Hawaii's latest postcard from the power sector's future is the management audit its Public Utility Commission (HPUC) ordered in the Hawaiian Electric 2019 general rate case, which highlighted significant opportunities for a new kind of regulation.
The audit revealed weaknesses in business and operational practices that regulators, utility leaders and stakeholders can address as the state moves toward performance based regulation (PBR), the audit reported. The audit found strengths, but identified weaknesses, especially in the company's Energy Delivery division, where "urgent corrective actions" could "deliver annual benefits for customers" of $46 million by 2023.
"We're taking ownership of the need shown in the audit for us to become more efficient in a lot of areas," Hawaiian Electric CEO Scott Seu told Utility Dive. "Our very explicit commitment is that we are going to do that as our company transitions to 100% renewables and new regulation."
But the corporate culture revealed in the audit may prevent Hawaiian Electric from meeting that commitment, some stakeholders said. That prospect for failure will require special attention from regulators as Hawaii moves into the biggest U.S. test of PBR, they added. It also makes the audit a message to regulators across the country, Rábago Energy Principal and former Texas electric utilities regulator Karl Rábago told Utility Dive.
"Audits are not uncommon, but they are more uncommon than they should be, given the transformation in the electric utility sector," Rábago said.
What the auditor found
A "management audit will help ensure Hawaiian Electric is operating in a prudent and efficient manner for the benefit of ratepayers" and "identify opportunities for improved performance," the HPUC's September 2019 order initiating the audit reported.
The need for an audit began with "public backlash over high energy prices" and "rejection by the Commission of a number of [Hawaiian Electric's] proposals," auditor Munro Tulloch reported May 12. Hawaiian Electric has "already been proactive" in improving efficiency and savings, but also has "greater opportunities for improvement," Munro added.
Hawaiian Electric's "One Company" restructuring has supported and streamlined Hawaii's ongoing "transition to a 100% renewable future," the audit reported. But "costs and staffing levels have also increased," often without "a clear role or purpose."
In a move widely seen as creating the opportunity to make corporate level changes ahead of the audit's release, Hawaiian Electric's board appointed Seu as CEO in March after former CEO Alan Oshima retired to head Governor David Ige's Coronavirus-19 response.
"Energy delivery has an absolutely foundational role in our transition to 100% renewables. Addressing the audit recommendations is the work ahead of us, and we're going to get it done."
CEO, Hawaiian Electric
Seu replaced the Energy Delivery head and began restructuring, the audit observed. These are "encouraging signs" that Hawaiian Electric "is serious about delivering performance improvements," but "the difficult implementation work remains."
Structural and operational improvements across Hawaiian Electric's divisions and especially in Energy Delivery could "deliver annual benefits for customers, through cost reductions and savings, of as much as $35.7 million" in a "best-case" scenario, the audit found. "A more realistic target is annual benefits and savings in the range of $25 million - $26.5 million to be progressively delivered by the end of 2022."
The Power Supply division, which operates power plants, has shown how to "reconcile the apparently conflicting objectives of improving performance and reducing costs," it reported. In contrast, the Energy Delivery division, which oversees transmission and distribution systems, had "little focus on costs, efficiency and managing the business effectively."
The Energy Division's review of smaller projects, including "high value programs for asset replacement," lacks "clear objective oversight," the audit added. This is especially important in Hawaii, where the rapid growth of distributed generation has necessitated significant distribution system investment, stakeholders told Utility Dive.
Energy Division supervisors and managers "apply little attention" to whether work is done "efficiently or within budget," the auditors found. There was "little effort to correlate what had actually been delivered versus expenditure."
Contrary to stakeholder criticism, Hawaiian Electric's support of Hawaii's groundbreaking 100% by 2045 renewable portfolio standard (RPS) has been strong, the audit found. "It has exceeded its mandated obligations" and criticisms "appear to be largely unfounded."
