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Monday, January 20, 2014
Decoupling: How HECO's "Money Printing Machine" Causes High Electric Rates
By News Release @ 10:57 PM :: 5168 Views :: Energy, Cost of Living

Docket 2013-0141 -- "INSTITUTING AN INVESTIGATION TO REEXAMINE THE EXISTING DECOUPLING MECHANISMS FOR HAWAIIAN ELECTRIC COMPANY, INC., HAWAII ELECTRIC LIGHT COMPANY, INC., AND MAUI ELECTRIC COMPANY, LIMITED."

Excerpts From Hawaii County's 'Reply to Positions' Submitted to PUC by Hawaii County Corporation Counsel, January 7, 2014

When alternative energy is available at competitive prices, decoupling is not needed as further incentive to adopt it, nor will decoupling be an effective incentive for consumers when compared to reduced pricing. 

Further, ratepayers’ interests versus shareholder interests should be given more balance.

Given that renewable energy sources in Hawai'i are often lower cost than fossil-fuel generation, transparent and accurate pricing that is accessible to power generation investors/entrepreneurs and ratepayers can be more effective than current mechanisms, especially decoupling, in achieving greater utilization of cost- effective renewable power in an optimized power generation portfolio

In addition, accurate and transparent pricing mechanisms would make it easier to incorporate innovative technologies, improve efficiency, and enable consumer-driven creative solutions, as happens routinely in other industries.

Despite repeated assertions, no convincing argument has been made that guaranteed revenues provide incentive to innovate or are necessary to ensure such innovation. When combined with regulated rates of return that are based on the utilities' costs, including capital investment base and O&M, decoupling's guaranteed revenues provide an "protected" environment where there may be little incentive to control costs, and there is minimal incentive to seek major system changes or, more importantly, maximize customer benefit—and it is such major system changes that are now expected and overdue from Hawai'i's utilities.

As stated previously in the County's Simultaneous Statements of Position (SSOP), financial risks should be readjusted. For the sake of increased renewable energy and efficiency, multiple parties in this docket promote decoupling and Revenue Balancing Account / Rate Adjustment Mechanism (RBA/RAM) to shift revenue risk from utilities to ratepayers. The County respectfully suggests this is not a virtuous outcome, and is one that harms individual well-being as well as growth of new business opportunities and a diversified economy for Hawai'i's people, many who have already conserved their electricity usage to a bare minimum.

(Editor's Note: Parties "Promoting Decoupling' on the docket include the Blue Planet Foundation and the Hawaii Solar Energy Association as well as HEI itself.)

The County does question, however, why an ever-expanding list of business risks should be transferred from the utility to its customers.

On top of these measures—which transfer more and more risks from the utility to ratepayers—the utilities have been given decoupling, which is glowingly described as beneficial in transferring all revenue risk from the utilities to ratepayers. For a $3.1 billion business that is essentially a "hyper-monopoly" (given physical isolation of the Islands and lack of interconnecting grids), with at least some level of community service obligation, how much risk are ratepayers expected to assume, all? Is it the obligation of ratepayers to support a business organization whose pay and benefits are so high that the average citizen can only dream of attaining?

Where do the guaranteed revenues of decoupling end? Multiple price distortions create the previously referenced "death spiral" where ever-higher costs are imposed on the declining number of ratepayers who remain connected full-time to the grid^. Triennial rate cases are unlikely to reverse these cost/price levels once they are embedded within the HECO system. No analyses have been provided that the decoupling model is sustainable, whereas there is already ample evidence of ratepayers fleeing the grid...most likely due to high electricity prices.

At over forty percent (40%) renewable generation decoupling was never needed and is no longer needed to achieve Renewable Portfolio Standard (RPS) goals, and appears to be more of a crutch to sustain an eroding business model, rather than the key to future prosperity.

Shifting revenue risk entirely to ratepayers in the name of preserving utility financial health is objectionable because it ignores the financial health of Hawai'i's people and businesses. Again, where does this end? Is it the role of Hawai'i's people to subsidize the utilities at 1 time, or 2 times, or, preposterously, 10 times current utility revenues to ensure favorable credit ratings from Moody's and S&P? Where is the analysis that says consumers are better off paying higher electricity rates for more favorable utility credit ratings?

