COMMENT SHEET

CVP COST ALLOCATION MEETING OF AUGUST 9, 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 August 

9, 2013 meeting:

1. Final Allocation: NCPA supports Reclamation’s decision to make this the 

final cost allocation for the CVP. 

2. Justifiable Expenditure: The purpose of updating the CVP cost allocation is to 

align project costs with the future operations/benefits of the project. This 

prospective approach has been used by Reclamation in both the 1970 and 1975 

CVP cost allocations and should be the basis for this cost allocation.

We believe the option presented at the August 9th meeting as well as previous 

ones to potentially use historical benefits distorts the accuracy of the cost 

allocation process. The top slide on page 5 of the presentation states that the 

justifiable expenditure represents the maximum amount to be allocated to each 

project purpose and states that it is calculated as the lesser of the multi-purpose 

project benefits or the single-purpose project cost for each purpose. This is the

basic tenet of the separable cost – remaining benefits allocation methodology. 

The bottom slide on page 5 states that if future benefits are greater than the 

single-purpose alternative, the justifiable expenditure is equal to the single 

purpose costs. This comports with the definition of justifiable expenditure.

The top slide on page 6, however, states that if future benefits are less than the 

single-purpose cost historic benefits will then be used to increase the total 

benefits. We believe this proposal is a clear manipulation of the cost allocation 

process. It is like stating on the bottom slide of page 5 that if the future benefits 

are greater than the single-purpose cost a different historical cost index will be 

used to increase the single-purpose cost alternative. 

When Reclamation allocates costs for a new project it uses the future benefits or 

the single purpose alternative, whichever is less, to determine the justifiable 

expenditure. The separable cost – remaining benefits cost allocation 
methodology does not allow benefits to be inflated simply because they are less 

than the single purpose cost. Cost allocations should not be unilaterally adjusted

to accomplish some preconceived outcome and should focus on a forward 

looking (i.e., prospective) analysis.

Reclamation made an early decision in this cost allocation process to eliminate 

costs from being allocated to navigation, one of the three highest priority 

authorized project purposes, because navigation benefits will no longer be 

provided by the CVP. That is a forward looking decision on benefits provided by 

the project. Yet Reclamation proposes to reverse the forward looking process 

when analyzing power and water benefits and potentially use historical benefits

based on unsupportable criteria. This shows a lack of consistency in the 

treatment of the various project purposes and an attempt to control the results of 

the separable costs – remaining benefits process.

Reclamation has already analyzed the flood control project purpose and revealed

that flood control benefits will greatly exceed the single-purpose cost. Thus, the 

single-purpose cost establishes the maximum allocation. Water and power 

benefits, however, will likely be less than the single purpose cost and adding 

historical benefits increases the justifiable expenditure for power and water. The 

probable result of using historical benefits will be to increase the costs allocated 

to power and water and decrease the allocated costs to flood control. Inclusion 

of historic power and water benefits appears to be an attempt by Reclamation to 

modify the cost allocation process to assign more costs to power and water for 

repayment. 

While the proposed use of historical power and water benefits clearly deviates 

from separable costs - remaining benefits cost allocation methodology, using 

historical power benefits may require an environmental impact statement to 

evaluate socioeconomic and environmental justice impacts. First, some of the 

customers who received historical CVP power no longer exist (for example 

Mather and McClellan Air Force Bases). Any historical benefits that may accrue 

because of past CVP power deliveries to those entities would be used to allocate 

costs to current and future power customers. Current and future power 

customers would be unfairly burdened by an increase in allocated costs caused 

by historic benefits received by another entity. This unjust increase would need 

to be analyzed to determine socioeconomic and environmental justice impacts.

