PROPOSED INTERIM RATESETF~ING POLICY

MUNICIPAL AND INDUSTRIAL WATER

CENTRAL VALLEY PROJECT - CALIFORNIA

PUBLIC REVWW DOCUMENT

DECEMBER 1993

United States Department of the Interior

Bureau of Reclamation

Sacramento, california
TABLE OF CONTENTS

INTRODUCTION

DESCRIPTION OF THE CENTRAL VALLEY PROJECT

ATTRIBUTES OF THE PROPOSED M&I RATESETTING POLICY

Description of Water Rate components:

Water Marketing . . .

Storage

conveyance

Conveyance Pumping

Direct Pumping

Interest

Deficits

EXHIBITS

Deferred Interest Method

Minimum M&I Rate

Recovery of M&I Investment

1 Present Value of Revenue Streams through 2030

Under the Proposed Policy

2 Determination of Deferred Interest Under the

Proposed Policy and Calculation of the Deferred

Interest composite Interest Rate

3 Schedule of 1993 contract Water Rate and Rate

at Contract Renewal per Acre—foot, By contractor

GLOSSARY

Pane

1

2

6

9

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10

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24

i
INTRODUCTION

This document provides a brief descript$on of the Central Valley Project

(Project) and the details of the proposed new municipal and industrial (M&I)

ratesetting policy (hereafter referred to as the Proposed Policy) for bhe

Project.

Throughout this document, a number of key terms are used which have specific

meanings in reference to the Proposed Policy. Definitions of these key terms

are provided in the GLOSSARY section of this document.

Accompanying this Public Review Document is a booklet entitled “1993 M&I Rates

for the central Valley Project.” This booklet (hereafter referred to as the

1993 M&I Rate Book) includes the following two sections:

—— The “A” Section includes the 13 major schedules used in developing the

1993 M&I water service rates. These interrelated schedules provide

details on the computations of rates for the 0&M, capital, deficit, and

interest elements of the water rates.

—— The “B” Section includes the primary schedules detailing the fiscal

year 1991 M&I accounting of operations by individual M&I contractor.

Public meetings will be conducted in appropriate locations in the Project

service area and oral and written com~nents on the Proposed Policy will be

obtained. The Proposed Policy will be revised as appropriate, in response to

the comments received. The Proposed Policy will then be submitted to the

Department of the Interior (Department) for final approval along with a

summary of the comments received, the Bureau of Reclamation’s (Reclamation)

responses and/or descriptions of the changes made to the Proposed Policy, and

appropriate environmental documentation required by the National Environmental

Policy Act (NEPA). The approved policy will be implemented as the new Project

M&I Ratesetting Policy.

An 14&I water ratesetting policy is needed for the Project in order to assure

that costs allocated to the M&I water function are repaid by the end of the

• Project repayment period. The Proposed Policy will meet this repayment

requirement. With minor variations, the Proposed Policy has been used on an

interim basis in setting the Project’s M&I water rates for the past several

years.
DESCRIPTION OF THE CENTRAL VALLEY PROJECT

The Project was authorized by the Act of August 26, 1937, and has since been

reauthorized several times to.include new features and operating measures..

The Project was designed for coordinated operation of its surface res~ervoirs

and canals with existing rivers, streams and ground water supplies. Project

operations are c8ordinated to maximize water yield and delivery and efficiency

of operations. The Project catches and stores the mountain runoff and,

through a complex web of storage and diversion dams, pumping plants, canals

and distribution facilities, delivers water throughout its authorized service

area.

The Project provides multiple benefits associated with water resources

management activities. Although initially developed for irrigation_and flood

control, the Project now supplies M&I water throughout the Basin, generates

hydroelectric power, provides water for fish and wildlife and water quality

enhancement, offers recreational opportunities, and provides other benefits

and services as well. The Western Area Power Administration of the Department

of Energy operates the power transmission features, while the power generation

features and all other Project functions are the responsibility of

Reclamation.

Passage of the Central Valley Project Improvement Act (CVPIA) in October 1992

increased the emphasis on operating the Project in a more environmentally

sensitive manner requiring improved water conservation and expanded use of

voluntary water transfers, and use of a balanced approach to meeting the

competing demands for Project water by fish and wildlife, agricultural, M&I,

and power components of the Project.

The Project’s plant in service costs were $3.01 billion as of September 30,

1991, $2.91 billion applicable to Reclamation’s facilities and $100 million

applicable to Western Area Power Administration power facilities.

Reclamation’s plant in service costs include $48S million for facilities

constructed by the Corps of Engineers which have been integrated into the

Project for operational and repayment purposes. The Project’s September 30,

1991, plant in service costs by type of facility are summarized in Table 1

below.

