B-157984 OM, NOV 14, 1979

B-157984 OM, NOV 14, 1979

SUBJECT: CLARIFICATION OF PROVISIONS OF THE WATER SUPPLY ACT OF 1958 AND THE RECLAMATION ACT OF 1939:

MILTON J. SOCOLAR:

DURING OUR REVIEW OF INEQUITIES IN CONTRACTING AND REPAYMENT PROCEDURES FOR MUNICIPAL AND INDUSTRIAL (M & I) WATER FROM FEDERAL PROJECTS (CODE 080450) WE HAVE NOTED SEVERAL INSTANCES WHERE BUREAU OF RECLAMATION AND CORPS OF ENGINEERS CONTRACTING POLICIES AND PROCEDURES WERE INCONSISTENT. OFFICIALS FROM BOTH AGENCIES TOLD US THAT THEIR PROCEDURES ARE BASED ON LEGISLATIVE REQUIREMENTS. WE NEED YOUR ASSISTANCE TO INTERPRET THE LEGISLATIVE BASIS FOR THE BUREAU AND CORPS' CURRENT POLICY.

CONTRACTING FOR FUTURE WATER

FEDERAL WATER RESOURCES PROJECTS ARE OFTEN DESIGNED TO INCLUDE ADDITIONAL SPACE FOR M & I WATER STORAGE. THE WATER IS DIVIDED INTO TWO CLASSES, (1) "CURRENT WATER" WHICH WILL BE DELIVERED AS SOON AS THE PROJECT IS COMPLETED, AND (2) "FUTURE WATER" WHICH WILL BE DELIVERED AT SOME DATE (USUALLY UNSPECIFIED) IN THE FUTURE. BOTH AGENCIES REQUIRE LOCAL SPONSORS TO SIGN FIRM CONTRACTS FOR CURRENT WATER REQUIREMENTS PRIOR TO PROJECT CONSTRUCTION. HOWEVER, WHILE THE CORPS ONLY REQUIRES AN ASSURANCE FROM THE LOCAL SPONSOR FOR FUTURE WATER REQUIREMENTS, THE BUREAU GENERALLY REQUIRES A FIRM CONTRACT.

QUESTION 1. DOES EITHER THE 1939 RECLAMATION PROJECT ACT OR THE 1953 WATER SUPPLY ACT REQUIRE WATER RESOURCE AGENCIES TO OBTAIN FIRM CONTRACTS FOR FUTURE WATER?

QUESTION 2. WOULD THE 1939 OR 1958 ACTS HAVE TO BE AMENDED TO REQUIRE SUCH CONTRACTS FOR FUTURE WATER REQUIREMENTS (NOTE THAT SECTION 221 OF THE FLOOD CONTROL ACT OF 1970, WHICH REQUIRES STATES OR OTHER NON-FEDERAL ORGANIZATIONS TO GUARANTEE PAYMENT OF CERTAIN FEATURES OF CORPS PROJECTS, SPECIFICALLY EXCLUDES FUTURE WATER SUPPLY STORAGE).

REGARDLESS OF WHETHER AN ASSURANCE OR A CONTRACT IS OBTAINED, BOTH AGENCIES AGREE THAT REPAYMENT FOR FUTURE WATER MUST BEGIN THE FIRST DAY SUCH WATER IS DELIVERED AND REPAYMENT MUST BE COMPLETED WITHIN 50 YEARS OR THE LIFE OF THE PROJECT, WHICHEVER IS LESS. OUR REVIEW OF THE LEGISLATION AND CORRESPONDENCE FROM THE SOLICITOR'S OFFICE, DEPARTMENT OF INTERIOR (ENCLOSED) LEADS US TO BELIEVE THAT THIS INTERPRETATION MAY BE QUESTIONABLE. BOTH AGENCIES REFER TO THE WATER SUPPLY ACT OF 1958 AS THEIR AUTHORITY TO (1) DELAY REPAYMENT UNTIL FUTURE WATER DELIVERY BEGINS, AND (2) ALLOW 50 YEARS AFTER FIRST DELIVERY TO REPAY THE ALLOCATED SHARE OF THE COSTS. SECTION 301 (B) OF THE ACT STATES:

