Delaware River Deepening Project: Comprehensive Reanalysis Corrected Errors, but Several Issues Still Need to Be Addressed
Published: 2010-03-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 1992 Congress authorized the U.S. Army Corps of Engineers (Corps) to implement the Delaware River deepening project, which would deepen the river's shipping channel from 40 to 45 feet. In 2002 GAO reviewed the Corps' economic analysis of the project, concluding that it contained significant limitations. GAO recommended that the Corps prepare a comprehensive economic reanalysis, which the Corps completed in 2004. GAO was asked to determine the extent to which (1) the reanalysis addressed the limitations GAO identified; (2) the reanalysis's benefit projections, as updated, reflect current and anticipated market and industry conditions; and (3) the Corps has accounted for other key issues that could affect the project. GAO reviewed Corps project documentation and interviewed federal officials along with representatives of affected states, firms, and environmental groups.
section_title: What GAO Found
paragraphs: The Corps' reanalysis addressed many of the limitations GAO had identified in 2002 in the Delaware River deepening project's original economic analysis by using updated information to correct invalid assumptions and outdated data, recalculating benefits and costs to correct miscalculations, and accounting for some of the economic uncertainty associated with the project. For example, the Corps revised its benefit estimates for transportation cost savings related to such commodities as crude oil, containerized cargo, and steel slabs. In addition, as GAO recommended, the Corps had independent experts review the reanalysis. Although the Corps' efforts were responsive overall to GAO's 2002 recommendations, GAO identified several additional limitations in the reanalysis. For example, in its analysis of economic uncertainty, the Corps considered the effects of negative-growth scenarios only for crude oil and refined petroleum, but not for the remaining commodities. In the 6 years that have elapsed since the Corps completed its reanalysis, current and anticipated future market and industry conditions have changed significantly. Several of the assumptions that underlie the Corps' estimates of the project's benefits are inconsistent with these changes. For example, the Department of Energy has lowered its long-term forecasts for growth in East Coast refinery capacity and U.S. imports of crude oil. Also, in the fall of 2009, Delaware River refinery firms closed two major facilities. Further, steel imports have declined since 2006 according to the benefiting facility identified in the reanalysis, and were well below the reanalysis's growth projection for 2009. However, the Corps' 2008 and 2009 economic updates for the project did not analyze the potential effect of these changes on the project's benefit estimates. The updates also did not determine the current status of shipping services on two trade routes that provide all of the benefits related to containerized cargo. Because of these and other omissions, decision makers do not have sufficient updated information to judge the extent to which market and industry changes would affect the project's net benefits. GAO identified three key outstanding issues that could affect the Delaware River deepening project. First, the Corps lowered its estimate of the volume of dredged material, which eliminated the need for new disposal sites in New Jersey, but its disposal plan continues to face resistance from that state. Second, Delaware, New Jersey, and several environmental groups filed separate lawsuits against the Corps in the fall of 2009, charging that the Corps lacks the environmental approvals needed to proceed with the project, among other concerns. Finally, New Jersey and several environmental groups have challenged in court the Corps' National Environmental Policy Act (NEPA) process for the project. Although the Corps completed an environmental assessment (EA) in April 2009, stakeholders believe that the process for soliciting public comment on its scope was unclear, did not allow enough time for comment, and that a new supplemental environmental impact statement is needed. Also, at the Army's direction, the Corps did not provide a public comment period for the draft EA as it had proposed to do.

section_title: Letter
paragraphs: In 1992 Congress authorized the U.S. Army Corps of Engineers (Corps) to  implement the Delaware River deepening project. The project would  increase the depth of the Delaware River’s main shipping channel from 40  to 45 feet from the mouth of the Delaware Bay to the ports of Philadelphia,  Pennsylvania, and Camden, New Jersey, about 100 miles upriver. The  Corps expects this greater depth to facilitate the movement of certain  commodities—liquid cargo (such as crude oil), containerized cargo (such  as refrigerated meat), and bulk commodities (such as steel slabs and other  construction materials)—to receiving refineries and other terminals along  the river. The deeper channel is also expected to reduce the transportation  costs for these commodities because ships carrying them could travel  upriver more fully loaded. Specifically, the Corps expects cost savings to  occur because oil tankers would need less lightering—the practice of  unloading a portion of a tanker’s liquid cargo onto smaller ships in deeper  water before sailing upriver—and because container and bulk commodity  vessels could carry the same cargo for lower shipping costs and  potentially make fewer overall trips from their originating ports to their  Delaware River destinations. Furthermore, ships that now experience  delays as they wait for rising tides to allow safe passage up the channel  could see these tidal delays reduced or eliminated.
According to project plans, the construction period for the Delaware River  deepening project is 5 years, followed by annual maintenance over a 50- year project operation period. Responsibility for managing the project  rests with the Philadelphia district office of the Corps’ North Atlantic  division. Following the project’s congressional authorization in 1992, the  Philadelphia district issued a series of analyses supporting the deepening,  including its 1998 Limited Reevaluation Report (LRR), which updated the  project’s benefits and costs. In June 2002 we reported on material  weaknesses in the 1998 report’s economic analysis of the project’s benefits  and costs. We concluded that the analysis undermined the reliability of the  Corps’ basis for determining whether the project was economically  justified—that is, whether net benefits exist once project costs are  subtracted from project benefits. We recommended, among other things,  that the Corps comprehensively reanalyze the project’s benefits and costs.
In response, the Corps reanalyzed the project from 2002 to 2004 (hereafter  referred to as the reanalysis) and concluded that it would yield, on  average, annual benefits of $24.2 million with annual costs of $21.0  million—resulting in annual net benefits totaling $3.2 million, about $8  million less than the 1998 estimate of annual net benefits. As in the Corps’  1998 LRR, the reanalysis determined that benefits would result largely  from transportation cost savings associated with importing specific  commodities, such as crude oil. In addition to the reanalysis, the Corps  updated aspects of its benefit and cost information in 2008 and 2009.
The Corps’ project plans call for the mud, silt, sand, gravel, and rock that  would be dredged from the river bottom (dredged material) to be stored at  federal disposal sites in Delaware and New Jersey; blasted rock would be  deposited at a federal disposal site in Pennsylvania. Through the years,  these affected states and regional environmental groups have differed in  their positions toward the deepening project. For example, Pennsylvania  has been supportive of the deepening, while Delaware, New Jersey, and  the environmental groups have raised concerns about the disposal of  dredged material among other aspects of the project. At the time of its  reanalysis, the Corps envisioned adding three new disposal sites in New  Jersey, in addition to using existing disposal sites in all three states.
You asked us to determine (1) the extent to which the Corps’ reanalysis  addressed the economic analysis limitations we identified in 2002; (2) the  extent to which the benefit projections the Corps included in its reanalysis  of the project, as updated, are consistent with current and anticipated  future market and industry conditions; and (3) what other key issues, if  any, could affect the project, and the extent to which the Corps has  accounted for these issues and their potential impacts.
To answer the first and third objectives, we developed a list of economic  limitations and other key issues that we had identified in our 2002 report.  These issues ranged from errors in benefit and cost estimation—such as  the misapplication of commodity growth rates and the omission of  disposal site construction costs—to concerns about the Corps’ treatment  of economic uncertainty, the lack of internal quality control in the Corps’  report review process, and the Corps’ analysis of selected environmental  topics. We used the economic limitations and other key issues we had  identified earlier, along with standard economic principles, as criteria for  reviewing the 2002 and 2004 reports that form the basis of the Corps’  reanalysis to assess whether and how each issue was addressed in those  documents. In addition to the reanalysis, we reviewed later economic and  environmental analyses the Corps had prepared to determine whether  certain limitations and other key issues previously identified by GAO had  been addressed in these subsequent documents. We discussed these issues  with officials from the Corps’ Philadelphia district, its North Atlantic  division, and its headquarters in Washington, D.C. To answer the second  objective, we reviewed historical crude oil imports from a number of  sources, including the Department of Energy’s Energy Information  Administration (EIA). We also reviewed EIA’s Annual Energy Outlook  forecasts for U.S. crude oil imports and refinery capacity on the East  Coast. We determined that EIA’s crude import data and forecasts are  sufficiently reliable for the purposes of this report. (We note that EIA may  revise its forecasts over time as new information becomes available.) For  other commodities, we interviewed representatives of importing firms and  a U.S. Geological Survey official, as appropriate. We also reviewed U.S.  government import data for additional background. For all three  objectives, we consulted experts in the fields of economics and lightering,  including consultants who helped the Philadelphia district prepare its  reanalysis. We also spoke with representatives of the Delaware River  refineries, other potential project beneficiaries, and the private lightering  firm that serves the Delaware River market; representatives of the states  of Delaware, New Jersey, and Pennsylvania; and environmental groups  with an interest in the project. Appendix I contains more detailed  information on our scope and methodology.
We conducted this performance audit from March 2009 through March  2010 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: The Delaware River deepening project calls for dredging the river’s main  navigation ship channel to 45 feet, from a depth of 40 feet, beginning at the  mouth of the Delaware Bay through Philadelphia Harbor, and to the  Beckett Street Terminal in Camden, New Jersey—a distance of 102.5  miles. The Corps plans to use nine existing federal disposal sites in  Delaware (one), New Jersey (seven), and Pennsylvania (one) to dispose of  the material dredged from the bottom of the river. The new dredged  material is to be layered on top of the material already deposited at these  sites during annual maintenance dredging in the channel to maintain its 40- foot depth. Additionally, a portion of the material to be dredged is sand  from Delaware Bay, which would be used by the Corps to restore wetlands  at Kelly Island, Delaware, and the shoreline at Broadkill Beach, Delaware.  According to the Corps, dredged material has been used in a variety of  beneficial projects over the years, including environmental restoration,  landscaping, and airport runway fill material. Often, the material must be  drained and dried for several months before it can be used in these ways.  Figure 1 shows the area to be dredged, the nine federal disposal sites, the  two Delaware restoration locations, and other features discussed in this  report.
In 1992, the year Congress authorized the deepening project, the Corps  completed a Final Interim Feasibility Study and Environmental Impact  Statement (EIS) for the project. 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, and the 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 (SEIS) in 1997. In its 1998 LRR, the Corps updated its economic  analysis of the project’s benefits and costs.
In our June 2002 report, we found that the Corps’ 1998 analysis was based  on miscalculations, invalid assumptions, and outdated information, and  did not consider a number of uncertainties that could affect the project’s  benefits and costs. Consequently, we concluded that the Corps’ analysis  did not provide a reliable basis for determining whether the project was  economically justified and recommended that the Corps (1) prepare a  comprehensive, new economic analysis of the project; (2) obtain the  information necessary to address uncertainties that could affect benefits  and costs; (3) engage an external independent party to review the new  analysis; and (4) submit the new analysis to Congress.
In response to our 2002 report, the Corps reanalyzed the economic  benefits and costs of the deepening project and issued a Comprehensive  Economic Reanalysis Report in 2002, followed by a Supplement to  Comprehensive Economic Reanalysis Report in 2004. (In this report we  use the term “reanalysis” to refer collectively to both the Corps’ 2002  report and 2004 supplement.) The Corps’ reanalysis concluded that the  project would yield average annual benefits of $24.2 million, about $16  million less than the Corps’ 1998 annual benefit estimate of $40.1 million.  According to the Corps’ reanalysis, annual benefits would result largely  from transportation cost savings associated with the importation of  specific commodities—crude oil; containerized cargo, such as refrigerated  meat and produce; and dry bulk commodities, such as steel slabs and blast  furnace slag (an additive used in the production of cement). Crude oil  savings would account for about half of these benefits, with cost savings  related to containerized cargo accounting for another quarter of them. See  table 1 for details on the benefit estimates and share of total benefits for  each benefit category in the reanalysis.
The benefit estimates in the Corps’ reanalysis depend on a number of  factors, including (1) the extent to which future growth expands the total  volume transported for each of the benefiting commodities; (2) the savings  associated with using less of certain economic resources, such as the  Delaware River lightering fleet; and (3) the economy’s prevailing price  level and discount rate. For the reanalysis, the Philadelphia district  contracted with a private consulting firm to analyze project benefits.
