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New Day for Prudence

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

Fortnightly Magazine - December 2009

severely outdated and couldn’t be relied on, and that the utilities had ignored the substantial risk that future state or federal CO 2 regulations would harm and erode the economics of Big Stone 2. In short, the intervenors argued that the project should be rejected because of the utilities’ failure to prove they’d anticipated and mitigated all possible future risks.

In a similar matter, the Florida Public Service Commission (PSC) allowed recovery of costs sought in a 2008 utility application, ruling they were reasonably and prudently incurred. However, in order to address assertions by the Office of Public Counsel that the utility’s documentation was insufficient to prove the costs of its sole source and single contracting approach, the Florida PSC recommended that prospectively the utility should increase its documentation and support for single source and sole source controls for projects that would be included under its nuclear construction rule. The PSC also recommended on-going auditing and “refinement” of the utility’s project-management policies and procedures. 2

In North Carolina, the Office of Public Counsel filed testimony creating even more uncertainty as to how prudence reviews of costs not yet incurred would be handled, arguing for results based on after-the-fact review of the initial prospective review:

“Imprudent actions without substantive adverse impacts have in the past not been investigated by regulators… It will further be required to review the reasonableness of costs incurred and decisions made year by year despite having resources that are a tiny fraction of those devoted to making those decisions. A prudence review without a cost overrun is to a real prudence review as a doctor’s physical exam is to an autopsy. Just as a person may pass a physical exam one month and die the next, so as a transaction may pass a review based on the level of information provided in this proceeding only to be revealed as imprudent by later rate impacts indicative of significant infirmities.  3

While the North Carolina commission held that it was reasonable and prudent for a utility to proceed with the construction of the Lee nuclear units, with a cap for project development costs, the commission also noted that it hadn’t ruled relative to the reasonableness and prudence of specific project-development activities or costs that later would be subject to a determination of prudence and reasonableness. 4 This means that in at least North Carolina, prudence determinations are continuing and that a certified prudent decision today can be reviewed tomorrow based on the results of that decision.

Defining Prudence

Some states have codified the definition of prudence, but most haven’t. Many states have issued prior regulatory and judicial decisions articulating the appropriate standard, most of which arose during prudence reviews of over-budget nuclear plants. Other states have either regulations or statutes that refer to the recovery of “reasonably incurred costs,” or the regulatory commissions’ right to conduct “prudence reviews,” without further explanation. 5

The majority of jurisdictions conducting prudence reviews have adopted a common definition of prudence—a test of reasonableness of the decision under all of the circumstances known at the time.