Bureau of Reclamation: Reclamation Law and the Allocation of Construction
Costs for Federal Water Projects (Testimony, 05/06/97,
GAO/T-RCED-97-150).

GAO discussed the Bureau of Reclamation's financing of federal water
projects, focusing on the: (1) evolution of reclamation law primarily
from 1902 to 1982; and (2) allocation and repayment of construction
costs for federal water projects among the projects' beneficiaries.

GAO noted that: (1) the Reclamation Act of 1902 established the
Reclamation Fund and provided for the construction of single-purpose
irrigation projects in the West; (2) since then, reclamation law has
been significantly amended and supplemented; (3) initially, the federal
water project construction program was to be self-sufficient; (4)
projects were to be funded through a revolving fund initially
capitalized by revenue generated from the sale of public lands and, upon
project completion, irrigators were to repay the revolving fund for
project construction costs within 10 years; (5) irrigators were not
required to pay interest on their repayment obligation; (6) early on, it
was discovered that the costs of establishing irrigated farming on
previously unfarmed, arid land were much higher than expected and the
costs of building water projects were much higher than originally
estimated; (7) as a result, major funding and repayment changes were
made to the reclamation program between 1902 and 1939; (8) in 1939, the
Congress fundamentally changed the nature of the program by enacting the
Reclamation Project Act of 1939, under which projects could be
authorized for multiple purposes, and the construction costs would be
allocated among the projects' various purposes; (9) the act provided
that construction costs allocated to municipal and industrial water
supply and power could be repaid with interest and gave irrigators
additional relief in fulfiling their repayment obligations; (10) with
passage of the Reclamation Reform Act of 1982, the Congress increased
the number of acres that an individual or legal entity could irrigate
with federal project water from 160 acres to 960 owned or leased acres,
but required irrigators to pay the "full cost" for water delivered to
leased land over the limit, which was a significant departure from prior
reclamation law; (11) reclamation law determines how the costs of
constructing reclamation projects are allocated and how repayment
responsibilities are assigned among the projects' beneficiaries; (12) a
project's construction costs are divided into two categories; (13)
reimbursable costs are those that are repaid by the project's
beneficiaries and nonreimbursable costs are those that are borne by the
federal government because certain purposes of the project are viewed as
national in scope; (14) the amount of reimbursable costs that a water u*

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

 REPORTNUM:  T-RCED-97-150
     TITLE:  Bureau of Reclamation: Reclamation Law and the Allocation 
             of Construction Costs for Federal Water Projects
      DATE:  05/06/97
   SUBJECT:  Water resources development
             Construction costs
             Water supply management
             Municipal governments
             Reimbursements to government
             Cost sharing (finance)
             Land reclamation
             Intergovernmental fiscal relations
IDENTIFIER:  Reclamation Fund
             
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Cover
================================================================ COVER


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

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

BUREAU OF RECLAMATION -
RECLAMATION LAW AND THE ALLOCATION
OF CONSTRUCTION COSTS FOR FEDERAL
WATER PROJECTS

Statement of Victor S.  Rezendes, Director,
Energy, Resources, and Science Issues,
Resources, Community, and Economic
Development Division

GAO/T-RCED-97-150

GAO/RCED-97-150T


(141051)


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


============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

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

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


--------------------
\1 Bureau of Reclamation:  Information on Allocation and Repayment of
Costs of Constructing Water Projects (GAO/RCED-96-109, July 3, 1996),
Water Subsidies:  Basic Changes Needed to Avoid Abuse of the 960-Acre
Limit (GAO/RCED-90-6, Oct.  12, 1989), and Reforming Interest
Provisions in Federal Water Laws Could Save Millions (CED-82-3, Oct. 
22, 1981). 

\2 Collectively, the federal statutes that are generally applicable
to all reclamation water projects and the statutes authorizing
individual projects are known as reclamation law. 


