United States Department of the Interior

BUREAU OF RECLAMATION

WASHINGTON, D.C. 20240

m KEPLY July 10, 1975

zmz?o: 440

832.-

Memorandum

To: R.egional Director, PN, ~‘, LC, UC~ SW, tIM, LM

Chief, Division of Water 0&M, E&R Center

Chief, Division of Planning Coordination, E&R Center

From: Coissioner

Subject: Final Report of Task Force on Water Marketing

A vater-~arketing task force was formed in accordance with our

memorandum dated May 3, 1973. A copy of a preliminary task force

report d-ated.January 1974 was furnished you for comment. Those

Comments ware considered in preparation of the final report. A copy

• of that report is attached for your use and application of the

guid~lines included therein, both in planning and contract negotiations, wherever appropriate. When the guidelines do not fit

specific situations, please furnish the details and alternate proposals for our review and approval.

/S/ C. G. Stamm

Enclosure

~

0WTJo4

-)

“~?e.iQ1~
TASK FORCE REPORT

ON

WATER MARKETING

BUREAU OF RECLAMATION

APRIL 1975

4

4I

I
APRIL 1975

REPORT OF THE

COMMISSIONER OF RECI~MATION’S

WATER MARKETING TASK FORCE
A/al

832.

United States Department ofthe Interior

BUREAU OF RECLAMATION

WASHINGTON, D.C. 20240

APR~ ~275

Memorandum

To: Commissioner

Through: Assistant Commissioner — Resource Management

From: Chairmen, Water Marketing Task Force

Subject: Task Force Report

Transmitted herewith is the report of the water. marketing task force

which you established by memorandum of May 3, 1973.

The task force was formed to study and recoamiend planning and

contracting procedures that would better define existing water uses,

recognize the new categories of suburban and part—time farm water use,

and provide flexible repayment requirements for changing water use

over time. Planners and contract negotiators have needed guidance

in these matters, and we believe the task force has developed guidelines

to fill this need.

During the study is was found there were related subjects involving the

planning and marketing of Reclamation water which should also be reviewed.

Thus, the scope of the task force assignment was broadened and guidelines

were also developed in those areas.

The recommendations included in this report for your consideration are

meant to be used as guidelines. Upon your acceptance, we propose to

submit them for adoption and application Bureau—wide, with the

understanding that Regional Directors will have flexibility to recommend

alternate procedures for specific situations when other approaches are

required.

40u.rio4Enclosure

z

C., m—4
REPORT OF THE COMMISSIONER OF RECLAMATION’S

WATER MARKETING TASK FORCE

CONTENTS

Page

PURPOSE AND SCOPE . . .~ 1

SUMMARYOFRECOMMENDATIONS 6

AGRICULTURAL AND MUNICIPAL AND INDUSTRIAL

WATER MARKETING POLICY 1 1

Background ......• 11

Definitions 12

Establishmentof Water Charge . 16

Municipal and Industrial Water 17

Agri cul tural Water . . . . . . . . . . 18

Type of Cont~racts to be Used ..... 26.

Period of Payments 31

Adjus~ent of Charge 35

Contract Term . 36

Water Use Buildup in Water Service Contracts Where There

are Multicontractors for Water From the Same Facilities 37

Readiness—to—Serve Charge in Industrial Water

User Option Contracts 43

Specification of Obligation or Rate in Contracts 46

COST ALLOCATION 48

Background . 48

Adequacy of Separable Cost—Remaining Benefit Cost

Allocation Method to Reflect Change in Water Use 49

Project Operation Reflected in Cost Allocation . 49

Modified Separable Cost-Remaining Benefit Cost

Al location Methods . . . . 50

WATER MANAGEI1ENT . ... . ... 56

Background . . . . . . . . . . . . . 56

Water Management. Provisions in Contracts 57

WATER SHORTAGES . ...... 58

Background . . 58

WaterShortage Provisions in Contracts 59

RESERVE FUNDS . 62

Background ... . 62

Emergency Reserve Fund 62

ReplacementReserveFund 63

Repayment Reserve Fund ........ 64

Contractual Requirements for Reserve Funds 64
REPORT OF THE COMMISSIONER OF RECLAMATION’S

WATER MARKETING TASK FORCE

List of Figures

Figure Following

No. Title Page No

.

1 Example of Agricultural Water Rate

Which Includes an Account Charge 25

2 Example of Water Users Buildup and

Payment Requirements Where no Water is

RequiredUntil Year9. 42

3 Guide for Determining Minimum Contractual

Emergency and Replacement Reserve Funds .... 66
REPORT OF THE COMMISSIONER’S

WATER MARKETING TASK FORCE

PURPOSE AND SCOPE

The repayment of reimbursable project costs by the project beneficiaries

has been one of the basic concepts of the Reclamation program since its

inception under the Reclamation Act of June 17, 1902. Numerous changes

have occurred during the evolution of the Reclamation program to its

present state as is revealed by amendments to the Act of 1902 and additions to Reclamation law. Many of these changes in the law and the

program have been made to accommodate unforeseen changes in water and

land use as well as to meet increased demands for irrigated agricultural

production and social demands. It has been recogt~ized for some time,

however, that additional flexibility is required in Reclamation’s water

marketing program to conform it to current needs. Population growth and

increased standards of living are accelerating the conversion of agricultural water to urban, suburban, rural, municipal, industrial, and

specialty uses.

The Bureau of Reclamation’s water marketing policies are influenced by

many factors: Reclamation and State laws and their interpretation,

specific congressional authorizations, public support, and political
determinations. With seven regions covering 17 contiguous Western

States and Hawaii, each with its own State laws, varying water demands,

and repayment ability, the water marketing policies have been tailored

to fit varying specific needs or preferences. For example, the Pacific

Northwest Region (Oregon, Idaho, and Washington) utilizes repayment

contracts almost exclusively whereas the Mid-Pacific Region (California

and Nevada) and projects of the Missouri River Basin Project use water

service contracts for service from water supply and conveyance facilities

and repayment contracts for water distribution facilities. Basin

accounts have been authorized for use in some areas while other areas,

such as the Southwest Region, must rely solely upon the repayment

ability of the direct project beneficiaries.

The changing economic and social values of the population which demand

municipal, industrial, and domestic water service, and water for recreational areas and quality improvement have radically changed the emphasis

of.th~ Reclamation program and its repayment aspects. While the Reclama—

tio?viprogram does recoup the reimbursable expenditures, which most Federal

programs do not, it is criticized for the interest-free aspects of

the irrigation function and the lack of full payment by some of the

irrigators of tnpir allocated costs. In view of these many factors,

the Commissioner of declamation on May 3, 1973, established a Water

Marketing Task Force.

2
The task force was composed of representatives of the Division of Water

and Land Operations, Division of Project Development, and Associate

Solicitor — Energy and Resources. The first meeting of the task force

was in May 1973, and as an outgrowth coninittees were formed to prepare

papers on different subjects. Those papers were exchanged among all

task force members and a second meeting of the task force was held in

August 1973 to discuss these subjects. Subsequently, a mini—task force

was formed to prepare a preliminary draft of report for review by staffs

of the Commissioner’s office, the E&R Center, regional offices, and the

Associate Solicitor - Energy and Resources.

The preliminary report was published in January 1974, and comments were

received that spring. This final report was prepared using the recommendations of the task force and comments receive~i on the preliminary

draft of report. The preliminary report presented conflicting viewpoints as options for consideration and it has been necessary to decide,

in view of the comments, which options to recommend for implementation.

A special task force was formed on September 6, 1974, and met in midSeptember. That group reviewed comments on all the optional recommendations, but it was most concerned with recommendations regarding small

tracts. A consensus of that group is herein reflected in recommendations

regarding definitions, and payments for use of water on small tracts.

3
The Water Marketing Policy Task Force has worked within the context

of Reclamation law, and not deliberated on questions such as

interest-free irrigation financing, more stringent rep~yment requirements, or the acreage limitation effects ~onrepayment. The major

issues which the task force did address itself.to are:

1. The definition of water uses

2. Agricultural, municipal and industrial water marketing policy

3. Rural residential and suburban agricultural water marketing

policies

4. Compatibility between cost allocation and repayment

5. Shortage provisions, reserve funds, and water management

The task force members who participated in this report are:

*George Blake

*Mervin de Haas

Gene Hinds

Don Justus

Samuel Kennedy

George Loomis

Glenn Masters

Conrad Miller

Harold Mathes

Howard Pearson

*Ben Prichard

Paul Sant

Edward Talbot

*Larry Vinsonhaler

Washington, D.C. (Co-chairman)

Sacramento, Cal i forni a

Boulder City, nevada

Boise, Idaho

Denver, Colorado

Amarillo, Texas

Denver, Colorado

Denver, Colorado

Billings, Montana

Salt Lake City, Utah

Denver, Colorado

Salt Lake City, Utah

Denver, Colorado

Boise, Idaho (Co—chairman)

Participants at ~thelast meeting of the task force also included

Alvin Bielefeld, Field Solicitor, Billings, Hontana, Ed Leland, Billings,

Montana, and Dean Bucy, Denver, Colorado.

