Thursday, March 5, 2015

2015 --The Hawai`i Year of Energy Transformation


By Henry Curtis

HECO Headquarters, King and Richards Streets, Downtown Honolulu

The proposed NexEra takeover of Hawaiian Electric Company (HECO) and subsidiaries Maui Electric Company (MECO) and Hawaii Electric Light Company (HELCO) will transform the Hawai`i energy picture regardless of whether the takeover is successful or not.

The Public Utilities Commission has accepted 28 intervenors into the merger docket. They join NextEra, the three HECO utilities and the Consumer Advocate. 

The Public Utilities Commission has set a deadline of August 31, 2015 to complete all pre-hearing processes.
Several readers have asked why should discovery (information requests) and the submission of testimony and exhibits be jammed in by August 31, 2015. After all NextEra would like the proceeding to be completed by December 2 but has stated that it might take another six months.
The answer relies on what comes after August 31. What will the hearing process be like? What type of hearings has the Commission held?
The Public Utilities Commission holds small hearings in its basement hearing room. The room can seat 30-40 people.
Larger hearings require the meetings to occur elsewhere. The Commission has held formal hearings at the State Capitol, Tokai University, the East-West Center, the Honolulu Country Club and the DHHL Complex in Kapolei.
The choice of which location to hold the hearing depends not only on the number of people involved but also the nature of the hearing. Investigatory proceedings such as feed-in tariffs (Docket No. 2008-0273) and decoupling (Docket No. 2008-0274) are generally simpler. The Commission’s designation consultant spends most of the time questioning the utility.
In other panel discussions the Commission’s designation consultant quizzes the expert witnesses of each of the parties. They experts sit at the table while their attorneys sit against the walls, unable to jump in for the most part.
The more rigorous and legalistic contested case hearing process kicks in only when a public hearing is mandated by law. For the PUC, this occurs in only two situations. One is an overhead sub-transmission or transmission line proposed for a residential neighborhood. The other is for a rate case, and only if the applicant proposes to raise rates.

