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.
Background
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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