RELATING TO THE PUBLIC UTILITIES COMMISSION.

SB2487

THE SENATE

S.B. NO.

2487

THIRTY-THIRD LEGISLATURE, 2026

STATE OF HAWAII

A BILL FOR AN ACT

relating
to the public utilities commission
.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

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SECTION 1.
�
The legislature finds that, in 2018, the
legislature enacted the Hawaii Ratepayer Protection Act to provide proactive
protections to the State's electric utility customers.
�
Act 5, Session Laws of Hawaii 2018 (Act 5), provided
that electric utility rates would be considered just and reasonable only if
they were derived from a performance-based model for determining utility
revenues.
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Act 5 emphasized that the
State should adjust electric utilities' interests to better align with
customers' interests.
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The legislature found
that there was "extraordinary urgency" for this realignment.

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Act
5 directed the public utilities commission to establish a performance-based
model for utility regulation and ratemaking based on performance incentives that
"directly tie an electric [utility's] revenues to that utility's
achievement on performance metrics and break the direct link between allowed
revenues and investment levels."
�

The intent of this performance-based model was to depart from the
traditional cost‑of-service model that rewards utilities for increasing the
utility's capital expenditures and bases allowed revenues on the value of the
rate base, irrespective of the utility's performance.
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The legislature recognized that the
traditional model misaligned the interests of customers and utilities because
it created a possible bias toward utilities that expended capital on utility-owned
projects, rather than utilities that supported more efficient or cost-effective
options like customer-owned distributed energy resources or independent,
third-party projects.
�
The legislature
concluded that the State needed a shift away from the traditional focus on
utility costs to a more modern focus on performance.

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The
legislature further finds that, in response to the Hawaii Ratepayer Protection
Act, the public utilities commission opened its performance-based regulation
proceeding as a historic, multi-phase process that included participation from
local and national experts.
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In December
2020, the commission established a comprehensive framework for
performance-based regulation that has since been nationally recognized as a
leading model.
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The guiding principles
for this framework include a customer-centric approach, including day-one
savings for customers; administrative efficiency through a simplified
regulatory framework; and utility financial integrity with the opportunity to
earn profits and rewards through performance.
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The main features of the framework include a multi-year rate period of
five years, during which the utility's allowed revenues are determined not by
traditional rate cases but by an objective index tied to general
inflation.
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The utility's profits are
driven largely by its ability to capture cost savings and efficiencies.
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The framework also includes performance
incentive mechanisms to reward or penalize a utility based on its performance
on public interest priorities like reliability, accelerated progress toward
renewable energy, and improved customer service.
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The commission emphasized that, with the
transition away from traditional cost-of-service regulation, customers would
benefit from lower utility costs.

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In
establishing the performance-based framework, the public utilities commission
recognized the need for a transformative and lasting shift away from
cost-of-service regulation.
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The
commission made clear that, after the five-year rate control period, the
commission anticipated continuing to refine the performance-based framework and
did not envision returning to cost-of-service regulation.
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However, now that the end of the rate control
period is approaching, the legislature is concerned about the integrity of the
performance-based framework and the commission's compliance with the Hawaii
Ratepayer Protection Act.
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For example,
last year, the commission adopted the utility's proposal to initiate a
traditional, cost-of-service rate to "re-base" the utility's allowed
revenues using its projected increased costs.
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This cost-based rebasing of revenues backtracks on the progress and
reforms the State has made and violates the commission's previous commitment
not to return to cost-of-service regulation.

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The
legislature is also aware that the public utilities commission has insisted on
requiring a "forward test year" approach to the rate case, in which a
utility requests a rate increase based on future cost projections, rather than
the historical cost trends that have been controlled under the
performance-based framework.
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This return
to forecasted cost‑of‑service ratemaking encourages utilities to
make "wish lists" of capital projects to boost utility profits,
thereby inflating customer rates.
�

However, the predominant practice in rate cases is to use historical
costs adjusted for known and measurable changes, rather than forecasted future
costs, as the basis for regulatory rate analyses.
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Jurisdictions using forecasted costs instead
of historical costs end up paying substantially higher rates.

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The
legislature recognizes that the public utilities commission has expressed the
commission's belief that it is constrained by existing legal provisions to
follow certain traditional cost-bound methods, notwithstanding the mandates of
the Hawaii Ratepayer Protection Act.
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As
a result, the commission is inviting a return to "cost-plus"
ratemaking that threatens to undermine the benefits and progress achieved under
the performance-based framework.
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This
poses the risk of significant rate increases for customers.

