Department of the Interior, Bureau of Reclamation, Central Valley 

Project, California 

Municipal & Industrial Water

Ratesetting Policy

APPROVAL AND FINALIZATION OF MUNICIPAL & INDUSTRIAL WATER RATESETTING POLICY: 

On December 31, 2020, Assistant Secretary of the Interior, Water and Science signed a memorandum 

finalizing the Municipal and Industrial Water Ratesetting Policy. 

 Below is the final Policy. 
Mission Statements

The mission of the Department of the Interior is to protect and provide access 

to our Nation’s natural and cultural heritage and honor our trust responsibilities 

to Indian Tribes and our commitments to island communities.

The mission of the Bureau of Reclamation is to manage, develop, and protect 

water and related resources in an environmentally and economically sound 

manner in the interest of the American public. 
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Table of Contents 

Page

PURPOSE AND BACKGROUND........................................................................1

CVP COST ALLOCATION PROCEDURE............................................................5 

RATESETTING POLICY DESCRIPTION....................................................7

COMPONENT WITH INDIVIDUAL CONTRACTOR

DEFICITS RATESETTING METHOD ................................................................. 11 

COST OF SERVICE WATER RATE DEVELOPMENT.......................................17

INTEREST ON M&I UNPAID COST................................................................... 19

TABLE OF M&I CONSTRUCTION COST RECOVERY..................................... 21

GLOSSARY........................................................................................................23 

ATTACHMENT ................................................................................................. ..26 
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1

PURPOSE AND BACKGROUND

The purpose of this policy (Policy) is to present the procedures and methodologies

utilized in calculating water rates for the Central Valley Project (CVP) Municipal and 

Industrial (M&I) water service contractors under the Component with Individual 

Contractor Deficits Ratesetting Method and to provide a brief history of the CVP. Also 

included is a description of the cost allocation procedures used in the CVP, a 

description of many of the premises included in the ratesetting method and a detailed 

description of the procedures utilized in computing water rates under the Component 

with Individual Contractor Deficits Ratesetting Method. This Policy will be applied 

prospectively from the date of approval.

Background

The CVP was first authorized by the California Legislature as a State project. Approved 

by the Governor on August 5, 1933, the CVP immediately became the subject of a State 

referendum petition which required that the CVP be approved by the electorate. The

election was held in December 1933, and the CVP was approved by the voters.

State officials then turned to the problem of financing the CVP. The State Legislature 

had authorized the sale of public bonds as a means of financing the construction of the 

CVP, but the public bonds were found to be unmarketable. Requests for Federal grants 

and loans to aid in the financing of the CVP were submitted and turned down. Because 

of the Financing difficulties, State officials then asked the Federal Government to 

undertake construction of the CVP.

CVP Legislative History

With the Rivers and Harbors Act of 1935, the federal government assumed control of the 

project and its initial features were authorized for construction by the U.S. Army Corps of 

Engineers. Funds for construction of the initial features of the Central Valley Project were 

provided by the Emergency Relief Appropriation Act of 1935 (49 Stat. 115). The Act 

authorized the U.S. Army Corps of Engineers to construct the following project facilities: the 

Shasta, Keswick, and Friant Dams, the Tracy Pumping Plant, the Delta-Mendota and FriantKern Canals, and the Contra Costa Canal and related facilities. 

Funds for construction of the initial features of the Central Valley Project were provided by 

the Emergency Relief Appropriation Act of 1935 (49 Stat. 115). The project was authorized 

by a finding of feasibility by the Secretary of the Interior and approved by the President on 

December 2, 1935, for construction by Reclamation.

Congressional reauthorization of the initial CVP facilities under Reclamation law was 

provided for in Section 2 of the River and Harbors act of August 26, 1937 (50 Stat. 844) 

and in the River and Harbors Act of October 17, 1940 (54 Stat. 1198). Since then, the 

Congress has authorized the construction and operation of several additional CVP 

units, divisions and facilities.
2

Water supplies produced by the CVP are marketed primarily pursuant to the 

Reclamation Project Act of August 4, 1939 (53 Stat. 1187). This Act provides the basic 

concepts and provisions included in all CVP repayment and water service contracts. In 

addition, the Acts of July 2, 1956 (Public Law 84-643, 70 Stat. 483) and June 21, 1963 

(Public Law 88-44, 77 Stat. 68) contain provisions applicable to the renewal of Federal 

Reclamation waters service contracts.

