By Geoff Lubbock
Used and Useful Meets Energy Affordability
When utilities offer special discounts to low-income customers, critics sometimes ask: Isn’t that unfair “discrimination”? Or, more legalistically: Doesn’t the “used and useful” rule mean everyone has to pay the same cost-based rate?
Short answer: no. Modern low-income electric and gas discounts are not only lawful, they fit neatly within the evolution of U.S. utility law from Smyth v. Ames (1898) to FPC v. Hope Natural Gas (1944). The “used and useful” doctrine still matters for what goes into rate base, but it does not prohibit policy-driven rate design like affordability discounts.
This post walks through:
- Where “used and useful” came from and how it evolved
- What Hope really changed
- Why low-income discounts are “just and reasonable” and not “unduly discriminatory”
- How Massachusetts and California programs show this in practice
Where “Used and Useful” Comes From
The phrase “used and useful” doesn’t appear in Smyth v. Ames, 169 U.S. 466 (1898), but the idea is there.
In Smyth, the Supreme Court said a utility is constitutionally entitled to a fair return on the value of the property it is using to serve the public. That became the core of the “fair value” approach to ratemaking:
- Regulators had to determine the value of the physical plant serving customers.
- Only property currently serving the public could be included in the rate base.
State commissions and commentators later turned that into the “used and useful” shorthand: only assets presently used and useful in providing service belong in rate base. Customers shouldn’t be paying for plant and equipment that isn’t actually serving them, except in narrow cases like near-term additions or emergency backup.
But notice what Smyth was really doing:
- It was drawing a constitutional floor under rates, preventing states from making rates so low that they were confiscatory.
- It focused on how to value utility property, not on the fine details of rate design or social policy (like low-income discounts).
In other words, Smyth constrained how much total revenue a utility had to be allowed to collect, and on what property. It did not decide whether a commission could, for instance, charge elderly or low-income customers less while still recovering enough revenue overall.
The Shift from “Fair Value” to “End Result”
By the 1940s, Smyth‘s “fair value” approach had become unworkable. Calculating “reproduction cost new” for every asset was expensive, speculative, and wildly sensitive to inflation. Two Supreme Court cases dismantled this regime.
FPC v. Natural Gas Pipeline Co. (1942) began loosening fair-value’s grip, emphasizing that commissions had broad latitude as long as resulting rates were “just and reasonable.” FPC v. Hope Natural Gas Co. (1944) completed the transformation. The Court held that no single formula is constitutionally required—what matters is the end result. If the rate order allows the utility to maintain financial integrity, attract capital, and compensate investors for risk, while keeping rates just and reasonable for customers, the commission’s method is legitimate.
Hope also endorsed the shift from speculative fair value to prudent investment ratemaking: rate base reflects actual dollars prudently spent, minus depreciation. “Used and useful” survives as a screen for what enters rate base, but no longer as a rigid constitutional command.
Post-Hope cases like Permian Basin and Duquesne Light reinforced this deference, confirming that commissions can consider public interest factors and that their economic judgments warrant substantial respect. This doctrinal flexibility is what permits low-income discounts.
“Used and Useful” Today
“Used and useful” now appears in debates over stranded coal plants (should customers pay for assets shut down early?), grid modernization investments (smart meters with long-term, diffuse benefits), and variable renewables (wind and solar aren’t dispatchable 24/7, but provide fuel savings and carbon reductions). Hope‘s logic dominates: commissions have flexibility determining what’s useful in a modern system, and courts focus on whether the overall rate structure is just, reasonable, and allows utility financial soundness. This same flexibility permits public-interest rate design beyond pure cost-causation formulas.
Reasonable Discrimination
Most statutes prohibit “unduly” discriminatory rates—not identical pricing for all customers. Courts and commissions consistently allow different rate classes with different prices, provided the differences serve legitimate policy or cost-related purposes and similarly situated customers within each class are treated equally.
Low-income discounts qualify as reasonable discrimination because they serve clear public interests (affordability, preventing health-harming shutoffs, universal service for essential commodities), receive formal commission approval, and apply uniformly to all qualifying customers under objective criteria.
Under Hope, two questions matter: (1) Can the utility still recover prudently incurred costs and earn a fair return? (2) Are the resulting rates just, reasonable, and non-confiscatory? If yes, courts defer.
Low-income discounts don’t violate “used and useful” because customers collectively still pay only for assets actively providing service. The discount affects how the revenue requirement is allocated across classes—not whether idle plant enters rate base. The underlying infrastructure remains fully in service; only the cost sharing changes.
Case Studies: Low-Income Discounts in Practice
Two states demonstrate how low-income discounts work seamlessly within traditional ratemaking principles.
Massachusetts: Four Decades of Coexistence
Massachusetts has offered discounted utility rates since 1978, when the DPU approved the first reduced electric rates for elderly poor customers. The Massachusetts Supreme Court upheld these discounts in American Hoechst Corp. v. Department of Public Utilities, recognizing that regulators can approve rate differentials serving legitimate public purposes—even when customers use identical infrastructure.
The 1997 Electric Industry Restructuring Act (M.G.L. c. 164, § 1F(4)(i)) made low-income discounts mandatory, requiring investor-owned utilities to provide discounts on both basic service and distribution rates. Today, these discounts range from 20–40% off delivery charges, with some electric tariffs offering up to 71% reductions for the lowest-income tier. Eligibility is tied to means-tested programs like MassHealth and SNAP, plus a 60% state median income threshold.
The key to constitutional compliance: utilities remain financially whole through transparent cross-subsidies. The revenue shortfall from discounted customers is recovered through approved surcharges on other customer classes (like the Local Distribution Adjustment Factor). This satisfies Hope’s end-result test—utilities earn their reasonable return—while respecting “used and useful” principles. The distribution system actively serves these customers; the discounts simply reallocate costs across customer classes rather than recovering idle assets.
California’s CARE Program
California’s approach is equally instructive. In 1989, the CPUC established the Low-Income Ratepayer Assistance (LIRA) program, creating a separate low-income rate class with an initial 15% discount funded by surcharges on other customers. Later renamed CARE (California Alternate Rates for Energy) and codified in Public Utilities Code § 739.1, the program now provides roughly 30–35% off electric bills and 20% off gas for eligible households. A companion program, FERA, offers lighter discounts for moderate-income families.
CARE discounts are funded through non-bypassable surcharges, ensuring utilities recover prudently incurred costs and earn reasonable returns. CARE customers receive standard service over the same used and useful infrastructure as everyone else—the discount affects only how the revenue requirement is divided, not whether idle assets enter rate base.
Both Massachusetts and California prove that low-income discounts can advance social policy without threatening utility financial integrity or violating core ratemaking principles like Smyth, Hope, or “used and useful.”
Summary
Low-income discounts easily satisfy traditional ratemaking principles. Smyth v. Ames bars confiscatory rates but never mandated uniform pricing—it simply requires utilities earn a fair return on property serving the public. FPC v. Hope Natural Gas established that if the overall rate structure is just, reasonable, and non-confiscatory, courts won’t second-guess regulatory methods. “Used and useful” ensures rate base includes only plant actually serving customers, but says nothing about requiring identical rates.
Low-income discounts check every box: customers collectively pay only for infrastructure in active service (satisfying “used and useful”), commissions maintain utility financial viability through transparent cross-subsidies (Hope‘s end-result test), and the rate differentials serve legitimate public purposes without being unduly discriminatory. Rather than conflicting with constitutional principles, low-income discounts represent precisely the kind of flexible, public-interest ratemaking these precedents permit.