Public Utilities Commission denies HECO-NextEra merger in 2-0 vote

Always Investigating

The biggest business deal in Hawaii history has been rejected.

The Public Utilities Commission voted 2-0 to deny the merger between HECO and NextEra.

NextEra had proposed a $4.3 billion takeover of the utility company that operates on Oahu, Maui and Hawaii Island. About a year and a half after the applicants filed for regulatory approval, the PUC dismissed the merger docket, saying NextEra did not show that the merger was in the public interest and that the benefits it offered were both inadequate and uncertain.

View the decision and order summary here (.pdf).

The full 410-page decision and order is posted here.

Gov. David Ige opposed the merger. He released a statement following the announcement:

“I want to thank the Public Utilities Commission and stakeholders for their participation in this historic process. This ruling gives us a chance to reset and refocus on our goal of achieving 100 percent renewable energy by 2045. The proceeding helped define the characteristics and parameters of Hawaii’s preferred energy future. We look forward to creating a process to find the best partner in the world.

“No matter who owns the company, the energy vision for Hawaii remains very clear – 100 percent renewable energy with a transformation to a customer-centered utility focusing on smart meters, smart grid, distributed local solutions, and as much consumer choice as possible.”

But the ruling might not be the end of it, and there are legal challenges possible. It’s not yet clear whether HECO or NextEra will walk away without a fight. They have a short window for an agency-level appeal.

HECO and NextEra released a joint statement saying only: “We are in receipt of today’s PUC order and are currently reviewing it.”

The applicants’ immediate option is to ask the PUC for a redo. “They have 10 days to file a motion for reconsideration if they choose to do so,” explained Del Won, PUC executive officer.

“Do you feel they can rectify that long list of things that were outstanding?” Always Investigating asked.

“I don’t know if they can or not,” Won said. “They put forth a huge case as you know, 95 commitments. I cannot speak for the commissioners. I don’t know if they would be able to correct the deficiencies found or not.”

They, or any of many other intervenors in the case, could also seek remedy in court.

Meanwhile a legal challenge has been filed over the legality of a utility commission appointment just weeks before the decision came out.

Former PUC staff attorney Tom Gorak helped draft the order that started circulating to commissioners in early May. Gov. Ige then moved him into a commissioner’s seat as an interim, without Senate approval, and critics of that said they’d be watching closely what impact Gorak had on the final decision.

In the end, Gorak recused himself from the vote and didn’t sign the order, and it was still 2-0 against the merger.

“Given the controversy surrounding this appointment, he just wanted to avoid all that. The fact the other two commissioners voted to dismiss the application made his decision unnecessary,” Won said.

KHON2 asked, “Does it therefore protect this decision from those grounds for potential legal challenge?”

“I’m not an attorney, I couldn’t make that opinion, but there is a 2-0 vote,” Won said. “There is a majority. The practical effect of whether or not he voted is zero.”

Gorak’s appointment and role at the agency won’t dodge all legal challenge though. Former PUC chairwoman Mina Morita filed suit Friday afternoon, shortly after Attorney General Doug Chin reaffirmed in a formal opinion that the governor’s choice was okay.

Morita’s lawyer, Mark Bennett, himself a former Hawaii attorney general, takes the opposite view.

“The rule of law is important. We believe Mr. Gorak assuming this office is contrary to the law,” Bennett said. “If Mr. Gorak is improperly filling this office, it calls into question every PUC decision in which he participates.”

In rejecting the merger, the PUC said HECO could still seek another partner or try to keep going with NextEra, laying out in its hundreds-of-pages-long decision “elements that should serve as the foundation for any future applications.”

“For those who may find this regulatory decision too onerous or somehow casting a dark cloud over Hawaii’s business climate, what would you say to that?” Always Investigating asked.

“The decision was very clear. This commission is not opposed to some entity acquiring HEI,” Won said. “Any other company that might be interested and theoretically approach HEI, I would think, would review this particular order and see what they need to do to obtain regulatory approval.”

The NextEra merger proposal has been pending since the end of 2014. HECO shareholders approved it over a year ago, but the PUC gets the final say and held weeks of public hearings on it last year.

During those hearings, concerns were raised about millions of dollars in costs that could be passed on to customers.

The following is an explanation from the PUC regarding its decision:

In considering the record, the two standards of review are whether the Applicants 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 Commission concluded that while the Applicants demonstrated that NextEra is fit, willing, and able to perform the services currently offered by the HECO Companies, the Applicants failed to demonstrate that the Application is reasonable and in the public interest. In reaching this conclusion, the Commission focused on five fundamental areas of concern: (1) benefits to ratepayers; (2) risks to ratepayers; (3) Applicants’ clean energy commitments; (4) the proposed Change of Control’s effect on local governance; and (5) the proposed Change of Control’s effect on competition in local energy markets.

First, the Commission 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 Commission 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 Commission 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, Applicants maintained that the proposed Change of Control would result in approximately $1 billion in State-wide benefits. The Commission observed that these calculations were based on assumptions and/or unrealistic expectations about the future that were vigorously challenged in the proceeding. Additionally, Applicants 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 Commission concluded that Applicants 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 Commission 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 Commission concluded that the ring-fencing measures proposed by the Applicants 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 Commission concluded that notwithstanding NextEra’s extensive management capabilities, experience, and finances, Applicants had failed to put forth near-term commitments for specific action tailored to Hawaii’s unique circumstances and clean energy goals. Rather, Applicants’ commitments were in the nature of providing “best efforts” and maintaining existing practices and standards. Additionally, the Commission noted Applicants’ lack of specific commitments relating to Distributed Energy Resources (“DER”), which runs contrary to Hawaii’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 Commission concluded that Applicants’ proposed commitments in this area were simply too broad and vague to be consistent with the public interest.

Fourth, the Commission concluded that while local regulatory control would not be diminished, Applicants had failed to adequately demonstrate how the proposed Change of Control would affect local governance. In particular, Applicants had failed to provide corporate governance documents that would allow the Commission to sufficiently analyze the roles, functions, and limitations of NextEra’s proposed local intermediary holding companies, Hawaiian Electric Holdings (“HEH”) and Hawaiian Electric Utility Holdings (“HEUH”), and the HECO Companies. Consequently, Applicants did not provide any details to reassure the Commission that the local interests of Hawaii would not suffer as a result of this change in corporate structure.

Fifth, the Commission concluded that Applicants 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 Commission concluded that additional safeguards would be necessary. In this regard, the Commission concluded that Applicants 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 Commission 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 Commission included a section that provides guidance on key elements that should serve as the foundation for any 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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