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In September 2004, the River District, Colorado Springs, Aurora, Twin Lakes Reservoir and Canal Company, and the Homestake Project, which is a joint undertaking between Colorado Springs and Aurora, entered in a MOU explaining and clarifying the water and storage rights of the parties in Arkansas River Basin water. Also in September 2004, Reclamation and SECWCD completed work on drafting a MOU defining the District's "First Right of Refusal” included in H.R. 4691 and outlining the procedures for the con acting of excess capacity contracts outside the Arkansas River Basin (this MOU was never executed).

In November 2004, Rep. Bob Beauprez introduced another PSOP bill, H.R. 5373, 108th Cong., 2d Sess., during the lame-duck session of Congress. This bill was similar to Rep. Hefley's bill from earlier in the year. It was during consideration of Beauprez's H.R. 5373 that the LAVWCD began voicing its objections to the PSOP.

It was also during November 2004 that SECWCD executed two other agreements. On November 16, SECWCD and the Colorado River Water Conservancy District (“River District”) entered into an agreement settle various matters in dispute between the parties. The agreement accomplished four main goals: 1) it settled West Slope opposition to SECWCD's water court cases regarding the enlargement of its Boustead Tunnel water rights, 2) it resolved conflicts with SECWCD over West Slope operations of Ruedi Reservoir, 3) it provided for a dispute resolution process to address future issues, and 4) it stipulated that the River District agrees to support the PSOP legislation in a form substantially similar to H.R. 4691, 108th Cong., 2d Sess. Then on November 30, SECWCD, the River District, and Twin Lakes Reservoir and Canal Company entered into a separate agreement regarding the operation of the Twin Lakes Exchange described in the Operating Principles of the Fryingpan-Arkansas Project.

Since early 2005, the PSOP parties have been in negotiations with LAVWCD to address a variety of regional concerns, including PSOĎ. In May 2005, SECWCD, Aurora and Reclamation entered into a MOU regarding the settlement of Aurora's application in Case No. 99CW170(A) and clarified the applicability of the spill priorities found in Article 13 of the SECWCD Contract (No. 5-07-70-W0086) to Aurora's requested long-term storage and exchange contracts with Reclamation.

Mrs. NAPOLITANO. Thank you so much for your testimony, sir, and we'll take your request into consideration.

Mr. Ryan, the Bureau of Reclamation. STATEMENT OF MIKE RYAN, REGIONAL DIRECTOR, GREAT

PLAINS REGION, U.S. BUREAU OF RECLAMATION, BILLINGS, MONTANA

Mr. RYAN. Good morning, Madam Chair, members of the committee. My name is Mike Ryan. I'm the Great Plains Regional Director for the U.S. Bureau of Reclamation. Early in my career, I spent about four years on the headwaters of the Arkansas, helping to operate and maintain some of the facilities of the FryingpanArkansas Project, and I am pleased to be here today to provide you information on Reclamation's activities and involvement on the Fry-Ark and provide our view on water management challenges we are all facing

Congress authorized the project in 1962 as a multi-purpose trans-basin diversion project for Colorado. The project annually diverts an average of about 52,000 acre-feet of water from the Fryingpan River and other Colorado River tributaries on the Western Slope to the Arkansas River Basin on the Eastern Slope. Project water provides a supplemental water supply for municipal, industrial, and domestic uses and irrigation in the Arkansas Valley. Additional authorized project purposes include power, flood control, recreation, and conservation and development of fish and wildlife resources. The project has been operated and maintained by Reclamation since its completion in 1975, when the Fry-Ark Project water was first delivered to users in the Arkansas Valley. The Southeastern Colorado Water Conservancy District represents water users and is responsible for repaying the United States for the cost of the Fry-Ark Project works associated with irrigation and municipal uses. The district also pays a proportionate share of annual operation and maintenance.

It is a challenge to meet the competing water demands of people, farms, cities, and the environment. Consistent with the principles of Reclamation's Water 2025 Initiative, Reclamation is proposing the use of existing facilities to better utilize infrastructure, while not jeopardizing authorized Fry-Ark Project purposes.

