```
                                                                 
Delaware River Deepening Project: Comprehensive Reanalysis Needed
(07-JUN-02, GAO-02-604).					 
                                                                 
The U.S. Army Corps of Engineers' February 1992 Final Interim	 
Feasibility Study and Environmental Impact Statement reported	 
that deepening the Delaware River ship channel from 40 to 45 feet
was economically justified and environmentally feasible. However,
it does not provide a reliable basis for deciding whether to	 
proceed with the project. In particular, GAO's analysis of the	 
Corps' 1998 benefit estimate identified several miscalculations, 
invalid assumptions, and the use of significantly outdated	 
information. In addition, a number of unresolved issues and	 
uncertainties were not factored into the Corps' economic	 
analysis, the outcome of which could either increase or decrease 
the benefits and costs of the project. Due to the shortcomings	 
GAO identified in the Corps' analysis, the actual economic merits
of the project will not be reliably known unless the Corps	 
comprehensively reanalyses it. The Corps of Engineers has largely
addressed environmental concerns related to the project to the	 
satisfaction of federal and state environmental agencies.	 
However, a number of unresolved issues remain, including the	 
issuance of a permit from the state of Delaware governing	 
construction projects that affect state waters. 		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-604 					        
    ACCNO:   A03518						        
  TITLE:     Delaware River Deepening Project: Comprehensive	      
Reanalysis Needed						 
     DATE:   06/07/2002 
  SUBJECT:   Cost analysis					 
	     Environmental engineering				 
	     Marine engineering 				 
	     Economic analysis					 
	     Inland waterways					 
	     Waterway costs					 
	     Land management					 
	     Environment evaluation				 
	     Delaware River					 

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GAO-02-604
     
Report to Congressional Requesters

United States General Accounting Office

GAO

June 2002 DELAWARE RIVER DEEPENING PROJECT

Comprehensive Reanalysis Needed

GAO- 02- 604

Page i GAO- 02- 604 Delaware River Deepening Project Letter 1

Results in Brief 1 Background 3 Corps? Analysis Substantially Overestimated
Project Benefits 5 Corps Has Refined Its Cost Estimate to Reflect Some
Changes and

Corrections, but Additional Updates Are Needed 11 Further Corrections for
Outdated Information and Additional

Errors and Omissions Would Likely Increase Project Costs 12 Several
Uncertainties Could Further Affect Project Benefits and

Costs 13 Corps? Quality Control Process Did Not Identify Major Flaws in the

Economic Analysis 18 Most Environmental Concerns Have Been Addressed, but
Several

Related Issues Remain Unresolved 20 Conclusions 22 Recommendations for
Executive Action 23 Agency Comments 23

Appendix I Scope and Methodology 25

Appendix II Comments from the Under Secretary of the Army 31

Appendix III GAO Contact and Staff Acknowledgments 36

Table

Table 1: Analysis of Annual Project Benefits 10

Figure

Figure 1: The Delaware River Ship Channel 3 Contents

Page 1 GAO- 02- 604 Delaware River Deepening Project

June 7, 2002 The Honorable Jon Corzine The Honorable Robert G. Torricelli
United States Senate

The Honorable Robert E. Andrews House of Representatives

The U. S. Army Corps of Engineers? February 1992 Final Interim Feasibility
Study and Environmental Impact Statement reported that deepening the
Delaware River ship channel from 40 to 45 feet was economically justified
and environmentally feasible. Following this assessment, Congress, in the
Water Resources Development Act of 1992, authorized the design and eventual
construction of the Delaware River ship channel to accommodate the movement
of larger vessels. The total estimated cost of the project is over $420
million. The federal share of the project cost- approximately $287 million-
would be for constructing the deeper channel and the disposal sites for the
dredged material, as well as maintaining the channel for 50 years at a depth
of 45 feet. The Delaware River Port Authority (DRPA), the nonfederal
sponsor, would be responsible for most of the rest of the cost. The Corps?
economic analysis of the project, updated in 1998, concluded it would yield
annual benefits of $40.1 million, largely in the form of transportation cost
savings related to importing crude oil (about 80 percent of the benefits)
and importing or exporting cargo in containers, as well as bulk commodities
including scrap metal, iron ore, and coal. The economic analysis estimated
annualized project costs of $28. 8 million. In addition to questions about
the project?s cost and benefits, a number of concerns have been raised about
whether the project would have adverse environmental impacts- for example,
whether it would resuspend toxic substances in the water, degrade water
quality, permit salt water intrusion into groundwater supplies used for
drinking and other purposes, or significantly harm fish and wildlife.

We were asked to review whether (1) the Corps of Engineers? economic
analysis accurately and appropriately considered the benefits and costs of
the project and (2) the environmental implications of the project have been
fully addressed.

The Corps of Engineers? economic analysis of the Delaware River main ship
channel- deepening project contains a number of material errors. As a

United States General Accounting Office Washington, DC 20548

Results in Brief

Page 2 GAO- 02- 604 Delaware River Deepening Project

result, it does not provide a reliable basis for deciding whether to proceed
with the project. In particular, our analysis of the Corps? 1998 benefit
estimate identified several miscalculations, invalid assumptions, and the
use of significantly outdated information. For example, the Corps misapplied
commodity growth rate projections, miscalculated trade route distances, and
continued to include benefits for some import and export traffic that has
declined dramatically over the last decade. In addition, a number of
unresolved issues and uncertainties were not factored into the Corps?
economic analysis, the outcome of which could either increase or decrease
the benefits and costs of the project. While the Corps has established
procedures to ensure that its benefit- cost analyses are fundamentally sound
and properly prepared, in this case at least, the process was ineffective in
identifying significant errors and analytical problems. Because of the
shortcomings we identified in the Corps? analysis, the actual economic
merits of the project will not be reliably known unless the Corps
comprehensively reanalyzes it.

The Corps of Engineers has largely addressed environmental concerns related
to the project to the satisfaction of federal and state environmental
agencies. On the basis of the results of the Corps? 1992 Final Interim
Feasibility Study and Environmental Impact Statement, 1997

Supplemental Environmental Impact Statement, and subsequent studies, most
federal and state environmental agencies have agreed that the project would
not significantly affect such areas as water quality and fish and wildlife
habitat. Consequently, the Corps has obtained most of the approvals it needs
from these agencies. However, a number of unresolved issues remain,
including the issuance of a permit from the state of Delaware governing
construction projects (such as dredging) that affect state waters.

Given the serious problems we identified with the Corps? economic analysis,
we are making recommendations to the Secretary of the Army on the need to
comprehensively reanalyze the project. In commenting on a draft of this
report, the Under Secretary of the Army generally agreed with our findings
and concurred that a new and comprehensive economic analysis of the
project?s benefits and costs is warranted. The Under Secretary also
concurred that once the economic reanalysis is complete, an external
independent party would be engaged to ensure that the reanalysis accurately
and fairly represents the expected benefits and costs of the proposed
project.

Page 3 GAO- 02- 604 Delaware River Deepening Project

Figure 1 is a map of the Delaware River Ship Channel that also shows the
locations of various project features discussed throughout the report.

Figure 1: The Delaware River Ship Channel

Background

Page 4 GAO- 02- 604 Delaware River Deepening Project

The Delaware River project plan calls for deepening the main navigation ship
channel from the mouth of the Delaware Bay through Philadelphia Harbor, and
on to Beckett Street Terminal in Camden, New Jersey- a distance of 102. 5
miles. The project includes plans for constructing three new disposal
facilities for dredged material, called confined disposal facilities, in
Gloucester and Salem counties, New Jersey. Two of these new disposal
facilities would be needed to maintain the current channel, even if the
project were not built. The new facilities and 10 other existing facilities
would accommodate the material dredged during the construction of the deeper
channel and during the 50- year maintenance period that would follow. The
project also includes plans to restore two wetland areas, one in New Jersey
and the other in Delaware, and to replenish a beach site in Delaware.

