Project Management Institute

CPM in prudence reviews

a perspective

Legal Lights

Jon M. Wickwire
Feature Editor

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Critical Path Method (CPM) techniques have become accepted mechanisms for scheduling and managing projects. CPM principles are important in “prudence re-reviews” in the context of proceedings of public utility commissions. This article evaluates the use of CPM techniques to identify pivotal events in utility projects and assist management in proving the reasonableness of decisions undertaken during the course of the project. CPM techniques can be used to preserve a contemporaneous perspective and justify decisions based upon information and options available at the time of the decision.

Jon M. Wickwire

John S. Durning, Richard Metzler & Associates, Ashland, Massachusetts

INTRODUCTION

Critical Path Method (CPM) systems are typically thought of in terms of prospective management of a project's cost and schedule. These same systems, however, are also being used to settle disputes concerning the outcome of projects through retrospective application. One of the most visible examples of this has been the number of prudence investigations in the 1980s by state public utility commissions. These investigations were an effort to deal with the unprecedented rate increases that utilities were seeking to recover for their nuclear construction programs. The size of these capital programs made apportioning costs among rate payers and shareholders extremely delicate. Many long-standing utility/commission relationships were refashioned in the process. With huge stakes involved, the prudence standard provided the commissions an accepted legal precedent and an equitable framework for determining the reasonableness of the utility's actions. Under this standard, management's decisions are measured in terms of a “reasonable person or manager test.”

The prudence standard has also been used in evaluating ongoing utility operations, particularly in assessing the performance of individual power plants already in the company's rate base. This application of the prudence standard in many cases can be attributed to the somewhat lackluster performance of some of these mega-generating nuclear facilities. Upon commercial operation, many have failed to live up to the criteria of “used and useful” in the eyes of consumer advocates and utility commissioners alike.

Through all of this, CPM-based project management systems have been—and will continue to be—relied upon by parties on both sides to wade through the conflicting arguments concerning managements actions. The prudence standard eliminates simple finger pointing and provides guidelines for adopting accepted or expected standards of management performance. The retrospective use of CPM-based project management systems has offered an effective tool for identifying the issues and events that shaped the outcome of a project. It also offers a succinct method for quantifying both findings and conclusions resulting from these prudence investigations.

Despite the impact these systems can have on the outcome of prudence investigations or similar civil proceedings, many project managers are unaware of the importance CPM should play as they start designing and implementing their complement of project management systems and procedures. Although one of the benefits of CPM has been its ability to document project events, very little effort or even thought is typically dedicated to seeing that this retrospective application will be there when it's needed.

The current retrospective process is far from perfect. Both regulators and utilities are looking for alternatives to eliminate the abuses and inefficiencies inherent in the current system. One avenue being explored involves foregoing the current process for an ongoing/rolling prudence review [1]. Although the framework or procedures for such a process are unclear, the new approach would provide more real-time review of management prudence issues—within the recognized limitations of the regulatory arena. Unfortunately, utilities are no more equipped to deal with the likely requirements of such a new process than they are with the current procedure.

THE PRUDENCE STANDARD

The prudence standard used by public service commissions to assess utilities is firmly rooted in the legal concept and standards for litigating over capital investments. The prudence standard is the benchmark against which management's actions and decisions are measured, and it is often described in terms of a “reasonable person or manager test.” In short, the point to assess is: whether, given the information that was available or should have been available at the time, would a reasonable person make the same decision or take the same action [2]? In this type of retrospective investigation, it is imperative to recognize the danger of introducing “hindsight” into the evaluation. Hindsight can contaminate one's conclusions in various ways. For example:

  • When conclusions regarding the reasonableness of management's decisions or actions are made without identifying and evaluating what appeared to be viable alternatives given the information available and/or knowable at the time.
  • When application of the reasonableness standard is based on management principles that were either not well known, not available, or not proven to be in use at the time of management's decision/action.
  • When reliance is placed principally on the outcome which resulted from a specific decision as an indicator of the reasonableness of management's action [3].
  • When in evaluating the reasonableness of a specific management decision, one fails to consider other contemporaneous matters requiring management attention or fails to evaluate the reasonableness of the attention devoted to a particular activity in light of the entire spectrum of activities.
  • When one's assessment of management performance focuses on the reasonableness or appropriateness of decisions and actions which were uncontrollable.

