IRRIGATIOU RATESETTING DOCUMENT

CENTRAL VALLEY PROJECT

CALIFORNIA

Description of the

Component With Individual Contractor Deficits

Ratesetting Method

1988

Bureau oiT Recl0.mation

Mid—Pacific Region

Sacramento, California

C.- •‘
CONTENTS

PURPOSE AND BACKGROUND I

Background. . 1

CVP Legislative History. . 1

History of CV? Water Ratesetting Policies. 3

1940 — 1969 3

1970 — 1980 3

1981 — 1983 5

1984 — Present 6

CVP COST ALLOCATION PROCEDURES 8

RATESETTING POLICY DESCRIPTION 9

Legal and PolicyConsiderations 9

Policy Provisions 9

COMPONENT WITH INDIVIDUAL CONTRACTOR DEFICITS

RATESETTING METHOD 12

Description of Ratesetting Method 12

WATER RATE CALCULATIONS 17

SCHEDULE 1 — CV? IRRIGATION FULL O&M, COST OF SERVICE

AND FULL COST (INCLUDING FULL O&K) WATER RATES PER

ACRE—FOOT BY CONTRACTOR FOR 1988 IS

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PURPOSE AND BACKGROUND

The purpose of this document is to present the procedures and

methodologies utilized in calculating water rates for the Central

Valley Project CCV?) under the Component with Individual Contractor

Deficits Ratesetting Method and to provide a brief history of the CV?

and the different ratesetting methods that have been utilized since

its beginning. Also included is a description of the cost allocation

procedures used in the CV?, a description of many of the premises

included in the ratesetting method and a detailed description of the

procedures utilized in computing water rates under the Component with

Individual Contractor Deficits Ratesetting Method.

Background

The CV? was first authorized by the California Legislature as a State

project. Approved by the Governor on August 5, 1933, the CV?

immediately became the subject of a State referendum petition which

required that the CV? be approved by the electorate. The election was

held in December 1933, and the CV? was approved by the voters.

State officials then turned to the problem of financing the CV?. The

State Legislature had authorized the sale of public bonds as a means

of financing the construction of the CV?, but the public bonds were

found to be unmarketable. Requests for Federal grants and loans to

aid in the financing of the CV? were submitted and turned down.

Because of the financing difficulties, State officials then asked the

Federal Government to undertake construction of the CV?.

CV? Legislative History

The U.S. Congress authorized construction of the initial CV?

facilities in the River and Harbors Act of August 30, 1935 (49 Stat.

1028, 1038). The Act authorized the U.S. Army Corps of Engineers to

construct the following project facilities: the Shasta, Keswick and

Friant Dams, the Tracy Pumping plant, the Delta—Mendota and

Friant—Kern Canals, and the Contra Costa Canal and related facilities.

On September 10, 1935, the President signed an Executive Order which

transferred $20 million of Emergency Relief Act funds •to the

Department of the Interior for construction of Friant Dam and the

other features of the initial CV?. The finding of feasibility on

which to base the reauthorization of the CV? under provisions of the

Reclamation Act of June 17, 1902 (32 Stat. 388), and all acts

amendatory and supplementary thereto, was approved by the Secretary of

the Interior and the President on October 26, 1935 and December 2,

1935, respectively.
Congressional reauthorization of the initial CV? facilities under

Reclamation law was provided for in Section 2 of the River and Harbors

Act of August 26, 1937 (50 Stat. 844) and in the River and Harbors Act

of October 17, 1940 (54 Stat. 1198). Since then, the Congress has

authorized the construction and operation of several additional CV?

units, divisions and facilities.

In many cases, the legislation authorizing the construction and

operation of a new CV? unit, division or facility included language

reauthorizing the entire CV?. Regardless of whether or not the entire

CV? was reauthorized, however, the authorizing legislation

consistently contained language requiring the new unit, division or

facility to be operated and repaid as an integral part of the CV?.

Additional units and facilities authorized as integral parts of the

CV? include: the American River Division (Folsom, Nimbus, and Sly Park

Dams and related facilities) (Act of October 14, 1949, 63 Stat. 852);

the Sacramento Valley irrigation canals (Red Bluff Diversion Dam,

Corning Canal, and Tehama—Colusa Canal) (Act of September 26, 1950, 64

Stat. 1036); the Trinity River Division (Act of August 12, 1955, 69

Stat. 719); the San Luis Unit (June 3, 1960, 74 Stat. 156); the New

Melones, Hidden and Buchanan Projects (October 23, 1962, 76 Stat. 1191

and 1192); the Auburn—Folsom South Unit (Act of September 2, 1965, 79

Stat. 615); the San Felipe Division (Act of August 27, 1967, 81 Stat.

