The Klamath River Basin, spanning the southern Oregon and northern California borders, covers over 15,000 square miles. The Klamath River originates in the Upper Basin, fed by Oregon’s Upper Klamath Lake, a large, shallow body of water composed of flows from the Sprague, Williamson, and Wood Rivers. The river subsequently flows into the Lower Basin in California, fed by tributaries including the Shasta, Scott, Salmon, and Trinity Rivers, and empties into the Pacific Ocean. River flows and lake levels depend primarily upon snowpack that develops during the winter months, melts in the spring, and flows into the river basin. Rainfall and groundwater from natural springs also contribute to flows. On average, about 1.5 million acre-feet of water pass from the Upper Basin to the Lower Basin annually at Iron Gate Dam. The Secretary of the Interior authorized construction of the Klamath Project in 1905. Reclamation dammed Upper Klamath Lake, drained and reclaimed Lower Klamath and Tule Lakes, stored the Klamath and Lost Rivers’ flows, and provided irrigation diversion and flood control on the reclaimed land. About 85 percent of the Project lands obtain irrigation water from Upper Klamath Lake and the Klamath River, while Gerber Reservoir, Clear Lake, and the Lost River supply the remainder of the Project. Water is delivered to Project lands using an elaborate system of canals, channels, and drains, including diversions directly from the Klamath River. The distribution system is considered highly efficient, ensuring that water that is diverted for use within the Project is reused several times before it returns to the Klamath River. Homesteading of the reclaimed lands began in 1917 and continued through 1948. As shown in figure 2, the Project is currently composed of about 207,000 acres of irrigable lands. Historically, about 200,000 acres of Project lands have been in agricultural use annually. For example, in 2003, the most recent year for which data is available, about 202,000 acres were considered to be in agricultural use, of which about 180,000 acres were irrigated and harvested. Crops grown and harvested on the Project include alfalfa, barley, oats, wheat, onions, potatoes, and peppermint, and cattle graze on more than 40,000 acres of irrigated pastureland. In addition to farm and pastureland, four national wildlife refuges were set aside by executive orders in conjunction with the construction of the Project. The refuges, managed by Interior’s Fish and Wildlife Service (FWS) support many fish and wildlife species and provide suitable habitat and resources for migratory birds of the Pacific Flyway. About 23,000 acres of the two refuges within the Project water delivery area—Tule Lake and Lower Klamath National Wildlife Refuges—are leased for agricultural purposes. Reclamation, through contracts, provides water for irrigation and hydropower production and must also provide water for the national wildlife refuges. Reclamation has entered into contracts with numerous irrigation districts and individual irrigators on the Project to provide for the repayment of Project costs and the right to receive Project water. The contracts most commonly specify a land acreage amount to be covered by the contract—not a specific water amount to be delivered. Also by contract with Reclamation, California-Oregon Power Company (now PacifiCorp) obtained the right to use certain amounts of water, after requirements of the Klamath Project are satisfied, for hydropower generation at its privately owned and independently operated dams on the Klamath River downstream of the Project. PacifiCorp’s southernmost hydropower dam, Iron Gate Dam, located about 20 miles downriver of the Oregon-California border, is the last control point before Klamath River flows run freely to the Pacific Ocean. Finally, the national wildlife refuges have federally reserved rights for the water necessary to satisfy the refuges’ primary purposes, and Reclamation must satisfy refuge water needs after its other obligations are met. Reclamation is also obligated to protect tribal trust resources, such as water and coho salmon. The Klamath River Basin is home to four federally recognized tribes, identified by Reclamation as the Klamath Tribes in the Upper Basin area of Oregon, and the Hoopa Valley Tribe, Yurok Tribe, and Karuk Tribe in the Lower Basin area of California. Each tribe has long- standing cultural ties to the Klamath River, its tributaries, and native fish species. Furthermore, the Klamath, Hoopa, and Yurok tribes have, either by treaty or executive order, reserved rights to sufficient water quality and flows to support all life stages of fish life in protection of tribal fishing rights. As with all federal agencies, Reclamation has a trust responsibility to protect these tribal resources and to consult with the tribes regarding its actions in a government-to-government relationship. Reclamation must comply with the Endangered Species Act to ensure that any action it authorizes, funds, or carries out is not likely to jeopardize the continued existence of any listed species of plant or animal or adversely modify or destroy designated critical