The County's concern with metrics includes the ability to evaluate progress towards greater use of renewable energy, as well as its concerns that Hawai'i's electricity system serves first and foremost the economic and consumer needs of the citizens of Hawai'i County and the State of Hawai'i. Where needed, Hawai'i's electricity supply should be affordable and reliable as well as high-quality. With so many leaving the grid, finding alternative power solutions, and curtailing other activities in their lives in order to pay utility bills, few would argue that Hawai'i's current electricity system is affordable. To the contrary, Hawai'i residents pay the highest electric rates in the nation.

High electricity costs burden Hawai'i's citizens directly by reducing consumers’ effective wealth while inhibiting growth of new business and educational opportunities, thereby making them even less "well-off" in the future. Citizens scrape by to feed their families while paying high utility bills. Many forego proper or proactive health-care and live without some basic necessities.

In large part due to high-cost and poor-quality electricity, farmers attempting to grow on-island food cannot afford greenhouse fans or packing sheds, thin-margin food stores suffer under high refrigeration costs; high electricity costs force restaurants to centralize kitchens thus eliminating opportunities for entrepreneurial restaurateurs; hotels cut back services and amenities with each increase in power costs; timeshares attempt to pass higher power costs to owners through increased fees; energy-intensive astronomy activities are stunted as companies that seek to analyze high-output data from Hawai'i's telescopes need to outsource this part of their business to the mainland.

Additionally, new energy-intensive business such as datacenters are turned away. Discussions with aspiring entrepreneurs indicate a strong desire to stay on-island, but they face heightened challenges in building businesses due to high costs overall—of which sky-high electricity costs are a primary complaint.

A startling trade-off between power costs and "what could be" is demonstrated by Chancellor Don Straney of the University of Hawai'i, Hilo when, in minutes 10:43 - 11:36 of this video Dr. Straney cites his campus' utility bill of $4.3 million (up $500 thousand from the year before, which was up $900 thousand from the prior year), and underscores that for every $1 million spent on his electricity bill he could have offered 100 courses.

The trade-off is: electricity versus student training. The trade-off is: current dollars to the utilities under mechanisms that artificially increase prices—in the name of improving credit ratings but leading the utility into an unsustainable death spiral—or teaching students to build the islands' future growth/prosperity with innovative ideas. With only limited funds available to him, Dr. Straney describes how he did what many others on the islands are doing in the face of high and increasing utility costs: he is experimenting with micro-grids to see how he can make a cluster of buildings energy self-sufficient, leave the grid, and avoid expensive utility rates.

Reliable, affordable electricity is a foundation for economic activity and growth. As an input to the economy, the utility is the start of economic activity and citizen well-being, not the end objective. High power costs bring high opportunity costs for Hawai'i's citizens by diminishing their current disposable income and inhibiting their achievement of educational objectives, life dreams, and opportunities to build economic wealth. It is in this sense that electricity rates are appropriate to include in utility performance metrics, since the financial health of Hawai'i's people and businesses is more important collectively than the financial health of a single business.

It is from this perspective that the justification for decoupling to compensate for reduced electricity sales is misguided, and should be rejected. The proper focus for Hawai'i should be affordable, reliable energy that is available from increased use of renewables, and is able to be used as extensively as possible for the citizens' benefit. The benefit for the utilities is that lower cost renewable energy can maintain their financial health, assuming demand curves exhibit elasticity, of which there is strong evidence they do, while increased sales enable them to maintain profitability.

Already evidenced on this island, ever-increasing prices caused by decoupling will certainly reduce overall demand and can potentially encourage greater efficiency, but is a draconian approach that harms those Hawai'i citizens that are least well-off economically and that violates the spirit, if not the letter, of State Law 269-91's specification for "cost effective" renewable energy.

Moreover, decoupling erodes savings from increased energy efficiency, as these savings become "lost revenues" that are "made-up" elsewhere—resulting in customers paying the utility anyway through increased rates.

The County notes that creating "financial indifference" is a weak incentive for, and quite possibly irrelevant to, encouraging increased availability of lower cost and/or renewably sourced energy. These are not the only outcomes possible from a decoupling environment, nor are they necessarily the most likely. It's one thing for the utility to care less how much electricity it sells and who generates it because it earns the same amount by fiat, while it's quite another to have proper pricing signals throughout the energy supply system to provide market-based incentives to innovate and actively incorporate new renewable generation technologies.

