AB 1774 directs the California Public Utilities Commission (CPUC) to disallow for rate-making purposes any direct or indirect expenses that result from an "unreasonable" error or omission in the planning, construction, or operation of any portion of an electrical or gas corporation’s plant that cost, or was estimated to cost, more than $50,000,000. The disallowance explicitly includes expenses tied to delays caused by such errors or omissions.
The bill also creates a mandatory disallowance where a utility fails to prepare or keep records sufficient to let the commission fully evaluate the reasonableness or prudence of project costs, unless the commission finds a reasonable person could not have anticipated the relevance of those records. AB 1774 frames these rules as a clarification of CPUC authority, applies to matters pending before the commission, and preserves the commission’s ability to set rates using other bases than an allowed return on undepreciated capital.
At a Glance
What It Does
Requires the CPUC to disallow expenses tied to unreasonable errors or omissions for any plant segment costing or estimated to cost over $50 million, including delay-related costs; it also mandates disallowance when a utility’s records are insufficient for evaluation, subject to a narrow exception.
Who It Affects
Investor-owned electrical and gas corporations operating in California (for example, PG&E, SCE, SDG&E and major gas utilities), their contractors and project managers, CPUC staff and intervenors, and ultimately California ratepayers who finance utility capital through rates.
Why It Matters
The bill shifts more financial risk for large project missteps onto utilities (and indirectly their shareholders or contractors) and raises the stakes on project governance, contract terms, and recordkeeping. It gives the CPUC a clearer statutory handle to deny recovery of big, avoidable cost overruns.
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What This Bill Actually Does
At its core, AB 1774 creates two blunt tools the CPUC must use when assessing whether utility customers should pay for large project costs. First, if any portion of an electrical or gas corporation’s plant costs—or is estimated to have cost—more than $50 million, the commission must disallow expenses that are the result of an unreasonable error or omission in planning, construction, or operation.
That disallowance covers direct costs and indirect costs tied to the error or omission, and explicitly includes costs caused by delays.
Second, the bill requires disallowance when a utility has failed to prepare or maintain records adequate to let the commission fully evaluate an expense’s reasonableness or prudence. The statute carves out a narrow safety valve: the recordkeeping rule does not apply when the commission concludes a reasonable person could not have anticipated the relevance of the missing records for evaluating project costs.AB 1774 provides concrete definitions for the key terms. "Planning," "construction," and "operation" are defined to include common project activities such as site selection, engineering and procurement, startup, dispatch, and maintenance. "Error" and "omission" are defined functionally: either an action or a failure to act that causes an avoidable increase in time to reach commercial operation, changes in necessary personnel, additional worker hours, or changes to equipment, configuration, design, schedule, or program.The bill labels itself a clarification of the CPUC’s existing authority and says it does not limit other statutory powers; it also applies to all matters pending before the commission.
Practically, this creates a stronger, statutory incentive for utilities to tighten project governance, retain contemporaneous records, and re-evaluate how they contract for and allocate risk on projects likely to exceed the $50 million threshold. It also invites litigation over what counts as "unreasonable," how to allocate indirect costs, and when the recordkeeping exception applies.
The Five Things You Need to Know
Threshold: The rule kicks in for any portion of a utility’s plant that "cost, or is estimated to have cost, more than $50,000,000"—the statute ties the disallowance to the size of the plant segment, not the utility’s total capital budget.
Mandatory disallowance: The commission must disallow expenses that reflect direct or indirect costs resulting from any "unreasonable error or omission," and that disallowance explicitly covers delay-related costs.
Recordkeeping trigger: If a utility fails to prepare or maintain records sufficient for the commission to fully evaluate the reasonableness or prudence of a project expense, the commission must disallow that expense unless it finds a reasonable person could not have anticipated the record’s relevance.
Functional definitions: "Error" and "omission" are tied to avoidable harms—specifically avoidable increases in time to commercial operation, changes in personnel, additional worker hours, or changes to equipment/configuration/design/schedule—giving the commission defined touchpoints for assessing imprudence.
Scope and preservation of authority: The bill states it clarifies existing CPUC authority, applies to pending matters, and expressly does not prevent the commission from using rate-setting methods other than allowed returns on undepreciated capital.
Section-by-Section Breakdown
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Disallowance for unreasonable errors or omissions on >$50M plant portions
Subdivision (a) directs the commission to disallow expenses that reflect direct or indirect costs from "unreasonable" errors or omissions tied to planning, construction, or operation of any plant portion costing or estimated to cost over $50 million. The provision also names delays caused by such errors or omissions as disallowable. Practically, this creates a bright-dollar threshold that focuses scrutiny on large-capital elements (for example, a substation, major transmission line segment, or generation unit) rather than smaller maintenance projects.
