COMMENT SHEET

CVP COST ALLOCATION MEETING OF NOVEMBER 19, 2013

Name: Jerry Toenyes

Organization and Address: Northern California Power Agency, 651 Commerce 

Drive, Roseville, Ca 95678

Phone: (916) 781-4297

E-mail: Jerry.Toenyes@ncpa.com

Comments:

NCPA provides the following comments on the material presented at the 

November 19, 2013 meeting:

1. Historical Benefits. NCPA has provided previous comments to Reclamation 

on why the use of historical benefits is inappropriate for this cost allocation study. 

Reclamation has spent too much time trying to justify the use of historical 

benefits when it has been clearly demonstrated that historical benefits distort the 

cost allocation process and have socioeconomic impacts. Further comments on 

the shortcomings of the use of historical benefits are discussed in the paragraphs 

below.

In general, the purpose of undertaking a cost allocation update for a project that

is considered to still be in “construction” status is to ensure that current 

accomplishments and costs are properly aligned. Proper alignment assures that 

during the remaining economic life of the project, project beneficiaries are 

assigned their appropriate share of the costs, independent of whether their 

project purpose is deemed reimbursable or non-reimbursable. 

Historically the Mid-Pacific Region had a cost allocation policy that required 

completion of a major allocation of CVP costs every 10 years to ensure that the 

allocation is compatible with current use, accomplishments, benefits, and 

repayment responsibilities of the project. The policy was clear that benefits 

would be based on prospective basis, not those of the past. It recognized that 

project accomplishments changed over time and a continual update of the cost 

allocation is needed to align the allocated costs with the current 

accomplishments.

Reclamation stated at the meeting that historical benefits had always been used 

in previous CVP cost allocation evaluations. This is absolutely incorrect. The 

1960 evaluation used future project benefits and costs to determine the presentworth values over a 100-year period of analysis and this is clearly stated in 

Reclamation’s 2001 cost allocation report. The 1970 cost reallocation report 
contains tables that show that the benefit period of analysis used future benefits 

only for the period from 1970 to 2069. The decision to use future benefits for the 

1970 cost allocation was decided by Reclamation’s senior economists at a 

meeting in Washington, D.C during the week of October 21, 1968. In 1975, a 

“short-form” reallocation of CVP costs was prepared that updated indexed costs 

and future benefits from the 1970 cost allocation. A February 13-14, 1975 

meeting held in Washington D.C. confirmed that a future benefits analysis would 

yield the most accurate results. The 1988 cost allocation study states 

“Reclamation Instructions define the period of analysis as the shorter of either the 

remaining physical life or the economic life of the major project feature as of the 

time of the study. In either case, the period of analysis is not to exceed 100

years. In this 1988 cost allocation study, the period of analysis reflects the 

economic life of the major project features. This 100-year period begins with the 

first day of fiscal year 1987 and ends on the last day of fiscal year 2086.” Again 

only future benefits were used in the 1988 allocation. Reclamation records show 

that in each CVP cost allocation since 1960 only future benefits were used in the 

analysis. 

The importance of aligning project costs with current operations is shown in the 

Act of October 27, 1986. The Act amended the Central Valley Project 

Authorization Act to meet new water quality standards and directed Reclamation 

to undertake a new cost allocation study to account for the new requirements of 

the Act. Reclamation completed the cost allocation study in 1988 using a future

benefits analysis over a 100-year period that began in fiscal year 1987. Using 

future benefits aligned the cost allocation to the new operational requirements as 

required by the Act.

Unfortunately this cost allocation was not implemented because the General 

Accounting Office reviewed the cost allocation process and found Reclamation

included inappropriate costs and made questionable estimates of project benefits 

and alternative costs. As reported in the 1992 GAO report, the SCRB method is 

based on the principle that users should not pay more than the benefits they 

receive or more than the cost of the most economical single-purpose alternative 

that would achieve the same purpose. Therefore, to develop distribution 

percentages for allocating joint costs, the SCRB method relies on estimates of 

the benefits attributed to each purpose and estimates of the costs of alternatives 

to each purpose.

Future benefits are estimated to determine the limit of costs that can be allocated 

to the project purposes. For power, the benefits are based upon the projected 

value of power. If Reclamation used historical data that increased costs beyond 

the value of the future benefit, power users will choose another source of power 

that is more economical. Then Reclamation will only be able to receive market 

rates for power deliveries, which would be insufficient to recover Reclamation’s 

costs. If historical data distorts the cost so that the future benefit is less than the 

value of energy that Reclamation is delivering, Reclamation will under collect 
from power users. That is the strength of the SCRB allocation method - to 

determine the limits so costs are appropriately allocated for repayment based on 

how the project will be operated in the future. That is why the history of CVP cost 

allocations always used future benefits in the SCRB methodology.

Reclamation has presented different proposals on what it considers to be the 

period of analysis for the cost allocation study. The proposals have been very 

inconsistent on how historical benefits would be used. Initially the historical 

period to be used was 1980 forward. The proposal then changed to using

historical benefits only if they did not exceed the single purpose alternative. Now 

it has been changed again to use historical benefits starting from the first year of 

CVP operation. Reclamation’s inconsistent and constantly changing position on 

historical benefits occurs because there is no justifiable support to use historical 

benefits in the SCRB cost allocation. Reclamation seems more interested in 

managing the outcome of the SCRB allocation process than relying on the 

process to develop the correct result.

