[Final Audit Report on the Recovery of Construction Costs, Columbia Basin Project, Bureau of Reclamation]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 95-I-1204

Title: Final Audit Report on the Recovery of Construction Costs,
       Columbia Basin Project, Bureau of Reclamation

Date:     August 22, 1995


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United States Department of the Interior
      OFFICE OF INSPECTOR GENERAL
     Washington, D.C. 20210

               September 5, 1995

MEMORANDUM

TO:                 The Secretary

FROM:               Wilma A. Lewis
                    Inspector General

SUBJECT SUMMARY:    Final Audit Report for Your Information - "Recovery of
                    Construction Costs, Columbia Basin Project, Bureau of
                    Reclamation" (No. 95-I-1204)

Attached for your information is a copy of the subject final audit report.

We concluded that the value of the revenue flow to the U.S. Treasury could be
increased if the Bureau of Reclamation updated the Columbia Basin Project cost
allocation to reflect changes in the power and irrigation purposes. The Bureau
agreed to prepare an interim cost allocation that reflects the Project as currently
constructed, with the assumption that additional irrigation acreage will not be
developed.

If you have any questions concerning this matter, please contact me at
(202) 208-5745.

Attachment

 
W-IN-BOR-002-94A


United States Department of the Interior
OFFICE OF INSPECTOR GENERAL
Headquarters Audits
1550 Wilson Boulevard
Suite 401
Arlington, Virginia  22209


               August 22, 1995

Memorandum

To:            Assistant Secretary - Water and Science

From:          Marvin Pierce
          Acting Assistant Inspector General for Audits

Subject:       Final Audit Report on the Recovery of Construction Costs, Columbia
          Basin Project, Bureau of Reclamation (No. 95-I-1204)

This report presents the results of our review of the recovery of construction costs
on the Columbia Basin Project by the Bureau of Reclamation. The objective was to
determine whether the Bureau's financial management practices on the Project,
including construction cost allocation and recovery, complied with Reclamation law
and Instructions and adequately protected the Government's interests.

We concluded that the value of the revenue flow to the U.S. Treasury could be
increased if the Bureau updated the Project cost allocation to reflect changes in the
power and irrigation purposes. In that regard, we recommended that the Bureau
prepare an interim cost allocation for the Project which reflects the Project as
currently constructed, with the assumption that additional irrigation acreage will not
be developed. Upon completion, this allocation should be submitted to the Congress
for approval before it is actually implemented.

The July 6, 1995, response (Appendix 2) from the Acting Commissioner, Bureau of
Reclamation, concurred with our recommendation, and the response was sufficient
for us to consider the recommendation resolved but not implemented. Accordingly,
the recommendation will be referred to the Assistant Secretary - Policy, Management
and Budget for tracking of implementation, and no further response to the Office
of Inspector General is required (Appendix 3).

The legislation, as amended, creating the Office of Inspector General requires
semiannual reporting to the Congress on all audit reports issued, action taken to
implement audit recommendations, and identification of each significant
recommendation on which corrective action has not been taken.

cc:  Commissioner, Bureau of Reclamation

 
CONTENTS

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...1

BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...1
OBJECTIVE AND SCOPE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...2
PRIOR AUDIT COVERAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...3

FINDING AND RECOMMENDATION. . . . . . . . . . . . . . . . . . . . . . . . . ...4

ALLOCATION OF PROJECT COSTS.. . . . . . . . . . . . . . . . . . . . . . ...4

APPENDICES

1. CLASSIFICATION OF MONETARY AMOUNTS . . . . . . . . . . ...7
2. BUREAU OF RECLAMATION
RESPONSE TO DRAFT REPORT . . . . . . . . . . . . . . . . . . . . ...8
3. STATUS OF AUDIT REPORT RECOMMENDATION . . . . . . ...9

 
INTRODUCTION

BACKGROUND

The Columbia Basin Project, a multipurpose project located in the State of
Washington, provides electrical energy to about 1.8 million people; delivers a full
water supply to 530,000 acres of the approximately 1 million acres of agricultural
land originally authorized to be developed; and provides for other purposes, such as
flood control, fish and wildlife, and navigation. The Congress authorized the Bureau
of Reclamation to construct the Columbia Basin Project in 1943 and in 1966
authorized construction of a third power plant, which was completed in 1980 at the.
Project's Grand Coulee Dam complex.  The Bureau also installed six pump
generators in the late 1970s and early 1980s to assist in meeting increased power
demands and to provide irrigation pumping capacity for the 470,000 acres of land
remaining to be developed.