"A contested case hearing shall be held in connection with any increase in rates." HRS §269-16(b) 
The Commission’s Order elaborates on the Standard of Review. “With respect to rates, the Applicants propose …for at least four years following the closing of the Proposed Change of Control …will not submit any applications seeking a general base rate increase …However, there are several significant caveats to this proposal, including: (1) rates could be increased during the moratorium on the basis of "compelling financial need" or the occurrence of an extraordinary expense, such as an expense caused " by a tropical storm, an act of terrorism, etc.”
The Commission noted that HECO promised substantial decreases in rates by 2030. Thus if NextEra lowers rates, but not as much as HECO proposed, then that is in effect a rate hike.
Thus item 1b in the Commission’s Initial Statement of the Issues is, “Whether the Proposed Transaction, if approved, provides significant, quantifiable benefits to the HECO Companies' ratepayers in both the short and the long term beyond those proposed by the HECO Companies in recent regulatory filings.”
In an Evidentiary Hearing each party has the right to cross-examine adverse witnesses. Two solar companies who share a common view on a particular issue cannot waste time asking friendly questions to witnesses for the other party. But they can cross-examine witnesses who profess opinions that go against their interests.
Perhaps the most unusual regulatory proceeding held by the Commission involved HECO’s proposal to import rainforest palm oil biodiesel from Malaysia. The raw material would be shipped to Seattle where, to gain a federal tax credit, the palm oil would be treated so it could withstand sub-zero temperatures. A two-day Evidentiary Hearing was held from October 6-7, 2008.
The court reporter brought the transcript to HECO so they could correct errors in it. Two weeks later the court reporter made the undeclared revised transcript available to Life of the Land. 
Then HECO announced that they had decided to re-write the contract, shifting risk from the biofuel producer to HECO ratepayers. A second Evidentiary Hearing was held from March 9-10, 2009. `Olelo filmed the hearings using three remote cameras.
The longest energy-based Evidentiary Hearing was the fight over the proposed Wa`ahila Ridge Transmission Line (BLNR OA-2801). Four parties spend seven days in the Board of Land and Natural Resources hearing. The whole DLNR process took six years, part of HECO's 30-year attempt to build the transmission line.
Perhaps the most complex Evidentiary Hearing in State history involved the Water Commission's docket (CCH-OA95-1)  on the Waiahole Ditch.
“On May 17, 1995, the [Water] Commission gave all applicants to participate the opportunity to be heard orally and/or in writing, and gave anyone objecting to the standing of any applicant to participate the opportunity to submit such objections in writing and/or orally. The Commission granted standing to twenty-five parties and denied standing to nine parties.”
“On November 9, 1995, the parties began their opening statements and presentation of evidence. The hearing continued to August 21, 1996, during which time there were fifty-two days of hearings including four evening sessions. The parties presented written testimony from 161 witnesses, of which 140 testified orally. There were 567 exhibits introduced into evidence. Closing arguments were presented during three days, from September 18 to 20, 1996.”
The HECO-NextEra merger proceeding has more parties and more issues that the Waiahole Ditch proceeding.
Implied Public Utilities Commission Procedural Action
The Commission’s Order notes, “The HECO Companies are in the midst of addressing a series of complex and challenging issues that will determine how they will develop and implement a sustainable and progressive business model that results in quantifiable benefits for ratepayers and the State's citizens and economy.
While the Proposed Transaction will be addressed on its specific merits, the commission cannot ignore the current regulatory landscape in conducting its review.
Thus, in this Order, the commission is establishing procedures to determine not only whether the benefits promised by the Applicants would be realized if the Application is approved, but whether the Applicants will adequately address those issues currently before the commission, as well as the State's renewable energy goals.”
The only way of determining whether Applicants can address the issues before the Commission is to resolve those other issues, so the Applicant knows what is expected of them and the Commission can figure out whether the Applicant can effectively handle them.
That implies that those proceedings must move in parallel with this proceeding and be completed by the end of the year.
These parallel proceedings include Power Supply Improvement Plans (Docket No. 2014-0183), Distributed Generation Interconnection Plan (Docket No. 2014-0192), Integrated Demand Response Portfolio Plan and Demand Response (Docket No. 2007-0341), Decoupling Mechanism (Docket No. 2013-0141), HECO Rate Case (Docket No. 2013-0373), the MECO Rate Case (Docket No. 2014-0318), the Inter-island Transmission Cable (Docket No. 2013-0169) the increased use of liquefied natural gas (LNG).
Thus the September-November period is going to involve some intense hearings in related proceedings. 
After parties file opening briefs and reply briefs in the merger docket the Commission will need time to sort it all out, to dot all of the “i’s” and crosses all the “t’s,” and issue an Order that is unlikely to be appealed.

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Wednesday, March 4, 2015

When will we find out if NextEra is going to acquire the HECO Companies?