The use of historical benefits would cause the cost allocation to be unduly 

biased, as the cost allocation would accentuate benefits provided by the project 

during the early years of its operation while greatly devaluing operational 

changes that have occurred in the recent past. The present worth of benefits

dramatically weighs the project benefits provided to the first few years of the 

analysis. At an interest rate of 3 1⁄4 percent half the benefit value for each project 

purpose would occur in the first 20 years of the present worth analysis. At an 

interest rate of 8 percent approximately 80 percent of the benefit valuation occurs

in the first 20 years of the present worth analysis. Using Reclamation’s latest 

historical benefit proposal future benefits starting in 2017 have approximately a 5 

percent impact on the total benefit analysis at a 3 1⁄4 percent discount rate. If an 

8 percent discount rate is used future benefits starting in 2017 have less than 

one-half of one percent impact on the total benefit analysis. Thus, if 

Reclamations’ proposal to use historical benefits were used, the project benefits 

provided from 1945 to 1965 would significantly determine how the costs are to be

allocated for rate setting from 2017 forward. The significant CVP operational 

changes that have recently occurred would barely make any difference in the 

cost allocation. One example is the navigation project purpose. If historical 

benefits are used, future costs will be allocated to a purpose that is no longer 

served by the CVP. This type of distortion would occur for every project purpose 

if historical data is used.

The purpose of the updated cost allocation is to align the project costs with the 

current and future benefits provided, not to make beneficiaries have costs 

allocated to them from project operations occurring more than 50 years ago.

There is no question that the amount of water and generation provided by the 

CVP has continually declined in the last twenty five years. Weighting the cost 

allocation based on project operations that happened 50 years ago completely 

distorts the allocation of costs from future CVP water and power rate setting. For 
a cost allocation to be useful it has to be aligned with the project rate setting and 

repayment responsibilities. Reclamation stated at the meeting that the allocation 

of costs and the setting of water and power rates are not related. That statement 

is shocking as Reclamation’s objective should be to insure that benefits, 

allocated costs and rates are in harmony. 

Reclamation also presented charts at the meeting to show how the cost 

allocation changes when the benefits change. This is a perfect demonstration of 

what happens when future benefits are used in the SCRB allocation process. 

When future benefits are used, the allocation percentages change exactly as 

shown in the charts. If historical benefits are used one single allocation factor is 

developed for the entire 100 period of analysis, unlike what is shown in the 

charts. 

In summary, a historical benefit analysis has never been used in the history of 

CVP cost allocations, would inappropriately weigh the allocation of costs to 

project benefits provided before 1965, would diminutively value operational 

changes that have occurred in the last 25 years, would not be aligned with future 

operations of the project, would be disconnected from future water and power 

rate setting, have socioeconomic impacts, and slant the SCRB method so that 

the alternative cost becomes the justifiable expenditure for every project purpose. 

That is not the intent SCRB allocation method. Simply put, the use of historical 

benefits in this cost allocation is a non-starter. 

2. System Benefits: Reclamation stated that the CVP power system provides 

power system benefits to keep the grid operational. System benefits should not 

be used to allocate costs to CVP water and power customers. If an estimation of 

value can ever be determined for these benefits, the cost associated with those 

benefits should be allocated to non-reimbursable as those benefits flow to all 

customers on the Western interconnected grid, not just to CVP customers.

3. Alternative Cost: Designing an alternative cost for power is difficult because 

power is the lowest CVP priority, generated only when water is released for the 

other project purposes. Thus, the CVP system is a high capacity, low energy 

generator that is not cost effective as a standalone purpose. NCPA believes that 

two alternative options be considered and the less costly of the two options be 

used for the single purpose alternative. First, a hydro alternative should be 

developed as a large Shasta generator that can provide the future generation 

capability of the CVP under average water hydrology. Second, a gas fired 

generator alternative be developed that would provide the same future 

generation that is projected to occur under average water conditions. 

NCPA’s agrees that the sizing for the alternative cost should be based upon the 

average amount of generation forecasted to occur in 2020. This comports with 

using future benefits to develop the benefit analysis. Alternative costs are not 

developed based on water and power deliveries that can no longer provided. 
The benefit analysis has to be based on the same logic as the alternative cost 

development, which is one more reason why future benefits are the only 

appropriate benefits to be used in the cost allocation. The SCRB benefit analysis 

needs to align with the alternative cost development.

4. Modeling: One of the bullets under the technical presentation of the PLEXOS 

model stated that it values CVP generation by modeling 2020 conditions, when 

California’s 33 percent renewable resource mandate is implemented. Large 

hydro is not considered a renewable resource and, except for Nimbus and 

Lewiston power plant generation, no valuation should be placed in this analysis 

of large hydro having a renewable benefit. Nimbus and Lewiston produce 

approximately one percent of the total CVP generation.

It is very difficult to provide comments on the modeling with the general 

information that has been provided. NCPA strongly recommends that 

Reclamation coordinate this evaluation with Western so that the benefits are 

accurately valued.