of the Project, and the start of construction. The Project could not have been authorized without the diligent work of those within the Arkansas Valley to unify state interests and broker compromises to ensure that the final Project satisfied as many needs as possible.

B. The Fryingpan-Arkansas Project was Authorized for Multiple Purposes.

The Fry-Ark Project was authorized for numerous purposes including: (1) developing the regional and national economy through irrigation of arid lands of the Arkansas Valley; (2) developing power and energy surplus to Project needs; (3) supplying domestic, municipal, and industrial water; (4) providing flood control on the Arkansas River; (5) providing for the preservation, propagation, and enhancement of fish and wildlife; (6) improving water quality; and (7) developing recreation facilities.

The Authorizing Act, Public Law 87-590, makes it clear that certain purposes take precedence over others. Section 1(a) of the Authorizing Act acknowledges that the Project is authorized for the purposes of "supplying water for irrigation, municipal, domestic, and industrial uses, generating and transmitting hydroelectric power and energy, and controlling floods, and for other useful and beneficial purposes incidental thereto." Incidental or secondary purposes include recreational uses, development of fisheries, and conservation of wildlife habitat. As evidenced by the programs discussed herein, Southeastern and its constituents use Project water for many purposes, and Southeastern's Board of Directors has attempted to maximize the use of all transmountain diversions, while recognizing the supplemental nature of Project water and acknowledging that there is insufficient water to satisfy all demands. C. Project Features

Construction of the Fry-Ark Project began with Ruedi Dam and Reservoir in 1964, and continued without interruption until September 28, 1990 when the Project was declared completed with the dedication of the Fish Hatchery at Pueblo Reservoir. Construction is completed on all the water supply-related features that were expected to be initially developed. The North Side Collection System may be expanded to Last Chance and Lime Creeks, tributaries of the Fryingpan River. However, plans to pursue this expansion have been deferred. Plans to construct the Arkansas Valley Conduit to serve towns and cities east of Pueblo with treated Project water are currently in process.

There are two distinct areas of the Project: the western slope, located in the Hunter Creek and Fryingpan River watersheds, and the eastern slope in the Arkansas River Valley. These areas are separated by the Continental Divide, which, in many places, exceeds an elevation of 14,000 feet. The Project consists of diversion, conveyance, and storage facilities designed primarily to divert water from Colorado River tributaries on the western slope for use in the water-short areas in the Arkansas River on the eastern slope. The North and South Side Collection Systems and Ruedi Dam and Reservoir are located on the western slope in the Fryingpan River basin. Sugar Loaf Dam and Turquoise Lake, Mt. Elbert Conduit, Halfmoon Diversion Dam, Mt. Elbert Forebay Dam and Reservoir, Twin Lakes Dam and Reservoir, and Pueblo Dam and Reservoir are all located on the eastern slope in the Arkansas River Basin.

The Project provides water for uses on the west slope in response to the requirements of the Water Conservancy Act, which directs water conservancy districts removing water from the Colorado River basin to operate their projects so that existing appropriations and prospective uses of water on the western slope will not be impaired nor increased in cost to the western slope water users. This compensatory storage is provided by Ruedi Reservoir, which provides storage for replacement and regulation of water for the western slope users. This water is used for irrigation, municipal, industrial, recreation, and fish and wildlife purposes.

The North and South Side Collection Systems on the western slope collect the high mountain runoff and convey the diverted waters into the inlet portal of the Charles H. Boustead Tunnel. Sixteen diversion structures on the western slope are used to divert water into the Project collection system. The system includes eight tunnels with a combined length of 21.5 miles. The five-mile long Boustead Tunnel conveys the water from the North and South Collection Systems under the Continental Divide to Turquoise Lake. Boustead Tunnel may only divert at 900 c.f.s. from the Fryingpan River (not including water from the Hunter Creek system) unless the Colorado River Water Conservation District agrees that Ruedi Reservoir will fill that season, at which point Boustead may divert at 945 c.f.s.

