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WATER SPECIAL REPO REPOR cotta.
Colorado Watter Congress• 1390 Logan St., Rm.312• Denver, Colorado 80203• Phone: (303) 837-0812
Dick MacRavey, Editor April 15, 1982
STATE WATER PROJECT FINANCING
At the April 1, 1982 meeting of the Colorado Water Conservation Board,
a discussion draft on state water project financing needs was circulated
for reaction. A copy of this "discussion draft" appears on the succeeding
pages of this CWC Water Special Report. Readers are urged to review this
"discussion draft" and send their responses to the Colorado Water Conser-
vation Board, 823 Centennial Building, 1313 Sherman Street. Denver, Colo-
rado 80203. (Please send a copy of your response also to the Water Con-
gress.)
It is our understanding that the subject of financing needs will be
before the Water Conservation Board at the June 3+, August 5-6 and October
7.8 meetings. As you will note in Mr. McDonald's memorandum, the CWCB
deliberations will break into three segments; namely:
(1) defining.the problems which confront water project financing,
including changes or reductions in traditional federal
pr'ograms;.
(2) identifying the range of alternatives potentially available
to address these problems; and
(3) evaluating the availability and effectiveness of various
financing alternatives.
The result of the CWCB's deliberations could be possible recommenda-
tions to be submitted to the Fifty-Fourth General Assembly during its
"tong session" in 1983. Therefore, it behooves water users and those in-
terested' in Colorado's water needs to communicate their feelings on fi-
nancing before the CWCB recommendations become "fixed in concrete."
Incidentally, the Colorado Water Congress will conduct a workshop on
"Financing Water Projects in the 1980's" at the Holiday Inn Northglenn,
I-25 & 120th Avenue, Northglenn, starting at 9 a.m.. Friday, June 4, 1982.
(Registration will start at 8 a.m.) For more information on this workshop.
please contact the staff of the Colorado Water Congress, 1390 Logan Street,
Roo. 312. Denver, Colorado 80203, or call -- 837-0812.
820732
WATER SPECIAL REPORT -2- DISCUSSION DRAFT COPY
STATE OF COLORADO
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FROM: Bill McDonald svanm "VMS'
ProPMNWor
DATE: March 31 , 1982 Don Olaf
SUBJECT: Agenda Item 11, April 1 , 1982, Board Meeting--
State Water Project Financing Needs
As you will recall, the Board has decided to discuss the
matter of water project financing and the need for state
participation therein over the course of the next several
meetings. As I look ahead, it seems to me that our deliberations
will logically 'break into three segments:
( 1) defining the problems which confront water project
financing, including changes or reductions in
traditional federal programs;
(2) identifying the range of alternatives potentially
available to address these problems; and
( 3) evaluating the availability and effectiveness of
various financing alternatives.
Finally, of course, the Board must decide what recommendations,
if any, it will make to the General Assembly concerning future
means of project financing and the projects to be pursued.
I suggest that we cover, at least one area of discussion at
each of--the -next-three--Board meetings, commencing April 1, with
final decisions to be reached no later than the October Board
meeting: This will then leave the December meeting for the
discussion of specific project proposals for submittal to the
General Assembly in January, 1983.
Consistent with this proposed schedule, please find a draft
discussion paper .which outlines the problems facing water project
financing. I hive characterized it as a draft with the
expectation that it will be revised and finalized based on the
comments and discussion at the Board meeting.
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Attachments as stated
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WATER SPECIAL REPORT -3- DISCUSSION DRAFT COPY
WATER PROJECT FINANCING:
DEFINING THE PROBLEM COLORADO FACES
Introduction
The State of Colorado has historically played a minor role
in the construction and financing of water development projects.
The primary reasons for this have been the ability of municipal
and industrial water users to finance their own projects and the
reliance on the federal government to finance irrigation and
flood control projects. In the face of rapidly escalating
construction costs and reductions in the amounts of federal funds
available for water project development, it has become necessary
to re-examine the means by which future water development in the
state can be financed.
This discussion paper, which is the first in a series, will
explore the problem which Colorado faces with respect to water
project financing. Subsequent discussion papers will identify
the means which may be available in the future to finance water
projects and the utility of various financing mechanisms.
Project Financing
The financing of a water development project has two main
considerations:
( 1 ) What sources of capital are available at what cost to
pay for the construction of a project?
(2) By what means, if any, can the capital investment be
repaid?
Whatever the subtleties and complexities of the financing package
for any given project may be, these two fundamental questions
govern the ultimate ability to move forward with project
construction in all cases.
With respect to the capital needed at the time of
construction, there are essentially two sources of such capital .
First, there are private financial markets in which, through a
wide variety of techniques, capital can be raised . The second
major source of capital is the monies raised by governmental
bodies through their various taxing powers.
It is important to note that money for the construction of a
project does not have to be derived exclusively from one or the
other of these two sources. Indeed, one of the challenges of
financing future water project development will be to identify
means by which a combination of both private financial markets
and tax revenues can be used to raise the capital which will be
necessary if Colorado is to proceed with an aggressive and timely
water development program.
