Repayment Study Process

   To determine if power rates for each project are adequate, Western calculates how much revenue is needed to meet annual operating and maintenance expenses and repayment requirements. (These calculations are done according to the Reclamation Project Act of 1939 and Title 43 of the U.S. Code.) Western prepares annual power repayment studies to ensure power rates are adequate. Prepared according to the DOE Order No. RA 6120.2, the power repayment study essentially summarizes historical financial data and estimates future revenues, expenses and investments and repayment.

   The study includes income from marketing and transmitting power, expenses for purchased power (power that Western must purchase to meet contractual obligations to customers)¹ and transmission customers. It also includes expenses for operations and maintenance, capital investment (including replacements of power facilities) and the annual interest on those investments. Repayment Studies also track irrigation costs assigned to power customers for repayment. These costs, determined to be "beyond the ability of irrigators to repay" are called "aid to irrigation."

   More specifically, the study details year-by-year projected revenues and expenses, estimated amounts of interest to be paid each year, as well as the total amount of investment to be repaid.² Historical data is gathered primarily from accounting records through the last fiscal year. In addition to Western's marketing and billing records, historical and projected figures for generation, hydrology, and project data are provided by the U.S. Bureau of Reclamation, the U.S. Army Corps of Engineers and the International Boundary and Water Commission. These agencies also provide hydrological forecasting data used to project resource sales.

   Power repayment studies normally use long-term, average generation expected in all future years of the study. However, during high water years, more revenue than average is available to make additional principal payments. During low water years, Western incurs additional expenses for purchase power to meet contractual obligations. In this case, estimated principal payments may be reduced or deferred. We are allowed to vary repayment to recognize the water supply's variable nature from year to year, but must meet the repayment criteria set forth in DOE Order No. RA 6120.2.

   Projected operating and maintenance expenses are usually based on budget documents. Interest on investments in the repayment study is calculated according to the specific authorizing legislation for each project or Order No. RA 6120.2. Estimated and budgeted costs for project additions and equipment replacement are included. Projected service life on replaceable items is recorded in the power repayment study.

   In each repayment study, revenues are applied to expenses according to specific repayment criteria. Annual operation and maintenance costs, transmission charges, purchase power and annual interest expenses are paid first and must be repaid each year. Annual expenses must be repaid in the year the expense was incurred. Annual expenses that cannot be repaid in the same year may be capitalized. Remaining revenues are applied against unpaid capital deficits and investments, such as generation and transmission facilities, and, finally, irrigation costs assigned to power for repayment.

   ¹ Purchase power and wheeling are increasingly being funded by specific customers who choose to have Western purchase energy on their behalf, and the costs are not included in the rate base. (However this does not apply for CRSP customers.)

   ² The majority of Western's projects use the balloon payment methodology for repayment of project costs. This means that interest associated with the investment is due annually on the unpaid balance and principal payments for capital costs are not due until the end of their repayment period. For example, if an investment has a repayment period of 50 years, the project can pay interest in each year based upon the unpaid balance and the total principal payment can be made in the 50th year.