In Hawaii, a chain of islands in the middle of the largest ocean on Earth, the vulnerability of our power generation couldn’t be more apparent. Shipping in fossil fuels isn’t a mere luxury–it’s a potential disaster. Cut off the oil, and in no time at all our state returns to the 19th century. It’s a weak point state officials finally addressed this year with the passage of House Bill 623, a bold mandate that 100 percent of the energy used by the state’s utilities will be from renewable sources by the year 2045.
“Hawaii’s dependency on imported fuel drains our economy of billions of dollars each year,” states the bill, which Governor David Ige signed into law in June. “A stronger local economy depends on a transition away from imported fuels and toward renewable local resources that provide a secure source of affordable energy. The legislature further finds that alternative energy technologies have advanced significantly in recent years, leading to an explosion of new markets, jobs, and local energy sources.”
For this reason, everyone seems to take notice when the parent company of the state’s public power utilities announces that it wants to merge with a corporation headquartered 5,000 miles away. In February, Florida-based NextEra Energy (NEE) announced that it wished to merge with Hawaiian Electric Industries (HEI), which owns the state’s power utilities, including Maui Electric (MECO).
It’s a controversial plan, facing considerable opposition (Ige, Maui Mayor Alan Arakawa and Sierra Club Hawaii all want the merger rejected). Then on Aug. 10, the office of the Hawaii Consumer Advocate weighed in with 548 pages of testimony on the merger. The testimony (a small portion of which was redacted because of “confidentiality” reasons) came from five consultants hired by the Consumer Advocate, and all had extensive experience in the world of public utilities and mergers.
Though long and often repetitious, the massive package made one thing perfectly clear: despite the NextEra’s and HEI’s insistence that the merger would lead to at least $60 million in rate-payer savings over the first four years, the deal would likely be bad for the public (after the Consumer Advocate released the testimonies, NextEra announced that, in fact, the merger would lead to a billion dollars in consumer savings).
The state Public Utilities Commission (PUC) still has to approve the merger, and they’ve scheduled a few hearings to take testimony from the public. The first will take place on Maui on Sept. 4.
Reading 548 pages of testimony on a utility merger is a lot to ask of working people, so we did the heavy lifting and read through the whole damn thing. Consider this a Top 40 list of the reasons why the merger may not be in the best interests of Hawaii consumers:
1. Ian Chan Hodges, a Maui resident and managing member of Responsible Markets LLC, started right off by throwing cold water on why the merger should happen in the first place. “The Applicant has neither offered a credible rationale for why the proposed transaction would be a net benefit to the state’s economy nor provided a plan for how the post-transaction entity will better serve the diverse communities within the five islands where the HECO companies operate,” Chan Hodges said.
2. It’s also an open question as to whether NextEra even understands the state it wants to start doing business in. “Because Hawaii is an island society with mauka (mountains) and makai (ocean) providing orientation for navigation as well as natural separation between many of Hawaii’s neighborhoods, very distinct communities have developed with specific needs,” Chan Hodges said. “NextEra has also not put forth a plan that demonstrates that it understands this basic reality of Hawaii.”
3. Merger documents show company officials like to talk about the concepts of kuleana, malama pono and aloha, but Chan Hodges doesn’t really buy that these are anything but buzzwords to NextEra. “Kuleana, malama pono and aloha are not just a triple bottom line for Hawaii,” Chan Hodges testified. “They are values that when lived out will provide a foundation from which to embrace the disruptive innovation necessary to achieve the hopes and dreams for Hawaii’s energy future identified by the governor.”
4. And out here in Hawaii, these ideals resonate strongly with both residents and public officials. NextEra would do well to respect that. “In order to be successful overall in Hawaii (not just with its Change of Control Application), NextEra needs to make it clear to HECO employees, HECO customers (95% of the state’s population), the Commission, as well as state and county leaders, that it understands, embraces and is willing to be held accountable for upholding Hawaii’s values,” said Chan Hodges.
5. Maximilian Chang, a consultant with Synapse Energy Economics in Cambridge, Massachusetts, echoed those concerns when he noted in his testimony that “I find it problematic that the Applicants have not provided any commitments directly targeting low-income customers.”
6. Chang also found it disconcerting that “the Applicants have claimed a benefit for its charitable contributions by maintaining the status quo of the Hawaiian Electric Industries’ (“HEI”) current contribution levels. While it is laudable that NextEra has committed to maintain charitable donations for the Hawaiian Electric Companies at an amount equal to $2.2 million, this amount is merely what is being done currently Pre-Transaction.”
7. For these reasons, Chan Hodges suggests that “A real commitment to its community kuleana would likely have NextEra put forth a plan for how approval of the proposed transaction could lead to job creation outside of the HECO companies in the communities served.”
8. The Consumer Advocate testimonies are largely concerned with the savings NextEra and Hawaiian Electric Industries promise, which at the time were confined to about $60 million (not the $1 billion figure the companies threw out after the testimonies were made public). Nonetheless, Steven G. Hill–a self-employed financial consultant from Virginia–said that “while it is possible that there could be financial-related cost reductions realized as a result of the proposed transaction, those cost reductions are not certain and, if realized, are likely to be less significant than depicted by the applicants.”
