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# California-Great Basin

Welcome to the Bureau of Reclamation California-Great Basin

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              - Ratesetting Process Overview
              - Annual Accounting

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## Annual Accounting

The following flowchart depicts the timeline for completing major tasks associated with the annual accounting phase of the ratesetting process. For detailed information, click on the task or scroll down the page.

**Definition**. Annual accounting is the process of determining each contractor's net financial position for the fiscal year just ended. This process accounts for each contractor's recorded water revenues against costs and applicable interest allocated to the contractor based upon their respective water deliveries. The outcome of the annual accounting process is the contractor's final Net Results of Operations for the year just ended. The Net Results of Operations is subsequently documented in the M&I and Irrigation Ratebooks, Volume 1. In any given year, the Net Results of Operations may result in either a deficit or a surplus for the year. Such results are combined annually with previously accumulated deficit and/or surplus balances to establish updated accumulated balances as of the fiscal year just ended.

**Purpose**. The annual accountings provide financial information necessary to determine contractors' repayment status which is then used in calculating water rates for the forthcoming water year.

**Background**. Annual contractor accountings are performed under both CVP ratesetting policies. These accountings track project repayment status by individual water contractor to include outstanding deficits. Prior to the Coordinated Operations Act of 1986 (COA), deficits were pooled on a CVP-wide basis. However, Section 106 of the COA established several new requirements pertaining to CVP O&M deficit accounting. Specifically, Section 106 requires Reclamation to:
> 
1. Include provisions in each new or amended CVP water service contracts to ensure repayment of O&M deficits "outstanding and hereinafter arising" incurred by a CVP contractor. To determine such deficit amounts by individual contractor, Reclamation conducted an individual accounting of all O&M and capital costs for the period 1949 - 1985 to determine annual and accumulated surpluses or deficits at the end of each fiscal year for each M&I and irrigation water service contractor. These annual accountings are also performed for years after fiscal year 1985.

SPECIAL NOTE: While these accountings establish deficit and/or surplus repayment positions to date, such deficits are not legally binding on fixed rate and adjustable rate contractors until they amend or renew their contracts. The Net Results of Operation are attributed to individual fixed rate and adjustable rate contractors only in the sense that they are the current revenue source for the water.

2. Charge interest on all O&M deficits arising on or after October 1, 1985, using specified interest rates. The main impact of this provision was on irrigation, as until this time, no interest was charged on annual irrigation O&M deficits. M&I has always been treated as an interest bearing function consistent with authorizing legislation and Reclamation policy.

For purposes of the annual accounting process:
            - An annual M&I deficit is defined as "the excess of allocated annual O&M and applicable interest expense on water deliveries under a contract over revenues earned from the sale of water under that contract". The accumulated M&I deficit is the deficit balance accumulated from inception of the contract through the most recent accounting period.
            - An annual M&I O&M surplus is defined as "the excess of revenues earned from the sale of water under a contract over annual O&M and interest expense allocated to water deliveries under that contract." Annual surpluses are either used to repay accumulated deficits or applied to capital repayment.

These definitions are the same for irrigation except that interest is not included as an annual expense.

For both M&I and irrigation, the capital obligation is the total capital costs allocated to a contract based on 50 years of historical and projected water deliveries. To the extent capital repayment has been accomplished, the current capital obligation reflects such repayment, and capital rates are computed on only the unpaid capital obligation to date.

The total of all individual annual accountings for the period 1949 -1985 is an overall deficit balance for the CVP since virtually all contracts during that period were nonadjustable fixed rate contracts that did not generate sufficient revenue to cover annual allocated O&M and interest (as applicable) costs. This initial deficit represented the cumulative difference over time between fixed rate revenues and the actual cost of delivering the water. This includes Reclamation costs as well as certain costs incurred by the Western Area Power Administration (WAPA) and the U.S. Army Corps of Engineers.

**Process**. The annual accounting process begins after fiscal year end on September 30 annually and is planned for completion the following February. However, the completion date may extend beyond February depending upon various circumstances, including audit findings, changes in policy or retroactive or current year adjustments required as a result of contractor input. The process is as follows:

*Last Updated: 8/3/20*

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