Regulation of utilities has always had the formal, legalistic qualities of a courtroom without the drama that high crimes and TV fiction add. But the story is being rewritten and once again Hawaii is setting the pace.

A new effort to bring out the more collaborative part of the regulatory process was recently introduced in workshops as part of Hawaii's ongoing proceeding to develop a new business model for the state's regulated utilities. Led by facilitators from think tank Rocky Mountain Institute (RMI), the workshops stressed stakeholder interactions as a way build to consensus without compromising the legalistic underpinnings of the process.

Driven by customer demand, climate change and reliability needs, utilities and others are finding that rapid changes in today's power sector require something beyond traditional regulation.

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"Existing regulatory processes were designed for the different purposes of the 20th century system and won't work in the rapidly transforming 21st century."

David Littell

Principal, Regulatory Assistance Project

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But while renewables and distributed energy resources (DER) have become practical and least-cost options, outdated regulatory approaches continue to support utility investments in traditional assets, impeding the power sector's transformation and making reform necessary, veterans of the process told Utility Dive.

"Existing regulatory processes were designed for the different purposes of the 20th century system and won't work in the rapidly transforming 21st century," Regulatory Assistance Project (RAP) Principal David Littell, a former commissioner with the Maine Public Utilities Commission, told Utility Dive.

"Utilities used to be the initiators of new ratepayer costs and were protected by formal and intimidating legalistic regulatory processes that made it hard for the public to engage," he added. Companies who sell DER, their customers and DER advocates "are beginning to participate and it is opening up the old processes."

The need for reform of the regulatory process was echoed in the February 2019 launch of the Renovate initiative, which is being convened by the Smart Electric Power Alliance and launched in partnership with the National Association of Regulatory Utility Commissioners and 10 other groups. The initiative aims to evolve state regulatory processes and open opportunities for "innovative technologies and business operating models that support the transition to a clean and modern energy grid," the organizations said in a statement.

Opening up the regulatory process

But while new stakeholders are intervening in regulatory proceedings on rates and technology, commission processes often do not make it easy for their voices to be heard, according to a new paper from RMI on leveling the playing field for advocates of the new power sector.

The RMI paper proposes a commission-initiated reform when interaction with stakeholders reveals the need and opportunity for a new process.

The commission should then make clear its "vision" of what that new process should achieve and open a docket to bring stakeholders further into the process. Reform would culminate with the implementation of a new regulatory process.

The RMI-led workshops on Hawaii's performance-based regulation proceeding were a major test of the RMI ideas, effective in part because "the [public utility] commission set the agenda, and the utility was just one of many parties participating," Earthjustice Attorney Isaac Moriwake, who represented environmental advocacy group Blue Planet Foundation in the proceeding, told Utility Dive.

The Hawaiian Electric Company (HECO) d​eclined to comment on its participation in the RMI workshops.

Moriwake and other participants saw the workshop as evidence that a regulatory process can help level the playing field between the utility and other stakeholders. But some participants identified critical weaknesses in the RMI process that could give utilities too much leverage.

The three goals and four stages of regulatory reform

Regulatory processes "are a critical, often overlooked, determinant of the outcomes and relative success of utility reform efforts," the paper reports. In current, formal processes, "back-and-forth filings" frequently result in "contested decision-making." Better-designed processes "can enable collaboration and coalescence toward a coherent reform."

Regulatory reform should improve the process by which regulated utilities improve their efficiency, reliability and resilience as well as support utilities in reducing rates or increasing customer choice, according to RMI.

A third goal is to help utilities achieve policy objectives such as reducing greenhouse gas emissions, reallocating system risk or "preserving the long-term viability of utilities' business."

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"There is no one-size-fits-all proceeding, but participants must work from the beginning to understand the subject and technical issues in a similar way or they can end up talking past each other."

Dan Cross-Call

RMI Electricity Practice Manager

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There are four stages of reform to acheive these goals.

The first is launching a commission-guided vision of how a new regulatory process could serve stakeholders. Directives from the legislature or governor are valuable in setting time and scope parameters and sustaining momentum, but regulators' expertise should guide the process.

