Initial work on Bly’s Eagle Lake tunnel began on the Willow Creek side, just as Merrill did before him. By the spring of 1922, rumor was circulating that there were problems with the construction of the tunnel. In May, J.F. Blakemore, the superintendent for Grant Smith Co., the tunnel contractor, invited residents to Eagle Lake for a picnic, as work had not started on the lake side. When some of his guests questioned him about the rumors, Blakemore denied it and that everything was going smooth and the tunnel would be completed in time.
A year later with the approaching completion of the tunnel, the story had changed. The initial plans called for the tunnel to tap the lake forty below its surface. That was later renegotiated to eight to nine feet below the surface. In February 1923, Grant Smith encountered solid rock for the last portion of tunnel which put the project behind schedule. In the end, Grant Smith only tapped the lake three feet below the surface of the lake. This was totally unacceptable and did not provide sufficient water flow. The matter would be litigated. The Baxter and Tule Irrigation Districts, owners of the tunnel, would spend the next ten years deepening the tunnel inlet.