HONOLULU, Hawaii: In a decision that was handed down today, the Hawaii Public Utility Commission voted to deny the HECO companies’ application for approval of the biodiesel supply contract with Aina Koa Pono, rendering moot the application to establish a biofuel surcharge to help cover costs.

In its decision, the PUC wrote:

By this Decision and Order, the commission denies the HECO Companies’ request, as set forth in their Application, to approve HELCO’s Biodiesel Supply Contract with Aina Koa Pono-Ka’u LLC (“AKP” or “Seller”), dated January 6, 2011, for approximately sixteen million net United States (“U.S.”) gallons annually of locally-produced biodiesel over twenty years.  Specifically, the commission finds and concludes that the contract price for the AKP-produced biofuel is excessive, not cost-effective, and thus, is unreasonable and inconsistent with the public interest. In effect, from a real world, bill-paying perspective, the HECO Companies seek the commission’s approval to consistently charge affected ratepayers a premium for HELCO’s purchase and use of AKP-produced biofuel under the terms of the twenty-year contract. Such a result is unreasonable and not in the public interest. By the HECO Companies’ own projections:

(1) the incremental cost difference between the AKP-produced  biofuel and the cost of the petroleum fuel it intends to replace will be an estimated eight-figure amount in 2015, the first year in which the sixteen million gallons of biofuel is utilized; and

(2) over the course of the twenty-year contract period, the total estimated cost impact of using AKP-produced biodiesel instead of petroleum fuel will be a nine-figure amount The commission, by its Decision and Order, also finds it feasible to state certain observations with respect to the HECO Companies’ proposal to establish and implement a Biofuel Surcharge Provision that is intended to pass through the differential between the cost of the biofuel and the cost of the petroleum fuel that the biofuel is replacing, in the event that the cost of the biofuel is higher than the cost of the petroleum fuel, over the customers of HECO and HELCO.

While the commission’s Decision and Order is largely based on the high cost of the biofuel, it does have other major concerns with the contract, including economic dispatch, i.e., the likelihood that the use of the existing generation units will displace or curtail existing cheaper renewable alternatives. The commission intends to explore an appropriate forum for these and other biofuel-related issues.

Details about the pricing of the proposed Aina Koa Pono biofuels has long been a mystery to all but a select few, for competitive and proprietary reasons. In its decision, the PUC discusses this unknown pricing structure:

The HECO Companies chose to file and retain the AKP biofuel pricing information under confidential seal. Thus, to the commission’s knowledge, the entities that are privy to the confidential information are the HECO Companies, the Consumer Advocate, AKP, and the commission. In this regard, the commission, at the outset, notes that the non-Parties who support or oppose the AKP Project are not privy to the confidential biofuel pricing information, other than AKP. The commission further notes that the HECO Companies’ underlying reasons and data in support of the agreed-upon biofuel price and twenty-year term of the contract have also, to a large extent, been filed under confidential seal. The commission, based on its extensive review, finds and concludes that the contract price for the AKP-produced biofuel is excessive, not cost-effective, and thus, is unreasonable and inconsistent with the public interest.

In support thereto, the commission specifically finds and concludes as follows:

1. The Legislature, in the form of the RPS law, has clearly endorsed the use of cost-effective biofuel as a viable renewable energy resource for the generation of electricity within the State. Consistent with this legislative mandate, the commission has previously rejected a HECO proposed biofuel supply contract with Imperium Services, LLC, on the basis that the contract price and related terms were unreasonable, and thus, inconsistent with the public interest.

2. The contract price for the AKP-produced biofuel is a fixed annual per gallon rate that is subject to an annual escalation factor.

3 . The HECO Companies estimate that in 2015 — the first year in which the sixteen million gallons of biofuel will be delivered to HELCO — HELCO’ s total fuel cost will be higher by an eightfigure amount than if it utilized only petroleum fuel. In other words, the incremental cost difference between AKP’ s biofuel and HELCO’ s petroleum fuel in 2015, alone, is an estimated eight-figure amount.

