Inside Hawaii's landmark regulatory proceeding to value distributed resources
Phase 1 of the tumultuous docket has brought only 'general disagreement' among stakeholders
With more than 12% of its electric customers generating their own power from solar, Hawaii is the front lines of the struggle to value distributed generation properly for utilities and their customers.
As Utility Dive has reported, how the state's electric suppliers value the output of rooftop solar and other distributed energy resources will impact the financial health of the island's utilities, its transition to renewable resources, and how much customers pay in a state with the nation's highest electric rates.
To that end, Hawaii regulators opened a landmark regulatory proceeding in August of last year. It is aimed at devising a valuation scheme for distributed resources acceptable to utilities, solar installers, and consumer advocates. But if the second phase of the proceeding is anything like the first, those stakeholders are in for a rough ride.
The Phase 1 collaboration of stakeholders reached an impasse when solar advocates and the Hawaiian Electric Companies (HECO), the state’s dominant electricity provider, failed to find common ground on how to revise net energy metering (NEM), the rate at which customers with solar panels are renumerated for the electricity they send to the grid.
As a result, The Alliance for Solar Choice (TASC), the most outspoken of the solar advocates, called for a full adversarial process in which HECO would have to show evidence proving its positions and arguments in the rate case. In reply, HECO asked the commission to disqualify TASC from further participation in the proceedings.
With the battle lines drawn and the second phase about to begin, the commissioners have their work cut out for them.
HECO's solar conundrum
Each stakeholder filed a June 29 Final Statement of Position (FSOP) in the regulatory proceeding, laying out their positions for the next phase of rulemaking. HECO’s document begins with a review of the Hawaii solar industry’s unparalleled achievements and the utility’s efforts to keep pace.
“As of the end of 2014, over 51,000 DG systems have been installed, representing a total 390 MW of capacity and 12% of residential customers,” it reports.
After falling far behind the onslaught of interconnection applications in late 2013 and early 2014, HECO mounted a commission-driven effort and “conditionally approved 4,176 out of roughly 5,700 customers in the post October 2014 queue.”
In total, HECO handled more PV interconnections per customer than any utility in the country, and 20 times the national average. But, it adds, “the unprecedented DG growth has also created economic, technical, and equity issues that must be addressed.”
Solar's winning value proposition, supported by the high price of oil-fired electricity in Hawaii and the falling cost of panels, have turned NEM into a financial strain on all HECO’s customers, the FSOP explains. The result, it argues, is NEM customers not paying a fair share of the fixed grid maintenance costs and those costs are shifted to non-NEM customers.
In addition, the financial burden forces HECO to displace “more cost-effective, diverse, and grid-friendly renewable resources.”
In short, NEM “is no longer sustainable in its current form.” The Commission recognized this, HECO says, in its call for “a new model where the customer value proposition is predicated upon how distributed solar PV benefits both individual customers and the overall electric system.”
The utility’s FSOP proposes several remedies. Per the commission’s instruction, it provides Self-Supply and Grid-Supply options to DER owners.
The Self-Supply Option promises interconnection without a "lengthy" review period as long as the system has “certain modifications to address safety and reliability concerns.”
Its Grid-Supply Option compensates DER owners for electricity their systems sell to the grid at $0.180 per kWh which is a “cost effective rate for all customers, but which nevertheless does not significantly lengthen the payback period.”
Over 15 years, the rate would save HECO’s non-DER owning customers “about $206 million,” the utility estimates.
When these options are in place, HECO says, the Commission should “declare the existing NEM program fully subscribed," effectively ending retail rate net metering in Hawaii.
Finally, it promises a DER 2.0 Transition Plan that will “set the framework to achieve a more sustainable distributed energy resource program.”
This plan includes an increase in the minimum monthly bill to $25, advanced smart inverter standards, a residential time-of-use (TOU) rate program, and new PV hosting capacity studies that allow proactive identification of distribution circuit capacity to cut the time needed for interconnection application evaluation.
The solar industry's filing
Solar and environmental advocates submitted a joint June 29 FSOP. The Hawaii Solar Energy Association (HSEA), the Hawaii PV Coalition, the Hawaii Renewable Energy Alliance (HREA), Life of the Land, SunPower, and TASC signed on.
