
term eligible, which has its own specific meaning under part 426.
    Eligible is included to reflect its common meaning among those 
familiar with acreage limitation provisions: the right to receive 
irrigation water without consideration of the price paid for that 
water. This definition can be compared with that of ineligible.
    Exempt land is replaced with the term exempt primarily because that 
term can be applied to districts and certain types of landholders 
(e.g., trusts and public entities), as well as to specific land 
parcels.
    Extended recordable contract is added to define a term that is used 
in these regulations.
    In the definition of the term full cost, Secretary is changed to 
Reclamation. 
    Full-cost rate and full-cost charge are defined to differentiate 
between the two terms.
    The reference to the Internal Revenue Code is deleted from the 
definition of individual because that concept is covered in the 
definition of dependent.
    Ineligible is added to reflect that term's common meaning among 
those familiar with acreage limitation provisions: the lack of 
eligibility to receive irrigation water at any price. This definition 
can be compared with that of eligible.
    Intermediate entity is added to define a term used in these 
regulations.
    Involuntary acquisition is added to define a term used in these 
regulations.
    Irrevocable elector is added to define a term that is used in these 
regulations.
    Irrigable land is changed to be more concise and understandable. 
The phrases from the prior regulation excluding permanent buildings, 
etc., are transferred to the definition of nonexempt land.
    Landholder is modified to delete the references to the terms 
qualified recipient, limited recipient, and prior law recipient, 
because not all landholders fall into these categories (i.e., trusts 
and public entities). The terms directly and indirectly have been added 
to the definition to clarify which landowners and lessees are 
considered to be landholders.
    Landholding has been greatly simplified. The final definition is 
clearer, and takes advantage of the new term nonexempt land. It should 
be noted that involuntarily acquired land is included within this 
definition of landholding.
    Nondiscretionary provisions is modified to eliminate the reference 
to Title II, to include Section 203(b), and to include the United 
States Code citation. The second sentence of the prior definition has 
been eliminated because that concept is covered elsewhere in the 
regulations.
    Nonexempt land is newly defined in these final regulations to 
replace the compound term irrigable and irrigation land. Nonexempt land 
is defined more precisely than irrigable and irrigation land, and is 
used as a concise term to describe, generally, all land subject to the 
acreage limitation provisions of Federal reclamation law.
    Nonfull-cost entitlement is modified to enhance clarity by 
including the defined term nonfull-cost rate.

[[Page 66764]]

    Nonresident alien entitlement is eliminated because, under the 
final rules, nonresident aliens will be treated as prior law 
recipients, unless certain criteria have been met. See Sec. 426.8.
    Operation and maintenance costs or O&M costs is newly defined in 
order to clarify the types of activities that are included in the 
calculation of operation and maintenance costs.
    Ownership entitlement is added to define a term that is used in 
these regulations.
    Prior law is modified primarily to include United States Code 
citations.
    Public entity is added to define a term that is used in these 
regulations.
    Qualified recipient is modified to include married couples in which 
only one spouse is a U.S. citizen or resident alien.
    Reclamation is added to define a term that is used in these 
regulations.
    Reclamation fund is modified to eliminate unnecessary language.
    RRA is added. This term is used throughout the regulations as it is 
concise and well understood by most readers.
    Standard certification or reporting forms is added to define a term 
that is used in these regulations.
    Title II is eliminated in favor of a definition of the term RRA 
which is used throughout these regulations.
    The following changes to definitions included in the final rules 
were not reflected in the proposed rules.
    Compensation rate was defined in proposed regulations to describe 
the full-cost charges applied to certain types of illegal irrigation 
water deliveries that are not discovered until after they have taken 
place. This was retained. In addition, it has been further revised for 
these final regulations to ensure it is understood that application of 
the full-cost rate is for the legal delivery of irrigation water to 
land that exceeds the nonfull-cost entitlement.
    As in the proposed rules, indirect is added. See the above 
discussion of the term direct. In the final rules it has been specified 
that lenders holding only a security interest in the land are 
specifically excluded from the definition of indirect.
    Again, as in the proposed rules, irrevocable election is changed to 
delete both the reference to Title II and the second sentence which 
presently contains additional explanation that is redundant with that 
contained in the text of the prior rule. The final version has been 
revised to make it clear that this term is referring to a process, not 
to any specific document.
    Irrigation land was modified in the proposed rule primarily to 
exclude land exempt from acreage limitation laws. Also, the phrase in a 
given water year is added to clarify that land which has received 
irrigation water retains irrigation land status for the entire water 
year, even if irrigation is not taking place at any particular time. 
The final rule includes an additional modification to ensure that any 
land receiving water for irrigation purposes from a Reclamation project 
facility will be counted against the landholder's acreage limitation 
entitlements. While this reflects current policy, Reclamation would 
like to ensure there is no confusion on this issue based on the 
regulatory definitions.
    Irrigation water was modified from the proposed version so that it 
would more closely reflect the statutory definition.
    Lease has been changed from the definition in the proposed rule and 
in the prior rule. The final definition revises the prior rule for 
clarity and to conform it with long standing Reclamation policy. It 
includes the same key elements Reclamation examined under the prior 
rule when determining if a farming arrangement is a lease, rather than 
focussing solely on possession of the land as had been proposed. After 
considering comments, Reclamation determined that this would not be 
workable.
    Specifically, when Reclamation examines a farming arrangement to 
determine if it is a lease Reclamation will consider who assumes the 
economic risk in the farming operation; who has the use or possession 
of the land; who is responsible for paying operating expenses; and who 
is entitled to receive the profits from the farming operation. Since 
most individuals or entities involved in a farming operation have use 
or possession of the land, the key element will often be if the 
operator in question also has assumed a portion of the economic risk. 
By contrast, if an individual has a typical forward contract, the 
economic risk is often shared by the landholder and the contracting 
company, but the contracting company has no use or possession of the 
land. This definition differs from the prior rule in that the prior 
rule contained the term ``use and possession''. Reclamation has become 
aware that this might lead to confusion if anyone felt that two 
separate elements must both be present. Reclamation has always 
construed the language such that either use or possession, together 
with economic risk, constituted a lease. Therefore, it has adopted the 
language to clarify this intent. This definition is not intended to 
have a different substantive effect than the prior rules and how the 
prior rules have been administered by Reclamation.
    In administering the nonfull-cost entitlement provision, 
Reclamation must determine if the farming arrangement constitutes a 
lease for acreage limitation purposes. In general, Reclamation must 
make this determination on a case-by-case basis. However, Reclamation 
has determined that most custom service arrangements in which only one 
narrow farm service is provided, or arrangements in which lenders hold 
only a security interest in the farming operation, usually do not 
constitute leases. On the other hand, Reclamation has determined that, 
consistent with current Reclamation interpretation, sharecropping 
arrangements are always leases for acreage limitation purposes.
    Some comments alleged that water users employ certain devices, such 
as the creation of trusts, as a means to avoid the acreage limitation 
provisions of the RRA. The proposed rulemaking sought to address these 
concerns by changing the definition of what constitutes a lease for the 
purposes of the acreage limitation provisions. To prevent circumvention 
of the RRA, Reclamation has treated farm operators as lessees subject 
to the acreage limitation provisions if the operator assumes the 
economic risk of the farming enterprise and has use or possession of 
the land. The proposed rulemaking focused on possession of the land. 
Under that proposed change, if someone other than the landowner has 
possession of the land, then Reclamation would determine that a lease 
subject to the acreage limitation provisions existed regardless of 
whether that person or entity also assumed the economic risk. One of 
the effects of that proposal may have been to treat certain operators 
of land held in trust as lessees.
    Based upon comments on the proposed rulemaking, Reclamation has 
determined that the proposed provision altering the definition of a 
lease is an inadequate means of addressing the concerns about 
compliance with the acreage limitation provisions of the RRA and could 
have produced unintended consequences. Many comments from the public 
raised concerns about the effects of such a change on custom service 
providers, specialty services, and lenders among others. Many comments 
noted that modern farm operators often provide the necessary equipment 
and services to farming operations that cannot be economically provided 
to only 960 acres if the farmer is to cover expenses and make a 
reasonable return on investment. Other comments noted that the proposed 
change would not

[[Page 66765]]

work and could be easily avoided. As a result of its review of the 
proposed rulemaking and the widely divergent comments received from the 
public, Reclamation has determined that seeking further public comment 
to an advance notice of proposed rulemaking is appropriate.
    As in the proposed rule, legal entity is broadened to include 
certain types of landholding arrangements whose status for acreage 
limitation purposes had been unclear under the prior regulation. The 
final rule clarifies the proposed definition, stating that trusts are 
included as legal entities only for purposes of RRA forms submission.
    The term nonproject water was added in the proposed rules in the 
commingling section to define a term that is used in these regulations. 
In the final rules this term was moved to the definitions section 
because it is found in multiple sections.
    Part owner was added in the proposed rule to define a term that is 
used in these regulations. The final rule retains the proposed rules' 
definition, but it has been revised to clarify that lenders, who only 
have a security interest and are not otherwise considered to be the 
landholder of the land, are not considered to be part owners for 
acreage limitation purposes.
    The definition of prior law recipient has been modified from the 
proposed version to eliminate the statement that nonresident aliens and 
entities not established under State or Federal law are always prior 
law recipients. The entitlements of nonresident aliens and foreign 
entities are now discussed in a separate section (Sec. 426.8).
    Water year is a new addition to the final rules that defines a term 
that is used in these regulations.

Comments Concerning Sec. 426.2--Definitions

    Comment: There is no authority to expand the definition of 
``district'' beyond that provided in RRA Section 202(2).
    Response: The definition in the final regulations mirrors the 
statutory definition, except that ``Secretary'' has been replaced with 
``United States.'' In addition, some explanatory language was included 
to explain exactly what types of contracts are included. The language 
in the final regulations is essentially the same as that found in the 
prior regulations. Reclamation does not intend to expand the definition 
beyond that provided in the statute.
    Comment: The definition of ``full cost'' or ``full-cost rate'' 
should clarify that the full-cost charge is the difference between the 
applicable nonfull-cost rate, which may include a capital component, 
and the full-cost rate, which includes the applicable interest 
component required by RRA.
    Response: Reclamation recognizes that there are various rates 
associated with the delivery of irrigation water, including, among 
others: contract rate, operation and maintenance rate, cost-of-service 
rate, and the full-cost rate. The definition of ``full-cost charge'' 
includes construction and interest, but not the operation, maintenance, 
and replacement component. The term ``full-cost rate'' includes the 
operation, maintenance, and replacement component as well as the 
components included in the ``full-cost charge.'' The term ``nonfull-
cost rate'' does not consistently include the same components. 
Accordingly, to state that the full-cost charge always represents the 
difference between the nonfull-cost rate and the full-cost rate would 
be incorrect for purposes of how ``full-cost charge'' is used in these 
rules.
    Comment: The use of the term ``beneficial interest'' in the 
definition of ``indirect'' is ambiguous. The definition should be 
clarified so that it does not allow the interpretation that a lender's 
security interest could be considered a beneficial interest. This can 
be accomplished by adding another sentence as follows: ``A security 
interest in a legal entity or in a land parcel shall not be considered 
an indirect interest or a beneficial interest under these 
regulations.''
    Response: This comment has been accommodated in the final 
regulations. Reclamation agrees that if a lender strictly has a 
security interest in a legal entity or a land parcel, that interest 
will not be considered a beneficial interest for purposes of 
attribution of the land.
    Comment: The ``irrigable land'' definition would be improved by 
citing the classification standards specified in the Class 1 
equivalency section of the rules.
    Response: This comment has not been accommodated in the final 
regulations. The classification standards have a different purpose from 
what is intended in the definition of irrigable land. Specifically, 
``irrigable land'' refers to the general concept of whether land can be 
irrigated. The Class 1 equivalency classification standards are much 
more precise, pertaining to the productive potential of the land. The 
commenter's suggestion, if incorporated, could create confusion.
    Comment: A commenter asked if the definition of ``irrigable land'' 
includes all land that has the legal right to receive water, the 
practical possibility of obtaining a legal right, or just the physical 
possibility of receiving the water presently or in the future? Another 
commenter suggested that if the definition included all such land, it 
represented a change from current Reclamation policy.
    Response: All land which is defined as irrigable must be included 
on RRA forms and counted against the landholder's acreage limitation 
entitlements. This includes all land that has the legal right to 
receive irrigation water, the practical possibility of obtaining a 
legal right, or just the physical possibility of receiving irrigation 
water presently or in the future. This is not a change from current 
Reclamation policy. If landholders do not want to report land for which 
irrigation water cannot be received, they need to work with their 
districts and Reclamation to have any unbuilt features removed from 
Reclamation's books. It should be noted that often land in areas not 
yet served with irrigation water is used to further distribute the 
construction costs and thus lower the per acre full-cost rate. In such 
cases, the landholders and districts will have to decide if higher 
full-cost rates are an acceptable trade-off for not having to include 
certain land on RRA forms.
    Comment: Terms such as ``irrigable land,'' irrigation land,''and 
``irrigation water,'' have common meanings that are different than what 
the regulations described for these terms. Therefore, other terms 
should be used.
    Response: While these terms have different meanings in different 
contexts, they are clearly defined in the definitions section for use 
when administering or complying with these regulations. Reclamation has 
tried to make the definitions consistent with other uses of the 
terminology to the extent possible.
    Comment: The ``irrigation water'' definition goes beyond the 
definition in the existing rules and the RRA. By deleting the phrase 
``pursuant to a contract with the Secretary'' from the definition, 
Reclamation is going beyond what is provided in the RRA and is 
attempting to extend its own regulatory authority without congressional 
approval.
    Response: Reclamation has changed the definition of the term 
``irrigation water'' in the final regulations to make it consistent 
with the RRA definition. Any land used for agricultural purposes that 
receives irrigation water subject to acreage limitations must be 
counted against the landholder's acreage limitation entitlements. 
Otherwise, such landholders could evade the acreage limitation 
provisions by applying such water on, for example, ineligible land.

[[Page 66766]]

Although Reclamation has made a change to the definition of 
``irrigation water'' to include the reference to contracts with 
Reclamation, Reclamation requires any land receiving irrigation water 
subject to acreage limitation to be included on the RRA forms (see the 
definition of ``irrigation land''). Land receiving such water in 
violation of contract provisions will count against the landholder's 
acreage limitation entitlements.
    Comment: To clarify treatment of involuntarily acquired land, the 
definition of ``landholder'' should be changed by adding: ``Landholding 
includes involuntarily acquired land, although involuntarily acquired 
land is not counted as part of a landholder's nonfull-cost entitlement, 
pursuant to the applicable regulations concerning involuntarily 
acquired land.''
    Response: This comment has not been accommodated in the final 
regulations. Section 426.14 concerning involuntarily acquired land 
clearly provides which water rate will be applied. Such land must be 
included on RRA forms. Reclamation believes the proposed addition would 
only confuse the issue of what land needs to be included on RRA forms, 
what water rate should be charged, etc.
    Comment: Reclamation received many comments on the proposed change 
to the definition of ``lease'' and criteria to determine whether a 
farming arrangement is considered a ``lease.''
    Response: Reclamation has not changed its interpretation of the 
term ``lease'' from the prior rules. It continues to treat as leases, 
arrangements which transfer ``economic risk'' and ``use or possession'' 
of land. To accommodate this change from the proposed rules, 
Reclamation used the language from Sec. 426.7(a)(1) in the prior 
regulations in the final rule definition of ``lease.'' Under existing 
policy, Reclamation examines economic risk, use, possession, who 
received the profits from the farming operation, and who is responsible 
for payment of the operating expenses, in determining if an arrangement 
is a lease. Since the commenters were generally supportive of how 
Reclamation presently examines farming arrangements Reclamation wanted 
to make sure that the current practices are clearly incorporated in the 
regulations.
    Comment: Some commenters suggested that custom operators, 
employees, lenders, etc. should be categorically exempted from the 
definition of a lease, while another commenter wanted to know at what 
point a custom operator becomes a lessee under the proposed definition 
of lease?
    Response: Reclamation will not consider the provision of a single 
service alone to be a lease for purposes of applying the nonfull-cost 
entitlement. While such operators have the use of the land while they 
are providing their services, they do not assume any of the economic 
risk associated with the production of the crop. Businesses and 
individuals providing multiple custom services will be considered on a 
case-by-case basis to determine whether they are lessees. In addition, 
lenders who only have a security interest in the farming operation will 
not be considered to be lessees.
    Comment: Several commenters believed that forward contracting 
arrangements should be categorically exempted from the definition of a 
lease.
    Response: A typical forward contract is one in which the landholder 
is guaranteed a market and price for specified production; the 
individual or entity that will receive the crop does not participate in 
any aspect of the actual growing of the crop. As such, a typical 
forward contract is not a lease for acreage limitation purposes because 
the contractor does not have use or possession of the land.
    Nevertheless, Reclamation did not provide a categorical exemption 
in the final regulations. As under the prior rules, each forward 
contracting arrangement will be considered on its own merits in order 
to determine whether it is a lease. Based on past experience, 
Reclamation expects the vast majority of forward contracting 
arrangements will not be considered leases, some arrangements will 
require minor modifications, and a few arrangements will be found to be 
leases.
    Comment: A few commenters suggested that family farming 
arrangements should be exempted from being a lease where only a few 
family members make the farming decisions, but the economic risk is 
shared by all the members of the family.
    Response: This comment was not accommodated. Whether a family 
farming operation will be considered to be a leasing arrangement will 
have to be determined on a case-by-case basis. Congress did not exempt 
family farms from the acreage limitation entitlements.
    Comment: ``Lease'' needs to be redefined in order to comply with 
and enforce the intent of acreage limitations.
    Response: Reclamation determined that the proposed definition of 
``lease'' would not efficiently meet Reclamation's intended goals and 
objectives. Reclamation believes the intent of reclamation law will be 
better met with the application of the criteria found in the prior 
rules. Reclamation agrees with comments that altering the definition of 
a lease in itself is an inadequate means of addressing the concerns 
about efforts to avoid the acreage limitation provisions of the RRA and 
could have produced unintended consequences. As a result of its review 
of the proposed rulemaking and the widely divergent comments received 
from the public, Reclamation has determined that seeking further public 
comment to an advance notice of proposed rulemaking is appropriate.
    Comment: A concern was expressed that for trusts the trustee must 
make farming decisions and, thus, might be considered to be the lessee, 
with application of the nonfull-cost entitlement.
    Response: Under the proposed rule, some trustees might have been 
treated as lessees. As discussed in the advance notice of proposed 
rulemaking published today, Reclamation is concerned about how trusts 
are treated. Under the rules adopted today, trustees will not be 
subject to application of the nonfull-cost entitlement with regard to 
land held in trust if the trust meets the criteria specified in 
Sec. 426.7 of the final regulations. However, Reclamation will publish 
an Advance Notice of Proposed Rulemaking on this subject with respect 
to some trusts with landholdings (owned and leased) in excess of 960 
acres.
    Comment: The terms ``organization'' and ``association'' do not have 
a clearly understood legal meaning and should be deleted from the 
definition of ``legal entity.''
    Response: This comment has been partially accommodated in the final 
regulations in that ``association'' has been removed. Reclamation finds 
``organization'' to be widely understood.
    Comment: The inclusion of the term ``trust'' in the definition of 
``legal entity'' will cause problems. If this inclusion is solely to 
ensure it is understood that RRA forms must be submitted for trusts, 
then that concept should be included in the Information Requirements 
section.
    Response: This comment was partially accommodated in the final 
regulations. The term ``trust'' was removed from the definition of 
``legal entity.'' A sentence was added to the end of this definition 
that states trusts will only be considered as legal entities with 
regard to the RRA forms requirements. Reclamation does not intend to 
provide trusts with any acreage limitation entitlements, and therefore, 
they are not subject to the limitations inherent in those provisions.

[[Page 66767]]

    Comment: In the definition of ``nonexempt land,'' it should be 
irrigable AND irrigation land, not irrigable OR irrigation land, since 
both are used in calculating the amount of nonexempt land.
    Response: This comment has been accommodated in the final 
regulations. Reclamation has added the word ``all'' and adopted the 
word ``and'' to indicate that both types of land must be included when 
calculating the amount of nonexempt land. This does not change 
Reclamation's longstanding interpretation of this term.
    Comment: The definition of ``part owner'' should use the term 
``legal entity'' not just ``entity,'' unless a different meaning is 
intended.
    Response: This comment has been accommodated in the final 
regulations.
    Comment: The definition of ``part owner'' should be clarified with 
another sentence that states: ``A holder of a security interest in a 
legal entity or land owned by a legal entity shall not be considered a 
part owner under these regulations.''
    Response: This comment has been accommodated in the final 
regulations.
    Comment: The definition of ``nonresident alien'' should be modified 
by adding ``a nonresident alien will be treated as the indirect owner 
of the land of which he is the beneficial owner through direct or 
indirect corporate (direct or indirect) ownership.''
    Response: Reclamation does not feel this addition is fully 
explanatory or necessary. Based on the comments received concerning the 
nonresident/foreign entity provisions, Reclamation added a new section 
to the rules to address the entitlements of such landholders. Please 
see the comments for the new Sec. 426.8.
    Comment: A definition of ``Preamble'' is needed that states: 
``Means the introduction to these regulations as concurrently published 
in the Federal Register, the text of which (including the examples) are 
designed to be read as the official explanatory material by Reclamation 
of these regulations.''
    Response: The preamble accompanying the rules constitutes 
explanatory material even without a definition.
    Comment: The definition of ``resident alien'' is unworkable due to 
the test used (Internal Revenue Code). Under that provision, a person 
can drift in and out of resident alien status. Reclamation should use 
the ``green card'' test instead.
    Response: Reclamation considered using Internal Revenue Code 
section 7701(b) as part of the 1987 rulemaking. Reclamation was aware 
that changes to the code were imminent as part of a 1986 statute. No 
major changes have occurred to the cited section since. Reclamation 
believes the definition with the reference to the Internal Revenue Code 
section is acceptable. One of the tests utilized by the cited section 
is the so-called ``green card'' test.
    Comment: Because of the way ``qualified recipient'' is defined in 
the RRA, Reclamation should not apply the excess land provision to 
anyone who holds less than the discretionary provisions entitlement. 
But, do not let such landholders receive water on land held above the 
prior law entitlements, unless they become subject to the discretionary 
provisions as provided for in Sec. 426.3.
    Response: The respondent appears to be requesting that Reclamation 
establish a new application of the acreage limitation entitlements. 
Specifically, the only ownership entitlements would be those created by 
the RRA under the discretionary provisions while the restrictions of 
RRA Section 203(b) would apply with regard to nonfull-cost 
entitlements. By doing this, certain landholders could sell land that 
is, in fact, excess under prior law provisions without price approval.
    Reclamation has not accommodated this comment in the final 
regulations. If a landholder would like the benefits that are 
associated with the discretionary provisions, specifically the larger 
ownership entitlement, then that landholder must conform to the 
discretionary provisions by making an irrevocable election or 
convincing the district to conform to the discretionary provisions.
    Comment: The term ``registered'' does not have a clear legal 
meaning when applied to legal entities. It should be deleted and 
replaced with either ``created'' or ``established'' throughout the 
regulations.
    Response: Reclamation has replaced ``registered'' with 
``established'' throughout the final regulations.
    Comment: What is meant by ``natural person''?
     Response: A ``natural person'' is a living human being.

Section 426.3  Conformance to the Discretionary Provisions

    The section in the prior regulations, entitled Authority, is 
removed because it is redundant with the authorities statement that 
immediately follows the table of contents. The new Sec. 426.3, 
Conformance to the discretionary provisions, replaces the prior 
Sec. 426.5 and adds a more precise description of the section's 
contents. This section has been generally rewritten to eliminate 
redundancy with other sections and paragraphs within the section. The 
main purpose of this section is to present what actions taken by a 
district or individual landholder will result in the district or 
landholder conforming to the discretionary provisions. The section also 
presents information on the effect of conforming to the discretionary 
provisions in terms of the rate that will be charged for irrigation 
water.
    The final rules retain the more general criteria provided in the 
prior rules with modifications to remove provisions that are no longer 
applicable. Unlike the proposed rule, specific contract actions are not 
specifically listed.
    Actions pursuant to the Reclamation Safety of Dams Act of 1978 are 
added to the list of items not considered to provide additional and 
supplemental benefits, as provided by statute.
    Paragraph (a) details under what conditions or actions an entire 
district will be considered to be subject to the discretionary 
provisions of the RRA. An addition has been made to these final rules 
as compared to the proposed rules in that (a)(2)(iii) has been revised 
to make clear that Reclamation will amend a contract to conform to the 
discretionary provisions if certain requirements are met. In addition, 
(a)(2)(iv) was added to make it clear that if a district wants to 
conform to the discretionary provisions it will not be required to make 
any other changes to its contract.
    Paragraph (b) categorically describes the conditions under which 
districts remain subject to prior law.
    A new standard RRA contract article is included under paragraph (c) 
to clarify any misconceptions concerning the applicability of the 
Acreage Limitation Rules and Regulations.
    Paragraph (d), The effect of a master contractor's and 
subcontractor's actions to conform to the discretionary provisions, of 
the final regulation has been rewritten for conciseness. The following 
examples illustrate the application of this paragraph:

     Example (1). Assume Districts A, B, and C are members of a 
water conservancy district which entered into a master contract with 
the United States prior to October 12, 1982. The water conservancy 
district has allocated all the irrigation water made available to it 
under the master contract to Districts A and B, pursuant to pre-
October 12, 1982, subcontracts with the conservancy district to 
which the United States is a party. The irrigation water is not made 
available to District C or any other districts or landholders within 
the water conservancy district. Consequently, Districts A and B are 
subject to the acreage limitation and pricing provisions of prior 
law. Districts A and B may amend their subcontracts to conform to 
the discretionary provisions without making

[[Page 66768]]

it necessary for the conservancy district or the other 
subcontracting entity with the conservancy district to so amend 
their contract or the subcontract.
     Example (2). Assume District XYZ has a pre-October 12, 1982, 
contract with the United States for the delivery of irrigation 
water. The district also has allocated that irrigation water 
pursuant to subcontracts with six subcontracting entities. However, 
the United States is not a party to these subcontracts. A 
subcontractor may choose to conform to the discretionary provisions 
only if it makes the United States a party to the subcontract. Such 
action will not require the prior law master contractor or the other 
subcontractors to so amend.
    Example (3). Assume District A, a master contracting agency, 
executes a water service contract with the United States after 
October 12, 1982. The irrigation water is to be delivered to only 
two of the eight member agencies within District A. Subcontracts are 
executed between District A, the United States, and each of the two 
member agencies to provide irrigation water service to the two 
member agencies. In this instance, the discretionary provisions 
become applicable to only the two member agencies which execute 
subcontracts with District A and the United States.

    Paragraph (e), which is new, explains the effect on a landholder's 
status of a district becoming subject to the discretionary provisions. 
While this paragraph goes on to explain how Reclamation treats direct 
and indirect landholdings of nonresident aliens and foreign entities in 
districts conforming to the discretionary provisions, the final version 
of this paragraph has been revised to reflect the addition of the new 
Sec. 426.8 that discusses entitlements for nonresident aliens and 
foreign entities.
    Paragraph (f) expands on the prior rules' discussion of individual 
elections to address the effects of elections by part owners on 
entities and vice versa. It also explains how certain indirect 
landholders in districts with an amended contract can conform to the 
discretionary provisions by simply submitting a certification form.
    Paragraph (g) provides that districts may rely on the information 
included on the irrevocable election form.
    Paragraph (h) highlights how irrevocable elections made between 
April 12, 1987, and May 13, 1987, will be treated.

Comments Concerning Sec. 426.3--Conformance to the Discretionary 
Provisions

Section 426.3(a)
    Comment: The proposed rules seem to provide that Reclamation has 
discretion as to whether to accept a district's action to conform to 
the discretionary provisions.
    Response: A change has been made to Sec. 426.3(a)(2)(iii), to make 
it clear that if the stated requirements have been met, Reclamation 
will amend the contract to allow the district to conform to the 
discretionary provisions.
    Comment: One commenter wanted the effective date of a district's 
request to conform to the discretionary provisions to be the date of 
Reclamation's approval, not the date of the district's request. This 
could avoid problems with the pricing of water, etc., if Reclamation 
should take some time to approve the request.
    Response: This comment has not been accommodated in the final 
regulations. Reclamation believes the beneficial effect for landholders 
of conforming to the discretionary provisions outweighs the 
difficulties the district may encounter if a request should not be 
approved. It is in the district's control as to whether or not the 
criteria specified in Sec. 426.3(a)(2) have been met when the district 
submits its request. If the criteria have been met, the district should 
consider itself subject to the discretionary provisions when it submits 
its request because Reclamation will approve that request.
    Comment: Districts that have been paid out should not be again 
placed under the acreage limitation restrictions if they receive some 
additional or supplemental benefit.
    Response: If a district is paid out, it is no longer subject to the 
acreage limitation provisions. A paid out district would normally enter 
a new contract if the United States provided new, additional, or 
supplemental benefits. New repayment contracts trigger the 
Discretionary Provisions under Sec. 203 of the RRA.
    Comment: Some commenters thought too much discretion remains as to 
what will be considered an additional or supplemental benefit that 
requires conformance to the discretionary provisions. All contract 
actions that provide for supplemental or additional benefits should 
require conformance to the discretionary provisions, no matter how 
minor the benefit. On the other hand, other commenters believed that a 
district that receives a supplemental benefit should not be required to 
conform to the discretionary provisions.
    Response: The final regulations include both contract amendments 
and other types of contract actions as providing additional or 
supplemental benefits. However, some contract actions primarily benefit 
Reclamation, and Reclamation does not want to discourage such 
amendments. The statute requires, and these regulations implement, a 
program where only such actions which confer additional or supplemental 
benefits to the district require conformance with the discretionary 
provisions of the RRA.
    Comment: Commenters suggested that in approving water transfers the 
transferees should pay a rate sufficient to eliminate any operating 
losses to the United States, and the language of the regulations should 
be changed to reflect this suggestion.
    Response: The discussion of water transfers concerns only those 
made on an annual basis as they relate to additional and supplemental 
benefits. Reclamation's long standing policy has been to encourage 
efficient use of water through water transfers.
    Comment: Water transfers should not be considered an additional or 
supplemental benefit if a portion of the transferred water is used for 
fish and wildlife purposes.
    Response: This comment has not been accommodated in the final 
regulations. However, if the transfer only benefits fish and wildlife, 
then in most cases the transfer would not be considered an additional 
or supplemental benefit to the district.
Section 426.3(c)
    Comment: The new paragraph in the standard contract article is not 
required or authorized by the RRA. However, if it should be retained, 
then it should include the rest of the language that was used in the 
Central Valley Project interim renewal contracts.
    Response: Reclamation has accepted part of the commenters' 
suggested change. The accepted language assures Reclamation's 
contractors that Reclamation will make deliberative decisions.
    Comment: Since the terms of Federal reclamation law include rules 
and regulations adopted pursuant to the Administrative Procedure Act, 
it is unnecessary to add reference to the rules and regulations within 
the first paragraph of the standard contract article.
    Response: This comment has not been accommodated in the final 
regulations. The subject language may be unnecessary, but it has been 
retained for the benefit of those who may not be aware that the terms 
of Federal reclamation law encompass the regulations.
    Comment: The reference to ``implied provisions'' in the new clause 
should be removed.
    Response: Reclamation agrees that the standard contract article may 
not be clear. Reclamation has revised the standard contract article to 
ensure that all contract provisions may be

[[Page 66769]]

administered by replacing ``expressed and implied'' with ``all.''
Section 426.3(e)
    Comment: Landholders are supposed to conform automatically to the 
discretionary provisions when a district conforms.
    Response: In general, this is a true statement. However, the 1987 
rules allowed indirect landholders in discretionary districts to choose 
between being subject to the discretionary or prior law provisions. 
This provision has been clearly stated on the cover of the RRA forms 
booklet and is continued under these final regulations.

Section 426.4  Attribution of Land

    Section 426.4 in the prior regulations, Definitions, is renumbered 
as Sec. 426.2. A new Sec. 426.4, entitled Attribution of land, is 
intended to clarify how Reclamation attributes land to direct and 
indirect landholders. It does not change existing policy regarding how 
land is attributed for entitlement purposes, but sets forth a concise 
summary. No significant changes were made from the proposed rule.
    Paragraph (a) establishes the general rule that individuals and 
entities cannot enhance their entitlements or eligibility through the 
creation or acquisition of legal entities. For example, a prior law 
recipient could not increase his or her 160-acre ownership entitlement 
(see Sec. 426.5) by creating or acquiring an interest in a qualified 
recipient legal entity. Such a prior law recipient will need to conform 
to the discretionary provisions (through district contract action or 
individual irrevocable election) in order to realize an increase in his 
or her entitlements.
    Paragraph (b) establishes that, for purposes of acreage limitation 
entitlements, owned land is attributed to each indirect landholder 
proportionally based on that landholder's interest.
    Paragraph (c) establishes that leased land counts against the 
entitlements of both the owner and the lessee.
    Paragraph (d) establishes that if a series of legal entities has 
ownership relationships with each other, Reclamation will attribute 
proportionately the land to each such entity. Paragraph (e) addresses 
how land that is owned by a landholder and then is indirectly leased by 
the same landholder will be counted by that landholder.
    Paragraph (f) acknowledges that irrigation water cannot be 
delivered to a legal entity without benefiting all indirect owners of 
undivided interests in that entity; therefore, all such indirect owners 
must be eligible in order for the entity to be eligible.
    If the interests of the entity's indirect owners are divided, 
however, then the district could deliver irrigation water to the entity 
without necessarily benefiting all such owners. In this situation, it 
may be possible to deliver irrigation water to a portion of the 
entity's landholding even if one or more of the entity's indirect 
owners is not eligible.
    The following examples illustrate the application of Sec. 426.4:

    Example (1). Corporation A is a limited recipient that did not 
receive water on or before October 1, 1981, and therefore, is not 
entitled to receive irrigation water at a nonfull-cost rate (see 
Sec. 426.6). Such an entity may not gain entitlement to receive 
irrigation water at a nonfull-cost rate by acquiring Corporation B, 
an entity that received water on or before that date. If the latter 
entity were so acquired, irrigation water could be delivered to the 
entities' landholding only at the appropriate full-cost rate.
    If the entities' roles in the preceding example were reversed 
(that is, if Corporation B acquired Corporation A), the landholding 
of Corporation A could be irrigated only at the appropriate full-
cost rate as long as Corporation A continued to exist. In this case, 
it should be noted that Corporation B, which is eligible to receive 
irrigation water at a nonfull-cost rate on up to 320 acres, could 
potentially receive nonfull-cost irrigation water on other land in 
its holding that is not held through Corporation A. However, any 
land held by or through Corporation A could be irrigated only at the 
full-cost rate.
    If Corporation A were to go out of existence, then the land 
formerly held by Corporation A would be directly held by Corporation 
B and could be irrigated at the nonfull-cost rate on up to 320 
acres, if so selected by Corporation B.
    Example (2). Corporation C is a qualified recipient which owns 
and irrigates 500 acres. Corporation C is subsequently acquired by 
Corporation D, a limited recipient which received irrigation water 
on or before October 1, 1981, but which currently has no 
landholdings other than Corporation C's 500 acres. On the date of 
acquisition, Corporation C becomes a limited recipient because it 
benefits all the stockholders of Corporation D. Since Corporation C 
becomes a wholly owned subsidiary of Corporation D, all of its 
direct and indirect landholdings will be attributed against 
Corporation D's 640-acre ownership entitlement (see Sec. 426.5) and 
320-acre nonfull-cost entitlement (see Sec. 426.6). Therefore, if 
all 500 acres are irrigated, the full-cost water rate must be paid 
for water delivered to 180 of those acres (500 acres-320 acres).
    Example (3). The trustees of five irrevocable trusts, each of 
which have six natural persons as beneficiaries, form a partnership 
that holds land subject to the acreage limitation provisions in a 
discretionary district. In order to determine if that partnership is 
a limited or qualified recipient, it is necessary to ascertain how 
many natural persons will benefit from the partnership. In this 
case, 30 natural persons will benefit (none of the trust 
beneficiaries benefit from more than one trust) and, therefore, the 
partnership has the acreage limitation status of limited recipient. 
Although the five trusts are not limited in the amount of land they 
can hold and receive irrigation water at the nonfull-cost rate 
(other than through the entitlements and holdings of their 
beneficiaries), the acreage limitation status of the partnership 
will limit how much land can be held through that entity by the 
trusts and receive such water.
    Example (4). Assume Trust A has two beneficiaries, beneficiary A 
and beneficiary B. Beneficiary A has a 60 percent interest in the 
trust, and beneficiary B has a 40 percent interest. Trust A owns 800 
acres of nonexempt land. Beneficiary A must attribute 480 acres 
toward her ownership entitlement, and beneficiary B must attribute 
320 acres toward his ownership entitlement.
    Example (5). Assume Corporation C wholly owns Corporation D, and 
that Corporation D owns a 60 percent interest in Corporation E. 
Corporation E leases 500 acres of irrigation land. Reclamation will 
attribute to Corporation E all 500 acres toward the company's 
nonfull-cost entitlement, and Corporations C and D must each 
attribute 300 acres toward their nonfull-cost entitlements.
    Example (6). Attribution to both owner and lessee is 
demonstrated by Farmer A who owns 400 acres of irrigation land which 
she leases to Farmer B. Farmer A must count all 400 acres towards 
her ownership and nonfull-cost entitlements, and Farmer B must count 
all 400 acres towards his nonfull-cost entitlement.
    Example (7). Farmer A owns 60 acres and leases that land to 
Corporation XYZ that leases a total of 200 acres. Farmer A also owns 
50 percent of Corporation XYZ. Farmer A would claim his 60 owned 
acres, but would not have to claim the entire 200 acres leased by 
Corporation XYZ. Instead, Farmer A would claim 70 acres leased by 
Corporation XYZ (200 acres minus the 60 owned acres, times the 50 
percent ownership interest). Accordingly, Farmer A would claim a 
total landholding of 130 acres. If Farmer B was the other part owner 
of Corporation XYZ and leased his 140 owned acres to that entity, 
his total claimed landholding would be 170 acres, which includes 30 
acres leased by Corporation XYZ (200 acres minus the 140 owned 
acres, times the 50 percent ownership interest).
    Example (8). Assume two qualified recipients, Farmer A and 
Farmer B, form a qualified recipient partnership with equal, 
undivided interests. Farmer A has no landholding outside the 
partnership, but Farmer B owns 960 acres of nonexempt and nonexcess 
land outside the partnership, and has therefore completed his 
ownership entitlement. The partnership has no remaining ownership 
entitlement, because any land irrigated by the partnership would 
cause Farmer B to exceed his ownership entitlement.
    If, however, the partnership agreement in this example provided 
that the partners' interests were separable and alienable, the

[[Page 66770]]

partnership could receive irrigation water on that land attributable 
to Farmer A. It would need to be shown that Farmer B does not 
benefit from the receipt of irrigation water by the partnership.

Comments Concerning Sec. 426.4--Attribution of Land

Section 426.4(b)
    Comment: Change Sec. 426.4(b)(2) of the proposed rule to read, 
``Indirect landowners in proportion to the indirect beneficial interest 
they own in the entity that directly or indirectly owns the land.''
    Response: This comment has not been accommodated in the final 
regulations. While Reclamation understands the addition of the word 
``indirectly'' Reclamation does not believe it is necessary, because 
indirect landholders have beneficial interest in the direct landholder 
even if there are one or more intermediate entities in existence. It is 
the proportion of interest held in the direct landholder by the 
indirect landholder that determines attribution.
Section 426.4(c)
    Comment: The provision in Sec. 426.4 to attribute all direct and 
indirect interest in land to a landholder's nonfull-cost entitlement is 
supported. However, a fundamental flaw exists because the burden of 
proof is on Reclamation to show that a farm larger than 960 acres must 
pay full cost on the acreage above 960 acres. It is inappropriate to 
place this burden on the government. Rather the recipients should be 
required to show that they qualify using tax returns and other 
documentation as appropriate. Reclamation should operate under the 
assumption that any farm or operation larger than 960 acres must pay 
full cost on acreage above 960 until any entitlement to nonfull-cost 
water is clearly proven in writing.
    Response: In fact, the burden of proof is with the landholder under 
both the final and prior rules. All landholders must submit RRA forms. 
If the forms indicate that a nonfull-cost entitlement is exceeded then 
full cost is applied. Farming operations that do not meet the 
definition of landholder are not required to submit RRA forms, because 
the statute does not support applying the acreage entitlements to them. 
Reclamation performs audits on all farming arrangements that exceed 
entitlements to ensure they are in fact not landholders. If any 
questions arise, the farm operators are required to submit 
documentation to prove they are not landholders.
Section 426.4(f)
    Comment: The rules should not provide that if one part owner is 
ineligible to receive irrigation water, the entire landholding is 
ineligible.
    Response: If one part owner is ineligible to receive irrigation 
water in an entity in which the interests of the part owners are not 
divided, then to allow the delivery of irrigation water to land held by 
that entity would result in the ineligible part owner receiving 
benefits to which that part owner is not entitled.

Section 426.5  Ownership Entitlement

    Section 426.5 in the prior regulations, Contracts, is renamed 
``Conformance to the discretionary provisions'' and renumbered 
Sec. 426.3. The new Sec. 426.5, Ownership entitlement, replaces 
Sec. 426.6 of the prior regulations. This section summarizes the 
ownership entitlements of individuals and most types of entities, and 
has been rewritten for conciseness. This section makes no substantive 
change in the prior regulations.
    All descriptions of what constitutes qualified, limited, and prior 
law recipients are deleted because they are redundant with the 
definitions found in Sec. 426.2. The trust discussion has been placed 
in a new Sec. 426.7. A new Sec. 426.8 has been created to address 
acreage limitation entitlements for nonresident aliens and legal 
entities not established under State or Federal law. The only 
significant change between the proposed rule and this final rule is to 
paragraph (d) as explained below.
    Paragraph (a) has been rewritten from the prior rules to achieve 
better organization and clarity. Included is language clearly stating 
that land leased from a public entity counts against the lessee's 
ownership entitlement. Moreover, the reference in the prior language to 
the regulation on Class 1 equivalency is deleted because that topic is 
addressed in the discussion of qualified and limited recipient 
entitlement.
    Paragraph (b) discusses the ownership entitlement for qualified 
recipients, while paragraph (c) discusses the ownership entitlement for 
limited recipients.
    Paragraph (d) discusses the ownership entitlement for prior law 
recipients. As in the proposed rule, this discussion is much more 
detailed than in the prior rules; specifically, the entitlements for 
surviving spouses and children are provided. The final rule includes a 
new paragraph (d)(3) that discusses how ownership entitlements for 
certain entities are calculated if the part owners interests are not 
equal.
    The following table summarizes the ownership entitlements specified 
in this section:

----------------------------------------------------------------------------------------------------------------
     If the landowner is a:         The size of his or her ownership  entitlement is:      Basis of computation 
----------------------------------------------------------------------------------------------------------------
Qualified recipient.............  960 acres or Class 1 equivalent......................  Westwide.              
Limited recipient...............  640 acres or Class 1 equivalent......................  Westwide.              
Prior law recipient and is a(n):                                                                                
    Individual..................  160 acres............................................  Westwide for land      
                                                                                          acquired after 12/6/  
                                                                                          79. District-by-      
                                                                                          district for land     
                                                                                          acquired on or before 
                                                                                          12/6/79.              
    Husband and wife who jointly  320 acres............................................  Westwide for land      
     own equal interest.                                                                  acquired after 12/6/  
                                                                                          79. District-by-      
                                                                                          district for land     
                                                                                          acquired on or before 
                                                                                          12/6/79.              
    Surviving spouse............  Up to 320 acres......................................  Westwide for land      
                                                                                          acquired after 12/6/  
                                                                                          79. District-by-      
                                                                                          district for land     
                                                                                          acquired on or before 
                                                                                          12/6/79.              
    Child.......................  160 acres............................................  Westwide for land      
                                                                                          acquired after 12/6/  
                                                                                          79. District-by-      
                                                                                          district for land     
                                                                                          acquired on or before 
                                                                                          12/6/79.              
    Joint tenancy or tenancy-in-  160 acres per tenant.................................  Westwide for land      
     common, if interests are                                                             acquired after 12/6/  
     equal.                                                                               79. District-by-      
                                                                                          district for land     
                                                                                          acquired on or before 
                                                                                          12/6/79.              

[[Page 66771]]

                                                                                                                
    Partnership if interests      160 acres per partner................................  Westwide for land      
     are: alienable, separable,                                                           acquired after 12/6/  
     and equal.                                                                           79. District-by-      
                                                                                          district for land     
                                                                                          acquired on or before 
                                                                                          12/6/79.              
    Partnership if interests      160 acres total......................................  Westwide for land      
     are: not alienable or not                                                            acquired after 12/6/  
     separable.                                                                           79. District-by-      
                                                                                          district for land     
                                                                                          acquired on or before 
                                                                                          12/6/79.              
    Corporation.................  160 acres............................................  Westwide for land      
                                                                                          acquired after 12/6/  
                                                                                          79. District-by-      
                                                                                          district for land     
                                                                                          acquired on or before 
                                                                                          12/6/79.              
----------------------------------------------------------------------------------------------------------------

    The following examples illustrate the application of Sec. 426.5:

    Example (1). Farmer A receives irrigation water on 160 acres 
owned directly in District X, a district subject to prior law. 
District X subsequently amends its contract to conform to the 
discretionary provisions. Farmer A automatically becomes a qualified 
recipient by virtue of the district's decision and is entitled to 
receive irrigation water on a maximum of 960 acres of nonexempt land 
in his ownership.
    Example (2). Farmer B and her husband are a qualified recipient 
by virtue of an irrevocable election. They own in joint tenancy 960 
acres of nonexempt land. As a qualified recipient, they may irrigate 
the entire 960-acre landholding. However, they have completed their 
ownership entitlement.
    Example (3). Farmer C and Farmer D are a married couple, and 
each owns 480 acres of irrigation land under separate title in 
District A. District A has amended its contract to conform to the 
discretionary provisions. Even though the land is held in separate 
title, Farmer C and Farmer D as a married couple have reached the 
limits of their ownership entitlement as a qualified recipient.
    Example (4). ABC Farms is a general partnership comprised of 
four individuals who are qualified recipients and who own equal 
interests in the partnership's 960-acre landownership. The land is 
located in District Z, which is subject to the discretionary 
provisions. Therefore, ABC Farms satisfies the requirements for a 
qualified recipient and may receive irrigation water for all 960 
acres in its ownership. Moreover, the members of the partnership, as 
qualified recipients, may each receive irrigation water on a maximum 
of 720 acres in some ownership or ownerships other than ABC Farms.
    Example (5). Corporation A is a qualified recipient receiving 
irrigation water on a landownership of 960 acres. Farmer Brown is 
also a qualified recipient who owns 25 percent of Corporation A and 
farms 800 acres of owned land using irrigation water. In this 
instance, Farmer Brown exceeds his individual ownership entitlement 
by 80 acres and must either divest an appropriate share of his 
ownership in Corporation A or designate 80 acres of his directly 
owned land as excess.
    Example (6). Corporation B and Corporation C, wholly owned 
subsidiaries of Corporation D, each own 500 acres in District Z 
which has amended its contract to conform to the discretionary 
provisions. All three corporations are qualified recipients. The 
landholdings of Corporations B and C are counted against the 
entitlement of the parent corporation, Corporation D. Therefore, 
Corporation D has exceeded its 960-acre ownership entitlement by 40 
acres, and 40 acres must be declared excess.
    Example (7). AAA Land Company, a corporation benefiting more 
than 25 persons and registered in the State of California, owns 320 
acres in District Y. In the absence of district action, the company 
makes an irrevocable election to conform to the discretionary 
provisions. Thereby AAA Land Company becomes a limited recipient and 
is entitled to receive irrigation water on 640 acres or less owned 
westwide.
    Example (8). BBB Fertilizer Company is a corporation registered 
in Nebraska and directly owns 160 acres of nonexcess and 480 acres 
of excess land in District X, a district subject to prior law. 
District X subsequently amends its contract to conform to the 
discretionary provisions. BBB Fertilizer Company benefits more than 
25 persons and therefore automatically becomes a limited recipient 
with a 640-acre ownership entitlement. BBB Fertilizer Company may 
therefore redesignate the 480 excess acres as nonexcess utilizing 
the process highlighted in Sec. 426.12(b).
    Example (9). Farmer G, a prior law recipient, owns 160 acres of 
irrigation land in each of four districts. None of the districts in 
which Farmer G owns land has amended its contract to conform to the 
discretionary provisions, and Farmer G held title to the land prior 
to December 6, 1979. Thus, Farmer G remains eligible to receive 
irrigation water on the 640 acres owned in the four different 
districts.