"... AND PROVIDED FURTHER, THAT THE ENTIRE AMOUNT OF THE CONSTRUCTION COSTS, INCLUDING INTEREST DURING CONSTRUCTION, ALLOCATED TO WATER SUPPLY SHALL BE REPAID WITHIN THE LIFE OF THE PROJECT BUT IN NO EVENT TO EXCEED FIFTY YEARS AFTER THE PROJECT IS FIRST USED FOR THE STORAGE OF WATER FOR WATER SUPPLY PURPOSES, EXCEPT THAT (1) NO PAYMENT NEED TO BE MADE WITH RESPECT TO STORAGE FOR FUTURE WATER SUPPLY UNTIL SUCH SUPPLY IS FIRST USED, AND (2) NO INTEREST SHALL BE CHARGED ON SUCH COST UNTIL SUCH SUPPLY IS FIRST USED, BUT IN NO CASE SHALL THE INTEREST FREE PERIOD EXCEED TEN YEARS. ..."

THE BUREAU - WHILE RELYING HEAVILY ON THE 50-YEAR PROJECT PAYBACK CEILING AS THEIR BASIS FOR DETERMINING CONTRACT LIFE AND DELAYING THE DATE REPAYMENT BEGINS - HAS GIVEN VERY LITTLE CONSIDERATION TO THE MORE SPECIFIC STATEMENT THAT THE ENTIRE AMOUNT ALLOCATED TO M & I WATER MUST BE REPAID NO LATER THAN 50 YEARS AFTER THE PROJECT IS FIRST USED FOR WATER STORAGE. FROM AN AUDITORS PERSPECTIVE, EXCEPTIONS ONE AND TWO IN THE LAW MERELY ALLOW A DELAY IN PAYMENT INITIATION DATES AND REDUCE INTEREST CHARGES, BUT ARE NOT EXCEPTIONS TO THE REQUIREMENT THAT COMPLETE REPAYMENT MUST BE MADE WITHIN THIS 50-YEAR PERIOD.

QUESTION 3. DOES THE 1958 ACT ALLOW THE AGENCIES TO EXTEND PROJECT PAYBACK PERIODS BEYOND 50 YEARS WHEN SOME OF THE M & I WATER IS FOR FUTURE REQUIREMENTS?

THERE ARE NO LEGISLATIVE OR REGULATORY PROCEDURES WHICH REQUIRE THE FEDERAL GOVERNMENT AND LOCAL SPONSORS TO AGREE UPON A FIRM DATE WHEN FUTURE WATER DELIVERIES WILL START. SINCE REPAYMENT DOES NOT START UNTIL THE FIRST SUCH DELIVERY, IT IS POSSIBLE THAT THE FEDERAL GOVERNMENT WILL NEVER BE REPAID FOR THE ADDITIONAL M & I WATER STORAGE BECAUSE THE USERS WILL NOT (OR CANNOT AFFORD TO) REQUEST WATER DELIVERIES. IN FACT, WE HAVE FOUND SEVERAL CASES WHERE THIS SUPPOSITION MAY PROVE TO BE A TREND.

QUESTION 4. IN THE EVENT THAT YOU FIND (IN RESPONSE TO QUESTION 1) THAT THE AGENCIES NEED NOT REQUIRE A FIRM CONTRACT FOR FUTURE WATER STORAGE, MUST THE LAW BE AMENDED TO ESTABLISH A DATE WHEN THE INTENDED USER MUST EITHER (1) START PAYMENT, OR (2) GIVE UP HIS RIGHTS TO THE WATER SO THAT THE AGENCIES MAY ATTEMPT TO MARKET IT ELSEWHERE?

