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BEFORE THE PUBLIC UTILITIES COMMISSION
OF THE STATE OF HAWAII
In the Matter of the Application of
MAUI ELECTRIC COMPANY, LIMITED
For Approval of Terminalling Agreement with Aloha Petroleum, Ltd. and to include the Contract Costs in Maui Electric Company, Limited's Energy Cost Adjustment Clause.
DOCKET NO. 2013-0083
DECISION AND ORDER NO. 3 19 2 5
APPROVING APPLICATION WITH MODIFICATIONS
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BEFORE THE PUBLIC UTILITIES COMMISSION
OF THE STATE OF HAWAII
In the Matter of the Application of
MAUI ELECTRIC COMPANY, LIMITED
For Approval of Terminalling Agreement with Aloha Petroleum, Ltd. and to include the Contract Costs in Maui Electric Company, Limited's Energy Cost Adjustment Clause.
Docket No. 2013-0083
Decision and Order 3 1 9 2 5
APPROVING APPLICATION WITH MODIFICATIONS
By this Decision and Order ("Order"), the commission
(1) approves, with modifications, the Terminalling Agreement
("New Terminalling Agreement") between the Maui Electric Company,
Limited ("MECO"), and Aloha Petroleum, Ltd. ("Aloha"), dated
December 5, 2012, and (2) approves for inclusion in MECO's Energy
Cost Adjustment Clause ("ECAC") the costs associated with the New
Terminalling Agreement for the receiving, storage, handling,
distribution, and tanker truck loading for Low Sulfur Diesel,
Ultra Low Sulfur Diesel, Biodiesel, or High Sulfur No. 2 Diesel
(collectively referred to as "Product") at Aloha's liquid fuel
products storage and terminalling facility to the extent that
these costs are not included in base rates.
I.
Procedural Background
On April 5, 2013, MECO filed its application and
supporting exhibits with the commission (collectively, the
"Application"), requesting approval of the New Terminalling
Agreement, as well as approval of its request to recover costs
associated with the new Agreement through its ECAC to the extent
they are not recovered through base rates. MECO served copies of
the Application on the Division of Consumer Advocacy of the
Department of Commerce and Consumer Affairs ("Consumer
Advocate").^ No other party moved to intervene in this docket.
On May 22, 2 013, the commission approved the parties'
stipulated procedural schedule which, among other things,
provided for the filing of a Statement of Position ("SOP") by the
Consumer Advocate, and a Reply Statement of Position ("Reply
SOP") , if necessary, by MECO.^ As to the latter, MECO was
permitted to file a Reply SOP if the Consumer Advocate objected
to approval of the Application, or requested that any approval be
made subject to conditions.^ Further, if substantial
^The Consumer Advocate is an ex officio party to this docket pursuant to Hawaii Revised Statute ("HRS") § 269-51 and Hawaii Administrative Rule ( 'HAR") § 6-61-62 (a)
^"Stipulated Procedural Order No. 31255, filed May 22, 2013 ("Order No. 31255"). The schedule also provided an opportunity for the parties to file information requests ("IRs").
^Order No. 31255 at 4, n.2.
2013-0083
disagreements remained following the filing of the SOPs, and the
differences could not be resolved by stipulation, the Parties
were directed to propose additional procedural steps, such as the
filing of briefs and/or proposed findings of fact and conclusions
of law for Commission approval."^
Pursuant to the procedural schedule, the Consumer
Advocate filed its SOP on September 13, 2013. As further
discussed herein, the Consumer Advocate does not object to
approval of the New Terminalling Agreement, but does not agree
that costs associated with the Agreement that are in excess of
the costs included in base rates should be recovered through
MECO's ECAC. On October 4, 2013, MECO filed its Reply SOP, in
which it maintained its position that the costs incurred under
the New Terminalling Agreement should be included in it's ECAC to
the extent that they are not recovered in base rates. No further
procedural steps were requested by either party.
Thereafter, on November 6, 2 013, the commission issued
IRs to both the Consumer Advocate and MECO. Both parties filed
their responses on November 22, 2013.
40rder No. 31255 at 4.
2013-0083
II.
Issues
As set forth in Order No. 31255, the issues to be
decided with respect to this Application are as follows:
1. Whether the New Terminalling Agreement between
MECO and Aloha is reasonable and should be
approved.
2. Whether the inclusion of costs associated with the
New Terminalling Agreement for the receiving,
storage, handling, distribution and tanker truck
loading of Product, in MECO's ECAC, to the extent
not included in base rates pursuant to HAR
§ 6-60-6, is reasonable and should be approved.
III.
MECO's Application
MECO is a corporation duly organized under the laws of
the Territory of Hawaii on or about April 28, 1921, and now
exists under and by virtue of the laws of the State of Hawaii.
MECO is a public utility engaged in the production, purchase,
transmission, distribution, and sale of electricity on the
islands of Maui, Lanai, and Molokai.
2013-0083
According to the Application, MECO currently stores
high sulfur No. 2 diesei fuel ("HSD") purchased from Chevron
Products Company, a Division of Chevron U.S.A. Inc. ("Chevron)
and Tesoro Hawaii Corporation ("Tesoro") at Aloha's liquid fuel
products storage and terminalling facility (the "Aloha
Terminal").^ When required, the HSD is transported by common
carrier from the Aloha Terminal to MECO's Maalaea Generating
Station.^ MECO states that the Aloha Terminal is a "vital part
of MECO's fuel supply chain.""'
MECO's use of the Aloha Terminal is currently governed
by. the terms of an assigned terminalling agreement (Contract
No. W-252), dated July 23, 1998, and executed on August 20, 1998
("Current Terminalling Agreement").^ As set forth in Exhibit B
^Application at 4-5.
^Application at 5.
''Application at 5.
