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This program is incorporated in the proposed contract. It was formulated after & careful survey of the district's rehabilitation needs, a reclassification of the district's lands, a detailed physical and economic analysis upon which conclusions as to the district's repayment capacity could be based, and extended discussions with water users of the Frannie division. Under the proposed contract the Government effects a reclassification of the district lands, modifies the annual district obligation to accord with its payment capacity, and undertakes to participate in the rehabilitation program. The district agrees to compromise and release its long-standing claim to a portion of the revenues of the Shoshone power plant and to use the proceeds of the compromise in rehabilitating not only its irrigation system, but project lands, and works which are jointly used with the Garland division. The district also agrees to establish and maintain a reserve fund to meet unforeseen operation and maintenance costs.

The principal features of the proposed contract are briefly as follows:

(a) The Government agrees to continue to deliver water and, if appropriations are made, to participate in a rehabilitation program for the irrigation works of the Frannie division.

(6) The district agrees to compromise and release its claim to the net power revenues of the Shoshone power plant and to use $138,000 of the $213,000 received in settlement of the claim for participation in a rehabilitation program for the irrigation works of the Frannie division. The district will use the remaining $75,000 of its $213,000 settlement in a program to restore its project lands to productivity. Payment of the power settlement moneys will be made over a 5-year period, the first payment being $163,000, and the four succeeding payments being $12,500 each

(c) Reclassification of the district lands is to be approved. This will bring 201.87 acres of formerly unproductive land into the district and will exclude 65.90 acres of formerly productive land. A total of 5,080.86 acres of land of former pay class will be classified as temporarily unproductive. To this acreage must be added approximately 2,960 acres of land originally classified as temporarily unproductive, the classification of which was not changed by the reclassification. Restoration of these lands to a pay status will be undertaken with the $75,000 portion of the district's power-settlement funds earmarked for the purpose. If action to restore the lands is not taken within 10 years, they will be excluded from the project.

(d) The district accepts a construction charge obligation of $2,019,605, which will include: (1) an existing construction charge obligation of $1,702,735 minus past payments and credits of $117,654; (2) an obligation of $170,250 as the district's proportionate share of the cost of the Buffalo Bill Dam and Reservoir, this being a condition of the power settlement; (3) an obligation of $7,274 representing the net increase resulting from the difference between construction costs allocated to lands included and those excluded from the project; and (4) an obligation not exceeding $257,000 to cover proposed expenditure by the United States for the rehabilitation work noted above in (a).

For each acre classified as temporarily unproductive and hereafter excluded from the division, the district's obligation will be reduced by $68.51. Its obligation will be increased in the same amount for each new acre included in the division.

The district's annual construction installment will be $7,500 until such time as the district elects the use of a formula under which the annual installments will vary with agricultural prices. The variable formula will be applied to a base annual installment of $6,000 with a 175 percent ceiling and a 15 percent floor. The $6,000 base figure is in keeping with the water users' estimated longrange payment capacity. Once the district elects to make its payment under the variable formula all payments will thereafter be in accordance with the formula. This will insure higher payments during periods. of higher prices and protect water users in periods of low prices. For each acre brought into the division or returned to a pay status from the tempor unproductive status, the $7.500 flat annual installment and the $6,000 base installment will be increased by 62.5 and 50 cents, respectively.

(e) The district will continue to operate and maintain the irrigation works of the division under Government supervision and will establish an operation and maintenance reserve fund. It will participate in the operation and maintenance of the works it uses jointly with the Garland division and will pay the United States for supervising costs. The district will secure the Secretary's approval of its budget and assessment roll.

The power settlement is predicated upon the district's claim to a proportionate share, on an acreage basis, of the net power revenues of the Shoshone power plant. When this plant was constructed in 1922, it was an initial money loser. The water users of the Frannie division were agreeable to accepting a proportionate share of the cost of the plant, but water users of the Garland division were not. At that time, the power plant was incurring an operation-and-maintenance deficit. In the Deaver district's 1926 repayment contract with the United States, it was agreed the Deaver district should accept a share of the power-plant cost and revenues if the Garland water users did likewise. At the time the Garland water users would not accept their share of the power plant's costs and revenues.

The passage of the act of March 4, 1929 (45 Stat. 1592), then prevented the two districts from accepting a share of the power plant's costs and revenues by directing that power revenues from the Shoshone plant were to be first applied to repayment of the power-plant cost and the cost of the Shoshone Dam and then covered into the reclamation fund. The Garland water users challenged this statute as an unconstitutional deprivation of rights on the ground that their repayment contract provided that the provisions of subsection I of section 4 of the act of December 5, 1924, were to be applicable. Subsection I provides that profits from project power plants shall be credited to project construction charges and made available for water users' annual construction and operation and maintenance charges. The Secretary of the Interior pointed out that the water users in this case had not assumed a proportionate share of the cost of the plant. The Court held that since, at the most, only a breach of contract could be complained of (which the Court did not undertake to determine) the district's re edy, if any, lay in an action before the Court of Claims (U. S. ex rel. Shoshone Irrigation District v. Ickes, 70 F. (2d) 771, 773). Accordingly the Court ordered judgment in favor of the United States.