The Delaware River Port Authority, the nonfederal sponsor, would share in
the costs of the project, according to requirements in the Water Resources
Development Act of 1986 and a project cooperation agreement that would need
to be signed with the Corps before beginning construction. The Port
Authority would be responsible for contributing 25 percent of the total
costs of the project?s general navigation features- largely constructing and
dredging- and for providing lands, easements, relocations, and rights- of-
way necessary for the project. The Port Authority would pay an additional 10
percent of the general navigation feature costs after receiving credit for
providing for such items as lands for dredged material disposal areas. The
three states that would be affected by the channel deepening, Delaware, New
Jersey, and Pennsylvania, are expected to contribute funds toward the Port
Authority?s share of the project.

The Philadelphia district office of the Corps of Engineers is leading the
effort to prepare the various studies and documents required for the
project. It completed a Final Interim Feasibility Study and Environmental
Impact Statement for the project in 1992. This document was used to inform
decision- makers and the public of the Corps? recommended plan for the
project, potential alternatives to it, its benefits and costs- annualized
over a 50- year period- and its likely environmental effects. The Corps then
prepared a design memorandum in 1996, which provided details on the final
design and engineering plans for the project, and published a Supplemental
Environmental Impact Statement in 1997. In its Limited Reevaluation Report
of 1998, the Corps updated the project?s benefits and costs. Approval of
this report constituted the Corps? decision to budget construction funds for
the project. Corps guidance and procedures require that key decision
documents such as the Feasibility

Page 5 GAO- 02- 604 Delaware River Deepening Project

Study and the Limited Reevaluation Report undergo review by district
officials; the Corps? North Atlantic division in Brooklyn, New York; and the
Corps? Office of Civil Works in Washington, D. C., before receiving final
approval. On April 22, 2002, the Corps? Director of Civil Works suspended
work on the project pertaining to the project cooperation agreement, plans
and specifications, and advertising for construction, until questions
pertaining to the project justification have been resolved.

The Corps? analysis of project benefits contained or was based on
miscalculations, invalid assumptions, and outdated information. After taking
these problems into consideration, we found that the project benefits for
which there is credible support would be about $13.3 million a year, as
compared to the $40. 1 million a year claimed in the Corps? 1998

Limited Reevaluation Report. Some of the major problems we identified in the
Corps? analysis of project benefits are discussed below.

Based on a number of miscalculations, the Corps? analysis overstated annual
project benefits by about $8.6 million. In one instance, the Corps
misapplied the projections of commodity growth rates for traffic in the
Delaware River ship channel when estimating future project benefits. For
example, for oil imports from West Africa, the underlying data indicated
that the appropriate predicted growth rate for 1992 through 2000 would be
5.8 percent, and 1. 4 percent for 2001 through 2005. However, the Corps
applied the 5.8 percent growth rate to the entire 1992 through 2005 time
period and repeated the mistake by incorrectly applying predicted rates
elsewhere in its analysis. In aggregate, this miscalculation led to about a
$4. 4 million overestimate of annual project benefits. Corps headquarters
officials agreed with our analysis.

After taking the Corps? misapplication of growth rates into consideration,
there remained about a $4. 7 million gap between the Corps? estimated annual
project benefits and the outcome of our efforts to replicate its results.
The Corps? economist for the project told us that this gap was created by a
computer error and speculated that it could have occurred when files were
transferred from one program to another. Ultimately, however, the Corps was
unable to definitively explain the discrepancy between its original estimate
and our attempt to replicate its estimate and acknowledged that the error
overstated project benefits by about $4.7 million. Corps headquarters
officials agreed with our analysis. Corps? Analysis

Substantially Overestimated Project Benefits

Corps? Benefit Analysis Contained Miscalculations

Page 6 GAO- 02- 604 Delaware River Deepening Project

The Corps also inconsistently discounted the project?s future benefits to
determine their net present value. Specifically, the Corps used different
discount rates, realized benefits at different times of the year, and used
different 50- year project time periods for the various benefit categories.
For example, the Corps estimated project benefits for coal shipments for the
period 2005 through 2055 (note that this is 51 years, not 50 years), while
it estimated benefits for container ships from 2000 through 2050. Also, the
Corps used an 8. 75 percent discount rate to discount the coal benefits for
present value purposes, but used 7.625 percent for crude oil. The Corps?
economist for the project acknowledged the errors and noted that the
discounting procedures used for net present value purposes should have been
consistently applied. Taking these errors into consideration, as called for
by applicable Corps guidelines for water resource projects, we found that
annual project benefits would be about $0.4 million less than the Corps had
projected. 1 Corps headquarters officials agreed with our analysis.

Finally, the Corps presented its benefit estimates in dollar values for
different years for the various benefit categories. The Corps stated in its
1998 Limited Reevaluation Report that the benefit and cost estimates were in
1996 dollars. However, this was not true for any of the benefit categories:
coal benefits were calculated in 1991 dollars; crude oil, iron ore, and
scrap metal benefits in 1993 dollars; and container benefits in 1995
dollars. A basic principle of benefit- cost analyses is that benefit and
cost estimates be given in the same year dollar values. Without such
consistency, it is not possible to accurately compare project benefits and
costs. Taking this mistake into account, we found that estimated project
benefits increased by about $0. 9 million. 2 Corps headquarters officials
agreed with our analysis.

Based on a number of invalid assumptions, the Corps? analysis overstated
annual project benefits by about $9.4 million. The Corps? analysis of the
benefits that a 45- foot channel would be expected to produce was based on
several components, such as time at sea, time in port, tonnage shipped,

1 We updated the Corps? estimates so benefits are realized from 2005 through
2054, at the mid- point of each year, using the discount rate applicable at
the time of the 1998 Limited Reevaluation Report- 7. 375 percent. 2 Using
the gross domestic product implicit price deflator, we escalated the input
data used

in the Corps? analysis to reflect benefits in 1996 dollars. Corps? Benefit
Analysis

Was Based on Invalid Assumptions

Page 7 GAO- 02- 604 Delaware River Deepening Project

and average shipping cost per unit of cargo. For certain crude oil vessels,
one of these components is time savings in unloading crude oil. Currently,
crude oil vessels that are loaded to a hull depth of more than 40 feet must
stop at the mouth of the Delaware River to transfer crude oil to smaller
vessels (a process called lightering) until the ship?s hull is no deeper
than 40 feet below the surface. This transfer of cargo takes time and thus
increases costs. With a deeper channel, such ships would spend less time
lightering, or might not need to lighter at all, thus reducing costs. In
calculating the economic benefits that a 45- foot channel would produce, the
Corps assumed time savings from reduced lightering at both the port of
origin and the port of destination. However, the benefits of reduced
lightering are realized only at the destination of the voyage. Thus, the
Corps double- counted this benefit, resulting in an overstatement of about
$2.6 million in annual project benefits. Corps headquarters officials agreed
that its analysis double- counted lightering time savings and therefore
overstated annual project benefits.

The Corps? economic analysis also claimed project benefits for predicted
shipments of crude oil on vessels that require a channel depth of only 40
feet. Currently, some of the vessels that deliver crude oil to the
Philadelphia area refineries require less than a 40- foot channel depth, but
they have the capacity to more fully load, and thus could potentially take
advantage of a deeper channel. To estimate the benefits of a 45- foot
channel for these vessels, the Corps used a statistical model (two stage
least squares) to predict how much oil these vessels would carry if a 45-
foot channel were available. The model predicted benefits by analyzing 137
combinations of ship types and trade routes. The model predicted that only
32 of these 137 combinations (or 23 percent) would require a channel depth
of greater than 40 feet to make the trip upriver to the oil refineries.
Nonetheless, the Corps assumed benefits for all 137 combinations. The Corps?
economist was unable to provide a clear rationale for claiming benefits for
the 105 ship- type/ trade- route combinations that its model predicted would
not benefit from a deeper channel. The result was that the Corps claimed
about $3. 0 million in annual project benefits that were not supported by
its model. Corps headquarters officials told us they believe that a greater
number of these vessels could benefit from additional channel depth, but
they could not verify their model. We agree that the deeper channel could
benefit crude oil vessels with sailing drafts of less than 40 feet, but the
amount of such benefits cannot be determined without a comprehensive
reanalysis.

