Thursday, August 6, 2015


The HECO-NextEra merger/acquisition application before the PUC has some discussing utility ownership models.  While I personally believe this discussion detracts from the main issue of the acquisition, Kathryn Mykleseth's article in today's Star Advertiser talks about information requests between the applicants and interveners in the merger docket on the subject of ownership models.

The electricity sector is in a period of high uncertainty with significant shifts in technology, customer preferences and the regulatory environment.  Irrespective of type of utility ownership, to navigate during this time of transformation a well-functioning electric utility will require insightful leadership, nimble and flexible strategic planning and strong analytical capacity.  A particular ownership model does not guarantee any of the characteristics or qualities required for a successful energy transformation and may, in fact, hinder it with decisions based on politics rather than fact, technology and economics.

What are the differences between a municipal utility, a electric cooperative and an investor-owned utility?

A municipal, or publicly-owned utility is a government entity, established or enabled by State constitution, law or county charter.  The Boards of Water Supply, authorized by the Hawaii Legislature through law and established in each county would be an example of a municipal utility. Typically structured to have autonomy, a municipal utility is governed through an appointed or elected board of directors. Revenues to operate are generated by taxes and user fees assessments. Financing of infrastructure are through the issuance of municipal bonds or appropriations from State or County treasuries.  Chapter 46-1.5, Hawaii Revised Statutes (HRS) describes the general powers and limitations of the counties. While there is explicit language about a county's ability to manage water, sewer and solid waste, there is no mention of providing electric service.  This may be the first hurdle to establishing a publicly-owned electric utility.  It should be noted that all risks are borne by taxpayers and ratepayers.

Electric cooperatives are private, non-profit electric utilities owned by the members they serve.  I am hesitant to say customers because at Kauai Island Utility Cooperative (KIUC) you have to opt in to become a member by paying a membership fee (I think its a penny), that is you don't have to be a member to be a customer.  An elected board, held accountable to and by its members, govern the business and broad affairs (not the day to day operations) of the cooperative.  Most electric cooperatives have been initially financed by he Rural Utilities Service, U.S. Department of Agriculture.  Subsequent financing needs are usually obtained from the National Rural Utilities Cooperative Finance Corporation, also a cooperative whose members are electric cooperatives throughout the county.  Click here for KIUC's new member guide which describes in detail the electric cooperative structure and principles.  Typically, electric cooperatives are unregulated entities as there is no shareholder/member conflict.  However, when Kauai Electric was acquired by KIUC it remained as a regulated utility through mutual agreement amongst the parties and Public Utilities Commission, therefore, Chapter 269, HRS applies to KIUC although Chapter 421-C, HRS authorizes Consumer Cooperative Associations.  All risks are borne by the cooperative membership.

An Investor Owned Utilities (IOU) is a privately-owned electric utility whose stock is publicly traded.  It is rate regulated by a Public Utilities Commission (PUC) or similar type of entity and authorized to achieve [not guaranteed] an allowed rate of return.  Stockholders (investors), bonds and bank borrowing are an IOU's means to finance the business. Utility rates are set to recover costs and earn a reasonable return as profits for investors in return for the risk they bear for investing in new facilities. National expert on utility regulation, Scott Hempling, Esq. describes the regulator/IOU relationship in one of his monthly essays:
To Enforce the Utility's Obligation to Serve, Condition Compensation on PerformanceThe purpose of regulation is to align private behavior with the public interest.  That public interest imposes two chief obligations.  The first obligation is the utility's obligation to serve the public.  This obligation must be defined by commission‑established standards for performance. The second obligation is the commission's obligation to compensate the utility.  This compensation must be based on the utility's performance.
These two obligations yield three main guidelines when addressing utility requests for incentives.  First, the commission defines the obligation to serve, by establishing performance standards.  Those performance standards include more than quantitative standards like cost levels, and more than qualitative standards like "average," "above average," "best practices" or "excellent."  Merely keeping electric current flowing at reasonable rates is only one component of the obligation to serve.  Performance standards also should include factors like product diversity, innovation, customer education and customer empowerment.  Second, the commission designs rate plans that condition compensation on the utility's performance.  This step involves (a) establishing the level of revenues necessary for a prudent utility to produce the necessary performance, and (b) designing the compensation scheme so that the utility's profit depends on its performance.  Third, the commission conditions compensation on performance.  Alert commissions performs this role continuously, inside and outside rate cases.
Those who argue that incentives are necessary to align rates with costs miss the central purpose of utility regulation.  That purpose is not to align rates with cost, but to align compensation with performance.
For more information, click here for a chart put out by the California Energy Commission comparing publicly-owned utilities with investor owned utilities.

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