Businesses Love to Hate the Hawaii PUC

But there's a plan to build a better regulator

March, 2011

Critics say

The state Public Utilities Commission is slow, inefficient and secretive, but this small agency has a lot on its plate. It regulates:

4 electric utilities;
1 gas company;
176 telecommunication companies;
38 private water and sewer companies;
4 water carriers;
1,272 trucking and bus companies.

Legislators say they want to reform and properly fund the PUC, but it’s not a done deal – or an easy fix.

The mood was tense in the packed Senate hearing room in December, as angry Neighbor Island businessmen, farmers and representatives from community organizations testified before the Committee on Commerce and Consumer Protection against the Public Utilities Commission. The immediate cause for the rancor was an interim decision by the PUC in September that allowed Pasha Hawaii Transport Lines to begin limited interisland cargo shipping between Honolulu and Kahului and Hilo.

Before this ruling, interisland cargo service was provided exclusively by Young Brothers – a monopoly contingent on the barge company serving not only the state’s large, profitable ports, but also the smaller, unprofitable ones, such as those on Lanai and Molokai. But the interim order imposed no such obligations on Pasha.

That’s what caused the stir. In the wake of all the discontent, Sen. Rosalyn Baker, chair of the committee, spoke testily of the need to reform the PUC, a process that this blowup may have both hastened and complicated.

The intent of the Pasha decision, according to the previous commission chair Carlito Caliboso, was simply to find out if more competition among water carriers would help improve service and lower costs for consumers. Young Brothers, and many of its Neighbor Island customers, had a different take. They viewed the PUC’s ruling as fundamentally unfair to the highly regulated interisland barge company, and potentially lethal to the businesses that depend on its service, particularly those on Molokai and Lanai.

Even worse, they viewed the process the PUC used to reach its decision as opaque and capricious. As Baker points out, the commission held no public hearings, let alone Neighbor Island public hearings, before making its ruling. Then, one day before the Senate hearing, the commission denied a Young Brothers’ request to reconsider its decision. “I thought the commission behaved most arrogantly to the folks that came in from the Neighbor Islands to be heard,” Baker said later.

But assigning blame for the commission’s failings is more complicated than it seems.

Quasi-Judicial Agency

The PUC is a small state agency with astonishingly broad regulatory powers. According to its 2010 annual report, it is responsible for regulating electric utilities, telecommunication companies, water and sewer companies, and bus and trucking companies. In other words, a huge part of the state economy falls under its jurisdiction; yet, early last year, the agency had a staff of fewer than 40 people. For most purposes, the three PUC commissioners operate like a quasi-judicial body, with the chair presiding over lawyers, engineers, analysts and accountants who conduct research and provide technical assistance. This small cadre of professionals has to provide the expertise to regulate the diverse industries under their jurisdiction.

The Division of Consumer Advocacy is in even worse straits. In 2010, this agency, which is supposed to represent the public’s interest before the PUC (and is funded out of the PUC’s special fund), had only 11 staff positions filled. Yet, the division is responsible for much the same analytical and policy footwork as the PUC. In fact, PUC actions often can’t proceed because of delays caused by the division’s understaffing. For a while, the division simply stopped processing certification applications from telecommunications providers, according to a legislative report. Consumer Advocacy officials didn’t respond to repeated requests to comment for this story.

It’s not surprising that the most common complaint about the PUC is that it’s slow and inefficient. However, that fact has to be viewed in the context of how the agency works. Regulated companies typically bring cases, called dockets, before the commission for consideration. Dockets range from something as simple as an application to operate a motor carrier, to a petition for rate relief from a water carrier, to something as complicated as decoupling, a new policy that fundamentally changes the business model for the electric company. A docket isn’t that different than a court proceeding: There are motions, opportunities for interveners to join the docket, and periods for discovery and rebuttal. All of which take time.

And there are a lot of dockets. In 2010, 330 new dockets were filed before the PUC. In addition, there were still 271 dockets pending from 2009. Altogether, the commission completed 448 dockets over the course of the fiscal year, and left 153 pending. All those figures are improvements.

Diverse Complaints

Even though few individuals are willing to go on the record – their companies are still regulated by the commission, after all – criticism of the PUC is widespread and diverse. For example, among motor carriers, by far the largest group of companies regulated by the PUC, the standard complaint is that there isn’t enough regulation: It’s too easy to get a certificate, and there isn’t enough rate enforcement.

Young Brothers, as we’ve seen, complains that it’s held to a different standard than its competitor – much the same complaint Hawaiian Telcom representatives make privately about its competitors.