   RECLAMATION LAW FROM 1902 TO
   1982
---------------------------------------------------------- Chapter 0:1

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

Initially, the federal water project construction program was to be
self-sufficient.  Although debate occurred on how a reclamation
program should be financed, when the Congress passed the Reclamation
Act of 1902, it clearly intended that the projects' costs should be
repaid by the irrigators using the water delivered by the projects. 
No appropriated funds were to be used to build these water projects. 
Under the 1902 act, projects were to be funded through a revolving
fund initially capitalized by revenue generated from the sale of
public lands.  Upon the completion of a project, irrigators were to
repay the revolving fund for the costs of constructing the project
within 10 years.  However, from the beginning, irrigators were not
required to pay interest on their repayment obligation.  The act's
legislative history states that ".  .  .  the Government, interested
only in the settlement of the lands, can well forego any interest on
investments and be content with the return of the principal."

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

In 1939, the Congress fundamentally changed the nature of the program
by enacting the Reclamation Project Act of 1939.  Under this act,
projects could be authorized for multiple purposes, and the
construction costs would be allocated among the projects' various
purposes:  irrigation, municipal and industrial water supply,
hydroelectric power generation, flood control, and navigation.  The
legislation allowed the costs of these multipurpose projects to be
shared among the various beneficiaries so that the projects,
including those that provided irrigation, would be economically
viable.  The act provided that construction costs allocated to
municipal and industrial water supply and power could be repaid with
interest.  The act also gave irrigators additional relief in
fulfilling their repayment obligations by allowing for variable
annual payments based on crop returns and providing for an
interest-free development period of up to 10 years before starting to
require repayment.  Since 1939, appropriated funds have been used to
construct most reclamation projects. 

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

In addition to legislation that is generally applicable to all
federal water projects, the Congress has also enacted specific
authorizing legislation dictating a water project's purposes, cost
reimbursement terms, and repayment period.  For example, section 2 of
the Tualatin Project Act of 1966\3 authorizes a 50-year period for
the repayment of the portion of a project's construction costs
allocated to irrigation and municipal and industrial water supply. 

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


--------------------
\3 P.  L.  89-596, 80 Stat.  822. 


   ALLOCATION OF PROJECTS' COSTS
   AND REPAYMENT REQUIREMENTS
---------------------------------------------------------- Chapter 0:2

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

Under reclamation law, a project's construction costs are divided
into two categories--reimbursable and nonreimbursable costs. 
Reimbursable costs are those that are repaid by the project's
beneficiaries.  The costs allocated to irrigation, municipal and
industrial water use, and power generation are reimbursable. 
Nonreimbursable costs are those that are borne by the federal
government because certain purposes of the project are viewed as
national in scope.  These costs include those allocated to flood
control and navigation, as well as the majority of the costs
allocated to fish and wildlife enhancement, highway transportation,
and recreation.  For example, the $108 million Weber Basin project in
Utah includes $18.9 million in nonreimbursable costs allocated to
flood control, recreation, fish and wildlife enhancement, highway
transportation, and the safety of dams. 

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

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


--------------------
\4 Since 1906, reclamation law has authorized the use of power
revenues to assist in the repayment of irrigation costs.  A 1944
opinion from the Department of the Interior's Office of the
Solicitor, interpreting the provisions of the 1939 act, confirmed the
principle of limiting the financial obligation of irrigators to their
ability to pay their share of a project's construction costs.  Costs
determined to be beyond the irrigators' ability to pay could be
repaid from other revenue sources, primarily from revenues earned
from the sale of electrical power generated by the projects. 
Payments made from other sources under this interpretation of the law
became known as irrigation assistance. 

\5 When we issued our 1996 report, these were the most current data
available in the Bureau's financial reports for the 133 projects. 


-------------------------------------------------------- Chapter 0:2.1

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


SOME SIGNIFICANT CHANGES IN
RECLAMATION LAW REGARDING THE
ALLOCATION OF PROJECT COSTS AND
THEIR REPAYMENT
=========================================================== Appendix I

Statute                                                                              Change
-----------------------------------------------------------------------------------  ------------------------------------------------------------------------------------
Reclamation Act of 1902 (32 Stat. 388)                                               Irrigation projects are authorized.
                                                                                     Construction is funded via a revolving fund.
                                                                                     Repayment of costs takes place over 10 years.
                                                                                     Repayment is interest-free.

Town Sites and Power Development Act of 1906 (34 Stat. 116)                          Establishment of towns and provision of water are authorized.
                                                                                      Projects' surplus power can be sold to towns and the revenues credited to
                                                                                     repayment of irrigation costs.

