United States Department ofthe Interior

BUREAU OF REClAMATION

N Washington, D.c. 20240

w—6400 JUL 201994

MEMORANPUM

To: Director, Office of Program Analysis

Director, Office of Operations

Director, Office of PoIicy and External Affairs•

Regional Director PN, LM~ LC, UC, GP

Attention: 100, JNioo

From: Daniel P. Beard

Commissioner

Subject: Contracts and Repayment Policy

Introduction

The Bureau of Reclamation’s (Reclamation) past contracting

practices have concentrated on defining repayment terms and on

providing long-term assurances of water supplies to water users.

As a corollary, Reclamation has not historically reserved for

itself the flexibility to improve the management of existing

projects, shift water supplies to meet growing demands for

municipal and environmental uses, or address contemporary

resource management needs. This has placed the United States in

a disadvantageous position to respond to changing public values.

One of my primary objectives is to ensure that Reclamation’s

future contracting and repayment policies and procedures are in

accord with our goal of being a premier water resources

management agency. Flexibility contained in future contracts

will be oriented to assist in achieving the Bureau’s multiple

objectives. Toward this end, we need to revise our policies and

procedures to ensure that Reclamation has considerably more

flexibility and discretion in the management of the water, land,

and power resources associated with our projects than has

historically been the case. Detailed guidance for implementing

the policies set forth in this’memorandum will follow as soon as

possible. It is also of paramount importance that we keep

emerging water needs, environmental concerns, and sound business

• practices at the forefront of our considerations.

Alternatives to Contracts

Reclamation can maximize its discretion and flexibility by

seeking alternatives to contracts whenever practical. Thus, if

formal contractual arrangements for the recovery of reimbursable

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project costs or to protect the interests of the United States

are not required, we will utilize less formal operating

agreements, letters of intent, and other less restrictive

documents to memorialize the terms and conditions of an

agreement. Such instruments must be’ approved in adVance, with

concurrence by the Solicitor and the Assistant Secretary — Water

and Science, by the Commissioner. Requests for approval to use

these instruments should be addressed to the Program Analysis

Office, which will promptly process.such requests and obtain

• concurrence and comments from other organizational components as

appropriate

AcTreement on Contract Terms d

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In order to avoid unnecessary litigation, we must ensure that the .jj parties to the contract share the same understanding of contract

terms. Therefore, where a party to a contract is engaged in

litigation over the meaning of specific contract terms or other—

wise has expressed disagreement with the Bureau of Reclamation’s

understanding’ of terms, the Bureau should not enter into a new Ii

contract containing those same terms. In such situations, the

Bureau should insist that the parties resolve differences before

entering into a new contract, and set out with specificity the

meaning of the terms for the purpose of the new contract.

- New or Renewal Contracts

With the foregoing precepts in mind, the following policies shall

henceforth govern the negotiation and administration of new

repayment contracts and new water service contracts including

renewals, under the authority of Reclamation law, including, but

not limitedto: the Reclamation Project Act of 1939, the Water

Supply Act of 1958, the Warren Act, the Small Reclamation

Projects Act, and the Safety of Dams Act.

1. Contracts will ensure that the Federal investment and

Reclamation’s administrative costs are recovered in an effective

and businesslike ‘manner. When negotiating these aspects of a

contract, consideration needs. to be given to the full extent of

Reclamation’s cost recovery objectives and policies, and to all

sources of repaymeni for a given project, h9t just to the narrow

issues presented by a given contract. ~•

2. Contracts will proVide for the appropriate balancing of

all water uses, including new water demands, recreation, instream

flow needs ,enhancement of fish and wildlife habitat and

resources, and water quality. Contracts will be drafted in a

manner that will permit and’ encourage water transfers to occur

and’ aid in our objective of providing water to a broader spectrum

of water uses.

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3. Contracts will be written to avoid-or eliminate non—

• essential explanatory recitals and other restatements of past

agreements, accomplishments, or rights of parties other than the

United States.