2
Table 1 —— Project Facilities in Service

at September 30, 1991

($ in millions)

Dams and Reservoirs $927

Power Generation and Transmission 299

Pumping / Generating Plants 73

Pumping Plants 182

Conveyance System 926

Distribution System 321

Drainage System 42

Fish and Wildlife Facilities 17

Recreation Facilities 14

Permanent Operating Facilities 42

Interest During Construction 42

Buildings and Equipment 29

Investigation and Development Costs 63

Other 33

TOTAL $3,010

Table 2 summarizes the capital investment allocated to the Project M&I water

supply function as of September 30, 1991. Estimated fiscal year 1993 O&M

costs allocated to the M&I water supply function are also shown in this Table.

3
Table 2 —— Costs Allocated to the M&I Water Supply Function

at September 30, 1991.

Capital Investment:

In—Basin Facilities

Storage

Conveyance

Conveyance Pumping . . .

Direct Pumping . .

Subtotal (1)

Out—of—Basin Facilities (2)

Deferred Interest Capitalized (3)

Total — As of September 30, 1991

$86, 328, 137

.89,116,171

8,942, 628

11,789.422

196,176,358

230,915,495

26.244.984

$453, 336 • 837

Estimated M&I 0&M Costs, Excluding Interest, for Year Ended

September 30, 1993:

Water Marketing

Storage Facilities

Conveyance Facilities

Conveyance Pumping

Direct Pumping

Total — Estimated for Fiscal Year 1993

$610,929

1,218,453

1,141,337

576,441

432.117

$3,979,277

(1) Project water storage and delivery system facilities

located in the Central Valley Basin of California.

(2) Project water delivery system located in the San Felipe

Division service area, which is outside the Central Valley Basin.

(3) Interest attributable to 1949 — 1987; capitalized and

deferred for repayment during 1988 — 2030. see page 12.

The capital investment cost allocation is updated each year to reflect

additions to and retirements from the plant investment account. Annual

updates may also reflect changes in forecasts of future Project water and

power deliveries.

4
The repayment requirements for the M&I water supply function are set forth in

Federal reclamation law. As shown in Table 3, the unpaid M&I repayment

obligation was about $513 million as of September 30, 1991.

Capital Costs to be Repaid by M&I Water Users

as of September 30, 1991

- Total In—Basin Out—of—Basin

Capital Investment

Deferred Interest

Subtotal (Table 2)

Accumulated Deficit

Total Repayment

Obligation

Capital Repayment

Unpaid Balance as of

September 30, 1991

$427,091,853

26. 244, 984

.453, 336, 837

75. 428, 001

528,764,838

<15.584,798

>

$513 • 180,040

$196, 176,358

26.244.984

222,421,342

54,748.238

27.7,169,580

<14.691.086

>

$262., 478,494

$230,915,495

230,915,495

.20,679,763

251,595,258

<893.712

>

$250,701. 546

Costs allocated to the H&I function are to be fully repaid by the end of the

authorized repayment period. The capital costs of the existing in—basin and

out—of—basin facilities are to be repaid by the end of their repayment periods

of 2030 and 2036, respectively, as explained on page 6. Capital investment

costs are repaid with interest. Anhual 0&M costs, including interest on

unpaid capital and deficits, which are not repaid within the year incurred,

become deficits and must also be repaid with interest.

The Proposed Policy will repay the unpaid balance amounts shown in Table 3

within the authorized repayment periods. Upon approval, the Proposed Policy

will be used to determine the individual contractor’s M&I water rates required

to repay these unpaid balances. While existing contract provisions will

continue to be honored during each contract’s term, the M&1 water rates will

be implemented as soon as possible throughout the Project.

Table 3 —-

5
ATTRIBUTES OF THE PROPOSED

M&I RATESETTING POLICY

Both the irrigation and ){&I functions of the Project are integral water

delivery operations governed by common requirements, criteria, and principles.

The integrated operations and common characteristics dictate consistency and

uniformity in the ratesetting policies for these two functions wherever

possible. Accordingly, the basic principles, criteria, and methodologies

established by the irrigation ratesetting policy provided the broad framework

upon which the Proposed Policy was based.

Two fundamental concepts underlie the Proposed Policy: Individual Contractor

Accounting, and Cost of Service water rates.

—— Individual Contractor Accounting refers to the determination of annual

water rates, the annual accounting for O&M and interest expenses and the

accumulation of deficit and/or surplus balances by individual contractor.

Under this concept, each contractor has repayment responsibility for the

costs applicable to its M&I water deliveries and, if a deficit occurs,

the individual contractor has continuing repayment responsibility for

that deficit. This concept was codified by Public law 99—546, which

requires annual accountings of net income or deficit for each individual

Project water contractor, as follows:

“The Secretary of the Interior shall include in each new

or, amended contract for the delivery of water from the Central

Valley project provisions ensuring that any annual deficit

(outstanding or hereafter arisin~1 incurred by a Central

Valley project water contractor in the payment of operation and

maintenance cost of the Central Valley project is repaid by

such contractor under terms of such new or amended contract . .

(underlining added)

—— Cost of Service refers to the determination of annual water rates

based on the Government’s cost of providing H&I water to the individual

contractor’s designated delivery point. This includes recovery, within

the authorized repayment period, of: (1) annual O&M costs, (2) interest

costs, (3) H&I investment costs, and (4) any individual contractor

deficit balances.

