Bound for Change

Gov. Lingle wants to reduce the state's reliance on oil, but her proposals could face a fight from the fuel industry

AS GOV. LINDA LINGLE prepares to introduce a sweeping energy bill this week designed to reduce the state's reliance on petroleum, she appears to be heading toward a confrontation with industry over some items in her proposal.

Although the bill has not yet been made public, industry executives are voicing concerns about details that Lingle has made public on her Web site and in meetings between administration officials and industry leaders.

One of these provisions would redirect a portion of money that Hawaiian Electric Co. Inc. receives from customers for energy efficiency programs into a fund that would be administered by the state or a contracted third party. Another provision would require HECO to share the financial risks of volatile oil prices; these risks are now passed on to customers through fuel surcharges.

DAVID SWANN / DSWANN@STARBULLETIN.COM

"We haven't seen a bill, so whatever I say is pretty much a response to what's on the governor's Web site, and until you see drafted legislation you can't be too specific," said Chuck Freedman, HECO's vice president for corporate relations. Still, Freedman said, "We have a couple of places where there appear to be fundamental disagreements, again subject to seeing what the bill is."

BEYOND ELECTRICITY GENERATION is the issue of motor fuels. Here, industry's concerns appear to lie with the language of the bill, and whether it will contain mandates, or less imposing guidelines or goals.

"Generally, we would be more likely to favor proposals that allow for flexibility and responding to consumer needs versus mandates that don't allow any flexibility, but we'd really need to look at the specifics to come out with any position," said Melissa Pavlicek, a lobbyist for the Western States Petroleum Association, which represents gasoline producers in Hawaii, including Shell Oil Co. and Chevron.

Despite these apparent differences, the parties appear to agree on an overarching point: that Hawaii policymakers need to address the state's energy policy.

Hawaii's geographic isolation means that most goods must be shipped into the state, typically by ships that use petroleum-based fuel. Likewise, oil that's refined into gasoline for cars also has to be shipped in. Finally, because it doesn't have any nuclear or natural gas-fired power plants, Hawaii is unusually dependent on oil needed to produce electricity, and that oil also has to be shipped in.

Although oil prices have not reached the record levels of the 1980s when adjusted for inflation, nominal oil prices are at record levels, and the situation is not expected to improve much.

IN OUTLINING why Lingle is pushing for the changes, Ted Liu, director of the Hawaii Department of Business, Economic Development and Tourism, points to new projections from the U.S. Department of Energy's Energy Information Administration.

In a 2006 energy outlook, the administration projects that oil prices will hover at about $54 a barrel in 2025. While that is lower than the $68.55 per barrel posted last week, it is more than 50 percent higher than the $33 per barrel the agency forecast for 2025 in its 2005 outlook.

Everyone seems to agree that the state needs to adopt some kind of policy.

"An important overall comment is that there's a lot of common ground between ... the utility and the administration and other people around town," said HECO's Freedman.

"I think it's fair to say that we're pleased to see that for once people are looking at a comprehensive approach to figuring out a pathway to Hawaii's energy future," said Albert Chee, a spokesman for Chevron Hawaii.

Among the policies Lingle has proposed are ones to retrofit and renovate state buildings and facilities to use energy-efficient designs and promote the use of fuel-efficient vehicles; increase tax credits for homeowners and businesses who buy solar energy systems; and invest taxpayer dollars in hydrogen fuel research, development and deployment.

"Those are all items that -- at least as they've been described to us -- that we would support," Freedman said.

Despite one provision that could prove difficult for the Legislature to accept, much of the Republican governor's bill appears likely to gain support from the Democratically-controlled Legislature.

Sen. Kalani English, D-East Maui-Lanai-Molokai, said that he has in the past proposed legislation promoting many of the items in Lingle's bill, including the one to make state buildings more energy efficient. But English said the administration has been unwilling to extend the support it now is offering.

But with fuel costs becoming alarmingly high, the stars appear to be aligned, said English, who is chairman of the Senate Energy, Environment, and International Affairs Committee.

"This transcends all the partisan politics," he said. "To begin characterizing it as a partisan issue would really be a counter-service to the public."