WE NEED A VERBAL RESPONSE TO THESE QUESTIONS BY EARLY AUGUST SO THAT THE TEAM LEADER CAN MEET HIS COMMITMENT TO DELIVER A FIRST DRAFT BY AUGUST 31, 1979. I DISCUSSED THESE QUESTIONS ON JUNE 26, 1979, WITH MR. STAN FEINSTEIN OF YOUR STAFF WHO WAS FAMILIAR WITH THE BACKGROUND AND REFERENCED LEGISLATION AND FELT HE COULD PROVIDE AN ANSWER WITHIN THIS TIME FRAME.

I AM ATTACHING SOME BACKGROUND INFORMATION TO ASSIST IN YOUR ANALYSIS. IF YOU HAVE FURTHER QUESTIONS, PLEASE CONTACT LEE GOATLEY (693-8287) OR ME (343-7611).

INDORSEMENT

DIRECTOR, CED

RETURNED. IN ANSWERING THE FIRST QUESTION, WE HAVE FOCUSED ON THE WATER SUPPLY ACT OF 1958, TITLE III OF PUBLIC LAW 85-500, 72 STAT. 319, CODIFIED AS 43 U.S.C. SEC. 390B (1976). THE RECLAMATION PROJECT ACT OF 1939, 53 STAT. 1187, AUTHORIZES CONSTRUCTION ONLY FOR WATER SUPPLY FOR WHICH THERE IS A PRESENT NEED. IT DOES NOT PROVIDE AUTHORITY FOR FUTURE WATER SUPPLY CONSTRUCTION.

BOTH THE HOUSE AND SENATE REPORTS ON THE WATER SUPPLY ACT OF 1958 (ACT) STATE THAT THE BUREAU OF RECLAMATION (BUREAU) AND THE CORPS OF ENGINEERS (CORPS) ARE AUTHORIZED TO MAKE "PROVISION OF WATER SUPPLY STORAGE IN RESERVOIRS WHERE IT IS APPARENT THAT THERE WILL BE A FUTURE DEMAND FOR SUCH STORAGE BUT WHERE THE DEMAND IS NOT PRESSING AT THE TIME OF CONSTRUCTION." SEE H. R. REP. NO. 1894, 85TH CONG., 2D SESS. 134 (1958). NEITHER THE LEGISLATIVE HISTORY NOR THE LANGUAGE OF THE WATER SUPPLY ACT OF 1958 ITSELF EXPRESSLY STATES THAT THE BUREAU AND THE CORPS MUST OBTAIN FIRM CONTRACTS FOR FUTURE WATER SUPPLY BEFORE PROCEEDING WITH CONSTRUCTION.

THE ACT PROVIDES:

"THAT NOT TO EXCEED 30 PER CENTUM OF THE TOTAL ESTIMATED COST OF ANY PROJECT MAY BE ALLOCATED TO ANTICIPATED FUTURE DEMANDS WHERE STATES OR LOCAL INTERESTS GIVE REASONABLE ASSURANCES THAT THEY WILL CONTRACT FOR THE USE OF STORAGE FOR ANTICIPATED FUTURE DEMANDS WITHIN A PERIOD OF TIME WHICH WILL PERMIT PAYING OUT THE COSTS ALLOCATED TO WATER SUPPLY WITHIN THE LIFE OF THE PROJECT:" (SEC. 301(B)).

NO DEFINITION OF "REASONABLE ASSURANCES" IS PROVIDED IN THE ACT OR IN ITS LEGISLATIVE HISTORY. THE ACT WAS PART OF AN OMNIBUS BILL THAT AUTHORIZED OVER 100 PUBLIC WORKS PROJECTS. AN EARLIER VERSION OF THE OMNIBUS BILL, WHICH HAD BEEN VETOED BY PRESIDENT EISENHOWER, DID NOT CONTAIN THE WATER SUPPLY ACT. NO DISCUSSION OF THE WATER SUPPLY ACT OCCURRED IN EITHER THE HEARINGS OR THE FLOOR DEBATES WHICH WERE DEVOTED TO INDIVIDUAL PROJECTS.

