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11. CHOICE OF TEST YEAR AND ALLOCATION METHODOLOGY FOR <br />WATER RATE STUDY <br />A. Test Year <br />In an effort to provide a more nonnalized level of consumption for rate making puiposes, <br />historical consumption by customer class from FY 2001 to FY 2009 was reviewed. Historical <br />annual consumption for each customer class, which was chosen as the customer class' "test year" <br />for tlze water rate Study, was selected based on anticipated consumption levels for FY 2010. <br />B. Allocatioii <br />The pLirpose of cost allocation is to express the utility's total cost of service in terms of costs <br />associlted with the various components of that service. This approach allows the costs to Ue <br />recovered from the customers of the syslem in accordance with tlieir use of the various <br />components. Allocatioji allows tlie utility to achieve equity in water and wastewater rates, <br />assuring that the customers pay for servicc on the basis of their use of the system. Typically, the <br />allocation process is handled in steps - first, allocating costs to the various service fi►nctions and <br />then distributing them to customers according to their use of each fiulction. In general, tlie <br />service costs are associated with supplying both the customer's average and peak rates of use and <br />with customer meter reading, accounting, Uilling administration, and fire scrvicc. <br />C. Cost Fuiictionalizltion, Allocation avd Distribution Method <br />The base-extra capacity method of fiulctionalizing, allocating cost to seivice funclions, and <br />distributing costs to customer classes is commonly used within the water utility industry. This <br />inethod recognizes the differences in the cost of providing service due to variations in average <br />rate of use and peak rate of use by 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 vaty with the total <br />quantity of water used plus capital costs and operation and maintenance costs needed to provide <br />service to customers tmder average load conditions. Exlra capacity costs are those costs incurred <br />above the average operatiiig conditions, and are necessary to support peaking conditions. <br />5 Ciq- ofPnris, Tesas <br />IValr.i• nnA Y1laslewnter Cost ojService Shtdy <br />Jtare 2010 <br />