We also found that the Corps? container ship benefit analysis was based on
several invalid assumptions. First, the Corps incorrectly assumed the same

Page 8 GAO- 02- 604 Delaware River Deepening Project

one- way distance (3, 600 nautical miles) for each of several different
container ship trade routes (Australia, East Coast of South America, Europe,
and the Mediterranean). For example, the one- way distance from Australia to
Philadelphia via the Panama Canal is about 10, 000 nautical miles. Further,
for the Australia- to- Philadelphia route, the Corps assumed that with a 45-
foot channel containers would be shipped on larger vessels and would go
through the Suez Canal- as opposed to using the Panama Canal, the current
trade route for this traffic. But, the Suez Canal trade route is
significantly longer than the Panama Canal trade route, raising serious
questions about whether shipping via the Suez Canal would be more cost-
effective. 3 After taking this invalid assumption regarding distances into
account, and using the Corps? methodology, we found that- even with a 45-
foot channel depth- the least costly container ship trade route from
Australia to Philadelphia remains through the Panama Canal. Furthermore,
vessels using the Panama Canal are currently restricted to sailing drafts of
39 feet 6 inches. Thus, the benefits of the deeper channel for this trade
route would be minimal. After taking the invalid assumptions in the Corps?
analysis into account, we estimated that annual container ship benefits
would be about $1. 7 million less than the Corps estimated. Corps
headquarters officials acknowledged our findings and their relative impact,
as calculated on the basis of the information presented in the 1998 Limited
Reevaluation Report. However, they now believe that container ship benefits
may be higher than presented in the 1998 report because of changed shipping
patterns. While changes have occurred in the container shipping industry, it
would be premature to speculate on the effect these changes would have on
project benefits without a comprehensive reanalysis.

Moreover, the Corps also incorrectly assumed the same distance for different
trade routes when estimating benefits for the category of crude oil vessels
with sailing drafts less than 40 feet. Taking this invalid assumption into
account reduced annual project benefits by about $1 million. Finally, we
identified about $1.0 million in additional overestimated annual benefits
due to other invalid assumptions related to the analysis for scrap metal,
iron ore, and coal commodities.

3 The difference in route distances for container ship trade between
Australia and Philadelphia via the Suez Canal and via the Panama Canal
ranges from 3,500 to 5, 000 nautical miles, depending on the port of origin
(in Australia) and the number of port calls.

Page 9 GAO- 02- 604 Delaware River Deepening Project

Much of the baseline information that underpins the Corps? project benefit
analysis dates from 1985 through 1991. Thus, the data are outdated and do
not reflect current shipping practices and trends. For example, the data the
Corps used in its economic analysis led to a projection that crude oil
imports up the Delaware River would increase by over 20 million short tons
from 1992 though 2000. 4 However, our review of available data indicated
that crude oil imports increased by only about 10 million short tons over
this period. 5 We identified a number of instances, discussed below, in
which the information used in the Corps? analysis was outdated. Where
possible, we updated the information, and found that the Corps? analysis
overstated total annual project benefits by about $8. 8 million.

The Corps? 1992 feasibility study included benefits for the time savings
related to reduced lightering of crude oil by tankers with a sailing draft
of greater than 40 feet. The Corps estimated that crude oil could be
unloaded from crude oil tankers to the refineries? storage tanks about twice
as fast as it could be transferred to lightering vessels. Since that time,
however, the company that provides lightering services in the Delaware River
has modified its fleet of vessels that performs this service. Based on
information provided by several refineries and the lightering company,
lightering rates are almost the exact opposite of those used in the Corps?
analysis. According to these sources, crude oil can be transferred from oil
tankers to lightering vessels almost twice as fast as it can be unloaded
from oil tankers to refineries. The Corps? use of the outdated information
resulted in overstating annual project benefits by about $3. 2 million.

As discussed previously, the Corps overestimated the projected growth in
crude oil imports. Substituting the predicted growth rates used by the Corps
with actual growth rates based on historical import data to the Philadelphia
region (at the time of the 1998 Limited Reevaluation Report),

we found that the Corps? annual benefits were overestimated by about $3. 5
million. In commenting on a draft of this report, the Corps stated that its
crude oil projections (1992 through 2000) were in line with actual recorded
tonnage. However, this statement is misleading because the crude oil import
data that the Corps used to make this claim were inconsistently collected
between 1992 and 2000. Nevertheless, the Corps stated in its comments that
its project reanalysis would need to verify the

4 The term ?short ton? is a unit of weight equal to 2, 000 pounds. 5 We
obtained historical data on crude oil imports from the project?s nonfederal
sponsor (DRPA). Data were drawn from the Journal of Commerce (PIERS)
database. Corps? Benefit Analysis

Was Based on Outdated Information

Page 10 GAO- 02- 604 Delaware River Deepening Project

database used to establish current and historic shipments to ensure data
reliability. In addition, the Corps? predicted growth rates for container
ship imports for some trade routes were also overestimated; substituting the
predicted growth rates with actual growth rates, we found that the Corps?
annual benefits were overestimated by about $0.3 million.

Finally, the Corps? analysis included benefits for exporting scrap metal to
Turkey and importing coal and iron ore. However, since the time of the
Corps? 1992 analysis, trade of these commodities on the Delaware River has
greatly declined. Updating for this information, we found that benefits for
scrap metal, iron ore, and coal were reduced by about $1. 7 million a year
(beyond the $1. 0 million benefit reduction mentioned earlier). Corps
headquarters officials concurred that shipments of scrap metal, coal, and
iron ore have decreased since the 1998 Limited Reevaluation Report but
stated that shipments of these commodities increased from 2000 to 2001 and
may warrant further analysis.

Table 1 shows the Corps? 1998 benefit estimates and summarizes errors in
those estimates based on our evaluation of the Corps? analysis.

Table 1: Analysis of Annual Project Benefits Dollars in thousands Commodity
Corps? estimates a Miscalculations b Invalid

assumptions b Outdated information b Remaining

benefits c

Crude oil $32,481 ($ 8,883) ($ 6,681) ($ 6,764) $10,153 Containers 4, 546 3
(1,742) (294) 2,513 Scrap metal 2, 357 406 (938) (1, 465) 360 Iron ore 598
(152) 9 (244) 211 Coal 160 23 (93) 8 98

Total $40,142 ($ 8,603) ($ 9,445) ($ 8,759) $13,335

a Figures obtained from the Corps? 1998 Limited Reevaluation Report.

b Negative values are given in parentheses and represent reductions to the
Corps? estimates. c Values are given in 1996 dollars and are calculated as
the sum of the previous four columns.

It is important to note that because of the numerous shortcomings in the
Corps? analysis, the actual project benefits cannot be reliably known
without a comprehensive reanalysis. To be complete, such a reanalysis would
need to account for the miscalculations and invalid assumptions we
identified. Furthermore, it would need to comprehensively update the data
used in the 1998 analysis to account for current shipping trends on the
Delaware River, and reexamine the methodology used to estimate benefits.

Page 11 GAO- 02- 604 Delaware River Deepening Project

The Corps has made several changes to reflect project updates and correct
for cost estimating errors since the 1998 Limited Reevaluation Report.

Some of these changes- reducing the volume of material and locations where
dredging would need to be performed- would reduce annual project costs. But
this cost reduction would be offset by several other updates and corrections
that would increase project costs. Accounting for these increases and
decreases, in aggregate, annual project costs would likely be about $27
million (in 2001 dollars) rather than the $28.8 million estimated by the
Corps in the 1998 Limited Reevaluation Report.

However, other Corps costs were based on outdated information, contained
errors, or did not take into account all pertinent information. While the
Corps has not yet addressed these problems, doing so would likely increase
project costs. Because of the interrelationship among the cost categories,
the effects of the individual updates and corrections cannot be readily
isolated from each other.

The Corps has refined its cost estimate to account for new information.