The construction costs for power and irrigation are repaid to the U.S. Treasury by
the beneficiaries of those Project purposes, while the costs of other Project purposes,
such as flood control and fish and wildlife, are borne by the general taxpayers. The
amount of repayment to the U.S. Treasury is determined by an allocation of the
construction costs to the various purposes based on the relative benefits to be
received from each purpose. The first allocation was done in the 1940s and updated
with an interim cost allocation in 1963. Of the $880 million in Project construction
costs incurred as of fiscal year 1993 and allocated based on the 1963 cost allocation,
the Bureau allocated $196 million to power; $602 million to irrigation; $57 million
to flood control; and $25 million to navigation, recreation, Indian reservation, fish
and wildlife, and other miscellaneous purposes. The Bureau directly assigned the
$842 million in costs related to the construction of the third power plant and
installation of the pump generators to power ($795 million) and irrigation
($47 million). The completion of the Project's remaining agricultural component,
totaling about 470,000 acres, would add another $2.9 billion in estimated construction
costs to the Project.

The Project construction costs allocated to power are repaid by the users with
interest, while the costs allocated to irrigation are repaid by the irrigators or the
power users without interest over a 50-year period. The power users are responsible
for the repayment of irrigation construction costs determined by the Bureau to be
beyond the ability of the irrigators to pay. This "irrigation assistance" occurs after
repayment of power construction costs. The Project costs for the other purposes are

1

 
either nonreimbursable, in accordance with Federal law, or deferred for future cost
recovery, in accordance with the Leavitt Act. 1

OBJECTIVE AND SCOPE

The audit objective was to determine whether the Bureau's financial management
practices on the Project, including construction cost allocation and recovery,
complied with Reclamation law2 and Instructions and adequately protected the
Government's interests. Our review was conducted at the Bureau's Pacific Northwest
Region, located in Boise, Idaho, and the Columbia Basin Project Office, located in
Ephrata, Washington. This report and another report? on the billing and collection
of Project operation and maintenance costs present the results of our review of
financial management of the Columbia Basin Project.

To accomplish our objective, we reviewed Project planning documents and financial
records and interviewed Regional officials responsible for the operation and financial
management of the Project, including cost recovery. The scope of the audit included
an evaluation of the 1963 interim cost allocation and subsequent changes in the
Columbia Basin Project's role in providing power and water to areas of the Pacific
Northwest, which affected the allocation of costs.

Our review was made in accordance with the "Government Auditing Standards,"
issued by the Comptroller General of the United States. Accordingly, we included
such tests of records and other auditing procedures that were considered necessary
under the circumstances. Further, we reviewed the Secretary of the Interior's fiscal
year 1993 Annual Statement and Report, required by the Federal Managers'
Financial Integrity Act of 1982, to determine whether the Bureau had identified any
weaknesses in the allocation of construction costs, The Report did not disclose any
material weaknesses in this area. However, we found a weakness in the Bureau's
allocation procedures during our review of the Columbia Basin Project. Our
recommendation, if implemented, should strengthen internal controls over the
allocation of construction costs on this Project and increase the Federal
Government's cost recovery.



1The Leavitt Act provides that the collection of all construction costs allocated against any
Indian-owned land within any Government irrigation project is deferred as long as the title to the
lands remains in Indian ownership (25 U.S.C. 386a).

2Reclamation law is a term used to refer to the total body of public laws governing the
reclamation program, beginning with the Reclamation Act of 1902 and including all laws
amending and supplementing the Act.

