U.S. Senate Committee on Appropriations

Statement of Bennett Raley, Assistant Secretary for Water and Science Department of the Interior Before the Senate Appropriations Committee Subcommittee on Energy and Water Development Oversight Hearing on the Construction of the Animas La-Plata Project

Wednesday, March 24, 2004

Mr. Chairman, I am Bennett Raley, Assistant Secretary of the Interior for Water and Science. My testimony today is intended to help the Committee understand why the cost estimate to complete the Animas La-Plata Project (Project) increased from $338 million in 1999 to $518 million today, and to explain the steps we’ve taken to ensure that the problem does not recur.

Background

The purpose of the Project, essentially, is to divert, pump, store, and convey water from the Animas River at Durango, Colorado to provide water for both Indian and non-Indian municipal and industrial uses in Colorado and New Mexico. It is required to fulfill the requirements of the Colorado Ute Settlement Act Amendments of 2000.

After several changes in the scope of the project over six decades, the project plan is now settled on four key project features: the Durango Pumping Plant; Ridges Basin Inlet Conduit; Ridges Basin Dam; and the Navajo Nation Municipal Pipeline. Project construction also required the relocation of parts of a county road and natural gas pipelines.

2003 Project Construction Cost Estimate Reclamation began developing the new Project construction cost estimate in early 2003, which contained a total estimate of $500 million, based on January 2003 price levels. The current indexed price for the project is $518 million.

After these construction cost estimates for the Project were completed in July 2003, Secretary Norton directed Reclamation to review the costs associated with the project to explain the reasons for the increase in the construction cost estimate. Reclamation undertook a detailed and critical review of technical and administrative data, held discussions with Reclamation staff involved in program and construction management, and met with project sponsors to prepare the report. The complete report, including a chronology of the project dating to 1956, is submitted for the record along with this statement.

In summary, there is no single reason why the construction cost estimate for the Project increased from $337.9 million in 1999 to $500 million in 2003. There are, however, several factors that contributed to the increased estimate that I will focus on today:

1. The accuracy and completeness of the 1999 construction cost estimate, along with additional costs associated with final Project design and construction;

2. The failure to include the cost of contracting under the Indian Self-Determination and Education Assistance Act (ISDEA) P.L.938-638; and,

3. Inadequate communication between Reclamation and sponsors of the Project concerning cost factors related to design options and decision-making.

The 1999 Project Construction Cost Estimate In general, the report shows that, with the exception of the Ridges Basin Dam feature, the 1999 Project construction cost estimate was incomplete and inaccurate for the pumping plant, inlet conduit, gas pipeline and road relocations, and the newly-added Navajo Nation Municipal Pipeline.

The 1999 estimate was prepared by qualified engineers hired by the Ute Mountain Ute Tribe (UMUT) who relied upon several years of Reclamation data and analyses. Key factors that contributed to the underestimate included:

• Dependence on appraisal level information at the feasibility study phase;

• Mischaracterization of site conditions; and

• Failure to fully factor in the cost impacts of environmental and legislative requirements.

A crucial problem with the 1999 estimates was that they were identified as being at the feasibility level, when they were actually based upon less developed appraisal level data. Another factor that contributed was oversight. In the early 1990’s, Reclamation was reorganized to give Area Offices greater autonomy to design and manage construction, eliminating the Technical Support Center’s (TSC) oversight role. This fact alone contributed to the lack of attention to the 1999 estimates accuracy or source.

Despite concerns raised by TSC technical staff in Denver to the Western Colorado Area Office that the feasibility design and estimate used in the 1999 Draft Supplemental Environmental Impact Statement (DSEIS) did not contain sufficient information and detail to complete an in-depth review of cost estimates, work on the 1999 DSEIS pushed ahead without addressing this concern. In 1999 and early 2000, attention was on completing environmental requirements with limited focus on accuracy of the cost estimate.

Nevertheless, the 1999 cost estimate was included in the July 2000 Final Supplemental Environmental Impact Statement (FSEIS), used to support the Colorado Ute Settlement Act Amendments of 2000 authorizing the project, and formed the basis for negotiations of repayment contracts for some of the Project sponsors.

The 2003 estimate for the Durango Pumping Plant is $52 million above the 1999 estimate. Approximately $38 million of this increase was due to the type and quantity of material that must be excavated: bedrock vs. soil, and project management and site support costs. Neither the total volume to be excavated nor the bedrock was factored into the initial design concepts by the contractor.

