Prudency

A test used by regulators to evaluate the justification for particular corporate activities, used for cost of service and price cap regulation. The test checks whether an investment or outlay is reasonable based on principles of cost minimizing–thus promoting frugal behavior by managers. It should not be an after-the fact evaluation, but one that utilizes the information only available at the time of investment or outlay decisions, including expectations about the future. However, the test does assess what managers should have known and should have considered when they made the decision in question.