Prior to 1989, the rafting companies found that during the latter part of summer, river flows became too low to continue their rafting trips. They also noticed that river flows would increase as water users made their releases to the various entities downstream. Early in 1991, the rafting companies approached AHRA with an idea of a "Volunteer Flow Program."

The Volunteer Flow Program was based in part on Reclamation timing releases of Project water from Twin Lakes Reservoir and Turquoise Reservoir to Pueblo Reservoir to meet the needs of fishermen and rafters. The one problem with such releases was the increased evaporative losses that resulted from storing increased amounts of water in Pueblo Reservoir during the summer, rather than the higher mountain reservoirs. In 1992, the Colorado Department of Natural Resources ("DNR") recommended that CDPOR use funds collected from the commercial rafting companies to pay for replacement of evaporative water losses caused by the summer augmentation. This repayment is only necessary when the flows are released before they are actually needed by Southeastern or Reclamation. The funds to pay for this replacement are obtained from the commercial rafting companies' yearly licensing fees.

For many years, DNR, Southeastern and other interested parties negotiated the terms of the program on an annual basis. In August of 2006, Southeastern, DNR, the Colorado Division of Wildlife ("CDOW"), CĎPOR, Chaffee County Board of County Commissioners, the Arkansas River Outfitters Association and Trout Unlimited executed a five-year agreement relating to the operation of the Upper Arkansas River Voluntary Flow Management Program ("VFMP"). As was true in previous years, the parties agreed to operate the VFMP on a year that runs from July 1 of each year through June 30 of the following year ("Plan Year"). For at least five Plan Years following the date of the VFMP Agreement (2007-2011), DNR_agreed that it would, after consultation with the VFMP Parties, agreed to request Reclamation to operate the VFMP by agreement with DNR and Southeastern on an annual basis. The highest priority for the VFMP is to maintain a minimum year-round flow of at least 250 c.f.s. at the Wellsville gage, downstream from Salida, to protect the fishery. To the extent possible, winter incubation flows (mid-November through April) should be maintained from 250 to 400 c.f.s., depending on spawning flows. Between April 1 and May 15 the flow target is within the range of 250-400 c.f.s. to provide conditions favorable to egg hatching and fry emergence. Any flow augmentation for recreational use, or to maintain flows at a target level greater than 250 c.f.s., is limited to the period from July 1 to August 15. Subject to consideration of water and storage availability, flows from July 1 to August 15 should be augmented to maintain flows at 700 c.f.s. through releases of Project water. The 700 c.f.s. level is a target; the primary goal is to maintain predictable, consistent recreation flows throughout the summer. Accordingly, Southeastern, DNR and Reclamation evaluate the water likely to be available for augmentation in a particular year and adjust the target accordingly to ensure that augmentation water is not exhausted prior to the end of the season. CDPOR is responsible for replacing evaporative losses to Project water caused by this summer flow augmentation.

To ensure that the Project is not releasing water that will be consumed by other entities' exchanges, each year, the Parties request Reclamation to include in its annual VFMP Operating Agreement a provision restricting contract exchanges, to the effect that during the time of the annual VFMP Operating Agreement, Reclamation will not execute contract exchanges (non-Project water with Project water) until after the May 1 water supply forecast from the NRCS has been evaluated to assure that such contract exchanges will not interfere with operation of the VFMP, nor impair the ability of the Fremont Sanitation District or Salida Wastewater Treatment Plant to meet their Colorado Discharge Permit System requirements. Reclamation has frequently included such restrictions when granting contracts for storage in Project facilities. The VFMP facilitates use of Project water for multiple purposes by timing its release to support recreation and fisheries while allowing consumptive use below Pueblo Reservoir.

