S 1258 - 7/26/07

Statement of Larry Todd, Deputy Commissioner for

Policy, Administration and Budget

Bureau of Reclamation

Department of the Interior

Before the

Senate Energy and Natural Resources Committee

Subcommittee on Water and Power

On

S. 1258

July 26, 2007

Mr. Chairman and Members of the Subcommittee, I am Larry Todd, Deputy Commissioner of the Bureau of Reclamation.I am pleased to be here today to present the Department of the Interior's views on S. 1258, legislation to amend the Reclamation Safety of Dams Act and redirect reimbursable costs for dam safety activities.The Department opposes S. 1258, as introduced.

S. 1258 would make major changes to the process and revenues used by Reclamation to secure its facilities resulting in a loss of receipts to the Treasury.This proposed legislation addresses two components of Reclamation's site security program: 1. capital investment (mainly facility fortification) and 2. operation and maintenance (O&M), which consists mainly of guards and patrol functions.Currently, Reclamation treats security-related capital investment as non-reimbursable costs, and security-related O&M expenses as project costs subject to reimbursement based on project cost allocation.S. 1258 would change this methodology, eliminating the distinction between capital investment and O&M costs so that Reclamation would be required to treat 85% of the capital investment and O&M security costs as non-reimbursable, while the remaining 15% would be recovered from the reimbursable project purposes.

Reclamation understands that the impetus for this legislation is concern over increased security related costs incurred for all Federal facilities after September 11, 2001.However, our agency has been and remains committed to working with our customers and with Congress to ensure fair, consistent and efficient policies related to the treatment of these costs.The Department does not believe that the changes instituted under S. 1258 would be a positive step in this direction.

As explained in reports submitted by Reclamation to Congress in May 2005 and February 2006, Reclamation distinguishes capital costs of security-related fortifications from security-related O&M costs.Since the beginning of increased security levels in fiscal year 2002, Reclamation has treated security-related capital investment as non-reimbursable.From fiscal year 2002 through the end of fiscal year 2007, for example, Reclamation will have funded over $66 million in fortification costs, none of which has been passed on to customers.

Treatment of post-9/11 O&M (guard and patrol) costs has been different, however.Early on, when security was increased at Reclamation facilities immediately after 9/11, Reclamation took the position that while these are clearly O&M costs, until a stable budget pattern emerged, and until customers had sufficient time to make the necessary adjustments to their planning and budgets, these costs should be non-reimbursable.Therefore, from FY 2002 through FY 2004, Reclamation's budget proposals called for post 9/11 security-related O&M costs to be treated as nonreimbursable.

However, in its FY 2005 and all subsequent budget proposals, Reclamation returned to the pre-9/11 practice of treating security-related O&M costs as reimbursable by project allocation.Report language which accompanies the FY 2005 Energy and Water Development Appropriation, however, directed Reclamation not to begin reimbursement in FY 2005, and additionally, provide a report to Congress on the delineation of planned reimbursable costs.Later, Congress' FY 2006 appropriations report language limited security-related O&M reimbursement to $10 million out of total costs of $20.9 million in FY 2006.

Reclamation's FY 2007 budget proposal anticipated total security-related O&M guard costs of $20.9 million.Of that amount, $2 million is allocated to non-reimbursable project purposes and requires appropriations.Reclamation anticipated full reimbursement of the remaining $18.9 million, of which approximately $11.6 million is in up-front funding not requiring appropriations, and approximately $7.3 million would be repaid to the Treasury and requires appropriations.However, because a Continuing Resolution in FY 2007 left unanswered the reimbursement amounts for the current fiscal year, Reclamation has moved to collect $14.5 million as a mid-point between the $10 million cap in FY 2006 and the full $18.9 million we expect to be reimbursable in FY 2008.

Under S. 1258, instead of the $18.9 million future annual reimbursement Reclamation currently anticipates, Reclamation would instead receive only 15% of roughly $33.1 million in total security-related O&M guard and fortification costs, or at most, about $5 million each year depending upon the structure of repayment.This would result in an additional financial burden to the
United States of about $13.9 million per year in reduced reimbursement.Up-front funding would be reduced by approximately $9.7 million annually and Reclamation would need additional appropriations in order to carry out planned security activities.

Reclamation believes this legislation could bring unintended results for Reclamation water and power customers.While the change to 15% reimbursement of security-related O&M costs would benefit some customers, the change to 15% reimbursement of currently non-reimbursable security-related capital costs would work to the detriment of customers in projects where future capital fortification expenditures are planned.Water and power customers of projects whose security fortifications were lower in priority and therefore not completed prior to the bill's enactment would be particularly disadvantaged.Furthermore, Reclamation would be required to collect these costs under multiple repayment contracts that could extend as long as 50 years.

Indeed, what is less certain are the future costs for facility fortifications that Reclamation's water and power customers would absorb as reimbursable.The total cost of internally-approved fortifications for FY 2007 and future years is $35.4 million ($78.8 million minus the $43.4 million that was spent through FY 2006), and this figure does not include potentially significant additional fortification activities still under study.Under S. 1258, 15% of these fortification costs would become reimbursable by customers.

Reclamation has met with its customers frequently in the past several years on this issue, and we understand and share our contractors' desire for stable, predictable security assessments.We recognize that certainty, accountability, and transparency are important in the financing of this program.However, we believe that the site security program is now sufficiently established, and the benefits to contractors is sufficiently clear, so that reimbursable costs for our customers are adequately quantified, fairly allocated and understood in the ratepaying community.

Reclamation is interested in working with the subcommittee to address its customers' concerns in the administration of the security program.However, S. 1258 does not provide a workable solution to address those concerns.Mr. Chairman, this concludes my testimony.I am pleased to answer any questions the subcommittee may have.