Decoupling insulates the utility monopoly from the necessity of acting more like a competitive business that would continually seek efficiencies and ever increasing cost-effective products for its customers.

The island of Hawai'i and Hawai'i Electric Light have achieved the State's Energy Policy goals without needing decoupling, and Hawai'i Electric Light therefore has no need for decoupling going forward.

Upgrading the grid is not a reason to award the utilities a blank- check that automatically leads to increased returns on investment on a larger capital base, nor is it a reason that, unlike any other large-scale capital investment, guaranteed revenues are uniquely required in order to raise this capital.

Where is the analysis of the increased electricity rates faced by consumers from decoupling compared to the utilities' financing costs at various credit ratings? How much of these financing costs should be allocated to incorporation of renewable energy sources, versus upgrading infrastructure that has become (by the utilities' own admission) quite aged?

Where is the analysis of other factors beyond regulatory lag that have led to HECO's credit downgradings? Moody's and S&P reports list multiple causes for financial risks that led to these downgrades, including questions about management and pension costs—among many factors in addition to regulatory lag.

It is no surprise that credit agencies look favorably on decoupling as a mechanism to reduce the utilities' risk. What business wouldn't be considered less risky and more favorable to investors if revenues were guaranteed regardless of its level of sales? What credit agency wouldn't rate a guaranteed "money printing machine" more favorably? Still, these arguments should be kept in proper perspective—it is not the job of ratings agencies to worry about the welfare of the utilities' customers...at least until such time arrives as customers can no longer afford to pay.

HECO fails to consider how high electricity rates may be the primary driver of "this period of falling sales." Falling sales as the result of a poor business model should not be rewarded. Rather, focus should be on developing a viable and sustainable business model aligned with the future realities and opportunities in Hawai'i.

The County questions the presumed "balance" of ratepayer versus shareholder/utility interests. How can it be in ratepayer interests when all revenue risks are shifted from the utility to them? Ratepayer interests in "just and reasonable rates" appear ill-served in light of historic price rises and potential "death spiral" dynamics. As ratepayers who can afford to flee the grid are apparently doing so as quickly as possible, and prices for those who remain on the grid inexorably rise due to the "death spiral," it is reasonable to question what ratepayer interests have been balanced. How is it in the interest of ratepayers to guarantee revenues to ensure the "financial health" of Hawai'i's largest corporation (and its favorable employment and benefit packages) when ratepayers are suffering economically and continually restrict their own well-being and financial health to pay their ever increasing utility bills?

Absent from these assertions is a convincing and evidence-based argument why decoupling is in the interests of ratepayers, especially when renewable energy objectives have already been exceeded on the Island of Hawai'i without having had to rely on decoupling, and when underlying economic incentives (i.e., competitive prices for renewable energy) are a far more powerful and effective mechanism for consumers to adopt renewables, underscoring the irrelevance of decoupling to achieve overall State RPS objectives.

The County notes HECO's inclination to argue to the PUC that decoupling is absolutely required to raise capital under less onerous terms as influenced by credit rating agencies, while simultaneously arguing to the investment community that prospects for HEl's future business are a "unique opportunity."

The County does, however, suggest that a rational independent observer might conclude the utilities' financial health is not as desperate as might be inferred from reading only submissions in this docket. The County also suggests that, given the positive financial results reported by HECO/HEl to its investors/ shareholders, greater balance be given to ratepayer interests, along with much greater consideration of the financial health of Hawai'i's citizens and economic opportunities currently hindered by utility costs that are high, and the real likelihood of being even higher under decoupling.

In addition to whether decoupling is necessary or effective, is it viable? How can decoupling lead to utility financial health when customers leave the grid due to high costs (aided by price distorting mechanisms such as Net Energy Metering--NEM), resultant higher rates must then be paid by those who remain "trapped," and the death spiral accelerates?

HECO's customers are already rebelling against high costs. Those who can afford to do so are leaving the grid entirely, some are leaving partially, and those who can't afford to leave are cutting back as best they can. Is this not a dire warning sign that the current business model is failing, and that decoupling will only make it worse? Rather than double down on a backward-looking business model, is it not time to develop a new business model that accurately reflects Hawai'i's energy future and opportunities?

PDF: Hawaii County Reply to Position on DOCKET NO. 2013-0141

LINK: Hawaii PUC Docket Search

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