Statement of Robert W. Johnson, Commissioner Bureau of Reclamation U.S. Department of the Interior Before the Senate Energy and Natural Resources Committee Water and Power Subcommittee On S. 2974, Arkansas Valley Conduit Act of 2008 July 8, 2008 Mr. Chairman and Members of the Subcommittee, I am Robert W. Johnson, Commissioner of the Bureau of Reclamation. I am pleased to be here today to present the Department of the Interior's views on S. 2974, legislation authorizing appropriations and the Arkansas Valley Conduit in the State of Colorado. For the reasons described below, the Department has significant concerns with S. 2974 and cannot support this legislation. The Arkansas Valley Conduit is an authorized feature of the 1962 Fryingpan-Arkansas Project (Fry-Ark Project), but never constructed due to financing considerations. Today, increased water treatment costs due to local groundwater quality and changing requirements of the Safe Drinking Water Act, have renewed local interest in alternative means of obtaining safe and clean water supplies for the Lower Arkansas Valley. The Conduit would transport water about 110 miles from Pueblo Dam (part of the Fry-Ark Project) to communities along the Arkansas River to a point near Lamar, Colorado. The Lower Arkansas River Basin is comprised of rural communities, with the largest town, Lamar, having a population of approximately 8,600. The population anticipated to be served by the Conduit is approximately 50,000.Total project costs were roughly estimated in 2005 to be between $265 million and $345 million, depending on the project features chosen for construction. This legislation intends to utilize existing infrastructure as one component in addressing a water need, proposes a different mechanism for repaying the outstanding debt for the construction of current features of the Fry-Ark Project (including nearly $38 million in outstanding and uncontracted debt for the construction of Ruedi Reservoir), and proposes one way to provide water for Lower Arkansas basin communities. Reclamation has testified previously on several versions of legislation to fund construction of the Arkansas Valley Conduit (AVC). The Department testified on H.R. 317 on March 13, 2008 before the House Water & Power Subcommittee, and in September 2006 before this Subcommittee on S. 1106. In both of those testimonies, Reclamation cited those prior bills' cost share arrangement as inconsistent with the existing AVC authorization in PL 87-590, which requires 100% repayment of project features within 50 years. While this bill improves upon past versions for cost-sharing requirements, S. 2974 also continues to be inconsistent with the original Fry-Ark authorization by providing that the Federal government bear 65 percent of the cost of the project. In addition, several outstanding issues remain regarding the funding source for the local cost share. The legislation before the Subcommittee today, S. 2974, is a new proposal that proposes a different financing arrangement involving contracts that would provide a still-undetermined revenue stream for repaying the Conduit. We have been happy to work with the Southeastern Colorado Water Conservancy District on identifying and further refining the complex financing concepts outlined in S. 2974. Although the Department is appreciative of the work that has been done, the Administration still has some significant outstanding concerns with this legislation. In particular, Reclamation does not believe the excess capacity contracts referenced in Section 2(b) of this bill will provide adequate funding for a pipeline that, in 2005, was priced between $265 million and $345 million. Section 2(b) provides that any revenue derived from contracts for the use of Fryingpan-Arkansas project excess capacity or exchange contracts using Fryingpan-Arkansas project facilities shall be credited to the actual cost of Ruedi Dam and Reservoir, the Fountain Valley Pipeline, and the South Outlet Works at Pueblo Dam and Reservoir until the date on which the payments to the Arkansas Valley Conduit begin. After that, the revenue would be used for the Conduit. To date, Reclamation has entered into three such long-term excess capacity contracts, which generate annual revenue of only about $1 million per year. They are "if and when" contracts, which depend heavily on hydrology and water supply considerations outside of Reclamation's control. In addition, any new contracts take years to negotiate and finalize. We do not believe that these revenues will be sufficient to pay for the Conduit. Relying on these new contracts could leave the Federal government responsible for the primary funding of this project. Also, the revenues from these excess capacity contracts would normally be deposited into the general Treasury after being credited to project repayment. Therefore, using them in this manner creates a troubling precedent. We cannot say what the potential loss to the Treasury would be and would need to study this issue further if this type of financing were to proceed. Reclamation also has concerns regarding the overall Federal and Non-federal cost share described in S. 2974. This type of credit toward future projects may not comport with the Administration's fiscal management policies and could potentially leave the Federal government responsible for being the primary source of funding for all of these types of projects in the future. Also, this type of applied cost sharing appears to deviate from standard cost-sharing practices, potentially creating a precedent that needs more careful consideration. Finally, while incentivizing local sponsors to manage their water resources responsibly can be a positive, we are concerned that this type financing may allow project beneficiaries to not have to repay their pre-existing obligations, which, in turn, may necessitate even more Federal funding being dedicated toward this project. The loss to the Treasury under our current contracting policies would be about $1 million annually, but could increase as these contracts increased. We recognize the importance of the Conduit proposal to southeastern Colorado, and remain committed to working with Congress and the Southeastern Colorado Water Conservancy District to further define and clarify provisions within this bill. However, for the aforementioned concerns noted above, we cannot support S. 2974. This concludes my statement, and I would be pleased to answer any questions.