Hawaiian Electric is less sanguine about the bill.

ONE ISSUE involves a one-quarter cent per kilowatt hour surcharge that electricity customers now pay to cover HECO's energy-efficiency programs, which include subsidies for residential solar energy and commercial lighting and air conditioning systems. Although much of this surcharge goes to cover capital expenses of installing systems, most of it is used to make up for the revenue that HECO loses from customers who are not using as much electricity because they have become more efficient.

Citing HECO data, Liu said that out of approximately $19.2 million paid to HECO last year from the fee, only about $7.5 million was used for "actual delivery ... to customers." The other $11.6 million went to "the utilities for shareholder incentives and lost sales recovery payments."

The governor's proposal would steer the customer surcharge money into a fund that would be managed by the state for efficiency programs. The administration estimates it could direct 90 percent of the money raised to implement programs.

"This is one of the places we think there's just a misunderstanding," Freedman said.

A major problem, Freedman said, is that the surcharge helps cover certain fixed costs that HECO must pay even when consumption declines. If the fees used to cover those costs are steered away from the company into a state-run fund, Freedman said, the company would have to ask customers to pay them through another sort of fee.

"They're real costs, and the customer will end up paying twice," he said.

Freedman acknowledged that a portion of the fees goes to shareholders, but he defended the practice.

"Our only comment to that would be that earning a limited profit is a good thing, and it incentivizes us to do a good job, and we work very hard at this," he said.

Freedman also defended HECO's fuel surcharge, saying that 35 states have utilities that similarly pass fuel costs through to customers and that HECO made no profit on the charges. In any case, he said, charge has not prevented HECO from investing in alternative energy, by building its own wind farms and hydro-electric facilities and by buying electricity from private wind farms.

But Freedman declined to comment in detail until he had seen Lingle's bill.

"That's where it's sort of a highway to the danger zone talking about legislation that's not yet in draft," he said.

THE MAJOR OIL and gas companies have a more subtle position, which centers on an opposition to mandates.

A case in point is Hawaii's newly imposed policy on ethanol, a fuel made from sugar and corn and often blended with gasoline. Following dozens of mainland states, many of which require ethanol to be blended in gasoline for environmental reasons, Hawaii will require about 9 percent of the gasoline sold in the state to be replaced by ethanol starting in April.

Lingle has proposed to further increase the percentage of highway fuels that will be provided by so-called "renewable fuels" -- including ethanol, bio-diesel and hydrogen -- to 20 percent by 2020.

Pavlicek, the oil industry lobbyist, declined to comment on the current proposal, saying much would depend on the language of the bill and whether it mandated the renewable fuel levels.

But Pavli-cek said the industry did oppose the pervious mandates which require 85 percent of the gasoline sold in the state to contain 10 percent ethanol starting in April.

The industry, she said, opposed the mandate because it was not clear whether local ethanol production facilities would be running by April -- none are scheduled to -- and because activists groups such as the Sierra Club had raised concerns about potentially harmful emissions from ethanol.

Chee, the Chevron spokesman, said the key is to make the energy policy a broad and comprehensive one. Chee said that the state's gasoline price cap, which pegs Hawaii prices to wholesale gasoline prices on the mainland, has become the state's de facto energy policy, one that dominates public discourse about energy issues. And it's a policy the industry opposes.

Lingle's plan would eliminate the gasoline price cap and require producers to make public information on their gasoline costs. The goal, Liu said, would be to let consumers know the price it would cost to import gasoline and thereby pressure the companies to base their retail prices on the import price.

MAKING THE gas cap part of the energy policy could prove one of the more divisive moves. English, the senator who otherwise supports virtually all of Lingle's package, said the gas cap is a consumer-protection issue that doesn't belong in a conversation about an energy policy.

"If you take the governor's package and apply the 'Sesame Street' test to it -- which one of these things is not like the others -- it would be the gas cap," he said.

For his part, Liu said that the alternative to the cap is just a minor part of Lingle's proposal.

"If this results in nothing but a debate over price caps, we've failed," he said.