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B-217826 The Bureau implemented an interim water service rate-setting policy in 1981. In response to public input, continued Inspector General criticism, and new irrigation repayment requirements for some customers as a result of the 1982 Reclamation Reform Act, the Bureau reanalyzed and revised this policy. Revised irrigation and M&I rate-setting proposals were issued for public comment in April 1984 and October 1984, respectively. In May 1985, the Bureau's Mid-Pacific Region submitted a revised irrigation policy proposal with five rate-setting options to the Commissioner of Reclamation for his review. A revised M&I policy proposal is scheduled to be submitted to the Commissioner in December 1985. Under the proposed policies, all new or renewed contracts would provide for annual water rate adjustments to recover potential increased costs. Rolling repayment would be discontinued and replaced by a requirement to repay all existing facilities in service by 2030. Any new major facilities would be repaid 50 years after each facility is placed in service. Irrigation water rates would be based on cost of service. If, at contract renegotiation time, a customer should assert inability to meet the rate set under the new policy, the customer's ability to pay would be determined. The water rate for that customer would then be established at the cost of service or the customer's ability to pay, whichever is less, but would at least cover annual operating expenses. with respect to interest applied to M&I deficits, current Bureau instructions require that beginning in 1984, annual operating deficits will carry interest based on Treasury rates. A regional official told us, however, that a range of interest alternatives may be explored or analyzed as part of their M&I rate-setting policy process. The San Felipe Unit is not scheduled to be placed in service until 1987; thus, the Bureau has not yet analyzed what impact it will have on repayment or customers' rates. Nevertheless, according to the proposed irrigation rate-setting policy and the Bureau's regional official who is revising the M&I proposal, the beneficiaries of the San Felipe Unit will be required to repay all San Felipe costs allocated to irrigation and M&I water supply, now estimated. at $105 million and $214 million, respectively. In summary, the proposed new water rate-setting policies should provide the basis for repayment of existing facilities now in service by 2030. Even with new rate-setting policies, however, irrigation and M&I water operations will experience annual operating deficits for the next several years, until existing water service contracts can be renewed and water rates are increased. M&I deficits will increase because of the effect of interest. Furthermore, San Felipe will add significantly to M&I operating deficits when it is placed in service. It will add $214 million to the existing $149 million plant in service. 6