This study reports on the trends of operational costs of farmer owned and operated irrigation enterprises (irrigation districts and canal companies) in five intermountain states. Administrative costs have risen faster then operation and maintenance costs. While salaries of employees have not risen significantly over time, legal costs have greatly escalated.Agribusiness,

Anderson, Raymond L.

Anwer, Muhammad Sarfraz

Lagae, Hubert J.

Wilkins-Wells, John

English

Research Papers in Economics

Operational Costs of Canal Companies and
  Irrigation Districts in the Intermountain Region
by
John Wilkins-Wells,
1 Hubert J. Lagae,
2 Raymond L. Anderson,
3
and Muhammad S. Anwer
4
                                                       
1  Senior Research Scientist, Special Assistant Professor, Department of Sociology,
Colorado State University, Fort Collins, Colorado, 80523
2  Graduate Research Assistant, Department of Agricultural and Resource Economics,
Colorado State University, Fort Collins, Colorado, 80523
3  Faculty Affiliate, Department of Agricultural and Resource Economics, Colorado State
University, Fort Collins, Colorado 80523.
4  Post-Doctoral Research Associate, Department of Agricultural and Resource
Economics, Colorado State University, Fort Collins, Colorado, 80523
Presented at Western Agricultural Economics Association Annual Meeting
July 11-14, 1999
Fargo, ND1
Abstract
This study reports on the trends of operational costs of farmer
owned and operated irrigation enterprises (irrigation districts and
canal companies) in five intermountain states.  Administrative
costs have risen faster then operation and maintenance costs.
While salaries of employees have not risen significantly over
time, legal costs have greatly escalated.
Operational Costs of Canal Companies and
  Irrigation Districts in the Intermountain Region
Key words: irrigation, irrigation districts, canal companies, operating cost,
irrigation water cost
Introduction
In most areas of the West, irrigation water is delivered to farms primarily through
mutual irrigation companies and irrigation districts; broadly referred to as irrigation
enterprises. Most farmers in the West still depend heavily upon the ability of their local2
irrigation enterprise canal system to deliver gravity-fed water to their farm turnouts in a
timely and reliable fashion.  This generally requires that the irrigation enterprise be
financially sound, and with sufficient employees to supervise water deliveries and ensure
good service. This paper presents some recently compiled data on the cost of operating an
irrigation enterprise in the 1990s, and therefore the cost paid by farmers for gravity
surface irrigation water.  A glimpse is also given into some historical trends in irrigation
enterprise operating costs from 1945 to 1995.
Whether one speaks of irrigation districts developed under U.S. Bureau of
Reclamation programs or private mutual companies owned by farmers, these enterprises
operate on a nonprofit basis.  This means that they provide water service to farms and are
designed as businesses to provide water to farmers at the lowest possible cost.  This is in
order to hold down the overall production costs borne by farmers in growing crops, of
which water is a significant cost component.  They perform much in the way that any
farm supply or commodity marketing cooperative that is organized to reduce production
costs.
Federal or state policies conceived in the name of improving water conservation,
increase the cost of water for irrigation and may have far-reaching negative repercussions
on farm income.  Efforts to promote the marginal pricing of water, or efforts to promote
local water markets, are often seen as a means of stimulating water reallocation to other
uses.  However, such policies should be evaluated in terms of the effect they have on
farm production costs.  It will be shown in this paper that the cost of gravity surface
irrigation water in the intermountain region (Colorado, Idaho, New Mexico, Utah and
Wyoming) has increased significantly in recent years.  Given this increase in water costs,3
how does this trend balance with federal or state agency attempts to increase the cost of
irrigation water through various means?  Are such policies potentially regressive in their
failure to acknowledge the water costs and overall production costs borne by irrigators
today?  We will close with some comments on these issues, after reviewing some new
data on gravity surface water costs in the intermountain region.
Data Collection
A three-year study funded by the U.S. Bureau of Reclamation (USBOR) and
located at Colorado State University compiled current and historical financial data on
thirty-six irrigation enterprises in five intermountain states.  This involved visits to
irrigation enterprise offices in these states.  Certified financial audits and annual reports
were used in most instances.  Balance sheets, and revenue and expense statements were
coded using an account numbering system developed by the National Association of
Regulatory Utility Commissioners for Class “A” water utilities.  Selected years were
coded, including every fifth year beginning in 1945 and up to 1995.  When an enterprise
was missing records on a selected year, other sources were consulted when available.
The sampled irrigation enterprises consisted of four irrigation districts and nine
mutual canal companies in urbanizing counties and eleven irrigation districts and 12
mutual companies in rural counties.  The sample was also distributed proportionally
across the five-state region.  Not all irrigation districts sampled were part of USBOR
projects.  Some canal companies, on the other hand, received supplemental water4
supplies from USBOR projects.  Overall, the sampling procedure focused on diversity in
size, geographical location and enterprise type.
Types of Enterprise Expenditures
Irrigation enterprises exhibit different operational costs, depending upon the
complexity of the irrigation system.  In fact, no correlation was found in the sample
between the per acre cost of operating an irrigation enterprise and the size--in acres–of
