Water Subsidies: Impact of Higher Irrigation Rates on Central Valley
Project Farmers (Chapter Report, 04/19/94, GAO/RCED-94-8).

Farmers have received federally subsidized water from the Interior
Department's Central Valley Project for up to 40 years under fixed-rate
water service contracts.  The fixed rates, however, no longer function
as intended; they do not cover Interior's operating costs and have not
been enough to repay virtually any of the $1 billion in construction
costs owed.  Moreover, environmental and water use problems have been
linked to the irrigation carried out under these contracts.  Studies by
agricultural economists suggest that higher water prices would increase
irrigation efficiency and conservation, thereby reducing environmental
degradation caused by irrigation and freeing up water now used for
irrigation for other uses.  This report (1) estimates the impact on farm
profits of the higher irrigation rates mandated under 1992 legislation
and of further rate increase under various scenarios, (2) estimates the
financial benefits to the federal government of increasing the
irrigation rates, and (3) determines how farmers can mitigate the impact
of higher rates.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-94-8
     TITLE:  Water Subsidies: Impact of Higher Irrigation Rates on 
             Central Valley Project Farmers
      DATE:  04/19/94
   SUBJECT:  Water supply management
             Environmental monitoring
             Agricultural programs
             Water resources development
             Cost analysis
             Utility rates
             Water resources conservation
             Profits
             Agricultural production
             Farm subsidies
IDENTIFIER:  California
             Central Valley Project (CA)
             Sacramento Valley (CA)
             San Joaquin Valley (CA)
             California State Water Project
             
**************************************************************************
* This file contains an ASCII representation of the text of a GAO        *
* report.  Delineations within the text indicating chapter titles,       *
* headings, and bullets are preserved.  Major divisions and subdivisions *
* of the text, such as Chapters, Sections, and Appendixes, are           *
* identified by double and single lines.  The numbers on the right end   *
* of these lines indicate the position of each of the subsections in the *
* document outline.  These numbers do NOT correspond with the page       *
* numbers of the printed product.                                        *
*                                                                        *
* No attempt has been made to display graphic images, although figure    *
* captions are reproduced. Tables are included, but may not resemble     *
* those in the printed version.                                          *
*                                                                        *
* A printed copy of this report may be obtained from the GAO Document    *
* Distribution Facility by calling (202) 512-6000, by faxing your        *
* request to (301) 258-4066, or by writing to P.O. Box 6015,             *
* Gaithersburg, MD 20884-6015. We are unable to accept electronic orders *
* for printed documents at this time.                                    *
**************************************************************************


Cover
================================================================ COVER


Report to the Chairman, Subcommittee on Water and Power, Committee on
Energy and Natural Resources, U.S.  Senate

April 1994

WATER SUBSIDIES - IMPACT OF HIGHER
IRRIGATION RATES ON CENTRAL VALLEY
PROJECT FARMERS

GAO/RCED-94-8

Water Subsidies


Abbreviations
=============================================================== ABBREV

  ASCS - Agricultural Stabilization and Conservation Service
  CVP - Central Valley Project
  GAO - General Accounting Office
  GCID - Glenn-Colusa Irrigation District
  O&M - Operation and Maintenance
  RRA - Reclamation Reform Act

Letter
=============================================================== LETTER


B-252899

April 19, 1994

The Honorable Bill Bradley
Chairman, Subcommittee on Water and Power
Committee on Energy and Natural Resources
United States Senate

Dear Mr.  Chairman: 

This report responds to your request that we estimate the impacts on
farmers' profits of the higher irrigation rates mandated in the 1992
Central Valley Project Improvement Act (P.L.  102-575) and of further
rate increases under various scenarios, estimate the financial
benefits to the federal government of increasing irrigation rates,
and determine the ways farmers can mitigate the impacts of increased
rates. 

As arranged with your office, unless you publicly announce its
contents earlier, we plan no further distribution of this report
until 30 days after the date of this letter.  At that time, we will
send copies to the Secretary of the Interior; the Commissioner,
Bureau of Reclamation; the Director, Office of Management and Budget;
and other interested parties.  We will also make copies available to
others on request. 

This report was prepared under the direction of James Duffus III,
Director, Natural Resources Management Issues, who can be reached at
(202) 512-7756 if you or your staff have any questions.  Major
contributors to this report are listed in appendix V. 

Sincerely yours,

Keith O.  Fultz
Assistant Comptroller General


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

Irrigators within the Department of the Interior's Bureau of
Reclamation's Central Valley Project (CVP) have received federally
subsidized water for up to 40 years under fixed-rate water service
contracts.  However, the fixed rates no longer function as intended;
they do not cover the Bureau's operation and maintenance costs and
have not been sufficient to repay virtually any of the $1 billion in
the construction costs owed.  Moreover, environmental and water use
problems have been associated with irrigation practices carried out
under these contracts.  Studies by agricultural economists suggest
that higher water prices would increase irrigation efficiency and
conservation, thereby reducing environmental degradation caused by
irrigation and freeing up water currently used for irrigation for
other uses.  However, raising irrigation rates is a complex issue
that requires the consideration of such factors as the potential
impacts on farmers and local agricultural economies. 

The Chairman of the Subcommittee on Water and Power, Senate Committee
on Energy and Natural Resources, asked GAO to (1) estimate the
impacts on farmers' profits of the higher irrigation rates mandated
in the 1992 CVP Improvement Act and of further rate increases under
various scenarios, (2) estimate the financial benefits to the federal
government of increasing the irrigation rates, and (3) determine the
ways farmers can mitigate the impacts of increased rates.  To
estimate the impacts on farmers' profits, GAO created budgets for two
hypothetical farm operations designed to represent the major
commodities grown in farms in the two major regions of the Central
Valley--the Sacramento Valley and the San Joaquin Valley.  The
budgets were based on a computer program and production costs
developed by the University of California at Davis.  Other
information was provided by cooperative extension service officials,
agricultural economists, and farmers in two major irrigation
districts.  The budgets do not consider the effect of other possible
actions that could affect water availability, such as reallocations
of water from irrigation that may occur under the CVP Improvement
Act, the Endangered Species Act, or other environmental requirements. 
The scope of GAO's work did not include an examination of the effect
of higher irrigation rates on local economies. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

Located in California's Central Valley Basin, the CVP is the Bureau's
largest water resource project.  Historically, the CVP has provided
about 6 million acre-feet--or about 2 trillion gallons--of water each
year for irrigation and has helped make California's Central Valley
one of the most productive agricultural areas in the world.  The
CVP's water is marketed by the Secretary of the Interior under
long-term contracts authorized by the Reclamation Project Act of 1939
and supplied to state-established water and irrigation districts for
irrigation and other purposes.  The Bureau has begun renewing
contracts as they expire.  Over one-fourth of the remaining contracts
will expire by the end of 1996. 

CVP irrigation rates vary and are intended to repay a share of the
capital costs associated with the construction of irrigation
facilities and operation and maintenance costs owed the federal
government.  Districts charge farmers distribution costs as well. 
Farmers not receiving CVP water pay a wide variety of rates,
depending on the source of the water.  Federal irrigation rates are
considered to be subsidized because they do not cover interest on the
federal government's costs incurred in constructing the irrigation
component of project facilities.  As water service contracts continue
to be renewed in coming years, a 1986 statutory requirement provides
that the renewed contract rates--referred to as cost-of-service
rates--provide for the repayment of capital costs by the year 2030
and full payment of operation and maintenance costs each year.  The
rates will not cover interest payments on capital costs, however.  A
full-cost rate for all water users would recover both the capital and
interest costs but would require changes in reclamation law. 

In an August 1991 report,\1 GAO documented significant environmental
and water use problems associated with irrigation practices carried
out under water service contracts in the CVP.  GAO recommended that
the Congress amend reclamation law to allow contract renewals for
lesser quantities of water and shorter periods of time.  GAO also
recommended that the Secretary of the Interior determine the impacts
of renewing contracts and demonstrate the extent to which problems
can be mitigated by changes in contract terms, including market
mechanisms such as raising rates and easing water transfers. 

In October 1992, the Congress passed the CVP Improvement Act.  The
act raises irrigation rates through a tiered rate structure that
charges up to the full-cost rate for only the final 20 percent of the
water received.  Revenues raised from higher irrigation rates will be
placed in a restoration fund to mitigate environmental damage in the
Central Valley.  If fund receipts are not sufficient to meet the
amounts required under the act, the Secretary will assess a fee of up
to $6 per acre-foot on irrigation water to help make up the
difference.  The act also requires environmental impact analysis
before renewing long-term contracts, limits contract terms to 25
years, reallocates water to environmental purposes, and allows water
transfers to new uses.  GAO currently is analyzing issues associated
with water transfers in 17 western states and will report these
findings separately in an upcoming report.\2


--------------------
\1 Reclamation Law:  Changes Needed Before Water Service Contracts
Are Renewed (GAO/RCED-91-175, Aug.  22, 1991). 

\2 Water Transfers:  More Efficient Water Use Possible If Problems
Are Addressed, (GAO/RCED-94-35). 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

Increased CVP irrigation rates would negatively affect irrigators and
positively affect the U.S.  Treasury and water use efficiency.  The
rate increases mandated in the CVP Improvement Act reduced farm
profits for GAO's hypothetical San Joaquin Valley farm by 11 percent
and reduced the profits of the Sacramento Valley farm by 4.3 percent. 

Increasing the irrigation rates to provide for a 100-percent increase
in the repayment of capital costs would decrease profits by a total
of 18.3 percent for the San Joaquin farm and 5.7 percent for the
Sacramento farm compared with profits at the cost-of-service rates. 
Charging farmers the costs to fully repay all capital costs with
interest would decrease profits by a total of 34 and 6.9 percent for
the San Joaquin and Sacramento farms, respectively.  Both farms would
remain profitable under all simulated rate increases. 

Each farm using CVP water is unique, and actual impacts of higher
irrigation rates on CVP farms depend on farmers' individual
circumstances.  For example, economic studies GAO reviewed indicate
that reduced profits will be expressed in decreased land values and
therefore decreased land rental costs.  Decreased rental costs will
partially offset increased water costs.  However, those who own land
will lose some equity in their landholdings.  Some farmers with low
profits or with high debt and reduced equity in their land may not be
able to maintain viable farms.  Information from agricultural lenders
in California indicates that the effect on California's overall farm
economy is not likely to be severe.  Despite higher irrigation rates
and water shortages during the recent drought, the overall farm
economy remained strong.  Other economic variables, such as interest
rates, the export market, and the value of the U.S.  dollar, affected
the farm economy more than water rates. 

If irrigation rates were increased beyond the requirements of the CVP
Improvement Act, the CVP's outstanding debt would be retired more
quickly and federal revenues would be increased.  If irrigators paid
the full-cost rate, the present value of the amount repaid would be
$800 million more than would have been repaid without interest
payments. 

Studies completed by economists at California universities and
lending institutions and GAO's discussions with farmers, agricultural
economists, water district officials, and others indicate that
increased irrigation rates give farmers incentive to change their
farm management practices and reduce water use to mitigate increased
water costs.  Farmers may improve their irrigation practices, adopt
more efficient irrigation technologies, or change crops to adjust to
higher water costs and conserve water. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      INCREASED WATER RATES WILL
      REDUCE FARM PROFITS, BUT THE
      HYPOTHETICAL FARMS REMAIN
      PROFITABLE
-------------------------------------------------------- Chapter 0:4.1

To determine the impact of increased CVP irrigation rates on CVP farm
profits, GAO simulated farm operations for two hypothetical farms. 
One farm reflects 1990 water rates and production data for cotton,
wheat, tomatoes, and garlic--commonly grown commodities in the San
Joaquin Valley.  The other farm reflects 1990 data for rice--the
primary crop grown in the Sacramento Valley.  Farm profits were
measured without adjusting for possible changes in farming practices
farmers might make in response to higher irrigation rates or changes
in land values associated with higher irrigation rates.  Profits were
also measured without considering possible reallocations of water
from irrigation to other uses. 

The budgets showed that CVP irrigation costs represented from 1 to
6.6 percent of the total cost of crop production for these farms. 
The rate increases mandated in the CVP Improvement Act, including the
maximum $6 per acre-foot charge, reduced farm profits for GAO's
hypothetical San Joaquin Valley farm by 11 percent, from $248,411 to
$221,406, and reduced the profits of the Sacramento Valley farm by
4.3 percent, from $49,882 to $47,732.  The impacts on the Sacramento
farm are less than those on the San Joaquin farm primarily because
the Sacramento farm is less dependent on CVP water. 

GAO then increased the capital portion of irrigation rates in
25-percent increments, up to 100 percent.  When the capital portions
of the rates were increased 100 percent and the $6 per acre-foot
charge was included, profits decreased by a total of 18.3 percent for
the San Joaquin Valley farm and 5.7 percent for the Sacramento Valley
farm from the profits with the cost-of-service rates. 

GAO also increased the irrigation rates up to the full cost and
included the $6 charge--the maximum rate increase examined.  The San
Joaquin Valley farm's profits decreased by 34 percent, to $160,911,
and the Sacramento Valley farm's profits decreased by 6.9 percent, to
$46,436 under this scenario.  Both hypothetical farms would remain
profitable under all scenarios. 

Each farm using CVP water is unique, and the actual impacts on CVP
farms depend on farmers' individual circumstances.  For example, the
economic literature GAO reviewed indicates that for farmers who lease
land, reductions in land rental costs will partially offset the
increase in water costs.  However, those who own land will lose some
equity in their landholdings as a result of decreased land values,
and some farmers with high debt and reduced equity or with low
profits may not be able to maintain viable farms.  Reduced equity
reduces farmers' borrowing capacity for loans.  Local economies that
rely on farmers may be harmed.  The effect on California's overall
farm economy is not likely to be severe, however.  Information from
agricultural lenders on farm profits and loan losses indicates that
during California's drought from 1987 to 1992, farmers encountered
water shortages and higher water costs, but such costs had little
effect on farm loan losses.  While higher water costs have affected
farm profits and may be significant for individual farmers, the
strong farm economy during the drought indicates that higher costs
have not affected the farm economy overall as much as other key
economic variables such as interest rates and commodity prices. 


      FEDERAL REVENUES COULD BE
      SIGNIFICANTLY ENHANCED
-------------------------------------------------------- Chapter 0:4.2

The capital portion of the irrigation rates is used for repaying the
estimated $1 billion in capital costs that are allocated to be repaid
by CVP irrigators.  Under a 1986 statutory requirement, the Secretary
of the Interior is to adjust the rates if they are not adequate to
recover capital costs by the year 2030. 

GAO analyzed the effect on federal revenues of raising the capital
portion of the cost-of-service rates in 25-percent increments, up to
100 percent, assuming full contract delivery levels continue. 
Depending on the increases, the irrigators' allocated capital costs
could be repaid 4 to 12 years earlier.  Therefore, the present value
of the repayment would increase from $35 million to $114 million.  If
irrigators paid full-cost rates for water, which include both the
capital costs owed and the interest on them, the present value of the
amount repaid would be $800 million more than would have been repaid
between now and 2030 without interest under the existing rate
schedule. 

A legislative change would be needed to require the Secretary to
recover capital costs before 2030 and to charge interest on capital
costs.  However, the 1986 statute does not preclude the Secretary
from collecting capital costs at an earlier date.  But if interest
were charged for contracts already renewed, it might give rise to
irrigators' claims that the United States breached its contracts,
subjecting the government to claims against it for damages. 
Moreover, the more contracts that are renewed, the more difficult it
may become to effect change because the terms in already renewed
contracts may be viewed as the norm. 


      FARMERS CAN MITIGATE THE
      IMPACTS OF INCREASED WATER
      RATES
-------------------------------------------------------- Chapter 0:4.3

GAO's review of the economic literature and discussions with farmers,
agricultural economists, agricultural extension agents, water
district officials, and others consistently indicate that farmers
have a number of options for reducing the impact of higher rates. 
For example, farmers might improve irrigation efficiency through
better irrigation practices such as leveling fields, more accurate
irrigation scheduling, and reusing runoff-irrigation water.  Modern
technologies such as sprinkler or drip systems control the amount,
time, and place of water applications and reduce losses to
evaporation or runoff.  Farmers might also switch crops to mitigate
increased water costs and reduce water use.  However, some farmers
will not be able to change the type of crops that they grow because
of limitations in the soil and salinity problems. 

Whether it is profitable for a farmer to change to a more efficient
irrigation system or shift crops in response to higher water costs
depends on such site-specific variables as the type of soil and
topography and other factors affecting farm profitability.  It is
difficult to predict to what extent farmers will switch to various
irrigation systems or switch crops. 


   MATTERS FOR CONGRESSIONAL
   CONSIDERATION
---------------------------------------------------------- Chapter 0:5

Whether irrigation rates should be increased beyond current
requirements is a policy decision for the Congress.  If the Congress
decides to pursue the issue of increasing irrigation rates, the
Congress may wish to consider in its deliberations such factors as
(1) the extent to which farmers can absorb increased irrigation
costs, (2) the potential adverse impacts on farmers and local
economies, (3) the increased revenues to the U.S.  Treasury that
could be generated, (4) the ability of farmers to mitigate the
effects of the price increases, (5) the environmental and water
supply benefits resulting from higher irrigation rates, (6) the
impacts of future water supply reductions, and (7) whether the
increases should apply to already renewed contracts.  Other options,
such as using water markets in which rights to use water are bought
and sold, may achieve similar benefits but would affect farmers
differently. 