Reclamation is involved in several ongoing projects, either as a lead agency or as a source of technical assistance, that will help alleviate water delivery challenges in Colorado. We have helped to prepare a report on Preferred Storage Options Plan, and have provided planning assistance to local stakeholders weighing options for the Southern Delivery System. Reclamation has also responded to frequent requests for information from local sponsors interested in the study of the Arkansas Valley conduit.

We are also working to address water shortfalls through excess capacity contracts, commonly known as “if and when” contracts for communities in Colorado. For instance, temporary “if and when” storage contracts for 10,000 acre-feet of Aurora's water have been executed on an annual basis with Reclamation for the past 22 years. In addition, “if and when” exchange contracts for 10,000 acre-feet have been executed annually. This year in Eastern Colorado, Reclamation entered into 18 temporary storage contracts totaling approximately 45,500 acre-feet, and one exchange contract for 10,000 acre-feet. Contractors included several cities and water districts, the Federal Bureau of Land Management, and the State of Colorado.

The proposed Aurora contract is an example of the multi-purpose use of the Fry-Ark Project consistent with its governing statutes. The proposed contract allows a non-Federal entity to utilize space not being used to store project water. This contract is within both legal and policy parameters. It will cause no significant impact on the environment and does not require Aurora to construct additional facilities to meet their needs. It provides revenues which assist in the repayment of the reimbursable portion of the project. It also allows Aurora to plan for the future without injury to existing beneficiaries within the Arkansas Basin.

Because excess capacity contracts are exercised only when the service can be provided without harm to the project or those receiving water from the project, Reclamation believes making excess capacity available to store non-project water for Aurora, Colorado Springs, and others is an efficient and beneficial use of existing project features.

Reclamation has other proposed "if and when" contracts for the Southern Delivery System and the Preferred Storage Options Plan. These arrangements have been formulated in response to identified needs for additional water-related contracts to meet long-term water supply needs.

Reclamation applauds the forward-thinking and collaborative planning efforts that have gone into the development of these efforts. We will continue to work with local entities to provide water

to small valley cities to enhance existing flows for recreation and to protect the fisheries.

In summary, full utilization of Reclamation's FryingpanArkansas project is necessary to help communities work through water resource challenges. It is the right thing to do, and we are committed to this collaborative, constructive approach.

This concludes my statement and I would be pleased to answer any questions at the appropriate time. Thank you. [The prepared statement of Mr. Ryan follows:] Statement of Michael J. Ryan, Great Plains Regional Director,

Bureau of Reclamation, U.S. Department of the Interior Madam Chairwoman and members of the Subcommittee, my name is Michael J. Ryan and I am the Great Plains Regional Director for the Bureau of Reclamation. I am pleased to be here today to provide you information on Reclamation's activities and involvement in the Fryingpan-Arkansas Project, commonly known as the FryArk Project, and provide the Department of the Interiors view on water management challenges we are facing.

Congress authorized the Project in 1962 as a multi-purpose, trans-basin water diversion project for Colorado. The Project annually diverts an average of 52,300 acrefeet of water from the Fryingpan River and other Colorado River tributaries on the western slope of the Rocky Mountains to the Arkansas River basin on the eastern slope. Fry-Ark Project water provides a supplemental water supply for municipal, industrial, and domestic uses, and irrigation in the Arkansas Valley. Additional authorized Project purposes include power, flood control, recreation, and conservation and development of fish and wildlife resources. The Project has been operated and maintained by Reclamation since its completion in 1975 when Fry-Ark Project water was first delivered to users in the Arkansas Valley.

The Southeastern Colorado Water Conservancy District represents water users and is responsible for repaying the United States for the cost of the Fry-Ark Project works associated with the irrigation and municipal uses, plus applicable interest. The District also pays a proportionate share of annual operation and maintenance of the Project.

It is a challenge to meet the competing water demands of people, farms, cities, and the environment. Consistent with the principles of Reclamation's Water 2025 Initiative, Reclamation is proposing the use of existing facilities to better utilize infrastructure, while not jeopardizing existing authorized Fry-Ark Project purposes.

