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Hawaii regulators move toward performance-based ratemaking

The Hawaii Public Utilities Commission has set goals to guide the development of rates to replace traditional cost of service regulation. And to that end, it plans to launch a proceeding in June to design and implement annual revenue adjustment mechanisms, targets and performance-based ratemaking incentives for the islands' electric utilities.

The PUC recently decided it will remove utilities of Hawaiian Electric Industries Inc. from their triennial general rate schedules and institute five-year rate schedules instead. Between rate cases, a combination of annual revenue adjustments, performance incentive mechanisms and cost trackers will be used. Existing cost trackers and pass-through mechanisms will continue, including power adjustments and surcharges for renewable energy and demand-side management.

By automatically adjusting utility revenues based on an annual revenue formula and employing an "upside" and "downside" earnings sharing mechanism, utilities will have greater certainty and more timely recovery of costs, the PUC said. Customers will share in excess utility earnings, while utilities will be insulated from extreme financial hardship, the agency added.

Regardless of energy sales, a revenue balancing account will be maintained to ensure that utilities recover their approved earnings level target. The utilities will have the opportunity to earn performance revenues for cost control, greenhouse gas reduction and progress interconnecting distributed energy resources, among other factors.

The commission aims to implement a law Hawaii passed in April 2018 requiring state regulators by Jan. 1, 2020, to create performance incentives and penalties for utilities based on the extent to which they integrate distributed solar and other forms of renewable energy, provide customer choice, promote affordable electricity and improve energy efficiency.

The law and subsequent PUC decisions apply to Hawaiian Electric Co. Inc., Maui Electric Co. Ltd. and Hawaii Electric Light Co. Inc. The utilities had opposed what they called the "ill-defined incentive scheme" described in the legislation but expressed confidence in their ability to work with regulators on performance-based rates.

Through its legislative and regulatory efforts, Hawaii is among a number of states that in recent years have taken steps to move utilities away from cost-of-service regulation, which bases revenues on allowed investment levels that reflect the total amount that must be collected in rates for the utility to recover its costs and earn a reasonable return.

Other states engaged in efforts to decouple the direct link between utility costs and rates include Nevada, where the state Legislature on May 28 sent to the governor a measure to establish performance-based ratemaking for Berkshire Hathaway Energy subsidiary NV Energy Inc.'s utilities.

California, New York and Rhode Island have applied performance-based regulation in specific instances, such as distributed generation proceedings, according to a report by the Rocky Mountain Institute, which served as an adviser, designer and workshop facilitator in Hawaii's performance-based regulation proceeding. Oregon, Michigan and Minnesota also have been investigating performance-based regulation, the report said.

The Colorado legislature recently passed a bill to require the PUC to study performance-based ratemaking. Washington state on May 7 passed a law authorizing utility regulators to use performance-based ratemaking to help utilities reduce carbon emissions. Massachusetts regulators adopted a mechanism for such rates for Eversource Energy in December 2017.

Yet, while performance-based regulation has been studied for decades, progress has been somewhat slow and only narrowly implemented. For instance, the Public Service Co. of Oklahoma in March failed to get the performance-based rate plan it requested.