   AGENCY AND OTHER COMMENTS
---------------------------------------------------------- Chapter 0:6

In order to obtain the views of affected groups, GAO requested and
received comments on a draft of this report from the Bureau of
Reclamation and the Central Valley Project Water Association, which
represents water and irrigation districts that contract for water
from the CVP.  The Association asked GAO to include comments provided
by the Westlands Water District. 

The Bureau said that the report provides a useful and credible
analysis of some of the potential financial effects of changes in the
price of CVP irrigation water.  The Bureau indicated that in general,
it accepts the report as corroboration of several of the key
assumptions embodied in the 1992 CVP Improvement Act. 

In general, the Association and Westlands said that GAO's analysis
and conclusions are flawed primarily because (1) the budgets are not
based on water delivery levels provided in 1990 during the drought
and do not consider future reductions in supply resulting from the
CVP Improvement Act and other environmental requirements, (2) GAO did
not examine impacts on local economies resulting from increased water
rates, and (3) the hypothetical farms are not representative of all
farms in the Central Valley. 

GAO recognizes that drought and future water supply reductions may
affect California farmers and local agricultural communities. 
However, GAO was asked to examine the impact of higher irrigation
rates on farmers' profits, not the impact of drought and reduced
water supplies or the effects on local economies.  Moreover, if
budgets had been based on water delivery levels provided under
drought conditions, GAO would have modeled profits for an atypical
year, and the results would reflect the impacts of rate increases
under drought conditions, rather than under normal conditions.  In
addition, future reductions in deliveries to CVP farmers as a result
of the CVP Improvement Act and the Endangered Species Act are
unknown.  Because the Bureau indicated that its estimates of possible
water supply reductions over the next 5 years were very rough, GAO
did not use these data.  The report recognizes that impacts on
farmers could be greater if changes in the water supply also
occurred.  The impacts of reductions in the water supply from drought
or environmental requirements are significant issues, and GAO has
added the impact of water supply reductions to the factors to be
considered by the Congress.  GAO also recognizes that local economies
may be affected by changes in water rates and has added local
economic impacts to the factors to be considered by the Congress. 
However, the absence of an analysis of these issues does not
invalidate the analysis of the impacts of higher rates on farmers'
profits. 

The farm budgets were designed to represent farm operations for the
major commodities grown in two major regions of the Central Valley. 
The budgets were not intended to be representative of all farms in
the Central Valley.  GAO believes that the budgets provide an
indication of the effects of increased irrigation rates on farms with
similar characteristics to the hypothetical farms.  Budget
information was combined with data on the agricultural economy during
the drought and information from discussions with irrigation
specialists, farmers, cooperative extension officials, and economists
about the potential impact of higher irrigation rates.  The combined
data and information indicate that other factors more greatly affect
the agricultural economy than irrigation rates and that some farmers
may change farming practices to mitigate their reductions in profit. 
Whether all farms in the Central Valley are represented or not does
not affect the report's conclusions that increased irrigation rates
will negatively affect farmers' profits and positively affect the
U.S.  Treasury and water use efficiency. 

The Association and Westlands Water District also provided technical
corrections, and changes have been made where appropriate.  (See
apps.  II through IV for the comments received and GAO's response to
the comments.)


INTRODUCTION
============================================================ Chapter 1

The Department of the Interior's Bureau of Reclamation plans,
constructs, and operates water resource projects to, among other
things, provide irrigation water to arid and semiarid lands in the 17
western states.  Construction, operation, and maintenance of these
projects are financed with federal funds.  The Bureau provides most
of its irrigation water to state-established water and irrigation
districts that obtain the water under contracts and distribute it to
farmers.  Through service or repayment charges, the Bureau, over
time, recoups a portion of the federal government's costs in
providing the water. 


   THE CENTRAL VALLEY PROJECT AND
   WATER USE IN CALIFORNIA
---------------------------------------------------------- Chapter 1:1

The Central Valley Project (CVP), located in California's Central
Valley Basin, is the Bureau's largest water resource project and
consists of numerous dams, reservoirs, canals, and pumping and
power-generating facilities.  The Central Valley Basin includes the
valleys formed by the Sacramento River in the north and the San
Joaquin River in the south and extends nearly 500 miles.  The two
river systems join at the Sacramento-San Joaquin Delta and flow
through San Francisco Bay to the Pacific Ocean.  Irrigation has made
California's Central Valley one of the most productive agricultural
areas in the world.  Historically, the CVP has provided about 6
million acre-feet\1 of irrigation water each year to approximately
3.8 million acres of cropland.  This amount represents about 85
percent of the total water available through the CVP.  Water is also
used for municipal and industrial uses, fish and wildlife,
recreation, and power generation. 

The CVP's water is marketed by the Secretary of the Interior to water
and irrigation districts (districts) under the Reclamation Project
Act of 1939 (43 U.S.C.  485), as amended.  The Secretary, through the
Bureau of Reclamation, has entered into 238 water service contracts
with districts in the Central Valley Basin to provide CVP water for
irrigation.  These contracts generally were written for 40-year
periods.  Interior has begun renewing the contracts as they expire. 

Most of California's developed water supplies from federal, state,
and private sources are used for irrigation.  As California's
population continues to grow, additional demands for water, such as
for municipal use, are expected to grow rapidly.  The state of
California reported that in 1989, approximately 79 percent of its
developed water was used for irrigation, 17 percent for municipal and
industrial uses, 3 percent for environmental purposes, and 1 percent
for recreation and other uses.  Sources of water include the
California State Water Project--a state system of dams, reservoirs,
and aqueducts that delivers 2.4 million acre-feet annually--as well
as direct diversions from rivers and streams, deliveries from U.S. 
Army Corps of Engineers reservoirs, deliveries from local water
district reservoirs, and groundwater pumping. 


--------------------
\1 An acre-foot is the volume of water necessary to cover 1 acre to a
depth of 1 foot--about 326,000 gallons. 


   CENTRAL VALLEY PROJECT
   IRRIGATION RATES VARY GREATLY
---------------------------------------------------------- Chapter 1:2

Federal irrigation rates are considered to be subsidized because they
do not include interest on the federal government's costs incurred in
constructing the irrigation component of the project facilities. 
Farmers receiving water from the CVP currently pay varying rates
depending on (1) the type of contract established between the Bureau
and the district for the repayment of costs owed the federal
government and (2) the distribution costs charged by the districts. 
Generally, there are three different federal rate structures:  the
fixed contract rate, the full-cost rate, and the cost-of-service
rate.  Districts then add charges to these rates to cover districts'
operation and maintenance costs and distribution systems.  Farmers
not receiving CVP water pay a variety of water rates, depending on
the source of the water. 

Most CVP farmers currently pay the fixed contract rates that were
established in the original CVP irrigation contracts to cover the
entire 40-year term of the contracts.  These rates were intended to
repay the capital costs of CVP facilities without interest and to pay
irrigation operation and maintenance (O&M) costs through a fixed
charge on each acre-foot of water delivered.  However, the contracts'
low fixed rates cannot pay growing operation and maintenance costs
due to inflation and have not been sufficient to repay virtually any
of the construction costs owed.  Combined with interest-free
repayment for over 40 years, the federal government has recovered
very little of its actual costs.  According to Bureau figures,
irrigators owe approximately $1 billion in capital costs.\2

The full-cost rate resulted from amendments to reclamation law in the
Reclamation Reform Act (RRA) of 1982 (43 U.S.C.  390aa to zz-1) and
includes repayment of O&M costs, as well as the federal government's
capital costs allocated to irrigation and unreimbursed O&M expenses,
with interest.  The act increased the acreage limit from 160 owned
acres to 960 acres of owned or leased land that a farmer could
irrigate with subsidized water.  Some districts and farmers taking
advantage of the expanded acreage limits agree to pay the Bureau a
rate at least sufficient to cover the Bureau's O&M costs.  Those
farmers wanting to irrigate leased land over the 960-acre limit are
charged the full-cost rate for the additional acreage. 

The cost-of-service rate is the contract rate for water districts
after they renew their contracts.  Under a 1986 statutory
requirement, irrigators using CVP water must repay their portion of
capital costs without interest by the year 2030 and pay O&M
deficits\3 accruing on or after October 1, 1985, with interest. 
Irrigators are required to pay annual O&M costs each year.  Farmers
in districts that have renewed their original 40-year contracts pay
the cost-of-service rate.  By the end of 1996, over one-fourth of the
original 40-year contracts will have expired and be subject to these
new rates. 

Table 1.1 illustrates different rates in three of the largest
districts.  Some farmers pay the fixed contract rate plus the
district's rate for distribution costs.  Some farmers who farm more
than 960 acres pay the district's rate plus the CVP's full-cost rate
for leased acreage in excess of 960 acres.  Once irrigation contracts
are renewed, farmers pay the cost-of-service rate plus the district
distribution charges.  District rates vary depending on the type of
distribution systems used and pumping requirements.  As shown in
table 1.1, in some cases the Bureau rates may be only a small portion
of the total rates paid for irrigation water. 



                                    Table 1.1
                     
                      Sample 1992 Water Rates Per Acre-Foot

                               CVP full-cost                            Range of
                       Fixed  rate for farms    Cost-of-    District    farmers'
                    contract    in excess of     service  distributi       water
District                rate       960 acres        rate  on charges       rates
------------------  --------  --------------  ----------  ----------  ----------
Westlands              $8.00          $45.79      $20.13      $14.48   $22.48 to
                                                                          $60.27
Arvin-Edison           $3.50          $33.12      $19.10   $43.50 to   $47.00 to
                                                              $93.50     $126.62
Glenn-Colusa\a         $2.00          $11.50       $6.73     $5.17\b    $7.17 to
                                                                          $16.67
--------------------------------------------------------------------------------
\a Rates listed are those charged for CVP water.  They do not reflect
water received under water rights held by the district prior to
construction of the CVP. 

\b Glenn-Colusa charges farmers by the acre for water, not by the
acre-foot.  The distribution charges are estimated based on 7.8
acre-feet of water required to grow rice. 


--------------------
\2 The $1 billion is the sum of the nominal costs of construction
over many decades.  No interest was accrued, therefore, no
adjustments were made for inflation or the opportunity costs for
federal funds invested. 

\3 As of 1992, about 76 percent of CVP contracts were operating with
an annual O&M deficit. 


   CVP IMPROVEMENT ACT INCREASES
   FUTURE WATER RATES
---------------------------------------------------------- Chapter 1:3

In October 1992, the Congress passed the CVP Improvement Act (Title
XXXIV, P.L.  102-575), which increases irrigation rates.  Section
3405(d) provides that all contracts for a term longer than 3 years
entered into, renewed, or amended after the act was passed are
subject to tiered water pricing.  Under this approach, the rates will
be based on how much of the total amount of water available under its
contract a district receives.  The first 80 percent of a district's
contract water will be charged at the district's cost-of-service
rate.  The next 10 percent will be charged at a rate halfway between
the cost-of-service rate and the full-cost rate.  The final 10
percent will be charged the full-cost rate; that is, the rate for the
final 10 percent of the water delivered will include both capital and
interest on the capital costs.  Table 1.2 illustrates how the
Westlands Water District's 1992 cost-of-service rate would increase
from $30.86 per acre-foot to $35.74 per acre-foot under the act, once
its existing contract expires in 2007 and it enters into a new
contract. 



                          Table 1.2
           
           CVP Improvement Act's Effect on the 1992
             Westlands Water District's Cost-of-
                         Service Rate

                                                  Applicable
                                                        rate
                                                  (per acre-
Amount of water delivered                              foot)
--------------------------------------------  --------------
80% of the contract total                             $30.86
81-90% of the contract total                          $47.12
91-100% of the contract total                         $63.37
Weighted average price for all contract               $35.74
 water
------------------------------------------------------------
Revenues from the tiered pricing component of irrigation rates will
be placed in a restoration fund of up to $50 million annually for
fish and wildlife.  If fund receipts are not sufficient to meet the
amounts required under the act,\4 the Secretary will assess a fee of
up to $6 per acre-foot on irrigation water and $12 per acre-foot on
municipal and industrial water.\5 Some farmers may avoid much of the
price increases under the act by maintaining valuable wildlife
habitat.  Farmers who produce a crop that provides significant
habitat for waterfowl, as determined by the Secretary, are not
subject to tiered pricing.  Furthermore, the act provides farmers
with incentives of up to $2 million annually, either directly or
through credits against contractual obligations, to keep fields
flooded during appropriate periods during the year for waterfowl
habitat.  How these incentives will be distributed will be determined
by the Secretary. 

Conversely, the act charges additional fees to districts receiving
water diverted from the San Joaquin River.  These districts, located
in the CVP's Friant Unit, must pay a surcharge of $4 per acre-foot
for all water delivered on or before September 30, 1997, in addition
to other fees or increased rates.  The surcharge increases in
increments up to $7 per acre-foot for water delivered after September
30, 1999, until the Secretary completes, and is authorized to
implement, a plan that includes reestablishing and sustaining
anadromous fisheries in the San Joaquin River. 


--------------------
\4 The act requires that funds be sufficient to meet amounts
appropriated by the Congress each year until fiscal year 1998.  If
$50 million per year has not been appropriated on an average annual
basis, the Secretary will increase surcharges in fiscal year 1998 and
each fiscal year thereafter to generate $50 million per year on a
3-year rolling average basis for each fiscal year following enactment
of the act. 

\5 Surcharges are indexed to October 30, 1992. 


   OTHER RATES IN THE CENTRAL
   VALLEY VARY GREATLY
---------------------------------------------------------- Chapter 1:4

Farmers not receiving CVP water pay a wide variety of water rates,
depending on the source of the water.  Some rates are higher than CVP
rates, while others are lower.  Although some farmers pay rates much
higher than others, they continue to farm.  Farmers receiving water
from the State Water Project must pay the full cost of the water,
including the capital costs of project facilities with interest and
distribution systems.  Those located in the southern region of the
Central Valley who receive State Water Project water may pay twice as
much as their neighbors receiving CVP water.  For example, farmers
within the Wheeler-Ridge Maricopa Water Storage District paid as much
as $200 per acre-foot in 1992 for water from the State Water Project. 
In contrast, the most expensive rate for farmers in the adjoining
Arvin-Edison Water Storage District receiving nonfull-cost CVP water
was about $100 or less per acre-foot.  These rates represent the
extreme range of different rates paid for CVP and the State Water
Project irrigation water.  Table 1.3 provides examples of the various
rates farmers pay for non-CVP water. 



                                    Table 1.3
                     
                         1992 Water Rates for Farmers Not
                               Receiving CVP Water

                              Retail cost of
                                       water
                                  (per acre-
Water district                         foot)  Source of water
----------------------------  --------------  ----------------------------------
Wheeler-Ridge Maricopa             $100-$200  State Water Project.
Alta Irrigation District              $19.48  Kings River via Pine Flat Dam
                                               (Corps of Engineers Dam).
Modesto Irrigation District            $4.13  Don Pedro Reservoir (a nonfederal
                                               reservoir and dam).
Central California                     $8.37  Receives water from the Bureau's
 Irrigation District                           Delta-Mendota Canal in exchange
                                               for river-rights water.
--------------------------------------------------------------------------------
Farmers without adequate sources of surface water often pump
groundwater.  Many farmers rely on groundwater for some of their
water.  Generally, groundwater costs are higher than surface water
and vary by how far the water must be pumped.  Pumping costs range
from around $20 to over $75 per acre-foot for energy and may cost
$350,000 or more to install a well.  When surface water prices exceed
groundwater pumping costs, farmers will pump groundwater to replace
surface water.  As more water is pumped, water levels can decline and
groundwater pumping costs can increase.\6


--------------------
\6 Excessive groundwater pumping can result in overdraft of the
groundwater supply and land subsidence, in which land collapses. 


   WATER USE PROBLEMS IN THE CVP
---------------------------------------------------------- Chapter 1:5

We documented significant environmental and water use problems
associated with irrigation practices carried out under CVP water
service contracts in our 1991 report.\7 These problems include
environmental degradation from selenium\8 poisoning and increasing
salinity, the production of subsidized crops with subsidized water,
and inadequate water supplies for fish and wildlife.  Furthermore,
with water dedicated to irrigation in contracts, water cannot be used
to meet emerging demands in California such as urban use.  To address
these concerns, we recommended that the Secretary of the Interior
determine the impacts of renewing CVP contracts for the same
quantities of water for long terms.  We recommended that the analysis
include a demonstration of the extent to which problems associated
with water service contracts can be mitigated by changes in contract
terms, including consideration of market mechanisms such as raising
irrigation rates, to promote more efficient water use and
conservation.  We also recommended that the Congress amend
reclamation law to allow contract renewals for lesser quantities of
water and shorter periods of time.  Since the completion of our
report, the CVP Improvement Act was passed, which not only raises
irrigation rates but requires environmental impact statements before
long-term contract renewal, limits contract terms to 25 years,
dedicates 800,000 acre-feet of water to fish and wildlife and
encourages water markets by allowing CVP farmers and districts to
voluntarily resell some agricultural water supplies to other uses,
such as municipal, industrial, and environmental purposes. 


--------------------
\7 Reclamation Law:  Changes Needed Before Water Service Contracts
Are Renewed (GAO/RCED-91-175, Aug.  22, 1991). 

