Friday’s MECO rate case decision included an unprecedented reproach by the PUC in the form of a six-page addendum attached to the order. We include the clearly articulated reasoning of the “Commission’s Observations and Perspectives” here and commend the PUC for ensuring that the public utilities serve the public interest, and when they do not, holding them accountable.
Commission's Observations and Perspectives
The commission believes it is timely, necessary and essential to outline fundamental, emerging issues pertaining to the operation and regulation of investor-owned electric utilities in Hawaii to set a course that is mutually beneficial to utility shareholders and utility ratepayers.
The commission has observed that electric customers are increasingly frustrated because of high electric rates. These concerns were also expressed by the 2013 Hawaii State Legislature in connection with Senate Bill 120, Session Laws of Hawaii 2013, which authorizes the commission "to establish a policy to implement economic incentives and cost recovery regulatory mechanisms, as necessary and appropriate, to induce and accelerate electric utilities' cost reduction efforts, encourage greater utilization of renewable energy, accelerate the retirement of utility fossil generation, and increase investments to modernize the State's electrical grids." Therefore, the commission's Decision and Order in the instant docket and the simultaneous filing of the decoupling mechanism investigation is intended to serve notice to Maui Electric Company, Limited ("MECO"), as well as the other HECO Companies.
The commission understands the importance of and supports the concept of delinking electricity sales from revenue. However, existing automatic adjustment mechanisms appear to unduly insulate the HECO Companies from the need or urgency to make major adjustments to current utility management and operational practices, thus offering no motivation to implement strategies and action plans that may be more conducive to serving the public interest.
The commission is concerned that the 2008 "Energy Agreement" may be the principal foundation for HECO Companies' overall business strategy. The HECO Companies' over-reliance upon a link between the Agreement and utility financial health obfuscates utility performance and ultimately customer service and satisfaction. The commission affirms its commitment and support of Hawaii's clean energy transformation. However, clean energy in and of itself is not the singular goal but rather should be viewed as one strategy to serve the public interest along with sound business practices centered on customer value.
From the commission's perspective, the HECO Companies appear to lack movement to a sustainable business model to address technological advancements and increasing customer expectations. The commission observes that some mainland electric utilities have begun to define, articulate and implement the vision for the "electric utility of the future." Without such a long-term, customer focused business strategy, it is difficult to ascertain whether HECO Companies' increasing capital investments are strategic investments or simply a series of unrelated capital projects that effectively expand utility rate base and increase profits but appearing to provide little or limited long-term customer value. While a public utility is required to have a reasonable opportunity to earn a fair financial return, attractive financial returns are not an entitlement by virtue of being a regulated utility.
The HECO Companies have characterized various automatic adjustment mechanisms that are used as regulatory cost recovery as an "Improved Regulatory Model" for security analysts in lieu of traditional general rate cases. Unfortunately, these automatic adjustment clauses are not linked to key performance measures such as rate affordability and customer satisfaction.
The commission believes that a well-managed, customer focused electric utility is one that is driven by a management philosophy and corporate culture to provide superior customer value through affordable electric rates and outstanding customer service, as defined by its customers. Top performing utilities embrace a well-researched phenomenon known as the virtuous cycle or virtuous circle where positive performance drives positive regulatory outcomes, which drive positive financials, which can then be reinvested in the utility to keep that cycle going.
Conversely, the opposite phenomenon, a "vicious cycle" also can happen. Poor performance drives poor regulatory outcomes and financial penalties starting a downward cycle in the opposite direction.
The virtuous cycle is readily apparent to those who follow and critically analyze electric utility financial performance. As a result, it is common knowledge among these professionals which utilities are top industry performers and whether the HECO Companies are recognized among the industry's elite performers in this regard.
The extent of the HECO Companies' own volition to achieve high performance, provide excellent customer service and affordable rates will determine the appropriate amount of regulatory oversight required. Otherwise, the commission would be forced to employ arduous regulatory scrutiny and oversight of utility expenditures, operations and investments to attempt to achieve the desired performance levels and customer satisfaction. The commission prefers the former but unfortunately, at the present time, believes the lack of a strategic and sustainable business model would require more of the latter until there is evidence of an acceptable course correction.
To this effort, the commission is committed to work collaboratively with the HECO Companies, Consumer Advocate, and other stakeholders for timely regulatory responses and action. The commission remains committed to alternative regulatory mechanisms to minimize regulatory lag and uncertainty and is open to innovation to streamline the ratemaking process to the extent they would be in the public interest. However, the achievement of a high performing, customer focused and financially viable electric utility with affordable rates is the responsibility of the electric utility management, not the commission, to deliver on its responsibilities and obligations to uphold the regulatory compact. The public interest demands no less.
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