3

Corps of Engineers Water Resources Infrastructure and Mission Areas

The U.S. Army Corps of Engineers constructed, operates, and maintains a vast water resources infrastructure across the United States that includes dams, levees, and coastal barriers for flood risk management, locks and dams for inland navigation, ports and harbors, and hydropower generation facilities. Much of this infrastructure exhibits considerable maintenance and rehabilitation needs. Federal investments in civil works infrastructure for water management have been declining since the mid-1980s, and today there are considerable deferred rehabilitation and maintenance needs (NRC, 2011).

Operation, maintenance, and rehabilitation (OMR) of its existing water resources infrastructure is a primary challenge for the Corps today. These activities include repair and upgrades, carried out at many different scales, from routine to major (major projects usually require a separate construction budget). For each Corps mission area, there are generally separate annual budgets for operation and maintenance (O&M) and construction. Most minor and routine rehabilitation is funded through annual O&M budgets, while major rehabilitation and replacement generally is funded through annual construction budgets. The process of prioritization for the annual O&M budget takes place largely at the division and district level and follows general guidelines, but it has many variations, depending on local needs (for further details on budget guidance see USACE, 2011c).



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3 Corps of Engineers Water Resources Infrastructure and Mission Areas The U.S. Army Corps of Engineers constructed, operates, and maintains a vast water resources infrastructure across the United States that includes dams, levees, and coastal barriers for flood risk management, locks and dams for in- land navigation, ports and harbors, and hydropower generation facilities. Much of this infrastructure exhibits considerable maintenance and rehabilita- tion needs. Federal investments in civil works infrastructure for water man- agement have been declining since the mid-1980s, and today there are consid- erable deferred rehabilitation and maintenance needs (NRC, 2011). Operation, maintenance, and rehabilitation (OMR) of its existing water re- sources infrastructure is a primary challenge for the Corps today. These activi- ties include repair and upgrades, carried out at many different scales, from rou- tine to major (major projects usually require a separate construction budget). For each Corps mission area, there are generally separate annual budgets for operation and maintenance (O&M) and construction. Most minor and routine rehabilitation is funded through annual O&M budgets, while major rehabilita- tion and replacement generally is funded through annual construction budgets. The process of prioritization for the annual O&M budget takes place largely at the division and district level and follows general guidelines, but it has many variations, depending on local needs (for further details on budget guidance see USACE, 2011c). 33

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34 Corps of Engineers Water Resources Infrastructure Corps of Engineers maintenance responsibilities do not apply to all water infrastructure the agency has built, and maintenance duties for many portions of Corps-built water infrastructure have been turned over to state and local en- tities. This especially has been the case with many levees and other flood pro- tection structures that have been built by the Corps, then subsequently turned over to levee districts or municipalities that assume OMR responsibilities. Fur- thermore, appropriations for operations and maintenance (and some rehabilita- tion) typically are not part of the project-by-project authorization process within the federal Water Resources Development Act (WRDA) process described in Chapter 2. The needs for OMR of Corps water infrastructure are great, as funding from Congress for civil works construction and major rehabilitation has been declining for decades. Further, periodic WRDA bills are focused on new project construction and major rehabilitation, rather than more routine, but important, OMR activities. Not all aging and degraded infrastructure necessarily merits continued operation and investment, but there are legal, regulatory, and other obligations that inhibit the Corps from easily divesting, privatizing, or decom- missioning existing infrastructure. As mentioned, this report focuses on Corps of Engineers’ “hard” infrastruc- ture—locks, dams (both navigational and multipurpose), other navigation in- frastructure (e.g., river control structures, federal harbor and port facilities), hy- dropower plants, and levees and other flood protection infrastructure. Alt- hough this chapter does not include a section on ecosystem restoration, the Corps’ hard infrastructure discussed herein often is integral to restoration ef- forts. This report’s focus is on maintenance, upgrades, and modernization of hard infrastructure, not on related ecological resources. The committee viewed this interpretation as consistent with its charge to consider “navigation, flood risk management, hydropower, and related ecosystem infrastructure managed by the Corps.” A prominent theme in this chapter is the considerable diversity across Corps mis- sion areas in terms of enabling legislation, taxation and revenue sources, clients, and re- lations with the private sector. For example, inland navigation facilities are pre- dominantly federally owned, whereas many harbor and port facilities are oper- ated by states in partnership with private entities, with the Corps playing sup- porting roles. There are separate taxes and funds to provide revenue for in- land navigation, and for harbor maintenance. Dams with hydropower gen-

