New trouble for NextEra merger as regulators slam Hawaiian Electric power supply plan
Unless NextEra offers a better plan, and fast, observers say the takeover bid could be in jeopardy
A recent Hawaii Public Utilities Commission filing could be a signal of how regulators will rule in hearings opened this week on the proposed $4.3 billion buyout of Hawaiian Electric Industries (HEI) by NextEra Energy.
A few weeks ago the commission noted “significant concerns” and unequivocally rejected the Power Supply Implementation Plan (PSIP) submitted by the Hawaiian Electric Company (HECO), the electricity supplier to Oahu and HEI’s main subsidiary. That rejection, observers say, could be an ominous warning for backers of the contentious merger.
“The commission finds it necessary to remind the HECO Companies that as a result of their numerous, repeated failures to properly plan for an affordable, high renewable future, the commission has had to take appropriate actions to address the Companies' poor performance,” the regulators admonished the company in the filing (Docket 2014-0183).
As the filing noted, this was the commission’s second rejection of HECO’s power supply plan, despite the fact that “acceptable PSIPs are critical to continuing progress towards the state's policy goals while maintaining affordable electricity rates."
The PSIP is also essential to utilities meeting “the diverse service requirements of their customers by integrating a variety of generation sources and customer-sited resources in an economically and operationally efficient manner.”
The list of the PSIP’s shortcomings is particularly surprising because the commission had offered guidance after its rejection of HECO’s first plan. Yet the utility’s second PSIP effort raised a long list of commission concerns:
- Cost impacts and risks not demonstrated to be reasonable
- Does not aggressively seek lower-cost new utility-scale renewables
- Does not adequately address distributed energy resources
- Fossil-fueled power plant plans not sufficiently justified
- System security requirement costs not sufficiently justified
- Ancillary services proposals lack transparency and may not be the most cost-effective option
- Inter-island transmission analysis lacks sufficient detail
- Customer and implementation risks not adequately addressed
“The investment strategies proposed by the HECO Companies appear to entail risks that are borne ultimately by customers,” the order asserts. “The HECO Companies have provided no discussion of this risk or possible measures to lower or mitigate the risk to customers.”
In addition, the PSIP left regulators “seriously concerned with the implementation risks of the capital program proposed,” it says. HECO’s “performance in managing large capital projects…[raises concerns] about the risk of significant cost overruns and delays in execution of the proposed plan.”
Finally, the PSIP does not demonstrate “the cost-effectiveness of several key projects and programs that comprise major near-term investments,” the commissioners note, adding that HECO's own delays on several of the projects increase their concerns.
“The commission has determined that the PSIPs, in their current form, are not acceptable without supplementation and amendment,” the filing rules.
If NextEra doesn't come forward with a better plan, and fast, many observers doubt whether regulators will allow it to buy out Hawaiian Electric.
Reactions to the PUC order
When it was filed in August 2014, HECO described the PSIP as “a good faith starting point,” explained Energy Delivery Vice President Colton Ching in a statement provided to Utility Dive.
“We recognized that any plans with a long planning horizon would need to continue evolving and adapting in a rapidly changing energy environment,” he wrote.
What has not changed, he added, is that the utility remains “committed to achieving the goal of having Hawaii free of dependency on imported fossil fuel for electricity with greater energy self-sufficiency and sustainability at reasonable costs for our customers.”
The state’s just-enacted 100% renewables by 2045 mandate means that an “update” of the PSIP’s 65% renewables by 2030 target “make sense,” Ching wrote, “and this is what the PUC has directed us to do.”
Others, however, say the PUC order only begins with the request for an "update" of HECO's plan. In full, they say, the order expresses skepticism toward HECO's planning process and any similar one that could be undertaken by NextEra, should it be approved to buy the utility.
“There is no doubt the PUC's decision signals a lack of confidence in HECO's planning and analysis ability,” former Hawaii PUC Chair Mina Morita told Utility Dive.
“HECO proposed to spend $4 billion on new generating resources to add flexibility on a system that only has a total value of $1 billion," observed Regulatory Assistance Project (RAP) Senior Advisor Jim Lazar. "That’s not the most pragmatic approach."
The centerpiece of the plan, Lazar said, was replacing Hawaii’s high-priced, oil-fired electricity generation with natural gas-fired plants supplied with Canadian liquefied natural gas (LNG) imports.
“That solution would work as the state moves toward its 100% renewables mandate, but it would be hard to think of a more expensive way to do it,” Lazar said.
Plus, a whole new fleet of natural gas-fired power plants wouldn't get the state to 100% renewables, he added.
“That was an essential part of the commission’s order," Lazar said, referring to the need for a 100% renewables plan. "[HECO's filing] is solving the problem Hawaii thought it had five years ago, not the problem [the state] thinks it will have fifteen years from now.”
The PSIP, with its focus on gas, also directly contradicts Governor David Ige’s recent declaration that “time and money spent on LNG is time and money not spent on renewable energy.”
Ige's administration will oppose construction of LNG infrastructure because “LNG will no longer save us money,” the governor told a conference audience in August. “The capital plans of those wishing to import LNG are anything but small. LNG is a fossil fuel. LNG is imported.”
