Lessons from Hawaii

In the electricity business, power plants get built, major accidents unfold, and faulty infrastructure breaks down. But one thing never changes: the utility always gets paid. Guaranteed.

Investor-owned utilities make money by justifying capital investments in infrastructure that are paid for by their customers, and which then earn the utilities guaranteed rates of return as high as 9%. In years when interest rates are high, the returns can reach double digits. A captive customer base pays for nearly everything, even when things break down.

One recent example I wrote about last week: A leak discovered at San Onofre Nuclear Generating Station in January 2012 has kept the plant offline for eighteen months. Southern California Edison finally made the decision to shut down the plant, but only after the Nuclear Regulatory Commission shot holes in their plans to re-open it. Meanwhile, ratepayers have been charged nearly $1 billion for a plant that was producing no power.

It’s an arrangement most businesses can only dream of. The utilities are incentivized to keep building forever because they’ll keep earning a guaranteed return on whatever they build. But what’s the incentive for the people they serve?

Perhaps it’s time for California to take a page from Hawaii’s playbook. An article published last week in Hawaii’s largest newspaper, the Honolulu Star-Advertiser, reported that the state’s Public Utilities Commission reduced the allowable profit for Maui Electric Company (MECO) from 10% to 9%.

As one of the commissioners phrased it, “attractive financial returns are not a utility entitlement. Instead, excellent utility performance with affordable rates and superior customer service should drive utility financial performance.” What a concept!

Back here on the mainland, the Associated Press reported that a recent audit of PG&E following the 2010 San Bruno gas pipeline explosion uncovered a 12.7% average rate of return for the utility’s gas distribution operations from 2003 to 2010. During that same timeframe, PG&E’s authorized rate averaged 11.3%.

California regulators should follow Hawaii’s lead and tell our investor-owned utilities that they have to earn their profits through superior customer service and performance, including safety standards.

The Star-Advertiser article goes on to point out that Hawaii’s utilities lack a “strategic and sustainable business model to address technological changes and increasing customer expectations.” Sounds like a familiar story in California, and it could have detrimental effects on the utilities’ public image.

When California utilities resist innovation and advancement – for example, by trying to stop rooftop solar and end net metering – they seem more and more like a landline in the age of smart phones, or the newspaper industry ignoring the possibilities of the Internet. It’s anti-progress; and when we’re talking dirty energy versus clean, it’s also anti-public health.

We can only hope Hawaii’s stance that utility returns are not an entitlement will have a bit of influence on the Golden State.