Rural Water Projects: Identifying the Benefits of the Proposed Lewis and
Clark Project (Letter Report, 05/28/99, GAO/RCED-99-115).

Pursuant to a congressional request, GAO provided information on the
benefits of constructing the Lewis and Clark Rural Water Project,
focusing on: (1) what benefits could derive from the Lewis and Clark
project; (2) who could receive these benefits; and (3) how these
benefits are valued.

GAO noted that: (1) the potential benefits from the Lewis and Clark
project generally fall into three categories: (a) societal benefits; (b)
economic benefits; and (c) fiscal benefits; (2) local water users such
as households and businesses would be the major beneficiaries of the
Lewis and Clark project; (3) they would benefit from lower water-related
expenditures and costs as well as higher income because of increases in
local economic activity and transfers of economic activity into the
Lewis and Clark service area from outside the region; (4) these
transfers could include moving slaughterhouses or food processing plants
from other states or counties; (5) concerning fiscal benefits, local and
state governments would be the principal recipients of any net increases
in sales and income tax revenues that would result from increases in
economic activity; (6) counties and school districts could benefit if
there were increases in taxes; (7) conversely, the federal government
would realize little fiscal benefit from the Lewis and Clark project;
(8) however, the federal government could realize nonfinancial benefits
by making progress toward the objectives of improving the lifestyle of
rural residents, investing in the development of the infrastructure of
rural America, and ensuring compliance with federal drinking water
standards; (9) the benefits from municipal and industrial water projects
are difficult to value; (10) at the national level, there would be
little change in net economic activity, but transfers of economic
activity into the Lewis and Clark service area could result in increased
regional economic activity; (11) for a given water district, the cost of
its reasonable alternative to constructing a particular water project,
such as drilling additional water wells or replacing a water treatment
plant, can produce an approximation of the value of the project's
economic benefits so long as the alternative yields the same quantity
and quality of water; (12) for the water districts that would be served
by the Lewis and Clark project, GAO estimated that the sum of the
alternative costs that would be avoided if the Lewis and Clark project
was built to be between about $71 million and $81 million in 1998
dollars; and (13) these figures should be considered the minimum value
of the economic benefits to the area served because few of the
alternatives would produce the same quality of water as the Lewis and
Clark project and because two of the water districts in the area that
have reasonable alternatives to the project did not estimate the cost of
their alternatives.

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

 REPORTNUM:  RCED-99-115
     TITLE:  Rural Water Projects: Identifying the Benefits of the
	     Proposed Lewis and Clark Project
      DATE:  05/28/99
   SUBJECT:  Potable water
	     Rural economic development
	     Water supply management
	     Regional development programs
	     Water resources development
	     Economic analysis
	     Economically depressed areas
	     Federal aid programs
IDENTIFIER:  Lewis and Clark Rural Water Project (IA/MN/SD)
	     South Dakota
	     Iowa
	     Minnesota
	     Drinking Water State Revolving Fund

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

Report to the Chairman, Subcommittee on Water and Power, Committee on
Resources, House of Representatives

May 1999

RURAL WATER PROJECTS - IDENTIFYING
THE BENEFITS OF THE PROPOSED LEWIS
AND CLARK PROJECT

GAO/RCED-99-115

Rural Water Projects

(141230)

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

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

B-282187

May 28, 1999

The Honorable John T.  Doolittle
Chairman, Subcommittee on Water and Power
 Committee on Resources
House of Representatives

Dear Mr.  Chairman: 

This report responds to your July 22, 1998, request regarding
legislation that would authorize the construction of and funding for
the Lewis and Clark Rural Water Project.  The purpose of the proposed
project is to provide a water supply for cities and rural areas in
southeastern South Dakota, northwestern Iowa, and southwestern
Minnesota to address the dual problems of inadequate quantities of
water and poor quality of water.  The cost of the project is
estimated to be $282.9 million (in 1993 dollars).  While a specific
estimate of the project's costs was developed, no definitive estimate
of the value of its benefits was developed.  As a result, you
requested that we conduct an economic evaluation focusing on the
direct economic benefits that could come from constructing such a
system.  The focus of the evaluation was to determine the relative
benefits to local water users, cities and communities, the respective
states, and the federal government.  You expressed interest in using
this information to provide guidance on allocating the respective
cost shares for the participants.  To determine the relative
benefits, we obtained information on the following questions:  (1)
What benefits could derive from the Lewis and Clark project?  (2) Who
could receive these benefits?  (3) How are these benefits valued? 

   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The potential benefits from the Lewis and Clark project generally
fall into three categories:  (1) societal benefits, such as the
improved health, safety, and lifestyle of residents; (2) economic
benefits, such as an increase in the value of the national or
regional goods and services produced because of the project (for
example, increases in hog production); and (3) fiscal benefits, such
as higher tax revenues because of increased economic activity or
increases in the value of taxed properties. 

Local water users such as households and businesses would be the
major beneficiaries of the Lewis and Clark project.  They would
benefit from lower water-related expenditures and costs as well as
higher income because of increases in local economic activity and
transfers of economic activity into the Lewis and Clark service area
from outside the region.  These transfers could include moving
slaughterhouses or food processing plants from other states or
counties.  Concerning fiscal benefits, local and state governments
would be the principal recipients of any net increases in sales and
income tax revenues that would result from increases in economic
activity.  Counties and school districts could benefit if there were
increases in property taxes.  Conversely, the federal government
would realize little fiscal benefit from the Lewis and Clark project. 
However, the federal government could realize nonfinancial benefits
by making progress toward the objectives of improving the lifestyle
of rural residents, investing in the development of the
infrastructure of rural America, and ensuring compliance with federal
drinking water standards. 