3. Arkansas River Flow Management Program

In partnership with the United States Army Corps of Engineers, the City of Pueblo developed the Arkansas River Corridor Legacy Project ("Legacy Project"). The Legacy Project is intended to restore riparian habitat and provide enhancements to improve recreational opportunities in and along the Arkansas River through Pueblo. To help achieve the Legacy Project goals, Pueblo desired to protect and enhance the flows and the quality of the water in the Arkansas River through Pueblo. In furtherance of the Legacy Project, Pueblo filed an application for a recreational in-channel diversion ("RICD") water right in Case No. 01CW160 (Water Division No. 2.) To resolve many of the disputes related to the RICD water right, several parties including the City of Pueblo, the City of Aurora, Southeastern, the City of Fountain, the

City of Colorado Springs, and the Board of Water Works of Pueblo, Colorado ("BWWP") entered into an intergovernmental agreement to address flow issues related to the Legacy Project.

The six parties agreed to this intergovernmental agreement ("Six-Party IGA") in May 2004. The Six-Party IGA binds the parties to the Arkansas River Flow Management Program (“FMP”). The FMP ensures that exchanges and augmentation plans operate in a manner that preserves minimum flows in the Arkansas River between the outlet of the fishery at the Pueblo Dam and the confluence of the Arkansas River with Fountain Creek. The minimum year-round target flow is 100 c.f.s. Recreation flows between March 16 and November 14 (all times except when Pueblo Reservoir is storing water for the WWSP) vary depending on the water forecast for that year.

To meet the flow requirements of the FMP, the IGA parties, including Southeastern, agreed to limit their exchanges to allow the Arkansas River below Pueblo Dam to maintain certain flow levels. The Parties, however, explicitly stated that they did not intend to abandon any water right used to support the FMP, and accordingly created a program designed to recover foregone water. Colorado Springs, BWWP, Aurora, Fountain and Southeastern agreed to work together to develop recovery of yield storage, that is likely to be located at downstream gravel pit reservoirs.

4. Tamarisk Control Program

Tamarisk is a tenacious, non-native plant that has a deep root system (up to 100 feet) and leaves a salt residue in the soil. These characteristics enable it to quickly displace native cottonwoods and willows as well as adjacent upland plant communities such as bunch grasses, sage and rabbit brush. The resulting Tamarisk thickets crowd out streams and rivers; provide poor habitat for livestock, animals, and birds; increase fire hazards; and limit human use of the waterways. Tamarisk steals water by using more water than the native vegetation that it displaces. This nonbeneficial user of the West's limited water resources dries up springs, wetlands, and riparian areas by lowering water tables. It is estimated that the western United States is losing from 2 to 4.5 million acre-feet of water per year over what the native plants would use. This is enough water to supply upwards of 20 million people or to irrigate over 1,000,000 acres of land.

Southeastern's Board of Directors supported the efforts to pass federal legislation providing the financial tools for the implementation of regional projects for the control of tamarisk and other non-native plants impacting western rivers. On October 11, 2006, President Bush signed the Salt Cedar and Russian Olive Control Demonstration Act, H.R. 2720, Public Law 109-320, which authorized $80 million for large-scale demonstrations and associated research over a five-year period.

The Tamarisk Coalition, in which Southeastern participates, is a non-profit alliance working to restore riparian lands. The Tamarisk Coalition is taking the lead in developing a collaborative effort between the western states and is developing partnerships with governmental agencies for control of this non-native invasive tree species. Southeastern is committed to developing innovative programs to eradicate non-native phreatophytes such as tamarisk that hinder agricultural and municipal entities from making efficient use of the limited water resources in the Arkansas River Basin.

III. Challenges for the Future

A. Colorado River Conflicts

With the supplemental supply of water for the communities and individuals who benefit from the Fry-Ark Project coming from the Colorado River, Southeastern, as part of a coalition of Colorado water users, has been involved in three major issues on the Colorado River over the last several years:

1. Negotiations with California and the other upper basin states on California's over use of its apportionment in use of surplus water on the Colorado River. The basin states were successful in negotiating with California on achieving an agreement by California to reduce its use to its basin apportionment. With the Department of Interior's assistance, the other Basin states' success in reaching this agreement was historic for the river.