It’s within the electric sector that we see the most complaints: that the PUC is too cautious, that the consumer advocate is too closely aligned with the utility, and that the PUC chair should be more of a vanguard. Almost all this criticism, though, comes back to those two words: slow and inefficient. Most of the complaints are justified, but that’s not the whole story.

For example, not everyone is convinced that the commission is responsible for many of these problems. Carl Freedman, an electric utility regulatory expert and frequent intervener before the commission, notes that, under the Caliboso administration, the PUC undertook an enormous number of major policy dockets. In fact, it’s largely trying to deal with those energy-policy initiatives that accounts for much of the commission’s slowness. “I think it’s a fair criticism of the PUC to say it’s not fast enough,” Freeman says. “But I don’t think that equates to criticism of (Caliboso), or even the staff. That’s a criticism of the whole state.”

Similarly, Freedman isn’t sure that slow and cautious are necessarily bad things, at least when it comes to these major policy decisions. “Some people want to see the commission be more of a vanguard. But I think cautious is certainly also one of the things we want the PUC to be.”

Caliboso also isn’t convinced that the charges of slowness and excessive caution are merited. Some of the slowness, he points out, is built into a fair and deliberative process. “You can’t really say this docket took a year, so it’s slow, for example. You really have to look at each one to see when the parties were really done with it, when was it submitted for a decision. A lot of times, it’s the parties involved in the case that slow things down, because they want time for things like review and discovery before they submit their positions and make their arguments. And all that takes time.”

Caliboso also points out that sometimes the PUC’s new responsibilities conflict with its traditional regulatory role, particularly in the complicated field of energy policy. “If you’re assuming the complaints are that we’re not moving fast enough or far enough in a particular policy direction, then you really have to look at what is the policy direction being given to the PUC from the Legislature, because we’re a creature of statute. The law says we’re supposed to be a traditional regulator. Those duties deal with trying to make sure the rates that customers pay are reasonable – so, keeping costs down. And then, we’re responsible for making sure the utilities provide reliable service and earn a reasonable rate of return. It’s all connected.

“At the same time, you’re telling the commission to try to implement these new energy policies, which should help get us off of fossil fuels, improve our energy security, reduce greenhouse emissions, improve our environment and make things more sustainable. That’s fine. I understand that task, and we’re driven to implement these policies. But those traditional regulatory responsibilities have not gone away. So, when somebody says we’re not going fast enough, maybe it’s because we still have those traditional objectives to look out for.”

Buying a Plan

The real issue is money. The PUC is mostly funded by fees collected from the utilities it regulates. This special fund should be more than adequate for the commission’s regulatory duties, but it doesn’t actually get all the money.

“In 2009, we collected $17.6 million in revenues, most of which are from the public utilities,” Caliboso says. “At the same time, our expenditures were only about $8.2 million, $2.9 million of which went to the consumer advocate. That means about $9.4 million went back to the general fund. So, the money is there. The problem, as far as money goes, is that a lot of it is being used for something other than regulatory purposes.”

Money also plays a role in another challenge facing the commission: attracting quality staff. PUC positions go unfilled for so long partly because the pay isn’t competitive with private industry. As one industry insider put it, it’s not uncommon for commission attorneys to be sitting across the table from utility attorneys making four or five times more money. This is a national problem, but, even so, according to Sen. Baker, the disparity in Hawaii is larger.

“We did a study where we looked around the country,” she says, “and other state salaries, almost without exception, are higher than ours.” Similarly, other states pillage utility commission revenues, just not so wantonly.

Utility professionals routinely complain about the underfunding of the commission. In her 2004 report on the PUC, the state auditor recommended the commission undertake serious strategic planning, pointing specifically at the agency’s deficiencies in personnel management. In 2006, the Legislature passed Act 143, which required the PUC and the consumer advocate to prepare a reorganization plan specifying their budget, resource and manpower needs. The following year, Acts 177 and 183 approved and funded most of the commission’s requests. The PUC’s reorganization plan included:

• Increasing the staff level to 62 for the PUC and 15 for the Division for Consumer Advocacy;
• Redescribing several positions to better reflect new responsibilities;
• Restructuring the agencies’ hierarchy to improve organizational effectiveness, especially by creating an Office of Policy and Research to better address highly technical policy issues; and 
• Relocating the PUC offices to accommodate the larger staff and new organization.