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Corps of Engineers Water Resources Infrastructure and Mission Areas 35 erating facilities have a direct base of paying customers (although in most cases the revenues do not come back to the Corps). Some levees constructed with federal funds, in whole or in part, have been turned over to local levee districts that are responsible for maintenance and that raise local funds to cover repair costs. Distinctions among Corps mission areas are rooted in the historical devel- opment, and expansion, of Corps of Engineers activities. The Flood Control Act of 1936 specified the circumstances for federal involvement in flood control and elevated the Corps’ flood control activities to the same level as its navigation program. In 1996, Corps responsibilities were expanded further when ecosys- tem restoration was added as a formal, primary mission. Newer mission areas were not always fully consistent with the agency’s original missions of naviga- tion and flood control. Moreover, there have not been any specific congression- al initiatives or activities to promote coordination and consistency across the Corps’ mission areas, or any guiding principles for broad Corps responsibilities such as water resources infrastructure maintenance and rehabilitation. NAVIGATION The Corps has constructed, and operates and maintains, a large portion of the infrastructure that supports the nation’s commercial inland waterways and its ports and harbors. Corps-maintained waterways and ports support com- mercial navigation in 41 U.S. states. In considering the current state of the Corps’ navigation infrastructure and its options for rehabilitating and upgrad- ing that infrastructure, it is important to recognize several distinctions between infrastructure for inland navigation and that for harbors and ports. Important differences between these systems in terms of taxation, public and private fund- ing and facilities ownership, companies that use the facilities, and other factors will affect the direction of future infrastructure rehabilitation and upgrades. Inland Navigation The commercial inland navigation system includes roughly 12,000 miles of maintained river channels and 191 locks sites with 238 navigation lock

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36 Corps of Engineers Water Resources Infrastructure chambers. Figure 3-1 shows the scope of the Corps-maintained inland wa- terways system. The U.S. inland navigation system is used to ship bulk commodities such as corn and soybeans, coal, fertilizer, fuel oil, scrap metal, and aggregate (sand and gravel). Some of this cargo may transit nearly the entire length of the system. For example, corn and soybeans are shipped from across the midwestern United States down the Ohio, Illinois, and Mis- sissippi Rivers to the Port of New Orleans, then exported. By contrast, some portions of the system are used primarily for local transport. For example, of total commodity tonnage shipped on the Missouri River between 1994 and 2006, 83 percent was estimated to originate and/or terminate in the state of Missouri, with 84 percent of the shipments consisting of sand and gravel (GAO, 2009). The Atlantic and Gulf Intracoastal water- ways also provide commercial transportation corridors. All portions of the inland navigation system also serve recreational uses, but it is commercial that primarily justi- fies and helps fund the system. The system is used primarily by U.S. based, domestic shipping companies. Lock and dam facilities on the inland navi- gation system are federally owned, operated, maintained, and rehabilitated FIGURE 3-1 U.S. Fuel-Taxed Inland Waterway System. SOURCE: U.S. Army Corps of Engineers.

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Corps of Engineers Water Resources Infrastructure and Mission Areas 37 by the Corps of Engineers. Some portions of the Atlantic and Gulf Intra- coastal Waterways, however, are operated and maintained by the states they border. There have been major changes to the U.S. economy, patterns of trade, and other cargo transportation alternatives since much of the inland navigation sys- tem was constructed several decades ago. Before the nation had its currently extensive rail and highway systems, “inland waterways were a primary means of transporting bulk goods” (Stern, 2012). Today, alternative modes for ship- ping inland navigation goods—namely, roads and rail—are in a more advanced state of development than during the period when the lock and dam projects were constructed. Although they remain important transportation modes for some sectors in some areas, “inland waterways are a relatively small part of the nation’s overall freight transportation network” (Stern, 2012). The topics of rela- tive costs, energy uses and efficiencies, and environmental impacts of rail, road, and barge transport make for lively debate among users of these respective modes. Another important aspect of the inland navigation system is that its locks and dams create extensive upstream navigation pools. These navigation pools often affect river ecosystems up- and downstream for tens of miles. The inland navigation system thus affects many public resources and many private system users beyond commercial cargo carriers. There are impacts on floodplain lands overseen by federal government agencies (such as the U.S. Fish and Wildlife Service), private landowners, and recreational users, including boaters and an- glers. The navigation pools are sources of both beneficial and negative effects. Ports and Harbors The Corps of Engineers maintains 926 coastal, Great Lakes, and inland har- bors (Figure 3-2). U.S. harbors and ports operate in a setting very different from the inland navigation system. For example, U.S. harbors and ports handle a wider variety and higher volume and value of cargo than does the inland navi- gation system. Many more shippers use U.S. harbor and port facilities com- pared to the inland navigation system, and these shippers include both U.S. domestic and international companies. Docking and (un)loading facilities at

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38 Corps of Engineers Water Resources Infrastructure FIGURE 3-2 Major U.S. Ports and Harbors. SOURCE: U.S. Army Corps of Engineers. the harbors and ports generally are operated as public-private partnerships, and do not depend on direct federal resources. Corps responsibilities in ports and harbors are focused on dredging to maintain desired navigation and dock- ing depths. The Corps also maintains wave/surge protection structures at some ports and harbors. This division of responsibilities and limited role for the fed- eral government allows harbors and ports to pursue a broader range of part- nerships and financing options. The Port of Baltimore (Box 3-1) and the Port of Miami (Box 3-2) provide good examples that involve states and private entities, with the Corps of Engineers having a limited support role. There are generally fewer cost-effective alternatives to maritime transport for intercontinental or trans-ocean shipment for larger, heavier bulk goods such as coal and petroleum. This provides strong incentives for all port and harbor users and beneficiaries to be interested in port and harbor maintenance.