By the act of April 9, 1938 (52 Stat. 210), it was provided that net power revenues should be disposed of in accordance with the district's repayment contract. In view of the Government's long-standing position that the district's contract did not obligate the district to repay a proportionate part of the cost of the power plant and that therefore the contract did not permit the district to claim a share in the power revenues, the act of April 9, 1938, did not resolve the controversy. Nevertheless, an effort to settle the matter to the satisfaction of all parties continued to be made, and the settlement contained in the proposed contract is acceptable both to this Department and to the Deaver irrigation district.

The settlement is based on the consideration that if the Frannie division were entitled to a share of the net power revenues, such share would be in the proportion that the acreage of the division bears to the total acreage of the project. The Frannie division acreage is 10 percent of the total project acreage. The settlement is further based on the consideration that net revenues earned by the power plant prior to 1942 should be allocated to amortization of the power investment and establishment of a replacement fund that net revenues earned after 1981 will be negligible due to an anticipated low energy rate. The net revenues of the power plant between 1942 and 1981 are estimated at $2,130,000. This means the Frannie division's share of the revenues during the period would amount to $213,000 if its 1926 contract authorized it to participate in the revenues. This is the amount of the payment under the proposed contract. I believe this is a fair settlement and that it will do much to place the Frannie division on a sound operating basis.

S. 2089, if enacted, will authorize me to execute the proposed contract. It will also approve the land classification and consequent modification of the district's obligation as required by section 8 (i) of the Reclamation Project Act of 1939. As above noted, the reclassification will bring 201.87 new acres into the project and will exclude from the irrigable area 65.90 acres of land found to be permanently unproductive. It will also suspend the charges against 5,080.86 acres of land which, under the classification, were found to be temporarily unproductive. When these lands are returned to productivity, they will again begin paying construction charges. If they cannot be returned to productivity within the time stipulated in the contract, they will be ex luded from the project. The construction charge obligation under the propo ed contract is subject to adjustment by reason of the final disposition of the class 5 land and to the extent rehabilitation funds are appropriated by the Congress. For that reason and also because of the possible application of the variable repayment formula, it is not possible to predict precisely the period of years required to return the district's construction charge obligation. Considering these factors such period could range from approximately 150 to approximately 250 years.

Since the district is to be allowed a reduction in its construction-charge obligation equal to the total of the construction charge allocated to each acre excluded from the project and is credited with any payments made to date on such lands, no further allowance would be proper. The bill, accordingly, will provide that the owners of lands excluded from the project shall not be entitled to receive from the United States credit or refund for construction charges which they have heretofore paid on such lands. This provision would not preclude the landowner from making claim for refund or credit against the district if a basis could be found for such claim.

In connection with the proposed land classification, section 3 (b) of the proposed bill will authorize the Secretary to make necessary minor adjustments not exceeding a total of 100 acres to reflect corrections in land area measurement. This section also will authorize the Secretary to modify the district's obligation in accordance with these probable minor adjustments in land classification.

Section 3 (c) will permit revenues of the Shoshone power plant to be applied in payment of the compromise settlement contained in the proposed contract.

Section 3 (d) is intended to permit the various phases of the proposed rehabilitation work to be performed in the manner found to be most economical and practical for such phases. Work on the larger features will need to be performed by Government contract or by force account. But work on the smaller features, such as the installing of water measuring and control devices, can in most cases be performed by the farmer or irrigation district employees if the necessary structures are provided. In the latter case, the need for drafting specifications and for the incurring of other contract costs could be avoided. The savings would be substantial.

One of the features of the Umatilla Federal reclamation project, located in north-central Oregon, is McKay Dam and Reservoir which was constructed by the United States on McKay Creek, a tributary of the Umatilla River, to supply supplemental water to then developed irrigated lands, including among others, those of the Westland and Stanfield irrigation districts. Mckay Dam was undertaken in 1924 and completed in 1926 after these districts had contracted under the Warren Act (act of February 21, 1911, 36 Stat. 925) for space in the reservoir.

