Used and Useful

Definition

"Used and useful" is a regulatory standard applied to energy assets, determining if they are actively providing services to customers. It assesses whether infrastructure, such as power plants and pipelines, is operational and contributing to customer needs and system reliability.

This concept ensures that only operationally essential assets are included in the calculation for setting rates and tariffs. It excludes idle or redundant facilities from rate bases, preventing utility companies from charging customers for non-functional assets.

Commonly used across utilities and energy infrastructure operations, this standard influences charges passed onto consumers, affecting electricity, gas, and water services.

In simple terms, "used and useful" ensures customers pay for only those facilities that are functional and necessary.

Significance in Energy & Investing

The "used and useful" concept supports the utility industry by ensuring that service rates reflect the actual utility provided to consumers. By limiting rate calculations to operationally essential assets, it maintains fairness in consumer billing and ensures asset productivity.

Operationally, this standard requires utilities to maintain and regularly assess infrastructure to confirm its service contribution. Pipelines must transport resources, power plants must produce electricity, and storage facilities must hold reserves, directly impacting operation costs and profitability.

In the context of energy transition, "used and useful" benchmarking supports smarter infrastructure investment decisions and helps mitigate against stranded assets, especially in renewable energy integration and fossil fuel transition.

Regulators like the Federal Energy Regulatory Commission (FERC) use this criteria in ratemaking decisions. For example, when assessing a new power plant's cost recovery, it must be deemed "used and useful" before costs can be recouped from consumers.

Implications for Investors

For investors, "used and useful" impacts revenue by affecting how utilities can recover costs. Assets deemed not operational may not contribute to earnings, affecting a company’s financial performance and valuation. Stable revenue streams rely on maximally utilized, productive assets recognized under this standard.

Public market investors should review regulatory filings to understand how a company’s assets are classified. Infrastructure that consistently meets "used and useful" criteria indicates reliability and operational soundness, vital in valuing investments.

Direct investors in mineral rights and royalties must consider how "used and useful" influences production quantities. As asset productivity governs cash flows, understanding which operations meet this criteria can clarify returns on investment.

A common misconception is that all investments in a utility's infrastructure pass costs to consumers automatically. In reality, only "used and useful" operations qualify, which can exclude speculative or unproductive ventures.

Red flags for investors include aging infrastructure or projects without clear "used and useful" designations, which present risk of underperformance and unexpected costs that compromise returns.