Monday, April 20, 2015

Hawaii’s Utility Reforms Unlikely to Result in Significant Changes

By Nate Larsen, Energy Fellow

In spite of the Hawaii PUC’s aspirational language in the Commission’s Inclinations guidance document, the process by which Hawaii pursued its reforms makes a significant transformation of the electric industry unlikely. The Hawaii PUC’s guidance contained a variety of significant proposals, but the state’s investor-owned utilities, the HECO Companies (HECO), are driving the reform process and have not demonstrated an appetite to adopt the changes recommended by the Hawaii PUC.

The Hawaii PUC issued the Commission’s Inclinations on April 28, 2014, with the purpose of aligning HECO’s business model and infrastructure with the rapidly evolving technical, market and public policy changes in the electric industry. The guidance document recommended a number of reforms—discussed in previous posts—as a means of accomplishing these objectives. While the PUC’s proposed reforms represent a dramatic shift away from current practices, the policies that regulators will ultimately adopt are unlikely to depart dramatically from business-as-usual. This post discusses the relevant background to Hawaii’s utility reform process, and examines how Hawaii’s mechanism for utility reform will ultimately impact the outcome of utility reform in the state.


The Hawaii PUC set the wheels of utility reform in motion through a series of four Orders and Decisions concurrently issued on April 28, 2014. These orders rejected HECO’s integrated resource plans (IRPs) and required the utilities to file plans to comply with the state’s ambitious renewable energy objectives. To guide HECO in drafting these plans, the PUC issued a white paper, entitled Exhibit A: Commission’s Inclinations on the Future of Hawaii’s Electric Utilities, which set forth an array of policy recommendations for HECO to consider. In compliance with the PUC’s orders, HECO filed its Power Supply Improvement Plans and Distributed Generation Interconnection Plan on August 26, 2014. The plans are currently before the PUC for review, and, as of the publishing of this post, the PUC has yet to issue a final decision approving or denying HECO’s proposals.

Hawaii’s Utility Reform Process

            The mechanism established by the PUC for implementing Hawaii’s utility reforms is being driven primarily by HECO’s plan filings.This is problematic, because the investor-owned utilities’ decisions are guided by a responsibility to earn a profit for shareholders. The process relegates the PUC to playing a responsive role, which may limit the Commission’s ability to implement some of the more progressive reforms identified in the Commission’s Inclinations.

The PUC’s Commission’s Inclinations reflect the Commission’s intent to dramatically overhaul the state’s electric utility regulatory regime. The proposed reforms consider requiring utility divestment from generation assets, transitioning the utilities’ role to serve primarily as distribution system managers, and adopting changes to the utility cost-recovery model. HECO’s plans, however, simply cherry-pick the PUC’s recommendations, advancing the measures from which the utilities stand to profit, and ignoring the proposals that have the potential to reduce revenue or create uncertainty.

The PUC should instead be directing the reform process. The utilities’ selective reform proposals are understandable; one of the primary roles of a corporate entity is to create value for shareholders. While the PUC is responsible for ensuring that the utilities have the opportunity to earn a reasonable rate of return, that responsibility is balanced against an array of long-term policy goals that occasionally run counter to the utilities’ interests. These goals include:

·                fostering and encouraging competition or other alternatives where reasonably feasible in an effort to provide consumers with meaningful choices for services at lower rates that are just and reasonable;

·                promoting and encouraging efficient and reliable production and delivery of all utility services, and promoting and encouraging efficient and reliable electricity generation, transmission and distribution; and

·                promoting and encouraging the use of alternative, renewable, and clean energy resources for the production of electricity to increase the efficiency, reliability, and sustainability of electricity generation and supply for consumers.

Aspects of these goals are both directly and indirectly adverse to HECO’s economic interests. Competition and customer choice clearly take revenue away from the incumbent utilities by allowing customers to purchase services from other providers. Additionally, the PUC’s goals seem to encourage the development of distributed generation and renewable energy resources, which represent a departure from the traditional centralized utility model. While they may have an opportunity to develop and operate these alternative resources, utilities are unlikely to embrace the uncertainty associated with adopting a new business model when their existing arrangements generate a predictable rate of return.

The PUC still has an opportunity to determine the ultimate outcome of the utility reform process. The PUC can deny HECO’s plans and subsequently instruct the utilities to comply with policy objectives. The PUC also has the authority to issue a top-down order implementing certain utility reforms. However, the PUC has already taken considerable steps down the current path of reform. If the PUC pursues either of these alternative courses of action, it may face criticism for compelling the utilities to invest resources in the required plans and for limiting stakeholder participation in the reform process.

The PUC’s chosen mechanism to reform Hawaii’s electric industry regulations is inefficient and unlikely to result in a radical departure from business-as-usual. This is because some of the PUC’s objectives are adverse to HECO’s interests, HECO is responsible for preparing the plans, and HECO cannot be expected to act contrary to its economic interests.

States considering comprehensive utility reforms in the future should employ a more regulator-directed process, such as the process used by the New York Public Service Commission. The PSC in New York sought stakeholder input in constructing its reform proposals, including from the utilities, but ultimately the regulators in New York are responsible for issuing the final reforms. A future post will discuss the benefits and disadvantages of the reform process in New York.

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