Nothing happened as planned. In 2008, the Legislature reduced the commission’s budget again, removing nine existing positions, and not funding two new positions or the agency’s relocation. The following year, the consumer advocate lost eight positions and other new positions went unfunded. Yet, even with funding and legislative approval, the commission still can’t reorganize on its own. It needs approval from the Department of Budget and Finance to release the funds, and the Department of Human Resources and Development has to rewrite job descriptions. Both departments presented roadblocks to the PUC’s reorganization.

Finally, in the 2010 session, the Legislature relented, passing Act 130, which acknowledged that the PUC’s reorganization was essential, especially to “successfully implement meaningful energy policy reform.” Act 130 puts numbers to that, noting that the commission regulates “electric and telecommunications services worth between $3 billion and $4 billion annually.” The legislation also notes that the potential savings from appropriate regulation may save the state more than the cost of fully funding the reorganization. Put another way, a well-run PUC is good business.

Caliboso highlights the value of effective regulation differently. “Another way to think about it is to look at how much is being invested in energy,” he says. “The cost rate base for the utility – or the money they’ve invested in energy infrastructure – is almost $2 billion.” Viewed in the context of protecting that investment, the PUC budget starts to look trifling.

Similarly, Caliboso says, you can look at the state’s regulatory costs in comparison with the aims of the state’s Clean Energy Initiative. “When you think of how much we should be investing to achieve our policy goals of getting us off oil and achieving energy security, which could help both in addressing price volatility and in securing our supply of energy, the cost of (better regulation), that’s not that much more to invest.”

More of the Same?

The remarkable thing about this ebb and flow of funding is that the PUC’s reorganization isn’t controversial. “Everyone knows it should happen,” Freeman says. “Everyone agrees. Everyone is supportive.” But he acknowledges that might not be enough. After all, he points out, funding for the reorganization has been given and taken away several times. “The question is: Is the Legislature just going to wipe it out again?”

Gov. Neil Abercrombie seemed to address some of these questions in February by appointing the former chair of the House Committee on Energy and Environmental Protection, Rep. Hermina Morita, to the commission, filling the seat vacated by Leslie Kondo, and replacing Caliboso as chair.

Morita had long been the most knowledgeable supporter of renewable energy in the House and a vocal advocate for increased PUC funding. Even so, it’s not clear the PUC’s reorganization will survive the legislative session. “I would like to say, ‘Yes,’ ” Morita confided, shortly before her appointment, “but I’m only confident if the other legislators fully understand that this is a critical part of our economic recovery and our economic development.” 
In fact, Morita’s appointment may add to the uncertainty surrounding the reorganization. Although she’s widely admired among PUC observers, particularly those in the energy sector, her departure from the House will deprive the commission of a powerful legislative advocate at a critical moment. She may also stir things up within the commission itself, where, as chair, Morita will have an opportunity to reshuffle PUC staff.

Some legislators simply aren’t convinced that the commission is properly structured in the first place. “I just don’t think we have the appropriate expertise on the PUC,” said Baker, shortly before Kondo’s departure. “We have two government attorneys and one private-sector attorney. We don’t have anybody with any kind of engineering expertise, accounting expertise, or financial or business expertise. We don’t even have anybody with any energy background. They don’t have to have worked for a utility, but just to understand some of the technical dynamics.”

Baker is also concerned about the PUC’s demographics. “I don’t want to impugn the background or integrity of anybody, but the commission just is not diverse. For example, there are no members from the Neighbor Islands.” She acknowledges that the addition of Morita, who is from Kauai, will alleviate some concerns, but she believes the PUC needs structural changes.

Which brings us back to the PUC’s Pasha decision. In the wake of the flack following that ruling, Baker has proposed legislation that will further complicate the PUC reorganization. “I have a bill that tries to professionalize the staff and adds two more commissioners, so there would be a total of five,” she says. This would simplify adding a requirement that the commission include Neighbor Island representation. And, according to Baker, it would also allow PUC staff to specialize. “The bill also creates two panels,” she says. “One to deal with energy and private water systems – because that’s a big piece of what the commission does – and the other would deal with water carriers, motor carriers and warehousing. That way, you’ve got some specialization, so both the commissioners and the staff can zero in.”

It seems like a good plan. But you have to wonder if the added uncertainty introduced by the bill will kill the PUC’s reorganization in the Legislature again. That’s a fate Caliboso knows is all too possible.

“Is it a done deal, pau, don’t worry about it?” he asks. “No, they could always take it away again.”

 

Regulatory Commission Staffing

 

 

Major Policy Dockets

Within the electric industry, the PUC undertook more major public policy initiatives under the Caliboso administration than the previous three administrations combined.

 

 

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