In accordance with the provisions of Public Law 99—546, the repayment period.

for the main Project water system facilities, referred to as the in—basin

facilities, began in 1981 and ends in 2030. The repayment period commenced

the year after the last major water storage facility, the ~ew Melones Dam and

Reservoir, was placed in service.

A separate repayment period of 1987—2036 has been established for the costs of

the San Felipe Division facilities, also referred to as the out—of—basin

facilities. The repayment period for the out—of—basin facilities commenced

the year after these facilities were substantially completed. For repayment

6
purposes, the Proposed Policy isolates the costs of the San Felipe Division

out—of—basin facilities. The San Felipe Division contractors have sole

repayment responsibility for the out—of—basin costa.

Under the Proposed Policy, annual M&I water rates are based on operating cost

and capital coat pools, or components, and interest and deficit recovery

rates, where applicable. The O&M cost components include the annual labor,

supervision, materials, and other types of O&M expenses associated with each

ofthe five operating cost components —— water marketing, storage, conveyance,

conveyance pumping, •and direct pumping. The capital cost components ——

storage, conveyance, conveyance pumping, and direct pumping —— are associatedwith recovery of the costs of- structures and facilities within the applicable

in—basin and out—of—basin repayment periods.

A preliminary step in the determination of annual O&M and capital cost

component rates is to accumulate th~ total pooled cost and the acre—feet of

water deliveries applicable to each component. Once the costs and acre.-feet

applicable to each component have been determined, the basic methodology for

computing annual water rates is to divide each component’s pooled cost by its

corresponding acre—feet of water deliveries.

—— For the O&M cost components, the annually determined rates are

computed by dividing the pooled annual costs by the corresponding

projected annual water deliveries for each component, respectively.

Operating cost components are assigned to contractors on the basis of the

services used to deliver their water supply. All water deliveries

require water marketing services. While most contractors require- storage

• services, several Project contractors operate and maintain the storage

and conveyance facilities that provide their water service at their own

expense. In those cases, the pooled O&M cost components are excluded

from their water rates.

—— The in—basin capital cost components are determined by accumulating

all H&I plant costs by component, as of the most recently completed

fiscal year, and then dividing each component’s costs by its total

historical and projected acre—feet for the authorized repayment period of

1981—2030. The resultant component capital rates are then combined as

applicable by individual contractor. The combined capital rate is then

multiplied by the total quantity of water to be delivered to the

contractor during the 1981—2030 repayment period, with the result being

the capital cost allocation to the contractor. This allocation, less any

repayment realized as of the end of the same fiscal year, is then divided

by the present worth of remaining deliveries to be made during the

repayment period, with the result being the individual capital rate for

the then—current water year. The-present wdrth of remaining deliveries

concept is provided in the GLOSSPtRY on page 36.

—— The out—of—basin capital cost component is determined in the same

manner as that described above for the in—basin capital cost components,

• only using the capital costs, repayment period, water deliveries, and

interest rate applicable to the out-of—basin facilities.

7
The interest recovery rate is comprised of two elements: interest on

unpaid plant investment, and interest on deficit balances, by individual

contractor. All interest costs are computed annually on a compound

basis. This component is described in detail starting on page 11.

—— Individual contractor deficit recovery rates are computed by dividing

the contractor’s accumulated deficit balance as of the end of the most

recently completed fiscal year by the present worth of that contractor’s

projected deliveries over the remainLng repayment period. The pr~sent

worth of each contractor’s projected deliveries is computed using each

contractor’s composite deficit interest rate.

Deficits or surpluses, as well as the updating of accumulated deficit or

surplus balances, are determined each fiscal year. All M&I O&M costs are

compiled and grouped into the components indicated above. Costs in each

component are allocated to those contractors utilizing that component, based

on~ each contractor’s respective share of the total annual water deliveries for

that component. Interest charges on O~~M deficits and on unpaid capital

investment are then added to the 0&M costs, resulting in the total costs

assigned to the individual contractor for the year. Total costs applicable to

each contractor are then compared with the corresponding revenues applicable

to each contractor. The result is either a net surplus or deficit for that

fiscal year. A hypothetical example of this process is shown below:

Revenues — Contractor A $500, 000

0&M Expenses — Contractor A

Water Marketing $28,000

Storage 43,000

Conveyance 89,000

Conveyance Pumping 37,000

Direct Pumping 16.000

Total O&M 213,000

Interest Expenses — Contractor A 120.000

Total Current Year Expenses 333,000

Net Surplus (Deficit) — Contractor A $167,000

Contractor revenues are applied first towards current year expenses —— O&M and

interest expenses. Revenues in excess of~currentyear expenses are then

applied first to repaying allocated capital costs, and second to unpaid prior

year O&M costs (i.e., deficits).

The total of the assigned O&M (including interest), capital, and deficit (if

applicable) rate. components constitutes the contractor’s annual water rate.