Another $28 million of the increase was to relocate parts of gas pipelines and County Road 211 from the Ridges Basin Reservoir site, again due to increased excavation and directional drilling.

Reclamation did not identify these significant costs until completing final designs for the Durango Pumping Plant.

Costs to comply with P.L. 93-638 The spirit and intent of the ISDEA is to provide Tribes an opportunity to be self-determining and to take a more active role in those activities that impact their daily lives. Under the ISDEA, the Secretary must allow a Tribe to contract for any work that is a program, service, function, or activity administered by the Secretary for the benefit of a Tribe. The ISDEA is not a sole-source program; it is a congressionally mandated, direct-source program that directs the Secretary to contract with Tribes under certain situations. In the 1988 Settlement Act, Congress mandated application of the ISDEA to the Animas La-Plata Project.

Contracting under P.L. 93-638 (the “638 process”) differs from traditional competitive bidding. Under the ISDEA, the fixed-price construction contracts (requested by the Ute Mountain Ute Tribe) are to be comprised of: (1) the reasonable costs to the Tribe of actually performing the work; (2) the costs to the Tribe of auditing the general and administrative expenses incurred by the Tribe in performing the work; (3) the costs of developing the project proposal; and (4) a fair profit.

The objective of the negotiations is to arrive and a fair and equitable price for the award, not to obtain the lowest possible award price. Nor does the price have to conform to either party’s cost estimate.

The 1999 cost estimate did not include additional costs of applying ISDEA. Instead, it was based on construction costs in a competitive bidding environment. The 2003 Project construction cost estimate includes a 30% Estimating Difference Factor (EDF) that would be applied to future Project contracts. The intent of using the EDF was to try to more accurately estimate and account for Reclamation and contractor administrative and other costs likely to occur in negotiating future ISDEA contracts. While the 2003 EDF equate to $43 million to apply ISDEA, accounting for 24% of the increase (none of which was included in the 1999 estimate), there is some optimism that the actual amount could be less for the remainder of the Project as Reclamation, the Tribe, and other Project sponsors work more closely on Project implementation.

Communications between Reclamation and Project Sponsors The report found that communications and discussions between Reclamation Project staff and Project sponsors about the cost factors related to design options and decision-making have been inadequate. Specifically, communication as required by existing contracts was not detailed or timely enough to allow sponsors input on construction plans and progress, changing conditions, or other information associated with the construction of the Project.

As a result of this finding, the Project Construction Committee was established by Reclamation in 2001 to provide a system to assure that necessary internal and external coordination and management of the project occurred during construction.

Reclamation has also reconfigured the Project Construction Committee to improve interaction and communications with the sponsors. It is our opinion that this reconfigured process seems to be working quite well at this time.

Conclusion and Next Steps Mr. Chairman, despite the cost increases, Animas-La Plata is still a viable project and a high priority for our customers. Moving the project forward is crucial to satisfying the Indian Water Rights Settlement and meeting future non-Indian municipal water supply needs in southwestern Colorado and northwestern New Mexico.

Reclamation has completed or is taking steps to manage and complete the Project in the most cost effective and efficient way possible. These actions, when fully implemented, will provide the safeguards necessary to avoid similar occurrences on this and other Reclamation Projects in the future.

First, the basic construction cost estimate for the Project has been redone by Reclamation. Management efforts will continue to save costs during scheduling of construction and final design of components of the Project. Second, Reclamation has reviewed its internal organizational approach to construction of the Project and reconfigured the organization as necessary to improve construction management and interaction and communication with sponsors. Third, the ISDEA processes are being reviewed to improve efficiencies in construction of the Project. Fourth, as noted above, Reclamation has reconfigured the Project Construction Committee to improve the external communications with Project sponsors. Fifth, Reclamation will use Value Engineering processes, in cooperation with Project sponsors, to seek additional ways to reduce Project construction costs. Finally, Reclamation is reviewing its procedures for cost estimates and construction to identify and correct process deficiencies that may have led to the Animas La-Plata Project cost estimate problems.

Thank you for the opportunity to testify today and update this Committee on the progress we are making in constructing the Animas La-Plata Project. I would be happy to answer any questions you may have at this time.