According to the Corps’ reanalysis, the Delaware River deepening project  would generate benefits relating to commodities imported by the following  entities:    Five crude oil refining facilities with six deep-draft terminals now owned  by Sunoco (four), Valero (one), and ConocoPhillips (one), with four  terminals located in Pennsylvania and two in New Jersey.
Other commodity terminals, including those at Beckett Street Terminal in  Camden, New Jersey; Packer Avenue Marine Terminal in Philadelphia,  Pennsylvania; and Delaware Terminal at the port of Wilmington,  Delaware.  (The nine commodity terminals appear in the figure 1 map.)
With regard to project costs, the Corps’ reanalysis estimated average  annual project costs of $21.0 million, almost $8 million less than the Corps’  1998 annual cost estimate of $28.8 million. This revised cost estimate  includes channel dredging, disposal site construction, and any related land  costs, such as land for new disposal sites and rights of way. It also  includes associated costs, which are those needed, in addition to project  costs, to achieve the benefits claimed during the period of the Corps’  analysis. These costs include, for example, berth deepening and dock  modifications to accommodate deeper ships at refinery facilities and  container terminals. Although associated costs are the responsibility of the  potentially benefiting facilities, the Corps includes these costs in its total  cost estimate, in accordance with its guidance. See appendix II for more  information about the project’s associated costs.
In addition to the 2002 and 2004 reanalysis documents, the Corps prepared  the following documents that provide supplemental information on the  benefits and costs of the Delaware River deepening project:    an economic update to the project that reaffirmed the reanalysis’s benefit  and cost estimates for budgeting purposes (April 2008),    an environmental assessment that included a section summarizing the  project’s potential economic benefits (April 2009), and    an economic update to support the Corps’ fiscal year 2011 budget request  (December 2009).
See figure 2 for a summary timeline of key documents related to the  to the  deepening project.  deepening project.
As of December 2009, the Corps estimated average annual benefits of  $30.1 million and average annual costs of $22.3 million for the project,  yielding annual net benefits of $7.8 million. Because estimated benefits  exceeded estimated costs—resulting in positive net benefits and a benefit- cost ratio greater than one—the Corps determined that the project  remained economically justified. See table 2 for a summary of the benefit  and cost estimates and resulting benefit-cost ratios in the Corps’ reanalysis  and in its most recent economic update. As noted in table 2, the benefit  and cost estimates are based on different price levels and discount rates,  which accounts for some of the changes observed in the estimates  between the 2002-2004 reanalysis and the 2009 economic update. This  means that the estimates and resulting net benefits and benefit-cost ratios  are not directly comparable between the two analyses.
With regard to assessing the project’s potential environmental impacts, the  Corps is required to comply with the National Environmental Policy Act  (NEPA). In addition to summarizing the project’s potential economic  benefits, as noted earlier, the 2009 environmental assessment’s primary  purpose was to evaluate the impacts of changes to the project and in the  project area since the 1992 EIS and 1997 SEIS, as well as to present the  results of post-SEIS environmental monitoring and data collection.
Although the Corps has made efforts to conduct a reanalysis of the project  and provide assessments of its potential environmental impacts, the  project has remained controversial. For many years the project has been  criticized by regional environmental groups, among others, who have  raised concerns about the project’s impact on water quality and various  fish and wildlife species, as well as the accuracy of the Corps’ estimates of  the project’s benefits and costs. Notwithstanding, because of the results of  the reanalysis, congressional funding, and support for the project from its  local sponsor and others, the Corps continued its efforts to begin  construction. Specifically, in 2008 the Philadelphia Regional Port Authority  (PRPA)—an independent agency of the state of Pennsylvania—replaced  the Delaware River Port Authority as the project’s local sponsor. In that  same year, PRPA and the Army signed a project partnership agreement for  the construction of the deepening project. As the local sponsor, PRPA is to  contribute 25 percent of the project’s total costs.
section_title: The Corps’ Reanalysis Addressed Many of the Economic Analysis Limitations GAO Had Identified in 2002
paragraphs: The Corps’ reanalysis addressed many of the limitations that we had  identified in 2002 in the project’s original economic analysis by using more  recent information to correct invalid assumptions and outdated data,  recalculating benefits and costs to correct miscalculations, and accounting  for some of the economic uncertainty associated with the project. In  addition, as we recommended, the Corps had independent experts review  the reanalysis before submitting it to Congress. Although the Corps’ efforts  were responsive overall to the recommendations we made in 2002, we  found several additional limitations in the reanalysis. For example, in its  analysis of the economic uncertainty associated with the project, the  Corps considered the effects of negative-growth scenarios only for crude  oil and refined petroleum but not for the remaining benefit categories.
subsections: section_title: Reanalysis Used Updated Information to Correct Invalid Assumptions and Addressed Other Errors
paragraphs: The Corps’ reanalysis was based in large part on the information that its  contractor, David Miller & Associates (DMA), an economic consulting  firm, developed between 2002 and 2004. Using the updated information  that DMA developed, the Corps revised its list of potential benefit  categories to exclude those that would no longer benefit from the project  or those for which the agency had insufficient information to calculate  benefits. For example, our 2002 report noted that the Corps had assumed  benefits resulting from coal and iron ore imports, as well as scrap metal  exports, even though trade in these commodities had greatly declined  since the Corps had last studied them. In its reanalysis, the Corps dropped  these commodities from its benefit calculations because of factors, such  as reduced trade volumes, that indicated that benefits related to these  commodities would not be realized. In addition to identifying outdated  benefit categories, our 2002 report suggested that changing import  patterns could present new commodities for the Corps’ consideration. The  Corps’ reanalysis subsequently identified additional benefiting  commodities that were not previously considered, such as refined  petroleum, steel slabs, and blast furnace slag.
The Corps’ reanalysis also prepared new forecasts of growth rates for each  of the benefiting commodities to correct the past overstatement of key  benefit categories, using information from government and private trade  databases to re-evaluate import growth rates. For example, in 2002 we  found that the Corps’ 1998 LRR had applied a 5.8 percent growth rate to oil  imports from West Africa for 1992 through 2005, when that rate should  have been applied only through 2000 and a lower rate—1.4 percent— applied for 2001 through 2005. This misapplication of growth rates was  significant because crude oil benefits increase as import volume increases,  generating savings from reduced transportation costs per barrel. For the  reanalysis, the Corps assumed a lower annual growth rate of 0.2 percent  by linking the forecast to the expected growth rate for the Delaware River  refineries’ relatively fixed overall capacity, which was expected to grow by  10 percent—or 0.2 percent per year—over the 50-year life of the project.  For other commodities, the Corps assumed that growth would be limited  to the period leading up to the base year, which is the first year that the  project’s full benefits can be realized. One commodity that the Corps  limited in this way was containerized cargo, which, like crude oil, was  assigned growth rates in the 1998 LRR that we found in 2002 to be  overstated. In addition to constraining containerized cargo growth to the  period leading up to the base year, the Corps’ reanalysis also assumed that  project benefits for containerized cargo would be limited to two specific  trade routes and the Corps forecasted growth for only one of these two  routes. These routes included one extending from the East Coast of South  America northbound to the U.S. East Coast and a second reaching from  Australia and New Zealand eastbound through the Panama Canal and up  the U.S. East Coast—both terminating at Philadelphia’s Packer Avenue  Marine Terminal.
In its reanalysis the Corps also corrected several additional invalid  assumptions that we had identified in our prior report concerning the  estimate of crude oil benefits. Specifically, in 2002 we reported that the  Corps’ 1998 LRR (1) assumed that many more crude oil ship type and trade  route combinations would benefit from a deepened channel than could be  supported by its analysis, (2) relied on outdated specifications for  lightering vessels in calculating benefits, and (3) incorrectly assumed that  lightering reduction benefits would be realized at ports of origin. In the  reanalysis these issues were addressed as follows:    First, according to the Corps’ original statistical model, in 23 percent of all  possible cases, ships on specific crude oil trade routes would carry enough  cargo to exceed 40 feet of draft if a 45-foot channel were available, leading  to transportation cost savings for that cargo in a deeper channel. However,  in its 1998 LRR the Corps applied these benefits for 100 percent of the  possible ship type-trade route combinations, thereby overstating benefits.  In the reanalysis, DMA replaced the Corps’ statistical model with new  projections based on the characteristics of the ships that actually called on  Delaware River refineries in 2000, including information on each ship’s  origin and destination, operating cost, crude oil tonnage, actual draft, and  maximum draft for which it was designed. DMA used this information, in  conjunction with refinery interviews, to determine which ships would be  likely to increase their tonnage—and thus their drafts—in a deepened  channel, and what level of benefits would be associated with this change.  DMA ultimately based its projections on 86 percent of the crude oil  tonnage reported by the refineries for the year 2000 because the remaining  data were incomplete or otherwise unsuitable for analysis.
Second, for those crude oil tankers that would need to be lightered less in  a deepened channel, the 1998 LRR relied on outdated specifications in  assuming that tankers can discharge crude oil into refineries’ dockside  storage tanks twice as fast as they can transfer the oil to lightering vessels.  The Corps’ reanalysis revised this assumption to reflect that lightering  rates exceed dockside discharge rates because of, for example, shorter  pumping distances and the assistance of gravity when pumping from large  tankers to smaller lightering vessels. As the Corps recognized in the  reanalysis, some portion of the benefits of reduced lightering would be  offset by the increased time and cost of discharging more cargo at  refineries’ docks.
Third, the Corps’ 1998 analysis assumed that cost savings from reduced  lightering would be realized at both the port of origin and port of  destination. In fact, these benefits would be realized only at the  destination port because that is where lightering occurs. The reanalysis  assigns these benefits only to destination ports.
In the reanalysis, the Corps used a lightering model based on a full year’s  worth of lightering operations data to help refine its estimate of crude oil  benefits. DMA initially constructed this model using assumptions about  the lightering firm’s practices that were based on its review of Maritime  Exchange data on tanker movements and sailing drafts for the year 2000.  Following publication of the model’s assumptions and results in the Corps’  2002 Comprehensive Economic Reanalysis Report, the lightering firm  disagreed with DMA’s methodology and claimed that DMA’s assumptions  resulted in an overstatement of lightering costs, which in turn would  overstate crude oil benefits derived from avoiding these costs. For  example, the lightering firm noted that DMA did not include the minority  of its lightering activity that occurs not in the Delaware River but in the  ocean offshore of Delaware Bay. Ignoring this portion of the firm’s  lightering overstates cost per barrel lightered by inaccurately dividing 100  percent of costs by less than 100 percent of barrels lightered. In response,  DMA revised its lightering model in the 2004 supplement by collecting and  combining actual lightering operations data for the year 2000 from the  lightering firm, the Corps’ Waterborne Commerce Statistics Center, and  three of the five principal refinery firms operating in the Delaware River at  that time. According to the Corps, this refinement allowed DMA to  account for nearly 99 percent of all crude oil barrels lightered in the  Delaware River and offshore during 2000, providing a more accurate  estimate of crude oil benefits in the 2004 supplement.
The Corps further attempted to address the lightering firm’s comments  about its 2002 report by developing a more sophisticated model of  lightering activities in the event of a 45-foot channel. Specifically, in its  initial model, DMA had determined that the likely reduction in lightering  volume in a deeper channel would be roughly equivalent to the capacity of  one of the three vessels in the lightering firm’s fleet. DMA estimated  lightering reduction benefits by removing that vessel and its operating  costs from the fleet, as it assumed the lightering firm would choose to do  in the event of a deepened channel, then recalculating total lightering  costs based on the remaining two vessels. In response to the lightering  firm’s criticism of this approach as unrealistic, DMA revised its approach  by using updated data on operations from 2000 to simulate tanker-by- tanker lightering operations through 2058. The simulation results were  matched with estimated vessel operating costs and hourly fuel  consumption costs developed by the Corps’ Institute for Water Resources  specifically for each of the three vessels in the lightering firm’s fleet.  According to the Corps, this approach allowed the agency to more directly  calculate the reduction in total economic resources—such as those  devoted to each ship’s crew, fuel, and maintenance—needed to provide  lightering services as lightering volumes fall. The Corps assumed these  freed resources would be put to productive use by the lightering firm  elsewhere in the economy. The revised methodology in the 2004  supplement was associated with a roughly 20 percent drop in the Corps’  crude oil benefit estimate when compared to the 2002 report.
