Greetings From Hawaii, Where Utility Profit Depends on Performance — Episode 130 of Local Energy Rules

Isaac Moriwake:

People talk about risk, but then it’s really like compared to what, right? I mean, it’s far less risky to be innovative and transformative and going towards this PBR direction rather than stay with the unsustainable, bankrupt status quo.

John Farrell:

For nearly 100 years, the key to making money as an electric company has been to spend money and build things with the government granted monopoly and no competitive pressures, utilities have under-invested in everything from conservation to rooftop solar to putting too much money into big power plants. That’s starting to change. In an order filed in December 2020, Hawaii’s Public Utility Commission ruled that its monopoly utility is on a new profit plan: Performance-based regulation. Joining me in February, 2021, Isaac Moriwake, Earth Justice managing attorney for the mid-Pacific, explains how the Hawaiian electric company will make money for things its customers want from now on. Paid for its performance and reliability, affordability and clean energy. I’m John Farrell, director of the Energy Democracy initiative at the Institute for Local Self-Reliance and this is Local Energy Rules, a bi-weekly podcast telling powerful stories about local, renewable energy.

John Farrell:

Isaac, great to talk to you again. Thanks for joining us.

Isaac Moriwake:

Thank you for having me, great to be here.

John Farrell:

So I just, I have to start off because I did a little bit of Googling. I like to get a little background on our guests and I don’t know that I would be doing it justice to call it a side hustle, but you have this band Jive Nene. I’m now a fan of your song, Blue Planet Blues. We’ll have a link to some of your music in the program notes, but I was curious how long have you played bass and sadly, when are we going to have a chance to hear your next live gig?

Isaac Moriwake:

Sure. Well, I’ve been playing bass since college, really when I started dabbling in it, this Jive Nene band, which is a kind of labor of love and R&B band we’ve been doing for 10 plus years, the members include a whole bunch of movers and shakers in Hawaii’s clean energy scene. That song Blue Planet Blues you mentioned was actually written by a guitarist who was the former head of the Hawaii State Energy Office, now over at the University of Hawaii at their Clean Energy Institute. So yeah, unfortunately like you said, COVID has put a little bit of a hiatus on that side gig, but we hope to get it back on and if live music, you know, rebound sooner than later, hopefully.

John Farrell:

Well, I just think it was great. I’ve been trying to learn guitar during COVID. This was one of my commitments and I am up to strumming my way through some very basic songs, but enjoying it a great deal, nowhere near band quality. But you know, I have something to aspire to. Now, I have to be checking out my clean energy allies here in the state of Minnesota to see who else I can wrestle up for a band.

Isaac Moriwake:

Well, we’ll look for for you, uh, you know, guesting as a lead soloist in one of our gigs.

John Farrell:

Sounds great. Well, now that we’ve established your bona fides in the music industry, let’s talk about electric utilities. So in Hawaii, when the state’s public utilities commission recently adopted either performance mechanisms or performance-based regulation, I’m going to let you sort out the meaning of some of these terms, but they did this for the investor owned utility company, Hawaiian Electric Company. The news outlet Hawaii Tech described this 250 plus page decision as quote, “a landmark ruling for the entire nation, putting Hawaii at the leading edge for realigning the electric utility business with a 100% clean energy future.” So quite a bold statement. I guess I’m hoping you can start off by explaining what needed to change, what was wrong with the way that Hawaiian electric was doing business before? And so many investor-owned utilities are still doing business across the country.

Isaac Moriwake:

So a little bit of context and history for Hawaii. We’re about 10, 12 years in now to our bonafide clean energy push. It started around 2008 when the utility committed to an RPS of 40% at the time. And at that time that utility was driving the agenda. It had a lot of ideas about huge wind plants on neighbor islands and undersea cables and whatnot. And somewhere along the way, about a couple of years after that, the whole rooftop solar thing took off in full and just dominated and took pretty much everyone by surprise, but give us gave us a real, huge, turbocharged jumpstart, as far as, you know, the clean energy revolution. And kind of inspired by that momentum, Hawaii then passed a hundred percent RPS, renewable portfolio standard, and it really set the agenda for the rest of the nation where other states and cities are now jumping on the a hundred percent clean energy wave.

