HR 3980 HR 3981 - 2.5.14

Statement for the Record
Bureau of Reclamation
Department of the Interior
before the
U.S. House of Representatives
Committee on Natural Resources
Subcommittee on Water and Power
on
Draft Bills: 1. HR 3981, the Accelerated Revenue, Repayment and Surface Water Storage Enhancement Act
2. HR 3980, the Water Supply Permitting and Coordination Act, and
3. Discussion Draft: Legislation to Amend the Secure Water Act of 2009

February 5, 2014

Chairman McClintock and members of the Subcommittee, the following statement represents the initial review of the Department of the Interior (Department) and Bureau of Reclamation (Reclamation) on the three bills. All of these bills were only presented to the Department one week ago, and the Department has not had adequate time to conduct an in-depth analysis and develop detailed, thorough testimony.

The Department has expressed concern to the Committee that short notice of the hearing on multiple new bills would deprive the Department and the Administration the opportunity to provide testimony containing thorough analysis of the language. The Department may provide additional views on this legislation after conducting further analysis.

HR 3981: “Accelerated Revenue, Repayment and Surface Water Storage Enhancement Act”

HR 3981 contains language to authorize pre-payment of outstanding construction cost obligations, and also authorizes the conversion of water service contracts to repayment contracts. In general, Reclamation supports legislation authorizing the pre-payment of repayment contracts, and has done so before this subcommittee[1]. Below is some background on Reclamation's initial reaction to legislation authorizing pre-payment, and our interpretation as to the effect of the bill.

As background, we note that specific statutory authorization for accelerated repayment is not required in all cases involving construction costs that are allocated to irrigation. The Reclamation Reform Act of 1982 (RRA) subsection 213 (c) specifies that no authority is provided for lump sum or accelerated repayment of construction costs, except for repayment contracts that provide for lump sum or accelerated repayment that were in effect as of the enactment of RRA. Therefore, Reclamation and the Congress have interpreted current law to require water contractors to obtain additional statutory authority to make accelerated repayments of construction costs allocated to irrigation, except for those contracts already in effect as of the RRA's enactment, or for contracts otherwise exempt from the provisions of the RRA. As written, the bill would primarily benefit irrigation contractors on Reclamation's Central Valley Project based on the number of water service contracts connected with the Project. For municipal and industrial water service contracts, additional statutory authority may not be necessary for conversion of municipal and industrial water service contracts to repayment contracts, or for pre-payment of outstanding obligations, depending upon the circumstances applicable to each case. With this background, Reclamation can foresee some concerns with equity in implementation of the draft HR 3981 as currently written, specifically related to the contract conversion authority provided in the bill. While contract conversion legislation has been implemented for certain Reclamation project units (e.g., the San Joaquin River Restoration Settlement Act, 2009), the general concern is that this legislation proposes a broad, Reclamation-wide, “one-size-fits-all” approach, while the unique aspects of most Reclamation projects argue for a more case-by-case approach to accommodate the nuances of each project and its contracts.

For example, there are instances where contract conversions would be in direct conflict with existing statutory law applicable to the Reclamation project in question. On the Colorado River Storage Project (CRSP), enforced contract conversions required under the language of the draft bill would likely conflict with Section 5 of the CRSP Act, which establishes very specific requirements for the collection and disposition of revenues from various project elements into funds specific to that comprehensive, multi-purpose project. Section 5 of the CRSP Act specifically directs where all project revenues are to be distributed. The bill language would change that arrangement, impacting the funding for the project.

Where longstanding pricing systems and/or negotiated payment agreements are in place, those could be completely disrupted by the mandates of this legislation (again, CRSP being a good example). In other cases there is ongoing litigation associated with existing water service contracts that would be further complicated by the legislation's mandate that conversions be granted “upon request of the contractor”. Providing this authority to be used at the Secretary's discretion would likely address many of these concerns. Another concern with the bill is that in many cases it would be very difficult to determine the appropriate construction repayment obligation within the proposed 30-day time-frame envisioned by this legislation. Water service contracts often are entered into because a final repayment obligation associated with various project purposes has not yet been determined. Many projects operate under an interim rather than final cost allocation, and therefore only an initial determination of an appropriate repayment obligation could be made within the compressed period allowed under the bill. On projects with several contractors, pay off dates may vary from one contractor to the next (no guidance is provided by the legislation), which would complicate the determination of the appropriate payment amount.

There are other concerns with the financial and discounting language in the bill, which require additional analysis. In particular, the offer of a discounted repayment in Section 2(a)(2)(A) may have implications for revenues to the Treasury, and raises questions as to fairness given the contractors who have already pre-paid their obligations under different allowances. For example, similar legislation in the San Joaquin River Restoration Settlement Act of 2009 (section 10010) provided for prepayment on the basis of the outstanding obligation, not the net present value of that obligation. Combined with the discounting at ½ the Treasury rate provided in this same section, this could amount to double-discounting of outstanding repayment obligations. It is also unclear why the Treasury rate specified in the legislation is the 20-year rate. OMB Circular A-129 suggests that, for discounted prepayments, a current market yield on Treasury securities of comparable maturities should be applied. Finally, while Section 2(e) of the bill diverts receipts generated to a new account, the legislation has no cost-recovery provisions for the staff time and expenses that would be incurred by Reclamation in accommodating the accelerated repayment determinations, and in developing and executing the new contracts.

