Back to Basics – Cost of Service Analysis (COSA)

A Cost of Service Analysis (COSA) is the allocation of costs to the various customer classes served (i.e. residential, commercial, industrial, etc.) corresponding to the level of service provided. Many costs are incurred for the joint benefit of all customers, some costs benefit certain customers more than others, and other costs may benefit only specific customers. A COSA follows the principles of cost-causation – those that cause costs, pay costs.

Basic COSA methodology recommended by the American Water Works Association (AWWA) involves three steps: [tooltip title=”Categorization of line item revenue requirements from the budget into major functional components, activities, or parts of operation.(e.g. administration, treatment, pumping, etc)”]Functionalization[/tooltip], [tooltip title=”Classifies “functionalized” cost based on how costs vary within the utility (i.e. commodity, capacity, customer). Commodity costs are costs that vary according to the amount of water treated or wastewater/stormwater discharged to the system. Capacity costs are fixed costs related to the potential maximum flow to be handled by the system. Customer costs are fixed per-account costs related to billing and administrative charges. “]Classification[/tooltip], and [tooltip title=”Allocation of “functionalized” and “classified” costs to customer classes based on specific flow characteristics and flow volumes of each user class.”]Allocation[/tooltip]. In the evaluation, costs are allocated to user classes and an overall cost to provide service to each particular user class is calculated. Gaining an understanding of the cost of service is particularly important for systems with distinctly different user classes such as residential, commercial/light industrial, institutional, bulk, or heavy industrial users. COSA is also valuable in the consideration of service and associated charges to wholesale customers and/or consecutive users.

The costs of service by user class are then compared to the amount of revenue that was generated from each user class to determine whether inequities exist within user classes. Ideally, the cost percentages for each user class will closely resemble the revenue percentages for each user class. If they do not, the utility may want to consider conducting a Rate Design exercise in which alternate rate structures are developed to correct inequities between user classes.

It should be noted that a COSA provides a perspective on cost per user class that is only representative of the test year for which the analysis was completed. The cost and revenue percentages associated with each user class will vary from one year to the next, but can be used as a general guideline in developing a fair and equitable rate structure. It is generally recommended that COSA be updated every five years or in conjunction with any major changes to your utility.

Figure1 (1)

Figure 1 illustrates theoretical COSA results in which it can be noted that the Single Family Residential user class is paying significantly more than its calculated cost percentage (cost of service). Conversely, it can be seen that the industrial user class is paying significantly less than its calculated cost of service. It is important to note that there are often other objectives that factor into Rate Design decisions. One such example would be a community that desires to promote economic development by making the conscious decision to have other user classes subsidize the industrial user class. In such a situation, the illustration in Figure 1 would represent a cost versus revenue incentive for industrial users.

Do I Need COSA?

Give some thought to your customer classes. Do they all use water in the same way? That is, are there variations in seasonal and peak demands by user class? Are average water sales consistent most months of the year, with all classes using more water during the hot and dry periods? Or do you have classes whose water usage does not vary with climatic conditions? Do they all discharge wastewater that is generally below the domestic limits? Are your users all within the City boundaries? Do you provide service to neighboring communities? If the answers to these questions lead you to conclude that usage patterns and service characteristics associated with all user classes are similar, then there is probably limited benefit from in-depth COSA. If you have one or more user classes whose water use patterns are markedly dissimilar from the others, then a COSA should be considered to help you to determine whether your current rate structure is fair and equitable.

For more information on COSA, contact Miranda Kleven at or 701-746-8087.