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Corps of Engineers Water Resources Infrastructure and Mission Areas 39 BOX 3-1 PARTNERSHIPS FOR WATER RESOURCES INFRASTRUCTURE: PORT OF BALTIMORE The Port of Baltimore is among the busiest deep-water ports in the United States. Commerce in 2011 totaled 37.8 million tons of cargo valued at $51.4 billion (MPA, 2012a). Managed by the Maryland Port Administration (MPA) and a private sector partner, Ports America Chesapeake, the Port of Baltimore encompasses both public marine terminals and private marine terminals. The Seagirt Marine Terminal, for which a major expansion was completed in 2012, is the primary container facility at the Port. It is operated by Ports Ameri- ca Chesapeake under a 50-year agreement established with MPA in 2010. The Port of Baltimore has been expanding shipping capacity in response to increasing globalization of commerce and to the Panama Canal widening scheduled for completion in 2014. When the Panama Canal widening project is completed, larger container ships from Asia will be able to access East Coast ports, including Baltimore. Accommodation of “Pana- max” ships will require 50-foot berths and 50-foot deep channels. The Port of Baltimore has installed 50-foot berths and larger cranes for cargo handling at the Seagirt Marine Terminal, and, in partnership with the Corps of Engineers, has dredged 50-foot deep channels and an- chorages. Changes to the Seagirt Terminal, valued at more than $200 million, are being fi- nanced and managed by Ports America Chesapeake (MPA, 2012b). In addition, MPA has worked closely with the State of Maryland and the railway company, CSX Corp., on develop- ment of an intermodal terminal facility near the Port where containers can be double-stacked on railcars, and with CSX Corp. on their National Gateway project which will raise bridges and lower tracks in 50 locations to permit rail transport of double-stacked containers from Maryland into the Midwest (MDR, 2011). The National Gateway project cost is about $850 million, of which CSX has committed $575 million (MDR, 2011). The Corps of Engineers has had a well-defined role in the expansion of shipping capaci- ty at the Port of Baltimore through the Baltimore Harbor Anchorages and Channels project. At the request of Congress, the Corps performed reconnaissance and feasibility studies in the 1990s for expanded commercial navigation capacity. The Water Resources Development Act of 1999 authorized construction of a 50-foot deep turning basin, deepening and widening of several anchorages in the harbor, widening of the Seagirt Marine Terminal channel and others, and construction of a new loop channel. The project was completed in 2003 at a total cost of $30.5 million, of which the federal share was $22.3 million and the MPA share was $8.2 mil- lion. Maintenance dredging is performed by the Corps annually, at a cost ranging from ap- proximately $16 million to $18 million.

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40 Corps of Engineers Water Resources Infrastructure BOX 3-2 PARTNERSHIPS FOR WATER RESOURCES INFRASTRUCTURE: PORT OF MIAMI The Port of Miami, managed by Miami-Dade County, is a man-made waterway in Bis- cayne Bay that was initially dredged in the early twentieth century. It was significantly ex- panded into a deep channel waterway and a man-made island during the 1960s and 1970s. Today the Port of Miami is the number one passenger cruise port in the world, the ninth largest cargo port in the United States and the largest cargo port in Florida. Despite the high level of activity, the port’s current waterway and harbor are 42 feet deep and would not be accessible by post-Panamax megaships that require 50-foot clearance. The Corps, with responsibility for maintenance of navigation depths in the port, was authorized by Con- gress in 1999 to study the feasibility of deepening the port. Dredging to deepen the port was authorized by Congress in 2008 and scheduled to be completed by 2014, coincident with the scheduled completion of the Panama Canal expansion. It is the only harbor pro- ject south of Norfolk, Virginia authorized to dredge to depths that can accommodate Pan- amax ships. Total costs for the Port of Miami project were estimated to be $170 million (including environmental mitigation) in 2004. The local sponsor, Miami-Dade County, has provided funding for the non-federal cost share requirement. The federal contribution has not been committed, however, because of the current Congressional moratorium on earmarks and exclusion of the project from the President’s 2012 budget proposal for dredging projects (Clark, 2011). In response to the lack of federal funding to proceed with the project, Florida Gover- nor Scott redirected $77 million in state transportation funds to cover the federal share (Wright, 2011). Dredging for the port was initiated in summer 2012. This project coincides with additional infrastructure investments that state and local governments have initiated to expand overall capacity at the port. A public-private partnership was established in 2009 to build a $1 billion tunnel beneath the harbor that will connect the port’s inner roadways to a nearby interstate highway (Port of Miami, 2010). Short-term funding for completion by 2014 will be provided by the private concessionaire, MAT Concessionaire, LLC, which will also maintain the tunnel and roadways for 30 years. Distinctions Between Inland Navigation, and Harbors and Ports The differences outlined above entail advantages and flexibility in options that harbors and ports possess in terms of financing infrastructure improve-

