Is Hawaii’s Performance Based Regulation the Future for How Utilities Make Money?
by Bob Shively, Enerdynamics President and Lead Facilitator
"Hawaii is number one per capita in the U.S. in rooftop photovoltaic adoption and number two in electric vehicles per capita. These levels of new technologies have changed the way we think about doing business with and regulating the electric industry." ~ Commissioner Jennifer Potter, Hawaii Public Utilities Commission
With the state’s target for 100% renewable energy by 2045 and the islands’ fast growth of distributed energy resources, Hawaii has become a technology test case for other
states to study. But driven by Senate Bill 2939, Hawaii also is becoming a test case for a new form of utility regulation.
The bill, passed in April 2018, directed the Hawaii Public Utilities Commission (HPUC) to implement performance-based regulation (PBR) to break the link between utility revenues and capital investments. In May of 2019, the HPUC issued the Phase 1 Order in its resulting Proceeding to Investigate Performance-Based Regulation. The decision laid the framework for how the new regulation will work by establishing three guiding principles, three regulatory goals, and 12 priority outcomes that the principles and goals are designed to achieve. A later Phase 2 decision will specify the specific PBR mechanisms.
Guiding principles, regulatory goals, and outcomes
The development of the PBR framework is guided by three principles:
- a customer focus, including immediate rate savings
- administrative efficiencies that reduce regulatory burdens to stakeholders and the utility
- utility financial integrity to ensure the utility remains financially healthy and can access low-cost capital
The commission also identified three overarching regulatory goals:
- enhance customer experiences
- improve utility performance
- advance societal outcomes
For each goal, the commission identified expected outcomes, including traditional outcomes that reflect today’s world plus emergent outcomes that reflect new opportunities or changing expectations.
Source: HPUC Summary of Phase 1 Decision and Order Establishing a PBR Framework
It is interesting to note the focus demonstrated in the emergent outcomes:
- Ease of interconnecting customer-owned DERs
- Involvement of customers in flexible load programs
- Use of DERs as grid assets and as a tool for system efficiency
- Reduction of greenhouse gas emissions including transport electrification
- Grid resilience
How the new PBR will work
Hawaii will transition from cost-of-service regulation, where utility revenues and earnings are tied directly to authorized capital investment, to the new PBR mechanism. Under the new mechanism, earnings will be based on cost control resulting in customer cost savings plus utility performance in achieving identified outcomes. The framework is summarized in the tables below:
Source: HPUC Summary of Phase 1 Decision and Order Establishing a PBR Framework
Some of the key points include:
- Rates are set for a five-year period with no rate cases during this time.
- Rates are adjusted annually to increase or decrease underlying revenues based on formulaic factors including inflation, assumed productivity gains, costs outside the control of the utility, and assumed savings that provide customer benefits.
- Any utility earnings that exceed or fall below a specific band will result in future rate adjustment to return earnings to the approved band.
- Revenue decoupling will help insulate the utility from changes in forecasted sales.
- Existing cost-tracking mechanisms provide recovery of expenses such as fuel, purchased power, pensions, and public benefit programs.
- An off-ramp provision allows a review sooner than five years for extraordinary situations.
- The utility can enhance earnings via certain metrics related to the interconnection experience, customer engagement, DER asset effectiveness, grid investment efficiency, and cost control.
The new mechanisms are meant to transition the utilities’ current incentive focused on capital investment solutions to a new focus on cost-effective solutions whether through expense or capital spending.
What happens next
The proceeding's next step is Phase 2 in which the commission discusses the development of specific revenue adjustment and performance mechanisms. Stakeholder meetings and workshops began in August 2019 and are expected to continue through May 2020 with a commission decision to follow thereafter.
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