Uncertainties remain, but recent cases provide guidance.
Patricia D. Galloway is CEO and president of management consulting firm Pegasus Global Holdings. David L. Cousineau is an attorney at Kaye Scholer. The authors dedicate this article to Kris R. Nielsen (May 14, 1945-Feb. 16, 2013), who was the chairman and president of Pegasus Global Holdings, and a leader in the utility industry, known for his work on risk management and prudence audits, and advice to executive management. He also was the co-author of “New Day For Prudence,” which Fortnightly published in December 2009.
Utilities face numerous options as they modernize their baseload fleets: build new generating capacity, expand existing plants, refurbish and repower aging plants, and retire or decommission plants. Each of these options will require significant capital expenditures. Pre-approval of cost estimates for these types of projects—often called mega- or giga-projects—was intended to provide a buffer against the billions of dollars of cost disallowances that occurred in the 1970s and ’80s. Recent experience suggests, however, that utilities continue to face numerous obstacles to achieving full cost recovery. Indeed, in the last six months alone, two state commissions approved settlements that required significant disallowances, reinforcing the need for utilities to consider carefully at every step of a project how cost-recovery issues affect the management and execution of projects. But all isn’t grim. A careful reading of recent cases provides guidance for how utilities can increase the likelihood of recovering all their costs.