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New Day for Prudence

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

Fortnightly Magazine - December 2009

of need. 10

The Florida PSC adopted a definition of prudence in an Oct. 2, 2008 order as follows: “…other testimony based on management audits assert FPC was reasonable and followed reasonable business practices. This is significant because the standard for determining prudency is consideration of what a reasonable utility manager would have done in light of conditions and circumstances, which were known or reasonably should have been known at the time the decision was made.” 11

While the Florida formulation resembles other prudence definitions most commonly adopted and used in other states, not everyone agrees. Ohio consumer’s counsel provides one example. Also, a staff consulting expert in a recent state prudence case proposed that costs not be classified as either prudent or imprudently incurred, but rather as avoidable or unavoidable. Abandoning the reasonable-manager test, as articulated by the Florida commission, and adopting vague and undefined terms such as avoidable, results in confusion and provides little guidance to either utilities or regulatory commissions in evaluating prudency.

In the midst of uncertainty in this new age of power plant construction, utilities thus will be looking toward design-build and engineering, procurement and construction (EPC) contractors to provide mechanisms that will prove the prudency of costs and any changes to the original estimate. The prudence evaluation will focus on the efficiency of the decision-making and implementation process, which typically includes: 12

• Identification of what data was available, including how the management systems and procedures were organized and implemented to produce the information to enable analysis. Was the data reliable? What was the timeliness of the data to the decision?
• Flow of the information including to whom and when the data was transmitted and what available data was communicated.
• Analysis of the information including what the information meant, what alternatives were considered, what benefits and impacts were projected and how the decision meshed with project, corporate and ratepayer needs.
• Determination of what decisions were made, including when each decision was made, how it was monitored and how it was reviewed as assumptions and circumstances changed.

Future Expectations

In the 1980s, U.S. utilities and their respective shareholders lost billions of dollars when commissions made determinations of imprudent spending. Utilities were caught in the midst of regulatory changes that demanded plant design changes, and ever-increasing costs for which reasonableness couldn’t be accurately documented. Plants such as Marble Hill were abandoned. Some were completed but never started operating, including Zimmer and Shoreham. Challenges in plant operations in the 1980s and 1990s caused extended outages and early shutdowns, at such plants as Zion and Maine Yankee, in many cases triggering additional prudence reviews.

Today, the challenges to new nuclear construction include the lack of a U.S. infrastructure for manufacturing, services and a craft labor force. Also, the knowledge and experience of nuclear construction workers from the previous fleet of plants are seriously diminished. And despite high hopes about greater certainty with standardized plant designs and a consolidated licensing process in the United States, some current foreign projects are over budget and behind schedule. It isn’t surprising