173); the Black Butte Project (Act of October 23, 1970, 84 Stat.

1097); and the Allen Camp Unit (Act of September 28, 1976, 90 Stat.

1328).

Water supplies produced by the CV? are marketed primarily pursuant to

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

Act provides the basic concepts and provisions included in all CVP

repayment and water service contracts. In addition, the Acts of July

2, 1956 (Public Law 84—643, 70 Stat. 483) and June 21, 1963 (Public

Law 88—44, 77 Stat. 68) contain provisions applicable to the renewal

of Federal Reclamation water service contracts.

The Reclamation Reform Act of 1982, (Public Law 97—293, 96 Stat. 1263)

was signed by the President on October 12, 1982. While retaining the

basic principle of limiting the amount of owned land which may receive

irrigation water deliveries from Reclamation projects, the Act

introduced the concept of full—cost pricing (including interest on the

unpaid plant investment) for certain irrigation water deliveries to

leased lands.

The Act of October 17, 1986, (Public Law 99—546), was signed by the

President on October 27, 1986. This Act codified certain existing CV?

ratesetting practices (such as the automatic adjustment of water rates

in new and/or amended contracts to ensure payout of the existing

Federal investment by the year 2030) and provided for some new CV?

ratesetting provisions including the last sentence in Section 105 with

respect to the adjustment of individual contractor’s ability to pay

determinations every five years and Section 106 which requires that

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each new or amended contract for the delivery of water from the CV?

include provisions requiring each contractor to pay any annual deficit

incurred by that contractor together with interest on any such deficit

which arises on or after October 1, 1985.

History of CVP Water Ratesetting Policies

1940 — 1969

The first CV? water service contracts were negotiated and entered into

during the late 1940’s. The initial CV? water rate structure

consisted of a graduated scale, ranging from $2.00 per acre—foot for

irrigation water in the Sacramento Valley (near the source of supply)

to $3.50 per acre—foot for irrigation water service in the San joaquin

Valley (south of the Delta formed by the Sacramento and San Joaquin

Rivers). The same water rates applied to all of the contractors in

each service area regardless of the contract date. While contracts

did not include provisions for rate changes, uniform contract

expiration dates were used in some service areas in order to

facilitate service area contract negotiations upon renewal.

The San Luis Unit was authorized in 1960 based on a feasibility report

which contained an irrigation water service rate of $7.50 per.

acre—foot. This rate was included in the San Luis service area

contracts with the rate remaining constant throughout the 40—year term

of the contracts.

By the mid—1960’s, the repayment status of the CV? indicated that

water rates were too low and that fixed rate contracts for 40 years

would not produce sufficient revenues to recover both increasing

annual operating costs and the sunk capital investment costs. Steps

were taken to modify the ratesetting policy for new contracts in order

to provide for rate adjustments during the term of each new contract

and ensure the recovery of the escalating cost of operations.

1970 — 1980

Major revisions to the CV? ratesetting policy were proposed in 1970.

Under that proposal, irrigation water service rates would be based on

75 percent of the irrigator’s available payment capacity, but the rate

structure would include separate segments for annual operating costs

and capital investment costs. The annual operating cost segment was

to be adjustable at 5—year intervals in order to facilitate the full

recovery of actual operation, maintenance and replacement expenses.

The capital segment was to be adjusted in the 20th and 30th years of

the 40—year water service contract, and the adjustment was to be based

on a reevaluation of the irrigator’s payment capacity in each of those

2 years.

The 1970 ratesetting policy proposal was based on three major

component charges for services provided by the CV?:

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—— A Delta Service Charge for storage north of the Delta. This

component would be subject to change in 1996 and every 5 years

thereafter, with a maximum change of 20 percent for each 5—year

adjustment. Further, financial assistance in the form of

municipal and industrial water supply revenues was specifically

included in the irrigation water rate calculations. The amount

of aid was limited to 20 percent of the total revenue credited

for repayment of the Delta service costs. The 1996 date was

selected because it coincided with a major portion of the CVP’ s

municipal and industrial water contract renegotiations.

—— A Conveyance Charge to reflect the contractor’s share of CV?

costs associated with the specific conveyance facilities being

used to serve the contractor. This component was adjustable 5

years after the initial water delivery date and at the end of

each 5—year period thereafter.