Clarification of authority and application to pending matters
The same subdivision clarifies that the statute is a clarification of the commission’s existing authority and is not intended to limit other powers granted by law. It also states the rule applies to all matters pending before the CPUC. That means the provision is written to reach ongoing proceedings, but it leaves open how the commission will reconcile retroactive disallowances with prior rate decisions and prudence findings.
Mandatory disallowance for inadequate recordkeeping (with narrow exception)
Subdivision (b) requires the CPUC to disallow an expense when a utility fails to prepare or maintain records sufficient to enable a complete evaluation of any relevant issue about reasonableness or prudence for planning, construction, or operation costs. The statute provides one exception: the rule does not apply if the commission finds a reasonable person could not have anticipated the relevance of the records or the extent of recordkeeping needed. This flips the burden toward contemporaneous documentation and makes record-retention a substantive prerequisite for cost recovery.
Definitions: planning, construction, and operation
Subdivision (c) defines "planning," "construction," and "operation" expansively and in practical, activity-based terms—site selection and environmental investigation; engineering, procurement, and quality control; and dispatch, fuel loading, and maintenance. Those functional definitions guide what the commission will examine when deciding whether an error or omission occurred and which project activities must have been documented.
Definitions: "error" and "omission" tied to avoidable harms
The final clauses set out what counts as an "error" or "omission": either an action or a failure to act that causes an avoidable increase in time to commercial operation, a change in personnel or firms required, increased worker hours, or changes in equipment, design, schedule, or program. Those concrete markers give the commission measurable factors to evaluate, but they also invite factual disputes about avoidability and causation.
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Explore Energy in Codify Search →Who Benefits and Who Bears the Cost
Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Residential and commercial ratepayers in California — gain stronger statutory protection against passing large, avoidable cost overruns through rates for projects (or plant portions) exceeding $50 million.
- Office of the Public Advocate / intervenors — obtain a clearer statutory basis to challenge recovery of imprudent costs and to press for tighter project records and disclosures.
- Competitors and developers of smaller projects — may benefit indirectly because utilities facing stricter recovery tests may pursue more disciplined procurement and fairer contracting, reducing anti-competitive cross-subsidies or preferential treatment.
Who Bears the Cost
- Investor-owned electrical and gas corporations (e.g., PG&E, SCE, SDG&E) — face heightened risk that large project costs will be disallowed, increasing the need for governance, documentation, and potential write-offs or shareholder exposure.
- Contractors and design firms working on large projects — likely face tighter oversight, stronger contractual risk-shifting, increased audit exposure, and pressure for more detailed contemporaneous records.
- California Public Utilities Commission staff and administrative law judges — will bear added adjudicative and investigatory workload to determine "unreasonable" conduct, causation, and whether missing records were reasonably foreseeable, potentially requiring new procedural guidance and resources.
- Insurers and surety markets — may see higher underwriting risk or demand different terms as large project recovery becomes less certain, raising premiums or limiting coverage for certain construction risks.
Key Issues
The Core Tension
The central dilemma is balancing protection for ratepayers against imprudent, avoidable expenditures with the need to avoid creating a hindsight-driven penalty regime that discourages utilities from undertaking necessary, complex infrastructure projects; the bill deters poor project governance but risks shifting investment risk in ways that may raise costs or reduce privately financed infrastructure.
The bill seeks to make imprudence costly to utilities, but it relies on several fact-intensive determinations that will be litigated. "Unreasonable" is inherently retrospective; distinguishing true managerial negligence from difficult, unforeseeable problems (for example, novel supply-chain interruptions or unanticipated regulatory changes) will require the CPUC to develop evidentiary standards and guardrails. The statute’s $50 million threshold focuses attention, but does not resolve questions about how to allocate indirect costs across multiple project segments or how to treat cost estimates that change over time.
The recordkeeping trigger is practical but ambiguous. The exception for situations where a "reasonable person could not have anticipated" relevance creates a critical discretionary inquiry: who is the reasonable person (project manager, utility executive, regulator) and what contemporaneous standards govern record retention?
Those uncertainties will drive litigation and raise compliance costs. There is also a behavioral risk: utilities may restructure projects into smaller components to avoid the threshold, shift costs off books, or reclassify spending to categories less susceptible to scrutiny.
Conversely, the statute could chill investment in risky but socially valuable infrastructure if utilities fear hindsight disallowances, or it could push more cost into shareholder-funded contingency rather than ratepayer-funded capital.
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