But I would say about halfway through this first decade, or first chapter of the Hawaii clean energy movement, we quickly found that we weren’t going as far as fast as we should have been. And mind you in Hawaii, we’ve already crossed over a long time ago into that new paradigm where renewable energy is cheaper than imported fossil fuels in Hawaii. We had, let’s say had, cause I think California’s passes at this point, but we had the highest electricity rates in the nation, largely because everything’s, uh, generated from imported oil. And so that fueled the rooftop solar boom as well. And then there was a realization, wait, why aren’t we going faster, even faster, given that we can save money doing it? And we realized quickly that it was because of the utility’s incentives and a quote, you know, that famous quote from the Clinton campaign, “it’s the incentive stupid,” right?

So that I think led into a more focused push really led by our public utilities commission, but it was very quickly I think, a broad based movement to reform those incentives. And we can talk about those incentives, but I think folks generally familiar with the clean energy scene, understand that the traditional utility, the model, which goes back a hundred plus years at this point, is basically based on this cost plus or cost of model of making money where the more capital they invest in building and owning stuff, the more profit they make. Now, now that paradigm worked for, let’s call it the industrial age, where we needed to build the modern grid. And one of the wonders of the world that we see today, but it’s ill suited going forward for the new clean energy, informational, digital age. I would say of the 21st century where the utilities are continually on this treadmill of building more and more stuff. And yet again, in the climate era, in the clean energy era, it’s more about downsizing our footprint and building more efficiently and smartly rather than just more for its own sake. And so that’s the fundamental incentive that we need to turn around and that’s the heart of performance-based regulation.

John Farrell:

So as you just said, that the basic idea behind this change is that instead of paying the monopoly company based on how much of our money it’s spending, that we should pay them for what services we want to receive, like energy efficiency and clean energy. Before we dive into kind of, what’s been changing with the regulation, I guess one of the things I’m curious about, and there’s been a lot of really interesting debate over the past decade, you had this merger conversation with NextEra that took up a lot of oxygen. But I guess one of the questions would be why, why wouldn’t the commission just like break up the monopoly model entirely, for example, you know, I’ve got solar on my rooftop, lots of people do. And something like one in four or even one in three Hawaii residents has already done that as well.

Isaac Moriwake:

Great question. And I think that’s the direction that maybe some states tried to head toward maybe in the nineties with deregulation and divesting generation from the traditional vertically integrated utility, because the thought was that generation is more of a competitive market. So we get the right answers through the invisible hand in that arena. Such conversations have come up over the years in Hawaii, but it is just a huge lift as far as for regulatory change and just working through all the utility resistance and inertia around that. And we even had a study post NextEra. You mentioned NextEra — for folks that don’t know, you can Google it, but essentially once this conversation about reforming the utility came about, NextEra saw an opportunity and crashed the party and tried to basically take over our entire utility system here. That was ultimately rejected as is not the direction we wanted to go. Not, you know, we didn’t want more top down sort of models. And so after that, there was a study that was commissioned by the legislature for 2 million bucks about, what’s the best model going forward? How do we change the system? And they consider co-ops, they consider munies, to consider divestiture and all that. And I think that the answer that came of that and not to say that it was the end all, but certainly the, the commission I think had independently come to a similar conclusion that working with what we’ve got, in terms of a vertically integrated, privately-owned utility, but aligning or realigning the incentives, was the best way to get the most bang for the buck in the near term.

John Farrell:

So let’s dive into that, you know, since the utility is not going to make money for just spending it anymore, what are they going to get paid to do?