By Henry Curtis

PUC Building at King and Punchbowl

The Public Utilities Commission has accepted all intervenors into the HECO-NextEra merger proceeding.
There are 33 parties in the Merger Docket: four applicants (NextEra, HECO, MECO and HELCO), the Consumer Advocate and the 28 intervenors.
As requested by the Commission, by March 23 the parties must filed a proposed procedural order with the Commission, identifying the issues and the pre Evidentiary Hearing Schedule.
The Commission will issue a Protective Order (Confidentiality Agreement) and a Procedural Order which will, in essence, divide the procedural process up into three phases.
The first phase is pre-trial. The first step of the first phase is discovery wherein parties ask questions to the Applicant. This includes requests for documents.
Then sequentially the Applicants file their Direct Testimony, followed by the testimony of the Intervenors and then the Consumer Advocate, and finally the Rebuttal Testimony of the Applicant.
The next step is crucial. Parties get to ask each other questions which must be answered. The Applicant gets to ask questions of the Intervenors. Everyone gets to question the state and county agencies. HECO gets to ask questions of every other party.
By Order of the Commission, all of this pre-trial procedure must be completed by August 31, 2015.
Then the Commission will establish a schedule for the second phase: Information Requests filed by the Commission to various parties, an Evidentiary Hearing, and then Opening and Reply Briefs by each of the Parties.
Contested Case Evidentiary Hearings are powerful. The American Bar Association (ABA) asserts that “the purpose of Cross-Examination is to test the credibility of statements.” 
Cross-examination creates a written record, and sometimes a video record, that has altered the course of events.
Hawaiian Electric agreed in an Evidentiary Hearing, during cross-examination by Life of the Land in 2006, that climate change is real and caused by fossil fuels.
Hawaiian Electric’s argument for its proposed use of Malaysian rainforest palm oil biodiesel fell apart in an Evidentiary Hearing.
Then the third phase will be the issuance of a decision and order by the Commission. Each party then has the legal right to file an appeal to the Intermediate Court of Appeals.
The Commission’s recent Order notes the complexity of the merger docket.
“It would be difficult to understate the importance of this docket, not only to the ratepayers of the HECO Companies, but to the State of Hawaii's citizens and its economy. Even in the face of recent declines in oil prices, the HECO Companies' residential ratepayers face the highest per kilowatt hour rates in the country.”
“Likewise, the majority of Hawaii's businesses - both large and small – depend on a reliable source of energy at the lowest reasonable cost. Those businesses, in turn, not only furnish goods and services to the citizens of Hawaii, they employ those citizens to produce these goods and services.”
“As the commission has observed on many occasions, the HECO Companies face significant challenges, ranging from meeting the State's Renewable Portfolio Standards ("RPS") goals, to reliably integrating more renewable energy sources, to reducing reliance on fossil fuel fired generation, to maintaining reliability of the grid.”
“The commission has actively addressed the issues currently facing the HECO Companies, as well as the Companies' present and future capability to meet these goals, in a series of dockets. Notably, in April of 2014, the commission issued a "White Paper" entitled ‘Commission's Inclinations on the Future of Hawaii's Electric Utilities - Aligning the Utility Business Model with Customer Interests and Public Policy Goals.’"
 “The Commission views the objectives of lower, more stable electric bills and expanding customer energy options, while maintaining reliable energy service in a rapidly changing system operating environment, as essential principles that are the foundation for the future strategic business direction of the HECO Companies. By extension, these principles are also important criteria in the review and approval of future utility capital investment projects and programs.”
“The commission provided guidance to the HECO Companies in three areas: (1) creating a twenty-first century generation system; (2) creating modern transmission and distribution grids; and (3) addressing the policy and regulatory reforms necessary to achieve Hawaii's clean energy future.”
“In short, the HECO Companies are in the midst of addressing a series of complex and challenging issues that will determine how they will develop and implement a sustainable and progressive business model that results in quantifiable benefits for ratepayers and the State's citizens and economy. While the Proposed Transaction will be addressed on its specific merits, the commission cannot ignore the current regulatory landscape in conducting its review. 
Thus, in this Order, the commission is establishing procedures to determine not only whether the benefits promised by the Applicants would be realized if the Application is approved, but whether the Applicants will adequately address those issues currently before the commission, as well as the State's renewable energy goals.”

A decision could be reached by the end of the year. 

