Effective January 1, 2026, the laws in Delaware have changed to replace the business judgment rule with the prudence standard for utility ratemaking. This change in the legal standard for regulated utilities in Delaware now aligns with the prudency standard for cost recovery in most jurisdictions in the United States.

With this change and ever-increasing concerns about affordability – especially so due to constrained energy resources and the proliferation of data centers in the mid-Atlantic – Staff for the Delaware Public Service Commission (PSC) and the Division of the Public Advocate (DPA) may more vigorously assert challenges to utility spending in base rate cases and other cost‑recovery proceedings. Accordingly, regulated utilities in Delaware should be prepared to proactively document and demonstrate the value of investments to address customer affordability, as well as provide assurances that costs are not being improperly allocated to ratepayers.

Business Judgment and Delaware Utility Regulation

For decades, Delaware stood apart from nearly every other state in the nation in how it evaluated the recoverability of utility costs in rate proceedings. The PSC historically applied the business judgment rule, the bedrock standard of Delaware corporate governance, when determining whether utility expenditures could be included in the rate base and recovered from ratepayers. Under the business judgment rule, the PSC was required to afford substantial deference to the utility’s management decisions regarding capital investments and operating expenditures. If a utility could demonstrate that costs were incurred in good faith, and absent evidence of fraud, waste, or abuse of discretion, the PSC generally could not disallow recovery of that cost under the business judgment standard, even if in hindsight the decision resulted in excess or unnecessary spending.

What changed—and where it appears in the Code

Effective Date/Scope

The new rules took effect January 1, 2026, amending Title 26 to expressly embed the prudency standard into utility ratemaking. Among other sections, 26 Del. C. § 210 (general jurisdiction) and 26 Del. C. § 307 (burden of proof) now make clear that recovery is limited to prudently incurred costs, judged on what the utility knew or reasonably should have known at the time. The pertinent updates to Title 26 are excerpted below in underline. 

26 Del. C. § 201(e)(1) General Jurisdiction and Powers

“In the exercise of supervision and regulation over public utilities, the Commission may, upon application or on its own motion, after notice and hearing, alter, in whole or in part, its supervision and regulation over some or all public utility products or services and over some or all public utilities to the extent necessary to promote and sustain adequate service at just and reasonable, and prudent rates, where the Commission determines that alternatives to supervision and regulation including the competitive provision of such products and services are in the public interest. . . . The Commission is specifically authorized to depart from rate base, rate of return regulation when it is in the public interest and when such departure is found to promote just and reasonable, and prudent rates.”

26 Del. C. § 307(a). Burden of Proof

“In any proceeding upon the motion of the Commission, or upon complaint, or upon application of a public utility, involving any proposed or existing rate of any public utility, or any proposed change in rates, the burden of proof to show that the rate involved is just and reasonable, and prudent, which requires a showing that the rate involved allows for recovery of only those costs or expenses prudently incurred, is upon the public utility. In making the determination of whether a cost or expense was prudently incurred, the Commission must consider the objective reasonableness of the cost or expense incurred, based on what the public utility knew or reasonably should have known at the time the cost or expense was incurred. The Commission may determine that the cost or expense incurred is only partially prudent, and may adjust the elements of rate base, operating expenses, or fuel costs accordingly to reflect that determination.”

Practical Impact

Senate Bill 59, the enabling legislation for the change to prudency, was expressly aimed at checking avoidable capital spending. The following excerpt from the synopsis of Senate Bill 59 makes clear the legislative intent for the shift to the prudency standard:

Public utilities are regulated monopolies. Practically speaking, a public utility has no competition in its service territory and, therefore, does not face the economic risks that a for-profit, non-utility company must face. By law, a public utility is authorized the opportunity to earn a reasonable rate of return on the costs it incurs in operating its business. . . . The more costs that are included in rate base, the higher the rates that are charged to utility customers. Under the “business judgment rule” standard, the Public Service Commission may not disallow the inclusion of a cost in rate base, even though the cost was incurred imprudently. . . . Amending the Public Utility Code so that the “prudence” standard applies, would give the Public Service Commission the ability to deny, in whole or in part, certain expenses and costs, which can lead to less frequent and less impactful rate increases.

