September 24, 2014

HECO Companies Propose Significant Charges for DG Customers

Hawaii’s Public Utility Commission issued a guidance document recommending rate reforms to better account for distributed generation customers’ use of the electricity system. The HECO Companies, in turn, filed a plan that proposed significant charges and modifications to distributed generation customers’ compensation structure. Though the PUC will not likely approve the plan as written, its ultimate decision could influence energy policy on the mainland.

The Hawaii Public Utilities Commission (PUC) issued a guidance document on April 28—Commission’s Inclinations on the Future of Hawaii’s Electric Utilitieswhich proposed a series of sweeping reforms to the state’s electricity industry. On August 26, the state’s investor-owned utilities, the HECO Companies, responded to a PUC order to file a Power Supply Improvement Plan (PSIP) that sets out the steps the utilities will take to achieve the state’s clean energy goals. 

Last week’s post took a look at the PUC’s vision for the future of utility generation ownership outlined in the Commission’s Inclinations. This post will consider the Commission’s proposal to reform the rate structure to adapt to a future with greater distributed energy resource penetration, and the HECO Companies’ response to that proposal.

House of the Rising Sun

In its Commission’s Inclinations, the PUC laid out a number of potential avenues for reforming the HECO Companies’ rate structures. Some of those reforms were targeted to address the costs that some people believe distributed generation (DG) customers shift onto utility customers. 

The majority of DG customers on the HECO Companies’ grid systems are Net Energy Metering (NEM) customers with solar photovoltaic installations. Hawaii’s net metering policy allows those customers to net out the cost of the electricity that they purchase from the utility with the power that they produce. Utilities argue, with some merit, that that arrangement fails to account for the costs associated with operation and maintenance of the electricity grid, and the provision of supplemental power and ancillary services, essentially foisting those costs onto non-DG customers. 

The PUC offered three potential reforms to address that perceived cost-shifting issue, including 1) the implementation of an unbundled retail electricity rate structure, 2) capacity-based, fixed-cost based pricing, and 3) a supplemental power supply pricing structure. The mechanics of the suggested reforms vary, but the net effect of each would be to charge DG customers for the services that they consume above and beyond their own generation.

The Commissions’ Inclinations, however, failed to direct the utilities to consider and account for the potential value of distributed generation assets in terms of avoided transmission and distribution system upgrade costs. Any policy that the PUC approves should include a proper valuation, not only of the costs associated with serving DG customers, but also of the benefits that distributed generation provides to the system.

Give Them an Inch…

The rate reforms that the HECO Companies propose in their PSIP go beyond those envisioned by the PUC and will not likely survive review as currently constructed. The utilities propose 1) a $55 monthly charge for all customers, allocating customer service and demand costs; 2) a $16 monthly charge for DG customers, accounting for standby generation and capacity requirements; and 3) a “gross export purchase model,” compensating NEM customers at wholesale rates for the power they contribute to the grid. The cumulative impact of the HECO Companies’ proposed reforms would be to significantly curtail the economic incentive for customers to participate in the NEM program, most likely spelling the end of net metering in the state.

Utilities have similarly sought DG customer surcharges in other states, with limited success. Recently, APS, the largest investor-owned utility in Arizona, petitioned the Arizona Corporation Commission for a net metering surcharge of $8.00 per kilowatt to account for fixed costs. After reviewing the recommendations of the utility, ratepayer advocates, the solar industry and its own staff, the Arizona Commission approved a $0.70 per kilowatt charge on net metering customers’ bills.  

The Hawaii PUC is likely to follow the lead of the Arizona Corporation Commission in approving a modest charge for DG customers. Although the Hawaii PUC seemingly opened the door for DG customer charges, it seems unlikely that it will approve charges at levels that would quash the net metering program and disincentivize renewable energy development.

Furthermore, the HECO Companies’ proposed rate reforms might even harm their long-term viability. If the PUC does approve the HECO Companies’ rate reform proposal, the calculus of increased rates for DG customers plus decreased compensation for exported power might make customer grid defection a more appealing proposition. The idea of exponential utility customer defection caused by a decreasing pool of customers being saddled with growing system costs is referred to as the “utility death spiral,” and it represents something of a nightmare scenario for investor-owned utilities. (But that is a topic for another day.)

Charting a New Course

As was the case with the issue discussed in last week’s post—diminishing utility ownership of generation assets—Hawaii represents one of the first states to tackle the issue of DG rate reform. For that reason, the policies that the Hawaii PUC adopts have the potential to influence the decisions of public utility commissions on the mainland.

It is therefore important that the Commission crafts a policy that fairly allocates the costs associated with serving DG customers, while considering the value of the avoided transmission and distribution costs that DG provides. In so doing, the PUC must avoid taking actions that will threaten the economic viability of the state’s utilities, while simultaneously preserving incentives for customers to invest in DG projects. An equitable policy that accomplishes all of those objectives could serve as a model for the rest of the US.

The Hawaii PUC is accepting public comments on the HECO Companies’ PSIP until October 6.