R97-17 AUTHORIZING AGREEMENT - ECONOMIC AND ENGINEERING SERVICES, INC.

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• • Attachement A between classes of service, and whether these differences are significant enough to warrant the establishment of classes of service. A more detailed discussion of cost of service and the basic analytical steps required in this process is provided below. 1.4.1 Selection of Test Period The selection of the test period for the cost of service analysis is similar to the process noted above for revenue requirements. Generally, the revenue requirement test period and the cost of service test period are the same. However, in some cases, the revenue requirement study may review an extended period of time, e.g. 3 to 5 years. In contrast, the cost of service analysis typically reviews a 1 to 2 year period, or the period over which rates will ultimately be set. It is recommended that a 1 year test period for the , cost of service analysis be used. It is generally recommended that water ' rates be reviewed on an annual basis. In the opinion of EES, much like the , utility prepares and annual budget and financial audit, the level and adequacy of rates should also be examined on an annual basis. It should be noted however that this statement does not necessarily imply that water rates should be adjusted each year, but simply, that they should be examined to assure that price (rates) closely matches costs. 1.4.2 Selection of a Costing Methodology Much like the revenue requirements, the allocation of costs within the cost of service study can use either a "cash basis" or a "utility/accrual basis" for cost allocation purposes. Under the "cash basis" approach, the cash basis revenue requirements are simply allocated to each class of service. While this approach is typically used by municipal water utilities, given the City's unique mix of customers and their usage requirements, the City may want to consider using the "utility/accrual basis" for cost allocation. This recommendation is provided for two reasons. First, under the "utility/accrual basis" approach, the City would earn a "fair" return on their investment to the major industrial customers. In any particular year, these industrial customers could argue that under a "cash basis" approach the specific capital projects to be undertaken in that year are not benefiting them and therefore, they should be allocated no capital project costs. By using the "utility/accrual basis" approach, this issue is eliminated, and the utility simply earns a "fair return" on their investment from year to year. This tends to stabilize the rates for the industrial customers, and the revenues of the utility. The second reason this approach is recommended is that certain customers may have provided significant "up-front" capital contributions for the construction of facilities. This clearly needs to be considered within the analysis. The Scope of Services 1-7