They endorse the commission’s pursuit of "a flexible, efficient, fair, and cost-effective DER market structure" and recalled its efforts to expand and streamline interconnections and its intent with Phase 1 to “jumpstart” the transition to customer-based solutions for Hawaii solar.
They then note that the approximately “27% of the HECO Companies' renewable portfolio mix” in 2014 prevented the use of “millions of barrels of oil, curbed Hawai'i's greenhouse gas emissions, and reduced the over four billion dollars sent out-of-state each year.” They also remind the commission of NEM’s central role in driving that renewable energy growth.
Their recommendations strikingly echo those of HECO in broad terms, except in the case of rate structure. They too propose a minimum bill, TOU rates, a streamlined interconnection process, Self Supply and Grid Supply options, and a new NEM credit “to account for the State's uniquely high penetration levels.”
Finally, however, the Joint Parties vehemently object to the call by HECO and others to take “the drastic step of eliminating NEM immediately and replacing it” with “an arbitrary or severely low compensation rate.”
They insist NEM should be handled, as the commission originally planned, in a Phase 2 process that follows “proper studies of the cost and benefits of NEM” because “8 of 11 recent cost-benefit analyses conducted on NEM have found that the benefits NEM customers provide are worth more than the compensation NEM customers receive.”
Altering NEM without further evidence and analysis would be, they argue, a violation of “due process and administrative law principles.”
Among the questions that require definitive answers are whether HECO’s proposals could impose “significant taxation” on new solar customers, including loss of the federal tax credit, new and potentially discriminatory rate classes and charges, increased technical challenges to the grid, failure to grow DERS, or diminished third-party financing options for DER customers.
The call for evidence
On July 2, TASC filed a motion to initiate formal evidentiary hearings at the PUC on the solar issues. Though the group's spokesperson declined to talk to Utility Dive because of the swirling controversy, the filings make TASC's positions clear.
Evidentiary hearings are needed, it argues, “to establish a sufficient evidentiary record through discovery and the ability to respond on the record to the positions and evidence offered.”
TASC made what it describes as a "good faith effort" but failed to reach agreement with the HECO Companies and other parties in Phase 1 on what it calls "issues vital to the property and financial interests of TASC, its members, and their customers.”
The primary focus of disagreement was, by all available accounts, the net metering reimbursement rate.
Approved proceeding intervenors have “a right to a hearing to cross-examine witnesses, put on evidence, and respond to evidence submitted by other parties in order to assist the Commission in establishing a record upon which it can make a just and reasonable decision,” The TASC filing explains. That record was not established in Phase 1 and formal evidentiary hearings are the best remedy, the group argues.
The Hawaii Division of Consumer Advocacy called for the motion to be denied.
“The Commission was very clear in its intent to conduct an aggressive, expedient and urgent regulatory investigation for Phase 1,” the division, housed in the state's Department of Commerce, argues. TASC has presented no evidence it was denied the “opportunity to participate and establish the evidentiary record."
"An evidentiary hearing will only serve to further delay the Commission's timely resolution of the ‘high priority’ issues," the agency argued in its filing.
“The direction from the commission was that the parties should arrive at a settlement agreement. That didn’t happen. There was general disagreement,” explained Hawaii Consumer Advocate Jeffrey Ono, whose office filed the motion. The commission will now have to decide whether to accept or deny TASC’s motion, but its original orders and directions show it “understands the urgency to move on in the proceedings toward a sustainable solar industry.”
Hawaii’s Department of Business, Economic Development, and Tourism (DBEDT) echoed the consumer advocate. A “sufficient record has been developed,” DBEDT argues, and the motion “would delay the implementation of longer-term distributed energy resources market solutions.”
TASC’s partners in the FSOP – including HSEA, the Hawaii PV Coalition, HREA, technical expert Ron Hooson, Life of the Land, and SunPower – filed a joint “statement of no position” on TASC’s motion for an evidentiary hearing, as did environmental advocate Blue Planet Foundation.
