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<br />REVISED DRAFT <br /> <br />method recognizes the differences in the cost of providing service due to variations in average <br /> <br />rate of use and peak rate of use by a customer class. The method also recognizes the effects of <br /> <br />system diversity on costs. Costs are generally divided into three components: (a) base costs, (b) <br /> <br />extra capacity costs and (c) customer costs. Base costs are those that tend to vary with the total <br /> <br />quantity of water used plus capital costs and operation and maintenance costs needed to provide <br /> <br />service to customers, under average load conditions. Extra capacity costs are those costs incurred <br /> <br />above the average operating conditions, and are necessary to support peaking conditions. <br /> <br />Customer costs are those associated with serving customers regardless of the amount of water <br /> <br />used, i.e., meter reading, accounting, billing, etc. <br /> <br />The allocation of cost between base and extra capacity components depends upon the design and <br /> <br />use of the particular portion of the water system being analyzed. If an asset of the water system <br /> <br />is designed to meet only the average demand on the system - a raw water supply reservoir for <br /> <br />instance - the capital costs and operation and maintenance costs for that asset are totally allocated <br /> <br />to the base component. If the asset is designed to provide additional capacity which is needed to <br /> <br />provide peak demand on the system, the capital and operating costs associated with the asset are <br /> <br />allocated to base and extra capacity components in the same proportion that the capacity of the <br /> <br />asset is used for average and peak use. The appropriate allocation factors between base and extra <br /> <br />capacity usually vary from system to system. Therefore, they should be determined from actual <br /> <br />operating history or design criteria of the system. <br /> <br />The other important consideration for setting equitable rates for utility service is the <br /> <br />establishment of customer classes for cost distribution after costs are allocated to service <br /> <br />City of Paris. Texas <br />Water and Wastewater Cost of Sendee Study <br />March 2003 <br /> <br />8 <br />