SB 1501: BNF; Public Utilities Commission; Energy; Step-In Agreements; Power Purchase Agreements; Power Purchase Costs Trust Fund

A BILL FOR AN ACT

RELATING TO ENERGY.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

     SECTION 1.  The legislature finds that it is imperative to enable the development of affordable clean energy resources for the benefit of utility customers in the State.  Many existing generating units in the State will need to be retired in the next few years due to obsolescence and environmental permitting requirements.  The impending retirement of these units makes it urgent to obtain replacement resources, without which the reliability of electric supplies in the State will be at risk.  In addition, continued reliance on these aging units, even if feasible, would result in increased costs for utility customers and continued reliance on fossil fuels, contrary to the State's policy to transition to renewable, non-carbon-emitting resources.

     The procurement or purchase of energy from replacement clean energy resources by a certain investor-owned electric utility and its electric utility subsidiaries is ongoing in its Stage 3 request for proposals and further anticipated in its first Integrated Grid Planning request for proposals.  These requests for proposals set forth energy plans that have been developed through extensive engagement with local stakeholders and communities and reviewed and approved by the public utilities commission.  The legislature finds that successful purchase of energy from clean energy resources is in the public interest and necessary to avoid significant detrimental reliability and affordability impacts to electric utility customers.

     The legislature further finds that the development of clean energy resources by independent power producers is essential to achieve the State's goals of one hundred per cent net electricity sales from renewable sources by 2045, a statewide target to achieve a zero emissions economy and sequester more atmospheric carbon and greenhouse gases than emitted by 2045, and greater energy security and energy diversification, as established by the Hawaii State Planning Act and existing public utility laws.

     The legislature also finds that continued development of clean energy resources requires adequate assurances that payments for purchased power will be made to independent power producers as and when due by the utility under power purchase agreements.  The current sub-investment-grade status of a certain investor-owned electric utility and its subsidiaries, arising from the tragic events that occurred in the 2023 Maui wildfires, has led independent power producers, and those who would otherwise finance renewable energy projects, to raise concerns about the reliability of payment by the utility and its subsidiaries under power purchase agreements procured through the Stage 3 and Integrated Grid Planning requests for proposals.  Those concerns have caused independent power producers to terminate their renewable energy projects and may continue to cause remaining independent power producers to cancel renewable energy projects, increase the prices they would charge for deliveries to address the inability to obtain financing due to this perceived credit risk, or choose not to respond to the electric utility's Integrated Grid Planning request for proposals.  Either outcome would be contrary to the interests of electric reliability and to electric utility customers in the State.

     The legislature further finds that the public interest would be served if the department of budget and finance enters into step-in agreements with independent power producers, pursuant to which the department of budget and finance would agree to make payments to an independent power producer after a failure by the electric utility to make required payments pursuant to the terms of a power purchase agreement.  The department of budget and finance's obligation to make payments pursuant to the terms of a step-in agreement is limited to the revenues received from power purchase charges associated with power purchase agreements subject to step-in agreements and reserve fees that are on deposit in the power purchase costs trust fund established by the department of budget and finance.  Neither the full faith and credit of the State, nor any other moneys of the State, will be pledged for any obligations under a step-in agreement.

     The legislature finds that step-in agreements may provide assurances that payments for purchased power will be made to independent power producers as and when due by the utility under the covered power purchase agreements.  The legislature also finds that the intent of this Act is further served by appointing, authorizing, and empowering the electric utility to serve as the billing, collection, and payment agent of the department of budget and finance.  Prior to a payment default under a covered power purchase agreement by the electric utility, the electric utility will be authorized to utilize revenues received from power purchase charges to discharge its obligations to pay independent power producers for electric energy and related services and products.  The obligations of the department of budget and finance under this Act are undertaken for a public purpose, namely, the protection of public health, safety, and welfare by supporting the development of clean energy resources that are needed for the reliable provision of electric supply at a reasonable cost.

     Therefore, the purpose of this Act is to:

     (1)  Require the department of budget and finance to enter into a step-in agreement with an independent power producer, in which the department of budget and finance agrees to make required payments to the independent power producer from revenues received from power purchase charges and reserve fees after a failure by the electric utility to make required payments pursuant to the terms of a power purchase agreement;

     (2)  Require the department of budget and finance to establish a trust fund outside the state treasury that shall be capitalized by money from a surcharge supporting a reserve account within the trust fund and, in the event of a default by the electric utility of its payment obligations under one or more covered power purchase agreements, by revenues received from the power purchase charges related to the covered power purchase agreements, for the fulfillment of payment obligations arising under the covered power purchase agreement;

     (3)  Establish that revenues collected from on-bill power purchase charges associated with covered power purchase agreements and money from a surcharge supporting a reserve account that are deposited in the power purchase costs trust fund shall be held in trust by the department of budget and finance, and that independent power producers shall hold a beneficial interest in the moneys to the extent of the amounts owed to each independent power producer under the related covered power purchase agreements; and

     (4)  Appoint, authorize, and empower the electric utility to serve as the billing, collection, and payment agent of the department of budget and finance to implement the requirements of this Act.

     SECTION 2.  Chapter 269, Hawaii Revised Statutes, is amended by adding a new part to be appropriately designated and to read as follows:

"Part    .  STEP-IN AGREEMENTS COVERING POWER PURCHASE COSTS

     §269-A  Definitions.  As used in this part:

     "Covered power purchase agreement" means a power purchase agreement that is subject to a step-in agreement.

     "Default" means the failure by an electric utility to pay power purchase costs as and when due to an obligee under a covered power purchase agreement after the expiration of any applicable grace or cure periods and extensions thereto.  "Default" does not mean a bankruptcy filing by an electric utility.

     "Department" means the department of budget and finance, or any successor by law.

     "Electric utility" means a public utility that produces, conveys, transmits, delivers, or furnishes electric power.

     "Energy cost recovery clause" means the provision, or other equivalent, in an electric utility's rate schedules that allows the electric utility to recover its costs of fuel, expenses, and related taxes for energy costs of power purchased under a power purchase agreement.

     "Fund" means the power purchase costs trust fund established pursuant to section 269-D.

     "Hawaii electric system" has the same meaning as defined in section 269-141.

     "Independent power producer" has the same meaning as user, owner, or operator of the Hawaii electric system.

     "Investment grade status" means a credit rating for the electric utility's senior unsecured long-term debt obligations or an issuer credit rating for the electric utility, in each case, without regard for third-party credit enhancements, from at least two out of three of the following:

     (1)  BBB- or higher for S&P Global Ratings, or any successor by law;

     (2)  BAA3 or higher by Moody's Investor Services, Inc., or any successor by law; or

     (3)  BBB- or higher by Fitch Ratings, Inc., or any successor by law.

     "Obligee" means any user, owner, or operator of the Hawaii electric system that does not claim a tax credit for a project system under section 235-12.5, and that is owed payment of power purchase costs by the electric utility under a power purchase agreement.

     "Power purchase agreement" means a contract between an electric utility and a user, owner, or operator of the Hawaii electric system, pursuant to which the electric utility agrees to purchase, and the user, owner, or operator of the Hawaii electric system agrees to sell, electric energy and related products produced by plants or facilities that have not provided, sold, or transmitted electricity to the electric utility before July 1, 2025.

     "Power purchase charges" means the on-bill charges, excluding reserve fees, authorized by the public utilities commission to be imposed on and collected from all existing and future customers of an electric utility or any successor for power purchase costs, including but not limited to the energy cost recovery clause and the purchased power adjustment clause.

     "Power purchase costs" means costs incurred by an electric utility pursuant to the terms of a power purchase agreement, including but not limited to costs such as termination payments payable by an electric utility in connection with the termination of a power purchase agreement as a result of a default by the electric utility.  "Power purchase costs" includes but is not limited to all categories of costs recoverable under the energy cost recovery clause and the purchased power adjustment clause under their respective tariffs in effect on July 1, 2025.

     "Purchased power adjustment clause" means the provision, or other equivalent, in an electric utility's rate schedules that allows the electric utility to recover expenses and related taxes for non-energy costs of power purchased under a power purchase agreement.

     "Reserve account" refers to the account for deposit and accounting of revenues from reserve fees within the fund established pursuant to section 269-D(a).

     "Reserve fees" means the surcharge described in section 269-E(a).

     "Revenue" means moneys from power purchase charges and reserve fees net of any applicable taxes or government fees, including but not limited to the franchise tax, public service company tax, and public utilities commission fee.

     "Step-in agreement" means a contract by which the department undertakes the obligation of payment for power purchase costs owed to an obligee as and when due by an electric utility under a power purchase agreement following a default by the electric utility as described in section 269-B(a); provided that the department's payment obligation under the step-in agreement is limited to the revenues from power purchase charges collected in connection with covered power purchase agreements and reserve fees that are on deposit in the fund.

     "User, owner, or operator of the Hawaii electric system" has the same meaning as defined in section 269-141.

     §269-B  Step-in agreements.  (a)  Within ninety days of receiving notice of the filing of an application to the public utilities commission for approval of a power purchase agreement, or if an application has already been filed as of July 1, 2025, within ninety days of receiving notice of the pending application, the department shall execute a step-in agreement related to the power purchase agreement with the obligee; provided that, before the expiration of the ninety-day period, the department completes a due diligence investigation of the obligee and the proposed step-in agreement and finds the obligee and proposed step-in agreement to be satisfactory; and further provided that if the public utilities commission denies the application, the step-in agreement shall be deemed void.  The step-in agreement shall require the department to make payments for power purchase costs owed by an electric utility to the obligee in the event of a default under the related covered power purchase agreement.  Pursuant to the step-in agreement and upon a default by the electric utility under the covered power purchase agreement related to the step-in agreement, the department shall make payments to the obligee for power purchase costs with revenues received from power purchase charges from covered power purchase agreements and reserve fees that are on deposit in the fund as and when due by the electric utility under the related covered power purchase agreement; provided that any step-in agreement entered into by the department shall provide that the department's payment obligation thereunder shall be limited to the revenues received from power purchase charges from covered power purchase agreements and reserve fees that are on deposit in the fund.  Each step-in agreement shall include a clause stating that neither the full faith and credit of the State nor any other moneys of the State will be pledged for any obligations pursuant to the terms of the step-in agreement and that in any action concerning a failure by the department to comply with the terms of a step-in agreement, the sole and exclusive remedy available to an obligee and the electric utility under the step-in agreement against the department shall be a court order directing specific performance by the department of the step-in agreement, and that under no circumstances shall the department be liable for any costs, expenses, or other monetary relief or compensatory damages.  An obligee of a covered power purchase agreement shall have no claim or lien on any moneys of the State.  An obligee of a covered power purchase agreement shall only have a claim or lien on those revenues from power purchase charges and reserve fees that are transferred by the electric utility and on deposit in the fund.  An obligee shall remain entitled to all payments for power purchase costs owed under its covered power purchase agreement, whether or not the revenues from power purchase charges attributable to its covered power purchase agreement are timely collected.  Notwithstanding anything to the contrary in this part, a step-in agreement shall also obligate the department to pay claims of an obligee from revenues received from power purchase charges and reserve fees on deposit in the fund arising out of a termination of the covered power purchase agreement by the electric utility under bankruptcy law.  In determining any amounts owed, the department shall have a right, but not an obligation, to rely on an invoice from an obligee describing amounts owed to make that determination.  The department shall not be deemed in breach of the step-in agreement by sole reason of having relied or failed to rely on the invoice.  Notwithstanding any law to the contrary, the department shall not be bound to make any independent calculation, verification, or investigation into the invoice from an obligee.

     (b)  The department shall enter into a step-in agreement only if the power purchase agreement that is subject to the step-in agreement arises from the Stage 3 request for proposals under docket number 2017-0352 before the public utilities commission or the first Integrated Grid Planning request for proposals issued under docket number 2024-0258 before the public utilities commission.  The department shall enter into a step-in agreement related to a power purchase agreement subject to the department completing its due diligence review and finding both the obligee and the contract to be satisfactory as provided in subsection (a).

     (c)  The payment obligation of the department under a step‑in agreement shall commence not later than two days after the date of a notice given by the department to the electric utility pursuant to section 269-C(a).

     (d)  A step-in agreement shall terminate when the credit rating of the electric utility or its successor achieves investment grade status for at least thirty days, or may be terminated by express agreement of the obligee, department, and electric utility.  Following the termination of a step-in agreement, the department shall have no obligation to the electric utility or the obligee upon a continuing or future default by the electric utility under the related power purchase agreement.

     (e)  Following a default of a covered power purchase agreement and any payment by the department from revenues in the fund, the electric utility, through explicit agreement with the respective obligee of its covered power purchase agreement, may elect to resume payments owed by the electric utility for power purchase costs related to the covered power purchase agreement in default, regardless of the credit rating of the electric utility at that time, in which case the electric utility shall cease to transfer revenues received from power purchase charges in connection with the covered power purchase agreement in default to the department for deposit into the fund as described in section 269-C(a), and may use the revenues received from power purchase charges related to the covered power purchase agreement in default through the vesting of title in the electric utility as described in subsection (h); provided that any election by the electric utility to continue making payments shall not terminate the step-in agreement that is related to the covered power purchase agreement in default, the related step-in agreement shall remain in effect until terminated pursuant to subsection (d), and the department shall remain obligated to pay the obligee of the covered power purchase agreement in default upon a subsequent default by the electric utility solely from revenues on deposit in the fund; provided further that no election by the electric utility shall be permitted if the department has made payment for any power purchase costs with revenues from the reserve account.

     (f)  The department may impose other conditions, and may include other terms, in a step-in agreement that the department deems necessary to implement the requirements of this part; provided that the conditions and terms shall not adversely affect the obligation of the department as set forth in this part, including but not limited to the obligation to make payments under the step-in agreement, but only to the extent that there are moneys in the fund, for power purchase costs owed by an electric utility to an obligee under a covered power purchase agreement related to the step-in agreement as and when due in the event of a default as required under subsection (a) or otherwise be inconsistent with the related covered power purchase agreement.

     (g)  As consideration for the department entering into a step-in agreement, the electric utility or its successor shall enter into an agreement to assign and transfer title to the revenues from power purchase charges and reserve fees attributable to the covered power purchase agreement to the department to be held in trust for the benefit of the obligees under the covered power purchase agreements to the extent of the amounts owed to the obligees.  The assignment and transfer of title to the revenues from the power purchase charges by the electric utility shall be made and remain for the term of the step-in agreement free and clear of any prior lien, pledge, security interest, or encumbrance of any kind, and shall be exempt from section 269-19.  The revenues from power purchase charges and reserve fees shall not be subject to appropriation for any other purpose.  The revenues shall be exempt from the requirements of chapters 36 and 38.  The electric utility or its successor shall be and remain at all times, even upon the occurrence and during the continuance of a default by the electric utility or its successor, obligated to bill and collect the power purchase charges and reserve fees as an agent for the department to effectuate the purposes of this part.

     (h)  Before default or an entry of an order of relief with respect to the electric utility pursuant to title 11 of the United States Code, if any payment obligation of the electric utility under a covered power purchase agreement for power purchase costs becomes owed and due, any title held in trust by the department to the revenues from power purchase charges for the payment obligation owed and due shall divest from the department and vest in the electric utility or its successor at the time the payment by the electric utility or its successor is made to the obligee.  Any vesting of revenues from power purchase charges to the electric utility at the time of payment may be made without appropriation by the legislature or allotment.  The department, except as permitted pursuant to section 269-C(a), shall not otherwise assign, sell, or transfer any title to, or any claim or right to, the revenues from power purchase charges or reserve fees.

