Markets for Federal Water: Subsidies, Property Rights, and the Bureau of Reclamation

By Richard W. Wahl | Go to book overview

3
Administrative Extension of Subsidies: The Central Valley Project

Federal legislation gradually increased the subsidy for irrigation construction costs on both new and existing federal projects by lengthening the interest-free repayment period, deferring repayment during hardship years, and limiting repayment to the water users' estimated "ability to pay." Furthermore, subsidy levels increased above those originally envisioned by Congress as general inflation led to higher interest rates, thereby increasing the value of the interest- free subsidy. Subsidies on existing projects also grew beyond those authorized by reclamation legislation through administrative measures taken by the Bureau of Reclamation--for example, the establishment of long-term contracts with fixed rates that made no allowance for inflation adjustments for increased operating costs. The most prominent case of this type is the Central Valley Project (CVP) in California, where fixed-rate contracts have led to a situation in which the federal government receives neither yearly capital repayment nor sufficient repayment to cover annual operating costs, despite water users' ample ability to pay. In other words, the federal government is operating the irrigation portion of the project at an annual loss. This situation may well continue until a majority of the contracts expire in the mid-1990s. The story of how it came about and the difficulty of resolving it is important because the Central Valley Project is among the largest federal reclamation financial investments in the country. The project's story also illustrates how difficult it is to alter de facto entitlements to water supplies once they become established, no matter how disadvantageous the financial terms are to the United States.

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