In an unprecedented move, Hawaii’s utilities regulators have ordered an independent management audit of Hawaiian Electric Co. in response to the utility’s request to increase electricity rates for Oahu customers.

Nothing in the Public Utilities Commission’s audit request suggests the agency suspects that HECO is being mismanaged. Rather, the regulators described the audit as something done in other locales that could benefit Hawaii.

HEI Hawaiian Electric Building. Richards and King Street. 1 june 2016
The Hawaii Public Utilities Commission has ordered a first-ever outside management audit of HECO in response to the company’s request to raise rates. 

Still, the PUC’s order imposes a stark reality on Oahu’s power utility: If it wants more money from ratepayers, it has to open itself to greater scrutiny.

“The commission observes that similar audits are common in other jurisdictions, and believes that such in-depth investigation is desirable to promote transparency and understanding of HECO’s management practices and its related expenses,” the PUC’s document says.

The audit also may provide HECO opportunities to “realize operational efficiencies, better manage costs, and improve its financial condition,” the PUC said.

In August, HECO, which provides electricity on Oahu, announced it was proposing to raise rates by 4.1%. Although the impact would vary, the company said a typical residential customer on Oahu would see a monthly increase of $8.67. Such increases are subject to approval by the PUC in public proceedings.

Jay Griffin, chairman of the PUC, declined to comment on the audit request, saying it was part of an ongoing case.

However, the document ordering the audit provides some information on the audit’s scope. The PUC wants it to include examinations of HECO’s governance and executive leadership; capital, operations and maintenance planning and budgeting; and program and project management.

“These areas have been the subject of focus in other public utility management audits, and the commission finds that they provide a reasonable starting point for evaluating HECO’s management policies and practices,” the document says.

The commission offered only broad outlines of the audit’s scope and nothing about audit standards to be used. But it cited audits conducted in other jurisdictions, which could provide insight into what the commission expects and what the final product could look like.

As an example, the PUC cited an audit of Niagra Mohawk Power Corp. conducted in 2009 for the New York Public Service Commission. That resulted in a 200-page report containing 44 recommendations. It documented numerous shortcomings affecting the business and, in some cases, customers.

For instance, the auditors found some of the New York utility’s grid investments were “driven by a desire to build its rate base more than interest in reducing customer bills or improving customer service.”

Looking For Deeper Insights

HECO already has begun talking to the auditor, said Jim Kelly, HECO’s vice president for corporate relations.

“Every rate review proceeding is essentially an audit of our operations, so we look at this management audit as an additional tool being used by our regulators,” Kelly said in a statement. “These audits are done in other jurisdictions and our understanding is that the Public Utilities Commission is using this process to get an extra layer of visibility into how we run our business day-to-day.”

“By meeting with the auditor, we hope we’re providing deeper insights into how we manage our operations, how we set our priorities and even how we work together as a team,” Kelly added.

Ray Tulloch, the principal of Munro Tulloch Inc., which has been hired to conduct the audit, declined to comment. The audit is to be completed in May 2020, according to the PUC.

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