\8 Selenium is a trace element that occurs naturally in soil and is
needed in small amounts to sustain life.  However, high
concentrations of selenium attributed to drain-water runoff from
agriculture have been linked to waterfowl deformities, embryo
mortality, and death in adult birds. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:6

The Chairman of the Subcommittee on Water and Power, Senate Committee
on Energy and Natural Resources, asked us to:  (1) estimate the
impacts on farmers' profits of the higher irrigation rates mandated
in the 1992 CVP Improvement Act and of further rate increases to
recover the capital costs before 2030 and to recover the interest on
construction costs, (2) estimate the financial benefits to the
federal government of increasing the irrigation rates, and (3)
determine the ways farmers can mitigate the impacts of increased
water rates. 

Our review considered increasing water rates as an option to improve
irrigation efficiency and conserve water in the CVP and increase
federal revenues.  We did not address other options to achieve these
benefits such as changing water allocations or using water markets. 
These options would impact farmers differently.  We currently are
analyzing issues associated with the development of water markets in
the 17 western states and will report our findings separately in an
upcoming report.\9 We did not examine the effects of higher
irrigation rates on local economies.  Such a review was beyond the
scope of our work. 

To determine the impact of increased CVP irrigation rates on CVP farm
profits, we created farm budgets designed to represent farm
operations for major commodities grown in two regions of the Central
Valley:  the San Joaquin Valley and the Sacramento Valley.  We
estimated the effect of increased rates as mandated in the CVP
Improvement Act, further rate increases to recover costs before 2030,
and increases to recover interest on capital costs.  We used a
computer program developed by the University of California at Davis
to create the farm budgets and used 1990 production data
representative for commodities grown in the two districts.  We used
the Bureau of Reclamation's 1990 cost-of-service rates for two of the
largest districts in the CVP--the Westlands Water District and the
Glenn-Colusa Water District--as our base irrigation rate. 

Inputs to the farm budgets were provided by agricultural extension
service officials, agricultural economists, and farmers in the
Westlands and Glenn-Colusa districts.  The farmers were recommended
to us as knowledgeable about various farming practices and
alternatives by agricultural extension service officials and the
Director of Irrigation Training and Research, Agricultural Training
Department at California Polytechnic State University at San Luis
Obispo.  Production cost data were provided largely by the University
of California at Davis.  We chose the commodities examined in our
budgets on the basis of district crop reports and interviews with
officials from the U.S.  Department of Agriculture's Agricultural
Stabilization and Conservation Service (ASCS), the University of
California Cooperative Extension Service, and farmers recommended to
us to reflect the most commonly produced crops in each district.  We
based crop acreage on reclamation law acreage limitations, 1990
district crop reports, ASCS support program policies, and other
factors affecting production decisions.  The budgets reflect the
impact of irrigation rate increases with current CVP contract
deliveries but do not consider the impact of possible reductions in
water supplies resulting from drought or implementation of the CVP
Improvement Act, the Endangered Species Act, or other environmental
requirements. 

Our inputs were reviewed by university professors, the farmers,
officials from ASCS, and the California Cooperative Extension
Service.  The farm budgets are discussed in detail in appendix I. 

To determine the benefits to the federal government of increased
irrigation rates beyond those required by the CVP Improvement Act,\10
we increased the capital portion of the water rates, that is, the
portion attributed to repaying CVP facilities.  We increased the
capital portion of irrigation rates for each irrigation and water
district by 25-percent increments up to 100 percent at the date of
contract renewal.  Increasing the rate would accelerate repayment of
the $1 billion in capital costs owed.  We used the Bureau's figure
for the amount of capital costs owed by irrigators.  We also used
Bureau data indicating districts' contract expiration dates and
annual water deliveries to determine when the CVP contracts will be
renewed and the capital rates necessary to repay the project by 2030. 
We then calculated the present value of the repayment at higher
irrigation rates and compared it with the present value of the
repayment at the current rate.  The current rate does not consider
inflation and the real rate of interest forgone to the government. 

To determine how farmers can mitigate the impacts of higher
irrigation rates, we reviewed the literature addressing the effects
of increasing agricultural water rates on farm management and
irrigation practices and technologies.  Our economists examined the
methodology of the studies presented in the literature to identify
those studies on which we could base sound conclusions.  We met with
officials from several districts, the Bureau of Reclamation, ASCS,
and the Western Farm Credit Bank and interviewed the farmers
recommended to us in the Westlands Water District and Glenn-Colusa
Irrigation District.  We also interviewed agricultural economists
from Stanford University; the Universities of California at Davis,
Berkeley, and Riverside; the California State Universities at Fresno
and Chico; as well as California Polytechnic State University, San
Luis Obispo; and the Bank of America, a major agricultural lender. 
We worked with a number of these economists in developing our
methodology and reviewing the accuracy of the information in our
report. 

Significant studies and reports used in conducting our work are
listed in the Selected Bibliography at the end of this report. 

Our work was conducted between October 1991 and December 1993 in
accordance with generally accepted government auditing standards. 


--------------------
\9 Water Transfers:  More Efficient Water Use Possible If Problems
Are Addressed, (GAO/RCED-94-35). 

\10 The capital portion goes to repay costs allocated to the CVP's
irrigation functions.  CVP cost allocation is explained in our report
entitled Bureau of Reclamation:  Central Valley Project Cost
Allocation Overdue and New Method Needed (GAO/RCED-92-74, Mar.  31,
1992). 


   AGENCY AND OTHER COMMENTS
---------------------------------------------------------- Chapter 1:7

We requested and received comments on a draft of this report from the
Bureau of Reclamation and the Central Valley Project Water
Association, which represents approximately 90 water and irrigation
districts that contract for water from the Central Valley Project. 
The Central Valley Project Water Association asked us to include
comments provided by the Westlands Water District.  Comments we
received and our responses are summarized at the end of chapter 4 and
presented in full in appendixes II, III, and IV.  We have made
changes to the report where appropriate. 


INCREASED WATER RATES WILL REDUCE
FARM PROFITS AND INCREASE FEDERAL
REVENUES
============================================================ Chapter 2

Using farm budgets designed to represent farm operations for the
major commodities grown in two regions, we simulated the impacts on
CVP farmers' profits of raising CVP irrigation rates, under various
scenarios.  These budgets represent hypothetical farms at one moment
in time and hold constant all factors affecting farm profit except
irrigation rates.  We determined that increasing the rates in
accordance with the CVP Improvement Act and up to full cost would
decrease farm profits, but the hypothetical farms would remain
profitable.  Economic studies show that the loss indicated by our
models will be expressed through reduced land values.  Some farmers
with low profits, or with high debt and reduced equity, may not be
able to maintain viable farms.  However, information from
agricultural lenders indicates that the effect on California's
overall farm economy is not likely to be severe.  If irrigation rates
were increased beyond the requirements of the CVP Improvement Act,
the CVP's outstanding debt would be retired more quickly and federal
revenues would be increased.  However, impacts on farmers would be
greater than those resulting from the CVP Improvement Act. 


   FARM BUDGETS INDICATE THAT
   HIGHER IRRIGATION RATES IMPACT
   PROFITS TO VARYING DEGREES
---------------------------------------------------------- Chapter 2:1

To determine the impact of increased CVP irrigation rates on CVP farm
profits, we created farm budgets designed to represent farm
operations for five major commodities grown in two regions of the
Central Valley:  the San Joaquin Valley and the Sacramento Valley. 
Farming practices differ greatly between these two valleys primarily
because of different soil conditions. 


      BUDGETS REPRESENT
      HYPOTHETICAL FARMS WITH ALL
      FACTORS EXCEPT WATER HELD
      CONSTANT
-------------------------------------------------------- Chapter 2:1.1

Each farm in the CVP is unique, and actual impacts of higher
irrigation rates will vary from those calculated in our budgets. 
Other types of farms exist in the Central Valley, such as orchards
and vineyards, that produce high-value crops.  Farms that produce
low-value pasture crops such as alfalfa also exist in the Central
Valley.  While our budgets should not be construed as indicative for
all farms, we believe that they provide an indication of the effects
of increased irrigation rates on farms with similar characteristics
to our simulated farms. 

The budgets indicate the profits\1 generated by the five commodities
at one point in time, keeping all variables except irrigation rates
constant.  Therefore, profits were measured without adjusting for
possible changes in farming practices farmers might make in response
to higher irrigation rates, such as changing the type of crops
planted, installing new irrigation technologies, and reducing water
application rates.  These changes could reduce impacts on profits. 
Profits also do not consider the changes in land values associated
with higher irrigation rates.  The value of farm land represents the
present value of future income that can be generated from the highest
and best use of the land.  If water rates increase, then present and
future farm incomes will decrease, reducing the value of the land to
farmers.  The amount of the reduction will depend upon changes to
farm practices that farmers make to adjust for higher water costs. 
We did not include these factors because of the difficulty of
predicting changes to farming practices in response to higher rates
and in determining how land values would change. 

Actual impacts on farmers over time will depend upon the individual
farmer's circumstances and adjustments made in response to higher
irrigation rates.  For example, along with decreased land values will
be lower land rents for farmers who lease land.  Lower rents should
offset higher water costs for farmers who lease land, at least in
part.  However, some farmers could experience a short-term reduction
in profit until lower land values are reflected in rental leases.  In
contrast, those who own land will experience the loss associated with
higher water costs by losing some equity in their landholding as a
result of decreased values. 

Changes in variables other than irrigation rates, such as commodity
prices and other production costs, can affect farm profitability as
well.  Our budgets do not account for changes other than those in
irrigation rates.  For example, we did not consider reductions in
irrigation water deliveries that may occur under the Endangered
Species Act, the CVP Improvement Act, or other environmental
requirements because these reductions are uncertain; therefore, all
conclusions are based on farmers receiving their current contractual
delivery levels.  It is unknown how the Secretary will implement the
CVP Improvement Act's provision mandating 800,000 acre-feet for fish
and wildlife.  The Bureau has developed rough estimates of possible
reductions over the next 5 years to meet environmental requirements
and estimates that some farmers may receive 50 to 65 percent of their
current contractual supply.  However, the Bureau stresses that these
figures are very uncertain.  We chose not to include changes based on
highly uncertain estimates of water supply reductions. 

As water deliveries to some farms decrease as a result of
environmental requirements, irrigation costs per acre-foot could
increase further and impacts on farmers could be greater.  Irrigation
costs per acre-foot can increase as water deliveries decrease because
the fixed O&M costs apply to fewer acre-feet of water.  Furthermore,
farmers may increase groundwater pumping to make up for reduced
surface supplies.  Groundwater costs often are substantially higher
than surface water costs. 

Table 2.1 is a summary budget of the costs, returns, and profits for
each of the five commodities simulated in the budgets.  All costs are
based on 1990 prices, the most recent year for which complete data
are available.  The water rate used was the base 1990 cost-of-service
rate for the Westlands Water District in the San Joaquin Valley and
the Glenn-Colusa Irrigation District in the Sacramento Valley.  These
are among the largest districts in the Central Valley.  Acreage for
each crop is based upon the ratio of each crop's production acreage
to total production acreage in the district, in addition to other
factors affecting production decisions.  For example, garlic
production is dependent on the availability and acreage requirements
of garlic processor contracts.\2 Districts in the Sacramento Valley
that receive CVP water through the Tehama-Colusa and Corning Canals
have significantly different cropping patterns and CVP water charges
from the Glenn-Colusa Irrigation District.  Therefore, our Sacramento
Valley farm budget does not reflect conditions in these districts. 

Table 2.1 shows a profit for all commodities except wheat.  Farmers
plant wheat as a rotational crop, despite its low value, because it
provides an opportunity for weed control and land leveling after
harvest and helps control some soil organisms.  In addition, farmers
may plant wheat as a means for maximizing the benefit of winter
rainfall.  Tables I.2 through I.6 provide more detailed commodity
budgets.  (See app.  I.)



                                    Table 2.1
                     
                     Summary Budget of 1990 Costs and Returns
                         Per Acre for Hypothetical Farms



                          Cotton    Tomatoes      Garlic       Wheat        Rice
--------------------  ----------  ----------  ----------  ----------  ----------
Production acreage           500         225         160          75         320
Yield per acre            1360\a       35.50        9.51        2.87          76
                          pounds        tons        tons        tons       cwt\b
Gross return           $1,192.85   $1,799.14   $1,428.40     $403.52     $854.24

Production costs:
--------------------------------------------------------------------------------
Preharvest               $297.76     $521.21     $259.48     $165.38     $225.20
Irrigation\c             $135.62     $114.51     $142.50      $74.35      $48.71
Harvest                  $171.88     $511.87       0.0\d      $30.00     $163.27
Overhead                 $200.30     $140.92     $111.97      $96.94      $49.68
Land rent                $217.92     $217.92     $217.92     $217.92     $211.50
================================================================================
Total production       $1,023.48   $1,506.43     $731.87     $584.59     $698.36
 costs
Profit per acre          $169.37     $292.71     $696.53   $(181.07)     $155.88
--------------------------------------------------------------------------------
\a The yield per acre for cotton includes 1,360 pounds of acala-lint
and 2,275 pounds of seed. 

\b Cwt, defined as a hundredweight or 100 pounds, is a standard
measure for rice. 

\c The costs for irrigation include both the cost of water and labor
to apply the water. 

\d The processor harvests the garlic and incurs the processing costs. 
The gross return is the price received by the farmer. 


--------------------
\1 Farm profits are defined as gross returns minus production costs. 
Production costs include skilled and unskilled labor costs for all
work on the farms but do not include an allowance for farmers'
management skills.  The budgets reflect profits before reductions for
taxes. 

\2 Garlic is one specialty crop grown in the Westlands Water
District--others include onions, melons, and certain vegetables.  We
used garlic as a proxy for other specialty crops grown in the
district. 


      CVP WATER IS A RELATIVELY
      SMALL PRODUCTION COST
-------------------------------------------------------- Chapter 2:1.2

Our farm budgets revealed that the cost of CVP water is a small
portion of total production costs.  On the basis of the
cost-of-service rate, the cost of CVP water would range from 1 to 6.6
percent of the total production costs for the five selected
commodities.\3 The majority of farm production costs are for all
other production factors, including land rent, and preharvest and
harvest costs such as fertilizer, electricity, labor, and machinery. 
The significance of water costs varies with each crop.  Generally,
the greater the percentage of production costs represented by water,
the greater the significance of water costs.  Profits for farmers
growing crops such as wheat, rice, or cotton, which have a relatively
low value per acre, will be influenced more by increases in water
costs because water represents a larger portion of the crop's
value.\4

Table 2.2 shows for the five commodities the total production costs,
the cost of CVP water per acre, and CVP water as a percentage of
total costs. 



                                    Table 2.2
                     
                      Comparison of 1990 CVP Water Costs Per
                     Acre to Total Per-Acre Production Costs
                              of Hypothetical Farms

                                Cotton    Tomatoes    Garlic     Wheat      Rice
--------------------------  ----------  ----------  --------  --------  --------
CVP water costs per acre           $57         $57       $48       $38        $7
Total production costs per      $1,023      $1,506      $732      $585      $698
 acre
Percent of water costs to          5.6         3.8       6.6       6.5       1.0
 total
--------------------------------------------------------------------------------
We assumed for the San Joaquin Valley farm that all water used in
crop production was delivered from the CVP, not from other sources. 
However, for the Sacramento Valley farm, we calculated CVP rates only
for that portion of water actually received from the CVP.  Most rice
farmers in the Sacramento Valley held water rights from the
Sacramento River before the CVP was built and now receive this water
through CVP facilities, but the water is not considered CVP water. 
Many of these farmers supplement their original supply with CVP
water.  For example, Glenn-Colusa receives about 720,000 acre-feet of
river-rights water and 105,000 acre-feet of CVP water.  Any changes
in Bureau rates would not affect the cost of owned river-rights
water. 


--------------------
\3 The 1990 water rate used for the San Joaquin Valley farm was $35
per acre-foot, which included $19 per acre-foot for the CVP
cost-of-service rate and $16 per acre-foot for Westlands Water
District charges.  Glenn-Colusa Water District charges farmers for
water by the acre instead of a cost per acre-foot as customary in
other CVP water districts.  The district allows 7.8 acre-feet of
water per acre to grow rice and in 1990 charged $43.35 per acre. 
However, only a small portion of the water used is CVP water.  We
calculated the CVP rate per acre-foot to be $6.73. 

\4 A crop's value is equal to the amount of the commodity produced
per acre times its selling price--the revenue generated from the
crop. 


      FARM PROFITS DECREASE AS
      WATER RATES INCREASE
-------------------------------------------------------- Chapter 2:1.3

To demonstrate the impact of higher irrigation rates on farm profits,
we compared profits using the cost-of-service rate with profits at
higher rates.  The higher rates analyzed were:  (1) the CVP
Improvement Act tiered rates with and without the $6 charge applied,
(2) increases in the capital portion of these rates in increments of
25 percent up to 100 percent with the $6 charge applied, and (3) the
full-cost rate--which includes interest on the capital costs
owed--with and without the $6 charge applied.  Under the CVP
Improvement Act, the additional charge may or may not be applied and
may equal any amount up to $6 per acre-foot.  Therefore, adding $6 to
each rate illustrates the maximum impact under each scenario.  All of
these rates are higher than the fixed contract rate that most farmers
currently pay for water, but the cost-of-service rate will be the
base rate when the contracts are renewed. 

