BOULDER CANYON PROJECT ADJUSTMENT ACT

WEDNESDAY, MAY 29, 1940

UNITED STATES SENATE,

COMMITTEE ON IRRIGATION AND RECLAMATION,

Washington, D. C. The committee met, pursuant to recess, at 10:30 a. m., in room 101 Senate Office Building, Senator Pat McCarran (presiding).

Present: Senators McCarran (presiding), Pittman, Ashurst, O'Mahoney, Chavez, Clark, McNary, and Johnson.

Senator MCCARRAN. Gentlemen, the ranking members of the committee are detained in other committees. Senator Bankhead is in an important committee; Senator Sheppard in another important committee; Senator Pittman is also detained in the Foreign Relations Committee. Unless there be some suggestion to the contrary, I think in view of the time necessary we had better proceed.

Senator McNary, do you have any objection to that at this time? Senator MCNARY. No, indeed.

Senator MCCARRAN. Senator Chavez?

Senator CHAVEZ. No.

Senator MCCARRAN. Judge Stone, commencing where you left off yesterday, it might be well to proceed.

STATEMENT OF CLIFFORD H. STONE-Resumed

Mr. STONE. I believe that yesterday I had proceeded to about the bottom of page 3 of my prepared statement. I stated yesterday it would be necessary to make certain additions and deviations from the statement.

The Project Act of 1928 contains a further provision to the effect that if during the period of amortization the Secretary of the Interior shall receive revenues "in excess of the amount necessary to meet the periodical payments to the United States as provided in the contract or contracts executed under this act," then, immediately after the settlement of such periodical payments, he shall pay to the State of Arizona 1834 percent of such excess revenues and to the State of Nevada 1834 percent of such excess revenues. Inasmuch as the contracts with the United States call for periodical payments for the energy as delivered and made no provision for any excess, it is not clear what is meant by the phrase "excess over the amount necessary to meet the periodical payments to the United States as provided by the contracts."

Senator MCCARRAN. Judge Stone, in that expression you are referring to the present law?

Mr. STONE. The present Boulder Canyon Project Act.

Senator MCCARRAN. Yes.

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Mr. STONE. In this section I am discussing the present act.
Senator CHAVEZ. That is the 1928 act?

Mr. STONE. That is the 1928 act.

It is argued, however, that it was the intent of Congress to provide that any excess over amortization requirements received under the contracts should be subject to such division. This is one of the points of controversy proposed to be clarified by the pending legislation.

The Project Act of 1928 also states that after all moneys advanced by the United States have been repaid, revenues from the project shall be kept in a separate fund to be expended within the Colorado River Basin as prescribed by the Congress. This provision gives the States of the basin an interest in early amortization and consequently in high energy rates. This section, too, has been the subject of extensive discussion and controversy.

It might be said, deviating from the statement there, that the Committee of Sixteen came to the conclusion-and in that we are supported by many who have carefully studied the act, and I personally think there is no quetsion about it-that there will be no accruals to the separate fund for development within the basin until after the amortization is completed; that is, under the Project Act of 1928.

The pending bill proposes to remove these uncertainties and ambiguities as to rates and the application of revenues. It is proposed to eliminate entirely the competitive rate base and place the dam definitely on an amortization basis, all advances made prior to 1937 to be repaid with interest prior to June 1, 1987. Later advances will be repaid on the basis of amortization within 50 years from their respective dates.

The Secretary is directed under the pending bill, that is, the bill now before you, to promulgate rates sufficient, first, to meet the cost of operation and maintenance to provide for replacements; second, to repay to the Treasury with interest the advances to the Colorado River Dam fund for the project as above indicated; third, to provide $300,000 a year for each of the States of Arizona and Nevada in commutation of their rights under the old Project Act, and, fourth, to provide for the transfer of $500,000 each year during the period of amortization to a new fund to be designated the "Colorado River development fund." Authorization is provided so that the Secretary, in promulgating rates, may provide for the periodic adjustments.

Senator MCCARRAN. Now, in that respect, Judge Stone, if you do not mind the interruption, is it your construction of the language that the Secretary may promulgate rates to meet, first, second, and third, that they are all-inclusive, and that this promulgation of a rate must contemplate those items as a whole, or, rather, could it be construed that he may promulgate a rate which would meet, say, the first two and eliminate the remaining conditions?

Mr. STONE. According to the proposed bill, the bill is intended, and we believe clearly shows, that the Secretary must promulgate rates sufficient to meet all of these objectives.

Senator MCCARRAN. Inclusive?

Mr. STONE. Inclusive; yes, sir.

It is obvious that if rates were to be fixed with amortization as a sole guide, there would be no excess revenues for Arizona and Nevada,

nor would there be any possibility of the existence of a separate fund under the Project Act prior to 1987. For this reason, in shifting from a competitive rate base to an amortization rate base, it became necessary to commute the uncertain amounts involved in the payments to Arizona and Nevada and to the separate fund into definite and fixed amounts. This has been done in the proposed bill and all parties have agreed upon the figures used. That agreement refers to the agreement of the Committee of Sixteen. It is provided that if Arizona and Nevada collect any taxes from the project or the privilege of using the generating equipment or falling water, their respective payments shall be correspondingly reduced.

