Hawai'i Utilities Commission Ends Free Ride for Hawaiian Electric on Fossil Fuel Costs

Last Friday, the Hawai'i Public Utilities Commission ("PUC") issued a landmark ruling requiring Hawaiian Electric Company ("HECO"), Hawai'i's largest electric utility, to partially share in the costs of fossil fuels it uses to generate electricity, rather than its traditional practice of passing 100% of the costs onto its customers. The ruling will give the utility a direct financial incentive to accelerate the shift from imported oil to cheaper renewable energy sources.

Blue Planet Foundation, a Hawai'i nonprofit committed to clearing the path for 100% clean energy, represented by Earthjustice, a national nonprofit clean energy law firm, advocated for such sharing of fossil fuel costs in a PUC case to set HECO's rates. In Friday's decision, the PUC agreed with Blue Planet and ended the 100% pass-through of fossil fuel costs. In an initial, "conservative" step, the PUC required fluctuations in fuel costs to be shared 98% by customers and 2% by the utility, with a cap on the potential impact to the utility of $2.5 million annually.

The PUC explained that such sharing would "enhanc[e] HECO's strategic level of attention, diligence, and motivation to manage and avoid the costs and risks of fossil fuels, while remaining substantially below an amount that will negatively impact HECO's financial integrity."

"The PUC's order is a victory for consumers, clean energy, and common sense," said Melissa Miyashiro, Blue Planet Foundation's Chief of Staff. "It requires our electric utility to share in the costs of its fossil fuel reliance and gives it some 'skin in the game' to move away from fossil fuels to clean energy."

The PUC's decision revises a traditional mechanism for charging utility rates--called the Energy Cost Adjustment Clause or "ECAC"--that insulated HECO from the risks of its over-97% reliance on oil. This left customers to bear the full brunt of volatile swings in oil prices, as in 2007-08 when prices spiked from around $60 per barrel to a high of $134 per barrel.

As Hawai'i moves toward its 100% renewable goal, the ECAC has been increasingly criticized for giving the utility a perverse incentive to ignore the costs and risks of fossil fuels. In a major guidance document issued in 2014, the PUC pointed out that "the utility is insulated and has no direct financial 'skin in the game' as to whether fuel costs . . . increase or decrease."

"Automatic energy adjustment clauses like the ECAC create a 'moral hazard' for utilities," explained Ron Binz, an expert witness for Blue Planet and former Chair of the Colorado Public Utilities Commission. "They insulate utilities from the financial risk of using fossil fuels, shifting it fully onto consumers. The PUC's decision begins to change that by splitting the risk with shareholders, forcing their utilities to think about the dangers of continued heavy reliance on fossil fuels. This begins to level the regulatory playing field between fossil fuels and clean resources like renewable energy and energy efficiency."

The utility, along with the state Consumer Advocate, opposed any sharing of fuel costs, arguing that the utility has no control over global fuel prices. The PUC was unpersuaded, stating that "it is evident that the current allocation of 100% fuel price risk to customers is neither fair nor compliant with the letter or intent of the [law]."

The PUC's change of the ECAC is an important step in the ongoing movement in Hawai'i to reform utility incentives. In April, Hawai'i became the first state in the nation to pass a law calling for utility performance incentives that "directly tie" utility revenues with performance. The PUC is moving forward with a new docket to comprehensively investigate such performance-based incentives for HECO. Blue Planet Foundation, represented by Earthjustice, was recently granted intervention in that docket.

"Regulation is all about incentives, and letting HECO simply 'pass the buck' on fossil fuel costs was a wrong incentive that needed correction," said Earthjustice attorney Isaac Moriwake. "We look forward to more work to make sure the utility has all the right incentives to align its financial interest with the public interest in a 100% clean energy future."