The applicable components and the makeup of each contractors 1993 water rate

computed in accordance with the Proposed Policy is shown on Schedules A—2 and

A—3 of the 1993 M&I Rate Book. -

8
Description of Water Rate Components

A general description of each of the M&I water rate components, computational

mechanics, and other specifics is provided below.

Water Marketma

The water marketing cost component includes the costs incurred for monitoring,

administering and negotiating water service contracts, maintaining water

delivery and payment records, accounting for the annual financial results for

Project water operations, developing annual water rates, and related types of

activities.

Dividing the total water marketing costs by the total projected water —

deliveries for the corresponding water year results in the average cost per

acre—foot for this component.

Storage

The storage O&M cost and capital investment components represent the costs of

project facilities associated with the collection and storage of Project

water. These facilities consist primarily of the Project’s dams and

reservoirs, such as Shasta, Folsom and New Melones.

All contractors receiving storage services are assigned a Project—wide capital

rate, except for the Foresthill Public Utility District (which has a fixed

repayment obligation) and the San Felipe Division users whose storage capital

rate includes an adjustment for the costs of the San Luis Pumping—Generating

Plant. Because the San Luis Pumping—Generating Plant serves as a pumping—only

facility for the San Felipe Division, the costs of the San Luis Pumping—

Generating Plant are assigned to the San Felipe Division as direct pumping

costs, rather than as storage costs.

Storage O&M costs inclu’d&the project use energy costs associated with pumping

water at the San Luis Pumping—Generating Plant, the Columbia—Mowry system, and

the Folsom Pumping Plant. Similar to the treatment of storage capital costs,

all storage contractors receive the same storage Q&M rate, except for the San

Felipe Division. The San Felipe rates. incI~ide an adjustment for the costs of

the San Luis Pumping-~enerating.Pl~nt as- .d@scribed above.

Conveyance

The conveyance 0&M and capital cost components include the costs associated

with Project facilities designed and used for transporting water throughout

the Project. Canals such as the Delta-Mendota, San Luis, and Friant—Kern

Canals, are the primary type of facility included in this cost component.

9
All contractors receiving in—basin conveyance services, including those in the

San Felipe Division, are assigned the same conveyance operating and capital

rate components. The San Felipe Division contractors have an additional

capital rate for the conveyance facilities which are located out—of—basin and

used exclusively by the San Felipe contractors. The San Felipe Division

contractors perform the O&M on the out—of—basin conveyance facilities.

Conveyance Pumi~ina

The conveyance pumping O&M and capital cost components include the costs of

the three main Project pumping facilities used to move H&I water through the

Project; the Tracy Pumping Plant, the O’Neill Pumping-Generating Plant, and

the Dos Amigos Pumping Plant. Separate O&Z4 and capital rates are computed for

each of the three pumping plants and those rates are assigned to contractors

whose water is pumped through these pumping plants.

In addition to labor, supervision, and other typical O&M cost elemejits,

conveyance pumping O&M expenses includ&project use energy costs. Project use

energy costs are charged on the energy used to pump water at each of the

pumping plants. The amount of energy required to pump an acre—foot of water

varies at each of the three facilities because of the different lift

requirement at each facility. The greater the lift requirement, the more

energy required to pump each acre—foot of water and the more pumping O&M

expenses associated with that acre—foot of water.

Total conveyance pumping costs are assigned to pumping plants based on each

plant’s prorata share of project use energy used. The per acre—foot rates

calculated for each of the pumping facilities used by a contractor are totaled

to determine each contractor’s conveyance pumping O&M rate.

Separate conveyance pumPing capital rates are calculated for each of the three

pumping plants based on the recorded capital costs as of the end of the most

recently completed fiscal year. A rate per acre—foot is calculated for each

facility based on its total historic and projected deliveries during the 50—

year repayment period. The rates for each of the main pumping facilities used

by a contractor are totaled to determine the contractor’s capital rate for.

conveyance pumping.

A portion of the Tracy Pumping Plant’s capital costs and O&M expenses are

assigned to the Friant—Kern Canal and Madera Canal contractors on the basis of

the historical and projected deliveries to the Exchange contractors located in

the Delta—Mendota Pool service area.

Direct Pum~in~

The direct pumping O&M arid capital cost bomponents are based on the costs

• associated with relift pumping plants which pump water exclusively for

specific contractors. These facilities were constructed by Reclamation and

are now operated and maintained by the local water districts whose water they

pump. These facilities and the operating entities follow:

10
Pumping Plant Operator

Wintu Pumping Plant Bella Vista WD

Contra Costa Canal Pumping Plants Contra Costa WD

Ygnacio Pumping Plant Contra Costa WD

Clayton Pumping Plant. Contra Costa ‘WD

San Luis Relift Pumping Plants San Luis WD

Westlands Relift Pumping Plants Westlands WD

Pleasant Valley Pumping Plant Westlands WD

Pacheco Pumping Plant Santa Clara Valley WD

Coyote Pumping Plant Santa Clara Valley WD

The direct pumping capital costs as of the end of the most recently completed

fiscal year are allocated to the contractors using the facilities. A ~er

acre—foot rate is calculated for each plant based on the total of the

historical and projected deliveries over the 50—year repayment period.

