In competitive power markets based on locational marginal pricing (LMP), the facts sometimes conflict with popular belief. Most notably: 1. When there’s congestion, the books don’t balance, and...
Cost-Recovery for Pre-Approved Projects
Uncertainties remain, but recent cases provide guidance.
might need to demonstrate that it has enforced its legal remedies for contractor misfeasance. Commissions will be unlikely to approve full cost recovery if they believe the utility hasn’t made a reasonable attempt to recover increased costs from its contractors, even if the utility itself was prudent. Of course, contract limitations or the facts of a particular increase could preclude recovery, but a well-planned prudence strategy will already have laid the foundation for demonstrating that the contractual provisions that preclude recovery were prudent at the time the contract was signed. Again, the foundations for such a showing are best laid early in the proceedings so that regulators appreciate the risk-reward tradeoff before allegations of imprudence arise.
These lessons as well as many others emerge from understanding and appreciating the role expected of utilities for pre-approved projects. Ninety years ago, Justice Brandeis described utilities as “the substitute for the state in the performance of the public service, thus becoming a public servant.” 13 By taking that role to heart and treating mega- or giga-projects as partnerships with commissions, utilities can enhance their ability to recover all their costs.
2. P. Galloway, K. Nielsen, and C. Whitney, “ New Day for Prudence ,” Public Utilities Fortnightly, December 2009.