^Application at 5. MECO explains that:
[t]he Current Terminalling Agreement was originally with Shell Oil Products US ("Shell"), which sold its Hawaii assets to Aloha on November 22, 2010. Shell subsequently assigned the Current Terminalling Agreement to Aloha with the consent of MECO. See October 14, 2010 Letter regarding Consent to Assignment, filed October 14, 2 010, in Docket No. 98-0407.
Application, Exhibit B at 1.
2013-0083
to the Application, on January 20, 2012, Aloha served MECO with a
Notice of Termination letter ("Notice of Termination") with an
effective date of August 31, 2012.^ Aloha stated that
termination of the Current Terminalling Agreement was necessary
because it was not able to obtain sufficient rate adjustments
under that Agreement. °
Negotiations between MECO and Aloha ensued, ultimately
resulting in the New Terminalling Agreement which is the subject
of this docket. ^ The key terms of the New Terminalling
Agreement, as designated by MECO, are set forth below.
Term. The New Terminalling Agreement will become
effective on the "Effective Date" for an "Initial Term" of
seven (7) years. ^ The Agreement will automatically continue
after the Initial Term for one (1) year extension periods,
until terminated upon notification by either party at least
three hundred sixty-five (365) days before the end of the Initial
^Application, Exhibit B at 1. A copy of the Notice of Termination is included in Exhibit B as Attachment 1.
^f^Application, Exhibit B at 1.
^ The New Terminalling Agreement is attached to the Application as Exhibit A.
^^Application at 6. The "Effective Date" occurs when MECO receives commission approval and MECO notifies Aloha that MECO deems the Commission Approval Order to be reasonable and in a final form. Application, Exhibit A at 5 (Section 4.3).
2013-0083
Term or the Extension. ^ MECO is currently operating under
successive one (1) year extensions of the Current Terminalling
Agreement. "
Terminalling Services. As described by MECO, the New
Terminalling Agreement provides for marine barge delivery
receipts of Product into the -Aloha Terminal:
Aloha will operate and maintain the Aloha Terminal, provide the necessary services for barge deliveries. Product storage, and provide truck loading services. In addition. Aloha is responsible for ensuring regulatory compliance, including but not limited to, activities under the jurisdiction of the United States Coast Guard, Environmental Protection Agency and the State of Hawaii Department of Health, ^
These services are essentially the same as those
provided by Aloha under the Current Terminalling Agreement and
include, but are not limited to, the necessary support to receive
barge deliveries and to operate and maintain the Aloha Terminal
and the truck loading facilities, 24/7 access for the receipt
and/or delivery of the Product, and responsibility for regulatory
^^Application at 6.
^'^Application, Exhibit C at 1
^^Application at 6.
2013-0083
compliance.1^ The total storage capacity under the New
Terminalling Agreement remains unchanged.^''
The Current Terminalling Agreement only permits
terminalling of HSD, while the New Terminalling Agreement
provides for terminalling of all Product, i.e., either Low Sulfur
Diesel ("LSD"), Ultra Low Sulfur Diesel ("ULSD"), Biodiesel, or
HSD. IS
Rates and Pricing. The rates under the New
Terminalling Agreement have been modified from the Current
Terminalling Agreement by separating the base rate from the other
pricing components in order to show operational expenses. ^ The
rates under the New Terminalling Agreement are higher than the
rates under the Current Terminalling Agreement as a result of
inflation and the need to upgrade the facility to comply with
current governmental regulations, such as the inclusion of spill
prevention measures. ° MECO further asserts that, during
negotiations. Aloha maintained its position that the New
^^Application, Exhibit C at 2.
^•'Application, Exhibit C at 2.
^^Application, Exhibit C at 2.
^^Application at 6. Sample Rate and Annual Cost Calculations for each year of the New Terminalling Agreement are attached as Exhibit E to the Application. Id. See also Exhibits B and C for additional discussion on Throughput Fee Adjustments. Id.
^^Application at 7.
2013-0083 8
Terminalling Agreement should "accurately reflect the changes
made and the cost increases that have occurred" since the
approval of the Current Terminalling Agreement by the commission
in 1999."21
While the pricing terms have been filed under
confidential seal, according to MECO, if the New Terminalling
Agreement is approved, a typical residential customer would see
an increase in their electric bill of approximately $0.82 per
month. 22 This is equivalent to an increase of approximately 0.4%
to the typical residential bill for MECO customers.^3
Volumes. The Current Terminalling Agreement has both
minimum and maximum volume restrictions. The New Terminalling
Agreement has minimum volume restrictions, but no maximum volume
restrictions; however, there is a maximum limit on fuel that may
be stored at any one time. '*
Section 3.4 of the New Terminalling Agreement states
that MECO may, pursuant to the terms specified in the Agreement,
make a one-time election to reduce the minimum annual throughput
at certain times by providing prior written notice to Aloha of
^^Application at 7.
22Application at 7. MECO uses 600 kWh as the monthly consumption for a typical residential bill. Id. at n. 2.
^^Application at 7. Exhibit F of the Application sets forth the Residential Bill Impact Calculations.
^^Application, Exhibit C at 3.
2013-0083
MECO'S decision to reduce the minimum annual throughput
required.25 Such action, when effective, triggers a change in
pricing, s
IV.
The Consumer Advocate's Position
On September 13, 2013, the Consumer Advocate filed its
SOP. The Consumer Advocate's SOP ("CA SOP") addresses both
issues set for decision in this docket.