The Westland irrigation district contracted for 40 percent of the pace at a cost of $846,620.80 This contract as supplemented is currently. in force and requires payment of this obligation in 40 years on a graduated scale of payments which now requires annual payments of $22,560, about $3 per assessable acre, a charge which is greatly in excess of the repayment ability of the water users. Beginning in 1950, this contract requires annual payments alır ost twice as large as currently. The area now encompassed by the district has had financial difficulty since its development by private capital in 1908. In only 1 year has the district been able to pay fully under the existing contracts with the United States. In all other years, partial deferments have been necessary with the result that only about $13,000 in excess of the district's share of the cost of operation of Mckay Dam and Reservoir has been repaid since water was first available in 1928. Deferments and delinquencies total about $124,743.

The Stanfield irrigation district contracted for 20.5 percent of the storage space available in McKay Reservoir, the cost of which is $433,893.16, also to be repaid in 40 years on a graduated scale of annual installments. These installments range from $1,000 in 1933 to $23,000 in 1963. Currently the installment is $12,000, an amount which is in excess of the repayment ability of the water users. In addition, the United States in 1934 expended on behalf of the Stanfield irrigation district $97,830.24 to rehabilitate and better the irrigation system of the district and to provide for the retirement of district bonds. This obligation is being repaid by the district in 39 annual installments of $2,508:47 each. The district is current on all its charges except for $8,000 of the $12,000 payment required for Mckay stored water for 1948.

These districts, realizing they were unable to meet the required contractual payments, requested that an investigation be made under section 7 of the Reclamation Project Act of 1939. Accordingly, a complete study has been made of the economic and physical resources of the districts with a view to working out a feasible repayment plan in keeping with the water users' repayment ability.

There are several factors which account for the difficulties experienced by the districts in meeting their repayment contract obligations. The principal difficulty is that the lands of both districts are sandy and for the most part of poor quality adaptable only to the growing of low-value crops, and even these crops produce comparatively low yields. For exemple, a land classification of the lands within the Westland irrigation district made in connection with negotiation of these contracts and employing standards currently used by the Bureau of Reclamation, showed that out of the approximately 8,500 assessable acres in the Westland irrigation district, only 3,634 acres were irrigable and about one-half of this area is suitable only for pasture. Less than 1,000 acres within the Westland irrigation district are capable of producing good yields and even these lands are scattered and are usually combined in farms with poor quality land. Somewhat better conditions exist with respect to the Stanfield irrigation district, but yields of crops from that district are also low, the gross crop returns averaging only $28.50 per acre during the period from 1939 through 1944, which period is taken as a representative period for the purpose of determining future long-range conditions. Most self-sustaining full-time farms in the two districts are approximately 40 acres in size, largely because of high man-labor requirements to produce crops. A large percentage of the units are small, many less than 10 acres in size, and are used for part-time farm operations or rural homes. In addition, the Westland irrigation district's main canal borders the desert for some 26 miles and frequent sand blows fill the cana: with thousands of yards of sand that must be removed at heavy cost each season, oftentimes more than once. This, together with unforeseen and emergency repair work necessary to keep the system functioning, has materially contributed to the district's difficulties.

In view of this situation it is planned, and the proposed contracts provide, for the delivery of water to be made to the districts upon an advance toll charge basis. The proposed contracts supersede all the obligations of the districts under the existing repayment contracts which obligate the districts to return their proportionate share of the cost of construction of McKay Dam and Reservoir, The proposed contracts provide only for the furnishing of water on a year-toyear rental basis and do not impose upon the districts a general obligation to repay construction costs. The proposed contracts require, however, advance payment for water, including payment for an amount of water which will be sufficient, it is estimated, to assure receipt of sufficient funds to cover the cost of operation and maintenance of McKay Dam and Reservoir. Also, the contracts reserve to each of the districts sufficient water to meet their requirements, but provision is made that if the districts fail to utilize any portion of the reserved water for a consecutive 5-year period other arrangements may be made by the United States.for the disposal of such water. Provision is also made in each of the contracts for the districts to accumulate and maintain reserve funds to meet their extraordinary maintenance costs which provision should assure a greater amount being available for return to the United States.

The rate for water proposed in both contracts is 25 cents per acre-foot measured at the outlet works of McKay Dam. This rate was arrived at on the basis of a thorough study of the repayment ability of the water users and will provide a sufficient amount of stored water for a payment approximately within the repayment ability of the model group of farms, A water-use study of both districts showed that the space reserved to the Westland irrigation district could be reduced from 40 to 30 percent and that the space reserved to the Stanfield irrigation district should be increased from 20.5 to 30 percent. These amounts of water, in addition to the natural flow water available, will be adequate, if correctly applied, although it is somewhat less than the present usage. While it is recognized that some of the poorer lands within each of the districts cannot produce revenues sufficient to meet this rate in years when prices are lower than those prevailing through the 1939-44 period, in my opinion a lower rate is not justifiable, for even if these lands should go out of production, this would not prevent the districts from meeting the provisions of the proposed contracts. With respect to the Stanfield irrigation district, the water users' repayment ability investigation showed that the district could, in addition to paying the foregoing rate for stored water, pay the annual installment of $2,508.47 required to retire its rehabilitation obligation. Accordingly, the contract with that district provides that the district is to continue its payments under this obligation and when it has been retired in 1978, the water rental rate will advance to 35 cents per acre-foot. Also, both contracts provide that the water rate may be increased if receipts for water are not adequate to cover operation and maintenance costs of McKay Dam and Reservoir, although this is believed to be extremely unlikely.