I

4
The mini-task force members who prepared the preliminary report are

denoted by an asterisk.

The special task force members include those members on the mini-task

force and:

Frank E. Ellis

Edmund Barbour

Glenn Masters

Alan Kleinman

Washington, D.C.

Denver, Colorado

Denver, Colorado

Denver, Colorado

5
SUMMARY OF RECOMMENDATIONS

The following recommendations are made with the intent that they be

considered for use as general policy. The many individual complex

variations that occur in Reclamation water marketing situations preclude

setting such policy as inviolate. Adopted recommendations should be

implemented with the provision that exceptions will be permitted with

approval of the Commissioner on a case—by-case basis.

Definitions

Municipal and industrial water will be defined as “water furnished to

municipalities, to industrial establishments, and for commercial recre—

ational uses.” Water uses involving reimbursement of project costs that

are associated with farming, suburban living, or noncommercial recreation will be considered to be in the agricultural category.

Establishment of Water Charges

Municipal and Industrial (M&I) — The M&I rate will be based, as a minimum,

upon repayment of its allocated cost with interest.

Agricultural — The commercial agricultural water rate will be based pri-’

6.’

manly upon payment capacity, but other criteria will be considered in

establishing the rate. The agricultural rate structure will be made up

of an account charge and a charge per acre of irnigable land or per

6
acre—foot of project water. This rate structure will permit the recovery

of additional project revenues as the type of project ownerships change

from commercial to part-time agriculture or suburban living.

Type of Contracts

The costs of project water supply and main conveyance facilities will be

recovered under water service contracts whereas repayment contracts will

be used for project distribution facilities. The recovery of costs for

projects which include both federally financed water supply, main conveyance, and distribution facilities should be a combination water

service—repayment type. Both the physical facilities and the water

users’ repayment ability should be considered in the determination of

which project costs to place under the repayment portion of the contract.

Period of Payments

Payments under repayment contracts, other than operation, maintenance,

and replacement (QM&R) payments if the United States is operating the

facilities, will terminate when the initial contract term has expired,

but charges becoming due pursuant to water service contracts will continue after the initial contract term, until the water users have repaid

all of the reimbursable project costs allocated to the M&I and agricultural water functions.

7
Adjustment of Rate

Water service contracts should provide for rate review and possible rate

adjustment every 5 years. Repayment contracts should provide for

announcement of the repaym~nt obligation upon completion of project

construction when the actual plant-in—service cost is known.

Contract Term

The term of the contract should be for 40 years unless otherwise authorized by Congress. However, flexibility should be permitted and, if it

can be supported, consideration given to making some water service

- contracts of 15-to 20—years duration.

Water Use Buildup in Water Service Contracts Where There are Multi

—

contractors for Water from the Same Facilities

Agricultural water service contracts should permit a 15—year buildup in

water use during which time some target quantities should be reached.

The minimum buildup in payments for M&I water use should include:

(1) A short—term minimum based on 1 percent of the maximum annual

• quantfty of water under contract with a progressive 1 percent increase

• per year to 10 percent in the 10th year; and (2) a long—term minimum

quantity equal to 60 percent of the total water which would b.e realized

if the maximum annual amount under contract was used every year. The

short—term minimum would be included in reaching the long-term minimum

requirement.

8
Readiness-to—Serve Charge in Industrial Water Use Option Contracts

Option contracts of 10—years duration can be written for industrial

water use. During this period, with certain exceptions, the contractor

should be required to make payments in the same manner as the shortterm minimum requirement for M&I contracts.

Specification of Obligation or Rate in Contracts

A maximum contractual obligation can be specified in repayment contracts

if sufficient flexibility is permitted to assure the repayment of the

actual plant-in—service cost. Unless required by State law, the maximum

water rate should not be stated specifically in water service contracts.

Cost Allocation

A functional separable cost-remaining benefit method of cost allocation

should normally be used. Following the initial allocation, the costs

allocated to the M&I and agricultural functions will be combined to

permit suballocations as the result of changing water use in subsequent

years. In certain approved cases, the M&I and agricultural water use

functions will be combined into a water supply function to be used

throughout the cost allocation.

9
Water Management

Water service contracts should provide for the establishment by contracting entities of a base charge for water with significant increases

in the charges for additional water quantities.

Water Shortages

Hydrologic studies should be based on an equal sharing of water shortages by all water users with water service contracts written accordingly. When a water user demonstrates a need for a firm water supply,

and there is adequate water available, the water user should be permitted to contract for the quantity of water required, possibly at a

premium rate, to meet his needs. in a water—deficient year.

Reserve Funds

The accumulation of an emergency reserve fund should be mandatory for

all contracting entities operating Reclamation facilities. The need for

replacement and repayment reserve funds should be determined on a case—

by-case basis. The size of the emergency and replacement reserve funds

should be determined by using Figure 3 of this report.

10
AGRICULTURAL AND MUNICIPAL AND

INDUSTRIAL WATER MARKETING POLICY

BACKGROUND

In the past, the Bureau of Reclamation’s prime goal was the development

of storage, conveyance, and distribution works to provide water for

commercial agricultural purposes. M&I water use was only a minor

function in Bureau projects. While the Reclamation Project Act of

1939 did permit the sale of water for M&I purposes, it stated explicitly

that “. . . no contract relating to municipal water . . . shall be made

unless, in the judgment of the Secretary, it will not impair the efficiency of the project for irrigation purposes.” In most recently authvr-~

ized projects involving both irrigation and M&I water service, the

authorizing act has specifically excluded compliance with the provision

of the 1939 Act granting priority to irrigation.

Some recent project authorizations have made M&I water service an

explicit or sole project purpose. Examples are: (1) the Colorado River

Storage Act of April 11, 1956, which authorized M&I water service as a

project purpose with the costs to be repaid with interest in 50 years;

(2) the Act of June 27, 1960, which authorized the Secretary to construct the Norman Project, Oklahoma, for the principal purpose of furnishing M&I water service; and (3) the Southern Nevada Project,

authorized by the Act of October 27, 1965, which provides for only M&I

water service.

11
Title III of the Water Supply Act of July 3, 1958, authorized the Corps

of Engineers and Bureau of Reclamation to cooperate in. and develop water

storage supplies for municipal, industrial,~ and other purposes, including authority to impound water for future M&I demand. This act is an

alternative to and not a substi-tute for the 1939 Reclamation Project

Act.

Regardless of the added emphasis on arrangements for M&I water service,

the Bureau of Reclamation’s participation in regard to M&I water has

historically been relegated to the construction of storage and conveyance facilities with the cons-truction, in many cases, of the distribution, treatment, and related facilities being the responsibility of

non—Bureau interests.

DEFINITIONS

Two major water—use classifications which have evolved over the years in

Reclamation studies and contracts are agricultural or irrigation and

M&I. If the water pricing policy for the various classes of water use

were similar, there would be no need to define or classify water use.

The Reclamation Project Act of 1939 separates but does not define

the categories of water use.

12
The term “municipal” carries the common distinction of having to do with

domestic, municipal, and commercial service to a city or town. The term

“industrial” pertains to a particular branch of trade or manufacture,

and when used in conjunction with “municipal” the joint term normally

refers to the purchasing entity,which in turn markets the water within

a given sector for both municipal and industrial purposes. Agriculture

relates ~o the art or science of cultivation of the soil and production

of crops and livestock. M&I water use invariably carries a rate substantially higher than that for agricultural water use as the rate

structure for the former is predicated upon costs of project facilities

and alternative sources of a like supply and is interest bearing, while

the latter is related to repayment ability and does not bear interest.

As applied to Reclamation contracts, “municipal and industrial” water

has been defined as water used on tracts of land df less than 2 acres.

The origin of that definition is obscure, but it has been included in

many Reclamation contracts since 1951. The definition has been criticized because of the apparent arbitrariness of the selection of the size

of tract and the resultant effect of a sharp deviation in the project

rate structure as the size of ownership exceeds the 2-acre limitation.

The effect of the abrupt change from 2 acres and the higher rate for M&I

water Is further intensified by the trend toward subdivision.of agricultural land lnta small tracts, usually located near existing towns and

cities. Depending somewhat on the size of the tracts, the land is often

13
owned by professional people wanting the amenities of country life and

part—time farm operators who are employed in town but supplement income

from those jobs by farming the small tracts. Because there is a

relatively small quantity of water required and because of the intown

income, a payment ability exists which is believed to be generally

higher than that computed as payment capacity for a commercial agricultural endeavor in the same area. Thus, there is a gradual change in

size of ownerships and payment capacity with an abrupt change in

Reclamation’s definition and rate. To help alleviate the inequitable

charges from this situation, we suggest that there should be a rate

differential on a unit basis which gradually decreases from that

charged to small tracts to that charged to commercial agricultural use. If the recommendation to modify the definitions and rate

structures is implemented, the needed changes for equity among users

will be accomplished and the intent of Congress in recognizing the

difference in water uses will be satisfied.