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Corps of Engineers Water Resources Infrastructure and Mission Areas 41 ments. In the past, the inland navigation system enjoyed more consistent fed- eral support for maintenance and repair of its facilities. The decline of available federal resources increasingly represents a barrier for inland navigation in try- ing to raise funds for OMR. Harbors and ports have opportunities to employ new financing arrangements with numerous private-sector carriers and with state and local governments, but inland navigation generally faces more limits in its ability to employ similar options and private-sector partnerships (as dis- cussed further below). Taxation and Financing Some portion of Corps infrastructure maintenance and rehabilitation activi- ties is supported through taxes levied directly on facility users. For inland wa- terways, an Inland Waterways Trust Fund (IWTF) was established in 1978 and reauthorized as part of the 1986 WRDA. For harbors and ports, a Harbor Maintenance Trust Fund (HMTF) was first authorized in the 1986 WRDA. Prior to authorizations for these trust funds, waterway and harbor infrastructure and maintenance expenditures were funded almost entirely through general reve- nue from the U.S. Treasury (Carter and Fritelli, 2004). The IWTF is based on a commercial fuel tax of $0.20 per gallon (collected by the IRS), which has re- mained constant since 1995. A proposal for increasing the IWTF has been put forward by the inland waterways commercial shipping industry and is under discussion (see Box 3-3). The HMTF is based on a 0.125 percent ad valorem tax imposed on imports, domestic shipments, and cruise line passenger tickets at designated ports (collected by U.S. Customs). The Inland Waterways Trust Fund is designated for construction and major rehabilitation of inland waterways, while the HMTF is limited to operation and maintenance of federally authorized channels for commercial navigation in deep-draft harbors and shallow-draft waterways that are not subject to the IWTF fuel tax (Carter and Fritelli, 2004). This is a crucial distinction between these two sources of funding and is important to understanding likely future maintenance options. Projects are undertaken under the IWTF at a 50-50 cost share between the federal government and the inland waterways shipping in- dustry.

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42 Corps of Engineers Water Resources Infrastructure BOX 3-3 OPERATIONS, MAINTENANCE, CONSTRUCTION, AND MAJOR REHABILITATION COSTS ON THE INLAND WATERWAYS Two pieces of legislation are largely responsible for the current framework of inland waterways financing: the Inland Waterways Revenue Act of 1978 and the Water Resources Development Act of 1986. These laws together established a fuel tax on commercial barg- es, cost-share requirements for inland waterway projects, and a trust fund to hold these rev- enues and fund construction (Stern, 2012). This legislation created more financial and deci- sion-making responsibilities for commercial operators on the inland waterway system. To- day, expenditures for construction and major rehabilitation projects on inland waterways are cost-shared on a 50-50 (federal-user) basis through the Inland Waterways Trust Fund (IWTF). Operations and maintenance costs for inland waterways projects typically exceed these construction costs; these O&M costs are 100 percent federal responsibility. The IWTF currently is supported by a $0.20/gallon tax on barge fuel. The balance in the IWTF has declined significantly due to a combination of decreased appropriations, cost overruns, and decreased revenues from previous years (see Figure 3-3). To help offset this declining balance, both the Bush and Obama administrations recommended replacing the IWTF with one or more user fees. Both the U.S. Congress and the navigation industry have rejected these proposals. In 2010, the Inland Waterways Users Board (IWUB), a federal advisory committee that advises the Corps on inland waterways, endorsed an alternative proposal that called for increase in the fuel tax of $0.06-08/gallon. The proposal also called for the federal gov- ernment and taxpayer to pay the full cost of some projects that now are cost-shared. Inland navigation shippers argue that changes are necessary to shore up the trust fund, improve in- frastructure, and distribute costs more equally among those that benefit from the system. Other groups, such as Taxpayers for Common Sense, argue that an increased share of wa- terway costs should be borne by the user and that routine O&M costs also should be a user responsibility. In a letter dated December 21, 2010, Assistant Secretary of the Army for Civil Works Jo-Ellen Darcy provided some of the administration’s views on the IWUB proposal. The letter noted that the IWUB “would transfer a significant responsibility from the users . . . to the general taxpayer. Such a major shifting of costs is inconsistent with the user-pay principle that helps to guide Civil Works investment decisions” (emphasis added). More specifically, the letter also noted, “The Board’s” recommendation to increase the revenue to the IWTF is an increase in the level of the existing diesel fuel tax of 30 percent (and potentially an increase of up to 45 percent) over the current fuel tax rate of $0.20 per gallon. This would be the first such rate increase since 1996. The Army notes that this lev- el of revenue increase would not be sufficient to support efficient investment in the inland waterways . . .” That is, the proposed increase in fuel tax would do little to address the OMR funding shortfall that confronts the navigation system.