9. Financial consultant Michael Brosch, the president of the firm Utilitech in Kansas City, Missouri, agreed that pinning down cost savings isn’t easy. “The Applicants’ cost savings estimates are not detailed, are not broken down by year, and have not been netted against the costs that must be incurred to achieve such savings.”
10. Of course, Brosch also points out that “there is a meaningful difference between realized cost savings for the utility and realized cost savings that are translated into tangible benefits for utility customers.”
11. Much of the savings that Next-Era and HEI are promising to pass on to consumers comes in the form of a four-year moratorium on future rate hikes that would commence after the companies merge. Hill testified that this moratorium “would suspend increases that would otherwise occur” but “the Applicants state that the 4-year stay-out commitment would be voided if HECO suffers financial distress or encounters other circumstances ‘that create a compelling financial need for a base rate increase.’”
12. There’s no evidence, according to Brosch, that such a rate hike moratorium would really help ratepayers. “[Applicant consultant John] Reed’s claim that a moratorium is beneficial to ratepayers presumes, with no supporting analysis, that present rate levels are not excessive today and will not become excessive throughout at least four future years, even after realization of the significant costs savings that he has estimated will be enabled by the proposed Transaction,” Brosch testified.”
13. Also, Brosch said that “The proposed moratorium cannot be relied upon to protect ratepayers from recovery of potentially large business integration charges on the books of the Hawaiian Electric Companies, which costs may exceed any resulting cost savings in the year incurred and potentially thereafter.”
14. Oh, and electricity consumers in Hawaii already pay excessive rates. “Twice in the annual decoupling filings with the Commission over the past three years, HECO and then MECO submitted calculations showing they earned in excess of their authorized return on equity in the prior calendar year, resulting in earnings sharing credits to ratepayers,” Brosch testified.
15. Brosch even has evidence for this: “The recent actions taken by HECO and MECO, in filing rate case applications and then not asking for the revenue increases supported therein, also undermines the credibility of any assumption that large future rate increases would suddenly be needed.”
16. What’s more, Brosch said the timing of the end of that rate hike moratorium just doesn’t make a lot of sense. “The expiration of Applicants’ proposed rate credits in year five would be occurring about when integration work is being completed and ‘steady state’ savings are being harvested by the utilities.”
17. For that reason, Brosch suggests that the Public Utilities Commission impose a real rate reduction on the companies. “If the Transaction is approved by the Commission, I recommend that presently effective base rate levels for each of the three Hawaiian Electric Companies be permanently reduced, across all rate schedules, by 0.7 cents per kWh ($0.007) effective at the date the proposed Transaction is consummated,” Brosch said. “This level of ‘up-front’ rate reduction would impact annual revenues across the three utilities by about $62 million annually, reducing a typical residential customer bill by about $4.20 per month.”
18. Hill agrees. “It is appropriate to reduce rather than freeze the utilities’ existing base rates, if ratepayers are to participate in lower capital costs and be credited with a reasonable share of projected merger cost savings.”
19. The companies also project cost savings in regards to corporate debt. But Hill says this is also problematic. “For example, the debt cost savings estimates are based primarily on the Companies’ focus on one credit rating agency (Standard & Poor’s or “S&P”) that expects an improvement in HECO’s bond rating if the proposed Transaction proceeds,” he testified. “However, the two other major credit rating agencies expect no change in bond rating for HECO.”
20. And that’s not good. Neither is this, says Hill: “NEE has more financial risk than HECO because, on a consolidated basis (i.e., including all of the companies owned by NEE) the parent company uses more debt to capitalize operations than HECO does.”
21. Because, Hill testified, it means that “NEE does not need HECO to issue debt or to use HECO assets to secure that debt. If the proposed transaction is completed, NEE will own the revenue and income stream created by HECO and that income stream will serve as security for the issuance of additional debt by NEE.”
22. Hill discusses corporate debt at length in his testimony because “NEE’s financial engineering requires regulated ratepayers to shoulder some of the operating risks of its unregulated operations through capital costs that are higher than they need to be.”
23. Hill added that once the merger is approved, the new company will be able to issue new debt without regard to Hawaii’s utility needs or the PUC. “Once it owns the assets, NEE does not require any action of this Commission or guarantee by HECO in order to issue debt,” Hill testified. “Therefore, the pledge that HECO will not make loans to NEE or will not secure NEE loans in no way inhibits the ability of NEE to issue debt that is secured by the regulated income stream generated by HECO.”
24. This kind of arrangement spells trouble for Hill. “As HECO witness Sekimura noted, I believe correctly… ‘there may be situations in which upstream NextEra subsidiary activities could impact their credit ratings which in turn could affect the credit ratings of Hawaiian Electric,’” Hill testified.
25. Brosch was even concerned that NextEra execs could try to pass off their costs of doing business in Hawaii on consumers. “The Consumer Advocate is concerned that significant new charges to the Hawaiian Electric Companies may result from future use of NextEra’s aviation fleet for travel to and from Hawaii, adding significant new costs that may be sought for recovery from ratepayers,” Brosch testified.