     (i)  To meet the requirements of the State and the public utilities commission as they pertain to electric reliability, energy security, and energy diversification under this chapter and any rules adopted pursuant thereto, the electric utility shall ensure that it maintains sufficient availability of electric energy and related products, to the extent provided by an obligee in accordance with a covered power purchase agreement.  The public utilities commission shall exercise its regulatory powers to ensure that the electric utility complies with its obligations under a covered power purchase agreement.

     (j)  Notwithstanding any other law to the contrary, the electric utility shall file with the public utilities commission, and the public utilities commission shall allow to become effective, monthly rate adjustments provided under the energy cost recovery clause and purchased power adjustment clause to establish or adjust power purchase charges in a manner designed to:

     (1)  Generate sufficient revenues from power purchase charges to timely and fully pay amounts when owed and due under covered power purchase agreements;

     (2)  Ensure that in no event shall revenues from power purchase charges fall below the amounts owed and due under covered power purchase agreements by a sum that exceeds the amounts in the reserve account established under section 269-E; and

     (3)  Recover any applicable taxes and government fees and any incremental administrative costs of the electric utility or the department incurred to implement the requirements of this part.

To achieve the objectives established pursuant to this subsection, unless the public utilities commission otherwise directs, before a default, the electric utility may retain revenues collected from power purchase charges in excess of amounts owed and due under the covered power purchase agreements.  Any moneys in the reserve account established under the fund shall remain with the department at all times, subject to section 269-C(a).  The obligations of the electric utility and of the public utilities commission under this section shall survive any default by the electric utility and shall terminate only upon the termination of the step-in agreement as provided in subsection (d).

     §269-C  Default of electric utility; successor requirements.  (a)  After an obligee provides notice to the department of a default of a covered power purchase agreement, the department shall promptly provide the electric utility with a copy of the notice.  No later than twenty-four hours from the time the electric utility receives the notice, the electric utility shall record a journal entry accounting for the transfer of all revenues from the power purchase charges arising from any covered power purchase agreements identified in the notice, regardless of when collected, then in its possession, to the fund established pursuant to section 269-D(a).  No later than forty-eight hours from the time the electric utility receives the notice, the electric utility shall transfer all revenues from the power purchase charges arising from any covered power purchase agreements identified in the notice, regardless of when collected, then in its possession, and, subject to section 269‑B(e), all future revenues from the power purchase charges arising from the covered power purchase agreement identified in the notice and reserve fees thereafter collected to the fund established pursuant to section 269-D(a).  These amounts shall include all revenues from power purchase charges and reserve fees received by the electric utility after a default for the power purchase charges and reserve fees billed before the default.  Following a default, the department shall use the revenues collected from the power purchase charges and reserve fees on deposit in the fund, only in the order as follows:

     (1)  To pay power purchase costs pursuant to step-in agreements, subject to the appointment, authorization, and empowerment of the electric utility as an agent as described in section 269-F(e); provided that, for purposes of complying with the requirements of this part, the department shall have a right, but not an obligation, in determining the amounts owed to an obligee, to rely on an invoice from an obligee describing amounts owed, and the department shall not be deemed to have breached the step-in agreement by sole reason of having relied or failed to rely on the invoice; and notwithstanding any law to the contrary, the department shall not be bound to make any independent calculation, verification, or investigation into the invoice from an obligee;

     (2)  To recover any incremental administrative costs of the electric utility or the department incurred to implement the requirements of this part; and

     (3)  To implement a rate credit to customers.

     (b)  Any step-in agreement shall remain in effect notwithstanding any bankruptcy, reorganization, or other insolvency proceedings with respect to the electric utility.

     (c)  The obligation of the electric utility to collect and remit the revenues from power purchase charges and reserve fees pursuant to the requirements of this part shall not be subject to any setoff, counterclaim, surcharge, or defense by the electric utility, or in connection with a bankruptcy of any electric utility.

     (d)  Any successor to an electric utility shall be bound by the requirements of this part.  The successor shall perform and satisfy all obligations of the electric utility in the same manner and to the same extent as the electric utility, including the obligations upon a default.

     (e)  If a step-in agreement is terminated as described in section 269-B(d), then by operation of law, any title to the revenues related to power purchase charges attributable to the related covered power purchase agreement shall immediately cease to be held in trust and the electric utility or its successor shall thereafter be the sole holder of title or beneficial and equitable interest in, and any claim or right to, the revenues related to power purchase charges attributable to the related covered power purchase agreement, and the obligation of the electric utility or its successor to bill and collect the power purchase charges and reserve fees for the covered power purchase agreement as an agent for the department, and, if applicable, to remit the collected revenues for the covered power purchase agreement to the fund, shall terminate.

     §269-D  Power purchase costs trust fund.  (a)  There is established outside the state treasury the power purchase costs trust fund to be administered by the department.  The department shall establish and maintain two separate accounts within the fund, the first account to be utilized for the deposit of all revenues received from power purchase charges transferred by the electric utility and the second account to be utilized for the deposit of revenues received from reserve fees transferred by the electric utility.  The electric utility shall transfer to the department for deposit into the applicable account in the fund all revenues collected in connection with a covered power purchase agreement from:

     (1)  Power purchase charges following a default of the covered power purchase agreement; and

     (2)  Reserve fees.

     (b)  Moneys in the fund shall be held by the department in trust for the benefit of the obligees of covered power purchase agreements to the extent of the amounts owed to the obligees.  The department's payments from the fund shall be made without appropriation or allotment, as provided in section 37-40.

     (c)  If a step-in agreement is terminated as described in section 269-B(d), the fund shall cease to receive any revenues from the power purchase charges collected by the electric utility or its successor related to the terminated covered power purchase agreement and the department, as directed by the electric utility, shall pay to the electric utility or its successor the remainder of any revenues in the fund attributable to power purchase charges associated with the terminated covered power purchase agreement related to the step-in agreement, which shall be considered moneys of the electric utility or its successor.

     (d)  The department shall be under no obligation to make payment to any obligee in excess of the moneys in the fund.  Any default or failure by the department to make payments pursuant to the terms of a step-in agreement under this part shall not result in any recourse by the electric utility or an obligee to any funds of the State.  An obligee of a covered power purchase agreement shall have only the benefit of revenues derived from power purchase charges and the reserve fees collected and on deposit in the fund.  In any action concerning a breach by the department of a step-in agreement, the sole and exclusive remedy available to an obligee and the electric utility against the department shall be a court order directing specific performance by the department of the step-in agreement, and under no circumstances shall the department be liable for any costs, expenses, or any other monetary relief or compensatory damages for a failure to comply with the terms of a step-in agreement.

     §269-E  Reserve account; establishment.  (a)  By August 1, 2025, the public utilities commission shall create a surcharge, referred to as reserve fees, which shall be deposited into an account within the fund and be pledged to secure and be applied to the repayment of payment obligations under a covered power purchase agreement to the extent that there is a shortfall in the amount of revenues received from power purchase charges on deposit in the fund.  Reserve fees shall be collected in full by the electric utility or its successors, as collection agents for the department, through a surcharge that is separate and apart from the electric utility's rates.  Reserve fees may be included in the purchased power adjustment clause on customer bills.  The department shall establish and maintain a separate account within the fund to accept and account for revenues from reserve fees, and the electric utility shall, within twenty-four hours of receipt, transfer all revenues collected from the surcharge related to the reserve fees directly to the department for deposit into the account.  The electric utility shall not otherwise assign, sell, or transfer any title to, or any claim or right to, the revenues from reserve fees, except as provided under this part.  The electric utility shall not access the reserve account or utilize the revenues from the reserve fees deposited therein, except as directed by the department pursuant to section 269-F(e).  The public utilities commission may require, in the financing order creating the surcharge, that, if a default occurs by the electric utility in remittance of the reserve fees collected, the public utilities commission, upon the application by the department, and without limiting any other remedies available to the department by reason of the default, shall order the sequestration and payment to the department of the reserve fees.  Any order shall remain in full force and effect notwithstanding any bankruptcy, reorganization, or other insolvency proceedings with respect to the electric utility.

     (b)  Reserve fees shall be collected and maintained and if necessary, reinstated, to establish or replenish a reserve account in an amount not to exceed the total of fifteen per cent of the forecasted monthly power purchase costs of all covered power purchase agreements plus an amount sufficient to recover costs related to administration by the department of the reserve account and any applicable taxes and fees.

     (c)  If a step-in agreement terminates pursuant to section 269-B(d), reserve fees collected in connection with the related covered power purchase agreement shall cease to be collected.  Upon the termination of all step-in agreements, all moneys remaining in the reserve account shall be returned in full, together with any associated interest earned, to customers through a rate credit.

     §269-F  Electric utility; agent of the department.  (a)  To implement the requirements of this part, the department shall designate the electric utility or its successor to act as an agent of the department to provide billing, collection, payment, and other related services.  In any action concerning a breach by the department of an agency agreement entered into in connection with the billing, collection, payment, and other related services, the sole remedy available to an electric utility against the department shall be a court order directing specific performance by the department of the agency agreement.  Under no circumstances shall the department be liable for any costs, expenses, or other monetary relief or compensatory damages in connection with a breach of any agency agreement.

     (b)  At the request of the department, the public utilities commission shall order the electric utility or its successor to perform the duties designated under subsection (a).

     (c)  The act of serving as an agent to bill and to collect the power purchase charges and reserve fees shall not cause the electric utility to be subject to the laws that regulate financial institutions, escrow depositories, or collection agencies.  The electric utility shall not be responsible for lending, underwriting, and credit determinations in respect to these billing and collection activities.

     (d)  To the extent any revenues are received by the electric utility pursuant to subsection (a) in the process of collection and pending their transfer to the fund pursuant to section 269-D(a), those revenues shall be held in trust for the department's exercise of its obligations pursuant to this part.

     (e)  To implement the requirements of this part, the director of finance may appoint, authorize, and empower the electric utility, as agent for and on behalf of the department, to collect and pay out moneys, including from the fund, for fulfillment of payment obligations of the department arising from step-in agreements related to covered power purchase agreements.  The appointment shall terminate when all step-in agreements are terminated as described in section 269-B(d) or as otherwise directed by the director of finance.

     (f)  The department's designation of the electric utility for services pursuant to subsections (a) and (e) shall be exempt from chapter 103D."

     SECTION 3.  If any provision of this Act, or the application thereof to any person or circumstance, is held invalid, the invalidity does not affect other provisions or applications of the Act that can be given effect without the invalid provision or application, and to this end the provisions of this Act are severable.

     SECTION 4.  In codifying the new sections added by section 2 of this Act, the revisor of statutes shall substitute appropriate section numbers for the letters used in designating the new sections in this Act.

     SECTION 5.  This Act shall take effect upon its approval.

Report Title:

BNF; Public Utilities Commission; Energy; Step-In Agreements; Power Purchase Agreements; Power Purchase Costs Trust Fund

Description:

Requires the Department of Budget and Finance to enter into step-in agreements for payment obligations arising under certain power purchase agreements.  Establishes the Power Purchase Costs Trust Fund.  Establishes that revenues from on-bill charges for power purchase agreements and money from a surcharge supporting a reserve account shall be held in trust by the Department of Budget and Finance, and that independent power producers shall hold a beneficial interest in the revenues to the extent of the amounts owed under the covered power purchase agreements.  Appoints, authorizes, and empowers the electric utility to serve as the billing, collection, and payment agent of the Department of Budget and Finance in the service of performing step-in agreements.  (CD1)

The summary description of legislation appearing on this page is for informational purposes only and is not legislation or evidence of legislative intent.

A BILL FOR AN ACT

RELATING TO ENERGY.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

     SECTION 1.  The legislature finds that it is imperative to enable the development of affordable clean energy resources for the benefit of utility customers in the State.  Many existing generating units in the State will need to be retired in the next few years due to obsolescence and environmental permitting requirements.  The impending retirement of these units makes it urgent to obtain replacement resources, without which the reliability of electric supplies in the State will be at risk.  In addition, continued reliance on these aging units, even if feasible, would result in increased costs for utility customers and continued reliance on fossil fuels, contrary to the State's policy to transition to renewable, non-carbon-emitting resources.

     The procurement of replacement clean energy resources by a certain investor-owned electric utility and its electric utility subsidiaries is ongoing in its Stage 3 request for proposals and further anticipated in its first Integrated Grid Planning request for proposals.  These requests for proposals set forth energy plans that have been developed through extensive engagement with local stakeholders and communities and reviewed and approved by the public utilities commission.  The legislature finds that successful procurement of clean energy resources is in the public interest and necessary to avoid significant detrimental reliability and affordability impacts to electric utility customers.

     The legislature further finds that the development of clean energy resources by independent power producers is essential to achieve the State's goals of one hundred per cent net electricity sales from renewable sources by 2045, a zero emissions economy by 2045, and greater energy security and energy diversification, as established by the Hawaii state planning act and existing public utility laws.

     The legislature also finds that continued development of clean energy resources requires adequate assurances that payments for purchased power will be made to independent power producers as and when due by the utility under power purchase agreements.  The current sub‑investment‑grade status of a certain investor-owned electric utility and its subsidiaries, arising from the tragic events that occurred in the 2023 Maui wildfires, has led independent power producers, and those who would otherwise finance renewable energy projects, to raise concerns about the reliability of payment by the utility and its subsidiaries under power purchase agreements procured through the Stage 3 and Integrated Grid Planning requests for proposals.  Those concerns may cause independent power producers to cancel renewable energy projects or increase the prices they would charge for deliveries to address this perceived credit risk.  Either outcome would be contrary to the interests of electric utility customers in the State.

     The legislature further finds that the public interest would be served if the department of budget and finance enters into step-in agreements with independent power producers, pursuant to which the department of budget and finance would agree to make payments to the independent power producers after a failure by an electric utility to make required payments pursuant to the terms of the power purchase agreements.  The department of budget and finance's obligation to make payments pursuant to the terms of a step-in agreement is limited to the moneys received from power purchase charges associated with a power purchase agreement subject to a step-in agreement and reserve fees that are on deposit in the power purchase costs trust fund established by the department of budget and finance.  Neither the full faith and credit of the State, nor any other moneys of the State, will be pledged for any obligations under a step-in agreement.

     The legislature finds that step-in agreements may provide assurances that payments for purchased power will be made to independent power producers as and when due by the utility under the covered power purchase agreements.  The legislature also finds that the intent of this Act is further served by appointing, authorizing, and empowering the electric utility to serve as the billing, collection, and payment agent of the department of budget and finance.  Prior to a payment default by the electric utility, the electric utility will be authorized to utilize moneys received from independent power producers related to power purchase charges to discharge its obligations to pay independent power producers for electric energy and related products.  The obligations of the department of budget and finance under this Act are undertaken for a public purpose, namely, the protection of public health, safety, and welfare by supporting the development of clean energy resources that are needed for the reliable provision of electric supply at a reasonable cost.

