Inspector General Report Raises Possibility of USBR Claim to Millions in Water Transfer Revenue
Published by: Somach Simmons & Dunn
An investigation by the Office of Inspector General (OIG) regarding the Bureau of Reclamation’s (USBR) administration of federal water projects ended abruptly upon discovery that the USBR was neglecting its potential entitlement to millions of dollars in revenue related to water transfers. The USBR’s response to the investigation has the potential to significantly reshape the water transfer market in California.
The OIG undertook a review of the USBR’s administration of water transfers and conveyances in accordance with applicable laws, regulations, and policies, but stopped short of providing a determination on the USBR’s compliance. Instead, the OIG issued a report on January 17, 2018 identifying a potential opportunity for the USBR to recoup revenue from contractors who profit from the conveyance of non-project water through federal facilities under the Warren Act of 1911 (Pub. L. No. 61-406). Because the OIG found no formal legal opinion on whether the USBR is entitled to such revenue, the OIG’s report requests that the USBR seek a legal opinion on the application of the Warren Act.
The Warren Act authorized the Secretary of the Interior to contract for the conveyance and storage of non-project water through federal projects when there is excess capacity. 43 U.S.C. § 524 (1911). Warren Act contracts are commonly required to transfer water south of the Sacramento-San Joaquin Delta, and such transfers incur charges for use of federal conveyance and storage facilities. However, the Warren Act provides that:
No irrigation system, district, association, corporation, or individual so contracting shall make any charge for the storage, carriage, or delivery of such water in excess of the charge paid to the United States except to such extent as may be reasonably necessary to cover cost of the carriage and delivery of such water through their works. 43 U.S.C. § 523.
Furthermore, any profit “derived from the sale or rental of surplus water under the Warren Act . . . shall be credited to the project or division of project to which the construction costs has been charged.” Id. § 526.
There are two elements to the price of water conveyed under the Warren Act: (1) the price the USBR charges for the conveyance of non-project water through a federal facility, and (2) the contract price of the water negotiated between a willing buyer and seller. The OIG’s report states that USBR officials currently do not consider the second element, the contract price between a willing buyer and seller, to fall under the purview of the Warren Act. The OIG’s report, therefore, requests a legal opinion on (1) whether contractors are allowed to profit from the conveyance of non-project water through federal facilities, and (2) whether any profits derived from such conveyances must be “credited to the project or division of project to which the construction costs has been charged” or to the U.S. Treasury.
The OIG’s question arose from the review of USBR water data from 2012 to 2015 for California’s Central Valley Project (CVP). The OIG found that the contract price for CVP water during this period was higher than the USBR’s price for water conveyance. Based on the range of market prices and the amount of water moved under the Warren Act over these years, the OIG estimated that contractors generated between $192 million and $1 billion in revenue on water conveyed through the CVP. The OIG opined that the potential revenue generated from these contracts was so large that it was critical for the USBR to seek a formal legal opinion.
The USBR’s response on how and when it will take action to address the OIG’s recommendation is expected February 16, 2018. A copy of the OIG’s report is available here.
For questions or additional information please contact Michelle Chester at mchester@somachlaw.com.
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