Isaac Moriwake:

They’re going to get paid to be more efficient. They’re going to get paid to deliver service and performance along the lines of what the customers want and in line with interest mandates, like our 100% clean energy mandate our RPS and, you know. We can get into the nuts and bolts, but you know, traditionally utilities come in for rate cases every so often and increased their rates. And it’s driven again by increased investments on which the utilities tack on a rate of return. And that’s the engine that ever points upwards as far as increasing the utility’s revenues and customers rates. So instead of that vertical engine, the fundamental beginning that the foundation for performance-based regulation, I think starts in principle in general, as well as how Hawaii implemented is what we call a revenue cap or revenue index in store. And basically instead of ever increasing rate through ever increasing rate cases and mind you, these rates always go one way, one direction, no utilities ever come in for a rate case to decrease rates, right?

Instead of that, a treadmill, we’re just going to cap utility revenues and keep it there for a long period of time. In this case, in Hawaii’s case, five years. We pushed for more, eight years, but it’s going to be five years for starters. And then the utility is turned loose to basically find any kind of efficiencies, cost savings so that anything, any savings underneath that cap where that index, which is externally calculating driven, will go straight into the utilities pocket. And that is said to mimic a competitive environment and as close, I guess, as monopoly utility regulation is going to get where the utility is basically left to its creative competitive juices to, to basically maximize his profits and increase efficiencies across the board. So that’s key. And, and how does that work in terms of, you know, creating customer value? Well, whereas traditionally, the utility would automatically reach for that centralized fossil fuel plant as a way to boost its profits and its revenues, now it will consider hopefully on a more level playing field, distributed energy resources, non wire alternatives, alternatives to traditional utility infrastructure investments, as a way to get the job done, to reach our clean energy goals without spending utility and ultimately rate payer money. And so again, leveling the playing field between all options, de-linking from that traditional cost plus engine of just more utility stuff is the fundamental premise and starting point for performance regulation. And then on top of that, once we have an idea of, okay, there’s certain areas where we want better targeted utility performance, whether it’s faster interconnection, whether it’s greater customer satisfaction, whether it’s more sort of attention to low and moderate income needs, then you can establish what they call performance incentive mechanisms for PIMS, for short, to drive utility performance in those targeted areas. But I want to emphasize that unlike, I think some people, when they think about PBR, they automatically think about PIMS the performance incentive side. What we really need to focus first is that foundation of breaking the link between cost of service and utility revenues first. And that’s what Hawaii did for sure, as a foundation. Like I said.

John Farrell:

Funny, when you were first describing this, about how you sort of, you set a revenue cap for the utility and you say, go out and innovate and change, my gut reaction to it was this sounds like wall street where they’re like, hey, efficiency means we’re going to screw the unions. We’re going to cut back on maintenance. And I’m looking at like PG&E in California thinking, Ooh, cutting back maintenance is not great. So I assume that some of those things have already been addressed that you’ve already thought about, oh, what are the things that utility could potentially cut back that we don’t want them to do, as well as the areas in which we want them to innovate.

Isaac Moriwake:

Yeah. Right on target on that. And that I think is one of the reasons why you also want the affirmative incentives in the form of PIMs — mind you PBR is not a totally new concept. You know, the general framework and idea has been around for decades. And the first wave of PBR was explored in and implemented in a lot of areas in the nineties, really. And it’s been going on for decades, for example, in the United Kingdom. And what they did in that, I would say first generation or first wave of PBR is directly to your point about, hey, we don’t want the utility just cutting corners and screwing up in some key fundamental areas. So what the regulators did was established PIMs of a backstop nature. So these backstop PIMs would make sure that reliability was maintained, that call service quality didn’t decline because the utility neglected those areas. And so, yes, I think in order to make sure that the utility simply doesn’t cut corners just for cost savings sake, then you have to pay attention to those targeted areas and make sure that PIMs are in place.

John Farrell:

We’re going take a short break. When we come back, we discuss who benefits from this new performance-based system and whether it has considerations for equity, how it might change the nature of the electric grid, and whether or not other states should join the club to have a better utility business model. You’re listening to a Local Energy Rules interview with Isaac Moriwake, Managing Attorney of the Earth Justice Mid-Pacific office, about the new performance-based profit system for Hawaii’s is monopoly utility.