Because each pumping plant is operated by a local water district at its

expense, the only Project O&M costs to be recovered are the project use energy

costs. Project use energy costs are charged directly to the user of the

direct pumping facility.

Interest

M&I is an interest bearing function, and interest is computed annually on both

the individual contractor’s unpaid capital cost allocation and their

accumulated deficit balances.

Annual interest on general (non—specific) plant investment is calculated using

a composite interest rate for the Project. The interest rate applicable to

the unpaid plant investment balance during the 1949—1973 period is 2.5

percent. The, facilities placed in service after 1973 had higher authorized

interest rates. A composite interest rate is developed each year which weighs

each of the authorized interest rates by the expenditures to date for the in—

service facilities. Since 1973, the composite interest rate for the in—basin

facilities has gradually increased to a rate of 2.832 percent in 1991. The

composite interest rate is updated annually to reflect any additions to the

Project plant in service accounts and their authorized interest rates.

Interest on the unpaid balance of the specific costs allocated to individual

contractors is calculated using the authorized interest rate. for the specific

facilities.

Interest on individual contractor deficit balances is based on different

interest rate criteria. The deficit balance for an individual contractor

refers to the accumulation of annual 0&M and maintenance costs, including

interest expenses, which exceeded the annual water service payments made by

the contractor. As explained below, interest on each contractor’s cumulative

deficit has been based on separate’ interest rate criteria applicable to three

11
periods: 1949—1976, 1977—1985, and 1986—present. The specific rates

applicable to each year’s deficit are displayed on Exhibit 2 under the

“Interest Rate” column. A brief discussion of the interest rates for each of

the three periods follows:

—— The Project unpaid plant investment interest rate is applied to all

operating deficits incurred during the 1949—1976 period. The rates used

during this period were comprised of a specific rate of 2.5 percent for

the period 1949—1973, which gradually increased to a composite rate of

2.654 percent in 1976. Use of the unpaid plant investment ir~terest rates

is consistent with Reclamation’s practices and instructions during that

period.

—— In 1977, new instructions were received which prescribed applying

annual Project power repayment interest rates to future M&I deficits.

Given this -second interest rate criteria, a composite deficit interest

rate was computed to reflect the weighing of the annual deficits and

applicable interest rates.

—— In 1986, the 1977 instructions were superseded by the enactment of

Public Law 99—546. Section 106 of that law provides for the application

of an annually updated Federal interest rate to all annual deficits

incurred by Project water contractors. Annually, each contractor’s

composite deficit interest rate is updated for new O&l4 deficits incurred

at the applicable Section 106 deficit interest rate. The composite

deficit interest rates applicable to each contractor’s O&M deficit as of

September 30, 1991, are shown on Schedule 12A, page 1 of 3, of the 1993

M&I Rate Book.

Deficits

Annually, deficits or surpluses by individual contractor are determined by

comparing each contractor’s total allocated costs with their respective

revenues. A detailed description of how the deficits or surpluses are

determined, as well as an explanation of how deficit recovery rates are

calculated, was provided on page 8.

12
Deferred Interest Method

A potential inequity in the allocation of interest was identified during the

early development of the Proposed Policy. This inequity stems from a

disproportionate allocation of interest costs. An example of how this

disproportionate interest allocation occurs follows.

—— If, in the first year of M&I water deliveries, only one contractor was

taking water from a system ultimately designed for 5P contractors, all

the plant costs of the M&I function and the repayment interest for that

year would be allocated to the one user. The contractor would not be

ultimately responsible for repaying all the capital costs, as the capital

costs would be reallocated each year based upon the then—current

contra.~tors receiving water services. However, there is no retroactive

adjustment of allocated interest expense. Accordingly, the contractor is

forever burdened with the repayment obligation for the entire interest

amount computed for the initial year. These interest costs together with

assigned O&M costs result in increased deficits, as well as increased

interest charges on those deficits.

The need for a method to equitably allocate historic interest costs during

completion of the many features of the Project led to the development of the

Deferred Interest Method. The Deferred Interest Method established the period

1949—1987 as the period during which inequitable plant allocations and

interest computations occurred. As such, M&I plant costs, annual plant

interest, O&M deficits, and deficit interest applicable to that period were

recomputed under the Deferred Interest Method.

As shown on Exhibit 2, interest for the early project years, 1949 through

1987, under the Deferred Interest Method is $26 milrion less than the amount

of interest originally computed and allocated to contractors. The Deferred

Interest Method ensures recovery of the $26 million by amortizing these

charges as an additional capital cost component to be repaid over the

remaining Project repayment period. By doing this, it permits the

reallocation of capital costs and the resultant computation of a substantially

lower amount of interest as of 1987, while still providing for full recovery

of the interest amount. This is accomplished by capitalizing the $26 million

of deferred interest at the applicable 7.2063 percent composite interest rate

(Exhibit 2), and including a deferred interest component in M&I rates to

recover such amount.

