Why are electricians allowed to sometimes lower the size of the grounded (neutral) conductor?
As DrMoishe points out some pieces of equipment use mostly 240 volts and very little 120 volt power. It is the 120 volt power that uses the neutral. Therefore the National Electrical Code allows the downsizing of the neutral in limited application. This is NOT blanket permission to downsize all neutrals. It is only applicable in a few instances.
It is possible to downsize a feeder or service neutral according to the calculations in the National Electrical Code here:
220.61 Feeder or Service Neutral Load.
(A) Basic Calculation. The feeder or service neutral load shall be the maximum unbalance of the load determined by this article. The maximum unbalanced load shall be the maximum net calculated load between the neutral conductor and any one ungrounded conductor.
Exception: For 3-wire, 2-phase or 5-wire, 2-phase systems, the maximum unbalanced load shall be the maximum net calculated load between the neutral conductor and any one ungrounded conductor multiplied by 140 percent.
(B) Permitted Reductions. A service or feeder supplying the following loads shall be permitted to have an additional demand factor of 70 percent applied to the amount in 220.61(B)(1) or portion of the amount in 220.61(B)(2) deter‐ mined by the following basic calculations:
(1) A feeder or service supplying household electric ranges, wall-mounted ovens, counter-mounted cooking units, and electric dryers, where the maximum unbalanced load has been determined in accordance with Table 220.55 for ranges and Table 220.54 for dryers
(2) That portion of the unbalanced load in excess of 200 amperes where the feeder or service is supplied from a 3-wire dc or single-phase ac system; or a 4-wire, 3-phase system; or a 3-wire, 2-phase system; or a 5-wire, 2-phase system
Informational Note: See Examples D1(a), D1(b), D2(b), D4(a), and D5(a) in Informative Annex D.
(C) Prohibited Reductions. There shall be no reduction of the neutral or grounded conductor capacity applied to the amount in 220.61(C)(1), or portion of the amount in (C)(2), from that determined by the basic calculation:
(1) Any portion of a 3-wire circuit consisting of 2 ungrounded conductors and the neutral conductor of a 4-wire, 3-phase, wye-connected system
(2) That portion consisting of nonlinear loads supplied from a 4-wire, wye-connected, 3-phase system
Informational Note: A 3-phase, 4-wire, wye-connected power system used to supply power to nonlinear loads may necessitate that the power system design allow for the possibility of high harmonic neutral conductor currents.
Regarding branch circuits, the code allows the downsizing of ranges and cooking equipment here, attention to exception 2:
210.19(A)(3) Household Ranges and Cooking Appliances. Branch-circuit conductors supplying household ranges, wall-mounted ovens, counter-mounted cooking units, and other household cooking appliances shall have an ampacity not less than the rating of the branch circuit and not less than the maximum load to be served. For ranges of 8 3∕4 kW or more rating, the minimum branch-circuit rating shall be 40 amperes.
Exception No. 1: Conductors tapped from a 50-ampere branch circuit supplying electric ranges, wall-mounted electric ovens, and counter-mounted electric cooking units shall have an ampacity of not less than 20 amperes and shall be sufficient for the load to be served. These tap conductors include any conductors that are a part of the leads supplied with the appliance that are smaller than the branch-circuit conductors. The taps shall not be longer than necessary for servicing the appliance.
Exception No. 2: The neutral conductor of a 3-wire branch circuit supplying a household electric range, a wall-mounted oven, or a counter-mounted cooking unit shall be permitted to be smaller than the ungrounded conductors where the maximum demand of a range of 8 3∕4-kW or more rating has been calculated according to Column C of Table 220.55, but such conductor shall have an ampacity of not less than 70 percent of the branch-circuit rating and shall not be smaller than 10 AWG.
There are no other allowances for a downsized neutral that I can find in the National Electrical Code.
Most dryers and ranges are wired with NM cable and will therefore have full sized neutrals anyway. If you are wiring with conduit, you could use this exception for the range.
The dryer circuit neutral has to be able to carry the full imbalance of the load. Since that load is unknown because you are wiring a receptacle not a piece of equipment, then the neutral must be full sized. These circuits are normally #10 wire and the range exception sets the minimum at #10 so there would be no reduction even if dryers used the same exception.
Hopefully, this will help to clarify this subject.