Ratesetting Process
Irrigation Ratesetting Document
Purpose and Background
The purpose of this document is to present the procedures and methodologies utilized in calculating water rates for the Central Valley Project (CVP) under the Component with Individual Contractor Deficits Ratesetting Method and to provide a brief history of the CVP and the different ratesetting methods that have been utilized since its beginning. Also included is a description of the cost allocation procedures used in the CVP, a description of many of the premises included in the ratesetting method and a detailed description of the procedures utilized in computing water rates under the Component with Individual Contractor Deficits Ratesetting Method.
Background
The CVP was first authorized by the California Legislature as a State project. Approved by the Governor on August 5, 1933, the CVP immediately became the subject of a State referendum petition which required that the CVP be approved by the electorate. The election was held in December 1933, and the CVP was approved by the voters.
State officials then turned to the problem of financing the CVP. The State Legislature had authorized the sale of public bonds as a means of financing the construction of the CVP, but the public bonds were found to be unmarketable. Requests for Federal grants and loans to aid in the financing of the CVP were submitted and turned down. Because of the financing difficulties, State officials then asked the Federal Government to undertake construction of the CVP.
CVP Legislative History
The U.S. Congress authorized construction of the initial CVP facilities in the River and Harbors Act of August 30, 1935 (49 Stat. 1028, 1038). The Act authorized the U.S. Army Corps of Engineers to construct the following project facilities: the Shasta, Keswick, and Friant Dams, the Tracy Pumping Plant, the Delta-Mendota and Friant-Kern Canals, and the Contra Costa Canal and related facilities. On September 10, 1935, the President signed an Executive Order which transferred $20 million of Emergency Relief Act funds to the Department of the Interior for construction of Friant Dam and the other features of the initial CVP. The finding of feasibility on which to base the reauthorization of the CVP under provisions of the Reclamation Act of June 17, 1902 (32 Stat. 388), and all acts amendatory and supplementary thereto, was approved by the Secretary of the Interior and the President on October 26, 1935 and December 2, 1935, respectively.
Congressional reauthorization of the initial CVP facilities under Reclamation law was provided for in Section 2 of the River and Harbors act of August 26, 1937 (50 Stat. 844) and in the River and Harbors Act of October 17, 1940 (54 Stat. 1198). Since then, the Congress has authorized the construction and operation of several additional CVP units, divisions and facilities.
In many cases, the legislation authorizing the construction and operation of a new CVP unit, division or facility included language reauthorizing the entire CVP. Regardless of whether or not the entire CVP was reauthorized, however, the authorizing legislation consistently contained language requiring the new unit, division or facility to be operated and repaid as an integral part of the CVP.
Additional units and facilities authorized as integral parts of the CVP include: the American River Division (Folsom, Nimbus, and Sly Park Dams and related facilities) (Act of October 14, 1949, 63 Stat. 852); the Sacramento Valley irrigation canals (Red Bluff Diversion Dam, Corning Canal, and Tehama-Colusa Canal) (Act of September 26, 1950, 64 Stat. 1036); the Trinity River Division (Act of August 12, 1955, 69 Stat. 719); the San Luis Unit (June 3, 1960, 74 Stat. 156); the New Melones, Hidden and Buchanan Projects (October 23, 1962, 76 Stat. 1191 and 1192); the Auburn-Folsom South Unit (Act of September 2, 1965, 79 Stat. 615); the San Felipe Division (Act of August 27, 1967, 81 Stat. 173); the Black Butte Project (Act of October 23, 1970, 84 Stat. 1097); and the Allen Camp Unit (Act of September 28, 1976, 90 Stat. 1328).
Water supplies produced by the CVP are marketed primarily pursuant to the Reclamation Project Act of August 4, 1939 (53 Stat. 1187). This Act provides the basic concepts and provisions included in all CVP repayment and water service contracts. In addition, the Acts of July 2, 1956 (Public Law 84-643, 70 Stat. 483) and June 21, 1963 (Public Law 88-44, 77 Stat. 68) contain provisions applicable to the renewal of Federal Reclamation water service contracts.
The Reclamation Reform Act of 1982 (Public Law 97-293, 96 Stat. 1263) was signed by the President on October 12, 1982. While retaining the basic principle of limiting the amount of owned land which may receive irrigation water deliveries from Reclamation projects, the Act introduced the concept of full-cost pricing (including interest on the unpaid plant investment) for certain irrigation water deliveries to leased lands.
The Act of October 17, 1986, (Public Law 99-546), was signed by the President on October 27, 1986. This Act codified certain existing CVP ratesetting practices (such as the automatic adjustmenc of water rates in new and/or amended contracts to ensure payout of the existing Federal investment by the year 2030) and provided for some new CVP ratesetting provisions including the last sentence in Section 105 with respect to the adjustment of individual contractor's ability to pay determinations every 5 years and Section 106 which requires that each new or amended contract for the delivery of water from the CVP include provisions requiring each contractor to pay any annual deficit incurred by that contractor together with interest on any such deficit which arises on or after October 1, 1985.