History of CVP Water Ratesetting Policies

The first CVP water service contracts were executed by Reclamation during the late 

1940's. The initial CVP water rate structure consisted of a graduated scale, ranging 

from $2.00 per acre-foot for irrigation water in the Sacramento Valley (near the source 

of supply) to $3.50 per acre-foot for irrigation water service in the San Joaquin Valley 

(south of the Delta formed by the Sacramento and San Joaquin Rivers). The same 

water rates applied to all of the contractors in each service area regardless of the 

contract date. While contracts did not include provisions for rate changes, uniform 

contract expiration dates were used in some service areas in order to facilitate service 

area contract negotiations upon renewal. 

By the mid-1960's, the repayment status of the CVP indicated that water rates for both 

irrigation and M&I water service contracts were insufficient to recover both increasing 

annual O&M costs and the capital investment costs for the CVP within the prescribed 

terms of the contract. Reclamation honored the terms of the then-existing contracts and 

withheld any action to adjust the fixed-rate or impose any additional charge or rate for 

those contracts to recover the accumulated O&M deficits pending contract renewal. 

However, Reclamation did require that any new contracts include provision for rate 

adjustments to promote the recovery of Reclamation’s escalating cost of operations.

In 1986, Congress enacted the Coordinated Operations Act (COA) (P. L. No. 99-546, 

100 Stat. 3050-56) which included several provisions for addressing the CVP cost 

recovery deficiency. In particular:

• Section 105 established 2030 as a firm repayment deadline for contractors to 

repay all construction costs and O&M deficits existing as of 1986 and required 

contracts to include provisions for adjusting rates if it is found that the rate in 

effect may not be adequate to recover Federal investment.

• Section 106 established specific requirements for calculating individual 

contractor O&M deficits and required the Secretary of the Interior include 

provisions in each new or amended CVP contract for recovery of such 

accumulated O&M deficits.

Although Interest-Bearing O&M Deficit balances existing through 1986 are 

authorized to be recovered through 2030, O&M deficits identified for routine O&M 

expenses after 1986 may be recovered through 2035. 
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To ensure compliance with P.L. 99-546, Reclamation needed to develop water 

ratesetting policies for both irrigation and M&I contractors. Due to the earlier renewal of 

irrigation contracts, completion of an irrigation ratesetting policy took precedence over 

development of the M&I ratesetting policy. On May 4, 1987, the Assistant Secretary of 

the Interior for Water and Science (AS/WS) proposed the Component with Individual 

Contractor Deficits Ratesetting Method (Irrigation Ratesetting Policy) as the new policy 

for development of water rates for the CVP. The AS/WS subsequently approved the 

final Irrigation Ratesetting Policy in 1988.

In the early 1990’s, Reclamation initiated a corresponding process to develop and 

implement a CVP M&I Ratesetting Policy. That process was to be similar to the 

methodology of the CVP Irrigation Ratesetting Policy that was adopted. In addition, the 

M&I Ratesetting Policy was to be interest bearing for unpaid construction costs and 

O&M from the date M&I CVP water was taken. The calculation of M&I O&M deficit 

interest for years before 1986 led to litigation which was eventually settled at the 

Department level.1 O&M interest is calculated on unpaid balances from 1986 forward 

using the same interest rates that are applicable to irrigation.

In addition to complying with the statutory mandate, Reclamation also had audits and 

reviews performed by the Department of the Interior (Interior) Office of Inspector 

General (OIG) and Government Accountability Office (GAO); and interest by the general 

public, other project stakeholders, Congressional Committees and individual members 

of Congress.

Due to on-going resolution of statutory requirements, OIG/GAO findings, contractor 

opposition, and Congressional and stakeholder interest, the CVP M&I Ratesetting 

Policy was approved on an interim basis, pending completion of the Programmatic 

Environmental Impact Statement (PEIS) on the CVP pursuant to Public Law 102-575. 

The broad scope of the PEIS encompassed both the project’s Irrigation and M&I water 

ratesetting policies, making them subject to modification based on the results of the 

PEIS.

The PEIS was completed in October 1999 and a final Record of Decision (ROD) was 

issued on January 9, 2001. The ROD resulted in no modification to either of the CVP 

ratesetting policies. However, finalization of the Interim Policy did not move forward 

pending (1) completion of Endangered Species Act (ESA) section 7 consultation with 

the National Marine Fisheries Service (NMFS) and U.S. Fish and Wildlife Service 

(F&WL) on an updated CVP Operations Criteria Plan; and (2) the settlement of the 

lawsuit brought about by CVP M&I contractors.