A. Whether The New Terminalling Agreement Is Reasonable And Should Be Approved.
As previously noted, the Consumer Advocate takes issue
with MECO's request to include within its ECAC any costs
associated with the New Terminalling Agreement that are not
recovered through base rates; this issue is discussed in the
following section of this Order. However, the Consumer Advocate
observes that the commission may not agree with this position,
and thus offers its views on the first issue - whether the New
Terminalling Agreement between MECO and Aloha is reasonable and
should be approved - based on the presumption that "the
25Application, Exhibit C at 3
26Application, Exhibit C at 4
2013-0083 10
Commission may allow MECO to continue using the ECAC to recover
terminalling costs. "2"'
The Consumer Advocate states that, in light of the
information provided by MECO in this docket, MECO still requires
the services provided by Aloha to maintain its level of service
in MECO's service territories.^^ In support of this conclusion,
the Consumer Advocates observes, among other things, that:
• The New Terminalling Agreement with Aloha provides the same services to MECO as it would have received under the Current Terminalling Agreement;
• The total storage capacity under the New Terminalling Agreement remains unchanged;
• Aloha will continue to provide necessary support to receive barge deliveries of Product, and to operate and maintain the Aloha Terminal and truck loading facilities;
• Aloha will continue to provide access 24 hours a day, seven (7) days a week, including holidays, for the receipt and/or delivery of Product via truck, marine vessel, and pipeline;
• Aloha will maintain responsibility for regulatory compliance;
• MECO does not have sufficient on-site storage capacity available to accommodate the volumes of diesei fuel necessary for use at the Maalaea Power Plant;
• MECO's arrangement with Aloha is necessary to ensure a continuous, reliable fuel supply for MECO's operations in its service territories; and
•'CA SOP at 7.
2SCA SOP at 14 .
2013-0083 11
• MECO does not have its own storage facilities in Kahului Harbor, and besides Chevron Products Company (which lacks capacity) and Tesoro Hawaii Corporation (which is restricted to ULSD), there are no other fuel terminals for MECO's potential use in receiving bulk fuel shipments delivered by barge from Oahu.29
With respect to the term, insurance provisions,
volumes, and nature of fuel products, the Consumer Advocate
concludes that those terms, as amended in the New Terminalling
Agreement with Aloha, are necessary for MECO to conduct its
operations in its service territories.^°
For example, as noted by MECO in the Company's responses to CA-IR-5 and CA-SIR-3 in this docket, the term and volume requirements included in the [New] Terminalling Agreement with Aloha were reached after an arms-length negotiation conducted between the two (2) parties in this instance and accounted for MECO's operational needs during the duration when the [New] Terminalling Agreement would be in effect with respect to MECO. Furthermore, the change in the number of different fuel products handled under the [New] Terminalling Agreement with Aloha provides MECO with the flexibility to change fuel products stored at Aloha's facilities depending upon the operational needs of MECO. ^
Notwithstanding this conclusion, the Consumer Advocate
states that it has "remaining questions" concerning these issues.
29CA SOP at 13-14, citing, among other things. Application, Exhibit C, and responses to CA-IR-2 and CA-SIR-1.
30CA SOP at 15.
31CA SOP a t 15 ( f o o t n o t e o m i t t e d ) .
2013-0083 12
These include a desire for more clarity related to both the
timing of generation mix and the needed fuel storage capacity
over the next five to seven years, which the Consumer Advocate
believes would assist it in evaluating whether the New
Terminalling Agreement reflects reasonable terms and
conditions. ^
With respect to price, the Consumer Advocate concludes
that the price may be higher than what MECO would have paid had
the Current Terminalling Agreement remained in effect past the
date when Aloha requested that the Agreement be terminated. ^
However, the Consumer Advocate further observes that the increase
in rates connected to MECO's use of services under the New
Terminalling Agreement with Aloha should be minimal.^'^
In addition, the Consumer Advocate states that, in
response to CA-SIR-4, MECO asserted that it was reasonable to pay
for Aloha's EPA-required upgrades because "MECO is the sole
tenant and user of Aloha's facilities with respect to the
terminalling and storage of fuel products at the Aloha
Terminal."^^ The Consumer Advocate states that while the
calculated bill impact related to this issue is relatively low,
32CA SOP at 15.
33CA SOP at 15.
34CA SOP at 15.
35CA SOP at 16.
2013-0083 13
there are issues with respect to the transference of all risk and
costs associated with the upgrades of the terminalling
infrastructure to ratepayers. ^
While Aloha remains responsible for complying with all relevant laws, rules, and regulations covering the operations of its facilities in Kahului, Maui, the Consumer Advocate does note that MECO is the sole tenant and user of Aloha's facilities in Kahului, Maui, and that MECO requires the services provided by Aloha under the [New] Terminalling Agreement because MECO does not have adequate storage capacity to accommodate the volumes of fuel inventoried for the Company's use at its Maalaea Power Plant on Maui. As noted by MECO in its response to CA-SlR-3 issued in this docket, separate consideration of Aloha's EPA-required upgrades to its facilities in Kahului, Maui, allowed MECO to understand and, in some respects, select the solution used by Aloha to ensure its compliance with the relevant EPA regulations in this instance. Furthermore, as suggested by the Company in its response to CA-IR-18 issued in this docket, payments made to Aloha pursuant to... the [New] Terminalling Agreement allows Aloha to keep its facilities operational such that Aloha can continue to provide services to MECO uninterrupted during the duration of the [New] Terminalling Agreement dated December 5, 2012. '
The Consumer Advocate concludes:
Thus, for the reasons stated above, if the Commission will allow MECO to use the ECAC for recovering the terminalling costs not already reflected in base rates, the Consumer Advocate will not object to a Commission
36CA SOP at 16.
•'CA SOP at 16-17 (footnotes omitted) .
2013-0083 14
finding that the proposed agreement appears reasonable, where the terms and conditions included in the [New] Terminalling Agreement with Aloha appear reasonable, prudent, and in the public interest. ^
B. Whether The Inclusion Of Costs Associated With The New Terminalling Agreement In MECO's ECAC, To The Extent Not Included In Base Rates Pursuant To HAR § 6-60-6, Is Reasonable And Should Be Approved.