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John Farrell:

So what impact do you think this will have on customers and what impact on shareholders?

Isaac Moriwake:

The grand vision of all of this is the win-win win, right? Because of that revenue cap or index, utility revenues and ultimately customer rates aren’t going to be escalating like they do traditionally. Now on top of that, there is a customer dividend or consumer dividend that is tacked on to that cap to create even additional day one savings, right off the bat, right at the beginning, but realize the savings come over time as the utilities become more efficient and realize those efficiencies. So that’s the winner on the customer side, lower rates, right? And if you read the PUC order, that was their number one focus, focus and priority. It’s really clear. It’s just jumping off the page. And then the other wins are we’re going to get clean energy faster and cheaper because the utility is already subject to a mandate. But because when left to the most efficient choices and you know, the profit motive of how can we do this, uh, deliver performance most cheaply, clean energy is the answer, right? And at least the theory and principle is that we’re going to get clean energy faster. And then the utility gets the win. Because again, they get to keep the profits. I mean, there’s earner sharings mechanisms as backstops to make sure that the utility somehow doesn’t find loads of profits savings opportunities that no one was aware of. We were just like, well, it happened. I mean, you know, we’ve seen it in other cases, but when these types of regions have been instituted and then, and the tricking everybody or whatever. So, so there’s guardrails here. But I think by and large, the PUC has given the utility a wide runway to go forth and do good as far as profiting while delivering performance.

John Farrell:

What do you see as maybe changing how the electric grid looks like? And you kind of talked about this earlier a little bit, you alluded to it when you talked about how the historical model encouraged the utility to spend its money on infrastructure, to get a payback. And that it meant that the utility often defaulted toward looking towards some centralized power plan as the way that they address a grid need. What do you anticipate might change if the utility is following this new performance-based path toward revenue and following the structure of the incentives?

Isaac Moriwake:

So again, in theory, and in principle and we, you know, we can talk about this in terms of, okay, what are the flags for the future? Because we do our best, the best we can. And this is a bold step forward by Hawaii. Certainly leading the nation in this, you keep your paradigm, but theory and principle and how we’re driving forward on this is that all options would be on the table, right? And ideally, a level playing field between utility centric solutions, such as essentially a new, new centralized, clean energy power plant, hopefully, or bottom up solutions that are customer centric, such as distributed energy resources, energy efficiency, demand response, distributed storage, and what have you. And so again, because a utility is capped out on its revenues over a long time is going to be looking for long-term solutions. The greatest efficiencies, not only on the short term, but over the longer term of how it can get the job done cheaper and where instead of building a new, big honking transmission upgrade, or a substation or a centralized power plant, you can get the same job done through distributed energy resources, through virtual power plants using all the distributed solar, the rooftop solar that’s already installed it. And someone has, has likened that to Porsche sitting in people’s garages, or I guess, on their, on their roof. In this case, if you can get the job done utilizing those under-utilized resources right now, then do it and money, and pocket the profits while you do it. That’s the theory and principle anyway.

John Farrell:

Yeah. I mean, it reminds me of all of these… We hear about a lot of these sort of specific approaches. So there’s things like demand response, right? There’s the notion that my utility might offer me an incentive to turn down my air conditioner on a hot day or as Texas is experiencing right now, turn down your heat on a cold day to provide more electricity. That they’d want me to invest in energy efficiency and the more of us to do that collectively, the less they have to spend to provide new energy. But instead, what I’m hearing you say is that all of these sort of individual programs that are kind of tacked on like a sidecar on a motorcycle in other states become the core focus of the utility to kind of put them all together to say, hey, if we can put together a portfolio of all of this stuff, that’s cheaper than a power plant while we get to when, when that happens. Whereas now I feel like there’s this tension where utility says, oh, well, we can do all of that stuff. And it’s better for customers, but it’s not better for shareholders.

