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II. CHOICE OF TEST YEAR AND ALLOCATION METHODOLOGY FOR <br />WATER RATE STUDY <br />A. Test Year <br />In an effoit to provide a more nonnalized level of consumption for rate making putposes, <br />historical consunlption Uy customer class from FY 2001 to FY 2009 was reviewed. Historical <br />annual consumption for each customcr class, which was chosen as the customer class' "test year" <br />for the water iale study, was selected Uased on anticipated consumption levels for FY 2010. <br />B. Allocation <br />The purpose of cost al(ocation is to express the utility's total cost of set•vice in terms of costs <br />associated with the various components of that service. This approach allows the costs to be <br />recovered from the customers of the system in accordance with their use of the various <br />components. Allocation allows the utility to achieve equity in water and wastewater rates, <br />assuring that the customers pay for service on the basis of their use of the system. Typically, the <br />allocation process is handled iu steps - first, allocating costs to the various service functions and <br />then distributing them to customers according to their use of each function. In general, the <br />service costs are associated wit1l supplying both the customer's avcrage and peak rates of use and <br />with customer meter reading, accounting, billing administration, and fire service. <br />C. Cost Functionalization, Allocation and Distribution Method <br />The Uase-extra capacity metliod of funetionalizing, allocating cost to service funetions, and <br />distriUuting costs to customer classes is commonly used witliin the water utility industry. This <br />method recognizes the differences in the cost of providing service due to variations in average <br />rate of use and peak rate of use Uy a customer class. This method also recognizes the effects of <br />system diversity on costs. Costs are generally divided into three components: (a) base costs, (b) <br />extra capacity costs and (c) customer costs. Base costs are those that tend to vary with the total <br />quantity of water used plus capital costs and operation and maintenance costs needed to provide <br />service to customers under average load conditions. Extra capacity costs are those costs incurrcd <br />above the average operating conditions, and are necessary to support peaking conditions. <br />5 Ciq, of Pm•is, Tesns <br />(4'a(er mid WasfewvUer Cosr ojService S1udy <br />Jtn:e 2010 <br />230 <br />