June 05, 2018 | By Keith Martin in Washington, DC

Hawaii is looking for a new business model for its regulated utilities.

The governor, David Ige, signed a bill in late April that directs the Hawaii Public Utilities Commission to come up with a new framework for setting utility rates that ties the rates to performance rather than the amount of capital spending the utility has made that goes into rate base. The bill is SB 2939.

The commission has until the end of 2019 to act.

Regulated utilities in the United States charge rates that are projected to give them an agreed rate of return on a rate base, which is their capitalized spending on plant and equipment reduced over time by depreciation. The regulators hold periodic rate cases to refresh the numbers and adjust rates. New capital spending plans by a utility may lead to an increase in rates.

The state legislature said it believes this approach misaligns the interests of customers and utilities because it makes utilities biased toward spending on assets the utility will own rather than considering other options that do not add to utility rate base but are better for customers.

It directed Hawaii regulators to “establish performance incentives 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.”