PUC Nixes NextEra-HECO Merger
In a 2-0 decision, the Hawai‘i Public Utilities Commission today dismissed without prejudice the Hawaiian Electric Companies and NextEra Energy’s application for a joint merger.
PUC Commissioner Thomas C. Gorak abstained from signing the Decision and Order.
In summary, the commissioners concluded that the proposal for the $4.3 billion purchase of Hawaiian Electric Industries Inc. by NextEra failed to demonstrate that the merger is “reasonable and in the public interest,” using the words “vague, inadequate, uncertain, unrealistic” and lacked sufficient assurances” throughout their findings and conclusions.
Hawaiian Electric Industries Inc. is the largest supplier of electricity in the state of Hawai‘i, supplying power to 95% of the state’s population through its electric utilities: Hawaiian Electric Company, Hawaii Electric Light Company and Maui Electric Company.
The PUC’s reasoning is as follows:
In considering the record, the two standards of review are: whether HECO and NextEra have proved, by a preponderance of the evidence, that 1, the application is reasonable and in the public interest; and 2, the acquiring utility is fit, willing and able to perform the service currently offered by the utility being acquired.
Based on its review of the record, the PUC concluded that while the HECO-NextEra demonstrated that NextEra is fit, willing, and able to perform the services currently offered by the HECO Companies, HECO-NextEra failed to demonstrate that the merger was in the public’s interest.
In reaching this conclusion, the PUC focused on five fundamental areas of concern:
- benefits to ratepayers
- risks to ratepayers
- HECO-NextEra’s clean energy commitments
- the proposed change of control’s effect on local governance
- the proposed change of control’s effect on competition in local energy
First, the PUC concluded that the benefits offered by applicants are both inadequate and uncertain.
The applicants proposed a combination of rate credits, investment funds and a rate case moratorium.
Upon reviewing the record, the PUC concluded that each of these lacked sufficient assurances that they would translate into tangible, enforceable benefits to ratepayers.
For example, both the proposed $60 million in rate credits and four-year rate case moratorium were conditioned on a number of events, some of which were vaguely defined.
The PUC concluded that there was an unacceptable risk that ratepayers may not ultimately enjoy the entire $60 million in rate credits, if at all, and/or the projected benefits of a rate case moratorium.
Similarly, the applicants maintained that the proposed change of control would result in approximately $1 billion in state-wide benefits. The PUC observed that these calculations were based on assumptions and/or unrealistic expectations about the future that were vigorously challenged in the proceedings.
Additionally, HECO-NextEra had not offered any reliable means to track these estimated benefits to determine whether or not they actually occurred, nor did they propose an enforcement or penalty mechanism, in the event that such benefits did not result.
Second, the PUC concluded that HECO-NextEra had not offered sufficient protection to the HECO Companies and their ratepayers, to offset the risks presented by NextEra’s complex corporate structure.
Unlike the HECO Companies, NextEra is a large corporate family, with hundreds of affiliates and subsidiaries. While the PUC believed that its existing regulatory power would offer ratepayers some protection, primarily through preventing various types of cost-recovery by NextEra, it expressed serious concern over the risk posed by the potential bankruptcy of NextEra and/or one of its many subsidiaries or affiliates.
In order to avoid consolidation into a bankruptcy estate, legal protections known as “ring-fencing” measures are used to protect a specific corporate entity, such as the HECO Companies, from the bankruptcy-related issues of a related corporate entity, such as NextEra and its affiliates.
The PUC concluded that the ring-fencing measures proposed by HECO-NextEra would not adequately insulate the HECO Companies, and their ratepayers, from the risks posed by a NextEra-related bankruptcy.
Third, with respect to the state’s clean energy goals, the PUC concluded that notwithstanding NextEra’s extensive management capabilities, experience and finances, HECO-NextEra had failed to put forth near-term commitments for specific action tailored to Hawai‘i’s unique circumstances and clean energy goals.
Rather, HECO-NextEra’s commitments were in the nature of providing “best efforts” and maintaining existing practices and standards.
Additionally, the PUC noted HECO-NextEra’s lack of specific commitments relating to Distributed Energy Resources, which runs contrary to the state’s status as a national leader in integrating high levels of distributed solar photovoltaic systems.
Accordingly, while possessing potential to accelerate the state’s clean energy goals, the PUC concluded that HECO-NextEra’s proposed commitments in this area were simply too broad and vague to be consistent with the public interest.
Fourth, the PUC concluded that while local regulatory control would not be diminished, HECO-NextEra failed to adequately demonstrate how the proposed change of control would affect local governance.
In particular, HECO-NextEra had failed to provide corporate governance documents that would allow the PUC to sufficiently analyze the roles, functions and limitations of NextEra’s proposed local intermediary holding companies, Hawaiian Electric Holdings and Hawaiian Electric Utility Holdings and the HECO Companies.
Consequently, HECO-NextEra did not provide any details to reassure the PUC that the local interests of Hawai‘i would not suffer as a result of this change in corporate structure.
Fifth, the PUC concluded that HECO-NextEra had not adequately demonstrated that competition would be preserved if the change of control was approved.
Given the increased complexity that would result from the HECO Companies joining a large corporate family with extensive affiliates and subsidiaries, of which many are involved in the same energy markets, the PUC concluded that additional safeguards would be necessary.
In this regard, the PUC concluded that HECO-NextEra had failed to meet their burden, as they did not provide for an immediate revision to the competitive rules governing solicitation of projects, nor did they sufficiently take into account the commercial appetites of many of the companies with whom the HECO Companies would now be affiliated.
Finally, in dismissing the application, the PUC emphasized that it is not precluding the HECO Companies from seeking another partner, or from renewing discussions with NextEra.
As part of its decision, the PUC included a section that provides guidance on key elements that should serve as the foundation for future applications seeking a change of control of the HECO Companies.
Commissioner Gorak expressed his full support for this Decision and Order’s findings and conclusions.
In abstaining, he believes that the focus should be on the substance of the Decision and Order, as well as the HECO Companies’ path toward achieving the state’s renewable energy goals, and not on the concerns raised by some regarding his participation in the decision.
Since the Decision and Order has the support of the other two commissioners, his vote was not necessary.
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