2. Deliveries of water to Mexico and some issues raised by Mexico and various environmental organizations in the United States to secure additional water for environmental purposes. The coalition has been involved in those issues in the last several years, and this issue will continue to come up over the next several years.

3. Current drought and shortage situation in the Colorado River. For several years, the focus of discussions has been about allocating surplus water, and, all of a sudden, there is no surplus water. Currently, the discussion is cen

tering on drought and compact calls, which provides a very clear indication of how quickly things can change on the river.

Neither the Boulder Canyon Project Act nor the decree in the Arizona v. California case provides any real guidance to the Secretary on how to develop shortage criteria for how shortages will be allocated in the lower basin. The only guidance is in the authorizing legislation for the Central Arizona Project, which give California the first priority to its basin apportionment of 4.4 million acre-feet. Former Secretary Gale Norton, considering the current conditions of the reservoirs, was interested in moving forward with the development of shortage criteria. She asked the basin states to come to a consensus on that, and to provide that consensus to her. Recently, after several months of intense negotiations, the seven Colorado River Basin States reached an accord on handling of the drought and shortage situation in the Colorado River. The agreement is specifically designed to comport with the Colorado River Compacts and the "Law of the River" but seeks to find flexibility within the law to further improve reservoir operations. The signing of the proposed agreement is a significant event in the overall water operations on the Colorado River and will remove the threat of litigation between the states over water operations through 2025.

Several circumstances combined to lead to this agreement. Due to the recent drought conditions, the Secretary of the Interior was asked to review current operations of Colorado River reservoirs. As a result, on June 15, 2005, Reclamation published a Federal Register notice beginning the process to develop the lower basin shortage criteria and changes to the coordinated reservoir operations of Lakes Powell and Mead. The deadline for completion of this process is December 31, 2007.

In response to the Bureau's notice, on August 25, 2005 Governor's representatives for the seven Colorado River Basin States wrote a letter to the Secretary of Interior stating the seven Colorado River Basin States had agreed on a three-pronged strategy for improving management and operations of the Colorado River. First, the states, working with Reclamation, would develop lower basin shortage criteria in conjunction with new coordinated operating criteria for Lakes Powell and Mead under low reservoir conditions. Second, the states, working with Reclamation, would look for ways to improve system efficiency and management. Finally, the states would look for ways to augment the water supplies of the Colorado River. Southeastern continues to work with other Colorado River water users to resolve those issues in a manner that promotes sustainable use of the Colorado River.

B. Exportation of Water from the Arkansas Valley

The Fry-Ark Project was designed to provide supplemental water to a valley that is water short. Thus, when municipalities from the South Platte basin have attempted to export some of the Arkansas' limited supply of native water, it has created challenges for water users in the Arkansas Valley as well as the District. Nothing in the Fry-Ark authorizing act, including any documents incorporated by reference in the statute, provides authority for the Secretary to enter contracts for use of Fry-Ark excess capacity space to store native Arkansas River water rights for use out of the Arkansas River Basin in Colorado, with the possible exception of the City of Aurora.

Special protection for the Arkansas Basin beneficiaries of the Fry-Ark Project is built into the repayment contract, Contract No. 5-07-70-W0086, as amended, between Southeastern and the United States, which govern the evacuation of water from Pueblo Reservoir. The spill order became part of the Contract by the Fourth Amendment in 1984 and resulted from negotiations between Southeastern, BWWP and Colorado Springs in connection with the 1984 applications filed in Water Court for the WWSP and Colorado Springs' and BWWP's exchanges. The spill priorities in Article 13, which are unique among Reclamation projects, provide:

(a) Whenever water is evacuated from Pueblo, Twin Lakes, and Turquoise Reservoirs to meet the necessities of Project flood control, power generation purposes, storage of transmountain Project water, storage of native Project water, and Project operational requirements; except as provided in Subarticle 13.(b) below, the water evacuated shall be charged in the following order:

1. Against water stored under contracts for if-and-when available storage space for entities which will use the water outside the District boundaries. 2. Against water stored under contracts for if-and-when available storage space for entities which will use the water within the District boundaries. This evacuation shall be charged pro rata against water stored under all such like contracts at the time of the evacuation.