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Tuesday, March 3, 2015

PUC accepts all intervenors in HECO-NextEra Merger Docket

By Henry Curtis
The Hawai`i Public Utilities Commission issued Order 32695 dated March 2, 2015
Who has been accepted as a Party in the HECO-NextEra Docket?
All entities who filed Motions to Intervene including the Honolulu Board Of Water Supply  which filed one day late. The Alliance for Solar Choice has been conditionally accepted since "it does not appear that counsel for TASC is a member of the Hawaii bar."
 Public Listening Sessions
The commission is not legally required to hold public hearings with respect to the Proposed Transaction. However, based on the discussion in this Order, the commission intends to provide members of the public the opportunity to address the commission concerning the Proposed Transaction at "public listening sessions." These sessions will be conducted on each of the islands served by the HECO Companies: Oahu, Maui, Lanai, Molokai, and Hawaii. The commission will provide adequate public notice prior to conducting each of these sessions.
 Contested Case 
The commission will conduct formal contested case proceedings in this docket pursuant to these provisions and the commission's hearing procedures as set forth in Subchapter 3, Agency Hearing Procedures, of Title 6, Chapter 61, of the Rules of Practice and Procedure before the Public Utilities Commission.
Contested Case Procedures
As defined in HRS Title 8, Public Proceedings and Records, Chapter 91, Administrative Procedure, § 91-1(5), a "contested case" is "a proceeding in which the legal rights, duties, or privileges of specific parties are required by law to be determined after an opportunity for agency hearing." Contested cases are conducted pursuant to HRS § 91-9.
Standards of Review
HRS §269-6, §269-7, 269-7.5, 269-17.5, §269-19(a):
Initial List of Issues
1. Whether the Proposed Transaction is in the public interest.
a. Whether approval of the Proposed Transaction would be in the best interests of the State's economy and the communities served by the HECO Companies.
b. Whether the Proposed Transaction, if approved, provides significant, quantifiable benefits to the HECO Companies' ratepayers in both the short and the long term beyond those proposed by the HECO Companies in recent regulatory filings.
c. Whether the proposed transaction will impact the ability of the HECO Companies' employees to provide safe, adequate, and reliable service at reasonable cost.
d. Whether the proposed financing and corporate restructuring proposed in the Application is reasonable.
e. Whether adequate safeguards exist to prevent cross subsidization of any affiliates and to ensure the commission's ability to audit the books and records of the HECO Companies, including affiliate transactions.
f. Whether adequate safeguards exist to protect the HECO Companies' ratepayers from any business and financial risks associated with the operations of NextEra and/or any of its affiliates.
g. Whether the Proposed Transaction, if approved, will enhance or detrimentally impact the State's clean energy goals.
h. Whether the transfer, if approved, would potentially diminish competition in Hawaii's various energy markets and, if so, what regulatory safeguards are required to mitigate such adverse impacts.
2. Whether the Applicants are fit, willing, and able to properly provide safe, adequate, and reliable electric service at the lowest reasonable cost in both the short and the long term.
a. Whether the Proposed Transaction, if approved, will result in more affordable electric rates for the customers of the HECO Companies.
b. Whether the Proposed Transaction, if approved, will result in an improvement in service and reliability for the customers of the HECO Companies.
c. Whether the Proposed Transaction, if approved, will improve the HECO Companies' management and performance.
d. Whether the Proposed Transaction, if approved, will improve the financial soundness of the HECO Companies.
3. Whether the Proposed Transaction, if approved, would diminish, in any way, the commission's current regulatory authority over the HECO Companies, particularly in light of the fact that the ultimate corporate control of the HECO Companies will reside outside of the State.
4. Whether the financial size of the HECO Companies relative to NextEra's other affiliates would result in a diminution of regulatory control by the commission.
5. Whether NextEra, FPL, or any other affiliate has been subject to compliance or enforcement orders issued by any regulatory agency or court.
6. Whether any conditions are necessary to ensure that the Proposed Transaction is not detrimental to the interests of the HECO Companies' ratepayers or the State and to avoid any adverse consequences and, if so, what conditions are necessary.
Parties

NextEra Energy (NEE)

Hawaiian Electric Company (HECO)

Maui Electric Company (MECO)

Hawaii Electric Light Company (HELCO)

Consumer Advocate (CA)

Life of the Land (LOL)

Renewable Energy Action Coalition of Hawaii (REACH)

Hawaii Island Energy Cooperative (HIEC)

Kauai Island Utility Cooperative (KIUC)

Hawaii Water Services Company (HWSC)

Ka Lei Maile Ali`i Hawaiian Civic Club (KLMA)

County of Maui (COM)

Hawaii Solar Energy Association (HSEA)

Friends of Lana`i (FOL)

Puna Pono Alliance (PPA)

County of Hawai`i (COH)

International Brotherhood of Electrical Workers (IBEW)

Ulupono Initiative

The Alliance for Solar Choice (TASC)

AES Hawaii

Blue Planet Foundation (BPF)

Sun Power

Tawhiri

Hawaii PV Coalition (HPVC)

Parker Ranch subsidiary Paniolo Power

The Gas Company (Hawai`iGas)

Hawaii Renewable Energy Association (HREA)

State Office of Planning (OP)

Department of Business, Economic Development and Tourism (DBEDT)

Sierra Club

Sun Edison

Hina Power Corporation

Honolulu Board of Water Supply (BWS)

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NextEra and State Regulators: Keep Our Options Open -- Don’t Repeal Inter-island Cable Laws


By Henry Curtis

The House Committee on Consumer Protection & Commerce and the House Committee on Judiciary held a joint hearing yesterday on HB 1468 which would remove “the authorization granted to the public utilities commission to establish a regulatory structure for the installation and implementation of an interisland high-voltage electric transmission cable system.”