    Note: If title to the irrigated land changes hands, the 160-acre 
westwide entitlement will automatically apply to the transferred 
land, assuming the new landholder is a prior law recipient.

    Example (10). Farmer H owns 160 acres in each of two prior law 
districts, and all of the acreage is eligible for irrigation water 
by virtue of the fact Farmer H owned the land prior to December 6, 
1979. On January 1, 1983, Farmer H purchased another 160 acres of 
nonexcess land which is located in a third prior law district. The 
land newly purchased in this district must be declared excess, 
except as provided for in Sec. 426.12(d).
    Example (11). Farmer I and spouse own 320 acres of irrigation 
land in each of two prior law districts, for a total of 640 acres. 
The couple purchased both parcels of land in 1976. They have not 
made an irrevocable election. Since the land was purchased prior to 
December 6, 1979, they are entitled to receive irrigation water on 
all 640 acres. The couple has reached the limit of their ownership 
entitlement.
    Example (12). EFG Farms, a partnership composed of four 
individuals who hold equal, separable, and alienable interests in 
the partnership, owns 960 acres of nonexempt land located in 
District Y. District Y has not amended its contract to become 
subject to the discretionary provisions. EFG Farms and two of the 
partners are subject to prior law; the other two partners have made 
irrevocable elections. Neither EFG Farms nor any of the partners 
owns irrigation land outside the partnership. Based on these facts, 
each partner may own and receive irrigation water on a maximum of 
160 acres through the partnership. Therefore, 640 of the EFG Farms' 
960 acres are entitled to receive irrigation water; the remaining 
320 acres must be declared excess. The two partners who have made 
irrevocable elections may each purchase and receive irrigation water 
on another 800 acres outside the partnership in order to complete 
their individual 960-acre ownership entitlement for qualified 
recipients.
    Example (13). Farmer N and Farmer O form a corporation in which 
Farmer N owns a 60 percent interest and Farmer O owns a 40 percent 
interest. Neither individual owns land outside the corporation. 
Farmer N and the corporation are qualified recipients, but Farmer O 
remains subject to prior law. The maximum nonexempt acreage that the 
corporation can own as nonexcess is 400 acres (160 divided by 40 
percent). If the corporation owned more than 400 nonexempt acres, 
this would cause Farmer O to exceed his ownership entitlement.
    Example (14). Farmer P, a qualified recipient, owns 1,400 
nonexempt acres and has designated 960 acres as nonexcess and 
eligible to receive irrigation water. In 1995, Farmer P irrigates 
only 800 acres; however, the entire 960 nonexcess acres are still 
counted against his ownership entitlement.
    Example (15). Farmer Q, a qualified recipient, owns 640 acres 
receiving irrigation water. Farmer Q also owns 320 acres which are 
not in a district, but Farmer Q has individually entered into a 10-
year contract with the United States for irrigation water for that 
land. All 960 acres receiving irrigation water must be counted for 
purposes of determining ownership entitlement.
    Example (16). Farmer R, a prior law recipient, owns 160 
nonexempt acres. However, only 120 acres were deemed irrigable and 
eligible to receive irrigation

[[Page 66772]]

water. Some years subsequent to this determination, Farmer R 
installed a center pivot irrigation system and now irrigates 160 
acres with the same amount of water as he once used to irrigate 120 
acres. For purposes of ownership entitlement under the RRA, all 160 
acres must be counted.

Comments Concerning Sec. 426.5--Ownership Entitlement

General
    Comment: Why is the government trying to get farmers to reduce 
their landholdings down to 960 acres?
    Response: The acreage limitations place no restrictions on how much 
land a farmer owns or leases. Rather, it limits how much owned land may 
receive irrigation water and how much leased land may receive such 
water at subsidized rates. The concept of limiting owned land that can 
receive irrigation water has been in existence since 1902. Originally 
that provision was intended to restrict land speculation at Reclamation 
irrigation projects. The concept of limiting the amount of leased land 
that can receive irrigation water at a subsidized rate was enacted in 
1982. These regulations do not provide for any new limitations on owned 
or leased land.
    Comment: If ownership entitlements are not violated, the landowner 
can receive irrigation water, but at the full-cost rate, plus 
administrative fee which is the actual cost of delivering the water, 
including the cost of constructing project facilities and interest on 
those expenditures.
    Response: This commenter appears to suggest that landowners are 
entitled to or willing to receive Reclamation irrigation water on 
eligible land provided they pay the full-cost rates. Only limited 
recipients have ownership entitlements that are higher than nonfull-
cost entitlements. In the case of limited recipients, they may receive 
water at the full-cost rate if they exceed their nonfull-cost 
entitlement, but that does not include the administrative fee (see 
Sec. 426.20). What the respondent believes is part of the 
administrative fee is in actuality part of the full-cost rate.
Section 426.5(a)
    Comment: Prior law partnerships where the partners have unequal 
interests, but which are separate and alienable, have an entitlement 
determined by the relative interest held by the partners. The partner 
with the largest percentage interest in the partnership is entitled to 
hold 160 acres through the partnership. Partners with lesser percentage 
interests are entitled to hold a proportional amount of land through 
the partnership. It may clarify the intent here to simply delete the 
reference to equal interest, leaving the requirement that the 
partnership interest be separable and alienable.
    Response: Reclamation wants to make it clear that the only prior 
law partnerships that may benefit from 160 acre entitlement per part 
owner are those that have separable, alienable, and equal interests. If 
Reclamation allowed partnerships with unequal interest to benefit from 
the 160-acre per part owner arrangement, some part owners could receive 
benefits to which they are not entitled. Section 426.5(d)(3) was added 
to explain what will happen if the interests are not equal.

Section 426.6  Leasing and Full-Cost Pricing

    Section 426.6 in the prior regulations, Ownership entitlement, is 
renumbered as Sec. 426.5. The new Sec. 426.6, Leasing and full-cost 
pricing, replaces Sec. 426.7 of the prior regulations. This section 
describes the conditions under which full-cost charges are applied and 
describes how full-cost rates are determined. No substantive change to 
these provisions is intended.
    The paragraph in the prior regulation on what constitutes a lease 
has been deleted because it more properly belongs in the definition 
section. As in the proposed rules, the term irrigation land is used 
more extensively in the discussion of nonfull-cost entitlements, as 
compared to the prior rules. The reference to exempt land that was 
included in the prior rules is deleted since use of the term irrigation 
land automatically excludes exempt land.
    Under the discussion of nonfull-cost entitlements of qualified, 
limited, and prior law recipients, the sentences found in the prior 
rules describing various types of land not subject to full-cost pricing 
have been deleted to eliminate redundancy with other sections. As in 
the proposed rules, land subject to recordable contracts is no longer 
addressed in this section, but is solely discussed in Sec. 426.12; 
exempt land is no longer discussed in this section because it has been 
excluded through use of the term irrigation land; and involuntarily 
acquired land is no longer discussed in this section, but is solely 
addressed in Sec. 426.14.
    The paragraph found in the prior rules on multidistrict 
landholdings is deleted because it is redundant with the discussion of 
this topic in Sec. 426.3.
    Paragraph (a) details what requirements a lease must meet. If a 
lease does not meet one or more requirements of a lease, then the land 
is ineligible to receive irrigation water. As such, the district may 
not deliver irrigation water to the land and the landholder(s) may not 
accept delivery of such water. Reclamation, however, will attribute 
that land to the would-be lessee's nonfull-cost entitlement. The 
proposed rule added to the requirements found in the prior rules. These 
additional requirements include: a legal description of the land; the 
lease must be signed by all parties to the lease; and the lease must 
include the dates of signatures. The final rules do not include the 
signature date requirement, and specify that the legal description need 
not be any more specific than that required to be included on the RRA 
forms. The final rules also specify that leases in effect on the 
effective date of these regulations do not have to meet these two new 
requirements until such leases are renewed.
    Paragraph (b) details the nonfull-cost entitlements for qualified, 
limited, and prior law recipients. Paragraph (c) details how the 
nonfull-cost entitlement will be applied, while paragraph (d) details 
what types of land will be counted in determining if a landholder has 
exceeded a nonfull-cost entitlement.
    Paragraph (e) examines what land may be included in selecting 
nonfull-cost and full-cost land. A revision to what had been included 
in (e)(2) of the proposed rules was made to explain that the selection 
of full-cost and nonfull-cost land is binding after irrigation water is 
received on a parcel until the landholder has completed receiving 
irrigation water westwide for the water year. This language replaces 
the proposed version that made the selection binding for the remainder 
of the water year.
    Paragraph (f) states that if land is selected as full-cost, that 
selection is binding on all landholders. Paragraph (g) discusses how 
land that is subleased is treated.
    Paragraph (h) provides how full-cost charges are calculated, while 
paragraph (i) discusses how full-cost rates are levied on a per-acre 
basis and a per acre-foot basis.
    Paragraph (j) provides for the disposition of revenues obtained 
through full-cost pricing. This paragraph has been changed from the 
proposed version to provide in (j)(1)(iii) that any capital component 
of full-cost revenues will be credited to project repayment where 
applicable. In addition, (j)(2) has been revised in the final version 
to state that certain charges assessed by the district will not have to 
be turned over to Reclamation, when such assessments were made through 
an illegal delivery of irrigation water.

[[Page 66773]]

    The following examples illustrate the application of Sec. 426.6:

    Example (1). Farmer A, a qualified recipient, receives 
irrigation water on 900 of the 960 acres of nonexempt land in his 
ownership in District X. Farmer A leases and receives irrigation 
water on another 320 acres in District Y. Since Farmer A receives 
water on 260 acres over and above his nonfull-cost entitlement, he 
must select 260 acres of owned land, leased land, or a combination 
of both, and pay the full-cost rate for water delivered to that 
land.
    Example (2). Farmer B, a qualified recipient, owns and receives 
irrigation water on 960 acres in District X. Farmer B decides to 
lease all 960 acres to another qualified recipient, Farmer C. Farmer 
C, however, already farms 960 acres receiving irrigation water. 
Therefore, Farmer C would be eligible for nonfull-cost rate 
irrigation water on only 960 acres of the 1,920 acres he is farming.
    Example (3). Farmer D has made an irrevocable election and owns 
and receives irrigation water on 960 acres. Farmer E is subject to 
prior law and owns and receives water on 160 acres. Farmer D hires 
Farmer E to operate Farmer D's equipment in performance of all the 
physical farm work on Farmer D's 960 acres. Farmer E receives 
compensation for such services, which does not consist of a share of 
the crop and is not based, in advance, on the degree of economic 
success or failure of the production or marketing of the crop. This 
arrangement between Farmer D and Farmer E does not constitute a 
lease because Farmer D has retained the economic risk. Accordingly, 
Farmer E does not have to count Farmer D's 960 acres against his 
nonfull-cost entitlement.
    Example (4). Assume the same facts as in example 3 of this 
section, except that Farmer E receives a portion of the crop for her 
services. This arrangement between Farmer D and Farmer E constitutes 
a lease because it constitutes sharecropping, and all sharecropping 
arrangements are considered to be leases. Therefore, Farmer E has 
exceeded her nonfull-cost entitlement by 960 acres and must pay full 
cost for water delivered to 960 acres of her landholding.
    Example (5). Landholder F, a qualified recipient, receives 
irrigation water on 960 acres of owned land in District X and 800 
acres leased in District Y. At the beginning of the water year, 
Landholder F selects 360 owned acres plus 600 leased acres to 
receive irrigation water at the nonfull-cost rate. He pays the full-
cost rate for water delivered to the remaining 800 acres. In July, 
Landholder F terminates the lease on the 600 acres of leased land 
which are part of his nonfull-cost entitlement. However, since 
nonfull-cost acreage is counted against one's entitlement on a 
cumulative basis during any 1 water year, Landholder F has already 
reached the limits of his nonfull-cost entitlement for this water 
year. Therefore, Landholder F may not replace in that water year 
those 600 nonfull-cost acres, even though they no longer receive 
irrigation water, with 600 acres from his full-cost land. Landholder 
F also must pay the full-cost rate for irrigation water delivered to 
any new land he irrigates during that water year.
    Example (6). Mr. and Mrs. G own 320 acres of eligible land in 
each of two districts and 160 acres in a third district. All three 
districts remain subject to prior laws as do Mr. and Mrs. G. All of 
this land was purchased prior to December 6, 1979. In addition, Mr. 
and Mrs. G lease 100 acres from another party. All 800 acres of 
owned land is eligible to receive irrigation water at the regular 
contract rate, because it is within the couple's 320-acre per 
district entitlement for land purchased before December 6, 1979. 
However, the 100 leased acres can receive irrigation water only at 
the full-cost rate, because it exceeds the couple's maximum nonfull-
cost entitlement of 320 acres. The fact that the couple's owned land 
was acquired prior to December 6, 1979, has no bearing on their 
nonfull-cost entitlement computation.
    Example (7). ABC Farms, an entity benefitting more than 25 
natural persons, remains under prior law. It owns and was receiving 
irrigation water on 160 acres in District X prior to October 1, 
1981. ABC Farms also owns and irrigates 480 acres in another prior 
law district which are subject to a recordable contract. ABC Farms 
may continue to receive irrigation water at the nonfull-cost rate on 
its entire landholding until the end of the recordable contract 
period. At that time, if ABC Farms remains under prior law, only 160 
acres in District X may continue to receive irrigation water. If ABC 
Farms makes an irrevocable election prior to the maturity of the 
recordable contract, it may amend the recordable contract to allow 
it to own and receive irrigation water on all 640 acres owned. Upon 
electing, ABC Farms may receive irrigation water at the nonfull-cost 
rate on 320 acres, but it must pay the full-cost rate on the 320 
acres by which it has exceeded its nonfull-cost entitlement.
    Example (8). CDE Farms, a limited recipient, owns 640 acres of 
land eligible to receive irrigation water. The purchase of the land 
took place after October 1, 1981, and CDE Farms was not receiving 
irrigation water on any other land on or before October 1, 1981. 
Therefore, in order for CDE Farms to receive irrigation water for 
any nonexempt land, it must pay the full-cost rate for that water.
    Example (9). The XYZ Corporation, a limited recipient, owns 640 
acres of irrigation land in District A. Since the corporation was 
receiving irrigation water prior to October 1, 1981, it is entitled 
to irrigate 320 acres at the nonfull-cost rate and 320 acres at the 
full-cost rate. If the corporation were to lease the owned land 
subject to full cost to another landholder, the full-cost rate would 
still apply.
    Example (10). Farmer I and his wife lease 640 acres of 
irrigation land in District X and another 640 acres of irrigation 
land in District Y. Districts X and Y have not amended their 
contracts to become subject to the discretionary provisions and 
Farmer I and his wife have not made an irrevocable election. Since 
the couple has exceeded their 320-acre nonfull-cost entitlement by 
960 acres, Farmer I and his wife must select 960 acres in their 
landholding and pay the full-cost rate for water delivered to that 
land.
    Example (11). Four brothers hold equal, separable, and alienable 
interests in a partnership they formed. The partnership owns 160 
acres of irrigation land in District X and also leases another 320 
acres from another party in District Y. The partnership and both 
districts remain subject to prior law. Since the partnership's 
landholding is within its 640-acre nonfull-cost entitlement (160 
times 4), no full-cost charges will be assessed to water delivered 
to any land in the holding.
    Example (12). Farmer J, a prior law recipient, owns 5,000 acres 
of irrigation land in District X, 4,900 of which are under 
recordable contract. He also receives irrigation water on another 
320 acres which he leases in this same district. Thus, Farmer J is 
receiving irrigation water on 5,160 acres (5,320 minus 160) in 
excess of his nonfull-cost entitlement. However, his recordable 
contract land is not subject to full-cost pricing; therefore, Farmer 
J must select 260 acres (5,160 minus 4,900) for full-cost pricing. 
Although his recordable contract land is not subject to full-cost 
pricing, Farmer J may, at his option, select part or all of the 260 
full-cost acres from the land under recordable contract in lieu of 
his nonexcess or leased land.
    Example (13). Farmer K, a qualified recipient, owns 960 acres 
receiving irrigation water in Alpha Irrigation District. Farmer K 
also leases 100 acres receiving irrigation water in Alpha Irrigation 
District from another party. Alpha Irrigation District's repayment 
contract specifies an annual assessment of $5 per irrigable acre. 
Alpha Irrigation District's annual full-cost rate is calculated to 
be $15 per irrigable acre. Therefore, Farmer K's total water charge 
for that year is (960 acres times $5) plus (100 acres times $15), 
for a total of $6,300.

Comments Concerning Sec. 426.6--Leasing and Full-Cost Pricing

General
    Comment: Family farm ownerships should generally be excluded from 
full-cost pricing.
    Response: The RRA does not include an exemption from application of 
the nonfull-cost entitlements for family farms. However, most family 
farms do not exceed the nonfull-cost entitlement level; therefore, the 
majority do not face application of full-cost pricing.
    Comment: The definition of leasing should be coordinated with that 
used by the Farm Service Agency (FSA). FSA will not allow 10-year 
leases.
    Response: Reclamation works with other Federal agencies to the 
greatest extent possible to facilitate consistent program 
administration and enforcement. However, the purposes of Reclamation's 
and FSA's programs are different. The acreage limitation program is 
intended to limit the distribution of benefits (irrigation water) that 
is otherwise generally available. The programs provided by the 
Department of Agriculture generally

[[Page 66774]]

provide farmers, in the form of crop payments, benefits that are not 
otherwise available. As for the length of the lease, the RRA 
specifically allows for long term leases (up to 10 years, except for 
perennial crops that can be for up to 25 years depending on the crop), 
but does not require any minimum term.
    Comment: The annual reports of acreage owned and/or leased should 
be made available for public review. That is the only way it can be 
determined if lessees are within the limitations.
    Response: Reclamation does not prepare an annual report of acreage 
owned or leased. The preparation of such a report would be expensive 
and there has been no interest in such a report generally expressed by 
the public.
    Comment: Any increase in full-cost revenues should be used for 
rural community development where the proposed rules have an impact on 
the community.
    Response: Reclamation does not have the authority to expend funds 
for purposes that are not authorized or appropriated by the Congress. 
Generally, all monies received are credited to the Reclamation Fund.
Section 426.6(a)
    Comment: The proposed rules enumerate seven conditions or 
requirements for a lease. The requirements are very specific and rigid 
and seem to go beyond Reclamation's legitimate interest in being able 
to establish the existence of a bona-fide lease. It may be more 
practical and realistic to view these factors as what may be considered 
in the review of a lease instrument. Reclamation should allow itself 
and the landholder some flexibility in this area.
    Response: The RRA provides that leases must be in writing and must 
not exceed certain time limitations. In addition, Section 206 of the 
RRA requires lessees to tell Reclamation about their lease, including 
the term of the lease, the number of acres leased and whether the rent 
paid reflects the reasonable value of the irrigation water to the 
productivity of the land. Reclamation needs to establish the effective 
date, legal description, people involved in the lease, and values, in 
order to verify the information required by the statute and to 
effectively administer the program.
    Comment: Several commenters requested that Reclamation delete or 
amend certain of the requirements a lease must meet. These included the 
deletion of the signature dates requirement, clarification of what 
would be an acceptable legal description, and changes to the 
requirement concerning dates when rent is due.
    Response: The requirement for signature dates has been deleted. The 
other suggested changes have been accommodated with some minor 
modifications, since the changes can be made without affecting 
Reclamation's ability to administer and enforce the program.
    Comment: The RRA and Sec. 426.7 require a lease to be in writing 
even if it is not for more than 1 year. This requirement contravenes 
State law that allows oral leases provided they do not exceed 1 year in 
length.
    Response: Section 227 of the RRA specifically states that all 
leases must be in writing. No exceptions are made for leases that have 
a term of less than 1 year. Therefore, if a lessee wants to receive 
irrigation water from Reclamation, then the lease must be in writing.
    Comment: This provision should specify whether leases currently in 
effect prior to the effective date of these regulations must conform to 
the conditions set for them in Sec. 426.6(a). Will the new requirements 
be applied retroactively?
    Response: Most of the conditions listed have not changed from the 
prior rules and, therefore, Reclamation has provided no grace period 
for those conditions. However, Reclamation has added Sec. 426.6(a)(8) 
that exempts leases in existence on the effective date of these 
regulations from meeting two of the conditions until such leases are 
renewed. These conditions are the signature and legal description 
requirements.
    Comment: What happens if a lease is not in writing? What if some of 
the other lease requirements are not met?
    Response: The lease would not be a valid lease for acreage 
limitation purposes. Typically, Reclamation would provide an 
opportunity for the problem to be corrected. If the problem is not 
rectified, then the land would be ineligible to receive irrigation 
water. In addition, the compensation rate would be applied to any 
irrigation water previously delivered under the lease to the land in 
question because the land was not eligible to receive irrigation water.
    Comment: So long as there is no attempt to defraud, any parties to 
a lease should be given 30 days to amend a lease that fails to fully 
comply with these requirements.
    Response: Reclamation's policy is to provide a 30-day opportunity 
to correct leases that do not meet certain requirements.
Section 426.6(e)
    Comment: Section 426.6(e)(2) creates a problem due to the 
difference between ``crop year'' and ``water year.'' The proposed rule 
would limit redesignation to a particular water year and would appear 
to preclude or impede lease changes at any time of the year other than 
the end of the water year. This should be changed to provide that a 
redesignation is permitted once a year, without limitation to a crop 
year, water year, or calendar year.
    Response: In order to be sure the readers of this Preamble are not 
confused, the term redesignation applies to excess land. Redesignations 
are not permitted unless the criteria provided in Sec. 426.12-Excess 
Land-are met. Reclamation believes the commenter is in fact referring 
to the reselection of nonfull-cost and full-cost land. Reclamation has 
retained the term ``water year,'' as that is the term used in the prior 
rules. However, Reclamation has defined that term in the definitions 
section (Sec. 426.2), and made it clear in Sec. 426.6(e)(2) that once a 
landholder has completed receiving irrigation water westwide for a 
water year, the selection of nonfull-cost land can be changed.
    To allow reselections of land any time during the year, after the 
landholder has started to receive irrigation water on the land, and at 
a time chosen by each landholder would make the program extremely hard 
to administer both by the districts and Reclamation. Such a change 
would allow each landholder to define his or her own water year for 
purposes of application of the nonfull-cost entitlement. Thus, 
Reclamation and districts would have to track each landholder's 
``year'' to ensure a landholder did not receive benefits to which he or 
she is not entitled.
    Comment: Some commenters noted that a farmer should be able to 
irrigate two crops in any 1 calendar year, receiving water on the same 
land. In fact, the rules should take into consideration cumulative 
counting of acres where 2 crop years overlap in a calendar year.
    Response: Reclamation's regulations do not address the number of 
crops which may be raised in 1 year. Acreage limitations apply to the 
landholding, not to the amount of irrigation water a landholder may 
receive. The acreage limitation provisions do not restrict the delivery 
of irrigation water to any acreage that is eligible land, regardless of 
the number of crops planted in any 1 year.
Section 426.6(h)
    Comment: A full-cost rate with no interest subsidy should be 
developed

[[Page 66775]]

and applied to all foreign investors and corporations.
    Response: The full-cost rate is defined by the RRA. Reclamation 
lacks authority to develop additional full-cost rates to be applied to 
select groups of landholders.
Section 426.6(j)
    Comment: This section of the regulations should be clarified that 
for revenues collected through full-cost pricing, the capital component 
of any such rate should be credited to project repayment if applicable 
and not recovered to the Reclamation Fund.
    Response: This suggestion is consistent with Reclamation practice. 
Reclamation added to Sec. 426.6(j)(1)(iii) to make it clear that the 
capital component is to be credited to project repayment if consistent 
with contract, statute, and regulation.

Section 426.7  Trusts

    Section 426.7 of the prior regulations, Leasing and full-cost 
pricing, is renumbered as Sec. 426.6. Section 426.7, Trusts, is a new 
section devoted to describing the requirements for trusts and how land 
held in trust will be attributed for acreage limitation purposes. 
Generally, this new section does not alter existing Reclamation policy 
regarding trusts, but includes some existing policies that are not 
referenced in the prior regulations; specifically, attribution of land 
held in trust if the trust does not meet requirements specified in the 
regulations. Any changes between the proposed and final regulations are 
noted below. In addition, Reclamation is publishing an advance notice 
of proposed rulemaking to solicit comments on future changes to rules 
regarding trusts.
    During this rulemaking, Reclamation received a number of comments 
regarding the compliance of large trusts with the acreage limitation 
provisions of the RRA. Comments expressed a variety of viewpoints, 
including the assertion that some trusts with landholdings in excess of 
960 acres may circumvent the requirements of Federal reclamation laws. 
Through the advance notice of proposed rulemaking, the Department will 
invite comments and suggestions on: (1) Whether to limit nonfull-cost 
water deliveries to large trust arrangements that exceed 960 acres; (2) 
the criteria used to determine whether landholdings (owned and leased 
land) in excess of 960 acres total, operated under a trust agreement, 
should be eligible to receive non-full cost water deliveries; (3) 
whether Reclamation project non-full cost water deliveries to such 
large scale trusts are consistent with the principles of Federal 
reclamation law; (4) the appropriate criteria and standards to be 
applied to such trusts, implementation of the criteria and standards; 
and (5) the extent of the Department's statutory authority to address 
this issue. For example, what is the extent of the Department's legal 
authority to regulate: (a) future trusts, (b) trusts established from 
1982 to the present, and (c) trusts established prior to 1982. See 
today's notice in the Federal Register.
    Paragraph (a) defines the three categories of trusts: irrevocable; 
grantor revocable; and otherwise revocable. The final rules add to the 
definition of irrevocable trust to make clear that if, upon termination 
of the trust, the lands held by trust will return to the grantor, then 
the trust must be considered to be a grantor revocable trust for 
acreage limitation purposes. The definition of grantor revocable trust 
has also been revised in the final rules to make it consistent with the 
other definitions in this paragraph.
    The effects of inclusion or absence of required elements of each 
category of trust are described in paragraph (b).
    Paragraph (b)(1) establishes that land held by an irrevocable trust 
will be attributed to the trust's beneficiaries, provided that the 
trust agreement is in writing, and the beneficiaries and their 
interests are identified. Otherwise, the land will be attributed to the 
trustee.
    Paragraph (b)(2) describes attribution of land held in a revocable 
trust that provides for reversion of the trust land to the grantor upon 
revocation. Land held by such trusts are attributed to the grantor(s) 
of the trust in proportion to the grantor's contribution to the trust. 
Such attribution assumes the trust agreement is in writing and the 
following have been identified in the trust document: the beneficiaries 
and their interests; the grantor(s) of all land held by the trust; the 
conditions under which the trust may be revoked or terminated; and the 
identity of the recipients of the trust land upon revocation or 
termination. If any of these requirements are not met, the land will be 
ineligible to receive irrigation water, unless the land has already 
been attributed to the grantor(s) on the RRA forms.
    Paragraph (b)(3) describes attribution of land held in revocable 
trusts other than those covered under paragraph (b)(2). If the 
otherwise revocable trust does not specify its grantors, the conditions 
under which it may be revoked, or to whom the land will revert upon 
revocation, the land held in trust will be ineligible to receive 
irrigation water until these issues are resolved. If the otherwise 
revocable trust includes all of the criteria listed in the preceding 
sentence, the land held in trust will be attributed to the 
beneficiaries. The only exception is if the otherwise revocable trust 
is not in writing or does not identify the beneficiaries or the 
beneficiaries' interests. Under such circumstances, the land will be 
attributed to the trustee.
    Paragraph (c) was included in the final rules to address the 
concept of a ``class'' of beneficiaries. If the trust document is 
specific as to the beneficial interest to which each member of the 
class will be entitled and the members of the class are identifiable, 
then attribution will be made to members of the class who are natural 
persons or established legal entities.
    Paragraph (d) describes how full-cost rates will be assessed to 
certain grantor revocable trusts.
    The following examples illustrate the application of Sec. 426.7:

    Example (1). Bank X is the trustee for five irrevocable trusts, 
each of which has more than one beneficiary. The irrevocable trusts 
contain 1,280, 960, 640, 800, and 400 acres, respectively, and all 
meet the criteria set forth in Sec. 426.7(b)(1). All trust 
beneficiaries are qualified recipients, and none has any 
landholdings outside of the trusts. Since all the trusts' land is 
attributable to the trust beneficiaries, and Reclamation determines 
all the beneficiaries are within their ownership and nonfull-cost 
entitlements, all 4,080 acres in the five irrevocable trusts are 
eligible to receive irrigation water.
    Example (2). Farmer A, a qualified recipient, provides in his 
will for the establishment of a trust and the conveyance of 640 
acres of his land receiving irrigation water into that trust for his 
daughter upon his death. The trust meets the criteria set forth in 
Sec. 426.7(b)(1). The land is located in a district which has 
amended its contract to conform to the discretionary provisions. The 
brother, who is designated as trustee for the trust, owns 800 acres 
in the same district which receives an irrigation water supply. 
Farmer A dies, and the testamentary trust he has established is 
activated. The trust's land is attributable to the daughter as the 
sole trust beneficiary. Therefore, the trust's land is eligible to 
receive irrigation water at the nonfull-cost rate, assuming the 
daughter has not exceeded her acreage limitation entitlements.
    Example (3). Farmer B, a qualified recipient, owns 960 acres 
eligible to receive irrigation water in a district subject to the 
discretionary provisions. He decides to place 160 acres of his land 
in an irrevocable trust with his daughter as the beneficiary. The 
trust agreement satisfies the criteria of Sec. 426.7(b)(1). The 160 
acres of trust land will be attributed to the daughter's entitlement 
if she is independent. If she is dependent, the 160 acres of trust 
land will be attributed to Farmer B as her parent or to the person 
who is acting as her guardian.

[[Page 66776]]

    Example (4). ABC Corporation, a prior law recipient, establishes 
a grantor revocable trust and places 160 acres of land receiving 
irrigation water in the trust for the benefit of J. Jones. The trust 
agreement satisfies all criteria of Sec. 426.7(b)(2). Under the 
terms of the revocable trust, the trust will terminate and title to 
the 160 acres will revert back to ABC Corporation in 10 years. All 
160 acres of the land in trust are attributed both to the 
corporation and to the corporation's stockholders in proportion to 
the stockholders' percent of stock held in the corporation.
    Example (5). Assume the same facts as in Example 4 above, except 
that Charity X, a legal entity fully independent of ABC Corporation, 
will receive the land held in trust upon termination. In this 
example, the trust is an ``otherwise revocable trust'' rather than a 
``grantor revocable trust.'' The 160 acres are attributed to the 
beneficiary of the trust, J. Jones.
    Example (6). Farmer C, a qualified recipient, places 960 acres 
of land receiving irrigation water in a trust for his son. The trust 
agreement satisfies all criteria of Sec. 426.7(b)(2). It provides 
that the trust shall expire in 20 years, and ownership of the trust 
land shall be vested in Corporation Y, of which Farmer C is a part 
owner with 5 percent interest. Because title to 5 percent of the 
trust land will revert indirectly to Farmer C upon termination of 
the trust, 48 acres (960 times 5 percent) of the trust land are 
attributed to Farmer C. The remaining 912 acres of trust land is 
attributable to the beneficiary of the trust. If Farmer C's interest 
in Corporation Y changes during the term of the trust, the amount of 
trust land attributed to Farmer C will change accordingly.

Comments Concerning Sec. 426.7--Trusts

General
    Comment: Trusts should be treated as a legal entity subject to the 
limits of the RRA.
    Response: Reclamation has not accommodated this comment in the 
final regulations at this time. Section 214 of the RRA expressly 
addresses trusts and exempts from the ownership and nonfull-cost 
pricing limitations of the Federal reclamation law lands held by 
certain trustees acting in a fiduciary capacity. Reclamation intends to 
address this issue, along with related Trust issues in a separate 
rulemaking. In this section of the Federal Register, Reclamation has 
published an advance notice of proposed rulemaking which solicits 
comments on how to address problems associated with certain trusts.
    Comment: The draft regulations do not provide guidelines to 
determine whether a minor child is actually independent. To allow 
income from a trust to be used as the basis for determining if a child 
is independent eviscerates RRA Section 202(4)'s definition of 
individual as a family unit. Reclamation should adopt mechanisms that 
determine whether a minor child is actually independent, including 
affidavits as to each minor's independent status, the minor's status 
during previous tax years, and copies of tax returns.
    Response: The definition of the term ``dependent'' is based on the 
Internal Revenue Code of 1954 (see Sec. 426.2), and the interpretation 
of this term by the Internal Revenue Service will govern Reclamation's 
application. Reclamation does require the submittal of tax returns to 
prove the independent status of minor children.
    Comment: Class gifts should be allowed to be beneficiaries.
    Response: This comment has been accommodated. A new Sec. 426.7(c) 
has been inserted in the rules that provides for such attribution under 
certain circumstances.
Section 426.7(a)
    Comment: The definition of an irrevocable trust as non-revocable is 
circular and useless.
    Response: Reclamation has examined the definition of irrevocable 
trust and revised it to remove the term ``nonrevocable'' and to specify 
that an irrevocable trust is a trust that does not allow any 
individual, including the grantor or beneficiaries, the discretion to 
decide when or under what conditions the trust terminates. For the 
purposes of the acreage limitation provisions, land held in irrevocable 
trusts cannot revert to the grantor.
    Comment: The definition of ``otherwise revocable trust'' has the 
land reverting directly or indirectly to someone other than the 
grantor. Since that person or persons never owned the land it cannot 
revert to them, rather the land is transferred to them upon 
termination.
    Response: Reclamation has revised the definition to accommodate 
this comment.
Section 426.7(b)
    Comment: Trusts should not have to be submitted to Reclamation for 
review and approval.
    Response: As under the prior rules, trusts do not have to be 
submitted to Reclamation for review, unless the land held in the trust 
will be receiving irrigation water. The approval of trusts by 
Reclamation is limited to ensuring that the RRA trust criteria have 
been met. Reclamation is not interested in any other legal aspects 
associated with trusts. The information included in a trust is 
protected by the Privacy Act of 1974.
    Comment: The prior regulations do not attribute property held by a 
trust to the trustee. The new regulations should not do so either.
    Response: The commenters are correct in their reading of the prior 
regulations, in that the prior regulations did not address attribution 
of land held by a trust that does not meet Reclamation's trust 
criteria. However, Reclamation policy has been to attribute land to the 
trustee, the nominal holder of title, if the trust does not meet the 
established criteria. If a trust does not exist for Reclamation 
purposes, then the trustee is not covered by RRA Section 214. Thus, the 
land held by the trust is counted against the trustee's acreage 
limitation entitlements.
    Comment: Any attempt by Reclamation to attribute land to the 
trustee will impose the trustee's limitation on acreage and pricing on 
the beneficiaries for whom the trustee is the fiduciary. This will 
deprive the beneficiaries of their personal entitlement to nonfull-cost 
project water and pricing. This is contrary to the common law of 
trusts.
    Response: The treatment of lands held in trust is dictated by 
Section 214 of the RRA, not by the common law of trusts. Section 214 
established criteria for treatment of certain kinds of trusts. Trusts 
that do not meet those requirements must be treated as required by the 
RRA. Accordingly, the nominal owner of the land is attributed the 
entire landholding for acreage limitation purposes.
    Comment: If the trustee serves as the operator or farm manager of 
trust property, the acreage limitations should be applied to the 
trustee.
    Response: The RRA does not impose acreage limitations on farm 
operations or management arrangements, unless they constitute leases. 
If a trustee was found to have leased the land held in trust from the 
trust, then the acreage limitation would apply to that landholder just 
as they would apply to any other lessee.
    Comment: Does the use of a formula for identifying beneficiaries' 
interests, rather than identifying a specific beneficial interest in 
acreage, meet the requirement that beneficiaries' interests be 
identified?
    Response: For trusts where attribution is to the beneficiaries, if 
the trust document uses a formula for identifying beneficial interests, 
Reclamation will also use that formula to attribute acreage, so long as 
at any point in time the percentage of beneficial interest attributable 
to any specific beneficiary can be readily determined.
    Comment: In practice, trusts are provisionally approved when 
submitted to Reclamation. If Reclamation

[[Page 66777]]

discovers minor discrepancies the grantors or trustees are provided a 
reasonable opportunity to amend or restate the trust. This existing 
practice should be reflected in Sec. 426.7.
    Response: Although these practices were not placed within the rule, 
Reclamation intends to continue them.

Section 426.8  Nonresident Aliens and Foreign Entities

    Section 426.8 of the prior regulations, Operation and maintenance 
(O&M) charges, is renamed Recovery of operation and maintenance (O&M) 
charges and renumbered as Sec. 426.23. Section 426.8, Nonresident 
aliens and foreign entities, is a new section that was not included in 
the proposed regulations. This section describes the acreage limitation 
entitlements of nonresident aliens and entities not established under 
State or Federal law.
    Paragraph (a) defines domestic entity and foreign entity, since 
those terms are used in this section.
    Paragraph (b) states that nonresident aliens and foreign entities 
may not receive irrigation water on land held directly in discretionary 
districts. It also states that such landholders may hold eligible land 
directly in prior law districts, if the landholders have not already 
elected to conform to the discretionary provisions.
    Paragraph (c) provides the general entitlement for nonresident 
aliens and foreign entities, namely, the prior law entitlements. 
Paragraph (d) provides to the prior law entitlement applicable to 
certain nonresident aliens and foreign entities. If the nonresident 
alien is a citizen of, or the entity has been established in a country 
that has treaty or other international agreements with the United 
States Government that provide for treatment of foreign citizens or 
entities like United States citizens or domestic entities, then they 
will be treated as a United States citizen or a domestic entity with 
regard to the acreage limitations. Proof of citizenship or the 
establishment of the entity will be required.
    Paragraphs (d)(3)(i) through (iv) specify how nonresident aliens 
and foreign entities from countries with such agreements with the 
United States can become subject to the discretionary provisions and 
when irrevocable elections submitted by nonresident aliens and foreign 
entities will not be approved.
    The following examples illustrate the application of Sec. 426.8:

    Example (1). Farmer F is a citizen and resident of Switzerland. 
Farmer F directly owns 160 acres of irrigation land in District X, a 
district subject to prior law. Subsequently, District X amends its 
contract to conform to the discretionary provisions. Farmer F, as a 
nonresident alien, cannot meet the requirements of either a 
qualified recipient or limited recipient. For that reason, and 
because he owned the irrigation land prior to the district's 
contract amendment, Farmer F may, as set forth in Sec. 426.12(e), 
place the land under recordable contract and receive irrigation 
water at the nonfull-cost rate for 5 years. (If the land were not 
placed under recordable contract or had Farmer F not acquired the 
irrigation land prior to the district's contract amendment, the 160 
acres owned would be ineligible for service until such time as it 
was sold or otherwise transferred to an eligible recipient or Farmer 
F qualifies as a resident alien in the United States.)
    Example (2). Six siblings who are citizens and residents of 
Canada form a family corporation registered in the State of Montana 
with each sibling holding equal shares in the corporation. The 
corporation makes an irrevocable election and is therefore a 
qualified recipient entitled to receive irrigation water on 960 
acres or less of owned land. The brothers cannot meet the 
requirements to be qualified recipients since none are citizens of 
the United States or residents aliens thereof. However, since Canada 
has certain treaty commitments with the United States and the six 
siblings hold the land indirectly, the six siblings will be treated 
as United States citizens for purposes of applying the acreage 
limitation provisions. Therefore, each sibling may make an 
irrevocable election and indirectly own up to 800 additional acres 
through other entities that would be eligible to receive irrigation 
water. In a district subject to the discretionary provisions, 
nonresident aliens may receive irrigation water only on lands held 
through legal entities (i.e., indirectly) and may not receive 
irrigation water on land they hold directly.
    Example (3). CDE Development Company is a corporation, 
incorporated in the Greater Antilles, with more than 25 
shareholders. CDE Development Company buys 160 acres in a district 
which has amended its contract to conform to the discretionary 
provisions. However, unless and until such time as CDE Development 
Company establishes itself as a legal entity under State or Federal 
law, it cannot meet the requirements to become a limited recipient, 
and none of its land held directly in discretionary districts is 
eligible to receive irrigation water.
    Example (4). FGH Corporation is owned by more than 25 
stockholders and was established in Mexico. IJK Corporation is 
registered in California and is a wholly-owned subsidiary of FGH 
Corporation. IJK owns 640 acres in a district subject to the 
discretionary provisions. IJK is a limited recipient that would 
normally be eligible to receive irrigation water on 640 acres. Since 
Mexico has a treaty with the United States whose terms require 
treatment of its citizens like United States citizens, and FGH 
Corporation holds the land indirectly, FGH Corporation will be 
treated as a legal entity established under State or Federal law for 
purposes of applying the acreage limitation provisions. Therefore, 
FGH may make an irrevocable election to become a limited recipient 
with an ownership entitlement of 640 acres. If FGH does not make an 
irrevocable election, FGH will only have the 160-acre ownership 
entitlement of a prior law recipient corporation and only 160 acres 
of IJK's owned land would be eligible to receive irrigation water; 
the remaining 480 acres would have to be declared excess.

Comments Concerning Sec. 426.8--Nonresident Aliens and Foreign Entities

    Comment: Entitlements for nonresident aliens should be in its own 
section.
    Response: Reclamation has adopted this suggestion.
    Comment: Since the settlement contract did not include a review of 
the nonresident alien provisions, the current regulations do not need 
to be changed.
    Response: Reclamation is not restricted by the settlement contract 
as to what provisions may be revised. The prior regulations did not 
address foreign entities entitlements and the lack of clarity has led 
to confusion. Some interpretations could place foreign entities in a 
better position than United States citizens or entities established 
under State or Federal law. That would not be consistent with United 
States policy.
    Comment: Some commenters suggested that the congressional intent 
was to provide nonresident aliens with no federally subsidized water on 
land held directly or indirectly. Another commenter supported the 
application of prior law entitlements to nonresident aliens and foreign 
entities as provided in the proposed rules.
    Response: Under prior law, there is no distinction between 
nonresident aliens, foreign entities, United States citizens, resident 
aliens, or domestic entities. Accordingly, a nonresident alien or 
foreign entity may hold land as a prior law recipient and receive 
irrigation water. The United States Government treats citizens and 
entities from other countries that have certain treaties or other 
international agreements with the United States in the same manner as 
United States citizens or domestic entities. Reclamation has 
incorporated both of these concepts in the final regulations.
    Comment: Many commenters suggested foreign ownership is not 
restricted in the RRA and there is no statutory authority for placing a 
restriction on the amount of land a nonresident alien or foreign entity 
can own through a domestic legal entity.
    Response: The RRA strictly addresses the amount of land that may 
receive irrigation water and what rate must be paid for such 
deliveries. While the RRA

[[Page 66778]]

does not address land ownership itself, it does not provide for land 
directly held by nonresident aliens or entities not established under 
State or Federal law in a discretionary district is ineligible to 
receive irrigation water. This is because nonresident aliens and 
entities not established under State or Federal law are not included in 
the definitions of qualified and limited recipients. If no limitation 
was placed on the amount of land nonresident aliens or foreign entities 
could hold and receive irrigation water, United States citizens, 
resident aliens, and domestic entities would be placed at a 
disadvantage in their own country. Reclamation simply does not believe 
that is the intent of the RRA.
    One of the goals of Reclamation's reexamination of the ability of 
nonresident aliens and foreign entities to receive water in 
discretionary districts is to treat all recipients in the same manner, 
unless prohibited by statute. Section 426.8 accomplishes that goal.
    Comment: Congress expressly repealed the 160-acre limitation.
    Response: This statement is not supported by the statute. Section 
203(b) provides that districts and, thus, landholders who do not 
conform to the discretionary provisions remain subject to reclamation 
law in effect prior to the enactment of the RRA. The prior law 
entitlements remain available.
    Comment: One commenter suggested that because Congress used the 
term ``natural persons'' instead of ``individuals'' in the definition 
of qualified and limited recipients, their intent was not to 
discriminate against nonresident aliens.
    Response: Reclamation disagrees with this interpretation.. 
Reclamation believes the Congress used the term ``natural persons'' to 
clarify which parties should be counted in determining if an entity is 
a qualified or limited recipient.
    Comment: An alternative resolution may be to limit the ownership 
entitlement of foreign corporations that hold land indirectly to that 
allowed under prior law, because foreign corporations do not meet the 
definition of ``natural persons'' who may have an ownership interest in 
a qualified or limited recipient.
    Response: Essentially, this is how the proposed regulations 
addressed foreign entities with respect to acreage limitation status. 
The final regulations include recognition of the requirement that the 
United States treat citizens of nations that have certain treaties and 
other international agreements with the United States like United 
States citizens.
    Comment: Changing the treatment of nonresident aliens is 
unnecessary, violates the RRA, and discriminates against non-U.S. 
citizens in violation of the North American Free Trade Agreement 
(NAFTA) and the Canada-U.S. Free Trade Agreement (CUSFTA).
    Response: The RRA does not provide for eligibility of any land held 
directly in a discretionary district by a nonresident alien or foreign 
entity. In addition, the RRA does not allow nonresident aliens or 
foreign entities to become qualified or limited recipients under any 
circumstance.
    However, in recognition of United States treaties and other 
international agreements, Reclamation has made provisions for nations 
that have certain treaties and other international agreements with the 
United States. Specifically, citizens of such nations or entities 
established in such nations will be treated as U.S. citizens or 
domestic entities in discretionary districts for indirectly held land.
    Comment: Congress rejected a bill in 1990 that would have prevented 
the delivery of Reclamation water to U.S. corporations with foreign 
shareholders (passed House, not voted on in the Senate). In 1991, a 
similar bill was introduced. The Commissioner of Reclamation objected 
to the provision pertaining to the RRA. The House passed the bill, the 
Senate passed another version, and the bill itself never came out of 
conference committee.
    Response: The interpretation of the RRA adopted by this rulemaking 
is consistent with the congressional directives set forth in the RRA 
and the United States' international obligations.
    Comment: A 1984 Solicitor's opinion states that corporations with 
foreign ownership may elect to conform to the discretionary provisions.
    Response: The regulations do not contradict that opinion. The 
Solicitor's opinion and the regulations require that the electing 
entity is a domestic entity if it directly holds land.
    Comment: Some commenters suggested that Reclamation should look-
through to the ultimate owner of the U.S. entity and ignore the 
intermediate entities, if any, or simply ignore foreign part owners.
    Response: The RRA does not provide exceptions for intermediate 
entities or any part owners of entities. Reclamation looks at 
intermediate entities and part owners to ensure that they do not exceed 
their acreage limitation entitlements.
    Comment: At the very least, the new restrictions should only be 
applied prospectively to corporations that have existing water rights 
that would be curtailed.
    Response: Since the final regulations include an exception 
recognizing certain treaties and other international agreements, 
Reclamation believes that many of the foreign entities and nonresident 
aliens who hold land will not be adversely affected by this provision. 
For those few that may be affected, they are given a 5-year grace 
period to address the situation, provided the land was purchased before 
December 18, 1996 [see Sec. 426.12(e)(4)]. The grace period will not 
begin prior to the effective date of these rules. During and after the 
grace period expires, the sale price of land that becomes excess 
because of this rulemaking will not be restricted.
    Comment: Five years is simply too short a period of time in which 
to divest landholdings that have been accumulated since the enactment 
of the RRA in reliance on the RRA and the current regulations. At a 
minimum, these persons should be allowed 10 years to make plans to 
divest themselves of their excess landholdings.
    Response: This comment has not been accommodated in the final 
regulations. The recordable contract provision, including the 5-year 
limitation, has been historically used to address instances where 
changes to the rules or district actions to conform to the 
discretionary provisions results in land becoming ineligible. 
Reclamation has encountered few situations where the 5-year limitation 
has caused problems. Reclamation believes it is fair to treat 
nonresident aliens and foreign entities in the same manner it has 
historically treated United States citizens, resident aliens, and 
domestic entities.
    Comment: The 5-year grace period and provision to sell the land at 
fair market value does not address the situation where the nonresident 
alien does not control the domestic legal entity. In many situations 
the nonresident alien or foreign entity may not be able to ensure the 
sale of lands.
    Response: Such land will be treated in the same manner as any other 
land that becomes ineligible as a result of these regulations. As with 
any legal entity, if a part owner's acreage limitation status or 
holdings outside the entity results in the part owner exceeding an 
entitlement because of attribution of the entity's land, then the 
entity may not be able to realize its full entitlement. Reclamation 
believes it is fair to treat part ownership by a nonresident alien or 
foreign entity in the same manner as all other part owners.

