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APPENDIX II APPENDIX II M&I RATE-SETTING OPTIONS In October 1984, the Bureau released the CVP M&I Water Rate-setting Policy proposal for public comment. The rate-setting options presented in the M&I proposal are very similar to those presented in the April 1984 irrigation policy proposal. The M&I proposal had a component option with two variations--a postage stamp option, and a double postage stamp option. The M&I proposal differs from the irrigation proposal because interest is applied to unpaid investment costs and annual operating deficits. The public comment period for the M&I proposal ran through the end of February 1985. In late May, Bureau regional personnel began preparing a revised M&I rate-setting proposal. To accommodate public comments from water users and conform to the revised irrigation rate-setting proposal, we were told by the Regional Cost and Analysis Branch Chief that a modified postage stamp option will probably be included in the M&I proposal. This same official is preparing the proposal and said that he anticipates having it ready for submission to the Commissioner by December 1985. Impact on repayment Bureau personnel have not yet prepared revenue projections to illustrate how repayment will proceed under each option. Nevertheless, it appears that, under any option, deficits are likely to continue for the next several years. Impact on customers Like the irrigators, those M&I customers that use the most services would tend to have the highest rates under the component option, while those using storage only would probably have the highest rate under the postage stamp option. Under the component option, rates computed for some customers requiring storage only are less than the $9 per acre-foot they are now typically paying. Customers whose water rates have been insufficient to cover annual interest obligations and operating expenses will experience sharp increases when their contracts expire if the component rate method is adopted. This increased rate is primarily due to the effect of interest on deficits. One of the public criticisms of the proposed policy is that it does not give individual customers an idea of what their rates would be when their contracts expire. . . TO illustrate the impact that inflation and interest rates could have on M&I customers whose rates have been insufficient to cover costs, we asked the Bureau's Regional Economist to compute future rates for a hypothetical customer. Three contract expiration dates were assumed, to show the hypothetical 26