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

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DRAFT REPORT service to customers under average load conditions. Extra capacity costs are those costs incurred above the average operating conditions, and are necessary to support peaking conditions. Customer costs are those associated with serving customers regardless of the amount of water used, i.e., meter reading, accounting, billing, etc. The allocation of cost between base and extra capacity components depends upon the design and use of the particular portion of the water system being analyzed. If an asset of the water system is designed to meet only the average demand on the system - a raw water supply reservoir for instance - the capital costs and operation and maintenance costs for that asset are totally allocated to the base component. If the asset is designed to provide additional capacity which is needed to provide peak demand on the system, the capital and operating costs associated with the asset are allocated to base and extra capacity components in the same proportion that the capacity of the asset is used for average and peak use. The appropriate allocation factors between base and extra capacity usually vary from system to system. Therefore, they should be detennined from actual operating history or design criteria of the system. The other important consideration for setting equitable rates for utility service is the establishment of customer classes for cost distribution after costs are allocated to service functions. A customer class should include only those customers who; (a) are in similar location in relation to the utility, (b) use the same or similar facilities of the utility, (c) receive similar service from the utility, and (d) place similar demands of the utility. It is important to note that makeup of the customer class can change depending upon the particular asset that is being allocated. A customer class that is appropriate for allocation of one type of cost, e.g., water treatment costs, may include customers that would not be appropriate to the class when another type of cost of assets is allocated, e.g., treated water distribution costs. The objective of cost allocation and ultimate distribution to customer groups is to avoid cross-subsidization, and it is important with that objective in view, differences in service commitment and service requirement be given full consideration in detennining customer classes. City of Paris, Texas Water and Wastewater Cost of Service Study May 2005 6