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WATER SPECIAL REPORT -4- DISCUSSION DRAFT COPY
The willingness of private financial markets to invest in
the construction of a water project will be a function of the
return which the investor can expect to gain (after tax
considerations are taken into account) . This in turn will be a
function of the revenues which a project may be expected to
generate and the anticipated risks of the expected revenues not
materializing . Thus, the ability of a project to generate
sufficient revenues is the critical determinant of the
availability of capital from private financial markets.
Water Projects--Which Ones Can lay?
The ability of a water project to generate revenues is
primarily a function of two factors:
( 1 ) the administrative practicability of charging for the
benefits received , and
( 2) the ability of project beneficiaries to pay for what
they receive.
The benefits, or outputs, from water resources projects are
often characterized as being either vendibles or nonvendibles.
Obviously, vendibles include water supply for municipal ,
industrial, and agricultural purposes and the production of
hydroelectric power. These outputs are referred to as vendibles
because they are items over which ownership and control can be
exercised and are therefore items which can be sold to willing
purchasers .
In contrast , benefits such as flood control protection and
recreational services are not readily marketed outputs. Although
it is not necessarily impossible in either case to charge those
who benefit from flood control protection and recreational
opportunities , there are admitted administrative problems which
make it difficult to have the beneficiaries of these kinds of
project functions pay for the benefits received . As a
consequence, the full value of flood control and recreational
benefits is typically not sought from those who receive those
benefits.
Apart and separate from the question of the administrative
practicability of collecting revenues is the question of the
,ability of different kinds of water users to pay for the full
value of the project outputs which they receive . Generally
speaking, it has been the historical policy of both federal and
state water development programs to charge users for the full
costs of municipal and industrial water supplies. In contrast,
the federal reclamation program has not sought full repayment
from irrigators, flood control project beneficiaries, or
recreationists .
WATER SPECIAL REPORT -5- DISCUSSION DRAFT COPY
With respect to irrigation water supplies , it is clear that
the cost of developing new supplies will almost always be
significantly greater than the value which the new supplies
provide in the way of increased productivity. With respect to
municipal water supplies, it seems to Pe generally accepted that
the beneficiaries of municipal projects are able and should
pay for all project costs allocable to municipal purposes. On
the other hand, it has become evident in the last several years
that the rapidly escalating costs of construction, coupled with
high interest rates in private financial markets, are making it
• increasingly difficult for Colorado 's smaller rural communties to
pay the full cost of projects if they are privately financed.
Problems in Financing Future Water Project Development
Colorado confronts two main problems in raising the money
needed to pay for the costs of project construction:
( 1 ) the .-- Yy high interest rates for capital raised in
private financial markets, and
( 2) the drastic reductions which are occurring in the
appropriations available for federal programs,
especially the reclamation program.
The difficulties created by high interest rates in private
financial markets are self-evident . The cost of capital has
become so great that it is increasingly difficult to find water
projects whose outputs are so highly valued that those outputs
can generate the revenue necessary to repay a project's cost .
Tax shelters , leveraging mechanisms , and a variety of other
techniques may assist in alleviating these problems, but the
fundamental fact remains that the value of the water produced by
new storage projects in Colorado is frequently not competitive
with the costs of capital in the private marketplace .
The major difficulty which reductions in federal
appropriations is causing is that those federal appropriations
have traditionally been the major source , especially for
reclamation projects, of the capital needed to pay for project
construction. Furthermore , even where repayment to the U.S.
treasury is required under law, those repayments do not begin to
approach the actual cost involved . The current operation of
reclamation law and the use of Upper Colorado River basin
revenues in this regard are briefly detailed in the attached
paper.
In summary, it appears that private financial markets will
be a source of capital to pay for the costs of water project
construction only in the case of municipal and industrial water
supply projects and in the case of hydropower projects. Even
then, there is some question ,1 to the ability of small rural
Colorado communites to shoulder the full burden of such costs.
WATER SPECIAL REPORT -6- DISCUSSION DRAFT COPY
On the other hand , it is abundantly clear that the agricultural
sector does not have the ability to pay the full cost of their
projects. Therefore , it is essentially impossible to raise any
significant sum of capital in private financial markets for the
benefit 'of irrigated agriculture . Finally, it will , as it has
been in the past, be difficult to use private financial markets
as a means of raising capital for flood control and recreation
projects, although it is clearly not impossible to do so, because
of the administrative problems of charging those who receive
these kinds of benefits.
Summary
The consequence of these circumstances is to require the
state to consider, for the first time , the need to use large sums
of tax revenues as a means of providing the capital necessary to
pay for the cost of water project construction. In turn, the
state must also consider the extent to which subsidies will be
provided in the repayment of those capital investments (e.g . ,
through grants, long-term low-interest loans below market rates,
etc. ) .