habitat. Interior’s FWS and Commerce’s NMFS are responsible for administering the act. If FWS or NMFS finds that an agency’s proposed activity is likely to jeopardize a threatened or endangered species or destroy or adversely modify its critical habitat, then a “reasonable and prudent alternative” that would avoid such harm must be identified. Three species of fish that are of particular importance to the cultures of the tribes—the threatened southern Oregon/northern California coho, and the endangered Lost River sucker and shortnose sucker—are affected by Project operations. NMFS listed the coho as threatened in 1997, and FWS listed the two species of suckers, which populate Upper Klamath Lake and rivers other than the Klamath, as endangered in 1988. Drought conditions since 2000 have complicated Reclamation’s efforts to balance the irrigation water demands on the Project with the requirements for specific river flows and lake levels for threatened and endangered species. Reclamation operates the Project according to an annual operations plan that helps the agency to meet its various obligations and responsibilities, given varying hydrological conditions. In 2001, responding to Reclamation’s biological assessment of its proposed Project operations plan, FWS and NMFS issued biological opinions that suggested Reclamation take numerous actions, including maintaining higher water levels in Upper Klamath Lake and two reservoirs on the Lost River and higher flows of the Klamath River below Iron Gate Dam. Because of the new biological opinions and drought conditions, Reclamation was prohibited from releasing normal amounts of water to most Project irrigators, which impaired or eliminated agricultural production on much of the Project. Subsequently, Reclamation proposed a new 10-year Project operations plan for 2002 through 2011. NMFS reviewed Reclamation’s biological assessment of the plan to determine its effect on listed species, and issued a final biological opinion on May 31, 2002, directing Reclamation to establish a multiyear water bank to provide additional river flows. Reclamation incorporated this water bank into its Project operations plan through 2011. NMFS and Reclamation can reconsult on the requirements of the biological opinion as warranted, for example, if new scientific information on river flow requirements for fish is developed. Reconsultation is likely during 2006, when ongoing studies of Klamath River flows are expected to be completed. Although NMFS’ biological opinion recommended a water bank as an alternative and specified the amounts of water to be provided each year, it provided Reclamation little specific guidance regarding the structure, management, or operation of the water bank. Water banking is broadly defined as an institutional mechanism that facilitates the legal transfer and market exchange of various types of surface water, groundwater, and water storage entitlements. Water banks have been proposed or are operating in almost every western state. However, significant differences exist in the way that each bank operates with respect to market structure, degree of participation, pricing, regulatory oversight, environmental objectives, and other factors. Under Reclamation’s water bank program, participating irrigators would be paid to forego their contractual entitlement to water for one irrigation season in order to make more water available for release into the river. Water acquired by Reclamation would accrue to the water bank over the course of the year as participants did not divert water for irrigation purposes as they normally would. A schedule for delivery of additional flows is determined by NMFS and Reclamation by March 31 each year, with the majority of the water bank provided in the spring and early summer when the water is most needed by the coho. According to Reclamation, the water bank would enable the agency to augment river flows for threatened species and also meet its contractual responsibility to deliver water to Project irrigators until other solutions for balancing water demands were identified. Reclamation was also required to initiate a Conservation Implementation Program that would bring together basin stakeholders, including federal agencies, tribes, and the states, to collaboratively develop long-term solutions, some of which would increase flows, such as surface water storage and groundwater resource development. Reclamation modified its water bank operations from year to year as its obligations and costs increased. Reclamation acquired water for the water bank by contracting with irrigators for the water needed to augment Klamath River flows as required by the biological opinion. As it gained more experience each year, Reclamation modified its water bank operations to better meet the increasing obligations and to mitigate costs. As its annual obligations increased, Reclamation’s annual water bank expenditures also increased, totaling more than $12 million through 2004. Based on Reclamation’s estimated annual cost of about $7.6 million for fiscal year 2005 and onward, the cumulative cost of the water bank could exceed $65 million through fiscal year 2011.