For water to be diverted through the Boustead Tunnel from the Fryingpan River, the Fryingpan must meet minimum flows as measured at the Thomasville Gage, just upstream from Ruedi Reservoir. From January through March, those flows are

30 c.f.s. As a practical matter, however, for this period of time, the snowpack is not melting and the diversion structures are generally inaccessible due to snow, so diversions during this season are unlikely. Diversions will generally not begin until the spring runoff begins in late April or May. Minimum flows for the Thomasville Gage are 100 c.f.s. in April, 150 c.f.s. for May and 200 c.f.s. for June. By the end of June, the runoff has generally peaked. Nonetheless, the Project may continue to divert so long as it is in priority and there is adequate water to meet minimum streamflow of 100 c.f.s. in July, 75 c.f.s. in August, and 65 c.f.s. for September. Due to colder weather and increased snowfall, diversions are less likely in the late fall through early winter, but may occur. The Fryingpan River must measure at least 30 c.fs. at Thomasville Gage between October 1 and December 31 for such diversions to occur.

Turquoise Lake and Sugar Loaf Dam are located just east of the Continental Divide, approximately five miles west of Leadville, Colorado. The Lake provides storage capacity for the regulation of Project water delivered from the Boustead Tunnel, as well as non-Project water.

The Mt. Elbert Conduit, a 10.7 mile, 90 inch diameter pipe, conveys water from Turquoise Lake to Mt. Elbert Forebay. The Halfmoon Diversion Dam diverts available flows to Halfmoon Creek into the Mt. Elbert Conduit. Water delivered to the forebay is used to generate power at the Mt. Elbert Pumped-Storage Powerplant. The Mt. Elbert Pumped-Storage Powerplant is located approximately 13 miles southwest of Leadville, Colorado, at the northwest corner of the lower lake of Twin Lakes. The powerplant has two pump-generator units, each with a nameplate capacity of 100 megawatts. After use at the powerplant, Project water flows into Twin Lakes. From Twin Lakes, Project water is released to Lake Creek and the Arkansas River for delivery to water users upstream of Pueblo Dam and Reservoir or for storage in Pueblo Reservoir. The distance from the confluence of Lake Creek and the Arkansas River to Pueblo Dam is approximately 143 river miles.

Project water is released from Pueblo Reservoir to the Arkansas River for irrigation and municipal use; to the Fountain Valley Conduit for municipal use by the members of the Fountain Valley Authority; and to the Bessemer Ditch for irrigation use. Pueblo Reservoir is the terminal storage feature for the Project, and both Project and non-Project water are conveyed to Pueblo and Pueblo West through the municipal outlet works in Pueblo Dam.

El Paso County, Colorado is located to the north of the main channel of the Arkansas River. With the growth of the Colorado Springs metropolitan area, it became clear that this area would be interested in acquiring supplemental municipal water from the Project. Accordingly, representatives from El Paso County were active in the development of the Project, and portions of the county were included within Southeastern's boundaries. Nonetheless, it was clear that the Arkansas River could not be used as a delivery mechanism for such water. Several municipal entities including Colorado Springs Utilities, the City of Fountain, Widefield Water District, Security Water District and Stratmoor Hills Water District formed the Fountain Valley Authority which would sell bonds to construct a delivery pipeline and treatment plant. Revenue from the utility departments would then be used to fund a statutory authority which would, in turn, pay Southeastern and the United States for costs of construction of the delivery pipeline and water treatment plant. The Authority signed a 40-year contract with the United States and Southeastern to secure the repayment obligation. As with the remainder of the Project, title to the Fountain Valley Pipeline remains with the United States, even though Southeastern is responsible for operation and maintenance costs of all facilities.

II. Challenges for Today

While development of the Fry-Ark Project has greatly benefited the Arkansas Valley, operation of the Project is not without challenges. Demand for water in the Arkansas Valley has increased, particularly in drought years. The State has increased regulation of well pumping due to the Kansas v. Colorado decision. These factors and others have highlighted the need for leadership in developing conservation programs to ensure a sustainable water supply in the Arkansas Valley. A. Increased Demand for Project Water

The Arkansas River is an over-appropriated system with a continuous call on the river. There is usually a constant demand for water. Reclamation conducted land classification investigations prior to Fry-Ark Project authorization in 1962. The total irrigable area within the District was estimated to be approximately 280,600 acres. This includes 12,538 acres above Pueblo Reservoir, 12,805 acres along Fountain Creek, and 255,254 acres below Pueblo Reservoir.

