Public Utility Commission Issues Landmark Decision on Utility Business Model Reform

The Hawai‘i Public Utilities Commission has issued a historic decision adopting broad reforms for how the Hawaiian Electric Company (HECO) makes money and runs its business. The Commission explained that it made the changes to “sustain the momentum towards transforming [HECO] into a utility of the future” and give HECO better incentives to reduce customer bills by advancing Hawai‘i’s clean energy goals.

The Commission decision breaks from the century-old system where utility profits were based on how much capital the utility spends.  Instead, the Commission has established a new system of “Performance-Based Regulation” that “continues the transition away from traditional . . . regulation and will better align [HECO]’s financial incentives with customer needs and the State’s policy goals.” As a result, “customers will benefit from lower utility costs and see greater integration of renewable energy resources, while [HECO] will have the opportunity to improve their financial position through improved efficiencies and by earning rewards for exemplary and high-quality service.”

The Commission’s 264-page decision is a landmark ruling for the entire nation, putting Hawai‘i at the leading edge for realigning the electric utility business with a 100% clean energy future.

“It’s been a long road, but the Commission’s bold decision today puts “cost-plus” regulation in the rearview mirror,” said Ron Binz, former Chair of the Colorado Public Utilities Commission, and an expert for Blue Planet Foundation. Binz and Blue Planet filed the first proposal to move utility regulation in Hawai’i in a new direction in October 2014. “This decision puts Hawai‘i in the lead nationally by reforming regulation to achieve a ‘win-win-win’ for customers, the utility, and the environment and climate.”

“This order comes at a crucial time,” said Melissa Miyashiro, Blue Planet’s managing director of strategy and policy. “As we work collectively to rebuild from the COVID-19 pandemic while also urgently rising to meet the challenge of climate change, the Commission today is signaling that the time to reimagine the future is now. It provides assurance that we won’t be going back to business as usual and we can further accelerate Hawai’i’s march toward a carbon-free future.”

Today’s decision concludes a two-and-a-half-year process involving multiple parties—including Blue Planet, who partnered with Mr. Binz and Isaac Moriwake, a clean energy attorney with Earthjustice. The Commission opened the case in April 2018, around the same time that the Hawai‘i state legislature enacted the Ratepayer Protection Act. That pathbreaking law, the first in the nation, mandates the use of performance-based regulation to “break the direct link” between utility revenues and investments and instead link utility revenues to performance.

The Commission reiterated that “it is evident that further action is required to achieve the goals of a financially healthy utility supporting the State’s clean energy future.” HECO’s traditional business model posed a roadblock to progress, where HECO made money by building and maintaining its own centralized infrastructure. This created an inherent bias toward postponing the retirement of fossil-fuel plants, expending capital on utility-owned projects, and deterring customers from installing rooftop solar. In contrast, performance-based regulation seeks to unlock new opportunities for the utility to make money by supporting customer choice and the state’s clean energy goals.

The main features of the new performance-based system include:

• A revenue index tying utility revenue increases to general inflation, which will control utility cost escalations and give the utility the incentive to maximize its profits by capturing savings and efficiencies.
• A “consumer dividend” that will give ratepayers tens of millions of dollars of additional savings.
• A longer period between utility rate cases, extended from three to five years, giving the utility more time to realize longer-term savings opportunities.
• A mechanism for reviewing and approving major infrastructure investments and ensuring that the expenditures promote performance goals.
• A performance incentive mechanism to reward the utility with additional revenues for accelerating its adoption of renewable energy ahead of the legally mandated targets.
• Additional performance incentive mechanisms to encourage the utility to reduce delays in interconnecting rooftop solar, move forward on establishing rooftop solar programs to support the grid, and encourage energy efficiency for low-income customers.

“In a year that has been so challenging for all, the Commission has given the people of Hawai‘i a year-end present and more hope for the future,” said Isaac Moriwake, Earthjustice attorney for Blue Planet. “This decision not only gives ratepayers much needed bill relief, but also sets a bold direction for Hawai‘i and the nation so that everyone—the utility, its customers, and our planet—can win by moving to a 100% clean energy future without delay.”