Table 2.3 shows the impact on the total farm profits of our
hypothetical farms of increasing the water rates from cost-of-service
through full cost. 



                                    Table 2.3
                     
                     Decrease in Farm Profits of Hypothetical
                      Farm Budgets as a Result of Increased
                                    Water Cost


                                           Decrease in               Decrease in
                               Profit on        profit   Profit on        profit
Water rates                   operations     (percent)  operations     (percent)
----------------------------  ----------  ------------  ----------  ------------
Cost-of-service rate            $248,411            \a     $49,882            \a
CVP Improvement Act rate        $237,756           4.3     $49,652           0.5
 (excluding $6/acre-foot
 charge)
CVP Improvement Act rate        $221,406          10.9     $47,732           4.3
 (including $6/acre-foot
 charge)
CVP Improvement Act rate        $216,801          12.7     $47,563           4.6
 plus 25% increase in
 capital\b
CVP Improvement Act rate        $212,168          14.6     $47,396           5.0
 plus 50% increase in
 capital\b
CVP Improvement Act rate        $207,563          16.4     $47,226           5.3
 plus 75% increase in
 capital\b
CVP Improvement Act rate        $202,958          18.3     $47,060           5.7
 plus 100% increase in
 capital\b
Full cost (excluding $6/        $177,261          26.8     $48,356           3.1
 acre-foot charge)
Full cost with $6/acre-foot     $160,911          34.2     $46,436           6.9
 charge
--------------------------------------------------------------------------------
\a Data not applicable. 

\b The increase in capital contributions includes the $6 per
acre-foot charge for the Restoration Fund. 

Table 2.3 shows the following: 

  On the basis of the per-acre returns for each commodity and the
     acreage in production, we calculated farm profits at $248,411
     for the San Joaquin Valley farm and $49,882 for the Sacramento
     Valley farm. 

  When CVP Improvement Act rates are applied, profits decreased by
     about 4 and 11 percent for the San Joaquin Valley farm to
     $237,756 and $221,406, respectively, depending on whether the
     additional $6 per acre-foot charge is applied.  Profits declined
     less than 1 percent for the Sacramento Valley farm when the $6
     charge is not applied because the act's tiered pricing
     requirements increased CVP rates by less than $1, and only a
     small portion of Sacramento Valley farm water is CVP water.  If
     the tiered pricing is not applied, the profit would remain at
     its base level.  This will occur under the act for crops that
     provide habitat for waterfowl in their fields, such as rice.\5
     When the maximum $6 charge is applied, profits decreased by 4.3
     percent to $47,732. 

  When water rates are increased beyond the CVP Improvement Act
     requirements to repay the capital costs sooner, profits
     decreased more substantially.  At a 100-percent increase in
     capital costs, profits decreased from $221,406 to $202,958 for
     the San Joaquin Valley farm--an additional decrease of 7.4
     percent.  Profits decreased from $47,732 to $47,060 for the
     Sacramento Valley farm--an additional decrease of 1.4 percent. 
     These increased rates include the maximum $6 charge.  Decreases
     in profits from higher capital rates would be less without this
     charge. 

  When the rates are increased to reflect the full cost for water,
     profits declined to $177,261, or 27 percent less than the
     cost-of-service rate, for the San Joaquin Valley farm.  Profits
     declined to $48,356, or 3.1 percent less for the Sacramento
     Valley farm.  This decrease in profit at full cost is less than
     the decrease at previous rates that include the maximum $6
     charge because the difference between the full-cost rate and the
     cost-of-service rate for Glenn-Colusa water is between $4 and $5
     dollars.  Therefore, including the additional $6 charge in the
     other lower rates adds to water costs substantially. 

  When the full-cost rate and the maximum $6 per acre-foot charge
     were considered, profits declined for the San Joaquin Valley
     farm and the Sacramento Valley farm to $160,911 and $46,436,
     respectively.  These profits are 34 and 7 percent lower than
     profits at the cost-of-service rate. 

We assumed that crop prices will not increase in response to higher
water costs and that CVP farmers are forced to absorb the increased
costs.  This is most likely for commodities for which the farmers
have a relatively small share of the market, such as cotton and rice. 
For these crops, the farmers cannot pass along the cost increases to
the consumers in the form of higher commodity prices because others
in the market can maintain lower prices.  Any crop price increases
would reduce the effect of increased water rates on farmer profits. 

Under each scenario, although profits declined, the production of all
commodities remained profitable at full cost except wheat.  Even
before raising the cost of water, however, wheat did not generate a
profit.  The greatest impact on farm profits (34 percent) occurred
when irrigation rates were increased from the cost-of-service to
full-cost plus the $6 charge for the San Joaquin Valley farm. 
Impacts on profits were much less (7 percent) for the Sacramento
Valley farm because only a portion of the water delivered from the
CVP is subject to rate increases.  In general, because the capital
portion of the irrigation rate in both the San Joaquin and Sacramento
Valleys is usually the smallest component of the rate, large
increases in this portion of the rate will not increase the overall
rates paid by irrigators significantly.  For example, the CVP
Improvement Act rate we calculated for Westlands Water District was
$38.95\6 per acre-foot.  The capital repayment portion was $6.77.  By
doubling the capital portion--an increase of 100 percent--the overall
rate increased to $45.72 per acre-foot, an overall increase of 17
percent. 


--------------------
\5 The CVP Improvement Act waives application of tiered pricing for
any project water delivered to produce a crop that the Secretary of
the Interior determines will provide significant and quantifiable
habitat values for waterfowl in fields where the water is used and
the crops are produced. 

\6 The rate is based on 1990-91 rates supplied by the Westlands Water
District and increased by the tiered pricing provisions of the CVP
Improvement Act.  The $38.95 rate consists of $6.77 in capital costs
owed, $3.91 for tiered pricing under the CVP Improvement Act, $12.26
for Bureau O&M, and $16.01 for irrigation district fees. 


      DROUGHT EVIDENCE SUGGESTS
      THAT CENTRAL VALLEY
      AGRICULTURE WILL CONTINUE
      WITH HIGHER IRRIGATION RATES
-------------------------------------------------------- Chapter 2:1.4

As production costs--such as water--increase and farm profits or land
values decrease, farm viability can be affected.  Other production
costs, such as fertilizer or labor costs, may also vary and affect
farm viability.  Some farmers with low profits or with high debt and
reduced equity may not be able to maintain viable businesses if water
costs increase.  For farmers with low profits, a small increase in
costs could cause the farm to become unprofitable.  Similarly,
farmers with high debt who experience reduced equity as a result of
higher irrigation rates may be unable to cover their operating costs
plus debt payments, as reduced equity reduces their borrowing
capacity for loans.  Local economies that rely on income from these
sources can be harmed also, as property tax revenues and incomes
decline. 

However, data on California farms during the 6-year drought from 1987
through 1992 indicate that the effect of increased irrigation rates
on California's overall farm economy is not likely to be severe. 
These data indicate that the effect of water price increases on farm
viability is likely to be small relative to other factors.  For
example, during the drought farmers encountered water shortages and
higher costs for water, but losses on farm loans during the drought
declined from levels in the middle 1980s. 

Farm water costs were greater during the drought than in prior years
for several reasons.  Because of water shortages, the Bureau cut
water deliveries to some of its agricultural districts to 25 percent
of normal in both 1991 and 1992.  The water farmers received was more
expensive per acre-foot delivered because the fixed O&M costs applied
to fewer acre-feet of water.  For example, the Westlands Water
District's 1989-90 rate was $30.45 per acre-foot and increased to
$35.04 per acre-foot for 1990-91.  Furthermore, farmers increased
groundwater pumping during the drought to make up for reduced surface
supplies.  Groundwater costs, which include the cost of drilling a
well, installing a pump, and paying for electricity to pump the
water, often are substantially higher than surface water costs. 

Despite higher water costs, information from agricultural lenders
indicates that California's farm economy remained stronger during the
drought than during the mid-1980s, a period of relatively stable
water costs but declining farm sale values.  According to a report by
the Bank of America, a major agricultural lender in California,
higher water costs caused by the drought have impacted farm profits
and may be significant for individual farmers.  However, the strong
farm economy during the drought indicates that higher costs have not
affected the farm economy overall as much as other key economic
variables, such as interest rates, the export market, and the value
of the U.S.  dollar.  These factors contributed to the decline of the
farm economy in the mid-1980s. 

Similarly, data from agricultural lenders such as Western Farm Credit
Bank suggest that other factors have affected the financial stability
of farmers more than higher water costs.  Data on loan losses for
member lending institutions within the Central Valley for the period
1982 through 1991 revealed that Western Farm Credit suffered severe
loan losses during the middle 1980s, a period of relatively stable
water prices.  Figure 2.1 illustrates that this trend was reversed
during the drought period of 1988 through 1991, even though the cost
of water increased.  Other factors appear to have affected farm
profitability more substantially than water costs. 

   Figure 2.1:  Western Farm
   Credit Loan Loss Data for
   1981-92

   (See figure in printed
   edition.)

While some farmers may not be able to maintain viable farms, most
land will continue to be farmed.  As irrigation rates increase, the
value of the land declines to reflect the income it can now generate. 
Some farmers may not be able to maintain their farms, but other
farmers can purchase or lease this land at its reduced value.  With
lower land values, land production costs are lower and farming can be
profitable.  This is illustrated by the fact that farmers currently
pay a wide range of irrigation rates in the Central Valley, yet
continue to remain viable. 

In the past year, land values in the Central Valley have been
declining for a variety of reasons, including uncertainty over water
deliveries caused by the drought and future environmental
restrictions.  Increased irrigation rates would cause these values to
decline further.  In addition, as water deliveries to CVP farmers are
reduced because of environmental requirements, land values will
decrease further and more land will go out of production than would
by rate increases alone.  However, marginal land that produces
lower-value crops is the land most likely to be taken out of
production and the retirement of marginal land will have a less
significant impact on the farm economy than retirement of more
productive land. 


   INCREASING CAPITAL PORTION OF
   CVP IRRIGATION RATES CAN
   ENHANCE FEDERAL REVENUES
---------------------------------------------------------- Chapter 2:2

The capital portion of the irrigation rate is used to repay the
estimated $1 billion in capital costs that are allocated to be repaid
by users of CVP irrigation facilities.  Under a 1986 statutory
requirement, the Secretary is to adjust rates if the rate in effect
is not adequate to recover costs owed by the year 2030.  By
increasing the capital portion of the irrigation rate, we accelerated
the repayment of the $1 billion in capital costs owed. 

This acceleration increases the present value of the repayment due to
the time value of money.  The present value of the $1 billion in
capital costs owed is about $200 million\7 if paid under the existing
rate schedule between now and 2030.  Under this rate schedule, a
portion of the total $1 billion costs owed is paid each year, without
considering inflation or interest forgone to the government. 

We calculated the present value of the repayment at higher irrigation
rates and compared it with the present value of the repayment at the
current rate, assuming that current CVP delivery levels continue.  We
did not adjust the operation and maintenance portion of the rates
because these will be adjusted annually as costs fluctuate.  Doubling
the capital portion of 1990 irrigation rates speeds up recovery of
capital costs owed by 12 years and increases the present value of the
repayment by $114 million.  The results of our analysis are shown in
table 2.4. 



                          Table 2.4
           
            Enhanced Federal Revenues and Earlier
            Repayment Period If Capital Portion of
                   Water Rates Is Increased

                    (Dollars in millions)

                                        Enhanced    Years of
Percentage increase in capital          revenues   repayment
portion of rates                 (present value)       saved
------------------------------  ----------------  ----------
25                                           $35           4
50                                           $65           8
75                                           $91          10
100                                         $114          12
------------------------------------------------------------
If irrigators paid the full-cost rate, which includes interest on the
capital costs owed, then the present value of the amount repaid would
be the full amount allocated to irrigation, about $1 billion, or $800
million more than would have been repaid without interest.  The
impacts on farmers' profits and land values would be greater at this
rate than at smaller price increases.  An increase in irrigation
rates to full cost would result in a 34-percent decline in profit for
our hypothetical San Joaquin Valley farm, if the $6 surcharge is
included, and a 27-percent decline without the surcharge. 


--------------------
\7 We calculated the present value of the approximately $1 billion
over 37 years at an estimated Treasury bond rate of 8 percent. 
Present value is calculated in 1992 dollars. 


   LEGISLATION TO INCREASE
   IRRIGATION RATES
---------------------------------------------------------- Chapter 2:3

As present legislation only requires that the Secretary recover costs
by the year 2030, a legislative change would be needed to require the
Secretary to recover such costs at an earlier date.  However, the
1986 statute does not preclude the Secretary from collecting capital
costs at an earlier date.  In addition, a fundamental change in
reclamation law would be needed to generally charge interest on
irrigation capital costs.  If such changes were to apply to contracts
already renewed, it might give rise to irrigators' claims that the
United States breached its contracts and may subject the federal
government to claims against it for damages.  Moreover, the more
contracts that are renewed, the more difficult it may become to
effect change because terms in already renewed contracts may be
viewed as the norm. 


FARMERS CAN MITIGATE THE IMPACTS
OF INCREASED WATER RATES
============================================================ Chapter 3

Studies completed by economists at California universities and
lending institutions and our discussions with farmers, agricultural
economists, district officials, and others indicate that increased
irrigation rates give farmers incentive to change their farm
management practices and reduce water use.  Farmers may reduce water
use by changing irrigation practices and technologies and changing
crops grown. 


   FARMERS MAY INCREASE IRRIGATION
   EFFICIENCY
---------------------------------------------------------- Chapter 3:1

Some farmers may increase irrigation efficiency and reduce water use
through improved irrigation practices and technologies.  Farmers
change their irrigation practices or install more efficient
technologies if the benefits from increased efficiency, such as lower
water costs and higher yields, are at least equal to the costs of the
improvements. 


      INCREASED IRRIGATION
      EFFICIENCY AND DECREASED
      WATER USE CAN BE ACHIEVED BY
      IMPROVED PRACTICES AND
      TECHNOLOGIES
-------------------------------------------------------- Chapter 3:1.1

Increased irrigation efficiency can be realized through improved
irrigation practices or technologies.  Irrigation efficiency is
defined as the percentage of irrigation water applied to a field that
is beneficially used by the plants.  The greater the efficiency, the
less water is lost to runoff, to evaporation, or to the ground below
a level usable by the crop.  With higher efficiency, farmers use less
water to produce a crop and, therefore, pay for less water. 

Most CVP farmers use less efficient gravity-flow surface irrigation
systems rather than more efficient pressurized systems.  Surface
irrigation relies upon on-farm canals or ditches to distribute water
through channels.  A channel may be a narrow furrow,\1 such as those
used for row crops or as wide as an entire field, such as those used
for rice.  Farmers can increase efficiency and save water by adopting
new management practices for surface irrigation systems.  The water
savings achieved by improved surface irrigation practices varies
depending on the soil type and type of crops grown on a given farm. 
These practices include, among others,

  shortening the furrow lengths for row crops to reduce losses to the
     soil,

  replacing siphon tubes and ditches with pipes to control the
     release of water into furrows,

  using specialized equipment to schedule irrigation based on soil
     moisture,

  leveling fields to control runoff, and

  re-using runoff water after it reaches the end of the field. 

Pressurized systems such as sprinkler or drip irrigation are
generally more efficient than surface irrigation systems and
generally save more water because they allow the farmers to irrigate
more frequently, improve irrigation uniformity, and reduce water
losses to deep percolation and runoff.  The systems may also improve
crop yields. 

Table 3.1 shows water application efficiencies for various types of
irrigation systems. 



                          Table 3.1
           
              Water Application Efficiencies of
                  Various Irrigation Systems

                                                  Attainable
Type of irrigation system                       efficiencies
----------------------------------------------  ------------
Furrow                                               60 -75%
Sprinkler                                            65 -90%
Drip                                                 75 -90%
------------------------------------------------------------
Source:  California State University at Fresno. 

Table 3.2 compares the water savings that may be achieved by changing
irrigation technologies from conventional furrow irrigation.  The
data were generated by research done in the San Joaquin Valley\2 for
cotton production. 



                          Table 3.2
           
             Comparison of Water Requirements for
            Growing Cotton with Various Irrigation
                  Practices and Technologies

                                                Water saving
                              Water used per     over furrow
Type of irrigation practice      acre (acre-      irrigation
or technology                          feet)    as a percent
----------------------------  --------------  --------------
Furrow                            3.69 -4.17               0
Furrow with shortened runs        3.18 -3.57      13.8 -14.4
Sprinkler                         2.79 -3.13      24.4 -24.9
Drip                              2.41 -2.63      34.7 -36.9
------------------------------------------------------------

--------------------
\1 Furrow irrigation is used in relatively level basins and consists
of shallow channels formed between rows of crops.  The furrows
generally run parallel to the maximum field slope.  Water from a
ditch or pipe enters the upper end of the furrows and runs the length
of the row.  When water reaches the lower end of the row, some will
run off the field if it is not blocked. 

\2 Margriet Caswell, Erik Lichtenberg, and David Zilberman.  "The
Effects of Pricing Policies on Water Conservation and Drainage,"
American Journal of Agricultural Economics (Nov.  1990). 