These are usually transgressions committed by the intervener/auditor, but often the utility can unwittingly damage its case by leading the other side toward these types of hindsight. This is particularly relevant when retrospective prudence reviews utilize critical path techniques to identify and assess prudence issues.

PRUDENCE REVIEWS

CPM-based project management systems have played a crucial role in prudence reviews due to the impact of time upon project costs. In retrospective construction-prudence investigations of nuclear power plant projects conducted during the 1980s, schedule-oriented findings often had a significant impact on a project's AFUDC (allowance for funds used during construction) costs. Those could easily represent 30 to 40 parent of the total cost of the plant. More recently these systems are being used to assess not only capital projects but also to evaluate the execution of individual outages. Those findings are also extremely schedule/time dependent. Here, quantifications are typically in terms of the cost of replacement power, which often must be purchased at premiums from outside a utility's operating system while the unit is down.

In short, utility management is being challenged by its regulators and interveners to prove that the actions it took and the decisions it made were reasonable and prudent. This is crucial since few utility managers are truly aware of the burden placed upon them to prove their actions and decisions were just and reasonable.

BURDEN OF PROOF

In prudence reviews, courts have held that the “burden of proof” rests clearly with the utility. In contrast, there is often no similar burden placed on an intervenor challenging a utility. The term “burden of proof” means a duty to establish a fact by a preponderance of the evidence [4]. “Preponderance of the evidence” means that one party has presented evidence which is more convincing, by even the smallest amount, than the evidence presented by the other side. Essentially the utility must establish the reasonableness of its actions, Conversely, it is not necessary for the other party to disprove the reasonableness of the utility, but merely cast doubt on the utility's claim [5]. This distinction, not generally understood by those outside the circle of a utility's legal counsel, merits a great deal of consideration in designing and maintaining prudence-oriented project management systems and procedures.

CURRENT STATE OF AFFAIRS

Advances in the speed and power of microcomputers in just the last few years have contributed greatly to the proliferation of CPM-based project management systems. Unfortunately, this has at times acted as a two-edged sword for owners/utilities. On one hand it has helped them not only better plan and execute undertakings ranging from outages and capital construction projects, but to implementing corporate programs as well. On the other hand, these same advances have provided regulatoRS and plaintiffs alike with information that could be used against management. In similar fashion to waiving one's Miranda Rights (i.e., anything you say can and will be used against you in a court of law), anything you document through the use of a project-controls system can and will be used against you if the project ends up in litigation.

Despite what some software vendors would have utility managers believe, the introduction and use of sophisticated CPM-based project management systems, in and of themselves, does not constitute prudent management practices. Nor will the introduction of these systems alone ensure the utility's ability to demonstrate the reasonableness of management's actions and decisions in either a retrospective application, or even in potential rolling prudence reviews. Although CPM-based project management systems help facilitate and document the end result of management decisions and direction, they are not designed to capture and show how management arrives at various project alternatives.

In today's litigious environment it is imperative that key managers understand what may be expected of them in justifying their previous and/or current actions and decisions. All too frequently a proper perspective on the concept of management prudence and its role in litigation is not part of either a manager's job description or of management training. Those with any type of perspective on the prudence review process most likely acquired it the hard way—by experiencing this type of challenge first hand.

Unfortunately, even undergoing this type of litigation does not automatically give a manager the proper perspective on prudence. All too often a utility fails to apply lessons learned from the legal discovery process, and little is done to improve the way it records, reports and stores critical project information. When facing a prudence investigation, companies, whether regulated or non-regulated, cannot rely solely on their legal counsel to fill the gap left by inadequate litigation support methodologies. Only by indoctrinating key project/program managers and establishing appropriate prudence documentation methodologies at the outset, will potential discovery at the end of a project be likely to buttress one's case.

In order to establish an effective prudence-oriented methodology for applying and maintaining a CPM-based project management system, one must first understand its likely end-use requirements in a potential retrospective application. To accomplish this, it is imperative to understand the criterion under which a project will most likely be adjudicated. Unfortunately, ground rules for the retrospective use of CPM in prudence reviews or similar forms of litigation have not been clearly defined. General guidelines for their use, though, have been implied in the course of previous adjudications. These guidelines apply not only to regulatory proceedings but civil claims as well.