In 1979, Southeastern approved a set of Allocation Principles that described the percentage allocations to municipal and agricultural uses. The Allocation Principles were approved by the District Court for Pueblo County, Colorado that same year. The municipal demand for Project water is associated with the Arkansas Valley cities, towns, and entities lying east and west of Pueblo, Pueblo, and the Fountain Valley Authority. The Allocation Principles require allocation of "a minimum of 51 percent of the annual Project water supply to municipal and domestic use." This allocation is distributed, as requested, to Arkansas Valley cities, towns and entities lying east of Pueblo (12%), west of Pueblo (4%), Pueblo (10%), and the Fountain Valley Authority participants (25%). In the event the municipalities do not request the full 51% available to them, any excess water is made available for agricultural uses. Finally, after all other municipal and agricultural have been met, Pueblo West Metropolitan District is given notice that it can make a request. No municipal water user is required to take a minimum amount of Project water in a given year.

Project water for use by irrigation ditches is allocated based upon an acre-foot per irrigated acre basis. Therefore, when demand exceeds supply, each ditch receives a proportionate share of available Project water. This allocation is made only after the municipal requests are met up to at least 51% of the annual Project yield.

Southeastern also promulgated a "Water Allocation Policy," last amended in April 2006. The Water Allocation Policy is the direction of the Board of Directors as to how to implement the Allocation Principles. The Water Allocation Policy is not approved by the Pueblo County District Court and can be amended by majority vote of Southeastern's Board of Directors at any time.

In March of each year, appropriate letters and forms are mailed to eligible entities offering them the opportunity to apply for an allocation of Project water. About May 1st of each year, Reclamation notifies Southeastern as to the amount of water available that year. The Allocation Committee then meets to review the applications submitted by constituent entities, and prepares recommendations concerning the applications received as related to the amount of water available. All recommendations of the Allocation Committee must be approved by Southeastern's Board of Directors Recommendations from the Allocation Committee are considered at the next meeting of the Board of Directors, and appropriate allocations are made. Applicants are afforded the opportunity to appear before the Board in support of their allocation requests.

Many of the ditches serving irrigable areas located within the District have very senior decreed water rights and generally have not requested supplemental water from the District. Also, a portion of the District's irrigable acres have been taken out of production, or are not eligible to receive a Project water allocation, because of sales and changes of use of their decreed water rights. As recognized in the Allocation Policy, it is Southeastern's policy "not to replace with Project Water decreed water sold by persons or entities." This results in a reduction of the total irrigable acreage that are eligible to receive Project water.

"

The Allocation Principles state that "any increase in municipal and domestic allocations shall only occur if agricultural irrigated acreage, on which Project water has been used, is removed from irrigation, at which time the amount of Project water previously allocated to such acreage shall be allocated to other non-irrigation uses.' Allocation Principle ] G. In accordance with the Allocation Principles, Southeastern recently approved a reallocation of 3.59% of the Project water supply from agriculture to non-agricultural uses, due to removal of formerly irrigated lands from agriculture. The goal of the Allocation Principles, the Allocation Policy and the procedures followed by the Board each year is to facilitate an equitable allocation of water and to ensure efficient use of Project water.

B. Impact of the Kansas v. Colorado Decision on the Use of Water in the Arkansas River Basin

In 1949, after three years of negotiations, Kansas and Colorado approved, and Congress ratified, the Arkansas River Compact. The Arkansas River Compact's primary purposes are to "[s]ettle existing disputes and remove causes of future controversy...concerning the waters of the Arkansas River" and to "[e]quitably divide and apportion" the waters of the Arkansas River, “as well as the benefits arising from the construction, operation and maintenance by the United States of John Martin Reservoir."