Originally, assuming that the overall depth of the existing channel was 40
feet, the Corps estimated the amount of material to be dredged at 33 million
cubic yards. However, new information developed by the Corps indicates that
parts of the channel are already deeper than 40 feet. Thus, the Corps has
reduced its estimate of the material to be dredged to approximately 26
million cubic yards, thereby lowering the costs of dredging.

Further, new surveys of the main ship channel and the use of new technology
have given the Corps more accurate information about areas of the channel
that are 45 feet or deeper already and will not need to be dredged. The new
technology- side scan sonar- provides more accurate mapping of the contour
of the shipping channel, thereby enabling the Corps to determine that less
total area needs to be dredged than it previously believed. Thus, costs for
construction and equipment have declined.

In the process of reestimating project costs, the Corps decided to extend
the construction period from 4 years to 5 years. This extension resulted
from concerns that additional dredging equipment needed to finish the
project in 4 years might not be available when necessary. Moreover, a Corps
official told us that the Corps was concerned that it might not be able to
obtain the funding necessary to construct the project in 4 years. Corps Has
Refined Its

Cost Estimate to Reflect Some Changes and Corrections, but Additional
Updates Are Needed

Reducing Amount of Material and Total Area to Be Dredged Has Lowered Project
Costs

Other Revisions and Corrections Have Increased Project Costs

Page 12 GAO- 02- 604 Delaware River Deepening Project

Additionally, the Corps? 1998 analysis included the cost of purchasing four
new confined disposal facilities, but one of these facilities is no longer
available. The Corps now plans to take the dredge material excavated during
construction that was intended for this facility to another location farther
away. The Corps has revised the disposal costs for the construction phase of
the project to reflect this change.

Also, during our review of the Corps? cost estimate, we identified a number
of omissions. For example, in its 1998 cost estimate, the Corps did not
include construction costs for confined disposal facilities in its summary
calculations for maintaining the 45- foot channel. A Corps official was
unable to explain why this occurred, but the Corps has since corrected for
the omission.

Finally, we identified a number of errors in the Corps? cost estimate, one
having to do with inconsistent discounting. In estimating costs for
maintenance dredging, the Corps used end- year discounting, but for
construction costs and benefit calculations, it used different discount
periods. As discussed earlier, benefits and costs should be determined using
consistent discounting procedures. The Corps agreed that mid- year
discounting is appropriate and has updated project costs for this.

The Corps has not updated its cost estimates for maintenance dredging and
deepening the side channels that connect the main channel to the benefiting
firms? loading docks. Moreover, a number of specific errors and omissions in
the cost estimate remain to be addressed; making the necessary corrections
would likely increase project costs. For example, the cost estimate for
maintaining a 45- foot channel has not been revised to reflect that one of
the disposal facilities is no longer available. The alternative location is
more distant from the dredging operation. Corps officials agreed that this
problem exists in the cost estimate and that the additional distance would
increase costs. At the time of our review, the Corps had not calculated how
much this correction would increase project costs. Corps headquarters
officials believe that updating maintenance and berthing area cost estimates
to correct for outdated data and inaccuracies would have a marginal impact
on the total project costs. However, the full extent of the impact cannot be
accurately estimated until project costs have been completely reanalyzed.

In addition, the Corps? current cost estimate assumes that maintenance
dredging for the 45- foot channel would begin after the last year of
construction and continue for 50 years. But maintenance dredging for Further
Corrections

for Outdated Information and Additional Errors and Omissions Would Likely
Increase Project Costs

Page 13 GAO- 02- 604 Delaware River Deepening Project

some sections of the channel could begin before the 5- year construction
phase of the project is completed because the sections that are to be
deepened to 45 feet in the first years of construction would likely start to
fill in as sand and silt resettle in the channel. The Corps? estimate for
maintenance costs does not account for the fact that some costs should be
inflated and others discounted to reflect that maintenance in certain
sections of the channel would need to be done at different times. Taking
this oversight into account would increase costs. Although a Corps official
acknowledged this inaccuracy, the Corps had not, at the time of our review,
calculated how much this correction would increase annualized project costs.
Corps headquarters officials have stated that this problem could potentially
be corrected by modifying the project construction schedule. However, any
modification of the schedule would affect the total project cost.

Finally, the Corps did not include in its estimate all the capital
investments that private companies, such as oil refineries, would need to
make to take advantage of the deeper channel. For example, officials at two
refineries told us that they would need to build additional on- site storage
capacity to take advantage of a deeper channel, but these costs were not
included in the cost estimate. While taking this omission into account would
likely increase annualized project costs, the Corps had not addressed this
issue at the time of our review. Corps headquarters officials stated that
they assumed no land- side costs attributable to the proposed project at the
time of the 1998 Limited Reevaluation Report. However, these officials
further stated that a reanalysis of the project would reconsider the
assumption of no land- side costs, in addition to other potential capital
investment costs faced by the benefiting firms.

There are a number of uncertainties related to project benefits and costs
that could impact the economic analysis. Some of the cases of outdated
information and invalid assumptions discussed in this report are examples of
the uncertainty in forecasting information such as commodity shipments,
technological change, and the economic choices of industry. Reanalysis of
the project might consider a more careful treatment of such uncertainty. Our
review identified additional uncertainties that the Corps has not addressed
in its analysis. If and when these uncertainties are resolved, expected
benefits and costs could further increase or decrease, thus affecting the
project?s economic merits. Several Uncertainties

Could Further Affect Project Benefits and Costs

Page 14 GAO- 02- 604 Delaware River Deepening Project

It is uncertain whether the companies expected to benefit from the project,
primarily oil refineries, would undertake the capital improvements necessary
to take full advantage of a deeper channel and, if so, whether they would do
it in the same time frame as assumed by the Corps. In its economic analysis,
the Corps assumed that all potential beneficiaries would perform the work
necessary to take advantage of a deeper channel, such as dredging side
channels and berthing areas, by the end of the last year of planned
construction. However, potential beneficiaries have made few firm
commitments to make these capital improvements. An official of one company
wrote to the Corps supporting the project, and a public relations official
from another responded to a local newspaper saying the company would look
favorably on the project. In addition, representatives of several other
companies told us they believe the project could benefit them, but because
substantial work could be necessary to deepen their berthing areas, retrofit
docking areas, or expand storage capacity, they would not make a firm
commitment to making these improvements. If any of the benefiting companies
did not perform the necessary work, or if they delayed these efforts until
after the project was completed, anticipated benefits would be reduced.
Corps headquarters officials reaffirmed the Corps? support of the draft
project cooperation agreement, which calls upon the nonfederal sponsor to
enter into agreements with the benefiting firms to complete the necessary
work in conjunction with the construction of the project. The draft project
cooperation agreement provides that the Corps may elect to stop project
construction in the absence of such agreements.

As discussed earlier, one of the benefits of the deeper channel- included in
the Corps? analysis- is a reduced need for the lightering of crude oil. In
fact, the company that provides lightering services in the bay currently
estimates that the demand for its services could decrease by a third, from
lightering 90 million barrels of crude oil per year to 60 million. The
uncertainty involves how this company would react to a reduction in demand
for its services. An official of this company told us that the company might
reduce the number of lightering vessels operating in the bay from three to
two, which could potentially increase the time that vessels might have to
wait for lightering services, increase lightering fees, or both. These
scenarios would likely decrease the economic benefits of reduced lightering.
Another possibility is that the lightering firm could reduce its fees in an
effort to maintain demand for its services. In any event, less lightering
could reduce gaseous emissions that occur during the lightering process,
thus resulting in some environmental benefits. Uncertainties Related to

Project Benefits

Page 15 GAO- 02- 604 Delaware River Deepening Project

In addition, Federal Principles and Guidelines for Water Resource Agencies
call for including project benefits that contribute to national economic
development. Yet, it is uncertain whether all of the potential benefits of a
45- foot channel would contribute to national economic development because
most of the ships coming into Delaware River ports are foreign- owned. The
Corps? analysis did not take into account the distribution of the project
benefits between U. S. and foreign interests; in essence, the Corps assumed
that all transportation savings attributable to the project would accrue to
U. S. interests. In commenting on a draft of this report, the Corps stated
that we are making an implicit assumption that all benefits should accrue to
American interests, and those realized by foreign interests should be netted
out in the determination of U. S. national economic development. First, we
are not making an implicit assumption. The Economic and Environmental
Principles for Water and Related Land Resources Implementation Studies- a
publication that establishes principles intended to ensure proper and
consistent planning by the Corps- and the Corps? own guidance state: ?The
Federal objective of water and related land resources project planning is to
contribute to national economic development consistent with protecting the
Nation?s environment, pursuant to national environmental statutes,
applicable executive orders, and other Federal planning requirements.?