The benefits from municipal and industrial water projects are
difficult to value.  Specifically, societal benefits cannot be
monetarily measured with reasonable accuracy.  Economic benefits are
difficult to measure because of the difficulty in attributing
increases in economic activity directly to changes in the quantity
and quality of water.  At the national level, there would be little
change in net economic activity, but transfers of economic activity
into the Lewis and Clark service area could result in increased
regional economic activity.  For a given water district, the cost of
its reasonable alternative to constructing a particular water
project, such as drilling additional water wells or replacing a water
treatment plant, can produce an approximation of the value of the
project's economic benefits so long as the alternative yields the
same quantity and quality of water.  For the water districts that
would be served by the Lewis and Clark project, we estimated that the
sum of the alternative costs that would be avoided if the Lewis and
Clark project was built to be between about $71 million and $81
million in 1998 dollars.  These figures should be considered the
minimum value of the economic benefits to the area served because few
of the alternatives would produce the same quality of water as the
Lewis and Clark project and because two of the water districts in the
area that have reasonable alternatives to the project did not
estimate the cost of their alternatives. 

   BACKGROUND
------------------------------------------------------------ Letter :2

The 300,000 people in 14 counties near the junction of South Dakota,
Iowa, and Minnesota use groundwater as their principal municipal and
industrial water source.  The 100,000 urban residents of Sioux Falls,
the largest city in the area, obtain water from the city's municipal
water system, while rural residents of the area obtain water
primarily from smaller rural water districts.  A number of rural
residents obtain their own water from private wells.  Good-quality
water, however, is in short supply in this area.  Shallow aquifers, a
major source of water in the area, often hold insufficient quantities
of water for expanding populations and economic activity, and
quantities can be limited during times of drought.  Also, the
groundwater commonly obtained from these shallow aquifers is
vulnerable to contamination from nitrates and pesticides from the
intense agriculture that is the main economic activity of the area. 
Groundwater is often plentiful in deeper aquifers, but it is highly
mineralized and, thus, requires expensive treatment. 

Because of the insufficient quantities of good-quality water, 22
water districts within the area in 1990 formed what became known as
the Lewis and Clark Rural Water System.  The Congress provided
funding to the water system for a feasibility study to identify
alternative sources of drinking water.  This water is not intended to
be used for irrigation but would be used for drinking and for other
domestic activities such as laundry, fire fighting, and lawn
watering.  Engineering firms under contract with the Lewis and Clark
Rural Water System recommended the diversion of up to 23.5 million
gallons daily of Missouri River water to be treated and dispersed
through an extensive pipeline system in the tristate area.  This
diversion project became known as the Lewis and Clark project. 

The proposed Lewis and Clark project will consist of a diversion
system, water treatment plant, and distribution system that will
account for about $231.5 million (or 82 percent) of the project's
expenditures.  The recommended diversion system consists of a series
of wells that will pump water through gravel and sand adjacent to and
beneath the Missouri River near Vermillion, South Dakota.  A nearby
plant will treat this water.  A distribution system consisting of
about 400 miles of pipeline, five ground storage reservoirs, and nine
pump stations will then deliver water to serve connection facilities
within each of the 22 member districts (see fig.  1).  Engineering
costs will amount to about $25.4 million (9 percent) of the project's
expenditures, while legal costs, administrative costs, easements, and
land acquisitions will total about $13.9 million (5 percent).  The
remaining $12.1 million (4 percent) will consist of environmental
expenditures:  $2 million (in 1993 dollars) will be spent to mitigate
environmental damage caused by the construction of Lewis and Clark,
and another $10.1 million (in 1993 dollars) is suggested for
environmental enhancements of wetlands. 

   Figure 1:  Map of the Proposed
   Lewis and Clark Rural Water
   Project

   (See figure in printed
   edition.)

As we reported in May 1998, the construction of the proposed Lewis
and Clark project does not qualify for federal fundingï¿½through either
outright grants or repayable loansï¿½under any of the established
federal water programs.\1 For example, the inclusion of Sioux Falls'
100,000 residents in the Lewis and Clark project excludes outright
grants from the U.S.  Department of Agriculture because the
Department does not fund water projects in communities with
populations exceeding 10,000.  Although the Bureau of Reclamation and
the Environmental Protection Agency provide repayable loans to fund
100 percent and 80 percent, respectively, of water projects, an
ability-to-pay study found that the water districts in the Lewis and
Clark service area would be unable to repay these loans because the
cost would exceed their resources. 

