Used and Useful Principle: Still Relevant in Utah
| Publication year | 2012 |
| Pages | 32 |
Vol. 25, No. 1. 32. Used and Useful Principle: Still Relevant in Utah
Volume 25 No. 1
Jan/Feb 2012
Introduction
Within the framework of revenue requirement regulation, the principle of used and useful appears to have been somewhat forgotten in today's world of least cost planning and future test periods. However, the used and useful principle has a relatively long history in the regulation of electric utilities and there is little, if anything, to suggest that it has been legally overruled in Utah.
The concept that capital assets must be physically used and useful to current ratepayers before those ratepayers can be asked to pay the costs associated with them is a fundamental principle of utility regulation. This means that the assets must be commercially in-service, title of ownership has to have passed to the utility,(fn1) and the assets have to have become a productive source of value. This is what triggers capital recovery of the engineered, furnished, and installed cost of the asset. Failure to adhere to the principle of used and useful in the physical sense leads to a mismatch between the timing of capital cost recognition and the income effect that occurs when an asset is put into service. It also leads to a mismatch between the ratepayers who are paying for the service versus the ratepayers who are receiving the service.
While a future test year provides a sharing of risks for items such as fuel, purchased power, labor, benefits, administration, etc., which have a price and volume risk profile, construction has a completely different risk profile. With construction, the price risk is solved by the bidding process so that it is transferred to the contractor. That leaves the completion risk - whether the asset is operational on time, or completed at all. Under Utah law, it is the investor who is supposed to bear the risk of loss as a developer of a public utility.
Used and useful has always provided the "bright-line" demarcation for the risk of completion of construction. Nevertheless, that does not mean the utility is without recovery during that time. The utility is collecting its allowance of funds used during construction ("AFUDC"). In Utah, it also has the option of filing for recovery of major plant additions.
The Principle of Used and Useful Is the Bedrock of Utility Regulation.
In determining whether the state of Illinois had taken the property of grain warehousemen by legislating a maximum rate for grain storage, the United States Supreme Court in Munn v. Illinois, 94 U.S. 113 (1876), set forth the historic theory underlying public regulation of private property:
Id. at 126 (citation and internal quotation marks omitted)[W]hen private property is affected with a public interest, it ceases to be juris privati only.. . . Property does become clothed with a public interest when used in a manner to make it of public consequence, and affect the community at large. When, therefore, one devotes his property to a use in which the public has an interest, he, in effect, grants to the public an interest in that use, and must submit to be controlled by the public for the common good, to the extent of the interest he has thus created. He may withdraw his grant by discontinuing the use; but, so long as he maintains the use, he must submit to the control.
Several years later, in Smyth v. Ames, 169 U.S. 466 (1898), the Court formulated for the first time a coherent test of the extent to which regulated companies were protected from legislative expropriation on behalf of the public. See id. at 546-47. In doing so, the Court, in weighing the considerations of equity between the interests of the providers and the consumers of a service, tied together what is or is not physically used and useful to the public service being provided. See id.
We hold, however, that the basis of all calculations as to the reasonableness of rates to be...
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