Finally, the Corps corrected miscalculations and important omissions we  identified in 2002 that affected the project’s benefit and cost estimates. For  example:    When we attempted to replicate the Corps’ results in 2002, we identified a  $4.7 million gap between the Corps’ estimate of annual project benefits  and the estimate that we developed. The Corps’ economist for the project  told us in 2002 that the gap resulted from a computer error that could have  occurred when files were transferred from one program to another;  ultimately, the Corps acknowledged the error but was unable to  definitively explain it. For the reanalysis, the Corps recalculated its total  benefit estimate using DMA’s new analysis of each benefiting commodity.  We reviewed this calculation and found no significant errors.
The Corps’ 1998 LRR was marked by inconsistent discounting of project  benefits and costs to determine their net present value. Moreover, the  Corps presented benefit estimates at price levels for different years—for  example, coal benefits were presented at 1991 price levels and  containerized cargo benefits at 1995 price levels. Both of these practices  made it difficult for decision makers to understand and compare the true  benefits and costs of the project. In developing the reanalysis the Corps  used DMA’s analysis, which standardized the price level and discounting  adjustments for project benefit estimates by benefit category, presenting  each at 2002 price levels and using the prevailing discount rate at the time  the reanalysis was published (5.625 percent). The Corps adjusted the  reanalysis’s cost estimates using the same approach.
In 2002 we found that the Corps omitted construction costs for federal  disposal sites from its summary calculations in the 1998 LRR cost  estimate. These construction costs would be incurred as the Corps  expands the sites to accommodate additional dredged material resulting  from annual maintenance of the 45-foot channel over its 50-year project  life. In its reanalysis, the Corps’ estimate of total costs included costs for  these sites.
In 2002 we reported that the Corps’ 1998 LRR failed to update its estimates  for associated costs, such as deepening the access channels that connect  the main channel to benefiting facilities’ loading docks and increasing on- site storage capacity to handle larger deliveries. For the reanalysis, DMA  hired a subcontractor to survey potentially benefiting firms and determine  their likely associated costs, including berth deepening, dock  modifications, and additional storage, and to estimate the cost of these  modifications. This work was completed in 2002, and the Corps included  the updated associated costs in the reanalysis’s total cost estimate.
Our 2002 report noted that the Corps’ cost estimate in the 1998 LRR  assumed that annual maintenance dredging for the 45-foot channel would  begin after the last year of construction and continue for 50 years.  However, maintenance dredging in completed segments of the channel  could be required before the end of project construction—a consideration  that was not accurately incorporated into the Corps’ previous maintenance  cost estimate. The Corps’ reanalysis recognized that maintaining a 45-foot  channel segment is more costly than maintaining a 40-foot segment, and  incorporated this higher cost into its total cost estimate.
section_title: Reanalysis Included Sensitivity Analysis to Assess Uncertainty in Benefit and Cost Assumptions
paragraphs: In our 2002 report, we observed that some of the errors we identified  illustrated the uncertainty inherent in forecasting information, such as  commodity shipments, technological changes, and industry’s economic  choices. We suggested that a reanalysis of the project consider a more  careful treatment of the uncertainty associated with estimating benefits  and costs, particularly since Corps guidance requires planners to identify  areas of uncertainty in their analysis and to clearly describe them so that  decision makers can understand the degree of reliability in a project’s  benefit and cost estimates.
One way to analyze the uncertainty associated with estimating benefits  and costs is to include more information than simple point estimates,  which can give the illusion of precision when a range of estimates may be  more appropriate. Sensitivity analysis is one analytical tool for assessing  the uncertainty associated with the estimates. In the context of benefit and  cost estimation, sensitivity analysis can be used to assess the degree to  which a benefit or cost estimate is affected by a change in a key  assumption. For example, a sensitivity analysis for a labor-intensive  construction project might examine the effect on overall project cost if the  estimated hourly cost of labor were varied by plus or minus 10 percent.
The 1998 LRR did not employ sensitivity analysis, but both of the reports  that constitute the Corps’ reanalysis used this tool to analyze some of the  uncertainties associated with the project’s benefit and cost estimates.  Specifically, in the 2002 Comprehensive Economic Reanalysis Report, the  Corps used sensitivity analysis to assess the extent to which the benefit  and cost estimates, including the net benefit estimate, would change given  alternative assumptions about factors such as commodity growth rates,  lightering operation costs, and future ship sizes for slag and steel imports.  For example, the Corps analyzed the effect on the net benefit estimate if  future crude oil imports to Delaware River refineries grew by more, or  less, than the assumed 0.2 percent per year. Scenarios included higher  growth, lower growth, no growth, and negative growth. Under the latter  scenario, the Corps estimated that crude oil benefits would be reduced by  about 16 percent. The Corps’ rationale for the negative-growth scenario, in  part, was the possibility that one or more of the refineries could go out of  business. The Corps, however, stated that this was unlikely, citing the  continued expansion of demand for products refined from crude oil and  noting that its 0.2 percent growth rate was conservative relative to the  Department of Energy’s projection of future U.S. crude oil imports through  2020, which ranged from 0.6 percent to 1.6 percent annually. Similarly, the  Corps examined the potential effect on benefits of a negative-growth  scenario for refined petroleum, as well as higher-growth, lower-growth,  and no-growth scenarios for refined petroleum, blast furnace slag,  containerized cargo, and steel slabs.
To augment its sensitivity analysis, the Corps examined the vulnerability  of various benefit categories to the actions of individual firms whose  business decisions could affect the project. For example, the Corps’  estimate of blast furnace slag benefits was based on slag imports by a  single cement firm. Benefits related to importing blast furnace slag could  be lower or could disappear if this facility were to operate at a lower  production capacity than the Corps assumed, or if it were shut down and  not replaced by another firm. Crude oil, on the other hand, was imported  by five firms at the time of the reanalysis’s 2002 report. Given the history  of the continued operation of their respective refinery facilities in the  recent past, including successful transfers of ownership to new firms, the  Corps considered it unlikely that any refinery would be shut down for an  extended period of time. However, the Corps did note that if one or more  of the refineries went out of business, the benefits related to crude oil  imports could drop significantly.
In addition to analyzing the uncertainty associated with some of its benefit  estimates, the Corps conducted a sensitivity analysis of some cost  assumptions in the 2002 Comprehensive Economic Reanalysis Report.  These sensitivity analyses tested different assumptions about key cost  factors, such as dredging efficiency and the composition of dredged  material. The latter could vary from mud and silt, which is relatively more  expensive to dredge, to loose sand, which is relatively cheaper. The Corps  also examined associated costs—specifically, whether individual firms  were likely to make the necessary infrastructure investments to benefit  from a deepened channel given their expected benefits. The Corps’  analysis showed that facility benefits would likely exceed facility costs for  each of the project beneficiaries.
The 2004 Supplement to Comprehensive Economic Reanalysis Report  also contained sensitivity analyses—four related to crude oil benefits and  three related to containerized cargo benefits. The crude oil analyses  examined the impact of altering certain assumptions about lightering  operations. These assumptions informed the Corps’ lightering simulation  model, such as the vessel capacity assigned to each lightering trip in the  model, and therefore any change in these assumptions could result in a  significant change in the Corps’ crude oil benefit estimate. The final three  sensitivity analyses examined containerized cargo assumptions. For  example, the Corps calculated the positive and negative effect on project  benefits that would result from increasing and decreasing containerized  imports by 20 percent, respectively, for the two trade routes that the  reanalysis identified as benefiting from a deeper channel.
section_title: Independent Experts Reviewed the Corps’ Reanalysis
paragraphs: As we recommended in our 2002 report, the Corps submitted its reanalysis  to independent reviewers before delivering it to Congress. This process  included separate reviews of project benefits and costs. Benefits were  reviewed first by a university professor with expertise in transportation  systems. In addition, at the request of Corps headquarters, the Corps’  Institute for Water Resources arranged to have an external independent  panel review the project’s benefit analysis. The institute contracted with a  private consulting firm to convene a panel of economics and navigation  experts for this review, which consisted of an iterative process of issue  resolution through panel comments and the Corps’ responses. Similarly,  the Corps selected an engineering firm with expertise in dredging cost  analysis to review the project’s costs, including those incurred in initial  construction dredging, long-term maintenance dredging, and the  construction of disposal sites for dredged material. After the independent  reviewers issued their final reports, the Corps’ Director of Civil Works  approved the reanalysis.
In at least one instance, the Corps’ external independent reviews resulted  in a substantial change to the project’s benefit estimate. Specifically, the  benefits review panel disagreed with an aspect of the approach DMA used  to calculate the cost of crude oil lightering operations. This calculation  had a direct effect on project benefits because a significant portion of  crude oil benefits are derived from avoiding the cost of some lightering  due to a deepened river channel. DMA defended its methodology in a  series of responses to review panel comments. However, the Corps  ultimately accepted the review panel’s revision of DMA’s calculation and  used the resulting lower benefit estimate in its 2004 supplement. This $2.8  million adjustment represented a 19 percent reduction in annual crude oil  benefits and a 10 percent reduction in the project’s total benefit estimate.
section_title: Reanalysis Contained Several Additional Limitations
paragraphs: Overall, while the Corps’ efforts have been responsive to the  recommendations we made in 2002, we identified several limitations in the  economic reanalysis that introduce additional uncertainty into the  project’s benefit estimates. First, the external independent panel convened  to review the reanalysis’s benefit estimates raised concerns about the  benefit analysis for containerized cargo that may not have been fully  resolved. Specifically, in its January 2004 final report, the independent  panel concluded that the Corps had not eliminated significant  uncertainties associated with the estimation of containerized cargo  benefits. The review panel had been concerned that the Corps based its  benefit estimate on transportation cost savings that would accrue to the  project through more direct delivery of goods to Philadelphia-area  destinations on just the two trade routes in the Corps’ analysis—one  originating from South America and the other from Australia/New  Zealand—and a weekly shipping service operating on each. According to  the Corps, savings would result because some containers on the South  America route were being shipped to the deeper port of New York/New  Jersey to bypass the 40-foot Delaware River channel, and then trucked  south to Philadelphia-area destinations. With the deeper channel, the  Corps projected that these containers—as well as others resulting from  growth on the Australia/New Zealand route—would instead be shipped  directly to the port of Philadelphia through the 45-foot channel, avoiding  the costly trucking from New York/New Jersey to Philadelphia. The review  panel noted that for one of the two trade routes—Australia/New Zealand  to the U.S. East Coast, accounting for 85 percent of containerized cargo  benefits—the Corps’ benefit estimate relies on trucking that (1) does not  yet occur and (2) depends on future revisions to the existing shipping  service prompted by growth. The panel also noted that the prospective  benefits rely on the future business decisions of only a few shipping  services. For these and other reasons, the review panel stated that  significant uncertainties remained in the containerized cargo benefit  estimate and that the estimation of benefits accruing to the Australia/New  Zealand trade route was the greatest source of residual uncertainty for this  benefit category. The Philadelphia district responded to the panel’s  comments in a document defending its analysis and also revised its  discussion of containerized cargo benefits in the final version of the  February 2004 supplement. The district’s response was reviewed by Corps  headquarters, which acknowledged that not all uncertainties had been  resolved, but concluded that the findings as a whole were reasonable and  defensible. However, the Corps did not provide the final version of the  2004 supplement to the external review panel for resolution as the  contract for its services had expired.
Second, as noted earlier, the Corps’ 2002 Comprehensive Economic  Reanalysis Report employed sensitivity analysis to examine the effect of  negative-growth scenarios on the annual benefit estimates for crude oil  and refined petroleum. However, negative-growth scenarios were not  considered for the remaining benefiting commodities, which were  analyzed under only higher-growth, lower-growth, and no-growth  scenarios. The possibility of a contraction in the market for blast furnace  slag, containerized cargo, and steel slabs was not insignificant, given the  relatively few importers for certain commodities and the sensitivity of  these markets to changes in world economic conditions. Indeed, as noted  earlier, estimated benefits for slag rely on the future business decisions of  a single firm. Considering that even a no-growth scenario for each benefit  category would collectively result in the project’s total annual costs  slightly exceeding its total annual benefits, as shown in the Corps’  reanalysis, the cumulative effect of negative growth for all commodities  could have provided additional context to decision makers. In addition,  the alternative-growth scenarios for crude oil from the 2002 report’s  sensitivity analysis were not reanalyzed in the 2004 supplement, even  though the methodology used to develop the estimate of crude oil benefits  changed substantively from the 2002 report and the estimate itself  declined by about 20 percent.