BOTH THE LANGUAGE OF AND COMMITTEE REPORTS ON A 1961 AMENDMENT TO THE ACT (SEC. 10, PUB. L. NO. 87-88), HOWEVER, INDICATE THAT CONGRESS INTENDED TO PREVENT THE BUREAU AND THE CORPS FROM INTERPRETING THE REQUIREMENT FOR "REASONABLE ASSURANCES" AS A REQUIREMENT FOR FIRM CONTRACTS. THE WORD "CONTRACT" WAS REMOVED FROM THE DESCRIPTION OF WHAT NON-FEDERAL INTERESTS MUST PROVIDE BY CHANGING THE ORIGINAL LANGUAGE FROM

"WHERE STATES OR LOCAL INTERESTS GIVE REASONABLE ASSURANCES THAT THEY WILL CONTRACT FOR THE USE OF STORAGE FOR ANTICIPATED FUTURE DEMANDS ***." WATER SUPPLY ACT, SEC. 301(B), 72 STAT. 319.

TO READ AS FOLLOWS:

"WHERE STATE OR LOCAL INTERESTS GIVE REASONABLE ASSURANCES, AND THERE IS REASONABLE EVIDENCE, THAT SUCH DEMANDS FOR THE USE OF SUCH STORAGE WILL BE MADE WITHIN A PERIOD OF TIME WHICH WILL PERMIT PAYING OUT THE COSTS ALLOCATED TO WATER SUPPLY WITHIN THE LIFE OF THE PROJECT ***." 43 U.S.C. SEC. 390B (1976).

THE SENATE REPORT ON THE AMENDMENT EXPRESSLY STATES AN INTENTION TO REDUCE EXISTING RESTRICTIONS ON NON-FEDERAL INTERESTS.

"THE *** PROVISION IN MANY CASES PLACES AN UNDUE AND UNDESIRABLE RESTRICTION ON THE INCLUSION OF CAPACITY FOR FUTURE USE, BECAUSE OF THE INABILITY OF MANY COMMUNITIES, AND PERHAPS EVEN STATES, TO ASSUME THE CONTRACTUAL OBLIGATIONS IMPLIED. THEREFORE, IN ORDER TO PERMIT OPTIMUM UTILIZATION OF THE LIMITED NUMBER OF GOOD DAM AND RESERVOIR SITES REMAINING, THE REQUIREMENT FOR THE COMMUNITIES OR STATES, WITH RESPECT TO CONTRACTUAL ARRANGEMENTS, SHOULD BE LIBERALIZED. ACCORDINGLY, THE AMENDMENT, ALTHOUGH STILL REQUIRING REASONABLE ASSURANCES OF THE USE OF STORAGE FOR FUTURE WATER SUPPLY, WOULD PERMIT THE FEDERAL AGENCY CONCERNED TO MAKE ITS OWN DETERMINATION OF FUTURE WATER SUPPLY NEEDS AND, ON THE BASIS OF SUCH DETERMINATION, MAY INCLUDE CAPACITY WITHOUT DEFINITE CONTRACTUAL COMMITMENTS FROM STATE OR LOCAL INTERESTS." S. REP. NO. 353, 87TH CONG., 1ST SESS. 9.

THE CONFERENCE REPORT ON THE AMENDMENT ALSO STATED THAT THE PURPOSE OF THE CHANGE IN THE WATER SUPPLY ACT OF 1958 WAS TO PERMIT THE BUREAU AND THE CORPS TO MAKE THEIR OWN DETERMINATIONS OF FUTURE NEEDS "WITHOUT DEFINITE CONTRACTUAL COMMITMENTS FROM STATE OR LOCAL INTERESTS." (H.R. REP. NO. 675, 87TH CONG., 1ST SESS. 14.)