Second, it is unclear how the Corps can meet that definition of national
economic development without analyzing the distribution of project benefits
between U. S. and foreign interests. In summary, our concern is that to the
extent that some of the transportation cost savings of this project- as well
as those for other similar Corps navigation projects- accrue to foreign
interests, the contributions of the project to national economic development
are overstated.

Finally, an area of uncertainty that could increase project benefits is the
degree to which there are commodities being shipped on the Delaware River
that the Corps did not include in its economic analysis. For example, recent
shipping data indicate that imports of iron and steel increased from about
550, 000 short tons in 1990 to about 4 million short tons in 2000. The
importers of these and other goods might benefit from a deeper channel, but
the Corps? benefit analysis did not consider these commodities.

There are several uncertainties regarding project costs. One area of
uncertainty involves mitigation costs for any unexpected environmental
damage that could potentially emerge. While the Corps has included some
costs for assessing the likely environmental impacts of the project, should
monitoring or construction activities reveal unanticipated problems, the
Uncertainties Related to

Project Costs

Page 16 GAO- 02- 604 Delaware River Deepening Project

costs to slow the dredging schedule or rebuild damaged habitat are unclear.
In addition, discussed below are several other uncertainties that we
identified during our review that may increase or decrease costs by an as
yet unquantified amount.

One such uncertainty concerns the recent addition of beach replenishment to
the project?s plan for disposal of dredged material. The Corps? current
disposal plan calls for transporting sand dredged from the lower Delaware
Bay to Broadkill Beach in Delaware. However, it is unclear whether the clean
sand will ultimately go to Broadkill Beach because, pending an agreement
with the state of Delaware, another beach, or beaches, could be selected.
Using a beach that is closer to the dredging area would result in a lower
cost for beach replenishment than is currently estimated. Alternatively, if
the selected beach were farther from the channel- dredging area, the cost of
the operation would be higher than estimated. For example, the current costs
of dredging the channel and transporting the sand to Broadkill Beach are
estimated at $10 per cubic yard; the costs for the same activities with
Dewey- Rehoboth Beach as the destination would be about $18 per cubic yard.
Given the uncertainty about which beach or beaches will ultimately be
chosen, the final cost of this activity is unclear.

It is also uncertain how much purchasing the sites for the three new
confined disposal facilities in New Jersey would cost, and whether the
project sponsor would be able to acquire all of these sites. Currently,
these sites are estimated to cost $15. 4 million. 6 The Corps does not
intend to update its appraisal of these sites, which would involve
estimating the amount of land to be purchased, until after the project
cooperation agreement between the Corps and the nonfederal sponsor has been
signed. In the meantime, the Gloucester County Improvement Authority of New
Jersey is seeking to buy portions of these areas for recreational purposes.
Given these uncertainties, it is possible that the costs of land needed for
new confined disposal facilities could increase.

Another uncertainty concerns how much it would cost the Corps to comply with
certain environmental restrictions, called windows. Designed to protect
habitat and vulnerable populations such as horseshoe crabs, oysters, and
winter flounder in certain sections of the Delaware River, the windows limit
where and when dredging, beach replenishment, and

6 This figure was cited in the 1998 Limited Reevaluation Report; it is
presented in 1996 dollar values.

Page 17 GAO- 02- 604 Delaware River Deepening Project

wetland restoration activities can occur. For example, to protect the
habitat of winter flounder, dredging cannot occur in the lower portion of
the river from January through May without relief from the window. If the
Corps could not complete its scheduled dredging from June through December,
it would incur additional costs to stop the work and start it up again
later. The Corps is currently studying the extent to which fish and
surrounding habitat would be harmed by dredging activities. A Corps official
told us that these studies may show that the current windows are overly
protective, a finding that the official believes would provide some support
for federal and state agencies to provide relief from some of the
restrictions. In addition, the Corps plans to use two dredges in the areas
where restrictions are established to reduce dredging time. In any event,
the 1998 estimate and its recent update do not include the potentially
increased costs of complying with these windows. According to a Corps
official, because the Corps is unsure how much relief it would obtain from
the restrictions, it is uncertain how much project costs would increase.
Corps headquarters officials now state that a significant portion of the
project construction work could be accomplished within the existing
environmental windows. Specifically, they have said that the operations at
Broadkill Beach and Kelly Island would not require relief. However, to the
extent that the Corps cannot obtain the necessary relief in other areas,
project costs would increase.

A further uncertainty concerns whether the Corps will employ the technique
known as economic loading for its dredging operations in the lower bay area.
Using this technique, the water content of dredged material that has been
loaded onto a barge, or dredge, is allowed to drain back into the river at
that site. Therefore, when the barge is fully loaded, it contains a higher
percentage of dredged material, resulting in fewer trips to the disposal
sites. Because of concerns that the water drained from the dredge material
would contain a large amount of particulate matter that would cause a plume
in the water column, the Corps studied the potential environmental effects
of economic loading in 1999. The study concluded that economic loading would
not cause significant long- term environmental harm. Having reviewed the
results of the study, officials from Delaware and New Jersey said they would
consider allowing the use of economic loading in the lower bay. However, it
should be noted that this option was not included as part of the Corps?
permit application to the state of Delaware and that formal approvals from
either Delaware or New Jersey have not been requested. Should the Corps
formally seek and obtain permission to use economic loading, costs would
decrease. In commenting on the draft of this report, Corps officials said
that indications from the states of New Jersey and Delaware are that this
process may be

Page 18 GAO- 02- 604 Delaware River Deepening Project

viable and practical in the Delaware Bay for dredging sandy material. The
Corps estimated that if economic loading were permitted, it could result in
a 30 to 40 percent reduction in the unit cost of dredging, which the Corps
stated previously would translate into approximately $2 million in
annualized cost savings. However, the Corps recognized that it is uncertain
whether economic loading would be used, and that this issue would need to be
investigated in any reanalysis of the project.

Finally, a new dredging technology, known as a ladder pump, increases dredge
material production rates and has the potential to decrease costs for some
of the dredging operations that would occur during the construction and
maintenance phases of the project. However, the Corps did not incorporate
the use of this new technology into its cost estimate, and it is not known
whether the contractors that would conduct the project?s dredging operations
would use it.

The Corps has a three- tiered quality control process designed to ensure
that its economic analyses of proposed projects are factually accurate and
based on sound economic principles. Three organizational levels are
involved: the Corps? district offices, division offices, and headquarters.
In general, for projects such as the Delaware River deepening project, the
following process is used:

 The relevant district office is responsible for conducting a feasibility
study that addresses the technical and economic aspects of a proposed
project and manages the planning, engineering, and design work that follows.
The district office also prepares the Limited Reevaluation Report that
updates the technical and economic data as needed. Once it has developed
these project justification documents, the district office reviews them for
technical accuracy and quality, and upon approval, it forwards them to the
division for its review.

 The division?s responsibility is primarily procedural. It reviews the
project justification package to ensure that the district has prepared the
required documents such as the Feasibility Study and Limited Reevaluation
Report and has obtained all necessary approvals. It does not review such
documents for technical accuracy or to verify the underlying analysis. The
division ensures that reports such as the Limited Reevaluation Report

have undergone a technical review and that the district has issued a quality
control certification report with the required district office level
approvals. Once the division is satisfied that procedures have been
followed, it approves the package and forwards it to headquarters. Corps?