1 CVP M&I contractors litigated Reclamation’s calculation of the O&M deficit required by the COA. That litigation 

was eventually settled by the parties (M&I Settlement Agreement, Case No. CIV-F-03-5359 OWW SMS, dated 

March 3, 2005). The Settlement Agreement established terms for payment of obligations to the United States with 

interest. Paragraph 3(A) (2) through 3(A) (5) of the Agreement outlines CVP contractors’ responsibilities for CVP 

construction costs; as well as allocable O&M costs; including interest on the unpaid balances.
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CVP COST ALLOCATION PROCEDURE

Construction costs for plant-in-service are allocated through the cost allocation as 

prescribed by Reclamation Manual PEC 01-02, Project Cost Allocations. The cost 

allocation of the CVP plant-in-service investment is reviewed and updated annually to 

reflect: any additions to, or retirements from, the plant-in-service investment account; 

the adjustment to the historic data base to reflect another year’s actual CVP water and 

power deliveries; and any changes in the water and power deliveries projected to be 

made during the remainder or the 50-year repayment period (based on the in-service 

date of the last major facility). A general description of the plant-in-service investment 

cost allocation process is detailed below.

Plant-in-service investment costs are first allocated among the authorized CVP 

purposes (e.g. flood control, navigation, water supply and power). Costs allocated to 

the water supply purposes are then suballocated among various functions, one of which 

is M&I, based on each function’s proportionate share of the total of the past, present 

and future CVP water deliveries. Similarly, CVP hydroelectric power generation and 

transmission costs are suballocated between commercial sales and CVP project use 

functions based on each function’s share of the total past, present and future CVP 

power uses. Costs allocated to the CVP project use power function are then further 

suballocated among various CVP water supply functions (including M&I) based on each 

function’s share of the total of past, present and future CVP project use power uses.

Actual annual operating expenses are allocated at the close of each fiscal year. At year 

end, operation, maintenance and replacement costs incurred by the CVP during the 

previous 12 months are allocated among the authorized project purposes and then 

suballocated within the water supply and power functions. However, instead of 

allocating annual operating costs on the basis of past, present and future data as 

described above, the allocations is based on each function’s share of the CVP water 

and power deliveries identified for the current year.

The plant-in-service and operation expense allocations are used to determine the water 

supply and project use power costs allocated to the irrigation and municipal and 

industrial functions and detail the costs to be recovered from these two functions 

through the water service rates. 
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RATESETTING POLICY DESCRIPTION

Legal and Policy Considerations

This policy prescribes the methodology for distributing and recovering costs for the CVP 

and does not supersede other Reclamation Policy and Directive & Standards. The 

irrigation and M&I functions of the Project are integral water delivery operations for the 

CVP governed by common requirements, criteria, and principles. The integrated 

operations and common characteristics dictate consistency and uniformity in the 

ratesetting policies for these two functions wherever possible. Accordingly, Irrigation 

Ratesetting Policy provided the broad framework upon which the approved Interim and 

the Final M&I Policy are based. 

• CVP water service contracts: Consistent with terms and conditions of CVP M&I

water service contracts, this Policy and cost of service water rates apply to the

authorized uses of water within these contracts.

• Individual Contractor accounting is maintained for repayment accountability, and

O&M deficit(s) are accumulated for and will be repaid by each Contractor under the

terms of each new or amended contract, as required by Section 106 of Public Law

99-546.

• The cost of service water rates apply to all types of water with the CVP, including

storage and/or conveyance of non-project water in CVP facilities.

• The cost of service water rates are composed of a unique assembly of cost

components frequently referred to as “cost pools.” Each contractor pays a water

service rate encompassing a proportionate share of the cost pools associated with

the specific service required to provide that contractor with CVP water. A description

of the various cost pools involved is presented subsequently.

• All of the costs of those CVP facilities in-service are included in the M&I water rates.2

The cost of facilities not being fully utilized (unused capacity) are only deferred if

Congress has specifically authorized the deferral of these costs.

• The rate of interest to be applied to the O&M deficits will be determined annually by

the Department of the Treasury in accordance with criteria provided in Public Law

99-546. The rate will be applied using compound interest procedures to any

contractor’s deficit.

