Sunday, July 17, 2016

PUC Merger Decision: Politics Under Guise of Illusionary Regulation

The Hawaii Public Utilities Commission's (PUC) action on the Hawaiian Electric Company (HECO) and NextEra Energy merger application, dismissing the application without prejudice and closing the docket, seemed more like a cowardly way to a conclusion.  Steeped in flawed logic, rather than one based in well-reasoned findings and conclusion of law, it deliberately avoids a straight up or down decision based on the merits of the merger application.   

The Order is illusionary, falsely giving the appearance that a decision was made.  The Order states that HECO-NextEra can reapply using the guidance outlined in Appendix A.  However, if NextEra walks away, the PUC will simply say that was NextEra’s choice, as they were given a chance to submit a new application.  As issued, this is a devious way to accomplish a political decision to accommodate Governor Ige’s opposition to NextEra rather than a fair regulatory review under a well-established framework of regulatory standards and precedence to evaluate a business transaction between two private parties.

It appears that rather than relying on an up or down decision based on the typical fit, willing and able and do no harm regulatory standards supported by findings of fact, the dismissal order articulated an unreasonable high bar applicable only to the HECO-NextEra merger application.  In my opinion, if the PUC had issued an Order for approval with conditions (incorporating all the elements of the guidance document) or a denial listing the demands that were not met, this would have allowed an opening for a motion for reconsideration and eventually an appeal by the applicants.  But since a dismissal without prejudice may not be taken as a final decision by the PUC, the applicants may not be able to appeal the Order. 

But more importantly, an up or down decision, with a raised bar, would have set a new precedence and standard for all other future change in control applications - a bar so high it would make it impossible for other potential suitors to meet.  If the PUC/Ige Administration only motive was to discourage NextEra but not other potential suitors, a dismissal without prejudice judgment would have limited application and its contents discretionary for use in future change in control applications as it is likely not a final decision.

This outcome has put HECO and NextEra in a no-win situation, either go through hell again in politically charged environment subjected to arbitrary actions and great uncertainty or to just walk away.
Are there really other potential suitors?  I think any credible company would assess Hawaii’s current business/regulatory climate and run in the opposite direction.  This morning's Star Advertiser mentions Twenty First Century Utilities, a new concept start-up whose Chief Executive Officer background is in private equity and finance and who has never run an electric utility before.  Putting things in perspective, on one hand you have NextEra, ranked 183 by Fortune 500 and the top performing electric utility for 2016 and the premier renewable energy developer in the nation with solid financial and operational history and on the other hand you have a brand new start-up, dabbling with a new business concept with no financial or operational history.

How stupid would we be to risk the operations of our electric utility, an essential service that we all rely on, to private equity interest to experiment on - are our memories so short we have forgotten the disastrous sale of Verizon Hawaii (Hawaiian Telcom) to The Carlyle Group, a private equity firm which lacked telecommunications experience?

While Hawaii makes a lot of hoopla over rooftop solar and other distributed energy resources (energy storage, demand response technologies), about 95% of our electricity usage is still dependent on electricity supplied by the electric utility.  The PUC’s executive summary states that the merger benefits do not outweigh risks but the Order lacks an objective assessment of such risks.  The Order picks apart the near-term $60 million in rate credits, while it ignores the significant long-term merger synergies to be gained from this strategic transaction.  And, most importantly, it fails to acknowledge that the rate credits are to happen while making new capital investments.  As I mentioned in a previous post:

Who pays for the additional cost for these added risks of regulatory uncertainty and financial instability - the HECO customer - in HECO having to pay higher interest rates for access to capital thereby resulting in higher electricity costs.

In the Power Systems Improvement Plan, when discussing investments required for Hawaii's renewable future it said:

Achieving 100 percent renewable energy takes substantial capital investments.  All options, whether the Preferred Plans or other candidate plans, require substantial amounts of capital, compensated for by customer savings over time.  The total capital investments over the next 30 years for Hawaii is estimated to be $25.8 billion (in nominal dollars), of which the utility may invest 53%, or $13.6 billion.  The balance may be made by project developers, customers, and the State (via tax incentives).

With the kinds of antics happening under the Ige Administration, it looks like the anticipated savings will be wiped out and the cost of HECO borrowing money to make the necessary investments for a modern electrical system will be going up.  Hawaii's 100% renewable future is getting pretty expensive . . . mainly by self inflicted stupidity.

I had hoped that the independence and integrity of the PUC would give merger application a fair shake to be judged on regulatory merits.  However, I was not prepared for the lengths this administration would go to cause the deterioration of Hawaii’s regulatory environment.  While some may say Tom Gorack, Governor Ige’s controversial appointment to replace Commissioner Michael Champley on July 1, did not sign the Order, I do not doubt that his influence is reflected in this outcome as both Chief Counsel and an unlawful commissioner.  One does not have to sign the order to exert undue influence. 

Now, sadly, what we are left with is a Public Utilities Commission lacking credibility during a very important time of transition and transformation in our State.

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