FARM PROFITABILITY AND BUREC WATER SUBSIDIES: AN LP LOOK AT A REGION

I. POLICY BACKGROUND The Western Area Power Administration (WAPA) is a power marketing agency of the U.S. Department of Energy (DOE). One of WAPA's responsibilities is using revenue from federal power sales to repay costs associated with Bureau of Reclamation (BUREC) irrigation projects, mainly the California Central Valley Project (CVP). This practice is commonly referred to as "irrigation assistance." Background for the policy stems from the passage of the Reclamation Project Act of 1939, which authorized the federal government to initiate construction on large-scale projects designed to provide water for multiple uses, including the generation of hydroelectric power and irrigation. BUREC's largest water resource project, the CVP, has made California's Central Valley one of the more productive agricultural areas in the world, supplying some 2 trillion gallons of irrigation water each year. Irrigation water from the CVP is marketed to state-established water and irrigation districts under long-term contracts. Under the 1939 Act, these irrigators are accountable to the Treasury for repaying BUREC construction costs. An often-noted feature of the 1939 Act is that it makes no provision for the payment of interest on the capital costs of BUREC's water projects, including the CVP. Historically, BUREC has played a dual role in the process of recovering capital costs: first, in establishing cost-of-service rates for irrigation water from federal projects; second, in determining the extent to which irrigators have the "ability-to-pay" BUREC capital costs. An intriguing feature of BUREC's cost recovery process is the requirement that resulting deficits in ability-to-pay be offset by revenues from the sale of federal power; in effect, a portion of BUREC capital costs are subsidized by federal power users. This cross-subsidy is known as "irrigation assistance" and is allowed by law on some water projects and by administrative determination on others. In connection with previous work, the United States General Accounting Office (GAO) concluded that the 1939 Act does not authorize the use of power revenues to repay irrigation costs. Nevertheless, a substantial number of project authorizations either require or allow irrigation assistance (GAO, 1996a). A basic intent of this paper is to clarify the two distinct but related subsidies arising from BUREC's irrigation assistance program. On the one hand, non-agricultural users of federal power subsidize growers whenever the capital costs on irrigation-related projects are determined to be beyond what growers are able to pay. On the other hand, the U.S. Treasury extends a related subsidy to growers because BUREC's irrigation rates are not required to cover interest payments on irrigation-related capital costs. Relative to these administrative practices, the present study examines the impacts on farm profits from the elimination of water subsidies paid by non-agricultural power consumers and the Treasury. Not surprisingly, the provision of federal irrigation assistance through federal power users is a contentious issue, particularly when it comes to determining the growers' ability-to-pay. The empirical contribution of this paper is estimating the effects on farm profitability of charging irrigators full-cost rates for federal water and power. A full-cost rate for CVP irrigation water would recover both the capital and interest costs on irrigation-related water projects but would require changes in reclamation laws (GAO, 1994). Meanwhile, a full-cost rate for federal power used in irrigation would require a surcharge equal to the irrigation aid subsidy paid by non-agricultural power users. The present study focuses on irrigators and growers in California's Kern County, a region encompassing some 1.5 million acres (2,300 sq.mi.) at the southern end of the San Joaquin Valley. Federal power rates in the study region are set by the WAPA. Under the DOE Organization Act of 1977, WAPA assumed power-marketing responsibilities and transmission assets previously managed by BUREC. …