Isaac Moriwake:

Right? Well, and I think you’re touching on the fundamental idea behind PBR and you refer to innovation and that really is at the heart of this idea, right? So the utility is in the best position to figure out what creative solutions are going to get the job done as cheaply and effectively as possible. If sort of a third-party regulator has to come in and on a nickel and dime or a la cart basis, say try this program or that program, we’re going to be here decades later, just doing the same thing. And I think the last decade in Hawaii proved that. And so instead again, you lead a horse to the water. Anyway, you give them this runway to innovate and the utility ideally undergoes a culture change in terms of like any competitive company in a competitive environment, what we’ll do, let’s figure out like the best way to get this done on an enterprise level, not a program by program basis.

John Farrell:

I don’t want to dive into this too much, but I’m just really fascinated to see the way that this may or may not engage culture change. I keep thinking about like Green Mountain Power, which is the only investor owned utility that’s also a registered B corporation. So it has this triple bottom line: people and planet and the company. And it’s so funny because it’s not really driven by the regulators there. It was the case of kind of a dynamic CEO coming in and saying, hey, we can do this differently. And they made it work even within the cost of service regulatory framework, although they’ve certainly found some innovative approaches to it. And it’s, I love the idea that you’re able to impose regulation here that is bringing folks to this question of, can we create culture change by fundamentally changing the incentive for the utility?

Isaac Moriwake:

Well, I liken that to lead the horse to the water and it ultimately comes to utility leadership, right, and vision. So are we just going to get a penny pinching version of the old cost plus utility liking? And you kind of described that before in some of your questions. Or are we really going to get some fundamental culture change? Stay tuned, but I will say in Hawaii that most of the credit, as far as this transformation, has to go to our public utility commission who saw the need for change and, and clearly set forth an agenda brought up out this process, where are we going to tackle this issue of establishing PBR and got it done.

John Farrell:

One of the questions I definitely wanted to ask you was, back to this question of incentives, are there any incentives addressing equity? For example, are there rewards for lowering energy burdens for low-income residents, for example, or making investments that reduce pollution in particular, historically burdened communities?

Isaac Moriwake:

Helping low to moderate income communities was one of the outcomes or goals that the PUC identified for Hawaii PBR and in its final order issued in December, the PUC did adopt one of, let’s say five around there, a PIMs or performance incentives specifically addressing energy efficiency opportunities for LMI customers. And so the answer is yes, and there’s going to be a PIM that tracks overall energy savings for LMI customers and rewards the utility based on how much progress is gained on that front. Now in Hawaii, we’re like Vermont and some other jurisdictions where we’ve spun off energy efficiency to a third party administrator. And so why are we paying the utility for LMI energy efficiency gains? Well, the thinking on the PUC’s part was that this is an all hands effort and a shared goal. And the utility certainly has a part to play in terms of cooperating with the energy efficiency administrator, or they’re called Hawaii Energy, and not getting in their way. You know, communicating, uh, playing team ball. And, and so this PIM was specifically designed by the commission to, it encouraged that and boost that outcome.

John Farrell:

Isaac, you know, folks have often called Hawaii ‘postcard from the future.’ I think I first heard that term from Adam Browning at Vote Solar when it comes to clean energy policy. Is there any reason that other states shouldn’t sort of stampede to follow Hawaii into this? What, what do you think would hold them back?

