2006-075-RES-LAMAR CO. WATER SUPPLY DISTRICT

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DRAFT REPOR T n. CHOICE OF TEST YEAR AND ALLOCATION METHODOLOGY FOR WATER RATE STUDY A. Test Year In an effort to provide a more normalized level of consumption for rate making purposes, with, ~~e_'.~}(ception.:'of:Campbell~~oup.-cmd :Tenaska III, a historical average of consumption was chosen as the "test year" for the water rate study. Campbell Soup's FY 2004 consumption was chosen as its test year, since the FY 2004 consumption is the lowest of its recent historical consumption and is reflective of Campbell Soup's continual decline in water purchases over the last several years. To reflect operational changes, Tenaska Ill's consumption was forecasted .. based on operational estimations provided by Tenaska III. B. Allocation The purpose of the cost allocation is to express the utility's total cost of service in terms of costs associated with the various components of that service. This approach allows the costs to be recovered from the customers of the system in accordance with their use of the various components. Allocation allows the utility to achieve equity in water and wastewater rates, assuring that the customers pay for service on the basis of their use of the system. Typically, the allocation process is handled in steps - first, allocating costs to the various service functions and then distributing them to customers according to their use of each function. In general, the service costs are associated with supplying both the customer's average and peak rates of use and with customer meter reading, accounting, billing administration, and fire service. C. Cost Functionalization, Allocation and Distribution Method The base-extra capacity method of functionalizing, allocating cost to service functions, and distributing costs to customer classes is commonly used within the water utility industry. This method recognizes the differences in the cost of providing service due to variations in average rate of use and peak rate of use by a customer class. The method also recognizes the effects of system diversity on costs. Costs are generally divided into three components: (a) base costs, (b) extra capacity costs and (c) customer costs. Base costs are those that tend to vary with the total quantity of water used plus capital costs and operation and maintenance costs needed to provide City of Paris, Texas Water and Wastewater Cost of Service Study May 2005 5