We believe that in most instances the only water considered to be

used for M&I purposes outside municipalities should be that used for

commercial recreation and Industrial purposes. The following

definition of M&I water used is proposed for future contracts:

Municipal and industrial water shall mean water furnished to municipal-ET
1 w
57 18

ities, to industrial establishments, and for commercial recreational uses

.

In some instances, contracts have been entered into with irrigation

districts whereby the district provides municipal water in addition to

agricultural water ,from the project facilities. Examples of this are

the East Greenacres Unit, Rathdrum Prairie Project, Idaho, and the

14
Spokane Valley Project, Washington, where irrigation districts provide

water for municipal use by means of facilities constructed by the Bureau

of Reclamation. This water is intended for use within the dwelling unit

for culinary and sanitary purposes similar to that furnished a municipality. Therefore, in these examples the definition of I1&I water would

be expanded to include the furnishing of water to an irrigation district.

Commercial recreational water uses would be included in the M&I category

when water is used for golf courses or for’ those uses in which a membership or participant fee is charged for the recreation but which do not

usually involve planting and harvesting crops. Under some circumstances, planting and harvesting of crops may be involved, but these

activities would primarily be for esthetic purposes and would benefit

the specific recreational activity only. Water uses which involve

reimbursement of project costs associated with farming, suburban

living, or noncommercial recreation will be considered to be in the

agricultural category.

Commercial agriculture would represent those uses of water that result

in an output identified as agricultural commodity or product such as

livestock and dairy, field crops, fruits, and vegetables. Also included

would be irrigation of crops to provide cover for use by waterfowl or

other game birds, and water used for fish farms. Suburban agriculture

is characterized by the use of water on small tracts. This water is

15
principally used for the irrigation of lawns and gardens and pasture.

An example of the latter would be pasture for grazing horses which

are kept for-recreational enjoyment.

ESTABLISHMENT OF WATER CHARGE

The 1939 Reclamation Project Act provides that the repayment obligation

and the amount of the annual water charge or rate is to be determined by

the Secretary within the constraint that they should be sufficient to

cover “an appropriate share of the annual operation and maintenance cost

and an appropriate share of the fixed (construction) charges.” It has

been the policy in the case of water supplied for domestic, municipal,

industrial, and miscellaneous purposes to establish the repayment obligation or the water rate at a level to repay, as a minimum, the cost

allocated to that function with interest. The payment for agricultural

water has been established within the repayment capability of family—

size commercial agricultural enterprises.

Charges normally paid by water users are applied toward recovery of

capital and OM&R costs. Where an OM&R component is included in the

water service rate, it is possible that in the initial years of operation when water deliveries are low, the rate would have to be increased

significantly on a unit basis if there are to be adequate revenues to

cover the actual OM&R costs as well as the other designated rate components. In some instances where project faciliti~s are operated by the

United States and payments are received pursuant to water service contracts,

lb
QM&R costs are billed separately. This provides some flexibility since

it could, if necessary, permit consideration of capitalizing OM&R

expenditures without stipulating the procedure in the contract.

It is recommended that if facilities are operated by the United States

consideration should be given to recovering OM&R costs under a separate

billing

.

Municipal and Industrial Water - Two parameters were discussed by the task

force as guides in pricing M&I water: (1) the minimum amount should be

that required to recover the costs allocated to M&I service from the

project with interest; and (2) the maximum should be that to recover an

amount with interest that would not exceed the cost which would be

incurred in developing the water supply in the absence of the Federal

undertaking. Consideration should also be given to the repayment requii~~

ments of the other project functions and the charge should, in many

instances, be increased to include irrigation financial assistance and

project reserves.

Other concepts discussed by the task force were: (1) the establishment

of an area—wide rate for water where there is comparable service;

(2) determining a rate for industrial water service independent of

municipal water whereby the value of the commodity produced could be

recognized in the rate; and (3) establishing the industrial water rate,

particularly in option contracts, by means of a bidding procedure. In

17
addition, consideration was given to the use of short-term rather than

long-term interest rates; however, it was concluded that since long-term

contracts are executed, short-term interest rates should not be applied.

The task force recommends that the current procedures of establishing

minimum M&I water charges by repayment of costs with interest on

specific projects be continued

.

The cost of present water supplies, the demand and competition for

water, the irrigation financial assistance needed, and other factors

which have an effect on the use and price of water need to also be

considered. In some instances, the adoption of area-wide water rates

may be warranted. No consensus was reached in regard to pricing on the

basis of the value of products or by a bidding procedure.

Agricultural Water - As indicated in the discussion pertaining to defini—

tions, the term agricultural water is intended to encompass water used

for both corrinercial and suburban agricultural purposes. The following

discussion pertains to the establishment of the commercial agricultural

water charge and a proposed agricultural water rate structure designed

to result in the payment of additional revenues to the United States as

the type of ownersMps in the project area traverses from commercial

agricultural to suburban agricultural enterprises.

18
The Reclamation Project Act of 1939 was designed to alleviate some of

the difficulties that commercial agricultural water users had encountered in meeting repayment requirements. A legal interpretation of the

Act was that its principal purpose was to establish the water users’

repayment on the basis of economic factors pertinent to their ability to

pay. The irrigators’ ability to pay is determined by budgeting representative farm situations reflecting future with and without project

conditions. A representative crop pattern, including livestock enterprises where appropriate, is projected for the service area; budgets are

prepared on the basis of farm interviews, general knowledge of the area.

including soil characteristics, and any secondary information available.

The budgets include gross income and the costs of management, labor, and

return to capital priced at estimated market value which are deducted

from the gross farm income. The residual value, less a margin of about

25 percent for contingencies and incentive, is assumed to be available

to apply against the costs of project water service.

This procedure is sound conceptually. However, there are severe accuracy limitations in the determination of ability to pay by the use of

farm budgets. In this computation, assumptions must be made regarding

the price of. all inputs, outputs, and crop yields. Intangible items

such as level of management and farm efficiency have significant effects

on the results. Thus, in reality, the results are only an indicator of

the level of the repayment and should not be treated as a precise

determination.

19
For lack of a better indicator, payment capacity determinations must

continue to be the primary guide in setting commercial agricultural

water rates

.

In some service areas, there are other data that can be utilized to help

support a value or market price for water. In these cases these values

should be used in conjunction with payment capacity determinations to

verify irrigation water rates.

The following are examples of other values that should be considered:

1. Project service areas that have a current water supply have established a current cost of water. The cost of this water to the farmer

will be accounted for as an expense in the budget. Even so, the amount

farmers are paying for this water in the absence pf the project indicates

at least a minimum repayment ability. This current cost of water should

be used as support for payment capacity determinations by the farm

budget method.

2. When the project is designed to augment a ground water basin that is

declining, the costs of continued pumping could be less than project

water costs. This situation could exist until the depth to ground water

increases to the level that pumping costs equal or exceed project costs.

Whenever the above or a similar case arises, consideration must be given

to the effect on rates and the marketing situation.

20
3. The cost of developing and delivering project water should be a

major consideration when arriving at a rate. As a minimum, the water

users must pay the project~0M&R costs and to be financially acceptable,

a portion of the project construction cost.

4. The selection of the service area should include consideration of

competition among environment, recreation, and fish, as well as irrigation. This competition is not always in terms of economics or willingness to pay but is in terms of pressure not to dam rivers and not to

divert water away from streams. The demand for water for these purposes

will reduce water available for irrigation and M&I use. The water that

is available for irrigation should be applied on the most productive

land to achieve the highest value crops. This will be reflected in a

higher ability to pay thus supporting increased water charges. These

higher charges will permit water users to support a larger portion of

their project costs.

In summary, in addition to major reliance on payment capacity; other

criteria should be given full consideration

.

After the commercial agricultural rate has been determined, repayment

based on different criteria should be considered for small tracts.

Suburban water use or water use on part-time farms are recognized as

classes of use which should not be charged a rate based on the commercial

farm payment capacity. Because of amenities associated with living in

21
the rural and suburban environment, and the fact that off-farm income

is used to establisI~ the family’s standard of living, it is equitable that

a higher rate be charged than that charged for water used on the commercial farm.

As more stringent repayment requirements are imposed in order to demonstrate project financial feasibility, additional revenue from the small

tract category becomes increasingly important to project payout and

benefi ts.

The task force recommends that the agricultural water rate structure be

composed of a charge per individual customer; or an account charge

,

plus a charge per acre of irrigable land or acre—foot of water

.

This rate structure will generate additional project revenue. It will

also provide an equitable unit water charge which will automatically

be higher at the end of the scale where ownerships are small with a

gradual reduction in the unit charge to equal the agricultural rate

where ownerships reflect the commercial agricultural enterprise. The

charge would be paid by each water user within the contracting organization

for each noncontiguous ownership not identifiable in the M&I category.