As previously noted, the Consumer Advocate states that
MECO has not supported the reasonableness of including the costs
of the New Terminalling Agreement in MECO's ECAC to the extent
that such costs are not recovered in base rates. However, the
Consumer Advocate also concedes that "it has not objected to the
inclusion in the past and that the Commission has previously
permitted MECO to include the costs associated with [the Current
Terminalling Agreement], in MECO's ECAC to the extent that such
costs were not already recovered in the Company's base rates."^^
Nevertheless, the Consumer Advocate now contends that "it is
appropriate to review whether the inclusion of such costs is
reasonable and consistent with the general regulatory principles
that support the recovery of costs through . an adjustment
clause, "•'o
38CA SOP a t 1 7 .
39CA SOP a t 4 .
"OCA SOP a t 4 .
2 0 1 3 - 0 0 8 3 15
The Consumer Advocate recognizes that HAR § 6-60-6(2)
provides, in part, that, no changes in fuel cost may be included
in a fuel adjustment clause unless the contracts or prices for
the purchase of such fuel have been previously approved or filed
with the commission.**! However, the Consumer Advocate further
contends that it is generally recognized that the use of
adjustment clauses to recover a particular type of expense is a
form of single-issue ratemaking, and that single-issue ratemaking
should be generally avoided unless unusual situations exist. •'2
In the Consumer Advocate's view, the commission has authorized
the use of adjustment clauses where (1) the expense in question
is significant in nature such that, in the absence of an
adjustment clause, the utility would either face substantial risk
due to the lack of opportunity to timely recover the costs in
question and (2) the costs in question reflect sufficient
volatility such that the utility company cannot rely on
traditional rate proceedings to recover those changes in costs,
and that the costs and changes in cost are not within the control
of the utility.^3
"iCA SOP at 4 .
2CA SOP at 4.
- CA SOP at 4-5, citing Docket No. 99-0008, "Decision and Order No. 19016," filed on November 15, 2001, and Docket No. 05-0302, "Decision and Order No. 22154," filed on December 5, 2005.
2013-0083 16
Applying these two standards, the Consumer Advocate
concludes that the costs associated with the New Terminalling
Agreement are "not significant," and that "while there is some
volatility, that volatility is not that significant in terms of
both percentage and overall magnitude to warrant the use of an
adjustment clause. "''''
Thus, the Consumer Advocate concludes:
The Consumer Advocate contends that a reasonable, normalized estimate of these terminalling charges can and has been included when setting base rates and that, absent a showing that the actual costs reflect significant volatility and magnitude such that without recovery through a surcharge, unreasonable risk is placed either on the company or customers, the Commission should not allow the recovery of the terminalling costs through the ECAC. Therefore, even though past decisions have allowed the terminalling costs to be recovered, the Consumer Advocate contends that the practice should not be allowed to continue.'*5
^ CA SOP at 6.
" CA SOP at 6.
2013-0083 17
V.
MECO's Position
On October 4, 2013, MECO filed its Reply SOP. MECO's
Reply SOP ("CA SOP") addresses both issues set for decision in
this docket.
A. Whether The New Terminalling Agreement Is Reasonable And Should Be Approved.
With respect to this issue, MECO stated that, in its
Application, it had fully explained and described the need for
Aloha's terminalling services and why it entered into the New
Terminalling Agreement."*^ In response to the Consumer Advocate's
SOP, MECO observed:
The Consumer Advocate did not raise any substantial issues with respect to the agreement itself, and in fact, concluded that: (1) Maui Electric still requires the services provided by Aloha under the New Terminalling Agreement to maintain its level of service in Maui Electric's service territories; (2) the conditions, as amended in the New Terminalling Agreement with Aloha, meet the needs of Maui Electric for its operations in its service territories; and (3) the terms and conditions included in the New Terminalling Agreement appear reasonable, prudent, and in the public interest. More specifically, the Consumer Advocate explicitly recognized that Maui Electric "requires the services provided by Aloha under the [New] Terminalling Agreement because [Maui Electric] does not have adequate storage capacity to accommodate the
'' MECO Reply SOP at 5.
2013-0083 18
volumes of fuel inventoried for the Company's use at its Maalaea Power Plant on Maui."'*''
MECO reiterated that the Aloha Terminal is "an integral
and vital component of Maui Electric's fuel supply chain," that
provides "dedicated and segregated storage of HSD," and that
"there are no other existing storage facilities at Kahului Harbor
that are capable of meeting Maui Electric's large HSD volume
requirements. " ^
MECO concludes:
The Consumer Advocate did not object to approval of the agreement and specifically recognized that Maui Electric's arrangement with Aloha is necessary for Maui Electric to ensure continuous, reliable electric service to its customers. Accordingly, the New Terminalling Agreement with Aloha is reasonable, necessary and in the public interest, and therefore, should be approved. "
B. Whether The Inclusion Of Costs Associated With The New Terminalling Agreement In MECO's ECAC, To The Extent Not Included In Base Rates Pursuant To HAR § 6-60-6, Is Reasonable And Should Be Approved.
Citing HAR § 6-60-6(2) for the same proposition as the
Consumer Advocate, MECO states that it has "duly complied" with
the provisions of that section. In MECO's view, under this
"MECO Reply SOP at 5.
48MECO Reply SOP at 5 (footnotes omitted!
"SMECO Reply SOP at 6.