The committees passed the bill. Following one more floor vote the bill will head to the Senate.

The Public Utilities Commission, Consumer Advocate and DBEDT all filed written testimony against the bill. Blue Planet Foundation testified against the bill in a previous hearing but not at this hearing. Hawaiian Electric Company (HECO) has stayed silent on the bill this legislative session. Life of the Land and a number of individuals testified in favor of the bill.

The Public Utilities Commission submitted written comments noting that there are open regulatory proceedings reviewing the proposed inter-island cable.

Commission notes that other measures have been introduced to extend the Renewable Portfolio Standards. To achieve that goal the Commission believes that all options and alternatives should remain available for policymakers and decision makers to consider.”

The Consumer Advocate stressed the need to keep the existing cable legislation in place because one day Big Island geothermal could be powering Oahu.

The legislation which passed in the 2012 Legislature (Act 165) “simply established the regulatory framework for an undersea cable, if it was decided that a cable will be in the public interest with the net benefits of the cable exceeding the costs. Thus, since the framework in Act 165 is only called upon when the State is ready to move forward with the installation of an undersea cable system – and not before the State is ready – it is not clear what benefit repeal of this highly-vetted legislation does to serve Hawaii in reaching its long-term clean energy goals.”

Legislators spent about 20 minutes asking questions.

Representative Thielen: “The language on page one of the bill. What it is saying is that it’s premature at this point. Why does NextEra feel that it’s not it’s premature.”

NextEra President Eric Gleason: “There have been four or five studies that have been done of the cable, and whether it could eventually be in the public interest, the Consumer Advocate’s done one. DBEDT or the Commission studies, GE has done some work, we’ve done some work and Hawaiian Electric’s done some work. 

Four out of five of those have said that they believe it’s is in the public interest, based on the information available to them.

Now I will say, we’ve been very clear about this since we announced the merger and even going back to September before the merger was announced, we said there is new information. The new information that Hawaiian Electric filed their Power Supply Improvement Plan with the Commission in August which said that in their estimation the cable was no longer cost effective.

Now we don’t have all of the information and analysis that they did. We’re open minded about it. We don’t definitely conclude at this point it is or isn’t in the public interest. 

But I can’t agree with the statement that it is necessarily premature whether it’s based on significant community concerns that are addressed in here or whether it is based on Hawaiian Electric’s analysis.”

Judiciary Chair Karl Rhoades: “What’s the advantage of having a cable?”

Eric Gleason: “This has evolved over time. So I think that when this legislation was first passed, when the legislation was passed, the idea was, or at least the genesis was the Big Wind projects, the wind projects on Lanai, or the wind projects on Molokai. …What we call an extension cord from the Neighbor Island’s to Oahu. That was the original idea.

Another idea that actually started, at least from our perspective, with a statement by the Chair of the PUC, Chairman Mina Morita at the time, is why don’t we have a two-way cable? Why don’t we have a two-way cable linking different islands in the State? 

We were one of the parties that looked at that and said that actually can make some sense. So we looked at some between Maui Island and Oahu. Just speaking for NextEra what we proposed is that could make more sense.”

Chair Rhoades asked again: “What’s the advantage of having a cable?”

Eric Gleason: “So what the cable does is a couple of things. The two way cable. So the one-way cable is obvious. If you think you can bring wind energy plus a cable cheaper to Oahu and/or integrate more renewable energy by do that, than just having Oahu rely on its own sources. That was kind of the idea.

The idea of a two way cable is a little different if it allows both islands to fundamentally share the resources that each has. In the analysis that we’ve done and others have done, it suggested that basically through a combination of sharing of fossil fuel resources across both islands, as well as integrating additional renewable resources that you can get to a better place in terms of more renewable energy, less oil and lower costs, by having the cable and lower all-in costs to customers.

We’ll say, to give Hawaiian Electric their due, their more recent analysis suggests that that is not this case. So I think that is still something that reasonable people can differ on.”

Representative Chris Lee: “Noting obviously HECO’s most recent opposition to the cable ...renewable energy goals without the cable. Does NextEra at this point, have you done the due diligence to know which way we want to go and which pencils out best?”