Both the Deferred Interest Method and the original interest computation method

yield essentially the same financial result to the U.S. Government. The

difference between the two methods lies in the procedures for computing

interest costs by contractor and in the timing and method for recovering such

interest costs. The Deferred Interest Method erases the inequity in computing

contractor annual interest for years prior to 1988, resulting in $26 million

less interest computed through this period, and provides for recovery of the

$26 million, with interest, through the capitalized Deferred Interest Method.

The Deferred Interest Method is the procedure utilized in the Proposed Policy.

13
Minimum M&I Water Rate

The M&I ratesetting policy will continue to honor the water rate provisions of

existing long—term M&I water contracts even though some of these rates are

less than the cost of service rates computed under the Proposed Policy.

However, the Proposed Policy does not ~precludecontractors from voluntarily

paying the computed O&M or cost of service rates.

Contractors with long—term contracts having water service rates in excess of

computed cost of service rates will be required to continue paying these rates

until the contract expires or is renewed. Upon renewal, the contract will

provide for annual adjustments of the water rate to the higher of the annually

computed cost of service rate or the minimum M&I water rate as described

below.

The minimum Project M&I water rate shall be the hiaher of: (1) a rate of $15

per acre—foot, or (2) a rate equal to the O&M costs applicable to delivering

Project M&I water to the contractor’s designated point of delivery.

An example of the computation of a contractor’s minimum water rate follows:

Water Marketing:

Budgeted 0&M costs — 1993 $610,929

Projected Water Deliveries — 1993 387,694

Cost Per Acre—foot $1.58

Storage O&M:

Budgeted O&M Costs — 1993 $1,218,453

projected Water Deliveries — 1993 369,139

Cost Per Acre—foot 3.30

Conveyance O&M:

Budgeted O&M Costs — 1993 $1,141,337

Projected Water Deliveries — 1993 217,038

Cost Per Acre—foot 5.26

Total O&M Cost Per Acre—foot $10.14 **

** As the computed O&M rate is less than the $15 minimum rate, the

rate applicable to the contractor in this situation would be the $15

rate.

All water revenues, including minimum M&I water rate amounts, will be

accounted for by individual contractor and will be available to meet current

and future repayment obligations applicable to the individual contractor.

14
Once the M&I function of the Project achieves an overall positive repayment -

status, the use of a minimum rate procedure will be suspended. In place of

the minimum rate procedure, the minimum Project M&I rate will become the O&M

rate, so long as the Project maintains a. positive repayment status.

Once the Project is in a positive repayment status, a mechanism. will be

established for crediting contractors for• payments they have made in exce~s of

their allocated share of capital and operating costs. Such a mechanism may

include reductions to water service bills, and other such credits as may be

determined appropriate at that time.

15
Recovery of M&I Investment

• The Proposed Policy recognizes the legal requirement of honoring the Project’s

existing long—term, fixed—rate water service contracts. However, honoring

these contracts provides very, little opportunity to adjust the M&I rates or

increase the amount of M&I revenues. In the absence of authority to -

unilaterally increase the contract rates, H&I revenues do not begin to

increase appreciably until 2005, when the first major group of fixed—rate

contracts are subject to renewal. During the 1992 through 2004 period, the

inability to generate sufficient revenues to keep pace with steadily rising

0&M and interest costs will, in all probability, result in a continuing

downward slide in the H&I financial position.

A graph (Figure 1) depicting the estimated revenues and interest expenses

flows for the period 1990—2030 is provided on page 20. This Figure does not

consider the impacts of potential early contract renewals under the provisions

of Public Law 102—575. The Figure represents estimated revenues and interest

• expenses with contract renewals accomplished in accordance with existing

contract provisions.

As shown in Figure 1:

—— Annual revenues rise gradually from $6 million in 1990 to

approximately $22 million in 2005.~ This relatively gradual rise in

revenues is attributable to a combination of factors, including a limited

number of renewed contracts at cost of service rates, periodic

adjustments of rates for contracts with rate adjustment clauses, gradual

increases in annual water sales, and annually increasing water rates.

While revenues gradually increase between 1990 and 2005, annual O&M

deficits continue to increase-during this period.

—— Annual revenues during the period 2006—2013 rise dramatically

reflecting a major block. of contract renewals during this period.

—— Increases in annual revenues after 2013 are due primarily to some

increase in water sales and increased 0&M costs which are assumed to

escalate at an annual rate of five percent in the revenue analysis.

—— As contracts are renewed with cost of service rates, annual deficits

quickly disappear and substantial annual surpluses occur. As interest

charges decrease on outstanding 0&M deficits and unpaid capital balances,

greater net revenues become available for repayment. A sharp increase in

revenues occurs during 2022 and 2024 due to thE renewal of a block of

contracts having a significant amount of M&I water deliveries.

16
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19
M&! WATER RATE PER A/F

Fad Ifty/Contractot’

Black Butte D&R

County of Colusa 2/

Elk Creek CSD

Louisiana-Pacific Corp.