2013-0083 19
section, the commission is required to review the reasonableness
of fuel-related contracts, but, if any such contract is so
approved, the costs incurred under the contract should be
included the ECAC^o
In support of its position, MECO observes, among other
things, that:
• Terminalling costs in general, as well as the costs in question, have historically been included in the ECAC to the extent they are not included in base rates, pursuant to HAR § 6-60-6(2);
• MECO's past five terminalling agreements with Shell or with Aloha, including the [Current Terminalling Agreement], were supported by the Consumer Advocate and approved by the Commission;
• The Current Terminalling Agreement, which governs the storage and terminalling of MECO's fuel product at the Aloha Terminal involves the same type of costs in question here and was found by the Commission to be reasonable, and the associated costs were included in MECO's ECAC, to the extent they were not included in base rates;
• It would be inconsistent with prior practice and unreasonable to now disallow the inclusion of these same types of costs in the ECAC;
• Fuel costs, as well as the related transportation and terminalling costs, are integral fuel-related elements that are appropriate for inclusion in the ECAC, to the extent they are not included in base rates;
• Fuel costs represent a large portion of MECO's expenses and price levels are largely beyond MECO's control;
50MECO Reply SOP at 6.
2013-0083 20
• The ECAC allows for more timely recovery of fuel and purchased energy costs, helps to preserve MECO's financial integrity, and reduce its business risk profile;
• "The ECAC bene f i t s the Company and its shareholders by: (1) limiting the swings in cash flow and earnings; (2) reducing the cost of capital; (3) improving the Company's ability to earn a fair return on investor capital, and (4) providing a more timely recovery of fuel and purchased energy costs";
• Use of the ECAC reduces MECO's financial risk and lowers the cost of capital; the resulting savings are passed on to customers through lower base rates in rate case proceedings; and
• The ECAC passes through to customer savings incurred when fuel prices fall below the prices embedded in base rates, just as it passes through to the Company additional costs when fuel prices are above the embedded fuel prices. ^
MECO also states that whether MECO should have an ECAC
is not an issue in this proceeding, and that issues relating to
the manner in which a utility recovers its energy costs, or the
structure of an ECAC, have traditionally been addressed in a rate
case proceeding, not a proceeding requesting approval of a
51MEC0 Reply SOP at 6-10, citing Docket No. 7977, "Decision and Order No. 13405," filed on July 28, 1994; Docket No. 94-0361, "Decision and Order No. 13 7 05," filed on December 29, 1994; Docket No. 95-0386, "Decision and Order No. 14437," filed on December 29, 1995; Docket No. 97-0151, "Decision and Order No. 1564 3," filed on June 12, 19 97; and Docket No. 98-0407, "Decision and Order No. 1712 5," filed on August 23, 1999 (the Current Terminalling Agreement was approved in this docket).
2013-0083 21
fuel-related contract. 2 MECO further observes that its present
ECAC was approved in its last base rate case.^^
MECO also takes issue with the Consumer Advocate's
reference to the orders in Docket Nos. 99-000 and Docket
No. 05-0302 as a basis to exclude costs under the New
Terminalling Agreement from inclusion in the ECAC. According to
MECO, "[tjhese decisions do not relate to requests for inclusion
of costs in an established ECAC mechanism, but instead, relate to
a request for deferral of costs and to establish a fuel price
adjustment mechanism, respectively, and are distinguishable."^^
As to the Consumer Advocate's argument that MECO's
request here is tantamount to single-issue ratemaking, MECO
states that "[a]utomatic adjustment clauses, by design and
intent, are exceptions to the so-called 'single-issue ratemaking'
concept. "5^ MECO adds that "[i]t is not appropriate to
52MEC0 Reply SOP at 10.
"MECO Reply SOP at 10, citing Docket No. 2011-00 92, "Decision and Order No. 31288" at 125-26, May 31, 2013.
54MECO Reply SOP at 11, stating that these two orders, respectively, deal with Y2K costs and with Young Brothers, Limited's request to amend its tariff to impose a fuel price adjustment mechanism for its.water carrier transportation service that would allow YB to automatically increase or decrease its rates to reflect changes in YB's costs for diesei fuel outside of a base rate case. According to MECO, these are distinguishable because here, MECO wants to include fuel related costs in a previously-approved and established fuel adjustment mechanism. Id. at fn. 17.
"MECO Reply SOP at 12.
2013-0083 22
characterize the continued use of an existing Commission approved
cost recovery mechanism, such as Maui Electric's ECAC, as
'single-issue ratemaking.'"^^
Moreover, MECO contends that excluding the terminalling
costs in question from the ECAC would be contrary to the "fair
return" provision in HRS § 269-16 (b) (3) . " MECO also asserts
that the costs in question are both significant and volatile, and
that the Consumer Advocate's calculations are incorrect. ^
Finally, MECO states that the "practical effect of the
Consumer Advocate' s position" is that "MECO will not be able to
request recovery of the costs incurred under the New Terminalling
Agreement until the Company's next rate case."^^
If the Commission does not allow the costs of new terminalling agreements between rate cases to be included in the ECAC, the costs of fuel terminalling in a rate case would need to include the normalized level of terminalling costs estimated to be incurred during the period the base rates established in a rate case are expected to be in effect. It should be noted, however, that because terminalling costs will vary with the volume of fuel handled, by the terminal facility, a normalized level of terminalling costs would need to be estimated, and could result in an over or under estimate of the terminalling costs. This would add additional complexity
56MECO Reply SOP at 12 .
57MEC0 Reply SOP at 13-14.
"MECO Reply SOP at 15-17.
59MECO Reply SOP at 17.
2013-0083 23
and potential contention for another issue in a rate case proceeding in determining the appropriate level of costs to be included in base rates. Customers' base rates may be higher or lower than the actual terminalling cost incurred. The historic and present practice of including terminalling costs in the ECAC to the extent that they are not included in base rates is better for the customer, because the ECAC will adjust the recovery of terminalling costs from customers to more closely align with the actual fuel terminalling expenses incurred. The continued use of the ECAC to recover the actual terminalling costs to the extent not included in base rates will help to preclude there being a "winner" or "loser" as may be the case, if an estimated normalized level of these costs were to be included in a rate case test year estimate. °
MECO concludes that it should be allowed to include the
costs associated with the New Terminalling Agreement, and the
related revenue taxes, in its ECAC, to the extent such costs are
not recovered in base rates.^^
fiOMECO Reply SOP at 17-18.
