AB 2762 requires the California Public Utilities Commission (CPUC) to disallow any expenses that reflect direct or indirect costs caused by an "unreasonable" error or omission in the planning, construction, or operation of an electrical or gas utility plant when that error or omission costs, or is estimated to cost, more than $50 million. The disallowance also covers expenses resulting from delays tied to those errors or omissions.
The bill also mandates disallowance where a utility fails to keep records sufficient for the CPUC to evaluate the reasonableness and prudence of project costs, subject to a narrow exception where a reasonable person could not have anticipated the relevance of the records. AB 2762 clarifies that these provisions are intended as a clarification of the commission’s authority, do not limit other statutory powers, and apply to matters pending before the commission.
At a Glance
What It Does
The bill requires the CPUC to refuse cost recovery in rates for any direct or indirect costs caused by an unreasonable planning, construction, or operation error or omission that costs (or is estimated to cost) over $50 million, and to disallow costs when records are insufficient to permit a full prudence review unless the relevance of those records was unforeseeable.
Who It Affects
Investor-owned electric and gas utilities regulated by the CPUC, their contractors and project managers, CPUC staff and intervenors who litigate prudence reviews, and ultimately California ratepayers and utility shareholders who absorb unrecovered costs.
Why It Matters
AB 2762 raises the bar for which large project overruns can be shifted into rates, increases the legal and recordkeeping stakes for major infrastructure projects, and signals a tighter prudence standard for multi‑hundred‑million dollar investments that will affect capital planning and risk allocation.
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What This Bill Actually Does
AB 2762 changes how the CPUC treats large cost overruns and documentation gaps in utility plant projects. When an identifiable error or omission in planning, construction, or operation produces direct or indirect costs — or is expected to produce costs — exceeding $50 million, the commission must disallow those costs from rate recovery.
The statutory language expressly reaches costs attributable to delay as well as to concrete changes in scope, design, staffing, or schedule.
The bill tightens recordkeeping incentives by requiring disallowance where a utility ‘‘fails to prepare or maintain records sufficient’’ to permit a complete evaluation of the prudence of project costs. That rule contains a limited safety valve: the commission need not disallow costs if a reasonable person could not have anticipated either the relevance of the missing records or the extent of records needed to evaluate the costs.AB 2762 then supplies working definitions: "planning," "construction," and "operation" are described broadly to cover everything from site selection and procurement to dispatch and maintenance.
The statute also defines "error" and "omission" as any action or failure to act that causes an avoidable increase in time to commercial operation, changes in required personnel or firms, more worker hours, or changes in equipment, configuration, design, schedule, or program. Those definitions are operational: they tie the abstract concept of imprudence to measurable project impacts.Finally, the bill frames itself as a clarification of the CPUC’s existing authority, not a limitation on other powers or rate-setting methods, and expressly applies to matters already pending before the commission.
That means the new rules would govern both new and some ongoing prudence proceedings, creating immediate implementation issues for large projects under review.
The Five Things You Need to Know
The bill directs the CPUC to disallow recovery of direct and indirect costs produced by an "unreasonable" error or omission that costs or is estimated to cost more than $50,000,000, including delay-related expenses.
If a utility fails to prepare or keep records adequate for a full CPUC evaluation of project reasonableness, the commission must disallow those costs unless a reasonable person could not have anticipated the records' relevance or needed extent.
'Planning,' 'construction,' and 'operation' are defined broadly to include site selection, procurement, engineering, startup, dispatch, fuel-loading, and maintenance activities.
'Error' and 'omission' are defined by their measurable project impacts: avoidable increases in time to commercial operation, changes in personnel or firms, additional worker hours, or changes to equipment, configuration, design, schedule, or program.
The statute says it clarifies (rather than narrows) CPUC authority, preserves the commission's ability to use alternate rate-setting bases, and expressly applies to matters pending before the commission.
Section-by-Section Breakdown
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Mandatory disallowance for >$50M unreasonable errors or omissions
This subsection forces the CPUC to exclude from rates any expenses that reflect direct or indirect costs caused by an "unreasonable" planning, construction, or operation error or omission when that error or omission costs, or is estimated to cost, more than $50 million. The language explicitly reaches expenses arising from delays tied to those errors. For practitioners, the practical consequence is a statutory threshold that converts certain large project missteps into nonreimbursable shareholder losses unless the CPUC finds them reasonable.