• Construction is an interest bearing function and the contractors’ share of unpaid

amounts are repaid using present worth of future deliveries (see definition) to identify

an appropriate construction water rate.

2 Per Legislation and associated water contracts negotiated (refer to bullet on “Repayment Contracts” below), 

construction costs may be recovered outside of the Water Ratesetting Policies.
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• Transferred Works: Most of the O&M for major CVP conveyance and conveyance 

pumping facilities have been transferred to non-Federal operating entities through 

agreement with Reclamation. The agreement and associated methodologies 

adopted by the non-Federal operating entities to recover their O&M cost will be in 

lieu of recovering cost through this Policy.

• Repayment Contracts: Contractors that entered or enter into repayment contracts 

are responsible for their allocable construction costs based on the terms of the 

contract. Additionally, contractors that prepaid their construction obligation and 

converted to repayment contracts are still responsible for any increases to 

construction costs prorated to them. Construction costs are prorated to contractors 

annually through the M&I Ratesetting Policy and any unpaid costs identified are 

interest bearing and interest is treated as an annual expense. However, the costs

prorated to CVP water users are not considered final until a final CVP cost allocation 

study is completed and the results of the study are implemented for cost recoverable 

through 2030. Also, any new construction could have separate repayment periods

(up to 50-years) if authorized and approved as such. Additional costs could still be 

recovered through water service rates if their contracts allow for recovery under the 

CVP Ratesetting Policies.

• Repayment Periods

o In accordance with Public Law 99-546, the repayment period for the main Project 

water system facilities, referred to as in-basin facilities, ends in 2030. The 

repayment period commenced in 1981 the year after the last major facility, the 

New Melones Dam and Reservoir, was placed in service.

o Out of basin facilities. A separate repayment period of 1987-2036 has been 

established for the costs of the San Felipe Division facilities, also referred to as 

the out-of-basin facilities. The repayment period for the out-of-basin facilities 

commenced the year after these facilities were substantially completed. 

Currently, these facilities are recovered under repayment contract provisions 

included in the San Felipe Unit water service contracts.

o Construction authorized and completed after the date of this approved Policy. 

New authorized legislation would provide guidance regarding the repayment 

periods for those cost. 

o Extraordinary Operation and Maintenance (XOM). Title IX, Subtitle G, Section 

9603(b) of P.L. 111-11, (Omnibus Public Land Management Act of 2009) dated 

March 30, 2009, establishes requirements relating to repayment of extraordinary 

operation and maintenance work performed by the United States. Activities 

approved as extraordinary maintenance may be repaid over a period of up to 50 

years, with interest in accordance with Reclamation Manual PEC 05-03, 

Extended Repayment of Extraordinary Maintenance Costs. 

o Dam Safety Projects: The Reclamation Safety of Dams Act of 1978, as 

amended, established requirements for recovery of a portion of the costs 

associated with the modification of Reclamation dams due to dam safety 

concerns. The Act provides for repayment of the Safety of Dams modification 
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costs that are allocable to Project beneficiaries over a period not to exceed 50 

years, Reclamation Manual PEC 05-05, Safety of Dams Repayment, provides 

additional information.
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COMPONENT WITH INDIVIDUAL 

CONTRACTOR DEFICITS RATESETTING 

METHOD

Description of Ratesetting Method3

The Component with Individual Contractor Deficit Ratesetting Method provides for a 

block repayment procedure with 50 years to repay all of the costs included in that block 

of costs. This method abandons the historic procedure of extending the repayment 

period of the entire CVP each time a new facility is added to the CVP (also known as 

the “rolling repayment” method or rolling 50 procedure).

While it is expected that construction will continue for some time on the CVP, the initial 

construction period for repayment purposes is calculated from the date the most 

recently completed major CVP facility (the New Melones Dam and Reservoir) was 

included as a part of the CVP. Therefore, the plant-in-service costs at the end of fiscal 

year 1980 must be repaid within 50 years, or by the end of fiscal year 2030. This period 

conforms with the time frame specified by Public Law 99-546. As noted previously, new 

repayment periods will be established for the construction costs of major rehabilitations 

and new facilities or units added to the CVP.

The Component with Individual Contractor Deficits Ratesetting Method includes 

individual contractor repayment or deficit balances in the determination of contractor 

water rates. The terms “deficit” or “operation and maintenance” deficit refer to the 

accumulation of annual operation and maintenance costs in excess of the annual water 

service payments made under contract with a particular entity. By individual contractor, 

the revenues in excess of operation and maintenance expense are available for 

construction and deficit balances.