61MEC0 Reply SOP at 18.
2013-0083 24
VI.
Findings and Conclusions
A. Issue No. 1 - Whether The New Terminalling Agreement Between MECO And Aloha Is Reasonable And Should Be Approved.
Based on a review of the entire record, the commission
finds and concludes as follows:
1. MECO currently stores high sulfur No. 2 diesei
fuel or HSD purchased from Chevron and Tesoro at Aloha's liquid
fuel products storage and terminalling facility, i.e., the Aloha
Terminal. When required, the HSD is transported by common
carrier from the Aloha Terminal to MECO's Maalaea Generating
Station.
2. The terminalling services provided under the
Current Terminalling Agreement are and continue to be necessary
to MECO's utility operations so as to maintain its level of
service in MECO's service territories. The New Terminalling
Agreement with Aloha will essentially provide MECO with the same
services as it currently receives from Aloha, albeit at a higher
rate and with some changes in terms, such as the option to reduce
overall volumes. The commission further observes that the
Consumer Advocate agrees that MECO still requires these services
from Aloha.
2013-0083 25
3. Based on MECO's statements in its Application,
MECO does not have sufficient on-site storage capacity available
to accommodate the volumes of diesei fuel necessary for use at
the Maalaea Power Plant.
4. Based on MECO's statements in its Application,
MECO does not have its own storage facilities at Kahului Harbor.
Other than the Aloha Terminal, the only fuel terminals which
might be available to receive bulk fuel shipments delivered by
barge for MECO are Chevron and Tesoro. While MECO purchases fuel
from Chevron and Tesoro, neither is able to provide terminalling
service similar to Aloha.
Chevron does not have additional storage capacity at
its Kahului terminalling facility for MECO's HSD (although it
currently provides some HSD storage for MECO). Tesoro's Kahului
terminalling facility is restricted to only ultra low sulfur
diesei ("USLD"), which MECO states is of a different grade than
MECO's HSD. Moreover, according to MECO, due to environmental
regulations regarding sulfur content and because MECO's HSD has a
higher sulfur content, it cannot be commingled with the ULSD at
Tesoro's terminal.
Finally, the commission observes that, in its
Application, MECO stated that it has evaluated the potential to
develop its own fuel terminal, but ultimately determined that the
price of the land was too high {in excess of 60% higher than the
2013-0083 26
upper bound of MECO's appraisal) and the estimated construction
time would have required MECO to negotiate a concurrent, but
shorter agreement with Aloha, which was not receptive to this
proposition. 2
Thus, based on MECO's statements, there are no other
existing storage facilities located in the Kahului Harbor capable
of meeting MECO's large HSD volume requirements. The total
storage capacity under the Current Terminalling Agreement remains
unchanged in the New Terminalling Agreement.
5. Among other things, as recognized by both parties,
the New Terminalling Agreement provides a number of necessary
and/or desirable services, including (1) the necessary support to
receive barge deliveries of fuel, and to operate and maintain the
Aloha Terminal and truck loading facilities; (2) access 24 hours
a day, seven (7) days a week, including holidays, for the receipt
and/or delivery of Product via truck, marine vessel, and
pipeline; and (3) the responsibility for regulatory compliance.
6. There is a minimum annual throughput requirement
under the New Terminalling Agreement. However, as specified
under the terms of the Agreement, MECO has a one-time option to
reduce the minimum annual throughput volume in certain years by
^2Application, Exhibit B at 7
2013-0083 27
providing 180 days written notice. ^ If this option is
exercised, the rate will be adjusted and made effective as of the
date the minimum annual throughput requirement is reduced in
accordance with the terms of the Agreement.
7. In reviewing the New Terminalling Agreement,
commission staff noted certain concerns with Section 3.5, and
requested additional information from MECO on this section by way
of an information request, PUC-MECO-IR-1. While this material is
subject to confidential seal, MECO and Aloha have agreed to add
certain clarifying language to this Section. '*
8. AS discussed above, the pricing terms have been
filed under confidential seal. However, according to MECO, if
the New Terminalling Agreement is approved, a typical residential
customer would see an increase in their electric bill of
approximately $0.82 per month. Further, as the Consumer Advocate
recognizes, even though the prices under the New Terminalling
Agreement are higher than the Current Terminalling Agreement, the
^^Application, Exhibit C at 3.
s See MECO Response to PUC-MECO-IR-1.c: "If the Commission were to require an amendment to Section 3.5 of the New Terminalling Agreement as a condition to Commission approval of the New Terminalling Agreement, then the Company and Aloha would agree to submit the proposed language set forth in the Company's response to subpart b. above as an amendment to the New Terminalling Agreement. Attachment A to this response is a confidential letter from Aloha, dated November 12, 2013, further describing Aloha's position."
2013-0083 28
increase to the typical customer bill of 600 kilowatt hours is
minimal, approximately 0.4%.
9. The Consumer Advocate stated that it "will not
object to a Commission finding that the proposed agreement
appears reasonable, where the terms and conditions included in
the Terminal Agreement with Aloha appear reasonable, prudent and
in the public interest."^^ The Consumer Advocate further states
that it does not object to any of the terms and conditions of the
Terminalling Agreement at this time.^^ This conclusion is
subj ect to the Consumer Advocate's concerns regarding the
recovery of costs through the ECAC, which are addressed below.