Finally, the lightering firm disagrees with the reanalysis’s assumption that  significant savings will result from the firm reducing its service levels  proportionally in response to reduced demand for lightering in a deepened  channel. To the extent that lightering service levels in a 45-foot channel  are higher than the Corps assumes, project benefits could be reduced. In  practice, the Corps’ assumption would mean that the lightering firm’s  three vessels would spend less time in operation, or perhaps that two  vessels would maintain similar service levels but the third vessel would be  put to other uses. This reduction in service would save crew, fuel, and  other resource costs that are the basis for the Corps’ estimate of lightering  cost savings in its crude oil benefit model. However, the lightering firm  contends that tanker arrivals into Delaware Bay can be unpredictable,  with multiple arrivals possible on short notice, which requires the firm to  retain three vessels in order to maintain the flexibility needed to provide  prompt service. For the importing refineries that pay for tankers to ferry  crude oil across the ocean to their facilities, lightering delays in the bay  are costly. Moreover, refinery facilities typically do not maintain much on- site storage and instead rely on timely deliveries to continue operating.  For these reasons, the lightering firm told us that the reanalysis’s  assumption of service levels falling in proportion to reduced lightering  demand is unrealistic. Instead, the lightering firm believes service levels  would likely remain higher than the Corps’ modeling predicts because, for  example, the firm would continue to provide service with three vessels  instead of two. In fact, the lightering firm’s position on the feasibility of  reduced service levels resembles an observation that the Corps made in  discussing the undesirability of delivery delays for containerized cargo in  the reanalysis’s 2002 report: “The issue is customer satisfaction and the  potential loss of customers who are not receiving their desired service.” In  interviews with us, Corps officials characterized their assumption of  reduced lightering service levels as consistent with an economically  rational firm’s most efficient allocation of its resources.
section_title: The Benefit Assumptions in the Corps’ Reanalysis and Economic Updates Do Not Fully Reflect Current and Anticipated Future Market and Industry Conditions
paragraphs: In the 6 years that have elapsed since the Corps completed its reanalysis,  current and anticipated future market and industry conditions have  changed significantly. Several of the assumptions that underlie the Corps’  estimates of the project’s benefits are inconsistent with these changes. For  example, the Department of Energy has lowered its long-term forecasts for  growth in East Coast refinery capacity and U.S. imports of crude oil. These  developments raise questions about the extent to which the reanalysis’s  findings could be affected by these changed conditions. The Corps’ 2008  and 2009 economic updates did not analyze the potential effect of these  changes on the project’s benefit estimates. Consequently, decision makers  do not have the updated information necessary to indicate whether the  market and industry changes that have occurred would affect the project’s  net benefits.
subsections: section_title: Reanalysis’s Benefit Assumptions Do Not Consistently Reflect Current Market and Industry Conditions and Future Outlook
paragraphs: Benefits related to crude oil, containerized cargo, and steel slabs make up  89 percent of the project’s total annual benefits, accounting for 49 percent,  25 percent, and 15 percent respectively. Current market and industry  conditions and future outlook for these key benefit categories have  changed since the reanalysis was completed in early 2004. These changes  indicate that the assumptions underlying the Corps’ benefit estimates may  need to be revised, but their net effect is unclear without additional  information and analysis. The following summarizes our findings related  to these benefit categories, in descending order of importance to the  project’s overall benefit estimate.
subsections: section_title: Crude Oil
paragraphs: The reanalysis’s crude oil benefit assumptions are not consistent with  current market and industry conditions and future outlook, which raises  questions about the reliability of the reanalysis’s crude oil benefit estimate.  Relevant changes that could affect crude oil benefits include a projected  decline in refinery capacity, a current and projected decline in crude oil  imports, and changes in the Delaware River crude oil refining and  lightering industries.
Projected Decline in Refinery Capacity  In the reanalysis, the Corps chose a 0.2 percent annual growth rate as the  basis for its long-term forecast for crude oil imports into Delaware River  ports. The Corps based its growth rate on the expected growth in long- term capacity for refineries in the East Coast region. This forecast came  from the Department of Energy’s Energy Information Administration (EIA)  as part of its Annual Energy Outlook. However EIA’s long-term outlook  for East Coast refinery capacity has declined from 0.2 percent annual  growth in its 2002 outlook to a 0.1 percent annual decline in its 2009  outlook, and the early-release version of EIA’s 2010 outlook has predicted  a steeper decline of 2.0 percent annually.
Current and Projected Decline in Imports  The Corps observed in its reanalysis that its 0.2 percent annual growth rate  for crude oil imports was a conservative projection compared to a  Department of Energy forecast of future U.S. crude oil imports through  2020, which ranged from 0.6 percent to 1.6 percent annual growth; in its  2002 annual energy outlook, EIA identified 1.1 percent annual growth in  imports as the most likely rate for this period. By 2009, this outlook had  changed considerably from the earlier part of the decade: instead of the  1.1 percent annual growth for crude oil imports forecasted in EIA’s 2002  long-term outlook or the 0.2 percent annual growth assumed by the Corps,  EIA’s 2009 and 2010 long-term outlooks forecasted annual declines of 1.6  and 0.4 percent, respectively.
Moreover, to date, available data indicate that even the Corps’ marginal  growth rate of 0.2 percent overstated crude oil imports through at least  2008. According to EIA data, the volume of crude oil imports into  Delaware River ports declined from about 415 million barrels in 2000 to  about 381 million barrels in 2008, for an annual decline of 1.1 percent and  an overall decline of 8.1 percent since 2000. Imports were about 332  million barrels in 2009.
We identified several reasons for the decline in crude oil imports into the  Delaware River and changes to their long-term outlook. First, EIA officials  pointed to several factors that have reduced the demand for crude oil in  the United States overall and thus contributed to changes in the long-term  forecast. These include the requirements of new regulations and  legislation, such as the Energy Independence and Security Act of 2007— which includes mandates to increase domestic use of nonpetroleum liquid  fuels such as ethanol and more stringent fuel efficiency standards—and  competition from gasoline produced in Europe. EIA officials explained  that crude oil imports are sensitive to changes in the market for gasoline, a  product that accounts for about half of the refined output from a typical  barrel of crude oil. East Coast refineries are especially vulnerable to  competition from refineries in Europe (as well as U.S. Gulf Coast states)  because the East Coast refineries have relatively high production costs. On  the other hand, the officials noted that by lowering lightering costs, a  deeper channel could reduce the cost of production and could potentially  improve the refineries’ position in a highly competitive market.
Second, EIA officials explained that the nation’s current economic  recession has been associated with declines in demand for products  refined from crude oil and shrinking profit margins for Delaware River  refineries. These conditions are reflected in relatively low utilizations— that is, how much of a refinery’s total productive capacity is being used— which EIA officials said had fallen below 80 percent by late 2009. The  officials noted that the following two Delaware River refinery firms have  recently reduced their respective refinery capacities by halting production  at major facilities:  In October 2009 Sunoco announced that it was indefinitely idling its Eagle  Point refinery facility in Westville, New Jersey. Subsequently, the firm  announced in February 2010 that the closure was permanent.
In November 2009 Valero announced that it would permanently shut down  one of its two Delaware River refinery facilities—the former Motiva  facility in Delaware City, Delaware.
According to EIA officials, the remaining Delaware River facilities are  likely to continue to operate because most of the excess refinery capacity  has already been squeezed out of the Delaware River region. Looking  ahead, EIA officials said that according to many observers, demand is not  expected to return to its former levels even after the economy recovers  because of the policy and structural changes noted earlier, resulting in less  need for gasoline from crude oil. However, they said that the Northeast  will remain a major consumer of home heating oil, which is made from  crude oil, and that demand will likely grow for diesel fuel, a crude oil  product that is used heavily in the trucking industry—especially in the  Northeast.
Third, according to an independent economic expert with experience  analyzing the Delaware River crude oil market, demand for crude oil  imports has declined in the Northeast because of high oil prices, changing  consumer preferences, and gasoline imports from Europe. He predicted  that, in general, U.S. energy demand will rely less heavily on crude oil in  the future. In his assessment, the Corps’ crude oil forecasts are therefore  likely outdated, and while the Corps’ assumptions about projected crude  oil growth may have been reasonable in the early 2000s, they do not reflect  current and expected future conditions.
Changes in Delaware River Refining Industry  Changes in the Delaware River crude oil refining industry affect the  reanalysis’s crude oil benefit assumptions in ways that raise questions  about the Corps’ crude oil benefit estimate. For example, the reanalysis’s  lightering simulation model predicted that in the first year of a 45-foot  channel the recently closed Eagle Point facility’s lightering requirement  would be reduced by 41 percent. This amount represented 22 percent of  the total expected decline in the need for Delaware River lightering in the  model’s initial year. This reduction in lightering represents resource cost  savings that are a key part of the Corps’ crude oil benefit estimate. If the  facility is not reopened, it is unclear to what extent its share of crude oil  benefits would instead be realized by Sunoco’s remaining Delaware River  facilities. In comparison with Sunoco’s Eagle Point closure, Valero’s  closure of its Delaware City facility would likely affect the crude oil  benefit estimate less because this facility was not considered a potential  beneficiary in the Corps’ reanalysis. However, the Corps’ lightering  simulation model assumed that the facility would account for nearly a  quarter of the lightering firm’s volume in the first year of a 45-foot channel.
While this consideration does not affect the crude oil benefit estimate  directly—because the volume of lightering for this facility was expected to  remain the same in a 45-foot channel, thus precluding lightering reduction  benefits—it does alter the assumptions about the lightering firm’s day-to- day operations that the Corps used to build the model, which could affect  the benefit estimates for other facilities. In addition, because the Corps’  crude oil benefit estimate includes time savings from fewer tidal delays as  tankers proceed upriver, a reduction in future oil imports could decrease  these savings in a 45-foot channel. Overall, the net effect of these and  other industry changes on the Corps’ crude oil benefit estimate is unclear.
Changes in Delaware River Lightering Operations  Changes experienced by the lightering firm whose operations were  modeled in the Corps’ reanalysis also could influence the Corps’ estimate  of crude oil benefits. According to Overseas Shipholding Group (OSG),  the firm lightered about 98 million barrels in 2000, the year that the Corps  used to build the reanalysis’s crude oil benefit model and that served as  the basis for its crude oil projections. As recently as 2007, OSG officials  told us, the firm lightered about 95 million barrels; however, OSG lightered  only about 88 million barrels in 2008 and 77 million barrels in 2009, down  almost 22 percent from the 2000 total. Despite the drop in lightering  demand, OSG officials said they have maintained three ships in their  lightering fleet to keep service levels consistent for their customers.
As discussed earlier, the Corps’ Institute for Water Resources estimated  the vessel operating costs, including factors such as hourly fuel  consumption costs, for each of the three vessels in the lightering fleet at  the time of the reanalysis—avoiding these costs through reduced  lightering provided the basis for lightering resource cost savings in a  deepened channel. However, according to OSG officials, two of the three  ships in the firm’s current Delaware River lightering fleet are different  from those the Corps modeled in its reanalysis, which suggests that fleet  operating costs and other characteristics, such as pumping efficiency, may  now be different. In 2010 the composition of OSG’s lightering fleet is  expected to change even more from the composition of the fleet used in  the Corps’ model, which could further influence the Corps’ estimate of  crude oil benefits. Fleet composition would change because of a 10-year  contract with Sunoco—OSG’s largest Delaware River customer—that led  OSG to order two new tug-barges slated for delivery in 2010. An OSG  official explained that these vessels were specially designed to take into  account customer requirements, desired cargo volumes, increased  operational efficiencies, and anticipated future environmental  requirements. By adding these vessels to its fleet, OSG expects that greater  lightering volumes will be realized. OSG officials said that by fall 2010,  they expect to have the two new tug-barges operating as part of the firm’s  fleet, along with a third vessel that was not modeled in the Corps’  reanalysis. OSG officials expect the new lightering fleet to have lower  operating costs than the fleet that was modeled by the Corps, primarily  because they will burn a less expensive fuel, coupled with increased  operational efficiency. This would tend to reduce lightering resource costs  and thus reduce the Corps’ estimated crude oil benefits, all else the same.
