by Bob Shively, Enerdynamics President and Lead Instructor

In our pursuit of understanding how state utility commissions envision the future of the utility, last week we explored how the Hawaii Public Utilities Commission views the future of the Hawaiian Electric Companies (HECO).  This week we’re looking at how the Commission may evolve policy and regulation to attempt to achieve the desired outcome.

Policy and Regulatory Reforms to Achieve Hawaii’s Clean Energy Future

To achieve the strategic initiatives described in last week’s blog post, the utilities will need to transform their business models to de-emphasize supply procurement and increase roles in systems operations and integration.  Key aspects include:

• sufficient senior management attention and corporate resources to effectuate the transformation
• an assumption that the utility’s “traditional role as owner and operator of a fleet of fossil generation will diminish over time”
• consideration of precluding utilities from acquiring new generation and incentivizing utilities to accelerate retirement of existing inefficient generation
• a transition to new key utility roles including: 1) system planner and operator of high renewables grids (somewhat like an ISO on the mainland) and manager of fuel procurement for IPPs; and 2) transmission and distribution system integrator

To achieve these changes, the Commission recognizes that it must change the current regulatory cost-recovery model with company profits tied to return on utility plant investment. Concerns with the current regulatory model include lack of correct incentives to control power supply costs, no direct financial incentive to pursue clean energy projects developed by independent power producers, no direct financial incentive to accelerate retirement of fossil generating units, and lack of transparent price signals to evaluate the supply of ancillary services.

The Commission describes a number of potential regulatory solutions including:

• incentive mechanisms to increase renewable energy, minimize power supply costs, reduce emissions, and maintain bulk power supply reliability
• incentive mechanisms to encourage accelerated retirement of existing fossil units possibly including securitization to financially protect the utilities’ loss of rate base
• a prohibition on HECO developing new generation resources or undertaking major modifications to existing units
• unbundling ancillary services
• incentive mechanisms to reward investment in transmission and distribution grids to enable the type of system envisioned

Pricing changes might include:

• unbundling of supply, energy delivery, and ancillary services
• greater utilization of capacity-based fixed-cost pricing (instead of recovering most costs in a per kWh charge)
• utilization of time-of-use and dynamics pricing
• a supplemental power supply service for customers with self-generation

To achieve its vision, the Commission recognizes the regulatory compact may need to be changed, but it does not yet have a recommendation on how. The Commission notes that if consumers have the option to economically take care of their own supply needs then the utility obligation to serve must also be reconsidered.

States the Commission: “The long-term obligation for Hawaii’s electric utilities to interconnect customer-owned generation, to supply distributed generation customer with supplemental or back-up power supply and to provide grid capacity to enable power exports has not been defined.”  The Commission concludes by stating that it is now incumbent on HECO to develop a new sustainable business model.

Source: Hawaii Electric’s May 7, 2014 Earnings Conference Call