     Therefore, the purpose of this Act is to:

     (1)  Require the department of budget and finance to enter into a step-in agreement with an independent power producer under which the department of budget and finance will agree to make required payments from moneys received from independent power producers related to power purchase charges and reserve fees to the independent power producer after a failure by the electric utility to make required payments pursuant to the terms of a power purchase agreement;

     (2)  Require the department of budget and finance to establish a trust fund outside the state treasury that shall be capitalized by money from a surcharge supporting a reserve account and, in the event of a default, by money received from power purchase charges, in each case associated with covered power purchase agreements, for the fulfillment of payment obligations arising from the power purchase agreement;

     (3)  Establish that money collected from on-bill charges associated with covered power purchase agreements and money from a surcharge supporting a reserve account that are deposited in the power purchase costs trust fund shall be held in trust by the State, and that independent power producers shall hold a beneficial interest in such moneys to the extent of the amounts owed to such independent power producers under the covered power purchase agreements; and

     (4)  Appoint, authorize, and empower the electric utility to serve as the billing, collection, and payment agent of the department of budget and finance to implement the requirements of this Act.

     SECTION 2.  Chapter 269, Hawaii Revised Statutes, is amended by adding a new part to be appropriately designated and to read as follows:

"Part    .  STEP-IN AGREEMENTS COVERING POWER PURCHASE COSTS

     §269-A  Definitions.  As used in this part:

     "Covered power purchase agreement" means a power purchase agreement that is subject to a step-in agreement.

     "Default" means the failure by an electric utility to pay power purchase costs as and when due to an obligee under a covered power purchase agreement after the expiration of any applicable grace or cure periods and extensions thereto.  "Default" does not mean a bankruptcy filing by an electric utility.

     "Department" means the department of budget and finance, or any successor by law.

     "Electric utility" means a public utility that produces, conveys, transmits, delivers, or furnishes electric power.

     "Energy cost recovery clause" means the provision, or other equivalent, in an electric utility's rate schedules that allows the electric utility to recover its costs of fuel, expenses, and related taxes for energy costs of power purchased under a power purchase agreement.

     "Fund" means the power purchase costs trust fund established pursuant to section 269-D.

     "Investment grade status" means a credit rating for the electric utility's senior unsecured long-term debt obligations or an issuer credit rating for the electric utility, in each case, without regard for third-party credit enhancements, from at least two out of three of the following:

     (1)  BBB- or higher for S&P Global Ratings, or any successor by law;

     (2)  BAA3 or higher by Moody's Investor Services, Inc., or any successor by law; or

     (3)  BBB- or higher by Fitch Ratings, Inc., or any successor by law.

     "Obligee" means any user, owner, or operator of the Hawaii electric system that is owed payment of power purchase costs by an electric utility under a power purchase agreement.

     "Power purchase agreement" means a contract between an electric utility and a user, owner, or operator of the Hawaii electric system, approved by the public utilities commission, pursuant to which the electric utility agrees to purchase, and the user, owner, or operator of the Hawaii electric system agrees to sell, electric energy and related products produced by plants or facilities that have not provided, sold, or transmitted electricity to the electric utility before July 1, 2025.

     "Power purchase charges" means the on-bill charges, excluding reserve fees, authorized by the public utilities commission to be imposed on and collected from all existing and future customers of an electric utility or any successor for power purchase costs, including but not limited to the energy cost recovery clause and the purchased power adjustment clause.

     "Power purchase costs" means costs incurred by an electric utility pursuant to the terms of a power purchase agreement.  "Power purchase costs" include but are not limited to costs such as termination payments payable by an electric utility in connection with the termination of a power purchase agreement as a result of a default by such electric utility thereunder and all categories of costs recoverable under the energy cost recovery clause and the purchased power adjustment clause under their respective tariffs in effect on July 1, 2025.

     "Purchased power adjustment clause" means the provision, or other equivalent, in an electric utility's rate schedules that allows the electric utility to recover expenses and related taxes for non-energy costs of power purchased under a power purchase agreement.

     "Reserve fees" means the surcharges described in section 269-E(a).

     "Revenue" means moneys from power purchase charges and reserve fees net of any applicable taxes or government fees, including but not limited to the franchise tax, public service company tax, and public utility commission fee.

     "Step-in agreement" means a contract by which the department undertakes the obligation of payment for power purchase costs owed to an obligee as and when due by an electric utility under a power purchase agreement following a default, as described in section 269-B(a); provided that the department's payment obligation under such step-in agreement is limited to the moneys from power purchase charges and reserve fees collected in connection with the covered power purchase agreements and on deposit in the fund.

     "User, owner, or operator of the Hawaii electric system" has the same meaning as in section 269-141.

     §269-B  Step-in agreements.  (a)  The department shall enter into a step-in agreement with an obligee after receipt of satisfactory results, as determined by the department, from a due diligence investigation by the department of an obligee and the step-in agreement.  Such step-in agreement shall require the department to make payments for power purchase costs owed by an electric utility to the obligee in the event of a default.  Pursuant to such step-in agreement and upon the default, the department shall make payments to the obligee for power purchase costs with moneys on deposit in the fund as and when due by the electric utility under the covered power purchase agreement; provided that any such step-in agreement shall provide that the department's payment obligation thereunder shall be limited to the moneys from power purchase charges and reserve fees collected in connection with covered power purchase agreements that are on deposit in the fund.  Each step-in agreement shall include a clause stating that neither the full faith and credit of the State nor any other moneys of the State will be pledged for any obligations pursuant to the terms of the step-in agreement and that in any action concerning a failure by the department to comply with the terms of the step-in agreement, the sole and exclusive remedy available to an obligee and the electric utility against the department shall be an order directing specific performance of the step-in agreement, and under no circumstances shall the department be liable for any costs, expenses, or other monetary relief or compensatory damages.  An obligee of a covered power purchase agreement shall have no claim or lien on any moneys of the State.  An obligee of a covered power purchase agreement shall only have a claim or lien on moneys attributable to covered power purchase agreements that are transferred by the electric utility and on deposit in the fund.  An obligee shall remain entitled to all payments for power purchase costs owed under the covered power purchase agreement, whether or not the moneys from power purchase charges attributable to the covered power purchase agreement are timely collected.  Notwithstanding anything to the contrary in this part, a step-in agreement shall also obligate the department to pay claims of the obligee from moneys on deposit in the fund arising out of the termination of a power purchase agreement by the electric utility under bankruptcy law.

     (b)  The department shall enter into a step-in agreement only if the power purchase agreement subject to the step-in agreement arises from the Stage 3 request for proposals under docket number 2017-0352 before the public utilities commission or the first Integrated Grid Planning request for proposals issued under docket number 2024-0258 before the public utilities commission.  The department shall enter into a step-in agreement related to a power purchase agreement when the power purchase agreement is executed or, if the power purchase agreement has already been executed as of July 1, 2025, as soon as reasonably possible.

     (c)  The payment obligation of the department under a step-in agreement shall commence not later than two days after the date of a notice given by the department to the electric utility pursuant to section 269-C(a).

     (d)  The step-in agreement shall terminate when the credit rating of the electric utility or its successor achieves investment grade status or by express agreement of the obligee, department, and electric utility.  Following the termination of a step-in agreement, the department shall have no obligation to the electric utility or the obligee upon a default by the electric utility.

     (e)  Following a default of a covered power purchase agreement and any payment by the department from moneys in the fund, the electric utility, through agreement with all obligees of its covered power purchase agreements, may elect to resume payments for power purchase costs owed by the electric utility, regardless of the credit rating of the electric utility at that time, in which case the electric utility shall cease to transfer revenues representing moneys from power purchase charges collected in connection with the covered power purchase agreement to the fund as described in section 269-C(a), and may use the revenues from power purchase charges through the vesting of title in the electric utility as described in subsection (h); provided that the payments shall not terminate the step-in agreement, which shall remain in effect until terminated pursuant to subsection (d), and the department shall remain obligated to pay the obligee upon a subsequent default by the electric utility solely from moneys on deposit in the fund; provided that no election by the electric utility is permitted if the department has made payment for power purchase costs with moneys from the reserve fees.

     (f)  The department may impose other conditions, and may include other terms, in a step-in agreement that it deems necessary to implement the requirements of this part; provided that the conditions and terms shall not adversely affect the obligation of the department to make payments, but only to the extent there are moneys in the fund, for power purchase costs owed by an electric utility to the obligee as and when due in the event of a default as required by section 269-B(a) or otherwise be inconsistent with the covered power purchase agreement.

     (g)  As consideration for the department entering into a step‑in agreement, the electric utility or its successor shall enter into an agreement to assign and transfer title to the revenues from power purchase charges and reserve fees attributable to the covered power purchase agreement to the department to be held in trust for the benefit of the obligees under the covered power purchase agreements to the extent of the amounts owed to such obligees.  The assignment and transfer of title to the revenues by the electric utility shall be made and remain for the term of the step-in agreement free of any prior lien, pledge, security interest, or encumbrance of any kind, and shall be exempt from section 269-19.  The revenues shall not be subject to appropriation for any other purpose.  The revenues shall be exempt from the requirements of chapters 36 and 38.  The electric utility or its successor shall be and remain at all times, even upon the occurrence and during the continuance of a default by the electric utility or its successor, obligated to bill and collect the power purchase charges and reserve fees as an agent for the department to effectuate the purposes of this part.

     (h)  Prior to default or an entry of an order of relief with respect to the electric utility pursuant to title 11 of the United States Code, if any payment obligation of the electric utility under a covered power purchase agreement for power purchase costs becomes owed and due, any title held by the department in trust to the revenues related to moneys from power purchase charges for the payment obligation owed and due shall divest from the department and vest in the electric utility or its successor at the time the payment by the electric utility or its successor is made to the obligee.  Any vesting of moneys from power purchase charges to the electric utility at the time of payment may be made without appropriation by the legislature or allotment.  The department shall not otherwise assign, sell, or transfer any title to, or any claim or right to, the revenues from power purchase charges or reserve fees.

     (i)  To meet the requirements of the State and the public utilities commission as they pertain to electric reliability, energy security, and energy diversification under this chapter and any rules adopted pursuant thereto, the electric utility shall ensure that it maintains sufficient availability of electric energy and related products, to the extent provided by an obligee in accordance with a covered power purchase agreement.  The public utilities commission shall exercise its regulatory powers to ensure that the electric utility complies with its obligations under the covered power purchase agreement.

     (j)  Notwithstanding any other law to the contrary, the electric utility shall file with the public utilities commission, and the public utilities commission shall allow to become effective, monthly rate adjustments provided under the energy cost recovery clause and purchased power adjustment clause to establish or adjust power purchase charges in a manner designed to:

     (1)  Generate sufficient moneys from power purchase charges to timely and fully pay amounts when owed and due under covered power purchase agreements;

     (2)  Ensure that in no event shall moneys from power purchase charges fall below the amounts owed and due under covered power purchase agreements by a sum that exceeds the amounts in the reserve account established under section 269-E; and

     (3)  Recover any applicable taxes and government fees and any incremental administrative costs of the electric utility or the department incurred to implement the requirements of this part.

     To achieve the objectives established pursuant to this subsection, unless the public utilities commission otherwise directs, the electric utility may retain revenues collected from power purchase charges in excess of amounts owed and due under the covered power purchase agreements.  Any moneys in the account established under the fund related to reserve fees will remain with the department.  The obligations of the electric utility and of the public utilities commission under this section shall survive any default by the electric utility and shall terminate only upon the termination of the step-in agreement as provided in subsection (d).

     §269-C  Default of electric utility; successor requirements.  (a)  After the obligee provides notice to the department of a default of a covered power purchase agreement, the department shall promptly provide the electric utility with a copy of such notice of default.  One day after the electric utility receives the notice, the electric utility shall transfer all revenues from the power purchase charges arising from any covered power purchase agreements identified in the notice and reserve fees, regardless of when collected, then in its possession, and, subject to section 269-B(e), all future revenues from the power purchase charges and reserve fees thereafter collected to the fund established pursuant to section 269-D(a).  These amounts shall include all revenues received by the electric utility after a default for such power purchase charges and reserve fees billed before the default.  The department shall use the revenues collected from the power purchase charges and reserve fees on deposit in the fund, only in the order as follows:

     (1)  To pay power purchase costs pursuant to step-in agreements, subject to the appointment, authorization, and empowerment of the electric utility as an agent as described in section 269-F(e), and for revenues in excess of amounts owed under covered power purchase agreements;

     (2)  To recover any incremental administrative costs of the electric utility or the department incurred to implement the requirements of this part; and

     (3)  To implement a rate credit to customers.

     (b)  Any step-in agreement shall remain in effect notwithstanding any bankruptcy, reorganization, or other insolvency proceedings with respect to the electric utility.

     (c)  The obligation of the electric utility to collect and remit the revenues from power purchase charges and reserve fees pursuant to the requirements of this part shall not be subject to any setoff, counterclaim, surcharge, or defense by the electric utility, or in connection with a bankruptcy of any electric utility.

     (d)  Any successor to an electric utility shall be bound by the requirements of this part.  The successor shall perform and satisfy all obligations of the electric utility in the same manner and to the same extent as the electric utility, including the obligation upon default to bill and collect the power purchase charges and reserve fees and remit to the fund the revenues collected in connection with any covered power purchase agreement, unless and until the step-in agreement is terminated as described in section 269‑B(d).

     (e)  If the step-in agreement is terminated as described in section 269-B(d), then by operation of law, any title to the revenues related to power purchase charges attributable to the covered power purchase agreement shall immediately cease to be held in trust and the electric utility or its successor shall thereafter be the sole holder of title or beneficial and equitable interest in, and any claim or right to, the revenues related to power purchase charges, and the obligation of the electric utility or its successor to bill and collect the power purchase charges and reserve fees as an agent for the department, and, if applicable, to remit the collected revenues to the fund, shall terminate.

     §269-D  Power purchase costs trust fund.  (a)  There is established outside the state treasury the power purchase costs trust fund to be administered by the department.  The department shall establish and maintain two separate accounts within the fund, the first account to be utilized for the deposit of all power purchase charges transferred by the electric utility and the second account to be utilized for the deposit of reserve fees transferred by the electric utility.  The electric utility shall transfer to the department for deposit into the applicable account in the fund all revenues collected in connection with covered power purchase agreements from:

     (1)  Power purchase charges in the event of a default of covered power purchase agreements; and

     (2)  Reserve fees.

     (b)  Moneys in the fund shall be held by the department in trust for the term of the step-in agreement for the benefit of obligees of covered power purchase agreements to the extent of the amounts owed to such obligees.  The department's payments from the fund shall be made without appropriation or allotment, as provided in section 37-40.

     (c)  If a step-in agreement is terminated as described in section 269-B(d), the fund shall cease to receive any moneys from the power purchase charges collected by the electric utility or its successor and the department shall pay to the electric utility or its successor the remainder of any moneys in the fund attributable to power purchase charges.  Those moneys from power purchase charges shall be considered moneys of the electric utility or its successor.

     (d)  The department shall be under no obligation to make payment to any obligee in excess of the moneys in the fund.  Any default or failure by the department to make payments pursuant to the terms of a step-in agreement under this part shall not result in any recourse by the electric utility or obligee to any funds of the State.  The only moneys an obligee shall have the benefit of are moneys derived from power purchase charges and the reserve fees collected and on deposit in the fund.  In any action concerning a breach by the department of a step-in agreement, the sole and exclusive remedy available to an obligee and the electric utility against the department shall be an order directing specific performance of the step-in agreement, and under no circumstances shall the department be liable for any costs, expenses, or other monetary relief or compensatory damages.