[[Page 66779]]

    Comment: A commenter requested that special consideration be 
provided to nonresident aliens who hold land in the Central Arizona 
Project on this issue. Specifically, the commenter suggested that if a 
nonresident alien's entitlement is reduced, then in the Central Arizona 
Project the nonresident alien whose land becomes ineligible should be 
eligible for a 10-year recordable contract. The commenter proposed this 
special treatment because a possible consequence of the proposed rules 
may be the drilling of new wells and acceleration of the depletion of 
the underground water reserves.
    Response: Section 218 of the RRA provides for recordable contracts, 
``* * * for a period of time not to exceed 10 years from the date such 
lands are capable of being served with irrigation water, as determined 
by the Secretary.'' Accordingly, land held by nonresident aliens that 
becomes ineligible because of the changes to the entitlement for 
nonresident aliens or foreign entities will be eligible to enter into 
recordable contracts as provided for in Sec. 426.12(e)(4) for 5 years 
or the difference between 10 years and the number of years irrigation 
water has been available to the land in question, whichever is greater.
    Comment: What evidence is needed by a district to confirm that a 
corporation is owned by more than one foreign person?
    Response: Under Sec. 426.18, it is the responsibility of each 
landholder to complete the RRA forms completely and accurately. The 
district may reasonably rely on the information presented on the forms.
    Comment: A number of additional specific examples were presented to 
Reclamation to be addressed. These are addressed as follows:
    Example from comment: What is the entitlement of a domestic 
corporation which is wholly owned by a foreign corporation which in 
turn is wholly owned by a foreign family, e.g., mother, father, 
daughter, and son?
    Response: In addressing this example three factors must be known: 
(1) What is the acreage limitation status of the domestic corporation? 
(2) Was the foreign entity established in a nation that meets the 
exceptions included in Sec. 426.8(d)? (3) Are the family members 
citizens of a nation that meets the criteria included in Sec. 426.8(d)? 
If the foreign corporation does not meet the criteria, then it would be 
a prior law recipient with acreage limitation entitlements of 160 
acres. Whether or not this status affects the ability of the domestic 
entity to realize its full entitlement would depend on the domestic 
entity's acreage limitation status. If the foreign entity was 
established in a nation that met the criteria and it made an 
irrevocable election, then it would be a qualified recipient. Its 
ability to realize its full entitlement would depend on whether its 
part owners also met the criteria.
    Example from comment: What is the entitlement of a domestic 
corporation that is wholly owned by a foreign corporation and the 
shares of the foreign corporation are publicly traded? Reclamation 
should address the fact that such shares are commonly ``bearer'' shares 
and are not registered to individuals or entities.
    Response: Reclamation has addressed the issue of bearer shares in 
the past. If an entity cannot identify its part owners, as required on 
the RRA forms, the entity is ineligible to receive irrigation water.
    Example from comment: What is the entitlement of a domestic 
corporation whose shares are publicly traded, some portion of which are 
held in ``street name?''
    Response: This would be treated in the same manner as Reclamation 
treats any domestic corporation. For example, if that corporation is a 
limited recipient and is required to submit RRA forms, the entity is 
only required to disclose the names of persons whose acreage attributed 
through the corporation exceeds 40 acres. Generally, corporations are 
aware of such part owners. Districts are not required to take any 
special actions to determine if an entity is held by nonresident aliens 
or foreign entities.
    Example from comment: What is the effect on a domestic 
corporation's ownership entitlement if a foreign shareholder becomes a 
U.S. resident?
    Response: The domestic entity's entitlement is determined by its 
own acreage limitation status. However, its ability to receive 
irrigation water up to its full entitlement may be affected by part 
owners.

Section 426.9  Religious or Charitable Organizations

    Section 426.9 of the prior regulations, Class 1 equivalency, is 
renumbered as Sec. 426.11. The new Sec. 426.9, Religious or charitable 
organizations, replaces Sec. 426.15 of the prior regulations. This 
section describes the acreage limitation entitlements of these types of 
organizations. The few changes that have been made from the proposed 
rules are highlighted below.
    Paragraph (a) includes a new definition for purposes of this 
section of central organization, in addition to the definition of 
religious or charitable organizations found in the proposed rule.
    As in the proposed rule, the titles of paragraphs (b) and (c) have 
been modified in the final rule to reflect their application to both 
the ownership and nonfull-cost entitlements of religious or charitable 
organizations. This change eliminates the need for paragraph (d) that 
addressed leasing in the prior regulation.
    Both the proposed and final versions of paragraph (b) include a 
more significant modification that changes the consequences of failure 
by a subdivision of a religious or charitable organization to satisfy 
the three criteria established by the RRA. Under the prior rules, the 
entire religious or charitable organization would be treated as a 
single limited recipient for purposes of application of the acreage 
limitation provisions, if one of its subdivisions failed to meet one of 
the established criteria. Under the proposed and final rules, only the 
subdivision that does not meet one or more of the criteria and any 
subdivisions of it are affected; the central organization and other 
subdivisions are unaffected.
    The new language also establishes that the qualified or limited 
recipient status of a subdivision which fails to meet the three 
criteria is determined by counting the subdivision's members. Thus, 
most, but not all, subdivisions that fail to meet the criteria will be 
treated as limited recipients.
    Paragraph (c) addresses the acreage limitation status of religious 
or charitable organizations that remain under prior law.
    Paragraph (d) on affiliated farm management replaces paragraph (c) 
in the previous regulation.
    The following examples illustrate the application of Sec. 426.9:

    Example (1). A charitable organization has subdivisions in each 
of five different districts. Each of these districts amends its 
contract to conform to the discretionary provisions. Therefore, each 
subdivision is entitled to own and farm 960 acres of irrigation land 
as long as they meet the criteria specified in Sec. 426.9(b)(1).
    Example (2). A religious organization has subdivisions in each 
of Districts A, B, C, and D. Each subdivision operates 800 acres of 
irrigation land. Districts A and B amend their respective contracts 
to conform to the discretionary provisions; therefore, the 
subdivisions in Districts A and B are each entitled to own or 
operate 960 acres of irrigation land as long as they meet the 
criteria specified in Sec. 426.9(b)(1). Districts C and D do not 
amend their contracts to conform to the discretionary provisions and 
remain subject to the acreage restrictions specified under prior 
law. The subdivisions in Districts C and D, however, make individual 
elections to conform to the

[[Page 66780]]

discretionary provisions and are therefore entitled to own or 
operate 960 acres of irrigation land as long as they too meet the 
criteria specified in Sec. 426.9(b)(1).
    Example (3). Subdivision Z of the ABC Charity leases out the 
land it holds in a discretionary provision district. Accordingly, 
Subdivision Z and any subdivision of it will be treated as a single 
entity for acreage limitation purposes. Whether Subdivision Z is a 
qualified recipient or a limited recipient will be determined by the 
total number of members of Subdivision Z and its subdivisions. The 
acreage limitation status of ABC Charity and any other subdivisions 
of that central organization will not be affected because of the 
actions taken by Subdivision Z.

Comments Concerning Sec. 426.9--Religious or Charitable Organizations

General
    Comment: The proposed changes to provisions applying to religious 
or charitable organizations are an improvement over the current 
regulations.
    Response: Reclamation believes the changes in the proposed rules, 
all of which were retained in the final regulations, will resolve many 
questions associated with this topic.
    Comment: Religious and charitable organizations should be charged 
full-cost if they lease their land to another party.
    Response: Land held by such organizations will be subject to 
application of the full-cost rate if they or their lessees exceed their 
entitlements, just like any other landholder.
Section 426.9(c)
    Comment: Under this section would a local unit be allowed to become 
a limited recipient with respect to particular tracts of land that it 
must lease if the lessee will use the property in ways that are not 
within the exemption provided for in Sec. 426.8(b)(1) and the central 
organization remains subject to prior law?

    (Note: The referenced section is 426.9(b)(1) in the final 
rules.)

    Response: A local unit may make an election to conform to the 
discretionary provisions and not affect the prior law status of the 
central organization. If the local unit then became a limited recipient 
for any reason, the associated entitlements would apply to the entire 
landholding of that unit and any of its subdivisions, not just to a 
particular tract of land.

Section 426.10  Public Entities

    Section 426.10 in the prior regulations, Information requirements, 
is replaced by Secs. 426.18, Landholder information requirements, 
426.19, District responsibilities, and 426.25 Reclamation audits. The 
new Sec. 426.10, Public entities, replaces Sec. 426.17 of the prior 
regulations. This section describes the application of acreage 
limitation provisions to public entities and has been rewritten for 
clarity and organization. No substantive change is intended.
    Paragraph (a) in the proposed rule has been deleted because the 
definition of the term Public Entities was a duplication of what is 
included in the definitions section (Sec. 426.2). What follows reflects 
the numbering of the final regulation.
    Paragraph (a) has been rewritten to show that public entities are 
exempt from certain acreage limitation provisions rather than the land. 
The rephrasing more accurately states Reclamation policy. In 
particular, the land can become subject to ownership limitations 
through leasing. It also clarifies that public entities must meet 
certain RRA forms requirements.
    Paragraph (b) states that public entities are not subject to excess 
land provisions in that land may be sold without price approval.
    The wording of paragraph (c) is changed to state that land leased 
from a public entity will count toward the lessee's ownership 
entitlement, rather than being worded as a prohibition of leasing in 
excess of ownership entitlements.
    The following examples illustrate the application of Sec. 426.10:

    Example (1). Farmer X is a qualified recipient who owns and 
irrigates 160 acres of land with irrigation water. The State of 
Colorado may lease Farmer X an additional 800 acres of State-owned 
land which will make up the balance of Farmer X's ownership 
entitlement. Farmer X is still entitled, however, to lease 
additional acreage which may be irrigated at the full-cost rate 
provided that additional acreage is not owned by a public entity.
    Example (2). In 1976, Farmer X purchased 100 acres of irrigation 
land in District A and 100 acres in District B. Districts A and B 
remain subject to prior law and Farmer X has not made an irrevocable 
election. Since Farmer X purchased the land prior to December 6, 
1979, all 200 acres are eligible to receive irrigation water. In 
addition, Farmer X wants to lease 60 acres of irrigation land from 
the State of Wyoming. If he does so, the leased land will be 
ineligible to receive irrigation water because Farmer X already owns 
in excess of the 160-acre ownership entitlement for prior law 
recipients. However, if Farmer X becomes a qualified recipient 
through either a contract amendment by a district in which he is a 
direct landholder or an irrevocable election, he will be entitled to 
receive irrigation water on not only the 60 acres he wishes to lease 
from the State, but also on another 700 acres of irrigation land, 
whether in his ownership or leased from another party, including a 
public entity.

Comments Concerning Sec. 426.10--Public Entities

Section 426.10(a)
    Comment: The use of the term ``acreage limitation'' in this section 
rather than ``acreage limitation and full-cost pricing'' will apply the 
nonfull-cost entitlement to public entities.
    Response: The definitions of ``acreage limitation provisions'' and 
``acreage limitation entitlement'' includes both the ownership and 
pricing restrictions of Federal reclamation law. Reclamation calls the 
attention of the commenter to the definitions section (Sec. 426.2).

Section 426.11  Class 1 Equivalency

    Section 426.11 in the prior regulations, Excess land, is renumbered 
as Sec. 426.12. The new Sec. 426.11, Class 1 equivalency, replaces 
Sec. 426.9 of the prior regulations. This section presents the concept 
of Class 1 equivalency, its relationship to land classification, and 
how it is used with regard to acreage limitation entitlements. 
Substantial editorial and organizational changes are made throughout 
this section but these are not intended to have substantive effect.
    The proposed rule included a provision to prohibit the application 
of Class 1 equivalency in cases where irrigation of land contributes to 
hazardous or toxic return flows. The final rule does not include this 
provision and retains the provisions of the prior rule. The rest of 
this section includes no significant changes from the proposed and 
prior rule, unless otherwise noted below.
    Paragraph (a) provides the general application of the Class 1 
equivalency provision. Two changes were made to this paragraph from the 
proposed regulation. The first is in paragraph (a)(3) where the 
reference to Class 4 land has been removed. Since paragraph (a)(2) 
states that all land, including Class 4 and special use land, will be 
classified as 1, 2, or 3 for equivalency purposes, the rule was 
confusing without the change. Paragraph (e)(4) that addresses 
scheduling by Reclamation of requests for Class 1 equivalency 
determinations was moved to (a)(5).
    The wording of paragraph (b) is changed to make clear that only 
districts, and not individual landholders, can make requests to 
Reclamation for Class 1 equivalency determinations. Individual 
landholders

[[Page 66781]]

must work through their districts to obtain Class 1 equivalency.
    Paragraph (c) provides the definition of Class 1 land, while 
paragraph (d) explains how land classes are determined. Paragraph (e) 
addresses what additional studies are required for Class 1 equivalency 
determinations.
    Paragraph (f) addresses how Class 1 equivalency determinations are 
used with respect to the acreage limitation provisions. Finally, 
paragraph (g) makes it clear that equivalency determinations that were 
a provision of project authorization will be honored as originally 
calculated.
    The following examples illustrate the application of Sec. 426.11:

    Example (1). Farmer X owns a total of 1,300 acres in District A. 
That acreage includes 800 acres of Class 1 land, 300 acres of Class 
2 land, and 200 acres of Class 3 land. The equivalency factors for 
the district have been determined to be: Class 1 equals 1.0, Class 2 
equals 1.20, and Class 3 equals 1.50. Using these equivalency 
factors, the following landholding in terms of Class 1 equivalency 
would apply:
     Class 1: 800 acres divided by 1.0 equals 800 acres 
Class 1 equivalent.
     Class 2: 300 acres divided by 1.2 equals 250 acres 
Class 1 equivalent.
     Class 3: 200 acres divided by 1.5 equals 133 acres 
Class 1 equivalent.
    Thus, Farmer X's total landownership of 1,300 acres is equal to 
1,183 acres of Class 1 land in terms of productive capacity. It will 
be necessary for him to declare the equivalent of 223 acres of Class 
1 land (1,183 acres minus 960 acres), as excess and ineligible to 
receive irrigation water while in his landholding. This can be 
accomplished in any combination of Class 1, 2, and 3 land that 
achieves the necessary result.
    Example (2). A district with an existing contract decides not to 
amend its contract to conform to the discretionary provisions. 
However, an individual landholder within the district makes an 
irrevocable election to conform to these provisions. The landholder 
requests equivalency through the district, and the district requests 
Reclamation to make the equivalency determination for the entire 
district. Under such conditions, the district would be required to 
pay the United States for the cost of making the equivalency 
determination. Any arrangement regarding the payment of the costs 
between the landholder and the district would be a district matter. 
The application of Class 1 equivalency would be available only to 
landholders who have exercised an irrevocable election.
    Example (3). A district decides to amend its contract to conform 
to the discretionary provisions, but it elects not to request 
equivalency. Thus, individual landholders within the district are 
not entitled to Class 1 equivalency.
    Example (4). Landholder X is a qualified recipient who owns no 
land, but leases 1,100 acres in a district which has requested Class 
1 equivalency. The land leased is a mix of Class 1, 2, and 3 land. 
During the time the equivalency determination was being made, 
Landholder X would be required to pay the full-cost water rate on 
140 acres (1,100 acres leased minus her 960-acre nonfull-cost 
entitlement) if she continued to receive irrigation water on that 
land. Once the equivalency determinations had been completed, 
Landholder X would be entitled to lease the equivalent of 960 acres 
of Class 1 land at the nonfull-cost rate (something greater than 960 
acres). Reclamation will reimburse the district for certain full-
cost payments made for land which became nonfull-cost as a result of 
the equivalency determination and the district will reimburse 
Landholder X.
    Example (5). Corporation Y is a limited recipient that owns 600 
acres of irrigation land and leases another 160 acres in District A. 
District A has requested and received a Class 1 equivalency 
determination. However, Corporation Y was not receiving irrigation 
water on or before October 1, 1981. Thus, even with equivalency, 
Corporation Y would be required to pay the full-cost rate for all 
land served in its landholding. (If Corporation Y had been receiving 
irrigation water on or before October 1, 1981, it would have been 
entitled to receive irrigation water on the equivalent of 320 acres 
of Class 1 land at the nonfull-cost rate. Deliveries on the 
remaining 440 acres or less, depending on application of Class 1 
equivalency, would be at the full-cost rate.)
    Example (6). Farmer Jones is a qualified recipient and owns 320 
acres in each of three districts. One of those districts, District 
A, requests and receives a Class 1 equivalency determination. From 
the equivalency determination, Farmer Jones is shown to own the 
equivalent of 240 acres of Class 1 land in District A. Farmer Jones 
is therefore entitled to purchase and receive irrigation water on an 
additional 80 acres of irrigation land (or the Class 1 equivalent 
thereof in District A) in any district. He could also lease 80 acres 
(Class 1 equivalent thereof in District A) in any district and 
receive irrigation water on that land at the nonfull-cost rate.
    Example (7). Landholder Y owns 1,200 acres in District A and 160 
acres in District B. Landholder Y is a qualified recipient and has 
designated 800 acres in District A as nonexcess and 400 acres in 
District A as excess. She has placed the 400 acres of excess land 
under recordable contract so that it can be irrigated while still in 
her ownership. Subsequent to this nonexcess land designation, 
District A requests and receives a Class 1 equivalency 
determination. Landholder Y is then free to withdraw excess land 
from recordable contract and redesignate it as nonexcess to take 
advantage of District A's equivalency determination, as provided in 
Secs. 426.12(b) and (j)(5), if an appraisal of the excess land has 
not already been performed. The maturity date as determined in the 
original recordable contract, however, would not change.

Comments Concerning Sec. 426.11--Class 1 Equivalency

General
    Comment: Assurances should be in the rule or preamble that existing 
equivalency rights should not be impaired where Reclamation has not 
completed and is not operating required water and drainage service.
    Response: The final rule does not address this issue. Existing 
equivalency determinations will not be changed without the district's 
request. Once requested, Reclamation will examine any incomplete 
facilities, although no general exemption will be provided.
    Comment: The rules should address the incidental irrigation of 
Class 6 land.
    Response: Reclamation considered addressing this issue in a July 
1994 policy in a manner that would have allowed such land to 
permanently receive irrigation water for acreage limitation purposes. 
However, the policy was withdrawn in September 1994.
Section 426.11(a)
    Comment: Class 1 equivalency should be applied on a westwide basis.
    Response: The RRA provides for Class 1 equivalency on a district-
wide basis. As an administrative matter, where the agricultural setting 
with respect to land quality, climate and other productive factors is 
similar, nearby districts can be combined into one equivalency study. 
However, there is too much variation in conditions to apply equivalency 
on a westwide basis.
    Comment: Class 4 land should be considered as Class 3 land rather 
than making a determination on a case-by-case basis.
    Response: Class 4 lands typically include special characteristics. 
These lands are not necessarily Class 3 lands when those 
characteristics are not considered, but may have the productive 
potential of Class 1 or 2 lands.
Section 426.11(d)
    Comment: Reclamation has no authority to reclassify lands.
    Response: While it is true that Reclamation may not reclassify land 
for equivalency purposes without the district's request, Reclamation 
has authority under the Reclamation Act of 1939 and other statutes to 
reclassify lands.
    Comment: Contract amendments or renewals should not automatically 
trigger reclassification.
    Response: No provision in these regulations requires automatic 
reclassification because of a contract amendment or renewal.
    Comment: Proposed Sec. 426.10(d)(1)(i) goes beyond what the 
Congress provided. If nothing else it should not be used to remove 
Class 1 equivalency already provided.

[[Page 66782]]

    Response: RRA Section 207 requires that soil characteristics be 
taken into account when determining Class 1 equivalency factors. 
Reclamation has always considered soil characteristics when classifying 
or reclassifying land.
    Comment: The government should pay for reclassifications.
    Response: For projects authorized after 1924, Reclamation pays for 
the initial classification. Reclassifications are only done upon 
request and the benefits of that action will accrue to identifiable 
landholders and districts. In some instances, contracts between 
districts and Reclamation may provide for cost sharing with 
Reclamation.
Section 426.11(g) (of the Proposed Rule)
    Comment: Several commenters wanted Reclamation to explain under 
which provision of the RRA it claims authority to deny equivalency for 
lands which have the potential to contribute to hazardous or toxic 
return flows. The commenters believed that the proposal is purely 
punitive. Since it would result in some landholdings that will be 
economically less productive than if they had equivalency, the farmer 
may not be able to bear the costs of managing return flows and compete 
with farmers on Class 1 soils.
    Response: While Reclamation has authority under the RRA to consider 
toxic return flows, a provision has not been included in the final 
rules to limit Class 1 equivalency as a result of toxic and hazardous 
return flows. Instead, Reclamation will address this problem through 
other measures, and take appropriate steps under other authority. The 
problem of toxic drainage is a serious one and the equivalency 
provisions do not provide a mechanism for addressing toxic drainage 
from already classified lands.
    Comment: The hazardous/toxic study for Class 1 equivalency should 
only apply if State agencies are not already addressing that issue.
    Response: The final rule does not include a provision limiting 
Class 1 equivalency as a result of a study of toxic and hazardous 
return flows. Reclamation will address this problem through other 
authorities.
    Comment: Several commenters requested definitions for: (1) 
``hazardous and toxic return flows;'' (2) ``contribute to;'' and (3) 
``irrigation return flows.'' Others expressed their dislike of the use 
of the word ``could'' in reference to return flows and toxicity. Some 
thought it could be interpreted too broadly and noted that the preamble 
for the proposed rules states ``would'' and the rule should be changed 
to be the same. Others expressed support for substituting ``but for 
causation'' or ``substantial factor causation'' for the word 
``contribute.'' Some commenters recommended that Reclamation should 
explain what criteria it proposes to use to evaluate whether the return 
flows from irrigated land are hazardous and toxic.
    Response: The final rule does not include a provision limiting 
Class 1 equivalency as a result of toxic and hazardous return flows.
    Comment: The analysis of hazardous or toxic irrigation return flows 
is an unfunded mandate.
    Response: The final rule does not include a provision limiting 
Class 1 equivalency as a result of toxic and hazardous return flows. 
Accordingly, the question of whether the analysis of hazardous or toxic 
irrigation return flows is an unfunded mandate is no longer applicable.
    Comment: Reclamation should make it clear that if a contractor 
requests that a portion of its land be classified or reclassified, 
Reclamation will not classify or reclassify any other land in the 
district, including reclassification of the entire district.
    Response: When a district requests a Class 1 equivalency 
determination, Reclamation will examine all of the land in the 
district.
    Comment: The proposed rules ignore the fact that most of the Class 
1 equivalency arrangements have already been put into place. Therefore, 
instead of the prospective approach, the trace element analysis should 
also be initiated wherever equivalency is already in place.
    Response: In fact, many districts have yet to request Class 1 
equivalency determinations. Less than 7 percent of the districts 
subject to acreage limitation have Class 1 equivalency factors in 
place. However, relatively few districts request equivalency. Thus, in 
order to effectively address toxic and hazardous drainage, Reclamation 
will identify other approaches to solving this problem.
    Comment: Section 426.11(g)(2) should be changed to read: 
``Increased acreage entitlements as a result of Class 1 equivalency 
will not be permitted on land whose irrigation Reclamation finds to 
contribute to hazardous or toxic drainage irrigation return flows or 
where drainage or return flows degrade the waters of the United States 
or otherwise contribute to water pollution.''
    Response: The final rule does not include a provision limiting 
Class 1 equivalency as a result of toxic and hazardous return flows. In 
the environmental commitments section of the final EIS, Reclamation 
recognizes that water quality impacts may be associated with toxic 
constituents in some irrigation return flows from project waters 
applied to district lands. Reclamation will review its internal 
policies and procedures, including those concerning land 
classification, and determine what approaches are available to assist 
in reduction of toxic constituents in irrigation return flows from 
agricultural lands receiving Reclamation water.

Section 426.12  Excess Land

    Section 426.12 in the prior regulations, Excess land appraisals, is 
renumbered as Sec. 426.13. The new Sec. 426.12, Excess land, replaces 
Sec. 426.11 of the prior regulations. This section has been rewritten 
for conciseness. It addresses the eligibility of land that exceeds 
landholders ownership entitlements.
    The In general section found in the prior rules has been deleted 
because the first sentence contained a definition of excess land that 
is redundant with that found in the definitions section, Sec. 426.2. 
Paragraphs (g) and (i) of the prior rules have been deleted. These 
paragraphs apply to only a very small number of landholders who have 
pre-1982 recordable contracts. Reclamation did not retain paragraphs in 
the final regulations that currently apply to only a few landholders 
and are likely to become completely obsolete in the next few years. 
Reclamation will continue to administer the program with respect to 
these landholder as it has under paragraphs (g) and (i) of the prior 
rules.
    Paragraph (a) provides the process for designating excess and 
nonexcess land. Paragraph (b) discusses when and how designations of 
excess and nonexcess land can be changed. Paragraph (c) addresses 
issues such as whether land that becomes excess when a district first 
contracts with Reclamation may be placed under a recordable contract, 
must be sold at an approved price in order for it to become eligible, 
etc. It should be noted that the proposed rule did not consistently use 
the phrase ``sells or transfers'' throughout this and similar 
paragraphs. That has been corrected in this final version.
    Paragraph (d) specifies what happens to land that is acquired into 
excess status after the district has contracted with Reclamation. 
Paragraph (d)(3) of the prior regulation has been merged with paragraph 
(d)(2) of these final regulations.
    Paragraph (e) specifies what happens to land that has its status 
changed by operation of law or regulations. Included in the proposed 
and final

[[Page 66783]]

version of this paragraph is provision (e)(4) that addresses what 
happens to land held by nonresident aliens and foreign entities that 
becomes excess because of this rulemaking. The provision allows such 
land to be placed under recordable contract and sold or transferred 
without price approval regardless of whether the land is placed under 
recordable contract. The proposed rule stated that the indirectly owned 
land had to have been purchased by the nonresident alien or foreign 
entity before July 1, 1995, in order to take advantage of this 
provision. The final rule changes that date to December 18, 1996.
    Paragraph (f) discusses how Reclamation will treat excess land that 
is acquired without price approval. The proposed rule included 
paragraph (f)(2) that was redundant with paragraph (d)(1)(i). 
Accordingly, the final rule does not include the paragraph and 
paragraph (f) has been reformatted.
    The proposed and final rules add a new paragraph (g). This 
paragraph promotes the intent of the statute concerning the disposal of 
excess land by prohibiting sellers of excess land from receiving 
irrigation water if they lease back or reacquire that land either 
voluntarily or involuntarily. Land held under such lease back or 
reacquisition arrangements, however, will be permitted to receive 
irrigation water if the transaction transferring the land back to the 
seller of excess land takes place prior to December 18, 1996. This is a 
change from the proposed regulation that permitted the receipt of 
irrigation water on such land only if the transaction occurred prior to 
July 1, 1995. The final rule also modifies the proposed rule by 
including language that states the prohibition against receiving 
irrigation water on lease backs and reacquisition of land by the seller 
of the excess land is effective only until the deed covenant 
terminates, and that the prohibition is waived if the landholder pays 
the full-cost rate for the irrigation water delivered to the leased 
back or reacquired land that is otherwise eligible.
    As in the proposed rule, the final regulation adds a new paragraph 
(h) which provides for assessment of the compensation rate (see 
Sec. 426.2), and an administrative fee (see Sec. 426.20) if ineligible 
excess land is irrigated in violation of Federal reclamation law and 
regulations. The assessment of the compensation rate when irrigation 
water is delivered to ineligible excess land has been Reclamation 
policy and was incorporated in the proposed and final rules for 
clarity.
    Paragraph (i) of the proposed and final regulations, which 
corresponds to Sec. 426.11(h) of the prior rules, adds a new paragraph 
to the deed covenant language. In general, the deed covenant governs 
the resale of lands that had been sold from excess status, unless 
specifically exempted. The new language provides that certain covenant 
terms, which permit removal of the covenant and eliminate the 
requirement for sale price approval, will not apply if the acquiring 
party is the party who originally sold the land from excess status. The 
final rules make an additional modification providing for an exception 
to this new language if the reacquiring party is a financial 
institution. It should be noted that the provisions of the deed 
covenant are triggered only when title to the land is to be 
transferred. Thus, the deed covenant applies only to direct landowners, 
and does not apply to the sale or purchase of an indirect interest in a 
legal entity that holds the land directly.
    Paragraph (j) provides information on recordable contracts, such 
as: who may request a recordable contract; what clauses must be 
included; what water rates Reclamation will charge for land held under 
a recordable contract; etc. As in the proposed rules, paragraph 
(j)(4)(i) makes clear that land subject to a recordable contract can 
receive irrigation water at less than the O&M rate only if both the 
owner and the lessee are subject to prior law. The sentence from the 
prior rules [paragraph (e)], allowing recordable contract land to be 
selected as full-cost land, was deleted because that issue is addressed 
in Sec. 426.6. Paragraph (j)(5) was amended in the final rules to 
clarify the language of the proposed rules that provides landholders 
must receive Reclamation's permission to amend recordable contracts, 
and if so approved, the length of time before the landholder must sell 
the remaining land held under recordable contract will not change. 
Moreover, any requirement for application of a deed covenant will no 
longer be applicable to land removed from the recordable contract.
    The following examples illustrate the application of Sec. 426.12:

    Example (1). Landowner A owns 1,200 acres of irrigable land in 
District S. He purchased this land before the district entered its 
first repayment contract with the United States after October 12, 
1982. Landowner A, as a qualified recipient, designates 960 of his 
1,200 acres as nonexcess. With Reclamation approval, Landowner A may 
designate the 240 acres, which are now excess, as nonexcess and 
eligible to receive irrigation water, provided he redesignates 240 
acres of presently nonexcess land as excess.
    Example (2). Landowner B is a qualified recipient by virtue of 
District T's contract amendment to conform to the discretionary 
provisions. Landowner B purchased 1,400 acres of irrigable land in 
this district before the district entered a repayment contract to 
receive an irrigation water supply. After the district's contract 
amendment, Landowner B designates 960 acres of his land as 
nonexcess. Subsequent to this designation, the district requests and 
receives an equivalency determination. All 1,400 acres of Landowner 
B's land is Class 3 land, and in District T, 1 acre of Class 1 land 
is equal to 1.4 acres of Class 3 land. With equivalency, Landowner B 
may irrigate 1,344 acres of Class 3 land in District T. Thus, he may 
redesignate everything in his ownership as nonexcess except for 56 
acres. In the future, if Landowner B sells some of this 1,344 acres 
of nonexcess land, he may not designate any of the 56 excess acres 
as nonexcess.
    Example (3). Farmer C, who owns irrigable land in excess of his 
ownership entitlement, sells 960 acres of his excess land to Farmer 
D, a qualified recipient, at a Reclamation-approved price. Farmer D 
owns no other irrigable land and designates the 960 acres as 
nonexcess and eligible to receive irrigation water in his ownership. 
After the 10-year period of the deed covenant expires, Farmer D 
sells the 960 acres at fair market value and purchases another 960 
acres of irrigable land located in yet another district. Farmer D 
purchases the latter parcel at a Reclamation-approved price because 
the land was excess in the seller's holding. However, since Farmer D 
has already reached his 960-acre limit for recapturing the fair 
market value of land purchased at a Reclamation-approved price, the 
newly purchased land is not eligible to receive irrigation water 
while in his holding. In order to regain eligibility, the land must 
be sold to an eligible buyer at a Reclamation-approved price. After 
Farmer D sells that land at a Reclamation-approved price, he may 
purchase and receive irrigation water on another 960 acres, provided 
it is bought from nonexcess status.
    Example (4). Landowner E is a resident alien and owns 480 acres 
of irrigable land in District X, which is subject to prior law. 
Landowner E has designated 160 acres as nonexcess, and it is 
receiving irrigation water. Following this designation, District X 
amends its contract to conform to the discretionary provisions. As a 
result of the district amendment, Landowner E satisfies the 
requirements for a qualified recipient and may designate all 480 
acres owned as nonexcess.
    Example (5). Landowner G is a resident alien and owns 160 acres 
of irrigation land in District A. District A is subject to prior 
law. Landowner G purchases an additional 160 acres which had been 
designated nonexcess while in the landholding of the seller. Since 
Landowner G has purchased himself into excess status, the newly 
purchased land becomes ineligible to receive irrigation water in his 
holding. However, 3 weeks later, Landowner G makes an irrevocable 
election. Since he meets the requirements of a qualified recipient 
and

[[Page 66784]]

since he has become subject to the discretionary provisions, 
Landowner G may designate the newly purchased 160 acres as 
nonexcess. As a qualified recipient, he may also purchase and 
receive irrigation water on another 640 acres of eligible land.
    Example (6). In 1986, Landowner H bought 160 acres of irrigable 
land from excess status in District Z. Landowner H, however, failed 
to get sale price approval from Reclamation. This land is ineligible 
for service in his holding unless the sale is reformed at a 
Reclamation-approved price. If the price is not reformed, the 160 
acres must be sold to an eligible buyer at a Reclamation-approved 
price in order to become eligible to receive irrigation water.
    Example (7). ABC Corporation, which was established under the 
laws of Switzerland, is owned by two stockholders who are citizens 
and residents of Switzerland. The corporation owns 480 acres of 
irrigation land in District X and has designated 160 acres as 
nonexcess and eligible to receive irrigation water, and the 
remaining 320 acres as excess and ineligible. District X 
subsequently amends its contract to conform to the discretionary 
provisions. Thereby, ABC Corporation becomes ineligible to receive 
irrigation water as a qualified recipient because it is not 
established under State or Federal law. However, since 160 acres of 
its land were eligible to receive irrigation water under prior law, 
this land will continue to be eligible if it is placed under a 
recordable contract or sold to an eligible buyer. The 160 acres, 
whether or not under recordable contract, may be sold at fair market 
value; however, the 320 acres which were excess under prior law 
remain ineligible until sold to an eligible buyer at an approved 
price.
    Example (8). Landholder O, a citizen and resident of Atlantis, 
is the sole stockholder in Corporation P, a qualified recipient 
legal entity registered in Idaho. Atlantis is a country which does 
not have a treaty with the United States calling for treatment of 
Atlantis corporations like U.S. corporations. In 1990, Corporation P 
purchased 960 acres of nonexempt land in District B. This land was 
all designated nonexcess under the then-current regulations. 
However, on the effective date of these regulations, Landholder O's 
ownership entitlement decreases to 160 acres, even for indirectly 
held land. The remaining 800 acres that become excess can continue 
to receive irrigation water if Corporation P places the land under 
recordable contract, and the land can be sold at fair market value 
and remain eligible if sold to an eligible buyer.

Comments Concerning Sec. 426.12--Excess Land

General
    Comment: Some commenters suggested that the approved sales price 
for excess land should be changed. Specifically, one suggestion was 
that the sales price approval process itself was a disincentive to 
selling excess land. Another commenter suggested excess land should be 
sold at the full-market price, with the difference between what would 
have been the approved price and the market price going as a tail-end 
credit to project costs.
    Response: These comments have not been accommodated in the final 
regulations. Consistent with current policy, Reclamation sets the sales 
prices of excess land within a project at a price that reflects the 
value of the land without irrigation water service provided by the 
Federal project. Sale of the land at the lower price allows for a wider 
distribution of Reclamation benefits and greater fostering of family 
farming opportunities than would be possible if the land was sold at 
the full-market price.
Section 426.12(g)
    Comment: Reclamation should explain what abuse, if any, is 
addressed by preventing a farmer from ever leasing land that the farmer 
previously sold from excess status. Some commenters suggested that if a 
prohibition was necessary, it should be limited to the term of the deed 
covenant.
    Response: Reclamation agrees with the proposition that to prohibit 
the former owner of excess land from ever receiving irrigation water on 
that land was more limiting than necessary. Reclamation has modified 
the provision, as suggested, to restrict any limitation on receiving 
irrigation water to the period of the deed convenant associated with 
the sale. Once the deed covenant has expired, there will be no 
limitation on the ability of the former owner of the land to receive 
irrigation water.
    Comment: If the landowner leases formerly excess land after it is 
sold and he or she exceeds his or her nonfull-cost entitlement, the 
former landowner must pay the full-cost rate for water delivered to 
that land. There is no difference between leasing previously owned 
excess land and leasing any other land either at the nonfull-cost rate 
or at the full-cost rate.
    Response: Reclamation does believe there is a difference between 
leasing previously owned excess land and other land. The purpose of the 
regulation is to ensure that the anti-speculation provisions of Federal 
reclamation law are not evaded and to distribute the benefits of the 
program as widely as possible. However, Reclamation agrees that if the 
former owner is paying the full-cost rate for irrigation water 
delivered to the land in question, then the purposes of the law have 
been met. Accordingly, Reclamation has included a provision that allows 
a former owner of land that was excess in his or her holding, and who 
leases or otherwise acquires such land before the deed covenant 
expires, to receive irrigation water if the full-cost rate is paid and 
the land is otherwise eligible to receive irrigation water. Once the 
deed covenant expires, the requirement for full-cost payment will also 
terminate, unless the land would be otherwise subject to full-cost 
pricing.
    Comment: This section overly restricts lenders.
    Response: Reclamation has added an exception in the final 
regulations for financial institutions as defined in Sec. 426.14 
(Involuntary acquisition of land).
    Comment: The regulations must also address the situation in which a 
landholder holds only a partial interest in an entity which leases land 
previously sold by the landholder.
    Response: Reclamation has addressed this in Sec. 426.12(g)(3). The 
full-cost rate will be applied to the proportional share of irrigation 
water delivered that corresponds to a part owner's interest in the 
entity.
    Comment: Entities that sell excess land to individual part owners 
who are now farming separately appear to be barred by this proposed 
rule.
    Response: Such former part owners face a number of restrictions if 
they should purchase land subject to a deed covenant. In fact, they 
would be able to receive irrigation water on the land, but until the 
deed covenant expires, they would have to pay the full-cost rate on an 
acreage that is equal to the amount of excess land that was attributed 
to them as part owners of the entity.
    Comment: The intended application of the exception for a landholder 
who ``became or contracted to become a direct or indirect landholder of 
that land prior to July 1, 1995'' is extremely unclear. 
Administratively, this provision will be very hard to enforce and would 
put the districts into a position of policing leases on an annual 
basis.
    Response: The July 1, 1995, date has been replaced with December 
18, 1996.
    Comment: What kinds of pre-July 1, 1995, contracts to become a 
direct or indirect landholder of formerly excess land meet the test of 
proposed rule Sec. 426.12(g)(1)?
    Response: Any contract that results in a person or entity becoming 
a landholder as that term is defined (see Sec. 426.2).
    Comment: The proposal to allow individuals to continue to evade the 
acreage limitations until July 1995 is unjustified and could erase much 
of the benefit of this reform. Such arrangements should not be allowed 
after 1982, or at the latest, 1987.
    Response: This comment has not been accommodated in the final 
regulations.

[[Page 66785]]

Reclamation believes that it is appropriate to apply this provision 
prospectively only. Retroactive application would cause unnecessary 
hardship and potential legal problems.
Section 426.12(i)
    Comment: The new clause (v) of the deed covenant should be revised 
to read: ``Upon the completion of an Involuntary Conveyance, the 
Secretary shall reconvey or otherwise terminate this covenant of 
record, except that during the original term of this covenant, it shall 
not be reconveyed for the benefit of an excess landowner who sold this 
land from excess status or for the benefit of a landholder who was 
previously subject to this covenant and who reacquired this land by an 
Involuntary Conveyance.''
    Response: Reclamation has modified clause (v) of the deed covenant 
to reflect this suggestion. Additional modifications have also been 
made to reflect the revisions to Sec. 426.12(g) and the exception for 
financial institutions found in Sec. 426.14 (Involuntary acquisition of 
land).
    Comment: There is no authority to restrict landholders from selling 
more than 960 acres in a lifetime (formerly excess land that was 
purchased at an approved price and sold at full market value). Also, 
why does this only apply to individuals and not to entities? There is 
apparently no restriction on the purchase and sale of nonexcess land 
which was not acquired from excess status [Sec. 426.12(i)(3)].
    Response: Reclamation has retained the limitation on the sale of 
formerly excess land from the prior rules. The provisions are intended 
to ensure that the benefits of the Reclamation program are widely 
distributed by ensuring excess land is not used as a speculative 
investment. These provisions are not restricted to individuals, but is 
applicable to all landowners. Finally, the respondent is correct in 
that there is no restriction on the purchase and the sale of eligible 
land that was not acquired from excess status. In such cases, the 
excess land has not been used as a speculative investment based on the 
value added by the Reclamation project.

Section 426.13  Excess Land Appraisals

    Section 426.13 in the prior regulations, Exemptions, is renamed 
Exemptions and exclusions and renumbered as Sec. 426.16. The new 
Sec. 426.13, Excess land appraisals, replaces Sec. 426.12 of the prior 
regulations. Generally, only editorial changes have been made to the 
prior regulation. These changes are for clarity and without substantive 
effect. This section addresses how the approved price required for the 
sale or transfer of excess land, or land burdened by a deed covenant 
will be determined by Reclamation, if that land is to become eligible 
to receive irrigation water in the ownership of an eligible buyer.
    The only significant change between the proposed and final versions 
was made to paragraph (e)(2), where it is now specified that the 
landowner requesting the appraisal is responsible for associated costs.
    Paragraph (a) details when Reclamation appraises the value of land. 
Paragraph (b) provides the procedures used by Reclamation to perform 
appraisals. Paragraph (c) discusses the factors that may be considered 
and how information may be obtained for the appraisal of nonproject 
water supplies.
    Paragraph (d) provides what will be considered to be the date of 
the appraisal. Paragraph (e) specifies who will pay for appraisals. 
Paragraph (f) discusses who will select the appraiser, while paragraph 
(g) provides the process that will be used to resolve appraisal 
disputes. Finally, paragraph (h) states that Reclamation will review 
all appraisals of excess land or land burdened by a deed covenant and 
provides what will be used in that process.

Comments Concerning Sec. 426.13--Excess Land Appraisals

Section 426.13(c)
    Comment: This section should not include an obligation to conserve 
the groundwater supplies supporting farms in Federal projects.
    Response: This particular section of the rules provides a partial 
list of the factors that will be considered when appraising the value 
of excess land and how that information will be obtained. No other 
requirements are or should be implied.
Section 426.13(e)
    Comment: Appraisal costs should be uniform throughout the West and 
should be kept as low as possible.
    Response: A number of factors determine the costs of appraisal and 
these factors vary throughout the West. For example, in certain 
regions, data has been gathered over decades of processing excess land 
appraisals. The existence of this data results in lower costs as 
compared to other regions where the data must be developed for each 
excess land appraisal. Reclamation believes the costs of appraisals 
should be borne by the party who is benefitting from the ability to 
purchase excess land at below market values.

Section 426.14  Involuntary Acquisition of Land

    Section 426.14 in the prior regulation, Residency, is deleted 
because residency has not been a provision of acreage limitation 
provisions since it was repealed by the RRA in 1982. The new 
Sec. 426.14, Involuntary acquisition of land, replaces Sec. 426.16 of 
the prior regulations. This section addresses how the acreage 
limitation provisions apply to land that is involuntarily acquired.
    Paragraph (a) adds a definition that was not in the proposed rules, 
financial institution. This new definition accompanies the definition 
of involuntarily acquired land that was included in the proposed rule.
    Paragraph (b) provides the conditions under which ineligible excess 
land that is involuntarily acquired may become eligible. Paragraph (c) 
provides the same information for land that was held under a recordable 
contract and that is involuntarily acquired. Paragraph (d) discusses 
how mortgaged land that is involuntarily acquired would be eligible to 
receive irrigation water.
    A change from the prior rules was made in paragraph (e) of the 
proposed rules and is retained in the final rules with modifications. 
This paragraph discusses how acreage limitations apply to nonexcess 
land that becomes excess when it is involuntarily acquired. Like the 
proposed rules, paragraph (e) provides that land involuntarily acquired 
by a landowner, who held the land previously as excess or under 
recordable contract, is not eligible for application of the involuntary 
acquisition provision to receive water for 5 years. However, an 
exception is made to this prohibition in the final rules for financial 
institutions.
    An additional change to paragraph (e) in the final rules reflects 
the changes discussed in Sec. 426.12 regarding the reacquisition of 
formerly excess land by the party that originally held the land as 
excess. Incorporating the provisions of Sec. 426.12(g), if a landholder 
involuntarily acquires nonexcess land that he or she had held as 
excess, and designates that land as excess upon the reacquisition, the 
landholder cannot use the involuntary acquisition provisions to receive 
water on that land for 5 years, unless one of the exceptions provided 
in Sec. 426.12(g) applies or the landholder is a financial institution.
    Paragraph (e)(iv) of the proposed rules has become a new paragraph 
(f) in the final rules. This paragraph explains that a landowner is not 
permitted to redesignate involuntarily acquired land as nonexcess, if 
the land was designated as excess when it was involuntarily

[[Page 66786]]

acquired, and if a higher water rate would have been owed because if 
the land had been designated as nonexcess in the first place. The only 
exception is if the landholder remits the difference in the rates to 
Reclamation.
    What had been paragraph (f) in the proposed rules is paragraph (g) 
in the final rules. This paragraph describes the effect of 
involuntarily acquiring land that had been subject to the discretionary 
provisions if the acquiring party is subject to prior law. Unlike the 
prior and proposed rules, the final version highlights the situation in 
which a landholder would become subject to the discretionary provisions 
upon involuntarily acquiring land.
    Finally, paragraph (h) provides when the 5-year eligibility period 
commences for land that is acquired by inheritance or devise.
    The following examples illustrate the application of Sec. 426.14:

    Example (1). Farmer X owns 160 acres of irrigation land in 
District A. District A has not amended its contract to become 
subject to the discretionary provisions. Farmer X inherits another 
480 acres of irrigation land in District B. District B has amended 
its contract to become subject to the discretionary provisions. 
Farmer X never previously held the inherited land as ineligible 
excess land or under a recordable contract. Even though Farmer X has 
reached the limits of his individual ownership entitlement under 
prior law, since the 480 inherited acres had been designated 
nonexcess and eligible in its prior ownership, the land continues to 
be eligible to receive irrigation water for a period of 5 years in 
Farmer X's ownership. However, since this land is located in a 
district subject to the discretionary provisions, the price of water 
delivered to this land must include at least full O&M costs and, if 
the land is leased to another landholder, the full-cost rate may 
apply, depending on whether the lessee has exceeded his nonfull-cost 
entitlement. Farmer X also has the option of selling the 480 acres 
at any time at full market value. As explained in paragraph (g) of 
this section, Farmer X would not become subject to the discretionary 
provisions by virtue of the fact that he involuntarily acquired land 
from a landowner subject to the discretionary provisions. However, 
Farmer X has the option of becoming subject to the discretionary 
provisions through an irrevocable election. In addition, if Farmer X 
was to request and receive approval for a redesignation of his 
nonexcess and excess land, and thereby some of the involuntarily 
acquired land became nonexcess, Farmer X would automatically become 
subject to the discretionary provisions. If he chooses either of 
these options, he can then include the 480 acres as part of his 960-
acre ownership entitlement as a qualified recipient.
     Example (2). Farmer A, a qualified recipient who owns 500 acres 
of irrigation land, purchases 160 acres of excess land from Bank 
ABC. Farmer A designates this 160 acres as nonexcess, eligible to 
receive irrigation water. The deed transferring the land contains 
the 10-year deed covenant requiring Reclamation sale price approval. 
Farmer A finances this purchase through Bank ABC. Subsequently, Bank 
ABC forecloses on Farmer A's 160 acres. Since the bank is a 
financial institution, it may receive irrigation water on this land 
for a period of 5 years at the same price which was paid by Farmer 
A, unless the land becomes subject to full-cost pricing through 
leasing. In addition, the bank may sell the land at fair market 
value without affecting the land's eligibility to receive irrigation 
water. The deed covenant shall be removed by Reclamation at the 
bank's request.
    Example (3). Farmer Z owns 160 acres of ineligible excess 
irrigation land in District W. He decides to sell this land to his 
neighbor, Farmer Y, an eligible buyer. Farmer Z provides Farmer Y 
with the financing necessary for the purchase. The deed transferring 
the land to Farmer Y contains the 10-year covenant requiring sale 
price approval. The 160 acres of land burdened by a deed covenant 
becomes eligible to receive irrigation water in Farmer Y's 
ownership. During 1999, Farmer Y fails to meet his financial 
obligation to Farmer Z. Consequently, the land once again becomes 
part of Farm Z's ownership by foreclosure. Since Farmer Z is not a 
financial institution, he may not receive irrigation water on this 
land through the involuntary acquisition provisions, unless the land 
becomes exempt from the acreage limitation provisions, Farmer Z pays 
the full-cost rate for water delivered to the land, or the deed 
covenant expires. In addition, Reclamation will not remove the deed 
covenant requiring Reclamation price approval for the sale of the 
land.
    Example (4). Landowner L, a qualified recipient, owns 800 acres 
of irrigation land in District M. Landowner L inherits 640 acres of 
land in District N from his grandfather. The inherited land was 
placed under a 5-year recordable contract by his grandfather 3 years 
ago. Landowner L signs an agreement to assume his grandfather's 
recordable contract to the 480 acres that remain excess in his 
landholding. However, even though the original recordable contract 
term expires in 2 years, since the excess land was involuntarily 
acquired, it remains eligible to receive irrigation water for 5 
years from the date Landowner L involuntarily acquired the land. 
Within that 5-year period, however, Landowner L must sell the excess 
land at a Reclamation approved price.

