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by Jeff St. John
February 10, 2021

Over the past two and a half years, Hawaii has been embarking on the most aggressive effort in the United States to change the way utilities are financed by the public they serve, by leaving behind the capital-expenditure-focused, “spend money to make money” paradigm of traditional cost-of-service regulations. 

To replace it, Hawaii is looking toward performance-based ratemaking (PBR), a catch-all term that encompasses all kinds of regulatory structures. The common goal is to financially reward utilities for doing things regulators and policymakers have decided they need to do better and to stop rewarding them for things that end up costing customers more than they return in customer benefits. 

For Hawaii, that PBR impetus is aimed at Hawaiian Electric, which operates investor-owned utilities on the islands of Oahu, Maui and Hawaii. On one hand, regulators want to limit customer rate increases, especially for large capital projects that may not align with the island state’s clean energy imperatives. They also want to remove the inherent bias favoring utility-owned projects that can serve as a disincentive for more creative approaches that tap customer-owned rooftop solar, behind-the-meter batteries, grid-responsive loads and electric vehicles. 

On the other hand, they want to avoid putting the utility under a structure that could lead to excessive losses that might alienate Wall Street investors and dissuade lenders from supplying the capital it needs. They also want to reward the utility for doing its core jobs more efficiently — and to boost those rewards when it exceeds state mandates to shift from centralized fossil-fueled power plants to a clean and decentralized energy future. 

In December, the Hawaii Public Utilities Commission approved a decision and order that takes the next step in this journey. It’s the result of years of grinding negotiations and compromises between Hawaiian Electric and business, environmental and consumer stakeholders, and it doesn’t take up all the PBR concepts laid out in the first phase of the effort. 

But it does go much further than any of the PBR efforts underway in the rest of the U.S., according to participants in the process. That’s because it takes a vital, if still conceptual, step, beyond tinkering at the edges of the cost-of-service model, by setting a clear signal that, for HECO, there’s no going back to the old way of doing business.