—— A Pumping Charge for the use of CVP pumping facilities in the

delivery of water to the contractor. The pumping charge was

adjustable at the same time as the Delta Service Charge.

Implementation of the irrigation portion of the 1970 pr6posed policy

never occurred because there were no new CV? irrigation contracts

executed between the completion of that policy and 1974 when revisions

to the ratesetting policy were adopted.

In 1974, the concept of dete~mining CVP water rates based on the

actual cost of providing water service to each contractor

(cost—of—service) was introduced. Under this concept, water rates for

new contracts were to be equal to the lesser of the cost—of—service or

the irrigator’s payment capacity. The repayment of irrigation capita].

costs that were beyond the irrigator’s ability to ‘nay were to be

recovered from the surplus revenues Erom power and municipal and

industrial water sales.

In the cost—of—service concept, the single or “pooled” storage

procedure was extended from just those north of the Delta (Delta

Service Charge), to the pooling of the costs of all of the CV? storage

reservoirs. Therefore, all CV? water users would share equally (on a

cost per acre—foot basis) in the repayment of total CV? storage costs.

It was proposed that all conveyance charges would be “pooled” and a

single CVP—wide charge would be made for conveyance services received.

Accordingly, all contractors requiring conveyance services would also

share equally (on a cost per acre—foot basis) in the repayment of the

conveyance costs of the CV?.

Along with this major change in the rate determination process, all

new CV? water service contracts executed during the period 1974

through 1978 included some form of provision for water rate

adjustments. Between 1979 and the enactment of the Reclamation Reform

Act of 1982, all new CV? irrigation water service contracts

included a provision for rate adjustments at 5—year intervals.

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Another major revision in the irrigation ratesetting policy was the

establishment of a minimum CVP water rate of $3.50 per acre—foot.

That rate was deemed sufficient when it was established as the rate

met all costs associated with the delivery of CV? water from storage.

It was anticipated that over time the minimum charge would have to be

adjusted to reflect increases in project construction costs and annual

operating expenses.

In January 1978 and September 1979, the Office of the Inspector

General of the Department of the Interior issued audit reports which

were critical of several of the water marketing, financial and

ratesetting practices in the CVP. These reports stated that all of

the reimbursable functions of the CV? were in serious financial

trouble and would continue to be so unless basic operation policies,

contract terms, rate adjustment provisions and, possibly, existing

laws were changed. The audit reports stated that the problem was the

cumulative result of actions taken during many years and that the

Bureau of Reclamation, the Department of the Interior and Congress

must share the responsibility for this situation.

1981 — 1983

In January 1981, a draft CV? ratesetting policy was released for

public review and comment. The draft policy included four types of

service charges: water marketing, storage, conveyance and project

pumping. The charge for each service included components for recovery

of the applicable capital and annual operating costs. The total rate

to be applied to each water user depended on the number of CV?

services required to deliver water to that particular contractor. The

per acre—foot irrigation charge was based on the lesser of the actual

cost—of~-service or the irrigator’s payment capacity, but in no case

was the irrigation rate to be less than the actual operation,

maintenance and replacement expenses. In addition, the draft policy

included the $3.50 per acre—foot minimum charge for CV? irrigation

service.

The 1981 draft policy provided for the repayment of CV? costs

allocated to irrigation within 50 years from the time each major CV?

addition became operational. Under this concept, revenues in excess

of actual operating expenses were applied towards the repayment of the

older additions first, thereby meeting the “repayment within 50 years”

criterion. The water deliveries used in the water rate calculations

were th.e total of •the most recent forecast of CV? irrigation

deliveries for the next 50 years, beginning in the year in which the

calculations were made. The deliveries in any given year were subject

to the maximum available capacity of the CV? facilities included in

the cost base.

Also included in the draft ratesetting policy was a provision for rate

adjustments every 5 years.~ Accordingly, the water service rate for

each contractor would be adjusted every 5 years to reflect the plant

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investment projected to be in—service during the next 5—year period

and the annual operating expenses associated with the in—service

facilities. In this way, each irrigation water user would be paying

for an equitable share of the CV? services expected to be made

available during the 5—year period.

?ublic hearings on the draft CV? water ratesetting policy were held at

several locations, and a formal comment period was established for the

purpose of obtaining input on the draft policy from CV? water users,

various governmental entities, special interest groups and the general

public. Many comments were received and most of them suggested that

modifications to the proposed policy were needed or that other

ratesetting options should be considered.

