Can Regulators Base Rates on Secret Information?

A utility’s plant construction exceeds budget by hundreds of millions.  It seeks cost recovery, claiming that the design changes, delays and scheduling conflicts that caused the overrun were not its fault.  But it insists the supporting data is confidential.   A reporter asked me:  Can the state commission make customers pay for the overrun when the claimed support remains secret? 

There are two legal principles relevant to the question.

1. In any request for cost recovery, statutes make the utility bear the burden of proof:  the obligation to present the information necessary to persuade the tribunal.  The burden of proof is sometimes called the “risk of non-persuasion.”   If the tribunal lacks the data necessary to judge the utility’s prudence, the tribunal will remain unpersuaded.  Since the utility bears the risk of non-persuasion, it loses. 

2. Statutes require all regulatory decisions to be based on “substantial evidence.”  To allow cost recovery, the commission must not only possess the supporting information; the commission’s opinion must also display that information and explain its persuasive role.  Otherwise, a reviewing court (and the public) cannot know if the decision is arbitrary.  Without the information, and without the explanation, there cannot be a credible decision. Again, then, the utility loses.

These two principles—the tribunal’s obligation to base its decisions on substantial evidence, and the utility’s burden of proof—combine to leave the tribunal unable, legally, to approve a request for cost recovery when the utility withholds essential information.

There are ways to reconcile a utility’s need to keep data secret with the principles stated above.  The classic way is to provide the data to the tribunal, and to the parties, under a commission order requiring that the information be kept secret.  While this approach excludes the public, at least the commission can make an evidence-based decision.  The problem remains, however, that the commission will be unable to explain its decision to a reviewing court.  

And a separate question arises:  When is it appropriate for a tribunal to allow such secrecy?  Case law varies across the country.  It is always a balancing test, of the public’s need to know versus the utility’s business needs.  But what business needs would justify compromising the public’s need to know?  When a utility is not subject to retail competition for electricity (as was the case in this example), a business risk in disclosure seems unlikely, because the utility should have no business aims that conflict with its obligation to serve. 

Sometimes, though, the insistence on secrecy comes from the utility’s contractors, who agree to supply certain services only on the utility’s agreement to keep things confidential.  These external agreements create real awkwardness.  But the foregoing two principles remain.  If the utility cannot produce the evidence, then it cannot have the cost recovery.