Hawaii's New Utility Business Model Based on Performance Not Capital Spending
by Bob Shively, Enerdynamics President and Lead Facilitator
“The legislature is concerned that the existing regulatory compact misaligns the interests of customers and utilities because it may result in a bias toward expending utility capital on utility-owned projects that may displace more efficient or cost-effective options, such as distributed energy resources owned by customers or projects implemented by independent third parties.
The legislature concludes that it must ensure a change to the regulatory compact to promote decisions and strategies that will maximize public benefit, reduce ratepayer risk, and meet Hawaii's energy goals.”
~ Hawaii State Bill 2939
Hawaii State Bill 2939, passed unanimously by the legislature and signed into law by Governor Ige in April 2018, puts Hawaii on track to become the first state to fully transition its utilities away from the cost-of-service business model. This model, which has determined how utility rates are set and how utilities earn profits, has been in place for more than a century. It ties utility earnings to the amount of capital a utility spends to develop infrastructure required to provide reliable and safe service. But as distributed energy resources (DERs) have grown, concerns that utilities will favor their own spending over use of customer-owned assets have led regulators to consider alternatives. Hawaii has now mandated by law that its utilities will earn money in a different way.
A Bit of Hawaiian History
Here at Energy Currents, we have been watching events unfold in Hawaii as the state transitions from an energy system powered mostly by petroleum to a system based on renewable energy.
- In 2014, the Hawaii Public Utilities Commission (HPUC) rejected the Hawaii Electric Companies (HECO) Integrated Resource Planning filing, stating that the utility needed to develop a sustainable business plan for the future. The HPUC then issed a white paper laying out the commission’s thoughts on a future utility model.
- In 2015, the Hawaii legislature passed a bill which created Renewable Portfolio Standards which set a 100% renewable electric energy goal by 2045.
- HECO responded by filing a new Power Supply Improvement Plan (PSIP) in 2017 which would achieve the 100% standard 5 years prior to the mandated date. HECO also filed a grid modernization plan requesting $205 million in system upgrades over the next six years. These filings were subsequently approved by the HPUC.
How Hawaiian Utilities Will Earn Money in the Future
According to SB 2939:
“On or before January 1, 2020, the public utilities commission shall establish performance incentives and penalty mechanisms that directly tie an (sic) electric utility revenues to that utility's achievement on performance metrics and break the direct link between allowed revenues and investment levels. The performance incentives and penalty mechanisms, as may be amended by the public utilities commission from time to time, shall apply to the regulation of electric utility rates…”
The bill goes on to state:
“The purpose of this Act is to protect consumers by proactively ensuring that the existing utility business and regulatory model will be updated for the twenty-first century by requiring that electric utility rates be considered just and reasonable only if the rates are derived from a performance-based model for determining utility revenues.”
Although the details are left to be worked out in a recently opened HPUC proceeding, presumably an initial cost-of-service related base rate will be developed. The rates will then be adjusted based on performance incentives or penalties. Since the utilities’ earnings will be made up of the money left over from customer revenues after all expenses and costs of capital have been paid, utility earnings will become tied to performance mechanisms, not capital spending.
SB 2939 left the details to the HPUC, but suggested the following performance metrics:
- Volatility and affordability of electric rates and customer electric bills
- Electric service reliability
- Customer engagement and satisfaction, including customer options for managing electricity costs
- Access to utility system information, including but not limited to public access to electric system planning data and aggregated customer energy use data and individual access to granular information about an individual customer's own energy use data
- Rapid integration of renewable energy sources, including quality interconnection of customer-sited resources
- Timely execution of competitive procurement, third-party interconnection, and other business processes
In the HPUC order instituting the PBR proceeding, the HPUC wrote that PBR generally includes two key components:
1. A multi-year rate plan with pre-determined formulae for revenue adjustments
2. Performance mechanisms which increase or reduce revenue based on metrics
The order included the following table further explaining HPUC’s thoughts:
Hawaii to Lead the Future?
With the recent legislation, Hawaii is now leading the way in defining what may be the future in how utilities make money. While other states have utilized pieces of performance-based ratemaking, none have defined it as the complete mechanism to determine utility earnings. Just as Hawaii has become a laboratory for utilities transforming their grid design and operations to accommodate 100% renewables, Hawaii has now become a laboratory for a new utility business model.