Hawai‘i PUC Directed to Modify Rate Structure and Decouple Utility Revenues from Capital Investments

Earlier this week the Hawai‘i Governor David Ige signed into law the Hawai‘i Ratepayer Protection Act, SB 2939 SD 2, requiring the Hawai‘i Public Utility Commission (“PUC”) to develop a performance based regulation model that will “break the direct link between allowed revenues and investment levels.”

In enacting the legislation, the Hawai‘ian Legislature recognized that integrating more renewable resources into the grid and reducing carbon emissions affects the traditional utility business model.  Under the traditional cost-of-service model, a regulated distribution utility’s earnings are based on its revenue requirement and the size of its load from which it recovers that requirement. The revenue requirement, in turn, is based on a combination of:

  • The utility’s operating costs (e.g. more consumption = more fuel = higher costs);
  • A return on its rate base which is largely derived from the level of prudent capital investment that the utility had made, or was expecting to make, in plant and other assets (higher investment = higher return); and
  • The recovery of depreciation expenses on those capital investments.

The Hawai‘ian Legislature expressed concern that in transitioning energy generation to renewable energy, utilities are reducing their fossil fuel purchases, but will be spending more on capital projects.  The bill states that “[t]he legislature is concerned that the existing regulatory compact misaligns the interests of customers and utilities because it may result in a bias toward expending utility capital on utility-owned projects that may displace more efficient or cost-effective options, such as distributed energy resources owned by customers or projects implemented by independent third parties.” The Legislature “concludes that it must ensure a change to the regulatory compact to promote decisions and strategies that will maximize public benefit, reduce ratepayer risk, and meet Hawaii’s energy goals.”

While other states and public service commissions have adopted various performance based regulation mechanisms, this law earns Hawai‘i the distinction of becoming the first state to enact legislation to decouple a utility’s revenues from its capital investments.

The Act directs the Hawai‘i PUC to establish by January 1, 2020 “performance incentives and penalty mechanisms that directly tie an electric utility revenues to that utility’s achievement on performance metrics.” These metrics are to include, but not be limited to:

  • Certain economic incentives or cost-recovery mechanisms;
  • Volatility and affordability of electric rates and customer electric bills;
  • Electric service reliability;
  • Customer engagement and satisfaction, including customer options for managing electricity costs;
  • Access to utility system information, including, but not limited to, public access to electric system planning data and aggregated customer energy use data and individual access to granular information about an individual customer’s own energy use data;
  • Rapid integration of renewable energy sources, including quality interconnection of customer-sited resources; and
  •  Timely execution of competitive procurement, third-party interconnection, and other business processes.

The Act does not apply to member-owned cooperative electric utilities.

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FERC Approves Cybersecurity Reliability Standard

In its April Open Meeting, FERC issued a final rule approving a cybersecurity Critical Infrastructure Protection (CIP) Reliability Standard.  The rule focuses on low impact Bulk Electric System (BES) Cyber Systems and transient electronic devices.  “Low impact” is the default classification for all Cyber Systems not rated as High or Medium Impact, and transient electronic devices include thumb drives, laptops, and other portable electronics that can connect to a Cyber System.

In response to a FERC directive, the North American Electric Reliability Corporation (NERC) sought approval in March 2017 of a Reliability Standard on “Cyber Security—Security Management Controls.”  This Reliability Standard would (1) clarify obligations related to electronic access control for low impact BES Cyber Systems; and (2) adopt mandatory security controls for transient electronic devices.  Although FERC had not directed it to do so, NERC also proposed to require responsible entities to have a policy for declaring and responding to CIP Exceptional Circumstances related to low impact BES Cyber Systems.

In October 2017, FERC proposed adopting this Reliability Standard.  However, it proposed two modifications to what NERC had submitted.  First, it proposed requiring that the standard “provide clear, objective criteria for electronic access controls for low impact BES Cyber Systems.”  Second, it proposed that the standard “address the need to mitigate the risk of malicious code that could result from third-party transient electronic devices.”