In many cases the water service to small tracts will be on an

irrigation delivery pattern. In these cases the M&I charge per acre

might not be equitable for the service provided. With this in mind

22
the account charge should be negotiated at as high a level as possible

that will not preclude developments It is recommended that the cost

of water to irrigate an acre of land should be within a range which has

an upper limit based on the lesser of (1) the rate necessary to repay

the irrigation cost allocation with interest, or (2) the (4&I rate

converted to a per acre basis; and a lower limit based on repayment of

the cost allocated to irrigation without interest. For the conversion

of the M&I water service rate to an acreage charge, 3 acre—feet of water

per acre will be assumed as the per-acre requirement. •As used herein,

unless otherwise specified the interest rate should be determined

pursuant to the Water Supply Act of 1958.

23
IMPLEMENTATION OF ACCOUNT CHARGE CONCEPT

(Hypothetical example in which agricultural rates are based in part on

acreage. Adjustments necessary for rates based on water quantities.)

KNOWN

Jones River Project - Western United States

Repayment period - 40 years

Repayment interest rate - 3-1/2-percent

~A&ICategory

Estimated average sales 50,000 acre-feet annually

Rate required to repay full allocated costs at 3—1/2 percent interest

in the 40—year repayment period $25 per acre-foot

Rate per acre at standard 3 acre—feet per acre = 3 x $25 = $75

Agricul tural Category

Estimated average size of land developments and farms and number of

accounts:

Acres Accounts

Less than 5 acres 10,000 4,000

5 - 15 acres 20,000 2,000

Over 15 acres 70,000 1,000

Total 100,000 7,000

Commercial size farm:

Rate @ 75 percent of payment capacity = $8 per acre

Average size farm used in payment capacity computation 80 acres

Rate required to repay full costs allocated to irrigation: @ 3—1/2 percent

interest = $60 per acre: without interest = $20

ACCOUNT CHARGE COMPUTATIONS

Since the account charge computation is to be negotiated within a. range

whose ceiling is the lesser of the M&I charge per acre ($75) or the

agricultural charge per acre required to repay full cost allocated to

agriculture with interest ($60), the latter will be used as the ceiling

and herein referred to as the maximum charge per acre. The lower

limit would be the rate required to repay full cost allocated to

irrigation without interest ($20). Assume year round water service, and

that the maximum charge per acre was acceptable to the customer.

Differen~e in maximum and normal agricultural rates = $60 - $8 = $52 per

acre.

24
Account charge = Difference in rates + Difference in rates

— $52 + $52 = $52.65 Commercial size farm acreage

80 acres

Agricultural charge per acre = Maximum charge per acre minus account

charge = $60 - $52.65 = $7.35 per acre

(Thus, the rate for 80 acres = $52.65~+ ($7.35 x 80) = $8 per acre

80

which is the rate based on payment capacity)

Knowing the account charge and agricultural rate per acre, a curve can

be developed. (See Figure 1)

Computation of anticipated agricultural revenue

Two procedures can be followed. For demonstration purposes only, both

procedures are shown in this example as follows:

1. Based on acreage and number of accounts:

Anticipated agricultural revenue =

(100,000 acres x $7.35 + 7,000 accounts x $52.65) x 40 years = $44,100,000

2. Based on estimated size of developments:

The average rates for acreages below 5 acres, and for acreages between

5 and 15 acres are rates on the curve which would be those which apply

at the midpoint of each step on the developed curve (See Figure 1).

That is, in this example the former rate would be the rate found on the

rate curve at 2.5 acres and the latter would be that at 10 acres.

Under 5 acre rate = 2.5 x $7.35 + $52.65 = $28.41 rounded to $28 per

acre 2.5

5 — 15 acre rate = 10 x $7.35 + $52.65 = $12.62 rounded to $13 per acre

10

Anticipated agricultural revenue for 40-year period:

Under 5 acres = $28 x 10,000 acres x 40 years = $11,200,000

5 — 15 acres = $13 x 20,000 acres x 40 years = 10,400,000

Over 15 acres = $8 x 70,000 acres x 40 years = 22,400,000

Total $44,000,000

Benefits would be computed on a case—by-case basis u~ing some or all of

the above facts and computations. Generally, procedure (2) abov.e will•

provide a basis for determination of the most accurate benefits for the

smaller acreages.

25
Figure 1

EXA~LE OF AGRICULTURAL WATER RATE

WHICH INCLUDES AN ACCOUNT CHARGE

$8

Rate per acre required to repay full cost allocated to irrigation

$13

with interest

$75 M&I rate per acre

S.’

U

s.d $28

Rate curve for repayu~nt

.0 2.5 5 10 15 80

Acres of agricultural wter use
TYPE OF CONTRACTS TO BE US.ED

The Reclamation Project Act of August 4, 1939 (53 Stat. 927), provides

the present basis for contracting for the repayment of reimbursable

costs associated with facilities to furnish water from Federal Reclamation

projects. As provided by the Act, the Secretary of the Interior is

authorized to market water for agriculture and M&I purposes under contracts providing for the repayment of a specified contractual obligation

within a designated period (normally referred to as a “repayment contract”),

or for the payment of appropriate charges for the delivery of water over

a designated period (normally referred to as “water service contract”).

S

Water service contracts offer advantages not provided by repayment

contracts. Due to annual variations in water supplies and demands,

water service contracts encourage the most efficient use of project

water particularly when the project water source is coupled with non—

project sources of supply. While repayment contracts assure the return

of a stipulated obligation, this can also be accomplished in water

service contracts through the establishment of minimum purchase requirements and by periodic rate review and adjustment. Reclamation law

permits the renewal of water service contracts which could provide the

means to continue receiving revenue for the life of the project where

continuing service is provided or until the conversion provisions which

are applicable to agricultural water service contracts through the Act

of July 2, 1956,are implemented and repayment is achieved.

26
The task force recommends that (1) arrangements involving water supply

and conveyance facilities be contracted under water service contracts

wherever possible, and (2) that repayment contracts be used for those

irrigation facilities that are generally associated with distribution

of water to the lands

.

This would require no legislative change since section 9(e) of the 1939

Reclamatidn Project Act provides that in the event water service contracts are made for furnishing water for irrigation purposes, the costs

of any irrigation water distribution facilities constructed by the

United States shall be covered by a repayment contract entered into

pursuant to subsection 9(d).

Both the physical facilities and the water users’ repayment ability

should be. considered in the determination of which project costs to

place under the repayment portion of the contract.

’

In those instances where the water users have adequate financial ability

to repay the costs of the facilities which would normally be classified

as distribution facilities, the costs to be included in the repayment

portion of the contract would be based upon a physical determination.

However, where this is not the case, the costs to be included in the

repayment portion of the contract would be determined by starting at the

end of the system and including facilities and costs to the point where

the available payment capacity, leaving an allowance for water service

27
charges, is fully utilized. The residual costs would be covered by the

water service portion of the contract by means of specified water rates

which would extend for a longer period than the repayment portion of the

contract.

The foregoing examples are illustrated as follows:

Total cost of facilities =

Distribution

Water supply

$1 5

7

8

Example I

Facilities

Distribution

Water Supply

Total

Adequate Financial Ability to Repay Physical Works

Which Could be Classified as Distribution

Defined by Financial

_______ ___________ Ability

$7

Defined=Facilities

$7

8

$1 5

8

$15

Example II

Facilities

Distribution

Water Supply

Total

Inadequate Financial Ability to Repay Physical Works

Which Could be Classified as Distribution

Defined by Financial

________ ____________ Abi 1 i ty

$5

Defined ~ Facilities

$7

8

$1 5

10

$1 5

28
Some projects may consist solely of facilities which can be physically

classified as distribution and which also provide a domestic water

supply. Such an example is the East Greenacres Unit of. the Rathdrum

Prairie Project, Idaho, which includes a series of wells and a pressure

pipe distribution system to provide both an irrigation and a domestic

water supply. In this case, the determination of what constitutes the

distribution facilities is limited by the commercial agricultural water

jasers’ repayment ability. Under the recommended policy, the costs

to be included as a joint irrigation—domestic obligation under the

repayment portion of the contract would be determined pursuant to payment capacity. The M&I interest—bearing portion of the repayment obli—

gation would be determined periodically on the basis of water use. The

remainder of the project costs would be covered by the water service

portion of the contract by means of water rates. An illustration of

this concept follows:

Total cost of facilities $15

Distribution = 15

Water Supply = 0

Distribution Works Providing Both Commercial

Agricultural and Domestic Water Supply

Defined by

Facilities Defined by Facilities Financial Ability

Distribution $15 $ 5 Interest bearing

amount determined

periodically

Water Supply 0 10

Total $15 $15

29
Consideration was given by the task force to including an account charge

in the repayment portion of the contract. This could result in the

repayment of the obligation sooner if the lands were subdivided in which

event the commercial agricultural water service rate would be increased

since there would be added payment capacity available to pay for the

water supply facilities. It was concluded, however, that it would

simplify the administrative aspects if the contract variations were

restricted as much as possible to the water service contracts. On this

basis, the repayment portion of the contract should consist of a specified obligation, a definite repayment term, and fixed annual payments

which would only vary if the system were being used for M&I purposes

requiring interest payments on a portion of the unpaid obligation.