3Draft report entitled "Recovery of Operation and Maintenance Costs, Columbia Basin Project,"
Bureau of Reclamation" (Assignment No. W-IN-BOR-002-94), issued in May 1995.

2

 
PRIOR AUDIT COVERAGE

Neither the Office of Inspector General nor the General Accounting Office has
issued any reports on the Bureau's financial management of the Columbia Basin
Project during the last 5 years. However, the Office of Inspector General has issued
reports on the Bureau's Dolores and Animas-La Plata Projects, the Pick-Sloan
Missouri Basin Program, and the Central Arizona Project. These reports found
deficiencies in the Bureau's cost allocation procedures that significantly reduced
Federal cost recovery as follows:

  - "Development Status of the Dolores and the Animas-La P1ata Projects,
Bureau of Reclamation" (No. 94-I-884), issued in July 1994, concluded that the
irrigation benefits of both projects were overstated because indirect benefits were
included in the projects' cost allocations and that the capacity of the irrigators to pay
their contractual share of the operation and maintenance costs assigned to irrigation
had diminished.  Thus, both projects could be financially infeasible. We
recommended that the Bureau address these concerns by: (1) revising the cost
allocation and repayment arrangements of the Dolores Project to protect the
Government's financial interests; (2) reevaluating the feasibility of developing the
non-Indian portion of the irrigation component of the Animas-La Plata Project and
(3) seeking Congressional approval, if needed, to reformulate the Animas-La Plata
Project. The Bureau generally concurred with our recommendations, which we
considered resolved.

  - "Pick-Sloan Missouri Basin Program Cost Allocation, Bureau of
Reclamation" (No. 93-1-1641), issued in September 1993, concluded that the
allocation of Program costs based on the "ultimate development concept" had not
protected the Government's investment in the Program. The allocation of costs did
not reflect the benefits received by Program beneficiaries. Consequently, Program
power users benefited at the expense of the general taxpayers. We recommended
that the Bureau seek Congressional approval and funding for a complete reallocation
of Program costs and modify the allocation of pumping power, storage, and
operation and maintenance costs to initiate increased cost recovery as soon as
possible. The Bureau, in its response to the report, indicated general concurrence
with the intent of the recommendations.

  - "Cost Allocation and Repayment Central Arizona Project, Bureau of
Reclamation" (No. 92-I-1151), issued in August 1992, concluded that continued
inclusion of indirect irrigation benefits in the cost allocation of the Project
substantially overstated the benefits to be derived from the irrigation function, which
understated reimbursable cost recovery. We recommended that the Bureau revise
the cost allocation to limit irrigation benefits to those directly associated with that
purpose. The Bureau did not agree to remove indirect irrigation benefits from the
cost allocation and repayment computations because of, it said, "historical precedent."
As such, the issue remains unresolved pending a current reallocation of costs and the
settlement of present repayment contract concerns.

3

 
FINDING AND RECOMMENDATION

ALLOCATION OF PROJECT COSTS

The Columbia Basin Project's 1963 cost allocation methodology has not been
updated to reflect construction of a third power plant and installation of pump
generators at Grand Coulee Dam or cessation of planned irrigation development.
Reclamation law and Instructions and legislative history all require that costs be
allocated among Project purposes based on the benefits received by beneficiaries.
In addition, the Bureau of Reclamation prepared a Definite Plan Report before the
third power plant was constructed, which stated that when the power plant was
completed, a revised cost allocation fully integrating the third power plant's
construction with the rest of the Project would be prepared. However, according to
Pacific Northwest Regional officials, the interim 1963 cost allocation has not been
updated for changes in the power and irrigation purposes because the Project has not
been completed and the Congress has not reauthorized the unconstructed portion
of the Project.  We estimated that the 1963 cost allocation overstated the
construction costs attributable to both irrigation and flood control by $89.7 million
as of fiscal year 1993. As such, the power costs were understated, resulting in a
present value4 loss to the U.S. Treasury of $48.7 million as of fiscal year 1993.