Advances to the Reclamation Fund Act of 1910 (36 Stat. 835)                          U.S. Treasury is directed to loan up to $20 million to the fund to finance
                                                                                     completion of water projects' construction.

Reclamation Extension Act of 1914 (38 Stat. 686)                                     Repayment period is extended from 10 to 20 years.

Fact Finders' Act of 1924 (43 Stat. 672)                                             Repayment requirements are amended to 5 percent per year of irrigators' average
                                                                                     crop value for the preceding 10 years.
                                                                                     Use of project revenues from nonirrigation activities, such as power sales and
                                                                                     surplus water sales, is authorized for repayment of irrigators' construction costs
                                                                                     and payment of operation and maintenance costs.

Omnibus Adjustment Act of 1926 (44 Stat. 636)                                        Repayment period is extended from 20 to 40 years.
                                                                                     Irrigators are relieved of parts of their repayment obligations because of
                                                                                     nonproductive land at specified projects.

Five Million Dollar Advance to the Reclamation Fund Act of 1931 (46 Stat. 1507)      U.S. Treasury is directed to loan up to $5 million to the fund to finance
                                                                                     completion of water projects' construction.

Reclamation Project Act of 1939 (53 Stat. 1187)                                      Water projects are authorized for multiple purposes, including power, municipal and
                                                                                     industrial water supply, navigation, and flood control.
                                                                                     Construction of projects is financed by appropriated funds.
                                                                                     Development period of up to 10 years is added to irrigators' repayment schedule.
                                                                                     Some construction costs are designated as nonreimbursable.
                                                                                      Power costs are to be repaid with interest.
                                                                                     Municipal and industrial water supply costs can be repaid with interest.
                                                                                     Repayment of irrigation costs remains interest-free.

Rehabilitation and Betterment Act of 1949 (63 Stat. 724)                             Repayment of expenditures is authorized for the rehabilitation and betterment of
                                                                                     the irrigation systems of existing Bureau projects in installments fixed according
                                                                                     to the water user's ability to pay.

Federal Water Project Recreation Act of 1965 (P.L. 89-72, 79 Stat. 213)              Up to 50 percent of the separable construction costs for recreation and fish and
                                                                                     wildlife enhancement are deemed nonreimbursable.
                                                                                      Reimbursable costs for these purposes are to be repaid with interest over 50
                                                                                     years.

Reclamation Reform Act of 1982                                                       The acre limit that an individual or legal entity can irrigate with water from a
(43 U.S.C. 390aa to zz-1)                                                            federal project is increased from 160 acres to 960 owned or leased acres.
                                                                                     Owned land above the acre limit cannot be irrigated with federal water.
                                                                                     Irrigators are required to pay full cost for water delivered to leased land over
                                                                                     their acre limit.
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------

TYPICAL ALLOCATION OF FEDERAL
WATER PROJECT CONSTRUCTION COSTS
========================================================== Appendix II



   (See figure in printed
   edition.)


ALLOCATION OF CONSTRUCTION COSTS
FOR 133 WATER PROJECTS, BY
SPECIFIC PROJECT PURPOSE AND
AMOUNT, AS OF SEPTEMBER 30, 1994
========================================================= Appendix III

Type of costs                                                   Amount
--------------------------------------------------  ------------------
Reimbursable costs
----------------------------------------------------------------------
Irrigation                                                  $7,095,702
Municipal and industrial water supply                        3,103,283
Power                                                        6,373,084
Other                                                          292,605
======================================================================
Subtotal                                                   $16,864,674

Nonreimbursable costs
----------------------------------------------------------------------
Flood control                                               $1,093,760
Recreation                                                     504,149
Fish and wildlife                                              929,980
Highway improvement                                             80,482
Safety of dams                                                 750,683
Cultural restoration                                            54,943
Indian use                                                     806,615
Other                                                          739,610
======================================================================
Subtotal                                                    $4,960,222
======================================================================
Total costs                                                $21,824,896
----------------------------------------------------------------------
Source:  Bureau of Reclamation Project Construction Cost and
Repayment Reports as of September 30, 1994. 

*** End of document. ***