The adoption of a unilateral policy to restrict contracting to water

service contracts or combination water service-repayment contracts may

be questioned since existing legislation permits the use of repayment

contracts. However, existing legislation does not appear to give the

contractor the option to select the contractual arrangements. Water

service contracts could be required for new projects by Including this

type of repayment plan in all future planning reports with variations

contingent on approval by the Commissioner.

30
PERIOD OF PAYMENTS

Repayment contracts written under sections 9(d) and 9(c)(l) of the 1939

Reclamation Project Act have provided for the termination of the construction installments once the specified construction charge obligation has

been repaid. However, the concept of continuing payments for continuing

sefwice and use of facilities has considerable merit, particularly in

the case where the contractual obligation is considerably less than the

cost of the project facilities.

The use of water service contracts implies the service principle which

is associated with public utilities whereby continued service is provided for continued payment. It can be interpreted that such a policy

is consistent with sections 9(e) and 9(c)(2) of the Reclamation Project

Act which authorized the use of water service contracts. However, the

Act of July 2, 1956, permits the conversion of agricultural water

service contracts to repayment contracts upon the determination that the

remaining amount of. the construction cost which is properly assignable

for ultimate return by irrigators can probably be repaid within the

prescribed period. There is not similar legislation for municipal,

industrial, and miscellaneous water supplied under water service contracts. Further, the Act of June 21, 1963, providing for renewal of M&I

contracts, makes such renewal contingent on renegotiation of ‘. . . the

charges set forth in the contract in light of the circumstances prevailing at the time of renewal . . 2’

31
Legislation has been enacted in various areas to establish basin accounts

whereby revenues realized from the sale of commercial power from Federal

facilities are used to repay those project costs allocated to agricultural

water service which are in excess of the water users’ ability to pay

within the prescribed period under repayment contract arrangements. This,

in effect, recognizes the indirect benefits realized by other sectors

of the economy through irrigated agricultural development.

The task force discussed the following options in regard to the period

of payments:

Option 1 — Water users would continue to pay under all types of

contracts as long as service is provided.

Option 2 - Water service charges would continue for the life of

storage and major conveyance facilities. The construction charge

payments due under repayment contracts for distribution systems

would terminate when the obligation is repaid.

Option 3 — Permit payout under all contracts:

1. Within the initial contract term with application of

financial assistance from power revenues;

32
2. At such time that, the reimbursable project costs are fully

repaid by the water users without power financial assistance.

It was concluded that option 1 was not feasible since it would necessitate the exclusive use of water service contracts, and be difficult to

justify, particularly when project facilities are transferred to the

water users to operate and maintain.

Option 2 is similar to the procedure being followed in the Central

Valley Project. However, on that project the water supply and conveyance facilities are operated by the Bureau of Reclamation and continuous service, including maintenance and replacement, is being provided.

This is not the case in many other Reclamation projects.

Option 3(1) is the procedure which is now being followed in many regions.

However, it is questionable that payments should t~rminate at a specific

time while water users continue to enjoy substantial financial assistance

and have the ability to continue to pay.

Even though the present value of $1, collected 40 years from now is only

about $0.10 (discount rate of 5—7/8 percent) it seems appropriate to

require continuation of payments beyond 40 or 50 years if there are

still outstanding reimbursable project costs or if the reimbursable

project costs have been repaid in part by power revenues.

33
Therefore, it is recommended that the repayment portions of the contracts

terminate when the initial term has expired but that the water service

portion of the contract be renewed continuously until the water users

have repaid all of the reimbursable project costs allocated to the ~1&I

and agricultural water functions (Option 3(2))

.

This will not require a legislative change to eliminate the conversion

provisions for commercial agricultural water users now included in the

Act of July 2, 1956, since, as a practical matter, if the Secretary

determines that the obligation of the irrigators is the total allocated

cost, most irrigators would not be able to convert under the provisions

of the Act of July 2, 1956, for a considerable period. Further, it is

also workable in~. the Central Valley Project since the project is an

integrated project and, as new units are added, the financial capability

of the entire project is utilized to repay the integrated project cost.

Since the repayment portion of the contract will terminate upon the full

repayment of the costs covered thereunder, the water users’ repayment

ability, which will become available when such repayment is achieved,

will then be applied toward the project costs covered under the water

service portion of the contract.

34
This procedure is illustrated as follows:

Total cost of facilities = $15

Distribution 7

Water Supply 8

Covered by

Repayment Obligation to Renewal of

Facilities be Paid in Initial Term Water Service Total

Repayment portion $ Sal 0 $ 5

Water service 5 ~5b/ 10

Total $10 $5 $15

a! Payment capacity inadequate to pay the cos.t of the distribution

facilities.

b/ Includes cost of distribution facilities not covered by repayment

portion of contract.

ADJUSTriENT OF CHARGE

Currently the contractual obligation in repayment contracts is adjusted

upon completion of project construction and the determination of the

actual project costs. Some of the recent water service contracts

require adjustments in water rates as changes in water use occur from

that initially estimated.

It is recommended that M&I and agricultural water service contracts

provide for rate review and possible adjustment every 5 years

.

This review would permit changes in the rate to recognize changes in

costs, cost allocations, payment capacity, and water use. It should be

35
recognized that irrigation water rate reviews will necessitate reviews

of the farm budgets and other factors used in determining the irrigators’

repayment ability. Irrigation development may not have occurred in the

initial rate review periods to substantiate a rate change; however, the

opportunity to effect changes should be included in the contracts.

CONTRACT TERM

The Reclamation Project Act establishes the contract term at not to

exceed 40 years. However, authorizing legislation for project proposals

has provided for contracts beyond 40 years but generally not in excess

of 50 years, which is roughly half of the anticipated life of the

facilities.

There is some merit in setting the contract term at 10 to 20 years in

water service contracts with provision to renew pursuant to the Acts of

July 2, 1956, and June 21, 1963. However, terms of less than 40 years

would (1) be difficult to obtain since many contractors do not want to

make significant plant and distribution system investments without the

assurance of a long—term contractual commitment irrespective of the

contract renewal provisions of the Acts of July 2, 1956, and June 21,

1963, (2) there would be the continuing need for contract renegotiation,

and (3) problems might be encountered in negotiating the renewal of the

water service portion of the contract, particularly if the term of the

repayment portion of the contract had not terminated.

36
It was initially concluded by the task force that future water service

contracts should normally be for 40—year periods unless otherwise

authorized by Congress with provisions to provide for periodic rate

review and adjustments. Subsequently, in commenting on the preliminary

report, some of the regions believed that consideration should be given

to water service contracts with terms of 15 to 20 years.

It is recommended that flexibility be permitted and, on a case-by-case

basis if supported in view of other considerations, shorter terms be

negotiated

.

WATER USE BUILDUP IN WATER SERVICE CONTRACTS WHERE THERE ARE MULTI

—

CONTRACTORS FOR WATER FROM THE SAME FACILITIES

Water service payments should commence with the availability of water.

To make the best and most equitable use of the water resource and to

assure that the resource is not committed and held indefinitely without

beneficial use and monetary compensation, it is necessary to set a

minimum buildup in water use and payment. This buildup should represent

the contractors’ projected water needs over the contract term plus

additional stipulations if necessary to meet the minimum requirement.

Irrigation water use usually builds up faster than municipal uses. In

many projects a substantial portion of the service area is already under

irrigation so the buildup could be as little as 5 to 10 years.

37
It is recommended that a 15-year buildup period in irrigation water use

be established during which time some target quantities should be

reached and that the irrigators be permitted that period to fully utilize

their water commitment

.

This is compatible with the establishment of development periods which

cannot exceed 10 years and permits an additional 5 years to reach full

agricultural production of the irrigable land.

During the 15-year buildup period some minimum use requirements should

be stipulated in the contract with provision to increase or decrease the

projected minimum requirements on the basis of actual use as shown in

the following example:

Years _________________________

1 through 5

6 through 15

16 to end

of contract

period

Minimum Use Requirement

None

The average of the immediately preceding 5 years. If the

average were more or less than the projected requirement,

the minimum use requirement for the succeeding years

would be increased or decreased by the following ratio:

Projected use for Difference in actual from

that year x - projected use

actual use

If the average were less than the projected use, the

maximum quantity of water under contract would also be

decreased and the contractor would either make payment

compensation to equate payments to projected requirements

or relinquish all future entitlement to its use.

The quantity used in the 15th year or the contractual

annual maximum. Any water that is not under long-term

commitment by that time could be marketed by the United

Siates to any other water user.