Consequently, the Lewis and Clark project's sponsors are requesting
legislation that would authorize a federal grant to cover
construction.  The proposed legislation provides a formula for the
federal and nonfederal sharing of the costs of this construction. 
With the exception of the city of Sioux Falls, the federal government
would fund 80 percent of the project's planning and construction
costs, and nonfederal interests would fund the remaining 20 percent. 
For the city of Sioux Falls, the federal government and nonfederal
interests would each provide 50 percent ï¿½of the incremental cost to
the city of participation in the project.ï¿½

ï¿½Incremental costï¿½ is not defined in the proposed legislation, and
there is more than one way to interpret those words.  For purposes of
this report, we read the ï¿½incremental costï¿½ that would be subject to
50/50 federal funding to be Sioux Falls' proportionate share of the
project's capital costs based on its water demand as cited in the
project's feasibility study.  This proportionate share is 42.6
percent of the $282.9 million project's total cost less a small
amount (about $8.5 million), which we interpret the federal
government would pay for environmental enhancements.  Hence, we
estimate cost shares as follows:  the federal government would be
responsible for $192.9 million; Sioux Falls' nonfederal cost share
would be $58.5 million; and the other than Sioux Falls' nonfederal
cost share would be $31.5 million.  These amounts represent 68.2,
20.7, and 11.1 percent, respectively, as displayed in figure 2. 

   Figure 2:  Allocation Among the
   Participants of the Lewis and
   Clark Project's Costs (in 1993
   dollars)

   (See figure in printed
   edition.)

The Bureau of Reclamation concurred that our interpretation of
incremental costs is reasonable but pointed out that other
interpretations may exist.  According to the Executive Director of
the Lewis and Clark Rural Water System, for example, the project's
sponsors interpret the wording in the proposed
legislation,ï¿½incremental cost to the city of participation in the
project,ï¿½ as the amount of savings if Sioux Falls was dropped from
the project.  That is, the sponsors equate incremental cost to an
estimated savings from downsizing the pipelines, treatment plant, and
wells to account for water that no longer would be delivered to Sioux
Falls.  According to the Executive Director, the same engineering
firm that designed the Lewis and Clark project estimated that this
savings would be $55.2 million, and the nonfederal cost share for
Sioux Falls would be 50 percent of this amount, or $27.6 million. 

Although the Bureau of Reclamation provided technical assistance and
oversight to the Lewis and Clark project, the project was never
advanced for authorization by the Bureau and does not meet the
Bureau's funding criterion of having water users repay 100 percent of
the costs of projects.  Hence, the Bureau opposes the use of its
appropriations to fund the construction of the Lewis and Clark
project.  Although the Bureau did not conduct a cost-benefit study,
as it would for a Bureau-sponsored project, the Bureau did conduct
studies, at the request of the project's sponsors, to determine the
willingness and ability of the water users to pay the additional
costs for water from the project.  Willingness-to-pay is regarded by
economists as one alternative method for estimating the economic
benefits from these types of projects. 

--------------------
\1 See Rural Water Projects:  Federal Assistance Criteria
(GAO/RCED-98-204R, May 29, 1998). 

   NATURE OF THE BENEFITS OF THE
   LEWIS AND CLARK RURAL WATER
   PROJECT
------------------------------------------------------------ Letter :3

The benefits associated with a rural municipal and industrial water
project such as the Lewis and Clark project are a result of increases
in both the quantity and quality of water.  These benefits can
generally be categorized as (1) societal benefits, (2) economic
benefits, and (3) fiscal benefits.  The societal benefits include
improvements in the health, safety, and lifestyle of residents served
by the project.  Health improvements could result from the Lewis and
Clark project because of the improved quality of the water.  For
example, the Environmental Protection Agency's research reveals that
a reduction in sulfate concentration in a community's drinking water
could result in fewer gastrointestinal illnesses and reductions in
nitrate concentrations in drinking water could result in fewer
infants being at risk of serious illness or death.  The project could
improve safety in the region by making more water available for
fighting fires in the smaller communities.  Lifestyle improvements
could result from more water being available for landscaping or from
a better quality of water being available for drinking, bathing, and
washing clothes.  The societal benefits also include contributing to
the federal government's efforts to pursue its goal of furthering
economic development in rural America. 

The economic benefits are increases in the economic value of the
national or regional output of the goods and services produced as a
result of increases in the quantity or quality of water.  The Lewis
and Clark project could have an impact on hog and cattle production,
milk production, and other agricultural products made from soybeans,
corn, and eggs that are processed by local plants.  For example,
farmers have reported increased weight gains in hogs when rural areas
have switched to water having lower sulfates and hardness. 
Similarly, dairy farmers have attributed increased milk yields to
better quality water.  Although the water from the Lewis and Clark
project will not be used for irrigation, community officials stated
that an increased availability of water could provide opportunities
for economic development of industries whose processes require large
amounts of water, such as ethanol plants and food processing plants,
in the Lewis and Clark service area.  In addition, the improved
quality of the water would increase the longevity of water heaters,
water softeners, and other appliances by reducing mineral deposits
and thereby saving residents repair and replacement costs. 

The fiscal benefits are net increases in government revenues that
result from an increase in economic activity.  Proposed construction
projects such as the Lewis and Clark project would have an impact on
fiscal revenues.  Should the Lewis and Clark project be built,
increased sales tax revenues could result from an increase in
economic activity, and increased income tax revenues could result
from the higher earnings associated with this economic growth,
particularly in the agricultural sector.  Increases in the quantity
and quality of water could lead to increases in property values,
which in turn could increase property tax revenues.  However, the net
fiscal benefit to the various levels of government would depend also
on the impact of the project on various government expenditures,
including increases in infrastructure spending or increases in
government outlays to meet increased demands for government services. 