Quality

Control Process Did Not Identify Major Flaws in the Economic Analysis

Page 19 GAO- 02- 604 Delaware River Deepening Project

 Headquarters is responsible for ensuring that critical documents such as
the Feasibility Study and Limited Reevaluation Report, the major assumptions
on which the justification is based, and the recommendations adhere to Corps
policy for conducting benefit- cost analyses and environmental studies.
Headquarters also ensures that any concerns that it has raised have been
addressed. Once headquarters is satisfied that policy has been followed and
that the justification is based on sound economics and environmental
studies, it approves the project for construction funding.

Although the district, division, and headquarters offices approved the
project according to the procedures in place in 1992 and changes that
followed in 1995, these review processes were ineffective in detecting and
correcting the significant miscalculations, invalid assumptions, and
outdated information in the economic analysis that our review revealed. For
example, we found no indication that problems related to benefits, such as
misapplying growth rates, double- counting lightering time savings, and
miscalculating potential benefits derived from time savings in unloading
crude oil at the refineries, were detected during the internal reviews and
quality control certification process. This raises serious questions about
the adequacy and effectiveness of the Corps? review process. Corps
headquarters officials have stated that notwithstanding the changing and
existing procedures, there were failures in the execution of the process for
the development and review of the feasibility analysis and the Limited
Reevaluation Report. The economic update in the Limited Reevaluation Report
was performed in accordance with existing regulations but did not get to the
root of the underlying problems, some of which were carried forth from the
original report.

Another concern is that since 1995, the primary responsibility for
performing the quality reviews of key project documents has been largely
delegated to the district office level. The Philadelphia district office
prepared the economic analysis and other documents justifying the deepening
project and, following the 1995 change in Corps procedures, prepared the
1998 Limited Reevaluation Report and then conducted the technical review and
quality control certification process on the report. The fact that the same
office that prepared the economic analysis was also responsible for
conducting the technical and quality reviews raises questions about the
independence of the review process. Similar concerns about the Corps?
project review procedures were addressed in section 216 of the Water
Resources Development Act of 2000, which directed the Corps to contract with
the National Academy of Sciences to study and make recommendations with
regard to the need for independent reviews

Page 20 GAO- 02- 604 Delaware River Deepening Project

of Corps feasibility studies. The estimated date of completion for the study
is 2003.

Looking beyond the Delaware River deepening project, the number and
magnitude of problems that were not detected by the Corps? quality control
process raises questions about whether, or to what degree, such oversights
might exist for other Corps projects. This concern is shared, at least, to
some degree by the Corps of Engineers. Specifically, shortly after we
briefed the Corps? Director of Civil Works on our findings regarding the
Delaware River deepening project, he initiated a pause on projects
authorized, but not yet under construction, to resolve any questions about
the accuracy and currency of the Corps? economic analyses, the validity of
plan formulation decisions, and the rigor of the Corps? review process.

The Corps has largely addressed the likely environmental effects of the
project?s dredging operations and dredge material disposal to the
satisfaction of federal and state environmental agencies; however, several
issues are not yet resolved. On the basis of their review of the Corps?
environmental impact statements and studies of the potential for the project
to disturb toxic dredge material, contaminate water, and harm wildlife and
habitat, most federal and state agencies granted the Corps the necessary
approvals to proceed with the project. A major exception is the Corps?
request for a permit to conduct dredging operations in Delaware waters,
which is still pending. In addition, several other issues remain
outstanding.

With few exceptions, the Corps has obtained the approvals it needs from
federal and state environmental agencies to proceed with project
construction plans. As required by the National Environmental Policy Act of
1969, the Corps coordinated with other federal agencies and states; obtained
comments from the agencies, the states, and the public; and reported on the
potential environmental impacts of the project in the 1992

Environmental Impact Statement and the 1997 Supplemental Environmental
Impact Statement. The Corps also made some changes as a result of agencies?
comments. For example, in response to concerns raised by the National Marine
Fisheries Service and others, the Corps eliminated its proposal to dispose
of some dredged material at an underwater sand stockpiling location. On the
basis of their review of these and subsequent documents, as well as
consultations performed by the Corps, officials from the U. S. Environmental
Protection Agency, the National Marine Fisheries Service, the U. S.
Geological Survey, and the Most Environmental

Concerns Have Been Addressed, but Several Related Issues Remain Unresolved

Most Federal and State Environmental Agencies Have Approved the Project

Page 21 GAO- 02- 604 Delaware River Deepening Project

states of New Jersey and Pennsylvania determined that deepening the Delaware
River ship channel would not cause significant long- term harm to the
environment. Specifically, these officials told us they were satisfied that
the project?s dredging and disposal operations would not degrade water
quality, cause saltwater intrusion, release contaminated sediments, or
seriously harm endangered or other species.

The federal and state approvals were also based on a commitment by the Corps
to conduct additional studies and monitor the environmental impact of the
ongoing channel deepening and construction of confined disposal facilities.
Such monitoring would be central to ensuring that project activities would
not degrade water quality, damage groundwater through saltwater intrusion,
or harm commercially valuable or vulnerable species. Consequently, the Corps
has conducted preconstruction monitoring studies on whether the project
would adversely affect oysters and water and sediment quality. In addition,
the Corps has studied the likely impact of the project on blue crabs in the
lower part of the bay and on winter flounder, horseshoe crabs, and
shorebirds at Kelly Island. The Corps has provided the results of these
studies to the federal and state environmental agencies for their review,
and Corps officials told us that they would continue to monitor these and
other environmental issues during and after construction. Federal and state
officials told us that should monitoring reveal a problem, the Corps would
have to undertake some form of mitigation, such as slowing the dredging
schedule or rebuilding damaged habitat.

The Corps has not yet obtained a permit from Delaware to conduct dredging
operations for the project that affect its waters. The Corps has stated that
it will not begin the project until it obtains this permit. Its Philadelphia
district office applied for the permit in January 2001 and participated in a
public hearing on the application in December 2001. Delaware officials told
us that should the state approve the permit application, the permit could
include a number of monitoring requirements. For example, Delaware could
require the Corps to monitor for possible violations of PCB 7 standards near
the dredging zone. As of May 2002, the State of Delaware was still
considering the permit application.

7 Polychlorinated biphenyls (PCBs) are highly toxic cancer- causing
pollutants used in producing, among other things, plastics. Delaware Permit
Is Still

Pending

Page 22 GAO- 02- 604 Delaware River Deepening Project

One remaining issue concerns the possibility that, under certain conditions,
the project might cause increased saltwater intrusion into the Delaware
River estuary and the groundwater of the area. While Pennsylvania and New
Jersey accepted the results of the Corps? earlier tests for saltwater
intrusion, the Delaware River Basin Commission, which sets water quality
standards for the Delaware Estuary, requested an additional test. To satisfy
the commission?s concerns, the Corps agreed to the test, which it has not
yet conducted.

In addition, New Jersey officials told us that they would encourage the
Delaware River Port Authority to explore alternatives to disposing of dredge
material, such as using it for highway construction, before New Jersey would
grant water quality certificates for the three confined disposal facilities
to be acquired by the Port Authority and built by the Corps in New Jersey.
In addition, the Corps and New Jersey?s Department of Environmental
Protection have developed a groundwater- monitoring program designed to
ensure that existing confined disposal facilities in New Jersey do not harm
drinking water. A similar program is planned for the three new confined
disposal facilities.

Finally, as mentioned earlier, the Corps has not sought formal approval from
New Jersey and Delaware for using the economic loading technique. A Corps
official told us that the Corps would probably wait until it knows the
outcome of its Delaware permit application before deciding whether to seek
economic loading approval. Similarly, the Corps has not applied to Delaware
or the National Marine Fisheries Service for relief from environmental
windows, which restrict when dredging can be performed. However, the Corps
is conducting an evaluation of essential fish habitat and is collecting
information on the potential effects of the project on horseshoe crabs,
shorebirds, and hibernating female blue crabs to determine whether to seek
relief from regulatory agencies? restrictions on dredging. Also, the Corps
has not yet obtained a special use permit from the U. S. Fish and Wildlife
Service for its planned wetlands restoration at Bombay Hook National
Wildlife Refuge.