the enterprise service area.  Administrative costs alone are affected by the cost of
employee salary rates that vary with the enterprise’s location, the number of employees
required to administer the irrigation system effectively, and legal and regulatory costs.
Following is a brief summary of the various cost items reported in revenue and
expense statements by irrigation enterprises participating in the study.  Again, most
enterprises today have very well itemized revenue and expenditure statements.
Operation and Maintenance Costs (O & M Costs)
The main function of the management staff of the irrigation enterprise is to
maintain and operate the irrigation system so that water is delivered to farmers in a timely
and reliable way.  Typical O & M costs associated with these activities include the
following and related areas: repairs and maintenance of diversion structures, canals, and
machinery, repairs to headgates and measuring stations, maintenance of enterprise land,
right-of-ways, and buildings; maintenance of dams and reservoirs under the management5
or supervision of the enterprise.  These are all examples of annual budget line items.
Depreciation expenses, for those enterprises that kept depreciation accounts, are also
included in this broad cost category.
Administrative Costs
Administrative costs are comprised mainly of payroll for full as well as part-time
field, office and managerial staff, and contract labor.  In addition, there are a variety of
other costs incurred over the budget year that contribute considerably to administrative
costs.  These include regulatory fees, property taxes on organization property, and payroll
taxes (e.g., employee pensions and benefits); loss on sale of investments, the expense of
legal services; accounting services and engineering services.  Also special studies and
other contractual services, insurance, advertising, the cost of meetings and board
stipends, purchase of office equipment, transportation, rental of small equipment and a
number of other miscellaneous items are included.
Trends in Costs
Figure 1 shows historical trends for these broad categories of irrigation enterprise
costs for a subset of fourteen enterprises irrigating approximately 555,037 acres, and for
which there is continuous data from 1945 to 1995.  This figure shows the total costs rose
steadily until about 1975, and since then they have risen sharply.  Costs have increased in
each of the five-year increments examined.6
Figure 1.  Irrigation enterprise trends of total, administrative, and operation and
maintenance costs every fifth year from 1945 to 1995 (shown in nominal dollars, N =
14).
Administrative costs have risen faster than O & M costs.  Figure 1 shows that in
every five-year period, administrative costs have risen rapidly since the 1980’s.  In 1995
they comprised about 60 percent of the total costs whereas in 1945 they were only 35
percent of total costs.  In nominal dollars total costs have risen from around $2.00 per
acre in the late 1940’s to over $21.00 per acre in 1995.  For a typical 200 acre irrigated
farm in the intermountain region, this would amount to over $4,000 a year of family farm
income being spent on the cost of operating an irrigation enterprise.
y = 0.622e
0.2298x
R
2 = 0.9492
y = 0.3553e
0.3251x
R
2 = 0.9769
0
5
10
15
20
25
1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995
Year
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Total O&M Total Admin Total Cost
Expon. (Total O&M) Expon. (Total Admin)7
Figure 2 shows the average cost per irrigated acre in 1995 for the entire sample of
enterprises.  A total of 1,478,720 irrigated acres is represented in Figure 2.  We find that
in 1995, for this larger sample, the cost of operating an irrigation enterprise was $7.75 per
irrigated acre for  O & M costs, $11.87 per irrigated acre for administrative costs, 88¢ for
debt payment, both principle and interest, on the irrigation enterprise and 17¢ for special
project costs.  These projects are special O & M expenditures that do not occur on an
annual basis such as canal lining projects and rehabilitation after floods.  The overall cost
per service area irrigated acre in operating an irrigation enterprise was $20.68 for this
larger sample of 36 irrigation enterprises.
Figure 2.  1995 irrigation enterprise average cost per irrigated acre (nominal
dollars, N = 36).
As might be expected, the cost trend has been upward for virtually all major cost
categories.  This cost trend is a function of the many factors that go into operating,
maintaining and administering the daily needs of a canal system.  We will now explore
some of the key factors believed to be contributing to this cost trend.
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10.00
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Total O&M Total Admin Debt Pay Spec. Proj. Total
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$20.68
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$.88 $.178
Operation and Administrative Costs
The data show that O & M cost have increased less than administrative costs,
particularly when adjusted for inflation.  Figure 3, graphing trends in both total
administrative and salary costs in constant dollars, shows that administrative costs have
risen dramatically in recent years, even when such costs are adjusted for inflation.
Administrative costs seem to explain most of the rise in total costs over the years.  The
decade of the 1980s appears to be the period in which administrative costs begin to show
their most rapid increase.  Some of this is undoubtedly due to the general inflation in the
economy at this time.  However, the trend is still evident when adjusted for inflation, and
continues unabated thereafter.  Another jump in costs occurs in the early 1990s and
continues into the present.  Much of this later jump appears to be due to costs associated
with urbanization in the intermountain region, in addition to effects of increased
regulation associated with the environmental movement.  Discussions with irrigation