   BENEFICIARIES OF THE LEWIS AND
   CLARK RURAL WATER PROJECT
------------------------------------------------------------ Letter :4

The local water users, such as households and businesses, would
receive most of the benefits from the Lewis and Clark project.  Thus,
the project's 22 member districts would not benefit directly because,
as nonprofit water providers, they function as their customers'
agents in obtaining water and deliver water to users at or near cost. 
The benefits accruing to local water users could include (1) higher
personal income resulting from the increase in economic activity; (2)
decreased costs for replacing water heaters, maintaining water
softeners, and servicing other appliances; and (3) societal benefits,
such as improved health and lifestyles. 

State and local governments would benefit primarily from the
increases in tax revenues resulting from an anticipated increase in
the production and sales of goods and services.  State and local
governments could also benefit from increased sales and income taxes
generated from the construction activities of the Lewis and Clark
project.  County governments and school districts could be the
beneficiaries of increased property tax revenues. 

The federal government would realize only minimal financial benefits
from the Lewis and Clark project.  Increases in federal income tax
revenues resulting from increased economic activity attributable to
the project would likely be minimal.  However, the project would
benefit the federal government to the extent that it will be a means
of achieving such objectives as meeting federal drinking water
standards, improving the quality of rural life, and investing in the
infrastructure of rural America. 

   HOW BENEFITS FROM THE LEWIS AND
   CLARK RURAL WATER PROJECT ARE
   VALUED
------------------------------------------------------------ Letter :5

The societal benefits, such as meeting federal drinking water
standards, improvements in health and lifestyle, and investing in the
development of the infrastructure of rural America, cannot be
measured monetarily with reasonable accuracy.  For example, water
experts we interviewed stated that improved public health is a major
benefit, but the benefit is difficult to measure.  Improvements in
health were also cited by district representatives as a major benefit
of the Lewis and Clark project.  However, neither the reduction in
illnesses nor the subsequent reduction in health care costs that
might be attributable to better quality water can be valued with
precision. 

Similarly, it is not possible to accurately assign a monetary value
to an improved lifestyle attributed to better-tasting water. 
However, the Congress has recognized the long-standing need to
improve the quality of water in rural America.  For example, the
Rural Utility Service, through its water and wastewater loan and
grant program, has helped fund almost 17,000 water and sewer projects
serving more than 12,500 rural communities in the last 30 years. 
Also, the objective of the Environmental Protection Agency's Drinking
Water State Revolving Loan Fund program is to ensure that the
nation's drinking water supplies remain safe and affordable.\2

The economic benefits of water projects such as the Lewis and Clark
project are, for the most part, difficult to quantify because of the
difficulty in attributing with any precision an increase in economic
activity directly to an increase in water.  Water is rarely the sole
factor responsible for economic change, but water can facilitate
economic expansion.  For example, hog farmers are unlikely to decide
to raise more hogs based solely on the availability of better quality
water.  Instead, they are also likely to consider the cost of feed,
the amount of available space in their sheds, and the market demand
as reflected in the price paid for their product by slaughterhouses. 

Despite the difficulty of measuring the economic benefits, increases
in the value of the output of goods and services resulting from the
Lewis and Clark project can be viewed from either the national or
regional perspective.  Although both perspectives are measures of
changes in the value of goods and services produced, the regional
benefits could be significantly different from the national benefits
because regional benefits capture the transfer of economic activity
into the project's service area from outside the region.  Regional
transfers will result in no net national benefits. 

At the national level, we believe the increases in the value of goods
and services due to the Lewis and Clark project would be minimal. 
Increases in the output of goods and services do not necessarily
result in an increase in their value.  For example, hog production,
one of the major industries in the tristate area, was initially
expected to increase locally because of the anticipated improvements
in the quantity and quality of water.  However, production exceeded
the demand of slaughterhouses in 1998, resulting in plummeting
prices.  The hog price in December 1998 was $14.70 per 100 pounds,
down from an average price of $52.90 in 1997.  Additional production
would probably only lower prices further and would not necessarily
increase the total value of hog production nationally.  Because of
this decline in hog prices, smaller family farms are selling hogs at
a loss.  Similarly, the December 1998 beef cattle price of $55.80 per
100 pounds was down from an average price of $63.10 in 1997,
resulting in lower incomes. 

From the regional perspective, however, the economic benefits of
water projects are greater.  The regional benefits reflect not only
the increase in value of the goods and services produced in the
region but also the regional economy's gain from transfers of
industries into the area.  For example, local planners expect that on
completion of the Lewis and Clark project, food processing and
ethanol plants may relocate to their region. 

Because of the difficulty of identifying and directly attributing
changes in economic activity to the quantity and quality of water,
analysts have developed other methods that, for the most part, can
approximate the value of benefits accruing from a water project.  One
method, called a willingness-to-pay study, surveys water users and
asks them how much they are willing to pay for an increase in the
quality and quantity of their water.  The Bureau of Reclamation
analyzed a survey conducted by the Lewis and Clark project's sponsors
in 1992 and estimated that residents in the project's service area
were only willing to pay an additional $3.34 million per year to
ensure a safe and reliable future water supply.  Over the 40-year
life expectancy of the Lewis and Clark project, this amounts to about
$87 million in 1998 dollars.\3 As a result, the Bureau concluded that
from a purely economic standpoint, the Lewis and Clark project does
not pay for itself since the cost of the proposed project is $282.9
million.  However, if the project is required to meet future water
quality standards or solve reliability problems that must be dealt
with regardless of cost, the Bureau concluded that the Lewis and
Clark project may be the most cost-effective way to reach such goals. 
Moreover, economists that we contacted said that figures reported by
respondents in willingness-to-pay studies may underestimate total
benefits because respondents may fear that their water bills would be
increased by the amounts they report. 

