March 21,2006 

Mr. Kirk Rodgers 

Mid-Pacific Regional Director 

Bureau of Reclamation 

2800 Cottage Way 

Saaamento, OA 95825 

Dear Mr Rodgers; 

The Central Valley Project Water Association and tre Northern California Power 

Agency have a long history of working effectively with Reclamation to 

collaboratively resolve complex, and occasionally contentious, issues affecting 

Central Valley Project (CVP) water and power contractors (Contractors) It Is in 

this spirit that we write to you today to initiate a process to address some of our 

long-standing concerns about Reclamation's current CVP cost allocation 

structure. 

in response to the requirements of Public Law 99-546 (COA), Reclamation 

issued its May 2001 Central Valley Project Cost Allocation Study (Report), 

Reclamation has acknowledged that ths Report did not constitute a new cost 

allocation study based on estimates of project benefits or alternatives due, in 

part, to the significant resources that would have been required to conduct such 

a study, instead, the Report chose to continue using the cost allocation formulae 

derived from an update implemented in 1975. 

The Contractors contend that the Report does not meet the requirements of the 

COA and continue to believe that the cost ailocation structure currently in use 

results in inappropriate allocatons of costs to the various CVP purposes. We 

met with you n January 2005 to express our concern that Reclamation had not 

completed a new CVP cost allocation study in compliance with the COA. After 

examining the issues related to making a new cost allocation study, we are not 

requesting the initiation of a new cost allocatton at this time. Instead, we are 

requesting the development of an administrative action to ameliorate the current 

cost allocation flaws through two targeted steps* 

1. Return to the 1970 Separable Cost Remaining Benefit (SCRB) cost 

allocation factors. A short-form allocation was completed m 1975 to 

update the 1970 cost allocatton study, but the benefits and alternative 

costs for several of the project purposes were not updated in that shortform update. The principles of analyzing and treating all project purposes 
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on a comparable basis, which is inherent in a SCRB aiiocation, were 

compromised in the 1975 short-form update. The 1975 update also 

incorporated unrealistic assumptions pertaining to both inflation factors 

and power costs. Finally, documentation available to validate the 

conclusions of the 1975 update is incomplete and Inadequate, consisting 

of only 20 pages. 

2. incorporate cost allocation adjustments required by the COA to 

reflect changes In CVP operations necessary to meet the State's 

water quality standards. The COA establishes criteria for allocating 

costs associated with meeting State water quality objectives among all 

CVP project purposes. The Contractors' understanding of this legislation 

!S that this language is inclusive of both the resourca cost, water, and the 

financial costs associated with the resultant re-operation of the CVP. In 

the absence of a new SCRB, the Contractors believe that the most 

appropriate way to implement the COA requirement is to adjust the water 

supply sub-allocation to reflect the changes in operations necessary to 

meet the State water quality objectives. 

These two steps are discussed further in the enclosed Central Valley Project 

Cost Allocation Administrative Proposal. 

Your consideration of this matter is appreciated. We would also appreciate your 

assistance in implementing this proposal within a timeframe that allows its 

incorporation into the 2007 water and power rates. Our agencies, along with the 

water and power contractors we represent, are willing to work with Reclamation 

to resolve technical issues and accomplish these adjustments. 

We are confident that Reclamation has the administrative authority to implement 

these adjustments. Moreover, we believe that Reclamation is compelled to act in 

this instance, which entails one adjustment to correct the impacts of a severely 

flawed update by returning to the 1970 cost allocation study and one adjustment 

to incorporate a specific legislative requirement. 

We look forward to working with you and your staff to resolve these issues. 

Enclosure 
Central Valley Project Cost Allocation 

Administrative Proposal 

March 21,200S 

in response to the requirements of Public Law 99-546 (COA Legislation), 

Reclamation issued its May 2001 Central Valley Project Cost Allocation Study 

(Report). Reclamation has acknowledged that the Report did not constitute a 

new cost allocation study based on estimates of project benefits or alternatives 

due, in part, to the signifcant resources that would have been required to 

conduct such a study. Instead, the Report chose to continue using the cost 

allocation formulae derived from an update implemented In 1975. 

The Contractors contend that the Report does not meet the requirements of the 

COA Legislation and continue to believe that the cost allocation structure 

currently in use results In Inappropriate allocations of costs to the various CVP 

purposes. After examining the issues related to making a new cost allocation 

study, we have developed this administrative proposal that addresses the 

inadequacies of the current cost allocation structure through the two targeted 

adjustments detailed below. 