38
Water needs over an interval will vary between domestic and municipal

use and industrial use and between uses in each group. In most instances,

the demand for municipal water will increase over an extended peripd as

the population being served expands, whereas industrial water use

exhibits a relatively short—term buildup except in those specific cases

where water use is contingent upon the development of other resources

necessary to utilize the water resource (such as the development of the

coal resources to utilize water from the Yellowtail and Boysen Units

of the Pick-Sloan Missouri Program and units of the Colorado River

Storage Project). Further, such development usually consists of units

of production being placed in service atdifferent intervals and the

water demand is characterized by a “block buildup” rather than a

“graduated buildup.” Since the recommended water buildup requirement

is not compatible with the anticipated water use, this type of water

use is a special case to be treated individually.

Some members of the task force suggested that the M&I customer should

reach its maximum annual demand by the 20th year and any additional

water under contract not used or paid for by the contractor at that time

should revert to the United States for further marketing. Other members

believed that this was not realistic since M&I water marketed by the

Bureau of Reclamation has historically been to municipalities which will

experience a long-term buildup in water use. It was agreed that the main

concern should be equity among customers and reasonable financial return

to the United States. To accomplish this, and still permit annual

fluctuations in water sales based on demand, it is recormiended that a

minimum long—term financial return to the United States should be

~39
established over the repayment period. This should be a certain percentage of the total revenues which could be realized over the initial

contract term if the maximum annual quantity of water under contract was

paid for every year. Included in the long-term requirement should be

short—term criteria consisting of minimum payments during the initial

years.

It is recommended that the short—term requirement in the first year that

water is available be equivalent to 1 percent of the maximum annual

quantity of water under contract with a progressive 1 percent increase

to the 10th year

.

The 10 percent minimum payments would remain at that level until the

actual demands and payments for water use exceed that amodnt. Thereafter, the payments would be subject to actual demand.

The long-term minimum requirement would be based upon recouping 60 percent

of the total revenues which would be realized if the annual maximum

quantity under contract was used every year

.

The short—term minimum requirement would be included in computing the

60 percent minimum. During the contract term, the entity’s entitlement

to retain the water supply would remain in effect as long as it met the

established buildup criteria. However, a provision should be included

in M&I contracts to permit a “pull—back” of the long—term contractual

water supply commitment if there is excess water that is not

40
being put to beneficial use. This is particularly important in areas

where there are water deficiencies.

The United States, regardless of the level at which the water use buildup

requirement is established, would be assured of the return of the

allocated cost thz~ough periodic rate review and adjustment. The water

rate would initially be established on the basis of the projected water

needs or the minimum long-term requirement, whichever is greater. The

following factors would affect the magnitude of the rate in subsequent

years: (1) Changes in OM&R costs; (2) changes, in the project construc—

tion cost allocation due to changes in project water use; and (3) purchases in excess of the water use buildup established in the contract

which will, if all other factors remain constant, result in a decrease

in the water rate.

The following tabulation indicates the impact on certain entities of the

foregoing 60 percent minimum requirement.

41
Impact on Some Entities

If 60% Criteria Were Applied

(Based on requirements expressed by the entities)

Approx.

Entity Project Rate

East Bay MUD

Salt River

Proj ect~I’

Arizona P~jblic

Service~-/

90 M&I

Total

Central

Central

Valley

Arizona

Central Arizona

Central Arizona

~/ A. F.

16

45.50

Over 40—year Period __________

Entities Entities

Water Additional

Requirement Payment to

% of Meet 60%

Payment Maximum of Maximum

40 41.5 18

168 43 67

45.50 212

45.50 2,000

44

62

78

0

a! Minimum requirement could not be imposed by Reclamation since -

United States has contract with Central Arizona Project Water Conservation District for repayment of CAP costs. Tucson not included in list

of total entities.

Figure 2 illustrates an example of the proposed ~1&Iwater use buildup

requirement.

Some criteria which are common to both M&I and irrigation buildup

requirements are:

1. Any water above the minimum buildup requirement that is not scheduled and p~id for in advance would annually revert to the United States

for its use.

2. The contractor would not be entitled to dispose of any water to

another entity in excess of the minimum payment requirement.

42
Figure 2

EXAMPLE OF WATER USERS BUILDUP AND

PAYMENT REQUIREMENTS WHERE NO WATER

IS REQUIRED UNTIL YEAR 9

I00

IC-,

z

0

C-,

~75i

0

z

Iz

-J

~50

=

z

z

~25

Iz

w

C-,

LiJ

a0

10 20 30 40

YEARS
3. Except in unusual cases, payments made for water used in any year in

excess of that covered by the minimum payment requirement could not be

credited against the minimum payment requirement in a subsequent year.

READINESS-TO-SERVE CHARGE IN INDUSTRIAL WATER USE OPTION CONTRACTS

Long—term contracts providing for an option on the water supply for

industrial purposes have been executed in some cases where technology or

development has not advanced to the point to make beneficial use of the

available water supply. Such options have usually been for 10-year

periods during which time readiness-to—serve payments were required.

This has been accommodated in the Upper r~1issouri and Upper Colorado

Regions where water for industrial use has been placed under option

contracts which provide for (1) a readiness—to-serve payment based on

a relatively nominal charge per acre—foot applied against the total

quantity of water under contract, and (2) a provision that if during

the option period a potential contractor wanted to use and pay

for all or a part of the quantity of water under contract, the initial

contractor could either begin paying for the water and put it to beneficial use or lose the right to its use.

It is recommended that in some industrial water use option contracts

,

the contractor be required to make payments during the 10—year period

in the same manner as discussed in the M&I water use buildup

.

43
This procedure has the advantage of establishment and acceptance by the

customer of one rate; and, as shown in the following example, results in

about the same return to the United-States that is now being recovered

by the use of a separate readiness—to—serve rate.

Readiness-To—Serve Payments

Present Procedure

:

1. Sun Oil Company, Contract No. 14-06-600—10,619

Quantity of water under contract is 35,000 acre—feet

Rate per acre-foot for water is $11 per acre-foot

Readiness-to-serve charge is $0.50 per acre—foot

Annual readiness-to-serve payment is $17,500

Length of option period is 10 years

2. Peabody Coal Company, Contract ~lo. 14-06-600-lOlA

Quantity of water under contract is 40,000 acre-feet

Rate per acre—foot for water is $9 or $11 per acre—foot

Readiness—to—serve charge is $0.50 per acre-foot

Annual readiness—to-serve payment is $20,000

Length of option period is 10 years

Readiness-To—Serve Payments Received Over 10-Year Option Period

:

Present Procedure

1. Sun Oil is $17,500 annually x 10 years = $175,000

2. Peabody Coal is $20,000 annually x 10 years = $200,000

Proposed Procedure

:

1. Sun Oil is required to pay for a total of 19,250 acre-feet at

$11 per acre—foot — $211,750

2. Peabody Coal is required to pay for a total of 22,000 acre-feet

at $9 per acre-foot — $198,000

at $11 per acre-foot — $242,000

44
However, as discussed in the previous section, the-water demand by some

industries, particularly in the energy production fields, is characterized

by “block buildup.” In these cases, a progressive increase in option

payments may not be applicable if it is based upon the ultimate unit of

production being placed in service and its associated water demand and

consideration should be given to some other procedure.

State law should be considered when drafting contract lahguage pertaining to third—party option provisions so as not to circumscribe the

beneficial use requirements.

Policies applicable to industrial water use option contracts are:

1. No subsequent credit would be made in future years for

readiness—to-serve payments.

2. The option period should not be greater than 10 years and at the end

of the period the contractor would be required to start paying for the

quantity of water specified in the contract or the contract will

terminate. This quantity could either be the maximum quantity of

water under contract or some other payment requirement depending

upon the type of proposed development.

3. The United States retains the.right during the option period to

market any water on an interim basis which is not scheduled for use by

the contractor. The contractor cannot market the water to a third

party, but the contract should include the opportunity for third parties

45
to make a bona fide offer for water not being beneficially used

during the option period at whichtime the option contractor would

be required to commence paying for the quantity of water specified

in the contract for the period immediately following the option

period or lose the right to the use of the water to the third party.

This quantity could either be the maximum quantity of water under

contract or some other payment requirement depending upon the type

- of proposed development.

SPECIFICATION OF OBLIGATION OR RATE IN CONTRACTS

In repayment contracts the contractual obligation is specified, whereas

in water service contracts the general practice has been to specify the

water rate but not the contractual obligation. A legal interpretation

of some State laws is that a maximum construction obligation must be

specified in contracts. This will present no problems in regard to the

repayment portion of the combination water service—repayment contract

where an obligation will be specified. In those instances where the

water users have adequate financial ability to repay the full cost of

the distribution works, the maximum construction obligation in the

repayment contract should be established at a sufficient level to assure

the repayment of the actual plant—in—service cost. Where possible,

construction contracts should be broken into segments of work to

46
permit the deferment of items of work if necessary to help avoid

the possibility of one bid for performance of all the work exceeding

repayment contract maximum obligations.

Stating a maximum obligation in the water service portion of contracts

could present some problems depending upon the interpretation of the

law in each State. We believe there are procedures which can be

utilized in the contracts and in the election process which comply

with interpretation of these statutes and suggest that such compliance

be tested by the court through contract confirmation.

Unless required by State law, any reference to a maximum water rate

should be omitted from the water service contract

.