Comments Concerning Sec. 426.14--Involuntary Acquisition of Land

General
    Comment: Reclamation should designate all land acquired 
involuntarily as excess unless the acquiring party deems otherwise; the 
acquiring party should not be forced to make that decision.
    Response: This comment was not accommodated in the final 
regulations. Because of the consequences associated with land being 
designated as excess, it is the landholder's responsibility to make 
such designations. Reclamation will only make such designations if the 
landholder and district do not do so as provided for in Sec. 426.12 
(Excess land). In the case of involuntarily acquired land, if the 
landholder or district does not designate the land as excess and the 
landholder's holding has not exceeded the applicable ownership 
entitlement, such land up to the landholder's ownership entitlement 
will be assumed to be nonexcess by Reclamation if irrigation water is 
delivered to that land. Only when the landholder's ownership 
entitlement would be exceeded, will Reclamation designate the 
involuntarily acquired land as excess when the landholder and district 
do not make such a designation. For land involuntarily acquired, the 
land will remain ineligible to receive irrigation water until the land 
is designated.
    Comment: A qualified recipient who sells to a limited recipient 
should not be restricted to 960 acres in the case of foreclosure.
    Response: There are no general exceptions to the acreage limitation 
restrictions that have been established by statute. However, in many 
cases the qualified recipient could receive water on the land for at 
least 5 years, even if the ownership entitlement is exceeded. Relevant 
factors include: if any nonexcess eligibility remains in the 
foreclosing party's ownership entitlement; if the foreclosing party 
sold the involuntarily acquired land from excess status or held it 
under recordable contract; if the entity is a financial institution; if 
any of the exceptions provided in Sec. 426.12(g) apply; and if the 
status of the land was nonexcess immediately prior to foreclosure.
    Comment: Foreign ownerships should be able to take full advantage 
of the involuntary acquisition rules, as the current interpretation in 
the Central Arizona Project.
    Response: Reclamation believes the respondent is commenting on the 
practice that land that is held indirectly and was acquired 
involuntarily does not have to be considered in determining if an RRA 
form must be completed. This practice has been codified in 
Sec. 426.18(g). This provision is applicable regardless of the 
nationality of the involuntarily acquiring party. Foreign entities or 
nonresident aliens who involuntarily acquire land are treated no 
differently from citizens of the United States and domestic entities.
Section 426.14(a)
    Comment: Would an acquisition of a deed in lieu of foreclosure fit 
the ``sale

[[Page 66787]]

from the previous landowner is canceled'' situations described in 
Sec. 426.12?
    Response: A deed in lieu of foreclosure is considered to be an 
involuntary acquisition by the lender, but may not be a canceled sale 
from a previous land owner.
Section 426.14(b)
    Comment: A commenter stated that there is no justification to 
require a deed covenant on land that is declared as nonexcess by the 
landholder as specified in Sec. 426.14(b), since it was originally sold 
in accordance with RRA requirements and the acquiring landholder had no 
control over the land's status until it was involuntarily acquired.
    Response: This comment was not accommodated in the final 
regulations. The respondent is assuming that all land involuntarily 
acquired was never excess or it was sold at an approved price. That is 
not always the case. Section 426.14(b) addresses situations where the 
land was excess in the previous landholding and is involuntarily 
acquired. If the acquiring party declares it as nonexcess, it is 
appropriate to require a deed covenant and restrict the sales price for 
10 years, just as Reclamation does for any excess land that is 
designated as nonexcess.
    Comment: Involuntarily acquired excess land should be eligible as 
long as the new landowner is within his acreage limitations.
    Response: Reclamation agrees. As in the prior and proposed rules, 
this paragraph of the final rules provides a method for the new 
landholder to make such land eligible.
Section 426.14(d)
    Comment: Deed covenant restrictions should be removed from 
Sec. 426.14(d).
    Response: There are no requirements to include deed covenants in 
Sec. 426.14(d). In fact, that section is clear that deed covenants will 
not apply [Secs. 426.14(d)(1)(iii) and 426.14(d)(2)].
    Comment: Any nonexcess land a seller involuntarily acquires should 
not require a deed covenant to be considered nonexcess, even if the 
buyer designates the land as excess after the mortgage is recorded.
    Response: The rules provide for this interpretation if the land was 
involuntarily acquired.
Section 426.14(e)
    Comment: All farmers in the West receiving water through 
Reclamation should not be denied broad access as intended by Congress 
because Reclamation failed to pursue a few non bona fide transactions 
concerning the reacquisition of excess land.
    Response: Congress was very specific as to what involuntarily 
acquired land would be eligible to receive water. Reclamation has for 
many years interpreted this provision to not allow the delivery of 
water to land that was excess when it was involuntarily acquired, 
unless the new landowner declares it as nonexcess and includes the 
required covenant in the deed. The only exception is for certain 
mortgaged land. The proposed rules refined this limitation by stating 
that if the involuntarily acquiring party had sold the land from excess 
status, whether or not it was under a deed covenant, the same 
prohibition on receiving irrigation water would apply.
    The final rule provides exceptions to this restriction for 
financial institutions. The final rule also limits the application of 
the restriction to the period of the deed covenant and provides an 
additional exception if the full-cost water rate is paid. The final 
rule version fully implements the law, ensuring that excess land is 
fully disposed of by the landowner if it is to become eligible.
    Comment: Some commenters noted that they believe Reclamation has 
had difficulty determining whether financing and/or foreclosure were 
bona fide. They asked that these difficulties be described along with 
an explanation of why they justify a flat prohibition on receiving 
water for 5 years and not being able to remove the deed covenant.
    Response: It is sometimes difficult to determine whether a 
foreclosure occurred at arms length when the parties have prior or 
ongoing business relationships. Reclamation has excepted financial 
institutions from the restrictions on receiving water and removing the 
deed covenant. Reclamation understands that such organizations often 
lend to farmers based on the market value of the land rather than on 
the purchase price that has been approved by Reclamation. Such 
institutions are less likely to be motivated by the chance to foreclose 
on such property in the future to obtain a windfall profit than are 
other less well regulated entities and individuals.
    Reclamation does not believe individual lenders necessarily are 
driven by the same motives as financial institutions. Accordingly, 
lenders that are not financial institutions have been provided notice 
that Reclamation will not allow them to reacquire their formerly excess 
land and then sell it at full market value in the future. Thus, such 
lenders cannot sell the land at full market value until the deed 
covenant expires. In addition, such former owners will not be given the 
5-year grace period for receiving irrigation water on involuntarily 
acquired land declared as excess in their holdings.
    Comment: Rules concerning involuntary acquisition could affect 
lending institutions to the degree of not being able to loan money to 
farmers if those institutions have no entitlement available.
    Response: Reclamation has included an exception for financial 
institutions that involuntarily acquire land they formerly held as 
excess from the restriction on receiving irrigation water on the land 
or selling such land at full market value.
    Comment: The regulations could stop farmers from helping employees 
start farms by loaning money to buy excess land.
    Response: If the excess land was sold by the farmer at an approved 
price, the farmer who is helping his employee to buy the land would be 
able to recoup the loan amount as long as the farmer involuntarily 
acquired that land, even if the farmer was the owner of the land when 
it was excess. This is because the farmer could, again, sell the land 
at the approved price.
    Comment: Landholders who reacquire land that was previously excess 
in the landholders' holding prior to its sale should not be allowed to 
receive irrigation water following reacquisition, because the 
landholder is no worse-off as a result of the involuntary acquisition.
    Response: In general, Reclamation agrees with this comment. In the 
proposed rule, Reclamation applied this interpretation to all 
involuntary acquisitions. As discussed above, in the final rule, 
financial institutions, as defined, have been exempted from this 
application.
    Comment: Parties that involuntarily acquire land should be able to 
designate such land as excess, receive water on such land for 5 years, 
and then be able to redesignate such land as nonexcess. The current 
rules allow these actions.
    Response: Reclamation has adjusted the final rule by adding a new 
Sec. 426.14(f) to allow such actions with two conditions: (1) the 
landowner must follow the normal redesignation procedures; and (2) if a 
higher water rate would have been paid if the land had been designated 
as nonexcess upon involuntary acquisition, then the landowner must 
remit to the Federal Government the difference between the rate paid 
and the rate that would have been paid if the land had been designated 
as nonexcess rather than excess upon the involuntary acquisition.

[[Page 66788]]

    Comment: This section and other appropriate sections should be 
modified to allow an extension of the 5-year disposal period, if 
certain criteria are met.
    Response: This comment has not been accommodated in the final 
regulations. The commenter may be confusing the 5-year period for 
receiving irrigation water on involuntarily acquired land designated as 
excess with the 5-year period typically found in recordable contracts. 
The 5-year period for receiving water on involuntarily acquired land 
only addresses the period of time the excess land may receive 
irrigation water. After that period of time, the land becomes 
ineligible excess land. Whether the landowner wants to sell the land at 
that point is up to the landowner, since there is no requirement to 
sell the land.

Section 426.15  Commingling

    Section 426.15 in the prior regulations, Religious and charitable 
organizations, is renamed Religious or charitable organizations and 
renumbered as Sec. 426.9. The new Sec. 426.15, Commingling, replaces 
Sec. 426.18 of the prior regulations. This section describes how the 
acreage limitation provisions apply if water from project and 
nonproject sources are commingled before delivery to landholders.
    Editorial changes have been made to the prior and proposed 
regulation. Except as noted, no substantive changes are intended. In 
addition, as in the proposed rule, commingled water is defined in 
paragraph (a), but the definition of nonproject water that was found in 
this paragraph has been deleted. Instead, the definition of nonproject 
water may be found in the definitions section since that term is used 
outside of this section.
    Paragraph (b) discusses the application of Federal reclamation law 
and these regulations to commingling provisions already included in 
contracts. Paragraph (c) provides how new commingling provisions may be 
established in contracts and how Federal reclamation law and these 
regulations will be applied. Finally, paragraph (d) discusses when 
Federal reclamation law and these regulations do not apply.
    The following examples illustrate the application of Sec. 426.15:

    Example (1). District A has a distribution system constructed 
without funds made available pursuant to Federal reclamation law and 
irrigates land therein with nonproject surface supplies and ground 
water distributed to users within the district through its 
distribution system. The district enters into a contract with the 
United States for a supplemental irrigation water supply and intends 
to distribute that supplemental water through its distribution 
system. Only the landholders within the district who are eligible to 
receive a supply of irrigation water as specified in 
Sec. 426.15(c)(1) are subject to reclamation law. The district is 
not restricted in its use of the nonproject surface water or ground 
water, and will be in compliance with the provisions of its contract 
so long as there is sufficient eligible land to receive the 
Reclamation irrigation water supply.
    Example (2). District A has a contract with Reclamation for a 
supply of irrigation water. Within the boundary of the district 
there are several parcels of ineligible excess lands which are not 
supplied with irrigation water. Those lands are irrigated from the 
ground-water resources under them. If irrigation water furnished to 
the district pursuant to the contract reaches the underground strata 
of these ineligible lands as an unavoidable result of the furnishing 
of the irrigation water by the district to eligible lands, the 
continued irrigation of the ineligible excess lands with that ground 
water shall not be deemed to be in violation of reclamation law.

    Note: Example 2 also is applicable to the issue of unavoidable 
ground-water recharge.

    Example (3). A district has nonproject water available to 
deliver to lands considered ineligible for irrigation water under 
provisions of Federal reclamation law and these regulations. To 
eliminate the need to build a duplicate private conveyance system to 
transport nonproject water, the district would like to transport 
such water through facilities funded with monies made available 
pursuant to Federal reclamation law without the nonproject water 
being subject to Federal reclamation law and these regulations. If 
the district agrees, with prior Reclamation approval, the nonproject 
water may be commingled in federally financed facilities and 
delivered to ineligible lands if the district pays the incremental 
fee, as determined by Reclamation, for the use of the federally 
financed facilities required to deliver the nonproject water. The 
fee will be in addition to the capital, operation, maintenance, and 
replacement costs the district is obligated to pay and will be based 
on a methodology designed to reasonably reflect an appropriate share 
of the cost to the Federal Government, including interest, of 
providing the service.
    Example (4). The State of Euphoria has a water supply it wishes 
to transport in the same direction and elevation as planned in the 
Federal reclamation project. If Reclamation and the State each 
finance their share of the costs to construct and operate the 
project, the water supply of the State will not be subject to 
Federal reclamation law and these regulations.
    Example (5). District A has water rights to divert water from a 
river. These water rights are adequate to meet its requirements. It 
is located immediately adjacent to a federally subsidized facility, 
District B. District B is located immediately adjacent to the river 
but several miles from the Federal facility. District B contracts 
with the United States for a supply of irrigation water, but rather 
than construct several miles of conveyance facility, District B, 
with the approval of the United States, contracts with District A to 
allow District A's water rights water to flow down the river for use 
by District B, and the irrigation water is in turn delivered to 
District A. District A is not subject to Federal reclamation law and 
these regulations by virtue of this exchange, provided it does not 
materially benefit from that exchange. District B, however, is 
subject to Federal reclamation law and these regulations since it is 
the beneficiary of the exchange, i.e., a water supply.

Comments Concerning Sec. 426.15--Commingling

General
    Comment: The proposed rules should recognize that commingling is a 
fact of life and that often the Reclamation supply is only a minor part 
of the overall irrigation water supply.
    Response: Reclamation recognizes that often the supply from a 
Reclamation project is only a supplemental supply. The rules recognize 
the existence of commingling in contracts.
    Comment: The proposed commingling provision does not give any 
consideration for allocating evaporation, shrinkage, and other 
administrative losses between primary water and project water.
    Response: This comment has not been accommodated in the final 
regulations. Neither the RRA nor the acreage limitation provisions of 
these regulations address the amount of water received by any 
individual landholder. Rather, these provisions address what land may 
receive any irrigation water delivered from or through a Federal 
facility and the price charged for this water.
Section 426.15(a)
    Comment: Reclamation should not define as project water all water 
that is commingled and then impose acreage limitations on any land 
commingled water irrigates.
    Response: Whether or not nonproject water is subject to the acreage 
limitation provisions depends primarily on the terms of the contract 
with the district. This section of the rules only provides the 
parameters that must be met if nonproject water is not to be subject to 
the acreage limitation provisions.
Section 426.15(b)
    Comment: The proposed rules seem to change the application of this 
section so that it may apply only to contracts renewed at some earlier 
time and not to all renewals.
    Response: Reclamation has adjusted the provision to make it clear 
that it applies for the term of existing contracts

[[Page 66789]]

and any renewals. However, the provision does not apply to contracts 
that are no longer in effect.
    Comment: This section should be amended to include existing 
contracts which contain commingling provisions separate and apart from 
repayment contracts.
    Response: This paragraph applies to repayment, water service, and 
other types of contracts and any renewals of those contracts.
Section 426.15(c)
    Comment: The proposed commingling provisions do not address the 
situation where the distribution system is entirely privately owned and 
operated and Reclamation water can only be delivered through that 
system.
    Response: In fact, the prior, proposed, and final rules address 
such situations. See Sec. 426.15(c)(1) of the final regulations.
    Comment: What authority does Reclamation have to impose a limit 
upon the amount of water a landowner could use on his lands 
[Sec. 426.15(c)(1)(ii)]? Such may interfere with landowner's property 
rights.
    Response: The provision in question does not limit the amount of 
water a landowner may use. Rather, it is used strictly to determine if 
Federal reclamation law will apply to all landholders in a district or 
only those landholders who receive project irrigation water, as opposed 
to nonproject water. If facilities used to commingle water were built 
without Federal funds and the district is to receive more irrigation 
water than is equal to the quantity necessary to irrigate eligible 
lands, all landholders in the district will still be able to receive 
water. But all landholders will then be subject to Federal reclamation 
law and these regulations. Reclamation included this provision pursuant 
to Reclamation's authority to implement the RRA and its authority to 
make water available for irrigation purposes.
    Comment: Section 426.15(c)(2) is illegal, in that it exempts lands 
from Reclamation law if the water users pay for only a portion of the 
facility that they use that was built at Federal expense.
    Response: Reclamation disagrees with the commenter. Reclamation 
law, and the RRA give Reclamation in some instances discretion to 
negotiate contracts to provide for the use of facilities instead of a 
repayment or water service contract.
    Comment: Additional charges should not be imposed for the handling 
of waters which are or become commingled with project water. To do so 
is outside the scope of the RRA.
    Response: Reclamation believes this comment is in reference to 
Sec. 426.15(c)(2). This provision was included in the prior rules 
because a method was requested to allow districts using federally 
funded facilities and commingled water not to have acreage limitation 
apply to nonproject water. If the district chooses to not include this 
provision in its contract or not to pay the incremental fee, then the 
nonproject water will be subject to acreage limitation. Reclamation 
does not impose the fee; the decision on how commingled water will be 
treated with respect to the acreage limitation provisions under these 
circumstances rests with the district.

Section 426.16  Exemptions and Exclusions

    Section 426.16 in the prior regulation, Involuntary acquisition of 
land, is renumbered as Sec. 426.14. The new Sec. 426.16, Exemptions and 
exclusions, replaces Sec. 426.13 of the prior regulation. This section 
provides the general exemptions and exclusions from application of the 
acreage limitation provisions.
    This section has been rewritten mainly for editorial changes and 
clarification. Other than paragraph (f), no substantive change is 
intended. Additional editorial changes were made in the final version 
from the proposed rule.
    Paragraph (a) provides an exemption for land that receives its 
agricultural water from an Army Corps of Engineers project. Paragraph 
(b) discusses how districts or individuals can repay their construction 
obligations and what effect such action has on application of the 
acreage limitation provisions.
    Paragraph (c) discusses how Reclamation treats Rehabilitation and 
Betterment loans with respect to application of the acreage limitation 
provisions. It should be noted that a given contract action could be 
considered an additional or supplemental benefit pursuant to Sec. 426.3 
of these final regulations even though it neither invokes nor extends 
the application of acreage limitation provisions in general. For 
example, Rehabilitation and Betterment Act contracts are considered 
additional and supplemental benefits under Sec. 426.3 even though they 
would neither extend nor reinstate the application of acreage 
limitations, as provided in Sec. 426.16.
    Paragraph (d) provides how the acreage limitation provisions will 
be applied to deliveries of temporary supplies of water if they result 
from an unusually large water supply or are otherwise unmanageable 
flood flows of short duration.
    Paragraph (e) addresses the issue of isolated tracts and how the 
acreage limitation provisions apply if a landowner requests an isolated 
tract determination and Reclamation approves the request. This 
paragraph was adjusted in the final rule to eliminate redundancy in the 
proposed rule.
    Paragraph (f) was added to the proposed rule and is retained in the 
final rule to make it clear that the acreage limitation provisions are 
not applicable to Indian trust or restricted lands. This provision was 
adjusted in the final rule to address both the acreage limitation 
provisions and water conservation provisions of the RRA.

Comments Concerning Sec. 426.16--Exemptions and Exclusions

General
    Comment: All eligible projects in Arizona (CAP, Wellton-Mohawk, and 
the Salt River Project) should be included in exemptions from the RRA 
and conservation mandates.
    Response: This comment has not been accommodated in the final 
regulations. There is no authority to exempt a district from 
application of acreage limitation requirements before the district 
repays its contract obligations. Even upon payout, districts generally 
remain subject to certain RRA requirements, such as the water 
conservation provisions.
    Comment: The rules should declare that any change in use of water 
for purposes other than the use(s) originally specified in the contract 
shall require the participation of the United States in sharing any of 
the windfall profits which might result. Moreover, any proposed change 
in irrigable acreage in a paid out project should require the approval 
of the United States if only for reasons of water quality protection.
    Response: These issues are contractual issues, not acreage 
limitation issues. There is no authority for restricting a district's 
payout exemption from the acreage limitation provisions to satisfy non-
acreage limitation goals.
Section 426.16(b)
    Comment: How does the term ``subsidized Reclamation project water'' 
apply to paid out districts that pay the actual O&M charges assessed by 
Reclamation each year?
    Response: Section 426.16(b) exempts land in districts that have 
repaid applicable construction costs. Thus, that

[[Page 66790]]

term has no application with regard to the acreage limitation 
provisions in such districts.
    Comment: Reclamation should notify both individuals and the 
district when a landowner repays his contract so the information can be 
verified and included in the district's records [Sec. 426.16(b)(3)(i)].
    Response: This comment has been accommodated in the final 
regulations.
    Comment: Landholders should be given a certificate of repayment in 
a timely manner [Sec. 426.17(b)(3)(iii)].
    Response: Once a final payment has been received, a process is 
initiated by Reclamation to ensure the landholder is paid out and all 
requirements have been met. Often this is a time consuming process, but 
once completed, certificates are immediately made available upon 
request.
Section 426.16(c)
    Comment: Sections 426.16 (b) and (c) with regard to rehabilitation 
and betterment loans should be retained in the final regulations.
    Response: Section 426.16 (b) and (c) have been retained in the 
final rules with some minor editorial changes.
Section 426.16(d)
    Comment: Reclamation should establish reasonable criteria for 
determining when a Section 215 flood event occurs and incorporate those 
criteria into the final regulations.
     Response: Reclamation has adopted the statutory criteria for 
determining a temporary supply of water. Specifically, a flood event 
occurs when Reclamation determines the existence of an unusually large 
water supply not otherwise storable for project purposes or infrequent 
or otherwise unmanaged flood flows of short duration. The unusual 
hydrologic conditions, the wide range of physical constraints possessed 
by project facilities, and variations in State law make it unwise to 
attempt to further refine the statutory criteria.
    Comment: Several comments expressed a wide range of opinions on the 
conditions under which Reclamation should declare a temporary supply of 
water. Some commenters wanted Reclamation to make a declaration if it 
captures an unusable amount of water during a drought. Others wanted a 
definition that maximizes groundwater recharge for the purpose of 
overdraft protection. Still others suggested a definition that would 
limit declarations to those instances where releases were needed to 
prevent exceeding the dedicated flood control space of a reservoir or 
similar genuine flood conditions.
    Response: The declaration of a temporary supply of water is based 
on site specific hydrologic conditions and State law. While drought and 
groundwater recharge may at times contribute to these conditions, 
Reclamation evaluates the physical limitations of facilities in the 
context of the specific hydrologic conditions before making a 
declaration of the availability of temporary water supplies. Similarly, 
Reclamation will not limit itself to making a declaration only at a 
time when it is confronting a flood situation.
Section 426.16(f)
    Comment: Commenters submitted opposing views concerning the 
proposed exclusion of Indian trust or restricted lands from application 
of the acreage limitation provisions. Some stated that Indian trust 
land should not be treated any differently than any other land. On the 
other hand, others not only supported the proposed version but wanted 
the exclusion expanded to include Indian irrigation projects.
    Response: Indian trust and restricted lands are owned by the United 
States for the benefit of the tribes. These lands are not meant to be 
subject to the acreage limitation provisions of Reclamation law. As for 
Indian irrigation projects, they will be excluded if they are 
delivering water to Indian trust or restricted lands or are not 
considered to be Reclamation project facilities.
    Comment: If a district or legal entity buys or leases water from a 
tribe that is exempted under Sec. 426.15(f) [426.16(f) in the final 
rules], would the district or entity be bound by the acreage limitation 
provisions?
    Response: Section 426.16(f) excludes Indian trust or restricted 
lands from application of the acreage limitation provisions. It does 
not exclude land held in districts by entities or individuals that may 
purchase Indian water. If the water in question is delivered to a 
district that is subject to the acreage limitation provisions, then 
that district will remain subject to those provisions. This is due to 
the contract provisions the district has with Reclamation. The purchase 
of water from a tribe does not discharge the district's contract 
obligations with Reclamation.
    If the irrigation water in question was subject to the acreage 
limitation provisions, but such provisions are not applicable when the 
water is delivered to Indian trust or restricted lands, the delivery of 
such water to nonexempt lands will include the application of those 
provisions.
    If the water is sold to a district that is not subject to the 
acreage limitation provisions, then the purchase of the water from a 
tribe that is also not subject to those provisions would not in itself 
require application of the acreage limitation provisions.

Section 426.17  Small Reclamation Projects

    Section 426.17 in the prior regulation, Land held by governmental 
agencies, is renamed Public entities and renumbered as Sec. 426.10. The 
new Sec. 426.17, Small reclamation projects, replaces Sec. 426.21 of 
the prior regulation. This section discusses the effect of the RRA on 
Small Reclamation Projects Act (SRPA) projects and the effect of SRPA 
contracts on application of the acreage limitation provisions.
    The only substantive changes that are made to this section are in 
paragraphs (a) and (b). Paragraph (a) address the effect the RRA has on 
contracts made under the SRPA. Specifically, districts with such 
contracts were entitled to take advantage of the higher entitlements of 
the RRA. The proposed rule incorporated the fact that Pub. L. 99-546 
closed this opportunity on October 27, 1986. The final rules note the 
provision included in that public law that provides for a 320-acre 
entitlement instead of the original 160-acre entitlement.
    Paragraph (b) addresses how other provisions of these regulations 
apply to SRPA loans. A phrase has been added to the final version to 
reflect the fact that SRPA loans are considered additional and 
supplemental benefits as provided in Sec. 426.3 of the final 
regulation.
    Paragraph (c) discusses the effect of SRPA loans in determining 
whether a district has repaid its water service or repayment contract 
construction obligations. Paragraph (d) addresses instances in which 
districts have both an SRPA loan contract and another contract as that 
term is defined in the regulations.
    The following example illustrates the application of Sec. 426.17:

    Example. District A has entered into both a repayment contract 
and an SRPA loan contract. In 1983, District A amended its SRPA loan 
contract pursuant to Section 223 of the RRA in order to increase the 
interest threshold for its owners to 960 acres for a qualified 
recipient and 320 acres for a limited recipient. However, District A 
has not amended its repayment contract to become subject to the 
discretionary provisions, and is, therefore, still subject to the 
acreage limitations of prior law. Even though this SRPA contract 
permits an increased threshold for interest payments, until District 
A becomes subject to the discretionary

[[Page 66791]]

provisions it may not deliver irrigation water to land owned in 
excess of the prior law entitlements (160 acres or 320 acres for a 
married couple), except in those cases where such land is under 
recordable contract, is owned by an individual who has made an 
irrevocable election, or commingling provisions in the district's 
contract allow nonproject water to be delivered to excess land, see 
Sec. 426.15.

Comments Concerning Sec. 426.17--Small Reclamation Projects

    No comments were received concerning this section.

Section 426.18  Landholder Information Requirements

    Section 426.18 in the prior regulation, Commingling, is renumbered 
as Sec. 426.15. The new Sec. 426.18, Landholder information 
requirements, replaces, in part, Sec. 426.10 of the prior regulation. 
This section provides the requirements to submit information to 
Reclamation, how that action is normally accomplished through the 
submittal of RRA forms provided by Reclamation, and exceptions to the 
RRA forms requirements.
    This section has been rewritten to address only the certification 
and reporting requirements of landholders. Accordingly, a new 
definition paragraph and section regarding district responsibilities 
(Sec. 426.19) have been added. In addition, a new section concerning 
Reclamation audits (Sec. 426.25) has been added.
    This section clarifies district certification and reporting 
requirements. References found in the prior rules to the contents of 
the certification and reporting forms have been deleted because a 
comprehensive list of these contents is unnecessary and unwieldy for 
these regulations, and a partial list is inappropriate.
    Also deleted is the provision in the prior rules that specified 
that limited recipients had to identify all part owners who own more 
than 4 percent of the limited recipient and whose ownership interest 
would constitute an attribution of 40 acres. Reclamation has found that 
information is generally not available to verify the 4 percent 
requirement. Therefore, in the future, limited recipients will only 
have to include the names of those part owners whose ownership in the 
entity results in an attribution of more than 40 acres.
    Paragraph (a) provides a definition of irrigation season because 
that term is used in this section. The final rules do not include the 
definition of standard certification or reporting forms because that 
term is already defined in Sec. 426.2.
    Paragraph (b) specifies who must provide information to 
Reclamation, while paragraph (c) details who must submit RRA forms. The 
final version of paragraph (c) makes it clear that such forms must be 
submitted annually.
    Paragraph (d) provides what information is required to be provided 
on the RRA forms. Paragraph (e) specifies that the RRA forms must be 
submitted to each district where the landholder directly or indirectly 
holds land.
    Wholly-owned subsidiaries are specifically exempted from forms 
requirements in paragraph (f), provided the ultimate parent legal 
entity has met its forms requirement.
    The 40-acre certification and reporting exemption threshold found 
in the prior rules is replaced in paragraph (g) with a new system which 
permits higher exemption thresholds for qualified recipients. Unlike 
the proposed rules which included 5-acre thresholds for certain limited 
recipients, 80-acre thresholds for other limited recipients, and 
ceilings, but no fixed thresholds for qualified recipients, the final 
rules retain the 40-acre threshold for all prior law and limited 
recipients.
    As for qualified recipients, if a district has conformed by 
contract with the discretionary provisions and the district's financial 
obligations to Reclamation are not delinquent, the district will be 
granted Category 1 status. Category 1 status provides an RRA forms 
threshold for qualified recipients of 240 acres. Districts that do not 
meet the two criteria, will be called Category 2. Qualified recipients 
in such districts will have an 80-acre RRA forms exemption threshold. 
As in the proposed rules, paragraph (g) also provides that: wholly-
owned subsidiaries do not have to file; Class 1 equivalency factors 
cannot be used in determining if a RRA forms threshold has been 
exceeded; and indirect landholders need not count involuntarily 
acquired land that has been designated as excess by the direct 
landholder in determining if their holdings exceed the applicable RRA 
forms threshold.
    Paragraph (h) provides the criteria listed in the preceding 
paragraph for determining if a district is a Category 1 or 2 district 
for purposes of establishing the RRA forms threshold for qualified 
recipients. This provision has changed from the proposed rule in that 
the requirement for having entered into a partnership agreement with 
Reclamation to be considered a Category 1 district has been revised. 
Instead of the requirement for financial obligations to the United 
States not being delinquent, the final rule has been modified so that 
Category 1 districts have no delinquent financial obligations to 
Reclamation. This paragraph also specifies what will be considered in 
determining if a district's financial obligations with Reclamation are 
current.
    Paragraph (i) describes how Category 1 status will be applied. 
Since the thresholds are now fixed, the provision in the proposed rule 
that established the actual thresholds in partnership agreements has 
been deleted. In addition, this paragraph has been revised to state 
that the Category 1 status will be withdrawn.
    Under the proposed rule, the actual application of the RRA forms 
threshold to landholders who hold land in Category 1 and 2 districts, 
in effect, required the districts to be aware of the RRA forms status 
of all districts. The final rule simplifies this process in paragraph 
(j) in that the RRA thresholds that are applicable to any particular 
district will be applicable to all landholders in that district 
regardless of where they may hold land westwide.
    Paragraph (k) provides the requirements for notification of 
landholding changes if the changes occur after the landholder has 
submitted the annual forms. The final rules adjust the time frames for 
reporting landholding changes from 15 to 30 days for notifying the 
district and from 30 to 60 days for submitting new RRA forms. Paragraph 
(l) provides an opportunity to submit verification forms if a 
landholding has not changed from the previous year.
    Paragraph (m) was added in the proposed rule to state that 
landholders that have not filed the required forms are not eligible to 
receive irrigation water. In the final rule, the phrase ``the district 
must not deliver,'' was added to the previously included phrase ``the 
landholder is not eligible to receive and must not accept delivery of 
irrigation water'' to make it clear that the district as well as the 
landholder is responsible for water deliveries in the absence of the 
required forms.
    Paragraph (n) provides the actions Reclamation may take if false 
statements are made on the RRA forms. Included in this paragraph is the 
paragraph contained on the RRA forms providing for the possibility of 
criminal penalties for fraudulent statements. Paragraph (o) provides 
the Office of Management and Budget information requirements, while 
paragraph (p) provides information on the Privacy Act of 1974.

    The following examples illustrate the application of Sec. 426.18:

    Example (1). Landholder A failed to submit the required 
certification forms to District X

[[Page 66792]]

in 1994 and 1995. District X delivered, and Landholder A accepted 
delivery of, irrigation water in those years. Landholder A submitted 
certification forms for 1996; however, Landholder A's landholding is 
not eligible to receive irrigation water until he submits the 
necessary forms for 1994 and 1995.
    Example (2). Corporation A, which is registered in Venezuela, 
owns 100 percent of the stock of Corporation B, which is registered 
in Iowa. Corporation B, in turn, owns 100 percent of the stock in 
Corporations C and D, each of which are registered in Arizona and 
own and irrigate nonexempt land in two different Arizona irrigation 
districts. The landholdings exceed applicable certification and 
reporting exemption thresholds. Corporation A, the parent legal 
entity, must submit RRA forms to both Arizona districts. The forms 
must describe the corporate structure and Corporation A's entire 
landholding, including those of its subsidiaries. Furthermore, any 
stockholders of Corporation A that exceed applicable RRA forms 
thresholds must submit the necessary forms in order for the 
landholding to be eligible. Corporations B, C, and D are not 
required to file RRA forms provided that Corporation A files RRA 
forms and includes the holdings of its wholly owned subsidiaries on 
those forms.
    Example (3). In August 1997, District A amends its contract to 
conform to the discretionary provisions. Since District A is not 
delinquent in its financial obligations, the regional director 
determines that District A is a Category 1 district. Accordingly, 
qualified recipients in the district will have a 240-acre RRA forms 
threshold, starting with the 1998 water year. Limited recipients and 
prior law recipients will continue to have the 40-acre RRA forms 
threshold applied.
    Example (4). Landholder A is a qualified recipient who leases 
120 acres in District X and 40 acres in District Y. For 1998, 
District X achieves Category 1 status, but District Y does not. 
Landholder A must therefore submit RRA forms in District Y, because 
he exceeds the RRA forms threshold for qualified recipients of 80 
acres held westwide for that district, but he does not have to 
submit RRA forms in District X, because he does not exceed the RRA 
forms threshold of 240 acres held westwide for that district.
    Example (5). Bank Y is a limited recipient and has 12,000 acres 
of involuntarily acquired excess landholdings. Bank Y has also 
designated 640 acres as nonexcess. Stockholder A, a qualified 
recipient, owns a 15 percent interest in Bank Y. Thus, Stockholder A 
is attributed with 1,800 acres of involuntarily acquired excess land 
and 96 acres of nonexcess land. The fact that most of its 
landholdings are involuntarily acquired does not afford Bank Y with 
any exemption with respect to RRA forms thresholds, because the bank 
is the direct landholder. Therefore, Bank Y must file certification 
forms. Since Stockholder A is an indirect landholder, she need not 
consider the bank's involuntarily acquired excess land in 
determining whether she is required to certify. However, she must 
consider the 96 acres of attributed nonexcess land. If Stockholder A 
exceeds an RRA forms threshold, she would be required to include all 
land attributed to her, including that land involuntarily acquired, 
on her RRA form(s).
    Example (6). Corporation E leases 640 acres in a Category 1 
district. Corporation E is 90 percent owned by Corporation F, 5 
percent owned by Corporation G, and 5 percent owned by Farmer B. 
Corporations E and F are limited recipients that did not receive 
irrigation water on or before October 1, 1981. Corporation G is a 
limited recipient that received irrigation water on or before 
October 1, 1981, and currently has no landholding outside of 
Corporation E. Farmer B is a qualified recipient who also directly 
owns 320 nonexempt acres in the same district. Corporations E and F 
must both file because both have exceeded the applicable 40-acre 
threshold, and because Corporation E is not wholly owned by 
Corporation F. Corporation G need not file, because it is subject to 
a 40-acre threshold and its indirect holdings westwide total only 32 
acres. Farmer B must file because he has exceeded the applicable 
240-acre threshold.
    Example (7). Farmer C owns 440 acres in a Category 1 district. 
After the district's last delivery in 1996, Farmer C buys another 
40-acre parcel in the same district. Farmer C need not submit new 
RRA forms until the start of the next irrigation season.

Comments Concerning Sec. 426.18--Landholder Information Requirements

General
    Comment: The forms requirements have become very time consuming and 
districts are faced with huge fines for what are often inadvertent 
errors.
    Response: The RRA requires certification. Moreover, Reclamation has 
never issued a compensation bill for minor problems associated with 
errors and omissions on RRA forms. Such bills were issued only in 
instances where irrigation water was delivered without any attempt to 
file appropriate forms. Reclamation does not consider refusal to file 
to be minor, inadvertent, or insignificant. Since March 27, 1995, 
compliance problems with the RRA forms requirements have been addressed 
through the administrative costs section (see Sec. 426.20 of the final 
regulations).
    Comment: Some commenters believed that Reclamation should consider 
a waiver of paperwork for districts in which only a small portion of 
the total water supply is from a Reclamation project or base the 
threshold on conditions found within the district, such as the average 
size of the landholdings.
    Response: The RRA forms requirements must be applied consistently 
in order to ensure that no landholder exceeds his westwide entitlement.
    Comment: The forms for land held by a bank or managed by a farm 
management corporation should be able to be signed by those entities 
without a signature authorization form.
    Response: If the land in question is owned or leased by a bank, 
then a bank officer may sign the form without a signature authorization 
card. A farm manager may not sign the forms unless he or she directly 
or indirectly is the landholder of the land in question or the 
landholder has provided the farm manager the power of attorney to sign 
the forms. The completed forms report westwide landholdings so that the 
district and Reclamation will be able to determine if the landholder, 
not the farm manager, is eligible to receive benefits associated with 
the delivery of irrigation water. Thus, the certifying official must be 
able to attest to the entire westwide landholding of the entity 
included on the form.
    Comment: The annual changes to the forms' requirements are not 
making it easier, but more confusing and results in errors.
    Response: Reclamation has strived to minimize annual changes to the 
RRA forms. However, whenever changes are made to the regulations, as 
was the case in 1987, or the RRA is amended, as was the case in 1988, 
significant changes to the forms are often required. During 1996, 
Reclamation studied the RRA forms in-depth and made adjustments to 
facilitate their use and ease the filing requirements starting with the 
1997 water year. Public input was part of this process. Reclamation 
will also have to make some adjustments as a result of this rulemaking 
starting with the 1998 water year. Once the 1998 water year forms are 
finalized, Reclamation does not plan to make any further major 
adjustments to the RRA forms.
Section 426.18(b)
    Comment: The filing requirements are hard to decipher. Who is 
supposed to file forms?
    Response: All landholders, as defined, must annually file an RRA 
form prior to receiving irrigation water, except as set forth in 
Sec. 426.18(g).
    Comment: Define ``other parties'' as used in to whom information 
about nonexempt land can be required. Also, provide who is being 
referenced in ``involved in the * * * operation of nonexempt land.''
    Response: Other parties can be any entity or person who is involved 
in the operation of land subject to the acreage limitation provisions. 
Because of the great variety of farming arrangements, ``other parties'' 
may change on a case-by-case basis. However, other parties may include 
among others: farm managers, custom service providers,

[[Page 66793]]

lenders, employees, electrical companies, ditch riders, farm supply 
companies, etc.
Section 426.18(c)
    Comment: We would like a simplified RRA form for landholders who 
hold up to 150 acres.
    Response: In response to earlier comments, Reclamation developed 
``EZ'' forms that may be used by landholders who meet certain 
requirements. The ``EZ'' forms are relatively simple and should take 
very little time to complete. In addition, if a landholding does not 
change from year to year, a verification form may be submitted by the 
landholder, which should take less than 15 minutes to complete. 
Unfortunately, the more complicated a landholder's holdings, the more 
complicated are the forms that must be completed, regardless of how 
many acres are held. For example, if a landholder owns 100 acres and 
leases 50 more, with some land owned directly and other land owned 
through an entity in multiple districts, it will take that landholder 
more time to complete a form than a landholder who directly holds 150 
acres in one district.
    Comment: What does a district do if the farm manager does not know 
who owns a corporation's shares and does not know how to find out?
    Response: The responsibility for completing RRA forms rests with 
the landholders, not with farm managers, district staff, or any other 
person. If a landholder does not submit RRA forms, the land in question 
is not eligible to receive irrigation water, and the district may not 
deliver irrigation water to the landholding.
    Comment: Districts are not equipped to find water users who do not 
have project water allotments. If Reclamation insists that such 
landholders must report, they must provide districts with methods to 
locate such individuals. Maybe a one time certification for such 
landholders should be developed.
    Response: If no irrigation water from a Federal project is 
delivered to a landholder, then there is no problem if the landholder 
does not submit a form. However, if the landholder is interested in 
receiving irrigation water on land within the district, then all 
required forms must be submitted by the landholder before the land 
would be eligible to receive such water. In that way, the burden is 
actually on the landholder to submit forms. However, the district is 
responsible for ensuring that landholders who do not submit RRA forms 
do not receive Federal project water.
Section 426.18(d)
    Comment: This rulemaking should be used to require landholders to 
provide information on where water is being delivered. Thus, 
information on water spreading could be obtained.
    Response: The RRA forms do require landholders to identify all land 
on which irrigation water is received.
Section 426.18(e)
    Comment: The Federal Government should collect the RRA forms, not 
the district.
    Response: Generally districts have the contractual relationship 
with and control the delivery of water to landholders. Therefore, it is 
appropriate for districts to collect the RRA forms. The Federal 
Government does not have a direct relationship with water users. In 
addition, the RRA specifically requires that landholders submit forms 
to Districts.
Section 426.18(g)
    Comment: Several commenters believed that the proposed multiple 
thresholds for RRA forms submittal significantly complicates the system 
rather than simplifying it. Some of the commenters further stated that 
there is no policy or legal basis for treating prior law recipients 
differently than qualified recipients.
    Response: Reclamation has reduced the number of RRA thresholds to 
three in the final rules. All landholders will have a 40-acre threshold 
unless they are a qualified recipient. If the landholder is a qualified 
recipient in a Category 1 district, the threshold is set at 240 acres 
westwide in the final rules. A qualified recipient in a Category 2 
district is provided with an 80-acre westwide threshold. As for the 
basis for treating prior law recipients differently from qualified 
recipients, that is established by the acreage limitation provisions in 
that qualified recipients have 960-acre entitlements, while prior law 
recipients have 160-acre entitlements. The threshold is set at 25 
percent of the maximum acreage entitlement to assure Reclamation that 
it will be able to verify eligibility. Category 2 districts have a 
lower threshold in order to encourage those districts to confirm their 
contracts and to ensure compliance with the requirements of the RRA.
    Comment: The threshold incentive should be at least double the 
Category 2 threshold and that should be fixed, not ``up to.''
    Response: Reclamation has incorporated this comment in the final 
regulations. The final regulations provide for a forms threshold for 
qualified recipients that is 200 percent higher in a Category 1 
district than in a Category 2 district and 500 percent higher than the 
40-acre threshold applicable to qualified recipients in the prior 
regulations.
    Comment: Reducing the RRA forms threshold for limited recipients to 
5 acres could substantially increase the amount of paperwork that 
districts have to process. The provision should be changed back to 40 
acres.
    Response: This comment has been accommodated in the final 
regulations.
    Comment: Many commenters provided various suggestions on the 
general forms threshold. The suggestions included that the forms 
threshold should be raised to, for example, 80 acres, 160 acres, 240 
acres, 260 acres, 320 acres, 640 acres, 960 acres, or as high as 
possible. Other commenters believed that the forms threshold should be 
retained at 40 acres. In addition, some commenters felt the form 
threshold should be simply set with no strings attached. On the other 
hand, some commenters believed that no forms threshold was authorized 
by the Congress and that enforcement of the acreage limitation 
provisions is effectively being repealed through the existence of any 
forms threshold. They believed that annual reporting is a reasonable 
requirement for all landholders.
    Response: Reclamation does not believe that increasing the 
exemption threshold would decrease compliance with the RRA. The final 
rule will raise the threshold at most to 25 percent of a qualified 
recipient's ownership entitlement. Reclamation has experienced high 
compliance rates from prior law recipients who are presently exempted 
from having to submit forms if they hold less than 25 percent of their 
maximum ownership entitlement (40 acres is 25 percent of a prior law 
recipient entitlement of 160 acres). In addition, raising the threshold 
for qualified recipients should allow Reclamation to shift its 
enforcement resources from reviewing the paperwork of many small 
operations to ensuring compliance by larger operations.
    Reclamation is tasked with ensuring that the acreage limitations 
are administered and complied with on a westwide basis. Reclamation 
would not be meeting its responsibilities if Reclamation provided prior 
law recipients with a 320-acre forms threshold, for example, or all 
recipients with a 960-acre threshold. With regard to limited 
recipients, Reclamation acknowledges that a 40-acre threshold will 
allow some limited recipients to receive irrigation water without 
paying

[[Page 66794]]

the required full-cost rate. Reclamation does not want to further 
exacerbate this problem by raising the current threshold for limited 
recipients.
    Districts that elect to conform to the discretionary provisions and 
that are not delinquent on their financial obligations will receive a 
higher threshold for their qualified recipients than districts that 
remain under prior law or do not pay their bills in a timely manner. 
This provision is intended to encourage districts to conform to the 
discretionary provisions and to pay their bills. In the long term such 
actions will reduce RRA program costs for districts, landholders, and 
Reclamation.
    Comment: If an individual has less than 40 acres of land that 
receives project water, but the individual also owns additional acreage 
that has been classified as irrigable, but has no allotment of project 
water, is this landholder required to file the certification forms?
    Response: Yes, unless the individual is a qualified recipient, in 
which case the forms threshold is 240 acres in a Category 1 district or 
80 acres in a Category 2 district. All irrigable land and irrigation 
land is considered in determining if a forms threshold has been 
exceeded requiring the landholder to submit RRA forms. The only 
exception is if the land in question is held indirectly and was 
involuntarily acquired. In addition, if the landholder receives no 
irrigation water on land westwide, Reclamation will take no action to 
require the submittal of forms, until such time as that landholder 
wants to receive irrigation water. At that time, the landholder is 
required to provide all required forms to ensure no excess land was 
sold without price approval. Accordingly, it may be in the best 
interest of the landholder to submit forms annually.
Section 426.18(h)
    Comment: There is no support in the RRA for Category 1 and 2 
districts.
    Response: To make the system administratively efficient, the RRA 
forms threshold concept was incorporated in the first set of Acreage 
Limitation Rules and Regulations. Reclamation has the discretion to 
establish a forms threshold that will ensure enforcement of, and 
compliance with, the acreage limitation provisions while reducing the 
administrative burden where possible. The categories of districts are 
intended to assist Reclamation at ensuring compliance with its 
statutory requirements.
    Comment: Any changes with respect to encouraging districts by 
regulation to adopt the discretionary provision of the RRA are not 
appropriate.
    Response: It is up to the district, its board members, and its 
membership to decide whether to conform to the discretionary 
provisions. Reclamation is not prohibited from encouraging such 
actions.
    Comment: Several commenters wondered what the partnership agreement 
concept had to do with ensuring acreage limitation compliance through a 
forms requirement? Conversely, other commenters thought the partnership 
with Reclamation concept was a good idea.
    Response: The concept of Reclamation and districts entering into 
partnership for water resource management is a forward looking 
initiative. However, upon reanalysis, Reclamation has chosen not to 
include this concept as a requirement in order to obtain increased RRA 
forms thresholds.
Section 426.18(k)
    Comment: It is a burden for landholders to have to report 
landholding changes in 15 or 30 days.
    Response: Reclamation has provided additional time for reporting 
landholding changes. The final rules change the verbal notification 
requirement from 15 days to 30 days. The requirement to submit new 
forms when a landholding change occurs before the landholder has 
finished receiving irrigation water for the water year was changed from 
30 days to 60 days.
Section 426.18(m)
    Comment: The requirement to submit RRA forms by January 1 is not 
logical. Lands are often leased in March and April, since planting is 
done as late as June. Reporting by January 1 would cause a lot of 
paperwork to be done and redone, thereby increasing the paperwork 
burden.
    Response: The requirement for RRA form submittal is that RRA forms 
must be submitted before irrigation water is delivered. This 
requirement is not tied to a specific date.
    Comment: Why is a landholder who did not file in previous years not 
able to receive water until the missing forms have been filed? What if 
the landholder did not receive any water, was under the forms 
threshold, etc.?
    Response: Until the required forms are on file, Reclamation does 
not know if the land in question is excess, and therefore, not eligible 
to receive water, if the full-cost rate is applicable, etc. If the 
landholder did not exceed a forms threshold, then there are no missing 
forms.
Section 426.18(o)
    Comment: Districts should be allowed to draft their own tabulation 
forms for summary forms.
    Response: Reclamation must obtain approval from the Office of 
Management and Budget (OMB) for the RRA forms. This precludes 
Reclamation's ability to allow districts to draft their own tabulation 
sheets. In addition, Reclamation requires consistency in how data is 
provided to facilitate use of that data.