In its final rule, FERC adopted the Reliability Standard proposed by NERC, including the modification to mitigate the risk of malicious code from transient electronic devices.  Although commenters agreed that there was already an implicit obligation to guard against such risks, FERC concluded that an explicit requirement was needed to ensure that entities develop and implement adequate compliance plans.

Although FERC had proposed to direct NERC to develop objective criteria for electronic access controls for low impact BES Cyber Systems, it declined to do so in its final rule.  NERC and other commenters argued that existing standards provided a sufficiently clear security objective while at the same time providing responsible entities with the flexibility required to address the wide range of low impact BES Cyber Systems.  FERC stated that it was satisfied with this explanation, although it did direct NERC to conduct a study of what electronic access controls entities choose to implement and whether they are effective.  NERC must file this study by October 25, 2019.

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DOE Opens Informal Comment Period on FPA Section 202(c) Emergency Authority

Since First Energy Solutions Corp. asked DOE to issue a Federal Power Act (FPA) Section 202(c) emergency order requiring PJM to provide full cost recovery to certain nuclear- and coal-fired generators last month, energy industry organizations have responded to the request, and DOE has opened an unofficial comment period using its 202(c) authority.

On March 30th, a diverse group of energy industry trade associations* submitted a joint request to DOE Secretary Perry to establish a formal notice and comment period of at least 60 days to allow interested parties to respond.  These groups argued that First Energy’s request has far-reaching implications for the PJM markets and on a broad spectrum of parties, making the opportunity for meaningful stakeholder involvement imperative.

While DOE has not formally responded to the energy industry trade associations, last week, DOE opened an unofficial comment period and updated its website to provide an email address intended for the receipt of all public comments and requests related to FPA Section 202(c).  DOE made clear, however, that:

Establishment of this email address does not establish a “docket,” and those submitting correspondence do not constitute parties or intervenors to any proceeding.  Further, submission of correspondence to the Department does not in any way limit or prevent the ability of the Secretary to act on any application, or pursuant to section 202(c) without application, in any way and at any time as he deems appropriate.

DOE has not indicated how long the informal comment period will remain open, but states that any additional information related to 202(c) procedures will be announced on its website.

Energy industry organizations continue to respond to First Energy’s request.  The American Public Power Association urged Secretary Perry in an April 9 submittal to reject First Energy’s request, arguing that no emergency exists within the meaning of FPA Section 202(c), and that FERC already considered and rejected First Energy’s arguments in the proposed grid resilience pricing rule.  In addition, the Electric Power Supply Association submitted a letter to President Trump last Friday, stating that no emergency warranting the use of 202(c) authority exists, and that “[s]ince all electricity suppliers face the challenges of current market conditions . . . federal and state policies should be pursued on a fuel neutral basis to best serve consumers.”

 

* These groups included Advanced Energy Economy, the American Council on Renewable Energy, the American Forest & Paper Association, the American Petroleum Institute, the American Wind Energy Association, the Electric Power Supply Association, the Electricity Consumers Resource Council, the Independent Petroleum Association of America, the Interstate Natural Gas Association of America, the Natural Gas Supply Association, and the Solar Energy Industries Association.

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Former FERC Commissioners Weigh In on CPP Repeal

Former FERC Commissioners Norman Bay, John Norris, and Jon Wellinghoff submitted a comment to EPA’s Clean Power Plan (CPP) repeal docket, responding to EPA’s suggestion that the CPP may impermissibly tread on FERC’s functions and authority.  Characterizing this idea as “unfounded,” the former commissioners argue that the CPP respects the boundaries between EPA and FERC.  They argue that “none of FERC’s authorities under the [Federal Power Act] would be in any way diminished or altered if the CPP were fully implemented.”  They also point to other federal regulations—under the Clean Air Act as well as promulgated by other agencies, such as the Occupational Health and Safety Administration  and the Bureau of Land Management—that may increase generator costs, arguing that these agencies cannot be precluded from exercising their statutory authority because of FERC’s authority over wholesale electricity markets.

The comments also focus on the state/federal balance in energy regulation and the fact that FERC “routinely considers the impacts of state public policies on the areas it regulates.”