47
COST ALLOCATION

BACKGROUND

The initial projects undertaken by the Bureau of Reclamation were

single-purpose irrigation projects that did not require the division of

costs between functions. However, with the development of multiple—

purpose projects it became necessary to distribute costs because of

differences in the repayment requirements of the various project functions.

The first cost allocations were based on physical criteria; however,

such methods did not recognize the full extent of the services provided.

Cost allocations based upon benefits were developed but deficiencies

were also noted in these methods. Subsequently, methods involving a

combination of both physical and economic criteria were developed and in

the early 1950’s the separable costs—remaining benefits (SCRB) method

was universally adopted by all Federal agencies in the field of water

resource development.

Under the SCRB method, the maximum amount (justifiable expenditure)

which can be allocated to any project function is the lesser of (1) the

benefits accruing from the project to that function or (2) the cost of

developing a single—purpose project providing the same level of benefits

for that function. The minimum amount allocated to a function (separable

cost) represents the cost which could be omitted from the total project

cost if the particular function was not included. After deducting the

48
total separable costs from the total project costs, the residual &r

joint cost is distributed among all functions proportionate to the

remainder of each function’s justifiable expenditure.

ADEQUACY OF SEPARABLE COST-REMAINING BENEFIT COST ALLOCATION METHOD TO

REFLECT CHANGE IN WATER USE

The estimated benefits for each function are based on projections of the

quantities of water used, service, and use of project facilities. These

projections are for a 100-year period orthe life of the project whichever is least. The cost for the single-purpose alternative is based on

constructing a facility to generate an equivalent benefit stream including sufficient capacity to meet the maximum needs of the function. In

many cases, and essentially in all cases for M&I, the alternative cost

becomes the justifiable expenditure. This procedure causes initial

allocation of project costs to a function which may not fully utilize

the project’s resources until some future time. Thus, in many instances,

‘1&I water users having a 25-35—year buildup in water use are making

sizable interest payments or capitalizing these interest charges in

initial years when the water user is requiring very little water service.

Some M&I users have strongly objected to this situation.

PROJECT OPERATION REFLECTED IN COST ALLOCATION

As the project progresses from the planning through operational phases,

it is desirable to maintain compatibility among the allocated project

49
costs, the actual use of the project facilities, project water, and

project repayment. To accomplish this without requiring extensive

reformulation of the project alternatives and separable costs, various

cost allocation methods were reviewed. All methods of cost allocation

reflect to some degree the projected use of a project, and an allocation

will be correct only as long as the projections are accurate. As the

projections change, the allocation for the-reimbursable functions should

be changed. While other cost allocation methods are perhaps more

receptive to changing conditions, it was generally agreed that the SCRB

method results in a more equitable functional allocation. With some

modifications, particularly by means of suballocation procedures, it can

be reflective of changing project conditions without the complications

of reallocation.

MODIFIED SEPARABLE COST-REMAINING BENEFIT COST ALLOCATION METHODS

Two modifications of the SCRB method of cost allocation were discussed.

One of these was to maintain the current initial functional cost allocation and the other was to combine the irrigation and M&I functions in

the initial cost allocation into a water supply function. Following the

initial allocations, there would be periodic suballocations between

irrigation and M&I water based on projected uses over the original

contract period.

50
The Water Resources Council’s “Principles and Standards for Planning

Water and Related Land Resources” published on November 10, 1973, states

in regard to the cost allocation process that “Each objective and each

component of the objectives shall be treated comparably in the cost

allocation and each is generally entitled to its fair share of the

mutual advantages resulting from a plan.” It appears that the use of a

water supply function will result in a lesser allocation to water supply

than would have been realized if the two functions had maintained their

separate identity. This is due to the economies of scale which would be

realized by the use of one single-purpose alternative which will• probably

be the justifiable expenditure for the water supply function rather than

separate alternatives for irrigation and M&I.

On the basis of the foregoing, it was concluded that the water supply

cost allocation concept should be a secondary procedure to be used with

approval by the Commissioner’s office on a case—by—case basis.

It is recommended that a functional SCRB cost allocation will normally

be used, but in certain approved cases the M&I and agricultural water

use functions will be combined throughout the cost allocation

.

For repayment purposes, a project cost allocation should be made following construction. The final cost figures and projected water uses

should then be incorporated into the allocation. When there are major

changes in water use during the original contract period, the SCRB cost

51
allocation should be revised. The allocation should be reviewed at

least once every 10 years.

For the normal procedure, following the functional SCRB cost allocation,

a comparison should be made between the M&I and agricultural allocated

costs and water projected to be used by each purpose over the repayment

period. The allocated costs to the two functions will then be combined

to form a single function. At 5—year intervals, new projections of

water use will be made. If these projections vary from the original

projection, the cost suballocated between M&I and irrigation will vary

accordingly, keeping the original marginal percentage differences

between allocated costs and water use.

This procedure will permit changing allocations to reflect changes in

water use over the repayment period and will tend to maintain the

benefit/cost ratios developed in the SCRB cost allocation. After each

suballocation, the unpaid investment will be determined for the func—

tions by crediting revenues collected over the period to that point in

time. No retroactive adjustments will be made regarding interest. The

allocation is iflustrated by the following example:

52
FUNCTIONAL ALLOCATION

INITIAL CAPITAL COST ALLOCATION

$2,250

M&I

$750

Constructi on Irrigation

costs

Relationship of initial allocation to projected water use

:

Other Functions

$1 ,000

Water Supply

Suballocated Cost

Dollars Percent

Projected Water Use

Acre-feet Percent

Irrigation

M& I

TOTAL

2,250

750

3,000

75

25

16,000

4,000

20,000

80

20

Ratio of cost to projected water use shows irrigation cost is 5% less

than projected irrigation use and M&I cost exceeds projected M&I use by

5%. This differential will be maintained during periodic adjustments.

PERIODIC CAPITAL COST SUBALLOCATION

New Projection of Water Use

Water Supply Acre—feet Percent

Irrigation

M&I

TOTAL

15,200

4,800

20,000

76

24

Irrigation suballocation = (.76 — .05) x $3000 = $2130

M&I suballocation -= (.24 + .05) x $3000 = 870

TOTAL $3000

SCRB: Total

$4,000

53
The following water supply cost allocation procedure may be used if

approved by the Commissioner: The various project functions will be

identified and the irrigation and M&I functions will be consolidated

into a “water supply” function. The water supply benefits will be

composed of the sum of the irrigation and M&I benefits and the alternative project cost will be the cost of developing and operating facilities to provide equivalent service to the consolidated water supply

function.

Except for the foregoing deviation the allocation procedure would follow

the SCRB method. However, once the project costs allocated to the water

supply function are determined, the water supply costs would be suballocated to irrigation and to M&I in proportion to the anticipated water

use of the representative function over a selected interval. Subsequently,

the actual and estimated water use over the same time frame would be

reviewed, the initial water supply cost suballocated, and the unpaid

investment determined for the functions by crediting the revenues which

had accrued to the respective functions over the previous period.

54
This cost allocation method is illustrated by the following example:

WATER SUPPLY ALLOCATION

INITIAL CAPITAL COST ALLOCATION

SCRB:

Cons tructi on costs

Water

Supply

$3,000

Other Functions

$1 ,O0O

Subal location

:

Water Supply

Proj ected

Acre-feet

Water Use

Percent

Suballocated Cost

Dollars Percent

Irrigation

M& I

TOTAL

16,000

4,000

20,000

80

20

• 2,400

600

3,000

80

20

The initial and all subsequent suballocations are based on projected

water use

.

PERIODIC CAPITAL COST SUBALLOCATION

Water Supply New Projection of

Acre-feet

Water Use

Percent

Irrigation

M& I

TOTAL

Irrigation suballocation

M&I suballocation

TOTAL

— .76 x $3000 = $2280

— .24 x $3000 = 720

$3000

Total

$4,000

15,200

4,800

20,000

76

24

55
WATER MANAGEMENT

BAC KGROUNO

The best time to provide for all of the efficient water-saving facilities that can be accommodated within economic and engineering constraints

~uld be during the plan formulation stages of project development.

Planning procedure and the designed efficiency of project irrigation

systems may be excellent, but efficient water use will only result with

cooperation of the individual water user.

Excessive water use often occurs because it is cheaper than the equipment and labor necessary to reduce the use. •Increasing the cost substantially for the water would encourage water management in many cases.

The Bureau of Reclamation currently has an ongoing program to increase

the contracting entities’ water use efficiency. The program, Irrigation

Management Scheduling, involves Federal agencies working with the entities

as a consultant to reduce the quantity of applied water. This type of

program will appeal to entities purchasing water on a water service

basis since they will be able to effect some cost savings. Entities

with repayment contracts will not have such an incentive to participate

unless excessive use results in significant increases in O&M costs.

