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New Day for Prudence

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

Fortnightly Magazine - December 2009

One example is Missouri, where the Missouri Public Service Commission has defined prudence as:

[The] company’s conduct should be judged by asking whether the conduct was reasonable at the time, under all the circumstances, considering that the company had to solve its problem prospectively rather than in reliance on hindsight. In effect, our responsibility is to determine how reasonable people would have performed the tasks that confronted the company… In accepting a reasonable care standard, the Commission does not adopt a standard of perfection. Perfection relies on hindsight. Under the reasonableness standard relevant factors to consider are the manner and timeliness in which problems were recognized and addressed. Perfection would require a trouble-free project.  6

The North Carolina, Texas, Georgia, Kansas and Missouri commissions are actively involved in new power plant construction cases involving the demonstration of prudent costs. The Ohio Consumer’s Council has proposed expanding the “zone of reasonableness” test in prudency determinations from not just a range of reasonable management decisions, but also to include a zone of reasonableness for costs incurred, with the provision that reasonable costs might not be prudent. In short, the Ohio consumer’s counsel has taken the harsh and extreme position that reasonable decisions resulting in reasonable costs may, at some future point in time, be reviewed and found imprudent. Consumer’s counsel told the commission last year, “Costs for which utilities seek recovery that fall within the zone of reasonableness are not necessarily—and should not be presumed to be—prudent… The importance is that a cost the utility seeks to recover could fall within the zone of reasonableness but it may not have been the most prudent option.”  7

The result, if the Ohio proposal is adopted, will be that every cost can be, and probably will be, questioned.

Compare this approach and its impact on the potential risk profile of a project, with the prudence definition derived in the 1970s and 1980s, and commonly accepted in the utility industry, that decisions are prudent, if made in a reasonable manner, in light of conditions and circumstances which were known or reasonably should have been known when the decision was made. 8

In 2006, the Florida legislature enacted legislation to encourage utility investment in nuclear electric generation by creating a defined cost-recovery mechanism. The statute authorizes the commission to allow investor-owned utilities to recover certain construction costs in a manner that reduces the overall financial risk associated with utility nuclear power plants. 9 Pursuant to Florida regulatory commission rules, once the utility obtains an affirmative need determination, it may petition for cost recovery. The statute notes three types of prudently-incurred costs in the rule for PSC consideration: pre-construction costs, incurred after a site is selected through the date of completed site clearing work; construction costs, expended to construct the nuclear or integrated gasification combined-cycle power plant including, but not limited to, the costs of constructing power plant buildings and all associated permanent stations, equipment and systems; and site-selection costs, incurred prior to a selection of a site. A site is deemed selected upon the filing for a determination