Reclamation has played a role in several ongoing projects that aim to help alleviate water delivery challenges in Colorado. We have provided technical information for reports prepared by the Southeastern Colorado Water Conservancy District on the Preferred Storage Options Plan, a project conceived to provide additional reservoir storage space in the Arkansas River Basin. Reclamation has also provided planning assistance to local stakeholders weighing options for the Southern Delivery System, a project to provide additional water deliveries to the communities of Colorado Springs, Fountain and Security. And Reclamation has also responded to frequent requests for information from local sponsors interested in the study of ways to provide improved water quality to communities in the Arkansas River Valley east of Pueblo Reservoir.

In addition, Reclamation is working to address water shortfalls through excess capacity contracts, also known as “if and when” contracts for communities in Colorado. These contracts allow third parties to store water in Reclamation reservoirs as long as it does not affect the storage and delivery of project water. For instance, temporary "if and when” storage contracts for 10,000 acre-feet of Aurora's water have been executed on an annual basis with Reclamation for the past 22 years. In addition, “if and when” exchange contracts for 10,000 acre-feet have been executed annually for the past 9 years. This year in Eastern Colorado, Reclamation entered into

9 18 temporary storage contracts, totaling approximately 45,500 acre-feet, and one exchange contract for 10,000 acre-feet. Contractors included several cities and water districts, the Bureau of Land Management and the State of Colorado.

The contract sought by Aurora is an example of the multi-purpose use of the FryArk Project consistent with its governing statutes. The proposed contract allows a non-Federal entity to utilize space not being used to store Project water. This contract is within federal legal and policy parameters. It will cause no significant impact on the environment and does not require Aurora to construct additional facilities to meet their needs. The stored 10,000 acre-feet of water has been purchased from willing sellers, and will not be contracted as “Project water.” It provides revenues which assist in repayment of the reimbursable portion of the project. It also allows Aurora to plan for the future without injury to existing beneficiaries within the Arkansas Basin.

Because excess capacity contracts are exercised only when the service can be provided without harm to the project or those receiving water from the project, Reclamation believes making excess capacity available to store non-project water for Aurora, Colorado Springs, and others is an efficient and beneficial use of existing Project features.

Reclamation has other proposed “if and when” contracts for the Southern Delivery System and the Preferred Storage Options Plan. These arrangements have been formulated in response to identified needs for additional water related contracts to meet long-term water supply needs.

Reclamation applauds the forward thinking and collaborative planning efforts that have gone into the development of these efforts. We will continue to work with local entities to provide water to small valley cities to enhance existing flows for recreation and to protect the fisheries.

In summary, full utilization of Reclamation's Fryingpan-Arkansas Project is necessary to help communities work through water resource management challenges. It is the right thing to do, and we are committed to this collaborative approach.

This concludes my written statement, and I would be pleased to answer any questions.

Response to questions submitted for the record by Michael J. Ryan, Great

Plains Regional Director, Bureau of Reclamation, U.S. Department of the

Interior Post Hearing Questions from Chairwoman Grace F. Napolitano: Question: Can you give us more information on exactly what authority the Bureau of Reclamation has to contract with Aurora and specifically include a copy of the solicitor's opinion on this?

Answer: Reclamation laws encompass numerous statutes relating to specific projects as well as those of general application. Section 14 of the Reclamation Projects Act of 1939 is the general authority for this decision. This Section authorizes the Secretary to enter into contracts for the exchange or substitution of water and water rights. The most relevant language is as follows:

The Secretary is further authorized, for the purpose of orderly and economical construction or operation and maintenance of any project, to enter into such contracts for exchange or replacement of water, water rights, or electric energy or for the adjustment of water rights, as in his judgment are

necessary and in the interests of the United States and the project. Under this authority, Reclamation has entered into contracts for the exchange or facilitation of an exchange of non-project water. Reclamation believes the 1962 Project Act, as amended, also authorizes this contract.

There is no formal Solicitor's Opinion, but as per Reclamation's normal process for contracting actions, the Solicitor's Office has reviewed and approved the proposed contract for legal sufficiency. Question: By entering into these contracts with Aurora to store water, the Bureau is facilitating Aurora's effort to purchase water rights on the Arkansas River Valley. Aren't there policy considerations regarding the loss of farmland and the socioeconomic effects of water being removed from agricultural production for use by urban areas? Is this something a Federal Agency like the Bureau of Reclamation should be actively facilitating?