By memorandum dated April 10, 1981, the Office of the Inspector

General stated that the draft ratesetting policy resolved some, but

not all, of their audit concerns. The unresolved issues have remained

as such in the Inspector General’s semiannual report on outstanding

issues.

The draft 1981 ratesetting policy was further impacted by the

enactment of the Reclamation Reform Act of 1982, which included

several financial and repayment requirements that were neither

provided for, nor envisioned, in the draft proposal.

1984 — ?resent

In response to the above described factors, the draft 1981 ratesetting

policy was reanalyzed1 proposed methodologies were revised to reflect

the •public comments previously received, principles and requirements

of the Reclamation Reform Act of 1982 (RRA) were incorporated and

alternative ratesetting methods were developed. The resulting

ratesetting proposal provided several optional methods and was

released for public review and comment in April 1984. In May 1984,

public workshops were presented in three different locations to

discuss the ratesetting methods and to answer questions. Subsequently,

three formal public hearings were held to receive testimony and

comments and all comments and statements received at the public

hearings were recorded for use in finalizing the ratesetting approval.

The formal comment period was extended twice because of the interest

and efforts demonstrated by the persons reviewing the ratesetting

proposals. On September 21, 1984, the comment period officially

closed and the internal finalization of the ratesetting policy began.

The CV? water users, governmental entities, special interest groups

and other interested parties provided extensive comments on the

ratesetting options included in the April 1984 proposal. In response

to these comments, the Bureau developed and evaluated several

additional ratesetting methodologies. The number of optional CV?

ratesetting methods was eventually reduced to the six considered the

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most viable. After water rates were calculated under each of these

six ratesetting methods, each of the methods received extensive review

and analysis at both the Regional and Washingtdn levels.

In the final stages •of these evaluations, the Congress enacted ?ublic

Law 99—546. Section 106 of that ?ublic Law mandated the determination

of individual contractor repayment and/or deficit balances and

precluded the adoption of CV? ratesetting options previously under

consideration that would have pooled operation and maintenance

deficits CV?—wide for repayment. Additionally, this ?ublic Law

provided that interest would be calculated on operation and

maintenance deficits accruing on or after October 1, 1985.

On May 4, 1987, the Assistant Secretary of the Interior for Water and

Science proposed the Component with Individual Contractor Deficits

Ratesetting Method as the new irrigation ratesetting policy for the

CV?. Adoption of the proposed policy was subject to the results of a

60 day public review and comment period with the policy to become

final in 120 calendar days unless the public comments justified

reconsideration of the proposed policy.

Informal workshops to further explain the proposed ratesetting policy

and the applicable supporting calculations were held on June 1 and 4,

1987 and a public hearing was held on June 16, 1987. A total of 397

public comments were received which were determined to be applicable

to various provisions of the proposed ratesetting policy or applicable

Reclamation laws. All comments applicable to the proposed ratesetting

policy were reviewed, summarized and collated into a document entitled

“Summary of Irrigation Ratesetting ?olicy ?ublic Review Comments and

Responses”. This document summarizes the 397 public review comments

into 91 general comments and provides responses to each of the

generalized comments.

After a thorough review of the comments, it was determined that the

expressed concerns were not significant enough. to justify

reconsideration or amendment of the proposed ratesetting policy. A

copy of the “Summary of Irrigation Ratesetting ?olicy Public Review

Comments and Responses” will be sent to each of the participants in

the public review process upon formal approval of the proposed

ratesetting policy.

As of March 1, 1988, the Component with Individual Contractor Deficits

Ratesetting Method is in the offices of the Secretary of the Interior

for adoption as the irrigation ratesetting policy for the CV?.

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CV? COST ALLOCATION ?ROCEDURES

The cost allocation of the CV? Dlant—in—service investment is reviewed

and updated annually to reflect: any additions to, or retirements

from, the plant—in—service investment account; the adjustment to the

historic data base to reflect another year’s actual CV? water and

power deliveries; and any changes in the water and power deliveries

projected to be made during the remainder of the 50—year repayment

period (based on the in—service date of the last major facility). A

general description of the plant—in—service investment cost allocation

process is detailed below.

Plant—in—service investment costs are first allocated among the

authorized CV? purposes (e.g., flood control, navigation, water supply

and power). Costs allocated to the water supply purpose ae then

suballocated among various functions, one of which is irrigation,

based on each function’s proportionate share of the total of the past,

present and future CV? water deliveries. Similarly, CV? hydroelectric

power generation and transmission costs are suballocated between

commercial sales and CV? project use functions based on each

function’s share of the total past, present and future CV? power uses.