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Corps of Engineers Water Resources Infrastructure and Mission Areas 43 FIGURE 3-3 Federal Inland Waterway Projects: Financing Trends. SOURCE: Stern, 2012. In recent years, balances in the IWTF and HMTF have taken very differ- ent trajectories. In 2003, the IWTF was $412.6 million. Annually, expendi- tures from the IWTF exceeded revenues even though Congress appropriat- ed funds for inland waterway modernization. Coupled with declining tax revenues due to reduced barge transport in the mid-2000s, the balance in the IWTF declined below $35 million at the end of FY 2011 (Figure 3-3). A large portion of IWTF expenditure recently has been for a single project, the Olmsted Lock and Dam Replacement on the Lower Ohio River (see Box 3- 4). On the other hand, the HMTF balance has increased steadily, reaching over $5 billion at the end of FY 2010. Annual HMTF expenditures (approx- imately $1.0 billion) were approximately equal to revenue collected over the past decade (Fritelli, 2011).

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Corps of Engineers Water Resources Infrastructure and Mission Areas 73 al issues at play that limit the Crops’ ability to access revenue generated at most of its power facilities, with those of the Bonneville Power Administration being a notable exception. The Corps hydropower program also is affected by pres- sures to reallocate reservoir storage to non-power uses. This section examines the status of the Corps hydropower program, chal- lenges it faces, and unique opportunities that it has relative to other water re- sources infrastructure because of inherent revenue generation in the program. A primary source of information and perspective for this section was the com- prehensive and critical evaluation of the Corps hydropower program by Sale (2010). Infrastructure Status Through its 75 hydropower plants and installed generation capacity of 20,500 megawatts (MW), the Corps owns and operates approximately one- fourth of the nation’s hydropower capacity. Most of its generating capacity is in the Federal Columbia River Power System (FCRPS), with much of the remain- ing capacity in its Missouri River dams. The Corps’ Columbia (and Snake Riv- er) and Missouri River hydropower generation capacity combined represents about 75 percent of the Corps’ national generating capacity (USACE, 2012a). Average annual energy generation from Corps projects is approximately 70 bil- lion kWh (worth approximately $5 billion at current wholesale prices for pow- er), and annual revenue to the U.S. Treasury from Corps hydropower sales is in the range $2 billion to $3 billion per year (Sale, 2010). This represents over half the size of the entire Corps’ annual appropriation. As of 2010, the median age of all Corps hydropower projects was 47 years, and 90 percent of the projects were 34 years old or older (Sale, 2010). Given the ages of the facilities, OMR needs and failure rates are increasing, along with as- sociated decreases in performance. As an example, total hours of forced outag- es across all Corps hydropower projects have been increasing steadily since at least 1999 (Figure 3-7). In an era of heightened interest in energy policies and sources, electricity generation from Corps hydropower projects has been decreasing steadily as a result of insufficient equipment maintenance and rehabilitation. Total electric power generation from Corps hydropower projects decreased from 73.6 TWh

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74 Corps of Engineers Water Resources Infrastructure FIGURE 3-7 Total hours of forced outages over all Corps hydropower projects for 1999- 2008. SOURCE: Sale, 2010. in 2000 to 61.7 TWh in 2008 (Sale, 2010), a decrease of 16 percent. At some Corps hydro power projects, none of the original equipment has been replaced since the facilities were constructed 30 or more years ago. Annual budgets for repairs and upgrades of most of the Corps hydropower equipment have been inadequate for a long time (Sale, 2010). This not only has resulted in degraded infra-structure and less efficient operation, but has also meant missed opportunities for utilizing technological developments through upgrading to newer, higher-performing technology. Recent developments in hydro-power generating technologies and materials offer opportunities to up- grade to more efficient operations with less water use and less environmental impact, but fiscal constraints have largely inhibited upgrades. Developments in turbine design, runner configuration, and generator efficiency make it possible for existing dams to make modifications that can either produce 15-25 percent more with the same water flows and hydraulic heads that currently exist, or produce the same amount of power as is currently possible but with 15 to 25 percent less water flowing through the turbines. Through a hydropower gen- eration efficiency program in the 1980s and early 1990s, the Tennessee Valley Authority (TVA) achieved a 34 percent increase in power generation with the same water availability (Sale, 2010).