Under the Component with Individual Contractor Deficits Ratesetting Method, the 

individual contractor M&I water rates depend upon the extent and type of services 

provided by the Bureau of Reclamation (Reclamation). The water rate applicable to 

each contractor consists of a number of cost components (or cost pools) which 

correspond to the water services provided by Reclamation. Each contractor’s water 

rate consists of a composite of pooled CVP-wide rates, pooled service area rates, 

and individual rates to recover costs specific to certain contractors.

The cost pooling approach has been used in determining CVP M&I water rates since 

the 1940’s in accordance with the language of the legislation authorizing the CVP and 

perpetuated by subsequent legislation which provides for the continuation of the 

operational and financial integration of the CVP.

3 Reclamation has discretion to use a different methodology to distribute O&M among contractors to ensure 

recovery of reimbursable O&M costs from contractors as required by Reclamation Law.
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There are seven potential cost components that are totaled to determine a contractor’s 

M&I water rate under the Component with Individual Contractor Deficits Ratesetting 

Method. These cost components are: water marketing, storage, conveyance, 

conveyance pumping, direct pumping, other, and adjustments for historic individual 

contractor repayment or deficit balances. The storage, conveyance, conveyance 

pumping, and direct pumping components may include rates to recover both operation 

and maintenance expenses and construction costs.

A description of each of the seven potential costs components that are totaled to 

determine a contractor’s M&I water rate is provided below:

• Water Marketing

o The water marketing O&M cost component includes costs such as (but not 

limited to) monitoring, administering and negotiating water service contracts, 

maintaining water delivery and payment records, accounting for the annual 

financial results for Project water operations, developing annual water rates, 

and related types of activities. The annual water marketing expenses are

pooled CVP-wide and allocated to all paid water for the fiscal year involved.

• Storage

o The storage operation and maintenance expense component includes all of

the expenses classified as storage. Storage operation and maintenance 

expenses are pooled CVP-wide and allocated to all contractors benefitting 

from CVP storage by calculating a per acre-foot rate using the total paid water 

stored in facilities operated and maintained by Reclamation during the fiscal 

year involved. W.R. Gianelli Pumping-Generating Plant serves as a pumpingonly facility for the San Felipe Division, the costs of this facility are adjusted to 

include O&M cost of the facility and Project Use Energy as direct pumping

costs, rather than as storage costs for the San Felipe Unit contractors.

o Storage construction costs are pooled CVP-wide and allocated to all 

contractors benefitting from CVP storage by calculating a per acre-foot rate 

using the historic and projected long-term contract deliveries applicable to the 

50-year repayment period commencing in 1980. W.R. Gianelli PumpingGenerating Plant serves as a pumping-only facility for the San Felipe Division, 

the costs of this facility is adjusted to include construction cost of the facility 

and Project Use Energy as direct pumping costs, rather than as storage costs 

for the San Felipe Unit contractors.

o The storage component also includes the costs of the Folsom Pumping Plant, 

the Gianelli Pumping-Generator facility and the Columbia Mowry System. 

These pumping facilities are included in storage as they are utilized to provide 
13

services which were eliminated by construction of the applicable storage 

facilities or because their operations more closely reflect a storage operation 

than a pumping operation.

• Conveyance

o Reclamation will include recovery for any conveyance facilities that have not 

been to non-federal entities. BOR continues to perform OM&R for FolsomSouth Canal and the annual conveyance O&M cost are recovered through the 

ratesettting process. The Folsom-South Canal contractors conveyance O&M 

rate is calculated by dividing the projected Folsom-South Canal O&M costs by 

the projected water to be transported through the Folsom-South Canal. 

o Conveyance construction costs are pooled CVP-wide and allocated to all

contractors benefitting from CVP conveyance service by calculating a per 

acre-foot rate using the historic and projected long-term contract deliveries 

applicable to the 50-year repayment period commencing in 1980.