We found significant problems in the Corps? most recent economic analysis
for the Delaware River deepening project. These involved several
miscalculations, invalid assumptions, and reliance on outdated information.
Consequently, we believe that the Corps? current project analysis does not
provide a reliable basis for deciding whether to proceed with the project.
In addition, there are a number of uncertainties about the project that
could increase or decrease both benefits and costs. Because of Other Issues
and Permit

Approvals Remain Outstanding

Conclusions

Page 23 GAO- 02- 604 Delaware River Deepening Project

the significance of the problems we identified, the uncertainties that
surround the project, and the ineffectiveness of the Corps? quality control
process, the actual economic merits of the Delaware River deepening project
will not be reliably known unless and until it is comprehensively
reanalyzed.

Considering the significant problems we identified with the Corps? economic
justification for the Delaware River project, we recommend that the
Secretary of the Army direct the Corps of Engineers to

 prepare a new and comprehensive economic analysis of the project?s
benefits and costs, which includes all aspects of the analysis and corrects
for the miscalculations, erroneous assumptions, and outdated information
contained in the current analysis;

 obtain the information, where possible, that is needed to address the
uncertainties- such as changing commodity movements over the last decade and
alternative dredging techniques- that could significantly affect project
benefits and costs;

 engage an external independent party to review the revised economic
analysis to ensure that it accurately and fairly represents the expected
benefits and costs of the proposed project; and

 submit the revised analysis, including the external independent review, to
the Congress for its use in considering future appropriation requests for
the project.

We provided a draft of this report to the Secretary of the Army for review
and comment. In response, the Under Secretary of the Army stated that the
report is important to the department because it provides a current,
critical look at the proposed Delaware River deepening project and
identifies legitimate concerns that warrant comprehensive reanalysis. More
specifically, the Under Secretary stated that the Corps concurs that a new
and comprehensive economic reanalysis of the project?s benefits and costs
would be undertaken, and that once the economic reanalysis is complete, an
external independent party would be engaged to ensure that it accurately and
fairly represents expected benefits and costs of the proposed project. The
Under Secretary also provided additional comments on various aspects of the
project, which are discussed as appropriate in Recommendations for

Executive Action Agency Comments

Page 24 GAO- 02- 604 Delaware River Deepening Project

the body of the report. The full text of the comments is included as
appendix II.

We conducted our review between July 2001 and May 2002 in accordance with
generally accepted government auditing standards. A detailed discussion of
our scope and methodology is presented in appendix I.

As arranged with your offices, unless you publicly announce this report?s
contents earlier, we plan no further distribution of the report until 10
days after the date of this letter. At that time, we will send copies to the
Secretary of the Army, appropriate congressional committees, and other
interested Members of Congress. We will also make copies available to others
upon request. In addition, the report will be available at no charge on the
GAO Web site at http:// www. gao. gov.

If you or your staff have questions about this report, please contact me at
(202) 512- 3841. Key contributors to this report are listed in appendix III.

Robert A. Robinson Managing Director, Natural Resources

and Environment

Appendix I: Scope and Methodology Page 25 GAO- 02- 604 Delaware River
Deepening Project

Our review had two main objectives: to determine (1) whether the Corps of
Engineers? economic analysis accurately and appropriately considered the
benefits and costs of the project and (2) whether the environmental
implications of the project have been fully addressed.

To determine whether the Corps of Engineers? economic analysis appropriately
considered the benefits and costs of the Delaware River deepening project,
we assessed the extent to which the Corps met requirements and followed
accepted practices in estimating the various elements of the benefits and
costs, including whether the major assumptions were reasonable and well
supported. To determine whether the environmental implications of the
project have been fully addressed, we contacted a number of federal and
state environmental agencies such as the Environmental Protection Agency,
the Delaware River Basin Commission, and the Delaware Department of Natural
Resources and Environmental Control. We also obtained information from
environmental groups and other interested parties. For both these
objectives, we obtained the Corps? key documents for the project, such as
the Interim Final Feasibility Study of 1992, the Design Memorandum of 1996,
the

Limited Reevaluation Report of 1998, the Environmental Impact Statement of
1992, and the Supplemental Environmental Impact Statement of 1997. We
discussed the content and sources of the data in these reports with Corps
officials and staff responsible for their preparation and approval.

To validate the data and assumptions the Corps used in its analyses, we
obtained external data and contacted external parties where appropriate.
Where we obtained other analyses or studies, we considered the points raised
in these external studies but conducted our own independent review. Where we
identified problems with or changes to benefits, costs, or environmental
issues, we discussed them with the responsible Corps staff and considered
any new data or revisions that they provided. If the problems involved
miscalculations, invalid assumptions, errors, omissions, or outdated
information that would affect the project?s benefits, costs, or the
environment, we attempted to identify how or why these problems occurred. In
addition, we identified uncertainties related to the benefits, costs, and
the environmental implications of the project and considered whether
resolving these uncertainties would increase or decrease the benefits and
costs. We also reviewed the Corps? quality control processes. In the
following sections, we provide more detail on our first objective consisting
of benefits, costs, uncertainties, and the Corps? quality control process;
and our second objective about the potential environmental implications of
the project. Appendix I: Scope and Methodology

Overview

Appendix I: Scope and Methodology Page 26 GAO- 02- 604 Delaware River
Deepening Project

To evaluate the Corps? project benefit analysis, we had three primary
objectives. First we used the Corps? data and methodology- obtained from the
1992 Interim Final Feasibility Report, and the 1996 Design Memorandum, and
through interviews with the Corps? economist- to attempt to replicate the
estimated annual project benefits for each commodity as published in the
Corps? 1998 Limited Reevaluation Report.

These commodities included coal, containers, crude oil shipped on vessels
with sailing drafts greater than 40 feet, crude oil shipped on vessels with
sailing drafts less than or equal to 40 feet, iron ore, and scrap metal.
Where we were unable to replicate the Corps? estimates, we met with the
Corps? economist to discuss and resolve the discrepancies. Second, to
identify questionable assumptions in the analysis, we examined the data used
and calculations applied in the Corps? benefits programs. To determine
whether the Corps? assumptions were supportable, we requested documentation
or guidelines from the Corps? economist that validated the questioned
approach. In addition, we met and talked with industry representatives to
obtain their response. Third, to identify whether the analysis was based on
up- to- date information, we reviewed the origin of any changes to the
benefits estimates in the 1998 Limited Reevaluation Report from the 1992
Interim Final Feasibility Study and the 1996

Design Memorandum. Where no changes in benefits estimates occurred, we
searched for data sources available at the time of the Corps? latest report.
Where possible, we updated the information on the basis of historical or
industry trends at the time of the 1998 Limited Reevaluation Report.

We met with officials from the four companies that own the six oil
refineries representing 80 percent of the benefits in the Corps? analysis,
as well as Maritrans Corporation, which conducts the lightering operations
for the oil refineries on the Delaware River. We obtained information on
commodity shipments up the Delaware River to the Philadelphia region from
the Delaware River Port Authority. We also spoke with the Maritime Exchange,
which gathers data on ship tracking and reporting on the Delaware River and
represents a cross section of interests and companies that depend upon or
conduct business on the river. In addition, we met with the firm Rice,
Unruh, and Reynolds- shipping agents- to gather information on shipping
practices, and with the National Ports and Waterways Institute to gather
information about the container shipping industry.

We determined the net effect of the miscalculations, invalid assumptions,
and outdated information on the Corps? $40. 1 million annual project benefit
estimate by applying an eight- step iterative approach. In the first Project
Benefit Estimate

Appendix I: Scope and Methodology Page 27 GAO- 02- 604 Delaware River
Deepening Project

four steps, we corrected for an error in the Corps? computer program, the
misapplication of growth rates, inconsistent discounting, and different year
dollar values. For the fifth step, we corrected for the Corps? invalid
assumptions regarding trade route distances and its calculation of average
shipping costs. With the sixth and seventh steps, we updated the information
used in the Corps? analysis- specifically, the relative difference between
the unloading and lightering rates, and the commodity growth rate
information through 1997. In the eighth step, we corrected for the Corps?
incorrect assumption that its statistical model predicted benefits for the
45- foot channel deepening project- when it did not. The net effect of the
eight steps was a reduction in the estimated annual project benefits to
about $13. 3 million (in 1996 dollars).

