In what could be the beginning of the new way forward to utilities, on Tuesday, Hawaiian Gov. David Ige signed the Ratepayer Protection Act, a new law that directs utilities in Hawaii to change their business models and fully decouple revenue and capital expenditures.
“This is the first jurisdiction that is doing this. It’s a concept that’s been discussed at some length among scholars and experts in the field but no one has actually implemented this so this was definitely a moonshot bill,” said State Sen. Stanley Chang in an interview.
“Instead of charging what the market can bear or letting utilities charge on a cost-plus basis to recoup their costs, for the first time they are going to charge based on factors including affordability, reliability, transparency, renewable energy integration, efficiency,” he added.
“That’s a total change to the business model of these utilities.”
How it Works Now
Today, one of the only ways that utilities all across the world can generate revenue is by rate-basing capital expenditures. What that means in plain English is that the more utilities spend on infrastructure, such as upgrading transmission and distribution equipment (and building new generation plants in some territories), the more money they make because they are allowed to add those capital expenditures to their electric rates plus a healthy margin and recover their costs through ratepayer dollars.
As of July 1, 2020, this model will cease to exist in Hawaii.
Under the new law Hawaiian utilities and the public utility commission (PUC) will need to come up with “performance incentives and penalty mechanisms that directly tie an electric utility revenues to that utility’s achievement on performance metrics and break the direct link between allowed revenues and investment levels,” according to the new law.
The law was driven partly out of necessity. As costs for solar and storage increase, and utilities lower their net-metering compensation rates, increase fees and wait times for renewable energy interconnections and otherwise make using the grid more onerous for homes and businesses that install solar and energy storage, it simply becomes easier and ultimately could become more cost-effective for homeowners that want to go solar and use storage to cut the cord and go off-grid.
“Just going off the grid entirely is not the easiest thing in the world but it is true that, especially with advances in battery technology the reduction in costs of batteries and solar, that that is not just a theoretical threat at this point,” said Chang.
And once there is mass grid defection, the entire utility ecosystem is turned on its head.
Because a third of all residences in Hawaii have solar and the state seeks to get 100 percent of its energy from renewable sources by 2045, the need for a completely new way of for utilities to exist was born.
How It Will Work in the Future
The new bill establishes performance metrics that the PUC will consider while establishing performance incentives and penalty mechanisms. They include: affordability of electric rates and customer electric bills; service reliability; customer engagement and satisfaction, including customer options for managing electricity costs; access to utility system information; rapid integration of renewable energy sources; timely execution of competitive procurement.
Chang acknowledges that it’s not going to be easy for the three public utility commissioners to figure this out. He said they opened a docket last week to begin to study the issue.
“These are really tough questions that they are going to have to answer without the benefit of precedent from basically anywhere else,” he said.
“This is uncharted territory.”
Hawaii Paving the Way for All Others
If Hawaii can figure out a way to transform its utilities into customer-serving entities that are rewarded for performance, it could have a global impact.
“At the end of the day the utility of the future has to be one that is performing all of these different metrics. That is the one that is going to survive,” he said. “Otherwise the death spiral thing is a real thing.”
Chang said that he is receiving positive feedback from colleagues all over the world, including China where even though all utilities are state-owned “it’s still hard for them to adopt performance-based rate-making or other innovations like we have,” he explained.
“I think this is the wave of the future, and I think we will see a lot more of this around this country and around the world,” he said.
Utilities have until July 1, 2020, to develop new rates.
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