     §269-E  Reserve account; establishment.  (a)  By August 1, 2025, the public utilities commission shall create a utility-wide nonbypassable surcharge, referred to as reserve fees, which shall be deposited into an account within the fund and be pledged to secure and be applied to the repayment of payment obligations under a covered power purchase agreement to the extent that there is a shortfall in the amount of power purchase charges on deposit in the fund.  Reserve fees shall be collected by the electric utility or its successors, as collection agents for the department, in full through a surcharge that is separate and apart from the electric utility's rates.  The department shall establish and maintain a separate account within the fund to accept and account for revenues from reserve fees, and the electric utility shall, within one day of receipt, transfer all revenues collected from the surcharge related to the reserve fees into this separate account.  The electric utility shall not otherwise assign, sell, or transfer any title to, or any claim or right to, the revenues from reserve fees, except as provided under this part.  The electric utility shall not access the reserve account or utilize the revenues deposited therein, except as directed by the department pursuant to section 269-F(e).  The public utilities commission may require, in the financing order creating the surcharge, that, if a default by the electric utility in remittance of the reserve fees collected occurs, the public utilities commission, upon the application by the department, and without limiting any other remedies available to the department by reason of the default, shall order the sequestration and payment to the department of the reserve fees.  Any order shall remain in full force and effect notwithstanding any bankruptcy, reorganization, or other insolvency proceedings with respect to the electric utility.

     (b)  Reserve fees shall be collected and maintained to establish a reserve account in an amount not to exceed the total of fifteen per cent of the forecasted monthly power purchase costs of all covered power purchase agreements plus an amount sufficient to recover costs related to administration of the reserve account and any applicable taxes and fees.

     (c)  If the step-in agreement terminates pursuant to section 269-B(d), reserve fees collected in connection with the covered power purchase agreement shall cease to be collected, and all moneys remaining in the fund attributable to the reserve fees shall be returned in full, together with any associated interest earned, to customers through a rate credit.

     §269-F  Electric utility; agent of the department.  (a)  To implement the requirements of this part, the department may contract with an electric utility or its successor to act as an agent of the department to provide billing, collection, payment, and other related services.  In any action concerning a breach by the department of the agency agreement, the sole remedy available to an electric utility against the department shall be an order directing specific performance of the agency agreement.  Under no circumstances shall the department be liable for any costs, expenses, or other monetary relief or compensatory damages in connection with a breach of any agency agreement.

     (b)  At the request of the department, the public utilities commission shall order an electric utility or its successor to perform the duties pursuant to a contract under subsection (a).

     (c)  The act of serving as an agent to bill and to collect the power purchase charges and reserve fees shall not cause any electric utility to be subject to the laws that regulate financial institutions, escrow depositories, or collection agencies.  An electric utility shall not be responsible for lending, underwriting, and credit determinations in respect to these billing and collection activities.

     (d)  To the extent any revenues are received by an electric utility pursuant to subsection (a) in the process of collection and pending their transfer to the fund pursuant to section 269-D(a), those moneys shall be held in trust for the department's exercise of its obligations pursuant to this part.

     (e)  To implement the requirements of this part, the director of finance may appoint, authorize, and empower the electric utility, as agent for and on behalf of the department, to collect and pay out moneys, including from the fund, for fulfillment of payment obligations of the department arising from step-in agreements related to covered power purchase agreements.  The appointment shall terminate when the step-in agreement is terminated as described in section 269-B(d)."

     SECTION 3.  If any provision of this Act, or the application thereof to any person or circumstance, is held invalid, the invalidity does not affect other provisions or applications of the Act that can be given effect without the invalid provision or application, and to this end the provisions of this Act are severable.

     SECTION 4.  In codifying the new sections added by section 2 of this Act, the revisor of statutes shall substitute appropriate section numbers for the letters used in designating the new sections in this Act.

     SECTION 5.  This Act shall take effect on July 1, 3000.

Report Title:

BNF; Public Utilities Commission; Energy; Step-In Agreements; Power Purchase Agreements; Power Purchase Costs Trust Fund

Description:

Requires the Department of Budget and Finance to enter into step-in agreements for payment obligations arising under certain power purchase agreements.  Establishes the Power Purchase Costs Trust Fund.  Establishes that money from on-bill charges for power purchase agreements and money from a surcharge supporting a reserve account shall be held in trust by the State, and that independent power producers shall hold a beneficial interest in the revenues to the extent of the amounts owed under the covered power purchase agreements.  Appoints, authorizes, and empowers the electric utility to serve as the billing, collection, and payment agent of the Department of Budget and Finance in the service of performing step-in agreements.  Effective 7/1/3000.  (HD1)

The summary description of legislation appearing on this page is for informational purposes only and is not legislation or evidence of legislative intent.

A BILL FOR AN ACT

RELATING TO ENERGY.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

     SECTION 1.  The legislature finds that it is imperative to enable the development of affordable clean energy resources for the benefit of utility customers in the State.  Many existing generating units in Hawaii will need to be retired in the next few years due to obsolescence and environmental permitting requirements.  The impending retirement of these units makes it urgent to obtain replacement resources, without which the reliability of electrical supplies in the State will be at risk.  In addition, continued reliance on these aging units, even if feasible, would result in increased costs for utility customers and continued reliance on fossil fuels, contrary to the State's policy to transition to renewable, non-carbon-emitting resources.

     The procurement or purchase of energy from replacement clean energy resources by a certain investor-owned electric utility and its electric utility subsidiaries is ongoing in its stage 3 request for proposals, further anticipated in its first integrated grid planning request for proposals and other proposals.  These requests for proposals implement energy plans that are developed through extensive engagement with local stakeholders and communities and reviewed and approved by the public utilities commission.  The legislature finds that successful purchase of energy from clean energy resources is in the public interest and necessary to avoid significant detrimental reliability and affordability impacts to electric utility customers.

     The legislature also finds that the development of clean energy resources by independent power producers is essential to achieve the State's goals of one hundred per cent net electricity sales from renewable sources by 2045, a zero emissions economy by 2045, and greater energy security and energy diversification, as established by the Hawaii State Planning Act and existing public utility laws.

     The legislature further finds that continued development of clean energy resources requires adequate assurances to independent power producers that prompt and full payments for purchased power will be made, irrespective of the financial strength of an electric utility.  The current sub‑investment‑grade status of a certain investor-owned electric utility and its subsidiaries, arising from the tragic events that occurred in the 2023 Maui wildfires, has led independent power producers, and those who would finance renewable energy projects, to raise concerns about the reliability of payment by the utility and its subsidiaries under new power purchase agreements.  Those concerns may cause independent power producers to cancel renewable energy projects or increase the prices they would charge for deliveries to address this perceived credit risk.  Either outcome would be contrary to the interests of electric utility customers in the State.

     The legislature further finds that the public interest could be served by the State providing limited credit support through step-in agreements, under which the State will agree to make payments to independent power producers in the event of a default in payment by an electric utility.  These agreements can provide assurances to independent power producers that prompt and full payments for purchased power will be made.  The legislature also finds that the intent of this Act is further served by appointing, authorizing, and empowering the electric utility to serve as the billing, collection, payment, and management agent of the State.

     The legislature also finds that the State's obligations in connection with step-in agreements do not constitute contingent liabilities of the State pursuant to article VII, section 13, clause 8, of the Hawaii State Constitution, because the State will be vested with all ownership of and title to revenues resulting from on-bill charges for power purchase costs, and the full faith and credit of the State will not be pledged for obligations under these step-in agreements.  In the event of a default by an electric utility on its payment obligations, these revenues would cover all payment obligations of the State for electric energy and related products.  In the absence of default, the electric utility will be authorized to utilize these revenues to discharge its obligations to pay independent power producers for electric energy and related products.  The obligations of the State under this Act are undertaken for a public purpose, namely, the protection of public health, safety, and welfare by supporting the development of clean energy resources that are needed for the reliable provision of electric supply at a reasonable cost.

     Therefore, the purpose of this Act is to:

     (1)  Allow the State to enter into step-in agreements for payment obligations arising under new power purchase agreements entered into between an investor‑owned electric utility and its regulated subsidiaries and independent power producers;

     (2)  Establish a trust fund within the State treasury that shall be capitalized immediately in the event of a default to fulfill state-backed payment obligations arising from power purchase agreements subject to step-in agreements;

     (3)  Establish that revenues from on-bill charges for covered power purchase agreements and accompanying reserves shall be held in trust by the State, and that independent power producers shall hold a beneficial interest in the revenues and reserves to the extent they are owed under the covered power purchase agreements; and

     (4)  Appoint, authorize, and empower an electric utility to serve as the billing, collection, payment, and management agent of the department of budget and finance in the service of performing step-in agreements.

     SECTION 2.  Chapter 269, Hawaii Revised Statutes, is amended by adding a new part to be appropriately designated and to read as follows:

"Part     .  STEP-IN AGREEMENTS COVERING POWER PURCHASE COSTS

     §269-A  Definitions.  As used in this part:

     "Covered power purchase agreement" means a power purchase agreement that is subject to a step-in agreement.

     "Default" means the failure by an electric utility to pay power purchase costs when due to an obligee under a covered power purchase agreement after the expiration of any applicable grace or cure periods and extensions thereto.  "Default" shall not mean a bankruptcy filing by an electric utility.

     "Department" means the department of budget and finance, or any successor by law.

     "Electric utility" means a public utility that produces, conveys, transmits, delivers, or furnishes electric power.

     "Energy cost recovery clause" means the provision, or other equivalent, in an electric utility's rate schedules that allows the electric utility to recover its costs of fuel, expenses, and related taxes for energy costs of power purchased under a power purchase agreement.

     "Fund" means the power purchase costs trust fund established pursuant to section 269-D.

     "Investment grade status" means a credit rating for the electric utility's senior unsecured long-term debt obligations or an issued credit rating for the electric utility (in each case, not supported by third party credit enhancements) from at least two out of the three of the following:

     (1)  At least BBB- or higher from S&P Global Ratings, or any successor by law;

     (2)  At least BAA3 or higher from Moody's Investor Services, Inc., or any successor by law; or

     (3)  At least BBB- or higher from Fitch Ratings, Inc., or any successor by law.

     "Obligee" means any user, owner, or operator of the Hawaii electric system that does not claim a tax credit for a project system under section 235‑12.5 and that is owed payment of power purchase costs by the electric utility under a power purchase agreement.

     "Power purchase agreement" means a contract between an electric utility and a user, owner, or operator of the Hawaii electric system, approved by the public utilities commission, pursuant to which the electric utility agrees to purchase, and the user, owner, or operator of the Hawaii electric system agrees to sell, electric energy and related products produced by plants or facilities that have not provided, sold, or transmitted electricity to the electric utility.

     "Power purchase charges" means the on-bill charges authorized by the public utilities commission to be imposed on and collected from all existing and future customers of an electric utility or any successor for power purchase costs, including the energy cost recovery clause and the purchased power adjustment clause.  "Power purchase charges" do not include any amounts for state and county revenue taxes, including any franchise tax, public service company tax, and public utility commission fee.

     "Power purchase costs" means costs incurred by an electric utility pursuant to the terms of a power purchase agreement, including but not limited to termination payments payable by an electric utility in connection with the termination of a power purchase agreement as a result of a default by the electric utility.  "Power purchase costs" also include all categories of costs recoverable under the energy cost recovery clause and the purchased power adjustment clause under its respective tariffs.

     "Purchased power adjustment clause" means the provision, or other equivalent, in an electric utility's rate schedules that allows the electric utility to recover expenses and related taxes for non-energy costs of power purchased under a power purchase agreement.

     "Step-in agreement" means a contract by which the State undertakes an obligation of prompt and full payment for power purchase costs owed to an obligee by an electric utility under a power purchase agreement following a default.

     "User, owner, or operator of the Hawaii electric system" has the same meaning as defined in section 269-141.

     §269-B  Step-in agreements.  (a)  The department shall enter into a step-in agreement with an obligee that requires the department to make prompt and full payments for power purchase costs owed by an electric utility to the obligee in the event of a default; provided that before entry into any agreement, the department may conduct due diligence on a prospective obligee.  Notwithstanding any other provision in this part to the contrary, a step-in agreement shall also obligate the department to pay claims of the obligee from moneys in the fund arising out of the termination of a covered power purchase agreement by the electric utility under bankruptcy law.  Upon the default, the department shall make payments to the obligee for power purchase costs with moneys from the fund as and when due under the covered power purchase agreement.  The step-in agreement shall not be an obligation for which the full faith and credit of the State is pledged, and an obligee shall have no claim or lien on any revenues or moneys of the State, except for those revenues from the power purchase charges attributable to the covered power purchase agreement.

     (b)  The department shall enter into a step-in agreement for each covered power purchase agreement.  The department shall enter into a step-in agreement when the power purchase agreement subject to the step-in agreement is executed, or if the power purchase agreement has already been executed as of July 1, 2025, as soon as reasonably possible.

     (c)  Payment by the department under a step-in agreement shall commence not later than two days after the date of a notice from the department to the electric utility pursuant to section 269-C(a).

     (d)  The step-in agreement shall terminate when the credit rating of the electric utility or its successor achieves investment grade status or by express agreement of the obligee.

     (e)  Following a default of a covered power purchase agreement and any payment by the department, the electric utility, through agreement with all obligees of its covered power purchase agreements, may elect to resume payments for power purchase costs owed by the electric utility, regardless of the credit rating of the electric utility at that time, in which case the electric utility may use the revenue from power purchase charges as specified in subsection (h); provided that the payments shall not terminate the step-in agreement, which shall remain in effect until terminated pursuant to subsection (d), and the department shall remain obligated to pay the obligee upon a subsequent payment default by the electric utility.

     (f)  The department may impose other conditions, and may include other terms, in a step-in agreement that the department deems necessary to implement the requirements of this part; provided that the conditions and terms shall not adversely affect the obligation of the department to make prompt and full payments for power purchase costs owed by an electric utility to an obligee as and when due to a default as required under subsection (a) or otherwise be inconsistent with the covered power purchase agreement.

     (g)  As consideration for the State entering into the step‑in agreement, the electric utility or its successor shall enter into an agreement to assign and transfer any ownership in and title to the revenue from power purchase charges attributable to the covered power purchase agreement to the department, and, under the agreement, the department shall be deemed to be the sole holder in trust of all ownership and title to the revenue for the benefit of the obligees under the covered power purchase agreements to the extent the obliges are owed.  The revenue shall not be subject to appropriation for any other purpose.  The revenue, if held in a depository other than the state treasury, shall be exempt from the requirements of chapters 36 and 38.  The electric utility or its successor shall be obligated to bill and collect the power purchase charges and to manage the revenue attributable to the agreement as an agent for the department.

     (h)  Except in the case of any bankruptcy filing by an electric utility, if any payment obligation of the electric utility under a covered power purchase agreement for power purchase costs becomes owed and due, any ownership of or title to the revenue from power purchase charges for the payment obligation owed and due shall divest from the department and vest in the electric utility or its successor at the time the payment by the electric utility is made to the obligee.  Any vesting of revenues to the electric utility when payment obligations are owed and due may be made without appropriation or allotment by the legislature.  The department may not otherwise assign, sell, or transfer any ownership of, or title to, any claim or right to the revenue from power purchase charges. 

