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1.E?EX TO:

United States Department ofthe Interior

BUREAU OF RECLAMATION

WASHINGTON, D.C. 20240

440 NOV15 1983

Memorandum

To:

From:

Regional Director PN, ~ UC, LC, SW, LThi, 124

Commissioner (Sgd) R. N~ Broadbent

BUREAU Ol~ REClAMATiON

OEF1CIA’. FILE COPY

RECEIVED

9,.NOV18 1983

& PATE

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Subject: Bureauwide Municipal and Industrial Water Marketing Policy

Attached is a copy of the subject policy statement for your use and

implementation as of the date of this memorandum. The only exceptions to

this policy are those bases of negotiations which have been previously

approved in this office.

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The policy statement represents regional input from the task force which

met in Salt Lake City, Utah, on June 30 and July 1, 1983. A draft policy

statement was circulated for further regional comment and input on July 29,

1983. We believe the attached policy statement accommodates the concerns

expressed by those who reviewed and commented on the July 29 draft.

The section entitled Repayment Interest Rates was added to accommodate the

August 24, 1983, memorandum from the Deputy Assistant Secretary — Policy,

Budget and Administration on the subject FY 1985 Budget Passback” (copy

attached). See particularly, the paragraph identified as Operation and

Maintenance Facilities. Also, attached is a copy of the June 30, 1983,

letter from Joseph J. Tribble, Assistant Secretary for Conservation and

Renewable Energy of the Department of Energy. That letter establishes

repayment policy for power features of Federal multiple—purpose projects.

The attached water marketing policy is intended to conform with items 1 and

5 of •that policy for interest computations and interest rate determinations

for new projects.

Please include this memorandum in section IV of your looseleaf policy

instructions sent to you on February 26, 1980. That manual remains in

effect until Series 190 of the Reclamation Instructions has been released.

Attachments
Bureauwide

Municipal and Industrial Water Marketing Policy

Objective

The objectives of this water marketing policy are fourfold. The first is to

assure that costs of developing and supplying municipal and industrial water are

fully recovered with appropriate interest costs. The second is to accelerate

repayment of the Federal investment. The third is to identify some specific

ratesetting methods and policies which achieve the first two objectives. The

fourth is to encourage innovation and excellence in M&I ratesetting to meet the

first two objectives.

Background

Municipal and industrial water service ratesetting has historically been based

strictly on allocated costs plus interest at the authorized project interest

rate. The resultant municipal and industrial water service rates have been as

varied as the projects which deliver the water and the users who receive the

service. While it is recognized that many of the rate variations result from

peculiarities specific to project authorizations, there is room within those

variations where general policy guidance is appropriate in moving toward the

stated objectives and toward consistent contracting practices for preparing

municipal and industrial (M&I) water service contracts.

Policy

Each new contract should be approached within the following policy framework:

1. Every attempt should be made to evaluate and use one of the preferred rate—

setting methods identified in this policy memorandum, or an alternative to

accomplish these objectives should be developed and presented in the basis of

negotiations for a proposed contract.

2. Irrespective of the ratesetting method used, a regular rate review, no less

often than 5 years, is required. Operation, maintenance and replacement (OM&R)

charges should be billed and adjusted annually or provided for in internal

accounting procedures based on actual expenses.

3. Each contract should provide for both a standby and a delivery charge when

appropriate. Standby charges are appropriate when a water use build up period

or development period is involved. At a minimum, the standby charge must be

sufficient to recover- the Interest at the project interest rate and OM&R for the

amount of water under contract. The only year the standby charge should be

credited towards delivery charges is in the year in which delivery is first made

and only to that year’s payment.

4. A reasonable period of time, depending on the proposed use of the water,

should be identified in the contract for commencing beneficial use of the water.

After that time, a mandatory take—and—pay, or termination schedule, shall apply

to water under contract. This precludes speculation and indefinite holding of

water for a minimal charge. Should a bona—fide second offer for the water
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appear, and other water is not available for contracting, the contract should

provide for right of first refusal by the contractor who would be required to

immediately pay the delivery charge for water remaining on standby or relinquish

the water covered by the contract.

5. A specific use for the water service should be clearly stated in the

contract. Any deviation from such use or any assignment to another entity must

have the approval of the United States subject to the security of financial

obligations, compliance with appropriate related laws such as NEPA, and the concurrence of the State involved.

6. Each region should consider establishing a fee for both short and long—term

water service contracts. The fee should be adequate to recover the costs of

preparing, (including the costs of complying with the National Environmental

Policy Act, etc.) negotiating and administering the contract. Alternatively,

contracting costs should be placed in an 0&M rate base for recovery directly

through billing procedures or water charges.

