Ratesetting Process Overview
The following flowchart depicts the timeline for completing each major phase of the annual ratesetting process. The diagram also illustrates the relationship between the ratesetting process and the Congressional budget process for the forthcoming fiscal year (budget year). The ratesetting process is shaded in tan and the Congressional budget process is shaded in purple. For more detailed information, please click on any phase or follow the navigation map on the left of your screen.
Definition. For purposes of this document, ratesetting is process of calculating water service rates that recover the federal investment in constructing, operating and maintaining the Central Valley Project (CVP).
Authority. The basic authority for recovering the federal investment in constructing, operating and maintaining authorized water resource projects is the Reclamation Project Act of 1939 (the Act). The Act establishes two primary contract methods for this purpose:
1. Repayment contracts authorized under Sections 9c(1) and 9d of the Act respectively for municipal and industrial (M&I) and irrigation water. Repayment contracts are used when specific cost obligations can be readily assigned to beneficiaries such as when a specific facility is constructed for the sole benefit of a single contractor. Repayment contracts generally provide for 40 fixed annual payments to repay a fixed repayment amount.
2. Water service contracts authorized under Sections 9c(2) and 9e of the Act respectively for M&I and irrigation water. Water service contracts are used in instances such as the CVP where the project includes multiple individual multipurpose facilities benefiting different project functions and many different contractors. For such projects, costs are allocated to, and recovered from, appropriate beneficiaries based the amount of water received (i.e., water service). The basic unit of measurement for water deliveries and, consequently for cost recovery, is acre-feet of water.
For water service contracts, the Act requires the Secretary of the Interior to establish water rates for the sale of water to "produce revenue at least sufficient to cover annual operations and maintenance (O&M) costs and the appropriate share of fixed charges (construction costs) of the project." Reclamation has broad discretion under the Act for developing and implementing ratesetting policies. Ratesetting policies can be either (1) negotiated as a specific provision of individual water service contracts; OR (2) set forth into a formal policy applicable to multiple contractors. Reclamation has two ratesetting policies which together apply to 221 water service contractors (contractors) within the CVP. These are:
- The CVP Irrigation Ratesetting Policy, approved in 1988 (PDF - 58KB)
- The Interim CVP M&I Ratesetting Policy approved in 1995 (PDF - 142KB)
Twenty-two other Reclamation projects derive water rate revenue through water service contracts including the following six Interior Region 10 · California-Great Basin (MP) projects, the Cachuma Project, the Klamath Project, the Solano Project, the Orland Project, the Newlands Project and the Humboldt Project. However, ratesetting methods at these projects are prescribed by individual contracts rather than by policy documents applicable to multiple contractors.
SPECIAL NOTE: Generally the ratesetting process does not apply to repayment contract obligations. However, there is one exception pertaining to the computation of full cost irrigation water rates pursuant to the Reclamation Reform Act of 1982 (RRA). Under the RRA, full cost water rates are required to reflect all contractor water facility obligations to the United States, including both water service and repayment obligations. Regarding repayment contract obligations, only the interest applicable to capital obligations is reflected in the ratesetting process as capital obligations are repaid directly pursuant to repayment contract provisions.
Ratesetting Process. As indicated on the flowchart, the three major phases in the CVP ratesetting process are (1) annual accounting, (2) annual cost allocation, and (3) water rate development. All three phases are based primarily upon the following sources of information:
- Budgeted O&M allocations of expenses derived from the President's Budget
- Projections of Project Use Energy costs
- Capital cost allocations from the CVP Financial Statement
- O&M deficits/surplus' from the CVP Financial Statement
- Actual recorded water revenues from the CVP Financial Statement
- Actual recorded water deliveries, and projected water deliveries based upon contract entitlements as adjusted for build-out schedules and other considerations
Ratebooks. The principal outcome of the ratesetting process is a set of three Ratebooks compiled and distributed annually by the Business Resources Center Ratesetting Services (MP-3400). The three Ratebooks are:
The Ratebooks establish the official water rates applicable to all water contractors for the forthcoming contract year, usually March 1–February 28. Each CVP water service contract defines a specific 12-month period for water deliveries, referred to as the water year. While March 1– February 28 is the water year for most CVP water service contracts, the water year varies from contract to contract depending upon the specific contractor circumstances. Water years used in CVP water service contracts include the federal fiscal year (October 1 - September 30), the calendar year (January 1–December 31), or the growing season (March - February).
Each Ratebook includes several different rate categories. Rates apply to different contractors based upon (1) contract provisions; (2) whether or not they benefit from particular project features; or (3) other special circumstances.