CLear Creek Unit

Clear Creek CSD

Contra Costa 18

CC18 - Contra Costa Canal

CC18 - Contra Loma D&R

CCW - New Facilities

CC18 - General Facilities

Cow Creek Unit

BelLa Vista 18

Cross VaLLey Canal

County of Fresno 5/

County of Tulare 5/

Delta Mendota Canal

City of Tracy 5/

Orestin*,a 18

Panoche 18 - OHC 5/

PLain View 18

San Luis 18 - DNC 5/

Sunflower 18

Folsom p&R

City of Roseville

City of Sacramento

El Dorado ID - FD&R 5/

San Juan Suburban 18

Year of 1 -

Renewal Current 1/ 9 Renewal

1993

2008

2011

1995

1993

1993

1993

2011

1995

1996

1996

2014

1989

2009

1993

2009

1989

6/

10.80

9.00

9.00

18.50

4.30

7.10

7.40

10.00

17.50

27.21

32.02

26.98

28.01

30.11

28.48

11.57

6/ 28.01

2011

7/

2006

1993

9.00

9.00

9.00

9-37

15.00

15.00

15.00

3,

3,

3/

21.15

4/

4/

4/

49.33

38.17

30.80

40.44

SQ.98

28.01

54.21

28.48

27.04

28.01

16.05

45.76

15.00

15.00

3’

3/

SCS:9314&IREN.253

09”4193

CENTRAL VALLEY PROJECT

SCHEDULE OF 1993 CO$ETRACT WATER RATE AND PROJECTED RATE AT

CONTRACT RENEWAL PER ACRE-FOOT

BY CONTRACTOR

Exhibit 3

Pg 1 of 4

20
CENTRAL VALLEY PROJECT Exhibit 3

SCHEDULE OF 1993 CONTRACT WATER RATE AND PROJECTED RATE AT Pg 2 of 4

CONTRACT RENEWAL PER ACRE-FOOT

BY CONTRACTOR

M&I WATER RATE PER A/F

I I

Year of

Facility/Contractor Renewal Current 1/ 9 Renewal

Folsom South Canal

East Bay WJD 2013 17.36 95.73

Sacramento W.V

WI Delta Charge 2013 17.59 95.27

W/O Delta Charge 2013 8.59 73.38

Friant Dam

County of Madera 1995 10.00 19.21

Fresno County W#18 1996 20.00 15.00 3/

Friant Kern Canal

Arvin-Edison WSO 1995 10.00 64.01

City of Fresno 2006 10.00 134.24

City of Lindsay 1985 27.70 27.70

City of Orange Cove 1996 10.00 55.65

Lindsay-Strathmore ID 1990 28.40 28.40

Shafter-Wasco 10 1995 10.00 34.98

Terra Bella ID 1991 28.73 28.73

New Melones Unit

Stockton~East 18 1983 ¶3.21 15.00 3/

Sacramento River

City of Redding - SR 1996 9.00 15.00 3/

City of West Sacramento 5/ 2020 10.33 18.54

Diamond Lands Corp 2004 9.00 15.00 3/

Lake California P.O.A. 2004 9.00 15.00 3/

Riverview Golf & CC 2004 9.00 15.00 3/

San Felipe Unit

San Benito County 18 2028 42.86 112.88

Santa Clara Valley 18 2028 37.95 111.30

21
CENTRAL VALLEY PROJECT

SCHEDULE OF 1993 CONTRACT WATER RATE AND PROJECTED RATE AT

CONTRACT RENEWAL PER ACREFOOT

BY CONTRACTOR

M&I WATER RATE. PER A/F

I I.

Year of

Facility/Contractor Renewal Current 1/ 9 Renewal

San Luls Canal - Fresno

City of Avenal 2009 17.50 147.70

City of Coalinga 2009 18.50 177.12

City of Huron 2009 18.50 147.09

State of CA 5/ 2009 28.14 47.76

Westlands 18 1985 39.55 39.55

San Luis Canal - Tracy

Broadview 18 1992 29.35 29.35

Pacheco 18 - SLC 1987 51.45 51.45

Panoche 18 SLC 5/ 2009 32.28 54.21

San Luis 18 - SLC 5/ 2009 61.75 84.43

Shasta D&R

Shasta CWA 2005 9.00 25.44

Wonderland-Mt Gate CSD 2004 9.00 15.00 3/

Sly Park D&R

El Dorado ID SP 1995 17.50 15.00 3/

Spring Creek Conduit

Shasta Cty #25 2005 9.00 15.04

Shasta CSO 2004 9.00 15.00 3/

Sugar Pine Reservoir

Foresthill PVC 2022 85.00 85.00 8/

Exhibit 3

Pg 3 of 4

22
CENTRAL VALLEY PROJECT Exhibit 3

SCHEDULE OF 1993 CONTRACT WATER RATE AND PROJECTED RATE AT Pg 4 of I.