Section 426.19 District Responsibilities

    Section 426.19 of the prior regulation, Water conservation, has 
been moved to 43 CFR part 427. The new Sec. 426.19, District 
responsibilities, replaces, in part, Sec. 426.10 of the prior 
regulation.
    This new section is added to clarify the role of irrigation 
contracting entities in RRA administration and enforcement. Because 
this issue has caused some confusion and controversy in the past, it is 
considered desirable to establish district responsibilities in these 
final regulations.
    The changes to provisions of this section that were included in 
Sec. 426.10 of the prior rules are not substantive. Some existing 
Reclamation policy not contained in the prior rules, however, is 
included. The section is included to help prevent future 
misunderstandings about districts' roles in RRA administration.
    The acreage limitation responsibilities include the requirements 
that districts: (a) Provide information to landholders; (b) provide 
Reclamation records as requested; (c) be responsible to Reclamation for 
acreage limitation charges and to collect such from the appropriate 
landholders if possible; (d) distribute, collect, and review the RRA 
forms; (e) file and retain the RRA forms as specified; (f) comply with 
the requirements of the Privacy Act of 1974; (g) complete and submit to 
Reclamation summary forms; (h) withhold deliveries of irrigation water 
to ineligible landholders; and (i) return to Reclamation all revenues 
received from delivering water to ineligible land.
    The final version includes one substantive change. With regard to 
the revenues received for illegal deliveries of irrigation water, 
districts will be allowed in these final rules to retain that portion 
of such revenues that are attributable to any district charges assessed 
to cover district operation, maintenance, and administrative expenses 
arising from such deliveries.

[[Page 66795]]

    The following examples illustrate the application of Sec. 426.19:

    Example (1). Landholder A submitted to District X a standard 
certification form in 1988, then filed verification forms each year 
through 1993. He then filed a new certification form in March 1994. 
District X must retain Landholder A's 1988 certification form 
through 1998; thereafter, it may be destroyed by the district.
    Example (2). Same facts as Example 1, except that in October 
1995 a Reclamation audit team requests that Landholder A's 1988 
certification form be retained until January 2001. The district must 
retain the form until that date.
    Example (3). Landholder B submitted to District X a standard 
certification form in 1985, and has submitted verification forms 
each year thereafter. District X must retain Landholder B's 1985 
certification form as long as he continues to verify each year and, 
if he submits a new standard certification form, for 6 years from 
the date the last verification form of the 1985 standard 
certification form was submitted.
    Example (4). District Y delivers 2,000 acre-feet of irrigation 
water to Farmer C in 1996 at the contract rate of $10 per acre-foot. 
It is subsequently found that Farmer C used 100 acre-feet of that 
water to irrigate ineligible excess land. Therefore, the payments 
made by District Y to the United States for the water used to 
irrigate the excess land ($1,000), and any further billings that 
result from this illegal delivery, other than for the district's 
operation, maintenance, and administrative expenses, must be 
deposited into the Reclamation fund or to the United States 
Treasury, as applicable, and not credited toward any obligation of 
District Y to the United States.

Comments Concerning Sec. 426.19--District Responsibilities

General
    Comment: Districts should not have to be policing entities. 
Districts do not have the funds to administer the regulations.
    Response: In general, districts agree in their contracts that the 
delivery of irrigation water is subject to Federal reclamation law. 
Districts have working relationships with the landholders and control 
the delivery of irrigation water. Therefore, districts must take on the 
responsibility of ensuring the land is eligible to receive such water.
Section 426.19(b)
    Comment: Reclamation should ask landholders directly if additional 
information is required, rather than asking districts to collect the 
information.
    Response: Because of the contractual relationship between 
Reclamation and districts, Reclamation initially works with districts 
to gather information.
Section 426.19(c)
    Comment: Any provision that would transfer uncollected individual 
assessments under the RRA to a district obligation should be deleted.
    Response: Reclamation's contract is with the district and the 
district must collect monies due Reclamation. When a landholder submits 
a form that indicates irrigation water will be delivered to full-cost 
land, Reclamation suggests that the district collect the full-cost 
charges before such water is delivered. To do otherwise places the 
district at risk if the landholder should not be available to pay the 
bill after the water is delivered.
    Comment: Which district is responsible for full-cost charges if the 
landholder holds land in more than one district?
    Response: In such cases, the bills would be issued to the 
district(s) where the full-cost land is held. If the landholder's RRA 
forms indicate full-cost land is held in multiple districts, the bills 
would be issued accordingly.
Section 426.19(e)
    Comment: The 3-year retention period for RRA forms should not be 
increased to 6 years.
    Response: This comment has not been accommodated in the final 
regulations. Reclamation has considered this comment and determined 
that for statute of limitations purposes the RRA forms retention 
requirement should be increased to 6 years.
Section 426.19(i)
    Comment: This section should be clarified so that it does not apply 
to revenues received by the district to cover district operations, 
maintenance, and administrative expenses.
    Response: This comment has been accommodated in the final 
regulations.

Section 426.20  Assessment of Administrative Costs

    Section 426.20 of the prior regulation, Public participation, is 
renumbered as Sec. 426.22. The new Sec. 426.20, Assessment of 
administrative costs, replaces Sec. 426.24 of the prior regulation. 
This section addresses when and how Reclamation will assess 
administrative costs.
    The only substantive change from the prior regulation is the 
addition of irrigation of ineligible excess land as a violation subject 
to assessment of an administrative fee. This provision is provided as 
part of paragraph (a), which also provides for the assessment of the 
fee for deliveries to land without the landholder filing an RRA form 
with the district. No significant changes were made between the 
proposed and final version of this section. It should be noted that 
Sec. 426.12(h) requires the application of the compensation rate for 
the delivery of water to ineligible excess land.
    Paragraph (b) provides for the assessment of the administrative 
costs if corrections are not made to RRA forms within 60-calendar days 
of Reclamation's written request for such corrections.
    Paragraph (c) states that the districts are responsible for payment 
to Reclamation of the administrative costs, while paragraph (d) 
provides that administrative costs received by Reclamation will be 
deposited to the general fund of the United States Treasury.
    Finally, paragraph (e) sets the initial amount of the 
administrative fee at $260, and discusses when Reclamation will review 
the data to determine if adjustments to this amount are needed and 
notify the public. Reclamation bases any changes to the assessment 
amount on Reclamation's costs for: field observation; information 
analysis; communication with district representatives and landholders 
regarding possible cases of irrigation of ineligible excess land, or 
obtaining missing or corrected forms; assistance to landholders in 
completing certification or reporting forms for the period of time they 
were not in compliance with the form requirements; performance of 
onsite visits to determine if irrigation water deliveries have been 
terminated to landholders that failed to submit the required forms or 
that irrigated ineligible excess land; and performance of other 
activities necessary to address form and excess land violations.
    The following examples illustrate the application of Sec. 426.20:

    Example (1). ABC Corporation holds irrigable land in District Y 
and in District Z and has three shareholders (Farmers A, B, and C). 
In both 1996 and 1997, ABC Corporation and each shareholder filed 
certification forms prior to receiving irrigation water in these 
districts. However, in each year, Reclamation found several errors 
on the forms the three shareholders had submitted in each district. 
The districts were given 60-calendar days in which to have the forms 
corrected and returned to Reclamation. All the corrected forms were 
returned by the designated due date, except for Farmer C's. 
Districts Y and Z will each be assessed a fee of $520 ($260 for each 
of the 1996 and 1997 water years) because Farmer C's forms were not 
corrected and returned within the specified time period.
    Example (2). Farmer X owns 560 acres and leases 400 acres in 
District A. Each year, Farmer X submitted certification forms to the 
district prior to receipt of irrigation water. However, Reclamation 
found that in 1996

[[Page 66796]]

and 1997, Farmer X had reported all of his owned land on his form 
but only 150 of his 400 leased acres. Reclamation determines that 
this omission of information is not an attempt to defraud the 
Federal Government. Accordingly, the district will be required to 
obtain a corrected form, and if this is not accomplished in 60-
calendar days, it will be assessed a fee of $520 ($260 for 1996, and 
$260 for 1997.)
    Example (3). Farmer X and spouse, who are prior law recipients, 
own 480 acres in District A. None of the 160 acres in excess of the 
couple's 320-acre ownership entitlement was under recordable 
contract, as set forth in Sec. 426.12, or otherwise eligible to 
receive irrigation water. However, Reclamation found that irrigation 
water had been delivered to the 160 excess acres in both 1998 and 
1999. For the irrigation water delivered in these 2 years, District 
A will be assessed the compensation rate as set forth in 
Sec. 426.12(h). An additional fee of $520 will also be assessed to 
the district ($260 each for 1998 and 1999).

Comments Concerning Sec. 426.20--Assessment of Administrative Costs

General
    Comment: Several commenters supported the assessment of 
administrative fees in place of the compensation rate to address RRA 
forms problems.
    Response: Reclamation believes the assessment provides an equitable 
method for addressing RRA forms problems, while recovering costs 
incurred to address such problems.
    Comment: Reclamation does not have the authority to impose 
penalties or fines in the guise of assessments for administrative costs 
without specific direction from Congress.
    Response: Reclamation is authorized to promulgate regulations and 
to collect all data necessary to carry out the mission of Reclamation. 
43 U.S.C. 373; 43 U.S.C. 390ww(c); 31 U.S.C. 9701.
    Reclamation determines eligibility to receive water, in large part, 
based on the information provided on RRA certification and reporting 
forms. Section 426.18(m) of these final regulations require that 
failure by landholders to submit the required certification or 
reporting form(s) will result in loss of eligibility to receive water.
    In issuing Sec. 426.20 of the Acreage Limitation Rules and 
Regulations, Reclamation has properly exercised its authority to 
promulgate regulations for ensuring the delivery of irrigation water 
only to eligible landholders. The fee is intended to improve compliance 
with RRA certification requirements and ensure that irrigation water is 
delivered only to those landholders eligible under the RRA by 
recovering certain administrative costs Reclamation incurs due to 
noncompliance with RRA forms requirements and deliveries of irrigation 
water to ineligible excess land. Reclamation, as a Federal agency, also 
may impose remedial measures. The $260 charge provided for in this rule 
is remedial in nature rather than punitive.
    In addition, Reclamation possesses authority to ``* * * prescribe 
regulations establishing the charge for a service or thing of value 
provided by the agency.'' 31 U.S.C. 9701. As discussed above, under 
reclamation law, any landholder who received irrigation water prior to 
submitting the requisite RRA forms failed to meet the criteria which 
Congress established for eligibility. When Reclamation becomes aware of 
the violation and undertakes a variety of additional activities to 
obtain the forms and the necessary information or terminate the 
delivery of irrigation water on ineligible excess land, Reclamation is 
helping that landholder establish eligibility for receiving the 
``service or thing of value''--irrigation water. These additional 
activities are valuable services Reclamation provides districts and 
landholders who would otherwise not be in compliance with applicable 
Federal laws, regulations, and contracts.
    Comment: Reclamation's assessment of administrative costs should be 
the sole penalty for a violation of the certification and reporting 
requirements.
    Response: The assessment of administrative fees is not a penalty. 
The fee recovers the costs incurred by Reclamation to correct forms 
violations in administering the RRA forms requirements. Reclamation 
reserves the right to terminate the delivery of irrigation water if 
Reclamation cannot determine the eligibility of landholders to receive 
such water because of noncompliance with the RRA forms requirements.
    Comment: The proposed rule apparently treats all certification and 
reporting violations equally. The final rules should consider the 
relative severity of a particular violation. Otherwise, simple 
typographical errors will be treated identically to the failure to file 
a form at all.
    Response: Section 426.20(b), includes a 60-calendar day grace 
period in which RRA forms may be corrected without imposition of 
administrative costs. This differs significantly from Sec. 426.20(a), 
where addresses the nonsubmittal of RRA forms. No grace period is 
provided for failure to file RRA forms.
    Comment: Some commenters stated that administrative costs should be 
assessed prospectively only and should not be applied to certification 
or reporting violations which occurred prior to the formal adoption of 
the rule. Other commenters proposed that the administrative fee should 
be applied to previous compensation bills issued for forms violations.
    Response: The administrative cost provision will be applied 
prospectively from the date each provision first becomes effective. 
With regard to forms violations, it will be applied as of March 27, 
1995, the date the administrative fee provision first became effective.
    With regard to the delivery of irrigation water to ineligible 
excess land, it will not be applied to any such deliveries that 
occurred prior to the effective date of these regulations.
    Comment: Will both the district and landholder be assessed the 
administrative fee for the same violations? It would be unreasonable to 
assess the fee to both.
    Response: The administrative fee will be assessed only once for 
each violation.
Section 426.20(a)
    Comment: Reclamation should clearly state that it will assess the 
compensation rate only in instances of irrigation water being delivered 
to ineligible excess land.
    Response: Reclamation will not self-impose limits on the use of the 
compensation rate. The compensation rate will not be used to address 
noncompliance with RRA forms requirements. However, it may be used to 
address deliveries to other ineligible land in addition to ineligible 
excess land.
Section 426.20(b)
    Comment: No fines should be assessed for errors.
    Response: The assessment of administrative costs is not a fine. 
Rather, Reclamation is collecting the average cost associated with 
correcting forms problems. If there were no problems associated with 
the submittal of RRA forms, Reclamation would not have to incur these 
additional costs. In addition, Reclamation provides 60-calendar days to 
correct forms without the assessment of the administrative fee. Thus, 
the districts and landholders have a great deal of control over whether 
the $260 administrative fee will be applied.
Section 426.20(c)
    Comment: The proposed rule is defective in that it requires the 
collection of administrative costs from the district rather than from 
the landholder.
    Response: Reclamation's contract is with the district. The 
districts are also responsible for collecting RRA forms. Districts are 
not to deliver water to land

[[Page 66797]]

for which an RRA form has not been filed or to land that is ineligible 
excess land. The districts can minimize any assessment of 
administrative costs by reviewing RRA forms upon submittal to ensure 
they have been completed correctly. In addition, 60 calendar days are 
provided to obtain forms corrections. Again, districts can minimize any 
assessment of administrative costs by having the RRA forms corrected in 
a timely manner.
Section 426.20(e)
    Comment: The administrative fee amount is based on an arbitrary 
number.
    Response: The $260 assessment is based on the average costs 
Reclamation incurred to address RRA forms violations in 1991, 1992, and 
1993. The same type of costs were incurred during those years to 
address instances of irrigation water being delivered to ineligible 
excess land.
    Comment: The administrative fee is based on costs associated with 
the audits of landholders.
    Response: This is incorrect. However, if a forms problem is 
discovered during the audit of a landholder, the costs associated with 
correcting that problem have been and will be considered in determining 
the average costs associated with correcting forms problems. The same 
is true with respect to addressing the delivery of irrigation water to 
ineligible excess land.

Section 426.21  Interest on Underpayments

    Section 426.21 of prior regulation, Small reclamation projects, is 
renumbered as Sec. 426.17. The new Sec. 426.21, Interest on 
underpayments, replaces Sec. 426.23 of the prior regulation. This 
section discusses application of underpayment interest as required by 
Section 224(i) of the RRA, as amended (43 U.S.C. 390ww).
    As in the proposed rule, a definition of underpayment is included 
as paragraph (a). Other editorial changes from the prior regulation 
have been made for clarity and organization. No significant changes 
were made between the proposed and final rule.
    Paragraph (b) discusses how interest accrues on underpayments and 
provides that Reclamation will collect the underpayment with interest 
from the appropriate district. Paragraph (c) specifies how the 
underpayment interest rate is determined.

Comments Concerning Sec. 426.21--Interest on Underpayments

Section 426.21(b)
    Comment: Requiring the district to pay the underpayment exceeds 
Reclamation's authority under the law.
    Response: Reclamation contracts with districts and the contracts 
include the requirement to administer and comply with the acreage 
limitation provisions. These provisions include paying Reclamation for 
water delivered. If the district delivers water that is subject to 
application of the full-cost or compensation rates, then the district 
is responsible for promptly collecting those rates from the landholders 
and for promptly remitting those funds to Reclamation.
    Comment: Will both the district and landholder be assessed the 
underpayment interest for the same violation? It would be unreasonable 
to assess the interest to both.
    Response: Underpayment interest will be assessed only once.

Section 426.22  Public Participation

    Section 426.22 of the prior regulation, Decisions and appeals, is 
renamed Reclamation decisions and appeals and renumbered as 
Sec. 426.24. The new Sec. 426.22, Public participation, replaces 
Sec. 426.20 of the prior regulation. This section addresses the 
opportunities Reclamation will provide the public to become involved in 
pending contract actions.
    The only substantive change between the prior rules and the 
proposed rules is in paragraph (8) of the prior rule. This paragraph is 
replaced by paragraph (b) of this final regulation and deletes 
reference to a 60-day public comment period. The prior provision 
reduces Reclamation's flexibility to base the comment period on 
specific circumstances and is not a statutory requirement. No 
significant changes were made between the proposed and final version of 
this section.
    Paragraph (a) provides the general methods Reclamation will use to 
notify the public about pending contract actions, which includes a 
requirement to provide such 60-calendar days prior to contract 
execution. Paragraph (b) provides the steps Reclamation will use to 
notify the public about any modification to a proposed contract. 
Paragraph (c) specifies what information Reclamation will include in 
published announcements concerning contract actions.
    Paragraph (d) specifies that anyone may obtain copies of proposed 
contracts and from where, while paragraph (e) provides the 
opportunities for public participation. Paragraph (f) specifies which 
individuals are authorized to negotiate the terms of contract 
proposals.
    Finally, paragraph (g) specifies how Reclamation will use comments 
submitted during the comment period or made at hearings.

Comments Concerning Sec. 426.22--Public Participation

    No comments were received concerning this section.

Section 426.23  Recovery of Operation and Maintenance (O&M) Costs

    Section 426.23 of the prior regulation, Interest on underpayments, 
is renumbered as Sec. 426.21. The new Sec. 426.23, Recovery of 
operation and maintenance (O&M) costs, replaces Sec. 426.8 of the prior 
regulation. This section addresses when districts, and in some cases 
individual landholders, will be required to pay all O&M costs, if they 
are not paying such currently.
    This section has been rewritten for clarity. The proposed and final 
language contains no significant changes to prior regulations.
    Paragraph (a) provides a general statement that all new, renewed, 
or amended contracts will provide for payment of O&M costs as specified 
in this section.
    Paragraph (b) states that a district must pay all of the O&M costs 
that Reclamation allocates to irrigation if a district executes a new 
or renewed contract after the enactment date of the RRA. For a district 
that had a contract in existence on the date of enactment of the RRA 
and then amends that contract to conform to the discretionary 
provisions, paragraph (c) provides that the district must pay all of 
the O&M costs allocated to irrigation. This paragraph goes on to 
discuss other aspects of what will be part of the district's contract 
rate after the contract amendment. Paragraph (d) provides the same 
information for a district that amends a contract to provide 
supplemental or additional benefits.
    Paragraph (e) discusses the amount of O&M a district pays under a 
contract that was in place on the enactment date of the RRA and has not 
been amended.
    Paragraph (f) states that an irrevocable elector must pay his or 
her proportionate share of all O&M costs allocated to the district for 
irrigation and provides details on the application. Finally, paragraph 
(g) explains that if a prior law landholder is subject to full-cost 
pricing, then all O&M costs must be factored into any full-cost 
assessment and submitted to the United States by the district.

[[Page 66798]]

    The following examples illustrate the application of Sec. 426.23:

    Example (1). A district amends its water service contract to 
conform to the discretionary provisions. Prior to its amendment, the 
water service contract obligated the district to pay a fixed rate of 
$3.50 per acre-foot of water for the remaining 10 years of its 30-
year contract term. At the time of contract amendment, $3.00 of the 
contract rate are needed to pay current O&M costs. If the district's 
O&M costs increase by $0.50 per acre-foot from $3.00 to $3.50 per 
acre-foot in the year after the district's amendment, then the 
current $3.50 rate will be adjusted to $4.00 to reflect the $0.50 
increase in O&M costs. If the district's O&M costs increase by $0.25 
per acre-foot the following year, the district's rate would be $4.25 
per acre-foot. Similar adjustments to O&M costs would continue 
throughout the remaining term of the district's contract. One effect 
of these adjustments is that, subsequent to amendment and continuing 
throughout the remaining contract term, the district's annual 
payments will be $0.50 per acre-foot higher than its actual O&M 
costs.
    Example (2). A district amends its water service contract to 
conform to the discretionary provision. Prior to its amendment, the 
district's contract obligated it to pay a rate of $3.00 per acre-
foot of water for the remaining 10 years of its 30-year contract. At 
the time of the contract amendment, the district's actual O&M costs 
are $6.50 per acre-foot. Since the current contract rate of $3.00 
does not cover these O&M costs, the district's rate will be 
increased to $6.50. If the district's O&M costs increase by $.50 per 
acre-foot the following year, the district's rate would then be 
adjusted to $7.00 per acre-foot.
    Example (3). A district's repayment contract obligates it to pay 
$4.00 per acre for the remaining 5 years of its 40-year contract. It 
is also obligated under the terms of its contract to pay the full 
O&M costs due the United States on an annual basis in addition to 
its repayment obligation. If the district were to amend its contract 
to conform to the discretionary provisions, no change in its present 
repayment arrangement with the United States would be necessary 
since under the terms of its contract is it already paying its full 
O&M costs on an annual basis.

Comments Concerning Sec. 426.23--Recovery of Operation and Maintenance 
(O&M) Costs

Section 426.23(c)
    Comment: It was congressional intent that farmers pay the full cost 
of service, including capital, full O&M, and interest on O&M deficits, 
as soon as possible. The rules should require such when a district 
amends its contract to conform to the discretionary provisions.
    Response: Section 208(a) of the RRA states that when a district is 
subject to the discretionary provisions, the price of water will be at 
least sufficient to recover all O&M costs that the district is 
obligated to pay the United States. Section 208(b) of the RRA requires 
Reclamation to adjust the contract rate for discretionary provision 
districts annually to reflect any changes to O&M costs. Section 208(c) 
of the RRA states that the other two sections do not apply to districts 
which operate and maintain project facilities and finance such 
operations from non-Federal funds.
    While Reclamation has the authority in Section 208 to charge more 
than the O&M rate, with one option being the cost of service rate, 
Reclamation is not required to do so. Reclamation prefers to review 
each district individually to determine the repayment capability. 
Reclamation will charge the cost of service rate where appropriate. To 
provide a higher rate in these regulations than is statutorily required 
would limit Reclamation's flexibility to address differences between 
districts.

Section 426.24  Reclamation Decisions and Appeals

    Section 426.24 of the prior regulation, Assessment of 
administrative costs, is renumbered as Sec. 426.20. The new 
Sec. 426.24, Reclamation decisions and appeals, replaces Sec. 426.22 of 
the prior regulation. This section provides the right to appeal RRA 
final determinations made by regional directors, and specifies the 
process to be used.
    The proposed rules made significant changes to the final 
determination and appeals processes for RRA decisions. The proposed 
rules were prepared in response to Reclamation charging the 
compensation rate to districts for delivering irrigation water to 
landholders without an RRA form on file, and the resulting difficulties 
Reclamation was experiencing due to the volume of appeals. With the 
advent of the administrative fee provision, Reclamation believes the 
appeals process found in the prior rules would be more appropriate, and 
Reclamation has included that version in these final rules with changes 
for clarity and organization and a few significant adjustments.
    Paragraph (a) discusses who will make final RRA determinations for 
Reclamation. A significant change is that the regional director's 
decision will not take effect during the period in which an appeal to 
the Commissioner may be filed (i.e., 30 days). If an adversely affected 
party files a petition for a stay, the regional director's decision 
will not take effect until either the Commissioner acts on the petition 
or the Commissioner does not take action within 30 days after receiving 
the petition.
    In addition, the regulations clarify that if the final 
determination involves more than one region, the Commissioner will 
decide who makes the final determination. Because the final rule 
provides that decisions will not go into effect until adversely 
affected parties have had an opportunity to appeal, the shortened 
filing period ensures expedited implementation while allowing 
petitioners reasonable time to file an appeal.
    Paragraph (b) provides the general appeal rights concerning RRA 
final determinations and the effect of a final determination during an 
appeal. The final rule also reduces from 60 days to 30 days the time in 
which an adversely affected party may file a notice of appeal and 
reduces from 90 days to 60 days the time to submit documents in support 
of the appeal. Similar to paragraph (a), the shortened filing period 
coupled with the delayed effective date of the regional director's 
decision ensures that Reclamation can make and implement timely 
decisions.
    Paragraph (c) provides that the rules governing the procedures of 
the Ad Hoc Board of Appeals of the Office of Hearings and Appeals apply 
to appeals from the Commissioner's decision.
    Paragraph (d) discusses the effective date of an appealed decision 
and states the compensation rate may be applicable if irrigation water 
is delivered to land found to be ineligible. Paragraph (e) provides for 
the accrual of underpayment interest, if applicable, while an appeal is 
pending.
    Paragraph (f) addresses what happens to appeals made prior to the 
effective date of these regulations by stating pending appeals will be 
processed under the rules in effect prior to these final regulations.
    Paragraph (g) provides the addresses for requests for appeals, 
stays, etc. Unlike the prior rules where regional addresses were 
included, which often lead to confusion as to where to send an appeal, 
this list only includes the address for the Commissioner and the Office 
of Hearings and Appeals.

Comments Concerning Sec. 426.24--Reclamation Decisions and Appeals

General
    Comment: The proposed revisions would create too much paperwork and 
other activities for $260 forms bills. The cost of protesting a forms 
bill may exceed the bill itself.
    Response: Reclamation has decided not to implement the proposed 
appeals regulations. The prior appeals process as modified by these 
final rules is expected to efficiently manage disputes arising under 
these rules. The process is not expected to generate more

[[Page 66799]]

paperwork, and an appeal from a regional director's decision is 
expected to be completed in less time than under the prior rules. If in 
the future further changes to the appeals section are warranted, 
Reclamation will initiate a special rulemaking activity to address 
those changes.
    Comment: The appeals section is long and confusing. As written the 
ability of the Agency head to determine if field offices are making the 
correct decisions is removed.
    Response: See the response to the preceding comment. The appeals 
process under the final rules is substantially similar to prior rule 
provisions, although certain time periods have been shortened. The 
Commissioner, under the final rules, retains authority to correct 
decisions of the regional directors.
     Comment: The changes to this section improve the appeals process 
because the authority will be with the regional director and not with 
the politicians.
     Response: Although Reclamation is not retaining the proposed 
version of the appeals provisions, all final RRA determinations have 
been and will remain with the regional director. The appeals section 
only specifies a process that may be used if a party disagrees with 
that final determination.
     Comment: The rule should provide some specific time periods for 
response by Reclamation to appeals so that appellants know when the 
process may be considered completed, even in the absence of a response.
     Response: This comment has been accommodated with respect to stays 
in the final regulations. Variable workloads and resources make 
imposition of a specific time period for other petitions unwise. 
Reclamation will contact appellants to inform them that appeals have 
been received and when the Commissioner's decision has been made. 
Alternatively, the appellants may contact Reclamation to determine the 
status of their appeals.
     Comment: It is assumed the appeals section does not affect the 
waiver of sovereign immunity.
     Response: That is a correct assumption.
Section 426.24(b)
     Comment: Stays should be a matter of right, not at the discretion 
of the regional director. In addition, stays should be through the 
entire process, including any action brought to Federal Court.
     Response: If an appellant shows good cause for granting a stay, 
the request for stay is submitted in a timely manner, and the harm to 
the petitioner outweighs the interest to Reclamation, then the 
Commissioner will stay the decision of the regional director. Thus, for 
example Reclamation would not grant a blanket approval to deliver 
irrigation water to ineligible land simply because a party appeals a 
decision to terminate such water deliveries.
Section 426.24(f)
     Comment: Any pending appeals should be decided under the proposed 
regulations.
     Response: This comment has not been accommodated in the final 
regulations. Any changes between the prior rules and the final rules 
will be applied prospectively.

Section 426.25  Reclamation Audits

    Section 426.25 of the prior regulation, Severability, is renumbered 
as Sec. 426.26. The new Sec. 426.25, Reclamation audits, replaces 
Sec. 426.10(i) of the prior regulation.
    This section states that Reclamation will conduct reviews of 
district administration and enforcement of the RRA and these 
regulations, and landholder compliance. The prior rules discussed field 
audits that would be conducted. The proposed and final rule simply 
include the names of the activities associated with Reclamation's RRA 
field audits. The final rule changes the phrase ``has the authority to 
conduct'' to ``will conduct'' to reflect the intent of the statutory 
requirement and the wording in the prior rule.

Comments Concerning Sec. 426.25--Reclamation Audits

    Comment: Reclamation should retain the language of the prior rules 
that states Reclamation will conduct field audits, rather than the 
proposed language that states Reclamation is authorized to conduct 
field audits.
    Response: This section has been revised to state that Reclamation 
will conduct reviews of districts and landholders.
    Comment: Field audits would be welcome to determine if perceived 
violations or abuses of the law or regulations do actually exist. To 
the extent that audits disclose violations, appropriate action should 
be taken.
    Response: Reclamation has and will continue the RRA Program 
Evaluation effort, which includes the review of districts' 
administration and enforcement of the acreage limitation provisions and 
landholders' compliance with those provisions. This section specifies 
the three major components of the RRA Program Evaluation effort.
    Comment: Reclamation should not unnecessarily investigate and 
harass farmers as a result of the rules. Probing into structures of 
family farm operations is unnecessary if most of the irrigators are 
under the 960-acre limit.
    Response: Reclamation's audit activities are limited for 
landholders who do not exceed acreage limitation entitlements. However, 
Reclamation must ensure all entitlements are enforced, not just the 
960-acre limitations applicable to qualified recipients.

Section 426.26  Severability

    The new Sec. 426.26, Severability, replaces Sec. 426.25 of the 
prior regulations. This section simply states that if any provision of 
these regulations or the application of such is held invalid, the 
sections of the rules or their applications that are not held invalid 
will not be affected.
     The final language contains no substantive changes to proposed or 
prior rules.

Comments Concerning Sec. 426.26--Severability

     No comments were received concerning this section.

Part 427 (Water Conservation)--Summary of Changes; Public Comments 
and Responses

     The RRA requires those who contract for Federal project water 
supplies to develop water conservation plans and challenges both 
Reclamation and the districts to evaluate water management strategies 
and implement appropriate water conservation measures. A thoughtfully 
developed water conservation plan represents an opportunity for every 
district to identify water management problems, evaluate opportunities, 
highlight accomplishments, and plan for improvements.
     Water conservation rules implementing Section 210 of the RRA were 
previously part of the Rules and Regulations for Projects Governed by 
Federal Reclamation Law found in Part 426 (43 CFR 426.19). As part of 
this rulemaking, the water conservation rules have been removed from 
part 426 and placed in a new part 427. Reclamation intends no changes 
to the prior water conservation rule. However, Reclamation remains 
committed to actively encouraging and facilitating water conservation 
planning and implementation by water districts and landholders.
     Reclamation intends to encourage and assist districts in the 
development of quality water conservation plans, the demonstration of 
innovative conservation technologies, and the

[[Page 66800]]

implementation of effective water efficiency measures. As part of this 
effort, Reclamation will prepare advisory guidance that will contain 
recommendations for a sound water conservation planning process. 
Reclamation also recognizes the importance of cooperation and 
coordination with other State and Federal water conservation programs.
     The following comments were received on the proposed rules and 
were considered in developing these final rules.

Authorities

    Comments: A variety of comments were received regarding 
Reclamation's authorities to implement certain aspects of the proposed 
water conservation rules. Concern was expressed that the proposed rules 
would attempt to expand on the authorities provided by law. It was 
suggested that Reclamation should document prior authorities and seek 
additional legislative authority where such authority is lacking. 
Authorities were questioned in the following specific areas:
     Approval of water conservation plans,
     Withholding discretionary benefits, and
     Modifying signed contracts
    Response: The final rules do not alter the prior rules. Reclamation 
has reviewed its authorities with Interior's Office of the Solicitor. 
The Office of the Solicitor agrees that Reclamation has authority to 
implement the provisions contained in both the proposed rules and the 
final rules.

Incorporation by Reference

    Comments: Comments suggested that the proposed rules, by 
incorporating the Guidelines and Criteria, are in violation of the 
Administrative Procedure Act.
    Response: There is an established Federal Register process 
including specific language, for incorporation of materials by 
reference. Reclamation did not use this process or language because the 
proposed rules did not incorporate the draft Guidelines and Criteria by 
reference. However, there was a definite link between the rules and 
draft Guidelines and Criteria, because the rules proposed to use the 
Guidelines and Criteria as the standard upon which Reclamation would 
base its approval of water conservation plans. The final rules do not 
include a provision for Reclamation plan approval. Advisory guidance 
will be contained in independent advisory documents and is not 
incorporated by reference into the final rules as regulatory 
requirements.

Approval Process

    Comments: Comments regarding the water conservation plan approval 
process described in the proposed rules focused on the following issues 
and concerns:
     Triggering of NEPA compliance requirements.
     Public and tribal review of plans.
     Lack of penalties on Reclamation for delaying approval.
     Insufficient Reclamation resources to accomplish reviews 
and approval.
    Response: The proposed provision that Reclamation would approve 
water conservation plans is not included in the final rules. 
Reclamation will continue to make available its expertise and guidance, 
as resources permit, to encourage and assist districts in the 
development and implementation of effective water conservation plans. 
Although Reclamation will not approve plans, Reclamation will in the 
future appropriately address Federal responsibilities under NEPA, ESA 
and Native American trust responsibilities where major Federal actions 
may be involved regarding site specific implementation of plan 
measures. For example, Reclamation will comply with NEPA as 
appropriate, when undertaking future site specific Federal actions, 
such as financial assistance for implementation of a specific 
conservation measure related to this rulemaking. Native American trust 
responsibility will also be addressed.

Applicability

    Comments: Concerns were expressed regarding who should prepare 
water conservation plans. Comments indicated that the proposed rules 
should not apply to these groups:
     Indian tribes.
     Contractors for water for municipal and industrial 
purposes.
     Paid-out districts.
     Users where only a fraction of the total supply is 
Reclamation project water.
     Irrigation districts as opposed to irrigation projects.
     Canal companies.
     Small entities as defined in the Regulatory Flexibility 
Act (populations less than 50,000 versus 3,300 in the proposed rule).
    Response: Section 426.16(f) has been revised to clarify Indian 
tribes and tribal entities operating on tribal trust or restricted 
lands need not prepare water conservation plans. These tribal entities 
or others operating on trust lands are typically subject to BIA 
regulations which protect the resource. The RRA requires plans of each 
district that ``has entered into a repayment contract or water service 
contract pursuant to Federal reclamation law or the Water Supply Act of 
1958, as amended.'' This includes irrigation districts, canal 
companies, and municipal and industrial contractors receiving water 
from a Reclamation project. No additional exclusions are provided in 
the final rules; however, Reclamation will maintain present policy that 
excludes districts with contracts that are not developed pursuant to 
Federal reclamation law, small and temporary contractors and districts 
already complying with comparable State or other comparable Federal 
water conservation programs.
    Comment: If a tribe wishes to sell or lease water to a district 
which is not exempt under Sec. 427.2(a), would that district be 
required to have an approved water conservation plan in accordance with 
the regulations before Reclamation facilitates the purchase or lease?
    Response: The district would be required to prepare a water 
conservation plan in accordance with provisions contained in the final 
regulations. Reclamation could consider a district's compliance with 
the regulations before facilitating a purchase or lease of water; 
however, nothing in the regulations requires that to occur. Section 
426.16(f) contains an exception from the preparation of water 
conservation plans for Indian tribes and tribal entities operating on 
tribal trust or restricted lands; however, this exception does not 
extend to districts purchasing or leasing water from a tribe.

Definitions

    Comment: Regarding the definition of a district, commenters stated 
that the RRA defines the term ``district'' to be limited to those 
entities which have entered into contract with the Secretary for 
irrigation water. The proposed rules define ``districts'' to include 
anyone that has entered into a contract with the United States pursuant 
to Reclamation law (with a few exceptions). The rules have expanded on 
the RRA definition to include municipal and industrial (M&I) water 
users.
    Response: The RRA defines the term ``district'' as any individual 
or any legal entity established under State law which has entered into 
a contract or is eligible to contract with the Secretary for irrigation 
water. If a project is authorized to provide irrigation water, then a 
water district, including a district that currently supplies only 
municipal and industrial water, is eligible to contract for irrigation 
water unless it is prevented from doing so by another State or Federal 
statute. The intent of

[[Page 66801]]

Congress to require municipal and industrial water districts to prepare 
water conservation plans is substantiated by the reference to the Water 
Supply Act of 1958 in Section 210(b) of the RRA.
    Comment: One commenter stated that ``the language of the RRA refers 
only to entities that are parties to water supply contracts or 
repayment contracts. It does not require our irrigation ditch company 
to prepare water conservation plans.''
    Response: This comment and letter refers to a contract between the 
irrigation ditch company and Reclamation for the sale of land and 
replacement of storage space. This type of contract does not fall 
within the definition of contract given in the RRA.

Exemptions

    Comments: Commenters indicated that entities subject to additional 
specific State laws or Federal project authorizations with water 
conservation requirements should also be exempted from the rules. 
Entities subject to the Arizona's Groundwater Management Act and those 
within the Central Arizona Project and the Central Utah Project were 
mentioned. At least one commenter also indicated that there should be 
specific methodology identified in the rules for an entity to qualify 
for an exemption.
    Response: Specific exemptions such as these are not listed in the 
final rules. However, Reclamation's policy is to treat compliance with 
such comparable water conservation requirements of the Central Utah 
Project or Arizona Groundwater Act or comparable laws as satisfying the 
requirements of this regulation. Reclamation recognizes the importance 
of coordination with other State and Federal water conservation 
programs. Reclamation will describe compliance with comparable State or 
Federal water conservation through policy statements.

Limited District Influence

    Comments: Concern was expressed that some districts' ability to 
implement the requirements of the proposed rules would be limited 
because the district has no authority to require compliance by water 
users within the district.
    Response: In situations such as this, Reclamation would expect a 
district to develop a conservation plan that focuses on those elements 
within the district's control, including ways to encourage water users 
to undertake water conservation measures. In addition, many water 
service and repayment contracts contain assignment clauses which would 
allow requirements of a contractor to be assigned to a subcontractor.

Burdensome Nature

    Comments: Respondents expressed concern about what they view as the 
burdensome nature of the proposed rules. Some indicated that water 
conservation plans and measures would be a serious financial burden on 
some districts. Some indicated that the burden would result in time 
being spent by the districts on administrative exercises and law suits, 
rather than on water conservation. Others indicated that some Districts 
are already conserving water and that plans would be unnecessary.
    Response: The purpose of the Water Conservation Rules is to 
implement Section 210 of the RRA. Section 210 requires districts to 
prepare water conservation plans. The final rules neither include a 
provision for Reclamation to approve plans, nor do they contain 
requirements for specific conservation measures. Districts which are 
already conserving water will have the opportunity to identify such 
activities in their water conservation plans. Reclamation will assist 
districts in their water conservation planning efforts to facilitate 
improved water conservation planning.

Economic Feasibility

    Comments: Comments addressing the area of economic feasibility 
indicated that Section 210 of the RRA requires that water conservation 
measures should be economically feasible. The point was made that the 
costs of measures should not outweigh the value of the water conserved.
    Response: The RRA includes the provision that the Secretary should 
encourage prudent and responsible water conservation measures, where 
such measures are shown to be economically feasible. The final rules do 
not alter this provision. The final rules fully allow a district to 
examine the economic feasibility of water conservation objectives or a 
particular measure as part of its conservation planning process.

Increase Requirements

    Comments: Some commenters expressed the view that the proposed 
rules should go further in requiring water conservation activities. It 
was suggested that the proposed rules should, in addition, include 
minimum performance standards. The view was also expressed that the 
rules should allow consideration of all water resources, including 
groundwater.
    Response: The RRA requires districts to develop water conservation 
plans that address goals, economically feasible objectives, appropriate 
measures and a time schedule. It also requires Reclamation to encourage 
prudent and responsible water conservation measures on Federal 
projects. The final rules do not alter these provisions, but rather 
adopts an approach that evaluates opportunities for water conservation 
site-specifically through effective water management planning. This 
approach recognizes the widely ranging economic, social, institutional 
and environmental circumstances confronting districts westwide. 
Reclamation will actively encourage and assist districts, as resources 
permit, in the development and implementation of effective plans 
through the provision of advisory guidance and technical assistance.

Plan Updates

    Comments: Concerns were expressed regarding the requirement for 
plan updates every 5 years. Alternative periods of 10 and 15 years were 
suggested. It was also suggested that there should be an end to the 
update process, once several updates had been provided.
    Response: Effective water management and conservation planning is 
an ongoing process. Water conservation plans should be revisited and 
updated on a regular basis to assure the continuing relevancy of goals, 
objectives, measures and time schedules identified. The final rules do 
not specify an update schedule. However, Reclamation will maintain 
present policy that calls for 5-year updates of plans by districts.

Incentives

    Comments: Some comments on the incentive provisions in the proposed 
rules indicated that discretionary benefits should not be tied to 
compliance with water conservation plan requirements. Some used terms 
as ``punitive'' or ``blackmail'' to characterize such provisions. Other 
commenters indicated that sanctions such as monetary penalties or 
withholding of water deliveries should be imposed for noncompliance.
    Response: The final rules do not contain a provision that ties 
discretionary benefits to compliance with the water conservation rules. 
Reclamation will make its expertise and guidance available to districts 
regarding the development and implementation of effective water 
conservation plans. Reclamation will direct its available resources to 
support cooperative efforts

[[Page 66802]]

that address water management problems and opportunities.

Environmental Compliance

    Comments: The environmental compliance discussion in the preamble 
to the proposed rules generated considerable concerns. Most commenters 
opposed the requirement that water conservation plans would be subject 
to review under the NEPA. Some felt that it was the responsibility of 
the Federal Government, and would be an economic hardship on irrigation 
districts. It was pointed out that the requirement for NEPA compliance 
would be triggered by the Federal action of approving water 
conservation plans. At least one commenter supported the view that 
environmental compliance should be addressed at the individual water 
conservation plan development stage with a public participation process 
included.
    Response: Reclamation has not included a provision for the approval 
of plans in the final rule. NEPA compliance would no longer be 
triggered by plan preparation since the Federal action of ``approval'' 
has been removed. Reclamation will comply with NEPA as appropriate, 
when undertaking any future site specific Federal actions, such as 
financial assistance for implementation of a specific conservation 
measure related to this rulemaking. Reclamation anticipates that the 
resources which would have been devoted to environmental reviews can be 
better used for improved water conservation plan and implementation.

Federal Versus State and Local Jurisdictions

    Comments: Concern was expressed that the proposed rules are an 
intrusion into State authorities for managing water. It was indicated 
that States rather than the Federal Government should provide oversight 
for water conservation planning. Some also expressed the view that 
districts should have authority to make final decisions in water 
conservation planning.
    Response: With respect to the appropriation and distribution of 
water, Reclamation is subject to State water law and has a 
responsibility to see that its project water is used efficiently and in 
a manner consistent with State law. Opportunities exist for State/
Federal cooperation in achieving efficient water use. It is 
Reclamation's intent to coordinate fully with State conservation 
programs and to allow compliance with comparable State conservation 
programs to serve as compliance with the rules. In addition, districts 
make final decisions through the plan preparation process, subject to 
State and Federal law, regarding the development and implementation of 
water conservation measures.
    Comment: Executive Order No. 12612 requires Federal agencies 
undertaking policies with federalism implications, whenever possible, 
to ``defer to the States to establish standards.'' Respondents 
communicated that prior State and district programs are already 
requiring and accomplishing water conservation. Concern was expressed 
that the proposed rules would duplicate such programs.
    Response: Reclamation recognizes that some States have established 
conservation standards or programs that meet the goals and intent of 
the water conservation requirements of the RRA. Through policy, 
Reclamation intends to recognize compliance with comparable State or 
Federal water conservation requirements as fulfilling the intent of 
Section 210 of the RRA.