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Corps of Engineers Water Resources Infrastructure and Mission Areas 75 In 2009, the Corps initiated a Hydropower Modernization Initiative (HMI), which is using risk assessment and net present benefit methods to identify the most pressing investment needs for hydropower rehabilitation efforts, and the potential for energy generation increases at particular facilities (Sale, 2010). From the evaluation of the first six Corps facilities, an average energy increase potential of 8 percent was identified and investments to achieve the increases were deemed cost-effective. Funding the investments will generally be difficult for facilities outside the Bonneville system, however, as discussed below. Although there is much interest in increasing domestic hydropower pro- duction, there are challenges confronting hydropower production beyond just finding the resources to replace, rehabilitate, and upgrade equipment. The fate of hydropower is entwined with the opposition to large dams based on eco- nomic, social, and environmental factors. Dams change river flows and the fish runs that depend on them, alter water chemistry, change riverine landscapes, and inundate large areas that can include scenic canyons and valleys (Moore et al., 2010). There is growing interest in dam removal in the United States, which could affect some Corps hydropower projects in the future, although likely not the largest projects. In addition, climate change adds concerns about reliability and predictability of hydropower development. Hydropower production also faces increasing competition for use of the water and for reservoir storage space. Many Corps dams and reservoirs are part of multiple-purpose projects, so that hydropower must compete with other uses such as flood protection, ir- rigation, water supply, efforts to protect fish, and efforts to restore aquatic eco- systems. There is growing interest in sustainable reservoir operation (Jager and Smith, 2008). Some or all of these varied factors enter into discussions about the future of hydropower at particular project locations. Funding Issues and Options Hydropower is provided only modest funding in Corps budgets. In the Fiscal Year 2013 proposed Corps budget, for example, hydropower is allotted $180 million, with $178 million for operation and maintenance, and only $2 mil- lion for construction (USACE, 2012d). By contrast, the FY2013 budget includes $1.41 billion for flood risk management, $1.75 billion for navigation, $512 mil- lion for aquatic ecosystem restoration, and $252 million for recreation (USACE,

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76 Corps of Engineers Water Resources Infrastructure 2012e). The Corps hydropower budgets in 2010, 2011, and 2012 were $230 mil- lion, $207 million, and $182 million, respectively (USACE, 2009, 2010, 2011b). These budgets are far below what is needed for adequate operation and maintenance, even before consideration of replacement and rehabilitation needs. Sale (2010) points out that the international organization Electric Utili- ties Cost Group has provided a best-practices estimate of $50/MWh for annual operation and maintenance costs at hydropower facilities. For Corps hydro- power production of 70 TWh per year, the FY2013 budget of $180 million corre- sponds to $2.57/MWh. According to the Phase 2 HMI report issued in 2010, in which 54 Corps hydropower projects were evaluated, if no action is taken on modernization of these projects they will incur a combined loss of $7 billion of power revenue benefits over 20 years (Sale, 2010). In order to realize the full potential for installed hydropower generation capacity at Corps projects, new approaches to funding OMR for hydropower must be developed and made possible through legislation. As noted in Sale (2010), PMAs are required by law to sell federal hydropower at rates that usual- ly are significantly below market rates. These sales occur under long-term con- tracts that cannot easily be changed. The primary customers and beneficiaries of this power pressure the federal power producers to keep operation and maintenance costs as low as possible so as to keep power rates low. Sale (2010) outlines three possible paths forward for Corps hydropower projects: (1) status quo, (2) privatization of more facilities, and (3) moderniza- tion. The Status Quo path would continue the current trajectory of the Hydropower Program with minimal changes in any aspect. Most importantly, Congressional budgets would most likely be flat or declining. New legislation authorizing more direct fund- ing through PMAs would not occur, but limited agreements for direct funding from federal power customers . . . would pro- vide some of the additional funding needed for O&M and equipment replacements. However, because total funding would not keep up with program needs, the Status Quo strate- gy is not sustainable in the long term.

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Corps of Engineers Water Resources Infrastructure and Mission Areas 77 The Privatization path would focus on finding non-federal sources of funding and, where possible, transferring hydro- power assets from the federal to the private sector. This strate- gy is . . . often suggested as the solution to shortfalls of public funding. Asset transfers and other aspects of this path are problematic for many reasons. However, the fact that there are already more than 30 non-federal hydropower plants licensed by FERC [Federal Energy Regulatory Commission] and operat- ing at Corps dams means that joint operations are feasible. Nevertheless, some very contentious legislative and policy changes would be needed if this path were to be successful. The Modernization path may also require significant changes in authorities, financing, and management, but it has the best chance of long-term success. The Corps has already embarked on one modernization initiative, the HMI . . . but the HMI is on- ly part of the Modernization path envisioned . . . Many other aspects are part of this path, ranging from finding new sources of funding to full implementation of the new Hydropower [Memorandum of Understanding] with the DOE and DOI (Sale, 2010). A partnership on hydropower was established in March 2009 via a Memo- randum of Understanding involving the Corps, the Department of Energy, and the Bureau of Reclamation. The partnership includes initiatives on resource as- sessments, improved regulatory processes, technology development, and other topics. The privatization path is impractical given the need to change authorizing legislation and the complexity of the multiple-use responsibilities of the Corps. Sale (2010) notes that new legislation would be needed to de-authorize hydro- power operations at many projects, long-term federal power contracts would have to be phased out, and the loss of inexpensive federal hydropower by pri- mary customers is likely to be strongly opposed. Modernization of the Corps hydropower program will require new legisla- tion, new authorities, new funding, and modification and expansion of Corps partnerships. With low and declining federal support for Corps hydropower