Finally, the delivery of the first new tug-barge would activate the 10-year  contract with Sunoco, which OSG officials said includes guaranteed  minimum lightering volumes. If this contract causes lightering volumes to  be higher than the Corps’ model predicts for whatever portion of the 10  years overlaps with the deepened channel’s 50-year operation period, then  lightering reduction benefits could be lower as a result. It is possible that  increased lightering under the contract, if any, for Sunoco’s remaining  facilities could mitigate the drop in potential lightering cost savings  resulting from the closure of Sunoco’s Eagle Point facility. Still, without an  updated analysis of these changes, their net effect on the Corps’ estimate  of crude oil benefits remains unclear.
Potential Effect of Crude Oil Changes  The Corps has acknowledged that changes since the reanalysis could  affect its crude oil benefit model but has not analyzed this potential effect.  In the reanalysis’s 2002 sensitivity analysis, the Corps showed that benefits  related to crude oil could drop significantly in a negative-growth scenario  where, for example, refineries go out of business (though, as we  mentioned earlier, this analysis was not revised in the 2004 supplement  despite substantive changes in the crude oil analysis). Further, according  to the Corps, future import growth is responsible for about 9 percent of  annual crude oil benefits. The Corps’ primary economic consultant for the  reanalysis agreed that a decline in crude oil imports into the Delaware  River would reduce crude oil benefits, although he noted that the  percentage decline for benefits would be less than the decline for  imports—that is, it would not be a one-for-one decline. The consultant also  said that changes to vessel operating costs in the lightering firm’s fleet  could have a significant effect on the crude oil benefit model.
section_title: Containerized Cargo
paragraphs: The reanalysis’s containerized cargo benefit assumptions may not fully  reflect current conditions and cannot be adequately assessed without  additional information. In the reanalysis’s 2004 supplement, the Corps  revised its containerized cargo analysis to focus on specific growth  assumptions for the two trade routes in its analysis—one from the East  Coast of South America and a second from Australia/New Zealand passing  through the Panama Canal. At the time of the Corps’ reanalysis, the two  routes were served by a primary shipping firm and several partners  operating one weekly service on each route that called at Philadelphia.  The reanalysis’s containerized cargo benefits depended entirely on  changes in shipping practices prompted by a 45-foot ship channel.  Specifically, the reanalysis derived transportation cost savings from  avoiding inefficient and costly trucking from the port of New York/New  Jersey to Philadelphia—whether already occurring (on the South America  service) or assumed to begin at some future time (on the Australia/New  Zealand service). This trucking was an adaptation resulting from  constraints on cargo capacity because of the need to maintain ship drafts  that did not exceed the Delaware River’s 40-foot depth, which meant that  some ships and cargo destined for Philadelphia would offload first at the  relatively deeper port of New York/New Jersey.
We were unable to verify the Corps’ key assumptions underlying the  reanalysis’s expected containerized cargo benefits. Specifically, we could  not confirm whether trucking is occurring at all, is occurring at a stable  rate, or is growing on the South America service, and whether trucking has  begun as a result of growth on the Australia/New Zealand service.  According to the logistics provider for the firm that operates the Packer  Avenue Marine Terminal, the South America weekly service still exists, is  still operated by the same primary shipping firm, and still includes time- sensitive refrigerated cargo that could be trucked from New York/New  Jersey to hasten its arrival in Philadelphia, thus preserving its retail value.  The logistics provider’s weekly delivery data from January through  November 2009 indicate overall growth on this service. However, we  cannot fully assess the reanalysis’s benefit assumptions for this trade route  without information about the number of containers still being offloaded  in the port of New York/New Jersey and trucked to Philadelphia, which is  the basis for containerized cargo benefits.
We also asked the logistics provider for information about the weekly  Australia/New Zealand service, which represents 85 percent of  containerized cargo benefits in the Corps’ reanalysis. The provider said the  weekly shipping service on that trade route is now handled in part by a  firm that acquired the former primary shipper. In addition, a competing  biweekly service that carries refrigerated cargo from the same countries  began in early 2006. The logistics provider’s weekly delivery data from  January through November 2009 indicate that the reanalysis may have  understated the number of containers that could be shipped directly into  Philadelphia on the weekly service without being rerouted to New  York/New Jersey with subsequent trucking back to Philadelphia. It is also  possible that additional imports that otherwise would have arrived on the  weekly service are instead being accommodated at current channel depth,  without trucking, by the competing biweekly service that did not exist at  the time of the reanalysis. Being able to avoid trucking only through a  deeper channel was the basis for containerized cargo benefits in the  reanalysis, and was a key source of uncertainty identified by the  reanalysis’s independent review panel. Ultimately, as in the case of the  South America trade route, we cannot fully assess the reanalysis’s benefit  assumptions for this trade route without additional information about the  extent to which trucking is occurring on the weekly service, if at all.
section_title: Steel Slabs
paragraphs: The reanalysis’s steel slabs benefit assumptions are not consistent with  current market conditions. The Corps assumed that (1) transportation cost  savings would be realized by a shift toward deeper-drafted vessels that can  load more fully in a deepened channel and (2) these savings would grow as  steel import volumes increased. From a 2001 base, the reanalysis  forecasted a 1.1 percent annual growth rate for steel slab imports into the  Packer Avenue Marine Terminal over the life of the project, which the  Corps estimated would result in approximately 1 million tons imported in  2009—the reanalysis’s project base year—and 1.6 million tons imported in  2059. According to the Packer Avenue logistics provider, 1 million tons  was exceeded in 2002 (1.1 million tons) and again in 2006 (1.2 million  tons). However, worsening economic conditions affecting construction  and other steel-intensive industries were reflected in import volumes for  steel products in 2008 (261,000 tons) and 2009 (63,000 tons). In the  reanalysis’s 2004 supplement, the Corps notes that the domestic market  for steel is cyclical and exhibits a certain level of expected volatility. Still,  import volumes would need to recover to at least 1 million tons by 2015— the revised project base year—before steel slab benefits could reach the  Corps’ forecasted levels.
section_title: Potential Effect of Recession and Other Observations
paragraphs: For commodities such as steel slabs, the downturn in imports may be  directly related to the recession and imports may recover as the economy  recovers. It is possible that, over the length of the project, the growth rate  for this benefit category may reach or exceed the Corps’ expected growth  rate. For example, the current construction schedule means that benefits  would not begin to be realized until at least 2015. Certain market and  industry trends that have the potential to reduce project benefits— especially those tied to current economic conditions—could change over  the next 5 years and have little or no negative effect on the benefit  estimates or could even increase them. On the other hand, trends that  result in part from policy and structural changes in the economy, such as  legislation requiring increased fuel efficiency and the adoption of  alternative fuels, are more likely to persist.
Despite policy changes, competition from other sources, the recent  downturn in the crude oil market, and other changes in the industry,  officials from Delaware River crude oil refineries continue to be strong  supporters of the deepening project. They agree that as long as they are  importing crude oil, they would have an incentive to maximize efficiency  on large vessels with drafts that exceed 40 and often 45 feet. For example,  according to an official from a refinery facility that receives crude oil from  Canada, being able to more fully load its supply tankers would save one  out of every seven tanker deliveries to the facility. The Corps’ benefit  model correctly presumes that transportation cost savings could be  generated from these efficiencies, but given the market and industry  changes since the modeling was performed, the benefit estimates may not  be reliable.
In addition, the Corps, the Philadelphia Regional Port Authority (PRPA),  and others contend that the project has additional benefits that are not  included in the Corps’ reanalysis. In its reanalysis, the Corps based its  benefit estimate for the project on existing ships, commodities, and trade  routes, with no commodity growth or new routes occurring as a direct  result of the deepening. However, others have suggested that a 45-foot  channel would actually increase the amount of trade in the Delaware River  by making its ports more marketable globally. Moreover, a Corps Institute  for Water Resources study expects the expansion and deepening of the  Panama Canal that would accommodate 50-foot ship drafts by 2014 to  significantly affect shipping routes, port development, and cargo  distribution among ports. According to the study, one of the expansion’s  greatest impacts will be seen in the containerized cargo trade. We heard  from industry representatives that this trade is moving toward ever-larger  container ships in order to realize greater economies of scale, including  many ships that draft in excess of 40 feet. Furthermore, according to one  of the economic experts we spoke with, significant growth in the chilled  meat market could attract trade to Philadelphia and its extensive  refrigerated warehouse infrastructure. To the extent that new cargoes and  trade routes appear during the project’s 50-year operation period, the  Corps’ analysis may understate project benefits for those commodities  carried on vessels large enough to benefit from a 45-foot channel.  However, these potential benefits would need to be analyzed by the Corps  before they could be used to support the project’s economic justification.  This analysis would also need to assess the potential effect of an  expansion of Delaware River trade in relation to other East Coast ports to  ensure that any Delaware River benefits claimed are not merely transfers  from those ports.
section_title: Corps’ Recent Economic Updates Do Not Account for Changes in Conditions and Future Outlook That Could Affect Project Benefits
paragraphs: The Corps’ 2008 and 2009 economic updates do not account for the market  and industry changes that have occurred since the completion of the  reanalysis or verify certain benefit categories that were expected to  develop by 2009. The two economic updates affirmed the level of expected  benefits for each commodity and adjusted these estimates to reflect the  current price level and discount rate. However, neither update analyzed  the extent to which changes in, for example, the market for crude oil  might affect the net benefits of the project. Such information would be  useful to establish whether the changes have affected the Corps’ estimate  of the project’s economic justification.
Corps policy requires planners to report and maintain current estimates of  project benefits and costs for all active funded projects in order to provide  reasonable estimates of economic justification to Congress, federal  decision makers, and local project sponsors. This policy requires  economic updates for ongoing projects when more than 3 fiscal years have  passed since the project’s last economic analysis. According to Corps  guidance, economic updates do not require any major new analysis.  Instead, they are limited to reviewing and updating previous assumptions,  as well as limited surveying, sampling, and other techniques to develop a  reasonable estimate of project benefits.
The Corps’ 2008 economic update did not account for changed conditions  and uncertainties related to the Corps’ commodity benefit estimates.  According to Corps officials, the April 2008 economic update was  developed internally for budgetary purposes and for establishing current  project costs in preparation for the Army’s June 2008 project partnership  agreement with PRPA. The update recapped the discussion of major  benefit categories from the two documents that constitute the reanalysis  and presented an additional few years of data on the volume of commodity  imports. We believe that some of these updates would be useful to  decision makers seeking to understand how the reanalysis’s forecasts had  performed to date, but others would be less relevant. For example, the  Corps validated its assumption of growth in blast furnace slag imports  (and thus slag benefits) by using Waterborne Commerce Statistics Center  data through 2005 to show that slag imports had exceeded the reanalysis’s  growth forecast. However, the Corps also used the center’s data to show  that crude oil imports had remained stable through 2005, but did not  update the true constraint on long-term growth identified in the  reanalysis—the Corps’ assumption of 0.2 percent annual growth in the  area’s refinery capacity. For example, EIA’s 2006 Annual Energy Outlook  forecasted a 0.4 percent long-term annual decline in East Coast refinery  capacity, and its 2007 outlook forecasted no long-term change, but the  Corps did not discuss either of these forecasts in its 2008 economic update  or assess their potential effect on its crude oil benefit estimate. Neither  did the Corps contact OSG to discuss the potential benefit-estimate  implications of (1) the firm’s long-term contract with Sunoco and the new  lightering vessels it ordered (both of which were reported publicly in  2005), or (2) OSG’s 2006 acquisition of the lightering firm whose  operations were modeled by the Corps, which could have led to changes in  the lightering operations that serve as the basis for the Corps’ model.
