Federal Power: Recovery of Federal Investment in Hydropower Facilities in the Pick-Sloan Program
Released: 1996-05-02T00:00:00

Letter

Background

The Pick-Sloan Missouri Basin Program was authorized by the Flood Control Act of 1944 as a comprehensive plan to manage the water and hydropower resources of the Missouri River Basin. The act was a combination of two plans: (1) the Sloan Plan, developed by the Department of the Interior’s Bureau of Reclamation (Bureau) and designed primarily to irrigate lands in the Upper Missouri River Basin and (2) the Pick Plan, developed by the Department of the Army’s Corps of Engineers (Corps) and designed primarily to control floods and provide for navigation on the Lower Missouri River Basin.

The program encompasses an extensive network of multipurpose projects that provide for, among other things, flood control, navigation, irrigation, municipal and industrial water supply, and power generation. (Fig. 1 shows the location of the program’s hydropower generating facilities and the overall program area.) To accomplish these multiple purposes, the plan required compromise among the program’s participants. For example, in exchange for having their land permanently flooded by dams to produce such benefits as electricity and flood control, some participants anticipated the construction of irrigation projects. The program is administered by three federal agencies: (1) the Bureau, which operates seven multipurpose projects and is responsible for the water supply functions of the program’s projects, (2) the Corps, which operates six multipurpose projects and administers the flood control and navigation aspects of the program’s projects, and (3) Western, which markets the hydropower generated at the program’s generating facilities and constructs, operates, and maintains the program’s power transmission system.

The federal investment in the Pick-Sloan Program has nonreimbursable and reimbursable components. The nonreimbursable component consists of the capital costs of constructing, among other things, the program’s flood control and navigation facilities. The reimbursable component consists of the capital costs of constructing the program’s power generation and transmission, irrigation, and municipal and industrial water supply facilities. The reimbursable federal investment is further divided into investments repaid with interest (for power facilities and municipal and industrial water supply facilities) and investments repaid without interest (for irrigation facilities). Irrigation fees, power revenues, and other revenues are used to repay the federal investment in constructing irrigation facilities. Irrigation fees repay the portion of the investment in irrigation facilities that the Secretary of the Interior determines to be within the irrigators’ ability to pay. In general, power revenues are used to recoup both power costs and that portion of the investment determined to exceed the irrigators’ ability to pay.

The Pick-Sloan Program accounted for about 33 percent of the operating revenues generated during fiscal year 1994 by the 14 separate programs from which Western markets and transmits power. In annual revenues from the sale and transmission of electric power, Pick-Sloan is Western’s second largest program. The total federal investment in the program as of September 30, 1994, was about $4.5 billion. About $2.6 billion of the federal investment in the program is reimbursable through power revenues, and about $898 million of that amount had been repaid through September 30, 1994.

Infeasibility of Some Irrigation Projects Makes Repayment of Some Costs Unlikely

Because certain of the Pick-Sloan Program’s irrigation facilities will not be completed as planned, a portion of the federal investment is unrecoverable. As originally authorized in 1944, portions of the program’s power facilities and water storage reservoirs were intended for use with irrigation facilities. The federal investment for these portions was thus considered an investment in irrigation, and repayment was to be made without interest and deferred until the irrigation facilities were completed. As a result of this deferral, power customers would not be obliged to repay the investment in facilities that were ultimately intended for irrigation.

Under the original plan, about 33 percent of the program’s generating capacity was to be used to irrigate about 5.3 million acres. As the program progressed, only about 15 percent of the program’s power capacity would be needed for irrigation because the acreage planned for irrigation was reduced to about 3.1 million acres. As of September 30, 1994, the federal investment in power facilities intended for use with existing and planned irrigation facilities was $286 million, or about 15 percent of the approximately $1.9 billion total for that purpose. In addition, a portion of the program’s water storage reservoirs were intended for use with existing and planned irrigation facilities. As of September 30, 1994, the capital cost associated with this portion of the reservoirs totaled about $224 million. Although the program’s power facilities and storage reservoirs have been largely completed as planned, most of the planned irrigation facilities have not been constructed. As of September 30, 1994, only about 25 percent of the acreage planned for irrigation had been developed.