In the 1950s and 60s, there was a surge in well development along the Arkansas River due to improvement in pump technology and to the availability of inexpensive electrical power. Since the 1950s, water users in the Arkansas River Basin have increasingly relied on groundwater for irrigation and other uses.

In December 1985, Kansas brought an original action in the United States Supreme Court against the State of Colorado to resolve disputes arising under the

Arkansas River Compact. Kansas submitted that Colorado's increased reliance on new and existing irrigation wells materially depleted the water otherwise available for use by Kansas. The Special Master and the United States Supreme Court agreed that such additional pumping, absent appropriate offsets in surface diversions, increases the consumptive use of water, and ultimately decreases the surface flows of the Arkansas River. Colorado generally did not require sufficient reduction of surface water use to fully offset these impacts.

Colorado's State Engineer promulgated the Amended Rules and Regulations Governing the Diversion and Use of Tributary Ground Water in the Arkansas River Basin ("Use Rules") in September of 1995. The Use Rules require that all diversions of groundwater from the valley-fill and surficial aquifers along the Arkansas River from Pueblo to the Stateline, be discontinued unless depletions caused by such pumping are replaced pursuant to a replacement plan approved by the Colorado State Engineer's Office. The Use Rules establish certain presumptive stream depletions which are used to determine depletions to the Arkansas River caused by well pumping. The presumptive stream depletions are reviewed annually, and revised if necessary to prevent material injury to senior surface rights in Colorado, and depletions to usable Stateline flows. If replacement water is not available in sufficient quantities, pumping must be curtailed. Since the Use Rules became effective, the Arkansas River has seen more water rights, including Project water and return flows therefrom, being used for augmentation purposes. This is because wells can provide a more reliable, often better quality water supply than most surface water rights. The Fry-Ark Project is an important source of water that helps sustain agriculture in the Lower Arkansas Valley while complying with Colorado's Arkansas River Compact obligations.

C. Sale of Project Water and Return Flows

While Southeastern allocates Project water, Reclamation is responsible for accounting for the delivery of Project water. Southeastern provides Reclamation and the State Division 2 Engineer's Office with the listing of the annual allocation of Project water. Deliveries are then coordinated by Reclamation in communication with the Division 2 Engineer's Office as requests are made by ditch companies and municipalities.

The price for Project water is determined by Reclamation as directed by Reclamation policy and the Project repayment contract. Rates are subject to adjustment depending upon the "Ability to Pay Study" and "Repayment Analysis," which are conducted by Reclamation every four years. These studies first determine the irrigators' ability to pay for Project water by assessing the economic condition of the average farm operation within the District. Next, Reclamation, in consultation with Southeastern, projects the repayment status of the Project given projected revenues and expenses.

To encourage the efficient use of domestic water, municipal water users are not required to take a minimum amount of Project water in a given year. In adopting the Allocation Principles, the Board acknowledged that it was unlikely that any municipal entity receiving Project water would require its maximum allocation for a number of years. Southeastern recognized that over time, demands will gradually increase. Even if full demand would not be asserted for many years, the Allocation Principles make it clear that failure to request full allocation of water will not constitute an abandonment of the municipal allocation. Water not needed by the area or entity to which it is allocated may be allocated first to municipal and domestic users, thereafter offered to any other user on such basis as the Board of Directors determines.

The first time that municipalities requested their full 51% of Project Water was in 2002 due to the drought. This hurt agricultural water users, who had previously been able to use the unallocated municipal water. This is an indication that water use within the Arkansas Basin may be changing more toward municipal than agricultural uses.

Pursuant to its repayment contract with the United States, Southeastern retains dominion and control over Project water return flows. Southeastern has made return flows from the use of Project water available for use by eligible entities within its boundaries, primarily for augmentation purposes, since the first deliveries of Project water occurred. Southeastern, by resolution, created the Southeastern Colorado Water Activity Enterprise to administer the sale of Project water return flows. On February 15, 1996 the Enterprise approved a policy governing the sale of return flows. This policy has been amended and the current version is as of April 15, 2004. Sale of return flows promotes multiple uses of Project water.