The Corps’ 2008 update also did not resolve uncertainties related to some  other benefit categories. For example, the Corps noted the healthy growth  rate of container volumes overall for the Packer Avenue Marine Terminal  for 2005 and 2006 but did not update the status of the weekly shipping  services on the two trade routes that account for all containerized cargo  benefits. Specifically, the Corps did not confirm that (1) containers were  still being trucked from New York/New Jersey to Philadelphia on the  South America trade route and (2) the expected rate of growth was  occurring on the Australia/New Zealand trade route, which was projected  to cause trucking to begin by 2009—both of which are necessary to realize  any containerized cargo benefits. This information is especially vital given  that the future status of the Australia/New Zealand trade route was  identified by the reanalysis’s external independent review panel as the  primary source of uncertainty in the Corps’ estimate of containerized  cargo benefits. Furthermore, the Corps’ estimate of refined petroleum  benefits depends in part on the benefiting petroleum firm’s construction of  a new ship berth on the Delaware River that was due to be completed in  2007. The 2008 economic update did not discuss the status of this berth;  according to a firm official, these improvements have not been made.
Like the 2008 update, the Corps’ 2009 economic update reviewed  commodity growth rates and adjusted benefit estimates to reflect new  price levels and a lower discount rate. In addition, the update—completed  by the Philadelphia district in December 2009, reviewed by the New  England and New York districts, and approved by the North Atlantic  division in January 2010—reduced the project’s construction cost estimate  to reflect the latest engineering surveys of the amount of material needing  to be dredged from the river channel. However, the 2009 update did not  present any revised modeling, sensitivity analysis, or related adjustments  to the benefit estimates to reflect changes to market and industry  conditions and outlook for the Delaware River region—for example, by  incorporating the lost refinery capacity at the Delaware City and Eagle  Point facilities into its forecasts, or by revisiting the sensitivity analysis  from the Corps’ 2002 report that analyzed the effect of negative growth for  crude oil, both of which could have provided additional context for  decision makers. Like the 2008 update, the 2009 update provided no  updated information about the current status of the weekly shipping  services on the two trade routes that account for all containerized cargo  benefits. Moreover, the 2009 update reprinted the same steel slab import  volumes from 2005 and 2006 that appeared in the 2008 update, which  captured the 2006 peak in steel slab imports but ignored the precipitous  decline from 2007 through 2009. In addition, the 2009 update presented 2  additional years of blast furnace slag import data (2006 and 2007), but did  not discuss the 38 percent decline in slag imports from 2005 to 2007. The  2007 import total (529,000 tons) was just more than half of the 1 million  tons that the reanalysis forecasted would occur by 2009; according to a  U.S. Geological Survey official who studies the slag industry, a private  trade database indicates that the 2009 import total was about 125,000 tons.  Finally, like the 2008 update, the 2009 update did not revisit the Corps’  expectation that the benefiting petroleum firm’s new ship berth would be  in place by 2007.
The Corps’ 2009 update did reduce the project’s overall benefit estimate by  2.6 percent to remove benefits that were expected to be achieved prior to  the completion of all segments of the deeper channel. In the reanalysis, the  Corps stated that its construction schedule would allow benefits to be  achieved at downriver facilities where deepening had already occurred  before all upriver segments had been deepened. However, we observed— and Corps officials agreed—that the Corps’ revised construction schedule  makes it impossible to achieve these benefits.
After we shared our preliminary findings with the Corps in February 2010,  the agency asked David Miller & Associates (DMA) to prepare a document  that would provide us with additional information about the current status  of Delaware River commerce to consider as we finalized our report. The  resulting memorandum, reviewed by the Philadelphia district, discussed  current trends in Delaware River commerce and identified changes in  operations for relevant industries since the reanalysis was completed in  2004. DMA’s memorandum generally agreed with our findings regarding  declines in crude oil, steel slab, and blast furnace slag imports. However,  the memorandum concluded that other than short-term impacts of the  recession, Delaware River import trends and industry changes have the  potential to increase project benefits. According to DMA, this is because  changes that would likely have a negative impact on project benefits, such  as the reduction in crude oil imports, would likely be offset by increases in  containerized cargo, refined petroleum, and steel imports. However,  although the memorandum asserts that additional benefits and  beneficiaries may be present, it does not include sufficient quantitative  analysis to show how the changed conditions and outlook would likely  affect the reanalysis’s commodity benefit estimates. For example, DMA’s  memorandum acknowledges that (1) crude oil imports have declined in  part because of competition from imports of refined petroleum products,  such as gasoline, to East Coast ports; and (2) refined petroleum vessels  typically do not lighter their cargo and therefore tend to arrive at the  Delaware River with shallower drafts than crude oil vessels, which often  engage in lightering. DMA suggested that a deeper channel could result in  a shift to larger refined petroleum vessels that could make fewer trips to  deliver the same volume of cargo. If so, DMA states that partial  replacement of crude oil imports by refined petroleum imports may  increase project benefits if the transportation cost savings of avoided  refined petroleum vessel trips are greater than the cost savings associated  with reduced crude oil lightering over the life of the project. Nonetheless,  this partial revision of the reanalysis’s assumptions indicates that its crude  oil and refined petroleum benefit estimates may no longer be reliable.  Changed assumptions related to these benefit estimates—and those  related to the estimates for containerized cargo, steel, and slag that also  were presented in DMA’s memorandum—could affect each benefit  estimate as well as the project’s overall net benefit estimate.
section_title: Several Key Issues That Could Affect the Project Remain Outstanding
paragraphs: We identified three key outstanding policy issues that could impact the  construction of the Delaware River deepening project as it moves forward.  Specifically, the Corps (1) lowered its estimate of the volume of dredged  material, which eliminated the need for new disposal sites, but it continues  to face resistance to its disposal plan; (2) was sued by Delaware and New  Jersey in October and November 2009, respectively, which charged that  the Corps lacks the environmental approvals needed to proceed with the  project; and (3) has an ongoing dispute with New Jersey and several  environmental groups over the project’s National Environmental Policy  Act (NEPA) process.
subsections: section_title: Disposal Plan Remains a Point of Contention
paragraphs: In the 2009 environmental assessment, the Corps lowered its 2002 estimate  for the amount of material that would be dredged during the project’s 5- year initial construction period by 38 percent, from 26 million cubic yards  of material dredged during initial construction to 16 million cubic yards.  The estimate was lower because improved hydrographic survey  technology showed less need for dredging in some portions of the river  channel, nonfederal interests had conducted dredging in some portions of  the channel, and higher sea levels have naturally deepened some portions  of the channel. Unlike the estimate of dredged material for initial  construction, the estimate for additional annual dredging to maintain a 45- foot channel, over the amount of dredging that would be required to  maintain the 40-foot channel, remained unchanged—860,000 cubic yards  per year, or 43 million cubic yards over the 50-year life of the project. The  Corps’ lower estimate of dredged material for initial construction was  independently validated in January 2009 by an engineering firm hired by  PRPA, which, as the project’s local sponsor, is responsible for 25 percent  of the cost of dredging and other aspects of construction. We found the  firm’s approach to validating the dredged material estimate to be  reasonable.
The lower estimate for dredged material allowed the Corps to eliminate  the three additional disposal sites in New Jersey that it had planned to add  according to the reanalysis. In its 2009 environmental assessment, the  Corps stated that it can account for all project-related dredged material at  its existing disposal sites. The disposal sites are to receive the material  dredged during initial construction as well as the material dredged during  annual maintenance of the 45-foot channel. As we mentioned earlier, the  Corps already uses the existing sites in Delaware and New Jersey to  dispose of dredged material during annual maintenance cycles for the  current 40-foot channel. By using only its existing disposal sites, the Corps  expects to reduce project costs by forgoing land expenditures and  construction costs related to the new sites. The Corps has accounted for  these plans in a revised disposal cost estimate in its 2009 economic  update.
When it revised its dredged material estimate for the deepening project’s  initial construction in the 2009 environmental assessment, the Corps also  reduced the beneficial uses of Delaware Bay dredged sand from three  projects to two. A third beneficial use project included in the reanalysis  would have restored wetlands at Egg Island Point, New Jersey. However,  Corps officials told us that the agency decided to defer the project in part  because the Corps no longer expects to dredge enough sand in the bay  portion of the deepening project to supply all three sites.
Despite reductions in the dredged material estimate and the number of  disposal sites needed, the Corps’ disposal plan remains a point of  contention. Specifically, New Jersey is opposed to receiving any dredged  material from the deepening project because it believes that the Corps has  not adequately sampled and analyzed the material. Furthermore, New  Jersey officials believe that the material could contain polychlorinated  biphenyls (PCBs) and other toxins that could contaminate the state’s  water supply, harm marine life, and pose a risk to disposal site  employees. The Corps disagrees with this assertion, maintaining that the  incremental additional dredged material, from 40 feet to 45 feet, is similar  to the material dredged during annual maintenance of the 40-foot channel,  which is deposited each year at the same disposal sites in New Jersey. The  Corps contends that based on its sediment testing, the dredged material  contains no harmful levels of contamination and will have no impact on  water quality. New Jersey officials question the sufficiency of this  sediment testing, asserting that the Corps’ testing is outdated and did not  include sediment in the project’s new work areas—channel bends, channel  widenings, and the channel bottom below 40 feet—which are not dredged  during the Corps’ annual maintenance of the channel.
A 2007 agreement between the governors of New Jersey and Pennsylvania  has also added to the controversy over the placement of the project’s  dredged material. According to a letter from the governor of New Jersey to  the Corps, the agreement specified that dredged material resulting from  any deepening would be deposited entirely in Pennsylvania, not in New  Jersey. Conversely, in separate letters from the governor of Pennsylvania  to the Corps and to the governor of New Jersey, Pennsylvania interpreted  the agreement to mean that Pennsylvania would be the final repository for  all of the material unwanted by New Jersey or Delaware that could be  used for beneficial purposes in Pennsylvania, but that the material could  be initially deposited and drained in federal disposal sites in New Jersey  and Delaware before being moved to Pennsylvania. Additionally, while  both New Jersey and Pennsylvania agreed in 2007 to the formation of a  committee to identify sites for the disposal of the material, they have not  yet formed this committee. Although the Corps and PRPA were not  involved in the governors’ agreement, Corps officials told us that while  they are open to an alternative disposal plan in general, any new disposal  plan would have to be at least as safe as the current plan and result in no  additional costs to the agency. Moreover, Corps officials stated that the  project’s benefits and costs would need to be reassessed to ensure  economic justification if under an alternative disposal plan (1) the dredged  material were first placed in New Jersey and later moved to Pennsylvania  or (2) all the material went directly to Pennsylvania. They also noted that  an alternative plan could result in another needed round of project  approvals by Congress. However, Corps officials also told us that if  Pennsylvania agreed with New Jersey to remove the dredged material  from New Jersey sites at a later date, then the Corps would not consider  this agreement to be part of the deepening project. Further, Corps officials  said the later activity would have to be a “100 percent nonfederal expense”  and would not affect the overall cost of the project.
section_title: States Contend That Additional Approvals Are Needed
paragraphs: The Corps and the states of Delaware and New Jersey disagree on the  need for additional environmental approvals related to the deepening  project, and this is currently the subject of litigation. In 1997 the Corps  obtained letters from both states concurring that the project is consistent  with each state’s coastal resource management policies. Under the Coastal  Zone Management Act, a federal agency must carry out its activities  consistent to the maximum extent practicable with the enforceable  policies of approved state management programs. In states with federally  approved coastal zone management programs—such as Delaware and  New Jersey—a federal agency that undertakes a project in the coastal  zone must provide a certification to that state that the project is consistent  with the state’s program. If a state deems the project consistent with the  state’s policies, the state issues a consistency “concurrence.” However, in  2002, New Jersey informed the Corps that the state was revoking its  consistency determination, citing substantial changes in the project’s  economic analyses and unresolved environmental issues. According to  New Jersey officials, these issues include state requests for updated  sediment sampling and analyses, as well as surface and groundwater  monitoring reports, as described in a memorandum of understanding that  accompanied the state’s 1997 consistency concurrence. Additionally, in a  2009 letter to the Corps, Delaware asked for additional coordination on its  consistency concurrence issued in 1997, citing substantial project  modifications over the previous 10 years.
The Corps disagrees with the states’ positions on the consistency  concurrences. First, Corps officials told us that they have the necessary  concurrence letter on file from New Jersey. While New Jersey asserted  that it “revoked” this concurrence, the National Oceanic and Atmospheric  Administration, which administers the coastal zone management program,  advised New Jersey that a state may not revoke a concurrence, noting an  exception where the project has not begun and the effects are  substantially different than previously reviewed. Similarly, with respect  to Delaware, the Corps’ position is that the state already concurred with  the Corps’ consistency determination. In November 2009 the Corps  determined that supplemental coordination was not required for either  state’s concurrence, because it found that the project changes were not  substantial and that the changed circumstances were not significant.