Another method used by economists in estimating the value of a water
project's benefits is estimating the cost of reasonable alternatives
that would be avoided if the project is built.  In other words, how
much the beneficiaries are willing to pay for an alternative water
system provides an estimate of the value they would place on the
benefits they expect to receive from the increase in the quality and
quantity of their water.  At the water district level, this cost
represents the value of the project's benefits to all water users in
the district, including households, farms, and businesses.  This
method can approximate the value of benefits if the alternative will
produce the same quantity and quality of water as the proposed
project. 

To that end, we asked the 22 individual water districts to identify
and estimate the cost of reasonable alternatives that would be
avoided if the Lewis and Clark project is built.  Reasonable
alternatives for the water districts in the project's service area
include drilling additional wells, modifying or building treatment
plants, and purchasing water from other water districts.  A summary
of these alternatives and their individual costs appears in appendix
I. 

We estimate that the sum of these alternative costs for Lewis and
Clark members ranges between about $71 million and $81 million in
1998 dollars.  However, these figures should be considered minimum
values because many alternatives would not produce the same quality
of water as the Lewis and Clark project and because two districts did
not estimate the cost of their alternatives.  In addition, only 5 of
16 alternatives that would require large capital investments were
based on detailed written cost estimates or engineering studies, so
several of the verbal estimates we obtained may lack accuracy.  It
should be noted that for many of the districts, the proportionate
nonfederal share of the Lewis and Clark project adjusted to 1998
dollars would be less than the cost of their reasonable alternatives
because the federal government would assume most of the costs.  A
notable exception is the Sioux Falls component whose nonfederal
proportionate share of about $64 million (in 1998 dollars) is more
than double the cost of its alternative (in 1998 dollars). 

The net fiscal benefits attributable to the Lewis and Clark project
would depend largely on changes in the economic activity in the
region as well as on changes in the governments' outlays for services
and infrastructure.  The Bureau of Reclamation estimated the tax
revenue increases expected from the construction activities of the
Lewis and Clark project to be about $16.5 million in 1992 dollars. 
Its estimate included the excise, fuel, sales, and income taxes
expected to be collected by South Dakota, Iowa, and Minnesota from
the contractors and laborers.  However, the estimate did not include
increases in tax revenues anticipated from an increase in regional
economic activity. 

--------------------
\2 The Safe Drinking Water Act Amendments of 1996 (P.L.  104-182,
sec.  130) authorized a Drinking Water State Revolving Loan Fund to
help public water systems finance the infrastructure needed to
achieve or maintain compliance with the act's requirements and to
promote public health protection objectives.  Section 1452 authorizes
the Administrator of the Environmental Protection Agency to make
grants to states to capitalize drinking water state revolving loan
funds, which in turn can provide low-cost loans and other types of
assistance to eligible water systems. 

\3 Discounted at 3 percent. 

   AGENCY COMMENTS
------------------------------------------------------------ Letter :6

We provided a copy of a draft of this report to the Lewis and Clark
project's representatives and the Bureau of Reclamation for their
review and comments.  We met with Bureau officials, including the
Manager of the Bureau's Dakotas Area Office.  In general, the Bureau
agreed with the findings in our report but clarified certain issues
involving its participation in the Lewis and Clark project.  For
example, the Bureau stressed that it does not advocate any specific
interpretation of the ï¿½incremental cost to the city of Sioux Fallsï¿½
for allocating the project's construction costs and emphasized the
importance of clarifying the language in the proposed legislation if
the Congress decides to fund this project.  The Bureau also
emphasized that the project is not being advanced for authorization
by the Bureau.  The Bureau explained that planning studies were
primarily funded from nonfederal sources and that the Congress
appropriated funds into the Bureau's General Investigative Program
for oversight and technical assistance to the project's sponsors. 
The Bureau also clarified the willingness-to-pay study, explaining
that the $3.34 million cited in the study represents an annual amount
that households are willing to pay, not a total over the life of the
project.  Hence, the annual amounts over the 40-year life of the
project, according to Bureau representatives, should be discounted to
present value and summed.  We revised the report in response to these
comments and made other minor technical corrections as appropriate. 

The Director of the Lewis and Clark Rural Water System commented on
behalf of the water system.  The Director disagreed with our
interpretation of the ï¿½incremental cost to the city of Sioux Fallsï¿½
being based on water usage.  Instead, the Director interprets Sioux
Falls' incremental cost to be the difference between the cost of the
project built with a water supply for Sioux Falls and the cost of the
project built without Sioux Falls.  The Director also wrote that by
mentioning lawn watering, car washing, and fire fighting, our
representation of societal benefits ï¿½trivializesï¿½ the need for a safe
and reliable drinking water source.  The Director also disagreed that
the Lewis and Clark project could result in higher personal incomes
or in the transfer of economic activity into the Lewis and Clark
service area from other areas.  This report presents both our
interpretation of Sioux Falls' cost share and the Lewis and Clark
Water System's interpretation.  With regard to the comments on how
the water would be used and changes in personal income, the report
includes analysis to support our findings, and we made no changes to
the report.  The Director's comments and our responses appear in
appendix II. 

---------------------------------------------------------- Letter :6.1

We performed our review from August 1998 through April 1999 in
accordance with generally accepted government auditing standards. 
Our scope and methodology are discussed in appendix III. 