3. Against any winter storage water in excess of 70,000 acre-feet.

4. Against water stored under contracts with municipal entities within the boundaries of the District, which water is neither Project water nor re

turn flow from Project water and which water is limited to 163,100 acrefeet less any Project water purchased and stored by municipal users. This evacuation will be charged pro rata against the water stored under all such like contracts at the time of evacuation.

5. Against winter storage water not in excess of 70,000 acre-feet.

6. Against Project water accumulated from the Arkansas River and its tributaries.

(b) Notwithstanding the order of evacuation of water listed in Subarticle 13.(a) above, evacuation of water from storage pursuant to existing firm storage contracts, the Highline storage contract and future storage contracts that may be entered into with the Board of Waterworks of Pueblo, Colorado and Twin Lakes Reservoir and Canal Company to satisfy prior commitments will be made pursuant to the terms of such storage contracts.

First to spill out of the reservoirs is water stored under contracts for if-and-when available storage space for entities which will use the water outside Southeastern's district boundaries.

Commissioner John W. Keys, III, by his letter of April 3, 2003, announced Reclamation's conclusion that it has authority to enter into long-term contracts with Aurora for utilization of Fry-Ark Project facilities. The City of Aurora acquired Rocky Ford Ditch water rights and applied to the Water Court to change the use of those water rights from irrigation use in the Arkansas Basin to use for municipal purposes in Aurora located in the South Platte River Basin. The lands previously irrigated by these water rights were included within Southeastern's district boundaries. The transfer of such water rights out of the basin to municipal uses in Aurora has potentially serious impacts to the Arkansas River Basin. Southeastern executed an intergovernmental agreement with Aurora, as did several other parties in the Arkansas River Basin, to mitigate the damages caused by the exportation of water from the Arkansas Valley.

C. Meeting Increased Demands for Water Within the District.

Southeastern finalized a study in September 1998 that documented the projected future water storage and supply demands of Southeastern's municipal and agricultural constituents. The study also provided alternatives to meet those demands, which included conservation efforts. Southeastern worked with twenty-seven other water users groups throughout the District to collectively assess future storage and supply needs. The Water and Storage Needs Assessment Project envisaged future water demands and listed a set of alternatives to provide for those demands. The Needs Assessment Study reviewed existing water conservation efforts in cooperation with Southeastern and the water users groups. They provided guidance for conservation measures that will help meet future demands. The Needs Assessment Study also reviewed storage alternatives including the expansion of existing facilities and the construction of new storage facilities. The report indicated a need for an additional 173,100 acre-feet of storage in the Arkansas Valley by the year 2040. The challenge for the Arkansas Valley is to locate such storage in an environmentally and economically sound manner.

D. Preferred Storage Options Plan (PSOP)

The "Water and Storage Needs Assessment Report" led Southeastern and the communities in the Arkansas Valley to further study water needs in the Arkansas River Basin. The participants analyzed many different alternatives for providing future water supplies, worked with agricultural and municipal water providers, recreation interests, local environmental groups and state and federal resource agencies, to devise a plan to prepare Southeastern to meet water needs in the basin into the year 2040.

In 2000, the District completed a study that evaluated more than thirty different alternatives to meet the projected demand. The study concluded that efforts should be focused on the use and expansion of existing Fry-Ark Project facilities to meet future demands.

The first objective of PSOP is to better utilize existing capacity in the Fry-Ark Project reservoirs to help meet growing demand for storage. This is Phase I, the goal being to make full use of existing capacity in Project facilities without interfering with the current entitlements to Project water and storage. These new storage contracts will help communities meet their water needs through the year 2015. At that point, new storage capacity will need to be developed. The preferred alternatives for Phase II were to enlarge both Pueblo and Turquoise Reservoirs and to allow the use of existing excess capacity in the Fry-Ark Project (long-term contracts for municipalities within district boundaries to store non-Project water). PSOP proposes to en

large Pueblo Reservoir by 54,000 acre-feet and Turquoise Reservoir by 19,000 acrefeet in order to help meet the projected 2040 demand.

