Dive Brief

Hawaii Gov. David Ige (D) on Tuesday signed a bill directing the Public Utilities Commission to implement performance-based regulation by 2020 that breaks the link between utility revenues and capital investments.

SB 2939 directs the creation of a "new business model" for utilities, said State Rep. Chris Lee (D), by basing revenues on metrics like customer satisfaction, renewable energy integration and data sharing. The PUC opened a similar docket last week that will implement the law's goals.

Hawaiian Electric (HECO), the state's sole investor-owned utility, said it supports the new law, "especially if it follows the processes of the [PUC] docket." The bill passed both houses of the Hawaii legislature unanimously and is supported by the consumer advocate and clean energy groups.

Dive Insight

Hawaii on Tuesday became the first U.S. state with a legislative mandate to separate utility revenues from capital expenditures.

Performance-based metrics exist in other U.S. states — like New York and Minnesota — but those efforts so far have largely stacked new incentives on top of the utility's traditional revenue model of rate-based capital investments.

Hawaii's law envisions a clean break. By 2020, it reads, the PUC will design incentives 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.”

Instead, the bill directs the PUC to evaluate existing ratemaking structures and design new incentives and penalties around a number of outcomes:

Customer affordability

Electricity reliability

Customer engagement and satisfaction, including "options for managing electricity costs"

Access to system information, including "system planning data and aggregated customer energy use data and individual access to granular information about an individual customer's own energy use data"

Rapid interconnection of renewables and distributed resources

Timely execution of competitive procurement and interconnection of third-party resources

Lee told Utility Dive the law is needed due to unique pressures on HECO, which faces a 100% renewable energy mandate to meet by 2045 and the highest level of per-capita rooftop solar penetration of any U.S. state.

"Given that in many places in Hawaii we're beyond grid defection, where it's cheaper to leave electric grid than stick with the utility, and given falling price for storage, solar and innovative technology, we couldn't wait any longer," Lee said. "We need to ensure our utility is a sustainable business model that will be able to survive disruption and defection in the years to come."

The new revenue models will allow the utility to remain financially healthy even as consumers generate more of their own electricity and third-party renewables take the place of HECO-owned plants on the grid, Lee said.

"This is something for which the utility will be able to earn revenue sustainable and consistently over time," he said, and will "open up the door to a whole new swath of products and rate design which can make consumers a huge part of the electric grid services."

Even when utilities in other jurisdictions have welcomed performance-based metrics, they have largely resisted efforts to separate revenues from capital expenditures. But while HECO officials stress "flexibility" in applying new metrics, they support the new law.

"We're fine being judged on our performance because we feel like we've been getting a lot done," said Jim Kelly, HECO vice president for corporate communications. "We've been advocating in regulatory proceedings going back to the 1990s so we're not all apprehensive about it especially if it follows the processes of the docket established last week."

The PUC docket envisions implementing the new performance metrics in two phases — the first to evaluate the existing system and a second to design new incentives.

HECO already faces performance-based metrics as part of a new demand response program approved by the PUC, Kelly noted, and the utility is beginning to open up its integrated grid planning process to enhance competitive procurement.

"The first stage where we basically have to get an understanding of where we are with the setup the way it is will be very critical," Kelly said. "It's hard to say where we will end up but I think if this is done the way it should, all should be aligned with our IRP and our grid modernization plan."

The law was also welcomed by renewable energy providers, including those critical of the utility in the past. Sunrun, the nation's largest residential solar installer that has battled HECO on net metering policies, said the law could be a model for other states.

"Other state Legislatures and Commissions should take notice of Hawaii's efforts," said Sunrun Chief Policy Officer Anne Hoskins in a statement. "The time to make these changes is now, before billions of dollars are spent in rebuilding our outdated electrical networks."