MUNICIPAL AND INDUSTRIAL 

WATER

RATESETTING POLICY

CENTRAL VALLEY PROJECT

CALIFORNIA

TBD

Department of the Interior

Bureau of Reclamation

Mid-Pacific Region

Sacramento, California
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TABLE OF CONTENTS

 PAGE

INTRODUCTION

DESCRIPTION OF THE CENTRAL VALLEY PROJECT

LEGISLATION AND CHANGES

ATTRIBUTES OF THE M&I RATESETTING POLICY

ANNUAL WATER RATE

DESCRIPTION OF WATER RATE COMPONENTS

WATER MARKETING

STORAGE

CONVEYANCE

CONVEYANCE PUMPING

DIRECT PUMPING

INTEREST – CONSTRUCTION

INTEREST – DEFICIT BALANCES

DEFICITS

DEFERRED INTEREST METHOD

GLOSSARY
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INTRODUCTION:

This policy provides cost recovery principles and guidelines for costs of the Central Valley Project 

(Project) reimbursable by Municipal and Industrial (M&I) contractors. This policy is referred to as the 

M&I ratesetting policy. This Policy is to be applied prospectively from the date of this policy.

DESCRIPTION OF THE CENTRAL VALLEY 

PROJECT

The Project was authorized by the Act of August 26, 1937 and new features and operations have been 

subsequently authorized. The Project was designed for coordinated operation of its surface reservoirs and 

canals with existing rivers, streams and ground water supplies. Project operations are coordinated 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. The 

authorized project purposes are: Fish and Wildlife, Flood Control, Navigation, Power, Recreation, Water 

Quality, and Water Supply. 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 plant-in-service investment cost allocation is updated each year to reflect additions to and retirements 

from the project of facilities, as reflected in Reclamation’s plant investment accounts. Annual updates 

may also reflect changes in forecasts of future Project water deliveries. Deficits are also updated on an 

annual basis. 

The repayment requirements for the M&I water supply function are set forth in Federal reclamation law. 

LEGISLATION AND CHANGES

Public Law 99-546 (Coordinated Operations Agreement) enacted October 1986: The legislation 

prescribed existing construction cost obligations to be repaid by 2030. Further, deficits arising after 

October 1, 1985 are to be repaid with interest by 2030. 

M&I Settlement Agreement (Case No. CIV-F-03-5359 OWW SMS) dated March 3, 2005: This 

Agreement established provisions for payment of obligations to the United States with interest. 

Paragraph 3(A)(2) through 3(A)(5) of the Agreement outlines CVP Contractors will be responsible for 
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CVP construction costs; as well as allocable operation and maintenance expenses; including interest on 

the unpaid balances. 

PL 111-11, Subtitle G (Aging Infrastructure) enacted March 30, 2009: The legislation provides 

parameters relating to repayment of aging infrastructures. Projects meeting criteria outlined in this 

legislation will be repaid within 50 years, with interest. 

Other Legislation and Changes: Other legislation and regulations that influences cost recovery will be 

implemented as required by the statue. 

ATTRIBUTES OF THE M&I RATESETTING 

POLICY

Both the irrigation and M&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 M&I Policy was based.

Two fundamental concepts underlie the M&I Policy as outlined in PL 99-546: Individual Contractor 

Accounting and, Cost of Service water rates.

A) Individual Contractor Accounting refers to the use of water rate revenue for the recovery of 

O&M, interest, construction cost and deficit obligation. Each contractor is responsible for 

allocable costs associated with M&I water delivered annually. If the annual O&M obligation is 

not fully covered by water revenues, a deficit is incurred, and the individual contractor has 

continuing repayment responsibility for that deficit, and any applicable interest. 

B) Cost of Service refers to the determination of annual water rates based on the Government’s cost 

of providing M&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) M&I construction costs, and (4) any individual contractor deficit balances.

In accordance with Public Law 99-546, the repayment period for the main Project water system facilities

ends in 2030. The repayment period commenced in 1981 the year after the last major facility, the New 

Melones Dam and Reservoir, was placed in service.