D. Conservation of Project Water

Southeastern encourages municipal water users to develop and implement Water Conservation and Drought Management Plans. The Board of Water Works of Pueblo, Colorado Springs Utilities, and the cities of La Junta, Salida and Cañon City have provided summaries of their Water Conservation and Drought Management practices to Southeastern.

Southeastern has also participated in numerous projects that encourage efficient use of Project water including the Winter Water Storage Program, various flow management programs, and programs to control non-native phreatophytes.

1. Winter Water Storage Program

During the early planning stages of the Project, individuals and entities envisioned what has become known as the Winter Water Storage Program ("WWSP"). Prior to construction of Pueblo Dam, the various irrigation entities would divert the flow of the Arkansas River when in priority outside of the normal irrigation season to maintain soil moisture levels in the fields where crops would be grown during the following season. Problems associated with winter operation of canal and lateral systems, labor, and related items were frequently experienced.

As a result, the concept of a WWSP evolved with the objective of storing waters that otherwise would have been diverted to the fields downstream of Pueblo Reservoir if the reservoirs of those entities whose diversions to storage were located upstream of John Martin Reservoir. These stored waters would then be released during the following irrigation season. Allocation of this winter stored water is based upon the ratio of foregone winter direct flow diversion based on the average of a historic period. These ratios were negotiated among the parties through extensive negotiations. In 1974, Southeastern, with the cooperation of various entities in the basin, promoted and operated a voluntary WWSP each year from 1975-76 through 1986-87, except 1977-78. With the experience and data gained each year, refinements and adjustments were made to the program with the goal of arriving at an equitable means of apportioning the stored water among the program participants and avoiding injury to nonparticipants. In 1984, the participants agreed to file a water court application seeking to permanently decree a change of water rights that allow winter storage. Following intensive negotiations, the Water Court entered a final decree on November 10, 1990.

The WWSP includes all ditches (except Otero and Rocky Ford) on the main stem of the Arkansas River between Pueblo Reservoir and John Martin Reservoir which have historically diverted for beneficial use or storage during the winter period. The WWSP Decree changed various decreed water rights of Southeastern, Amity Mutual Irrigation Company, Bessemer Irrigating Ditch Company, Catlin Canal Company, Colorado Canal Company, Fort Lyon Canal Company, High Line Canal Company, Holbrook Mutual Irrigating Company, Lake Henry Reservoir Company, Lake Meredith Reservoir Company, Las Animas Consolidated Canal Company, Oxford Farmers Ditch Company, Riverside Dairy Ditch, and West Pueblo Ditch to storage for the November 15 to March 15 period with a shared priority of 1910. Many of these ditches have decrees that, so long as they are taking water for direct flow irrigation, are senior water rights on the Arkansas River. The WWSP Decree changed these water rights to a more junior shared priority from November 15 to March 15, that is typically the calling water right on the Arkansas River throughout those four months.

Operation of the WWSP promotes more efficient use of water among agricultural irrigators. While irrigators were previously compelled to use water as it became available, using winter water primarily for increasing the soil moisture, they now have the flexibility to store water and use it when it is most effective for direct irrigation of crops. Storage of winter water also allows ditch owners to use the winter season for ditch improvements, given that no water will be run during that time, further promoting efficient use of both native and trans-mountain water.

2. Upper Arkansas Voluntary Flow Management Program

It was noted in 1989 that commercial and private boating was increasing, as were the number of fishermen on the Arkansas River above Pueblo Reservoir. To answer the need for better management along the river corridor, the Bureau of Land Management with the Colorado Department of Parks and Outdoor Recreation ("CDPOR") formed a new management organization known as the Arkansas Headwaters Recreation Area ("AHRA").

The AHRA is assisted by a Citizen Task Force. The task force reviews area issues and helps to give direction to the AHRA staff. This task force is made up of volunteer citizen members throughout the basin with representation from anglers, environmental groups, cattlemen, water users, local governments, private boaters, and commercial rafting companies.