The comments attach a May 15, 2015 letter from FERC to EPA about the CPP, noting that FERC’s suggestions were solicited and incorporated throughout the development of the CPP. For example, FERC held four technical conferences concerning the CPP.  And EPA included a reliability safety valve and altered the compliance deadlines in response to consultation with FERC.

Further, the former commissioners state “that the CPP is consistent with ongoing trends in the power sector, is achievable at reasonable cost, and does not pose threats to reliability.”  They argue that in spite of recent changes to the grid—from changing resource mix to technological innovations—regulators and grid operators have maintained safe, reliable, and affordable electricity.  They point to studies showing the feasibility of CPP compliance and note that they can think of no instance where a Clean Air Act regulation “has been responsible for endangering resource adequacy,” citing this as “a powerful tribute to the robust system of policies, institutions, planning processes, and operating practices” protecting reliability.

Comments on the proposed repeal are currently due April 26.

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Utility Seeks DOE Emergency Assistance to Resolve Alleged Market Emergency

At the end of March, FirstEnergy Solutions Corp. (FirstEnergy) sent a letter to the Department of Energy (DOE) requesting that the agency issue an emergency order under Section 202(c) of the Federal Power Act.  Section 202(c) allows for orders during times of war and emergencies that require “temporary connections of facilities and such generation, delivery, interchange, or transmission of electric energy [that] will best meet the emergency and serve the public interest.”

According to FirstEnergy, there currently exists an emergency in PJM because PJM’s power markets fail to compensate nuclear and coal-fired generators for the full value of the benefits they provide.  As a result, many of these units are either planning to retire or are at risk of retirement.  FirstEnergy, whose generation subsidiary filed for bankruptcy a few days after the letter to DOE, has requested that DOE order PJM to enter into contracts that provide full cost recovery for certain nuclear and coal-fired generators that have a 25-day fuel supply onsite.

Several entities have voiced their opposition to emergency action.  PJM sent DOE a response requesting that DOE not take any action at this time, stating that there is no immediate threat to reliability and that PJM’s tariff provides a process to determine whether the retirement of certain nuclear and coal plants would create reliability concerns.  The Environmental Defense Fund and the Natural Resources Defense Council filed a joint letter arguing that an emergency order is unnecessary and would undermine ongoing FERC efforts regarding reliability.  The Sierra Club similarly told DOE that there is no reliability emergency in PJM, and that if DOE does not outright reject FirstEnergy’s request, then it should open a formal proceeding to solicit public comment before acting.

Although DOE has yet to act on FirstEnergy’s request, its website lists several examples of emergency orders it has issued under Section 202(c) over the past two decades, including orders in response to the California energy crisis, the Northeast Blackout of 2003, Hurricane Rita, and a decision by Mirant Corporation to cease generation of electricity at its Potomac River Generating Station.  More recently, DOE has issued Section 202(c) orders regarding coal-fired units not in compliance with EPA’s Mercury and Toxics Standards (MATS).

In April 2017, DOE issued emergency Order No. 202-17-1 in response to a request by the Grand River Dam Authority to keep a non-MATS-compliant coal unit online to ensure reliability in SPP.  Although the Grand River Dam Authority had two other generation units, one was offline because of a lightning-caused fire and the other had construction delayed because of flooding.  SPP filed a letter of support explaining that keeping this first unit online was needed for reliability.  DOE agreed that there was an emergency and ordered that the first unit remain online until one of the Grand River Dam Authority’s other units was brought online or SPP determined that generation from the first unit was no longer needed to maintain grid reliability.

A few months later, DOE issued emergency Order No. 202-17-2.  There, PJM filed a letter requesting an emergency order to preserve the reliability of the bulk power transmission system in the area east of Richmond, VA.  Two coal-fired units in that area were planned to be deactivated because of failures to comply with MATS, but PJM determined that the generation from these units was necessary to prevent the possibility of uncontrolled power disruptions.  DOE ordered that these two units were to operate as directed by PJM as needed to address reliability for 90 days.  DOE has since issued a series of 90 day extensions of the emergency order, the most recent of which allows the two units to continue operating under certain conditions until June 11, 2018.

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