Hawai`i consumers pay some of the highest electricity rates in the country, and it’s not just because fuel to fire our power plants is so expensive to import. Utilities here receive higher revenues for each kilowatt hour of electricity sold than do their counterparts anywhere else in the country.
In 1997, the average revenue per kilowatt-hour in Hawai`i was more than twice the national average, according to the state Department of Business, Economic Development and Tourism.
What’s more, DBEDT says, Hawai`i’s average revenues have grown faster than they have elsewhere, booming in the last decade. Between 1990 and 1997, in Hawai`i the average revenue per kilowatt hour grew 39.2 percent, while the U.S. average grew just 4.2 percent.
Bolstered by these facts and others, DBEDT endorsed the concept of competition in the market for electricity in an October 1998 report it prepared for the Public Utilities Commission. The PUC has opened a case – formally, a docket — on the issue of whether to deregulate the energy market, a move that would eliminate the monopoly power enjoyed by the island utilities and which, supporters say, could drive down energy costs.
“While there are uncertainties associated with the implementation of electric competition, the risks of inaction are greater,” DBEDT said.
With Hawai`i’s high electricity costs, it’s clear something must be done. But is the dismantling of our utilities the answer?
States and provinces that have already restructured electric industries on the mainland have made headlines with wild price fluctuations and power shortages. And a recent report released by nationally recognized consumer advocates has come out strongly against further industry restructuring.
“The stakes are staggering,” says a Consumers Union/Consumer Federation of America report released last November 2000? November 30. “Hundreds of millions of dollars changed hands in a matter of days in the mid-west and West Coast spikes of 1998 and 1999. Billions changed hands in a few months in California in 2000. Consumers in San Diego have suffered increased electricity bills in 2000 of $700 million and California utilities would appear to be in the hole for many billion more, which they are seeking to recover from ratepayers,” the report states.
Whatever path Hawai`i takes, the PUC’s decision on its energy competition docket will be a major contributing factor. Local parties have already flooded the commission with testimony both for and against competition. But, as PUC researcher Lani Nakazawa hints, a thumbs-up or thumbs-down decision on restructuring Hawai`i’s electric industry is far off.
“There are so many options,” she says. “This was a wide-ranging docket. It looks at everything from changing existing utility practices to opening the market in Hawai`i up to retail competition. Options are varied and could include commissioning studies and holding further hearings…. a whole number of possibilities. Some require statutory changes and some don’t.”
Four years ago, the PUC opened the docket to explore the feasibility of energy competition. After a year of meetings, the dozen or so parties involved – ranging from the four major utilities to community activists – had reached an agreement on only one thing: that Hawai`i’s energy situation differs in one key respect from that found on the U.S. mainland: here, there are no interstate transmission systems allowing electricity to be generated in one state and consumed in another.
In October 1998, the PUC accepted documents from nineteen parties, including the Consumer Advocate, the utilities on the four major islands, independent power producer AES-Hawai`i, Ensearch, Puna Geothermal Venture, and Waimana Enterprises, Hawai`i, Maui, and Kaua`i counties, the U.S. Department of Defense, DBEDT, GTE Hawai`ian Tel; Hawai`i Renewable Energy Alliance; IBEW Local 1260; and the community group Life of the Land.
Go For It
Responses to the docket fall into three categories: strong support, tentative support, and outright rejection. Life of the Land’s statement to the PUC falls clearly into the first category.
LOL contends that with out ???? competition in Hawai`i, mainland businesses, with their lower energy costs, will be better able to compete. Nearly half the country already has laws or regulations to restructure the electric industry.
The group contends that competition will allow mainland businesses to play on a level field in Hawai`i, and that this could only be good for the economy. It goes on to note that nearly half the country already has laws or regulations in place to restructure the electric industry.
“Hawai`i is facing record level bankruptcies,” its testimony says. “What will happen to Hawai`i-based businesses if deregulation occurs throughout the U.S. but not in Hawai`i? If the price of electricity drops for mainland companies but not for Hawai`i companies, will Hawai`i businesses be able to survive competing with cheaper imports? … Consumers will find less work, a continued recession will exist, and consumers will pay high electric utility rates.” LOL goes on to say that deregulation will lead to “technical advances and falling prices in photovoltaic and fuel cells and the increasing use of distributed power systems.”
DBEDT, while endorsing a cautious approach, also supports competition. In 1999, the agency argued that electricity rates should be “unbundled” – a move that would have separated out various electricity charges from base rates and which, DBEDT argued, would “increase the transparency of costs of the elements of the electricity system.” Between July 2000 and July 2001, DBEDT proposed establishing a system benefit charge, adopting rules to allow open access to transmission and distribution systems (now in a utility lockhold), and making mandatory competitive bidding on all new facilities for electricity generation. DBEDT’s plan would have given utilities until June 1, 2001, to submit to the PUC plans for their restructuring. By January 1, 2002, retail competition would begin, a statewide Independent System Operator would become operational, and a renewable portfolio standard would have been in place.