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78 Corps of Engineers Water Resources Infrastructure projects, equipment replacement and rehabilitation needs will have to come from direct funding by Corps hydropower customers. New legislation will be needed to enable this, such as (Sale, 2010): (1) legislative changes that would al- low all of the PMAs to fund equipment replacement/rehabilitation costs direct- ly from their power revenues, and (2) legislation that would establish a trust fund within each PMA to provide funding for construction and rehabilitation. The Bonneville Power Administration has the authority to fund OMR di- rectly from power revenues, with very positive effect on operations (see Box 3- 11), but other PMAs do not (Sale, 2010). Use of power revenues for direct fund- ing of OMR will require more engagement with and support from power cus- tomers. The Corps hydropower program will need to establish expanded, di- verse partnerships with federal power customers, the PMAs, and the nonfeder- al power industry. BOX 3-11 THE BONNEVILLE POWER ADMINISTRATION DIRECT FUNDING AGREEMENT The National Energy Policy Act of 1992 included a provision that allows the Bonneville Power Administration (BPA) to direct fund the costs of maintenance, operation, and capital projects. The BPA is the only Department of Energy Power Marketing Administration (PMA) with the authority to finance directly the OMR costs at Corps projects (Sale, 2010). This procedure eliminates the process of congressional approval, authorization, and funding, which can take years or even decades to complete. As a result, the federal assets in the Bonne- ville system are among the best maintained and most efficient federally owned power generating facilities in the nation. Through the direct funding agree- ments with its hydropower generators, BPA has been able to make a significant amount of investment across their system, where a number of the hydropower plants have been partially upgraded or scheduled to be upgraded to increase the reliability and productivity of the units and reduce the water requirements. On- ly a few federally owned hydropower units outside the Bonneville system have been so upgraded. Efforts to expand the direct funding agreement concept to allow other PMAs to use revenues from the generating units for capital and maintenance projects were attempted in the early 2000s, but they failed to re- ceive congressional approval. However, some limited PMA customer funding agreements have been developed.

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Corps of Engineers Water Resources Infrastructure and Mission Areas 79 The Flood Control Act of 1944 specified that the Corps and the PMAs pro- duce and sell power “at the lowest possible rates to consumers consistent with sound business practices.” As discussed in Sale (2010), the Corps’ responsibility to use sound business practices in managing its hydropower program pro- vides ample justification for incorporating the funding needs for replacement of aging equipment into customer rates for federal hydropower. Interagency dis- cussions involving the Corps, the PMAs, and DOE will be crucial in moving forward on this and other, similar modernization initiatives. SUSTAINING CORPS OF ENGINEERS WATER RESOURCES INFRASTRUCTURE Much of the existing water resources infrastructure of the Corps of Engi- neers, which is primarily in the mission areas of navigation, flood risk man- agement and hydropower production, is quite aged and has not been adequate- ly maintained. Funding needs for the repair and rehabilitation of this infra- structure are substantial, and it is clear from the long-term trend of declining funding from Congress for new construction and rehabilitation that new infu- sions of funding will not be available in the short term. Parts of the infrastruc- ture are failing, and parts are being taken out of service because of lack of fund- ing. Corps of Engineers infrastructure has different OMR needs, ranging from lock repair, dam safety, levee monitoring and maintenance, port deepening, and hydropower facility maintenance and upgrades. There are different means and mechanisms for funding of infrastructure maintenance and repairs across the mission areas. It thus is difficult for the Corps to manage all water resources in- frastructure as one collection of assets. In an earlier era, it was easier to inte- grate a smaller number of missions and to share expertise and experience among them. Today, however, the larger number of responsibilities makes agency-wide integration more difficult. The Corps is guided by numerous fed- eral laws and authorizations, a wide mix of clients with different goals, and dif- ferent modes of taxation and sources of revenue. Its distinctive and diverse wa- ter infrastructure, its specific roles in the national economy, and its clientele and history make the Corps a unique organization. Many potential approaches and solutions to Corps OMR challenges will be specific to the Corps.

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80 Corps of Engineers Water Resources Infrastructure Corps of Engineers water resources infrastructure responsibilities, in- cluding navigation, flood risk management, and ecosystem restoration, differ significantly in terms of enabling legislation, taxation and revenue sources, clients, and relations with the private sector. The Corps faces challenges in its OMR duties given that its roles, partnerships, and successes in addressing OMR in one mission area often are not transferred easily to other areas or ac- tivities. Greater private sector involvement is often raised as one option for increas- ing revenues for public agencies or works, and this report discusses some ways in which private-sector participation in Corps OMR activities might be en- hanced. Opportunities for greater private-sector involvement in Corps infrastruc- ture operations and maintenance activities will vary by Corps mission area, and by economic sector. In general, these opportunities are greater in the ar- eas of flood risk management, port and harbor maintenance, and hydropow- er generation, and less for inland navigation. Inland Navigation The inland navigation system presents an especially formidable chal- lenge and a set of difficult choices. There are stark realities and limited op- tions, including: x Funding from Congress for project construction and rehabilitation has been declining steadily. x Lockage fees on users/direct beneficiaries could be implemented. These are resisted by users and others. x Parts of the system could be decommissioned or divested and the ex- tent of the system decreased. x The status quo is a likely future path, but it will entail continued de- terioration of the system and eventual, significant disruptions in service. It also implies that the system will be modified by deterioration, rather than by plan.