History of CVP Water Ratesetting Policies
1940-1969
The first CVP water service contracts were negotiated and entered into during the late 1940's. The initial CVP water rate structure consisted of a graduated scale, ranging from $2.00 per acre-foot for irrigation water in the Sacramento Valley (near the source of supply) to $3.50 per acre-foot for irrigation water service in the San Joaquin Valley (south of the Delta formed by the Sacramento and San Joaquin Rivers). The same water rates applied to all of the contractors in each service area regardless of the contract date. While contracts did not include provisions for rate changes, uniform contract expiration dates were used in some service areas in order to facilitate service area contract negotiations upon renewal.
The San Luis Unit was authorized in 1960 based on a feasibility report which contained an irrigation water service rate of $7.50 per acre-foot. This rate was included in the San Luis service area contracts with the rate remaining constant throughout the 40-year term of the contracts.
By the mid-1960's, the repayment status of the CVP indicated that water rates were too low and that fixed rate contracts for 40 years would not produce sufficient revenues to recover both increasing annual operating costs and the sunk capital investment costs. Steps were taken to modify the ratesetting policy for new contracts in order to provide for rate adjustments during the term of each new contract and ensure the recovery of the escalating cost of operations.
1970-1980
Major revisions to the CVP ratesetting policy were proposed in 1970. Under that proposal, irrigation water service rates would be based on 75 percent of the irrigator's available payment capacity, but the rate structure would include separate segments for annual operating costs and capital investment costs. The annual operating cost segment was to be adjustable at 5-year intervals in order to facilitate the full recovery of actual operation, maintenance and replacement expenses. The capital segment was to be adjusted in the 20th and 30th years of the 40-year water service contract, and the adjustment was to be base on a reevaluation of the irrigator's payment capacity in each of those 2 years.
The 1970 ratesetting policy proposal was based on three major component charges for services provided by the CVP:
- Delta Service Charge for storage north of the Delta. This component would be subject to change in 1996 and every 5 years thereafter, with a maximum change of 20 percent for each 5-year adjustment. Further, financial assistance in the form of municipal and industrial water supply revenues was specifically municipal and industrial water supply revenues was specifically included in the irrigation water rate calculations. The amount of aid was limited to 20 percent of the total revenue credited for repayment of the Delta service costs. The 1996 date was selected because it coincided with a major portion of the CVP's municipal and industrial water contract renegotiations.
- Conveyance Charge to reflect the contractor's share of CVP costs associated with the specific conveyance facilities being used to serve the contractor. This component was adjustable 5 years after the initial water delivery date and at the end of each 5-year period thereafter.
- Pumping Charge for the use of CVP pumping facilities in the delivery of water to the contractor. The pumping charge was adjustable at the same time as the Delta Service Charge.
Implementation of the irrigation portion of the 1970 proposed policy never occurred because there were no new CVP irrigation contracts executed between the completion of that policy and 1974 when revisions to the ratesetting policy were adopted.
In 1974, the concept of determining CVP water rates based on the actual cost of providing water service to each contractor (cost-of-service) was introduced. Under this concept, water rates for new contracts were to be equal to the lesser of the cost-of-service or the irrigator's payment capacity. The repayment of irrigation capital costs that were beyond the irrigator's ability to pay were to be recovered from the surplus revenues from power and municipal and industrial water sales.
In the cost-of-service concept, the single or "pooled" storage procedure was extended from just those north of the Delta (Delta Service Charge), to the pooling of the costs of all of the CVP storage reservoirs. Therefore, all CVP water users would share equally (on a cost per acre-foot basis) in the repayment of total CVP storage costs. It was proposed that all conveyance charges would be "pooled" and a single CVP-wide charge would be made for conveyance services received. Accordingly, all contractors requiring conveyance services would also share equally (on a cost per acre-foot basis) in the repayment of the conveyance costs of the CVP.
Along with this major change in the rate determination process, all new CVP water service contracts executed during the period 1974 through 1978 included some form of provision for water rate adjustments. Between 1979 and the enactment of the Reclamation Reform Act of 1982, all new CVP irrigation water service contracts included a provision for rate adjustments at 5-year intervals.
Another major revision in the irrigation ratesetting policy was the establishment of a minimum CVP water rate of $3.50 per acre-foot. That rate was deemed sufficient when it was established as the rate met all costs associated with the delivery of CVP water from storage. It was anticipated that over time the minimum charge would have to be adjusted to reflect increases in project construction costs and annual operating expenses.
In January 1978 and September 1979, the Office of the Inspector General of the Department of the Interior issued audit reports which were critical of several of the water marketing, financial, and ratesetting practices in the CVP. These reports stated that all of the reimbursable functions of the CVP were in serious financial trouble and would continue to be so unless basic operation policies, contract terms, rate adjustment provisions and, possibly, existing laws were changed. The audit reports stated that the problem was the cumulative result of actions taken during many years and that the Bureau of Reclamation, the Department of the Interior and Congress must share the responsibility for this situation.
