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Once the appropriate level of revenues for the test year is determined, the next task is to
provide a fair allocation of these dollars to ratepayers. The typical means of accomplishing
this is to conduct a cost-of-service study. The principal reason for performing a COSS is the
fact that the water system provides service to a number of different classes of customers
who have different water use patterns and demands and, thus, different conditions of
service. An equitable rate structure must recognize these differences.
Peak Demands
For example, a single main delivers water to residential, commercial, industrial, and public
authority customers. In addition, this same water main provides public fire protection
service. If each customer had an identical pattern of use -- their demand for water occurred
at the same time of day or same season of year -- then the cost of servicing each customer
would be the same. However, this is not the case. Some customers use water uniformly
throughout the day, week, month and year; while others consume most of their water during
short intervals of time. Consider fire flows which are often of very short duration but may
represent the controlling parameter to be satisfied in the design of a water system.
Because many customers are using water simultaneously, peak demands are exerted on the
system. This requires the building of additional facilities and the sizing of facilities to satisfy
the peak demands. Customers with poor demand factors, or highly variable requirements,
should bear their relatively high demand costs and thus reduce the allocation of costs to
customers who use water at relatively uniform consumption rates.
The COSS that is used by the PSCW is AWWAs Base-Extra Capacity methodology. This
method is described in detail in Water Rates -- AWWA Manual No. M1, Fifth Edition, 1991.
Under this method, the operating expenses are first allocated to the service cost functions of
extra-capacity maximum-day and maximum-hour demand, base costs, customer costs, and
fire protection. The service cost function totals are then fully distributed to the customer
classes served by the utility. These classes typically include residential, commercial,
industrial, public authority, and public fire protection customers.
Cost Functions
Extra-capacity costs are incurred in supplying water at demand rates above the base or
average level, such as to meet the maximum daily and hourly system demands. Included
are the capital costs of the plant designed to meet peak requirements plus the expenses
associated with operating the plant.
Base costs consist of that portion of the production and delivery expense as well as capitalrelated costs that would be required if all water could be delivered at a uniform flow rate.
Included are such costs as power and chemical costs and that portion of utility plant that
contributes to the water systems capacity to supply an average flow rate.
Customer costs are costs that vary directly with the number of customers served. Part of
these costs, including costs related to meters, are distributed on an equivalent meter-size
basis; the remainder, which includes direct costs such as billing and accounting expenses,
are distributed equally to all customers.
Some costs, by their nature are readily allocated to one of the cost functions. Power and
chemical costs are directly proportional to the volume of water produced, thus they can be
assigned 100 percent to the base cost function. Meter reading costs and billing can be
directly assigned to customer costs. Hydrant costs are allocated exclusively to the fire
protection function. Other costs are related to facilities or operations that serve more than
one function. Such costs must be allocated between cost functions. An example would be
the depreciation expense on an elevated storage tank. The tank serves both base and
maximum hour demand functions. Without developing the detailed theory for making these
split allocations, it is sufficient to understand that the basis for these distributions is the
ratios of maximum hour and maximum day production to average day or base production.