4. Contracts will promote improved water management and

conservation ~nd require water conservation plans (with

implementation’ schedules) pursuant to the ‘authority of section

210 of the Reclamation Reform Act of 1982 (RRA), as amended.

5. Pricing and rate-setting ‘provisions will promote efficient

use of project water supplies. Our pricing policy is to

recognize market prices and/or the. value of water in specific

situations. We will rely less on cost-based or replacement cost—

based methods of pricing and setting rates. ‘ In addition,

wherever possible, we will eliminate or avoid using take—or—pay

provisions, which tend to encourage excessive or unnecessary use

of water.

6. Contracts will provide for reasonable beneficial use

determinations by Reclamation and require that the inappropriate

or wasteful use of water be eliminated. Contracts should also

provide for suitable and effective enforcement actions in the

event there is inappropriate or~ wasteful use of water.

7. Contracts will be written for the shortest possible term

consistent with good business practices and effective water

management. The working presumption is that this period is 25

years or less. Contractors might be offered, a “menu” of

possibilities from which they could select the most suitable

terms. Rather than offering a 25 year contract for a specific

quantity of water, the contractor could be offered a 5, 10, ‘15,

or 20 year contract, with different quantities and repayment

terms for each contract. Another possibility might beto avoid

long term “dropdead” contracts, and develop short-term contracts

of 10 years that could be renewed annually, providing the user

with a more or less permanent 10 year contract. Under this

approach, when the Government decided that it no longer desired

to renew, the user would have 10 years to make other

arrangements.

8. Contract negotiations will be in strict compliance with

the RRA, the accompanying rules and regulations, and applicable

policy, including the requirement to announce negotiations in

advance, and will be conduOted in a manner that provides

opportunities for the public ‘to observe and provide meaningful

input.

9. Subject to delegationof authority and approval of a basis

of negotiation, each Regional. Director will be responsible and

accountable for conducting contract negotiations and drafting

proposed contracts.

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10. Meetings held prior to the approval of the basis of

• negotiation for the purpose of gathering and exchanging factual

information will be clearly identified as such and conducted in a

manner that would not prejudice the j~ending approval of the basis

of negotiation or the contract.negotiations.

Amendatory Contracts

We will negotiate contract amendments to achieve as many of the

preceding policy objectives as are applicable to a given

situation as a condition of agreeing to the additional benefits

sought by the ‘water user. if Reclamation cannbt obtain

‘sufficient concessions of value to the United States to justify

providing additional ben’ef its to the water user, then we will

• exercise our option of sim~ly not agreeing to contract

amendments.

Repayment Contracts

Repayment contracts, although having a fixed repayment period,

have implications lasting far beyond the original contract term.

After payout of construction costs, water users often pay only,

O&M costs. O&M ‘costs alone are ndt sufficient to maintain the

services that are provided; ‘replacement costs are major

additional costs that have not always been collected. Thus, for

paid—out repayment contracts,,’ I want us to remedy the existing

situations and, avoid future sitiiati6ns where water users pay only

a part of the co~ts associated with providing project benefits

after payout of construction costs.’ There are at least three

options available to’address’this’problem: (1) charge for

replacement costs, (2) ievy’a c1~arge th’at is commensurate with

the value of water, or (3) transfer title of the facilities to

the water users. Water users must be encouraged to assume

greater responsibility for all costs and to recognize the public

values associated with Reclamation projects. I expect to see

improved cost recovery that in turn will result in water prices

that more nearly reflect market value and will encourage water

conservation.

Preparation of Policies and Procedures

I am assigning the Director, Office of Program Analysis, in

consultation with the Office~of the Solicitor, the Director,

Office of Operations, and the Regional Directors, to develop new

policy guidance and procedures., and standardized contract

provisions, to ensure the implementation of the above principles,

and to analyze and recommend means for dealing with existing

repayment contracts. Also, I am assigning the Director, Office

of Program Analysis, to review’Reclamation’s beneficial use

determinations. Your interest in and’support for these important

activities is appreciated;

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