With respect to the Colorado River development fund, it is provided that the first $1,500,000 shall go to the completion of the studies and investigations now being carried on by the Bureau of Reclamation for the formulation of a comprehensive plan for the utilization of waters of the Colorado River system.

Senator CHAVEZ. May I interrupt you there, Judge, please?
Mr. STONE. Yes.

Senator CHAVEZ. What further studies are to be made below Boulder Dam?

Mr. STONE. Senator Chavez, with respect to that, I have brought with me a statement here, and when I get through with this statement I intend to go into that. I did that because of the question you asked yesterday. I thought you would like to know, so I brought this to clarify that matter.

Senator CHAVEZ. Thank you. Will you proceed?

Mr. STONE. If that is agreeable.

Senator CHAVEZ. That is fine.

Mr. STONE. After those first 3 years, thereafter until 1955, the revenues in the development fund are to be expended in the States of the upper division as that term is used in the Colorado River compact. That is, after the first 3 years and until 1955, the $500,000 annually will be expended solely in the four States of the upper division. Senator CHAVEZ. That will be 15 years?

Mr. STONE. It will be 15 years. Under the act as it was originally agreed to, it was 13 years, and then this bill now before you includes an amendment inserted in the House adding 2 more years, so that for 15 years the $500,000 will be expended and equitably apportioned among the four upper-basin States.

Senator CHAVEZ. Who will decide that, as to the equitable apportionment?

Mr. STONE. That is subject to the appropriations from the Colorado River development fund by the Congress, so in the end it is decided by the Congress as to what is an equitable apportionment.

Now I might say here, in order that this may be clear and some things may be before you which were suggested in the House, that some suggestion has been made that the bill provide for equal division among the four States, but the opinion of the committee was that the word "equitable" should be used as to the fund before 1955, and the fund after 1955. Thereafter such funds are to be used in the entire basin.

For the purpose of making the amortization plan entirely equitable as among contractors for energy whose contracts called for the com

mencement of payment for energy at different times, the whole plan is made effective as of June 1, 1937. But this will not require any refunds from the United States Treasury. All adjustments will be handled by credits and the retroactive effect so far as the United States is concerned is immaterial; the dam will be amortized in 1987, as contemplated by the original act. When I say "as contemplated by the original act," under the original act it might have been extended beyond 1987, but we have always talked of the 50-year period. Because of the fact that, in the rate base, provision will be made for replacements, the payment therefor extending over the entire period in a substantially uniform annual amount, moneys will be on hand for replacements when there is no immediate occasion for the use thereof. It is consequently contemplated that, in order to reduce interest charges, such funds shall be paid into the Treasury and that readvances of moneys paid into the Treasury from the Colorado River Dam fund may be called upon to make replacements when required. Of course all such readvances will bear interest.

In the original Project Act it was provided that $25,000,000 of the investment in the dam be allocated to flood control. It was further provided that 6212 percent of "excess revenues" should be applicable to the repayment of that amount (the 6212 percent was the complement of the 3712 percent payable to Arizona and Nevada as hereinbefore stated and is subject to the same uncertainties). The Project Act provided that if, at the completion of amortization of the rest of the works, any part of the $25,000,000 remained unpaid, 622 percent of the net revenues thereafter should be applied to payment of the remainder. No provision was made as to the disposition of the remaining 371⁄2 percent. It is thus apparent that it was not contemplated in the original Project Act that the flood-control allocation should of necessity be repaid within the 50-year period of amortization. The pending bill proposes to definitely defer the repayment of the amount so allocated until after 1987 without interest. Floodcontrol expenditures are ordinarily not deemed reimbursable. The proposed treatment in the pending bill is thus more favorable to the Treasury than is the ordinary treatment of flood-control expenditures. In the original Project Act, as between the Colorado River Dam fund and the Treasury, a 4-percent interest rate was fixed and moneys transferred to the Colorado River fund were charged with that rate until repaid. This does not mean that the power contractors undertook to amortize the works on a 4-percent basis. As hereinbefore indicated, on and after 1945 the rates were to be adjusted on a competitive basis which has no reference to interest rates. In the proposed bill, as between the Treasury and the Colorado River Dam fund, a 3-percent interest rate is fixed. This represents a considerable margin over the cost to the United States of money invested in the dam. Inasmuch as the entire firm output at Boulder has been sold to responsible purchasers for the full 50-year period, the advances may properly be considered a secured loan. It must also be borne in mind that after the contractors have paid in enough to restore to the Treasury all of the advances made, with the 3-percent interest, the United States will still own the works and be entitled to secure revenues therefrom. Under these circumstances the 3-percent interest rate appears to be entirely reasonable and justified.