The PUC order reveals how HECO “is still focused on massive over-building and over-spending to benefit its profits, but not the customers,” argued Isaac Moriwake, an Earthjustice Attorney representing the Sierra Club in the NextEra merger proceeding.
He pointed to the commission’s observation that the PSIP favored the financial interests of the HECO Companies with “less prominent and less certain benefits” for customers.
The plan allowed utility earnings to increase “by a factor of 2.3 times," while “customer rates, in real terms, would increase…or decrease modestly,” the regulators wrote in the order.
With investment in LNG infrastructure and natural gas-fired power plants, the utilities earn a regulated rate of return for their capital spending, Moriwake said. But if natural gas price volatility erodes expected cost cuts, compensation would have to come from customer rates.
“The utility banks the guaranteed profits and customers play Russian Roulette with fuel prices,” Moriwake said.
In addition to challenging the PSIP’s LNG proposition, “the commission slammed HECO for slow-walking on renewable energy,” Moriwake said.
The plan focuses on new fossil-fuel plants instead of new utility-scale renewables, he added, failing to recognize the benefits of customer-sited rooftop solar. In addition, the plan doesn’t consider the demand response potential in customers adjusting their usage to benefit the grid.
“These are things that reduce costs for all ratepayers,” Moriwake said.
Power supply alternatives
The PUC clearly indicated the kind of plan it was looking for in its landmark white paper, “Inclinations on the Future of Hawaii’s Electric Utilities," Moriwake pointed out.
In it, the commission embraced change, regulatory reform, and “new ways of doing things to incentivize and facilitate transformation of utilities,” Hawaii Commissioner Lorraine Akiba told a recent conference audience.
With its call for energy efficiency, demand response, energy storage, and distributed energy resources to be treated as generation resources for planning and cost recovery,” Akiba said, “savvy utilities and savvy third parties” should be able find new revenue generation opportunities.
In Hawaii’s vision of the future, “customers are empowered and will be part of the portfolio,” Akiba said. “It won’t all be distributed energy resources but the value is in the diversity of the portfolio.”
The commission, in the white paper, directed HECO toward “a long-term, customer-focused business strategy” that would eliminate the impression that the utility’s capital investments were “strategic” and just “a series of unrelated capital projects to expand utility rate base and increase profits.”
The white paper specifically called for more demand response, utility-scale renewables, customer-sitedsolar, grid flexibility, and cost-effective fossil fuel plant retirements. It endorsed LNG only if it is “consistent with Hawaii’s clean energy goals.”
By contrast, Moriwake said, HECO’s PSIP proposed rebuilding the fossil fleet, slow-walked utility-scale renewables development, and used conservative assumptions about how much distributed generation could be incorporated into the grid “because they want to maintain their fossil fleet."
“In its order rejecting the PSIP, the commission dissected the HECO plan, showed its flaws, and essentially said the utility is still trying to pad its rate base, serve its own profits, and not benefit the customers,” he added.
What this means about the NextEra-HEI deal
Moriwake, who is advocating against the proposed merger, believes the PUC order is “a major blow” to the takeover unless NextEra offers a practical plan.
“NextEra has refused to disclose its own plan and instead has embraced HECO’s plan,” Moriwake said. “Its sales pitch is: We’ll execute the HECO plan better. But the PUC just declared the plan ‘not acceptable,’ so that no longer works.”
NextEra officials declined to comment for this story.
Former PUC Chair Morita has offered tacit approval of the merger, writing recently that “it appears that the benefits could outweigh negatives with appropriate conditions."
But along with Governor Ige, Moriwake, and many others, Morita wants to know what NextEra ownership would look like and believes a revised PSIP might reveal it.
“A revised PSIP would be one of the few tangible ways to get a glimpse of the HECO Companies under new ownership,” she wrote in an email to Utility Dive.
“At stake,” she added, “is the strength of NextEra analytics to reduce cost, run an efficient system with high penetration of cost-effective renewable resources that the PUC would find credible, and to appease the criticism of those who currently believe NextEra does not support Hawaii's clean energy objectives.”
The PUC’s order rejecting HECO’s PSIP is a reminder that a NextEra-owned HECO will be a regulated utility and the commission will, she acknowledged, have the final word in approving the new investments.
Though he does not believe the PSIP rejection will impact the merger proceedings, Lazar doesn't expect regulators to approve the acquisition anyway.
First, the RAP official does not see a path to profitability if the takeover is approved. “NextEra is paying a huge premium over the book value which isn’t unusual for acquisitions,” he explained.
But regulators do not allow recovery of premiums from rates and this merger shows no clear path to cost reductions that enable recovery, he said. With the two companies based in Florida and Hawaii, respectively, there appear to be no synergies that would allow streamlining.
Second, he said, “much of the public opposes it, the Governor opposes it, and the Governor decides if commissioners are re-appointed, so it is hard to see a path to the commission approving it,” he said.
Hearings in the merger docket began Monday, November 30 and will continue throughout December. The commission has indicated it will make its decision by Spring 2016.