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Corps of Engineers Water Resources Infrastructure and Mission Areas 81 Flood Risk Management Reductions in resources available for construction of federal flood con- trol works present opportunities for expanded implementation of nonstruc- tural flood risk management options that are more efficient and less costly and provide greater environmental benefits. Many of these strategies have been used successfully for years, in many parts of the country. They have not always received full consideration, however, because of a historical emphasis on large, engineered civil works for flood protection. Today’s fiscal realities present the Corps of Engineers opportunities to collaborate more closely with local communities in providing technical information and other types of support. Hydropower Generation Future investments in hydropower generation will balance the need for re- liable sources of domestic energy, relative efficiencies and flexibility of hydro- power, and environmental implications of reservoir storage and release re- gimes. The capacity of existing Corps hydropower is not being realized, and in fact is declining. Because of its revenue-generating potential, hydropower is in an espe- cially good position to accommodate public-private investments required to increase capacity and reliability. Some modification of operating regulations by the U.S. Congress will be needed to realize this potential. Systematic Asset Management Obligations placed on the Corps for continued safe and efficient operations of the entirety of its water resources infrastructure, under modern staffing and financial conditions, heighten the need for asset management efforts within each of its mission areas. A necessary first step toward this will be comprehen- sive inventories of existing infrastructure. These inventories will enhance sys- tematic planning efforts and the prioritization of OMR needs.

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82 Corps of Engineers Water Resources Infrastructure Increasing strains placed on the Corps today by decaying infrastructure and associated fiscal challenges demand a systematic approach to asset man- agement. To its credit, the Corps has begun an asset management initiative. To further promote these efforts, the Corps should continue to develop more comprehensive, and publicly accessible, inventories of infrastructure assets for each of its core mission areas. Economic Principles and Future Investments Wise infrastructure investments will not simply repair Corps infrastructure to the same configuration that existed in the 1940s or 1950s. These investments will be made with clear recognition of the many national economic changes since much of the Corps infrastructure was constructed. One major change, for example, is the substantial expansion in international trade since the WWII era and the changing nature of the transportation infrastructure to support that growth. Other major changes include technological advances in, and easier ac- cess to, freight transport options. Today, an extensive interstate highway sys- tem provides viable freight option opportunities in some instances, and rail sys- tems have implemented many technological advances. Regarding flood risk management, future investments in flood infrastructure will recognize lessons from relying heavily on engineered structures and the need to also develop lo- cal land use policies and zoning regulations designed to reduce vulnerability to floods. Many communities across the nation have learned, and are learning, to accommodate floods in more effective ways and reduce reliance upon large amounts of federal funding for hard-infrastructure mitigation measures. Ad- vances in hydropower technology make possible new systems that can gener- ate similar amounts of power, with less water. Sound OMR investments also will be guided by principles of economic ef- ficiency and seek to employ market-based principles when feasible. Wise in- vestments will acknowledge declining availability of federal funding and sub- sidies and the need to work with the private sector and to capture revenue streams from users and beneficiaries. Paralleling conclusions from a previous report from an NRC Transportation Research Board panel of experts on in- vestment to enhance U.S. freight capacity (NRC, 2003), Corps water infrastruc-

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Corps of Engineers Water Resources Infrastructure and Mission Areas 83 ture investments should be made according to a set of principles that help en- sure sustained contributions to economic development. Future OMR investments should be guided by a more coherent set of principles that include strong reliance on economics of infrastructure in- vestment. A 2003 NRC committee that studied national freight transport of- fered the following set of investment and economic principles that merit careful consideration. These principles can be summarized as follows: x Promote economic efficiency, with investments directed to im- provements that yield greatest economic benefits. x Limit government involvement to circumstances in which market- based outcomes clearly would be highly inefficient. Government also is re- sponsible for managing facilities where it has important historical responsi- bilities that would not be easily altered, and where institutional complexity necessitates government leadership. x Limit government subsidies and ensure that facility beneficiaries pay the costs. x Rely more on user revenues, and the ‘user pays’ principle, along with matching funds and stronger public-private relationships. Along with economic development principles, broader social and environmen- tal goals for Corps projects, including public safety purposes, of course need to be considered when prioritizing OMR investments for Corps projects (the com- plete listing of these principles is on pages 53 and 54).