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

suballocated among various CV? water supply functions (including

irrigation) based on each function’s share of the total of past,

present and future CV? project use power uses.

Actual annual operating expenses are allocated at the close of each

fiscal year. At year end, operation, maintenance and replacement

costs incurred by the CV? during the previous 12 months are allocated

among the authorized project purposes and then suballocated within the

water supply and power functions. However, instead of allocating

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

as described above, the allocation is based on each function’s share

of the CVP water and power deliveries made during that year.

The plant—in—service and operation expense allocations are used to

determine the water supply and project use power costs allocated to

the irrigation and municipal and industrial functions and detail the

costs to be recovered from these two functions through the water

service rates.

j

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RATESETING POLICY DESCRIPTION

Legal and ?olicy Considerations

The policy responds to the concerns of the Office of the Inspector

General. That office has reviewed the proposed policy (as well as

various other ratesetting options) and has found that the Component

with Individual Contractor Deficits Ratesetting Method will satisfy

that office’s recommendations contained in the CV? audit reports of

January 1978 and September 1979 with respect to the repayment of CV?

costs allocated to the irrigation function.

The formulation of the ratesetting policy is a Federal action

qualified for a categorical exclusion from formal compliance with the

National Environmental Policy Act of 1969, pursuant to 516 DM 6,

Appendix 9.4.D(5).

The ratesetting policy anticipates that only a limited amount of power

revenue assistance will be required to repay the irrigation function

of the CV? by the end of the year 2030.

The Office of the Solicitor has reviewed the ratesetting policy and

found it to be legally sufficient with respect to Reclamation Law,

including Sections 105 and 106 of ?ublic. Law 99—546.

Policy Provisions

The provisions of the Component with Individual Contractor Deficits

Ratesetting Method include the following:

— The policy will recover the United States’ investment, including

any operation and maintenance deficts applicable to CV? contracts,

within a definite 50—year repayment period terminating in year 2030,

as required by Section 105 of ?ublic Law 99—546. This block repayment

method supercedes the previous “rolling repayment” method used for

computing CV? water rates.

— New 50—year repayment periods will be established for the

capital cost of major rehabilitations and new facilities added to the

CV?. All other construction and rehabilitation costs affecting

existing facilities will fall within the initial 50—year repayment

period ending in year 2030.

— Individual contractor accounting is maintained for repayment

accountability, and O&M deficits are accumulated for and will be

repaid by each contractor under the terms of each new or amended

contract, as required by Section 106 of ?ublic Law 99—546.

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— The policy honors the provisions of existing CV? water service

contracts and requires the application of cost—of—service water rates

for all new and renewed water service contracts and amended contracts

described in section 203(a)(2) of the RRA. The policy also provides

for the automatic adjustment of cost—of—service water rates on an

annual basis. This is in accordance with Section 105 of Public Law

99—546.

— The rate computation procedures are based on cost—of—service

with capital costs amortized over a 50—year period. Water rates are

based on the “pooled and averaged costs” approach in accordance with

the “operationally and financially integrated project” concept

initially established by Congress and reaffirmed each time the CV? was

reauthorized to include a new unit.

— There are no minimum rates (such as the $3.50 previously used in

the CV?). Cost—of—service rates are used unless the contractor’s

ability to pay is limited by a documented payment capacity limitation

(payment capacity limitations are discussed subsequently). The

cost—of—service rates reflect credits for past capital payments and

miscellaneous receipts.

— The cost—of—service water rates apply to all types of water

within the CV?, including Class 1, Class 2 and the storage and/or

conveyance of non—project water in CV? facilities. All CV? irrigation

cost—of—service and full cost pricing determinations are made in

accordance with the ratesetting policy.

— The cost—of—service water rates are composed of a unique

assembly of cost components frequently referred to as “cost pools.”

Each contractor pays a water service rate encompassing a proportionate

share of the cost pools associated with the specific service required

to provide that contractor with CVP water. A description of the

various cost pools involved is presented subsequently.

— All of the costs of those CV? facilities in—service are included.

in the irrigation water rates. The cost of facilities not being fully

utilized (unused capacity) are only deferred if Congress has

specifically authorized the deferral of these costs.

— The ratesetting policy continues to recognize the ability to pay

concept that has been used for a number of years in irrigation water

contracting. Under this cdncept, the actual charge to the individual

contractor will be the lesser of the cost—of—service, or 100 percent

of the individual contractor s payment capacity. At a minimum,

however, the water rate charged will cover the operation and

maintenance costs applicable to the delivery of water to the

contractor. The difference between the individual contractor’s

cost—of—service water rates and ability to pay will be assigned to the

power function for repayment.