1981-1983
In January 1981, a draft CVP ratesetting policy was released for public review and comment. The draft policy included four types of service charges: water marketing storage, conveyance and project pumping. The charge for each service included components for recovery of the applicable capital and annual operating costs. The total rate to be applied to each water user depended on the number of CVP services required to deliver water to that particular contractor. The per acre-foot irrigation charge was based on the lesser of the actual cost-of-service or the irrigator's payment capacity, but in no case was the irrigation rate to be less than the actual operation, maintenance and replacement expenses. In addition, the draft policy included the $3.50 per acre-foot minimum charge for CVP irrigation service.
The 1981 draft policy provided for the repayment of CVP costs allocated to irrigation within 50 years from the time each major CVP addition became operational. Under this concept, revenues in excess of actual operating expenses were applied towards the repayment of the older additions first, thereby meeting the "repayment within 50 years" criterion. The water deliveries used in the water rate calculations were the total of the most recent forecast of CVP irrigation deliveries for the next 50 years, beginning in the year in which the calculations were made. The deliveries in any given year were subject to the maximum available capacity of the CVP facilities included in the cost base.
Also included in the draft ratesetting policy was a provision for rate adjustments every 5 years. Accordingly, the water service rate-for each contractor would be adjusted every 5 years to reflect the plant investment projected to be in-service during the next 5-year period and the annual operating expenses associated with the in-service facilities. In this way, each irrigation water user would be paying for an equitable share of the CVP services expected to be made available during the 5-year period.
Public hearings on the draft CVP water ratesetting policy were held at several locations, and a formal comment period was established for the purpose of obtaining input on the draft policy from CVP water users, various governmental entities, special interest groups and the general public. Many comments were received and most of them suggested that modifications to the proposed policy were needed or that other ratesetting options should be considered.
By memorandum dated April 10, 1981, the Office of the Inspector General stated that the draft ratesetting policy resolved some, but not all, of their audit concerns. The unresolved issues have remained as such in the Inspector General's semiannual report on outstanding issues.
The draft 1981 ratesetting policy was further impacted by the enactment of the Reclamation Reform Act of 1982, which included several financial and repayment requirements that were neither provided for, nor envisioned, in the draft proposal.
1984-Present
In response to the above described factors, the draft 1981 ratesetting policy was reanalyzed, proposed methodologies were revised to reflect the-public comments previously received, principles and requirements of the Reclamation Reform Act of 1982 (RRA) were incorporated and alternative ratesetting methods were developed. The resulting ratesetting proposal provided several optional methods and was released for public review and comment in April 1984. In May 1984, public workshops were presented in three different locations to discuss the ratesetting methods and to answer questions. Subsequently, three formal public hearings were held to receive testimony and comments and all comments and statements received at the public hearings were recorded for use in finalizing the ratesetting approval.
The formal comment period was extended twice because of the interest and efforts demonstrated by the persons reviewing the ratesetting proposals. On September 21, 1984, the comment period officially closed and the internal finalization of the ratesetting policy began.
The CVP water users, governmental entities, special interest groups and other interested parties provided extensive comments on the ratesetting options included in the April 1984 proposal. In response to these comments, the Bureau developed and evaluated several additional ratesetting methodologies. The number of optional CVP ratesetting methods was eventually reduced to the six considered most viable. After water rates were calculated under each of these six ratesetting methods, each of the methods received extensive review and analysis at both the Regional and Washington levels.
In the final stages of these evaluations, the Congress enacted Public Law 99-546. Section 106 of that Public Law mandated the determination of individual contractor repayment and/or deficit balances and precluded the adoption of CVP ratesetting options previously under consideration that would have pooled operation and maintenance deficits CVP-wide for repayment. Additionally, this Public Law provided that interest would be calculated on operation and maintenance deficits accruing on or after October 1, 1985.
On May 4, 1987, the Assistant Secretary of the Interior for Water and Science proposed the Component with Individual Contractor Deficits Ratesetting Method as the new irrigation ratesetting policy for the CVP. Adoption of the proposed policy was subject to the results of a 60 day public review and comment period with the policy to become final in 120 calendar days unless the public comments justified reconsideration of the proposed policy.
Informal workshops to further explain the proposed ratesetting policy and the applicable supporting calculations were held on June 1 and 4, 1987 and a public hearing was held on June 16, 1987. A total of 397 public comments were received which were determined to be applicable to various provisions of the proposed ratesetting policy or applicable Reclamation laws. All comments applicable to the proposed ratesetting policy were reviewed, summarized and collated into a document entitled "Summary of Irrigation Ratesetting Policy Public Review Comments and Responses". This document summarizes the 397 public review comments into 91 general comments and provides responses to each of the generalized comments.
After a thorough review of the comments, it was determined that the expressed concerns were not significant enough to justify reconsideration or amendment of the proposed ratesetting policy. A copy of the "Summary of Irrigation Ratesetting Policy Public Review Comments and Responses" will be sent to each of the participants in the public review process upon formal approval of the proposed ratesetting policy.
As of March 1, 1988, the Component with Individual Contractor Deficits Ratesetting Method is in the offices of the Secretary of the Interior for adoption as the irrigation ratesetting policy for the CVP.