The rate for water proposed in the contracts will return to the United States larger annual amounts than the districts have paid heretofore. In addition to the districts' proportionate share for the cost of operation and maintenance of McKay Dam and Reservoir, the contracts will return an amount estimated to be $4,400 annually for application against construction costs of McKay Dam and Reservoir, $2,400 of which will be from the Stanfield irrigation district and $2,000 from the Westland irrigation district. This estimated rate of annual return is not sufficient to amortize the construction costs of McKay Dam and Reservoir properly allocable to these districts, about $600,000 for each district, within any

Any period of years heretofore proposed under the usual repayment contract. plan to require the districts to assume a general obligation to repay these costs within

any fixed period, even the full estimated life of the project works, is beyond the repayment ability of these water users. It is for this reason that the usual general obligation repayment contract is not proposed and no provision is presently made in the contracts for a reduction in the rate upon a return of the districts' share of the construction costs. As pointed out, however, the Stanfield irrigation district contract does require the assumption of liability for and full repayment of the obligation incurred in connection with rehabilitation of that district's irrigation system,

8. 2089, if enacted, will provide authority for the execution of tne contracts and in addition will authorize the utilization of the needed portion of the districts' water payments for operation and maintenance of the reserved works, including accumulation of a reserve to cover large expenses apportionable over several years. This is made applicable to other contracts for water from McKay Reservoir in order to simplify the accounting processes on this small project and to allow this phase of the plan to be made applicable to all users of water from McKay Reservoir.

The Vale project, located in Malheur County, Oreg., was undertaken as a federal reclamation project under the authority of the act of March 3, 1925 (43 Stat. 1141, 1168), as supplemented by the act of May 10, 1926 (44 Stat. 453, 479). The project comprises storage works and gravity-flow distribution system built by the United States including Agency Valley Dam, the diversion works, and a canal system, consisting of the main canal, laterals and ditches, and necessary structures related thereto, as well as one-half interest in Warmsprings Dam and Reservoir purchased from the Warmsprings irrigation district. Water was first made available for irrigation on part of the project in 1930, and by 1938 the project was substantially completed.' Operation of the project was turned over to the district on January 1. 1949. except for Agency Valley Dam which is retained as reserved works.

Although the project area contains some 37,300 acres of irrigable land, the available water supply limits

the project irrigable area to 32,000 acres. Soils comprise two general types. Farms on the benchland areas, which comprise some 70 percent of the project's irrigable acreage, have soils developed over old lakelaid materials and deep gravel and are practically limited to feed-for-livestock types of farming with family-size dairy farms predominating because of steep topography, shallow topsoil, impervious subsoil, and low water-holding capacity. The remaining 30 percent of the project's area, consisting of the more level fertile bottom lands with generally deep soils, produces substantial volumes of row crops, such as sugar beets, potatoes, lettuce, onions, and vegetable seeds. The present contract providing for project repayment is the contract of October project-approximately $5,000,000—in 78° semiannual installments. Pursuant 40 that contract, the trsts of the semiannual installments were established by the Secretary of the Interior, taking into account the then-existing conditions. unpaid cost of construction. Payments under the first 8 semiannual installments et tema in 1946 and the district'is currently paying at the rate of $64,000 a year, that being $2 per irrigable acre per year. Únder the existing contract, however, $131,000, which is about $4.20 per acre per year. Although the district is not Dow delinquent under the contract, the annual amounts required to be paid beginsituation that the proposed contract was negotiated.

It is to meet this mis made of the repayment ability of the water users.

contract, an investigation could meet all farm expenses, maintain a reasonable level of living, pay the cost of project operation, and have $2.10 per irrigable acre available annually to meet project construction costs under average conditions similar to those which Existed in the period 1939 through 1944. The study also included a determination of a method to adjust the annual water charge in a manner in keeping with the district's gross crop income and the exchange value of farm commodities. go Lual repayment installment of $67,200, which is $2.10 times the 32,000 irrigable

Accordingly, the proposed contract establishes for 1950 and thereafter a basic

a

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