Annual M&I water rates are developed based on the reimbursable portion of budgeted operating cost; as 

well as each contractor’s outstanding balance of construction cost, for each pool or component; including 

applicable interest, and the outstanding deficit balance, if any. The O&M cost components include the 

annual labor, supervision, materials, and other types of O&M expenses associated with each of the five 

operating cost components – water marketing, storage, conveyance, conveyance pumping, and direct 

pumping. Where Operation & Maintenance agreements exist, the servicing authority recovers costs from 

contractors and expenses for these facilities are not included in Reclamation costs. 
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A preliminary step in the determination of annual O&M and construction cost component rates is to 

accumulate the 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.

A) 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 and storage

services.

B) The in-basin construction cost components are determined by accumulating all M&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 construction rates are then combined as applicable by individual 

contractor. The combined construction 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 

construction 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 future deliveries (see 

definition in Glossary) to be made during the repayment period, with the result being the 

individual construction rate for the then current water year.

C) Interest 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.

D) 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 remaining repayment period. The 

present 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 

for each fiscal year. 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. Total costs 

applicable to each contractor, including applicable interest, are compared with the corresponding revenues 

of each contractor. The result is either a net surplus or deficit for that fiscal year. Contractor revenues are 

applied in the following order:

1

st

– Current Year O&M Expenses

2

nd

– Interest Expense

3

rd

– Interest-bearing O&M deficit

4

th

– Construction Repayment
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ANNUAL WATER RATE

Each contractor’s annual water rate is comprised of the following components: 

 O&M Component – Water Marketing and O&M costs associated with Storage, Conveyance,

Conveyance Pumping, and Direct Pumping Facilities. 

 Construction Cost Component1– construction costs associated with Storage, Conveyance, 

Conveyance Pumping, and Direct Pumping facilities. Construction costs are an interest-bearing 

obligation. Interest of the outstanding balance is computed annually and recorded as an annual 

expense

 Deficit component: unpaid operation and maintenance costs from prior fiscal years. Deficit costs 

are an interest-bearing obligation. Interest of the outstanding balance is computed annually and 

recorded as an annual expense

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 Marketing

The water marketing cost component includes costs such as (but not limited to) 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 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 construction 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.

 

1

Certain construction costs are determined to be reimbursable and benefit users CVP wide (such as Programmatic 

Environmental Impact Statement Cost). As such, a separate cost component is developed to recover these costs. 
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All contractors receiving storage services are assigned a Project-wide construction rate. Except for 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 services as a pumping-only 

facility for the San Felipe Division, the costs of this facility are assigned to the San Felipe Division as 

direct pumping costs, rather than as storage costs.

Storage O&M costs include 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 construction costs, all storage contractors receive the same storage O&M rate, 

except for the San Felipe Division. The San Felipe rates include an adjustment for the costs of the San 

Luis Pumping-Generating Plant as described above.

Conveyance

The conveyance O&M and construction cost components include the costs associated with Project 

facilities designed and used for transporting water throughout the Project. Canals such as the DeltaMendota, San Luis, and Friant-Kern Canals, are the primary type of facility included in this cost 

component.

Conveyance Pumping

The conveyance pumping O&M and construction cost components include the costs of the three main 

Project pumping facilities used to move M&I water through the Project; the Jones Pumping Plant

(formerly Tracy Pumping Plant), the O’Neill Pumping-Generating Plant, and the Dos Amigos Pumping 

Plant. Separate O&M and construction rates are computed for each of the three pumping plants and 

assigned to contractors who use these pumping plants. These costs include 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 prorated 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 construction rates are calculated for each of the three pumping plants 

based on the recorded construction 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. The rates 

for each of the main pumping facilities used by a contractor are totaled to determine the contractor’s 

construction rate for conveyance pumping.