Disallowance for insufficient recordkeeping (with narrow exception)
This paragraph requires disallowance whenever a utility fails to prepare or maintain records sufficient for the commission to fully evaluate the prudence of incurred costs, shifting the burden to utilities to preserve contemporaneous documentation. The text creates a limited safeguard: the CPUC may decline to disallow costs if it finds a reasonable person could not have foreseen the relevance of the missing records or the level of detail needed. Expect disputes over what a 'reasonable person' standard means in the context of complex, technical projects.
Operational definitions: planning, construction, operation
These clauses enumerate what the statute means by planning (need assessment, contractor selection, site and environmental investigations), construction (engineering, procurement, startup, QA/QC), and operation (dispatch, fuel loading, maintenance). The breadth of these definitions reduces opportunities for narrow readings and means the disallowance rule can reach early-stage decisions (site selection, environmental review) as well as later operational choices.
'Error' defined by avoidable, measurable impacts
The bill defines an 'error' as an action or direction that causes an avoidable (A) increase in time to commercial operation, (B) change in number or types of personnel or firms needed, (C) increase in worker hours, or (D) change in equipment, configuration, design, schedule, or program. That formulation ties imprudence findings to quantifiable project metrics, but it also imports causation and avoidability questions that will dominate evidentiary battles.
'Omission' mirrors 'error' as a failure to act with similar impacts
'Omission' mirrors the 'error' definition and covers failures to act that cause the same avoidable increases or changes. Treating errors and omissions symmetrically expands the statute’s reach to planning lapses or oversight failures (for example, missed site studies or inadequate contract terms) as well as affirmative missteps.
Clarification of CPUC authority and application to pending matters
The bill states it is a clarification of existing CPUC authority, not a limitation on other statutory powers, and indicates it applies to all matters pending before the commission. It also confirms the CPUC may still set rates using bases other than an allowed return on undepreciated capital costs. That combination means the statute is written to be administrable within the CPUC’s existing prudence-review framework while signaling an intent to tighten recoverability standards going forward and retroactively for pending cases.
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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
- California ratepayers — they face reduced risk of having to absorb costs tied to large, avoidable project mistakes or recoverable costs attributable to poor documentation.
- Consumer and intervenor groups — the bill strengthens their position in prudence proceedings by legislatively expanding grounds for disallowance and by mandating consequences for missing records.
- CPUC staff and auditors — the law gives the commission a clearer statutory hook for denying cost recovery and for demanding more robust documentation during reviews.
Who Bears the Cost
- Investor‑owned electric and gas utilities — they risk losing recovery of large project costs, and will need stronger project controls, documentation systems, and legal resources to defend expenditures.
- Utility shareholders — when the CPUC disallows costs, shareholders typically absorb the write-downs rather than ratepayers, shifting financial risk to investors.
- Contractors, engineering firms, and project managers — the definitions of 'error' and 'omission' push utilities to allocate risk more tightly in contracts and to seek indemnities, which can increase contract prices or transfer disputes downstream.
- CPUC and intervenors — increased scrutiny and broader review standards will raise administrative and litigation burdens, potentially requiring more staff time, expert analyses, and contested hearings.
Key Issues
The Core Tension
The bill pits ratepayer protection and accountability for large utility project failures against the need to preserve incentives for utilities and investors to undertake capital‑intensive infrastructure projects; ensuring accountability via disallowance reduces moral hazard but also raises investment risk, potential project delays, and contentious causation fights about what counts as 'unreasonable'.
AB 2762 creates an enforceable threshold ($50 million) and a recordkeeping trigger that are simple in theory but messy in practice. Chief implementation problems will be causation and quantification: the commission will need robust methodologies to trace which costs are "resulting from" an error or omission and to separate preexisting project risk from avoidable management failures.
Large projects have multiple causes for overruns (supply chains, regulatory delays, force majeure); parsing out what portion is attributable to an 'unreasonable' error will invite complex expert disputes and litigation.
The recordkeeping rule tightens incentives to document decisions contemporaneously, but it also raises questions about proportionality and administrative burden. Utilities will argue that exhaustive contemporaneous records for every conceivable relevance are impractical; intervenors will press that gaps should not be excused.
The statute’s 'reasonable person could not have anticipated' exception is a safety valve but is vague and likely to be litigated. Finally, applying the statute to pending matters generates transitional fairness issues: projects already under review may face retroactive standards and shifting evidentiary expectations, while investors will read the provision as a change in the retroactive allocation of regulatory risk.
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