4. The HECO Companies further estimate that over the course of the twenty-year contract period, the sum of “the estimated cost impact by year of using biodiesel instead of diesel fuel”  will be a nine-figure amount.

5. The HECO Companies’ most recent annual fuel price forecasts are set forth in their responses to PUC-IR-107 and PUC-IR-108, filed on September 9, 13, and 16, 2011, in this proceeding. Docket No. 2011-0005.

6. Based on the information and data from the Energy Information Administration’s AEO issued in April 2011, HELCO’s updated forecasts of diesel fuel prices for the twenty-year period from 2013 to 2032, under the high, reference, and low forecast scenarios, are set forth in Tables C and D of the HECO Companies’ response to PUC-IR-107, expressed in 2011 and nominal dollars, respectively. Meanwhile, Tables E and F therein, filed under confidential seal, list the per barrel contract price of the AKP-produced biofuel in 2011 and nominal dollars, respectively, under the reference scenario only. Because the contract price for the AKP-produced biofuel is a fixed annual per gallon rate that is subject to annual escalation, there are no price projections for the AKP-produced biofuel under the high or low forecast scenarios.

7. Tables C and D of the HECO Companies’ response to PUC-IR-108, filed under partial confidential seal, list for the twenty-year period from 2013 to 2032: (A) HELCO’s updated forecasts of diesel fuel prices under the high, reference, and low forecast scenarios, expressed in 2011 and nominal dollars, respectively; and (B) the heat-adjusted, equivalent diesel price of the AKP-produced biofuel, expressed in 2011 and nominal dollars, respectively (filed under confidential seal). In comparing HELCO’s updated forecasts of diesel fuel prices with the heat-adjusted, equivalent diesel price of the AKP-produced biofuel, it is projected that commencing in 2 013 and over the twenty-year term of the contract, the heat-adjusted, equivalent diesel price of the AKP-produced biofuel will consistently exceed HELCO’s forecasted diesel fuel prices under the reference scenario in nominal dollars (Table D, filed under partial confidential seal). It is only under the high forecast diesel fuel prices scenario that the heat-adjusted, equivalent diesel price of the AKP-produced biofuel is projected to be lower than the forecasted diesel fuel prices in nominal dollars, at a future time period (Table D, filed under partial confidential seal)

8. The HECO Companies assert that the initial per gallon contract price for the AKP-produced biofuel is competitive with the price currently being paid for biodiesel in the State for the generation of electricity. The Consumer Advocate, likewise, “notes that the price provision of the Contract is not inconsistent with certain other biodiesel prices observed by the HECO Companies in recent months. The commission, in response, finds that the HELCO-AKP contract is for twenty years, with an annual escalation factor. By contrast, the commission-approved biodiesel contracts for HECO and MECO, which the HECO Companies and the Consumer Advocate refer to, are short-term contracts, three of which are limited to testing purposes. Specifically, in In re Hawaiian Elec. Co., Inc., Docket No. 2009-0296 (“Docket No. 2009-0296”), the commission approved a supply contract between HECO and Renewable Energy Group Marketing and Logistics, LLC (“REG”), for approximately 3 9 6,000 net U.S. gallons of biodiesel to be utilized in conducting biodiesel emissions testing at HECO’s CT-1 facility. The subject biodiesel was processed from animal tallow at  REG’S facility in Seabrook, Texas . Furthermore, in In re Hawaiian Elec. Co. , Inc. , Docket No. 2009-0353 (“Docket No. 2009-0353”), the commission approved a two-year supply contract between HECO and REG for up to seven million gallons of biodiesel annually, for use at HECO’s Campbell Industrial Park Combustion Turbine Unit 1 (“CIP CT-1”) facility and other generating units. The subject biodiesel is processed from yellow grease (used cooking oil) and animal fat waste products derived from existing commercial and industrial operations. Meanwhile, in In re Hawaiian Elec. Co., Inc., Docket No. 2009-0155 (“Docket No. 2009-0155”) , the commission approved a supply contract between HECO and Sime Darby Biodiesel SDN BDG (“Sime Darby”) for 1,575,000 net U.S. gallons of biofuel for use in HECO’s Biofuel Co-Firing Project. The purpose of the subject project is to test biofuel blended with low-sulfur fuel oil (  ” L S F O” ) over a period of thirty days to determine the maximum biofuel/LSFO blend that can be utilized at HECO’s Kahe Unit 3 and other steam electric generation units on the electric utility’s system.  Likewise, in In re Maui Elec. Co. , Ltd. , Docket No. 2009-0168 (“Docket  N o. 2009-0168″), the commission approved a supply contract, as amended, between MECO and Sime Darby for one million gallons of palm oil-derived biodiesel for MECO’ s use at its Ma’alaea power plant as part of the electric utility’s Biodiesel Demonstration Project (i.e., testing the feasibility of converting MECO’s generating units from petro-diesel to biodiesel) .” These limited supply, short-term biodiesel contracts are distinguishable from the HELCO-AKP long-term, twenty-year supply contract.