"There is no one-size-fits-all proceeding, but participants must work from the beginning to understand the subject and technical issues in a similar way or they can end up talking past each other," RMI Electricity Practice Manager and paper co-author Dan Cross-Call told Utility Dive. Cross-Call helped facilitate the Hawaii workshops.

The second stage is anchoring the proceeding in "a guiding vision" that articulates opportunities that could result from a better regulatory process for all stakeholders, RMI reported. Regulators are critical to this stage because they are responsible for the vision being well-defined and effectively implemented.

In the third step, regulators and stakeholders take part in the formal docket, but with new, more collaborative approaches.

There are non-docketed "investigatory" proceedings that allow exploration of problems and solutions, typically on challenging new ideas or technologies, and docketed "decisional" proceedings that deliver final rulings, RMI reported.

A non-docketed process is built on collaborative, flexible stakeholder discussions. A docket provides the formal legal framework for a binding ruling, with "a reliable record" and "greater transparency and accountability."

Docketed proceedings too often lack "in-the-present, back-and-forth dialogue between participants that allows arguing but also allows reaching consensus by working through details," RMI Electricity Practice Senior Associate and paper co-author Cara Goldenberg told Utility Dive. Goldenberg was also a facilitator in Hawaii's workshops.  

In either proceeding, stakeholder engagement is important so that "commissions do not establish new rules or programs in a black box," RMI reported.

"Many new players can be brought into these complex dynamic processes," Cross-Call said. "Ideas and proposals can emerge from any of the participants and filter through the vision in different ways."

The final stage is implementation of new policies, programs or rules to guide utilities. Allowing for pilot programs to test new policies or rules is an important potential outcome, RMI reported. Any implementation should include "performance tracking" and "mechanisms for review and adaptation" so that "lessons are captured."

Two key shortcomings

Hawaii's RMI-led workshops were "open, equitable, inclusive and relaxed," which "bodes well for harder work yet to come," according to Pace Energy and Climate Center Executive Director Karl Rabago, who participated in the Hawaii process.

Badly done, such workshops can be "time and resource intensive, which privileges the utilities, and invites gaming, such as legislative end-runs," Rabago, a former Texas utility commissioner, added. Such workshops can sometimes be "vague and unfocused" and such processes can be "a cover for hidden staff agendas" if the guiding vision is inadequate.

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"If [a proceeding] is only a cover for doing what [a commission] wants to do, or for doing nothing, then it's worse than doing nothing because it wastes resources, creates unfulfilled expectations, and erodes stakeholders' confidence in regulation."

Karl Rabago

Director, Pace Energy Center

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A non-confrontational stakeholder dialogue "partially levels the field," he said. "But ratepayers will not pay stakeholders' workshop expenses, while utilities are indifferent to the costs and can participate in workshop after workshop."

A commission could do this type of process "just to say it had a collaborative stakeholder process with working groups," he said. "If it is only a cover for doing what it wants to do, or for doing nothing, then it's worse than doing nothing because it wastes resources, creates unfulfilled expectations and erodes stakeholders' confidence in regulation."

Most regulatory systems offer the option of informal, non-docketed proceedings, but there are aspects of a formal proceeding that protect both utilities and stakeholders, he said. "You have a right to discovery, to a timetable and to protest a party being out of order."

Formal adjudicatory proceedings can resolve "contested disputes," Earthjustice's Moriwake agreed. "But the RMI paper doesn't suggest a one-size-fit-all approach."

A February ruling in New Hampshire's Grid Modernization proceeding showed why formal adjudicated proceedings must be available as "the resolution mechanism of last resort," New Hampshire Office of the Consumer Advocate head Donald Kreis emailed Utility Dive.

When commissioners delayed the four-year-long proceeding for further stakeholder input, Kreis raised "statutory and due process concerns" in his appeal to Commission Chair Debra Howland. The remedy he is seeking from Howland is a clearly scheduled, evidence-based adjudicative proceeding that will deliver a definitive commission ruling on grid modernization.

