Prudence: Under Strain in California

Sun Dec 01 05:00:00 UTC 2019
Dr. Jeff D. Makholm

In an upcoming article in the December 2019 issue of the Wiley journal Natural Gas & Electricity, NERA Managing Director Dr. Jeff D. Makholm notes that perhaps the most basic feature of the success of regulation in the United States is prudence: the way US regulators judge the efficiency and efficacy of utility investment and expenditures that are recoverable through regulated rates. Dr. Makholm also analyzes the strain of the prudence standard in California as costs have risen to great heights due to factors outside of utilities’ control—the state’s fast-growing and highly destructive wildfire problem. Those costs, funneled through California’s utilities via a mechanism called “inverse condemnation,” has contributed to the loss of credit and/or bankruptcy of California’s electric utilities.

Dealing with the strain on the prudence standard as it applies to such sharply increased wildfire costs in California is a work in progress. Dr. Makholm suggests reexamining the thin thread of precedent applying a “public use” principle, and the resulting inverse condemnation problem, to private utility operations.

Makholm, Jeff D. (2019, December). “Prudence: Under Strain in California,” Natural Gas & Electricity, 36/5, ©2019 Wiley Periodicals, Inc., a Wiley company.