Answer: Reclamation is not facilitating the purchase of water rights. For over 20 years, Aurora has followed state water law in acquiring the water from willing sellers, and the right to transfer the water to Aurora through the Colorado water rights system. All water proposed to be moved through the Fry-Ark Project facilities has been subject to environmental compliance and any additional amounts of water in the project would likewise be subject to further legal and environmental compliance. No significant socioeconomic impacts associated with the proposed contract were identified through Reclamation's National Environmental Policy Act compliance process.

Question: How does the 40-year long-term contract differ from the annual contracts that the Bureau and Aurora have entered into in the past?

Answer: Under the long-term contract, Aurora made additional commitments in the areas of payments for storage and exchange, proportionate responsibility for operation and maintenance and increased environmental safeguards for water quality. The rates under Aurora's current temporary 1-year contract, which include an operation and maintenance component, are $43.76 per ac-ft for 10,000 ac-ft of storage, and $43.76 for exchange. The storage rate under the long term contract starts at $43 per ac-ft and increases annually at a rate of 1.79% providing a final storage rate of $85.90 per ac-ft in 2046. The exchange rate under the long term contract starts at $49 per ac-ft and increases annually at a rate of 1.79% providing a final exchange rate of $97.88 in 2046. Aurora will pay an appropriate separate charge for operation and maintenance. Question: What is wrong with continuing with the yearly contract with Aurora? Why is a long-term contract needed?

Answer: The adoption of a long-term contract will result in a staff cost savings for both Reclamation and Aurora by ending the recurring cycle of annual contracts. Additionally, Aurora's payment for use of excess capacity of Fry-Ark facilities benefits the project and the United States with an earlier payout of reimbursable project costs. The use of excess capacity within the project provides for an efficient and beneficial use of existing project features. This use of facilities benefits the taxpayers and will not harm project beneficiaries. Question: Will this 40 year contract with Aurora mean that the Fry-Ark Project will be paid off any sooner?

Answer: Yes, revenues expected from the 40 year contract are estimated to be $30-50 million, which may result in early repayment. Post Hearing Questions from Rep. John Salazar: Question: The stated purpose of the Fryingpan-Arkansas project was to bring trans-basin water into the Arkansas Basin. Now, the project is being used to divert water out of basin through exchanges to Aurora. This seems to be in direct opposition to the intent of Congress. How does the Bureau explain their rationale for going against the law of Congress?

Answer: Reclamation's actions come in response to a direct request from a project stakeholder, and are consistent with federal and state laws. Under this proposed excess capacity contract, Aurora can use capacity in the project that is in excess of project needs to facilitate an exchange of their non-project Arkansas River water only when that capacity is not needed for project purposes. The non-project water Aurora intends to move through project facilities was purchased from willing sellers in the 1980's. Colorado state water law allows such a transfer and the Colorado water court approved the transaction. Excess capacity contracts are only entered into if there is no harm to the project or project beneficiaries. Question: I've never seen the Bureau articulate why they have authority to contract for storage or exchange contracts with Aurora. Can the Bureau, for once, explain how they generated their legal authority?

Answer: Reclamation laws encompass numerous statutes relating to specific projects as well as those of general application. Section 14 of the Reclamation Projects Act of 1939 is the general authority for this decision. This Section authorizes the Secretary to enter into contracts for the exchange or substitution of water and water rights. Under this authority, Reclamation has entered into contracts for the exchange or facilitation of an exchange of non-project water. Reclamation believes the 1962 Project Act, as amended, also authorizes this contract.

Aurora has purchased water rights on the Arkansas River (below Pueblo Reservoir) that are below Aurora's intake works (Otero Pipeline, which comes directly out of Twin Lakes Dam). In order for Aurora to utilize this water, they will have to enter into an exchange against water/water rights upstream of the intake works. Reclamation has the operational flexibility to exchange non-project water.

There are numerous provisions within the proposed contract to ensure that the Project is not adversely affected. Pursuant to state law, Aurora has changed the use and points of diversion of the water rights it has purchased in the Arkansas Valley. The Project has had ample excess capacity to store, convey and ultimately exchange Aurora's water. The contract would maximize the use of project facilities, within legal and policy parameters. There are minimal impacts on the environment in using Reclamation's facilities

and this approach does not require Aurora to construct future facilities. The United States receives a benefit from the exchange in that Rec

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