10. Based on these findings, as well as the general
agreement of the parties, the commission concludes that the New
Terminalling Agreement is necessary for continued uninterrupted
fuel supply to MECO's generation facilities. Thus, the
commission concludes that, with the modification set forth
herein, the New Terminalling Agreement is reasonable and is,
therefore, approved. MECO is directed to modify the Agreement
to MECO clarify the language in Section 3.5 as discussed herein.
11. Finally, in PUC-MECO-IR-3, the commission asked
MECO to provide any evaluation, effort, or analysis that MECO
escA SOP at 17.
6«CA SOP at 18.
2013-0083 29
has performed in order to make commensurate operational or other
business changes that could help to mitigate the expected bill
increase to its customers (i.e., more efficient fuel use, etc.).
In response, MECO references a number of actions taken
over the period from 2008-2013 which "were estimated to reduce
the monthly bill for a Maui residential customer who uses
600 kWh by an estimated $1.85 per month on average for 2014
through 2018." These actions generally focus on operational
changes such as cycling the Kl and K2 units at the Kahului Power
Plant on alternating days, utilizing BESS for a portion of
up-reserve and down-reserve, and lowering minimum load at K3 and
K4 .
MECO also states that, in the future, it plans to take
a number of additional actions that will result in additional
incremental savings of $0.60 to $0.87 a month on average for
2014 through 2018. These actions include, among other things,
deactivation of units K3 and K4, and changing the regulatory
reserve policy. MECO also observes that most of the savings
will come from a net reduction of total fuel and purchased
energy costs, which generally are flowed through to customers
through the ECAC.
The commission observes that these actions, while
beneficial to ratepayers, are not directly responsive to the
information request. The information request specifically asked
2013-0083 30
what actions were taken during, or concurrently with, the
negotiations for the New Terminalling Agreement to mitigate or
eliminate the $0.82 per month increase that is expected to
result. Stated differently, during the period in which MECO was
negotiating the New Terminalling Agreement, MECO does not appear
to have directly assessed whether any changes to its business
practices generally, or its operations specifically related to
terminalling, such as whether the services provided by Aloha
could be used to reduce MECO's direct labor costs or other
expenses, could offset the potential rate increase.
The commission will, in response to the System
Improvement and Curtailment Reduction Plan filed by MECO on
September 3, 2013, in Docket No. 2011-0092, and referenced by
MECO in its response to PUC-MECO-IR-3, further address these and
related issues pertaining to power supply and fuel curtailment.
Approval of the New Terminalling Agreement does not constitute
approval of any future plans discussed by MECO in response to
the commission's information request here.
2013-0083 31
B. Issue No. 2 - Whether The Inclusion Of Costs Associated With The New Terminalling Agreement In MECO's ECAC, To The Extent Not Included In Base Rates Pursuant To HAR § 6-60-6, Is Reasonable And Should Be Approved.
Based on a review of the entire record, the commission
finds and concludes as follows:
1. MECO has requested that the commission authorize
it to include costs associated with the New Terminalling
Agreement in MECO's ECAC to the extent they are not recovered in
base rates.
2. The Consumer Advocate, as discussed herein,
objects to this proposal for two related reasons: (a) use of
adjustment clauses to recover a particular type of expense is a
form of single-issue ratemaking, and single-issue ratemaking
should be generally avoided unless unusual situations exist; and
(b) adjustment clauses should be utilized only where the expense
in question is significant and demonstrates volatility. The
Consumer Advocate also apparently takes issue adjustment clauses
in general, arguing that it "has growing concerns with the
increasing requests by regulated companies for adjustment
mechanisms to recover costs or investments outside of a rate
proceeding. "''
''Consumer Advocate response to PUC-CA-IR-2 .b
2013-0083 32
3. HAR § 6-60-6(2) provides:
No changes in fuel and purchased energy costs may be included in the fuel adjustment clause unless the contracts or prices for the purchase of such fuel or energy have been previously approved or filed with the commission.
4. Despite its request here, the Consumer Advocate
concedes that "it has not objected" to the inclusion of costs
associated with the Current Terminalling Agreement in the ECAC
in the past, and that the Commission has previously permitted
MECO to include such costs in MECO's ECAC to the extent that
such costs were not already recovered in the Company's base
rates, s
In PUC-CA-IR-2, filed on November 6, 2013, the
commission asked the Consumer Advocate if it "dispute[d] MECO's
[] statement that the Consumer Advocate supported including
terminalling costs in MECO's ECAC in the past five terminalling
agreements." The Consumer Advocate responded that it "has not
objected to the inclusion of terminalling agreement costs in the
past," although it went on to state that it "has growing
concerns with the increasing requests by regulated companies for
adjustment mechanisms to recover costs or investments outside of
a rate proceeding."
68CA SOP at 4 .
2013-0083 33
5. In response to the Consumer Advocate's claim that
the ECAC is a form of a single-issue ratemaking that should be
generally avoided unless unusual situations exist, the
commission observes that the ECAC could be viewed as a form of
single issue ratemaking. However, the use of an ECAC is
specifically authorized under HRS § 269-16(g), which requires
that any such clause be designed so as to fairly apportion the
risk of changes in fuel costs between a utility and its
customers and to provide a utility with an incentive to manage
and/or lower its fuel costs. Likewise, HAR § 6-60-6 provides
that a utility's rate schedules may include automatic rate
adjustment clauses if such clauses have been previously approved
by the commission.