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Where there is a question about the individual contractor’s

ability to pay, the contractor can prepare, or have prepared at his

-expense, an acceptable payment capacity analysis. The contractor

will be responsible for the Bureau’s costs in reviewing and approving

the analysis.

— All new or amended contracts will contain provisions for

redetermination and adjust of contractor’s ability to pay at 5—year

intervals, pursuant to Section 105 of ?ublic Law 99—546. As a

minimum, the water rate will cover the annual 0&M costs applicable to

water delivery if payment capacity is employed as the ratesetting

criteria.

— Interest will be charged on all O&M deficits incurred on or

after October 1, 1985, pursuant to Section 106 of Public Law 99—546.

Transactions (either net repayment or deficits) prior to that date

will not be considered in determining the interest bearing deficit

amount although subsequent transactions will impact the interest

bearing deficit and the applicable interest calculations.

— The rate of interest to be applied to the O&M deficits will be

determined annually by the Departmentof the Treasury in accordance

with the criteria provided in Public Law 99—546. The rate will be

applied using compound interest procedures to any contractor’s deficit

accruing or accumulating on or after October 1, 1985.

— The costs of isolated or out—of—basin facilities are the direct

repayment responsibility of the contractor (or group oE contractors)

who benefit from the services provided by the facilities.

Accordingly, repayment for operation of isolated or out—of—basin

facilities, such as those associated with the San Felipe Unit located

west of the Gabilan Mountain Range near Monterey Bay, will not be

shared by the other CVP contractors, but will be paid for by the

out—of—basin contractors.

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COMPONENT WITH INDIVIDUAL CONTRACTOR DEFICITS

RATESETTING METHOD

Description of Ratesetting Method

The Component with Individual Contractor Deficits Ratesetting Method

provides for a block repayment procedure with 50 years to repay all of

the costs included in that block of costs. This method abandons the

historic procedure of extending the repayment period of the entire CVP

each time a new facility is added to the CVP (this was known as the

rolling repayment or rolling 50 procedure).

While it is expected that construction will continue for some time on

the CV?, the initial construction period for repayment purposes is

calculated from the date the most recently completed major CVP

facility (the New Melones Dam and Reservoir) was included as a part of

the CV?. Therefore, the plant—in—service costs at the end of fiscal

year 1980 must be repaid within 50 years, or by the end of fiscal year

2030: This period conforms with the time frame specified by Public

Law 99—546. New repayment periods will be established for the capital

costs of major rehabilitations and new facilities or units added to

the CV?. However, all other construction costs affecting existing

facilities will fall within this initial 50—year repayment period.

The Component with Individual Contractor Deficits Ratesetting Method

includes individual contractor repayment or deficit balances in the

determination of contractor water rates. The terms “deficit” or

“operation and maintenance deficit” refer to the accumulation of

annual operation and maintenance costs in excess of the annual water

service payments made under a contract with a particular entity. In

the aggregate, the irrigation account of the CV? has a positive

balance, although that balance has been eroded during years in which

annual operation and maintenance deficits have occurred. The terms

“repayment” or “net repayment” refer to the accumulation of the annual

water service payments in excess of that applied towards operation and

maintenance expenses. The revenues in excess of operation and

maintenance expenses is accumulated and applied to reduce the balance

of outstanding construction costs.

Under the Component with Individual Contractor Deficits Ratesetting

Method, the individual contractor irrigation water rates depend upon

the extent and type of services provided by the Bureau of Reclamation

(Bureau). The water rate applicable to each contractor consists of a

number of cost components (or cost pools) which correspond to the

water services provided by the Bureau. Each contractor’s water rate

consists of a composite of pooled CVP—wide rates, pooled service area

rates, and individual rates to recover costs specific to certain

contractors.

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The cost pooling approach has been used in determining CV? irrigation

water rates since the 1940’s in accordance with the language of the

legislation authorizing the CV.? and perpetuated by subsequent

legislation which provides for the continuation of the operational and

financial integration of the CV?.

There are seven potential cost components that are totaled to

determine a contractors s irrigation water rate under the Component

with Individual Contractor Deficits Ratesetting Method. These cost

components are: water marketing, storage, conveyance, conveyance

pumping, San Luis Drain, direct pumping and adjustment for historic

individual contractor repayment or deficit balances. The storage,

conveyance, conveyance pumping, San Luis Drain and direct pumping

components include rates to recover both operation and maintenance

(including replacements) expenses and capital costs.

