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II. 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, historical consumption by customer class from FY 2001 to FY 2006 was revi~Wed; Historical annual consumption for each customer class, which was chosen as the custoni~r class' "test year" for the water rate study, was selected based on anticipated consumption,levels foi.lj'Y 2007. B. Allocation The purpose of the cost allocation is to express the utility' $ total cost of service in terng;Of costs associated with the various components of that servi.~e./Ihis apprQach allows the costs to be recovered from the customers of the system in accordaricl;:' with their use of the various components. Allocation allows the utility to achieve equity itiwater@ld wastewater rates, assuring that the customers pay for sel\'ifeinth(i(.B~is of their use ofJh/e system. Typically, the allocation process is handled in steps:2first;~~locati~~~o~~~;.t~~~.e ~arious service functions and then distributing them to customers according tgtheir use6f each function. In general, the service costs are associatedwith sllPplying both the customer's average and peak rates of use and with customer meter re?ding, accollJ.}ting, billing a~Iiistration, and fire service. ..""'....,..,..--..-....--..... -,'''. .::::''".'.--....--...'".:,'...::,".:::.,::...:::,:.-;.:.'",-e- C. Cost Functionalization.Allocation and Distribution Method The base...l;:xtracapacity method.of functionalizing, allocating cost to service functions, and distributing costs to custQmer clas~~sis commonly used within the water utility industry. This methodr~cognizes the differences in the cost of providing service due to variations in average rate of useang peak rate of use by a customer class. The method also recognizes the effects of system diversitYol1 costs. Costs are generally divided into three components: (a) base costs, (b) extra capacity costsimd (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 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. City of Paris, Texas Water and Wastewater Cost of Service Study June 2007 5