Changing Use

When the Project was originally constructed in the 1930s and 1940s, the planned
purposes were the generation of power and the delivery of irrigation water to
approximately 1 million acres of land. Since initial development benefits accruing
from the Project have shifted as changes in Project facilities and operation have
occurred. For example, the Bureau realized after a flood in 1948 that the Grand
Coulee Dam could be operated to provide additional flood control protection.
Accordingly, the Bureau changed the operating procedures employed at the Dam to
provide these flood control benefits. In addition, changes in anticipated energy
demand and additional Columbia River development led to the construction of
additional power generation facilities at the Project. The addition of the third power
plant and pump generators almost tripled power generation capacity, increasing the
Project's initial 2.3 million kilowatts5 of capacity to 6.5 million kilowatts.

4A financial term referring to the time value of money, which recognizes that interest on money
makes $1 earned in the future worth less than $1 earned today. For example, assuming an interest
rate of 8 percent, $1 due in 10 years is worth only $.46 today.

5A kilowatt is the electrical unit of power equal to 1,000 watts, or about 1.34 horsepower.

4

 
Further, Project irrigation development has changed from that originally anticipated.
Historical planning documents indicated that development of the Project's full
1 million-acre potential was to proceed "as economic conditions may justify," with
completion of the Project anticipated in the early 1970s. However, the pace of
development slowed in the late 1960s and reached a plateau in the 1970s of about
530,000 acres because the Congress, the State, and other parties involved did not
view the construction of additional irrigation facilities as economically and financially
viable or ecologically sound.

Allocation Requirements and Current Practices

In developing the Project, planning documents and Reclamation Instructions
provided the Bureau with guidance to allocate costs to the purposes served by the
Project and to recover costs from Project beneficiaries. However, these documents
and Instructions require that costs be reallocated when significant changes in
accomplishments, benefits, or costs occur. In addition, the Project's legislative
history requires that Project costs be allocated among the various purposes based on
the benefits obtained.

In conformance with these requirements, the Bureau allocated the Project costs in
the 1940s to the various purposes served and reallocated costs in the 1960s to
recognize the added flood control benefits. Both of these allocations assumed that
the 1 million acres of planned agricultural development would occur. However, in
the 1980s, the Bureau did not reallocate the costs of the Project to reflect the
addition of the third power plant and pump generators or the cessation of irrigation
development in the Project. Instead, the Bureau directly assigned the additional
Project construction costs to purposes that did not reflect the Project's current uses.
This occurred, even though the Bureau, in its Definite Plan Report for the
construction of the third power plant indicated that this facility would be integrated
with the original structure and that Project costs would be reallocated after the
addition was completed.

Regional officials informed us that they had not revised the cost allocation because
the Project would require a final cost allocation upon completion and the acreage
to be developed for Project irrigation has not been reduced by the Congress. In our
opinion, however, Congressional action to reduce the scope of the irrigation function
is not required to permit a reallocation of Project costs, although Congressional
approval of a reallocation is necessary.  In 1977, the Congress passed the
Department of Energy Organization Act, which included a prohibition on the
reallocation of costs of multipurpose facilities without Congressional approval. We
believe that the Bureau should seek such approval because, by not reallocating
Project costs based on current use to reflect the partial irrigation development and
the addition of the third power plant, the Bureau has reduced cost recovery to the
U.S. Treasury. We found, in recalculating the 1963 Project cost allocation based on

5

 
these changes, that the construction costs assigned to the irrigation and flood control
purposes of the Project were collectively reduced and that the costs assigned to
power increased by $89.7 million.  In our opinion, a reallocation of Project
construction costs reflecting current use and benefits should be performed. Such a
reallocation should be considered "interim," as was the 1963 version.
We estimated that the $89.7 million increase to power and the corresponding
decrease to irrigation and flood control would result in a $48.7 million present value
increase in cost recovery to the U.S. Treasury. In determining our estimate of the
net present value of the changes to the cost allocation, we used a 6 percent interest
rate and assumed that: (1) the power function cost increase would be amortized and
repaid over a 50-year period at the Project interest rate of 3 percent (2) the
irrigation function cost decrease was a reduction of the irrigation assistance from
power which would have been repaid at or near the end of the repayment period;
and (3) the flood  control cost function decrease was a reduction of a  nonreimbursable cost.

