Ratesetting Process, Water Rate Calculations, M&I

Ratesetting Process

Water Rate Calculations - Municipal and Industrial (M&I)

M&I Fixed Rates

Definition. M&I fixed rates are the water rates specified in original long-term water service contracts between Reclamation and CVP M&I water contractors. Fixed rates are not adjustable to reflect changing O&M and capital costs of the CVP, and over time, have generally been insufficient to recover annual O&M and interest costs, and timely repay allocated capital costs. Newer contracts, such as the interim renewal contracts, incorporate annually adjusted Cost of Service (COS) rates. Contracts with fixed rate provisions will eventually be replaced with contracts with annually adjustable COS Rates.

Method. Fixed rates are specified in each long-term water service contract.

Process. Fixed rates are extracted from each long-term water service contract. Volume 1 of the annual M&I Ratebook lists the contract rate and COS rate applicable to each long-term contract. The contract rate is the rate required to be paid by the contract, whether it be a fixed rate, COS rate, or other adjustable rates. The published COS rates are those that each contractor should pay to cover the costs of their water.

M&I Cost of Service (COS) Rates

Definition. The M&I COS rate is the charge per acre/foot necessary to recover the cost of delivering the water to each individual contractor.

Purpose. The purpose of the M&I COS rates is to recover the actual cost of delivering the water, to include each contractor’s allocated share of:

Reclamation’s annual O&M costs
Capital costs with interest over the repayment period
Deficit costs (O&M and interest) over the repayment period

Application. COS rates apply only to those contractors whose original long-term water service contracts have expired and who have subsequently renewed their contracts.

Rate Structure. M&I COS rates consist of three rate categories. These categories and their corresponding rate components are:

O&M Rate (Water Marketing, Storage, Conveyance, Conveyance Pumping and Direct Pumping)
Capital Rate (Storage, Conveyance, Conveyance Pumping, Direct Pumping, and Other) including interest on all capital cost components
COS O&M Deficit Rate which includes interest on unpaid O&M and interest on capital and on unpaid deficit.

Rates for each of these categories vary by contractor depending upon:

Water service components used to deliver contract water (water service components vary by water service area; e.g., most contractors do not use conveyance services to deliver their water so they are not assessed a conveyance service cost component)
Repayment status
Water delivery projections
Amounts of outstanding O&M deficits

static image: m&i component ratesetting overview

¹These components now directly funded by water authorities.

M&I COS Rates: O&M Rate

Definition. The M&I COS O&M is the charge per acre/foot to each contractor necessary to recover the budgeted cost to Reclamation of operating and maintaining CVP facilities for the forthcoming fiscal year.

Components. Cost components used in the M&I O&M rate include Water Marketing, Storage, and Direct Pumping.

Method. M&I O&M rates are calculated for each water service component as follows:

where:

budgeted M&I O&M costs = Allocation of costs in the President’s Budget for CVP M&I O&M (includes all O&M costs for the budget year allocated to the M&I function).

projected water deliveries = 5-year rolling historical average water deliveries, as recorded for each contractor, as adjusted for contract build-out schedules, drought or wet conditions, and other considerations, not to exceed contract maximum entitlement

Note: The direct pumping rate per acre/foot is calculated based on projected project use energy costs attributable to each direct pumping facility, service area, and corresponding contractor water deliveries for each direct pumping facility, rather than a uniform component rate for the other O&M components.

Process. The following describes the timeline and major tasks involved with calculating the irrigation COS O&M rate.

Schedule: Feb - Mar

Tasks

Budgeted O&M Costs. Total budgeted O&M costs are derived from the President’s budget once it has been submitted to Congress. O&M costs include personnel compensation, supplies, materials, and contract costs. That budget is subsequently allocated to the various functions of the CVP, including the M&I water function.

Reclamation conducts a comprehensive technical analysis of the proposed O&M budget. The analysis involves comparing the proposed budget with prior year budgets; comparing prior year budgets with actual prior year costs; and categorizing water marketing into sub-elements. Reclamation also provides a copy of the current budget compared by line item with the respective corresponding budget for the preceding year to the CVPWA FAC for its information, analysis and any questions it may have on the projected O&M budget.

NOTE: In collaboration with the FAC, deviations have been made from this budget in recent years due to changing conditions between the time the President’s budget is approved and the time water rates are computed.

Schedule: Apr

Tasks

Projected water deliveries. For ratesetting purposes, Reclamation uses the average of the preceding 5 years actual water deliveries as adjusted for each contractor. Dividing these total 5-year averages, subject to adjustment for wet or dry water conditions for each rate component into the corresponding projected cost for each component to determine the rate per acre/foot for each component.

PUE Schedules. Reclamation also prepares schedules for Project Use Energy (PUE) costs for those pumping units using PUE in performing their function.

Ratebook Schedule. After analyzing (1) the proposed O&M budget; (2) PUE costs by facility; and (3) projected water deliveries by component for each contractor, Reclamation prepares:

Schedule A-8: Projected M&I Deliveries by O&M Cost Component and Contractor and O&M Rates by Cost Component
Schedule A-9: Estimated M&I Costs by O&M Cost Component for upcoming water rate year.
Schedule A-10: Estimated M&I Storage, Conveyance and Out-of-Basin Pumping Project Use Energy Costs for upcoming water rate year.
Schedule A-11; Estimated M&I Direct Pumping Cost by contractor for the upcoming water rate year.

The costs for each component are carried forward to Schedule A-2 of the Irrigation Ratebook. Schedule A-2 provides both the detail and summary O&M rates applicable to each contractor, as well as the total capital component rate and deficit rate, if any, for each contractor.

