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<br />REVISED DRAFT <br /> <br />II. <br /> <br />CHOICE OF TEST YEAR AND ALLOCATION METHODOLOGY FOR <br /> <br />WATER RATE STUDY <br /> <br />A. <br /> <br />Test Year <br /> <br />Based on the revie)V of the water production and consumption data of the City's water utility <br /> <br />system, the twelve-month period of October 2000 through September 2001 was chosen as the <br /> <br />"test year" for the water rate study. <br /> <br />B. <br /> <br />Allocation <br /> <br />The purpose of the cost allocation is to express the utility's total cost of service in terms of costs <br /> <br />associated with the various components of that service. This approach allows the costs to be <br /> <br />recovered from the customers of the system in accordance with their use of the various <br /> <br />components. Allocation allows the utility to achieve equity in water and wastewater rates, <br /> <br />assuring that the customers pay for service on the basis of their use of the system. Typically, the <br /> <br />allocation process is handled in steps - first, allocating costs to the various service functions and <br /> <br />then distributing them to customers according to their use of each function. In general, the <br /> <br />service costs are associated with supplying both the customer's average and peak rates of use and <br /> <br />with customer meter reading, accounting, billing administration and fire service. <br /> <br />C. <br /> <br />Cost Functionalization. Allocation and Distribution Method <br /> <br />The base-extra capacity method of functionalizing, allocating cost to service functions, and <br /> <br />distributing costs to customer classes is commonly used in the water utility industry. This <br /> <br />Cityol?or;s. Tems <br />Waler and Wastewater Cost olService Study <br />March 2003 <br /> <br />7 <br />