U.S. Senate Committee on Appropriations

TESTIMONY OF THE SAN JUAN WATER COMMISSION BEFORE THE SUBCOMMITTEE ON ENERGY AND WATER DEVELOPMENT OF THE UNITED STATES SENATE MARCH 24, 2004

Presented by L. Randy Kirkpatrick, Executive Director, San Juan Water Commission 7450 East Main Farmington, NM 87402

Thank you for the opportunity to testify in this important hearing today. Before I begin, I would like to introduce to you the Chairman of the San Juan Water Commission, Mark Duncan.

Today I want to address two points that are important to the San Juan Water Commission and the State of New Mexico. They are (1.) the Bureau of Reclamation’s management of the Animas La Plata Project and (2.) cost reimbursement.

However, I want you to know that despite the concerns I am raising today, the San Juan Water Commission remains committed to the completion of the Project. The Project is now under way, and it must be completed and put into operation. The Project and the water storage it will provide for New Mexico are critical to the future of the northwest part of the state. Further, the Bureau of Reclamation remains the best agency to complete the project – their construction team is excellent. The Bureau is working diligently to manage the construction, and it would be foolhardy – not to mention expensive and time-consuming – to change the construction team now.

Introduction – Background

The San Juan Water Commission (“SJWC” or the “Commission”) is a New Mexico joint powers organization, and it is composed of representatives of the San Juan Rural Water Users Association, San Juan County, and the Cities of Aztec, Bloomfield and Farmington. These entities collectively provide Municipal and Industrial water to more than 110,000 people, including many people on the Navajo Nation. The SJWC was the first entity to contract with the Bureau of Reclamation (“BOR” or “Bureau”) for storage in the Animas La Plata Project (“the Project”), as required in the authorizing legislation. We at the SJWC have paid up front our share of the cost of the Project as originally estimated by the BOR, or $6.9 million. We have advanced funds pursuant to our contract from an escrow account as requested, based on the BOR’s invoices.

The SJWC was shocked and dismayed to learn of the Bureau’s extreme cost underestimate on July 31, 2003. We attempted to understand the basis for our money advances and the cost of the construction contracts since construction began, but we frankly had little success obtaining the information we requested from the Bureau. Although apparently we were asking the right questions at the right time, we did not anticipate the magnitude of the Bureau’s underestimate.

It appears that the old construction estimate, which formed the basis of our contract and our $6.9 million payment, was incomplete. Apparently, the estimate was not a construction-level estimate, but rather was based only on an appraisal- or feasibility-level study. Further, the Bureau made changes to the Project that added significant costs. These two factors – an incomplete estimate and design changes – significantly contributed to the great disparity between the original cost estimate and the new cost estimate. The third significant factor contributing to the disparity between the two cost estimates is the use of the Indian Self-Determination and Education Assistance Act (P.L. 93-638) (the “638 process”), which the Bureau has interpreted to require the use of sole-source contracting for the construction of the Project, as well as to require the training and supervision of Indian contractors, often at significant expense. Additionally, the Bureau has maintained and increased its own non-contract staffing inconsistent with the spirit of the 638 process.

The first information the Project sponsors received concerning increased costs was the letter dated July 31, 2003, from Rick Gold, the Bureau’s regional director in Salt Lake City. This letter was released to the media the same day. The July 31 letter shocked the SJWC, and it unfairly placed much of the blame for the cost estimate differences on the Ute Mountain Ute Tribe (“UMUT”), which is the primary 638 contractor and whose consultant developed the old cost estimate. Although the letter threatened to split the sponsors, we agreed to continue to work together and to support continued appropriations for the Project.

In response to this unexpected bombshell, the SJWC prepared a report about how and why the mistakes were made in preparing the original cost estimate, which is attached. As we acknowledged in our report, the BOR must make some significant changes in the way it does business in order to regain our confidence and to maintain our support for the Project. Much to the credit of John Keys, Bill Rinne and Rick Gold, some progress has been made since July 31, but more remains to be done. Following are the two areas in which changes must still be made: the Bureau’s operations and the SJWC’s reimbursement obligations.

1. The Bureau must continue to change the way it is managing the Animas La Plata Project.

First and foremost, the Bureau must staff the Project with people who have the construction experience and project management judgment necessary to complete the Project. The Bureau has made these modifications for the construction phase of the project, and it is a welcome change.

Second, the Project Construction Coordination Committee meetings must comply with contractual obligations. This is a very challenging but necessary task, and we appreciate the Bureau’s efforts to change the structure and content of the meetings. Although the consultation function of the committee is difficult, it is necessary because it is mandated in Article 4(a) of our contract with the Bureau. Incorporating consultation with us into their process has been difficult for Bureau officials, and we appreciate the structural changes that have been made. However, a full, satisfactory consultation process has not yet been put into place.