Eric Gleason: “Representative Lee, we have not. We’ve done the original analysis that we did. We recognize and acknowledge that they’ve done different analysis that reaches different conclusions. We have not testified whether we disagree with that or not.”

“We have in the ordinary course of business are pursuing a portfolio. Have over a number of years pursued a portfolio of renewable energy projects in Hawaii. …Not all islands, we’ve actually said before, Oahu, Maui and the Big Island.”


Representative Chris Lee: “Does that change at all with or without the cable?”


Eric Gleason: “Eventually it might.”

Representative Cynthia Thielen: “Is Lanai on the table as well?”

Eric Gleason: “Our position on that, and we are on the record, is we think a two-way cable to Maui could make sense. The analysis that we’ve done suggests that it does make sense. It makes a lot more sense than a cable to Lanai. 

We’ve said that we are not pursuing a cable to Lanai. If we were a utility and if NextEra were a utility in the State and the Commission asked us to do a cable to Lanai. I’m not going to rule out that that could never happen but that’s not something we’re pursuing.”


Representative Cynthia Thielen: “I guess that’s a long way around saying it’sstill on the table.”


Eric Gleason: “It’s not our place to take it off the table but it’s not somethingwe are pursuing.”

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Monday, March 2, 2015

Hawai`i Energy Calendar for March 2015: Governor David Ige, Alan Oshima, Eric Gleason, Dutch Kuyper, Hunter Lovins, Alicia Moy



Thursday, March 5, 2015
Alan M. Oshima, Hawaiian Electric Company President and Chief Executive Officer
Hawai'i Economic Association
Networking starts at 11:30 am.  Lunch and program 12:00 - 1:30 pm
Plaza Club 20th floor, Pioneer Plaza Building, Honolulu
Price: $35 members, $40 non-members
RSVP: hawaiieconomicassociation@gmail.com
http://www.hawaiieconomicassociation.com/

Previously, Mr. Oshima served as senior vice president, general counsel and corporate secretary of Hawaiian Telcom, founded the law firm of Oshima Chun Fong & Chung, and practiced law with Carlsmith Ball.  The Farrington High School graduate received a marketing degree from Northwestern University and a law degree from University of California, Hastings College of the Law. Mr. Oshima also served as a Supply Corps Officer with the U.S. Navy.

Friday, March 6, 2015
Governor David Ige Talk Story with DBEDT Director Luis Salaveria and DOT Director Ford Fuchigami.
Women in Renewable Energy (WiRE)
7:30 – 9:30 a.m., Plaza Club, Honolulu.
WiRE Members: $24  Non-members: $34

http://hawaiiwire.org/

Wednesday-Thursday March 25-26, 2015 
(Field Trip: Friday March 27)
Maui Energy Conference: The Role of the Consumer
 Maui Arts & Cultural Center
Fee: $495.00
http://mauienergyconference.com/

The relationship between customers and electric utilities is changing with the growing array of options and services available to meet customer energy needs. Nationally recognized experts will discuss emerging trends in the electric utility industry and public policy shaping customer choices including customer engagement programs, distributed generation, microgrids, demand response programs, and renewables integration.

Presenters: Kapono‘ai Molitau, Kumu Hula, Teena Rasmussen, Jeanne Unemori Skog, Maui Mayor Alan Arakawa, Doug McLeod, Eric Gleason (NextEra), Alan Oshima, Jonathan Koehn, John Farrell, Henry Curtis, David Owens, Jay Griffin, Neil “Dutch” Kuyper, Hunter Lovins, Justin McCurnin, Jon Yoshimura, David Bissell, Jeff Mikulina, Will Rolston, Fern Tiger, Maurice Kaya, Jim Alberts, Kenneth Geisler, Tad Glauthier, Alicia Moy, Sebastian “Bash” Nola, Mark Duda, Dan Girard, Mathew McNeff and Richard Rocheleau.

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Legislators drill Hawaii Health Systems Corporation and Hawaii Pacific Health executives regarding proposed merger


By Henry Curtis

On Friday the House Finance Committee held a series of hearings to review more than sixty bills.

The Committee heard bills dealing with bonds for energy company, invasive species, keiki education, Aloha+ Challenge, cesspools, nursing, consumer protection, lead poisoning, trustee compensation, family justice centers, jurors, prosecutors, rules of evidence, campaign finance and disclosure, voting, compensation for wrongful imprisonment, micro apartment housing units, taxation and medical marijuana.

