After setting the utility's revenue requirement the Commission must then determine how the revenue requirement should be allocated to each of the utility's customer classes (residential, commercial, small industrial, large industrial and lighting). This phase of the rate case is known as revenue allocation.
The primary driver in allocating the utility's revenue requirement is usually the utility's cost to serve each class of customers. In order to calculate the utility's cost of serving a particular class, professionals conduct a class cost of service study (CCOS).
I'm simple terms, a CCOS attempts to allocate all cost and investment items to the various customer classes. This is done by applying some rational allocation factor to each segment of costs. For instance, the cost of mailing bills is allocated on the basis of the number of customers in each class. Similarly, the utility's fuel costs are allocated to the classes based upon the energy usage of the class.
The revenue allocation phase of the case may be as significant to customers as the revenue requirement phase. For this reason, MECG routinely dedicates resources to this phase of the proceeding. Moreover, given its importance, this is typically a contentious part of any rate case.
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