Description of each of the seven potential costs components that ~‘re

totaled to determine a contractor’s irrigation water rate under the

Component with Individual Contractor Deficits Ratesetting Method

follow:

1. Water Marketing — The water marketing cost component reflects

the annual operating expenses of selling (marketing) CV? water. The

annual water marketing expenses are pooled CV?—wide and allocated to

all paid water for the fiscal year involved.

Paid water includes all CV? supplies to be delivered to the

long—termcontractors. It excludes water rights, mitigation and

other such water deliveries. Long—term contractors are the CV?

contractors who already have long—term water service contracts and

others who are expected to continue to receive CV? water on a regular

basis pursuant to annual or long—term contracts.

2. Storage — The storage operation and maintenance expense

component includes all of the expenses classified as storage,

including a pro rata share of the annual administrative and general

expense. Storage operation and maintenance expenses are pooled

CVP—wide and allocated to all contractors benefitting from CV? storage

by calculating a per acre—foot rate using the total paid water stored

in facilities operated and maintained by the Bureau during the fiscal

year involved.

Storage capital costs are pooled CV?—wide and allocated to all

contractors benefitting from CV? storage by calculating a per

acre—foot rate using the historic and projected long—term contract

deliveries applicable to the 50—year repayment period commencing in

1980.

The storage component also includes the costs of the Folsom Pumping

Plant, the San Luis Pumping—Generator facility and the Columbia Mowry

13
System. These pumping facilities are included in storage as they are

utilized to provide services which were eliminated by construction of

the applicable storage facilities or because their operations more

closely reflect a storage operation than a pumping operation.

3. Conveyance — The conveyance operation and maintenance expense

component includes all of the expenses classified as conveyance

including a pro rata share of the annual administrative and general

expense. Conveyance operation and maintenance expenses are pooled

CVP—wide and allocated to all contractors using CVP conveyance by

calculating a per acre—foot rate using the total paid water to be

transported through conveyance facilities operated and maintained by

the Bureau for the year involved.

Conveyance capital costs are pooled CVP—wide and allocated to all

contractors benefitting from CV? conveyance service by calculating a per

acre—foot rate using the historic and projected long—term contract

deliveries applicable to the 50—year repayment period commencing in 1980.

4. Conveyance Pumping — The conveyance pumping component includes

all of the costs of the Corning, Tracy and Dos Amigos Pumping Plants

and the O’Neill Pumping—Generator facility.

The conveyance pumping operation and maintenance expenses include

a pro ra~a share of the annual administrative and general expense and

are allocated to those contractors receiving conveyance pump2.ng

services by using a CVP—wide pooled rate per kWh with ~he difference

in allocated costs per acre—foot caused by the varying lift

requirements of the pumping plants. The greater the lift requirement,

the more energy required to pump each acre—foot of water and the more

pumping operation and maintenance expenses allocated to the applicable

individual contractor. Separate rates are calculated for each of the

pumping plants involved, and the rates for each of the pumping

facilities used by a contractor are totaled to determine that

contractor’s total conveyance pumping operation and maintenance rate.

Conveyance pumping capital costs for each of the four conveyance

pumping facilites are allocated to all contractors benefitting from

CV? conveyance pumping by calculating a per acre—foot rate for each

facility using the historic and projected long—term contract

deliveries through each facility during the 50—year repayment period

commencing in 1980. The rates for each of the pumping plants used by

an individual contractor are totaled to determine each contractor’s

applicable conveyance pumping capital rate.

A portion of the Tracy Pumping Plant’s capital costs and operation

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

contractors on the basis of the historic and projected deliveries to

the Delta Mendota exchange contractors applicable to the 50—year repayment

period. These costs and expenses are then allocated among the Friant—Kern!

Madera Canal contractors on the basis of their historic and projected

Class 1 water deliveries during the 50—year repayment period.

14
5. San Luis Drain — The San Luis Drain operation and maintenance

expense component incorporates all San Luis Drain expenses including a

pro rata share of the annual administrative and general expense. The

San Luis Drain operation and maintenance expenses are pooled and

allocated to the three contractors currently entitled to San Luis

drainage service (the Panoche, San Luis and Westlands Water Districts)

on the basis of each contractor’s San Luis Canal deliveries for the

year involved.

San Luis Drain capital costs are allocated •to the three contractors

currently entitled to San Luis drainage service on the ratio of each

contractor’s historic and projected long—term San Luis Canal

deliveries applicable to the 50—year repayment period to the total of

all, such deliveries.