M&I COS Rates: Capital Rate

Definition. The M&I Capital Rate is the rate per acre/foot to each applicable contractor necessary to recover construction costs and other capitalized project costs. M&I capital costs are interest bearing as provided for in CVP authorizing legislation.

Components. Cost components used in the M&I capital rate include Storage, Conveyance, Conveyance Pumping, Direct Pumping, and Other Costs.

Method. M&I capital rates are calculated as follows:

where:

current CVP M&I plant-in-service = the subject year CVP plant-in-service allocation to the M&I function by ratesetting component.

historical and projected M&I water deliveries = over the authorized repayment period, M&I water deliveries as historically recorded and projected based on contract entitlements as adjusted for build up periods, CVP system limitations, water supply, and other considerations.

authorized repayment period = 1981 - 2030 for in-basin contractors; 1987 - 2036 for out-of-basin contractors.

Process. The following describes the timeline and major tasks involved with calculating the irrigation COS capital rate.

Schedule: Mar - Apr

Tasks

Plant in service by component. MP-3400 completes Ratebook Schedule A-2B (Capital Rates by Contractor for Current Rate Year) by multiplying each contractor’s total capital rate per acre-foot by their 50-year water deliveries, then deducts repayment to date to determine their net capital obligation as of that time. That outstanding capital obligation is then divided by total projected deliveries, as factored to recover interest due on capital, remaining in the repayment period.

Ratebook Schedule. Reclamation then completes Schedule A-2A: Schedule of CVP 20XX M&I O&M and Cost of Service Water Rates by Contractor

M&I COS Rates: O&M Deficit Rate

Definition. The O&M deficit rate is the charge per acre/foot to each contractor necessary to recover unpaid historical O&M costs, including unpaid interest on deficits and capital. M&I O&M deficits have been interest bearing since project inception. The O&M deficit rate is used to amortize outstanding contractor O&M deficits by contractor over the repayment period.

Method. The O&M deficit rate for deficits is calculated for each contractor as follows:

Process. The following describes the timeline and major tasks involved with calculating the M&I COS deficit rate.

Schedule: Mar - Apr

Tasks

Historical O&M deficit. Reclamation updates prior year Ratebook Schedule A-6 to reflect the most recent completed Net Results of Operations. Reclamation then determines each contractor’s composite deficit interest rate after incorporating new years’ deficit/repayment data. Interest rates applicable to the COA deficits are generated by the Department of the Treasury.

Reclamation calculates updated deficit rates for interest-bearing deficits as applicable, based on:

Updated deficit balances, and
Remaining future average project water deliveries factored at the applicable composite interest rate.

Ratebook schedule. Updated contractor deficit rates are carried to Ratebook Schedule A-2a (Schedule of CVP 20XX M&I O&M, and Cost of Service Rates by Contractor). Those COS rates include O&M, capital and deficit (if applicable) rates, and these total rates are carried forward to Schedule A-1 and listed as the COS rates applicable to each contractor.

M&I Operations, Maintenance, and Interest (OM&I) Rates

Definition. The M&I OM&I rate is the rate per acre/foot necessary to recover the annual cost to Reclamation of operating and maintaining project facilities, plus interest based on outstanding capital and deficit balances as of the most recent fiscal year.

Application. Any M&I contractor who wants to qualify for the CVP M&I voluntary payment policy.

Payment at the OM&I rate assures that the contractor has paid their annual costs (on an estimated basis) for all water taken during the water year. Once the year’s actual accounting results are determined, contractors that paid at the OM&I rate during the year may pay any difference between the estimated OM&I amount paid vs. actual OM&I costs incurred, without incurring interest on any deficit incurred during the year if paid by the end of the 30-day notification period.

Method. M&I OM&I rates are calculated similarly to M&I COS rates except that (1) the OM&I rate excludes capital and deficit cost recovery, and (2) interest is computed on expected actual interest costs to be incurred in the water rate year rather than amortized over the remaining repayment period.

Ratebook Schedule. M&I OM&I water rates are developed on Ratebook Schedule A-3, based on other completed ratebook schedules. Those schedules include capital allocations developed on Schedule A-2A and deficit balances shown on Schedule A-6. The rates developed on A-3 are then shown on schedule A-3. These rates are developed during the period July - September period and included in the draft M&I rates completed by October 1 annually.

M&I Adjustable Rates

Definition. Irrigation and M&I adjustable rates are specialized rates subject to periodic adjustment(s) based on specific provisions of individual long term water service contracts between Reclamation and CVP irrigation and M&I water contractors.

Application. The adjustments provided for under these contracts are specific to each contract and are not uniform to all such contracts. There are relatively few CVP water service contracts having periodically adjustable water rates. Contracts with adjustable rate provisions will eventually be replaced by contracts having annually adjustable cost of service (COS) rates.

Method. Adjustable rates water service contracts do not have uniform adjustment provisions concerning the specific adjustments to be made, or the timing of such adjustments. Accordingly, all adjustable rate contracts are administered on an individual basis for adjustment requirements. Based on the requirements of each such contract, rates are adjusted at prescribed intervals (usually 5-year intervals) and in accordance with methods prescribed in each contract. In general, all adjustable rates are determined using either individual cost recovery (customized) methods or a COS method.

Process. Adjustable irrigation and M&I water rates are calculated pursuant to terms of individual contracts having provisions for periodic adjustments. Contractors with these contracts are notified in advance of the applicable periodic rate adjustments.