     (i)  To meet the requirements of the State and the public utilities commission as it pertains to electric reliability, energy security, and energy diversification under this chapter and any rules adopted pursuant thereto, an electric utility shall ensure that it maintains sufficient availability of electric energy and related products, to the extent provided by an obligee in accordance with a covered power purchase agreement.  The department shall exercise its regulatory powers to ensure that an electric utility complies with its obligations under the covered power purchase agreements.

     (j)  Notwithstanding any other law to the contrary, an electric utility shall file with the public utilities commission, and the public utilities commission shall allow to become effective, monthly rate adjustments provided under the energy cost recovery clause and purchased power adjustment clause to establish or adjust power purchase charges in a manner designed to:

     (1)  Generate sufficient revenue to timely and fully pay amounts when owed and due under covered power purchase agreements; and

     (2)  Ensure that in no event shall revenues fall below the amounts owed and due under covered power purchase agreements by a sum that exceeds the amounts in the reserve established under section 269-E. 

     To achieve the objectives established pursuant to this subsection, unless the public utilities commission otherwise directs, the electric utility may retain revenue collected in excess of amounts owed and due under the covered power purchase agreement.  The obligations of the electric utility and of the public utilities commission under this section shall survive any default by the electric utility and shall terminate only upon the termination of the step-in agreement as provided in subsection (d). 

     (k)  If the electric utility fails to timely file any submission as described in subsection (j), the department shall promptly file, and the public utilities commission shall allow to become effective, a substitute submission as if the submission had been filed by the electric utility under subsection (j).  The electric utility shall implement the power purchase charges in the substitute submission from the department.

     §269-C  Default of electric utility; successor requirements.  (a)  If the obligee provides notice to the department of a default of a covered power purchase agreement, the department shall provide the electric utility notice of the default.  Two days after the electric utility receives the notice, the electric utility shall turn over all revenues from power purchase charges arising from any covered power purchase agreements identified in the notice, regardless of when collected, then in its possession, and all future revenues from the power purchase charges thereafter collected, to the fund as directed by the department; provided that the amounts shall include revenues received by the electric utility after a default for power purchase charges billed before the default that were intended to be used to pay power purchase costs arising from the covered power purchase agreement.  The department shall use the revenue from the power purchase charges, including the revenues turned over, only in the order as follows:

     (1)  To pay power purchase costs pursuant to a step-in agreement, subject to the appointment, authorization, and empowerment of the electric utility as an agent as described in section 269-F(e); and

     (2)  To implement a rate credit to customers for revenue in excess of amounts owed under the covered power purchase agreement.

     (b)  Any step-in agreement shall remain in full force and effect notwithstanding any bankruptcy, reorganization, or other insolvency proceedings with respect to the electric utility.

     (c)  The obligation of an electric utility to collect and remit the power purchase charges pursuant to the requirements of this part shall not be subject to any setoff, counterclaim, surcharge, or defense by the electric utility, or in connection with a bankruptcy of any electric utility.

     (d)  Any successor to an electric utility shall be bound by the requirements of this part.  The successor shall perform and satisfy all obligations of the electric utility in the same manner and to the same extent as the electric utility, including the obligation to bill and collect the power purchase charges and remit the collected revenue to the department in connection with any covered power purchase agreement, unless and until the step-in agreement is terminated as described in section 269‑B(d).

     (e)  If the credit rating of the electric utility or its successor achieves investment grade status, then by operation of law, any ownership of and title to the revenue from power purchase charges attributable to the covered power purchase agreement shall immediately divest from the department and vest in the electric utility or its successor; provided that the electric utility or its successor shall thereafter be the sole owner and holder of title or beneficial and equitable interest in, and any claim or right to, the revenue, and the obligation of the electric utility or its successor to bill and collect the power purchase charges and manage the revenue as an agent for the department, and, if applicable, to remit the collected revenue to the fund, shall terminate.

     §269-D  Power purchase costs trust fund.  (a)  There is established outside the state treasury the power purchase costs trust fund, to be administered by the department, into which shall be deposited all proceeds of the power purchase charges to be paid in the event of a default of a covered power purchase agreement by the electric utility.

     (b)  Moneys in the fund shall be administered and held by the department in trust for the benefit of obligees of covered power purchase agreements to the extent the obligees are owed.

     (c)  If the credit rating of the electric utility or its successor achieves investment grade status, the fund shall cease to receive any revenue from the power purchase charges collected by that electric utility and shall pay to the electric utility or its successor the remainder of any moneys in the fund; provided that the moneys in the fund shall be considered revenue of the electric utility.

     (d)  The department shall be under no obligation to make payment to any obligee if the moneys in the fund are depleted.  Any default or failure by the department to make payments pursuant to the terms of a step-in agreement under this part shall not result in any recourse by the electric utility or obligee to any funds of the State other than the revenues derived from power purchase charges and the subsidy for the reserve account collected and on deposit in the fund.

     §269-E  Power purchase costs reserve fee; establishment.  (a)  By August 1, 2025, the public utilities commission shall authorize a surcharge proposed by an electric utility, referred to as the power purchase costs reserve fee, the revenue from which shall be accorded the same treatment as revenue from power purchase charges as described in section 269-B(g).  The power purchase costs reserve fee may be included in the purchased power adjustment clause on customer bills.

     (b)  The power purchase costs reserve fee shall be collected and maintained to establish a reserve in an amount not to exceed fifteen per cent of the forecasted monthly power purchase costs of all covered power purchase agreements.

     (c)  In the event of default pursuant to section 269-C(a), all previously collected revenues and all future revenues from the power purchase costs reserve fee shall be accorded the same treatment as revenues from power purchase charges as described in section 269-C.

     (d)  Notwithstanding subsection (c), if the credit rating of the electric utility or its successor achieves investment grade status and the step-in agreement terminates pursuant to section 269-B(d), all moneys remaining in the reserve collected from the power purchase costs reserve fee shall be returned, together with any associated interest earned, to customers through a rate credit.

     (e)  In the special circumstances of this part, the legislature finds and declares that the reasonable reserve requirement of article VII, section 13, clause 8 of the Hawaii State Constitution, to the extent applicable, has been satisfied.

     §269-F  Electric utility; agent of the department.  (a)  To implement the requirements of this part, the department may contract with an electric utility or its successor to act as an agent of the department to provide billing, collection, payment, management, and other related services on terms and conditions that reasonably compensate the electric utility or its successor for its incremental cost to provide services, and adequately secure payment to the department.

     (b)  At the request of the department, the public utilities commission shall order an electric utility or its successor to perform the duties pursuant to a contract under subsection (a).

     (c)  The act of serving as an agent to bill and to collect the power purchase charges shall not cause any electric utility to be subject to the laws that regulate financial institutions, escrow depositories, or collection agencies.  An electric utility shall not be responsible for lending, underwriting, and credit determinations in respect to these billing and collection activities.

     (d)  To the extent any moneys are received by an electric utility pursuant to subsection (a) or section 269-B(g), in the process of collection, and pending their transfer to the department, those moneys shall be held in trust for the department's exercise of its obligations pursuant to this part.

     (e)  To implement the requirements of this part, the director of finance may appoint, authorize, and empower the electric utility, as agent for and on behalf of the State, to manage and pay out moneys, including from the fund, for fulfillment of payment obligations of the State arising from covered power purchase agreements.  The appointment shall terminate when the step-in agreement for the covered power purchase agreements terminates pursuant to section 269-B(d)."

     SECTION 3.  If any provision of this Act, or the application thereof to any person or circumstance, is held invalid, the invalidity does not affect other provisions or applications of the Act that can be given effect without the invalid provision or application, and to this end the provisions of this Act are severable.

     SECTION 4.  In codifying the new sections added by section 2 of this Act, the revisor of statutes shall substitute appropriate section numbers for the letters used in designating the new sections in this Act.

     SECTION 5.  This Act shall take effect on May 13, 2040.

Report Title:

BNF; Public Utilities Commission; Energy; Step-In Agreements; Power Purchase Agreements; Power Purchasing Costs Trust Fund

Description:

Allows the State to enter into step-in agreements for payment obligations arising under certain power purchase agreements.  Establishes the Power Purchasing Costs Trust Fund.  Establishes that revenues from on-bill charges for power purchase agreements and accompanying reserves shall be held in trust by the State, and that independent power producers shall hold a beneficial interest in the revenue and reserve to the extent of the amounts owed under the covered power purchase agreements.  Appoints, authorizes, and empowers an electric utility to serve as the billing, collection, payment, and managing agent of the Department of Budget and Finance in the service of performing step-in agreements.  Effective 5/13/2040.  (SD2)

The summary description of legislation appearing on this page is for informational purposes only and is not legislation or evidence of legislative intent.

A BILL FOR AN ACT

RELATING TO ENERGY.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

     SECTION 1.  The legislature finds that it is imperative to enable the development of affordable clean energy resources for the benefit of utility customers in the State.  Many existing generating units in Hawaii will need to be retired in the next few years due to obsolescence and environmental permitting requirements.  The impending retirement of these units makes it urgent to obtain replacement resources, without which the reliability of electrical supplies in the State will be at risk.  In addition, continued reliance on these aging units, even if feasible, would result in increased costs for utility customers and continued reliance on fossil fuels, contrary to the State's policy to transition to renewable, non-carbon-emitting resources.

     The procurement of replacement clean energy resources by a certain investor-owned electric utility and its electric utility subsidiaries is ongoing in its stage 3 request for proposals and further anticipated in its first integrated grid planning request for proposals.  These requests for proposals implement energy plans that are developed through extensive engagement with local stakeholders and communities and reviewed and approved by the public utilities commission.  The legislature finds that successful procurement of clean energy resources is in the public interest and necessary to avoid significant detrimental reliability and affordability impacts to electric utility customers.

     The legislature also finds that the development of clean energy resources by independent power producers is essential to achieve the State's goals of one hundred per cent net electricity sales from renewable sources by 2045, a zero emissions economy by 2045, and greater energy security and energy diversification, as established by the Hawaii State Planning Act and existing public utility laws.

     The legislature further finds that continued development of clean energy resources requires adequate assurances to independent power producers that prompt and full payments for purchased power will be made, irrespective of the financial strength of an electric utility.  The current sub‑investment‑grade status of a certain investor-owned electric utility and its subsidiaries, arising from the tragic events that occurred in the 2023 Maui wildfires, has led independent power producers, and those who would finance renewable energy projects, to raise concerns about the reliability of payment by the utility and its subsidiaries under new power purchase agreements.  Those concerns may cause independent power producers to cancel renewable energy projects or increase the prices they would charge for deliveries to address this perceived credit risk.  Either outcome would be contrary to the interests of electric utility customers in the State.

     The legislature further finds that the public interest could be served by the State providing limited credit support through step-in agreements, under which the State will agree to make payments to independent power producers in the event of a default in payment by an electric utility.  These agreements can provide assurances to independent power producers that prompt and full payments for purchased power will be made.  The legislature also finds that the intent of this Act is further served by appointing, authorizing, and empowering the electric utility to serve as the billing, collection, payment, and management agent of the State.

     The legislature also finds that the State's obligations in connection with step-in agreements do not constitute contingent liabilities of the State pursuant to article VII, section 13, clause 8, of the Hawaii State Constitution, because the State will be vested with all ownership of and title to revenues resulting from on-bill charges for power purchase costs, and the full faith and credit of the State will not be pledged for obligations under these step-in agreements.  In the event of a default by an electric utility on its payment obligations, these revenues would cover all payment obligations of the State for electric energy and related products.  In the absence of default, the electric utility will be authorized to utilize these revenues to discharge its obligations to pay independent power producers for electric energy and related products.  The obligations of the State under this Act are undertaken for a public purpose, namely, the protection of public health, safety, and welfare by supporting the development of clean energy resources that are needed for the reliable provision of electric supply at a reasonable cost.

     Therefore, the purpose of this Act is to:

     (1)  Allow the State to enter into step-in agreements for payment obligations arising under new power purchase agreements entered into between an investor‑owned electric utility and its regulated subsidiaries and independent power producers;

     (2)  Establish a trust fund within the State treasury that shall be capitalized immediately in the event of a default to fulfill state-backed payment obligations arising from power purchase agreements subject to step-in agreements;

     (3)  Establish that revenues from on-bill charges for covered power purchase agreements and accompanying reserves shall be held in trust by the State, and that independent power producers shall hold a beneficial interest in the revenues and reserves to the extent they are owed under the covered power purchase agreements; and

     (4)  Appoint, authorize, and empower an electric utility to serve as the billing, collection, payment, and management agent of the department of budget and finance in the service of performing step-in agreements.

     SECTION 2.  Chapter 269, Hawaii Revised Statutes, is amended by adding a new part to be appropriately designated and to read as follows:

"Part     .  STEP-IN AGREEMENTS COVERING POWER PURCHASE COSTS

     §269-A  Definitions.  As used in this part:

     "Covered power purchase agreement" means a power purchase agreement that is subject to a step-in agreement.

     "Default" means the failure by an electric utility to pay power purchase costs when due to an obligee under a covered power purchase agreement after the expiration of any applicable grace or cure periods and extensions thereto.  "Default" does not mean a bankruptcy filing by an electric utility.

     "Department" means the department of budget and finance, or any successor by law.

     "Electric utility" means a public utility that produces, conveys, transmits, delivers, or furnishes electric power.

     "Energy cost recovery clause" means the provision, or other equivalent, in an electric utility's rate schedules that allows the electric utility to recover its costs of fuel, expenses, and related taxes for energy costs of power purchased under a power purchase agreement.

     "Fund" means the power purchase costs trust fund established pursuant to section 269-D.

     "Investment grade status" means a credit rating for the electric utility's senior unsecured long-term debt obligations or an issued credit rating for the electric utility (in each case, not supported by third party credit enhancements) from at least two out of the three of the following:

     (1)  At least BBB- or higher from S&P Global Ratings, or any successor by law;

     (2)  At least BAA3 or higher from Moody's Investor Services, Inc., or any successor by law; or

     (3)  At least BBB- or higher from Fitch Ratings, Inc., or any successor by law.

     "Obligee" means any user, owner, or operator of the Hawaii electric system that is owed payment of power purchase costs by the electric utility under a power purchase agreement.

     "Power purchase agreement" means a contract between an electric utility and a user, owner, or operator of the Hawaii electric system, approved by the public utilities commission, pursuant to which the electric utility agrees to purchase, and the user, owner, or operator of the Hawaii electric system agrees to sell, electric energy and related products produced by plants or facilities that have not provided, sold, or transmitted electricity to the electric utility before July 1, 2025.

     "Power purchase charges" means the on-bill charges authorized by the public utilities commission to be imposed on and collected from all existing and future customers of an electric utility or any successor for power purchase costs, including the energy cost recovery clause and the purchased power adjustment clause.  "Power purchase charges" do not include any amounts for state and county revenue taxes, including any franchise tax, public service company tax, and public utility commission fee.

     "Power purchase costs" means costs incurred by an electric utility pursuant to the terms of a power purchase agreement, including but not limited to termination payments payable by an electric utility in connection with the termination of a power purchase agreement as a result of a default by the electric utility.  "Power purchase costs" also include all categories of costs recoverable under the energy cost recovery clause and the purchased power adjustment clause under its respective tariffs in effect on July 1, 2025.

     "Purchased power adjustment clause" means the provision, or other equivalent, in an electric utility's rate schedules that allows the electric utility to recover expenses and related taxes for non-energy costs of power purchased under a power purchase agreement.