• Conveyance Pumping

o Conveyance pumping component includes all of the costs of the Jones and 

Dos Amigos Pumping Plants, and O’Neill Pumping-Generator facility.

o The conveyance pumping operation and maintenance expenses are allocated 

to those contractors receiving conveyance pumping services by using a CVPwide pooled rate per kWh. The allocated cost for each pumping plant is 

calculated on a cost per acre-foot based on the lift requirements of the

specific pumping plant. Currently, routine conveyance pumping O&M is 

performed and/or recovered through the agreements established with nonfederal operating entities.

o Conveyance pumping construction costs for each of the four conveyance 

pumping facilities are allocated to all Contractors benefitting from CVP 

conveyance pumping by calculating a per acre-foot rate for each facility using 

the historic and projected long-term contract deliveries through each facility 

during the 50-year repayment period commencing in 1980. The rates for 

each of the pumping plants used by an individual contractor are totaled to 

determine each Contractor’s applicable conveyance pumping capital rate.

o A portion of the Jones Pumping Plant’s construction costs are assigned to the

Friant-Kern and Madera Canal Contractors on the basis of the historic and 

projected deliveries to the Delta Mendota exchange contractors applicable to 

the 50-year repayment period. These costs are then allocated among the 
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Friant-Kern and Madera Canal contractors on the basis of their historic and 

projected water deliveries during the 50-year repayment period.

o Similar to capital, a portion of the Jones Pumping Plant’s operation and 

maintenance expenses are assigned to the Friant-Kern and Madera Canal 

Contractors on the basis of the water deliveries to the Delta Mendota 

exchange contractors applicable to the water rate year. O&M costs are 

recovered through the agreements with the non-Federal Operating entities. 

• Direct Pumping

o The direct pumping component includes all of the costs applicable to the

various canalside relift pumping plants and the other CVP pumping plants not 

operated by the Reclamation. These facilities and the operating entities are 

as follows: 

Pumping Plant Operator

Wintu Pumping Plant Bella Vista Water District

Contra Costa Canal Pumping Plant Contra Costa Water District

Ygnacio Pumping Plant Contra Costa Water District

Clayton Pumping Plant Contra Costa Water District

San Luis Relift Pumping Plant San Luis Water District 

Westlands Relift Pumping Plant Westlands Water District

Pleasant Valley Pumping Plant Westlands Water District

Pacheco Pumping Plant Santa Clara Valley Water District

Coyote Pumping Plant Santa Clara Valley Water District

o All of the facilities included in the direct pumping component are operated 

and maintained at no cost to Reclamation with the exception of the cost of the 

project use energy provided. The project use energy costs are isolated and 

charged directly to the individual contractors receiving benefit of the pumping 

services.

o The CVP construction costs applicable to the direct pumping facilities is also 

charged directly to the individual contractor receiving benefit of the pumping 

service. Per acre-foot rates are determined for these costs by distributing the 

construction costs to the historic and projected long-term contract deliveries 

applicable to the 50-year repayment period.

• Other

o Certain construction costs are determined to be reimbursable and benefit 

users CVP-wide (such as Programmatic Environmental Impact Statement 

Cost). Consequently, a separate cost component, referred to as “Other” in 

the applicable water rate books, was developed to recover these costs. Per 

acre-foot rates are determined for these costs by distributing the construction
15

costs to the historic and projected long-term contract deliveries applicable to 

the 50-year repayment period.

• Deficits or Surpluses

o Deficits or surpluses, as well as the updating of accumulated deficit or surplus 

balances, are determined for each fiscal year. M&I O&M costs are compiled 

and grouped into cost components for Water Marketing, Storage, 

Conveyance, Conveyance Pumping, and Direct Pumping. The cost 

components were described in detail previously. Costs in each component 

are allocated to those contractors utilizing that component, based on each 

contractor’s respective share of the total paid water deliveries for that 

component. 

o Revenues of each contractor are applied towards their share of costs, 

including applicable interest. The result is either a net surplus or deficit for 

that fiscal year. Contractor revenues are applied in the following order:

1st – Current Year O&M Expenses

2nd – Current Year Interest Expense

3rd – Construction Costs

4th – Interest-Bearing O&M Deficit

• Extraordinary Maintenance. OM&R costs that are approved as Extraordinary 

Maintenance, will have up to 50 years for repayment with interest to all project 

purposes. Eligible costs will be reviewed in accordance with Reclamation Manual 

PEC 05-03, Extended Repayment of Extraordinary Maintenance Costs, and 

approval requested as required.
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Cost of Service Water Rate Development

• O&M. Annual M&I O&M water rates include the reimbursable portion of budgeted 

O&M cost. The O&M cost components include the annual labor, supervision, 

materials, and other types of O&M costs associated with each of the five O&M cost 

components – Water Marketing, Storage, Conveyance, Conveyance Pumping, and 

Direct Pumping. Where O&M agreements exist, the servicing authority recovers 

costs from contractors and expenses for these facilities are not included in 

Reclamation costs. For the O&M cost components, the annually determined rates 

are computed by dividing the pooled annual costs by the corresponding projected 

annual water deliveries for each component, respectively. O&M cost components 

are assigned to contractors on the basis of the services used to deliver their water 

supply. All M&I water deliveries require water marketing and storage services.

