SB120: $3.5B Rate Hike and No Natural Gas for Hawaii
by Andrew Walden
The text of SB120 points out: “Electric ratepayers are demanding immediate relief from increasing electricity rates." But ratepayers could be on the hook for as much as $3.5B of HECO's so-called "stranded costs" if SB120 becomes law.
Starting with the SB120 shell bill, Senator Roz Baker's Committee on Commerce and Consumer Protection in hearings February 6 and 13 wrote SB120 SD1 and then approved their handiwork 6-0. The amended bill passed Second Reading February 20 and is scheduled for Third Reading February 28. If approved it will pass to the House for consideration.
SB120 SD1 mandates the Public Utilities Commission to consider "incentive mechanism(s) designed to induce a public utility to reduce energy costs and operating costs and accelerate the implementation of energy cost reduction practices."
This sounds like a boon to ratepayers, but the devil is in the details. For instance:
The establishment of a renewable energy curtailment mitigation incentive mechanism to encourage public utilities to implement curtailment mitigation practices when lower cost renewable energy is available but not utilized through the sharing of energy cost savings between the public utility, ratepayer, and affected renewable energy projects;
Translation: 'Curtail' the use of HECO's 'base load' power plants to mitigate the curtailment of irregular industrial-scale wind and solar suppliers. According to HECO, 'base load' plants are: "the most fuel and cost efficient." Wind costs more. Solar costs more. "Curtailment mitigation" will pour millions of ratepayer dollars into the pockets of industrial wind farm operators and industrial solar (but nothing for rooftop solar, which is not 'curtailed') while leaving HECO's capital costs for base load plants unchanged. Ratepayers will pay twice.
It gets worse. The Abercrombie administration is leading the push to transform HECO base load plants to burn cleaner natural gas in place of their current Low-Sulfur Fuel Oil. But Natural Gas is still considered a "fossil fuel." SB120 SD1 would obligate the PUC to reward HECO with "stranded cost recovery"--even more ratepayer money -- but only when HECO retires "fossil generation plants." SB120 SD1 reads:
The establishment of a stranded cost recovery mechanism to encourage the accelerated retirement of an electric utility fossil fuel electric generation plant by allowing an electric utility to recover the stranded costs created by early retirement of a fossil generation plant; and
Recovery of ‘stranded costs’ means rate increases to pay or the closure and replacement of all of HECO’s existing generation facilities. HECO's latest financial report, released February 15, 2013, shows "Property, plant and equipment, net of accumulated depreciation" at $3.594 billion. Much of this amount could be "stranded" if HECO is transformed into a buyer of electricity from non-HECO sources. Moreover, the value of HECO's strand-able assets is growing--up $260M in just one year. Under SB120 SD1, rate payers would be liable for these costs.
The disincentive towards so-called ‘fossil fuels’ would work against Abercrombie’s plan to transfer from oil generation to LNG generation. Since LNG is ultra-cheap, this also means more rate hikes. Since existing facilities can be converted to ultra-cheap "Combined Cycle" electric generation to run on natural gas and reduce emissions, the amount of "stranded costs" is far less under LNG conversion than it is under a system where HECO is obligated to abandon all of its existing plants, declare the costs as "stranded" and buy exclusively from so-called "clean" energy producers independent of HECO.
SB120 SD1 reads:
The establishment of differentiated authorized rates of return on common equity to encourage increased utility investments in transmission and distribution infrastructure, discourage an electric utility investment in fossil fuel electric generation plants to incentivize grid modernization, and disincentive fossil generation, respectively.
To accept supplies from independent producers, HECO will have to install billions of dollars worth of new power cables. The biggest of these projects is the multi-billion dollar "Big Cable" project aimed at linking Oahu to Maui, Lanai, Molokai, and even the Big Island. "Differentiated authorized rates of return on common equity" means HECO will be allowed to raise electric rates to finance a higher payout to stockholders based on their so-called investment in Big Cable and other transmission lines to reach industrial scale wind and industrial scale solar.
The reduced stockholder payout for investments in so-called ‘fossil fuels’ would work against Abercrombie’s plan to transfer from oil generation to LNG generation. Since LNG is ultra-cheap compared to the very expensive oil-based pricing given to the politically connected wind and solar operators, this language in SB120 also means more rate hikes. Many wind and solar farms are selling electricity to HECO for wholesale prices twice as high as the average consumer retail price on the mainland.