      INCREASED COST OF WATER MUST
      JUSTIFY THE COST OF
      EFFICIENT IRRIGATION SYSTEMS
-------------------------------------------------------- Chapter 3:1.2

Efficient irrigation systems can be costly.  Pressurized systems in
particular are expensive to install and maintain and generally
require electrical energy to operate pumps to maintain system
pressure.  For example, while the cost to install shortened furrows
is about $17 per acre with no additional maintenance costs, the costs
to adopt a movable sprinkler irrigation system range from $100 to
$500 per acre.  Similarly, the costs to adopt drip irrigation may
range from $250 to over $1,500 per acre. 

Irrigation experts from universities and districts agree that farmers
will not incur the cost of purchasing, installing, and maintaining
more efficient irrigation systems unless associated costs are
recovered through the benefits and cost savings resulting from
greater efficiency.  Farmers can recover costs if the improved
irrigation systems use less water, improve yields, or reduce other
costs such as drainage management or irrigation labor.  Whether or
not it is profitable for a farmer to change to a more efficient
irrigation system in response to higher water costs depends on a
number of site-specific variables affecting farm profitability, such
as type of soil, topography, microclimate, and type of crops. 
Therefore, it is difficult to predict if and how many farmers will
switch to various irrigation systems. 

According to a report presented to the California Energy Commission
in 1992,\3 farmers did switch to more efficient irrigation systems
during California's recent drought.  From 1989 through 1991 farmers
responded to the California drought by increased groundwater pumping,
which provided irrigation water generally at a higher cost than CVP
water.  Concurrently, farmers improved their surface irrigation
practices or installed pressurized systems.  Results of the survey
showed that farmers

  shortened furrow lengths on about 13,000 acres,

  installed new pressurized sprinkler irrigation systems on 59,050
     acres, and

  introduced new pressurized drip irrigation systems on 21,090 acres. 

The study concluded that farmers chose the technologies that were
more water efficient. 

The Arvin-Edison Water Storage District is an example of a district
that has expensive CVP water and efficient irrigation systems.  In
1992, the cost of Arvin-Edison's CVP water ranged from $47 to $129
per acre-foot as compared with the Central California Irrigation
District where the average cost of water was about $8 per acre-foot. 
According to researchers at Stanford University, the Arvin-Edison
distribution system contains lined canals, ditches, and pipelines
that reduce water loss due to seepage or evaporation.\4 Furthermore,
farmers make extensive use of sprinkler and drip irrigation systems
for vegetables, orchards, and vineyards. 

Conversely, according to the same study, the Central California
Irrigation District, which has cheaper irrigation water than
Arvin-Edison, uses less efficient systems.  The distribution system
consists of unlined canals or ditches, and the predominant irrigation
methods are furrow or flood.  While very little use of drip
irrigation was reported, farmers are starting to improve their
irrigation practices by using shorter furrow runs. 


--------------------
\3 Economic Implications of Increasing Electrical Rates to
Agricultural Class Customers:  Water Scarcity, Technology
Substitutions, Farm Income, and Environmental Pollution in a Stylized
Region in the San Joaquin Valley California, Ariel Dinar, Department
of Agricultural Economics, University of California at Davis (1992). 

\4 An Economic Analysis of Water Availability in California, Central
Valley Agriculture Center for Economic Policy Research, Stanford
University.  (Feb.  14, 1992).  Sandra O.  Archibald, Ph.D.,
Principal Investigator; Thomas K.  Kuhnle, M.A.; Robin Marsh, Ph.D.;
Mary Renwick, M.A.; Barton Thompson, Jr., M.B.A., J.D. 


   FARMERS MAY CHANGE CROPS GROWN
   IN RESPONSE TO HIGHER
   IRRIGATION RATES
---------------------------------------------------------- Chapter 3:2

In general, shifting to less water-consuming crops is one option that
some farmers may be able to use to reduce the impact of higher water
costs on profits.  Economic theory indicates that if all factors
affecting farm profitability remain constant, but water rates
increase, farmers may be able to minimize their reduction in profits
by switching production to less water-consuming crops.  While not all
farmers may switch, overall, changes to less water-consuming crops
would be expected to occur in response to higher irrigation rates, if
other factors remain constant.  Economic theory also indicates that
some farmers may respond to higher water costs by fallowing some of
their less productive land.  As water costs increase, it may not be
possible to cover the costs of operations on less productive land. 
Since lower-value crops tend to be grown on less productive land,
fallowing such land would reduce the acreage devoted to low-value
crops. 

Specifically, in the CVP, our discussions with farmers, agricultural
economists, and agricultural extension agents, and our review of
empirical economic studies indicate that farmers in the CVP might
shift to high-value crops that consume less water in response to
higher water costs.  Many high-value crops also are less
water-intensive.  Some farmers may fallow some land in response to
higher water costs.  Water-intensive crops would decline in acreage
in response to higher water costs, with the greatest decrease
occurring in low-value, water-intensive crops. 

Studies show that during California's recent drought, which raised
irrigation rates, farmers increased production of high-value crops
and decreased production of low-value crops.  Yet many factors other
than irrigation rates also influence the mix of crops farmers grow,
and some of these factors also changed during the drought, such as
commodity prices.  According to a 1992 study conducted by Stanford
University,\5 farmers in the CVP's Westlands Water District
significantly increased production of some high-value crops, such as
tomatoes and garlic, since 1988, the second year of the drought. 
According to Westlands Water District's crop reports, an increase in
high-value crop acreage has occurred since 1978, but this trend
accelerated during the drought.  Conversely, cotton--lower in value
than tomatoes and garlic--showed a 28-percent decline from 1988 to
1991, and wheat--a relatively low-value crop--has decreased in
acreage during the same period by 45 percent.  Cotton requires more
water than garlic, and approximately the same amount as tomatoes, but
wheat is less water-intensive than these crops.  Farmers also
improved their irrigation efficiency in addition to shifting crops,
and factors other than irrigation rates may have influenced crop
choice during the drought. 

Factors such as changes in commodity prices and the opening of new
markets can have a greater impact on crop choice than irrigation
costs.  For example, a farmer generally will not plant tomatoes
without a marketing agreement with a tomato processor because of the
risk of not being able to sell such a perishable crop.  Therefore, it
is difficult to predict when and how many farmers will switch crops
and to which crops they will switch. 

Furthermore, some farmers will not be able to change the type of
crops they grow in response to higher irrigation rates.  For example,
about 300,000 acres in the Sacramento Valley are only suitable for
growing rice, and rice farmers on this land cannot grow other crops
profitably.  The soil consists of thick clay, which does not allow
water to penetrate.  Such land is excellent for growing rice, which
requires flooded fields, but will not support other crops.  The
farmers we interviewed indicated that they cannot profitably grow
other commodities on their land.  Similar situations exist in parts
of the San Joaquin Valley where soil salinity is so great that only
salt-tolerant crops such as cotton can be grown.  This land usually
has high salinity and poor drainage, which keeps salty water in the
root zone, causing some crops to grow more slowly, while others die. 


--------------------
\5 Ibid. 


      CHANGES IN FARMING PRACTICES
      JUSTIFIED AT FULL COST FOR
      HYPOTHETICAL FARM
-------------------------------------------------------- Chapter 3:2.1

We used the farm budget for the San Joaquin Valley farm to
demonstrate possible changes in farming practices farmers could make
to offset the impact of increased water costs.  In general, farmers
will make changes that will minimize losses caused by higher water
rates and, therefore, result in the most profit possible.  On our
hypothetical farm, one change in farm practices minimized losses when
water rates reached full cost.  Other changes might be advantageous
at different price increases for other farms because of the
site-specific variables affecting farm profitability. 

We considered eliminating wheat production and improving irrigation
efficiency by shortening furrow lengths to reduce losses caused by
higher water rates.  We also considered adopting sprinkler or drip
irrigation systems but found that the cost to install and maintain
drip and sprinkler improvements exceeded the saving resulting from
reduced water use at all price increases.  Such systems would have to
result in higher crop yields to justify the expense.  We did not
determine possible yield increases resulting from installing these
systems. 

We found that at full cost with the $6 per acre-foot charge, it was
more profitable for the farmer to stop producing wheat than to
produce it.  Shortening furrows did not provide any additional
benefit.  Wheat was not profitable in our budgets at any of the water
rates used but is planted by farmers as a rotational crop.  At most
water rates, growing wheat allows the farmer to generate enough
revenue to cover the operating costs for growing the wheat and some
land rental costs.  At full cost with the $6 charge, wheat revenues
were not great enough to cover all operating costs, and it was more
profitable not to produce wheat.  Some Central Valley farmers used
this strategy during the drought and fallowed land used to grow crops
such as wheat when surface water was unavailable and they had to rely
on expensive groundwater.  Eventually, farmers who fallow wheat would
have to realize the benefits of planting wheat some other way.  We
did not include that additional cost in our calculations.  Figure 3.1
shows the farm profits for our hypothetical San Joaquin farm at
various water rates. 

   Figure 3.1:  Increased Water
   Rates Impact on Income With and
   Without Wheat Production

   (See figure in printed
   edition.)

There may be other alternatives that could be taken on our
hypothetical farm to reduce the cost of fallowed land, such as
planting another crop that would cover the land rental costs and the
operating costs of planting, rather than fallowing former wheat
acreage.  Furthermore, we did not consider possible profits farmers
might make from transferring the right to use conserved water to
those who value it more highly.  The CVP Improvement Act allows the
transfer of CVP water to any water user in California for any purpose
recognized as beneficial, and sellers can retain profit from
transfers.  This option may help mitigate price increases further. 


CONCLUSIONS AND MATTERS FOR
CONGRESSIONAL CONSIDERATION
============================================================ Chapter 4


   CONCLUSIONS
---------------------------------------------------------- Chapter 4:1

Always a scarce resource, water is becoming increasingly valuable in
California as the urban population continues to grow and
environmental awareness about fish and wildlife needs increases. 
Raising irrigation rates can help meet new demand by providing
incentives for more efficient water use.  Higher rates encourage
farmers to conserve water, thereby reducing irrigation drainage with
subsequent reductions in environmental damage to water, soil, and
wildlife.  Conservation would also make water available for other
uses such as municipal and industrial use or fish and wildlife. 

Clearly, much has changed in the West since the subsidies were
initially established in the Reclamation Act of 1902.  Estimates of
the current cost of federal water subsidies in the western United
States are substantial, with the Bureau of Reclamation placing the
cost at $2.2 billion in 1986.  An important factor in determining
whether subsidies are still warranted is the question of whether the
irrigators could pay more of the cost of the water delivered. 

On the basis of our farm budgets, repayment analysis, literature
review, and discussions with agricultural economists, cooperative
extension officials, irrigation experts, and farmers, we found that
increased CVP irrigation rates would have positive impacts on the
U.S.  Treasury and water use efficiency and negative impacts on
irrigators.  The benefits to deficit reduction, the environment, and
other California water users resulting from higher rates must be
balanced against the adverse impacts on farmers' profits. 

Increasing irrigation rates beyond the levels mandated in the CVP
Improvement Act would enhance federal revenues and contribute to
deficit reduction.  Charging the irrigators the full cost of the
water would result in an $800 million increase in the present value
of the repayment of federal revenues.  Smaller increases, as little
as a 25-percent increase in the capital portion of the rate, for
example, would increase the present value of the repayment by $35
million. 

Increasing irrigation rates will negatively affect farmers, however. 
Our farm budgets, designed to represent farm operations for major
commodities grown in the Central Valley, showed how profits for two
hypothetical farms decline as irrigation rates increase up to full
cost.  Despite this decline, both hypothetical farms remain
profitable, even without considering changes in farming practices to
reduce water use or decreased land rental costs resulting from higher
rates.  Impacts on individual farmers will vary.  Each farm in the
CVP is unique, not every farm has the same profit margins, and
decreases in profit from increased irrigation costs will vary from
those calculated for our hypothetical farms.  Some farmers with low
profits or with high debt and reduced equity may not be able to
maintain viable farms. 

While some farmers may be hard hit, studies suggest that the effect
of irrigation rate increases on California's farm economy is not
likely to be severe.  In the long run, most land will continue to be
farmed as land values and prices adjust to reflect higher water
costs.  This is seen in the different water rates farmers currently
pay in the Central Valley, while farming profitably.  Moreover, data
from California's recent drought indicate that farmers have
encountered water shortages and higher water costs with little impact
on farm loan default rates. 

Furthermore, farmers who conserve water can benefit by reducing their
water costs and transferring use of conserved water to others.  Under
the CVP Improvement Act, individuals or districts receiving CVP water
can transfer water to any other California water user or water agency
for any beneficial use recognized by California state law.  This will
allow farmers to transfer water to other agricultural users,
municipal and industrial users, and natural resource agencies or
nonprofit conservation groups who desire additional supplies, at a
profit.  We are analyzing issues associated with the development of
water markets in the 17 western states and will report these findings
separately. 

A legislative change would be needed to require the Secretary to
charge interest on capital costs or recover these costs before 2030;
although the 1986 statute does not preclude the Secretary from
collecting capital costs at an earlier date.  If reclamation law were
changed and the change were to apply to contracts already renewed as
well as to those coming up for renewal, it might give rise to
irrigators' claims that the United States breached its contracts and
could subject the government to claims against it for damages. 
Therefore, decisions regarding higher irrigation rates should be made
before the Bureau renews additional long-term contracts.  The Bureau
will be able to continue its long-term contract renewal once
environmental impact statements required under the CVP Improvement
Act are completed. 


   MATTERS FOR CONGRESSIONAL
   CONSIDERATION
---------------------------------------------------------- Chapter 4:2

Whether irrigation rates should be increased beyond current
requirements is a policy decision for the Congress.  If the Congress
decides to pursue this issue of increasing irrigation rates, the
Congress may wish to consider in its deliberations such factors as: 
(1) the extent to which farmers can absorb increased irrigation
costs, (2) the potential adverse impacts on farmers and local
economies, (3) the increased revenues to the U.S.  Treasury that
could be generated, (4) the ability of farmers to mitigate the
effects of the price increases, (5) the environmental and water
supply benefits resulting from higher irrigation rates, (6) the
impacts of future water supply reductions, and (7) whether the
increases should apply to already renewed contracts.  Other options,
such as using water markets in which rights to use water are bought
and sold, may achieve similar benefits but would impact farmers
differently. 


   AGENCY AND OTHER COMMENTS
---------------------------------------------------------- Chapter 4:3

In order to obtain the views of affected groups, we requested and
received comments on a draft of this report from the Bureau of
Reclamation and the Central Valley Project Water Association, which
represents water and irrigation districts that contract for water
from the Central Valley Project.  The Association asked us to include
comments provided by the Westlands Water District. 

The Bureau said that the report provides a useful and credible
analysis of some of the potential financial effects of changes in the
price of CVP irrigation water.  The Bureau indicated that, in
general, it accepts the report as corroboration of several of the key
assumptions embodied in the 1992 CVP Improvement Act. 

In general, the Association and Westlands said that our analysis and
conclusions are flawed primarily because (1) the budgets are not
based on water delivery levels provided in 1990 during the drought
and do not consider future reductions in supply resulting from the
CVP Improvement Act and other environmental requirements, (2) we did
not examine impacts on local economies resulting from increased water
rates, and (3) the hypothetical farms are not representative of all
farms in the Central Valley. 

We recognize that drought and future water supply reductions may
impact California farmers and local agricultural communities. 
However, we were asked to examine the impact of higher irrigation
rates on farmers' profits; not the impact of drought and reduced
water supplies, or the effects on local economies.  Moreover, if
budgets had been based on water delivery levels provided under
drought conditions, we would have modeled profits for an atypical
year, and the results would reflect the impacts of rate increases
under drought conditions, rather than under normal conditions.  In
addition, future reductions in deliveries to CVP farmers as a result
of the CVP Improvement Act and the Endangered Species Act are
unknown.  Because the Bureau indicated that its estimates of possible
water supply reductions over the next 5 years were very rough, we did
not use these data.  The report recognizes that impacts on farmers
could be greater if changes in water supply also occurred.  The
impacts of reductions in water supply from drought or environmental
requirements are significant issues, and we have added the impact of
water supply reductions to the factors to be considered by the
Congress.  We also recognize that there may be impacts to local
economies resulting from changes in water rates and have added local
economic impacts to the factors to be considered by the Congress. 
However, the absence of an analysis on these issues does not
invalidate the analysis of the impacts of higher rates on farmers'
profits. 

The farm budgets were designed to represent farm operations for the
major commodities grown in two major regions of the Central Valley. 
The budgets were not intended to be representative of all farms in
the Central Valley.  We believe that the budgets provide an
indication of the effects of increased irrigation rates on farms with
similar characteristics to the hypothetical farms.  Budget
information was combined with data on the agricultural economy during
the drought and discussions with irrigation specialists, farmers,
cooperative extension officials, and economists to discuss the
potential impact of higher irrigation rates.  These data indicate
that other factors have greater impact on the agricultural economy
than irrigation rates and that some farmers may change farming
practices to mitigate their reductions in profit.  Whether or not all
farms in the Central Valley are represented does not affect the
report's conclusions that increased irrigation rates will negatively
affect farmers' profits and positively affect the U.S.  Treasury and
water use efficiency. 

The Association and Westlands Water District also provided technical
corrections, and we have made changes in response to these comments
where appropriate.  The full text of the comments we received and our
responses are presented in appendixes II through IV. 