Critical Practice--Water Measurement

    Comments: Commenters offered views regarding the water measurement 
provision in the proposed rules. The predominant view expressed was 
that meters on each turnout would be an unreasonable and unnecessary 
expense. It was further expressed that developing quantitative 
inventories of nonproject water sources is unnecessary. Some commenters 
expressed support for volumetric measurement at each agricultural 
turnout or service connection and indicated that Reclamation should 
require a minimum accuracy in accounting for water use and 
conservation. The view was also expressed that minimum measurement 
requirements should include documentation of amounts of water used on 
specific parcels of land. At lease one commenter suggested that the 
rules list water measurement devices which are acceptable. Questions 
were also asked regarding Reclamation's intent with respect to the 
following:
     Would M&I suppliers need to meter at each household or 
only at the wholesale connection for raw water deliveries?
     What does proven accuracy mean?
     Do agricultural districts include M&I conservation 
practices as part of their water conservation plans when they wholesale 
untreated water to M&I suppliers?
    Response: The final rules do not require a district to include any 
specific water measurement and accounting system as a required 
conservation measure in the district's water conservation plan. 
Reclamation will provide advisory guidance on the recommended content 
of water conservation plans, and will continue to promote the 
importance of water measurement and accounting as a fundamental measure 
that all districts should evaluate in developing their conservation 
programs. This approach will allow a district more flexibility in 
evaluating its existing water measurement and accounting system and in 
developing and implementing an effective water measurement and 
accounting system appropriate to the particular district.

Critical Practice--Water Pricing

    Comments: Commenters expressed concern about the water pricing 
provision in the proposed rules. Some indicated that tiered pricing 
could lead to an increase in consumption of groundwater, and would 
especially be a problem in States with aggressive programs to shift 
from reliance on groundwater. The view was also expressed that the 
water pricing provisions would be in violation of laws or contracts in 
some instances. Some indicated that pricing decisions should be made on 
a local level since issues vary greatly from area to area.
    Other commenters favored the pricing provisions and suggested that 
the rules should require districts to consider a conservation rate 
structure to encourage water conservation. Other supporters indicated 
that charges should reflect the full cost of supplying water and that 
the rules should mandate tiered pricing. Some stated that water pricing 
structures designed to increase efficiency of use are acceptable as 
long as they do not include tiered pricing.
    Response: The final rules do not require a district to include 
incentive pricing or any specific water pricing structure as a required 
conservation measure in the district's water conservation plan. 
Reclamation will provide advisory guidance on the recommended content 
of water conservation plans, and will continue to promote the 
importance of water pricing as a fundamental measure that all districts 
should evaluate in developing their conservation programs. This will 
allow a district more flexibility in evaluating its existing pricing 
structure and in developing and implementing an effective water pricing 
structure appropriate to the particular district and its customers. 
This approach will also ensure that water pricing is consistent with 
contract provisions and applicable State laws.

Critical Practice--Educational Programs

    Comments: Commenters stated that Reclamation should provide 
assistance

[[Page 66803]]

in education and that the assistance program should apply directly to 
local water management circumstances.
    Response: The final rules do not require a district to include an 
educational program as a required conservation measure in the 
district's water conservation plan. Through policy, Reclamation will 
provide advisory guidance on the recommended content of water 
conservation plans, and will continue to promote the importance of an 
education program as a fundamental measure that all districts should 
evaluate in developing their conservation programs. This will allow a 
district more flexibility in evaluating its existing educational 
activities and in developing and implementing an effective water 
conservation education program appropriate to the particular district 
and its customers.

Critical Practice--Conservation Coordinator

    Comments: Commenters offered the view that a requirement for each 
district to appoint a water conservation coordinator would have an 
adverse financial impact on smaller districts.
    Response: The final rules do not require a district to identify a 
water conservation coordinator in the district's water conservation 
plan. However, Reclamation encourages each district to identify a water 
conservation coordinator who is responsible for development and 
implementation of the district's conservation plan.

Use of Conserved Water

    Comments: Commenters offered views concerning the use of conserved 
water. Some indicated that decisions on the use of conserved water 
should remain with each district or with the State. Some also indicated 
that the use of conserved water is restricted by certain State laws. 
The view was offered that conserved water should belong to the district 
and landowners. Some commenters were concerned that conserved water 
would flow out of a basin rather than being made available for 
recharging local groundwater or satisfying local M&I demands.
    Support was expressed for Reclamation's facilitation of water 
transfers between willing parties. Support was expressed by some for 
the making of conserved water available to fish and wildlife and the 
environment. Some indicated that Reclamation should encourage and 
facilitate the transfer of conserved water for fish and wildlife and 
other environmental needs where allowed under State law. Others 
indicated that Reclamation should require transfers for such purposes.
    Response: Reclamation supports the view that decisions on the use 
of conserved water in a specific situation are subject to State law, 
contract requirements, and conditions of the water right, as well as a 
variety of other site-specific factors. Reclamation will actively 
encourage and facilitate individual water transfers of Reclamation-
supplied conserved water between willing parties as appropriate. 
Reclamation will also work closely with States, other Federal agencies, 
tribal entities, local entities, and water users to identify 
environmental and other current needs for conserved water at the 
watershed level that may be satisfied by facilitating transfers between 
willing parties, subject to State law.

Technical Assistance

    Comments: Commenters offered views regarding Reclamation's 
providing of technical assistance in water conservation planning. Some 
commenters indicated that increased technical and financial support 
could lessen the burden of preparing water conservation plans. Others 
suggested that Reclamation sponsor educational meetings on the rules 
for districts when they are finalized. The view was also offered that 
Reclamation should assist the States in satisfying EPA water quality 
regulations. Concern was expressed by some that technical assistance 
from Reclamation is unlikely due to Reclamation's downsizing. Some even 
indicated that Reclamation's prices for technical assistance are 
inflated and personnel have a lack of expertise.
    Response: Reclamation will make available, as resources permit, its 
expertise and guidance to encourage and assist districts in the 
development and implementation of effective water conservation plans. 
Reclamation will provide technical and financial assistance through an 
incentive-based field services program, in cooperation with States, to 
the extent resources are available.

Consultation With Indian Tribes

    Comments: At least three commenters expressed concerns about 
consultation with Indian tribes. One comment indicated that tribes were 
not identified as being involved in the NEPA process addressed in the 
proposed rules. Another expressed concern that Reclamation is not 
adhering to the intent of Secretarial Order 3175.
    Response: It is Reclamation's intent to engage Indian tribes in the 
NEPA process for future site-specific Federal actions related to 
conservation, whenever the tribes are identified as affected parties 
and to ensure that any anticipated effects on Indian trust resources 
are explicitly addressed. Reclamation intends to fulfill its tribal 
trust obligations, including protecting tribal trust resources whenever 
undertaking future Federal actions related to this rulemaking.

Environmental Compliance

    The environmental impact statement (EIS) and related coordination 
activities described below provide full environmental compliance for 
the promulgation of these final rules and regulations. Reclamation will 
comply with NEPA and other environmental statutes as appropriate, prior 
to undertaking any future site-specific Federal actions related to this 
rulemaking.

National Environmental Policy Act

    In compliance with the National Environmental Policy Act (NEPA), an 
EIS has been prepared which analyzes the impacts of these proposed 
rules and regulations and alternatives thereto. The EIS provides a 
complete assessment of the impacts of promulgating and implementing the 
rules and regulations. The EIS includes a no action alternative, a 
proposed rule alternative, a preferred alternative, and three 
additional alternatives. A notice of availability of the final EIS was 
published in the Federal Register (60 FR 4677, Feb. 7, 1996), and the 
final EIS was distributed to interested parties. The final EIS contains 
a list of seven programmatic environmental commitments that complement 
the preferred alternative. A formal Record of Decision on the final 
EIS, generally naming the preferred alternative, was signed by the 
Assistant Secretary `` Water and Science on December 10, 1996.

Fish and Wildlife Coordination Act

    In meetings and correspondence between Reclamation and the U.S. 
Fish and Wildlife Service, the National Marine Fisheries Service, and 
State wildlife agencies, it was agreed that a formal Fish and Wildlife 
Coordination Act (FWCA) report would not be required for this 
rulemaking. As part of coordination efforts, the U.S. Fish and Wildlife 
Service, the National Marine Fisheries Service, and State wildlife 
agencies provided technical assistance to Reclamation, which has been 
appropriately documented. If additional Federal actions are taken 
pursuant to these rules and regulations, FWCA coordination and formal 
reports will be accomplished, as appropriate to the future actions.

[[Page 66804]]

Endangered Species Act

    Section 7 of the Endangered Species Act (ESA) establishes the 
interagency cooperation program under which Federal agencies have their 
primary compliance responsibilities. Reclamation, the U.S. Fish and 
Wildlife Service (FWS), and the U.S. National Marine Fisheries Service 
(NMFS) conducted a review under section 7(a)(1) of the ESA of the 
potential effects of this rulemaking. The FWS and NMFS concurred by 
separate letter that the action as proposed is not likely to adversely 
affect listed or proposed species, or designated or proposed critical 
habitats. Reclamation requested a list of federally proposed or listed 
threatened, endangered, and candidate species from the FWS and NMFS, 
and prepared information required to conduct a programmatic review 
under section 7(a)(1). The FWS and NMFS provided guidance on how these 
proposed rules could be used to afford overall conservation for listed 
species. Reclamation will consult and/or confer as specified in 
sections 7(a)(2) and 7(a)(4) with appropriate FWS and NMFS office prior 
to undertaking future site-specific Federal actions related to the 
implementation of this rulemaking, as appropriate, that ``may affect'' 
proposed or listed species or their proposed or designated critical 
habitat. As part of its obligations under the ESA, Reclamation intends 
to provide internal policy guidance to its area managers on section 7 
and section 10 ESA procedures, and to assist districts in complying 
with section 10 procedures where required.

National Historic Preservation Act

    Informal consultation was conducted with the Advisory Council on 
Historic Preservation to apprise them of this rulemaking. The draft EIS 
was sent to the Council and the 17 Western State Historic Preservation 
Offices for official comment. For future Federal actions taken pursuant 
to these rules that trigger compliance under the National Historic 
Preservation Act, procedures prescribed in 36 CFR 800 will be followed.

Executive Order 12866, Regulatory Planning and Review

    Under Executive Order (E.O.) 12866, (58 FR 51735, Oct. 4, 1993), an 
agency must determine whether a regulatory action is significant and 
therefore subject to Office of Management and Budget (OMB) review and 
the requirements of the Executive Order. E.O. 12866 defines a 
``significant regulatory action'' as a regulatory action meeting any 1 
of 4 criteria specified in the Executive Order. This rulemaking is 
considered a significant regulatory action under criterion number 4, 
because it raises novel legal or policy issues arising out of legal 
mandates, the President's priorities, or the principles set forth in 
the Executive Order.

Regulatory Flexibility Act

     The Regulatory Flexibility Act requires that a regulatory 
flexibility analysis, describing the impact of regulations on small 
entities be prepared and published if the regulations will have a 
significant economic effect on a substantial number of small entities. 
The final rules generally reduce the economic burden on small entities 
by increasing the RRA forms threshold and modifying other provisions 
such as the application of the RRA to religious and charitable 
organizations. Other major provisions of the rules, such as leasing, 
trusts, and preparation of water conservation plans remain 
substantively unchanged. None of these provisions will have a 
significant economic effect on a substantial number of small entities.

Paperwork Reduction Act

Acreage Limitation Rules and Regulations

    Sections 206, 224(c), and 228 of the RRA (43 U.S.C. 390ff, 
390ww(c), and 390zz) require, among other things, that (1) as a 
condition to the receipt of Reclamation irrigation water, each 
landholder must certify, in a form suitable to the Secretary, that they 
are in compliance with the provisions of the Act, and (2) districts 
must annually submit to Reclamation, in a form suitable to the 
Secretary, records and information necessary to implement the RRA. 
These mandatory requirements are addressed in Sec. 426.18. To comply 
with these requirements, Reclamation provides forms for the 
landholders' and districts' use. The landholder forms have been 
approved by the OMB under control number 10006-0005. The district 
summary forms have been approved under control number 10006-0006. Both 
clearances expire on August 31, 1999.
    The final rules contain a change, which will become effective on 
January 1, 1997, that will reduce the reporting burden by raising the 
acreage threshold for which RRA forms are required. Reclamation 
estimates that the reporting burden will be reduced by 3,300 hours by 
increasing the RRA forms threshold for qualified recipients. All 
districts subject to the acreage limitation provisions will be notified 
of their new RRA forms threshold for qualified recipients shortly after 
the publication of these final rules in the Federal Register.
    Reclamation will initiate a full public process to revise its RRA 
forms to implement other changes to the Acreage Limitation Rules and 
Regulations that will become effective on January 1, 1998. This process 
will start early in 1997 and be completed in time to make such changes 
to the RRA forms for the 1998 water year.

Water Conservation Rules and Regulations

    Section 210(b) of the RRA (43 U.S.C. 390jj(b)) requires that each 
district that has entered into a repayment contract or water service 
contract pursuant to Federal reclamation law or the Water Supply Act of 
1958, as amended, develop a water conservation plan that includes 
specific features. Section 427.1(b) of the Water Conservation Rules and 
Regulations require that such plans be submitted to Reclamation.
    In accordance with the Paperwork Reduction Act of 1995, Reclamation 
is announcing its intention to require the preparation of water 
conservation plans and the submittal of those plans to Reclamation for 
review. The respondents to this information collection will be all 
districts that meet the statutory requirement to prepare water 
conservation plans. However, it is estimated that several districts may 
be exempted from the requirement to prepare water conservation plans 
based principally on size of the district or through meeting the 
requirements of other State or Federal programs. Overall, no less than 
an estimated 340 districts would actually be required to prepare water 
conservation plans and submit them to Reclamation. It should be noted 
that water conservation plans have been a requirement of the RRA since 
1982. Accordingly, the initial water conservation plan development work 
for most districts has already been accomplished and future efforts 
will be in updating the district plan every 5 years.

Executive Order 12612, Federalism

    These final rules modify prior provisions for administering the 
RRA. The rules do not significantly change the relationship or relative 
roles of the Federal and State Government. They do not lead to Federal 
control over traditional State responsibilities, or decrease the 
ability of the States to make policy decisions with respect to their 
own functions. These rules do not affect the distribution of power and 
responsibilities among the various levels of government and do not 
preempt State law. In summary, these

[[Page 66805]]

rules do not have a significant impact on Federalism as described by 
E.O. 12612.

Executive Order 12630, Takings

    These rules do not result in imposition of undue additional fiscal 
burdens on the public. These rules do not result in physical invasion 
or occupancy of private property or substantially affect its value or 
use. Specifically, these rules do not result in the taking of 
contractual rights to storage water in Reclamation reservoirs or water 
rights established under State law. In summary, these final rules do 
not have significant takings implications.

Unfunded Mandates Reform Act of 1995

    This statute directs agencies to assess the effects of Federal 
regulatory actions on State, local, and tribal governments, and the 
private sector, when those actions may result in the expenditure by 
State, local, or tribal governments, in the aggregate, or by the 
private sector, of $100,000,000 or more in any 1 year. These final 
rules will not result in the expenditure of $100,000,000 as described 
by this statute. These rules do not constitute an unfunded mandate 
within the meaning of the Unfunded Mandates Reform Act of 1995.

    Authorship: These final regulations were written by RRA and 
water conservation staff under the administrative direction of the 
Director, Program Analysis Office, Denver, Colorado; and the policy 
direction of the Director, Office of Policy and External Affairs, 
Washington D.C.

List of Subjects in 43 CFR Parts 426 and 427

     Administrative practice and procedure, Irrigation, Reclamation, 
Reporting and record keeping requirements.

    Dated December 11, 1996.
Patricia J. Beneke,
Assistant Secretary--Water and Science.

    For the reasons set forth in the preamble, 43 CFR chapter I is 
amended as follows:
Amendments Effective January 1, 1998
    1. Part 426 is revised to read as follows:
PART 426--ACREAGE LIMITATION RULES AND REGULATIONS
Sec.
426.1  Purpose.
426.2  Definitions.
426.3  Conformance to the discretionary provisions.
426.4  Attribution of land.
426.5  Ownership entitlement.
426.6  Leasing and full-cost pricing.
426.7  Trusts.
426.8  Nonresident aliens and foreign entities.
426.9  Religious or charitable organizations.
426.10  Public entities.
426.11  Class 1 equivalency.
426.12  Excess land.
426.13  Excess land appraisals.
426.14  Involuntary acquisition of land.
426.15  Commingling.
426.16  Exemptions and exclusions.
426.17  Small reclamation projects.
426.18  Landholder information requirements.
426.19  District responsibilities.
426.20  Assessment of administrative costs.
426.21  Interest on underpayments.
426.22  Public participation.
426.23  Recovery of operation and maintenance (O&M) costs.
426.24  Reclamation decisions and appeals.
426.25  Reclamation audits.
426.26  Severability.

    Authority: 5 U.S.C. 301; 5 U.S.C. 553; 16 U.S.C. 590z-11; 31 
U.S.C. 9701; and 32 Stat. 388 and all acts amendatory thereof or 
supplementary thereto including, but not limited to, 43 U.S.C. 390aa 
to 390zz-1, 43 U.S.C. 418, 43 U.S.C. 423 to 425b, 43 U.S.C. 431, 
434, 440, 43 U.S.C. 451 to 451k, 43 U.S.C. 462, 43 U.S.C. 485 to 
485k, 43 U.S.C. 491 to 505, 43 U.S.C. 511 to 513, and 43 U.S.C. 544.


Sec. 426.1  Purpose.

    These rules and regulations implement certain provisions of Federal 
reclamation law that address the ownership and leasing of land on 
Federal Reclamation irrigation projects and the pricing of Federal 
Reclamation project irrigation water, and establish terms and 
conditions for the delivery of Federal Reclamation project irrigation 
water.


Sec. 426.2  Definitions.

    As used in these rules:
    Acreage limitation entitlements mean the ownership and nonfull-cost 
entitlements.
    Acreage limitation provisions mean the ownership limitations and 
pricing restrictions specified in Federal reclamation law, including 
but not limited to, Sections 203(b), 204, and 205 of the Reclamation 
Reform Act of 1982 (43 U.S.C. 390aa et seq.).
    Acreage limitation status means whether a landholder is a qualified 
recipient, limited recipient, or prior law recipient.
    Commissioner means the Commissioner of the Bureau of Reclamation, 
U.S. Department of the Interior.
    Compensation rate means a water rate applied, in certain 
situations, to water delivery to ineligible land that is not discovered 
until after the delivery has taken place. The compensation rate is 
equal to the established full-cost rate that would apply to the 
landholder if the landholder was to receive irrigation water on land 
that exceeded a nonfull-cost entitlement.
    Contract means any repayment or water service contract or agreement 
between the United States and a district providing for the payment to 
the United States of construction charges and normal operation, 
maintenance, and replacement costs under Federal reclamation law, even 
if the contract does not specifically identify the portion of the 
payment that is to be attributed to operation and maintenance and that 
portion that is to be attributed to construction. This definition 
includes contracts made in accordance with the Distribution System 
Loans Act, as amended (43 U.S.C. 421).
    Contract rate means the assessment, as set forth in a contract, 
that is to be paid by a district to the United States, and recomputed 
if necessary on a per acre or per acre foot basis.
    Dependent means any natural person within the meaning of the term 
dependent in the Internal Revenue Code of 1954 (26 U.S.C. 152) and any 
subsequent amendments.
    Direct when used in connection with the terms landholder, 
landowner, lessee, lessor, or owner, means that the party is the owner 
of record or holder of title, or the lessee of a land parcel, as 
appropriate. However, landholdings of joint tenants and tenants-in-
common will not be considered direct under these regulations.
    Discretionary provisions refer to Sections 390cc through 390hh, 
except for 390cc(b), of the Reclamation Reform Act of 1982 (43 U.S.C. 
390aa et seq.).
    District means any individual or any legal entity established under 
State law that has entered into a contract or can potentially enter 
into a contract with the United States for irrigation water service 
through federally developed or improved water storage and/or 
distribution facilities.
    Eligible, except where otherwise provided, means permitted to 
receive an irrigation water supply from a Reclamation project under 
applicable Federal reclamation law.
    Entity, see definition of legal entity.
    Excess land means nonexempt land that is in excess of a landowner's 
maximum ownership entitlement under the applicable provisions of 
Federal reclamation law.
    Exempt, except where otherwise provided, means not subject to the 
acreage limitation provisions.
    Extended recordable contract means a recordable contract whose term 
was extended due to moratoriums

[[Page 66806]]

established in 1976 and 1977 on the sale of excess land.
    Full cost or full-cost rate means an annual rate established by 
Reclamation that amortizes the expenditures for construction properly 
allocable to irrigation facilities in service, including all operation 
and maintenance deficits funded, less payments, over such periods as 
may be required under Federal reclamation law, or applicable contract 
provisions. Interest will accrue on both the construction expenditures 
and funded operation and maintenance deficits from October 12, 1982, on 
costs outstanding at that date, or from the date incurred in the case 
of costs arising subsequent to October 12, 1982. The full-cost rate 
includes actual operation, maintenance, and replacement costs required 
under Federal reclamation law.
    Full-cost charge means the full-cost rate less the actual 
operation, maintenance, and replacement costs required under Federal 
reclamation law.
    Indirect, when used in connection with the terms landholder, 
landowner, lessee, lessor or owner, means that such party is not the 
owner of record or holder of title, or the lessee of a land parcel, but 
that such party has a beneficial interest in the legal entity that is 
the owner of record or holder of title, or the lessee of a land parcel. 
Landholdings of joint tenants and tenants-in-common will be considered 
indirect under these regulations. A security interest held by lenders, 
who are not otherwise considered a landholder of the land in question, 
in a legal entity or in a land parcel will not be considered an 
indirect interest or a beneficial interest for purposes of these 
regulations.
    Individual means any natural person, including his or her spouse, 
and including other dependents; provided that, under prior law, the 
term individual does not include a natural person's spouse or 
dependents.
    Ineligible, except where otherwise provided, means not permitted to 
receive an irrigation water supply under applicable Federal reclamation 
law regardless of the rate paid for such water.
    Intermediate entity means an entity that is a part owner of another 
entity and in turn is owned by others, either another entity or 
individuals.
    Involuntary acquisition means land that is acquired through an 
involuntary foreclosure or similar involuntary process of law, 
conveyance in satisfaction of a debt (including, but not limited to, a 
mortgage, real estate contract or deed of trust), inheritance, or 
devise.
    Irrevocable election means the execution of the legal instrument 
that a landholder subject to prior law provisions submits to become 
subject to the discretionary provisions of Federal reclamation law.
    Irrevocable elector means a landholder who makes an irrevocable 
election to conform to the discretionary provisions of Federal 
reclamation law.
    Irrigable land means land so classified by Reclamation under a 
specific project plan for which irrigation water is, can be, or is 
planned to be provided, and for which facilities necessary for 
sustained irrigation are provided or are planned to be provided.
    Irrigation land means any land receiving water from a Reclamation 
project facility for irrigation purposes in a given water year, except 
for land that has been specifically exempted by statute or 
administrative action from the acreage limitation provisions of Federal 
reclamation law.
    Irrigation water means water made available for agricultural 
purposes from the operation of Reclamation project facilities pursuant 
to a contract with Reclamation.
    Landholder means a party that directly or indirectly owns or leases 
nonexempt land.
    Landholding means the total acreage of nonexempt land directly or 
indirectly owned or leased by a landholder.
    Lease means any arrangement between a landholder (the lessor) and 
another party (the lessee) under which the economic risk and the use or 
possession of the lessor's land is partially or wholly transferred to 
the lessee. If a management arrangement or consulting agreement is one 
in which the manager or consultant performs a service for the 
landholder for a fee, but does not assume the economic risk in the 
farming operation, and the landholder retains the right to the use and 
possession of the land, is responsible for payment of the operating 
expenses, and is entitled to receive the profits from the farming 
operation, then the agreement or arrangement will not be considered to 
be a lease.
    Legal entity or entity for the purpose of establishing application 
of the acreage limitation entitlements means, but is not limited to, 
corporations, partnerships, organizations, and any business or property 
ownership arrangements such as joint tenancies and tenancies-in-common. 
For purposes of the information requirements specified in Sec. 426.18 
only, trusts will be considered to be legal entities.
    Limited recipient means any legal entity established under State or 
Federal law benefiting more than 25 natural persons. In order to become 
limited recipients, legal entities must be subject to the discretionary 
provisions through either district contract action or irrevocable 
election.
    Nondiscretionary provisions means sections 390cc(b) and 390ii 
through 390zz-1 of the RRA.
    Nonexempt land means either irrigation land or irrigable land that 
is subject to the acreage limitation provisions. Areas used for field 
roads, farm ditches and drains, tailwater ponds, temporary equipment 
storage, and other improvements subject to change at will by the 
landowner, are included in the nonexempt acreage. Areas occupied by and 
currently used for homesites, farmstead buildings, and corollary 
permanent structures such as feedlots, equipment storage yards, 
permanent roads, permanent ponds, and similar facilities, together with 
roads open for unrestricted use by the public are excluded from 
nonexempt acreage.
    Nonfull-cost entitlement means the maximum acreage a landholder may 
irrigate with irrigation water at a nonfull-cost rate.
    Nonfull-cost rate means any water rate other than the full-cost 
rate. Nonfull-cost rates are paid for irrigation water made available 
to land in a landholder's nonfull-cost entitlement.
    Nonproject water means water from sources other than Reclamation 
project facilities.
    Nonresident alien means any natural person who is neither a citizen 
nor a resident alien of the United States.
    Operation and maintenance costs or O&M costs mean all direct 
charges and overhead costs incurred by the United States after the date 
that Reclamation has declared a project, or a part thereof, 
substantially complete to operate, maintain, provide replacements of, 
administer, manage, and oversee project facilities and lands.
    Ownership entitlement means the maximum acreage a landholder may 
directly or indirectly own and irrigate with irrigation water.
    Part owner means an individual or legal entity that has a 
beneficial interest in a legal entity, but does not own 100 percent of 
that legal entity. A lender, who is not otherwise considered a 
landholder of the land in question, with a security interest in a legal 
entity or land owned by a legal entity shall not be considered a part 
owner under these regulations.
    Prior law means the Reclamation Act of 1902, and acts amendatory 
and supplementary thereto (43 U.S.C. 371 et seq.) that were in effect 
prior to the enactment of the RRA, and as amended by the RRA.

[[Page 66807]]

    Prior law recipient means an individual or legal entity that has 
not become subject to the discretionary provisions.
    Project means any irrigation project authorized by Federal 
reclamation law, or constructed by the United States pursuant to such 
law, or in connection with a repayment or water service contract 
executed by the United States pursuant to such law, or any project 
constructed by the United States through Reclamation for the 
reclamation of lands. The term project includes any incidental features 
of an irrigation project.
    Public entity means States, political subdivisions or agencies 
thereof, and agencies of the Federal Government.
    Qualified recipient means an individual who is a citizen or a 
resident alien of the United States or any legal entity established 
under State or Federal law that benefits 25 natural persons or less. A 
married couple may become a qualified recipient if either spouse is a 
United States citizen or resident alien. In order to become qualified 
recipients, individuals and legal entities must be subject to the 
discretionary provisions through either district contract action or 
irrevocable election.
    Reclamation means the Bureau of Reclamation, U.S. Department of the 
Interior.
    Reclamation fund means a special fund established by the Congress 
under the Reclamation Act of 1902, as amended, for the receipts from 
the sale of public lands and timber, proceeds from the Mineral Leasing 
Act, and certain other revenues.
    Recordable contract means a written contract between Reclamation 
and a landowner capable of being recorded under State law, providing 
for the disposition of land held by that landowner in excess of the 
ownership limitations of Federal reclamation law.
    Resident alien means any natural person within the meaning of the 
term as defined in the Internal Revenue Act of 1954 (26 U.S.C. 7701) as 
it may be amended.
    RRA means the Reclamation Reform Act of 1982, Public Law 97-293, 
Title II, 96 Stat. 1263, (43 U.S.C. 390aa et seq.) as amended.
    Secretary means Secretary of the U.S. Department of the Interior.
    Standard certification or reporting forms mean forms on which 
landholders provide complete information about the directly and 
indirectly owned and leased nonexempt lands in their landholdings.
    Water year means a 365-day period (or 366 days during leap years) 
whose start date is specified within a contract between Reclamation and 
the district or through some other agreement between Reclamation and 
the district.
    Westwide means the 17 Western States where Reclamation projects are 
located, namely: Arizona, California, Colorado, Idaho, Kansas, Montana, 
Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South 
Dakota, Texas, Utah, Washington, and Wyoming.


Sec. 426.3  Conformance to the discretionary provisions.

    (a) Districts that are subject to the discretionary provisions. 
Unless an exemption in Sec. 426.16 applies, a district is subject to 
the discretionary provisions if:
    (1) The district executes a new or renewed contract with 
Reclamation after October 12, 1982. The discretionary provisions apply 
as of the execution date of the new or renewed contract;
    (2) The district amends its contract to conform to the 
discretionary provisions:
    (i) A district may ask Reclamation to amend its contract to conform 
to the discretionary provisions;
    (ii) The district's request to Reclamation must be accompanied by a 
duly adopted resolution dated and signed by the governing board of the 
district obligating the district to take, in a timely manner, actions 
required by applicable State law to amend its contract; and
    (iii) If the requirements of paragraphs (a)(2)(i) and (ii) of this 
section are met, then Reclamation will amend the contract, and the 
district becomes subject to the discretionary provisions from the date 
the district's request was submitted to Reclamation;
    (iv) If the district only wants to amend its contracts to become 
subject to the discretionary provisions, the amendments need only be to 
the extent required to conform to the discretionary provisions; or
    (3) The district amends its contract after October 12, 1982, to 
provide the district with additional or supplemental benefits. The 
amendment must also include the district's conformance to the 
discretionary provisions:
    (i) The discretionary provisions apply as of the date that 
Reclamation executes the contract amendment;
    (ii) For purposes of application of the acreage limitation 
provisions Reclamation considers a contract amendment as providing 
additional or supplemental benefits if that amendment:
    (A) Requires the United States to expend significant funds;
    (B) Requires the United States to commit significant additional 
water supplies; or
    (C) Substantially modifies contract payments due the United States; 
and
    (iii) For purposes of application of the acreage limitation 
provisions Reclamation does not consider the following contract actions 
as providing additional or supplemental benefits:
    (A) The construction of facilities for conveyance of irrigation 
water for which districts contracted on or before October 12, 1982;
    (B) Minor drainage and construction work contracted under a prior 
repayment or water service contract;
    (C) Operation and maintenance (O&M) amendments;
    (D) The deferral of payments provided the deferral is for a period 
of 12 months or less;
    (E) A temporary supply of irrigation water as set forth in 
Sec. 426.16(d);
    (F) The transfer of water on an annual basis from one district to 
another, provided that:
    (1) Both districts have contracts with the United States;
    (2) The rate paid by the district receiving the transferred water:
    (i) Is the higher of the applicable water rate for either district;
    (ii) Does not result in any increased operating losses to the 
United States above those that would have existed in the absence of the 
transfer; and
    (iii) Does not result in any decrease in capital repayment to the 
United States below what would have existed in the absence of the 
transfer; and
    (3) The recipients of the transferred water pay a rate for the 
water that is at least equal to the actual O&M costs or the full-cost 
rate in those cases where, for whatever reason, the recipients would 
have been subject to such costs had the water not been considered 
transferred water;
    (G) Contract actions pursuant to the Reclamation Safety of Dams Act 
of 1978, as amended (43 U.S.C. 506); or
    (H) Other contract actions that Reclamation determines do not 
provide additional or supplemental benefits.
    (b) Districts that are subject to prior law. Any district which had 
a contract in force on October 12, 1982, that required landholders to 
comply with the ownership limitations of Federal reclamation law 
remains subject to prior law unless and until the district:
    (1) Enters into a new or renewed contract requiring it to conform 
to the discretionary provisions, as provided in paragraph (a)(1) of 
this section;
    (2) Makes a contract action requiring conformance to the 
discretionary provisions, as provided in paragraphs (a)(2) or (3) of 
this section; or
    (3) Becomes exempt, as provided in Sec. 426.16.

[[Page 66808]]

    (c) Standard RRA contract article. (1) New or renewed contracts 
executed after October 12, 1982, or contracts that are amended to 
conform to the discretionary provisions before or on the effective date 
of these rules must include the following clause:

    The parties agree that the delivery of irrigation water or use 
of Federal facilities pursuant to this contract is subject to 
reclamation law, as amended and supplemented, including but not 
limited to the Reclamation Reform Act of 1982 (43 U.S.C. 390aa et 
seq.).

    (2) New or renewed contracts executed after the effective date of 
these rules, or contracts that are amended to conform to the 
discretionary provisions after the effective date of these rules must 
include the following clause:

    The parties agree that the delivery of irrigation water or use 
of Federal facilities pursuant to this contract is subject to 
Federal reclamation law, including but not limited to the 
Reclamation Reform Act of 1982 (43 U.S.C. 390aa et seq.), as amended 
and supplemented, and the rules and regulations promulgated by the 
Secretary of the Interior under Federal reclamation law.

    (d) The effect of a master contractor's and subcontractor's actions 
to conform to the discretionary provisions. If a district provides 
irrigation water to other districts through subcontracts and the master 
contracting district is subject to:
    (1) The discretionary provisions, then all subcontracting districts 
who are entitled to receive irrigation water must also conform to the 
discretionary provisions; or
    (2) Prior law, then the subcontracting district can amend its 
subcontract to conform to the discretionary provisions without 
subjecting the master contractor or any other subcontractor of the 
master contractor to the discretionary provisions. If a subcontract 
that does not include the United States as a party is amended to 
conform to the discretionary provisions, or the subcontract is a new or 
renewed contract executed after October 12, 1982, then the amended, 
new, or renewed subcontract must include the United States as a party.
    (e) The effect on a landholder's status when a district becomes 
subject to the discretionary provisions. If a district conforms to the 
discretionary provisions and the landholder is:
    (1) Other than a nonresident alien or a legal entity that is not 
established under State or Federal law, and is:
    (i) A direct landholder in that district, then the landholder 
becomes subject to the discretionary provisions and the associated 
acreage limitation status will apply in any district in which the 
landholder holds land; or
    (ii) Only an indirect landholder in that and all other 
discretionary provisions districts, then the landholder's acreage 
limitation status is not affected. Such a landholder can receive 
irrigation water as a prior law recipient on indirectly held lands in 
districts that conform to the discretionary provisions.
    (2) A nonresident alien, or legal entity not established under 
State or Federal law, and the landholder is:
    (i) A direct landholder, then since such a landholder cannot become 
subject to, and has no eligibility under the discretionary provisions:
    (A) All direct landholdings in districts that conform to the 
discretionary provisions become ineligible; and
    (B) Directly held land that becomes ineligible as a result of the 
district's action to conform to the discretionary provisions may be 
placed under recordable contract as subject to the conditions specified 
in Sec. 426.12; or
    (ii) An indirect landholder, then such a landholder may receive 
irrigation water on land indirectly held in districts conforming to the 
discretionary provisions, with the entitlements for such landholder 
determined as specified in Sec. 426.8.
    (f) Landholder actions to conform to the discretionary provisions. 
(1) In the absence of a district's action to conform to the 
discretionary provisions, United States citizens, resident aliens, or 
legal entities established under State or Federal law, can elect to 
conform to the discretionary provisions by executing an irrevocable 
election. Upon execution of an irrevocable election:
    (i) The elector's entire landholding in all districts shall be 
subject to the discretionary provisions;
    (ii) The election shall be binding on the elector and his or her 
landholding, but will not be binding on subsequent landholders of that 
land;
    (iii) An irrevocable election by a legal entity is binding only 
upon that entity and not on the part owners of that entity;
    (iv) An irrevocable election by a part owner of a legal entity 
binds only the part owner making the election and not the entity or 
other part owners of the entity; and
    (v) An irrevocable election by a lessor does not affect the status 
of a lessee, and vice versa. However, the eligibility and entitlement 
of neither a lessor nor a lessee may be enhanced through leasing.
    (2) A landholder makes an irrevocable election by completing a 
Reclamation issued irrevocable election form:
    (i) The elector's original irrevocable election form must be filed 
by the district with Reclamation and must be accompanied by a completed 
certification form, as specified in Sec. 426.18;
    (ii) The elector must file copies of the irrevocable election and 
certification forms concurrently with each district where the elector 
holds nonexempt land;
    (iii) Reclamation will prepare a letter advising the recipient of 
the approval or disapproval of the election. Reclamation will base 
approval upon whether the election form and the accompanying 
certification form(s) indicate the elector's satisfaction of the 
various requirements of Federal reclamation law and these regulations;
    (iv) If the election is approved, the letter of approval, with a 
copy of the irrevocable election form and the original certification 
form(s), will be sent by Reclamation to each district where the elector 
holds land;
    (v) The district(s) shall retain the forms; and
    (vi) If the irrevocable election is disapproved, the landholder and 
the district will be advised by letter along with the reasons for 
disapproval.
    (3) A landholder that only holds land indirectly in a district that 
has conformed to the discretionary provisions, other than a nonresident 
alien or a legal entity not established under State or Federal law, may 
make an irrevocable election also by simply submitting certification 
forms to all districts where the landholder holds land subject to the 
acreage limitation provisions. An election made in this manner is 
binding in all districts in which such elector holds land.
    (g) District reliance on irrevocable election form information. The 
district is entitled to rely on the information contained in the 
irrevocable election form. The district does not need to make an 
independent investigation of the information.
    (h) Time limits for amendments or elections to conform to the 
discretionary provisions. Reclamation will allow at anytime a 
landholder to elect or a district to amend its contract to conform to 
the discretionary provisions. An irrevocable election that was made 
after April 12, 1987, but on or before May 13, 1987, shall be 
considered effective as of April 12, 1987.


Sec. 426.4  Attribution of land.

    (a) Prohibition on increasing acreage limitation entitlements. 
Except as specifically provided in these rules, a landholder cannot 
increase acreage limitation entitlements or eligibility by

[[Page 66809]]

acquiring or holding a beneficial interest in a legal entity. 
Similarly, the acreage limitation status of an individual or legal 
entity that holds or has acquired a beneficial interest in another 
legal entity will not be permitted to enlarge the latter legal entity's 
acreage limitation entitlements or eligibility.
    (b) Attribution of owned land. For purposes of determining acreage 
to be counted against acreage limitation entitlements, acreage will be 
attributed to all:
    (1) Direct landowners in proportion to the direct beneficial 
interest the landowners own in the land; and
    (2) Indirect landowners in proportion to the indirect beneficial 
interest they own in the land.
    (c) Attribution of leased land. Leased land will be attributed to 
the direct and indirect landowners as well as to the direct and 
indirect lessees in the same manner as described in paragraphs (b) and 
(d) of this section.
    (d) Attribution of land held through intermediate entities. If land 
is held by a direct landholder and a series of indirect landholders, 
Reclamation will attribute that land to the acreage limitation 
entitlements of the direct landholder and each indirect landholder in 
proportion to each landholder's beneficial interest in the entity that 
directly holds the land.
    (e) Leasebacks. Any land a landholder directly or indirectly owns 
and that is directly or indirectly leased back will only count once 
against that particular landholder's nonfull-cost entitlement.
    (f) Effect on an entity of attribution to part owners. For purposes 
of determining eligibility, the entire landholding will be attributed 
to all the direct and indirect landholders. If the interests in a legal 
entity are:
    (1) Undivided, then all of the indirect part owners must be 
eligible in order for the entity to be eligible; or
    (2) Divided, in such a manner that specific parcels are 
attributable to each indirect landholder, then the entity may qualify 
for eligibility on those portions of the landholding not attributable 
to any part owner who is ineligible.


Sec. 426.5  Ownership entitlement.

    (a) General. Except as provided in Secs. 426.12 and 426.14, all 
nonexempt land directly or indirectly owned by a landholder counts 
against that landholder's ownership entitlement. In addition, land 
owned or controlled by a public entity that is leased to another party 
counts against the lessee's ownership entitlement, as specified in 
Sec. 426.10.
    (b) Qualified recipient ownership entitlement. A qualified 
recipient is entitled to receive irrigation water on a maximum of 960 
acres of owned nonexempt land, or the Class 1 equivalent thereof. This 
entitlement applies on a westwide basis.
    (c) Limited recipient ownership entitlement. A limited recipient is 
entitled to receive irrigation water on a maximum of 640 acres of owned 
nonexempt land, or the Class 1 equivalent thereof. This entitlement 
applies on a westwide basis.
    (d) Prior law recipient ownership entitlement. (1) Ownership 
entitlements for prior law recipients are determined by whether the 
recipient is one individual or a married couple, and for entities by 
the type of entity, as follows:
    (i) An individual subject to prior law is entitled to receive 
irrigation water on a maximum of 160 acres of owned nonexempt land;
    (ii) Married couples who hold equal interests are entitled to 
receive irrigation water on a maximum of 320 acres of jointly owned 
nonexempt land;
    (iii) Surviving spouses until remarriage are entitled to receive 
irrigation water on that land owned jointly in marriage up to a maximum 
of 320 acres of owned nonexempt land. If any of that land should be 
sold, the applicable ownership entitlement would be reduced 
accordingly, but not to less than 160 acres of owned nonexempt land;
    (iv) Children are each entitled to receive irrigation water on a 
maximum of 160 acres of owned nonexempt land, regardless of whether 
they are independent or dependent;
    (v) Joint tenancies and tenancies-in-common subject to prior law 
are entitled to receive irrigation water on a maximum of 160 acres of 
owned nonexempt land per tenant, provided each tenant holds an equal 
interest in the tenancy;
    (vi) Partnerships subject to prior law are entitled to receive 
irrigation water on a maximum of 160 acres of owned nonexempt land per 
partner if the partners have separable and equal interests in the 
partnership and the right to alienate that interest. Partnerships where 
each partner does not have a separable interest and the right to 
alienate that interest are entitled to receive irrigation water on a 
maximum of 160 acres of nonexempt land owned by the partnership; and
    (vii) All corporations subject to prior law are entitled to receive 
irrigation water on a maximum of 160 acres of owned nonexempt land.
    (2) Prior law recipient ownership entitlements specified in this 
section apply on a westwide basis unless the land was acquired by the 
current owner on or before December 6, 1979. For land acquired by the 
current owner on or before that date, prior law ownership entitlements 
apply on a district-by-district basis.
    (3) For those entities where an equal interest held by the part 
owners would result in a 160-acre per part owner entitlement for the 
entity, if the part owners interests are not equal then the entitlement 
of the entity will be determined by the relative interest held in the 
entity by each part owner.


Sec. 426.6  Leasing and full-cost pricing.

    (a) Conditions that a lease must meet. Districts can make 
irrigation water available to leased land only if the lease meets the 
following requirements. Land that is leased under a lease instrument 
that does not meet the following requirements will be ineligible to 
receive irrigation water until the lease agreement is terminated or 
modified to satisfy these requirements.
    (1) The lease is in writing;
    (2) The lease includes the effective date and term of the lease, 
the length of which must be:
    (i) 10 years or less, including any exercisable options; however, 
for perennial crops with an average life longer than 10 years, the term 
may be equal to the average life of the crop as determined by 
Reclamation, and
    (ii) In no case may the term of a lease exceed 25 years, including 
any exercisable options;
    (3) The lease includes a legal description, that is at least as 
detailed as what is required on the standard certification and 
reporting forms, of the land subject to the lease;
    (4) Signatures of all parties to the lease are included;
    (5) The lease includes the date(s) or conditions when lease 
payments are due and the amounts or the method of computing the 
payments due;
    (6) The lease is available for Reclamation's inspection and 
Reclamation reviews and approves all leases for terms longer than 10 
years; and
    (7) If either the lessor or the lessee is subject to the 
discretionary provisions, the lease provides for agreed upon payments 
that reflect the reasonable value of the irrigation water to the 
productivity of the land; except
    (8) Leases in effect as of the effective date of these regulations 
do not need to meet the criteria specified under paragraphs (a) (3) and 
(4) of this section, unless and until such leases are renewed.
    (b) Nonfull-cost entitlements. (1) The nonfull-cost entitlement for 
qualified recipients is 960 acres, or the Class 1 equivalent thereof.