The hallway was full of people who could not fit in the hearing room. 

An hour was spent on one hospital merger bill that in many ways sounded similar to the proposed NextEra takeover of Hawaiian Electric Company (HECO) and its subsidiaries Maui Electric Company (MECO) and Hawaii Electric Light Company (HELCO).

The discussion dealt with mergers, due diligence, performance standards and metrics, reviewing CIP priorities, blank checks, taxpayer risks, economies of scale, employment plan, recently installed software programs that will be replaced, energy efficiencies and the critical need for new chillers.

HB 1075 would provide the necessary legalese to allow a  proposed takeover of one or more Maui Hospitals by Hawaii Pacific Health (HPH).

One starting point for the story in 1994.

In 1994 Governor Benjamin Cayetano initiated a “Blue Ribbon” Task Force which led to the passage of the landmark Act 262 (SB 2522) in 1996 created the Hawaii Health Systems Corporation (HHSC) which was codified as HRS Chapter 323F

The primary purpose was to free the community hospital system from bureaucratic oversight and red tape. HHSC was exempted from many laws that other state agencies must obey. Regional management advisory committees were established.

Act 290-1997 (SB1792 SD3 HD3 CD2) authorized the Hawaii Health Systems Corporation to create regional system boards.

A 2009 study by for the Hawaii Health Systems Corporation asserted that the hospitals could save $61.5 million a year by converting from a state government entity to a 501 (c)(3) nonprofit.

Hawaii Health Systems Corporation hired Stroudwater Associates to analyze the corporation. The 2009 Stroudwater report asserted that HHSC could save $61.5 million a year by changing from a state agency to a non-profit.

Act 189-2009 (SB1673 SD2 HD2 CD1) authorized the restructuring of the HHSC.  “Any of the regional systems or individual facilities of the Hawaii health systems corporation is hereby authorized to transition into a new legal entity in any form recognized under the laws of the State.”

The HHSC hospitals are facing staggering financial losses and a critical shortage of physician is challenging the hospitals.

In June 2012, Banner Health, a nonprofit hospital chain based in Phoenix, Arizona, approached the Hawaii Health Systems Corporation and offered to take over the operations of eight public hospitals on Maui and the Big Island.

Banner would not pay rent and would be guaranteed an annual management fee of tens of millions until a future transition point in seven to eight years. Some 3,000 unionized employees might face job loss. The United Public Workers union opposed the takeover. Banner owned 23 acute-care hospitals in seven states with more than 26,000 employees.

The Banner acquisition collapsed in 2013.

HHSC hospitals primarily serve rural areas on Neighbor Islands. 


Wesley Lo. Photo: Small Town Maui


During the summer of 2014 Wesley Lo, Maui region chief executive officer of Hawaii Health Systems Corp., approached Hawaii Pacific Health about a potential merger. Hawaii Health Systems Corporation wants to create a proposed public-private partnership and sign a 25-year lease with Hawaii Pacific Health.

Governor Abercrombie appointed Dr. Linda Rosen to be the DOH Director in February 2014 and appointed Dr. Rosen to be the Chief Executive Officer of the Hawaii Health Systems Corporation (HHSC) in November 2014.


Previously Linda Rosen, M.D., M.P.H. served as Chief of the Emergency Medical Services and Injury Prevention System Branch at the Hawaii State Department of Health (DOH). Rosen is a full time teaching physician and faculty member of the University of Hawaii’s John A. Burns School of Medicine.


Pacific Business News reported earlier this year that “the Maui region, which includes Maui Memorial Medical Center, Kula Hospital and Lanai Community Hospital, ended the last fiscal year with an operating loss greater than $43 million. HHSC is currently facing a $48 million budget deficit for the current fiscal year, which ends June 30.” 


At the hearing representatives of the seller -- Dr. Linda Rosen and Wesley Lo – spoke while a representative of the buyer - Hawaii Pacific Health CEO Ray Vara - mostly listened.

This is similar to the HECO-NextEra arrangement where the buyer listens to the seller who makes promises to the Legislature about corporate policies that will exist after they are no longer in charge.

