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Central Valley Project, California

Municipal and Industrial Water 

Ratesetting Policy

U.S. Department of the Interior

Bureau of Reclamation

Mid-Pacific Region October 2014
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Municipal and Industrial Water Ratesetting Policy, Central Valley Project, California iii

TABLE OF CONTENTS

TABLE OF CONTENTS

INTRODUCTION.........................................................................................................................................................1

DESCRIPTION OF THE CENTRAL VALLEY PROJECT...........................................................................................3

LEGISLATION AND CHANGES.................................................................................................................................5

Public Law 99-546 (Coordinated Operations Agreement) enacted October 1986.................................................5

M&I Settlement Agreement (Case No. CIV-F-03-5359 OWW SMS) dated March 3, 2005 ...................................5

PL 111-11, Subtitle G (Aging Infrastructure) enacted March 30, 2009...................................................................5

Other Legislation and Changes .............................................................................................................................5

ATTRIBUTES OF THE M&I RATESETTING POLICY................................................................................................7

ANNUAL WATER RATE .............................................................................................................................................9

DESCRIPTION OF WATER RATE COMPONENTS.................................................................................................11

Water Marketing...................................................................................................................................................11

Storage ................................................................................................................................................................11

Conveyance.........................................................................................................................................................11

Conveyance Pumping..........................................................................................................................................11

Direct Pumping ....................................................................................................................................................12

Interest – Construction Costs ..............................................................................................................................12

Deficits and Interest on Deficit.............................................................................................................................12

Deferred Interest Method.....................................................................................................................................13

GLOSSARY...............................................................................................................................................................15
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iv Municipal and Industrial Water Ratesetting Policy, Central Valley Project, California

TABLE OF CONTENTS

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Municipal and Industrial Water Ratesetting Policy, Central Valley Project, California 1

INTRODUCTION

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.
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2 Municipal and Industrial Water Ratesetting Policy, Central Valley Project, California

INTRODUCTION

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Municipal and Industrial Water Ratesetting Policy, Central Valley Project, California 3

DESCRIPTION OF THE CENTRAL VALLEY PROJECT

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 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. 
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4 Municipal and Industrial Water Ratesetting Policy, Central Valley Project, California

DESCRIPTION OF THE CENTRAL VALLEY PROJECT

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Municipal and Industrial Water Ratesetting Policy, Central Valley Project, California 5

LEGISLATION AND CHANGES

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 CVP construction costs; as well as 

allocable operation and maintenance (O&M) costs; 

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. 
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6 Municipal and Industrial Water Ratesetting Policy, Central Valley Project, California

LEGISLATION AND CHANGES

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ATTRIBUTES OF THE M&I RATESETTING POLICY

Municipal and Industrial Water Ratesetting Policy, Central Valley Project, California 7

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.

1. 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. 

2. 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 O&M 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 costs associated with 

each of the five O&M cost components – water 

marketing, storage, conveyance, conveyance 

pumping, and direct pumping. Where O & M 

agreements exist, the servicing authority recovers 

costs from contractors and expenses for these 

facilities are not included in Reclamation costs. 

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.

1. 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. 

O&M 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.

2. The in-basin construction cost components 

are determined by accumulating all M&I 

plant-in-service costs by component, as of 

the most recently completed fiscal year, 

and then dividing each component’s costs 

by its total historical and projected acrefeet for the authorized repayment period 

of 1981-2030. The resultant component 

construction rates are then combined 

as applicable by individual contractor. 
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8 Municipal and Industrial Water Ratesetting Policy, Central Valley Project, California

ATTRIBUTES OF THE M&I RATESETTING POLICY

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.

3. 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.

4. 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:

• 1st – Current Year O&M Expenses

• 2nd – Interest Expense

• 3rd – Interest-bearing O&M deficit

• 4th– Construction Repayment
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Municipal and Industrial Water Ratesetting Policy, Central Valley Project, California 9

ANNUAL WATER RATE

ANNUAL WATER RATE

Each contractor’s annual water rate is comprised 

of the following components: 

• O&M Cost 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 

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.

costs are an interest-bearing obligation. 

Interest of the outstanding balance is 

computed annually and recorded as an 

annual expense

• Deficit component – Unpaid O&M 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
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10 Municipal and Industrial Water Ratesetting Policy, Central Valley Project, California

ANNUAL WATER RATE

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Municipal and Industrial Water Ratesetting Policy, Central Valley Project, California 11

DESCRIPTION OF WATER RATE COMPONENTS

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 and construction cost 

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 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 ColumbiaMowry 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 Division rates include an 

adjustment for the costs of the San Luis PumpingGenerating 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 Delta-Mendota, San Luis, and FriantKern Canals, are the primary type of facility 

included in this cost component. All contractors 

receiving conveyance services are assigned the 

same Project-wide construction rates. 

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 acrefoot 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 costs associated with 

that acre-foot of water.

Total conveyance pumping costs are assigned to 

pumping plants based on each plant’s prorated 
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12 Municipal and Industrial Water Ratesetting Policy, Central Valley Project, California

DESCRIPTION OF WATER RATE COMPONENTS

share of project use energy used. The per acrefoot 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 and O&M costs 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 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

Pumping Plant Operator

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-in-service 

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 O & M costs, including 

applicable interest expenses. Deficits are incurred 

when a contractor’s annual revenue is not 

sufficient to repay their allocable share of O & M 

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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Municipal and Industrial Water Ratesetting Policy, Central Valley Project, California 13

DESCRIPTION OF WATER RATE COMPONENTS

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-in-service 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-in-service allocations and interest 

computations occurred. As such, M&I plant-inservice costs, annual plant-in-service 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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14 Municipal and Industrial Water Ratesetting Policy, Central Valley Project, California

DESCRIPTION OF WATER RATE COMPONENTS

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Municipal and Industrial Water Ratesetting Policy, Central Valley Project, California 15

GLOSSARY

GLOSSARY

Annual O&M: Annual O&M costs, annual 

interest expense related to the outstanding 

M&I construction costs and, where applicable, 

annual interest on the deficit. 

Construction Cost: In this document, plantin-service and construction cost are used 

interchangeably to refer to construction cost 

that have been placed into service for recovery 

purposes.

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.

Fiscal Year: Federal Year that runs from October 

1st through September 30th.

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. 

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 construction cost. 

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: This term refers to allProject 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 construction and 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.
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16 Municipal and Industrial Water Ratesetting Policy, Central Valley Project, California

GLOSSARY

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.