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

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� Attachement A One issue in the development of the summary results is the determination of a "fair" return on rate base (net plant investment). Typically, the rate of return that is used under this approach can be set in two ways. First, a weighted cost of capital approach can be used. This approach considers both the City's cost of debt and equity to determine an appropriate rate of return. This is the approach that is typically used by private water utilities when rates are set before a State public utility commission (PUC). In contrast to this approach, the rate of return can also be set at such a level that under the "utility/accrual" basis approach the utility will earn the same level of total revenues as was proposed under the "cash basis" revenue requirements. Utilizing this approach to set the "fair" rate of return, customers should be mostly indifferent to this assumption, given that the resulting level of rates is equal to that under the "cash basis" approach. This is the approach that will most likely be used within this study. 1.4.7 Development of Average Unit Costs The cost of service study also provides a second piece of cost information that is important to the development of final rate designs. The cost of service will provide average unit costs, or cost based water rate designs. For example, average unit costs will provide a cost based rate design in terms of$/CCF for volume and capacity costs, and $/Customer/Month for customer related costs. The average unit costs ultimately provide the cost basis or justification for certain rate designs or the setting of various administrative charges. In summary, the development of average unit costs will provide "cost of service" � based rates for all classes of service within the cost of service study. 1.5 Development of Water Rate Designs The final step in the process of developing the water rates is to use the results and findings from the revenue requirement and cost of service study to develop cost- based retail rates. 1.5.1 Rate Designs The first step in developing final rate designs is to consider the rate design goals and objectives of the City (e.g. conservation, revenue stability, ease of administration, etc.). From these goals and objectives, certain rate structures can be considered for further review and analysis. The City's current water rates will be reviewed and proposed rate design options will be developed which meet the target revenue needs of the City. For each class of service, alternative rate design options will be developed. Final proposed rate designs will embrace the results of the cost of service Scope of Services 1-10