In addition, in 2001 the Corps applied for a subaqueous lands and wetlands  permit from the state of Delaware. Under that state’s law, dredging in  subaqueous lands or wetlands requires a permit. In comments on our 2002  report, the Under Secretary of the Army stated that the Corps “could not,  and would not, proceed to construction without  Subaqueous  Lands/Wetlands Permit,” a position that the Under Secretary noted was a  provision of the project cooperation agreement with the project’s original  local sponsor (Delaware River Port Authority). In 2003 a hearing officer  for Delaware’s Department of Natural Resources and Environmental  Control recommended that the department deny the permit, citing the  need for additional information. According to the Corps, it made several  attempts to provide additional information to Delaware in the years  following the hearing officer’s recommendation. However, a senior  Delaware official told us that this information could have been accepted  only as part of a new application because the record on which the  department’s decision would be based had been closed.
When the Army entered into a new project partnership agreement with  PRPA in 2008, it reserved the right to determine whether the Delaware  state permit was required as a matter of federal law, and presumably to  move forward with the project if it determined the permit not to be  required. In July 2009 Delaware’s Department of Natural Resources and  Environmental Control denied the Corps’ request for the permit—finding  that the Corps failed in its 2001 application to demonstrate that adverse  environmental effects resulting from the project had been minimized, and  that the record was outdated given the significant changes to the project  as well as additional information developed since 2001. Subsequently, the  Corps has argued that, under a provision of the Clean Water Act, the  agency can assert federal supremacy and avoid compliance with the  relevant state law because the Assistant Secretary of the Army for Civil  Works found that regulation under such law impaired the Corps’ authority  to maintain navigation.
In summer 2009 the Corps solicited construction bids for dredging the first  segment of the project. In response to the Corps’ statements and actions,  in fall 2009, Delaware, New Jersey, and several environmental groups filed  separate lawsuits against the Corps in U.S. district courts in Delaware and  New Jersey. Among other things, the states and environmental groups are  seeking a halt to the project until the Corps complies with all legal  requirements, including obtaining relevant concurrences and permits.  However, a U.S. district court recently allowed the Corps to proceed with  deepening of the first river segment, denying in part Delaware’s motion for  preliminary injunction. The judge also granted Delaware’s motion in part,  ruling that the Corps cannot proceed with the rest of the project pending  resolution of the lawsuit or further order of the court. The judge stated her  opinion that, notwithstanding the ruling, the project “should be completed,  consistent with congressional intent.” In reaching the decision, the court  did not make a final ruling on Delaware’s claims, but concluded that the  state was unlikely to prevail on a majority of its claims, while finding the  Corps’ record lacking with respect to one claim. According to the court,  its decision “gives the parties the opportunity to satisfy their respective  obligations to govern responsibly.” The environmental groups who  intervened in the case have appealed the ruling. On February 23, 2010, the  Corps announced it had awarded a contract to deepen the first segment of  the project, and on March 1 this work began. In the meantime, the district  court case, as well as the pending New Jersey and environmental groups’  cases, is proceeding.
section_title: Outstanding Disputes over the Project’s NEPA Process
paragraphs: The Corps’ 2009 environmental assessment for the Delaware River  deepening project was controversial and has been challenged in court on  several grounds. Specifically, New Jersey officials and several  environmental groups have separately claimed that the assessment is not  the appropriate mechanism for updating the last major environmental  analysis of the project—the 1997 Supplemental Environmental Impact  Statement (SEIS)—because, in their view, applicable regulations require the  Corps to prepare another SEIS to account for project and environmental  conditions that they contend have changed significantly since 1997.  Generally, an environmental assessment involves a less detailed analytical  process than other NEPA documents, such as an Environmental Impact  Statement (EIS) or SEIS. Instead, it is intended to be a concise document  that provides sufficient evidence and analysis for determining whether to  prepare an EIS or SEIS. In commenting on a draft of this report, the  Department of Defense noted that it has followed the regulations  concerning the NEPA documents. Specifically, the stated purpose of the  environmental assessment included to evaluate the impacts of changes to  the deepening project, as well as changes to the existing conditions in the  project area from those described in the 1992 EIS and 1997 SEIS. On this  basis, the Corps concluded that none of the changes to the proposed project  were substantial and there were no new circumstances or information that  can be considered significant, and therefore determined that an SEIS was  not required.
According to New Jersey and the environmental groups, the environmental  assessment overlooked certain elements of the project, relied on outdated  information, and did not sufficiently explore all of the potential adverse  impacts from the project. For example, they believe additional and updated  sediment sampling and analyses are needed to fully characterize the  materials to be dredged in the deepening project. As a result of these  concerns, New Jersey and the environmental groups are now asking a U.S.  district court, as part of the lawsuits they filed in fall 2009, to order the  Corps to issue a new SEIS before proceeding with the project.
In this regard, the Corps’ process for public comments on the deepening  project has also been criticized. On December 17, 2008, the Philadelphia  district, via a public notice, solicited comments from stakeholders  concerning environmental changes as well as project changes since the  1997 SEIS, such as changes to the amount of estimated dredged material  and the elimination of new disposal sites. The Corps’ notice indicated that  all comments should be made by December 31, 2008. Among other things,  environmental groups criticized the Corps for not giving stakeholders  sufficient time for commenting on these changes and for scheduling the  comment period over a major holiday period. Following these criticisms,  the Corps extended the public comment period by 2 weeks.
The public notice also did not explicitly inform the public that their  comments would be used to prepare an environmental assessment.  Instead, the notice asked the public for comments related to a summary of  project changes and to identify any applicable existing and new  information generated subsequent to the 1997 SEIS, to be used to update  the environmental record and to determine whether further environmental  work and analyses would be needed. Owing to both the abbreviated  response period and the confusion over the public notice’s purpose, the  environmental groups we spoke to stated that some potential respondents  may not have commented, and comments the Corps did receive may not  have been comprehensive.
The environmental groups also contend that the Corps should have  circulated a draft of the environmental assessment for public comment.  There was professional disagreement between the Corps and the Army  concerning whether a comment period for the draft environmental  assessment was necessary. Specifically, in March 2009 the Corps’ Director  of Civil Works asked permission from the Assistant Secretary of the Army  for Civil Works to circulate the draft environmental assessment for public  comment before it was issued in final form. In his request, the director  identified several reasons why circulation of the draft assessment was  advisable. The Assistant Secretary of the Army, however, denied his request,  disagreeing with the rationale and focusing on its finding that circulation  was not legally required—maintaining that the initial notice and comment  period constituted a sufficient amount of public participation and that there  was no legal requirement for additional public involvement. While Corps  officials in the Philadelphia district told us that Corps guidance does not  direct the agency to provide a public comment period for draft  environmental assessments, they could not identify other environmental  assessments that the district had issued without first circulating the draft for  public comment. The reason that NEPA regulations emphasize public  involvement through mechanisms such as public comment is that the law’s  purpose, in part, is “to require disclosure of relevant environmental  considerations that were given a ‘hard look’ by the agency, and thereby to  permit informed public comment on  proposed action and any  choices or alternatives that might be pursued with less environmental  harm.”
section_title: Conclusions
paragraphs: The Corps has had the difficult task of developing benefit and cost  estimates for the Delaware River deepening project that are based on what  may occur over a 50-year period of analysis—a period that begins only  after 5 years of channel dredging have been completed. For such a project,  economic uncertainties associated with making projections about future  conditions are important to consider because expectations about future  market conditions and benefits often may not be realized. As the Corps’  policies recognize, analyzing uncertainties can help decision makers judge  whether a project would be warranted under a range of economic  conditions. The Corps’ reanalysis has provided a more solid foundation for  estimating the project’s benefits and costs and has used sensitivity analysis  to analyze the uncertainties associated with several key assumptions.
However, since the reanalysis was completed, market and industry  conditions have changed significantly in ways that raise questions about  the Corps’ project benefit estimates going forward. While some of these  changes could be short-term trends, others could have longer-lasting  impacts. Such changes create additional uncertainties about the deepening  project. In some cases, such as blast furnace slag, the changes affect a  small portion of the project’s estimated benefits, but in other cases, such  as crude oil, containerized cargo, and steel slabs, the changes are  associated with commodities that make up most of the project’s estimated  benefits. A key purpose of the Corps’ periodic economic updates is to  analyze these uncertainties by collecting enough additional information to  ensure that decision makers are presented with reasonable and timely  estimates and that the project is warranted under a range of economic  conditions. Because the Corps’ economic updates have not accounted for  the potentially significant impact that some market and industry trends  could have on the project’s estimated benefits, federal decision makers do  not have the most current information about the project, including  whether adjustments to the assumptions in the Corps’ benefit models are  necessary. Such information would help decision makers more fully assess  the project’s economic justification.
Noneconomic aspects of project implementation can also add to  uncertainties about the project. A key area of such uncertainty is the  outcome of the legal challenges to the project’s environmental approvals  and compliance. In particular, the Corps has made several decisions— such as soliciting information from the public over the winter holiday, and  then, following Army direction, not seeking public comment on the draft  environmental assessment—that have exacerbated public concerns over  environmental issues, and as a result, its communications with the public  regarding its actions have not been as open as might have been advisable  for such a controversial project.
section_title: Recommendations for Executive Action
paragraphs: To better ensure that decision makers have the most current information  about changes that could affect the benefits of the Delaware River  deepening project, we recommend that the Secretary of Defense direct the  Chief of Engineers and Commanding General of the U.S. Army Corps of  Engineers to provide an updated assessment to the Assistant Secretary of  the Army for Civil Works, and to Congress, of relevant market and  industry trends and outlook that specifies the extent to which the data and  assumptions underlying each benefit category have changed, and the  effect of any changes on each benefit estimate and the project’s net benefit  estimate. This assessment should be issued as a public document and  become part of the project’s official record.
To improve consistency and transparency in how the Corps handles public  participation in the development of environmental documents that are  related to controversial projects and that the Corps believes have no  applicable NEPA requirement, we recommend that the Chief of Engineers  develop guidance on the appropriate timing and approaches for public  notice and comment on such documents.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Department of Defense for review  and comment. The department generally agreed with the  recommendations in our report. Specifically, the department concurred  with our recommendation that the Corps provide an updated assessment  of relevant market and industry trends and outlook that specifies the  extent to which data and assumptions underlying each benefit category  have changed and the effect of these changes on project benefit estimates.  The department agreed to have the Corps prepare an updated quantitative  assessment that would incorporate the long-term trend in the economy  over the project’s 50-year planning period. In addition, the department  partially concurred with our recommendation that the Corps develop  guidance on the appropriate timing and approaches for public notice and  comment on environmental documents that are related to controversial  projects and that the Corps believes have no applicable National  Environmental Policy Act requirement. The department agreed that the  Army will review and evaluate the need for clarifying guidance regarding  whether or when a draft Corps Civil Works environmental assessment  (EA) and finding of no significant impact (FONSI) should be circulated for  public comment before they are finalized. The department notes that it  has no reason to believe that its existing regulations and guidance  regarding this subject are defective or in need of modification. While there  are regulations addressing the typical scenario where an environmental  assessment is the first NEPA document developed (e.g., there is no EIS  previously prepared), we believe that no Corps guidance exists for the less  common scenario where a relatively old EIS or supplemental EIS already  exists for a project that has not yet been constructed, as was the situation  in 2009 when the Corps prepared its EA for the deepening project. The  department acknowledges that it would be beneficial to issue clarifying  guidance for conducting an EA in such a scenario.