The reasons for enlarging Fry-Ark storage facilities are to allow for greater municipal storage and storage of agricultural water through the WWSP. An enlarged Pueblo Reservoir would help municipal users meet their future demands and provide permanent storage space for the WWSP. Without additional storage space in Pueblo Reservoir, Winter Water may be threatened with a spill or at least early release, which means that storage of this valuable water is restricted or eliminated entirely. In addition, the enlargement would provide for storage of other supplemental agricultural water and give small towns future opportunities to contract for firm storage space.

E. Arkansas Valley Conduit

Both the 1962 and 1978 Acts contemplated the construction of the Arkansas Valley Conduit ("AVC"), which has yet to be developed, primarily because the constituents do not have the funding to develop it.

The need for the AVC is driven by projected population growth, the economicallydisadvantaged nature of the lower Arkansas Valley, and increasingly costly water treatment requirements being experienced by certain water providers in the basin. In addition to population growth pressures, Southeastern's smaller communities, especially those east of Pueblo, who rely on groundwater for their main water supply, need to develop a higher quality drinking water supply for their residents. As early as 1953, the Secretary of the Interior acknowledged that additional quantity and better quality of domestic and municipal water was critically needed for the Arkansas Valley, and in particular for those towns and cities east of Pueblo. House Document 187, 83d Congress, 1st Session, and the Fryingpan-Arkansas Final Environmental Statement dated April 16, 1975, both of which have been incorporated by reference into the Authorizing Act, recognized that the AVC would be an effective way to address this need. The local water available from the Arkansas River alluvium has historically been high in Total Dissolved Solids (TDS), sulfates, and calcium, and has objectionable concentrations of iron and manganese. Additionally, various water suppliers have recently reported measurable concentrations of radionuclides in their water. This extremely poor groundwater quality, combined with increasingly stringent water quality regulations of the Safe Drinking Water Act, has caused several local water suppliers to invest in expensive water treatment facilities to assure a reliable water supply for their customers.

Generally, all drinking water systems in the Lower Arkansas River Basin, from St. Charles Mesa in eastern Pueblo County to Lamar in Prowers County, are concerned with the poor water quality in this region. Many of the water providers do not satisfy, or only marginally satisfy, current drinking water standards. More than 40 water providers in the Lower Arkansas River Basin could benefit from the AVC, if implemented.

All communities must meet the state and federal primary drinking water standards through treatment or source replacement. Less documented, however, is the potential burden placed upon communities by high raw water concentrations of various unregulated water quality constituents such as iron, manganese and hardness. These constituents can cause accelerated infrastructure decay and loss of tax base and economic impacts associated with factories and businesses locating elsewhere. To address these issues, representatives of local and county governments, water districts and other interested citizens of the Lower Arkansas River Basin formed a committee in 2000 to consider a feasibility study of the AVC. These interested parties formed the WaterWorks! Committee and, along with Southeastern, began to review the feasibility of developing the AVC. Some of the relevant conclusions reached are as follows: • The cost of the AVC compares favorably with any "no action alternative," which would still require the communities involved to make substantial financial investments to address current water quality and safe drinking standards.

• The financial capabilities of the participating agencies are estimated to be inadequate to fund the construction of the proposed Arkansas Valley Conduit, under a 100 percent funding requirement, but AVC participants could afford to pay 20 percent cost-share.

• There is an adequate water supply to make the AVC feasible.

As mentioned above, the AVC was included in the original Fry-Ark reports integrated into the Fry-Ark Authorization Act. The AVC was not built because communities in the Lower Arkansas River Basin could not fully fund the AVC project. A study of the Arkansas Valley Conduit was prepared for Southeastern, the Four Corners Regional Commission and the Bureau of Reclamation in 1972. The report's recommendations for construction of a water treatment plant, pumping station and