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MECO to pay for some fossil fuel cost per PUC decision

A full moon drops between a pair of wind turbines at Kaheawa Wind Power on the slopes of the West Maui Mountains in this photo taken last January. The wind farm provides renewable energy to Maui households. In approving rate increases for Maui Electric Co., the state Public Utilities Commission said the utility has to accelerate its pursuit of renewable energy. -- The Maui News / MATTHEW THAYER photo

The state Public Utilities Commission approved a base rate hike for Maui Electric Co. — with totals still being worked out — earlier this month while ordering the utility for the first time to assume a small portion of the cost of fossil fuels for power generation.

Currently, MECO passes on to customers 100 percent of the cost of oil — with all of its price ups and downs — that it consumes to fire up its generators. The Energy Cost Adjustment Clause appears as a separate item on bills.

With details still being worked out, the PUC has ordered MECO to assume 2 percent of the change in the cost of fossil fuels between base rate hikes, according to attorney Isaac Moriwake, who represented proceeding participant Blue Planet. The charges are capped at $633,000 annually, and the benchmarks still are being worked out, according MECO.

Blue Planet witness Ronald Binz of Denver-based Public Policy Consulting, whose testimony was cited in the decision and order, said that MECO should “fairly share the risk” of oil prices and “give MECO ‘skin in the game’ with respect to managing fossil fuel use and costs and moving to renewable energy.”

Blue Planet proposed that the rate be 5 percent but the PUC pared the figure to 2 percent.

Moriwake explained that the change in the energy cost clause for MECO is “the ripple effect” of a “landmark reform” ruling by the PUC last summer involving Hawaiian Electric Co. on Oahu. The June decision mirrors MECO’s with HECO taking on 2 percent of fuel costs.

“In conversations with energy experts and advocates on the continent, I’ve confirmed that this is a leading-edge reform for the nation,” Moriwake said in an email. “Today, a small but thoughtful minority of states . . . still require utilities to share in a small percentage of fuel costs.

“But Hawaii is the first state in the nation to reverse the general industry trend and require the utility to share in fossil fuel costs, based on the need to encourage the utility to move from fossil fuel to renewable energy.”

Automatic pass-through mechanisms for fuel costs were put in place after the OPEC cartel oil crisis of the early 1980s, when severe increases in prices brought long gas lines, and utility industry shifts to natural gas, also with volatile prices, Moriwake said.

In Hawaii, Jim Kelly, HECO vice president for corporate relations, said the fuel adjustment mechanism predates the OPEC oil crisis, though may have become noticeable to ratepayers at the time due to the sharp increases.

In the proceeding, MECO opposed the proposal, saying the effort would hold MECO responsible for fuel prices not in its control, increase business risk and credit rating and not be consistent with the majority of states with dollar-for-dollar-pass-through costs.

MECO will be replacing the current Energy Cost Adjustment Clause with a new Energy Cost Recovery Clause to become effective three months after the base rate hike goes into effect, the PUC ruling said.

MECO Communications Manager Shayna Decker explained last week that fuel costs will be removed from base rates and put into the new clause. This will lower base energy rates and raise the recovery clause rates.

“This is fairly straightforward and changes the geography of where dollars go on the bill but not the total amount,” she said. “Customers will see lower base rates, which are offset by higher ECRC rates.”

Moriwake said MECO ratepayers are not likely to see much of a change in their bills “especially at the modest 2 percent sharing percentage the PUC adopted.”

“But it will start to give MECO some ‘skin in the game’ to reduce its reliance on economically and environmentally costly fossil fuels and accelerate its shift to cheaper clean energy,” he said. “This, in turn, will help reduce rates because, as the PUC has emphasized and many studies have confirmed, the best path to reducing rates is to aggressively shift from fossil fuels to clean energy.”

The fuel charge changes were part of the 2018 base rate approval by the PUC on March 18. Some of the details of the decision and order still are being worked out between MECO and the state Consumer Advocate per a settlement and modifications ordered by the PUC.

The PUC approved a 3.8 percent interim rate increase in August. Rates increase by $5 for a typical Maui monthly residential bill for 500 kilowatt hours of use. On Lanai, a typical 400-kWh monthly bill rose by $5 and on Molokai, by $4.62, Decker said. The rate increase, which will bring in about $12.4 million in annual revenue, will help pay for operational improvements, including system upgrades to increase reliability, improve customer service and integrate more renewable energy, she said.

The company’s original request in October 2017 was for a 9.3 percent base rate increase, or $30 million, Decker said. That proposal would have led to an increase of monthly bills on Maui for 500 kilowatt hours used by $13.46 a month and on Lanai and Molokai for 400 kilowatt hours used by $13.83 and $11.25, respectively, the utility said when rolling out the proposal in 2017.

The decision and order grants MECO rates that provide a 9.5 percent maximum profit rate and a 7.43 percent rate of return for recovery of costs for major investments, like substation construction, interest on debt and return to investors financing projects, Decker said.

Kelly noted that the profit rate is a maximum target, which MECO has not reached in recent years. The return on equity was about 8 percent last year, MECO data show.

This base rate increase is the first in six years. When the PUC “decoupled” Hawaii utility rates from the amount of power sold in 2010, it set up a system where utilities could seek base rate increases every three years. Decoupling was intended to encourage development of renewable energy and reduce utilities’ incentive to sell more power to increase revenues.

In the decision and order, Moriwake noted that the PUC said that “the pace at which MECO pursues renewable solutions must be accelerated,” observing that the law that calls for all renewable power production by 2045 and Hawaii’s “recognized role” as a renewable energy leader “demand greater progress.”

The commission said it “expects MECO to exhibit sustained initiative in pursuing and implementing renewable energy.” This includes improving the speed and efficiency in resolving rooftop solar interconnection disputes, pursuing power purchase agreements for renewable energy at competitive prices, and “aggressively exploring innovative ways to further reduce its reliance on fossil fuels.”

The PUC reminded MECO of how its “excessive curtailment,” or dumping of wind power, in 2013 “resulted in the commission penalizing MECO for excessive curtailment of renewable energy.” It trimmed MECO’s profit margin and instituted reporting requirements.

While the comments in the decision and order “may not rise to the level of the penalty that the PUC slapped on MECO in its last rate case, it still sends a clear message to MECO that it needs to improve,” Moriwake said.

Decker said that MECO is “working quickly toward reaching such a momentous goal and continues to lead the way when it comes to integrating more renewables to power our islands.”

She said the two new industrial-scale solar projects coming online in Kihei and Lahaina last year increased MECO’s energy produced by renewable sources to 38 percent.

“We’re ahead of the state’s goal of 30 percent renewables by 2020,” she said.

* Lee Imada can be reached at leeimada@mauinews.com.

** This story includes corrections from publication on Sunday, March 31, 2019.

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