A Utility Takeover by a Mainland Company Poses a Threat to Electricity Ratepayers in the Aloha State

The Good News: The Hawaii Public Utilities Commission Is Asking the Right Questions

Shares of Hawaiian Electric Industries rose 16 percent on news in December that Florida-based NextEra Energy wanted to buy the main provider of electricity in the Aloha State.

It’s clear that the deal would bring a windfall for Hawaii Electric shareholders. What’s not so clear is whether it would be in the best interest of customers of Hawaii Electric Co. (HECO), which controls 95 percent of the state’s electricity market. And it would most likely slow the expansion of relatively affordable solar energy in Hawaii, which has by far the most expensive electricity in the country as a result of its reliance on oil-fired power plants.

Hawaii’s Public Utilities Commission has noted already that HECO has worked to slow the deployment of solar. Like any other traditional utility, HECO has an incentive to oppose solar because it cuts into profit margins by reducing the amount of electricity that customers purchase from the company. In a recent filing, the commission expressed frustration with the “continuing failure of the HECO Companies to articulate a sustainable business model and adequately plan for a future with substantial quantities of renewable energy.”

NextEra’s history on solar energy does not bode well for ratepayers. Florida Power & Light, one of NextEra’s largest subsidiaries, successfully prevailed upon the Florida Public Utilities Commission last year to eliminate the state’s solar rebate program and to roll back Florida’s energy-efficiency goals.

The proposed merger also raises many of the similar public-interest problems we noted in our report in January on Chicago-based Exelon Corp.’s proposed acquisition of Pepco Holdings, which supplies electricity to Delaware, the District of Columbia and Maryland. Like the Exelon-Pepco deal, the proposed NextEra-HECO merger would place control of the hometown electrical system in the hands of a distant and much larger utility.

HECO owns 2,360 megawatts of generation capacity, provides electricity to about 450,000 customers, and has about $3 billion in annual electricity revenues. NextEra, by comparison, owns more than 44,000 megawatts of generation, has more than 5 million customers and reported $17 billion in revenue in 2014. Its sheer size raises doubts about whether the Hawaii Public Utilities Commission could effectively regulate the new owner, which would have less of a financial incentive to please regulators in Hawaii because it would be less affected by any penalties the Hawaii PUC might impose on it.

The Hawaii Public Utilities Commission also would face greater burdens if the deal goes through because it would have to closely scrutinize affiliate transactions between HECO and other NextEra subsidiaries in order to ensure that inappropriate costs aren’t passed on to HECO customers—which can happen as a result of such mergers.

This case is still in the early stages, and the Hawaii Public Utilities Commission is asking the right questions. The commission recently included the following items in its description of the major issues in the case:

  • “Whether the Proposed Transaction, if approved, will enhance or detrimentally impact the State’s clean energy goals.”
  • Whether the Proposed Transaction, if approved, would diminish, in any way, the commission’s current regulatory authority over the HECO Companies, particularly in light of the fact that the ultimate corporate control of the HECO Companies will reside outside of the State.”
  • “Whether the financial size of the HECO Companies relative to NextEra’s other affiliates would result in a diminution of regulatory control by the commission.”

It’s encouraging, too, to see some opponents of the merger looking at it as an opportunity to “municipalize” by turning control of Hawaii’s electric grid over to local government, rather than to an out-of-state holding company.

Kudos to the Maui Office of Economic Development for issuing a recent RFP calling for a way to find “alternative forms of ownership” and “alternative utility business models” for Maui Electric Company, one of HECO’s three subsidiaries.

And kudos to Maui Mayor Alan Arawaka for his on-the-record skepticism.

“We have come to the conclusion that we have to start looking at this thing very seriously as to what our potential is in actually investing and creating our own utility,” Arakawa told the Honolulu Advertiser in April.

Arakawa most likely has a greater interest than NextEra in protecting Hawaiian ratepayers.

Cathy Kunkel is an IEEFA fellow.

Comments are closed.