     "Step-in agreement" means a contract by which the State undertakes an obligation of prompt and full payment for power purchase costs owed to an obligee by an electric utility under a power purchase agreement following a default.

     "User, owner, or operator of the Hawaii electric system" has the same meaning as defined in section 269-141.

     §269-B  Step-in agreements.  (a)  The department shall enter into a step-in agreement with an obligee that requires the department to make prompt and full payments for power purchase costs owed by an electric utility to the obligee in the event of a default.  Notwithstanding any other provision in this part to the contrary, a step-in agreement shall also obligate the department to pay claims of the obligee from moneys in the fund arising out of the termination of a covered power purchase agreement by the electric utility under bankruptcy law.  Upon the default, the department shall make payments to the obligee for power purchase costs with moneys from the fund as and when due under the covered power purchase agreement.  The step-in agreement shall not be an obligation for which the full faith and credit of the State is pledged, and an obligee shall have no claim or lien on any revenues or moneys of the State, except for those revenues from the power purchase charges attributable to the covered power purchase agreement.

     (b)  The department shall enter into a step-in agreement only if the power purchase agreement subject to the step-in agreement arises from the stage 3 request for proposals under docket number 2017-0352 before the public utilities commission or the first integrated grid planning request for proposals issued under docket number 2024-0258 before the public utilities commission.  The department shall enter into a step-in agreement when the power purchase agreement subject to the step-in agreement is executed, or if the power purchase agreement has already been executed as of July 1, 2025, as soon as reasonably possible.

     (c)  Payment by the department under a step-in agreement shall commence not later than two days after the date of a notice from the department to the electric utility pursuant to section 269-C(a).

     (d)  The step-in agreement shall terminate when the credit rating of the electric utility or its successor achieves investment grade status or by express agreement of the obligee.

     (e)  Following a default of a covered power purchase agreement and any payment by the department, the electric utility, within its sole discretion, may elect to resume payments for power purchase costs owed by the electric utility, regardless of the credit rating of the electric utility at that time, in which case the electric utility may use the revenue from power purchase charges as specified in subsection (h); provided that the payments shall not terminate the step-in agreement, which shall remain in effect until terminated pursuant to subsection (d), and the department shall remain obligated to pay the obligee upon a subsequent payment default by the electric utility.

     (f)  The department may impose other conditions, and may include other terms, in a step-in agreement that the department deems necessary to implement the requirements of this part; provided that the conditions and terms shall not adversely affect the obligation of the department to make prompt and full payments for power purchase costs owed by an electric utility to an obligee as and when due to a default as required under subsection (a) or otherwise be inconsistent with the covered power purchase agreement.

     (g)  As consideration for the State entering into the step‑in agreement, the electric utility or its successor shall enter into an agreement to assign and transfer any ownership in and title to the revenue from power purchase charges attributable to the covered power purchase agreement to the department, and, under the agreement, the department shall be deemed to be the sole holder in trust of all ownership and title to the revenue for the benefit of the obligees under the covered power purchase agreements to the extent the obliges are owed.  The revenue shall not be subject to appropriation for any other purpose.  The revenue, if held in a depository other than the state treasury, shall be exempt from the requirements of chapters 36 and 38.  The electric utility or its successor shall be obligated to bill and collect the power purchase charges and to manage the revenue attributable to the agreement as an agent for the department.

     (h)  Except in the case of any bankruptcy filing by an electric utility, if any payment obligation of the electric utility under a covered power purchase agreement for power purchase costs becomes owed and due, any ownership of or title to the revenue from power purchase charges for the payment obligation owed and due shall divest from the department and vest in the electric utility or its successor at the time the payment by the electric utility is made to the obligee.  Any vesting of revenues to the electric utility when payment obligations are owed and due may be made without appropriation or allotment by the legislature.  The department may not otherwise assign, sell, or transfer any ownership of, or title to, any claim or right to the revenue from power purchase charges. 

     (i)  To meet the requirements of the State and the public utilities commission as it pertains to electric reliability, energy security, and energy diversification under this chapter and any rules adopted pursuant thereto, an electric utility shall ensure that it maintains sufficient availability of electric energy and related products, to the extent provided by an obligee in accordance with a covered power purchase agreement.  The department shall exercise its regulatory powers to ensure that an electric utility complies with its obligations under the covered power purchase agreements.

     (j)  Notwithstanding any other law to the contrary, an electric utility shall file with the public utilities commission, and the public utilities commission shall allow to become effective, monthly rate adjustments provided under the energy cost recovery clause and purchased power adjustment clause to establish or adjust power purchase charges in a manner designed to:

     (1)  Generate sufficient revenue to timely and fully pay amounts when owed and due under covered power purchase agreements; and

     (2)  Ensure that in no event shall revenues fall below the amounts owed and due under covered power purchase agreements by a sum that exceeds the amounts in the reserve established under section 269-E. 

     To achieve the objectives established pursuant to this subsection, unless the public utilities commission otherwise directs, the electric utility may retain revenue collected in excess of amounts owed and due under the covered power purchase agreement.  The obligations of the electric utility and of the public utilities commission under this section shall survive any default by the electric utility and shall terminate only upon the termination of the step-in agreement as provided in subsection (d). 

     (k)  If the electric utility fails to timely file any submission as described in subsection (j), the department shall promptly file, and the public utilities commission shall allow to become effective, a substitute submission as if the submission had been filed by the electric utility under subsection (j).  The electric utility shall implement the power purchase charges in the substitute submission from the department.

     §269-C  Default of electric utility; successor requirements.  (a)  If the obligee provides notice to the department of a default of a covered power purchase agreement, the department shall provide the electric utility notice of the default.  Two days after the electric utility receives the notice, the electric utility shall turn over all revenues from power purchase charges arising from any covered power purchase agreements identified in the notice, regardless of when collected, then in its possession, and all future revenues from the power purchase charges thereafter collected, to the fund as directed by the department; provided that the amounts shall include revenues received by the electric utility after a default for power purchase charges billed before the default that were intended to be used to pay power purchase costs arising from the covered power purchase agreement.  The department shall use the revenue from the power purchase charges, including the revenues turned over, only in the order as follows:

     (1)  To pay power purchase costs pursuant to a step-in agreement, subject to the appointment, authorization, and empowerment of the electric utility as an agent as described in section 269-F(e); and

     (2)  To implement a rate credit to customers for revenue in excess of amounts owed under the covered power purchase agreement.

     (b)  Any step-in agreement shall remain in full force and effect notwithstanding any bankruptcy, reorganization, or other insolvency proceedings with respect to the electric utility.

     (c)  The obligation of an electric utility to collect and remit the power purchase charges pursuant to the requirements of this part shall not be subject to any setoff, counterclaim, surcharge, or defense by the electric utility, or in connection with a bankruptcy of any electric utility.

     (d)  Any successor to an electric utility shall be bound by the requirements of this part.  The successor shall perform and satisfy all obligations of the electric utility in the same manner and to the same extent as the electric utility, including the obligation to bill and collect the power purchase charges and remit the collected revenue to the department in connection with any covered power purchase agreement, unless and until the step-in agreement is terminated as described in section 269‑B(d).

     (e)  If the credit rating of the electric utility or its successor achieves investment grade status, then by operation of law, any ownership of and title to the revenue from power purchase charges attributable to the covered power purchase agreement shall immediately divest from the department and vest in the electric utility or its successor; provided that the electric utility or its successor shall thereafter be the sole owner and holder of title or beneficial and equitable interest in, and any claim or right to, the revenue, and the obligation of the electric utility or its successor to bill and collect the power purchase charges and manage the revenue as an agent for the department, and, if applicable, to remit the collected revenue to the fund, shall terminate.

     §269-D  Power purchase costs trust fund.  (a)  There is established in the state treasury the power purchase costs trust fund into which shall be deposited all proceeds of the power purchase charges to be paid in the event of a default of a covered power purchase agreement by the electric utility.

     (b)  Moneys in the fund shall be administered and held by the department in trust for the benefit of obligees of covered power purchase agreements to the extent the obligees are owed.

     (c)  If the credit rating of the electric utility or its successor achieves investment grade status, the fund shall cease to receive any revenue from the power purchase charges collected by that electric utility and shall pay to the electric utility or its successor the remainder of any moneys in the fund; provided that the moneys in the fund shall be considered revenue of the electric utility.

     (d)  The department shall be under no obligation to make payment to any obligee if the moneys in the fund are depleted.  Any default or failure by the department to make payments pursuant to the terms of a step-in agreement under this part shall not result in any recourse by the electric utility or obligee to any funds of the State other than the revenues derived from power purchase charges and the subsidy for the reserve account collected and on deposit in the fund.

     §269-E  Power purchase costs reserve fee; establishment.  (a)  By August 1, 2025, the public utilities commission shall authorize a surcharge proposed by an electric utility, referred to as the power purchase costs reserve fee, the revenue from which shall be accorded the same treatment as revenue from power purchase charges as described in section 269-B(g).  The power purchase costs reserve fee may be included in the purchased power adjustment clause on customer bills.

     (b)  The power purchase costs reserve fee shall be collected and maintained to establish a reserve in an amount not to exceed fifteen per cent of the forecasted monthly power purchase costs of all covered power purchase agreements.

     (c)  In the event of default pursuant to section 269-C(a), all previously collected revenues and all future revenues from the power purchase costs reserve fee shall be accorded the same treatment as revenues from power purchase charges as described in section 269-C.

     (d)  Notwithstanding subsection (c), if the credit rating of the electric utility or its successor achieves investment grade status and the step-in agreement terminates pursuant to section 269-B(d), all moneys remaining in the reserve collected from the power purchase costs reserve fee shall be returned, together with any associated interest earned, to customers through a rate credit.

     (e)  In the special circumstances of this part, the legislature finds and declares that the reasonable reserve requirement of article VII, section 13, clause 8 of the Hawaii State Constitution, to the extent applicable, has been satisfied.

     §269-F  Electric utility; agent of the department.  (a)  To implement the requirements of this part, the department may contract with an electric utility or its successor to act as an agent of the department to provide billing, collection, payment, management, and other related services on terms and conditions that reasonably compensate the electric utility or its successor for its incremental cost to provide services, and adequately secure payment to the department.

     (b)  At the request of the department, the public utilities commission shall order an electric utility or its successor to perform the duties pursuant to a contract under subsection (a).

     (c)  The act of serving as an agent to bill and to collect the power purchase charges shall not cause any electric utility to be subject to the laws that regulate financial institutions, escrow depositories, or collection agencies.  An electric utility shall not be responsible for lending, underwriting, and credit determinations in respect to these billing and collection activities.

     (d)  To the extent any moneys are received by an electric utility pursuant to subsection (a) or section 269-B(g), in the process of collection, and pending their transfer to the department, those moneys shall be held in trust for the department's exercise of its obligations pursuant to this part.

     (e)  To implement the requirements of this part, the director of finance may appoint, authorize, and empower the electric utility, as agent for and on behalf of the State, to manage and pay out moneys, including from the fund, for fulfillment of payment obligations of the State arising from covered power purchase agreements.  The appointment shall terminate when the step-in agreement for the covered power purchase agreements terminates pursuant to section 269-B(d)."

     SECTION 3.  If any provision of this Act, or the application thereof to any person or circumstance, is held invalid, the invalidity does not affect other provisions or applications of the Act that can be given effect without the invalid provision or application, and to this end the provisions of this Act are severable.

     SECTION 4.  In codifying the new sections added by section 2 of this Act, the revisor of statutes shall substitute appropriate section numbers for the letters used in designating the new sections in this Act.

     SECTION 5.  This Act shall take effect on May 13, 2040.

Report Title:

BNF; Public Utilities Commission; Energy; Step-In Agreements; Power Purchase Agreements; Power Purchasing Costs Trust Fund

Description:

Allows the State to enter into step-in agreements for payment obligations arising under certain power purchase agreements.  Establishes the Power Purchasing Costs Trust Fund.  Establishes that revenues from on-bill charges for power purchase agreements and accompanying reserves shall be held in trust by the State, and that independent power producers shall hold a beneficial interest in the revenue and reserve to the extent of the amounts owed under the covered power purchase agreements.  Appoints, authorizes, and empowers an electric utility to serve as the billing, collection, payment, and managing agent of the Department of Budget and Finance in the service of performing step-in agreements.  Effective 5/13/2040.  (SD1)

The summary description of legislation appearing on this page is for informational purposes only and is not legislation or evidence of legislative intent.

A BILL FOR AN ACT

relating to energy.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

     SECTION 1.  The legislature finds that it is imperative to enable the development of affordable clean energy resources for the benefit of utility customers in the State.  Many existing generating units in Hawaii will need to be retired in the next few years due to obsolescence and environmental permitting requirements.  The impending retirement of these units makes it urgent to obtain replacement resources, without which the reliability of electrical supplies in the State will be at risk.  In addition, continued reliance on these aging units, even if feasible, would result in increased costs for utility customers and continued reliance on fossil fuels, contrary to the State's policy to transition to renewable, non-carbon-emitting resources.

     The procurement of replacement clean energy resources by a certain investor-owned electric utility and its electric utility subsidiaries is ongoing in its stage 3 request for proposals and further anticipated in its first Integrated Grid Planning request for proposals.  These requests for proposals implement energy plans that are developed through extensive engagement with local stakeholders and communities and reviewed and approved by the public utilities commission.  The legislature finds that successful procurement of clean energy resources is in the public interest and necessary to avoid significant detrimental reliability and affordability impacts to electric utility customers.

     The legislature also finds that the development of clean energy resources by independent power producers is essential to achieve the State's goals of one hundred per cent net electricity sales from renewable sources by 2045, a zero emissions economy by 2045, and greater energy security and energy diversification, as established by the Hawaii state planning act and existing public utility laws.

     The legislature further finds that continued development of clean energy resources requires adequate assurances to independent power producers that prompt and full payments for purchased power will be made, irrespective of the financial strength of an electric utility.  The current sub‑investment‑grade status of a certain investor-owned electric utility and its subsidiaries, arising from the tragic events that occurred in the 2023 Maui wildfires, has led independent power producers, and those who would finance renewable energy projects, to raise concerns about the reliability of payment by the utility and its subsidiaries under new power purchase agreements.  Those concerns may cause independent power producers to cancel renewable energy projects or increase the prices they would charge for deliveries to address this perceived credit risk.  Either outcome would be contrary to the interests of electric utility customers in the State.

     The legislature further finds that the public interest could be served by the State providing limited credit support through step-in agreements, under which the State will agree to make payments to independent power producers in the event of a default in payment by an electric utility.  These agreements can provide assurances to independent power producers that prompt and full payments for purchased power will be made.  The legislature also finds that the intent of this Act is further served by appointing, authorizing, and empowering the electric utility to serve as the billing, collection, payment, and management agent of the State.

     The legislature also finds that the State's obligations in connection with step-in agreements do not constitute contingent liabilities of the State pursuant to article VII, section 13, clause 8, of the Hawaii State Constitution, because the State will be vested with all ownership of and title to revenues resulting from on-bill charges for power purchase costs, and the full faith and credit of the State will not be pledged for obligations under these step-in agreements.  In the event of a default by an electric utility on its payment obligations, these revenues would cover all payment obligations of the State for electric energy and related products.  In the absence of default, the electric utility will be authorized to utilize these revenues to discharge its obligations to pay independent power producers for electric energy and related products.  The obligations of the State under this Act are undertaken for a public purpose, namely, the protection of public health, safety, and welfare by supporting the development of clean energy resources that are needed for the reliable provision of electric supply at a reasonable cost.