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Attachment
CWCB
WATER SPECIAL REPORT -7- DISCUSSION DRAFT COPY 2/20
2/20/81
WATER PROJECT FUNDING
AND
THE BASIN FUNDS
Introduction
Federal water development projects .n Colorado are subject,
under present federal law, to three main provisions concerning the
repayment of construction costs, including interest during con-
struction, to the C►nited States :
(1) Irrigators are responsible for the costs allocable
to irrigation only to the extent of their ability to
repay, and that at no interest;
(2) Municipal and industrial users repay all of the
costs allocable to those purposes with interest; and
(3) Fish a!!d wildlife mitigation measures and the recrea-
tional features of the Colorado River Storage Project (CRS?)
participating projects are a 100 percent federal cost.
The maximum repayment period for the participating projects of
CR5P is 50 years, while other reclamation projects are subject
to 40-yea; repayment periods. "Front-end" cash payable by :l_r.-
federal entities at the time a project is constructed is not
presently required by federal law for any reason or purpose .
With respect to the payment of annual operation andmainte-
nance charges, irrigators and municipal and industrial users must
pay 100 percent of these costs.
upper Colorado River Basin Fund
Although the Reclamation Project Act of 1939 relieved
WATER SPECIAL REPORT -8- DISCUSSION DRAFT COPY
irrigators of the obligation to repay the United States for the
costs of construction which were beyond their financial ability to
repay, the general fund of the U. S. Treasury did not go unreim-
bursed. To the contrary, revenues generated from the sale of hydro-
electric power produced at reclamation projects were used to repay
to the federal treasury that portion of construction costs which the
irrigator could not repay.
Given this history of the use of power revenues to- offset
the costs of reclamation projects, the creation of the Upper Colorado
River Basin Fund (the Basin Fund) in the 1956 CRSP Act was not unique
except for one feature: revenues which accrue to the Basin Fund from
the generation of hydropower at the CRSP storage units are not avail-
able for just any reclamation project, but only for "participating
projects" in the Upper Basin. Since the customers who purchase CRSP
power are located almost entirely within the four Upper Basin states
(the major exception being the Salt River Project in Arizona) , it is
primarily the citizens of the states benefited by participating
projects, not the U. S. taxpayer at large, who foot the bill for
that portion of the cost of a participating project's irrigation
features which is beyond the ability of the irrigator to repay.
In general, the Basin Fund works as follows :
(1) Construction funds for a participating project must be
appropriated by Congress from the general fund of the U. S.
Treasury, which appropriations are credited to the Basin Fund
as advances (i.e. , "loans" are made from the general fund to
the Basin Fund) .
WATER SPECIAL REPORT -9- DISCUSSION DRAFT COPY
•
(2) All revenues from the CRS? and the participating projects
(i.e. , from sales of power, repayments from irrigators , munici-
palities, and industry, and payments by project users of annual
O&M charges) are credited to the Basin Fund.
(3) Revenues which accrue to the Basin Fund are then disbursed
as follows:
(a) Annual O&M charges are returned to the U. S. Treasury,
with the requirement that each participating project must
have annually paid into the Basin Fund an amount sufficient
to cover its own O&M costs;
(b) Revenue from the Basin Fund must then be used to
repay to the U. S. Treasury the construction cost of the
power, and municipal and industrial water supply, features of
both CRSP and the participating projects within 50 years
from date of construction with interest, which interest is
a first charge.
Participating projects with power, and municipal
and industrial water supply, features must, from their own
revenues, pay into the Basin Fund sufficient funds to cover
the construction cost, plus interest, of such features.
(c) Next, revenues in the Basin Fund go to repay the U. S.
Treasury for the cost of the irrigation components of the
CRSP storage units themselves, such costs being repayable
without interest within . 50 years; and
(d) Revenues in the Basin Fund in excess of the monies
needed for (a) , (b) , and (c) are apportioned among the
WATER SPECIAL REPORT -10- DISCUSSION DRAFT COPY
upper Basin states according to a fixed percentage
(Colorado is apportioned 46 percent) . Those revenues
are then used to repay to the U. S. Treasury the portion
of the construction cost of a participating project's
irrigation features which is beyond the irrigators '
ability to repay. Repayment must be made within 30 years
without interest. The revenues so credited to a state
may only be used to repay the costs of irrigation projects
located in the state to which the revenue is credited
unless, by "appropriate consent, " one state permits the
use of its revenues by some other state.
People often think of the Basin Fund as a "cash kitty" which
the Upper Basin states should be able to draw upon directly and at
will to construct new projects. For two reasons, this is incorrect.
First, the law specifically provides that appropriations for con-
struction must come from the general fund of the U. S. Treasury
and cannot come from the revenues which accrue to the Basin Fund.
Second, the Basin Fund does not have a continually increasing
balance of cash on hand. This is because user chargers and, more
importantly, the price of CRSP power, are set at rates designed
to create just enough revenue to cover the repayments to the U. S .
Treasury which are required over the specified S0-year repayment
periods. Thus, "extra" cash is not building up from which money
for construction costs could be taken, even if the law permitted
such.
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