DATA SOURCES AND METHODOLOGY FOR
FARM BUDGETS
=========================================================== Appendix I

To determine the impact of increased Central Valley Project (CVP)
irrigation costs on farm profitability, we developed farm budgets
designed to represent farm operations for the major commodities grown
in two regions of the Central Valley:  the San Joaquin Valley and the
Sacramento Valley.  The University of California at Davis, a leading
university in California agricultural research, developed the
computer program we used to create the farm budgets.  The program,
Budget Planner, assists growers in preparing budgets for individual
crops and combinations of crops.  The program calculates costs,
break-even points, and net returns for varying crop yields and
selling prices.  The program allocates costs for machinery, labor,
and materials to individual crops and operations.  The program also
provides summaries of equipment, investment, and overhead costs. 

The Budget Planner estimates the financial effects of changes in
farming practices and economic climates.  For example, by developing
budgets for hypothetical situations, the user can compare the costs
or the net returns that might be expected with different cropping
patterns, types of fertilizer, or equipment complements.  The program
can help growers anticipate the effects of changes in interest rates,
selling prices, yields, and many other cost factors. 

We obtained information from officials with the University of
California Cooperative Extension Service, the Westlands Water
District and Glenn-Colusa Irrigation District, and the Department of
Agriculture's Agricultural Stabilization and Conservation Service
(ASCS).  We interviewed farmers recommended to us by the Cooperative
Extension Service and the Director of Irrigation Training and
Research, Agricultural Training Department, at California Polytechnic
State University at San Luis Obispo, as knowledgeable about various
farming practices and alternatives.  Table I.1 provides a summary of
the costs and returns per acre we calculated from our farm budgets. 



                                    Table I.1
                     
                        1990 Costs and Returns Per Acre of
                                Hypothetical Farms



                          Cotton    Tomatoes      Garlic       Wheat        Rice
--------------------  ----------  ----------  ----------  ----------  ----------
Production acreage           500         225         160          75         320
Yield per acre           1,360\a  35.50 tons   9.51 tons   2.87 tons    76 cwt\b
                          pounds
Water usage per acre         3.0         3.0         2.5         2.0         7.8
 (in acre-feet)
Gross returns          $1,192.85   $1,799.14   $1,428.40     $403.52     $854.24

Production costs
--------------------------------------------------------------------------------
Preharvest                297.76      521.21      259.48      165.38      225.20
Irrigation\c              135.62      114.51      142.50       74.35       48.71
Harvest                   171.88      511.87         0\d       30.00      163.27
Overhead                  200.30      140.92      111.97       96.94       49.68
Land rent                 217.92      217.92      217.92      217.92      211.50
================================================================================
Total costs $           1,023.48   $1,506.43     $731.87     $584.59     $698.36
Net returns above        $169.37     $292.71     $696.53   ($181.07)     $155.88
 Total Costs
--------------------------------------------------------------------------------
\a The yield per acre for cotton includes 1,360 pounds of acala-lint
and 2,275 pounds of seed. 

\b Cwt is defined as a hundredweight or 100 pounds. 

\c The cost of irrigation includes water at the cost-of-service rate
and labor to apply the water. 

\d The processor harvests the garlic.  The farmer does not incur
harvest costs. 


   SELECTION CRITERIA AND DATA
   SOURCES
--------------------------------------------------------- Appendix I:1

We created farm budgets for two hypothetical farms:  one from the San
Joaquin Valley and the other from the Sacramento Valley.  Commodities
grown and farming practices differ greatly between the San Joaquin
and Sacramento Valleys primarily because of different soil
conditions.  We used data from the Westlands Water District in the
San Joaquin Valley and the Glenn-Colusa Irrigation District in the
Sacramento Valley for some variables.  The Westlands Water District
is the largest user of CVP water, and the Glenn-Colusa Irrigation
District is one of the largest users of CVP irrigation water in the
northern part of the Central Valley. 


      CROP ACREAGE
------------------------------------------------------- Appendix I:1.1

We based crop selection and acreage on reclamation law, 1990 crop
reports from Westlands Water District and Glenn and Colusa counties,
ASCS program policies, and other factors affecting production
decisions.  For example, to comply with the provisions of the
Reclamation Reform Act of 1982, farmers can only receive subsidized
water on 960 planted acres.  Therefore, the total size of our farms
did not exceed 960 planted acres. 

The San Joaquin Valley farm consisted of 960 planted acres and 86
acres of fallow land.  We selected those crops listed in the
Westlands crop report with the highest production acreage--cotton,
wheat, processed tomatoes, and processed garlic operations.  Garlic
is one of several specialty crops grown in the Westlands Water
District--others include onions, melons, and certain vegetables.  We
used garlic as a proxy for other specialty crops.  With the exception
of garlic, the ratio of each crop's production acreage to the total
production acreage was representative of those ratios for Westlands
Water District. 

Factors other than crop ratios also affected crop acreage.  For
example, processed garlic production is dependent on the availability
of garlic processor contracts.  According to a garlic processor we
interviewed, the acreage required to obtain a contract is 160 acres. 
Because of the 160-acre requirement, the ratio of the budget's garlic
acreage to total production acreage was higher than the ratio in the
Westlands Water District. 

Because cotton was the predominant crop in the Westlands Water
District, cotton was the primary crop used in our budget.  However,
cotton acreage also was based on the ASCS Cotton Support Program. 
ASCS assists in the stabilization, support, and protection of farm
income and prices for selected commodities.\1 Based on a yield of
1,360 pounds per acre, 500 production acres and 75 fallow acres are
needed to receive the maximum support payment.  We used the acreage
necessary to receive the maximum support payment. 

Wheat and tomato acreage were based primarily on production acreage
in the Westlands Water District.  Tomato production totaled 225
acres.  Wheat is part of the ASCS Support Program and consisted of 75
production acres and 11 fallow acres.  This acreage brought the total
production acreage to 960--the maximum amount that can receive
subsidized water.  Farmers told us that in some instances it is not
cost-efficient to grow wheat, but farmers plant it as a rotational
crop, despite its low value, because it provides an opportunity for
weed control and land leveling after harvest and helps control some
soil organisms. 

To determine the crops used in the Sacramento Valley, we obtained
crop production reports for Glenn and Colusa Counties.  Their primary
crop was rice.  Farmers we interviewed in the Glenn-Colusa Irrigation
District said that most rice farmers can only grow rice due to the
composition of their soils.  Therefore, our crop budget was for rice
production. 

The acreage allocated to rice was based on ASCS' Rice Support
Program.  According to ASCS, to obtain the maximum support payment, a
husband and wife together need approximately 320 production acres and
56 fallow acres.  The fallow acreage is based on a 5-year average of
the crop's acreage reduction requirements--which vary from year to
year--as specified in the Support Program.  The production acreage
and support payment are based on a yield of 7,600 pounds per acre,
the average yield for Colusa County.  We based our farm acreage on
the amount necessary to receive the maximum support payment. 


--------------------
\1 The ASCS Support Programs require that farmers leave fallow or not
farm a specified amount of land to receive support payments. 


      WATER RATES
------------------------------------------------------- Appendix I:1.2

The water rates used in both budgets are subsidized rates based on
the Bureau's 1990 cost-of-service water rate and the CVP Improvement
Act rate.  The cost-of-service rate would recover CVP capital costs
by 2030, operation and maintenance (O&M), and any past O&M deficit
accrued with interest.  The CVP Improvement Act rate consists of
tiered pricing with the first 80 percent of water deliveries charged
at the cost-of-service rate, the next 10 percent at the difference
between the cost-of-service rate and full cost, and the last 10
percent charged at the full-cost rate.  The full-cost rate includes
interest on the capital costs owed. 

The CVP Improvement Act allows the Secretary of the Interior to
charge up to $6 per acre-foot in addition to the tiered pricing to
enhance the CVP Restoration Fund.  We added this cost for additional
analysis.  We included the water districts' distribution and O&M
costs in all irrigation rates. 

In our budget for the San Joaquin Valley farm, we used the 1990
Westlands Water District's cost-of-service rate as the base rate and
adjusted it to reflect tiered pricing in analyzing the impact of the
CVP Improvement Act.  Thus the rate we used when examining the impact
of the CVP Improvement Act was $38.95 per acre-foot.  This included
$6.77 in capital costs to repay project facilities, $12.26 for Bureau
O&M, $3.91 for tiered pricing and $16.01 for district costs.  For
additional analysis, we added the $6 surcharge that could apply under
the CVP Improvement Act. 

In our budget for the Sacramento Valley farm, we used the 1990
Glenn-Colusa Irrigation District cost-of-service rate as the base
rate.  We then increased it to include tiered pricing to analyze the
impact of the CVP Improvement Act.  We applied CVP rates only to that
percentage of Glenn-Colusa water that is received from the CVP.  Most
of the water used to grow rice in the Sacramento Valley is not CVP
water.  Farmers held water rights before the CVP was built and now
receive their water through CVP facilities.  Many farmers supplement
their original supply with CVP water.  For example, Glenn-Colusa
receives about 720,000 acre-feet of non-CVP water through CVP
facilities and supplements this with 105,000 acre-feet of CVP water. 
The Bureau can only increase the irrigation rates on the supplemental
supply.  The CVP irrigation rate we used was $44.07 per acre.  This
included $2.10 in capital costs allocated to project facilities,
$4.63 for Bureau O&M, $0.72 for tiered pricing, and $36.62 for
district costs.  The remaining water was charged primarily the
irrigation district rate. 

We then increased only the capital portion of the rates for each
district by increments of 25 percent up to 100 percent.  For example,
we raised the $6.77 capital portion of the Westlands irrigation rate
by 25 percent increments.  At a 100-percent increase, the capital
portion of the rate was $13.54, and the total rate, which includes
operation and maintenance costs and district distribution costs,
increased to $45.72.  This excludes the $6 surcharge that could apply
under the CVP Improvement Act.  We also increased the irrigation
rates for each district up to the full-cost rate, with and without
the $6 surcharge. 

The budgets reflect full CVP water deliveries and do not consider the
possible impact of reduced supplies resulting from drought or
implementation of the CVP Improvement Act. 


      OTHER DATA SOURCES
------------------------------------------------------- Appendix I:1.3

The University of California at Davis (U.C.  Davis) was our primary
source of farm budget data for all the costs of production, such as
the kind of equipment required for each commodity, labor costs, and
the types of chemicals needed.  We used 1990 data because only 1990
data were available for all commodities we included in our
hypothetical farms.  Land values were based on interviews with
farmers and Cooperative Extension Service agents.  Crop yields were
based on 1990 county and state averages provided by U.C.  Davis and
the California Rice Industry Association.  Crop values, or returns
per acre, were based on 5-year county and ASCS support price averages
provided by U.C.  Davis, ASCS, and the Fresno County Department of
Agriculture.  U.C.  Davis and the Glenn-Colusa Irrigation District
provided crop water usages. 


   ASSUMPTIONS
--------------------------------------------------------- Appendix I:2

To develop the San Joaquin and Sacramento Valleys' hypothetical farm
budgets, we made various assumptions pertaining to the costs of
growing the commodities.  For example, budget costs assume operating
years with normal water supplies and do not consider drought
conditions.  The cost for the land is based on cash rents. 

Land rental costs for each farm include both production and fallow
acreage because farmers must fallow a certain amount of their land to
receive their ASCS Support Program payments.  Farm budgets outline
production costs and revenues on a per-acre basis.  However, while
fallowed land incurs rental costs, it does not generally incur other
production costs or generate revenue because it is not producing a
crop.  To include the cost of fallowed acreage in our farm budget, we
calculated a land rental cost per production acre rather than per
total acreage by dividing the total costs incurred for all land by
the number of production acres.  For example, land in the San Joaquin
Valley is rented for $200 per acre for the 960 production acres and
86 fallow acres.  This results in a cost of $217.92 per production
acre.  Similarly, the land in the Sacramento Valley is rented for
$180 per acre for 320 production acres and 56 fallow acres.  This
results in a cost of $211.50 per production acre. 

We also assumed that surface water is used for both farms; no
groundwater is included.  We assumed that the irrigation method used
in the San Joaquin Valley farm is furrow and that used in the
Sacramento Valley is flood.  This assumption was based on numerous
studies and surveys on irrigation practices in the Central Valley and
on discussions with farmers in both districts. 

We assumed that equipment used in farm operations is either owned by
the farmers or leased.  On the basis of discussions with farmers and
agricultural extension agents, the cost of owned equipment in the San
Joaquin Valley is valued at 60 percent of new equipment; the cost in
the Sacramento Valley is valued at 50 percent.  Costs of owned
equipment are allocated to each crop based on the number of hours the
machinery is used in the crop's production.  Straight line
depreciation is used. 

Harvesting operations can be performed by the farmer, contractor, or
processor.  On the basis of discussions with farmers, cotton is
harvested by the farmer; wheat, tomatoes, and rice are harvested by
contractors; and garlic is harvested by the processor. 


   REVIEW
--------------------------------------------------------- Appendix I:3

U.C.  Davis economists, agronomists, and farm advisors from the
Cooperative Extension Service reviewed our farm budgets.  In
addition, San Joaquin and Sacramento Valley farmers and officials
from the California Rice Industry Association examined the budgets. 
Generally, if the reviewers found our costs for an item, such as
fertilizer, to be less than their experience, we increased our costs
to ensure that our profit estimates were conservative rather than
excessive.  While operational practices described in the budgets are
typical for the associated crops and areas, not all farmers may use
these same practices due to variations in farm operations. 


   RESULTS
--------------------------------------------------------- Appendix I:4

Summary budgets, which outline the production costs for each of the
commodities used in the hypothetical farm budgets, are presented in
tables I.2 through I.6.  We used the CVP Improvement Act tiered
pricing rate without the $6 per acre-foot surcharge.  Table I.7
provides a sample of a more detailed budget for cotton production. 
Crop selections and acreage allocations used in the budgets may vary
from actual farm operation. 

The impacts of increased irrigation rates on net returns--or
profits--based on these farm budgets are presented in table 2.3. 



                                    Table I.2
                     
                       1990 Costs Per Acre to Produce Rice

                                                                Custom
                   Operation              Fuel &                work &
                   time (hr/   Labor      repair  Material      rental     Total
                       acre)   costs       costs     costs       costs      cost
----------------  ----------  ------  ----------  --------  ----------  --------
Preharvest
Soil preparation        0.77   $8.80       $8.31     $1.17      $29.50    $47.78
Chemical                0.09    1.03        1.04    102.34       23.59    128.00
 applications
Planting                   0       0           0     19.13       11.12     30.25
Miscellaneous           0.15    1.71        0.66         0           0      2.37
Interest on                                                                16.80
 operations
================================================================================
Subtotal                                                                  225.20
Irrigation\a            0.80    5.36           0     44.07           0     49.43
================================================================================
Total preharvest                                                          274.63
 costs
Harvest costs           0.21    5.72        0.23         0      157.32    163.27
================================================================================
Total                                                                    $437.90
 operational
 costs
Overhead
Interest and                                                               21.07
 depreciation on
 investment
Miscellaneous                                                              28.61
Land rent                                                                 211.50
================================================================================
Subtotal                                                                  261.18
================================================================================
Total                                                                    $699.08
--------------------------------------------------------------------------------
Note:  Labor rate:  $9.50/hr.  skilled labor and $6.70/hr.  field
labor.

Interest rate:  12.20%.

Yield per acre (cwt):  76. 

\a CVP Improvement Act tiered pricing rate without the $6 per
acre-foot surcharge. 



                                    Table I.3
                     
                      1990 Costs Per Acre to Produce Cotton

                                                                Custom
                   Operation              Fuel &                work &
                   time (hr/   Labor      repair  Material      rental     Total
                       acre)   costs       costs     costs       costs      cost
----------------  ----------  ------  ----------  --------  ----------  --------
Preharvest
Soil preparation        1.79  $20.01      $22.16         0      $25.00    $67.17
Chemical                0.22    2.45        2.79   $132.25       39.75    177.24
 applications
Planting                0.18    1.98        2.83     11.20           0     16.01
Miscellaneous           0.42    4.69        5.87         0           0     10.56
Interest on                                                                26.78
 operations
================================================================================
Subtotal                                                                  297.76
Irrigation\a            5.00   30.50           0    116.85           0    147.35
================================================================================
Total preharvest                                                          445.11
 costs
Harvest costs           1.38   22.50       32.38      9.50      107.50    171.88
================================================================================
Total                                                                    $616.99
 operational
 costs
Overhead
Interest and                                                              144.48
 depreciation on
 investment
Miscellaneous                                                              55.82
Land rent                                                                 217.92
================================================================================
Subtotal                                                                  418.22
================================================================================
Total                                                                   $1,035.2
                                                                               1
--------------------------------------------------------------------------------
Note:  Labor rate:  $9.38/hr.  skilled labor and $6.10/hr.  field
labor.

Interest rate:  12.20%.

Yield per acre (lbs):  1,360 lint and 2,275 seed. 

\a CVP Improvement Act tiered pricing rate without the $6 per
acre-foot surcharge. 