9. From a real world, bill-paying perspective, the HECO Companies seek the commission’s approval to consistently charge affected ratepayers a premium for HELCO’s purchase and use of AKP-produced biofuel under the terms of the twenty-year contract. Such a result is unreasonable and not in the public interest.

10. The HECO Companies’ focus on the estimated rate impact on a typical residential customer’s monthly bill (500 to 600 kWh) is but one factor in assessing the reasonableness of  the Biodiesel Supply Contract. That said, the rate impact for customers whose usage exceeds 600 kWh per month, such as commercial load customers, will be higher.

11. The commission recognizes that the contract is intended to reduce: (A) the State’s reliance and dependence on fossil fuels, including the volatility of fossil fuel prices and supply limitations; (B) the amount of funds that are expended for importing fuel; and (C) GHG emissions. Act 109, 2011 Session Laws of Hawaii, § 1 (codified at HRS § 269-6(b)). The commission also recognizes that the fixed biofuel contract rate, which is subject to an annual escalation factor, is de-linked from the price of fossil fuel. HRS § 269-27.2(c).  That said, the commission also finds that the contract price of the AKP-produced biofuel will, in all likelihood, not “potentially enable utility customers to share in the benefits of fuel cost savings resulting from the use of nonfossil fuel generated electricity.” HRS § 269-27.2(c).  Ultimately, in this instance, the commission finds and concludes that the contract price for the AKP-produced biofuel is excessive and not cost-effective.

12. Based on the foregoing reasons, the commission denies the HECO Companies’ request to approve the Biodiesel Supply Contract. The HECO Companies, in effect, have not met their requisite burden of proof with respect to the contract.

In its Final Comments, the PUC writes:

As a final matter, the commission is aware of and rejects as unwarranted and without merit the possible perception that by not approving the Biodiesel Supply Contract, the commission is “anti-biofuels” or “anti-renewables.” Indeed, State law, which recognizes the use of cost-effective biofuels as a renewable electrical energy resource, reflects the State’s overall policy of reducing its reliance and dependence on fossil fuels. Nonetheless, in this instance, the commission finds and concludes that the contract price for the AKP-produced biofuel, which the HECO Companies chose to file and retain under confidential seal, is excessive, not cost-effective, and thus, is unreasonable and inconsistent with the public interest.

The commission, in implementing the State’s energy policy, finds value in converting the existing fossil generation units to utilize indigenous renewable fuels in order to continue providing firm power. However, the purchase of an annual minimum quantity of indigenous biofuel, that likely would require the utility to operate generation outside of economic dispatch to ensure these volumes are consumed, had the potential to displace or curtail more economical, existing renewable energy resources on the HELCO system or restrict the addition of other new low-cost, fixed price renewable energy projects.

Furthermore, the degree to which utility customers should be required to provide financial assurances for indigenous biofuel development, and under what terms and conditions, is a critical policy issue that has not been fully vetted from a regulatory perspective. Given the foregoing, the commission intends to explore the appropriate forum for this and other biofuel-related issues to assist in establishing a more comprehensive evaluation of converting existing utility and independent power producer fossil generation units to utilize indigenous renewable resources.

UPDATED: with file video and voice of Stephanie Salazar