Repayment Interest Rates

Project authorizations often contain specific rates of interest or interest rate

formulas which determine the interest costs associated with project repayment.

In addition, section 9(c)(l) of the Reclamation Project Act of 1939, section

301(b) of the Water Supply Act of 1958, and various other general repayment

authorities contain specific and general interest rate criteria. The following

policies shall be applicable to establishing interest rates for repayment

purposes.

1. The contracting authority under section 9(c)(l) should be avoided if its use

precludes the use of an interest rate in excess of 3.5 percent.

2. Interest rates or formulas in project authorizing acts shall determine the

interest rate to be used for project repayment purposes when initially

constructing a project and contracting for repayment.

3. Unless clearly and expressly prohibited by general or specific Reclamation

law applicable to the project, all project costs for additions, replacements,

renovations, and rehabilitation, including capitalization of 0&M costs (when

unavoidable), associated with interest—bearing project purposes, shall be accumulated at a current interest rate. The interest rate shall be that calculated

pursuant to the formula contained in the project authorizing act for the current

year. Absent such a formula, the interest rate shall be that calculated pursuant to section 202(3)(c)(ii) of the Reclamation Reform Act- of 1982.

4. Unless clearly and expressly prohibited by general or specific Reclamation

law applicable to a project, current interest rates should be used to accumulate interest charges against those project facilities which were intentionally

deferred for construction by project sponsors until significantly after the

completion of other project features.
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Preferred Ratesetting Methods for Industrial Water Users

There are five ratesetting methods that have been used for establishing rates

for industrial users. A very brief description of each follows. Contact points

for i~re detailed information on each are also noted.

1. Debt Service. Using 10—year Treasury interest rates, which are representative of the actual financing costs to the Treasury, this method computes the

present worth of an investment. At the beginning of each year, the total unpaid

investment for consumptive uses is indexed to account for the interest on unpaid

investment and amortized at an appropriate interest rate to derive a rate for

each use. Recognizing interest charges for a year vary with the date of execution, two rates for each use, one for the first half and one for the second half

of the year are set to reflect interest costs. Special applications to

contracts with large volumes of water and the entity’s inability to accept

shortages in dry years are appropriate. Contact Position — Chief, Repayment Staff:

Location: Upper Colorado Region, Salt Lake City, Utah, Telephone FTS 588—5435,

Commercial (801) 524—5435.

2. Value of Federal Power Foregone — Opportunity Cost

When water service is provided by Federal contract to an industrial user, the

water depleted from the system is typically no longer available for Federal

hydropower generation. Generation losses may have to be replaced by purchasing

energy from other available sources at market rates to meet Federal power

customer commitment. The UM Region has used this procedure to establish a

postage stamp or utility type rate by pricing the value of Federal power foregone at the highest point in the Pick—Sloan Missouri Basin Program power system.

This established a minimum or base price for the entire UM Region. Contact

Position — Chief, Repayment Branch: Location: Upper Missouri Region, Billings,

Montana, Telephone FTS 585—6413, Commercial (406) 657—6413.

3. Cost of Alternative Facilities

The parameters for the Ruedi Reservoir (Fryingpan—Arkansas Project) industrial

water marketing program were established through the use of the alternative cost

of facilities and the cost of service approach. It was assumed the maximum rate

that an entity would be willing to pay would be their viable alternative cost of

facilities. Also, it was established that the minimum acceptable payment to the

United States would be the return of its invesfment plus a prorata share of the

operation and naintenance costs. These assumptions provided the negotiation

parameters. Contact Position — Chief, Repayment Branch: Location: Lower

Missouri Region, Denver, Colorado, Telephone FTS 234—3327, Commercial (303)

234—3327.

4. willingness to Pay

Where there is competitive industrial demand for a limited water supply, negotiation of rates by using a bidding method may be appropriate. Contact Position

— Chief, Repayment Branch: Location: Lower Missouri Region, Denver, Colorado,

Telephone: FTS 234—3327, Commercial (303) 234—3327.
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5. Market Value

Where already clearly established values for water exist in a geographical

location, those values should be used as a guideline to negotiate water service

rates. A certain amount of discretion should be used in this case. Contact

Position — Chief, Repayment Staff: Location: Upper Colorado Region, Salt Lake City,

Utah, Telephone FTS 588—5435, Commercial (801) 524—5435.

Ratesetting for Municipal and Domestic Uses

It is understood that customers for municipal and domestic water may not be able

to compete in the immediate market area with the industrial entity for water.

Such customers in general have no profit motive. While the general policy

applies, specific ratesetting methods for such water service contracts will be

considered on a case—by—case basis, and are not covered under this policy

directive.