To establish a baseline against which future revisions could be compared for
completeness and accuracy, and to get detailed information on planning,
engineering, and design study costs, we used the 1996 Design Memorandum. We
then compared the 1996 estimate with that in the

Limited Reevaluation Report of 1998. Our subsequent efforts focused on
changes to the project, various updates to costs by the Corps, corrections
we identified, and additional issues that could further affect costs. Where
changes in the project had occurred, and where we identified errors or
omissions that the Corps agreed to correct, we determined whether the
changes or corrections would increase or decrease the annualized project
costs.

Our review included the two main parts of the Corps? cost estimate: the
construction costs for the main navigation ship channel and the private
berthing areas, and the operations and maintenance costs for operating and
maintaining a 45- foot channel rather than a 40- foot channel. We also
reviewed the Corps? estimates of costs to construct or modify both new
confined disposal facilities and existing confined disposal facilities.
Because the Corps makes extensive use of internally developed costestimating
computer programs, we obtained these programs so that we could replicate
construction costs and operations and maintenance costs using the Corps?
programs and methodology. We gained an understanding of the Corps? Cost
Engineering Dredge Estimating Program, which estimates costs for each of the
three types of dredging operations used in the project, and the Corps? Micro
Computer- Aided Cost Estimating System, which estimates the costs of
constructing elements of the project that require land equipment, such as
the confined disposal facilities. We discussed these programs, and the major
assumptions and information Project Cost Estimate

Appendix I: Scope and Methodology Page 28 GAO- 02- 604 Delaware River
Deepening Project

used in them, with Corps staff in other offices responsible for developing
the cost- estimating programs and providing updates for them.

To identify a more accurate and updated cost estimate, we took into account
changes to the project that had occurred since the 1998 Limited Reevaluation
Report and corrections for errors and omissions that we identified during
our work. We obtained documentation on the project changes, verified the
information, and determined whether any updated cost estimates undertaken by
the Corps accurately reflected the changes. For example, where new
information existed on the volume of the material to be dredged from the
channel, we asked for documentation from the Corps, not only on the volume
of material that had been reduced but also on where those reductions had
occurred in the channel. When we learned that less of the channel needed to
be dredged because side- scan sonar technology provided better information
on the areas of the river that were already 45 feet deep, we obtained survey
maps from the Corps and verified that the estimated reductions in surface
areas that the Corps was using in its revised costs were reasonable. We also
identified any costs that were in error, or that were omitted, such as costs
to reflect the loss of a disposal site and to transport material to other
locations.

Since the Corps was updating various cost factors and revising its estimates
for changes in the project design and scope at the same time that we were
identifying the extent to which costs were accurate, we reestimated the
overall project costs using the Corps? programs and most recent data. We
compared our estimate with that of the Corps and obtained agreement with the
Corps on a revised annualized project cost estimate that accounted for
project changes and corrections that had been made as of the time of our
review.

During our review, we identified a number of uncertainties related to
project benefits and costs that the Corps had not addressed in its economic
analysis. In some cases, the uncertainties are linked to decisions that are
outside the control of the Corps, while others concern information that may
not be currently available. Some of these uncertainties are the result of
environmental issues that could affect future project benefits and costs.
When we identified an uncertainty, we sought information from Corps
officials and others that would allow us to say whether the uncertainty
would increase or decrease benefits and costs. Uncertainties of Project

Benefits and Costs

Appendix I: Scope and Methodology Page 29 GAO- 02- 604 Delaware River
Deepening Project

We obtained the Corps? quality control procedures to gain an understanding
of its processes and discussed them with Corps officials. We identified the
roles and responsibilities of the district, division, and headquarters
offices as they related to the Delaware River channel deepening project at
the time of the feasibility study in 1992 and any changes in the review
processes after that time. In doing so, we obtained copies of technical
reviews and the quality control certification for the project, identified
the offices responsible for the reviews, and obtained comments that the
reviewers had on the economic analysis and the environmental impact
statement. We also reviewed the responses of the Philadelphia district staff
to determine whether comments by headquarters and the division were taken
into consideration in any updated analysis.

To determine whether the Corps had considered and analyzed all areas of
environmental concern, we reviewed the Corps? Environmental Impact Statement
of 1992, the Supplemental Environmental Impact Statement of 1997, and other
Corps studies. We contacted the Environmental Protection Agency, the
National Marine Fisheries Service, the U. S. Fish and Wildlife Service, the
Delaware River Basin Commission, the U. S. Geological Survey, and
environmental agencies in the states of Delaware, New Jersey, and
Pennsylvania to discuss the project and obtain studies and documents from
them. We also reviewed information provided to us by environmental groups
and other interested parties. Where the Corps had tested for contaminated
sediments and hazardous materials, and had conducted studies to determine
the potential impact of the project on water quality, groundwater, fish and
wildlife and their habitat, we reviewed the test data and studies and
discussed them with responsible federal and state agencies. Further, we
reviewed the Corps? studies and monitoring plans for identifying any adverse
impacts of the project on water quality, groundwater, fish and wildlife, and
aquatic habitat with these agencies.

For example, to address concerns about contaminated sediments from the
dredging operations in the main navigation ship channel, in the private
berthing areas of the oil refineries, and at confined disposal facilities,
we reviewed sampling data in the Corps? Supplemental Environmental Impact
Statement. We reviewed the type of tests the Corps had conducted and the
number of samples and sites selected, and we discussed the tests and results
with Corps staff. We contacted officials from the Environmental Protection
Agency, the Delaware River Basin Commission, and state environmental
agencies in Delaware, New Jersey, and Pennsylvania to determine whether they
were satisfied with the test Corps? Quality Control

Process Environmental Implications of the Project

Appendix I: Scope and Methodology Page 30 GAO- 02- 604 Delaware River
Deepening Project

results and the Corps? monitoring plans for identifying potential problems
during and after construction.

Additionally, we identified unresolved environmental issues and any
outstanding approvals that remain open. For instance, to determine whether
and to what extent saltwater intrusion into aquifers from dredging
operations was addressed and what the Corps intended to do to resolve any
outstanding concerns, we discussed this issue with Corps staff, and
officials from the Environmental Protection Agency in Philadelphia and New
York City, as well as with officials from the departments of environmental
protection in Delaware, New Jersey, and Pennsylvania. We determined how
satisfied these officials were with the Corps? studies and tests. We also
met with officials from the Delaware River Basin Commission to discuss their
outstanding request for an additional test for saltwater intrusion under
certain drought conditions. We followed up with Corps officials to identify
what they planned to do to resolve the Delaware River Basin Commission?s
concern.

Appendix II: Comments from the Under Secretary of the Army Page 31 GAO- 02-
604 Delaware River Deepening Project

Appendix II: Comments from the Under Secretary of the Army

Appendix II: Comments from the Under Secretary of the Army Page 32 GAO- 02-
604 Delaware River Deepening Project

Appendix II: Comments from the Under Secretary of the Army Page 33 GAO- 02-
604 Delaware River Deepening Project

Appendix II: Comments from the Under Secretary of the Army Page 34 GAO- 02-
604 Delaware River Deepening Project

Appendix II: Comments from the Under Secretary of the Army Page 35 GAO- 02-
604 Delaware River Deepening Project

Appendix III: GAO Contact and Staff Acknowledgments Page 36 GAO- 02- 604
Delaware River Deepening Project

Barry T. Hill, (202) 512- 3841 In addition to the individual above, Chuck
Barchok, Maureen Driscoll, Christopher Murray, Ryan Petitte, Harold Brumm,
Richard Johnson, Jay Scott, and Nancy Crothers made key contributions to
this report. Appendix III: GAO Contact and Staff

Acknowledgments GAO Contact Acknowledgments

(360088)

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