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Ratesetting Process

Cost Allocation

The following flowchart depicts the timeline for completing major tasks associated with the cost allocation phase of the ratesetting process. For detailed information, click on the task or scroll down the page.

interactive image: cost allocation phase; click for more information

Definition. "Cost allocation" is the process of identifying and allocating the costs of a multi-purpose project among the various authorized project purposes. Cost allocations are performed on an annual basis for plant-in-service (construction) costs and of annual operation and maintenance (O&M) costs. The cost allocation phase updates (1) the respective repayment obligations of the reimbursable project functions (which include irrigation and M&I water supply and power) and (2) the costs allocated to nonreimbursable project functions including flood control, navigation, recreation, fish and wildlife and water quality improvement.

The method used to allocate plant-in-service costs is based upon the factors derived in the separable cost-remaining benefits (SCRB) allocation method. This is the standard economic method that Reclamation uses to allocate costs of multipurpose projects to authorized project purposes.

The method used to allocate O&M costs closely follows the plant-in-service allocation, although when O&M costs are not specifically related to particular CVP plant in service features, alternative factors are used for identifying costs to project purposes.

Purpose. The purpose of the annual cost allocations is to identify responsibilities for payment by project beneficiaries of reimbursable costs.

Background. Annual cost allocations are based upon periodic cost allocation studies. The last comprehensive cost allocation study of the CVP was completed in 1970 using the SCRB method. A "short-form" reallocation study using revised benefits and indexed costs was completed in 1975. The 1975 reallocation study did not include an evaluation of hydrologic operations, resizing, or re-costing of alternatives. The COA subsequently required Reclamation to conduct an interim cost allocation study for the CVP. That study report was issued in June 2001. As a result of the study, the MP Regional Director approved the updated existing method for application to the CVP until such time a new or modified cost allocation study is funded. This alternative was selected over one recommended by the General Accounting Office, and another proposed jointly by a consortium of CVP water and power contractors.

Process. The major schedule and tasks associated with the cost allocation phase are as follows:

Schedule:  Dec
Tasks

Annual Update. Reclamation annually reviews and updates the plant-in-service allocation for the CVP. Reclamation extracts plant-in-service costs for Reclamation's CVP facilities from the most recent: a) CVP Financial Statement, b) Western Area Power Administration's financial statement for power operations and c) the Corps of Engineers annual allocation for New Melones Dam and Reservoir. This information, along with updated water delivery and CVP-generated power use data, is used to update the plant-in-service allocation for each plant feature of the CVP based upon the current-year capital balance and updated water delivery information. Plant features include dams, reservoirs, power plants, canals, pumping plants and other fixed assets. The update involves adding any new costs or any reductions for retired or abandoned plants for the fiscal year just ended.

Capital and O&M costs are allocated based on the factors of the approved cost allocation study among the seven authorized purposes of the CVP. Costs of single-purpose facilities, such as a canal or power plant, are allocated directly to the purpose served, water supply and power, respectively. Costs of multi-purpose facilities, such as a dam, are allocated among purposes served, such as water supply, flood control, and power, using factors developed in the most recent reallocation study.

Schedule:  Jan - Feb
Tasks

Repayment obligation. Allocating costs among purposes served establishes the repayment responsibility for the cost of each facility. Repayment criteria can differ because of authorizing legislation, project purpose, and historical and projected use of the facility. Repayment for a project purpose may be reimbursable, nonreimbursable, or both. Reimbursable costs are the repayment responsibility of water and power users and the State of California. Costs allocated to water supply and power are predominately reimbursable, costs allocated to fish and wildlife may be reimbursable or nonreimbursable, depending on legislation, and costs allocated to flood control, navigation, recreation and water quality improvement are traditionally nonreimbursable.

Water Supply Repayment. Costs allocated to water supply are sub-allocated among irrigation, municipal and industrial (M&I), and wildlife refuges proportionate to their respective shares of historical and projected CVP water deliveries, over the period 1949-2030.

  • Irrigation (reimbursable)
  • M&I (reimbursable)
  • Level 1 Refuge Water Supply (Federal nonreimbursable)
  • Level 2 Refuge Water Supply (reimbursable by irrigation, M&I, and commercial power)
  • Level 4 Refuge Water Supply (Federal nonreimbursable and reimbursable by the state)

Project Use Power. Costs allocated to power are distributed between commercial power and project use power proportionate to their respective historical and projected uses of CVP-generated power. Project use power is further distributed (sub-allocated) among irrigation, M&I, and wildlife refuges proportionate to their respective historical and projected uses of CVP-generated power required to deliver water.

Project use power is allocated to the same water supply functions as shown in the preceding bullets. Commercial power is reimbursable from CVP power preference customers.

As of September 30, 2000, the repayment obligations for irrigation, M&I, and commercial power as follows:

Irrigation
$1,528 million
M&I
452 million
Commercial power (w/o Intertie)
538 million
Intertie
50 million
Total
$2,568 million
Schedule:  Feb
Tasks

Ratebook schedules. Upon completion of the annual plant in service allocation update, Reclamation prepares for each irrigation and M&I ratebooks:

  • Schedule A-4: Schedule of CVP 20XX Unpaid Capital Costs and Capital Rates by Component and/or Facility as of September 30, 20XX
  • Schedule A-5: Schedule of CVP 20XX Capital and Project Use Energy Costs by Component and/or Facility as of September 30, 20XX
  • Schedule A-2B