     Therefore, the purpose of this Act is to:

     (1)  Allow the State to enter into step-in agreements for payment obligations arising under new power purchase agreements entered into between a certain investor‑owned electric utility and its regulated subsidiaries and independent power producers;

     (2)  Establish a trust fund within the State treasury that shall be capitalized immediately in the event of a default to fulfill State-backed payment obligations arising from power purchase agreements subject to step-in agreements;

     (3)  Establish that revenues from on-bill charges for covered power purchase agreements and accompanying reserves shall be held in trust by the State, and that independent power producers shall hold a beneficial interest in the revenues and reserves to the extent they are owed under the covered power purchase agreements; and

     (4)  Appoint, authorize, and empower an electric utility to serve as the billing, collection, payment, and management agent of the department of budget and finance in the service of performing step-in agreements.

     SECTION 2.  Chapter 269, Hawaii Revised Statutes, is amended by adding a new part to be appropriately designated and to read as follows:

"Part     .  STEP-IN AGREEMENTS COVERING POWER PURCHASE COSTS

     §269-A  Definitions.  As used in this part:

     "Covered power purchase agreement" means a power purchase agreement that is subject to a step-in agreement.

     "Default" means the failure by an electric utility to pay power purchase costs when due to an obligee under a covered power purchase agreement after the expiration of any applicable grace or cure periods and extensions thereto.  "Default" does not mean a bankruptcy filing by an electric utility.

     "Department" means the department of budget and finance, or any successor by law.

     "Electric utility" means a public utility that produces, conveys, transmits, delivers, or furnishes electric power.

     "Energy cost recovery clause" means the provision, or other equivalent, in an electric utility's rate schedules that allows the electric utility to recover its costs of fuel, expenses, and related taxes for energy costs of power purchased under a power purchase agreement.

     "Fund" means the power purchase costs trust fund established pursuant to section 269-D.

     "Investment grade status" means a credit rating for the electric utility's senior unsecured long-term debt obligations or an issued credit rating for the electric utility (in each case, not supported by third party credit enhancements) from at least two out of the three of the following:

     (1)  At least BBB- or higher from S&P Global Ratings, or any successor by law;

     (2)  At least BAA3 or higher from Moody's Investor Services, Inc., or any successor by law; or

     (3)  At least BBB- or higher from Fitch Ratings, Inc., or any successor by law.

     "Obligee" means any user, owner, or operator of the Hawaii electric system that is owed payment of power purchase costs by the electric utility under a power purchase agreement.

     "Power purchase agreement" means a contract between an electric utility and a user, owner, or operator of the Hawaii electric system, approved by the public utilities commission, pursuant to which the electric utility agrees to purchase, and the user, owner, or operator of the Hawaii electric system agrees to sell, electric energy and related products produced by plants or facilities that have not provided, sold, or transmitted electricity to the electric utility before July 1, 2025.

     "Power purchase charges" means the on-bill charges authorized by the public utilities commission to be imposed on and collected from all existing and future customers of an electric utility or any successor for power purchase costs, including the energy cost recovery clause and the purchased power adjustment clause.  "Power purchase charges" do not include any amounts for state and county revenue taxes, including any franchise tax, public service company tax, and public utility commission fee.

     "Power purchase costs" means costs incurred by an electric utility pursuant to the terms of a power purchase agreement.  "Power purchase costs" include all categories of costs recoverable under the energy cost recovery clause and the purchased power adjustment clause under its respective tariffs in effect on July 1, 2025.

     "Purchased power adjustment clause" means the provision, or other equivalent, in an electric utility's rate schedules that allows the electric utility to recover expenses and related taxes for non-energy costs of power purchased under a power purchase agreement.

     "Step-in agreement" means a contract by which the State undertakes an obligation of prompt and full payment for power purchase costs owed to an obligee by an electric utility under a power purchase agreement following a default.

     "User, owner, or operator of the Hawaii electric system" has the same meaning as defined in section 269-141.

     §269-B  Step-in agreements.  (a)  The department shall enter into a step-in agreement with an obligee that requires the department to make prompt and full payments for power purchase costs owed by an electric utility to the obligee in the event of a default.  Upon the default, the department shall make payments to the obligee for power purchase costs with moneys from the fund as and when due under the covered power purchase agreement.  The step-in agreement shall not be an obligation for which the full faith and credit of the State is pledged, and an obligee shall have no claim or lien on any revenues or moneys of the State, except for those revenues from the power purchase charges attributable to the covered power purchase agreement.

     (b)  The department shall enter into a step-in agreement only if the power purchase agreement subject to the step-in agreement arises from the stage 3 request for proposals under docket number 2017-0352 before the public utilities commission or the first integrated grid planning request for proposals issued under docket number 2024-0258 before the public utilities commission.  The department shall enter into a step-in agreement when the power purchase agreement subject to the step-in agreement is executed, or if the power purchase agreement has already been executed as of July 1, 2025, as soon as reasonably possible.

     (c)  Payment by the department under a step-in agreement shall commence not later than two days after the date of a notice from the department to the electric utility pursuant to section 269-C(a).

     (d)  The step-in agreement shall terminate when the credit rating of the electric utility or its successor achieves investment grade status or by express agreement of the obligee.

     (e)  Following a default of a covered power purchase agreement and any payment by the department, the electric utility, within its sole discretion, may elect to resume payments for power purchase costs owed by the electric utility, regardless of the credit rating of the electric utility at that time, in which case the electric utility may use the revenue from power purchase charges as specified in subsection (h); provided that the payments shall not terminate the step-in agreement, which shall remain in effect until terminated pursuant to subsection (d), and the department shall remain obligated to pay the obligee upon a subsequent payment default by the electric utility.

     (f)  The department may impose other conditions, and may include other terms, in a step-in agreement that it deems necessary to implement the requirements of this part; provided that the conditions and terms shall not be inconsistent with the covered power purchase agreement.

     (g)  As consideration for the State entering into the step‑in agreement, the electric utility or its successor shall enter into an agreement to assign and transfer any ownership in and title to the revenue from power purchase charges attributable to the covered power purchase agreement to the department, and, under the agreement, the department shall be deemed to be the sole holder in trust of all ownership and title to the revenue for the benefit of the obligees under the covered power purchase agreements to the extent the obliges are owed.  The revenue shall not be subject to appropriation for any other purpose.  The revenue, if held in a depository other than the state treasury, shall be exempt from the requirements of chapters 36 and 38.  The electric utility or its successor shall be obligated to bill and collect the power purchase charges and to manage the revenue attributable to the agreement as an agent for the department.

     (h)  If any payment obligation of the electric utility under a covered power purchase agreement for power purchase costs becomes owed and due, any ownership of or title to the revenue from power purchase charges for the payment obligation owed and due shall divest from the department and vest in the electric utility or its successor at the time the payment by the electric utility is made to the obligee.  Any vesting of revenues to the electric utility when payment obligations are owed and due may be made without appropriation or allotment by the legislature.  The department may not otherwise assign, sell, or transfer any ownership of, or title to, any claim or right to the revenue from power purchase charges. 

     (i)  To meet the requirements of the State and the public utilities commission as it pertains to electric reliability, energy security, and energy diversification under this chapter and any rules adopted pursuant thereto, an electric utility shall ensure that it maintains sufficient availability of electric energy and related products, to the extent provided by an obligee in accordance with a covered power purchase agreement.  The department shall exercise its regulatory powers to ensure that an electric utility complies with its obligations under the covered power purchase agreements.

     (j)  Notwithstanding any other law to the contrary, an electric utility shall file with the public utilities commission, and the public utilities commission shall allow to become effective, monthly rate adjustments provided under the energy cost recovery clause and purchased power adjustment clause to establish or adjust power purchase charges in a manner designed to:

     (1)  Generate sufficient revenue to timely and fully pay amounts when owed and due under covered power purchase agreements; and

     (2)  Ensure that in no event shall revenues fall below the amounts owed and due under covered power purchase agreements by a sum that exceeds the amounts in the reserve established under section 269-E. 

     To achieve the objectives established pursuant to this subsection, unless the public utilities commission otherwise directs, the electric utility may retain revenue collected in excess of amounts owed and due under the covered power purchase agreement.  The obligations of the electric utility and of the public utilities commission under this section shall survive any default by the electric utility and shall terminate only upon the termination of the step-in agreement as provided in subsection (d). 

     (k)  If the electric utility fails to timely file any submission as described in subsection (j), the department shall promptly file, and the public utilities commission shall allow to become effective, a substitute submission as if the submission had been filed by the electric utility under subsection (j).  The electric utility shall implement the power purchase charges in the substitute submission from the department.

     §269-C  Default of electric utility; successor requirements.  (a)  If the obligee provides notice to the department of a default of a covered power purchase agreement, the department shall provide the electric utility notice of the default.  Two days after the electric utility receives the notice, the electric utility shall turn over all revenues from power purchase charges arising from any covered power purchase agreements identified in the notice, regardless of when collected, then in its possession, and all future revenues from the power purchase charges thereafter collected, to the fund as directed by the department; provided that the amounts shall include revenues received by the electric utility after a default for power purchase charges billed before the default that were intended to be used to pay power purchase costs arising from the covered power purchase agreement.  The department shall use the revenue from the power purchase charges, including the revenues turned over, only in the order as follows:

     (1)  To pay power purchase costs pursuant to a step-in agreement, subject to the appointment, authorization, and empowerment of the electric utility as an agent as described in section 269-F(e); and

     (2)  To implement a rate credit to customers for revenue in excess of amounts owed under the covered power purchase agreement.

     (b)  Any step-in agreement shall remain in full force and effect notwithstanding any bankruptcy, reorganization, or other insolvency proceedings with respect to the electric utility.

     (c)  The obligation of an electric utility to collect and remit the power purchase charges pursuant to the requirements of this part shall not be subject to any setoff, counterclaim, surcharge, or defense by the electric utility, or in connection with a bankruptcy of any electric utility.

     (d)  Any successor to an electric utility shall be bound by the requirements of this part.  The successor shall perform and satisfy all obligations of the electric utility in the same manner and to the same extent as the electric utility, including the obligation to bill and collect the power purchase charges and remit the collected revenue to the department in connection with any covered power purchase agreement, unless and until the step-in agreement is terminated as described in section 269‑B(d).

     (e)  If the credit rating of the electric utility or its successor achieves investment grade status, then by operation of law, any ownership of and title to the revenue from power purchase charges attributable to the covered power purchase agreement shall immediately divest from the department and vest in the electric utility or its successor; provided that the electric utility or its successor shall thereafter be the sole owner and holder of title or beneficial and equitable interest in, and any claim or right to, the revenue, and the obligation of the electric utility or its successor to bill and collect the power purchase charges and manage the revenue as an agent for the department, and, if applicable, to remit the collected revenue to the fund, shall terminate.

     §269-D  Power purchase costs trust fund.  (a)  There is established in the state treasury the power purchase costs trust fund into which shall be deposited all proceeds of the power purchase charges to be paid in the event of a default of a covered power purchase agreement by the electric utility.

     (b)  Moneys in the fund shall be administered and held by the department in trust for the benefit of obligees of covered power purchase agreements to the extent the obligees are owed.

     (c)  If the credit rating of the electric utility or its successor achieves investment grade status, the fund shall cease to receive any revenue from the power purchase charges collected by that electric utility and shall pay to the electric utility or its successor the remainder of any moneys in the fund; provided that the moneys in the fund shall be considered revenue of the electric utility.

     §269-E  Power purchase costs reserve fee; establishment.  (a)  By August 1, 2025, the public utilities commission shall authorize a surcharge proposed by an electric utility, referred to as the power purchase costs reserve fee, the revenue from which shall be accorded the same treatment as revenue from power purchase charges as described in section 269-B(g).  The power purchase costs reserve fee may be included in the purchased power adjustment clause on customer bills.

     (b)  The power purchase costs reserve fee shall be collected and maintained to establish a reserve in an amount not to exceed fifteen per cent of the forecasted monthly power purchase costs of all covered power purchase agreements.

     (c)  In the event of default pursuant to section 269-C(a), all previously collected revenues and all future revenues from the power purchase costs reserve fee shall be accorded the same treatment as revenues from power purchase charges as described in section 269-C.

     (d)  Notwithstanding subsection (c), if the credit rating of the electric utility or its successor achieves investment grade status and the step-in agreement terminates pursuant to section 269-B(d), all moneys remaining in the reserve collected from the power purchase costs reserve fee shall be returned, together with any associated interest earned, to customers through a rate credit.

     (e)  In the special circumstances of this part, the legislature finds and declares that the reasonable reserve requirement of article VII, section 13, clause 8 of the Hawaii State Constitution, to the extent applicable, has been satisfied.

     §269-F  Electric utility; agent of the department.  (a)  To implement the requirements of this part, the department may contract with an electric utility or its successor to act as an agent of the department to provide billing, collection, payment, management, and other related services on terms and conditions that reasonably compensate the electric utility or its successor for its incremental cost to provide services, and adequately secure payment to the department.

     (b)  At the request of the department, the public utilities commission shall order an electric utility or its successor to perform the duties pursuant to a contract under subsection (a).

     (c)  The act of serving as an agent to bill and to collect the power purchase charges shall not cause any electric utility to be subject to the laws that regulate financial institutions, escrow depositories, or collection agencies.  An electric utility shall not be responsible for lending, underwriting, and credit determinations in respect to these billing and collection activities.

     (d)  To the extent any moneys are received by an electric utility pursuant to subsection (a) or section 269-B(g), in the process of collection, and pending their transfer to the department, those moneys shall be held in trust for the department's exercise of its obligations pursuant to this part.

     (e)  To implement the requirements of this part, the director of finance may appoint, authorize, and empower the electric utility, as agent for and on behalf of the State, to manage and pay out moneys, including from the fund, for fulfillment of payment obligations of the State arising from covered power purchase agreements.  The appointment shall terminate when the step-in agreement for the covered power purchase agreements terminates pursuant to section 269-B(d)."

     SECTION 3.  If any provision of this Act, or the application thereof to any person or circumstance, is held invalid, the invalidity does not affect other provisions or applications of the Act that can be given effect without the invalid provision or application, and to this end the provisions of this Act are severable.

     SECTION 4.  In codifying the new sections added by section 2 of this Act, the revisor of statutes shall substitute appropriate section numbers for the letters used in designating the new sections in this Act.

     SECTION 5.  This Act shall take effect upon its approval.

Report Title:

BNF; Public Utilities Commission; Energy; Step-In Agreements; Power Purchase Agreements; Power Purchasing Costs Trust Fund

Description:

Allows the State to enter into step-in agreements for payment obligations arising under certain power purchase agreements.  Establishes the Power Purchasing Costs Trust Fund.  Establishes that revenues from on-bill charges for power purchase agreements and accompanying reserves shall be held in trust by the State, and that independent power producers shall hold a beneficial interest in the revenue and reserve to the extent of the amounts owed under the covered power purchase agreements.  Appoints, authorizes, and empowers an electric utility to serve as the billing, collection, payment, and managing agent of the Department of Budget and Finance in the service of performing step-in agreements.

The summary description of legislation appearing on this page is for informational purposes only and is not legislation or evidence of legislative intent.