1. Return the 1970 SCR B Factors 

The last complete cost allocation study for the CVP was implemented in 1970. In 

the 1970 study, the benefits and single-purpose alternative costs needed for a 

Separable Cost Remaining Benefits (SCRB) allocation were calculated for each 

CVP purpose. In the 1975 short-form update, two main changes were 

incorporated: 

• The type of power plant used as a basis to determine the benefits and 

single-purpose alternatives for the Power project purpose was changed 

from the fossil fuel plant used in the 1970 allocation to a significantly more 

expensive nuclear plant. 

• The alternative cost for the Water Supply project purpose was indexed 

forward from 1968 to the prevailing high inflation levels of 1975. Benefits, 

altemative costs, and inflation indexing for most other CVP purposes 

remained unchanged. 

Records Indicated-that-neitherthe- benefits nor the-singie-pufpos& altemative 

costs for Flood Control were recalculated in the 1975 short-form update. 

Furthermore, the Flood Control project purpose was not indexed forward from 

1968 to 1975. The Flood Control benefits incorporated In 1975 were almost 

unchanged from the data used in 1970. 
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A summary of the impacts resulting from this flawed update are illustrated below. 

Comparison of CVP Base I Allocation Factors 

From the 1970 and 1975 Studies 

Wtr Supply Power F&WL Recreation Flood Ctrl Navigation 

1970 Study 54.18 5.63 1.92 0.00 36.12 2.15 

1975 Study 55.79 21.81 0.00 0.00 20.49 1.91 

Increase 

(Decrease) 

Increase 01.61 18.18 (1.92) 0.00 (15.63) (0.24) 

(Decrease) 3% 287% (100%) N/A (43%) ,,(11%) 

When the 1975 short-form update was performed, it was anticipated that another 

complete cost allocation would be conducted In 1980 that would allocate CVP 

costs based upon the benefits and altemative costs for all the CVP project 

purposes. Subsequent updates have not occurred, however, and the 

multipurpose allocation factors developed in the 1975 short-form update have 

continued to be used through 2005. Imposing such an significant shift in CVP 

costs from non-reimbursable to reimbursable project purposes and keeping those 

allocation factors in place for 30 years without conducting new benefit and 

altemative cost studies for Flood (Control and other non-reimbursable project 

purposes has perpetuated the allocation of costs based on a flawed model. 

The allocation factors in the 1975 short-form update Incorporate the following 

significant flaws: 

1. The 1975 short-form update used nuclear power to determine the value 

for CVP energy because it was thought to be the new energy technology. 

As the 1973-1974 Arab Oil Embargo progressed, alarming predictions 

became widespread regarding extreme increases in the cost of fossil fuel. 

This led to the use of a nudear power facility as the single-purpose 

alternative in calculating power benefits. Using nuclear power as the 

alternative significantly increased the cost allocated to power. However, 

both the prediction of nuclear plants as the new technology and the 

projections for significantly escalating fossil fuel prices proved inaccurate. 

2. The 1975 short-fomi update did not perform new studies of benefits for all 

project purposes. The Power, Fish & Wildlife, and Navigation benefits 

were updated, while benefits calculations for Recreation, Water Supply, 

and Flood Control were left at 1970 values. Recreation benefits were left 

at zero. Water Supply benefits were unchanged because these benefits 

were assumed to exceed single-purpose altemative costs, but there is nomdlcatiorrthatthe stngl5=pinpose^ltematve was te-evaluated. The Flood 

Control benefits were not updated at all. The Corps of Engineers (COE) 

acknowledged during the 1975 study that "It appears that the effect of the 

new hydrology would be to increase the indicated average annual 
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benefrts". However, the COE never performed this study due to 

"concurrent substantive increases in the complexity of such studies". 

3. The 1975 short-form update utilized inconsistent indexing for inflation. 

The inflation index data utilized to derive the Water Supply allocation 

factor was adjusted forward from 1968 levels to 1975 levels, while the 

inflation data for most of the other project purposes was left at the 1970 

levels. The indexing adjustment raised the benefits attributed to the Water 

Supply project purpose from $1.4 billion In 1970 to $2.5 billion in 1975, an 

increase of more than 75%. 