Some of the program’s power facilities and reservoirs are now being used in conjunction with those irrigation facilities that have been completed.As a result, the associated federal investment is now scheduled for repayment. Power facilities representing about $7 million of the federal investment are now being used to provide irrigation pumping service to about 212,000 acres, and water storage reservoirs representing about $49 million of the federal investment are now being used to provide irrigation water to about 182,000 acres. These investments are scheduled for repayment between 2042 and 2047, according to Bureau officials. These officials also stated that the remaining portions of the program’s power facilities and reservoirs, which are intended for use with future irrigation facilities, are currently used to generate electricity for sale to power customers.

The Bureau now considers all but one of the program’s incomplete irrigation facilities to be infeasible and believes that these projects will likely not be constructed. According to Bureau officials, the costs of developing the remaining acreage planned for irrigation outweigh the benefits that would accrue from irrigating that acreage. They said that although their conclusions are based on preliminary estimates, a more expensive and time-consuming analysis would probably not change their conclusions. As a result, the remaining federal investment—$454 million— is deferred.

In addition, the amount of the federal investment that is considered unrecoverable will increase over time. As mentioned earlier, the portion of the power facilities planned for use with irrigation facilities represents about 15 percent of the program’s overall power capacity. As the overall federal investment in power increases, the amount of the investment associated with irrigation increases correspondingly. For example, while the total federal investment in power facilities increased from about $1.6 billion at the end of fiscal year 1987 to about $1.9 billion at the end of fiscal year 1994, the corresponding 15-percent portion of this investment that was associated with irrigation increased from about $249 million to about $286 million.

Congressional Action Would Be Needed to Recover Costs

Legislation currently precludes reallocation of the investment by the Bureau and Western from one purpose of the program to another without congressional authorization. The DOE Organization Act of 1977 precludes revision by the Bureau of the cost allocations and project evaluation standards without prior congressional approval. The Water Resources Development Act of 1986 directed that the program proceed to its ultimate development. According to Western officials, these acts preclude changes in the program’s repayment criteria.

The Congress reallocated a portion of the federal investment in power facilities and storage reservoirs intended for irrigation when it passed the Garrison Diversion Unit Reformulation Act of 1986. The act implemented recommendations in the Garrison Diversion Unit Commission’s Final Report, submitted to the Congress and to the Secretary of the Interior on December 20, 1984. The Commission was created by the Congress to review North Dakota’s needs for water development and to propose modification to the Garrison Diversion Unit. Among other things, the act terminated the development of about 876,000 of the acres planned for irrigation under the program. Also as a result of the act, Western scheduled repayment of the existing federal investment in the power facilities and storage reservoirs intended for use in irrigating this acreage. Thus, about $147 million in federal investment was reallocated for recovery through power revenues. The act directed that Western (1) attempt to minimize any rate increase and (2) phase in any such increase over a 10-year period. According to Western officials, because the investment is to be repaid over 50 years, the power rate was not appreciably affected by this reallocation of the federal investment.

The impact of recovering the $454 million investment through power revenues could vary significantly depending on many factors, including the amount Western passes on to its power customers. Consistent with the way investments in power are typically repaid (within 50 years and with interest), recovering the full amount through power revenues could result in an increase in Western’s wholesale power rate of as much as 14.6 percent, according to Western’s calculations. Western officials said the following about this scenario:

The potential rate increase of 14.6 percent assumes that the entire amount of the increased financial requirement would be passed through to existing power customers, without any offsetting reductions in the operating expenses of Western, the Corps, or the Bureau (any offsetting reductions could lessen the need for a rate increase). Western officials noted that such expenses could decrease as a result of Western’s ongoing restructuring efforts.

Since Pick-Sloan’s power customers purchase power wholesale and resell it to retail customers, it is difficult to estimate accurately to what extent, if any, the retail customers would be affected by a rate increase at the wholesale level.

Changes in the terms of repayment, such as phasing in a rate increase as was done in 1986, would lessen the effect of the increase.

The estimated rate increase assumes repayment of the $454 million through power revenues without an overall assessment of the program. Any general assessment of the program could lead to changes in the current cost allocations and rates.

Factors outside of Western’s control, such as the amount of water available for power generation, could affect any potential impact on the rates.

The amount of the federal investment in storage reservoirs that would be redirected for repayment through power revenues is uncertain because some of this investment could be assigned to other program purposes, thereby lessening any effect on the rates.