Isaac Moriwake:

I think it makes a ton of sense. And look, we got 10 years to turn this around, right? And so other states don’t have 10 years like Hawaii did to implement this reform. I gotta say that in Hawaii, we even had feedback from Wall Street. We had consultants from Moody’s credit services come in and participate in some of our workshops. And they were clear that ‘cost of service’ pulls utilities down the wrong path. It’s outdated and PBR is credit positive for utilities because of that win-win win opportunity. And so they were very, very enthusiastic about the direction Hawaii was going. The reports after the final decision in this case seemed to be positive as well. They recognize that the performance risk is going to be on the utility. It’s time for the utility to be firmly in the driver’s seat and deliver that performance. And so obviously there’s risk behind that and guess what, that’s the whole purpose, right? But because of the opportunities on the upside, if the utility does transform, Wall Street sees the positive. So on the downside, in terms of just maintaining our outdated status quo, wedded to the old cost plus model. If you take this on, now they’re going to see it very quickly that that’s leading them down or has been leading them down the wrong path towards stranded assets. If the utility keeps on going down this treadmill of just building, building more stuff, and then there’s carbon regulation that comes around it as DER goes through the roof, so to speak, like it’s going to happen, as the literature shows it will, as, as, as your work shows it will, then it’s a real big problem. It’s, it’s probably already a problem in that utilities don’t even recognize it. It’s like sort of frog in the pot. So yeah, I mean, people talk about risk, but then it’s really like compared to what? You’re… I mean, far less risky to be innovative and transformative and going towards this PBR direction rather than stay with the unsustainable bankrupt status quo.

John Farrell:

I just want to write that down verbatim. Cause I think that was excellent. Hold on just as I get… great. Isaac, where can folks go to learn more about this new performance-based regulation in Hawaii that shifts investor owned utilities to get rewarded for performance instead of just spending customer money?

Isaac Moriwake:

The best resource right now would be the PUCs website on its PBR docket. And I think they even have a page on their final decision and includes the decision itself, which is 260 plus pages. So I want to recommend that for everybody, but it also includes press materials and I think a couple of pages synopsis. And so, you know, that’s a good start. And then I think, you know, more and more industries, for analysis, literature commentary is going to be coming out sort of digesting what happened. And so I would keep an eye out for that as well. There was a good Utility Dive article that came out a little while ago, summarizing the initial take on, on what happened with the final decision. And I think there’s also Greentech Media that’s going to be covering it. And maybe John, you can do your own coverage and analysis of it.

John Farrell:

What do you think this podcast is for?

Isaac Moriwake:

Okay, well, I’m sorry. I should have led off with listen to this podcast.

John Farrell:

No, it’s, uh, it’s definitely just a starting point, but I think it’s really helpful to have your assessment of, and your explanation of how this works and kind of what the important pieces were behind it. Because I think it’s easy to be skeptical from the advocacy side about, you know, are we just being played by the utilities or by Wall Street? It’s easy to be skeptical from the other side. I mean, it’s great to hear that folks on wall street actually see this as a good alignment of risk and reward because that’s what a capitalist should be saying really when you talk about performance-based regulations. So I just think this is a great way for people to understand how this really can be a win-win and, and, and result in outcomes that we’re all trying to get to.

Isaac Moriwake:

Exactly.

John Farrell:

Well Isaac, thank you so much for joining me for Local Energy Rules. We’ll, uh, have links to all the stuff we talked about in the show notes.

Isaac Moriwake:

Great chatting with you. Thanks for all the work you do.

John Farrell:

And I hope you get to, uh, get back to making some music soon, uh, cause it was fun to listen that as in preparation for this podcast.

Isaac Moriwake:

Fingers crossed.

John Farrell:

Thank you so much for listening to this episode of Local Energy Rules with Managing Attorney of the Earth Justice Mid-Pacific office, Isaac Moriwake, where we discussed how customers and shareholders can benefit from a new profit model for regulated monopoly utilities. At the show page, look for links to the Hawaii commissions order and summaries by several news outlets. At ILSR’s website, you can also find more discussion of the perverse incentives in the standard cost-plus regulatory model for electric utilities and how they can be changed, as well as alternative options like community choice energy that lets communities – instead of utilities – choose their energy future. Local Energy Rules is produced by myself and Maria McCoy with editing provided by Audio Engineer Drew Birschbach. Tune back into Local Energy Rules every two weeks to hear more powerful stories of communities taking on concentrated power to transform the energy system. Until next time, keep your energy local and thanks for listening.