2. Issues regarding the cost of the Project and the SJWC’s reimbursement obligations must be resolved.

Bureau officials have told us about their internal efforts to allocate costs in a way that is equitable. However, although we appreciate what the Bureau has told us, we need to review the Bureau’s final cost allocations in order to determine whether they are equitable to the San Juan Water Commission. In addition, we believe some of the measures listed below must be implemented to ensure that the increased construction costs are fairly allocated. It is simply too early to tell whether the Bureau will incorporate these measures, but we do not doubt the sincerity of the people we have worked with most closely -- John Keys, Bill Rinne and Rick Gold.

First, the Bureau must develop a cost-tracking procedure to prevent the underestimates and mistakes that have occurred from happening again. Such a process is under development, and time will tell whether it is successful.

Second, Bureau staff (and staff costs) must be reviewed and reduced. As part of this evaluation, Bureau and tribal staffing must be visible to the project sponsors and to the public. In fact, the UMUT’s contract with the Bureau addresses the need to examine Bureau staffing directly, but we understand that this information has not been provided to the Tribe. The Master Contract for General Provisions for Self-Determination Construction Contracts for the ALP, October 22, 2002, states:

“M. Design and Construction Management Expenditures. In order to reduce project costs associated with 638 undertakings, Reclamation agrees to implement its design and construction management responsibilities in the most economical and efficient manner possible. Reclamation will provide to the Contractor [WCA], in writing, its work plans, which lay out planned staffing, projected level of effort required to carry out these responsibilities, and proposed expenditures.”

As of November 2003, counsel for the UMUT had not received any such information from the Bureau. At the recent Project Construction Coordination meetings, the Bureau has explained some of the inner-workings of the Bureau and how costs are charged to the Project. The Bureau, however, must still link its costs to specific 638 functions. We understand that the 638 process is being used here in a novel way, and we have a need to know how much it is costing and why. Third, the Bureau must continue to review the 638 process. Such review is ongoing, and the 638 process appears to be improving in efficiency and cost control. The Colorado Ute Indian Water Rights Settlement Act of 1988 (P.L. 100-585) requires the use of the 638 process in the design and construction functions of the Bureau with respect to the ALP. However, the legislation does not direct exactly how the 638 process will be used. Because this process is still developing, it is imperative that all 638 costs be visible and reviewable.

Fourth, all sponsors, including SJWC, must have a role in future contracts between the UMUT’s construction company and the Bureau. Such participation would give us more comfort with the process and enable us to tell our taxpayers that the federal government and Indian contractors are working hard to hold down costs between the Bureau and the tribal construction company. We understand that the contract negotiations have been hard-hitting and have resulted in lower costs, but we need to see this process for ourselves.

Fifth, the cost of the 638 process, including costs incurred by the BOR, should not be reimbursable by the non-Tribal sponsors. The 638 process represents a federal policy choice to help Indians gain skills and experience on government jobs. That federal policy choice should not be implemented in a way that increases costs to the non-Indian cost-share partners in the Project, including the Commission. Such costs should be non-reimbursable.

Finally, the Commission’s contract specifically states that the SJWC can be assessed additional costs only if those costs are “reasonable and unforeseen costs associated with Project construction as determined by the Secretary in consultation with the Commission.” Article 8(d). The Bureau’s mistakes in the original cost estimates should not be considered “reasonable and unforeseen” additional costs because they resulted from decisions that the Bureau made without consultation with the SJWC.

Moreover, the definition of “reasonable and unforeseen” costs (still to be determined) should not include costs resulting from design changes the Bureau made after the SJWC executed its contract with the Bureau. For example, the Bureau made a decision to relocate the pumping plant, in part, because of the presence of a fault line and potential contamination from an old mining site. The Bureau did not advise the SJWC when it was considering this change, or consult with the SJWC or other sponsors. The costs associated with this change should not be attributable to the joint costs for which the SJWC is responsible because the SJWC paid its upfront $6.9 million payment in good faith and under a contract that requires consultation on “final plans for Project Works, project completion schedule, and Project construction costs.” [Article 4(a)] In effect, the Bureau has not fulfilled its contractual obligations to the SJWC regarding this and many other changes, and the SJWC should not be forced to pay for such expenses. The Bureau’s contract with the State of Colorado for the Animas-La Plata Conservancy District has similar language.

Thank you again for the opportunity to present this testimony today, and thank you for your interest in this important issue. Please feel free to contact me if you have any additional questions.