We will provide copies of this report to the member districts of the
Lewis and Clark project.  We will also make copies available to
others on request.  If you or your staff have any questions, please
call me at (202) 512-3841.  Major contributors to this report are
listed in appendix IV. 

Sincerely yours,

Susan D.  Kladiva
Associate Director, Energy,
 Resources, and Science Issues

ALTERNATIVES AVOIDED BY THE LEWIS
AND CLARK PROJECT
=========================================================== Appendix I

In determining the cost of reasonable alternatives to the Lewis and
Clark project, we contacted representatives of the 22 member water
districts and asked what courses of action they would take if the
Lewis and Clark project is not built.  Specifically, we asked them
how they would obtain the same amount and quality of water to which
they had committed from the Lewis and Clark project.  We requested
that their responses be alternatives that would be economically
feasible and, hence, likely to be implemented. 

Representatives of the water districts reported that they would drill
additional wells, update or build treatment plants, obtain water from
nearby water districts, or engage in a combination of these
alternatives.  Thirteen districts had plans that involved drilling
additional water wells.  Seven said their plans included building or
updating treatment plants, and five had investigated obtaining water
from nearby districts.\4 One district reported that its only
alternative would be to adopt stringent water conservation, while two
districts said they had no alternatives to the Lewis and Clark
project.  To determine the cost of these alternatives, we asked
representatives for their written estimates and supporting
documentation, including cost proposals and engineering studies. 
Sixteen of the 22 member districts reported alternatives involving
significant capital expansions, such as drilling more wells, updating
treatment plants, or building extensive water lines.  Only 5 of these
16 districts had detailed written cost estimates.  Eight of the 16
member districts reported rough estimates of their costs, one gave us
information that we could use to estimate its alternative cost
(because it was comparable to other members' alternatives), and 2 of
the 16 member districts could not supply enough information to
estimate the cost of their alternatives. 

For members that provided cost estimates, we interviewed
representatives to ensure that all reasonable costs were included. 
Based on a recommendation from the engineering firm that designed the
Lewis and Clark project, we assumed the life expectancy of the
project to be 40 years, so we took steps to ensure that all member
districts' alternatives would also last 40 years.  Engineers
suggested that piping, treatment plants, and pumphouses should last
at least 40 years, but that shallow wells that tap surficial aquifers
would not be expected to last this long.  Because such wells often
experience plugging from iron and manganese in the groundwater, their
flow rates often diminish in time until they reach a point at which
it is no longer practicable to operate them.  An engineer working on
the design of the Lewis and Clark project suggested that such wells
would need to be replaced after 20 years, so we included additional
costs for the replacement of these shallow wells.  We assumed that
replacement wells would be drilled in 20 years and then discounted
their cost using a real interest rate that we assumed would be 3
percent.  We did not modify cost estimates of deeper wells, such as
those drilled in the Dakota Formation, because district
representatives reported longer life expectancies for these wells. 

All member districts that reported purchasing water from nearby water
districts as an alternative to the Lewis and Clark project gave us
price quotes for this water expressed in dollars per 1,000 gallons. 
To ensure comparability with the Lewis and Clark project, we assumed
that such arrangements would last 40 years.  Because of future
uncertainties, we did not assume any changes in the price of this
water over time.  To calculate the value of the water, we assumed
that water would be paid for monthly for 40 years and discounted
these payments using a real interest rate that we assumed would be 3
percent. 

We note that the quality and quantity of water that would be supplied
by the alternatives would not necessarily be exactly comparable to
that supplied by the Lewis and Clark project.  For example, the
Missouri River water supplied by the project should be of better
quality than that obtained from shallow aquifers; in most instances,
Missouri River water is lower in iron, manganese, sulfates, total
dissolved solids, and hardness.  The high cost of treatment often
prohibits bringing the quality of groundwater up to that of Missouri
River water.  This river water is also less susceptible to surface
contamination from nitrates and pesticides than water obtained from
shallow aquifers.  Some member districts' representatives reported
that a single chemical spill or infiltration of agricultural wastes
could shut down their entire wellfields.  Of course, disaster
scenarios involving contamination of Missouri River water are also
conceivable.  Also, the Lewis and Clark project would not be as
susceptible to drought as the shallow aquifers in the tristate area
are.  Lastly, some of the studies of alternatives that recommended
drilling additional wells did not contain sufficient geological
information to guarantee that adequate groundwater would be present
at the recommended locations of their wellfields.  These reports
suggested drilling test wells to determine the quantity of water in
the underlying aquifers. 

Each member district's alternative is summarized in table I.1. 
Because of the poorer quality of water that would be supplied by
alternatives to the Lewis and Clark project and because two member
districts that had alternatives did not estimate their costs, the
costs of these alternatives should be considered as a surrogate for
the minimum benefit of the Lewis and Clark project.  This minimum
benefit ranges between about $71 million and $81 million. 