With all these things in place, DBEDT predicted that utilities and other power producers would be spurred to seek lower fuel prices (fuel accounts for more than half of O`ahu’s power production costs). Also, the agency said, deregulation could lead to reduced energy reserves, thereby saving on new plant investment costs; power suppliers would enhance their generating efficiency; new generating facilities would be more appropriately sited and built with less expense; inefficient generating units would be retired sooner; and there would be incentives for the development of renewable energy and demand-side management technologies.
Let’s Think About This
While one might think the renewable energy industry would be eager to compete with utilities, the Hawai`i Renewable Energy Alliance, representing suppliers of solar water heating systems and other renewable technologies, was not exactly enthusiastic about jumping into the fray. “Renewables are already at risk in the existing Hawai`ian market,” HREA wrote to the PUC, adding that care should be taken during restructuring “to avoid adding to that risk.”
HREA explained the drawbacks to several possible forms of competition. If existing contracts between utilities and independent power producers had to be rebid, this could put renewable power at risk if the renewable plant’s contract had been negotiated at a time when the utility’s own cost of generating power was high relative to the cost of generating renewable power. Competitive bidding on new generating facilities might also threaten renewable energy, whose start-up costs are typically higher than those of conventional power plants.
“While [renewable] fuel costs are much lower, the evaluation process is biased towards the initial costs. Renewables will continue to be at risk if the long-term fuel costs of the power plants are not given a higher value in the evaluation process,” HREA states. Retail competition could also threaten renewables if service providers-delete? if the primary objective “was to drive the market to the lowest delivered cost of energy in the near term.”
To reduce these risks, HREA suggested that all existing power purchase agreements be honored; that the fuel adjustment clause, which allows utilities to pass increases or decreases in fuel costs directly onto ratepayers, be eliminated for new conventional power plants; that the social, environmental and economic benefits that renewable energy provides are “given higher weight in the evaluation and selection of power plants”; and that renewables receive state support through continued incentives, system benefit charges and/or renewable portfolio standards.
God, No!
The absence of an interstate wholesale market in electricity and lack of access to relatively cheap natural gas put Hawai`i at a disadvantage when it comes to developing a competitive industry, the O`ahu, Big Island and Maui utilities state in documents filed with the PUC.
HECO, the O`ahu utility, notes that Hawai`i has few large industrial customers compared to the mainland, where many large companies are capable of “economically bypassing” the utility system. In addition, Hawai`i never will have enough power producers to support competition, HECO says.
“For example, the sale of gasoline in Hawai`i is not regulated and is subject to competition. However, there area few producers, and only a limited number of sellers,” HECO says.
The fact that the utilities all have contracts with independent, non-utility producers of firm power also puts a kink in competition, utilities say. DBEDT, on the other hand, suggests that the power purchase agreements could be bought out “under favorable terms,” allowing those producers to “freely compete for future sales in the deregulated O`ahu market.”
In addition to these hang-ups, HECO says, “There already is competition.”
Large energy consumers can produce their own electricity. Also, HECO says, the Public Utility Regulatory Policies Act of 1978 (PURPA) requires utilities to purchase power from cogeneration and small power production facilities.
“Thus, the issue is whether it is feasible to restructure the electric industry in Hawai`i to allow competing generating firms to sell electricity directly (using the utility’s transmission and distribution system) to retail customers,” HECO says, concluding that Hawai`i markets are too concentrated and too small to support competition. A program that includes competitive bidding for new generation, performance-based ratemaking and “innovative pricing provisions” could achieve the goals of competition instead of outright deregulation, the utilities argue..
A Dangerous Road
While the local utilities have been criticized for fibbing to the legislature last year and for skewing facts in other areas, HECO’s assertion that Hawai`i’s energy industry is too small and too concentrated for full-scale competition is not necessarily self-serving bunk.
To some extent, HECO’s arguments are supported by the Consumers Union/Consumer Federation of America. The group analyzed deregulation in its recent report, Reconsidering Electricity Restructuring: Do Market Problems Indicate A Short Circuit of A Total Blackout?
“Open highways of commerce are a necessary, but not sufficient condition for competitive markets. Markets must be de-monopolized and de-concentrated before they are deregulated or prices will be higher than they should be,” the report states. It recommends there be no deregulation unless “responsible antitrust authorities” determine an absence of market power. The report also states that the biggest problem facing energy competition on the mainland is the failure of interstate transmission systems.
The causes for the price spikes, power shortages and brownouts on the mainland are “structural and long-term,” the report continues, and include inadequate power supply, a lack of incentives to reduce demand, an unfriendly market structure, and poor conduct by public and private entities involved are responsible.
There should be no more deregulation of the electric industry until states can demonstrate how consumers will benefit, the report concludes.
Hawai`i’s PUC may be following this advice. The last significant action taken in its deregulation docket occurred in October 1998, when it received everyone’s position statements. Since then, all sections of the PUC – including research, legal, and accounting – have been conducting their own research in addition to reviewing testimony. And as the PUC’s Nakazawa told Environment Hawai`i, she has no idea when a decision will be reached.
— Teresa Dawson
Volume 11, Number 7 January 2001
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