POSTURING CPM FOR PRUDENCE

The retrospective use of CPM analysis is an exercise in hindsight. As such it cannot be used exclusively to determine the prudence of management's actions or decisions. The retrospective use of CPM, however, can be used to identify pivotal points in the course of the project that would then become the subject of focused investigations. In short, CPM can be used to identify and quantify key issues. Rarely however, can it provide the necessary insight to arrive at findings and conclusions regarding the reasonableness of management's contemporaneous actions or decisions. Therefore, the focus of complementary prudence-assurance measures must be rooted in their ability to preserve the contemporaneous prospective view of the ongoing project. This is because any retrospective critical path analysis of a project can produce erroneous conclusions as to the reasonableness of management's actions.

Very seldom will the critical path envisioned at the outset of a project actually remain the critical path throughout the project. Emerging events will introduce new activities as well as new restraints. They will also alter existing tertiary paths which overtake the previous critical path and become the project's current critical path. The issue to be decided is whether management should have been able to forecast or reasonably foresee these events prior to their occurrence, and then how well they managed the evolutionary nature of the critical path. Project control managers must recognize the likelihood of these types of challenges and consider how these challenges will be defended. Inadequate forms of documentation or the inability to replicate contemporaneous project events can exacerbate the owner/utility's obligations in terms of burden of proof. These failures can even jeopardize the company's entire case.

In essence, the owner/utility must be able to demonstrate unequivocally what was knowable and doable at each point in time throughout the course of the project. This is important since the owner/utility will be judged on how well it executed the project and how that affects the issues being litigated. To place these issues in the proper context, the adjudicating body hearing the case must be given the same information weighed by the owner/utility in responding to emerging issues and changing conditions throughout the course of the project. Only by replicating the project execution in a contemporaneous manner can the body hearing the case obtain the necessary insight into the critical questions—why the company/utility reached the decisions it made, why it responded with the actions it took, and why it pursued the corresponding courses of action.

CPM-based project management systems are an ideal medium for archiving what was knowable and doable at any point in a project. However, all too often this aspect is overlooked in the ongoing maintenance of these systems. What is knowable and doable in terms of executing a project is an implicit part of CPM techniques. A CPM network is built on logic, facts and assumptions. These are also the fundamental elements for demonstrating prudence. Likewise, CPM is ideal for weighing the effect of different variables on the likely outcome of the project by developing various scenarios throughout its course. These scenarios are invaluable in terms of the ability to demonstrate whether viable alternatives did or did not exist and whether their feasibility was evaluated.

It is clear that CPM-based project management systems offer a great deal of assurance in demonstrating prudence—if used correctly. However, even if they are used correctly throughout the course of the project, there is nothing to ensure that these fundamental elements of demonstrating prudence have been preserved. The answer is not as much system-oriented as it is procedure-oriented. Assuming management is sound and acts reasonably, the challenge is to develop the necessary procedural requirements to:

  1. Set clear criteria for determining which actions and decisions should be captured and recorded.
  2. Provide an efficient vehicle to document actions and decisions.
  3. Develop an orderly method for records management and to facilitate document retrieval.

REFERENCE

1. Electric Utility Week. August 6, 1990. NARUC and Utility Chiefs Set Panel to Consider Issues Facing Industry

2. New England Power Co., 31 FERC (CCH) 61,047 at 61,084 (1985).

3. Panhandle Eastern Pipe Line Co., 46 FERC (CCH) 61,189 at 61,629 (1989).

4. Pennsylvania Supreme Court; Se-Ling Hosiery v. Marqulies, 364 Pa. 45,70 A.2d 854 (1950)

5. Pa. P.U.C. v. Equitable Gas Corn pan& 57 Pa. P.U.C. 423 (1983).

John S. Durning is a senior associate with the management consulting firm of Richard Metzler & Associates and is currently a second year law student at California's Newport University. He received his bachelor of science degree in architectural engineering and construction management from the University of Colorado. He has since spent over 11 years in both project management and performance assessment of engineering and constructing electric generating facilities. In addition, he has provided consulting services in the ongoing operations of electric, telephone and water utilities, Mr. Durning established his consulting firm's evaluative criteria for cost and schedule-performance assessments and has provided expert-witness testimony in this area. Over the pastsix years, his expertise has been engaged by utilities undergoing prudence investigations and/or litigation. He has also conducted prudence-related assessments of utilities for public service commissions.

This material has been reproduced with the permission of the copyright owner. Unauthorized reproduction of this material is strictly prohibited. For permission to reproduce this material, please contact PMI.

APRIL 1992 pm network

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