The Department of the Interior’s Inspector General reported in 1993 on the unrecoverable federal investment in the Pick-Sloan Program attributable to infeasible irrigation projects. Recognizing that the majority of the program’s irrigation facilities were infeasible and thus would likely never be completed, the report was critical of the Bureau’s continuing assumption that the project would ultimately be developed as planned. The Inspector General recommended, among other things, that the Bureau request that the Congress deauthorize—that is, terminate from the program—the infeasible acreage and reallocate the federal investment in the power facilities and storage reservoirs intended for planned irrigation facilities for repayment through power revenues.

The Bureau concurred with the Inspector General’s recommendations and agreed to a target date of February 1995 for submitting information to the Congress in response to these recommendations. The Bureau provided us with a draft copy of the list of the infeasible irrigation facilities that it developed in response to the Inspector General’s report, but as of April 18, 1996, the Bureau had not yet submitted this information to the Congress.According to Bureau officials, the Bureau is continuing to analyze the potential alternatives for recovering the portion of the federal investment that is currently unrecoverable. For example, the Bureau is assessing the impact of reallocating the investment on the basis of the current use of the program’s facilities rather than on the program’s planned long-term development.

The Inspector General’s 1993 report also identified another impact of recovering the $454 million through power revenues. Based on 1992 data, the Inspector General calculated, using a 7.25 percent interest rate, that carrying the unrecoverable federal investment in power facilities and storage reservoirs as an investment in irrigation facilities results in an interest cost to the Treasury of about $30 million annually because the investment is carried without interest. Repaying the unrecoverable federal investment through power revenues would necessitate an annual interest charge. Western officials noted that such an interest payment would likely be less than that calculated by the Inspector General because Western would expect to use a lower interest rate (likely 4 percent) that is based on the weighted average of the interest rates associated with the program’s outstanding debt.

We provided a draft of this statement to and discussed its contents with the Bureau’s Regional Director of the Great Plains Region; the Bureau’s Washington Director, Policy and External Affairs; Western’s Acting Area Manager for the Pick-Sloan Program; and the Deputy Assistant Administrator from the Department of Energy’s Power Marketing Liaison Office. They clarified several points about the estimate of the potential impact on the power rate of recovering a portion of the federal investment through power revenues. These officials also suggested several technical revisions to our statement, which we incorporated as appropriate. We conducted our review between December 1995 and April 1996 in accordance with generally accepted government auditing standards.

This concludes our prepared statement. It also concludes our work on this issue. Appendix I shows the operating characteristics of the Pick-Sloan Program’s hydropower generating facilities, appendix II shows the allocation of the reimbursable and nonreimbursable federal investment among the program’s purposes, appendix III shows the status of the federal investment reimbursable through power revenues, appendix IV shows the status of the program’s irrigation facilities. We will be glad to answer any questions you may have.

Operating Characteristics of Hydropower Generating Facilities in the Pick-Sloan Program, as of September 30, 1994

Nameplate capacity (MW)

Allocation of Reimbursable and Nonreimbursable Federal Investment by Program Purpose, as of September 30, 1994

Status of Federal Investment Reimbursable Through Power Revenues, as of September 30, 1994

Nonpower (irrigation assistance)

Status of Irrigation Projects in the Pick-Sloan Program, as of September 30, 1994

The following four tables provide information on the status of the Pick-Sloan Program’s existing, planned, and reauthorized irrigation facilities as provided by the Bureau in its draft list. Table IV.1 summarizes all these facilities. Tables IV.2, IV.3, and IV.4 provide details on existing, planned, and reauthorized units, respectively. The benefit-cost ratios that appear in these tables reflect the Bureau’s calculation of the feasibility of developing the irrigation facilities. The ratio for an individual facility results from dividing the benefits expected to be derived from developing a facility by the expected cost of constructing and operating that facility. The Bureau considers a ratio exceeding 1.0 to indicate feasibility and a ratio of less than 1.0 to reflect infeasibility. We did not assess the accuracy of the information in the tables or in the notes, which were also provided by the Bureau.

Capacity (kW)

Capacity (kW)

Benefit- cost ratio for irrigation and date of analysis (continued)

Capacity (kW)

Benefit- cost ratio for irrigation and date of analysis 1.47, Mar. 1956 1.67, Mar. 1952 1.22, Apr. 1956 (continued)

Capacity (kW)

In 1967, the benefit-cost ratio for this facility (0.55) indicated that the irrigation development was infeasible, and the irrigation storage in the Bonny Reservoir was sold to the state of Colorado for recreation purposes. The project was authorized for completion on the basis of all of its benefits.