Recommendation

We recommend that the Commissioner, Bureau of Reclamation, ensure that the
Pacific Northwest Region prepares an interim cost allocation for the Columbia Basin
Project that reflects the Project as currently constructed and assumes that additional
irrigation acreage will not be developed. Upon completion, this reallocation should
be submitted to the Congress for approval before it is actually implemented.

Bureau of Reclamation Response

The July 6, 1995, response (Appendix 2) from the Acting Commissioner concurred
with the recommendation, stating that the Bureau "will revise the interim cost
allocation which reflects the Columbia Basin Project as currently constructed and will
assume that additional irrigation acreage will not be developed." The response
further stated that the bureau will follow "the appropriate review and approval
process" before it implements the interim cost allocation.

Office of Inspector General Comments

The Bureau's response was sufficient for us to consider the recommendation resolved
but not implemented. Accordingly, the recommendation will be referred to the
Assistant Secretary for Policy, Management and Budget for tracking of
implementation (Appendix 3).

6

 
APPENDIX 1

   CLASSIFICATION OF MONETARY AMOUNTS

                              Funds To Be Put
  Finding Area                  To Better Use

Project Cost Reallocation                $48.7 million*

* In performing our recalculation of the Columbia Basin Project cost allocation, we:

- Adjusted estimated costs of the irrigation function to reflect its current size and scope.

- Adjusted estimated costs of the power function to reflect the additions of the third power
plant and the pump generators. All the construction costs associated with the pump generators
were assigned to the power function. The installation of the pump generators was considered 100
percent related to power production, since the present irrigated acreage of the Project can be
completely served by the original six pumps and the pump generators are currently used
primarily to shift pumping to low power demand periods (increasing "peak" power generation
revenues). As such, the current primary purpose of these pumps is to facilitate the marketing and
the sale of Project power for maximum revenue.

- Reallocated the multipurpose costs of the Project based on the revised costs determined for the
irrigation and power functions.

7

 
APPENDIX

2

United States Department of the Interior
      BUREAU OF RECLAMATION
       WASHINGTON, D.C. 20240


          July 6, 1995
IN REPLY
REFER TO:
D-501O
ADM-8.00

                    MEMORANDUM

To:            Office of Inspector General
          Attention Assistant Inspector General for Audits

From:          Daniel P. Beard
          Commissioner

Subject:       Draft Audit Report on Recovery of Construction Costs, Columbia Basin           
Project Bureau of    Reclamation (No. W-IN-BOR-002-94A)

The Bureau of Reclamation (Reclamation) offers the following comments in response to the
recommendation in the subject report:

Recommendation 1

We recommend that the Commissioner, Bureau of Reclamation, ensure that the Pacific
Northwest Region prepares an interim cost allocation for the Columbia Basin Project that reflects
the Project as currently constructed and assumes that additional irrigation acreage will not be
developed. Upon completion this reallocation should be submitted to the Congress for approval
before it is actually implemented.

Response 

Concur. Reclamation will revise the interim cost allocation which reflects the Columbia Basin
Project as currently constructed and will assume that additional irrigation acreage will not be
developed. The appropriate review and approval process will be followed prior to implementing
the interim cost allocation.

The responsible official is the Director, Pacific Northwest Region. The target date for developing
an interim cost allocation is March 31, 1997.

If you have any questions or require additional information, please contact Luis Maez at
(303) 236-3289, extension 245.

cc:  Assistant Secretary - Water and Science, Attention Margaret Carpenter
Office of Financial Management Attention: Wayne Howard

8

 
APPENDIX 3

STATUS OF AUDIT REPORT RECOMMENDATION

  Finding/
Recommendation      Status              Action Required
  Reference

     1              Resolved; not       No further response to
                    implemented.        the Office of Inspector
                                   General is required.
                                   The recommendation
                                   will be referred to the
                                   Assistant Secretary for
                                   Policy, Management
                                   and Budget for tracking
                                   of Implementation.

                                   






9

 
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