A portion of the Jones Pumping Plant’s construction costs and O&M expenses are assigned to the FriantKern 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.
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Direct Pumping

The direct pumping O&M and construction cost components 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:

Pumping Plant Operator

Wintu Pumping Plant Bella Vista Water District

Contra Costa Canal Pumping Plant Contra Costa Water District

Ygnacio Pumping Plant Contra Costa Water District

Clayton Pumping Plant Contra Costa Water District

San Luis Relift Pumping Plant San Luis Water District

Westlands Relift Pumping Plant Westlands Water District

Pleasant Valley Pumping Plant Westlands Water District

Pacheco Pumping Plant Santa Clara Valley Water District

Coyote Pumping Plant Santa Clara Valley Water District

The direct pumping construction costs as of the end of the most recently completed fiscal year are 

allocated to the contractors using the facilities. A per 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 – Construction Costs

M&I is an interest-bearing function, and interest is computed annually on the individual contractor’s

unpaid construction cost, Annual interest on general (non-specific) plant investment is calculated using a 

composite interest rate for the Project. 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. 

The composite interest rate is updated annually to reflect any additions to the Project plant in service 

accounts and their authorized interest rates. 

Deficits and Interest on Deficit

The deficit balance for an individual contractor identifies the unpaid operation and maintenance costs,

including applicable interest expenses. Deficits are incurred when a contractor’s annual revenue is not 

sufficient to repay their allocable share of operation & maintenance costs. In accordance with the terms 

of condition of settlement reached, a zero interest rate is used on deficit balances through 1986. For years 

1986 forward, pursuant to PL 99-546, the treasury rate is applied to any annual obligation incurred for 

each year. Deficit balances are updated annually to reflect repayment, additional deficit incurred and the 

annual interest expense. 
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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.

In the first years of M&I water deliveries, few contractors were taking water from a system ultimately 

designed for many contractors. Initially, all the plant costs of the M&I function and the repayment 

interest for the early years would be allocated to few users. The contractors would not be ultimately 

responsible for repaying all the construction costs, as the construction costs would be reallocated each 

year based upon the then current contractors receiving water services. Accordingly, the contractors 

should not be forever burdened with the repayment obligation for the entire interest amount computed for 

the earlier years.

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 to 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.

Interest for the early project years, 1949 through 1987, under the Deferred Interest Method is

considerably less than the amount of interest originally computed and allocated to contractors. The 

Deferred Interest Method ensures recovery of the deferred amount by amortizing these charges as an 

additional construction cost component to be repaid over the remaining Project repayment period. By 

doing this, it permits the reallocation of construction costs and the resultant computation of a substantially 

lower amount of interest as of 1987, while still providing of full recovery of the interest amount. This is 

accomplished by capitalizing the deferred interest at the applicable interest composite interest rate, 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, and provides for recovery of the deferred interest, through the capitalized Deferred Interest 

Method. The Deferred Interest Method is the procedure utilized in the M&I Policy.
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GLOSSARY

Annual O&M: Annual O&M costs, annual interest expense related to the outstanding M&I capital 

investment and, where applicable, annual interest on the operating cost deficit. 

Deficit: The accumulation of annual O&M and interest costs in excess of the total revenues received 

from the sale of water under existing water service contracts.

Historical and Projected Water Deliveries: All Paid Water and Project water expected to be delivered by 

Project 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 located in the Central 

Valley Basin of California. 

Isolated Facilities: Project constructed water storage and delivery 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. 

Fiscal Year: Federal Year that runs from October 1st through September 30th.

Long-Term Contractor: A contractor who's receiving Project water 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. 

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 required to be paid under water service and/or repayment (9d) 

contracts.

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 be worth $1.10 in 1 year. 

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

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 
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and O&M deficit water rates required to repay these costs within 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 Project water expected to be delivered for revenue producing purposes 

during the remainder of the repayment period. 

Repayment Period: The time allowed for the recovery of the construction invested in a project. For main 

project feature, the repayment period began in fiscal year 1981 and continues through fiscal year 2030.

Separate repayment periods may be established for major rehabilitation or new facilities.

Water 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.