                                        Table I.1
                         
                          Member Districts' Alternatives to the
                           Lewis and Clark Rural Water Project
                         Compared With the Project's Commitments

                                     Nonfederal
                                     proportion
                          Lewis and  ate share
                Average       Clark  of Lewis                Cost of
                  daily  commitment  and Clark   Alternativ  alternative   Nature of cost
Member        water use   (gallons/  (1998       e to Lewis  (1998         estimate for
district      (gallons)        day)  dollars)\a  and Clark   dollars)      alternative
-----------  ----------  ----------  ----------  ----------  ------------  --------------
Lincoln-      3,000,000   300,000\b  $769,000    None        Not           Not applicable
Pipestone,                                       available   available
Minnesota

Rock            583,000     300,000  769,000     Drill more  $2,887,000    Written
County,                                          shallow                   estimate
Minnesota                                        wells in                  prepared by
                                                 Rock River                district
                                                 Aquifer                   manager

Luverne,      1,200,000     500,000  1,282,000   Drill       388,000 to    Verbal
Minnesota                                        additional  1,388,000     estimate
                                                 shallow
                                                 wells

Worthington   2,720,000   1,730,000  4,436,000   None        Not           Not applicable
, Minnesota                                      available   available

Sheldon,      1,300,000   1,000,000  2,564,000   Drill more  6,332,000 to  Written
Iowa                                             wells and   6,832,000     proposal
                                                 update                    prepared by
                                                 water                     engineering
                                                 lines                     firm

Sibley,         400,000     650,000  1,667,000   Purchase    2,556,000     GAO estimate
Iowa                                             additional                based on water
                                                 water from                price supplied
                                                 Osceola                   by district
                                                 Water
                                                 District

Clay            750,000   1,000,000  2,564,000   Drill more  3,102,000     Written
County,                                          wells and                 estimate based
Iowa                                             build                     on studies
                                                 joint                     prepared by
                                                 treatment                 engineering
                                                 plant with                firm
                                                 Spencer,
                                                 Iowa

Rural Water   1,725,000   1,000,000  2,564,000   Drill more  Not           Not applicable
District 1,                                      deep wells  estimated
Iowa                                             and
                                                 upgrade
                                                 treatment
                                                 plant

Hull, Iowa      165,000     300,000  769,000     Join        2,447,000     Written cost
                                                 nearby                    estimate
                                                 district                  supplied by
                                                 in its                    nearby
                                                 expansion                 district and
                                                 and                       GAO estimate
                                                 purchase                  of value of
                                                 150,000                   water purchase
                                                 gallons/
                                                 day

Sioux         1,000,000     600,000  1,538,000   Drill       560,000       Verbal
Center,                                          wells west                estimate
Iowa                                             of town                   provided by
                                                 and build                 city's utility
                                                 water line                department

Boyden,          55,000     100,000  256,000     Pump        Not           Not applicable
Iowa                                             existing    estimated
                                                 wells and
                                                 eventually
                                                 add new
                                                 wells

Beresford,      280,000     250,000  641,000     Replace     2,000,000     GAO estimate
South                                            treatment                 based on data
Dakota                                           plant                     provided by
                                                                           water
                                                                           department

Centerville     200,000     220,000  564,000     Hook up to  4,412,000 to  Verbal
, South                                          nearby      5,012,000     estimate
Dakota                                           rural                     provided by
                                                 water                     city official
                                                 systems

Harrisburg,      70,000     250,000  641,000     Drill more  2,153,000     Verbal
South                                            wells,                    estimate
Dakota                                           construct                 supplied by
                                                 new                       utility
                                                 treatment                 department
                                                 and
                                                 softening
                                                 plants

Lennox,         200,000     400,000  1,026,000   Drill more  1,021,000     Verbal
South                                            wells                     estimate
Dakota                                                                     provided by
                                                                           water
                                                                           department

Madison,        800,000   1,000,000  2,564,000   Build a     0 to          Detailed study
South                                            new         8,040,000     prepared by
Dakota                                           treatment                 engineering
                                                 plant                     firm

Parker,         150,000     490,000  1,256,000   Drill       278,000       Verbal
South                                            high-                     estimate
Dakota                                           volume                    supplied by
                                                 well and                  water
                                                 build                     department
                                                 water
                                                 tower

Sioux        15,678,000  10,000,000  64,101,000  Develop     30,000,000    Informal
Falls,                                           Wall Lake                 estimate by
South                                            aquifer                   city
Dakota

Tea, South      150,000     330,000  846,000     Purchase    2,331,000     GAO estimate
Dakota                                           balance                   based on data
                                                 (180,000                  supplied by
                                                 gallons/                  city
                                                 day) from
                                                 Lincoln
                                                 Co.

Lincoln         533,000     900,000  2,308,000   Purchase    2,762,000     GAO estimate
County,                                          shortfall                 based on data
South                                            (up to a                  supplied by
Dakota                                           maximum of                water district
                                                 800,000
                                                 gallons/
                                                 day) from
                                                 Sioux
                                                 Falls

Minnehaha,    1,600,000   2,000,000  5,128,000   Implement   Not           Not applicable
South                                            stringent   applicable
Dakota                                           water
                                                 conservati
                                                 on

South           600,000     150,000  385,000     Drill       7,650,000     Informal
Lincoln,                                         three                     estimate
South                                            wells;                    supplied by
Dakota                                           build                     water district
                                                 booster
                                                 station,
                                                 lines, and
                                                 softening
                                                 plant

=========================================================================================
Total 3       3,159,000   3,470,000  98,638,000  --          $70,879,000   --
                      2           $                          to
                                                             $81,019,000
-----------------------------------------------------------------------------------------
\a These proportionate shares in 1998 dollars are not equal to the
proportionate shares shown in figure 1, which are in 1993 dollars. 

\b Lincoln-Pipestone has plans to increase its commitment to 1
million gallons per day. 

(See figure in printed edition.)Appendix II

--------------------
\4 The numbers in this example exceed 22 because some districts have
a combination of alternatives. 

