BY LAURA BROWN Hawaii’s electricity costs – already more than twice the national average — are about to increase again. But this time, it won’t be due to a Public Utilities Commission rate hike approval for the Hawaiian Electric Company and its subsidiaries.

Instead, the projected increases will result from a Public Utilities Commission decision last week that allows Hawaii’s monopoly power company, Hawaiian Electric, to realize a profit, regardless of consumer usage.

The Hawaii Public Utilities Commission, voting 2-1, issued on August 31 its Final Decision and Order in Docket No. 2008-0274 that allows for the“decoupling” of sales from the Hawaiian Electric Company’s’ revenues.

In a dissenting opinion, Commissioner Les Kondo writes, “I disagree that it is reasonable or in the public interest to shift essentially all of the HECO Companies’ business and economic risks to the customers.”

Sen. Sam Slom (R-Hawaii Kai) says, “The decision will benefit Hawaiian Electric. It means increased costs for consumers and a guaranteed benefit for our monopoly energy producer.”

Commission implements ‘decoupling’ as new rate-setting model

Hawaiian Electric recovers its operational costs by increasing charges on ratepayers’ bills, subject to the approval of the Public Utilities Commission.

Sen. Fred Hemmings (R-Kahala) says, “Hawaiian Electric has one of the most egregious monopolies with guaranteed profits and that is antithetical to the free market. We have the highest energy costs in the nation.”

Hemmings believes that any measures to mitigate the stranglehold the company has over consumers would be beneficial.

Traditionally, the Public Utilities Commission uses formula-driven estimates to approve any rate increase to cover operational and capital improvement costs while maintaining a return that is lucrative enough to attract investors.

The length of time it takes for the Public Utilities Commission to approve or disapprove rate-hikes means that the electric company must make frequent requests to ensure the company’s viability, according to company officials.

‘Going Green’ means electric sales will fall, but costs will rise

Hawaiian Electric company officials say the sales volume must continually increase to cover the electric company’s escalating costs, including labor, administrative, capital improvement, and “clean energy” projects, such as retrofitting plants for biofuels.

But Hawaiian Electric’s quarterly financial report, filed August 9, 2010, states that electricity sales to cover those costs are “flat.”

“Conservation, energy efficiency and customer-sited renewable generation measures that are advanced in Hawaii’s recent energy policies and laws will contribute to falling sales,” says Public Utilities Chairman Carlito P. Caliboso.

“With decoupling, the Hawaiian Electric Companies should have no economic or financial disincentive to support renewable energy and energy efficiency initiatives.”

State officials, including State Energy Administrator Ted Peck and Gov. Linda Lingle, promote “decoupling” as a way to remove the electric companies’ incentive to increase sales and thereby increase company profits based on fossil fuel usage.

They say the increased use of fossil fuels runs counter to Hawaii’s Clean Energy Initiative and “decoupling” will force Hawaiian Electric to move towards the use of “clean energy.”

Hawaiian Electric’s in its forward looking statements in its August 2010 quarterly report to investors describes the uncertainties that surround the Hawaii Clean Energy Initiative:

The implementation of the Energy Agreement with the State of Hawaii and Consumer Advocate (Energy Agreement) setting forth the goals and objectives of a Hawaii Clean Energy Initiative (HCEI), revenue decoupling and the fulfillment by the utilities of their commitments under the Energy Agreement (given the Public Utilities Commission of the State of Hawaii (PUC) approvals needed; the PUC’s potential delay in considering HCEI−related costs; reliance by the Company on outside parties like the state, independent power producers (IPPs) and developers; potential changes in political support for the HCEI; and uncertainties surrounding wind power, the proposed undersea cable, biofuels, environmental assessments and the impacts of implementation of the HCEI on future costs of electricity.

Kondo says that Hawaiian Electric conclusively reported for the record that subsidiary companies, Maui Electric and Hawaiian Electric and Light Company on the Big Island, “cannot accommodate any new variable renewable energy.”

That means that implementing “decoupling” will not solve the problems those islands face in integrating renewable energy sources into their grids, he says.

Hawaii Clean Energy Initiative requirements not set in law

In January 2008, the State of Hawaii and the U.S. Department of Energy signed a memorandum of understanding establishing the Hawaii Clean Energy Initiative to establish a long−term partnership between the State and the department to change the way in which energy is produced and utilized in the State.

As a result of that agreement, in October 2008, the governor, the State Department of Business, Economic Development & Tourism, the Division of Consumer Advocacy of the State Department of Commerce and Consumer Affairs, and Hawaiian Electric, signed the Hawaii Clean Energy Initiative.

The primary purpose of the agreement is to decrease the State’s dependence on imported fossil fuels through increases in the use of renewable energy with the goal of obtaining 70 percent of its energy needs from renewable sources by 2030.

However, the requirements of that agreement are not set in law.

And the Public Utilities Commission new ruling does not include any performance or service quality requirements to meet the goals of the Hawaii Clean Energy Initiative.

Consumer Advocate Dean Nishina states, “Hawaiian Electric Companies agreed to bear a host of new efforts and costs to help achieve energy independent for the State and that sales growth ‘to pay for’ those increased costs without needing frequent rate assessments.”

“Parties asked for a ‘quid pro quo.’ Hawaiian Electric Companies can only benefit from (decoupling) if performance metrics and service quality are included,” Nishina says.

The Legislature passed Act 155 in 2009 that requires the electric companies to increase their renewable energy portfolio to 25 percent by 2020 and 40 percent by 2030.

In December 2008, the Public Utilities Commission approved a penalty of $20 beginning in 2015 for every megawatthour (MWh) that an electric utility is deficient under that law.

Peck says that is about equal to Hawaiian Electric Companies’ profits and that should provide them with an incentive to move towards renewable energy.

However, the Public Utilities Commission has the discretion to reduce the penalty under certain circumstances.

Slom prefers Pennsylvania’s deregulation and competition as the preferred model over government interference. “The government is providing more sticks than carrots. I think people will be unpleasantly surprised when rates rise. Meanwhile, Hawaii refuses to examine alternatives, including nuclear energy.”

“Until the HECO Companies can provide concrete information, describing the ‘costs’ and ‘benefits’ to both the utilities and its customers, I do not believe that one can reasonably conclude that the mechanisms are in the public interest,” says Kondo.

The final order and entire docket record may be accessed through the Commission’s electronic Document Management System at

Laura Brown is a capitol reporter and researcher for Hawaii Reporter