The Standard for Prudent Managerial Action

The standard in a reasonableness review of managerial action is settled, and there is no dispute between Southwest, ORA, and the County on the standard for reviewing the gas purchasing actions of Southwest in the period from June 1, 1999 to May 31, 2001. In a reasonableness review:

"Utilities are held to a standard of reasonableness based upon the facts that are known or should be known at the time. While this reasonableness standard can be clarified through the adoption of guidelines, the utilities should be aware that guidelines are only advisory in nature and do not relieve the utility of its burden to show that its actions were reasonable in light of circumstances existent at the time. Whatever guidelines are in place, the utility always will be required to demonstrate that its actions are reasonable through clear and convincing evidence."³

Thus, the reasonableness of a particular management action depends on what the utility knew or should have known at the time that the managerial decision was made, not how the decision holds up in light of future developments. The Commission has affirmed this standard of review in numerous decisions over the last twenty years:

"The term `reasonable and prudent' means that at a particular time any of the practices, methods, and acts engaged in by a utility follows the exercise of reasonable judgment in light of facts known or which should have been known at the time the decision was made. The act or decision is expected by the utility to accomplish the desired result at the lowest reasonable cost consistent with good utility practices. Good utility practices are based upon cost effectiveness, reliability, safety, and expedition.

"A `reasonable and prudent' act is not limited to the optimum practice, method, or act to the exclusion of all others, but rather encompasses a spectrum of possible practices, methods, or acts consistent with the utility system needs, the interest of the ratepayers and the requirements of governmental agencies of competent jurisdiction."⁴

The standard of reasonableness does not derive from the consequences of managerial action, but the soundness of the utility's decision-making process that led to the decision and the consequences:

"Thus, a decision may be found to be reasonable and prudent if the utility shows that its decision making process was sound, that its managers considered a range of possible options in light of information that was or should have been available to them, and that its managers decided on a course of action that fell within the bounds of reasonableness, even if it turns out not to have led to the best possible outcome. As we have previously stated, the action selected should logically be expected, at the time the decision is made, to accomplish the desired result at the lowest reasonable cost consistent with good utility practices."⁵

At times, the Commission has noted that this standard can prove difficult to apply. In applying this standard of review to amendments to existing contracts concerning the supply of electric power, the CPUC has noted:

"Although different approaches may be preferable in other circumstances, for purposes of the review of amendments to existing contracts, as required in this case, we have found the following approach to be useful. We have first examined the goals that the utility hoped to achieve in the negotiations and have evaluated whether that goal was reasonable. We then compared the actual outcome with the goal. Finally, we considered whether a reasonable and prudent utility would have taken other steps to come closer to achieving the utility's goals."⁶

More generally:

"The reasonable and prudent act is not limited to the optimum act, but includes a spectrum of possible acts consistent with the utility system need, the interest of the ratepayers, and the requirements of governmental agencies of competent jurisdiction." ⁷

On the other hand:

"The greater the level of money, risk and uncertainty involved in a decision, the greater the care the utility must take in reaching that decision;"⁸

And:

"The burden rests heavily upon a utility to prove with clear and convincing evidence, that it is entitled to the requested rate relief and not upon the Commission, its staff, or any interested party to prove the contrary."⁹

Thus, although the utility need not show that it has undertaken the optimal act, it must show that its course of action was reasonable and that the utility took care in making its decision. Finally, it is the utility, not the staff or interested parties, that faces the burden of showing with clear and convincing evidence that its course of action was reasonable and therefore entitled to compensation.

³ D.88-03-036 (1988 Cal. PUC LEXIS 155,*7; 27 CPUC2d 525). ⁴ D.87-06-021 (1987 Cal. PUC Lexis 588, *28-29, 24 CPUC 2d 476). ⁵ D.89-02-074 (1989 Cal. PUC Lexis 128, *11, 31 CPUC 2d, 236). ⁶ D.89-02-074 (1989 Cal. PUC Lexis 128, *14, 31 CPUC 2d, 236). ⁷ D.90-09-088 (1990 Cal PUC Lexis, 847, *23-25, 37 CPUC 2d 488, 499), based on language in D.87-06-021, and quoted with approval in D.98-09-040 (1998 Cal. PUC Lexis 972 *34-35). ⁸ Ibid. ⁹ Ibid.