IT IS ALSO INTERESTING TO NOTE THAT FUTURE DEMANDS FOR WATER WERE SPECIFICALLY EXEMPTED FROM THE NEED TO HAVE BINDING CONTRACTS FOR ALL REQUIREMENTS OF LOCAL COOPERATION IN SECTION 221 OF THE FLOOD CONTROL ACT OF 1970, TITLE II OF PUBLIC LAW NO. 91-611, 84 STAT. 1824, 1831, BY A 1971 AMENDMENT (SECTION 4 OF PUBLIC LAW NO. 92-222, 85 STAT. 798, 799). PROVIDED THAT:

"THIS SECTION SHALL NOT APPLY TO ANY PROJECT THE CONSTRUCTION OF WHICH WAS COMMENCED BEFORE JANUARY 1, 1972, OR TO THE ASSURANCES FOR FUTURE DEMANDS REQUIRED BY THE WATER SUPPLY ACT OF 1958, AS AMENDED (43 U.S.C. SEC. 390B)." 42 U.S.C. SEC. 1962D-5CF) (1976).

THE PURPOSE OF THE AMENDMENT, ACCORDING TO THE HOUSE REPORT (H.R. REP. NO. 92-691, 92D CONG., 1ST SESS. 15 (1971) WAS TO INDICATE THAT THE CONGRESS DID NOT WANT SECTION 221 OF THE FLOOD CONTROL ACT OF 1970 TO BE INTERPRETED AS REQUIRING A FIRM COMMITMENT FOR FUTURE WATER SUPPLY NEEDS.

WE THEREFORE CONCLUDE, IN RESPONSE TO THE FIRST QUESTION, THAT THERE IS NO PRESENT REQUIREMENT UNDER THE WATER SUPPLY ACT OF 1958 AS AMENDED THAT WATER RESOURCE AGENCIES OBTAIN FIRM CONTRACTUAL COMMITMENTS FOR FUTURE WATER REQUIREMENTS. WHETHER THERE WAS SUCH A REQUIREMENT PRIOR TO THE 1961 AMENDMENT IS DEBATABLE. IN ANY EVENT, IF SUCH COMMITMENTS WERE MADE PRIOR TO OR AFTER THE AMENDMENT, THEY ARE VALID AND BINDING ON ALL PARTIES CONCERNED EVEN THOUGH THEY MAY NOT HAVE BEEN REQUIRED BY THE LEGISLATION. HOWEVER, A FIRM CONTRACT ENTERED INTO AFTER PASSAGE OF THE 1961 AMENDMENT MIGHT NOT BE ENFORCEABLE AGAINST A NON-FEDERAL ENTITY IF THE FEDERAL WATER RESOURCES AGENCY WERE FOUND TO HAVE COERCED THE ENTITY TO ENTER INTO THE CONTRACT AS A CONDITION FOR ITS CONSTRUCTION OF THE FUTURE RESERVOIR CAPACITY.

OUR RESPONSE TO THE SECOND QUESTION IS THAT FIRM CONTRACTS WOULD BE MANDATORY ONLY IF THE EXISTING LEGISLATION WERE AMENDED TO SO PROVIDE.

YOUR THIRD QUESTION IS WHETHER THE WATER SUPPLY ACT OF 1958 ALLOWS PAYBACK PERIODS TO EXCEED THE FIRST 50 YEARS OF A PROJECT'S LIFE WHERE SOME OF THE MUNICIPAL AND INDUSTRIAL (M&I) WATER IS FOR FUTURE REQUIREMENTS.

THE ACT REQUIRES REPAYMENT OF CONSTRUCTION COSTS WITHIN THE LIFE OF THE PROJECT, BUT IN NO EVENT MORE THAN 50 YEARS "AFTER THE PROJECT IS FIRST USED FOR THE STORAGE OF WATER." IT ALSO DELAYED PAYMENT "WITH RESPECT TO STORAGE FOR FUTURE WATER SUPPLY UNTIL SUCH SUPPLY IS FIRST USED." THE LEGISLATIVE HISTORY OF THE ACT INDICATES THAT THE 50-YEAR PERIOD BEGINS WHEN A NON-FEDERAL INTEREST BUYS THE WATER AND NOT WHEN IT IS FIRST AVAILABLE IN A RESERVOIR. THE HOUSE REPORT, SUPRA, REQUIRES REPAYMENT WITHIN "50 YEARS FROM THE DATE OF FIRST USE FOR WATER SUPPLY." (P. 134) IF THE REPORT HAD REFERRED TO FIRST USE FOR WATER STORAGE, THAT MIGHT HAVE INDICATED REPAYMENT WAS REQUIRED ONCE THE WATER WAS AVAILABLE. "USE FOR WATER SUPPLY," HOWEVER, SUGGESTS ACTUAL USE OF THE WATER IS A PREREQUISITE FOR REPAYING CONSTRUCTION COSTS. THE SENATE REPORT ALSO INDICATES AN INTENTION TO REQUIRE REPAYMENT ONLY AFTER A NON-FEDERAL INTEREST HAS BEGUN USING THE WATER. "IT IS EXPECTED THAT WHEN A PORTION OF SUCH CAPACITY IS FIRST UTILIZED THEN REPAYMENT FOR THAT PORTION WILL BE STARTED AND REPAID WITHIN THE LIFE OF THE PROJECT BUT NOT TO EXCEED 50 YEARS." S. REP. NO. 1710, 85TH CONG., 2D SESS. 133 (1958).

