Overview of the PBR Framework

Revenue Adjustment Mechanisms

The centerpiece of the Performance-Based Regulation (“PBR”) Framework is the multi-year rate plan (“MRP”), which consists of a five-year control period in which revenues begin with current effective rates and are modified annually based on an Annual Revenue Adjustment (“ARA”) formula that determines the target revenues for the utility each year:

ARA = (I Factor) – (X Factor) + (Z Factor) – (Customer Dividend)

The I Factor represents inflation, which is determined using the Gross Domestic Product Price Index. The X Factor represents productivity, which is determined using an annual productivity factor initially set at 0%. The Z Factor represents exogenous events, a post-implementation adjustment to account for events outside of the utility’s control. The Customer Dividend is a mechanism that ensures customers share in the benefits of the PBR Framework.

The purpose of this MRP and associated formula for revenues is to realign the utility’s profit-making incentives with State goals (e.g., renewable energy and customer experience) and encourage cost control. For extraordinary projects that are aligned with policy objectives and may not be covered by normal revenues, the Extraordinary Project Recovery Mechanism (“EPRM”) is an additional revenue mechanism in the PBR Framework.

The PBR Framework also includes revenue decoupling, which is the PBR mechanism that has been in place the longest in Hawaii. This mechanism sets a target revenue for the utility that is not linked to electricity sales. Decoupling revenue from sales removes the utility’s incentive to grow sales to increase revenues, which assists the State’s transition to renewable energy by reducing the capacity needed to meet energy requirements.

Performance Mechanisms

Performance Incentive Mechanisms (“PIMs”) allow the utility to earn additional rewards (or incur penalties) outside of the ARA formula based on the utility’s performance on identified metrics. While some PIMs pre-date the launch of the PBR Framework in 2021, the portfolio of PIMs has continued to evolve throughout the MRP. The Commission also requires Hawaiian Electric to provide reported metrics, which serve as a standard unit of measurement to assess the utility’s performance, and scorecards, which track progress of a reported metric against a specific benchmark or target.

See more about performance mechanisms on the Commission’s page, Monitoring Hawaiian Electric’s Progress.

Innovative Pilot Process

The innovative pilot process established through the PBR Framework provides expedited review for pilot projects initiated by Hawaiian Electric to incentivize development of innovative programs and projects. This process allows Hawaiian Electric the opportunity for expedited review and dedicated cost recovery for eligible pilot projects, subject to oversight by the Commission and a total annual cap of $10 million. While the utility has flexibility in which pilots it proposes, the Commission has provided guidance regarding types of eligible projects, which go beyond the sale of basic electric service, leverage funding from alternative sources, incorporate preferences for Hawaii-based vendors, provide estimates of revenues and costs, provide parties with reasonable access to data, and incorporate surveys and other forms of evaluations against specific success criteria and metrics.

Hawaiian Electric is required to file an annual report covering all active pilots by the end of March each year. Through 2023, Hawaiian Electric’s active pilots include the Charge Up eBus Pilot, the Charge Up Commercial Pilot, the EV Tariff Pilot, the Data Clearinghouse Pilot, and the Smart Charge Hawaii Pilot. See Hawaiian Electric’s Annual Pilot Update Report for more information on these pilots.

Safeguards

The PBR Framework includes two safeguards, an Earnings Sharing Mechanism (“ESM”) and a Re-Opener mechanism. The ESM is a risk-mitigation mechanism that protects both the utility and customers from excessive earnings or losses, as measured by Hawaiian Electric’s return on equity (“ROE”). Excursions in actual ROE from the target ROE outside of a deadband result in automatic sharing of earnings or losses with customers, according to pre-determined sharing tiers. The Re-Opener mechanism allows the Commission the ability to examine any part of the PBR Framework, at its discretion, to determine if adjustments or modifications are appropriate. The utility may also request to initiate the Re-Opener mechanism, subject to explicit triggering events related to the utility’s credit rating and actual ROE.

See related Commission pages:

Updated 8/2024