The department’s official comments are presented in appendix III. We also  received technical comments from the department, which we have  incorporated as appropriate throughout the report. In addition, we invited  Delaware, New Jersey, and Pennsylvania to comment on draft report  excerpts discussing issues relevant to each state. We received comment  letters from New Jersey and Pennsylvania, which we present in  appendixes IV and V, respectively. We also received technical comments  from all three states, which we incorporated as appropriate throughout the  report.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the  appropriate congressional committees, the Secretary of Defense, the Chief  of Engineers and Commanding General of the U.S. Army Corps of  Engineers, and other interested parties. In addition, this report will be  available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions regarding this report, please  contact me at (202) 512-3841 or mittala@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this report. Key contributors to this report are listed in  appendix VI.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to determine (1) the extent to which the U.S. Army  Corps of Engineers’ (Corps) reanalysis addressed the economic analysis  limitations we identified in 2002; (2) the extent to which the benefit  projections the Corps included in its reanalysis of the project, as updated,  are consistent with current and anticipated future market and industry  conditions; and (3) what other key issues, if any, could affect the project,  and the extent to which the Corps has accounted for these issues and their  potential impacts.
To determine the extent to which the Corps’ reanalysis addressed the  economic analysis limitations we identified in 2002, we reviewed our 2002  report to identify the key limitations we had found in the Corps’ 1998  analysis. These limitations ranged from errors in benefit and cost  estimation—such as the misapplication of commodity growth rates and  the omission of disposal site construction costs for future channel  maintenance dredging—to concerns about the Corps’ treatment of  economic uncertainty and the lack of internal quality control in the Corps’  report review process. We then reviewed the Corps’ reanalysis—the 2002  Comprehensive Economic Reanalysis Report and the 2004 Supplement to  Comprehensive Economic Reanalysis Report—and supporting  documents, and assessed the extent to which the reanalysis generally  addressed the limitations we had identified earlier consistent with  standard economic principles for conducting a benefit-cost analysis. The  supporting documents we reviewed included detailed quantitative  analyses for each of the five benefiting commodities included in the  reanalysis—crude oil, containerized cargo, steel slabs, blast furnace slag,  and refined petroleum—as well as the Corps’ calculation of benefits for  reuse of dredged sand at Broadkill Beach. We also reviewed documents  that provided greater context for the Corps’ reanalysis, such as the  agency’s official comments in response to the findings and  recommendations in our 2002 report, and two subsequent internal  documents that updated and further explained the reanalysis’s benefit and  cost assumptions—the Corps’ 2008 and 2009 economic updates. We  interviewed Corps officials at the Philadelphia district with primary  responsibility for the reanalysis’s benefit-cost analysis to gain further  understanding of the steps taken by the Corps to address the limitations.  We also discussed the reanalysis with officials from the Corps’ North  Atlantic division and its headquarters in Washington, D.C. For further  information about the reanalysis, we interviewed the primary economic  consultant for the reanalysis from David Miller & Associates (DMA), the  firm that the Corps hired to prepare key parts of the reanalysis, including  an updated analysis of project benefits and associated costs. Finally, we  presented our findings related to each limitation in a table for the Corps to  review, at which time we requested additional information and  documentation for certain items, as appropriate. In addition, we discussed  the Corps’ analyses with an academic expert who has analyzed the  lightering and crude oil industries in the Delaware River.
To determine the extent to which the benefit projections the Corps  included in its reanalysis of the project, as updated, are consistent with  current and anticipated future market and industry conditions, we  attempted to verify key data and assumptions underlying the key benefit  categories in the reanalysis’s 2002 report and 2004 supplement, as well as  the Corps’ 2008 and 2009 economic updates, using data on the general  trends since the Corps conducted its reanalysis, current conditions, and  the expected outlook for relevant Delaware River imports and industries.  For crude oil, we used data on imports to Delaware River ports collected  by the Department of Energy’s Energy Information Administration (EIA).  Importers of crude oil and petroleum products are required to report on a  monthly basis to EIA. To assess the reliability of these data, we reviewed  existing agency information about the data and the agency’s data quality  procedures, and we interviewed agency officials knowledgeable about the  data. We used information from the Department of Commerce and  industry sources to corroborate the general historical trend exhibited in  the EIA import data. We note that EIA’s import data for 2009 are  preliminary and may be revised. We determined that the EIA data are  sufficiently reliable for the purposes of this report. We also reviewed EIA’s  Annual Energy Outlook forecasts for U.S. crude oil imports and refinery  capacity on the East Coast; EIA forecasts were a primary source for the  Corps’ in developing the reanalysis’s crude oil benefit estimate. To assess  the reasonableness of these forecasts, we reviewed supporting  documentation on the approach and key assumptions and we interviewed  knowledgeable EIA officials to discuss possible reasons for observed  declines in historical imports and changes in the agency’s forecast for  crude oil refinery capacity and imports. We note that EIA may revise its  forecasts over time as new information becomes available.
To further assess trends and outlook in the Delaware River crude oil  industry, we interviewed officials from the three refinery firms that own  the six Delaware River refinery facilities included in the Corps’ reanalysis,  as well as representatives of Overseas Shipholding Group, which  conducts the lightering operations for those firms, to discuss their past  and present crude oil-related operations. We also interviewed EIA officials  and an academic expert knowledgeable about oil markets.
To assess current conditions and outlook for containerized cargo and steel  slab imports, we reviewed Corps data in the reanalysis and subsequent  economic updates and we interviewed the logistics provider for the  Packer Avenue Marine Terminal. Although we obtained information on  containerized cargo import trends, we were unable to obtain data with  which to verify key assumptions that the Corps used to support its  containerized cargo benefit estimate. Specifically, we could not confirm  that (1) containers were still being trucked from the port of New  York/New Jersey to Philadelphia for the weekly service on the South  America trade route and (2) the expected rate of growth was occurring for  the weekly service on the Australia/New Zealand trade route, which was  supposed to cause trucking to begin by 2009—both of which are necessary  to realize any containerized cargo benefits. For information on blast  furnace slag imports, we reviewed annual reports by the U.S. Geological  Survey on the slag industry in the United States and we interviewed a U.S.  Geological Survey official who is knowledgeable about the slag industry.  We believe that the information is sufficiently reliable for the purposes of  this report.
For details about the operational status of the reanalysis’s sole refined  petroleum beneficiary, we interviewed a representative of Magellan LP,  the firm that acquired the benefiting petroleum terminal identified in the  reanalysis. For additional background on all commodities, we reviewed  historical import data from several additional sources, including the  Corps’ Waterborne Commerce Statistics Center, the U.S. Department of  Agriculture, and the U.S. Department of Commerce.
To determine what other key issues, if any, could affect the project, and  the extent to which the Corps has accounted for these issues and their  potential impacts, we reviewed the limitations that we had identified in  our 2002 report to develop a list of key noneconomic concerns for further  examination. This included the Corps’ handling of environmental policy  issues, such as its pursuit of a subaqueous lands permit from Delaware for  dredging in that state’s waters. Similar to the methodology described in  our first objective, we used these previously identified concerns as criteria  for reviewing the reanalysis and other key documents, as well as the  Corps’ 2009 environmental assessment, to determine whether and how  each issue was addressed by the Corps. We also requested from the Corps  all comment letters received in response to its public request for  information in advance of its 2009 environmental assessment. These  letters—from federal, state, and local agencies; environmental groups; and  private citizens—detailed concerns about the project’s potential impacts  and changes in the project area since the Corps’ 1997 supplemental  environmental impact statement (SEIS). We reviewed these letters, and  the content analysis that the Corps prepared to summarize them, in order  to gain an understanding of prominent issues and controversies associated  with the project. Throughout our review we also read local media  accounts of these issues and controversies. Further, we reviewed  correspondence and legal filings related to Delaware’s, New Jersey’s, and  regional environmental groups’ ongoing disputes with the Corps over  environmental approvals for the deepening project. We discussed the  project with several regional environmental groups, including some that  were involved in lawsuits to stop the project. Finally, once we had  determined key policy and legal issues affecting the project, we discussed  these issues with the Corps and requested more information and  documentation of the Corps’ plans where necessary. We also asked  representatives of the three states likely to be most affected by the  project—Delaware, New Jersey, and Pennsylvania—to review our  interpretation of these issues to the extent that it was relevant to each  state.
For all three objectives, we consulted experts in the fields of economics  and lightering, environmental groups with an interest in the project,  representatives of firms likely to be affected both positively and negatively  by the project, and the Philadelphia Regional Port Authority (PRPA), the  project’s local sponsor. Where we obtained other analyses or external  studies, we considered the contents of these studies but conducted our  own independent review. For example, the Corps’ reduced estimate of  dredged material from initial construction was independently validated in  January 2009 by an engineering firm hired by PRPA, which, as the project’s  local sponsor, is responsible for 25 percent of the cost of dredging and  other aspects of construction. We reviewed the firm’s approach to  validating the revised dredged material estimate and found it to be  reasonable.
We conducted this performance audit from March 2009 through March  2010 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Additional Observations about the Project’s Associated Costs
paragraphs: It has now been more than 7 years since the Corps has asked the refineries  about changes to their facilities. Since the reanalysis, some refinery  facilities have undergone significant structural and operational changes  that could affect the associated costs of the project, which are the private  costs that would need to be incurred, in addition to project costs, to  achieve the project’s full benefits. Associated costs account for about 10  percent of the project’s total economic first costs. Specifically:    Associated costs could be lower. According to one refinery, a tanker dock  at one of its facilities was completely rebuilt in 2008 to address structural  problems. In anticipation of a deepened channel, the new dock was  constructed to accommodate tankers needing a depth of 45 feet. Since this  work was undertaken after the Corps’ reanalysis, the project’s associated  costs could be lower than the reanalysis initially predicted. In 2002 the  Corps estimated that these modifications would cost $3.6 million. In  addition, the recent closure of Sunoco’s Eagle Point facility, if permanent,  could decrease associated costs because no modifications would need to  be made at this facility. In 2002 the Corps estimated that it would cost  $362,000 to modify this facility.
Associated costs could be higher. Refinery officials expressed concerns  about the availability of private disposal space for dredged material, which  could be costly. According to PRPA, private dredging and disposal costs  have risen since the time of the reanalysis due to higher fuel costs, among  other factors. If the disposal cost for dredged material is significantly more  now than it was in 2002, the project’s associated costs could increase.
Officials from all three refinery firms told us that they supported the  deepening project. However, they also told us that they would need to  analyze the project’s benefits and costs for their firms to determine  whether they would commit to making the improvements necessary to  take advantage of the project. These improvements could be substantial:  deepening their ship berths, retrofitting their docks, or expanding their  storage capacity. As our discussions with refinery officials suggest, firms  are not likely to commit to the modifications needed to realize project  benefits until they have conducted their own financial analysis of the  benefits they would gain. If the firms decided against making the  necessary modifications, then the project’s benefits could be lower than  initially estimated.
These decisions are particularly important in light of the Army’s project  partnership agreement with PRPA. The agreement specifies that PRPA is  responsible for ensuring that the local facilities undertake the  modifications necessary to take advantage of the deepening project.  However, this agreement does not require PRPA to produce third-party  agreements with these potential beneficiaries as evidence of their  commitment before project construction could proceed. In contrast, under  the agreement with the project’s original local sponsor (the Delaware  River Port Authority), the local sponsor had to provide copies of third- party agreements as evidence of local facilities’ commitment to make the  modifications necessary to realize project benefits. Corps officials said  that in the time between the signed agreements with the Delaware River  Port Authority and PRPA, the model project partnership agreement,  developed by Corps headquarters, changed so that provisions for third- party agreements are no longer included.
Nevertheless, according to Corps officials with whom we spoke, the  agency expects benefiting firms will modify their facilities once project  construction begins. The Corps assumes that the beneficiaries will make  separate arrangements with the Corps’ dredging contractor while the  contractor is working in each beneficiary’s section of the river. By using  the Corps’ contractor, the beneficiaries could save certain dredging costs,  such as those related to the transfer of equipment to and from the site and  the installation and removal of pipelines.
section_title: Appendix III: Comments from the Department of Defense
section_title: Appendix IV: Letter from the State of New Jersey
section_title: Appendix V: Letter from the State of Pennsylvania
section_title: Appendix VI: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the individual listed above, Vondalee R. Hunt (Assistant  Director), Elizabeth Beardsley, David Brown, Laurie Ellington, and  Timothy Guinane made significant contributions to this report. Michael  Armes, Sara Daleski, Terrance Horner, Richard Johnson, Armetha Liles,  Christopher Murray, Lauren Nunnally, Katherine Raheb, Carol Shulman,  Vasiliki Theodoropoulos, and Eugene Wisnoski also made key  contributions.