Cost causation is the idea that the customer who causes a cost should carry it. It is a ratemaking principle first and a legal test second, and the second is why it matters more than it used to.
As a ratemaking principle
Every allocation step in a cost-of-service study is an argument about causation. Peaking capacity is assigned to the classes whose summer demand required it. Customer service cost is assigned by account count because an account causes it whether it consumes anything or not. Fire protection capacity is assigned by hydrant count and required fire flow rather than by volume, because volume did not cause it.
As a legal standard
Several states test a utility charge against something close to this principle when a payer argues the charge is really a tax. Michigan’s three-part test asks, among other things, whether the charge is proportionate to the necessary cost of the service. California’s Proposition 218 requires that the amount imposed on a parcel not exceed the proportional cost of the service attributable to that parcel. Other states reach comparable exposure through different statutory language.
The practical consequence is the same in each: the utility carries the burden of showing the basis, and the basis has to exist as a document rather than as an understanding among staff.
What it does not settle
Cost causation says who should pay what. It does not say whether the total is right, and it does not decide whether a customer can afford the result. A charge can be perfectly cost-caused and still be higher than the households in the service area can pay, which is a different problem with a different answer.
Sources
Bolt v City of Lansing, 459 Mich 152 (1998), on the proportionality element of the Michigan fee-versus-tax test. California Constitution, article XIII D, section 6(b)(3). American Water Works Association, Manual M1, 7th ed. (2017).