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New Day for Prudence

Pre-approvals demand a new approach to managing risks and costs.

Fortnightly Magazine - December 2009

and processes and continually evaluating them. As noted in an August 2008 Florida PSC Bureau of Performance Analysis report:

Well constructed internal controls assist with the challenges of risk management and decision-making. Risks must be identified and appropriate protections must be established to prevent or control these risks. Prudent decision-making results from orderly, well-defined processes that address known risks, needs and capabilities. Adherence to written procedures, effective communication, vigilant contractor oversight, and on-going auditing and quality assurance are all essential for ensuring that project costs are incurred prudently.  15

In the coming wave of construction, as each project unfolds changes will occur, so additional review might be necessary. New situations might require new decisions, and each decision is subject to a prudency evaluation, especially any change to pre-approved construction costs.

Effective management begins with planning and it continues with the systematic collection, preservation, and retrieval of project information and other data that provides support for the decision-making process and the costs incurred. Utilities, if they are to succeed in this new age of prudency, will have to document their decision-making process from the very beginning and demand that their contractors do the same. However, in today’s world, the utility companies must face the fact that prudency isn’t just a concept, but a requirement, and if not met, the risk of disallowed costs increases greatly. Utilities have little option but to move forward, even if it means venturing into unmarked territory.

 

Endnotes:

1. Presentation by Michael J. Wallace, President and CEO Constellation Energy Nuclear Group, Chairman, Unistar Nuclear Energy, EEI International Utility Conference 2008.

2. Docket No. 08-0009-E, Florida PSC Order, Oct. 2, 2008.

3. Testimony of Peter Bradford, North Carolina PSC, Docket No. E-7, Sub 819, Mar. 27, 2008.

4. Docket No. E-7, Sub 819, North Carolina PSC, Aug. 25, 2008

5. See, e.g. § 386.266 R.S. Mo. (2008) (“The commission may approve ... such rate schedules after considering all relevant factors which may affect the costs or overall rates and charges of the corporation, provided that it finds the adjustment mechanism ... (4) ... includes provisions for prudence reviews of the costs subject to the adjustment mechanism ... and shall require refund of any imprudently incurred costs...”). See also 4 C.S.R. 240-20.090(1)(B) (2008) (“Fuel and purchased power costs means prudently incurred and used fuel and purchased power costs, including transportation costs.”)[Same definition at 4 C.S.R. 240-3.161(1) (A).]

6. Union Electric , 27 Mo. PSC (N.S.) 183, 194 (quoting Consolidated Edison Co. of New York , 45 P.U.R.4th 331 (1982) (internal quotations omitted).

7. Migden-Ostrander, Janine L., Jan. 16, 2008 “Transparency, Special Contracts and Side-Deals,” Office of Consumer Counsel to the House Public Utilities Commission.

8. Galloway and Nielsen, “Preparing for the Utilities’ Future-Managing the Prudence Issue,” EP, Volume 2, No. 4, 1986.

9. F.S. 366.93.

10. Florida Rule 25-6.0423(4) and (5) F.A.C.

11. Docket No. 080009-EI, Florida PSC, Oct. 2, 2008.

12. K. Nielsen and P. Galloway, “The Prudency Management Audit-A New Challenge for the Civil Engineer,” Transitions in the Nuclear Industry-Proceedings of the symposium sponsored by the Construction