Section 2(e) and the remainder of the legislation create a “Surface Water Storage Enhancement Program” to be funded with receipts generated from prepayment of contracts “to fund or provide loans for the construction of surface water storage.” Authority for cooperative agreements with water users associations is provided, and funds would be available without appropriation for a variety of storage projects identified in Section 2(e)(5). Without any accompanying offset, we believe this provision would increase direct spending and would score under existing Pay-As-You-Go (PAYGO) provisions. Furthermore, while the Administration welcomes and supports efforts to efficiently maintain water assets, any proposals should result in the most efficient long-term use of the available Federal and non-Federal funds and be consistent with Federal budgetary requirements.

Reclamation is proud of its history constructing the surface water storage projects that are central to life in the West and our national economy. What is rarely considered in the political discussion of surface storage are the realities of project repayment and market conditions associated with building large dams today. In February of 2012, Reclamation testified before this Subcommittee at a hearing titled “Water for Our Future and Job Creation: Examining Regulatory and Bureaucratic Barriers to New Surface Storage Infrastructure.” As stated at that hearing,the most frequent reasons for fewer large surface storage projects being built today center around economics or an inadequate potential water market associated with the given facilities. In other cases, environmental, safety or geologic challenges came to light during a project's development, and rendered construction, completion or operation unfeasible. Local opposition sometimes contributed, leaving the facilities “on the books” awaiting further action, but with external events and new priorities passing them by. This legislation devotes significant new resources to the prospective construction of new surface water storage. But the underlying economic issues that prevent projects from being built – the difficulty of repayment – are unchanged by this bill. Reclamation's focus has instead been on meeting the challenge of rehabilitating the existing, aging, water and power infrastructure on which Western economies depend. We would be glad to work with the Subcommittee on this important aspect of the debate surrounding new surface water storage. However, we believe that any potential revenues from accelerated repayment of outstanding contractor obligations should be repaid to the Treasury or Reclamation Fund to fulfill the project beneficiaries' obligations to the taxpayers who originally financed these projects.

HR 3980: “Water Supply Permitting and Coordination Act”

HR 3980 directs the Secretary of the Interior to coordinate federal and state permitting processes related to the construction of new surface storage projects on lands managed by Interior and the U.S. Department of Agriculture (USDA). Section 3 of the bill would establish Reclamation as the lead agency for all reviews, analyses, permits and other requirements necessary for construction. A series of deadlines and timelines are mandated for notifying and consulting with cooperating agencies, completing environmental reviews, and determining project schedules. While nothing in the bill would facilitate more regular federal funding for any of these activities, the bill does allow for contributed funds from non-federal entities. However, Section 6(c) of the bill would prohibit use of any contributed funds for “a review of the evaluation of permits” by the Reclamation Regional Directors in the region in which qualifying projects would be built.

This legislation raises several concerns. In Section 2(4) the definition of “cooperating agency” leads to confusion and is inconsistent with established regulations and judicial interpretations. For example, it is inconsistent with the definition under NEPA and its implementing regulations which identify Federal, Tribal, State, and local governmental entities as potential cooperating agencies and further allow those governmental entities with subject matter expertise to be designated cooperating agencies. In Section 6(c) and throughout the bill, it is unclear what public policy problem would be addressed by the bill. Under the National Environmental Policy Act, the Economic and Environmental Principles and Guidelines for Water and Land Related Resources (P and G's), existing regulation and other laws, there is already ample basis for review of projects and coordination among federal agencies involved in water supply planning. We do not know of any Reclamation or USDA-sited surface water storage projects that have been denied construction because of delays associated with project review or permitting, or shortcomings in communication among Reclamation, USDA, or any other state or federal partners. Rather, as stated above and in prior testimony at the 2012 hearing, project economics and the pricing and repayment challenges in the potential markets where projects would be built are the primary reasons for some projects being authorized but not constructed. If nothing else, this bill reduces the time necessary to establish the merits of projects and, in some ways, could make favorable recommendations for project construction less likely.

An additional problematic aspect of the bill is that it establishes Reclamation as the lead agency for permitting for storage projects on Interior and USDA administered lands. Since those lands exist in all 50 states, this would put Reclamation in a significantly expanded role of administering the permitting process for activities outside the 17 Western states where Reclamation has typically had jurisdiction.

Draft Bill: “To Amend the Secure Water Act of 2009”

HR __(Discussion Draft) would amend the Secure Water Act to create a new “surface water storage enhancement program” within the Department, funded for five years with $400 million per year in receipts that under current law would be deposited in the Reclamation Fund. These are revenues that would otherwise flow to the U.S. Treasury, but which would, under the draft bill, be made available for construction of surface water storage projects without appropriation. This provision would increase direct spending by $2 billion and score under existing PAYGO provisions. Construction could be funded with these revenues “exclusive of any Federal statutory or regulatory obligations relating to any permit, review, approval or other such requirement.” Section 1(b) of the bill would add language to the Secure Water Act defining “any non-Federal facility used for the surface storage and supply of water resources” eligible for construction funding.

We recognize that this is a “discussion draft”, and would be glad to engage in further discussion with the Subcommittee on the bill. We believe that spending on surface-storage projects should reflect consideration for the economic return to the Nation. We would like additional clarity on the meaning of several phrases in the bill, and have questions as to how Reclamation would establish eligibility for funding under the proposed program. We would be glad to work with the Subcommittee to explore these issues further. In conclusion, the Bureau of Reclamation has a long history of constructing, managing and operating surface storage for the benefit of the arid West, and where projects make environmental and economic sense, will continue to pursue surface storage as one of many options to meet water demands in the West.