Bottom Line

This change in the law represents a material reallocation of risk to the utility for capital expenditures. While utilities were previously entitled to management deference under the business judgment rule, with Senate Bill 59 now effective, the PSC can now partially disallow costs as well as seek adjustments to rate base, operations & maintenance costs, or other costs if the utility cannot demonstrate prudency in spending. Accordingly, Staff and DPA will review projects under the less deferential prudency standard and may more aggressively challenge capital investments, as well as question the timing of investments and demand alternatives analysis for major projects, with special scrutiny for any costs passed to ratepayers due to capital-intensive, large-load infrastructure upgrades.  

What Regulated Utilities in Delaware Should Do Now: Plan for Investments and Build a Defensible Record

With Delaware’s move away from the business judgment rule and increasing emphasis on affordability, reliability, and cost prudency, utilities should expect that investment decisions will be examined more rigorously by regulators. Accordingly, utilities should integrate reliability and safety considerations into investment planning early and visibly. 

The existing Electric Service Reliability and Quality Standards requirements in the Delaware Administrative Code (26 Del. Admin. C. § 3007) provide guidance for best practices in record‑building for investments. These regulations require electric distribution companies (EDCs) to maintain safe, adequate, and reliable service and to engage in ongoing distribution planning supported by annual reporting. While currently only regulated EDCs are required to comply with these specific regulations, the requirements nonetheless provide a helpful roadmap for all Delaware utilities to understand the PSC and DPA’s expectations for major capital investments. 

Specifically, utilities should clearly tie expenditures to identified reliability, safety, or system needs based on documented performance metrics or other clearly identified system conditions. When developing plans for capital expenditures or other major categories of spending, Delaware utilities should consider the following best practices going forward:

• Define the specific system condition or risk being addressed;
• Identify timing drivers, load assumptions, or other external factors;
• Establish an analytical rationale for proposed solutions and leverage reliability metrics, performance data, or other quantifiable metrics as justification;
• Document the evaluation of alternatives to memorialize why alternatives were accepted or rejected, as well as quantify cost, reliability, and operational tradeoffs;
• Meaningfully engage, to the extent practicable, with regulators and other key stakeholders to identify metrics they find persuasive (e.g., SAIDI/SAIFI/CAIDI/CEMI improvements, $/kW deferred, $/MWh avoided, health or safety related benefits, environmental and community impacts) as well as to identify right-sized solutions that provide demonstrable value for ratepayers; and
• Provide an explanation as to why the chosen solution was the most reliable and cost‑effective option at the time. An absence of this type of cost-benefit analysis documentation may invite future challenges from regulators that a lower‑cost or less capital‑intensive option was reasonably available.

Similarly, while Delaware’s business judgment rule historically afforded broad deference to management, utilities should be cognizant that internal analyses and management decision-making may now be subject to discovery as regulators assess the prudency of utility spending. Delaware utilities should expect Staff and DPA to push for partial disallowances where sizing, timing, or alternatives analyses are thin. In order to demonstrate prudent spending based on what the utility knew or should have known when making investment decisions, utilities should strengthen contemporaneous documentation (e.g., engineering justifications, alternatives assessments, evidence of multiple vendor quotes, or issuance of requests for proposals). Lastly, utilities should also: develop a discoverable record that proactively links investment decisions to documented outcomes; demonstrate that investments are prudently made to ensure safe, reliable, and adequate service for ratepayers; and reinforce that investments were necessary – and not discretionary – to meet regulatory and other legal obligations. 

Cozen O’Connor Can Help

Cozen O’Connor’s Utility and Energy team routinely prepares and guides clients through complex regulatory approvals by state public utility commissions and other federal and state regulatory agencies, and represents clients in utility- and energy-related transactions, litigation, enforcement actions, and regulatory proceedings. Please contact David Zambito, Dawn Kurtz Crompton, or any member of Cozen O’Connor’s Utility and Energy team for further assistance with your business.