Most of the intervening parties, including all the solar industry parties, said “no position” on the specific request for an evidentiary hearing, acknowledged HSEA Attorney Isaac Moriwake, "but we emphasized in our joint filing that decisions need to be based on data and due process,” he said.
The utility doesn't think TASC's motives are to truly get more information.
“This is clearly a delay tactic,” HECO Senior Vice President Jim Alberts told Utility Dive. “TASC had every opportunity to investigate during the 90 day process laid out by the PUC order … Further hearings would only delay that process.”
HECO wants TASC out
On July 10, HECO asked the commission for an order removing TASC from the proceeding, or an order requiring TASC's compliance with commission direction not to “broaden the issues or to unduly delay.”
HECO accuses TASC of “litigating issues in the media versus through the collaborative process established by the Commission.” Its cites an April 14, 2015, article in the Honolulu Star-Advertiser in which, according to the utility, TASC questioned and misrepresented HECO’s handling of its interconnection queue.
Commission staff then directed proceeding stakeholders to "facilitate open, frank, collaborative, and productive discussion” and avoid involving the public. But, HECO argues, TASC demonstrated “bad faith conduct” with the issue of a May press release revealing details of HECO’s proceeding proposal and criticizing it.
The press release also supported the group KULOLO (Keep Our Utilities Locally Owned and Locally Operated), a group that advocates transforming HECO into a publicly-owned utility. HECO's filing argues that this “calls into question whether TASC really had any interest at all in engaging in a collaborative process."
Finally, HECO argues, TASC has consistently misrepresented its proposal to replace NEM as a type of feed-in tariff (FIT) that would subject Hawaii solar owners to “significant taxation” and threaten the loss of the federal tax credit.
The proposed NEM alternative is like the existing NEM credit, not an FIT, and holds no threat of creating tax problem or compromising access to the ITC, HECO says.
With a FIT arrangement, all the output of a distributed system is sent to the grid and reimbursed, typically at an above-retail rate. NEM is a typically retail-rate credit provided to DER owners for the electricity their systems send to the grid after onsite consumption is met.
“Our proposal is structured to function in the same way as net energy metering (NEM) as an energy exchange,” Alberts explained. “If our proposal is taxable, then so is NEM.”
In its press releases, TASC references tax opinions claiming the HECO tariff puts solar owners at risk of tax liabilities not incurred with NEM. Alberts said HECO rejects TASC’s “cherry-picked” expert tax opinions because they are about an FIT, which the utility's tariff is not.
“TASC'S repeated violations of both the letter and spirit of the commission's directives warrant removal from this proceeding,” the utility’s motion asserts.
TASC's “misinformation campaign” about HECO’s proposal “will undoubtedly confuse customers and may actually discourage potential solar customers from moving forward with solar,” Alberts believes.
“TASC’s conduct violates the standards expected of the parties involved in this critically important work,” HECO’s motion argues. “We need collaborative, productive discussions among all players.”
The tax question
There are two strands to HECO’s complaints. One is about TASC’s conduct. The other is about TASC's insistence that the utility's proposed alternative to NEM would create tax liabilities for solar owners.
Marco Mangelsdorf, a Hawaii solar industry veteran and founder of both ProVision Solar and the Hawaii PV Coalition, defends HECO.
Of the three tax opinions TASC cited, Mangelsdorf told Utility Dive, “all clearly say that they are rendered on the basis of a feed-in-tariff. The HECO proposal is not a new FIT. It is an energy exchange, just like the current NEM program.”
One of the opinions (originally from the firm Skadden) was rendered on a 2013 Arizona question and “can’t possibly assess the risk of HECO’s proposal,” Mangelsdorf noted.
And, Mangelsdorf said, “there are serious, and more narrow, self-interests at play here.” His own company, other Hawaii solar installers, and companies represented by TASC have prospered as the result of "lucrative incentives” like retail rate NEM, he noted.
According to 2012 Hawaii Department of Taxation data Mangelsdorf was able to obtain, $164 million was claimed through the state’s 24.5% solar tax credit. By his reading of the Department’s figures, about half went to out-of-state investors, including those in companies TASC represents.