                                    Table I.4
                     
                       1990 Costs Per Acre to Produce Wheat

                                                                Custom
                   Operation              Fuel &                work &
                   time (hr/   Labor      repair  Material      rental     Total
                       acre)   costs       costs     costs       costs      cost
----------------  ----------  ------  ----------  --------  ----------  --------
Preharvest
Soil preparation        0.84   $9.40      $15.39         0           0    $24.79
Chemical                0.15    1.69        2.07    $68.25      $20.32     92.33
 applications
Planting                0.26    2.89        4.65     19.50                 27.04
Miscellaneous           0.42    4.69        5.87         0           0     10.56
Interest on                                                                10.66
 operations
Irrigation\a             .70    4.27           0     77.90           0     82.17
================================================================================
Total preharvest                                                          247.55
 costs
Harvest costs              0       0           0                 30.00     30.00
================================================================================
Total                                                                    $277.55
 operational
 costs
Overhead
Interest and                                                               63.52
 depreciation on
 investment
Miscellaneous                                                              33.42
Land rent                                                                 217.92
================================================================================
Subtotal                                                                  314.86
================================================================================
Total                                                                    $592.41
--------------------------------------------------------------------------------
Note:  Labor rate:  $9.38/hr.  skilled labor and $6.10/hr.  field
labor.

Interest rate:  12.20%.

Yield per acre:  2.87 tons. 

\a CVP Improvement Act tiered pricing rate without the $6 per
acre-foot surcharge. 



                                    Table I.5
                     
                     1990 Costs Per Acre to Produce Tomatoes

                                                                Custom
               Operation              Fuel &                    work &
               time (hr/   Labor      repair    Material        rental     Total
                   acre)   costs       costs     costs           costs      cost
------------  ----------  ------  ----------  ------------  ----------  --------
Preharvest
Soil                1.11  $12.37      $25.54       0                 0    $37.91
 preparation
Chemical            0.70    8.04       10.58     $75.90         $22.50    117.02
 applications
Planting            0.68    7.69        8.97     135.00         169.55    321.21
Miscellaneou        0.42    4.69        5.87       0                 0     10.56
 s
Interest on                                                                34.51
 operations
Irrigation\a        1.54    9.39           0     116.85              0    126.24
================================================================================
Total                                                                     647.45
 preharvest
 costs
Harvest             0.59    6.64        8.23       0            497.00    511.87
 costs
================================================================================
Total                                                                   $1,159.3
 operational                                                                   2
 costs
Overhead
Interest and                                                              107.10
 depreciation
 on
 investment
Miscellaneou                                                               33.82
 s
Land Rent                                                                 217.92
================================================================================
Subtotal                                                                  358.84
================================================================================
Total                                                                   $1,518.1
                                                                               6
--------------------------------------------------------------------------------
Note:  Labor rate:  $9.38/hr.  skilled labor and $6.10/hr.  field
labor.

Interest rate:  12.10%.

Yield per acre:  35.5 tons. 

\a CVP Improvement Act tiered pricing rate without the $6 per
acre-foot surcharge. 



                                    Table I.6
                     
                      1990 Costs Per Acre to Produce Garlic

                                                                Custom
                   Operation              Fuel &                work &
                   time (hr/   Labor      repair  Material      rental     Total
                       acre)   costs       costs     costs       costs      cost
----------------  ----------  ------  ----------  --------  ----------  --------
Preharvest
Soil preparation        1.74  $19.47      $31.53         0           0    $51.00
Chemical                0.48    4.65        2.74   $153.58      $13.50    174.47
 applications
Planting\a                \b      \b          \b        \b          \b        \b
Miscellaneous           0.42    4.69        5.87         0           0     10.56
Interest on                                                                23.45
 operations
Irrigation\c            9.00   54.90           0     97.38           0    152.28
================================================================================
Total preharvest                                                          411.76
 costs
Harvest costs\a           \b      \b          \b        \b          \b        \b
================================================================================
Total                                                                    $411.76
 operational
 costs
Overhead
Interest and                                                               79.44
 depreciation on
 investment
Miscellaneous                                                              32.53
Land rent                                                                 217.92
================================================================================
Subtotal                                                                  329.89
================================================================================
Total                                                                    $741.65
--------------------------------------------------------------------------------
Note:  Labor rate:  $9.38/hr.  skilled labor and $6.10/hr.  field
labor.

Interest rate:  12.20%.

Yield per acre:  9.51 tons. 

\a The garlic processor does the planting and harvesting. 

\b Data not applicable. 

\c CVP Improvement Act tiered pricing rate without the $6 per
acre-foot surcharge. 



                                    Table I.7
                     
                     Commodity Budget for Cotton (1990 Costs
                     to Produce 500 Acres in the San Joaquin
                                     Valley)


                       Operation
                    time (hours/   Labor    Fuel &   Material    Custom/   Total
Operation                  acre)   costs   repairs       cost       rent    cost
------------------  ------------  ------  --------  ---------  ---------  ------
Preharvest operations:
--------------------------------------------------------------------------------
Deep rip                    0.08   $0.86     $2.09          0          0   $2.95
Primary discing             0.14    1.58      3.07          0          0    4.65
Preplant NH3                   0       0         0     $19.52      $5.00   24.52
Apply herbicide             0.12    1.38      0.93       8.26          0   10.57
Incorporate                 0.10    1.07      1.86          0          0    2.93
 herbicide w/disc
Make beds                   0.15    1.65      2.19          0          0    3.84
Make ditch                  0.06    0.68      1.02          0          0    1.70
Irrigate\a                  5.00   30.50         0     116.85          0  147.35
Close ditch                 0.06    0.68      0.86          0          0    1.54
Plant                       0.18    1.98      2.83      11.20          0   16.01
Uncap beds                  0.15    1.65      1.21          0          0    2.86
Cultivate                   1.15   12.91     11.72          0          0   24.63
Hand weeding                   0       0         0          0      25.00   25.00
Apply miticide                 0       0         0      18.00       5.00   23.00
Insect control                 0       0         0      11.11       5.00   16.11
Layby cultivate/               0       0         0      19.82       6.25   26.07
 herbicide
Apply growth                   0       0         0      15.38       5.00   20.38
 regulator
Sidedress                      0       0         0      24.78       8.50   33.28
 fertilizer
Defoliate cotton               0       0         0      15.38       5.00   20.38
Pickup use                  0.27    3.00      4.04          0          0    7.04
Truck use                   0.15    1.69      1.83          0          0    3.52
================================================================================
Total cultural            7.61 $   59.63   33.65 $     260.30     $64.75  $418.3
 costs                                 $                                       3

Harvest:
--------------------------------------------------------------------------------
Harvest                     0.65   $7.32    $21.79          0          0  $29.11
Build module                0.44   11.91      5.32      $9.50          0   26.73
Ginning                        0       0         0          0    $107.50  107.50
================================================================================
Total harvest             1.09 $   19.23   27.11 $       9.50    $107.50  $163.3
 costs                                 $                                       4
Postharvest:
Cut stalks                  0.10   $1.13     $1.55          0          0   $2.68
Cross disc                  0.19    2.14      3.72          0          0   $5.86
================================================================================
Total postharvest           0.29   $3.27     $5.27          0          0   $8.54
 costs
Capital 12.20%                                                            $26.78
 interest on
 operating
================================================================================
Total operating                   $82.13    $66.03  $269.80 $     172.25  $616.9
 costs per acre                                                                9
Cash overhead
 costs:
Land rent                                                                 $217.9
                                                                               2
Research and                                                                5.70
 promotion
Pink bollworms                                                              4.30
Classing HVI                                                                3.76
National Cotton                                                             1.07
 Council
Western Cotton                                                              0.11
 Growers
Office expense                                                             25.00
PCA contract fee                                                            3.26
Set aside                                                                   6.75
Property taxes                                                              3.77
Equipment                                                                   1.89
 insurance
Investment repairs                                                          0.21
================================================================================
Total overhead                                                            $273.7
 costs                                                                         4
================================================================================
Total cash costs                                                          $890.7
 per acre                                                                      3
--------------------------------------------------------------------------------

                                               Per
                                         producing  Depreciati  Interest   Total
                                              acre        on\b        \b    cost
------------------------------------  ------------  ----------  --------  ------
Non-cash overhead:
--------------------------------------------------------------------------------
ATV, 4WD                                     $6.77       $1.22     $0.45   $1.67
Fuel wagon                                    1.56        0.14      0.10    0.24
Shop tools                                   10.42        0.63      0.70    1.33
Equipment                                   666.89       96.49     44.75  141.24
================================================================================
Total non-cash overhead costs              $685.64      $98.48    $46.00  $144.4
                                                                               8
================================================================================
Total costs per acre                                                      $1,035
                                                                             .21
Gross values of production per acre                                       $1,192
                                                                             .85
Gross values of production per lb.                                         $0.76
Gain/loss from operations per acre                                        $157.6
                                                                               4
--------------------------------------------------------------------------------
Note:  Data Inputs-Labor rates:  $9.38 per hour for skilled labor and
$6.10 per hour for field labor.

CVP Improvement Act rate plus water district costs:  $38.95 per
acre-foot. 

Water required per acre:  3.0 acre-feet. 

Interest rate:  12.20 percent. 

Yield in pounds per acre:  1,360 - lint, 2,275 - seed. 

Crop value per pound:  $0.76 - lint, $0.07 - seed. 

Crop value per acre:  $1,033.60 - lint, $159.25 - seed. 

Gain from operations:  $157.64 per acre. 

\a CVP Improvement Act tiered pricing rate without the $6 per
acre-foot surcharge. 

\b Annual cost. 




(See figure in printed edition.)Appendix II
COMMENTS FROM THE BUREAU OF
RECLAMATION
=========================================================== Appendix I

See comment 1. 

See comment 2. 



(See figure in printed edition.)

See comment 3. 

See comment 4. 



   GAO'S COMMENTS
--------------------------------------------------------- Appendix I:5

1.  We agree that no legislation has authorized indexing upward the
construction cost repayment obligation of older units.  However,
because repayment costs are not indexed upward to their present
value, they do not include consideration of inflation over the years
and the interest that federal funds could have earned elsewhere. 
Dollars do not have the same value decades after their expenditure
that they had when they were spent. 

2.  Production costs do include a return to the farmer's equity
(equipment).  In our budgets, we applied an interest cost to the cost
of all equipment, whether owned or leased.  This cost represents a
cost of capital for leased equipment and an interest cost for
purchased equipment.  Because farmers would not have to pay this cost
for any owned equipment, it represents a return on farmers' equity
that is subtracted from the budget to arrive at the profit.  In our
budgets, equipment represents the only equity--all land is leased. 

As indicated in the footnote, our definition does not include an
allowance for returns for management. 

3.  We included weed control costs for the San Joaquin Valley farm as
set-aside costs for keeping land fallow.  We have revised our
Sacramento Valley farm budget to include these costs as well. 

4.  Irrigation costs differ between table 2.1 and the costs shown in
appendix I because irrigation costs shown in the appendix include the
CVP Improvement Act tiered pricing rates.  Rates shown in table 2.1
include the cost-of-service rate. 




(See figure in printed edition.)Appendix III
COMMENTS FROM THE CENTRAL VALLEY
PROJECT WATER ASSOCIATION
=========================================================== Appendix I



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



   GAO'S COMMENTS
--------------------------------------------------------- Appendix I:6

1.  We obtained extensive empirical data on farmers' use of project
water, crop patterns, and budget and water district costs for the
farm budgets we created.  The inputs were provided by the Cooperative
Extension Service, the University of California at Davis, farmers in
the Westlands Water District and Glenn-Colusa Irrigation District,
and district crop reports.  Our inputs were reviewed by university
professors, the farmers, and officials from the U.S.  Department of
Agriculture's Agricultural Stabilization and Conservation Service and
the Cooperative Extension Service. 

2.  We recognize that water supplies for many CVP farmers have been
reduced in recent years because of the drought and that future
supplies for some farmers also will be reduced under Endangered
Species Act restrictions, the CVP Improvement Act, or other
environmental requirements.  We have added discussion of these
factors in the report. 

However, we did not include water supply reductions in our analysis
for the following reasons:  (1) Drought conditions experienced by
farmers in recent years reflect an extreme situation.  If we had
based our budgets on water delivery levels provided under drought
conditions, we would have modeled profits for an atypical year, and
our results would have reflected the impacts of rate increases under
drought conditions rather than reflect the impacts of rate increases
under normal conditions.  (2) Future reductions in deliveries to CVP
farmers under the Endangered Species Act and the CVP Improvement Act
are unknown.  Because the Bureau was only able to provide us with
very rough estimates of possible short-term reductions over the next
5 years, we did not use these data in our analysis.  (3) We were
asked to examine the impact of rate increases on farmers'
profits--not the effect of reduced water supplies.  Our analysis
isolates the effect of increased rates on profits to the exclusion of
other factors.  While reduced supplies will affect farmers' profits,
perhaps to a greater extent than increased rates, our review did not
evaluate these impacts.  We have added the impact of water supply
reductions to the factors to be considered by the Congress. 

3.  We chose to use water rates and cropping patterns based on the
Glenn-Colusa Irrigation District (GCID) for several reasons.  First,
GCID is the largest federal irrigation district in the Sacramento
Valley, representing more irrigated acreage than any other single
irrigation district.  The irrigation districts that receive water
from the Tehama-Colusa Canal represent fewer irrigated acres combined
than the GCID, according to the Bureau of Reclamation's cropping
reports for 1991.  Tehama-Colusa districts had approximately 68,000
planted acres, with 94,000 acres in irrigation rotation, while GCID
had approximately 83,000 planted acres, with 126,000 acres in
irrigation rotation.  Districts that receive water from the Corning
Canal had approximately 12,000 acres in irrigation rotation, of which
approximately 6,000 acres were not irrigated.  Furthermore, over
62,000 acres in GCID were in rice production--over three times the
acreage of any type of crop grown by the districts served by the
Tehama-Colusa Canal. 

Different cropping patterns and different water rates among
irrigation districts affect farm profits and the impact of higher
rates on farmers.  We revised the report to indicate specifically
that our budgets do not apply to districts that receive all of their
water from the CVP and do not grow the crops modeled in our budgets,
such as those that receive CVP water through the Tehama-Colusa and
Corning Canals. 

4.  We do not agree with this assessment of our analysis.  As we
indicated in the comments above, we relied on empirical data to
create farm budgets representative of major commodities grown in two
regions of the Central Valley. 

5.  It was not within the scope of our review to analyze such recent
trends as increased groundwater pumping in certain districts.  We
agree that if surface water rates exceed groundwater costs, then
farmers will pump more groundwater.  We have added this information
to the report. 

6.  While we agree that the CVP faces uncertainty from the recent
statutory and regulatory changes, particularly the adequacy of water
availability and future water supplies, these impacts were beyond the
scope of our review.  The report recognizes that the Congress will
need to give appropriate weight to a host of factors in any decision
to raise irrigation rates.  We have added the impact of water supply
reductions to the factors to be considered by the Congress. 

7.  We have revised the report to recognize that land values in the
Central Valley have declined recently.  However, the recent land
auction in Westlands is not necessarily representative of future
changes in land values throughout the CVP. 

8.  We do not state or infer that there is a cause and effect
relationship between water costs and the Western Farm Credit Bank's
reduction in loan losses.  Our discussion of loan losses stresses
that higher water costs during the drought did not significantly
affect the overall farm economy.  In contrast, the high loan loss
rate and weak farm economy present in the 1980s--a period of stable
water rates--indicates that factors other than higher water costs did
adversely affect the farm economy to a much greater extent. 

9.  We revised the report to recognize that the decline of some farms
will affect local economies.  However, we were asked to examine the
impact of higher irrigation rates on farmers' profits, not on local
economies.  Because we did not analyze these impacts, we cannot
discuss them extensively. 

10.  The studies related to higher water prices and increased
irrigation efficiency and conservation are footnoted throughout the
report.  These studies specifically address Central Valley
agriculture. 

11.  We recognize in our report that each farm in the CVP is unique
and that actual impacts of higher irrigation rates will vary from
those calculated in our budgets.  We state that our budgets should
not be construed as indicative for all farms in the Central Valley. 
The report has been revised to specifically note some types of farms
in the Central Valley that we did not examine. 

See comment 3 regarding our selection of the Glenn-Colusa Irrigation
District. 

12.  We disagree that our crop yield assumptions are faulty.  We
relied upon yields provided by the County Commissioners for Fresno
and Colusa Counties for 1990, the most recent year for which data
were available at the time of our study.  These counties include the
Westlands Water District and the Glenn-Colusa Irrigation District. 

13.  References to the off-farm impacts have been added to the
report.  While we do not extensively discuss local economic impacts,
our report clearly indicates that, based on the changes in farm
profits and loan losses during the 6-year California drought, the
impacts of increased water rates on the overall California farm
economy will likely not be severe. 

14.  The Association references yields in the 1981-86 period.  We
used 1990 data, the most recent data available.  See comment 12. 

15.  We recognize the difficulty in estimating the average farm size
in the Central Valley.  In their comments to us on this draft report,
the Association and the Westlands Water District provided us
different averages in the CVP--one was for average farm size, the
other for average landholdings.  The Association indicated that the
average farm size was 660 acres in the west side of the San Joaquin
Valley and less than 660 on the east side.  The Westlands Water
District indicated that the average landholding was 865 acres. 
However, as indicated in previous GAO reports,\1 some landholdings of
less than 960 acres are operated collectively as single large farms. 
Therefore, landholdings often are not an accurate indicator of farm
size. 