THE LIFE SPAN OF THE PROJECT MAY BECOME A SIGNIFICANT CONSTRAINT ON THE ABILITY OF A PROJECT TO ATTRACT CUSTOMERS FOR ITS WATER AS THE REPAYMENT PERIOD IN NO EVENT MAY EXCEED THE LIFE OF THE PROJECT. AFTER THE PERIOD REMAINING FOR REPAYMENT FALLS BELOW 50 YEARS, IT WILL BECOME INCREASINGLY DIFFICULT FOR A PROJECT TO ATTRACT CUSTOMERS FOR ITS WATER.

ACCORDINGLY, IN ANSWER TO YOUR THIRD QUESTION, UNDER THE WATER SUPPLY ACT OF 1958 REPAYMENT OF CONSTRUCTION COSTS ATTRIBUTED TO FUTURE WATER SUPPLY IS TO BEGIN UPON DELIVERY OF THE WATER TO THE USER. REPAYMENT MUST BE COMPLETED WITHIN 50 YEARS OF THAT TIME, UNLESS THE REMAINING PROJECT LIFE IS SHORTER. IN THAT CASE, THE 50-YEAR PERIOD IS REDUCED SO THAT THE CONSTRUCTION COSTS WILL BE REPAID BY THE END OF THE PROJECT'S USEFUL LIFE. YOUR FOURTH QUESTION IS WHETHER AN AMENDMENT TO THE WATER SUPPLY ACT OF 1958 IS NEEDED TO ESTABLISH A DATE WHEN NON FEDERAL INTERESTS MUST EITHER BEGIN PAYMENTS OR FOREGO THE RIGHT TO FUTURE USE OF THE STORED WATER.

WE THINK THE "REASONABLE ASSURANCES" REQUIRED UNDER THE WATER SUPPLY ACT OF 1958 AS AMENDED ARE BROAD ENOUGH TO ENCOMPASS AN OPTION AGREEMENT, UNDER WHICH THE NON-FEDERAL ENTITY MAY, BUT IS NOT REQUIRED, TO EXERCISE A RIGHT TO USE THE STORED WATER. IF ANOTHER ENTITY WISHES TO UTILIZE ALL OR PART OF THE WATER SET ASIDE FOR THE OPTION HOLDER, THE WATER RIGHT BEING AVAILABLE FOR SUCH OTHER ENTITY, A REASONABLE PERIOD COULD BE ESTABLISHED IN THE OPTION AGREEMENT DURING WHICH TIME THE DECISION ON WHETHER TO ACCEPT THE WATER AND BEGIN THE PAYMENT OF THE CONSTRUCTION COSTS OR RELINQUISH THE USE OF THE WATER WOULD HAVE TO BE MADE.

AS INDICATED IN OUR PREVIOUS ANSWERS, THE ONLY WAY TO FORCE THE NON FEDERAL ENTITY TO FISH OR CUT BAIT BY A FIXED DATE, ASSUMING THAT THE OPTION AGREEMENT WAS NOT ACCEPTABLE, IS TO OBTAIN ADDITIONAL LEGISLATION.