[[Page 66810]]

    (2) The nonfull-cost entitlement for limited recipients that 
received irrigation water on or before October 1, 1981, is 320 acres or 
the Class 1 equivalent thereof. The nonfull-cost entitlement for 
limited recipients that did not receive irrigation water on or prior to 
October 1, 1981, is zero.
    (3) The nonfull-cost entitlement for prior law recipients is equal 
to the recipient's maximum ownership entitlement as set forth in 
Sec. 426.5(d). However, for the purpose of computing the acreage 
subject to full cost, all owned and leased irrigation land westwide 
must be included in the computation.
    (c) Application of the nonfull-cost and full-cost rates. (1) A 
landholder may irrigate at the nonfull-cost rate directly and 
indirectly held acreage equal to his or her nonfull-cost entitlement.
    (2) If a landholding exceeds the landholder's nonfull-cost 
entitlement, the landholder must pay the appropriate full-cost rate for 
irrigation water delivered to acreage that equals the amount of leased 
land that exceeds that entitlement.
    (3) In the case of limited recipients, a landholder does not have 
to lease land to exceed a nonfull-cost entitlement, since the nonfull-
cost entitlement is less than the ownership entitlement. Therefore, 
limited recipients must pay the appropriate full-cost rate for 
irrigation water delivered to any acreage that exceeds their nonfull-
cost entitlement.
    (d) Types of lands that count against the nonfull-cost entitlement. 
(1) All directly and indirectly owned irrigation land and irrigation 
land directly or indirectly leased for any period of time during 1-
water year counts towards a landholder's nonfull-cost entitlement, 
except:
    (i) Involuntarily acquired land, as provided in Secs. 426.12 and 
426.14; and
    (ii) Land that is leased for incidental grazing or similar purposes 
during periods when the land is not receiving irrigation water.
    (2) Reclamation's process for determining if a nonfull-cost 
entitlement has been exceeded is as follows:
    (i) All land counted toward a landholder's nonfull-cost entitlement 
will be counted on a cumulative basis during any 1-water year;
    (ii) Once a landholder's nonfull-cost entitlement is met in a given 
water year, any additional eligible land may be irrigated only at the 
full-cost rate; and
    (iii) Irrigation land will be counted towards nonfull-cost 
entitlements on a westwide basis, even for prior law recipients, 
regardless of the date of acquisition.
    (e) Selection of nonfull-cost land. (1) A landholder that has 
exceeded his or her nonfull-cost entitlement may select in each water 
year, from his or her directly held irrigation land, the land that can 
be irrigated at a nonfull-cost rate and the land that can be irrigated 
only at the full-cost rate. Selections for full-cost or nonfull-cost 
land may include:
    (i) Leased land;
    (ii) Nonexcess owned land;
    (iii) Land under recordable contract, unless that land is already 
subject to application of the full-cost rate under an extended 
recordable contract; or
    (iv) A combination of all three.
    (2) Once a landholder has received irrigation water on a given land 
parcel during a water year, the selection of that parcel as full cost 
or nonfull-cost is binding until the landholder has completed receiving 
irrigation water westwide for that water year.
    (f) Applicability of a full-cost selection to an owner or lessee. 
If a landowner or lessee should select land as subject to full-cost 
pricing, then that land can receive irrigation water only at the full-
cost rate, regardless of eligibility of the other party to receive the 
irrigation water at the nonfull-cost rate.
    (g) Subleased land. Land that is subleased (the lessee transfers 
possession of the land to a sublessee) will be attributed to the 
landholding of the sublessee and not to the lessee.
    (h) Calculating full-cost charges. Reclamation will calculate a 
district's full-cost charge using accepted accounting procedures and 
under the following conditions.
    (1) The full-cost charge does not recover interest retroactively 
before October 12, 1982. But, interest on the unpaid balance does 
accrue from October 12, 1982, where the unpaid balance equals the 
irrigation allocated construction costs for facilities in service plus 
cumulative federally funded O&M deficits, less payments.
    (2) The full-cost charge will be determined:
    (i) As of October 12, 1982, for contracts entered into before that 
date regardless of amendments to conform to the discretionary 
provisions; and
    (ii) At the time of contract execution for new and renewed 
contracts entered into on or after October 12, 1982.
    (3) For repayment contracts, the full-cost charge will fix equal 
annual payments over the amortization period. For water service 
contracts, the full-cost charge will fix equal payments per acre-foot 
of projected water deliveries over the amortization period.
    (4) If there are additional construction expenditures, or if the 
cost allocated to irrigation changes, then a new full-cost charge will 
be determined.
    (5) Reclamation will notify the respective districts of changes in 
the full-cost charge at the time the district is notified of other 
payments due the United States.
    (6) In determining full-cost charges, the following factors will be 
considered:
    (i) Amortization period. The amortization period for calculating 
the full-cost charge is the remaining balance of:
    (A) For contracts entered into before October 12, 1982, the 
contract repayment period as of October 12, 1982;
    (B) For contracts entered into on or after October 12, 1982, the 
contract repayment period;
    (C) For water service contracts, the period from October 12, 1982, 
or the execution date of the contract, whichever is later, to the 
anticipated date of project repayment; and
    (D) In cases where water services rates are designed to completely 
repay applicable Federal expenditures in a specific time period, that 
time period may be used as the amortization period for full-cost 
calculations related to these expenditures; but, in no case will the 
amortization period exceed the project payback period authorized by the 
Congress;
    (ii) Construction costs. For determining full cost, construction 
costs properly allocable to irrigation are those Federal project costs 
for facilities in service that have been assigned to irrigation within 
the overall allocation of total project construction costs. Total 
project construction costs include all direct expenditures necessary to 
install or implement a project, such as:
    (A) Planning;
    (B) Design;
    (C) Land;
    (D) Rights-of-way;
    (E) Water-rights acquisitions;
    (F) Construction expenditures;
    (G) Interest during construction; and
    (H) When appropriate, transfer costs associated with services 
provided from other projects;
    (iii) Facilities in service. Facilities in service are those 
facilities that are in operation and providing irrigation services;
    (iv) Operation and maintenance (O&M) deficits funded. O&M deficits 
funded are the annual O&M costs including project-use pumping power 
allocated to irrigation that have been federally funded and that have 
not been paid by the district;
    (v) Payments received. In calculating the payments that have been 
received,

[[Page 66811]]

all receipts and credits applied to repay or reduce allocated 
irrigation construction costs in accordance with Federal reclamation 
law, policy, and applicable contract provisions will be considered. 
These may include:
    (A) Direct repayment contract revenues;
    (B) Net water service contract income;
    (C) Contributions;
    (D) Ad valorem taxes; and
    (E) Other miscellaneous revenues and credits excluding power and 
municipal and industrial (M&I) revenues;
    (vi) Interest rates. Interest rates to be used in calculating full-
cost charges will be determined by the Secretary of the Treasury as 
follows:
    (A) For irrigation water delivered to qualified recipients, limited 
recipients receiving water on or before October 1, 1981, and extended 
recordable contract land owned by prior law recipients, the interest 
rate for expenditures made on or before October 12, 1982, will be the 
greater of 7.5 percent per annum or the weighted average yield of all 
interest-bearing marketable issues sold by the Treasury during the 
fiscal year when the expenditures were made by the United States. The 
interest rate for expenditures made after October 12, 1982, will be the 
arithmetic average of:
     (1) The computed average interest rate payable by the Treasury 
upon its outstanding marketable public obligations that are neither due 
nor callable for redemption for 15 years from the date of issuance at 
the beginning of the fiscal year when the expenditures are made; and
    (2) The weighted average yield on all interest-bearing marketable 
issues sold by the Treasury during the fiscal year preceding the fiscal 
year the expenditures are made;
    (B) For irrigation water delivered to limited recipients not 
receiving irrigation water on or before October 1, 1981, and prior law 
recipients, except for land owned subject to extended recordable 
contract, the interest rate will be determined as of the fiscal year 
preceding the fiscal year the expenditures are made, except that the 
interest rate for expenditures made before October 12, 1982, will be 
determined as of October 12, 1982. The interest rate will be based on 
the arithmetic average of:
    (1) The computed average interest rate payable by the Treasury upon 
its outstanding marketable public obligations that are neither due nor 
callable for redemption for 15 years from the date of issuance; and
    (2) The weighted average yield on all interest-bearing marketable 
issues sold by the Treasury.
    (C) Landholders who were prior law recipients and become subject to 
the discretionary provisions after April 12, 1987, are eligible for the 
full-cost interest rate specified in paragraph (h)(6)(vi)(A) of this 
section, unless they are limited recipients that did not receive 
irrigation water on or before October 1, 1981, in that case they remain 
subject to the full-cost interest rate specified in paragraph 
(h)(6)(vi)(B) of this section.
    (i) Direct and proportional charges for full-cost water. In 
situations where water delivery charges are contractually or 
customarily levied on a per-acre basis, full-cost assessments will be 
made on a per-acre basis. In situations where water delivery charges 
are contractually or customarily levied on a per acre-foot basis, one 
of the following methods must be used to make full-cost assessments:
    (1) Assessments will be based on the actual amounts of water used 
in situations where measuring devices are in use, to the satisfaction 
of Reclamation, to reasonably determine the amounts of irrigation water 
being delivered to full-cost and nonfull-cost land; or
    (2) In situations where, as determined by Reclamation, measuring 
devices are not a reliable method for determining the amounts of water 
being delivered to full-cost and nonfull-cost land, then water charges 
must be based on the assumption that equal amounts of water per acre 
are being delivered to both types of land during periods when both 
types of land are actually being irrigated.
    (j) Disposition of revenues obtained through full-cost water 
pricing.
    (1) Legal deliveries. If irrigation water has been delivered in 
compliance with Federal reclamation law and these regulations, then:
    (i) That portion of the full-cost rate that would have been 
collected if the land had not been subject to full cost will be 
credited to the annual payments due under the district's contractual 
obligation;
    (ii) Any O&M revenues collected over and above those required under 
the district's contract will be credited to the project O&M account; 
and
    (iii) The remaining full-cost revenues will be credited to the 
Reclamation fund unless otherwise provided by law, with any capital 
component of the full-cost rate credited to project repayment, if 
applicable.
    (2) Illegal deliveries. Revenues resulting from the assessment of 
compensation charges for illegal deliveries of irrigation water will be 
deposited into the Reclamation fund in their entirety, and will not be 
credited toward any contractual obligation, or O&M or repayment account 
of the district or project. For purposes of these regulations only, 
this does not include revenues from any charges that may be assessed by 
the district to cover district operation, maintenance, and 
administrative expenses.


Sec. 426.7  Trusts.

    (a) Definitions for purposes of this section:
    Grantor revocable trust means a trust that holds irrigable land or 
irrigation land that may be revoked at the discretion of the 
grantor(s), or terminated by the terms of the trust, and revocation or 
termination results in title to the land held in trust reverting either 
directly or indirectly to the grantor(s).
    Irrevocable trust means a trust that holds irrigable land or 
irrigation land and does not allow any individual, including the 
grantor or beneficiaries, the discretion to decide when or under what 
conditions the trust terminates, and that upon termination the title to 
the land held in trust transfers either directly or indirectly to a 
person(s) or entity(ies) other than the grantor(s).
    Otherwise revocable trust means a trust that holds irrigable land 
or irrigation land and that may be revoked at the discretion of the 
grantor(s) or other parties, or terminated by the terms of the trust, 
and revocation or termination results in the title to the land held in 
trust transferring either directly or indirectly to a person(s) or 
entity(ies) other than the grantor(s).
    (b) Attribution of land held by a trust. The acreage limitation 
entitlements of a trust are only limited by the acreage limitation 
entitlements of the trustees, grantors, or beneficiaries to whom land 
held by the trust must be attributed as provided for in Sec. 426.4. The 
entitlements of the parties to whom trusted land is attributed are 
determined according to Secs. 426.5, 426.6, and 426.8, and other 
applicable provisions of Federal reclamation law and these regulations. 
Reclamation attributes nonexempt land held by a trust to the following 
parties:
    (1) For land held in an irrevocable trust, the land is attributed 
to the beneficiaries in proportion to their beneficial interest in the 
trust. However, this attribution is only made if the criteria listed in 
paragraphs (b)(1) (i) and (ii) of this section are met. If the trust 
fails to meet any portion of these criteria, Reclamation attributes the 
land held in the trust to the trustee.
    (i) The trust is in written form and approved by Reclamation; and

[[Page 66812]]

    (ii) The beneficiaries of the trust and the beneficiaries' 
respective interests are identified within the trust document.
    (2) For land held in a grantor revocable trust, the land is 
attributed to the grantor according to the grantor's acreage limitation 
status and the land's eligibility immediately prior to its transfer to 
the trust. However, this attribution is only made if the criteria 
listed in paragraphs (b)(2) (i), (ii), (iii), and (iv) of this section 
are met. If the trust fails to meet any portion of these criteria, the 
land held in trust will be ineligible to receive irrigation water until 
all of the criteria are met. The only exception is if the trust's and 
grantor's standard certification or reporting forms indicate that the 
land held by the trust has been attributed to the trust's grantor(s).
    (i) The trust meets the criteria specified in paragraph (b)(1) of 
this section;
    (ii) The grantor(s) of all land held by the trust is (are) 
identified within the trust document;
    (iii) The conditions under which the trust may be revoked or 
terminated are identified within the trust document; and
    (iv) The recipient(s) of the trust land upon revocation or 
termination is (are) identified within the trust document.
    (3) For land held in an otherwise revocable trust, the land is 
attributed to the beneficiaries in proportion to their beneficial 
interests in the trust. However, this attribution is only made if the 
trust meets the criteria specified in paragraph (b)(1) of this section 
and the trust meets the additional criteria specified in paragraph 
(b)(2) of this section.
    (i) If Reclamation cannot determine who will hold the land in trust 
upon termination or revocation of the trust, or who is the grantor(s) 
of the land held in trust, then irrigation water will not be made 
available to the land held in trust until the trust satisfies the 
additional criteria listed in paragraph (b)(2) of this section.
    (ii) If the trust fails to meet the criteria listed in paragraph 
(b)(1) of this section, but does meet the additional criteria listed in 
paragraphs (b)(2) (ii) through (iv) of this section, then the land is 
attributed to the trustee.
    (c) Class beneficiaries. For purposes of identifying beneficiaries, 
a class of beneficiaries specified within the trust document will be 
acceptable, as long as the trust document is specific as to the 
beneficial interest to which each member of the class will be entitled 
and the members of the class are identifiable.
    (1) Attribution during any given water year will be provided only 
to class beneficiaries that are natural persons and established legal 
entities. For purposes of administering the acreage limitation 
provisions, attribution to unborn or deceased persons, or entities not 
yet established, will not be allowed.
    (2) If a trust includes a class of beneficiaries to which land 
subject to the acreage limitation provisions will be attributed, the 
trustee and each of the beneficiaries will be required to submit 
standard certification or reporting forms annually. The submittal of 
verification forms, as provided in Sec. 426.18(l), will not be 
applicable to such trusts.
    (d) Application of full-cost rate to land held by grantor revocable 
trusts. If a grantor revocable trust that meets the criteria specified 
in paragraph (b)(2) of this section is revised by the grantor in a 
manner that precludes attribution of the land held in trust to the 
grantor:
    (1) Before April 20, 1988, Reclamation will not assess full-cost 
rates for the land held by the revised trust for the period before it 
was revised; or
    (2) On or after April 20, 1988, Reclamation will charge the full-
cost rate for irrigation water delivered to any land held by the trust 
that exceeds the grantor's nonfull-cost entitlement, commencing 
December 23, 1987, until the trust agreement is revised to make it an 
irrevocable trust or an otherwise revocable trust.


Sec. 426.8  Nonresident aliens and foreign entities.

    (a) Definitions for purposes of this section:
    Domestic entity means a legal entity established under State or 
Federal law.
    Foreign entity means a legal entity not established under State or 
Federal law.
    (b) Restriction on receiving irrigation water. Notwithstanding any 
other provision of Federal reclamation law or these regulations, a 
nonresident alien or foreign entity that directly holds land in a 
district that is subject to the discretionary provisions is not 
eligible to receive irrigation water on such land. Nonresident aliens 
and foreign entities may hold land indirectly in discretionary 
districts and both directly and indirectly in prior law districts and 
receive irrigation water on such land, subject to their acreage 
limitation entitlements.
    (c) Entitlements for nonresident aliens and foreign entities. 
Except as provided in paragraph (d) of this section, all nonresident 
aliens and foreign entities will be considered prior law recipients, 
and shall have entitlements and eligibility only as prior law 
recipients as specified in Secs. 426.5(d) and 426.6(b)(3).
    (d) Exception to prior law entitlement application. (1) If a 
nonresident alien is a citizen of or a foreign entity is established in 
a country that has one of the following treaties with the United States 
or is a member of the listed organization, then that nonresident alien 
or foreign entity will not be restricted to prior law entitlements, 
provided the eligible landholding subject to the acreage limitation 
provisions is held indirectly:
    (i) Friendship, Commerce and Navigation Treaty;
    (ii) Bilateral Investment Treaty;
    (iii) North American Free Trade Agreement;
    (iv) Canada--United States Free Trade Agreement; or
    (v) Organization for Economic Cooperation and Development.
    (2) Nonresident aliens and foreign entities that meet the criteria 
listed in paragraph (d)(1) of this section will be required to provide 
proof of citizenship or documentation certifying the country in which 
the entity in question was established. Districts will retain such 
documentation in the landholder's file.
    (3) If a nonresident alien or foreign entity meets the criteria 
listed in paragraph (d)(1) of this section, and only holds eligible 
land subject to the acreage limitation provisions indirectly, then the 
nonresident alien may be treated as a United States citizen or the 
foreign entity may be treated as a domestic entity for purposes of 
application of the acreage limitation provisions for the land held 
indirectly.
    (i) The nonresident alien or foreign entity may submit an 
irrevocable election to conform to the discretionary provisions as 
provided for in Sec. 426.3(f). Conformance to the discretionary 
provisions through the submittal of a certification form will not be 
allowed as specified in Sec. 426.3(f)(3).
    (ii) Upon Reclamation's approval of the irrevocable election, a 
nonresident alien will be treated as having the ownership entitlement 
of a qualified recipient as described in Sec. 426.5(b), for any land 
held indirectly. A foreign entity will be treated as a qualified 
recipient or a limited recipient as determined by the number of natural 
persons who are beneficiaries of the entity as specified by the 
definitions found in Sec. 426.2, and the subsequent entitlement as 
provided in Sec. 426.5(b) or (c), for any land held indirectly. The 
applicable nonfull-cost entitlements will be determined as described in 
Sec. 426.6(b).
    (iii) Reclamation will not approve irrevocable elections submitted 
by a nonresident alien or a foreign entity that

[[Page 66813]]

holds any land directly in any prior law district.
    (iv) Reclamation will not approve irrevocable elections submitted 
by a nonresident alien that is not a citizen of or foreign entity that 
has not been established in a country that has a treaty or 
international membership as specified in paragraph (d)(1) of this 
section.


Sec. 426.9  Religious or charitable organizations.

    (a) Definitions for purposes of this section:
    Central organization means the organization to which all 
subdivisions, such as parishes, congregations, chapters, etc., 
ultimately report.
    Religious or charitable organization means an organization or each 
congregation, chapter, parish, school, ward, or similar subdivision of 
a religious or charitable organization that is exempt from paying 
Federal taxes under Sec. 501 of the Internal Revenue Code of 1954, as 
amended.
    (b) Acreage limitation status of religious or charitable 
organizations that are subject to the discretionary provisions. (1) 
Religious or charitable organizations or their subdivisions that are 
subject to the discretionary provisions have qualified recipient 
status, if:
    (i) The organization's or subdivision's agricultural produce and 
proceeds from the sales of such produce are used only for charitable 
purposes;
    (ii) The organization or subdivision, itself, operates the land; 
and
    (iii) No part of the net earnings of the organization or 
subdivision accrues to the benefit of any private shareholder or 
individual.
    (2) If Reclamation determines that a religious or charitable 
organization or any of its subdivisions does not meet the criteria 
listed in paragraph (b)(1) of this section, then:
    (i) If the central organization has not met the criteria, 
Reclamation will treat the entire organization, including all 
subdivisions, as a single entity; or
    (ii) If a subdivision has not met the criteria, only that 
subdivision and any subdivisions of it will be treated as a single 
entity and not the central organization or other subdivisions of the 
central organization; and
    (iii) In order to ascertain the acreage limitation status, 
Reclamation determines the total number of members in both the 
organization that has not met the criteria and in any subdivisions that 
are under that organization. If Reclamation determines that total 
number equals:
    (A) More than 25 members, then Reclamation treats that organization 
and every subdivision under that organization as a single legal entity 
with a limited recipient status; or
    (B) 25 members or less, then Reclamation treats that organization 
and every subdivision under that organization as a single legal entity 
with a qualified recipient status.
    (c) Acreage limitation status of prior law religious or charitable 
organizations or subdivisions. (1) Religious or charitable 
organizations and each of their subdivisions are treated as separate 
prior law corporations, if neither the district nor that religious or 
charitable organization or its subdivisions elect to conform to the 
discretionary provisions.
    (2) Reclamation will treat the entire organization, including all 
subdivisions, as a single prior law corporation, if the central 
organization or any subdivisions do not meet the criteria specified in 
paragraph (b)(1) of this section.
    (d) Affiliated farm management between a religious or charitable 
organization and a more central organization of the same affiliation. 
Reclamation permits a subdivision of a religious or charitable 
organization to retain its status as an individual entity while 
cooperating with a more central organization of the same affiliation in 
farm operation and management. Reclamation permits affiliated farm 
management regardless of whether the subdivision is the owner of the 
land being operated.


Sec. 426.10  Public entities.

    (a) Application of the acreage limitation provisions to public 
entities. Reclamation does not subject public entities to the acreage 
limitation provisions of Federal reclamation law with respect to land 
that Reclamation determines public entities farm primarily for 
nonrevenue producing functions. However, public entities are required 
to meet certification and reporting requirements as specified in 
Sec. 426.18.
    (b) Sale of public land. Reclamation does not require public 
entities to seek price approval before they sell nonexempt lands. Once 
sold, Reclamation can make irrigation water available to such land if 
the purchaser meets RRA eligibility requirements.
    (c) Leasing of public land. Public entities can lease irrigation 
land that they own or control to eligible landholders. Land leased from 
a public entity counts towards the lessee's ownership and nonfull-cost 
entitlement.


Sec. 426.11  Class 1 equivalency.

    (a) General application. Class 1 equivalency determinations will 
establish, on a district-wide basis, the acreage of land with lower 
productive potential (Classes 2, 3, and 4) that would be equivalent in 
productive potential to the most suitable land (Class 1) in the local 
agricultural economic setting.
    (1) Reclamation establishes equivalency factors by comparing the 
weighted average farm size required to produce a given level of income 
on each of the lower classes of land with the farm size required to 
produce that income level on Class 1 land.
    (2) For equivalency purposes, Reclamation will classify all 
irrigable land as Class 1, 2, or 3; no other classifications are 
permissible for irrigable land. Class 4 and special-use land classes 
will be allocated to one of these three classes on a case-by-case 
basis.
    (3) Once the Class 1 equivalency determinations have been made, 
individual landowners with land classified as 2 or 3 for equivalency 
purposes will have the right to adjust their actual landholding acreage 
to its Class 1 equivalent acreage.
    (4) In a district subject to prior law, Class 1 equivalency can be 
applied only to landholders who are subject to the discretionary 
provisions.
    (5) Requests for equivalency determinations will be scheduled by 
region, with the regional director of each Reclamation region having 
responsibility for such scheduling. Generally, requests will be honored 
on a first-come-first-served basis. However, if requests exceed the 
region's ability to fulfill them expeditiously, priority will be given 
on the basis of greatest immediate need.
    (b) Who may request a Class 1 equivalency determination? Only 
districts may request Class 1 equivalency determinations. Upon the 
request of any district subject to the acreage limitation provisions, 
Reclamation will make a Class 1 equivalency determination for that 
district. Equivalency determinations can be made only on a district-
wide basis.
    (c) Definition of Class 1 land. (1) Class 1 land is defined and 
will be classified as that irrigable land within a particular 
agricultural economic setting that:
    (i) Most completely meets the various parameters and specifications 
established by Reclamation for irrigable land classes;
    (ii) Has the relatively highest level of suitability for 
continuous, successful irrigation farming; and
    (iii) Is estimated to have the highest relative productive 
potential measured in terms of net income per acre (reflecting both 
productivity and costs of production). The equivalency

[[Page 66814]]

analysis will establish the acreage of each of the lower classes of 
land which is equal in productive potential (measured in terms of net 
farm income) to 1 acre of Class 1 land.
    (2) All land that Reclamation has not classified, or for which 
Reclamation has not yet performed the necessary economic studies, will 
be considered Class 1 land for the purposes of determining entitlements 
under these rules until such time as the necessary classifications or 
studies have been completed.
    (d) Determination of land classes. The extent and location of Class 
1 land and land in lower land classes in a district have been, or will 
be, determined by Reclamation.
    (1) Reclamation will take into account the influence of economic 
and physical factors upon the productive potential of the land lying 
within the district. These factors will include, but are not limited to 
the following and their effect on agricultural practices:
    (i) The physical and chemical characteristics of the soil;
    (ii) Topography;
    (iii) Drainage status;
    (iv) Costs of production;
    (v) Land development costs;
    (vi) Water quality and adequacy;
    (vii) Elevation;
    (viii) Crop adaptability; and
    (ix) Length of growing season.
    (2) Acceptable levels of detail for land classification studies to 
be utilized in making Class 1 equivalency determinations for a given 
district will be evaluated on the basis of the physical and 
agricultural economic characteristics of the area. For districts where 
the sole purpose of the land classification study is for a Class 1 
equivalency determination, the level of detail of the land 
classification to be made will never be greater than that required to 
make a Class 1 equivalency determination.
    (3) Reclamation will pay for at least a portion of the costs 
associated with the land classification study. The amount to be paid by 
Reclamation will be determined as follows:
    (i) Reclamation has provided basic land classification data as part 
of the project development process since 1924. Accordingly, if 
Reclamation determines that acceptable land classification data are not 
available for making requested Class 1 equivalency determinations and 
if the project was authorized for construction since 1924, such data 
will be made available at Reclamation's expense; or
    (ii) For each district located in projects authorized for 
construction prior to 1924, Reclamation will pay 50 percent of the 
costs and the district must pay 50 percent of the costs of new land 
classification studies required to make accurate Class 1 equivalency 
determinations.
    (4) When basic land classification data are available for a 
district, but the district does not agree with the accuracy or asserts 
that the data have become outdated, the district may request, and 
Reclamation may perform, a reclassification under the authority 
contained in the Reclamation Project Act of 1939 (43 U.S.C. 485), with 
the following conditions:
    (i) The requesting district will pay 50 percent of the costs of 
performing such reclassifications and 100 percent of the costs of all 
other studies involved in the equivalency process; and
    (ii) The results of such reclassifications will be binding upon the 
requesting district and Reclamation.
    (e) Additional studies required for Class 1 equivalency 
determinations. Economic studies related to Class 1 equivalency 
determinations will measure net farm income by land classes within the 
district.
    (1) Net farm income will be determined by considering the 
disposable income accruing to the farm operator's labor, management, 
and equity from the sale of farm crops and livestock produced on 
irrigated land, after all fixed and variable costs of production, 
including costs of irrigation service, are accounted for.
    (2) Net farm income will be the measure of productivity to 
establish equivalency factors reflecting the acreage of each of the 
lower classes of land which is equal in productive potential to 1 acre 
of Class 1 land.
    (3) The cost of performing new or additional economic studies and 
computations inherent in the equivalency process will be the 
responsibility of the requesting district.
    (f) Use of Class 1 equivalency with the acreage limitation 
provisions. Class 1 land and land in lower classes will be identified 
on a district basis by Reclamation using a standard approach in which 
the land classification for the entire district is considered. 
Equivalency factors will then be computed for the district and applied 
to specific tracts within individual landholdings. If adequate land 
classification data are not available, they will be developed as 
specified in paragraph (d) of this section using standard procedures 
established by Reclamation.
    (1) For purposes of ownership entitlement, Class 1 equivalency will 
not be applied until a final determination has been made by Reclamation 
concerning the district's request for equivalency.
    (i) Reclamation will protect excess landowners' property interests 
by ensuring that equivalency determinations are completed in advance of 
maturity dates on recordable contracts, provided the district requests 
an equivalency determination at least 6 months prior to the maturity of 
the recordable contract, the district fulfills its obligations under 
this section, and the district notifies Reclamation 6 months in advance 
of the maturity dates for the need for an expedited review.
    (ii) Once the determination has been made, owners of land subject 
to recordable contracts may withdraw land from such recordable 
contracts in order to reach their ownership entitlement in Class 1 
equivalent acreage.
    (iii) The requirement that land under recordable contract be sold 
at a price approved by Reclamation does not apply to land which is 
withdrawn from a recordable contract and included as part of a 
landowner's nonexcess landholding as a result of an equivalency 
determination.
    (iv) In cases of equivalency determination disputes, Reclamation 
will not undertake the sale of the reasonable increment of the excess 
land under a matured recordable contract which could be affected by a 
reclassification, provided the dispute is determined by Reclamation not 
to be an attempt to thwart the sale of excess land.
    (2) For purposes of nonfull-cost entitlement, Class 1 equivalency 
will not be applied until a final determination has been made by 
Reclamation on a district's request for equivalency.
    (i) During the time when such determinations are pending, the full-
cost rate will be assessed based on a landholder's nonfull-cost 
entitlement as determined in the absence of Class 1 equivalency.
    (ii) Following Reclamation's final determination, Reclamation will 
reimburse the district for any full-cost charges that would not have 
been assessed had Class 1 equivalency been in place from the date of 
the district's request. Districts will return such reimbursements to 
the appropriate landholders.
    (3) A landholder with holdings in more than one district is 
entitled to equivalency only in those districts which have requested 
equivalency (or are already subject to equivalency). That part of the 
landholding in a district or districts not requesting equivalency will 
be counted as Class 1 land for purposes of overall entitlement.

[[Page 66815]]

    (g) Prior equivalency determinations. In districts where 
equivalency was a provision of project authorization, those equivalency 
factor determinations will be honored as originally calculated unless 
the district requests a reclassification.


Sec. 426.12  Excess land.

    (a) The process of designating excess and nonexcess land. If a 
landowner owns more land than the landowner's ownership entitlement, 
all of the landowner's nonexempt land must be designated as excess and 
nonexcess as follows:
    (1) The landowner designates which land is excess and which is 
nonexcess in accordance with the instructions on the appropriate 
certification or reporting forms; or
    (2) If a landowner fails to designate his or her land as excess or 
nonexcess on the appropriate certification or reporting forms:
    (i) And all of the landowner's nonexempt land is in only one 
district:
    (A) If the district's contract with Reclamation includes 
designation procedures, then the land is designated according to those 
procedures; or
    (B) If the district's contract with Reclamation does not include 
designation procedures, then:
    (1) Reclamation will notify the landowner and the district that the 
landowner must designate the land as excess and nonexcess on the 
appropriate certification or reporting forms within 30-calendar days of 
the notification;
    (2) If the landowner fails to make the designation within 30-
calendar days of notification, the district will make the designation 
within 30-calendar days thereafter; or
    (3) If the district does not make the designation within its 30-
calendar days, Reclamation will make the designation; or
    (ii) If the landowner owns nonexempt land in more than one 
district, then Reclamation will notify the landowner and the districts 
that the landowner has 60-calendar days from the date of notification 
to make the designation. If the landowner does not make the designation 
in the 60-calendar days, Reclamation will make the designation.
    (b) Changing excess and nonexcess land designations.  (1) 
Landowners must file with the district(s) in which the land is located 
and with Reclamation the designation of excess and nonexcess land. The 
designation of land as excess is binding on the land. However, the 
landowner may change the designation under the following circumstances 
without Reclamation's approval if:
    (i) The excess land becomes eligible to receive irrigation water 
because the landowner becomes subject to the discretionary provisions 
as provided in Sec. 426.3;
    (ii) A recordable contract is amended to remove excess land when 
the landowner's entitlement increases because the landowner becomes 
subject to the discretionary provisions as provided in paragraph (j)(5) 
of this section; or
    (iii) The excess land becomes eligible to receive irrigation water 
as a result of Class 1 equivalency determinations, as provided in 
Sec. 426.11.
    (2) No other redesignation of excess land is allowable without the 
approval of Reclamation in accordance with established Reclamation 
procedures. Reclamation will not approve a redesignation request if:
    (i) The purpose of the redesignation is for achieving, through 
repeated redesignation, an effective farm size in excess of that 
permitted by Federal reclamation law; or
    (ii) The landowner sells some or all of his or her land that is 
currently classified as nonexcess.
    (3) When a redesignation involves an exchange of nonexcess land for 
excess land, a landowner must make an equal exchange of acreage (or 
Class 1 equivalent acreage) through the redesignation.
    (c) Land that becomes excess when a district first contracts with 
Reclamation. (1) If a landowner owned irrigable land on the execution 
date of the district's first water service or repayment contract, and 
the execution date was on or before October 12, 1982, the landowner's 
excess land is ineligible until the landowner:
    (i) Becomes subject to the discretionary provisions and the 
landowner designates the excess land, up to his or her ownership 
entitlement, as nonexcess as provided for in paragraph (b)(1)(i) of 
this section;
    (ii) Places such excess land under a recordable contract, provided 
the period for executing recordable contracts under the district's 
contract has not expired;
    (iii) Sells or transfers such excess land to an eligible buyer at a 
price and on terms approved by Reclamation; or
    (iv) Redesignates the land as nonexcess with Reclamation's approval 
as provided for in paragraph (b)(2) of this section.
    (2) If the landowner owned irrigable land on the execution date of 
the district's first water service or repayment contract and the 
execution date is after October 12, 1982, the landowner's excess land 
is ineligible until the landowner:
    (i) Places such excess land under a recordable contract, provided 
the period for executing recordable contracts under the district's 
contract has not expired;
    (ii) Sells or transfers such excess land to an eligible buyer at a 
price and on terms approved by Reclamation; or
    (iii) Redesignates the land as nonexcess with Reclamation's 
approval as provided for in paragraph (b)(2) of this section.
    (d) Land acquired into excess after the district has already 
contracted with Reclamation. (1) If a landowner acquires land after the 
date the district first entered into a repayment or water service 
contract that was nonexcess to the previous owner and is excess to the 
acquiring landowner, the first repayment or water service contract was 
executed on or before October 12, 1982, and:
    (i) Irrigation water was physically available when the landowner 
acquires such land, then the land is ineligible to receive such water 
until:
    (A) The landowner becomes subject to the discretionary provisions 
and the landowner designates the excess land, up to his or her 
ownership entitlement, as nonexcess as provided for in paragraph 
(b)(1)(i) of this section;
    (B) The landowner sells or transfers such land to an eligible buyer 
at a price and on terms approved by Reclamation;
    (C) The sale from the previous landowner is canceled; or
    (D) The landowner redesignates the land as nonexcess with 
Reclamation's approval as provided for in paragraph (b)(2) of this 
section; or
    (ii) Irrigation water was not physically available when the 
landowner acquired the land, then the land is ineligible to receive 
water until:
    (A) The landowner becomes subject to the discretionary provisions 
and the landowner designates the excess land, up to his or her 
ownership entitlement, as nonexcess as provided for in paragraph 
(b)(1)(i) of this section;
    (B) The landowner sells or transfers the land to an eligible buyer 
at a price and on terms approved by Reclamation;
    (C) The sale from the previous landowner is canceled;
    (D) The landowner places the land under recordable contract when 
water becomes available; or
    (E) The landowner redesignates the land as nonexcess with 
Reclamation's approval as provided for in paragraph (b)(2) of this 
section.
    (2) If a landowner acquires land after the date the district first 
entered into a repayment or water service contract that was nonexcess 
to the previous owner and is excess to the acquiring landowner, the 
first repayment or water

[[Page 66816]]

service contract was executed after October 12, 1982, and:
    (i) Irrigation water was physically available when the landowner 
acquired such land, then the land is ineligible until:
    (A) The landowner sells or transfers the land to an eligible buyer 
at a price and on terms approved by Reclamation;
    (B) The sale from the previous landowner is canceled; or
    (C) The landowner redesignates the land as nonexcess with 
Reclamation's approval as provided for in paragraph (b)(2) of this 
section; or
    (ii) Irrigation water was not physically available when the 
landowner acquired such land, then the land is ineligible to receive 
water until:
    (A) The landowner sells or transfers the land to an eligible buyer 
at a price and on terms approved by Reclamation;
    (B) The sale from the previous landowner is canceled;
    (C) The landowner redesignates the land as nonexcess with 
Reclamation's approval as provided for in paragraph (b)(2) of this 
section; or
    (D) The landowner places the land under recordable contract when 
water becomes available.
    (e) If the status of land is changed by law or regulations. (1) If 
the district had a contract with Reclamation on or before October 12, 
1982, and eligible land became excess because the landowner's 
entitlement changed from being based on a district-by-district basis to 
a westwide basis, then such formerly eligible land is ineligible until:
    (i) The landowner places such land under recordable contract. The 
recordable contract does not need to include the sales price approval 
clause and application of the deed covenant provision will not be 
required; or
    (ii) The landowner sells or transfers such land to an eligible 
buyer. The sales price does not need Reclamation's approval.
    (2) If the district had a contract with Reclamation on or before 
October 12, 1982, and the landowner was a nonresident alien or a legal 
entity not established under State or Federal law, who directly held 
eligible land and such land is no longer eligible to receive water, 
then such formerly eligible land is ineligible until:
    (i) The landowner places such land under recordable contract. The 
recordable contract does not need to include the sales price approval 
clause and application of the deed covenant provision will not be 
required; or
    (ii) The landowner sells or transfers such land to an eligible 
buyer. The sales price does not need Reclamation's approval.
    (3) If the district first entered a contract with Reclamation after 
October 12, 1982, and land would have been eligible before October 12, 
1982, but is now ineligible because the landowner is a direct 
landholder and either a nonresident alien or a legal entity not 
established under State or Federal law, then such land that would have 
been eligible remains ineligible until:
    (i) If the landowner acquired such land before the date of the 
district's contract:
    (A) The landowner places such land under a recordable contract 
requiring Reclamation sales price approval; or
    (B) Sells or transfers the land to an eligible buyer subject to 
Reclamation sales price approval; or
    (ii) If the landowner acquired such land after the date of the 
district's contract, the landowner sells or transfers such land to an 
eligible buyer subject to Reclamation sales price approval.
    (4) Eligible nonexcess land that is indirectly owned on or before 
December 18, 1996 by a nonresident alien or a legal entity not 
established under State or Federal law, and that becomes ineligible 
because of Sec. 426.8 is ineligible until:
    (i) The landowner places such land under recordable contract. The 
recordable contract does not need to include the sales price approval 
clause and application of the deed covenant provision will not be 
required; or
    (ii) The landowner sells or transfers such land to an eligible 
buyer. The sales price does not need Reclamation's approval.
    (f) Excess land that is acquired without price approval. If a 
landowner acquires land that is subject to Reclamation price approval, 
without obtaining such approval, the land is ineligible to receive 
water until:
    (1) The sales price is reformed to conform to the price approved by 
Reclamation and is eligible to receive irrigation water in the 
landowner's ownership entitlement; or
    (2) Such landowner sells or transfers the land to an eligible buyer 
at a price approved by Reclamation.
    (g) Excess land that is disposed of and subsequently reacquired. 
Districts may not make available irrigation water to excess land 
disposed of by a landholder at a price approved by Reclamation, whether 
or not under a recordable contract, if the landholder subsequently 
becomes a direct or indirect landholder of that land through either a 
voluntary or involuntary action, unless:
    (1) The landholder became or contracted to become a direct or 
indirect landholder of that land prior to December 18, 1996, and the 
land in question is otherwise eligible to receive irrigation water;
    (2) Such land becomes exempt from the acreage limitations of 
Federal reclamation law;
    (3) The landholder pays the full-cost rate for any irrigation water 
delivered to the landholder's formerly excess land that is otherwise 
eligible to receive irrigation water. If a landholder is a part owner 
of a legal entity that becomes the direct or indirect landholder of the 
land in question, then the full-cost rate will be applicable to the 
proportional share of irrigation water delivered to the land that 
reflects the part owner's interest in that legal entity; or
    (4) The deed covenant associated with the sale has expired as 
provided for in paragraph (i) of this section.
    (h) Application of the compensation rate for irrigating ineligible 
excess land with irrigation water. Reclamation will charge the 
following for irrigation water delivered to ineligible excess land in 
violation of Federal reclamation law and these regulations:
    (1) The appropriate compensation rate for irrigation water 
delivered; and
    (2) any other applicable fees as specified in Sec. 426.20.
    (i) Deed covenants. (1) All land that is acquired from excess 
status after October 12, 1982, must have the following covenant (that 
runs with the land) placed in the deed transferring the land to the 
acquiring party in order for the land to be eligible to receive 
irrigation water except as otherwise specified in these regulations. 
The covenant must be in the deed regardless of whether or not the land 
was under recordable contract.

     This covenant is to satisfy the requirements in 209(f)(2) of 
Pub. L. 97-293 (43 U.S.C 390, et seq.). This covenant expires on 
(date) . Until the expiration date specified herein, sale price 
approval is required on this land. Sale by the landowner and his or 
her assigns of these lands for any value that exceeds the sum of the 
value of newly added improvements plus the value of the land as 
increased by the market appreciation unrelated to the delivery of 
irrigation water will result in the ineligibility of this land to 
receive Federal project water, provided however:
    (i) The terms of this covenant requiring price approval shall 
not apply to this land if it is acquired into excess status pursuant 
to a bona fide involuntary foreclosure or similar involuntary 
process of law, conveyance in satisfaction of a debt (including, but 
not limited to, a mortgage, real estate contract, or deed of trust), 
inheritance, or devise (hereinafter Involuntary Conveyance). 
Thereafter, this land may be sold to a landholder at its fair market 
value without regard to any other provision of the Reclamation 
Reform Act of 1982 enacted on

[[Page 66817]]

October 12, 1982, (43 U.S.C. 390aa et seq.), or to Section 46 of the 
Act entitled ``an Act to adjust water rights charges, to grant 
certain relief on the Federal irrigation projects, and for other 
purposes,'' enacted May 25, 1926 (43 U.S.C. 423e);
    (ii) If the status of this land changes from nonexcess into 
excess after a mortgage or deed of trust in favor of a lender is 
recorded and the land is subsequently acquired by a bona fide 
Involuntary Conveyance by reason of a default under that loan, this 
land may thereupon or thereafter be sold to a landholder at its fair 
market value;
    (iii) The terms of this covenant requiring price approval shall 
not apply to the sales price obtained at the time of the Involuntary 
Conveyances described in subparagraphs (i) and (ii), nor to any 
subsequent voluntary sales by a landholder of this land after the 
Involuntary Conveyances or any subsequent Involuntary Conveyance;
    (iv) Upon the completion of an Involuntary Conveyance, 
Reclamation shall reconvey or otherwise terminate this covenant of 
record;
    (v) However, the deed covenant shall not be reconveyed or 
otherwise terminated if the involuntarily acquiring landowner is the 
landowner who sold this land from excess status, unless that 
landowner is a financial institution as defined in Sec. 426.14(a) of 
the Acreage Limitation Rules and Regulations (43 CFR Part 426); and
    (vi) The party whose excess ownership originally required the 
placement of this covenant may not receive Federal reclamation 
project irrigation water on the land subject to this covenant as a 
direct or indirect landowner or lessee, unless an exception provided 
for in Sec. 426.12(g) is met.

    Note: 1. Clauses (v) and (vi) of this covenant shall only be 
required on those covenants placed in deeds transferring land after 
January 1, 1998.
    Note: 2. The date that the covenant expires shall be 10 years 
from the date the land was first transferred from excess to 
nonexcess status.

    (2) A landholder may purchase or otherwise voluntarily acquire into 
nonexcess status, land subject to a deed covenant, at a price approved 
by Reclamation if the land is within the landholder's ownership 
entitlement.
    (3) Upon expiration of the terms of the deed covenant, a landowner 
may resell such land at fair market value. A landowner may not sell 
more of such land in his or her lifetime than an amount equal to his or 
her ownership entitlement. Once the landowner reaches this limit, any 
additional excess land or land subject to a deed covenant the landowner 
acquires is ineligible to receive irrigation water, until such land is 
sold to an eligible buyer at a price approved by Reclamation.
     (4) If a landholder acquires land burdened by such a deed covenant 
through involuntary foreclosure or similar involuntary process of law, 
conveyance in satisfaction of a debt, including, but not limited to, a 
mortgage, real estate contract, or deed of trust, inheritance, or 
devise, and is not the party whose excess ownership originally required 
placement of the deed covenant, then Reclamation must terminate the 
deed covenant upon the landholder's request. The provisions in 
paragraph (i)(1)(v) of this section and Sec. 426.14(e) address 
termination of deed covenants for landholders whose excess ownership 
originally required placement of the deed covenant.
     (j) Recordable contracts.  (1) Qualifications for recordable 
contracts. A landowner can make excess land eligible to receive 
irrigation water by entering into a recordable contract with the United 
States if the landowner qualifies under applicable provisions of:
     (i) The district's contract with Reclamation;
     (ii) Federal reclamation law; and
     (iii) These regulations.
     (2) Clauses to be included in recordable contracts. A recordable 
contract must include:
     (i) A clause whereby the landowner agrees to dispose of the excess 
land to an eligible buyer, excluding mineral rights and easements, 
under terms and conditions of the sale, in accordance with Sec. 426.13; 
and within the period allowed for the disposition of excess land, that 
must be within 5 years from the date that the recordable contract is 
executed by Reclamation (except for the Central Arizona Project wherein 
the time period is 10 years from the date water becomes available to 
the land); and
     (ii) A clause granting power of attorney to Reclamation to sell 
the land held under the recordable contract, if the landholder has not 
already sold the land by the recordable contract's maturation.
     (3) Date Reclamation can make irrigation water available. 
Reclamation can make available irrigation water to land that the 
landowner plans to place under a recordable contract on the day that 
Reclamation receives the landowner's written request to execute a 
recordable contract. The landowner has 20-working days in which to 
execute the recordable contract from the date Reclamation sends the 
recordable contract to the landowner. Reclamation, in its discretion, 
may extend this period upon the landowner's request.
     (4) Water rate. The rate for irrigation water delivered to land 
placed under recordable contract will be determined as follows:
    (i) If both the landowner and any lessee are prior law recipients, 
land placed under a recordable contract can receive irrigation water at 
a contract rate that does not cover full operation and maintenance 
(O&M) costs;
     (ii) If either landowner or any lessee is subject to the 
discretionary provisions, the water rate applicable to the recordable 
contract must cover, at a minimum, all O&M costs; or
     (iii) If a landholder leases land subject to a recordable contract 
and is in excess of his or her nonfull-cost entitlement, the lessee may 
select such land as the land on which the full-cost rate will be 
charged for the delivery of irrigation water, unless the land is 
already subject to the full-cost rate because of an extended recordable 
contract.
     (5) Amending a recordable contract to include less acreage. (i) 
Reclamation permits a landowner to amend a recordable contract to 
transfer land out of a recordable contract to nonexcess status, if:
     (A) The landowner has an increased ownership entitlement because 
of becoming subject to the discretionary provisions; or
     (B) Land becomes eligible by implementation of Class 1 
equivalency, if the landowner amends the recordable contract prior to 
performance of appraisal.
     (ii) Landholders must receive Reclamation's approval to amend 
recordable contracts.
     (A) The disposition period for any land remaining under a 
recordable contract will not change because of an amendment to remove 
some land.
     (B) For land removed from a recordable contract based on paragraph 
(j)(5)(i) of this section, any requirement for application of a deed 
covenant will no longer be applicable.
     (6) Sale of land by Reclamation. If the landowner does not dispose 
of the excess land held under recordable contract within the period 
specified in the recordable contract, Reclamation will sell that land. 
Reclamation will not sell the land if the landowner complies with all 
requirements for sale of excess land under these rules within the 
period specified, regardless if Reclamation gives final approval of the 
sale within that period or after.
     (7) Delivery of water when a recordable contract has matured. 
Reclamation can make available irrigation water at the current 
applicable rate, pursuant to paragraph (j)(4) of this section, to 
excess land held under a matured recordable contract until Reclamation 
sells the land.
     (8) Procedures Reclamation follows in selling excess land. If 
Reclamation must sell excess land, the following procedures will be 
used:
     (i) If Reclamation determines it to be necessary, a qualified 
surveyor will

[[Page 66818]]

make a land survey. The United States will pay for the survey 
initially, but such costs will be added to the approved sales price for 
the land. The United States will be reimbursed for these costs from the 
sale of the land;
     (ii) Reclamation will appraise the value of the excess land, in 
the manner prescribed by Sec. 426.13, to determine the appropriate 
sales price. The United States will pay for the appraisal initially, 
but such costs will be added to the approved sales price for the land. 
The United States will be reimbursed for these costs from the sale of 
the land; and
     (iii) Reclamation will advertise the sale of the property in farm 
journals and in newspapers within the county in which the land lies, 
and by other public notices as deemed advisable. The United States will 
pay for the advertisements and notices initially, but such costs will 
be added to the approved sales price for the land. The United States 
will be reimbursed for these costs from the sale of the land. The 
notices must state:
     (A) The minimum acceptable sales price for the property (which 
equals the appraised value plus the cost of the appraisal, survey, and 
advertising);
    (B) That Reclamation will sell the land by auction for cash, or on 
terms acceptable to the landowner, to the highest eligible bidder whose 
bid equals or exceeds the minimum acceptable sales price; and
    (C) The date of the sale (which must not exceed 90 calendar days 
from the date of the advertisement and notices);
    (iv) The proceeds from the sale of the land will be paid:
    (A) First, to the landowner in the amount of the appraised value;
    (B) Second, to the United States for costs of the survey, 
appraisal, advertising, etc.; and
    (C) Third, any remaining proceeds will be credited to the 
Reclamation fund or other funds as prescribed by law; and
    (v) Reclamation will close the sale of the excess land when parties 
complete all sales arrangements. Reclamation will execute a deed 
conveying the land to the purchaser. Reclamation will not require the 
purchaser to include a covenant in the deed, as specified in paragraph 
(i) of this section, that restricts any further resale of the land.


Sec. 426.13  Excess land appraisals.