• Deficits. Unpaid O&M and interest costs are identified by contractor and rates are 

developed for recovery through 2035. Any deficits for routine O&M that exist after 

2035 will be required to be paid once the contractor is notified through direct billing

of the unpaid amount.

• In-basin Construction Cost. Construction components are determined by 

accumulating all M&I plant-in-service costs by component, as of the most recently 

completed fiscal year, and then dividing each component’s costs by the total 

historical and projected acre-feet for contractors having the service for the 50-Year 

repayment period. The resultant component construction rates are then combined 

as applicable by individual contractor. Each contractors share is then determined 

based on their 50-Year deliveries to the rate determined. Once determined, a rate is 

developed for the contactor taking into account historical repayment and 

amortization of cost using a composite interest rate.

• Annual CVP M&I Cost of Service water rates. The above three components 

comprise the cost of service water rate.
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INTEREST ON M&I UNPAID COST

Interest – Construction Costs

M&I construction is an interest-bearing function, and interest is computed annually on 

the individual contractor’s unpaid construction cost. Annual interest on general (nonspecific) plant-in-service is calculated using a composite interest rate for the Project. A 

composite interest rate isdeveloped each year which weighs Treasury interest rates for 

each of the facilities in Plant-in-Service Each of the interest rates are based on the 

year that each of the facilities began construction.

The composite interest rate is updated annually to reflect any additions to the Project

plant-in-service accounts and their authorized interest rates.

Deficits and Interest on Deficit

The deficit balance for an individual contractor refers to the accumulation of annual 

O&M costs that have not been paid, including applicable interest expenses. Deficits are

incurred when a contractor’s annual revenue is not sufficient to repay their allocable 

share of O&M costs. Deficit balances are updated annually to reflect repayment, 

additional deficit incurred and the annual interest expense.

Deferred Interest Method

M&I plant-in-service costs, annual plant-in-service interest, O&M deficits, and deficit 

interest were recomputed under the Deferred Interest Method for the period 1949 to 

1987.

The Deferred Interest Method ensures recovery of the deferred amount by amortizing 

these charges as an additional construction cost component to be repaid over the 

remaining Project repayment period. In this method the deferred interest is capitalized

at the applicable composite interest rate, and including a deferred interest component in 

M&I rates to recover such amount. Refer to the attachment which describes the method 

in more detail.
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TABLE OF M&I CONSTRUCTION COST RECOVERY

M&I Cost Recovery as of September 30, 2018

Construction 4 O&M Deficit

Total CVP 

Construction Costs 

Allocated to M&I

Cumulative Repayment 

of M&I Construction 

Costs

Percentage of M&I 

Construction Costs 

Repaid

Cumulative 

M&I Deficit 

Balance

$122.6 Million $119.6 Million 97.5% $12.4 Million

• 4 These amounts are based on the current interim CVP cost allocation and will be trued-up 

when the final cost allocation is implemented.
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GLOSSARY

Annual O&M: The ongoing, regular, or routine operation, maintenance, repairs, 

replacements, and other activities and actions necessary for continued structural 

integrity and operational reliability of project facilities for the delivery of contract water. 

Construction Cost: In this document, plant-in-service and construction cost are used 

interchangeably to refer to construction costs that have been placed into service for

recovery purposes.

Cost of Service: The determination of annual water rates based on the Government’s 

cost of providing M&I water to the individual contractor’s designated delivery point.

Deficit: The accumulation of annual O&M and interest costs in excess of the total

revenues received from the sale of water under existing water service and/or 

repayment contracts.

Extraordinary Operation and Maintenance (XOM): Major, nonrecurring maintenance 

to Reclamation-owned or operated facilities, or facility components, that is—intended 

to ensure the continued safe, dependable, and reliable delivery of authorized project 

benefits; and greater than 10 percent of the contractor’s or the transferred works 

operating entity’s annual operation and maintenance budget for the facility, or greater 

than $100,000.

