A cost-of-service analysis answers a narrower question than most people expect. It does not ask what a customer is worth or what a customer can afford. It asks what it costs the utility to serve that customer, and it answers by dividing the revenue requirement into pools and spreading each pool by something measurable.
The base-extra capacity method
The most common water method separates the cost of serving average demand from the cost of the capacity built to meet peaks:
- Base costs vary with the total volume delivered over the year: chemicals, power, purchased water.
- Extra capacity costs are the plant, storage and pipe sized for maximum day and maximum hour demand rather than for the average.
- Customer costs do not vary with volume at all: meter reading, billing, customer service, and the meters and services themselves.
- Public fire protection is the capacity carried for hydrants and fire flow.
Each pool is then distributed to classes by the driver named for it. Base cost goes by annual volume; maximum day and maximum hour costs go by each class’s contribution to those peaks, measured with peaking factors read out of production records; customer cost goes by account count; meters and services go by meter equivalents.
The commodity-demand alternative
The commodity-demand method splits the same revenue requirement into commodity, demand and customer components rather than base and extra capacity. It reaches comparable results on most systems. Which one a study uses is a choice that has to be stated, because the two assign the peaking cost differently and the classes with the sharpest summer peaks feel that difference.
What the analysis cannot do
It cannot allocate a cost the records do not distinguish. Where a utility has never measured maximum day demand by class, the peaking factors come from a default or from a system-wide record, and the study has to say which. An allocation basis nobody wrote down is not a weaker allocation; it is an allocation that cannot be produced when somebody asks for it.
Sources
American Water Works Association, Principles of Water Rates, Fees, and Charges, Manual M1, 7th ed. (2017), on the base-extra capacity and commodity-demand methods. Water Environment Federation, Financing and Charges for Wastewater Systems, Manual of Practice No. 27, for the wastewater analogue.