    (a) When does Reclamation appraise the value of a landowner's land? 
Reclamation appraises excess land or land burdened by a deed covenant 
upon a landowner's request or when required by Reclamation. If a 
landowner does not request an appraisal within 6 months of the maturity 
date of a recordable contract, Reclamation, in its discretion, can 
initiate the appraisal.
    (b) Procedures Reclamation uses to determine the sale price of 
excess land or land burdened by a deed covenant. Reclamation complies 
with the following procedures to determine the sale price of excess 
land and land burdened by a deed covenant, except if a landholder owns 
land subject to a recordable contract that was in force on October 12, 
1982, or other pertinent contract that was in force on that date, and 
these regulations would be inconsistent with provisions in such a 
contract:
    (1) Appraisals of land. Reclamation will base all appraisals of 
land on the fair market value of the land at the time of appraisal 
without reference to the construction of the irrigation works. 
Reclamation must use standard appraisal procedures including: the 
income, comparable sales, and cost methods, as applicable. Reclamation 
will consider nonproject water supply factors as provided in paragraph 
(c)(1) of this section as appropriate; and
    (2) Appraisal of improvements to land. Reclamation will assess the 
contributory fair market value of improvements to land, as of the date 
of appraisal, using standard appraisal procedures.
    (c) Appraisals of nonproject water supplies. (1) The appraiser will 
consider nonproject water supply factors, where appropriate, including:
    (i) Ground water pumping lift;
    (ii) Surface water supply;
    (iii) Water quality; and
    (iv) Trends associated with paragraphs (c)(1) (i) through (iii) of 
this section, where appropriate.
    (2) Reclamation will develop the nonproject water supply and trend 
information with the assistance of:
    (i) The district in which the land is located, if the district 
desires to participate;
    (ii) Landowners of excess land or land burdened by a deed covenant 
and prospective buyers who submit information either to the district or 
Reclamation; and
    (iii) Public meetings and forums, at the discretion of Reclamation.
    (3) Data submitted may include:
    (i) Historic geologic data;
    (ii) Changing crops and cropping patterns; and
    (iii) Other factors associated with the nonproject water supply.
    (4) If Reclamation and the district cannot reach agreement on the 
nonproject water supply information within 60-calendar days, 
Reclamation will review and update the trend information as it deems 
necessary and make all final determinations considering the data 
provided by Reclamation and the district. Reclamation will provide 
these data to the appraisers who must consider the data in the 
appraisal process, and clearly explain how they used the data in the 
valuation of the land.
    (d) The date of the appraisal. The date of the appraisal will be 
the date of last inspection by the appraiser(s) unless there is a prior 
signed instrument, such as an option, contract for sale, agreement for 
sale, etc., affecting the property. In those cases, the date of 
appraisal will be the date of such instrument.
    (e) Cost of appraisal. If the appraisal is:
    (1) The land's first appraisal, the United States will initially 
pay the costs of appraising the value of the land, but such costs will 
be added to the approved sale price for the land. The United States 
will reimburse itself for these costs from the sale of the land;
    (2) Not the land's first appraisal, the landowner requesting the 
appraisal must pay any costs associated with the reappraisal, unless 
the value set by the reappraisal differs by more than 10 percent, in 
which case the United States will pay for the reappraisal; or
    (3) Associated with a sales price reformation as specified in 
Sec. 426.12(f)(1), the landowner requesting the appraisal must pay any 
costs associated with the appraisal.
    (f) Appraiser selection. Reclamation will select a qualified 
appraiser to appraise the excess land or land burdened by a deed 
covenant, except as specified within paragraph (g) of this section.
    (g) Appraisal dispute resolution. The landowner who requested the 
appraisal may request that the United States conduct a second appraisal 
of the excess land or land burdened by a deed covenant if the landowner 
disagrees with the first appraisal. The second appraisal will be 
prepared by a panel of three qualified appraisers, one designated by 
the United States, one designated by the district, and the third 
designated jointly by the first two. The appraisal made by the panel 
will fix the maximum value of the excess land and will be binding on 
both parties after review and approval as provided in paragraph (h) of 
this section.
    (h) Review of appraisals of excess land or land burdened by a deed 
covenant. Reclamation will review all appraisals of excess land or land 
burdened by a deed covenant for:

[[Page 66819]]

    (1) Technical accuracy and compliance with these rules and 
regulations;
    (2) Applicable portions of the ``Uniform Appraisal Standards for 
Federal Land Acquisition-Interagency Land Acquisition Conference 
1973,'' as revised in 1992;
    (3) Reclamation policy; and
    (4) Any detailed instructions provided by Reclamation setting 
conditions applicable to an individual appraisal.


Sec. 426.14  Involuntary acquisition of land.

    (a) Definitions for purposes of this section.
    Financial institution means a commercial bank or trust company, a 
private bank, an agency or branch of a foreign bank in the United 
States, a thrift institution, an insurance company, a loan or finance 
company, or the Farm Credit System.
    Involuntarily acquired land means land that is acquired through an 
involuntary foreclosure or similar involuntary process of law, 
conveyance in satisfaction of a debt (including, but not limited to, a 
mortgage, real estate contract or deed of trust), inheritance, or 
devise.
    (b) Ineligible excess land that is involuntarily acquired. 
Reclamation cannot make available irrigation water to land that was 
ineligible excess land before the new landowner involuntarily acquired 
it, unless:
    (1) The land becomes nonexcess in the new landowner's ownership; 
and
    (2) The deed to the land contains the 10-year covenant requiring 
Reclamation sale price approval, and that deed commences when the land 
becomes eligible to receive irrigation water.
    (3) If either of these conditions is not met, the land remains 
ineligible excess until sold to an eligible buyer at an approved price, 
and the seller places the 10-year covenant requiring Reclamation price 
approval, as specified in Sec. 426.12(i), in the deed transferring 
title to the land to the buyer.
    (c) Land that was held under a recordable contract and is acquired 
involuntarily. Reclamation can make available irrigation water to land 
held under a recordable contract that is involuntarily acquired under 
the terms of the recordable contract to the extent the land continues 
to be excess in his or her landholding, if the landowner:
    (1) assumes the recordable contract; and
    (2) executes an assumption agreement provided by Reclamation.
    (3) This land will remain eligible to receive irrigation water for 
the longer of 5 years from the date that the land was involuntarily 
acquired, or for the remainder of the recordable contract period. The 
sale of this land shall be under terms and conditions set forth in the 
recordable contract and must be satisfactory to and at a price approved 
by Reclamation.
    (d) Mortgaged land. Reclamation treats mortgaged land that changed 
from nonexcess status to excess status after the mortgage was recorded, 
and which is subsequently acquired by a lender through an involuntary 
foreclosure or similar process of law, or by a bona fide conveyance in 
satisfaction of a mortgage, in the following manner:
    (1) If the new landowner designates the land as excess in his or 
her holding, then:
    (i) The land is eligible to receive irrigation water for a period 
of 5 years or until transferred to an eligible landowner, whichever 
occurs first;
    (ii) During the 5-year period Reclamation will charge a rate for 
irrigation water equal to the rate paid by the former owner, unless the 
land becomes subject to full-cost pricing through leasing; and
    (iii) The land is eligible for sale at its fair market value 
without a deed covenant restricting its future sales price; or
    (2) If the new landowner is eligible to designate the land as 
nonexcess and he or she designates the land as nonexcess, the land will 
be treated in the same manner as any other nonexcess land and will be 
eligible for sale at its fair market value without a deed covenant 
restricting its future sales price.
    (e) Nonexcess land that becomes excess when acquired involuntarily. 
(1) Reclamation can make irrigation water available for a period of 5 
years to a landowner who involuntarily acquires land that becomes 
excess in the involuntarily acquiring landowner's holding provided the 
land was nonexcess to the previous owner and:
    (i) The acquiring landowner never previously held such land as 
ineligible excess land or under a recordable contract;
    (ii) The acquiring landholder is a financial institution; or
    (iii) The acquiring landowner previously held the land as 
ineligible excess or under a recordable contract and 
Secs. 426.12(g)(1), (3), or (4) applies.
    (2) The following will be applicable in situations that meet the 
criteria specified under paragraph (e)(1) of this section:
    (i) Reclamation will charge a rate for irrigation water delivered 
to such land equal to the rate paid by the former owner, except 
Reclamation will charge the full-cost rate if:
    (A) The land becomes subject to full-cost pricing through leasing; 
or
    (B) If the involuntarily acquired land is eligible to receive 
irrigation water only because Sec. 426.12(g)(3) applies and the deed 
covenant has not expired;
    (ii) The new landowner may not place such land under a recordable 
contract;
    (iii) The new landowner may request that Reclamation remove a deed 
covenant as provided in Sec. 426.12(i)(4), and may sell such land at 
any time without price approval and without the deed covenant. However, 
the deed covenant will not be removed and the terms of the deed 
covenant will be fully applied if the new landowner is the landowner 
who sold the land in question from excess status, except for:
    (A) Financial institutions; or
    (B) Landowners for which Secs. 426.12(g) (1) or (2) apply; and
    (iv) Such land will become ineligible to receive irrigation water 5 
years after it was acquired and will remain ineligible until sold to an 
eligible buyer or redesignated as provided for in paragraph (f) of this 
section.
    (f) Redesignation of excess land to nonexcess. Landholders who 
designate involuntarily acquired land as excess as provided for in 
paragraphs (d)(1) and (e)(1) of this section and want to redesignate 
the land as nonexcess, must utilize the redesignation process specified 
under Sec. 426.12(b)(2).
    (1) However, such redesignations will not be approved if the water 
rate specified in paragraphs (d)(1)(ii) or (e)(2)(i) of this section is 
less than what would have been charged for water deliveries to the land 
in question if the landholder that involuntarily acquired the land had 
originally designated the land as nonexcess.
    (2) Such landholders may utilize the redesignation process, if they 
remit to Reclamation the difference between the rate paid and the rate 
that would have been paid, if the land had been designated as nonexcess 
when involuntarily acquired, for all irrigation water delivered to the 
land in question while the land was designated as excess.
    (g) Effect of involuntarily acquiring land subject to the 
discretionary provisions. A landowner does not automatically become 
subject to the discretionary provisions if the landowner acquires 
irrigation land involuntarily which was formerly subject to the 
discretionary provisions. However, a landholder that is subject to the 
prior law provisions will become subject to the discretionary 
provisions upon involuntarily acquiring land if:
    (1) The land is located in a district that is subject to the 
discretionary provisions;

[[Page 66820]]

    (2) The landholder in question will be the direct landowner of the 
land; and
    (3) The landholder in question declares the land as nonexcess.
    (h) Land acquired by inheritance or devise. If a landowner receives 
irrigation land through inheritance or devise, the 5-year eligibility 
period for receiving irrigation water on the newly acquired land per 
paragraphs (c)(3) and (e) of this section begins on the date of the 
previous landowner's death.


Sec. 426.15  Commingling.

    (a) Definition for purposes of this section:
    Commingled water means irrigation water and nonproject water that 
use the same facilities.
    (b) Application of Federal reclamation law and these regulations to 
prior commingling provisions in contracts. If a district entered into a 
contract with Reclamation prior to October 1, 1981, and that contract 
has provisions addressing commingled water situations, those provisions 
stay in effect for the term of that contract and any renewals of it.
    (c) Establishment of new commingling provision in contracts. New, 
amended, or renewed contracts may provide that irrigation water can be 
commingled with nonproject water as follows:
    (1) If the facilities used for the commingling of irrigation water 
and nonproject water are constructed without funds made available 
pursuant to Federal reclamation law, the provisions of Federal 
reclamation law and these regulations will apply only to the 
landholders who receive irrigation water, provided:
    (i) That the water requirements for eligible lands can be 
established; and
    (ii) The quantity of irrigation water to be used is less than or 
equal to the quantity necessary to irrigate eligible lands.
    (2) If the facilities used for commingling irrigation water and 
nonproject water are funded with monies made available pursuant to 
Federal reclamation law, landholders who receive nonproject water will 
be subject to Federal reclamation law and these regulations unless:
    (i) The district collects and pays to the United States an 
incremental fee which reasonably reflects an appropriate share of the 
cost to the Federal Government, including interest, of storing or 
delivering the nonproject water; and
    (ii) The fee will be established by Reclamation and will be in 
addition to the district's obligation to pay for capital, operation, 
maintenance, and replacement costs associated with the facilities 
required to provide the service.
    (3) If paragraphs (c)(2) (i) and (ii) of this section are met, the 
provisions of Federal reclamation law and these regulations will be 
applicable to only those landholders who receive irrigation water. 
Accordingly, the provisions of Federal reclamation law and these 
regulations will not be applicable to landholders who receive 
nonproject water delivered through facilities funded with monies made 
available pursuant to Federal reclamation law if those paragraphs are 
met.
    (d) When Federal reclamation law and these regulations do not 
apply. Federal reclamation law and these regulations do not apply to 
landholders receiving irrigation water from federally financed 
facilities if the irrigation water is acquired by an exchange and that 
exchange results in no material benefit to the recipient of the 
irrigation water.


Sec. 426.16  Exemptions and exclusions.

    (a) Army Corps of Engineers (Corps) projects. (1) If Reclamation 
determines that land receives its agricultural water from a Corps 
project, Reclamation will exempt that land from specific provisions of 
Federal reclamation law, including the RRA, unless:
    (i) Federal law explicitly designates, integrates, or incorporates 
that land into a Federal Reclamation project; or
    (ii) Reclamation provides project works for the control or 
conveyance of the agricultural water supply from the Corps project to 
that land.
    (2) Upon such determination, Reclamation will:
    (i) Notify the district of its exemption status;
    (ii) Require the district's agricultural water users to continue, 
under contracts made with Reclamation, to repay their share of 
construction, operation and maintenance, and contract administration 
costs of the Corps project allocated to conservation or irrigation 
storage; and
    (iii) At the request of the district delete provisions of the 
district's repayment or water service contract that imposes acreage 
limitation for those lands served by Corps projects.
    (b) Repayment of construction obligations. The acreage limitation 
provisions do not apply to land in a district after the district has 
repaid, in accordance with the district's contract with Reclamation, 
all obligated construction costs for project facilities.
    (1) Payments by periodic installments over the contract repayment 
term, as well as lump-sum and accelerated payments, if allowed by the 
district's contract with Reclamation, will qualify the district to 
become exempt.
    (2) If a district has a contract with the United States providing 
for individual landowner repayment of construction charges allocated to 
land, and the landowner has repaid all obligated construction costs 
allocated for that landowner's land, that landowner will become exempt 
from the acreage limitation provisions.
    (3) Upon payout Reclamation will:
    (i) Notify the district, and individual landowner in cases of 
individual landowner payout, of the exemption from the acreage 
limitation provisions;
    (ii) Notify the district or individual landowner that the exemption 
does not relieve the district or individual landowner of the obligation 
to continue to pay, on an annual basis, O&M costs applicable to the 
district or landowner;
    (iii) Upon request by the owner of land for which repayment has 
occurred, provide a certificate from Reclamation acknowledging that the 
land is free of the acreage limitation provisions of Federal 
reclamation law;
    (iv) Except as provided for in Sec. 426.19(e), no longer apply the 
certification and reporting requirements to the district, if the entire 
district is exempt, or to exempt landowners as specified in paragraph 
(b)(2) of this section; and
    (v) Consider on a case-by-case basis continuation of the exemption 
if additional construction funds for the project are requested.
    (c) Rehabilitation and Betterment loans. If Reclamation makes a 
Rehabilitation and Betterment loan (pursuant to the Rehabilitation and 
Betterment Act of October 7, 1949, as amended, 43 U.S.C. 504) to a 
project that was authorized under Federal reclamation law prior to the 
submittal of the loan request, by or for the district, Reclamation:
    (1) Considers the loan as a loan for maintenance, including 
replacements that cannot be financed currently;
    (2) Does not consider the loan in determining whether the district 
has discharged its obligation to repay the construction cost of project 
facilities used to make irrigation water available for delivery to land 
in the district; and
    (3) Will not allow such a loan to serve as the basis for 
reinstating acreage limitation provisions in a district that has 
completed payment of its construction obligation, nor serve as the 
basis for increasing the construction obligation of the district and 
thereby extending the period during which acreage limitation provisions 
will apply.
    (d) Temporary supplies of water. If Reclamation announces 
availability of temporary supplies of water resulting from an unusually 
large water supply,

[[Page 66821]]

not otherwise storable for project purposes, or from infrequent and 
otherwise unmanaged floodflows of short duration a district may request 
that Reclamation make such supplies available to excess land. However, 
such water deliveries must not have an adverse effect on other 
authorized project purposes. Upon approval of the district's request, 
Reclamation will notify the requesting district of the availability of 
the temporary supply of water under the following conditions:
    (1) The contract for the temporary supply of water will be for 1 
year or less in accordance with prior policies and practices;
    (2) The acreage limitation provisions will not be applicable to the 
temporary supply of water;
    (3) An applicable price for the water, if any, will be established; 
and
    (4) Such other conditions as Reclamation may include.
    (e) Isolated tracts. If a landowner requests that Reclamation 
determine that portions of his or her owned land are isolated tracts 
that can be farmed economically only if included in a farming operation 
that already exceeds the landowners ownership entitlement, and 
Reclamation makes such a determination, then Reclamation:
    (1) Will exempt such land from the ownership limitations of Federal 
reclamation law; and
    (2) Will assess the full-cost rate for any irrigation water 
delivered to the isolated tract that exceeds the landowner's nonfull-
cost entitlement.
    (f) Indian trust or restricted lands.
    (1) Indian trust or restricted lands are excluded from application 
of the acreage limitation provisions.
    (2) Indian tribes and tribal entities operating on Indian trust or 
restricted lands are excluded from application of the water 
conservation provisions.


Sec. 426.17  Small Reclamation projects.

    (a) Effect of the RRA on loan contracts made under the Small 
Reclamation Projects Act. (1) If a district entered into a loan 
contract under the Small Reclamation Projects Act of 1956 (43 U.S.C. 
422) (SRPA) on or after October 12, 1982, the contract is subject to 
the provisions of the SRPA, as amended by Section 223 of the RRA and as 
amended by Title III of Pub. L. 99-546.
    (2) If a district entered into an SRPA loan contract prior to 
October 12, 1982, and the district:
    (i) Did not amend the loan contract to conform to the SRPA, as 
amended by Section 223 of the RRA, prior to October 27, 1986, then the 
acreage provisions of the contract continue in effect, unless the 
contract is amended to conform to the SRPA as amended by section 307 of 
Pub. L. 99-546.
    (ii) Amended the loan contract to conform to the SRPA, as amended 
by Section 223 of the RRA, prior to October 27, 1986, the contract is 
subject to the increased acreage provisions provided in Section 223 of 
the RRA. Reclamation cannot alter, modify or amend any other provision 
of the SRPA loan contract without the consent of the non-Federal party.
    (b) Other sections of these regulations that apply to SRPA loans. 
No other sections of these regulations apply to SRPA loans, except as 
specified in Sec. 426.3(a)(3)(ii) and paragraph (d) of this section.
    (c) Effect of SRPA loans in determining whether a district has 
repaid its construction obligations on a water service or repayment 
contract. If a district has a water service or repayment contract in 
addition to an SRPA contract, Reclamation does not consider the SRPA 
loan:
    (1) In determining whether the district has discharged its 
construction cost obligation for the project facilities;
    (2) As a basis for reinstating acreage limitation provisions in a 
district that has completed payment of its construction cost 
obligation(s); or
    (3) As a basis for increasing the construction obligation of the 
district and extending the period during which acreage limitation 
provisions will apply to that district.
    (d) Districts that have an SRPA loan contract and a contract as 
defined in Sec. 426.2. If a district has an SRPA loan contract and a 
contract as defined in Sec. 426.2, the SRPA contract does not supersede 
the RRA requirements applicable to such contracts.


Sec. 426.18  Landholder information requirements.

    (a) Definition for purposes of this section:
    Irrigation season means the period of time between the district's 
first and last water delivery in any water year.
    (b) Who must provide information to Reclamation? All landholders 
and other parties involved in the ownership or operation of nonexempt 
land must provide Reclamation, as required by these regulations or upon 
request, any records or information, in a form suitable to Reclamation, 
deemed reasonably necessary to implement the RRA or other provisions of 
Federal reclamation law.
    (c) Required form submissions. (1) Landholders who are subject to 
the discretionary provisions must annually submit standard 
certification forms, except as provided in paragraph (l) of this 
section.
    (2) Landholders who make an irrevocable election must submit the 
standard certification forms with their irrevocable election in the 
year that they make the election.
    (3) Landholders who are subject to prior law must annually submit 
standard reporting forms, except as provided in paragraph (l) of this 
section.
    (4) Landholders who qualify under an exemption as specified in 
paragraph (g) of this section need not submit any forms.
    (d) Required information. Landholders must declare on the 
appropriate certification or reporting forms all nonexempt land that 
they hold directly or indirectly westwide and other information 
pertinent to their compliance with Federal reclamation law.
    (e) District receipt of forms and information. Landholders must 
submit the appropriate, completed form(s) to each district in which 
they directly or indirectly hold irrigation land.
    (f) Certification or reporting forms for wholly owned subsidiaries. 
The ultimate parent legal entity of a wholly owned subsidiary or of a 
series of wholly owned subsidiaries must file the required 
certification or reporting forms. The ultimate parent legal entity must 
disclose all direct and indirect landholdings of its subsidiaries as 
required on such forms.
    (g) Exemptions from submitting certification and reporting forms. 
(1) A landholder is exempt from submitting the certification and 
reporting forms only if:
    (i) The landholder's district has Category 1 status, as specified 
in paragraph (h) of this section, and the landholder is a:
    (A) Qualified recipient who holds a total of 240 acres westwide or 
less; or
    (B) Limited recipient or a prior law recipient who holds a total of 
40 acres westwide or less.
    (ii) The landholder's district has Category 2 status, as specified 
in paragraph (h) of this section, and the landholder is a:
    (A) Qualified recipient who holds a total of 80 acres westwide or 
less; or
    (B) Limited recipient or a prior law recipient who holds a total of 
40 acres westwide or less.
    (2) A wholly owned subsidiary is exempted from submitting 
certification or reporting forms, if its ultimate parent legal entity 
has properly filed such forms disclosing the landholdings of each of 
its subsidiaries.

[[Page 66822]]

    (3) In determining whether certification or reporting is required 
for purposes of this section:
    (i) Class 1 equivalency factors as determined in Sec. 426.11 shall 
not be used; and
    (ii) Indirect landholders need not count involuntarily acquired 
acreage designated as excess by the direct landowner.
    (h) District categorization. (1) For purposes of this section each 
district has Category 2 status, unless the following criteria have been 
met. If the district has met both criteria, it will be granted Category 
1 status.
    (i) The district has conformed by contract to the discretionary 
provisions; and
    (ii) The district is current in its financial obligations to 
Reclamation.
    (2) Reclamation considers a district current in its financial 
obligation if as of September 30, the district is current in its:
    (i) Financial obligations specified in its contract(s) with 
Reclamation; and
    (ii) Payment obligations established by the RRA, and these rules.
    (i) Application of Category 1 status. Once a district achieves 
Category 1 status, it will only be withdrawn if the Regional Director 
determines the district is not current in its financial obligations as 
specified in paragraph (h)(2) of this section. The withdrawal of 
Category 1 status will be effective at the end of the current water 
year and can be restored only as provided under paragraph (h) of this 
section. With the withdrawal of Category 1 status, the district will 
have a Category 2 status.
    (j) Submissions by landholders holding land in both a Category 1 
district and a Category 2 district. If a qualified recipient holds land 
in a Category 1 district, then the 240-acre forms threshold will be 
applicable in determining if the landholder must submit a certification 
form to that Category 1 district. If the same qualified recipient also 
holds land in a Category 2 district, then the 80-acre forms threshold 
will be applicable in determining if the landholder must submit a 
certification form to the Category 2 district.
    (k) Notification requirements for landholders whose ownership or 
leasing arrangements change after submitting forms. If a landholder's 
ownership or leasing arrangements change in any way:
    (1) During the irrigation season, the landholder must:
    (i) Notify the district office, either verbally or in writing 
within 30-calendar days of the change; and
    (ii) Submit new forms to all districts in which the landholder 
holds nonexempt land, within 60-calendar days of the change.
    (2) Outside of the irrigation season, then the landholder must 
submit new standard certification or reporting forms to all districts 
in which nonexempt land is held prior to any irrigation water 
deliveries following such changes.
    (l) Notification requirements for landholders whose ownership or 
leasing arrangements have not changed. If a landholder's ownership or 
leasing arrangements have not changed since last submitting a standard 
certification or reporting form, the landholder can satisfy the annual 
certification or reporting requirements by submitting a verification 
form instead of a standard form. On that form the landholder must 
verify that the information contained on the last submitted standard 
certification or reporting form remains accurate and complete.
    (m) Actions taken if required submission(s) is not made. 
    (1) If a landholder does not submit required certification or 
reporting form(s), then:
    (i) The district must not deliver, and the landholder is not 
eligible to receive and must not accept delivery of, irrigation water 
in any water year prior to submission of the required certification or 
reporting form(s) for that water year; and
    (ii) Eligibility will be regained only after all required 
certification or reporting forms are submitted by the landholder to the 
district.
    (2) If one or more part owners of a legal entity do not submit 
certification or reporting forms as required:
    (i) The entire entity will be ineligible to receive irrigation 
water until such forms are submitted; or
    (ii) If the documents forming the entity provide for the part 
owners' interest to be separable and alienable, then only that portion 
of the land attributable to the noncomplying part owners will be 
ineligible to receive irrigation water.
    (n) Actions taken by Reclamation if a landholder makes false 
statements on the appropriate certification or reporting forms. If a 
landholder makes a false statement on the appropriate certification or 
reporting form(s) Reclamation can prosecute the landholder pursuant to 
the following statement which is included in all certification and 
reporting forms:

    Under the provisions of 18 U.S.C. 1001, it is a crime punishable 
by 5 years imprisonment or a fine of up to $10,000, or both, for any 
person knowingly and willfully to submit or cause to be submitted to 
any agency of the United States any false or fraudulent statement(s) 
as to any matter within the agency's jurisdiction. False statements 
by the landowner or lessee will also result in loss of eligibility. 
Eligibility can only be regained upon the approval of the 
Commissioner.

    (o) Information requirements and Office of Management and Budget 
approval. The information collection requirements contained in this 
section have been approved by the Office of Management and Budget under 
44 U.S.C. 3501 et seq. and assigned control numbers 1006-0005 and 1006-
0006. The information is being collected to comply with Sections 206, 
224(c), and 228 of the RRA. These sections require that, as a condition 
to the receipt of irrigation water, each landholder in a district which 
is subject to the acreage limitation provisions of Federal reclamation 
law, as amended and supplemented by the RRA, will furnish to his or her 
district annually a certificate/report which indicates that he or she 
is in compliance with the provisions of Federal reclamation law. 
Completion of these forms is required to obtain the benefit of 
irrigation water. The information collected on each landholding will be 
summarized by the district and submitted to Reclamation in a form 
prescribed by Reclamation.
    (p) Protection of forms pursuant to the Privacy Act of 1974. The 
Privacy Act of 1974 (5 U.S.C. 552) protects the information submitted 
in accordance with certification and reporting requirements. As a 
condition to execution of a contract, Reclamation requires the 
inclusion of a standard contract article which provides for district 
compliance with the Privacy Act of 1974 and 43 CFR Part 2, Subpart D, 
in maintaining the landholder certification and reporting forms.


Sec. 426.19   District responsibilities.

    A district that delivers irrigation water to nonexempt land under a 
contract with the United States must:
    (a) Provide information to landholders concerning the requirements 
of Federal reclamation law and these regulations;
    (b) Provide Reclamation, as required by these regulations or upon 
request, and in a form suitable to Reclamation, records and information 
as Reclamation may deem reasonably necessary to implement the RRA and 
other provisions of Federal reclamation law;
    (c) Be responsible for payments to Reclamation of all appropriate 
charges specified in these regulations. Districts must collect the 
appropriate charges from each landholder based on the landholder's 
acreage limitation status, landholdings, and entitlements, and

[[Page 66823]]

must not average the costs over the entire district, unless the charges 
prove uncollectible from the responsible landholders;
    (d) Distribute, collect, and review landholder certification and 
reporting forms;
    (e) File and retain landholder certification and reporting forms. 
Districts must retain superseded landholder certification and reporting 
forms for 6 years; thereafter, districts may destroy such superseded 
forms, except:
    (1) Districts must keep on file the last fully completed standard 
certification or reporting form, in addition to the current 
verification form; or
    (2) If Reclamation specifically requests a district to retain 
superseded forms beyond 6 years.
    (f) Comply with the requirements of the Privacy Act of 1974, with 
respect to landholder certification and reporting forms;
    (g) Annually summarize information provided on landholder 
certification and reporting forms on separate summary forms provided by 
Reclamation and submit these forms to Reclamation on or before the date 
established by the appropriate regional director;
    (h) Withhold deliveries of irrigation water to any landholder not 
eligible to receive irrigation water under the certification or 
reporting requirements or any other provision of Federal reclamation 
law and these regulations; and
    (i) Return to Reclamation, for deposit as a general credit to the 
Reclamation fund, all revenues received from the delivery of water to 
ineligible land. For purposes of these regulations only, this does not 
include revenues from any charges that may be assessed by the district 
to cover district operation, maintenance, and administrative expenses.


Sec. 426.20   Assessment of administrative costs.

    (a) Assessment of administrative costs for delivery of water to 
ineligible land. Reclamation will assess a district administrative 
costs as described in paragraph (e) of this section if the district 
delivers irrigation water to land that was ineligible because the 
landholders did not submit certification or reporting forms prior to 
the receipt of irrigation water in accordance with Sec. 426.18; or to 
ineligible excess land as provided in Sec. 426.12.
    (1) Reclamation will apply the assessment on a yearly basis in each 
district for each landholder that received irrigation water in 
violation of Sec. 426.18, or for each landholder that received 
irrigation water on ineligible land as specified above.
    (2) In applying the assessment to legal entities, compliance by an 
entity will be treated independently from compliance by its part owners 
or beneficiaries.
    (3) The assessment in paragraph (a) of this section will be applied 
independently of the assessment specified in paragraph (b) of this 
section.
    (b) Assessment of administrative costs when form corrections are 
not made. Reclamation will assess a district for the administrative 
costs described in paragraph (e) of this section, unless the district 
provides Reclamation with requested reporting or certification form 
corrections within 60-calendar days of the date of Reclamation's 
written request. If Reclamation receives the required corrections 
within this 60-calendar day time period, Reclamation will consider the 
requirements of Sec. 426.18 satisfied.
    (1) Reclamation will apply the assessment on a yearly basis in each 
district for each landholder that received irrigation water and for 
whom the district does not provide corrected forms within the 
applicable 60-calendar day time period.
    (2) In applying the assessment to legal entities, compliance by an 
entity will be treated independently from compliance by its part owners 
or beneficiaries.
    (3) The assessment in paragraph (b) of this section will be applied 
independently of the assessment specified in paragraph (a) of this 
section.
    (c) Party responsible for paying assessments. Districts are 
responsible for payment of Reclamation assessments described under 
paragraphs (a) and (b) of this section.
    (d) Disposition of assessments. Reclamation will deposit to the 
general fund of the United States Treasury, as miscellaneous receipts, 
administrative costs assessed and collected under paragraphs (a) and 
(b) of this section.
    (e) Amount of the assessment. The administrative costs assessment 
required under paragraphs (a) and (b) of this section is set at $260. 
Reclamation will review the associated costs at least once every 5 
years, and will adjust the assessment amount, if needed, to reflect new 
cost data. Notice of the revised assessment for administrative costs 
will be published in the Federal Register in December of the year the 
data are reviewed.


Sec. 426.21   Interest on underpayments.

    (a) Definition of underpayment. For the purposes of this section 
underpayment means the difference between what a landholder owed for 
the delivery of irrigation water under Federal reclamation law and what 
that landholder paid.
    (b) Collection of interest on underpayments. If a landholder has 
incurred an underpayment, Reclamation will collect from the appropriate 
district such underpayment with interest. Interest accrues from the 
original payment due date until the district pays the amount due. The 
original payment due date is the date the district should have paid the 
United States for water delivered to the landholder.
    (c) Underpayment interest rate. The Secretary of the Treasury 
determines the interest rate charged the district based on the weighted 
average yield of all interest-bearing marketable issues sold by the 
Department of the Treasury during the period of underpayment.


Sec. 426.22   Public participation.

    (a) Notification of contract actions. Except for proposed contracts 
having a duration of 1 year or less for the sale of surplus water or 
interim irrigation water, Reclamation will:
    (1) Provide notice of proposed irrigation or amendatory irrigation 
contract actions 60-calendar days prior to contract execution by 
publishing announcements in general circulation newspapers in the 
affected area;
    (2) Issue announcements in the form of news releases, legal 
notices, official letters, memoranda, or other forms of written 
material; and
    (3) Directly notify individuals and entities who made a timely 
written request for such notice to the appropriate Reclamation regional 
or local office.
    (b) Notification of modification of a proposed contract. In the 
event that modifications are made to a proposed contract the regional 
director must:
    (1) Provide copies of revised proposed contracts to all parties who 
requested copies of the proposed contract in response to the initial 
notice; and
    (2) Determine whether or not to republish the notice or to extend 
the comment period. The regional director must consider, among other 
factors:
    (i) The significance of the impact(s) of the modification to 
possible affected parties; and
    (ii) The interest expressed by the public over the course of 
contract negotiations.
    (c) Information that Reclamation will include in published 
announcements. Each published announcement will include, as 
appropriate:
    (1) A brief description of the proposed contract terms and 
conditions being negotiated;

[[Page 66824]]

    (2) Date, time, and place of meetings, workshops, or hearings;
    (3) The address and telephone number to which inquiries and 
comments may be addressed to Reclamation; and
    (4) The period of time during which Reclamation will accept 
comments.
    (d) Public availability of proposed contracts. Anyone can get 
copies of a proposed contract from the appropriate regional director or 
his or her designated public contact when the proposed contracts become 
available for review and comment, as specified in the published 
announcement.
    (e) Opportunities for public participation.  (1) Reclamation can 
provide, as appropriate: meetings, workshops, or hearings to provide 
local information. Advance notice of meetings, workshops, or hearings 
will be provided to those parties who make timely written request for 
such notice. Request for notice of meetings, workshops, or hearings 
should be sent to the appropriate Reclamation regional or local office.
    (2) Reclamation or the district can invite the public to observe 
any contract proceedings.
    (3) All public participation procedures will be coordinated with 
those involved with National Environmental Policy Act compliance, if 
Reclamation determines that the contract action may or will have 
``significant'' environmental effects.
    (f) Individuals authorized to negotiate the terms of contract 
proposals. Only persons authorized to act on behalf of the district may 
negotiate the terms and conditions of a specific contract proposal.
    (g) Agency use of comments submitted during the period provided for 
comment or made at hearings. (1) Reclamation will review and summarize 
for use by the contract approving authority, testimony presented at any 
public hearing or any written comments submitted to the appropriate 
Reclamation officials at locations and within the comment period, as 
specified in the advance published announcement.
    (2) Reclamation will make available to the public all written 
correspondence regarding proposed contracts under the terms and 
procedures of the Freedom of Information Act (5 U.S.C. 552), as 
amended.


Sec. 426.23  Recovery of operation and maintenance (O&M) costs.

    (a) General. All new, amended, and renewed contracts shall provide 
for payment of O&M costs as specified in this section.
    (b) Amount of O&M costs a district must pay if it executes a new or 
renewed contract. If a district executes a new or renewed contract 
after October 12, 1982, then that district must pay all of the O&M 
costs that Reclamation allocates to irrigation.
    (c) Amount of O&M costs a district must pay if it amends its 
contract to conform to the discretionary provisions. If a district has 
a contract executed prior to October 12, 1982, and the district amends 
the contract after October 12, 1982, as provided for in 
Sec. 426.3(a)(2) to conform to the discretionary provisions, then the 
following applies:
    (1) The district must pay all of the O&M costs that Reclamation 
allocates to irrigation;
    (2) If in the year the amendment is executed, the district's 
contract rate was more than the O&M costs allocated to the district in 
that year then that positive difference at the time of the contract 
amendment must continue to be factored into the contract rate and 
annually paid to the United States. This would be in addition to any 
adjusted O&M cost that results from paragraph (c)(1) of this section. 
The positive difference would be factored into the contract rate for 
the remainder of the term of the contract; and
    (3) The district will not be required to pay an increased amount 
toward the construction costs of a project as a condition of the 
district's agreeing to a contract amendment pursuant to paragraph (c) 
of this section.
    (d) Amount of O&M cost a district must pay if it amends its 
contract to provide supplemental or additional benefits. If a district 
amends its contract after October 12, 1982, to provide supplemental or 
additional benefits, as provided for in Sec. 426.3(a)(3), then the 
following must be complied with:
    (1) The district must pay all of the O&M costs that Reclamation 
allocates to irrigation;
    (2) If in the year the amendment is executed, the district's 
contract rate was more than the O&M costs allocated to the district in 
that year then that positive difference at the time of the contract 
amendment must continue to be factored into the contract rate and 
annually paid to the United States. This would be in addition to any 
adjusted O&M cost that results from paragraph (d)(1) of this section. 
The positive difference would be factored into the contract rate for 
the remainder of the term of the contract; and
     (3) The district must pay any increases in the amount paid 
annually toward the construction costs of a project that the United 
States requires the district to pay as a condition of agreeing to 
provide the district with supplemental and additional benefits.
     (e) Amount of O&M a district pays under a prior contract. For a 
district whose prior contract was executed prior to October 12, 1982, 
the district must pay all of the O&M costs allocated by Reclamation to 
irrigation unless the contract specifically provides contrary terms.
    (f) Amount of O&M that Reclamation charges an irrevocable elector. 
(1) Regardless of any terms to the contrary within a prior contract 
with a district, a landholder who makes an irrevocable election, as 
provided for in Sec. 426.3(f) must pay, annually, his or her 
proportionate share of all O&M costs allocated by Reclamation to 
irrigation. The irrevocable elector's proportionate share is based upon 
the ratio of:
     (i) The amount of land in the district held by the irrevocable 
elector that received irrigation water to the total amount of land in 
the district that received irrigation water; or
     (ii) The amount of irrigation water in the district received by 
the irrevocable elector to the total amount of irrigation water that 
the district delivered.
     (2) The district(s) where the irrevocable elector's landholding is 
located must collect from the irrevocable elector an amount equal to 
the irrevocable elector's proportionate share of all O&M costs 
allocated by Reclamation to irrigation and the following apply:
     (i) If in the year the election is executed, the district's 
contract rate was more than the O&M costs allocated to the district in 
that year, then that positive difference at the time of the contract 
amendment must continue to be factored into the contract rate. This 
would be in addition to any adjusted O&M cost that results from 
paragraph (f)(1) of this section. The positive difference would be 
factored into the contract rate for the remainder of the term of the 
contract; and
     (ii) Such collections must be forwarded annually to the United 
States.
     (g) Amount of O&M that Reclamation charges if a landholder is 
subject to full- cost pricing. In a district subject to prior law, if a 
landholder is subject to full-cost pricing the district must ensure 
that all O&M costs are included in any full-cost assessment, regardless 
of whether the landholder is subject to the discretionary provisions. 
The revenues from such full-cost assessments must be collected and 
submitted to the United States.

[[Page 66825]]

Sec. 426.24  Reclamation decisions and appeals.

     (a) Reclamation decisions.  (1) Decisionmaker for Reclamation's 
final determinations. The appropriate regional director makes any final 
determination that these regulations require or authorize. If 
Reclamation's final determination is likely to involve districts, or 
landholders with landholdings located in more than one region, the 
Commissioner designates one regional director to make that final 
determination.
     (2) Notice to affected parties. The appropriate regional director 
will transmit any final determination to any district and landholder, 
as appropriate, whose rights and interests are directly affected.
     (3) Effective date for regional director's final determinations. A 
regional director's decisions will take effect the day after the 
expiration of the period during which a person adversely affected may 
file a notice of appeal unless a petition for stay is filed together 
with a timely notice of appeal.
     (b) Appeal of final determinations. (1) Appeal Submittal. Any 
district or landholder whose rights and interests are directly affected 
by a regional director's final determination can submit a written 
notice of appeal. Such notice of appeal must be submitted to the 
Commissioner of Reclamation within 30-calendar days from the date of 
the regional director's final determination.
     (2) Submittal of supporting information. The affected party will 
have 60-calendar days from the date that the regional director issues a 
final determination to submit a supporting brief or memorandum to the 
Commissioner. The Commissioner may extend the time for submitting a 
supporting brief or memorandum, if:
    (i) the affected party submits a request to the Commissioner in a 
timely manner;
    (ii) the request includes the reason why additional time is needed; 
and
    (iii) the Commissioner determines the appellant has shown good 
cause for such an extension and the extension would not prejudice 
Reclamation.
     (3) Requests for stay of the final determination pending appeal. 
(i) The Commissioner will determine whether to stay a regional 
director's final determination within 30 days after receiving a 
properly filed petition for stay if the requesting party:
    (A) submits a request for stay in writing to the Commissioner, 
with, or in advance of, the notice of appeal, and states the grounds 
upon which the party requests the stay; and
    (B) Demonstrates that the harm that a district or landholder would 
suffer if the Commissioner does not grant the stay outweighs the 
interest of the United States in having the final determination take 
effect pending appeal.
    (ii) A decision, or that portion of the decision, for which a stay 
is not granted will become effective immediately after the Commissioner 
denies or partially denies the petition for stay, or fails to act 
within 30 days after receiving the request.
    (iii) A Commissioner's decision on a petition for a stay or any 
other Commissioner decision is appealable.
    (c) Appeal of Commissioner's decision. (1) Appeal to the Office of 
Hearing and Appeals. A party can appeal the Commissioner's decision to 
the Secretary by writing to the Director, Office of Hearings and 
Appeals (OHA), U.S. Department of the Interior. For an appeal to be 
timely, OHA must receive the appeal within 30-calendar days from the 
date of mailing of the Commissioner's decision.
    (2) Rules that govern appeals to OHA. 43 CFR Part 4, Subpart G, and 
other provisions of 43 CFR Part 4, where applicable, govern the OHA 
appeal process, except for the accrual of underpayment interest as 
specified in paragraph (e) of this section.
    (d) Effective date of an appeal decision. Reclamation will apply 
decisions made by the Commissioner or by OHA under paragraphs (b) and 
(c) of this section as of the date of the violation or other problem 
that was addressed in the regional director's final determination. If, 
during the appeal process, irrigation water has been delivered to land 
subsequently found to be ineligible, for other than RRA forms submittal 
violations, the compensation rate may be applied to such deliveries 
retroactively.
    (e) Accrual of interest on underpayments during appeal. Interest on 
any underpayments, as provided in Sec. 426.21, continues to accrue 
during an appeal of a regional director's final determination, an 
appeal of the Commissioner's decision, or judicial review of final 
agency action. Underpayment interest accrual will continue even during 
a stay under paragraphs (b)(4) or (c)(3) of this section.
    (f) Status of appeals made prior to the effective date of these 
regulations. (1) Appeals to the Commissioner of a regional director's 
final determination which were decided by the Commissioner or his or 
her delegate prior to the effective date of these regulations are 
hereby validated.
    (2) Appeals to the Commissioner of final determinations made by a 
regional director and appeals to OHA, which are pending on appeal as of 
the effective date of these regulations will be processed and decided 
in accordance with the regulations in effect immediately prior to the 
effective date of these regulations.
    (g) Addresses. All requests for stays, appeals, or other 
communications to the United States under this section must be 
addressed as follows:
    (1) Commissioner, Bureau of Reclamation, 1849 C Street N.W., MS-
7060-MIB, Washington, D.C. 20240, telephone (202) 208-4157.
    (2) Director, Office of Hearings and Appeals, Department of the 
Interior; 4015 Wilson Boulevard, Room 1103; Ballston Tower No. 3; 
Arlington, VA 22203.


Sec. 426.25  Reclamation audits.

    Reclamation will conduct reviews of a district's administration and 
enforcement of and landholder compliance with Federal reclamation law 
and these regulations. These reviews may include, but are not limited 
to:
    (a) Water district reviews;
    (b) In-depth reviews; and
    (c) Audits.


Sec. 426.26  Severability.

    If any provision of these regulations or the application of these 
rules to any person or circumstance is held invalid, then the sections 
of these rules or their applications which are not held invalid will 
not be affected.
    2. Part 427 is added as follows:

PART 427--WATER CONSERVATION RULES AND REGULATIONS


Sec. 427.1  Water conservation.

    (a) In general. The Secretary shall encourage the full 
consideration and incorporation of prudent and responsible water 
conservation measures in all districts and for the operations by non-
Federal recipients of irrigation and municipal and industrial (M&I) 
water from Federal Reclamation projects.
    (b) Development of a plan. Districts that have entered into 
repayment contracts or water service contracts according to Federal 
reclamation law or the Water Supply Act of 1958, as amended (43 U.S.C. 
390b), shall develop and submit to the Bureau of Reclamation a water 
conservation plan which contains definite objectives which are 
economically feasible and a time schedule for meeting those objectives. 
In the event the contractor also has provisions for the supply of M&I 
water under the authority of the

[[Page 66826]]

Water Supply Act of 1958 or has invoked a provision of that act, the 
water conservation plan shall address both the irrigation and M&I water 
supply activities.
    (c) Federal assistance. The Bureau of Reclamation will cooperate 
with the district, to the extent possible, in studies to identify 
opportunities to augment, utilize, or conserve the available water 
supply.

    Authority: 5 U.S.C. 301; 5 U.S.C. 553; 16 U.S.C. 590y et seq.; 
31 U.S.C. 9701; and 32 Stat. 388 and all acts amendatory thereof or 
supplementary thereto including, but not limited to, 43 U.S.C. 390b, 
43 U.S.C. 390jj, 43 U.S.C. 422a et seq., and 43 U.S.C. 523.

Amendments Effective January 1, 1997

PART 426--RULES AND REGULATIONS FOR PROJECTS GOVERNED BY FEDERAL 
RECLAMATION LAW

     1. The authority citation for part 426 continues to read as 
follows:

    Authority: Administrative Procedure Act, 60 Stat. 237, 5 U.S.C. 
552; the Reclamation Reform Act of 1982, Pub. L. 97-293, title II, 
96 Stat. 1263; as amended by the Omnibus Budget Reconciliation Act 
of 1987, Pub. L. 100-203; and the Reclamation Act of 1902, as 
amended and supplemented 32 Stat. 388, (43 U.S.C. 371 et seq.).

    2. Effective January 1, 1997, Sec. 426.10 is amended by removing 
and reserving paragraph (g) and adding paragraphs (n) through (q) to 
read as follows:


Sec. 426.10  Information requirements.

* * * * *
    (n) Exemptions from submitting certification and reporting forms. 
(1) A landholder is exempt from submitting the certification and 
reporting forms only if:
    (i) The landholder's district has Category 1 status, as specified 
in paragraph (o) of this section, and the landholder is a:
    (A) Qualified recipient who holds a total of 240 acres westwide or 
less; or
    (B) Limited recipient or a prior law recipient who holds a total of 
40 acres westwide or less.
    (ii) The landholder's district has Category 2 status, as specified 
in paragraph (o) of this section, and the landholder is a:
    (A) Qualified recipient who holds a total of 80 acres westwide or 
less; or
    (B) Limited recipient or a prior law recipient who holds a total or 
40 acres westwide or less.
    (2) A wholly owned subsidiary is exempted from submitting 
certification or reporting forms, if its ultimate parent legal entity 
has properly filed such forms disclosing the landholdings of each of 
its subsidiaries.
    (3) In determining whether certification or reporting is required 
for purposes of this section:
    (i) Class 1 equivalency factors as determined in Sec. 426.11 shall 
not be used; and
    (ii) Indirect landholders need not count involuntarily acquired 
acreage designated as excess by the direct landowner.
    (o) District categorization. For purposes of this section each 
district has Category 2 status, unless the following criteria have been 
met. If the district has met both criteria, it will be granted Category 
1 status.
    (i) The district has conformed by contract to the discretionary 
provisions; and
    (ii) The district is current in its financial obligations to 
Reclamation.
    (2) Reclamation considers a district current in its financial 
obligation if as of September 30, the district is current in its:
    (i) Financial obligations specified in its contract(s) with 
Reclamation; and
    (ii) Payment obligations established by the RRA, and these rules.
    (p) Application of Category 1 status. Once a district achieves 
Category 1 status, it will not be withdrawn unless the Regional 
Director determines the district is not current in its financial 
obligations as specified in paragraph (o)(2) of this section. The 
withdrawal of Category 1 status will be effective at the end of the 
current water year and can be restored only as provided under paragraph 
(o) of this section. With the withdrawal of Category 1 status, the 
district will have a Category 2 status with the associated 80-acre RRA 
forms submittal exemption for qualified recipients.
    (q) Submissions by landholders holding land in both a Category 1 
district and a Category 2 district. If a qualified recipient holds land 
in a Category 1 district, then the 240-acre forms threshold will be 
applicable in determining if the landholder must submit a certification 
form to that Category 1 district. If the same qualified recipient also 
holds land in a Category 2 district, then the 80-acre forms threshold 
will be applicable in determining if the landholder must submit a 
certification form to the Category 2 district.


Sec. 426.10  [Amended]

    3. Effective January 1, 1997, in Sec. 426.10(e), the reference to 
``paragraphs (f) and (g) of this section'' is revised to read 
``paragraphs (f) and (n) of this section.''
[FR Doc. 96-31904 Filed 12-13-96; 10:31 am]
BILLING CODE 4310-94-P