Irrigation Subsidies in the Reclamation Program
Bureau of Reclamation publications frequently claim that the costs of the reimbursable functions of reclamation projects will be repaid to the United States:
It has long been the philosophy of the Nation that all reclamation project costs for the purpose of irrigation, power, and municipal and industrial water supply should be repaid in full. ( U.S. Department of the Interior, Bureau of Reclamation, 1972, p. ix)
In reality, the situation is far different. As discussed in this chapter, subsidies for water supply have been part of the reclamation program since its inception, and the extent of subsidy has generally increased over time.
Irrigation subsidies in Reclamation law take two forms: interest- free repayment and the basing of irrigators' repayment on the bureau's estimate of their "ability to pay." Revenues from federal hydropower are used to "repay" costs beyond the irrigators' "ability to pay." However, repayment by hydropower embodies a substantial subsidy as well, both because it is interest-free and because it occurs after forty or fifty years of irrigation repayment. If federal borrowing costs 4 percent annually, then repayment forty years later interest- free returns to the United States only 20.8 percent of the true cost of the loan. At a borrowing cost of 7 percent, only 6.7 percent is returned (also see Eckstein, 1961, pp. 228-234).
For municipal and industrial water supply, even though interest is charged, the Bureau of Reclamation routinely applies the project interest rate dating from the initial phase of project construction.