How CAP planned rate stabilization funds

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Lake Mead Water Level

More than a decade ago, Central Arizona Project began planning for a future circumstance: a water shortage would come with an increase in water delivery rates.

Water delivery rates are, in the most basic terms, the cost divided by the amount of water delivered — so when a shortage reduces the amount of water delivered, the cost per acre-foot goes up.  In the case of a shortage on the Colorado River, the rate increase happens immediately, not gradually.

CAP focuses on how to help its water users avoid what could otherwise be rate shock. In 2011, the CAWCD Board of Directors, having collaborated with stakeholders, established the rate stabilization program.  The idea was to slowly and steadily build a reserve that would soften a sudden rate spike due to an eventual shortage.  In 2015, an opportunity arose to provide additional rate mitigation resources, and the Board approved the Voluntary Supplemental Shortage Stabilization Program. 

Today, the CAP water supply outlook for 2022 is likely to be a Tier 1 shortage, which means CAP’s rate stabilization accounts may be tapped for the first time.

How a shortage would impact water rates

Why would a water shortage declaration result in unanticipated rate shock for water users?

Water rates are developed annually by dividing fixed operations and maintenance (O&M) costs by water deliveries. And so, during a shortage, as the number of acre-feet of CAP water delivered were to decline, the per-acre-foot rate for fixed O&M would increase.

An example: if fixed costs are $150 million and deliveries are 1.5 million acre-feet, the rate would be $100 per acre-foot ($150 million divided by 1.5 million acre-feet). If there is a shortage and deliveries were reduced to 1.1 million acre-feet, and fixed costs remain at $150 million, the rate would increase to $136 per acre-foot ($150 million divided by 1.1 million acre-feet).

Types of stabilization reserves

CAP has two categories of rate stabilization reserves:

  • Shortage Stabilization Fund: Established in 2011, all customers contributed a few additional dollars per acre-foot each year across several years into the fund as part of the CAP fixed OM&R water delivery rates. This account was to be put to use when a shortage is declared on the Colorado River.
  • Voluntary Supplemental Shortage Stabilization Program: In 2015, due to a large reconciliation refund, those entities with long-term contracts and subcontracts were presented with the opportunity to opt-in to this reserve, which was in addition to the Shortage Stabilization Fund (above). This voluntary program was established to help further mitigate shortage rate impacts and allow these impacts to be “softened” over time.

Public meetings: 2021 rate stabilization funds

Have more questions on rate stabilization funds?

CAP stakeholders will be involved in public discussions this year to find the best solutions for all involved.

Here are some key dates:

  • March 25 – Shortage Rate Stabilization Roundtable. Staff will discuss with stakeholders their preference on utilization of the rate stabilization reserves.
  • April 15 – Finance, Audit and Power meeting. The Committee plans to recommend to the Board how much of the rate stabilization reserves will be applied during shortage.
  • May 6 – CAWCD Board of Directors meeting. The Board plans to confirm the use of the stabilization reserves.
  • June 3 – CAWCD Board of Directors meeting. The Board plans to finalize stabilization rate amounts.

CAP’s public process includes advanced planning and collaboration with water users to establish programs such as rate shortage stabilization.

This way, stakeholders are better equipped to plan their budgets for the future.