6. Direct Pumping — The direct pumping component includes all of

the costs applicable to ~.hevarious canalside relift pumping ~lants

~iidt e other CV? pumping plants not operated by the Bureau including

those serving the Bella Vista WD (Wintu pumping plant), Contra Costa

WD (Contra Costa, Ignacio, and Clayton pumping plants), Westlands WD

(Pl~asant Valley pumping plant) and tr’e Cross Valley Contractors

(State Delta pumping plant — project use energy costs only).

All of the facilities included in the direct pumping component are

operated and maintained at no cost to the Bureau with the exception of

the cost of the project use energy provided. The project use energy

costs are isolated and charged directly to the individual contractors~

~ uC Lfle pumping-services

.

The CV? capital costs applicable to the direct pumping facilities is

also charged directly to the individual contractor receiving benefit

of the pumping service. Per acre—foot rates are determined for these

costs by distributing the capital costs to the historic and projected

long—term contract deliveries applicable to the 50—year repayment

period.

7. Adjustment for Historic Individual Contractor Repayment or

Deficit Balances — This component consists of the net result of the

comparison of each contractor’s annual water payments with their

allocated share of the operation and maintenance expenses for that

year. This component reflects the calculation of individual

contractor balances starting at the time each long—term contractor

first started taking CV? water. The balances in this component

indicate the result of individual contractor accounting.

Prior to the enactment of Public Law 99—546, interest was not charged

on operation and maintenance de~ficits. Accumulated annual payments

were netted against accumulated annual operation and maintenance

charges in order to establish each contractor’s net repayment or

deficit financial position through September 30, 1985. If the

contractor’s total payments exceeded the allocated operation and

15
maintenance expenses through September 30, 1985, the net difference

was considered repayment and was applied as a credit in determining

the contractor’s water service rate. This credit is still applied in

subsequent years to the extent that any deficits incurred after

September 30, 1985 have been repaid. If the contractor’s allocated

share of the operation and maintenance expenses exceeded the payments

through September 30, 1985, the contractor had an operation and

maintenance deficit which increased the contractor’s repayment

obligation and computed water rate.

Passage of Public Law 99—546 required the calculation of interest on

all operation and maintenance deficits accruing on or after October 1,

1985. This necessiated the development and maintenance of individual

contractor ledgers showing the operation and maintenance deficit or

repayment balance accrued as of September 30, 1985, and the annual

interest bearing operation and maintenance deficits (including

interest) incurred thereafter. An annual accounting of financial

operations will be made by contractor showing the result of that years

activities. The annual accounting of operation and maintenance

deficits by contractor will include interest accruing on a compound

basis at rates determined in accordance with the interest rate

criteria contained in Public Law 99—546. Annual interest calculations

are simplified by using a composite interest rate method which

reflects the weighted average of the various annual contractor

deficits and applicable interest rates.

The Region, has decided to accept, and encourage, voluntary payments

from individual contractors to avoid operation and maintenance

deficits and has developed implementing procedures for accepting,

handling and applying voluntary payments. These procedures allow the.

contractors to avoid incurring interest on operation and maintenance

deficits so long as voluntary payments are made in accordance with the

Region’s established voluntary payment procedures.

The Component with Individual Contractor Deficits Ratesetting Method

applies all annual water revenues by individual contractor in the

following priority:

— Current operation and maintenance expenses

— Interest expenses

— Interest—bearing operation and maintenance deficits

— Non—interest bearing operation and maintenance deficits

— Capital repayment

16
WATER RATE CALCULATIONS

Using the methods and procedures previously described, water rates for

each component and CVP long—term contractor are calculated annually.

Pending final approval, the Component with Individual Contractor

Deficits Ratesetting Method has been used on an interim basis to

calculate individual contractor CVP water rates for the 1984, 1985,

1986, 1987 and 1988 water years.

Upon final approval, the Component with Individual Contractor Deficits

Ratesetting Method will be used to calculate all CVP irrigation

cost—of—service and RRA full—cost water rates. These rate

determinations include provisions for annual operation and maintenance

expenses, amortized rates for the applicable construction costs and

rates to recover any accumulated O&M deficits (including interest

pursuant to Section 106 of Public Law 99—546) and adjustments for

individual contractor repayments to date. The full—cost rate also

includes an interest charge on unpaid capital costs in accordance with

the RRA.

A copy of the schedule showing the 1988 Full O&M, Cost—of—Service and

Full Cost water rates by CV? contractor is attached.

17
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