CONTRACT RENEWAL PER ACRE-FOOT

BY CONTRACTOR

M&I WATER RATE PER A/F

I I

Year of

Facility/Contractor Renewal Current 1/ 9 Renewal

Toyon Pipeline

City of Redding - TP 1990 9.00 15.00 3/

Shasta Cain Area PVC 9/ 1993 10.05 15.00 3/

U.S. Forest Service 10/ 2008 20.00 18.71

San Felipe Out-Of-Basin Facilities

San Benito County 18 2008 43.00 243.67

Santa Clara Valley 18 2008 43.00 212.94

1/ May be either contract or cost of service rate.

2/ County of Colusa formerly Stony Ford 18.

3/ Represents the mininuit rate since their calculated cost of service rate is less than S15.OO.

4/ This represents the districts fixed repayment contract rates and they are expected to be paid

off by 2010.

5/ In accordance with their contracts these contractors are currently in the midst of a

5-year rate adjustment.

6/ Based on 40 years after contract was signed per Fresno field office.

7/ This Is a perpetual contract having a fixed, non-adjustable rate of S9.0O per A/F. For

purposes of this projection, It was assuned that this contract would be renewed In 2023.

8/ Their contract rate has been determinded adequate for repayment of all of the districts

obligations under this contract.

9/ Their permanent contract has expired and a new one is being negotiated. They are

curently operating under a teirporary contract. For purposes of this report, this rate

represents what they would be paying under a renewed contract.

10/ Rates adjusted annually In accordance with letter of agreement dated June 1, 1989.

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GLOSSARY

— Annual O&M. Annual O&H costs, annual interest expense related to the

outstanding H&I capital investment and, where applicable, annual interest on

the operating colt deficit.

Historical and Projected Water Deliveries. All paid water delivered and

expected to be delivered by the plant in service facilities within the

Project’s repayment period. The time frame extends from the beginning of the

first year in which water was delivered through the end of the repayment

period.

In—Basin Facilities. The main project water storage and delivery system

facilities locate~d in the Cent~al Valley Basin of California.

Isolated Facilities. Project constructed water storage and deliverj

facilities which are not operationally integrated with the main Project water

system. For example, Project water developed by Sugar Pine Dam and Reservoir

is all delivered to the local service area; none of that water is exported

from the local area for delivery to other Project water users.

Lonc~—Term Contractor. A contractor who is receiving water on a regular basis

under a water service or repayment contract having a term of greater than 10

years.

Net Repayment. Accumulation of annual water service payments in excess of the

amount required to cover the annual O&M and interest costs. The revenue

available to reduce a contractor’s deficit and capital investment balances.

Deficit. The accumulation of annual 0&M and interest costs in excess of the

total revenues received from the sale of water under existing water service

contracts. The Project’s M&I water supply account has a deficit balance, and

the deficit has been increasing every year. The deficit has increased because

revenues have not covered all the operating costs.

Out—of—Basin Facilities. The Project water system facilities located outside

the central Valley Basin of California, i.e., those Project facilities located

in the San Felipe Division service.

Paid Water. All project water supplies scheduled for delivery to long—term

water contractors for revenue producing purposes. Project water delivered for

non—revenue producing purposes, such as water rights and mitigation, is

excluded from paid water..

Present Worth. A financial term referring to the time value of money. The

present worth concept recognizes that the interest earning capability of money

makes $1 in the future worth less than $1 today. As an example, if $1 was

deposited today at a 10 percent interest rate, it would b~ worth $1.10 in 1

year. Thus, $1 in 1 year would be worth something less than $1 today.

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Present Worth of Future Deliveries. The same concept as indicated in the

preceding Present Worth definition, only as applied to a stream of water

deliveries rather than monetary payments. Similar to .the concept that money

earns interest, M&I costs must be repaid with interest; and hence, as $1 is

worth more today than in the future, an acre—foot of water today is worth more

than an acre—foot sold at the same price in the future. Because of this, the

time value of future deliveries must be considered in determining capital and

O&M deficit water rates required to repay these costs with~in the repayment

period. The present value of future deliveries is computed by discounting

such deliveries by the applicable interest rate over the remaining repayment

period.

Projected Water Deliveries. All paid water expected to be delivered during

the remainder of the repayment period.

Proposed Policy. For ease of reference, an abbreviated title for the full

name of the M&I component With Individual Contractor Deficit Ratesetting

Method. The Proposed Policy is explained in this document.

Repayment Period. The time allowed for the recovery of the capital invested

in a project. A 50—year repayment period has been established for the

Project. For in—basin Project facilities, the repayment period runs from the

beginning of fiscal year 1981 to the end of fiscal year 2030. The repayment

period for the San Felipe Division out—of—basin facilities extends from the

beginning of fiscal year 1987 to the end of fiscal year 2036.

Water Rate(s) or Rate(s). As discussed throughout this document, general use

of these terms refers to the cost of M&I water expressed on a cost per acre—

foot basis. When other meanings are intended in the use of the words “rate”

or “rates”, such as in referring to an interest rate or rates, such clarifying

words are provided in the text as appropriate.

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