Similarly, Western issued 1984, 2004, and 2014 marketing plans to allocate 

power to new customers and change the allocation percentages for existing 

customers. The 2014 marketing plan also contains significant changes in power 

allocation percentages to all existing customers because of the expiration of a 

WAPA/customer settlement agreement. Thus, each marketing plan changed the 

proportion of CVP power received by all customers. Any attempt to use historical

power benefits would cause costs to be disproportionally allocated to each 

customer because the new allocation percentages are different from the 
historical allocation amounts. Some customers would be allocated future costs 

for repayment based on historical benefits received by others. Besides being 

clearly inequitable, the socioeconomic and environmental justice impact caused 

by using historical data to improperly allocate future costs would need to be 

analyzed for each customer.

The ability to determine historical power benefits is also problematic. Market 

data exists for power generation on an hourly basis starting in April 1998 when 

the California Independent System Operator (CAISO) became operational. Prior 

to April 1998, power was sold using bilateral contracts between parties based on 

rates that were agreeable by the parties. The rates contained in those contracts 

varied greatly and thus any determination of a power value for a particular year 

prior to 1998 is speculative.

From 1990 to 2000 and from 2008 to date, the cost of CVP power was very close 

to the market rate. Thus, the net historical power benefit remaining after the cost 

of CVP power is deducted yields little or no net historic benefit to be used for 

those years. During the 2000 and 2001 energy crises and the lingering years 

thereafter, however, the difference between the cost of CVP power and the 

market rates were substantial. As history has shown the sharp spike in the 

market price during this era was caused by a faulty CAISO market design and by 

market manipulation. The State of California has pursued refunds for years from 

many market participants for that time period and has reached settlement with 

several of them. In the last few months, more than ten years after the crisis, the 

State reached settlement with two participants for approximately $1.2 billion for 

transactions during that era. Some of the entities accused of market 

manipulation, such as Enron, went bankrupt before refunds could be achieved. 

Without the “perfect storm” that happened during that era market prices would 

have been significantly lower. History has shown that market rates were unjust 

and unreasonable for that period and no one can recreate what the true market 

price should have been. This is another example of why power and water 

customers object to using any historical benefits in the cost allocation study as 

those perceived benefits are inaccurate, speculative, unjust, and unreasonable.

Reclamation knows that future water operations will be significantly different from 

historical operations because water priorities have changed to meet 

environmental objectives. The purpose of updating the cost allocation is to align 

the project costs with the benefits resulting from the changed project operation. 

Any attempt to control the cost allocation process to allocate more costs to a 

project purpose than what the future benefits support is clearly inappropriate and 

will likely yield unsustainable above market pricing.

3. Determination of Future Water and Power Deliveries: We are almost half way 

through the CVP cost allocation time frame and Reclamation has not yet begun 

to address how it will evaluate future power and water deliveries in the benefit 

and single purpose cost analyses. Estimating future power and water 
accomplishments is contingent on establishing an environmental baseline on a 

going forward basis. Without such a baseline, future power and water benefits, 

based on projected water deliveries, cannot be reliably quantified. The continued 

reduction of power and water deliveries to meet other purposes of water quality,

water temperature, fishery requirements, the Coordinated Operating Agreement, 

the Central Valley Project Improvement Act, the Endangered Species Act, and 

other criteria must be incorporated into the projections. In addition proposed 

Delta Flow Criteria, recent decisions by Reclamation to release additional water 

down the Trinity River above that required in the Record of Decision and 

generation by-pass releases also need to be considered. Obviously, whatever 

environmental operating assumptions are ultimately assumed and used will be 

critical to the cost allocation study. Getting consensus on these critical power 

and water delivery projections will require good estimating techniques and take 

more than one meeting to discuss.

4. Alternative Cost Allocation Option: The Central Valley Project Water 

Association and NCPA sent letters to Reclamation on March 21, 2006 and March 

21, 2008 regarding administrative solutions to updating the CVP cost allocation. 

Those letters are attached. Since we are now 3 years into the process and few 

decisions have been made, we believe Reclamation should consider using those 

proposed administrative solutions for this final cost allocation.