One of the interesting exchanges concerned the economies of scale. If the Maui Hospitals went with HPH because bigger is better and that leads to lower cost, then would that negatively impact what remains of HHSC?

In responding to legislative questions Mr. Lo asserted, We are actually starting to get through that due diligence, right now.” We have a CIP plan. “They are not so far at this point in time comfortable with our priority list of things going on.”


HPH asserted that “if our performance post transaction is greater than the expected performance, that we would be willing to share back whatever operating subsidies was provided to us with the fee. It’s not like this thought that HPH could take additional subsidies from the state and make a whole lot of money on it.”

Rep. Kobayashi noted that the approval process originally only specified the HHSC Regional Board but now the Governor has been added. Should the full HHSC Board also have to approve the merger?

What is being approved? The “approval process seems to be limited to a lease and management plan. Nothing about levels of service or any kind of financial or fiscal issues.”

Mr. Lo asserted that, “We are in the midst of due diligence right now, a fairly healthy due diligence, I will tongue-in-cheek say as I have 312 information requests sitting on my desk right now.”

We are and will be negotiating performance standards and metrics, default and unwind provisions. These should be “contractual but not statutory” incorporated.

At one point Mr. Lo asserted that “This is just one man's opinion on how this works,” perhaps suggesting that he wasn’t always speaking on behalf of the HHSC.


Rep. Kobayashi expressed concern that “other hospitals in HHSC system should not be adversely affected by this proposal.”


In responding to a question by Rep. Lowen on the economies of scale, Dr. Rosen remarked the remaining part of HHSC will not be impacted just because the remaining system is smaller.

As currently contemplated as Mr. Lo mentioned, the understanding of the corporate board is that each region determines what they want to do, and if one region goes, that there would not be a negative impact on the other regions. Now that said, you could say well you'll be a smaller entity so you wouldn't have the same economies of scale that you do before one hospital exits, but other than that and also the expenses that are related to Maui leaving as well.”

Dr. Rosen went on to assert that each region has their own budget and so the regions do not impact each other fiscally.

Representative Richard H.K. Onishi

Rep. Onishi inquired about a shared expense across regions.  “HHSC is implementing a $109M computer records management system. What share of that expense is Maui's?

The answer: The sunk capital costs have been spent but there will not be operating costs.

Rep. Onishi asked about the cost to install the replacement HPH computer system. 

According to Mr. Lo, “HPH ...actually wants to implement their electronic medical records system.” The cost: $42 million. Originally HPH wanted the State to pay half the cost, but they are looking at other possibilities so, “potentially it could be zero.”

Rep. Ward asked HPH, “If you compare your wages to wages that their getting in Maui, how is the difference?” The HPH answer is similar to the NextEra answer. “We haven't gone to that level of detail.”

HPH is “crosswalking all the positions.” That is, they will make a table showing equivalent positions between the entities. But they have not completed that yet.

Mr. Lo stressed several times that the Legislature has authority over the merger because enabling language must be passed and because the Legislature controls the budget which determines the subsidies over the next eight years.

Rep. Onishi remarked, “You also said ...that if the legislature did not fulfill the obligations in this contract, to provide the funding for the subsidy or for the CIP, that we would be in default of the contract.”

“What you're asking is that this legislature give Maui region a blank check and put all of our faith in the Maui regional board that they would do all of the due diligence that would be required not only for the people of Maui but also for HHSC as a statewide entity and all of the taxpayers in the State of Hawaii who would have to fund the subsidy and CIP program that you guys determine to be beneficial to Maui and HPH.”

“I don't think so.”

“Forgive me if I'm wrong, but in this bill as I read it, I don't see any safeguards for the state. What you're saying now is that before the end of the session you will have a meat-on-the bones presentation for us.”

“Yes.”

Supporters of HB 1075 include Maui Mayor Alan Arakawa, the Realtors Association of Maui and the Chamber of Commerce of Hawaii. 


The Office of Hawaiian Affairs (OHA) offered comments. The Hawaii Department of Budget and Finance supports the general intent and recommends moving the bill along to enable further discussion and deliberation. The Department of the Attorney General has a number of concerns about this bill. 


The Hawaii Government Employees Association, AFSCME Local 152, AFL-CIO strongly opposes the purpose and intent of the bill.

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