The Reclamation Projects Act deauthorized funding for irrigation at Cedar Bluff because of a lack of water. The irrigation district was relieved of its obligation, and the state of Kansas paid the costs of irrigation storage on a discounted present-value basis. The available water is used by the state for recreation, fish and wildlife, and supplemental municipal water supply.

The Kirwin Unit Definite Plan Report (June 1952) showed a benefit-cost ratio of 0.9. Correspondence in September 1952 from the Acting Commissioner and the Regional Director, Lower Missouri Region, requested that intangible (indirect) benefits be included in the justification. Subsequent correspondence from the Regional Director provided the requested benefits that were included to justify the construction.

The facility is part of the Three Forks Division, which has a total pumping demand of 3,199 kilowatts.

Since Boysen storage is designated for water service, irrigation assistance reflects the currently unassigned storage costs for the reservoir.

This facility has been integrated as part of the Bureau’s Rehabilitation and Betterment Program.

Year facility was placed in service

Capacity (kW) (continued)

Capacity (kW) (continued)

Capacity (kW) 122,269 $84,210,328 $74,894,665 (Table notes on next page)

Under the latest plan, the facility would use a hydraulic turbine from the Yellowtail Dam instead of electric pumps for irrigation pumping.

Unit 2 is infeasible.

Since Boysen storage is designated for water service, the irrigation assistance reflects the currently unassigned storage costs for the reservoir.

Storage assignment for unsold water out of Glendo. The sale of Glendo water is being impeded by unresolved environmental concerns.

Table IV.4: Reauthorized Irrigation Facilities

Capacity (kW)

These facilities were individually reauthorized by acts of Congress.

The date a facility will be placed in service is indeterminate pending a finding of feasibility and reauthorization or, in the case of reauthorized but suspended facilities, a determination of the facility’s status or the disposition of the facility’s construction appropriations.

The appropriation was deauthorized by P.L. 100-516, which authorized the Mni-Wiconi Rural Water Supply Project. No studies were conducted to determine the facility’s feasibility, but local interests suggested deauthorizing the irrigation development as a trade-off for developing a rural domestic water supply and distribution system to serve the needs of the Native American and non-Native American populations in the area. The power allocation for the facility was made available for the municipal and industrial system, and funding for irrigation was deauthorized. The irrigation facility was to remain as a planned facility of the Pick-Sloan Program. Approximately $1.1 million in federal investment in irrigation-related equipment had been expended on this facility as of September 30, 1994. This investment is currently categorized as construction-work-in-progress.

The acreage for the Garrison Diversion Unit was reduced from 1,000,007 acres to 130,940 acres by P.L. 99-294 and to 115,740 acres by P.L. 102-575. At the time of the reformulation in 1986, it was recognized that the reduced scope of the project would result in economic infeasibility because of the loss of economies of scale and other factors. The reformulation was a compromise. Subsequent to the reallocation of the project’s costs, it was determined that the project was also financially infeasible because the annual operation and maintenance costs exceeded irrigators’ ability to pay. A team appointed by the Secretary of the Interior recommended a halt to further development of the project. Approximately $132.9 million in federal investment in irrigation-related equipment had been expended on this facility as of September 30, 1994. This investment is currently categorized as construction-work-in-progress.

The facility was reauthorized by the Lake Andes-Wagner/Marty II Unit Act of 1992 (P.L. 102-575). The benefit-cost ratio for this unit was based on post-1979 methodologies. The Bureau employed “customized procedures” in calculating the ratio that allowed the consideration of a specialty crop (potatoes) as a benefit. The Planning Report/Draft Environmental Impact Statement (1985) included a benefit-cost ratio of 0.56. Under the customized procedures that included specialty crops, livestock intensification, and alternative price normalization, the benefit-cost was calculated at 1.02. On this basis, the Congress reauthorized the project.

Approximately $3.7 million in federal investment in irrigation-related equipment had been expended on this facility as of September 30, 1994. This investment is currently categorized as construction-work-in-progress.

Suspended; the assigned cost is for a Corps reservoir.

Approximately $3.0 million in federal investment in irrigation-related equipment had been expended on this facility as of September 30, 1994. This investment is currently categorized as construction-work-in-progress.

Approximately $7.1 million in federal investment in irrigation-related equipment had been expended on this facility as of September 30, 1994. This investment is currently categorized as construction-work-in-progress.

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