Intermittent feedback to stakeholders through commissioner decisions can also be absent from workshop-based regulatory processes, Rabago said. That feedback is needed because "earnings from traditional investments are falling and investors will pressure utilities to make transformation-enabling investments if regulators signal they will approve them."

Veterans of regulatory debates in the Southeast told Utility Dive that regulatory reform is likely not possible until political reform limits the influence of regulated utilities. 

"Regulatory reform is more necessary in the Southeast than anywhere else," Southern Alliance for Clean Energy (SACE) Executive Director Stephen Smith told Utility Dive. "Recent regulatory approvals of nuclear and fossil fuel power plants in South Carolina, Mississippi and Georgia have cost customers tens of billions of dollars."

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"If a regulatory decision will impact utility profits, it can bring direct political and indirect financial pressure on the decision-makers that eliminate the level playing field."

Stephen Smith

Executive Director, Southern Alliance for Clean Energy

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But RMI's proposal requires "a reform-minded commission or legislature and the region's lawmakers and regulators are not moving in that direction," he said. "If a regulatory decision will impact utility profits, it can bring direct political and indirect financial pressure on the decision-makers that eliminate the level playing field."

A significant step toward regulatory reform would be banning financial contributions from utilities or utility affiliates to political campaigns, Smith suggested. "If we take the money out of the equation, it would allow reforms to begin."

A second step would be disallowing commissioners and staff moving from the commission to jobs with utilities or utility affiliates "for at least some time after they serve," he added. "The concern is people making decisions who are aware that they could foreclose future opportunities."

These potentially valuable proposals would likely open the possibility of innovations in regulatory reform. In Hawaii, lessons about the effectiveness of new regulatory processes are already being learned.

Lessons from Hawaii

Hawaii's "historic transition" from fossil fuels to a "renewable, distributed system" can link clean energy goals, customer choice and reduced electricity costs "by updating regulation of the electricity industry for the modern age," public utility commission staff concluded from the RMI-led workshop process.

In early sessions of the proceeding, stakeholders informally workshopped and briefed the PUC's concept paper on performance-based regulation, RMI's Cross-Call said. This resulted in a staff "framing document" that is more coherent and addresses concerns "that may not have otherwise been addressed."

The workshops also improved the non-docketed proceeding concept, RAP's Littell said. "Stakeholder processes are common, but utilities maintain leverage in regulatory proceedings by keeping the debate complicated and legalistic. The RMI facilitator made sure participants understood and were heard and understood by decision-makers."

Pace Energy Center's Rabago applauded the process, but not the results.

The workshops did not lead to "recriminations and battling briefs," he said. There was "general consensus" on issues, Rabago acknowledged, "but nobody ever defined the vision." And in the metrics workshop, participants "stated their preferred metrics and practiced working together, but we didn't solve any problems or reach any agreements on metrics."

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The workshops allowed participants to "swiftly, yet thoughtfully, move through complicated regulatory territory ... Given the stark realities of climate change, we don't have the luxury of waiting for years on end."

Isaac Moriwake

Attorney, Earthjustice

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The workshop's "vision" was based on the Hawaii PUC's 2014 "Inclinations" white paper on goals for a new regulatory process and a new utility business model and has been refined by clean energy legislation, Earthjustice's Moriwake said. But the most important of RMI's insights is that commission vision and leadership are "the key ingredients for realizing comprehensive regulatory reform."

The workshops methodically built and advanced the group discussion leading to "a shared basis of understanding" about "what needs to be changed" and "how to implement the necessary reforms," he added.

"The utility is essentially on the examining table in this proceeding, and with that exposure can come controversy and contention," Blue Planet Foundation Chief of Staff Melissa Miyashiro emailed Utility Dive. A traditional regulatory proceeding might be stuck in "endless back-and-forth disagreements," but this process has narrowed "29 potential outcomes" to "12 priority outcomes" in only six months.

The workshops allowed participants to "swiftly, yet thoughtfully, move through complicated regulatory territory," she added. "Given the stark realities of climate change, we don't have the luxury of waiting for years on end."

The first phase of Hawaii's performance-based rate proceeding will be completed early this year when the commission concludes its consideration of the questions raised in these workshops and issues a decision on when and how to move into phase two.