“To ignore the pecuniary interests of these parties who are speaking out so loudly, and supposedly with the motivation of doing what’s best for Hawaii residents, does a disservice to the honest and responsible debate we need to have over these subsidies,” he said.
HECO and the other intervenors, of course, have major financial interest in the proceeding as well, and the solar advocates say it's a bit extreme to attempt to get TASC out of the proceeding.
The utility’s call to have TASC dismissed is “a bit over the top,” Moriwake said. “They are trying to police people’s public speech. This is bad form and bad precedent.”
HECO’s complaints, replies TASC in its July 16 response, “relate to events taking place outside of this proceeding that have no remedy before the Commission."
"The Commission is neither the arbiter of First Amendment claims nor the proper authority to resolve specious accusations regarding the conduct of licensed attorneys,” the group wrote.
TASC did not violate “any law or rule or order of the Commission,” it insists. “No basis in the record or the law exists for the Commission to take the extreme remedy of removing a party that has substantial and direct interests in the outcome of this proceeding.”
TASC acknowledges HECO’s concerns about the tax-related questions. But it should not be removed because it disagrees with HECO.
“The tax issues underlying the motion are a critical element of a public debate impacting Hawaii residents,” TASC insists. “TASC shoulders an important responsibility to increase public awareness about the issues.”
There are no grounds for such an “extreme remedy” that would deny TASC “due process” simply because it engaged in its “fundamental right to engage in public advocacy,” the filing concludes.
Moriwake offered more context. HECO’s reaction is “overheated,” he said. The commission was clear it wanted the Phase 1 discussions to take place in a safe, collaborative, and confidential context. But once the FSOPs were filed, the stakeholders were accountable for their positions.
“This is a public matter of great public interest and the utility is misguided if it thinks that it doesn’t have to answer for potentially damaging positions they are taking towards solar customers and the market.” Moriwake said. “After the confidential discussions broke down and the parties went to litigation, there was no expectation or requirement that those publicly litigated matters couldn’t be discussed.”
As to the proposal TASC revealed in its May press release, he added, it “was not materially different than what HECO had already made public in their August 2014 plans as well as their January 2015 motion to end NEM.”
What's next in the proceeding
At the precipice of a new phase of rulemaking, it is not clear what the PUC will do, or when it will do it.
Most participants said it's unlikely the regulators would approve TASC's request for an extended Phase 1 proceeding with an evidentiary hearing because of the urgency in dealing with DERs.
It could embrace either of the final position statements or neither as the basis for an extended Phase 2 proceeding. And that might or might not include TASC.
“The PUC could approve the Joint Parties FSOP, based on actual data and analysis, and reject HECO’s proposals,” Moriwake said.
There are also things the stakeholders can agree on, he added. The hosting capacity circuit analyses may be the next evolutionary step in interconnection. But if HECO’s filing prevails “it will slam the door on solar.”
On the tax liability question, the salient point is that the Joint Parties included expert analysis in its FSOP and “there is at least a substantial risk of tax liability” in HECO’s proposal that the utility has not provided evidence to defend, Moriwake believes.
“If HECO is so certain there is no tax issue, they should indemnify customers from liability,” he suggested.
If the PUC approves an evidentiary hearing, TASC could require HECO to convince the commission there is no tax liability.
The PUC will consider all of the input and issue a decision and the timing of that decision is at the discretion of the commission, Alberts said. “The next step will be to enter into the second phase to work on longer term issues.”
“I have no doubt about the commissioners’ ability to do their job, Moriwake said. “The commission and all the parties, including the utility, did their best in Phase 1 to take a collaborative approach.”
But in filing the motion to dismiss TASC, he said, “it appears HECO feels the gloves are off and there is nobody to collaborate with. Maybe collaboration is off the table. But filing the motion is pouring gas on the fire.”
The commission needs to help the stakeholders “step back and take a deep breath,” he suggested. “We need to agree on the things we can agree on and agree to disagree on the hard things and leave it to the commission to decide those.”
“The PUC will ultimately determine the process and we will respect that decision,” Alberts said. “We believe the collaborative process the PUC envisioned can be a very effective process to get solutions to customers more quickly."