MECO's ECAC was reviewed and approved by the
commission pursuant to these standards in MECO's most recent
base rate case:
Here, based on the record and consistent with the commission's determinations in prior rate cases involving the HECO Companies, the commission will allow MECO's existing ECAC design to continue at this time. Nonetheless, the commission reminds MECO that the interest of customers must be protected in order for shareholders' interests to continue to be protected under MECO's current ECAC design.^^
^^Docket No. 2011-0092, "Decision and Order No. 312 88" at 125-26, May 31, 2013 (footnotes omitted). Order No. 31288 further notes that " [b]ased on its evaluation of MECO's ECAC under HRS § 269-16(g), the Consumer Advocate does not object to
2013-0083 34
This conclusion, coupled with the fact that the costs
associated with the Current Terminalling Agreement that are not
recovered through base rates have been previously included in
the ECAC without objection from the Consumer Advocate, provide
sufficient justification to continue to permit MECO to recover
such costs as they are incurred under the New Terminalling
Agreement. Whether or not the ECAC is considered to be a form a
single issue ratemaking, it is a mechanism that is permitted by
both statute and administrative rule, and it has been
specifically reviewed and approved by the commission in MECO's
most recent base rate case. Moreover, by proceeding in this
fashion, the recovery of terminalling costs from customers
should be more closely aligned with the actual fuel terminalling
expenses incurred.
6. Similar conclusions can be drawn with respect to
the Consumer Advocate's arguments that in order to qualify for
recovery under an automatic adjustment clause, costs must be
both significant and volatile. Neither of these standards is
specifically set forth as a requirement for utilization of an
automatic fuel adjustment clause pursuant to HRS § 269-16 (g) or
the continuation of MECO's ECAC, and contends that MECO's ECAC 'provides a fair sharing of the risks of fuel costs changes between the Company and its ratepayers in a manner that preserves the financial integrity of the Company without the need for frequent rate filings.'" Id.
2013-0083 35
HAR § 6-60-6.''° Furthermore, as discussed above, the Consumer
Advocate has not objected to the inclusion of costs associated
with terminalling under the Current Terminalling Agreement.
7. The commission finds that any change to MECO's
ECAC is more appropriately addressed in a base rate proceeding.
In PUC-CA-IR-1, filed on November 6, 2 013, the commission asked
the Consumer Advocate whether or not it agreed that "it would be
reasonable for the Commission to review the issue of recovery of
terminalling costs through the ECAC in the Company's next rate
case." In its November 22, 2013 response, the Consumer Advocate
stated that "[i]f the Commission's preference is to review the
issue of recovery of terminalling costs through the ECAC in the
Company's next rate proceeding, the Consumer Advocate would not
object."
The Consumer Advocate is encouraged to raise the issue
of the recovery of terminalling - as well as other - costs
through the ECAC in MECO's nexit base rate case. HRS § 269(g)(2)
•'OHRS § 269-16 (g) states that an automatic fuel adjustment clause shall be designed, as determined by the commission, in its discretion, to address five specific factors. One such factor is that the clause should allow a public utility to "mitigate the risk of sudden or frequent fuel cost changes that cannot otherwise be reasonably mitigated through other commercially available means, such as through fuel hedging contracts." HRS § 269-16(g)(3). Thus, a fuel adjustment clause is designed to address volatility. However, it is not necessary for such volatility to always exist in order for a utility to utilize such a clause as the clause serves other purposes, such as risk sharing and incentivizing a utility to lower its fuel costs.
2013-0083 36
states, among other things, that automatic fuel rate adjustment
clauses such as the ECAC should "[p]rovide the public utility
with sufficient incentive to reasonably manage or lower its fuel
costs." In the commission's view, the concerns expressed by the
Consumer Advocate here go directly to the question of whether
MECO's ECAC provides the proper incentives to MECO to
proactively manage its fuel costs - including the terminalling
costs at issue here - so as to minimize those costs for the
benefit of ratepayers.
8. More generally, the commission understands the
Consumer Advocate' s concerns, as expressed in response to
PUC-CA-IR-2.b, with the increasing requests by regulated
utilities for adjustment mechanisms to recover costs or
investments outside of a rate proceeding. Those concerns can,
and should, be brought to the commission's attention in a base
rate or other appropriate proceeding.
9. Based on these findings, and pursuant to HAR
§ 6-60-6, the commission concludes that the costs associated
with the New Terminalling Agreement may be recovered through
MECO's ECAC to the extent that they are not included in base
rates.
2013-0083 37
VII.
Orders
THE COMMISSION ORDERS:
1. The commission approves the New Terminalling
Agreement, subject to the modification to Section 3.5 discussed
herein.
2. The commission approves for inclusion in MECO's
Energy Cost Adjustment Clause the costs associated with the New
Terminalling Agreement for the receiving, storage, handling,
distribution, and tanker truck loading for Low Sulfur Diesel,
Ultra Low Sulfur Diesel, Biodiesel, or High Sulfur No. 2 Diesel
at Aloha's liquid fuel products storage and terminalling facility
to the extent that these costs are not included in base rates.
2013-0083 38
3. This docket is closed, unless instructed otherwise
by the commission.
DONE at Honolulu, Hawaii FEB 2 7 2014
PUBLIC UTILITIES COMMISSION OF THE STATE OF HAWAII
( ^ lU^lCi^i^'^^' lA^fi^^ By Hermina Morita, Chair
.V / ^ J J <g. GLjcL. Michae l E^ Champley, cdrfimisf^ioner
By Lorraine H. Akiba, Commissioner
APPROVED AS TO FORM:
Thomas C. Gorak Commission Counsel
2013-0083. rs
2 0 1 3 - 0 0 8 3 39
CERTIFICATE OF SERVICE
The foregoing order was served on the date of filing by
mail, postage prepaid, and properly addressed to the following
parties:
JEFFREY T. ONO EXECUTIVE DIRECTOR DEPARTMENT OF COMMERCE AND CONSUMER AFFAIRS DIVISION OF CONSUMER ADVOCACY P.O. Box 541 Honolulu, HI 96809
DEAN K. MATSUURA MANAGER, REGULATORY AFFAIRS HAWAIIAN ELECTRIC COMPANY, INC. P.O. Box 2750 Honolulu, HI 96840
