When an expensive new power plant or major transmission facility enters
service, regulators often perform a prudence review to determine if the facility
was built in an economic fashion. Often consultants with power-sector
construction experience are retained to perform the review. If the planning or
construction is deemed imprudent, the commission may disallow a portion
of the investment, refusing to include it in the rate base. A similar review may
determine if the plant is actually used and useful in the provision of service
to customers; if not, excess generating capacity or other plant costs may be
excluded from the rate base.
In some states, a pre-approval process for major investments is used,
so that the commission reviews major projects for cost, consistency with
resource planning goals, and other factors before they are built. This is
becoming increasingly important as older power plants face significant
environmental retrofit costs. (See section 16 on environmental issues.)