Hawaii's electric rates are among the highest on earth and all of the usual suspects are on the bandwagon to raise them even higher. Testimony on SB120SD1 reveals:
Muted protest comes from Jeffrey T Ono, the State Consumer Advocate:
“The Consumer Advocate has difficulty accepting the concept of providing financial incentives to the electric utilities for carrying out that which they should be doing as part of their regularly conducted activities. For example, it is already part of the ratemaking process to provide sufficient financial incentives for the electric utilities to be able to attract capital for projects such as the improvement of transmission and distribution infrastructure. This bill seems to suggest providing a higher authorized rate of return on equity if the electric utilities invest in transmission and distribution infrastructure. The Consumer Advocate has objected to this type of single-issue ratemaking in the past and is likely to continue to do so in the future. In addition, these proposals may result in unintended consequences, such as increases in electricity rates and ratepayer bills, which the customers can ill afford at this time. "
SB120 SD1 is not the first time Hawaii Legislators have considered giving HECO a big fat payday for "stranded costs." HB1519 of 2011 was similar. Before deferring the bill, at a House Committee on Energy and Environmental Protection hearing February 1, 2011, Chair Hermina Morita (who is now PUC Chair) heard some very telling testimony on the issue:
Jeffrey T Ono, the State Consumer Advocate
As it relates to the recovery of stranded costs, this has been a very contentious issue in other jurisdictions when it has been raised and it is likely to be the same as it is considered in Hawaii. It should be noted that in other jurisdictions, the stranded investment dilemma was not limited to requiring the utility’s customers to bear the entire burden of such stranded costs; there is a need to determine how the investment became “stranded.” Then, there is also a need to determine what portion of the costs might be recoverable from the utility’s ratepayers, if at all. It appears that an effort has been made to include language to protect consumers’ interests, but additional changes might be considered, such as requiring that utility companies seek to mitigate such costs by seeking to divest assets. In addition, it should be noted that the reduction and elimination of fuel, operation, and maintenance costs are expenses and would not really mitigate the investment made in generation, transmission, and distribution facilities.
It should also be noted that changes, some of them very significant, have occurred within the last few years in Hawaii’s regulated energy industry. One such change is the approval of decoupling, which separates a utility’s link between increasing sales and profits. As such, it is not entirely accurate to suggest that without additional incentive mechanisms, there is no motivation for an electric company to meet statutory goals. It also should be noted that incentives have not been identified as an impediment to additional renewable resources; the HECO Companies have stated that here are system constraints that must first be addressed. Thus, incentives alone will not resolve these constraints. Furthermore, it should be noted that for every dollar spent on incentives for a utility company, that either means more costs to be borne by the ratepayer and/or less dollars that can be spent on additional renewable resources or energy efficiency measures since it will be going to the utility shareholders. Additionally, given that one of Hawaii’s electric utility companies is a cooperative, allowing an incentive would not be advisable since the customers are the member-owners and would not actually provide a meaningful incentive.
PUC Chair Carlito Caliboso:
Stranded Costs. The Commission already has the authority and may in fact be required to allow for recovery of utility stranded costs, but the express legislative authority to consider it in the context of increasing renewable generation could be helpful to the Commission as it considers the implementation of various clean energy strategies, initiatives, and projects. The Committee should be aware, however, that allowing electric utilities to implement new clean energy projects as it recovers stranded costs would generally tend to increase rates since the existing and old facilities will still need to be paid for while new projects are implemented.
Kevin Katsura, HECO:
With regard to stranded cost recovery, the bill proposes to have the PUC consider measures to allow recovery of stranded costs due to increased clean energy use, subject to conditions. In general, the Hawaiian Electric Companies agree that significant levels of departing load as a result of customer installation of generation can result in stranded costs for the utility and the utility should be allowed to recover those legitimately incurred costs. We note, however, that simply adding renewable energy resources may not necessarily result in stranded investment because particularly for variable renewable resources, certain of the utility’s existing assets will be required to balance the system and provide a back-up generation source in the event the renewable resource is not available.
Blue Planet Foundation:
Further, adding substantial amounts of renewable energy and energy efficiency will render existing fossil generation facilities useless, leaving the utility holding the bag with “stranded” investments on their books. Finally, when the utility purchases power from independent power producers, like large solar farms, the utility is exposed to additional financial risk (something it can’t afford, given its current credit rating of triple-B minus, one notch above junk bond status). These institutional barriers—decreasing sales on top of increasing costs to enable a system that doesn’t help their bottom line—makes change incredibly difficult for the utility.
How does this measure address these issues?
House Bill 1519 requires that the PUC consider a policy allowing for the recovery of the utility’s “stranded assets,” preventing these facilities from becoming anchors that restrain clean energy progress. The measure also directs the PUC to consider a “performance incentive mechanism” to reward the utility for achieving clean energy goals. This will align the financial decision making within the organization with achievement of Hawaii’s aggressive clean energy goals. It will also give Wall Street reasons to invest in the utility and help fund Hawaii’s clean energy transition.
Does 'Wall Street' need any more "incentive"? Here's what Zacks Equity Research December 21, 2012 says about the existing 'incentives' to buy HECO stock:
“Utility company Hawaiian Electric Industries Inc. posted a solid earnings surprise of 17% in the third quarter, taking its tally of positive surprises to four in the last five quarters. Along with long-term expected earnings growth of 6.4%, this stock also offers a solid dividend yield of 4.9%.... substantially higher than the industry average of 2.2%.”
HECO ratepayers have had "surprises" for the last five quarters as well. What a coincidence.