enterprise managers and board members clearly point to urbanization and increased
environmental regulation as the main factors associated with the nearly 300 percent rise
in costs between 1975 and 1995.
Employee Salary Costs
One element contributing to the rise of administrative costs appears to be
employee salaries.  Figure 3 shows the trend in employee salary costs in constant dollars.9
From this graph it is apparent that, for this sample of twenty-one enterprises having
records back to 1960, salaries account for about one third of total administrative cost in
1995.  It appears that the increase in employee salaries, when adjusted for inflation, is
increasing less than other administrative costs.  However, the cost of employee salaries
takes on more significance when looking at irrigation enterprises in urbanizing areas.
Figure 4 shows the difference in employee salaries for irrigation enterprises in rural and
urbanizing counties.  Employee salaries are nearly twice as high for enterprises in
Figure 3.  Total administrative and salary inflation adjusted cost trends for 1960 to
1995. (N = 21; inflation based on CPI with 1982-1984 = 100)
y = 0.1282x +
 2.1453
R
2 = 0.5159
y = 0.5527x + 3.8754
R
2 = 0.8159
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
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1960 1965 1970 1975 1980 1985 1990 1995
Year
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Admin Salaries Linear (Salaries) Linear (Admin)10
Figure 4.  Irrigation enterprise salary costs for 1995 in rural and urban areas in
nominal dollars.  (N = 36)
urbanizing counties.  The supervision requirements of operating a canal system in urban
or urbanizing areas are generally greater than they are for more rural areas.  This leads to
the need for a greater number of employees, and therefore a greater overall allocation of
the total enterprise budget to employee salaries, employee benefits and related
administrative costs.  Job opportunities are greater in urbanizing areas, requiring higher
salaries to keep competent workers from leaving for better pay.
Legal and Other Contractual Costs
Another important area of administrative costs for irrigation enterprises involves
legal and other contractual services, such as those associated with accounting services
and special engineering services and studies.  The true extent of legal costs, or the actual
amount spent by irrigation enterprises in the intermountain region on legal fees, will
probably require a special study in the future.  However, we can report on some general
0
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Rural (23) Urban (13)
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trends here.  First, there are legal costs associated with regional water rights issues, such
as the adjudication of large river basins that are borne jointly by all types of water users
in the area.  It is often difficult to know what percentage of these legal costs is borne
specifically by irrigation enterprises, although it is probably borne by the majority of
them unless state government has footed part of the bill.
In other instances, irrigation enterprises in particular river basins may have
formed a regional association in the past to represent their joint interests.  In this instance,
the legal costs borne by individual enterprises generally are not known.  Irrigation
enterprises often pay annual assessments to such umbrella associations, who then hire
lawyers of their own to represent the collective interests of all participating enterprises.
Figure 5.  A legal and accounting cost trends for 1945 to 1995 in nominal dollars.
y = 0.0048e
0.4345x
R
2 = 0.9345
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995
Year
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Accounting Legal Combined Expon. (Legal)12
Figure 5 shows a trend in legal costs reported by ten of the fourteen enterprises
that reported these costs separately.  Clearly, legal costs have risen dramatically over the
years.  It is now one of the major costs items for irrigation enterprises.  Accounting and
other special service costs have risen more modestly.  Total legal and accounting costs in
1995 were running about 95¢ per irrigated acre.  This may not seem like much at first
glance.  However, what it means is that for an irrigation enterprise with a service area of
20,000 acres, the costs of legal services might very well amount to $19,000 or more.
This is a recently occurring cost for these enterprises.  There is no evidence they were
paying these kinds of legal cost in the past.  It is most certainly a phenomenon associated
with increased competition for water supplies, environmental regulations, disputes with
the environmental movement in general, and the gradual urbanization of irrigated lands in
the intermountain region.
Conclusion
           The costs of operating irrigation enterprises in the intermountain West have been
increasing since World War II.  Nominal costs have risen from an average of roughly
$2.00 per acre in 1945 to over $20.00 per acre in 1995.  While operation and maintenance
costs of the canal systems have risen, the administrative costs, including legal expenses
are now more expensive than the costs of physically operating the systems.  Farms have
expanded and gross sales have increased but expenses have risen in tandem with
increased sales leaving little extra funds in the farmer’s hands.  This leaves little for
farmers to pay for these increasing costs of water delivery13
           The water used in irrigation is coveted by many newly developed demands and
irrigation enterprises have had to go to considerable expense to defend their water rights.
This creates a burden on the irrigated farmers who also have to bear the cost of defending
and improving the irrigation systems.  Many of the enterprises are barely able to keep the
systems functioning with little in the way of funds to rehabilitate the aging facilities,
many of which are around 100 years old.

OPERATIONAL COSTS OF CANAL COMPANIES AND IRRIGATION DISTRICTS IN THE INTERMOUNTAIN REGION

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