The problem is cost, it said. Meeting the RPS and the challenge of integrating rooftop solar have led to increased workload and costs, the audit recognized. But Hawaiian Electric increased staffing "with little evidence of any business cases supporting these additions."
Overall, the utility can achieve significant annual savings by focusing on two principles, the audit concluded. Asset Management should focus on "selecting the right work" for the utility and Energy Delivery should focus on "doing the work right" so that costs are controlled.
Hawaiian Electric responds
Hawaiian Electric had already planned "to dive deeper into the business processes in 2020," Seu said. "Energy delivery has an absolutely foundational role in our transition to 100% renewables. Addressing the audit recommendations is the work ahead of us, and we're going to get it done."
But "foundational changes to the delivery of electricity," like balancing renewables' variability and integrating distributed renewables, have expanded "the scope and complexity of utility planning" and transformation "is not always conducive to efficiency," the company's response, included in the audit, acknowledged.
"The audit made it clear the company is bloated and has been wasting resources. It emphasized Hawaiian Electric's lack of both cost control and attention to inputs and outputs."
President, ProVision Solar
"Urgent attention to cost containment and efficiency is necessary," the company also acknowledged. But "nowhere does the audit report indicate any illicit purpose" such as private gain in the shortcomings identified.
Progress will depend on balancing "traditional work like maintaining plants and equipment with upgrading and modernizing," Seu said. "We're the ones operating the entire energy system, balancing the individual interests, and we, the PUC, and the Consumer Advocate have to be mindful of all stakeholders' concerns."
But this is "an inflection point, a time to take a hard look at the efficiency of our operations and energy delivery," he added. "The audit found it will likely take three years to deliver sustainable annual savings and we will report regularly on our progress."
Stakeholders praised the audit's evenhandedness and accuracy, but differed on what it revealed about Hawaiian Electric's performance.
The auditors provided "a total view of the operations of a utility" that showed "the enormity of this challenging transformation," former HPUC Chair Mina Morita emailed Utility Dive.
It was "fair" and "instructive" and should help Hawaiian Electric's transition to "a more productive and efficient organization" that can meet "multiple objectives including important public policy goals," she added. "It showed the company is committed to the state's renewable energy future," but also showed the challenge of "maintaining an aging system" when policy "disregards other essentials of a well-run utility" like reliability and affordability.
The audit includes "a fairly reasonable scope of detail and analysis" and "generated a portfolio of action items," Hawaii Consumer Advocate Dean Nishina said. It confirmed that even if integrating variable and distributed renewables requires "additional costs," the pursuit of RPS goals should not be done "at any cost" and "costs were higher than they needed to be."
It showed Hawaiian Electric can provide basic services and meet the RPS "in a much more cost effective and efficient manner," Nishina told Utility Dive. "Many changes still need to be made and some will require time."
"PBR is intended to move away from regulatory proceedings like rate cases because no one has time for that with a climate crisis and a 100% renewables goal just decades away."
Mid-Pacific Managing Attorney, EarthJustice
"The audit made it clear the company is bloated and has been wasting resources," ProVision Solar President Marco Mangelsdorf told Utility Dive. "It emphasized Hawaiian Electric's lack of both cost control and attention to inputs and outputs."
Mangelsdorf acknowledged some positive aspects of Hawaiian Electric's clean energy performance, but said there are still questions.
Hawaiian Electric allowed "a far higher rooftop solar penetration than was thought possible 10 years ago without compromising system reliability," Mangelsdorf said. "But the audit does not show whether change could have been faster and deeper."
Looming behind the audit is the groundbreaking transition Hawaii is making from traditional cost-based regulation to PBR, Seu, Nishina and stakeholders said. The next phase of the proceeding is scheduled to produce a final order on design and implementation from the HPUC by the end of 2020.
A key benefit of the audit will be better information sharing among regulators, stakeholders and Hawaiian Electric in the PBR proceeding that can lead to "a more balanced and equitable outcome," Munro Tulloch reported. Seu agreed.