Fiscal Year: The federal government’s fiscal year that runs from October 1st through 

September 30th.

Historical and Projected Water Deliveries: The historical and projected project water

for project water contractors, with the exception of non-storable Reclamation Reform 

Act, Section 215 water, expected to be delivered by Project facilities within the 

Project’s repayment period.

In-Basin Facilities: The main Project water storage and delivery system facilities 

located in the Central Valley Basin of California.

Paid Water: This term refers to all Project water supplies required to be paid under

water service and/or repayment (9d) contracts.

Present Worth: A financial term referringto the time value of money. The present worth

concept recognizes that the interest earning capability of money makes $1 in the

future worth less than $1 today. As an example, if $1 was deposited today at a 10 

percent interest rate, it would be worth $1.10 in 1 year. Thus, $1 in 1 year would be 

worth something less than $1 today.

Present Worth of Future Deliveries: The same concept as indicated in the preceding

Present Worth definition, only as applied to a stream of water deliveries rather than

monetary payments. Similar to the concept that money earns interest, M&I costs must 
24

be repaid with interest; and hence, as $1 is worth more today than in the future, an 

acre-foot of water today is worth more than an acre-foot sold at the same price in the 

future. Because of this, the time value of future deliveries must be considered in 

determining construction and deficit water rates required to repay these costs within

the repayment period. The present value of future deliveries is computed by 

discounting such deliveries by the applicable interest rate over the remaining 

repayment period.

Projected Water Deliveries: All Project water expected to be delivered for revenue 

producing purposes during the remainder of the repayment period.5

Repayment Period: The time allowed for the recovery of the construction invested in a 

project. For main project feature, the repayment period began in fiscal year 1981 and 

continues through fiscal year 2030. Separate repayment periods may be established

for major rehabilitation or new facilities.

Water Rate(s): As discussed throughout this document, general use of these terms

refers to the cost of M&I water expressed on a cost per acre-foot basis. When other

meanings are intended in the use of the words “rate” or “rates”, such as in referring to 

an interest rate, such clarifying words are provided in the text as appropriate.

Water Service Contract(or): a contractor who is receiving Project water under a water 

service or repayment contract with Reclamation.

5 Where actual or estimated deliveries are zero, contract entitlement may be used to determine the allocation of 

O&M cost. The process to determine projected water deliveries for a water ratesetting year will be included in 

the foreword of the water rate books. 
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26

Attachment

Deferred Interest Method: A potential inequity in the allocation of interest was 

identified during the early development of the Proposed Policy. This inequity stems 

from a disproportionate allocation of interest costs to the early contractors. An example 

of how this disproportionate interest allocation occurs follows.

Costs are allocated annually based on water delivered, with each contractor 

being allocated a proportion of costs on this basis. Contractors are responsible 

for their proportional share of costs as noted; however, annually the construction 

costs would be reallocated each year based upon the then-current contractors 

receiving water services and each contractors obligation updated. However, 

there is no retroactive adjustment of allocated interest expense. These interest 

costs together with assigned O&M costs result in increased deficits, as well as 

increased interest charges on those deficits.

The need for a method to equitably allocate historic interest costs during completion of 

the many features of the Project led to the development of the Deferred Interest 

Method. The Deferred Interest Method established the period 1949-1987 as the period 

during which inequitable plant allocations and interest computations occurred. As such, 

M&I plant costs, annual plant interest, O&M deficits, and deficit interest applicable to 

that period were recomputed under the Deferred Interest Method.

Interest for the early project years, 1949 through 1987, under the Deferred Interest 

Method is $21.3 million less than the amount of interest originally computed and 

allocated to contractors. The Deferred Interest Method ensures recovery of the $21.3 

million by amortizing these charges as an additional capital cost component to be repaid 

over the remaining Project repayment period. By doing this, it permits the reallocation 

of construction costs and the resultant computation of a substantially lower amount of 

interest as of 1987, while still providing for full recovery of the interest amount.

Both the Deferred Interest Method and the original interest computation method yield 

essentially the same financial result to the U.S. Government. The difference between 

the two methods lies in the procedures for computing interest costs by contractor and in 

the timing and method for recovering such interest costs. The deferred Interest Method 

erases the inequity in computing contractor annual interest for years prior to 1988, 

resulting in $21.3 million less interest computed through this period, and provides for 

recovery of the $21.3 million, with interest, through the capitalized Deferred Interest 

Method.