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Based
on this stance by the public utilities commission, and the risk of rate
increases for customers, the legislature believes that further clarification
and guidance are needed to ensure that the commission upholds the legislature's
original intent under the Hawaii Ratepayer Protection Act and continues the
progress made under the commission's performance-based regulatory framework.
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These clarifications will help ensure that both
electric utilities and ratepayers will continue to benefit from the utilities' improved
performance, lower costs, and lower rates.

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Accordingly,
the purpose of this Act is to provide clarification and guidance by:

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(1)
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Clarifying that, for the purposes of regulating electric
utility rates, "performance-based incentives" include revenue
adjustment mechanisms; cost control mechanisms, such as the multi-year rate
period; rewards for superior performance; and penalties for subpar performance;

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(2)
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Confirming that the public utilities
commission may adopt alternative ratemaking procedures to establish electric
utility rates and performance-based incentives that fulfill the requirements of
section 269-16.1, Hawaii Revised Statutes; and

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(3)
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Requiring the commission to apply a
presumption in favor of considering historical cost trends and external indices
that reflect incentives to control costs if resetting an electric utility's
allowed revenues based on consideration of the utility's costs.

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SECTION
2.
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This Act shall be known and may be
cited as the Hawaii Ratepayer Protection Act of 2026.

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SECTION

3
.
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Section
269-16.1, Hawaii Revised Statutes, is amended to read as follows:

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"
�269-16.1
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[
Performance incentive
and penalty mechanisms
]

Performance-based
incentives; regulation of electric utility rates.
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(a)
�

On or before January 1, [
2020,
]
2027,
the public utilities
commission shall establish [
performance
]
performance‑based

incentives
, including revenue adjustment mechanisms, cost control
mechanisms, and reward
and penalty mechanisms
,
that directly tie an
electric [
[
]utility's[
]
] revenues to that utility's [
achievement
on
] performance [
metrics
] and break the direct link between allowed
revenues and investment levels.
�
The [
performance
]

performance-based
incentives [
and penalty mechanisms
], as may be
amended by the public utilities commission from time to time, shall apply to
the regulation of electric utility rates under [
section 269-16.
]
this
chapter.

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(b)
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Notwithstanding any law to the contrary,
including the ratemaking procedures described in section 269-16, the public
utilities commission may adopt, by commission order, alternative ratemaking
procedures to establish electric utility rates and performance-based incentives
for purposes of subsection (a); provided that the rates shall be derived from a
performance‑based model for determining utility revenues.

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(c)
�
If resetting an electric utility's allowed
revenues based on consideration of the utility's costs, the commission shall
apply a presumption in favor of considering historical cost trends and external
indices that reflect incentives to control costs, rather than relying on a
forward test period.

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[
(b)
]

(d)
�
In developing [
performance
incentive and penalty mechanisms,
]
performance-based incentives,
the
public utilities commission's review of electric utility performance shall
consider[
, but not be limited to,
] the [
following
]:

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(1)
�
[
The economic
]
Economic

incentives and cost-recovery mechanisms described in section 269-6(e);

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(2)
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Volatility and
affordability of electric rates and customer electric bills;

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(3)
�
[
Electric service
reliability;
]
Reliability of electric service;

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(4)
�
[
Customer
]
Level
of customer
engagement and satisfaction, including customer options for
managing electricity costs;

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(5)
�
[
Access to
]
Accessibility
of
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
]
, and
granular
information about an individual customer's own energy use data;

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(6)
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Rapid integration of
renewable energy sources, including quality interconnection of customer-sited
resources; and

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(7)
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Timely execution of
competitive procurement, third‑party interconnection, and other business
processes.

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[
(c)
]

(e)
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This section shall not apply
to a member-owned cooperative electric utility."

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SECTION 4.
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Statutory material to be repealed is bracketed and stricken.
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New statutory material is underscored.

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SECTION 5.
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This Act shall take effect upon its approval.

INTRODUCED BY:

_____________________________

Report Title:

PUC;
Ratemaking; Performance-Based Incentives; Hawaii Ratepayer Protection Act

Description:

Clarifies that, for electric utilities,
"performance-based incentives" include revenue adjustment mechanisms,
cost control mechanisms, rewards for superior performance, and penalties for
subpar performance.
�
Confirms that the Public
Utilities Commission may adopt alternative ratemaking procedures to establish
electric utility rates and performance-based incentives.
�
Requires the Commission to apply a
presumption in favor of considering historical cost trends and external indices
that reflect incentives to control costs if the Commission resets an electric
utility's allowed revenues based on consideration of the utility's costs.

The summary description
of legislation appearing on this page is for informational purposes only and is
not legislation or evidence of legislative intent.