The Assistant Secretary — Land and Water Resources had published in the

Federal Register of December 27, 1974, for comment, a proposed policy

concerning the use and management of water resources which are under

56
control of the Department of the Interior. An important concept was the

possible requirement by the Department of a statement by potential water

contractors indicating the planned use of the water. The statement

would be comprehensive in all aspects of the proposed source, alternative sources, and plans for efficient management of water use. If it is

determined that this policy should not be adopted on a Departmentwide

basis, it appears that Reclamation should pursue the possibilities of

adopting this idea, or variations thereof, on a Bureauwide basis.

WATER MANAGEMENT PROVISICNS IN CONTRACTS

Some contracts have provided for the establishment by the contracting

entity of a base O&M charge. The payment of this charge entitles the

water user to a specified quantity of water and a higher rate is assessed

for additional water. The increased cost must be significant in order

to be effective in deterring excessive water use. The determination of

the water allotment associated with the base quantity could vary widely

within contracting entities’ boundaries. Thus, the determination of a

base quantity usually comes about by negotiations with the entity. For

ease of administration, application of this principle must be on an

entity-wide basis.

It is recommended that water service contracts provide for establishment

by contracting entities of a base charge for water with significant

increases in the charges for additional water quantities

.

57
WATER SHORTAGES

BAC KGROUND

Reclamation projects are planned and constructed on the basis of assumptions regarding the project purposes to be served, the quantity of water

to be supplied to each purpose, and the deficiency or water shortage

which each purpose can operationally stand.

Storage reservoirs are sized to meet estimated demands less the estimated allowable shortages. The assurance of a full water supply for

each and every year during the driest periods would necessitate the

reduction of the irrigable area to be served and would result in significant increases in the unit cost of the project in respect to the

benefits. A general guideline which has been followed in project

planning in some areas is that the allowable irrigation shortage during

the year of greatest water deficiency should not exceed 25 percent of

the irrigation consumptive—use requirement, and that for a period of

water short years, the accumulated irrigation shortage should not exceed

75 percent of the irrigation consumpti~te-use requirement for the average

year. Where M&I water service has been included as a part of the

project development, the hydrologic operation has ranged from an equal

sharing of shortages to an assured M&I water supply in every year.

The ability to cope with water shortages is quite varied among water

users. Some industrial uses, such as cooling water for a nuclear

58
powerplant, require firm supplies. That supply may be assured by construction of small reservoirs to provide reserve supplies during project

operating outages. Other municipal uses, such as general city water

supplies, may not be as critical as the industrial or in some cases

irrigation supplies. Certain crops, including some perennial plants,

can be quite critical and require nearly a full water supply.

When the operation of a multipurpose project is similar to that for

which it was planned, the water shortage provisions used in the water

service and repayment contracts are generally adequate. However, when

there are unanticipated changes in water use, many existing contractual

provisions for allotment •of water shortages may be inadequate.

WATER SHORTAGE PROVISIONS IN CONTRACTS

Projects under consideration are normally planned to supply all or part

of the project water for irrigation, and changes in water use are anticipated to be from irrigation to M&I or other uses. Options for allotting

water shortages which have been considered in the development of contract

language for each project have either given equal sharing of shortages

by all water users, or limited or total preference toM&I.

Under equal sharing of shortages, it is assumed that all water users

have the same ability to bear shortages. This approach would accommodate

changing use with the least disruption of planned project operation, and

the least impact on remaining project uses. However, changes in points

59
of delivery or amounts of return flow from new users could have some

impact on planned project uses.

Some contracts have provided that the M&I water supply will not be

reduced in periods of shortages or that the M&I user would be assessed a

shortage only after the agricultural user has incurred a specific shortage.

Under this approach, it is assumed that the agricultural water users can

bear a shortage up to a certain point without a detrimental effect while

M&I cannot. A determination should be made as to whether this is truly

the case and the magnitude of the shortage which the agricultural use

could assume. Under certain conditions, T’1&I had a preference because

project repayment was dependent on M&I revenues, and those customers

required firm supplies before entering into contracts.

When a change in water use occurs, the various possibilities regarding

shortages are:

1. New use to bear the same shortage as that assigned to the original

use;

2. New use to bear the same shortage as that associated with the converted use; and

3. Secretarial apportionment with no stated basis included in the

contract.

60
It is recommended that (1) hydrologic studies and water service contracts

reflect an equal sharing of shortages by all water users; exceptions to

this policy will require approval by the Commissioner; and (2) when a

water user demonstrates a need for a firm annual water supply, and there

is adequate water available, the user-be~permitted to contract for the

quantity of water required, possibly at a premium rate, to meet his

needs in a water deficient year

.

The contractor would be required to pay for this water even if not used.

If the contractor did not require the water, the United States would

have the right to market it or otherwise use it on an interim basis and

retain the revenue.

61
RESERVE FUNDS

w.

BACKGROUND

The accumulation and maintenance of reserve funds by contracting entities

is sound fiscal management ensuring the entities’ capability to meet

operational and financial commitments. Some States statutes prohibit

the accumulation of reserve funds except for specific purposes. The

requirement for the establishment of a reserve fund in a contract between

a contracting entity and the Bureau of Reclamation provides an acceptable specific purpose.

Emergency reserve funds are established to cover unforeseen and extraordinary costs such as a major canal break or extensive flood damage.

Replacement reserve funds cover replacement of certain designated major

units of property with relatively short lives. Repayment reserve funds

are those that require the accumulation of funds to assure the payment

of future obligations.

Emergency Reserve Fund - Most of the contracts executed by the Bureau of

Reclamation in recent years involving federally financed irrigation

facilities have required the establishment of emergency reserve funds.

The amount of the emergency reserve fund is generally related to the

estimated average annual operation and maintenance cost, not including

costs for pumping energy, which will be incurred annually by the

62
contracting entity. Also to be considered are the types of facilities

and their operation, which may warrant a larger fund.

Emergency reserve funds are generally accumulated by equal annual deposits

during the project’s first 10 years and restored at a similar rate if

tire fund is depleted. No reduction is made in the required annual

repayment obligation during accumulation or restoration of the fund

since expenditures into the fund are considered to be a part of the

average estimated annual O&M cost. The fund should be used only for

meeting major unforeseen costs for repair or reconstruction due to

special stresses to the system such as would be caused by flood damage

and not for extensive rehabilitationor betterment since it is intended

that the estimated average annual O&H payment provides a sufficient

level of maintenance to perpetuate the life of the project facilities.

Replacement Reserve Fund — To cover the cost of replacing designated

major items of property, an annual deposit to create a sinking fund is

sometimes a contractual requirement. Where the annual replacement is

relatively small, the Bureau has not required the accumulation of a

replacement reserve fund.

The replacement of movable equipment such as trucks, tractors, and

draglines, in addition to many minor items of property, is also provided for as a part of the estimated average annual OM&R costs. In

these instances, contractual replacement reserve funds are not required.

63
Many districts establish separate reserves of their own volition for

financing such replacements.

Repayment Reserve Fund - Repayment reserve funds have been required in a

few instances when there was a considerable variation in the contractor’s

amortization ability over time. This situation may occur due to fluctuations in water supplies and political considerations in assessments of

ad valorem taxes. Requirements for accumulation and restoration of such

funds have been handled on a case—by—case basis.

CONTRACThAL REQUIREMENTS FOR RESERVE FUNDS

The accumulation of an emergency reserve fund should be mandatory for

all contracting entities operating Reclamation facilities; however, the

need for replacement and repayment reserve funds should be determined

on a case—by—case basis

.

As a guide for determining the magnitude of these funds, the attached

tabulation, designated Figure 3, should be used. In computing payment

capacity, payments into the replacement reserve fund should be

considered. Contracts should contain a provision that interest

which accrues from replacement reserve funds will remain in

the fund and, in effect, reduce the annual required deposits by the

64
water users. The need for and size of a repayment reserve fund should

be determined an a case-by-case basis.

The need for increasing the size of an existing, or establishment of a

new reserve fund to finance rehabili-tation and betterment programs,

which may be required at a future date, has been recognized. However,

no real purpose would be served by this requirement because the amortization capacity of the irrigators is decreased by the estimated amount

of the operation, maintenance, and replacement expenditures, so a requirement for increasing the size of these funds would result in a corresponding

reduction in the amount of the project construction cost- that could be

repaid annually. Also, in the early years of a new project, accumulation

of an amount to cover the cost of future rehabilitation work does not

appear as necessary as it has in the past in view of current improved

standards of construction and materials. Financing future rehabilita-

• tion and betterment work from reserve funds does not appear to be an

economic alternative, and it is recommended that such financing continue

under present arrangements.

65
Examples of Use of Reserve Fund

Total Annual OMR&P $143,900

Less P (Pumping energy cost) 6,400

Net OM&R $137,500

R $600

Ratio of R/OM&R 0.4%

Guide (see

$100,000

20,000

$ 80,000

$3,000

3.8%

Figure 3)

$56,000

3,600

$53,200

$5,400

10.2%

Minimum emergency reserve

fund accumulation

Minimum annual deposit to the

Replacement Reserve Fund

$ 62,000 $ 51,000 $37,000

— $2,500

66
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