4. The 1975 short-form update was Intended to be used only to allocate CVP 

costs for a short period of time to reflect the spike in the 1973 and 1974 

energy prices. Another SCRB was anticipated In 1980 to completely 

analyze the benefits and alternative costs for each project purpose. The 

1980 SCRB never occurred and no complete' allocation has been 

performed since 1970. 

We must stress that available documentation to support the 1975 short-form 

update is Incomplete and Inadequate. There are only 20 pages of supporting 

documents for the entire 1975 allocation, whereas the 1970 allocation is well 

documented and was performed n accordance with established cost 

allocation principles. This limited documentation makes reviewing and 

justifying the process used for the 1975 allocation impossible while the 

rationale and cost information for the 1970 cost allocation can be 

substantiated. Using the 1975 factors is not supportable due to the lack of 

records regarding basic cost inputs and calculations used to determine the 

allocation factors, There is no record of how these cost allocation factors 

were derived, which means that there is no way to verify that these factors 

were accurately calculated. 

For the above reasons, the Contractors request that Reclamation revert to 

using the supportable and more appropriate 1970 cost allocation factors. 

2. Incorporate COA Water Quality Requirements 

A component of the October 27, 1986 CCA Legislation authorized and directed 

the Secretary of the Interior to operate the CVP in conformity with the State of 

Califomla'a water quality objectives established for the San Francisco Bay and 

Sacramento - San Joaquin Rivers Delta Estuary, unless the Secretary found that 

such operations'ccnfllcted'witfrother CVP ralated'CongrissibnaTdirectrves. 

Since enactment of the COA Legislation no such conflict has been identified by 

the Secretary and Reclamation has provided annually varying quantities of water 

to meet the water quality objectives, The variability through the years has been 

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generally governed by the standards in place and the hydrologic cycle. Initially, 

Reclamation was to meet the standards promulgated by the State Water 

Resources Control Board's (SWRCB) 1978 "Decision in Furtherance of 

Jurisdiction Reserved in Permits of the United States Bureau of Reclamation for 

the Federal Central Valley Project and Department of Water Resources for the 

State Water Project" (01485). Though D1485 was the specific subject of the 

COA Legislation, Congress anticipated additional and more stringent standards 

In the future. 

In 1995, the SWRCB adopted the Water Quality Control Plan for the San 

Francisco Bay and Sacramento - San Joaquin Delta Estuary (Control Plan), 

which established additional limitations on operations of the CVP that were 

intended to protect and enhance fish and wildlife uses, including achieving the 

narrative anadromous fish doubling goal. The Control Plan was formally 

implemented by the SWRCB's 2000 "Decision Implementing Flow Objectives for 

The Bay-Delta Estuary, Approving a Petition to Change Points of Diversion of the 

Central Valley Project and the State Water Project in the Southem Delta, and 

Approving a Petition to Change Places of Use and Purposes of Use of the 

Central Valley Project" (D1641). Current modeling suggests the stricter 

standards set forth in D1641 resulted in an additional average annual delivery 

impact to the CVP of approximately 100,000 acre-feet. CVP water contractors 

estimate the total average annual water supply cost for meeting the State's BayDelta estuary water quality objectives Is now at 400,000 acre-feet 

In the COA Legislation, Congress recognized the financial consequence of 

complying with the State's water quality standards by calling for the costs of 

meeting the D14B5 standard to be allocated among all CVP purposes, with the 

portion delegated to the water and power purposes being reimbursable. 

Furthermore, Congress chose to limit the financial exposure of CVP Contractors 

for anticipated increases in water quality demands by declaring those costs 

above the D1485 standard to be non-relmbureable. 

Reclamation has previously indicated that compliance with the 01485 standards 

resulted In no "cost" to the CVP as the ability to provide full water deliveries to 

long-term contractors was unaffected. This claim is based on the results of 

hydrologic simulations conducted nearly twenty-years ago and an interpretation 

of "cost" with which CVP water contractors disagree. On the first point, CVP 

water contractors' review of various modeling runs conducted over the last few 

years indicate that there is indeed a delivery impact to the CVP as a result of 

Reclamation's compliance with D1485 water quality standards. On the second 

point, the COA refers to-"costs associated with providing Central Valley projecH 

wateri^shafl be-atlocated-among-the-CVP-purposes;—CVP-water^contractofsbelieve this language is Inclusive of both the resource cost, water supply, and the 

financial costs associated with the resultant re-operation of the CVP.