We used 960 acres as the farm size for the San Joaquin Valley farm
because the Reclamation Reform Act limits subsidized water to 960
planted acres.  We used 320 acres for the Sacramento Valley farm
because according to ASCS, a husband and wife need about 320 acres to
obtain the maximum support payment. 

16.  In the "Matters for Congressional Consideration" section, we
have added the potential adverse impacts on local economies of
raising water prices as an additional factor the Congress should
consider. 

17.  At the state and federal level, tax revenues will not
necessarily decline as a result of higher water rates, because
adverse impacts on some sectors of the economy, such as Central
Valley farmers, is offset by benefits in other sectors of the
economy.  For example, as agricultural land values decline in the
Central Valley, land values and jobs can increase in areas that
receive additional water resulting from increased conservation. 
Because decreases in farm profit are expressed in decreased land
values, local property taxes may decline, and can be considered one
of the local economic impacts resulting from higher water rates. 

18.  We have revised table 1.1 to state that the rates apply only to
the water received from the CVP--not to water rights water held by
the district. 

19.  Farmers in the districts told us that they pay such rates.  We
have added to the report a statement that these rates represent
extreme differences in rates paid for CVP and State Water Project
irrigation water. 

20.  We have added to the report a statement that, as more water is
pumped, groundwater pumping costs may increase.  We have also
footnoted some of the adverse impacts of excessive groundwater
pumping. 

21.  The basis for the yields is explained in comment 12, and average
farm size rationale is addressed in comment 15.  Regarding garlic,
the report clearly states that garlic is a proxy for specialty crops. 
While garlic itself may not be a significant crop in the CVP,
specialty crops--which include garlic--are significant. 

22.  Our rationale for using data for Glenn-Colusa Irrigation
District is explained in comment 3. 

23.  We agree that an "agricultural depression" occurred in the early
and mid-1980s, that economic conditions had improved when the drought
occurred, and that farmers applied extreme measures to maintain high
levels of production during a period of reduced water supplies and
higher water costs.  These facts support our conclusions.  The data
indicate that price increases during the drought did not affect the
overall farm economy as much as other factors did--such as those that
caused the agricultural depression in the 1980s.  The data
demonstrate that farmers adjusted to water shortages and price
increases over a 6- or 7-year period to maintain high levels of
production.  Some of these adjustments may not be sustained over long
periods of time.  However, the price increases analyzed in our report
are not as severe as those experienced during the drought. 

24.  We agree that increases in irrigation efficiency will only occur
when they are economically feasible, that is, when farmers' profits
are higher with increased efficiency than they would be without it. 
Levels of efficiency achieved by farmers, therefore, depend upon the
profitability of increasing efficiency.  Profitability varies on the
basis of production costs, such as water costs, and revenues.  While
some districts, such as Westlands, may currently have high levels of
efficiency, irrigation efficiency throughout the Central Valley
varies, and many districts are not as efficient as Westlands. 

25.  The report recognizes that factors such as changes in commodity
prices and the opening of new markets can have a greater impact on
crop choice than irrigation costs.  As an example, we note that a
farmer generally will not plant tomatoes without a marketing
agreement with a processor. 

If water costs increase, profits will decrease, and farmers will
shift to crops that give them the greatest profit possible under the
circumstances.  We agree that there will be secondary impacts on the
local economy.  However, as we indicate in the report, the acreage
devoted to low-value crops would likely be reduced in response to
higher water rates in the Central Valley.  Shifting crops, whether to
high- or low-value crops, will decrease the impacts of higher water
rates on farmers and local economies. 

26.  See comment 17. 

27.  See comments 1, 2, and 3. 

28.  In the "Matters for Congressional Consideration" section, we
have added the potential adverse impacts on local economies of
raising water prices as an additional factor the Congress should
consider.  The "Matters for Congressional Consideration" section also
includes factors affecting farmers such as the extent to which
farmers can absorb increased irrigation costs, the potential adverse
impacts on farmers, the ability of farmers to mitigate the effects of
the price increases, and the impact of future water supply
reductions.  We agree that these factors all must be considered under
existing legislation. 



(See figure in printed edition.)Appendix IV

--------------------
\1 Water Subsidies:  Basic Changes Needed to Avoid Abuse of the
960-Acre Limit (GAO/RCED-90-6, Oct.  1989).

Water Subsidies:  The Westhaven Trust Reinforces the Need to Change
Reclamation Law (GAO/RCED-90-198, June 1990). 


COMMENTS FROM THE WESTLANDS WATER
DISTRICT
=========================================================== Appendix I

See comment 2. 



(See figure in printed edition.)

See comment 3. 

See comment 4. 



(See figure in printed edition.)

See comment 5. 

See comment 6. 

See comment 7. 



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)

and 45-47. 



(See figure in printed edition.)



(See figure in printed edition.)



   GAO'S COMMENTS
--------------------------------------------------------- Appendix I:7

1.  We disagree that the discrepancy between actual water deliveries
to the Westlands Water District in 1990 and the delivery levels we
use in our hypothetical San Joaquin Valley farm is a fundamental and
fatal flaw in the report and materially distorts the entire
analytical approach and the conclusions of the report.  Our intent
was not to replicate the particular farming conditions present in the
Westlands Water District in 1990.  Rather, we designed our
hypothetical farms to reflect typical farming practices in the San
Joaquin and Sacramento Valleys in general, using the most recent data
available.  In general, San Joaquin Valley farms use water levels of
3 acre-feet of water for cotton. 

The most recent year for which complete data were available at the
time of our study was 1990.  However, we did not use 1990 water
deliveries because we did not want to model farm production costs and
profits under the extreme drought conditions present in 1990.  If we
had used 1990 water levels, we would have modeled profits for an
atypical year, and our results would have reflected the impact of
rate increases under drought conditions rather than the impact of
increased water rates on farm profits.  The higher water rates
provided by the Westlands Water District in its comments reflect the
higher costs of pumped groundwater and water purchased outside the
CVP necessary to supply water levels of 3 acre-feet in the Westlands
Water District in 1990. 

In developing farm budgets for the San Joaquin Valley farm, we relied
on data from Westlands Water District for some, but not all
variables.  For example, data on water rates and cropping patterns
are based on Westlands Water District while crop yields and water
usage were based on 1990 data for Fresno County, in which Westlands
is located.  Westlands is the largest water district in the San
Joaquin Valley; however, it also is more efficient than many
districts in the valley.  Modeling all conditions based on Westlands,
therefore, would be unrepresentative of other locations in the
valley. 

To remove any suggestion that our hypothetical San Joaquin Valley
farm specifically represents a Westlands Water District farm, we have
clarified our description of our farm budgets in the report. 

2.  We have revised the report to state that the CVP has delivered 6
million acre-feet, historically, to water rights holders and
contractors. 

3.  We changed the report to state that the water supply refers to
developed water. 

4.  The report recognizes that, under reclamation reform act
provisions, some farmers and districts pay the Bureau's O&M rate. 
The report also recognizes that some farmers and districts pay the
fixed contract rate, the CVP's full-cost rate, and the
cost-of-service rate, as specified by Westlands Water District in its
comment.  Table 1.1 specifically lists certain rates for Westlands
Water District and two other districts and presents the range of
rates paid for CVP water.  The Bureau O&M rates paid by some are
included within this range. 

5.  We do not state or infer that the economy of California or the
United States would be better off without the CVP.  The purpose of
the footnote is to recognize that the capital costs owed on the
irrigation component of the CVP do not include interest charges. 
Because the government does not receive interest on its investment in
the irrigation component of the CVP, it incurs opportunity costs. 
Opportunity costs exist for money invested anywhere in the economy
because the money invested could have earned returns (such as
interest) elsewhere.  We have clarified the footnote. 

6.  The percent of contractors with O&M deficits is important because
most CVP contractors will pay part of their O&M deficit in their
cost-of-service rate once contracts are renewed. 

7.  We have revised the table to show the 1992 rates. 

8.  We used the Bureau's 1992 Irrigation Water Rate published by the
Mid-Pacific Regional Office in the fall of 1991, for the 1992
irrigation season.  The rates the Bureau charged Westlands in 1992
varied from those published the previous fall.  We revised the report
to reflect the rates Westlands stated were actually charged. 

9.  We revised the report to show that the $6 charge is indexed to
1992 price levels. 

10.  We revised the report to recognize that as the cost of surface
water exceeds the cost of groundwater, farmers will pump more
groundwater.  We have also footnoted some of the adverse impacts of
excessive groundwater pumping. 

11.  We do not agree that not analyzing future reductions in water
supplies is a fatal flaw in our analysis.  While water supply can
impact farmers' profits, we were asked to examine the impact of
increased water rates, and not the impact of reduced supplies, on
farmers' profit.  Moreover, future reductions in deliveries to CVP
farmers under the CVP Improvement Act are unknown.  Because the
Bureau was only able to provide us with very rough estimates of
possible short-term reductions over the next 5 years, we did not use
these data in our analysis.  We have added the impact of water supply
reductions to the factors to be considered by the Congress. 

12.  The statement concerning the effect of increased water costs on
the California farm economy is highly relevant and significant.  The
evidence we obtained on the effect of the extensive, recent drought
showed that despite higher irrigation rates and water shortages,
California's overall farm economy remained strong, and other economic
variables, such as interest rates, the export market, and the value
of the U.S.  dollar, affected the farm economy more than water rates. 
We have clarified the report to state that impacts on California's
overall farm economy are not likely to be severe. 

We have revised the report to indicate that adverse impacts on
individuals can hurt local economies that rely on these individuals. 
However, we were asked to examine the impact of higher irrigation
rates on farmers' profits, not on local economies.  Because we did
not analyze these impacts, we cannot discuss them extensively. 

13.  Our definition of profit includes an allowance for interest on
investment, although it is not listed as a separate item.  In our
budgets, we applied an interest rate to the value of all equipment,
whether owned or leased.  This cost represents a cost of capital for
leased equipment and an interest cost for purchased equipment. 
Because farmers would not have to pay this cost for any owned
equipment, it represents a return on farmers' equity that is
subtracted from the budget to arrive at the profit.  In our budgets,
equipment represents the only equity--all land is leased. 

We have clarified the footnote to state that the budgets reflect farm
profits before reductions for taxes. 

14.  See comment 11. 

15.  We have added this information on wheat production to the
report. 

16.  The report recognizes that each farm in the CVP is unique and
that our budgets should not be construed as indicative of all farms
in the Central Valley.  We believe, however, that the budgets provide
an indication of the effects of increased irrigation rates on farms
with similar characteristics to our simulated farms. 

This belief is buttressed by Westlands' analysis of its 1991 crop
reports.  By stating that 35 percent of the water users in Westlands
do not match the cropping pattern assumptions in the report,
Westlands is agreeing that our hypothetical San Joaquin Valley farm
matches the cropping patterns of 65 percent of the water users in
Westlands--the largest water district in the valley. 

17.  Property taxes are included under the general heading of
"overhead" in table 2.1 and are listed as a separate item in appendix
I.  As one of our assumptions, the costs associated with irrigation
water delivery are included in the rental cost for land.  This
includes water district repayment assessments.  These costs vary from
water district to water district and are frequently negotiated in
land leases. 

See comment 1 for the discussion on discrepancies in water supply. 

18.  We assumed that farmers determined crop acreage to maximize ASCS
payments because it seemed unlikely that farmers would choose to
exceed the acreage limitation and become ineligible for payments, or
conversely, to reduce acreage and not receive all payments available. 

We recognize the difficulty in estimating the average farm size in
the Central Valley.  In their comments to us on this draft report,
the Association and the Westlands Water District provided us
different averages in the CVP--one was for average farm size, the
other for average landholdings.  The Association indicated that the
average farm size was 660 acres in the west side of the San Joaquin
Valley and less than 660 on the east side.  The Westlands Water
District indicated that the average landholding was 865 acres. 
However, landholdings often are not an accurate indicator of farm
size.  As indicated in previous GAO reports,\2 some landholdings of
less than 960 acres are operated collectively as single large farms. 

Our water usage for cotton and tomatoes is appropriate.  In
developing farm budgets for the San Joaquin Valley farm, we relied on
data from Westlands Water District for some, but not all variables. 
Westlands is more efficient than many districts in the valley. 
Modeling all conditions based on Westlands, therefore, would be
unrepresentative of other locations in the valley.  Data on water
usage and crop yields were based on 1990 data for Fresno County, in
which Westlands is located. 

19.  Our statement that increased irrigation rates give farmers
incentive to change their farm management practices and reduce water
use does not imply that farmers in Westlands Water District do not
currently have incentive to reduce irrigation losses.  We recognize
that Westlands engages in more efficient irrigation practices than
many other districts.  Our statement referred to farmers in general
and indicates that increased rates provide even more incentive for
conservation. 

We disagree that reduced profits from increased rates will decrease
the number of farmers who make irrigation system improvements. 
Improving efficiency is a way to mitigate the reductions in profit
resulting from higher water rates.  Farmers will improve efficiency
if, faced with higher water rates, it is profitable to do so. 

20.  We recognize that increased irrigation efficiency may not always
reduce water use.  However, higher water costs provide an incentive
to conserve on water use.  Higher irrigation efficiency caused by
higher rates reduces water use. 

21.  We agree that many factors affect irrigation efficiency and
differences in reported efficiencies can occur.  The attainable
efficiencies included in our report were provided by California State
University at Fresno. 

22.  Our figures on water usage are not specific to Westlands but
represent other areas in the San Joaquin Valley as well.  As
explained in comment 1, water usage was based on 5-year averages for
Fresno County, and other water districts are not as efficient as
Westlands. 

23.  We believe that we have developed a more accurate indication of
current ability-to-pay than the Bureau's figures.  We developed our
farm budgets with the most recent data available and obtained input
and review from many knowledgable sources. 


--------------------
\2 Water Subsidies:  Basic Changes Needed to Avoid Abuse of the
960-Acre Limit (GAO/RCED-90-6, Oct.  1989).

Water Subsidies:  The Westhaven Trust Reinforces the Need to Change
Reclamation Law (GAO/RCED-90-198, June 1990). 


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V


   RESOURCES, COMMUNITY, AND
   ECONOMIC DEVELOPMENT DIVISION,
   WASHINGTON, D.C. 
--------------------------------------------------------- Appendix V:1

Leo E.  Ganster, Assistant Director
Amy Mathews Amos, Assignment Manager


   SAN FRANCISCO REGIONAL OFFICE
--------------------------------------------------------- Appendix V:2

Steven G.  Reed, Issue Area Manager
James E.  Hampton, Evaluator-in-Charge
Laurie C.  King, Staff Member
Christine L.  McIntyre, Staff Member


   OFFICE OF THE CHIEF ECONOMIST
--------------------------------------------------------- Appendix V:3

James R.  White, Assistant Director


   OFFICE OF THE GENERAL COUNSEL
--------------------------------------------------------- Appendix V:4

Stanley G.  Feinstein, Senior Attorney


SELECTED BIBLIOGRAPHY
=========================================================== Appendix 1

Archibald, Sandra, et al An Economic Analysis of Water Availability
in California Central Valley Agriculture Phase II.  Stanford,
California:  Center for Economic Policy Research (Feb.  1992). 

Archibald, Sandra, et al An Economic Analysis of Water Availability
in California Central Valley Agriculture Phase III.  Stanford,
California:  Center for Economic Policy Research (Aug.  1992). 

Blank, Steven and Karen Jetter.  "The Effects of Higher Electrical
Costs on the Financial Outlook for California Agriculture," Davis,
California:  Agricultural Economics Department, University of
California at Davis (Mar.  1992). 

Burt, Charles.  Surface Irrigation Handbook.  Exeter, California: 
Waterman Industries (Mar.  1987). 

Cannon, Frederick.  "Overview of Financial Conditions in California
Agriculture:  Implications of Higher Electrical Rates" (Mar.  1992). 

Caswell, Margriet, Eric Lichtenberg, and David Zilberman.  "The
Effects of Pricing Policies on Water Conservation and Drainage,"
American Journal of Agricultural Economics (Nov.  1990). 

Dinar, Ariel and David Zilberman.  The Economics and Management of
Water and Drainage in Agriculture, Boston, Massachusetts:  Kluwer
Academic Publishers (1991). 

Klonsky, Karen.  "Budget Planner--Version 2.0," Davis, California: 
Regents of the University of California (1990). 

Solomon, Kenneth, Dennis Nef, Greg Jorgensen, David Zolodske. 
"Higher Agricultural Electricity Rates--A San Joaquin Valley
Perspective," Fresno, California:  A Study for the California Energy
Commission (Mar.  1992). 

Vaux, Jr., H.J., Dale Handley, Paul Giboney.  "An Assessment of
Irrigation Technology Performance in the Southern San Joaquin Valley
of California," Water Resources Research, Vol.  26, No.  1:  Pages
35-41 (Jan.  1990). 

Zilberman, David, Neal MacDougall, Richard Howitt, L.  Tim Wallace. 
"Analysis of the Economic Impacts of The Central Valley Improvement
Act" (Mar.  1992). 

"Increasing Agricultural Electricity Rates:  Analysis of Economic
Implications and Alternatives," Sacramento, California:  California
Energy Commission, P400-92-030 (June 1993). 

Water Conservation Plan--Westlands Water District, Fresno,
California:  Westlands Water District (July 1992). 

"Effective Use of Water in Irrigated Agriculture," Council for
Agricultural Science and Technology, Task Force Report No.  113,
Ames, Iowa:  (June 1988). 