26. For this reason, Hill recommended that the PUC call for additional protections–which he called “ring-fencing”–for the utilities from corporate influence. “In order to ensure that the financial risks residing at the parent company level do not affect the operations of the HECO Companies it would be necessary to include additional ‘ring-fencing’ requirements that would prevent parent company access to Hawaii utility subsidiary assets in the case of financial distress or bankruptcy by the parent,” Hill testified.
27. Hill also testified that Hawaiian Electric Holdings should have a board of directors with at least four members from Hawaii. And that one of those should be “independent” of the companies. Should HECO ever wish to declare bankruptcy, Hill said it shouldn’t happen without the approval of that independent director.
28. If it’s starting to seem like corporate transparency might be an issue, it’s because it is. “The Applicants have not provided any information satisfying the Consumer Advocate’s concern that the HECO Companies could see higher shared services costs post-merger,” said Steven Carver, who also works with Brosch at Utilitech.
29. Oh, and Hill also testified that he believes “Applicants are making access to the parent company’s books and records more difficult for the Commission.”
30. But transparency means more than simply providing everything to investigators. The layout of the post-merger company may simply be too complicated to understand. “As the corporate operation becomes more complex, through the addition of one or more parent company levels, the transparency of the financial and accounting processes that ultimately affects utility rates dwindles,” Hill testified. “[F]ollowing approval of the pending transaction, it would be much more difficult for this Commission to assess, in the same manner that it now does, the operating and financial influences on HECO and its rates.”
31. And we haven’t even got to the fact yet that, for much of the state, the reliability of the electrical utilities has been pretty poor through the years. In fact, in his testimony Chang couldn’t help but point this out. “While the Hawaiian Islands have unique circumstances and challenges with reference to reliability, that should not be an excuse for the Hawaiian Electric Companies to have third or fourth quartile reliability relative to other utilities consistently year to year,” Chang testified.
32. And the merger’s supposed to make reliability issues better, right? Right? Chang would agree, but he’s just not seeing that commitment in the documents the companies have handed over thus far. “My concern is that the Applicants’ reliability commitment is unknown at this time and is contingent upon the Commission’s approval of the merger.”
33. Chang also testified that NextEra’s commitment to using renewable energy–a requirement given the mandates laid out in the state’s new law cited above. “I am concerned that while NextEra does have a large renewable energy portfolio, almost all of the portfolio is associated with NextEra’s unregulated business and almost none of the renewable energy assets are located in FPL [Florida Power & Light–the utility NextEra already owns], with the exception of 35 MW of utility-scale solar.”
34. Because, damn: “I am concerned that of the 44,670 MW of generation in the combined NextEra Energy and FPL portfolio, only 35 MW of renewable energy in the form of solar PV is currently located in Florida,” Chang testified.
35. Chang also found it “difficult to accept Applicants’ assertions that they will be willing to advance Hawaii’s clean energy goals, when one considers that in Florida, where NextEra is headquartered, very limited renewable energy resources are incorporated in its generation mix.”
36. Oh, and NextEra’s holdings also include a number of nuclear reactors. Chang testified that the upkeep–and eventual decommissioning–of these may become factors even out here in Hawaii because of the merger. “Although it is not known whether or when any of the identified units will retire prematurely, and the Applicants assert that Hawaiian Electric Companies’ ratepayers will not bear any liability for decommissioning costs, the decommissioning process is allowed to take up to 60 years for any one unit,” Chang testified. “Thus, for the two units with 2030 nuclear license expirations, the decommissioning process could extend to 2090. This time period extends well beyond any commitments made by the Applicants.”
37. So what to do about all this? Chan Hodges had an interesting solution: he proposed that merged companies become a “Sustainable Business Corporation” that exists to promote public benefits like providing low-income or underserved individuals or communities with beneficial products or services, preserving the environment and promoting the arts, sciences or advancement of knowledge. Company officials would meet frequently with officials and residents in Hawaii. Provide regular reports on how they’re meeting the above goals.
38. Green Mountain Power in Vermont is a corporation set up along these lines.
39. According to a statement the Vermont utility company provided Chan Hodges, “Green Mountain Power is part of a community of more than 1,100 companies across 60 industries with one unifying goal: redefining success in business. We meet rigorous standards of performance, accountability, and transparency, and are using the power of business to alleviate poverty, address climate changes, and build strong local communities and great places to work.”
40. And that sounds pretty great, but as it stands now, “It is impossible to specifically identify and accurately quantify the scope of activities and specific cost/benefit results to be expected from the proposed Transaction and the integration of the businesses until more work has been completed,” says Brosch.
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Here’s the schedule for the Public Utility Commission’s upcoming “Listening Sessions” on the proposed NextEra/Hawaiian Electric Industries merger:
Friday, Sept. 4, 2015, 6pm
Lihikai Elementary School Cafeteria
335 S. Papa Ave., Kahului
Saturday, Sept. 5, 2015, 11am
Lanai High & Elementary School Cafeteria
555 Fraser Ave., Lanai City
Saturday, Sept. 19, 2015, 9am
Kulana Oiwi, Halau Area
600 Mauna Loa Hwy., Kaunakakai