The Aquarion Rule: Prohibiting Hindsight Prudence Review and Isolating ROE from Cost Disallowances in Connecticut Utility Rate-Setting

Aquarion Water Co. of Connecticut v. Public Utilities Regulatory Authority, Supreme Court of Connecticut, officially released July 15, 2025.

1. Introduction

Aquarion Water Company (“Aquarion”) sought judicial review of a 154-page final decision issued by the Public Utilities Regulatory Authority (“PURA”) in connection with Aquarion’s first general rate application since 2013. The case presented a multi-faceted clash between a monopolistic utility’s desire to recover nearly a decade of capital and operating costs, and PURA’s statutory mandate to balance investor and consumer interests under Conn. Gen. Stat. §§ 16-19 and 16-19e. At stake were (i) the prudence of more than $42 million in post-application plant additions, (ii) $2.2 million in employee incentive compensation, (iii) almost $3 million in deferred water-conservation expenses, and (iv) the lawfulness of PURA’s 8.70 % authorised return on equity (“ROE”). The Supreme Court largely upheld PURA, but carved out a critical new limitation: regulators may not use hindsight to deny recovery of deferred conservation costs that were reasonable when incurred. In doing so, the Court crystallised two doctrinal guideposts now dubbed here the “Aquarion Rule”:

No-Hindsight Prudence Review – Prudence must be evaluated as of the decision date, not in light of later economic outcomes, even for conservation programmes carried forward as regulatory assets.
ROE Isolation Principle – Disallowance of particular costs does not, by itself, render an approved ROE confiscatory; the authorised ROE remains intact so long as the statutory factors in § 16-19e(a) are met.

2. Summary of the Judgment

The Court (Ecker, J.) affirmed PURA’s rejection of (a) $42.1 million in post-application plant additions and (b) $2.2 million in incentive compensation, but reversed on the disallowance of roughly half of Aquarion’s deferred conservation expenses, remanding that issue for reconsideration under the correct prudence standard. It also rejected Aquarion’s constitutional takings argument, holding that PURA’s 8.70 % ROE is neither confiscatory nor undermined by concurrent cost disallowances. The decision cements PURA’s broad discretion in rate-setting, subject to the statutory prudence requirement and the newly clarified prohibition against hindsight review.

3. Detailed Analysis

3.1 Precedents Cited and Their Influence

Connecticut Light & Power Co. v. Dept. of Public Utility Control, 216 Conn. 627 (1990) – Originated the “decision-time” prudence rule in Connecticut; Aquarion extends its reach to deferred conservation assets.
GenConn Energy, LLC v. PURA, 348 Conn. 532 (2024) – Held that reducing recoverable costs does not automatically alter an approved ROE. Aquarion expressly applies this reasoning to Fifth-Amendment takings claims.
Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591 (1944) – Provides the constitutional benchmark for “just and reasonable” rates; the Court aligns § 16-19e(a)(4) with Hope.
Connecticut Natural Gas Corp. v. PUC, 29 Conn. Supp. 379 (1971) – Test-year and pro-forma adjustment principles; relied on to differentiate plant additions in versus out of the test period.
Gulf States Utilities Co. v. Louisiana PSC, 578 So. 2d 71 (La. 1991) – Cited for the inadmissibility of hindsight in prudence reviews.

3.2 Legal Reasoning

The Court’s reasoning proceeded on statutory interpretation, evidentiary review, and constitutional analysis:

Plant Additions – PURA may distinguish between classes of evidence. Narrative testimony supplied “some, albeit limited” detail for pre-application projects; spreadsheets alone for post-application projects lacked particulars on need, alternatives, and customer benefit. Substantial-evidence review therefore compelled affirmance.
Incentive Compensation – Evidence showed nearly every employee received payouts, 70 % of metrics were finance-oriented, and funding first protected shareholders. PURA thus reasonably concluded the programme did not “reflect prudent and efficient management” for rate-recovery purposes.
Deferred Conservation Costs – PURA erred by converting a prudence inquiry into a post hoc cost-benefit exercise. The Court re-applied the decision-time standard: utility actions must be assessed with knowledge available when the expenses were incurred. Notably, Public Act 13-78 did not displace this standard.
Takings / ROE – Leveraging GenConn, the Court held that statutory and constitutional “just and reasonable” tests are functionally identical. Disallowing costs may lower effective earnings but does not re-set the ROE itself. Aquarion offered no concrete evidence (e.g., Moody’s ratios recalculated under the new revenue requirement) that the 8.70 % ROE would impair creditworthiness.

3.3 Likely Impact of the Decision

Regulatory Practice – PURA (and likely other state commissions) must avoid hindsight analyses when reviewing deferred programmes. Expect more granular utility filings contemporaneous with spending to document prudence.
Utility Strategy – Utilities will front-load narrative evidence for capital projects, especially those occurring after filing, and maintain contemporaneous prudence files for deferred assets.
Rate Case Litigation – Litigants challenging ROE determinations will face the hurdle that cost disallowances, without more, do not make an approved ROE confiscatory.
Environmental Policy – By protecting reasonable conservation spending from hindsight disallowance, the Court removes a chilling effect and supports Connecticut’s resource-efficiency goals.

4. Complex Concepts Simplified

Prudence Standard – A utility’s spending is “prudent” if, at the moment it chooses to spend, the decision is sensible given available information—not merely because it later proves cheap or effective.
Deferred Regulatory Asset – An accounting mechanism allowing a utility to book expenditures now but seek cost recovery later, smoothing customer rates and avoiding “rate shock.”
Return on Equity (ROE) – The percentage return investors are permitted to earn on their invested capital. It is not automatically reduced when regulators disallow particular costs.
Test Year vs. Pro-Forma Adjustments – The test year is a snapshot of costs/revenues used to forecast future needs. Pro-forma adjustments modify that snapshot for known, measurable changes.
Water Infrastructure & Conservation Adjustment (WICA) – A Connecticut mechanism letting water utilities surcharge customers between general rate cases for qualifying infrastructure projects, capped at 10 % of revenues.

5. Conclusion

Aquarion v. PURA tightens the doctrinal screws on regulators and utilities alike. Going forward, (i) PURA retains latitude to accept or reject plant additions and operating costs, so long as its evidentiary distinctions are rational, but (ii) it cannot wield hindsight to disallow recovery of deferred costs that were sensible when incurred. Simultaneously, the decision underscores that an authorised ROE stands firm against collateral cost disallowances absent proof of financial impairment. Together, these holdings crystallise the “Aquarion Rule,” offering clearer parameters for prudence reviews and constitutional challenges in Connecticut’s utility landscape and providing persuasive guidance nationwide.