"PBR is to give the utility a direct line of sight to rewards or penalties based on what it delivers for customers, with a multi-year rate plan, by running the business more efficiently," Seu said. "Performance incentives reward the utility for meeting goals with cost savings. Most will go to the customers, but if the performance is good enough, the utility gets a share."
Designing PBR will require "a good baseline and a transparent understanding of our cost structures and operations," Seu said. "The audit is a foundation for PBR with a multi-year rate plan and that was probably a critical driver for the commission ordering it."
The audit "will help immensely with PBR" because it provides "a baseline to gauge performance improvement gains," former HPUC Chair Morita agreed. "If it had not been done, it would appear the regulators were going into PBR blindly."
Some stakeholders saw even greater importance in the audit's implications for the transition to PBR.
It emphasizes that Hawaiian Electric has not delivered services to customers "in a cost-effective manner," and that needs to be part of "the design of the PBR framework," Consumer Advocate Nishina said. Otherwise, changes might lead to savings for shareholders "and customers may not see of the benefits."
"In Hawaii and other states, regulators should be asking themselves how traditional tools for overseeing the utility budgets have not revealed poor practices."
Principal, Rábago Energy
The audit makes more clear the need for PBR's "paradigm shift" by "highlighting what traditional regulation has allowed Hawaiian Electric to get away with," EarthJustice Mid-Pacific Managing Attorney Isaac Moriwake told Utility Dive. "PBR is intended to move away from regulatory proceedings like rate cases because no one has time for that with a climate crisis and a 100% renewables goal just decades away."
But it also "raises questions about implementing the multi-year rate plan part of PBR," former regulator Rábago said. Incentives and monitoring performance on metrics and goals are supposed to keep Hawaiian Electric on track, but they may show that management does not see efficiency improvement opportunities, and that could turn PBR into "cost of service regulation by another name."
The audit "hammered home the urgent need to focus on performance," ProVision Solar's Mangelsdorf agreed.
The other benefit
The other benefit of the audit was that it showed their broader value. "We were forced to take ownership of some very hard messages," Seu said. Recent audits elsewhere have delivered similar lessons, utilities told Utility Dive.
In response to a New Jersey Board of Public Utilities October 2019 final audit report, Atlantic City Electric, an Exelon utility subsidiary of Pepco Holdings Inc. (PHI) is doing "a full review" of "the opportunities identified," PHI spokesperson Ben Armstrong emailed Utility Dive.
When the Pennsylvania Public Utility Commission's November 2019 audit report of UGI Utilities estimated changes can deliver annual savings of up to $713,000, and one-time savings of up to $7.13 million, then-Commissioner Andrew G. Place reported UGI "indicated agreement with 42" of the audit's 45 recommendations in its implementation plan.
National Grid sees the Massaschusetts Department of Public Utilities' coming audit over concerns about some spending and management practices as a way to "reinforce our commitment to continuous improvement," National Grid spokesperson Christine Milligan emailed Utility Dive.
Audits, if properly focused and conducted, can be very useful for both regulators and regulated entities, consumer advocate and former auditor Nishina said.
"Costs for upgrading the nation's aging electricity infrastructure and integrating rising renewables penetrations are driving major utility investments," former Illinois Commerce Commission Chair Brien Sheahan told Utility Dive. "The greater the impact of those investments on rates, the greater the scrutiny commissions are going to give to how ratepayers money is spent."
Increased transparency and accountability for utilities through audits "are good, especially because commissions often bring in third party experts to relieve overburdened staffs," he added.
Rábago agreed. "Spending is ballooning across the industry and answers to reasonable questions about that spending in contested rate cases are not always satisfactory," he said. "The management audit might be better suited to the purpose. In Hawaii and other states, regulators should be asking themselves how traditional tools for overseeing the utility budgets have not revealed poor practices."
In that, "Hawaii may again be a leader," he added. "The generic symptoms from Hawaii are transferable to other jurisdictions and the audit may be an overlooked tool."