COMMENTS FROM THE LEWIS AND CLARK
RURAL WATER SYSTEM
=========================================================== Appendix I

(See figure in printed edition.)

(See figure in printed edition.)

The following are GAO's comments on the Lewis and Clark Rural Water
System's letter dated April 15, 1999. 

GAO'S COMMENTS

1.  H.R.  297 and S.  244, which would authorize the construction of
the Lewis and Clark project, contain budget and financing terms for
the project.  These terms refer to the project's feasibility study
for clarification.  With regards to the allocation of construction
costs among participating water districts, the feasibility study
allocates construction costs according to each member's proportionate
share of water use.  For example, Sioux Falls is estimated to use
42.6 percent of the average daily water, so the Sioux Falls component
is allocated 42.6 percent of the construction costs, or about $120.5
million of the total $282.9 million construction budget.  The
feasibility study does not make reference to allocating costs based
on a definition of incremental cost that involves the difference
between constructing the project with a Sioux Falls component and
constructing the project without a Sioux Falls component.  Since we
discussed both approaches in the draft report, we did not revise the
report in response to this comment. 

2.  Our intent was not to trivialize the need for Lewis and Clark by
citing lawn watering, car washing, clothes laundering, or fire
fighting, but rather to provide a thorough discussion of the benefits
of the proposed system.  We believe all of these to be important
activities, although not as important in sustaining life as the
consumption of water, which we also discuss in this report. 
Nevertheless, human consumption of water only accounts for a small
percentage of actual domestic water use.  In addition,
representatives from the city of Sheldon, Iowa, stressed that they
need access to additional quantities of water for fire preventionï¿½a
critical safety issue for any community.  H.R.  297 and S.  244 do
indeed make funding for the Lewis and Clark project dependent on the
development and implementation of a water conservation program, and
it is also important to note that representatives of several water
districts stressed their communities' watering restrictions during
conversations with us.  Therefore, we did not revise the report in
response to this comment. 

3.  Personal incomes may rise because of an increase in economic
activity associated with water projects in two ways.  First, building
the Lewis and Clark project would generate construction jobs. 
Second, representatives from Lewis and Clark's member districts
reported that water from the project is needed to attract additional
businesses.  Because the project is expected to increase economic
activity in the region and we expect that the value added will remain
in the region, we concluded that regional income will increase.  We
did not revise the report in response to this comment. 

4.  We agree with the Director's statement that the availability of
water is not the sole factor considered by a business in deciding
whether to locate in a region.  In fact, our report addresses this
point.  However, if everything else is the same between regions, the
quality and quantity of a regional water supply will give any region
a competitive advantage in attracting industries, especially
water-intensive industries.  Representatives from Lewis and Clark
also agreed that the project should attract businesses to the region. 
Even though the purpose of the project is not to lure businesses to
the Lewis and Clark service area from other regions, new businesses
may choose to locate in the Lewis and Clark service area because of
the better quality of the water.  However, the net national benefit
would still be minimal.  Therefore, we did not revise the report in
response to this comment. 

SCOPE AND METHODOLOGY
========================================================= Appendix III

To determine the nature of the benefits that would accrue from the
Lewis and Clark project and to identify its beneficiaries, we
obtained documents on the economy of the tristate area and
interviewed Lewis and Clark project officials and business leaders in
the area.  We also interviewed water experts in government, academia,
and industry and reviewed relevant publications on the benefits of
water projects, including the ï¿½Economic and Environmental Principles
and Guidelines for Water and Related Land Resources Implementation
Studiesï¿½ published by the U.S.  Water Resources Council.  We gathered
information on how water is currently used, limitations to its use,
and how water will be used if the project is constructed.  We
reviewed information on the populations, incomes, businesses, and
industries within the 14 counties and 3 states of the area to be
served by the Lewis and Clark project.  We also reviewed publications
on groundwater resources of the tristate area published by the U.S. 
Geological Survey, the Minnesota Department of Natural Resources, the
South Dakota Geological Survey, and the Iowa Department of Natural
Resources. 

To determine how the benefits of a municipal and industrial water
project are valued, we reviewed economic literature, studies by the
Bureau of Reclamation, and the guidelines of the U.S.  Water
Resources Council.  When available, we obtained and examined written
cost estimates and engineering studies on alternatives to
constructing the Lewis and Clark project.  We interviewed
representatives, including public officials, engineers, and water
superintendents, of all 22 member districts and made site visits to
17 of these districts to clarify cost data, tour well fields, examine
treatment plants, and observe agribusiness.  We also consulted with
Banner and Associates, the principal engineering firm involved in the
design of the Lewis and Clark project, for information on the life
expectancy of water wells, treatment plants, pipelines, and hardware. 
We tabulated cost estimates and compared costs among the 22 districts
to ensure that they were reasonable and in certain instances adjusted
costs upwards to reflect the longer life expectancy of the Lewis and
Clark project.  Representatives of the member water districts told us
that the alternatives cited are likely to be implemented if the Lewis
and Clark project is not built.  More specific information on our
methodology for calculating cost alternatives is in appendix I. 

MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV

RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION

Ronald M.  Belak
Brad Hathaway
Mehrzad Nadji
Rudolfo G.  Payan
Victor S.  Rezendes

OFFICE OF THE GENERAL COUNSEL

Doreen S.  Feldman
Kathleen A.  Gilhooly

*** End of document. ***