CONFERENCE COMMITTEE REP. NO. 201

Honolulu, Hawaii

                 , 2025

RE:    S.B. No. 1501

       S.D. 2

       H.D. 1

       C.D. 1

Honorable Ronald D. Kouchi

President of the Senate

Thirty-Third State Legislature

Regular Session of 2025

State of Hawaii

Honorable Nadine K. Nakamura

Speaker, House of Representatives

Thirty-Third State Legislature

Regular Session of 2025

State of Hawaii

Sir and Madam:

     Your Committee on Conference on the disagreeing vote of the Senate to the amendments proposed by the House of Representatives in S.B. No. 1501, S.D. 2, H.D. 1, entitled:

"A BILL FOR AN ACT RELATING TO ENERGY,"

having met, and after full and free discussion, has agreed to recommend and does recommend to the respective Houses the final passage of this bill in an amended form.

     The purpose and intent of this measure is to require the Department of Budget and Finance to enter into step-in agreements to guarantee payments from electric utilities under certain power purchase agreements.

     Your Committee on Conference finds that since the Maui wildfires, the credit rating of a certain investor-owned electric utility and its subsidiaries has fallen below investment grade.  This low grade increases the risk that independent power producers will not be paid, which, in turn, increases the financing costs incurred by independent power producers to fund new projects.  Your Committee on Conference further finds that the step-in agreements required by this measure will help to ensure that independent power producers will be paid if an electric utility defaults, thus lowering financing risk and costs, decreasing the price to develop new energy projects, and ultimately helping to reduce energy costs for Hawaii ratepayers.

     Your Committee on Conference has amended this measure by:

     (1)  Defining the terms "Hawaii electric system," "independent power producer," and "reserve account";

     (2)  Specifying that "obligee" shall not include users, owners, or operators that claimed a tax credit for a project system under section 235-12.5, Hawaii Revised Statutes;

     (3)  Requiring the Department of Budget and Finance to execute a step-in agreement within ninety days of notice of the filing of an application for approval of a power purchase agreement;

     (4)  Authorizing the Department of Budget and Finance to rely on an invoice of an obligee for determining amounts owed to the obligee following a default by an electric utility;

     (5)  Specifying that reserve fees may be included in the purchased power adjustment clause on customer bills;

     (6)  Exempting from the Hawaii Public Procurement Code the Department of Budget and Finance's designation of the electric utility to collect the power purchase charges and reserve fees;

     (7)  Making the measure effective upon approval; and

     (8)  Making technical nonsubstantive amendments for purposes of clarity, consistency, and style.

     As affirmed by the record of votes of the managers of your Committee on Conference that is attached to this report, your Committee on Conference is in accord with the intent and purpose of S.B. No. 1501, S.D. 2, H.D. 1, as amended herein, and recommends that it pass Final Reading in the form attached hereto as S.B. No. 1501, S.D. 2, H.D. 1, C.D. 1.

Respectfully submitted on behalf of the managers:

STAND. COM. REP. NO.  1936

Honolulu, Hawaii

                , 2025

RE:   S.B. No. 1501

      S.D. 2

      H.D. 1

Honorable Nadine K. Nakamura

Speaker, House of Representatives

Thirty-Third State Legislature

Regular Session of 2025

State of Hawaii

Madame:

     Your Committee on Finance, to which was referred S.B. No. 1501, S.D. 2, H.D. 1, entitled:

"A BILL FOR AN ACT RELATING TO ENERGY,"

begs leave to report as follows:

     The purpose of this measure is to:

     (1)  Require the Department of Budget and Finance to enter into step-in agreements with independent power producers for payment obligations arising under certain power purchase agreements;

     (2)  Require the Department of Budget and Finance to establish the Power Purchase Costs Trust Fund;

     (3)  Establish that monies collected from on-bill charges for power purchase agreements and money received from a surcharge supporting a reserve account that are deposited in the Power Purchase Costs Trust Fund shall be held in trust by the State, and that independent power producers shall hold a beneficial interest in the monies to the extent of the amounts owed under the covered power purchase agreements; and

     (4)  Appoint, authorize, and empower an electric utility to serve as the billing, collection, and payment agent of the Department of Budget and Finance in the service of performing step-in agreements.

     Your Committee received testimony in support of this measure from Longroad Energy; Plus Power; Ameresco; AES Hawaiʻi; the Climate Hawaiʻi Initiative of the Hawaiʻi Executive Collaborative; and one individual.  Your Committee received comments on this measure from the Department of Commerce and Consumer Affairs; Department of Budget and Finance; Department of the Attorney General; Public Utilities Commission; Ulupono Initiative; General Contractors Association of Hawaii; Hawaiian Electric; Blue Planet Foundation; and Clearway Energy Group LLC.

     As affirmed by the record of votes of the members of your Committee on Finance that is attached to this report, your Committee is in accord with the intent and purpose of S.B. No. 1501, S.D. 2, H.D. 1, and recommends that it pass Third Reading.

Respectfully submitted on behalf of the members of the Committee on Finance,

STAND. COM. REP. NO.  1492

Honolulu, Hawaii

                , 2025

RE:   S.B. No. 1501

      S.D. 2

      H.D. 1

Honorable Nadine K. Nakamura

Speaker, House of Representatives

Thirty-Third State Legislature

Regular Session of 2025

State of Hawaii

Madame:

     Your Committee on Energy & Environmental Protection, to which was referred S.B. No. 1501, S.D. 2, entitled:

"A BILL FOR AN ACT RELATING TO ENERGY,"

begs leave to report as follows:

     The purpose of this measure is to:

     (1)  Allow the State to enter into step-in agreements for payment obligations arising under certain power purchase agreements;

     (2)  Establish the Power Purchasing Costs Trust Fund;

     (3)  Establish that revenues from on-bill charges for power purchase agreements and accompanying reserves shall be held in trust by the State, and that independent power producers shall hold a beneficial interest in the revenue and reserve to the extent of the amounts owed under the covered power purchase agreements; and

     (4)  Appoint, authorize, and empower an electric utility to serve as the billing, collection, payment, and managing agent of the Department of Budget and Finance in the service of performing step-in agreements.

     Your Committee received testimony in support of this measure from the Public Utilities Commission; Ulupono Initiative; TerraForm Power; AES Hawaiʻi; Hawaiian Electric; Clearway Energy Group LLC; Climate Hawaiʻi Initiative of the Hawaiʻi Executive Collaborative; Longroad Energy; Plus Power; Ameresco; Blue Planet Foundation; General Contractors Association of Hawaii; and Nexamp.  Your Committee received comments on this measure from the Department of the Attorney General; Department of Commerce and Consumer Affairs; and Department of Budget and Finance.

     Your Committee finds that it is imperative to enable the development of affordable clean energy resources in the State.  Your Committee further finds that an investor-owned electric utility's sub-investment-grade status has led independent power producers to raise concerns about the reliability of payment by the utility, risking the cancellation of renewable energy projects.  This measure helps ensure payments to independent power producers through step-in agreements.

     Your Committee has amended this measure by deleting its contents and inserting the contents of H.B. No. 974, H.D. 2, a substantively similar measure, and further amending it by:

     (1)  Clarifying that "power purchase costs" include termination payments payable by an electric utility in connection with the termination of a power purchase agreement;

     (2)  Allowing the Department of Budget and Finance to conduct due diligence investigations prior to entering into a step-in agreement;

     (3)  Limiting remedies available against the Department of Budget and Finance for failure to comply with a step-in agreement or breach of an agency agreement to an order directing specific performance of the step-in agreement or agency agreement, respectively;

     (4)  Clarifying that the obligee of a covered power purchase agreement shall only have a claim or lien on monies attributable to covered power purchased agreements and that the obligee shall remain entitled to all payments for power purchase costs owed under the covered power purchase agreement;

     (5)  Prohibiting the Department of Budget and Finance from imposing certain conditions on a step-in agreement that adversely affect the Department's obligation to make payments for power purchase costs;

     (6)  Clarifying that monies in the account established under the Power Purchasing Costs Trust Fund related to reserve fees will remain with the Department of Budget and Finance;

     (7)  Removing language specifying procedures for the failure of the electric utility to timely file a submission for monthly rate adjustments;

     (8)  Clarifying that the electric utility is required to transfer all revenues from the power purchase charges one day, instead of two days, after the utility receives notice of a default of a covered power purchase agreement;

     (9)  Requiring the Department of Budget and Finance to establish two separate accounts within the Power Purchase Costs Trust Fund;

     (10) Clarifying that the Department of Budget and Finance is not under obligation to make payment to any obligee in excess of the monies in the Power Purchase Costs Trust Fund;

     (11) Clarifying that the Public Utilities Commission is required to create reserve fees, which are a utility-wide nonbypassable surcharge, by August 1, 2025;

     (12) Prohibiting the electric utility from accessing the reserve account except if authorized;

     (13) Changing its effective date to July 1, 3000, to encourage further discussion; and

     (14) Making technical, nonsubstantive amendments for the purposes of clarity, consistency, and style.

     As affirmed by the record of votes of the members of your Committee on Energy & Environmental Protection that is attached to this report, your Committee is in accord with the intent and purpose of S.B. No. 1501, S.D. 2, as amended herein, and recommends that it pass Second Reading in the form attached hereto as S.B. No. 1501, S.D. 2, H.D. 1, and be referred to your Committee on Finance.

Respectfully submitted on behalf of the members of the Committee on Energy & Environmental Protection,

STAND. COM. REP. NO. 1050

Honolulu, Hawaii

RE:    S.B. No. 1501

       S.D. 2

Honorable Ronald D. Kouchi

President of the Senate

Thirty-Third State Legislature

Regular Session of 2025

State of Hawaii

Sir:

     Your Committee on Ways and Means, to which was referred S.B. No. 1501, S.D. 1, entitled:

"A BILL FOR AN ACT RELATING TO ENERGY,"

begs leave to report as follows:

     The purpose and intent of this measure is to authorize the Department of Budget and Finance to enter into step-in agreements to guarantee payments from electric utilities under certain power purchase agreements.

     Your Committee received written comments in support of this measure from the Public Utilities Commission, Ulupono Initiative, Longroad Energy, Plus Power, Hawaii Executive Collaborative, Climate Hawaii, Ameresco, Clearway Energy Group, Hawaiian Electric, Nexamp, and AES Hawaii.

     Your Committee received written comments on this measure from the Department of Commerce and Consumer Affairs, Division of Consumer Advocacy; Department of Budget and Finance; and Department of the Attorney General.

     Your Committee finds that the uncertainty of Hawaiian Electric Company's financial situation has increased the perceived risk of default regarding the company's obligations to pay independent power producers.  Your Committee believes that the step-in agreements authorized by this measure will help to reduce the risks associated with financing independent power producers in the State and help the State continue to make progress toward meeting its clean energy goals.

     Your Committee has amended this measure by:

     (1)  Removing various references to July 1, 2025, to ensure that the step-in agreements apply to all future power purchase agreements;

     (2)  Authorizing the Department of Budget and Finance to conduct due diligence on a prospective obligee before entering into a step-in agreement;

     (3)  Establishing the Power Purchase Costs Trust Fund outside of the state treasury;

     (4)  Amending the definition of "obligee" to require that the obligee not claim a tax credit for a project system under section 235-12.5, Hawaii Revised Statutes; and

     (5)  Making technical, nonsubstantive amendments for the purposes of clarity and consistency.

     As affirmed by the record of votes of the members of your Committee on Ways and Means that is attached to this report, your Committee is in accord with the intent and purpose of S.B. No. 1501, S.D. 1, as amended herein, and recommends that it pass Third Reading in the form attached hereto as S.B. No. 1501, S.D. 2.

Respectfully submitted on behalf of the members of the Committee on Ways and Means,

STAND. COM. REP. NO. 674

Honolulu, Hawaii

RE:    S.B. No. 1501

       S.D. 1

Honorable Ronald D. Kouchi

President of the Senate

Thirty-Third State Legislature

Regular Session of 2025

State of Hawaii

Sir:

     Your Committees on Energy and Intergovernmental Affairs and Commerce and Consumer Protection, to which was referred S.B. No. 1501 entitled:

"A BILL FOR AN ACT RELATING TO ENERGY,"

beg leave to report as follows:

     The purpose and intent of this measure is to:

     (1)  Allow the State to enter into step-in agreements for payment obligations arising under certain power purchase agreements;

     (2)  Establish the Power Purchasing Costs Trust Fund;

     (3)  Establish that:

          (A)  Revenues from on-bill charges for power purchase agreements and accompanying reserves shall be held in trust by the State; and

          (B)  Independent power producers shall hold a beneficial interest in the revenue and reserve to the extent of the amounts owed under the covered power purchase agreements; and

     (4)  Appoint, authorize, and empower an electric utility to serve as the billing, collection, payment, and managing agent of the Department of Budget and Finance in the service of performing step-in agreements.

     Your Committees received testimony in support of this measure from the Public Utilities Commission, Plus Power, Ulupono Initiative, Longroad Energy, Clearway Energy Group, Hawaiian Electric, Ameresco, General Contractors Association of Hawaii, and AES Hawaiʻi.

     Your Committees received comments on this measure from the Department of the Attorney General, Department of Budget and Finance, and Department of Commerce and Consumer Affairs.

     Your Committees find that the current sub‑investment‑grade status of a certain investor-owned electric utility and its subsidiaries has led independent power producers and those who would finance them, to raise concerns on whether prompt and full payments for purchased power will be made.  Your Committees recognize that these concerns may cause independent power producers to cancel renewable energy projects or increase the prices they would charge for deliveries, both of which are contrary to the interests of electric utility customers.  This measure addresses these issues by allowing the State to provide limited credit support through step-in agreements. 

     Your Committees have amended this measure by:

     (1)  Specifying that the definition of "purchase power costs" include termination payments payable by an electric utility in connection with the termination of a power purchase agreement as a result of a default by the electric utility;

     (2)  Inserting language stating that, step-in agreements shall also obligate the Department of Budget and Finance to make payments from the Trust Fund arising from the termination of a covered power purchase agreement by an electric utility under bankruptcy law;

     (3)  Inserting language stating that the Department of Budget and Finance shall not impose conditions or terms in a step-in agreement that would adversely affect the Department's obligation to make full and prompt payments for power purchase costs owed by an electric utility to an obligee due to a default by the electric utility;

     (4)  Clarifying that, if an electric utility files for bankruptcy, the ownership of or title to the revenues shall not divest from the Department of Budget and Finance and vest in the electric utility when payments are made;

     (5)  Inserting language stating that the Department of Budget and Finance shall be under no obligation to make payment to any obligee if the moneys in the Power Purchasing Costs Trust Fund are depleted and shall not result in any recourse to state funds;

     (6)  Inserting an effective date of May 13, 2040, to encourage further discussion; and

     (7)  Making technical, nonsubstantive amendments for the purposes of clarity and consistency.

     As affirmed by the records of votes of the members of your Committees on Energy and Intergovernmental Affairs and Commerce and Consumer Protection that are attached to this report, your Committees are in accord with the intent and purpose of S.B. No. 1501, as amended herein, and recommend that it pass Second Reading in the form attached hereto as S.B. No. 1501, S.D. 1, and be referred to your Committee on Ways and Means.

Respectfully submitted on behalf of the members of the Committees on Energy and Intergovernmental Affairs and Commerce and Consumer Protection,