In re Gas Co.

• Citation: 465 P.3d 633
• Decision Date: 09 June 2020
• Docket Number: SCOT-19-0000044
• Parties: In the MATTER OF the Application of the GAS COMPANY, LLC dba Hawaii Gas for Approval of Rate Increases and Revised Rate Schedules and Rules
• Court: Supreme Court of Hawai'i

465 P.3d 633

In the MATTER OF the Application of the GAS COMPANY, LLC dba Hawaii Gas for Approval of Rate Increases and Revised Rate Schedules and Rules

SCOT-19-0000044

Supreme Court of Hawai‘i.

JUNE 9, 2020

Lance D. Collins, for Appellants

David Y. Nakashima (Jeffrey T. Ono and John E. Dubiel with him on the briefs), Honolulu, for Appellee Hawai‘i Gas

Andrew D. Goff (Clare E. Connors and Bryan C. Yee with him on the briefs), Honolulu, for Appellee Public Utilities Commission

RECKTENWALD, C.J., NAKAYAMA, McKENNA, AND POLLACK, JJ.¹

OPINION OF THE COURT BY McKENNA, J.

I. Introduction

In this appeal, Life of the Land and Hui Aloha ‘Aina o Ka Lei Maile Ali‘i ("LOL" and "KLM," respectively, or sometimes collectively "Appellants") challenge whether the Public Utilities Commission ("PUC") fulfilled its statutory and constitutional obligations in reviewing an application for a rate increase submitted by Hawai‘i Gas ("HG"). HG sought to pass on to its customers the costs of its two recently established liquid natural gas ("LNG") projects. HG began importing LNG from the mainland to lessen its reliance on synthetic natural gas ("SNG") manufactured in Hawai‘i. LNG displaces a portion of SNG in HG's operations.

Concerned about LNG's effects on climate change, as well as climate change's impact upon native Hawaiians, LOL and KLM moved to intervene in HG's rate case. The PUC denied them intervenor status but allowed them to participate in the proceedings on a limited basis. Specifically, LOL and KLM were allowed to address only "whether the [PUC] should disallow as unreasonable [HG's] LNG costs due to the effects of [HG's] use of imported LNG on the State's reliance on fossil fuels² and greenhouse gas emissions" ("GHG emissions")³ . The PUC expressly considered the following issue to be "outside the scope of this rate proceeding": "The participants’ asserted interest in a clean and healthful environment beyond the State's borders, given the Hawaii Constitution's limited application and scope to a clean and healthful environment within the State's borders."

Ultimately, the PUC approved HG's rate increase in Decision and Order No. 35969. It adopted HG's representation that the two LNG projects would decrease GHG emissions in-state. LOL and KLM appeal, raising statutory and constitutional challenges to the PUC's Decision and Order. HG continues to challenge whether LOL and KLM have standing to bring this appeal.⁴

In summary, the issues raised in this appeal, and this court's resolution of each issue, as appropriate, are as follows:

A. Which standing test applies in this appeal, and whether the Appellants have standing under the applicable test.

Resolution: The two-part test for standing applies, in which the Appellants must show that they are "persons aggrieved" who "participated" in the contested case. Appellants meet this test, because they demonstrated their members’ right to a clean and healthful environment was specially, personally and adversely affected by the PUC's Decision and Order, and they were participants in HG's contested case.

B. Whether the PUC fulfilled its obligations under HRS § 269-6(b) (2007 & Supp. 2011), which provides the following:

The public utilities commission shall consider the need to reduce the State's reliance on fossil fuels through energy efficiency and increased renewable energy generation in exercising its authority and duties under this chapter. In making determinations of the reasonableness of the costs of utility system capital improvements and operations, the commission shall explicitly consider, quantitatively or qualitatively, the effect of the State's reliance on fossil fuels on price volatility, export of funds for fuel imports, fuel supply reliability risk, and greenhouse gas emissions. The commission may determine that short-term costs or direct costs that are higher than alternatives relying more heavily on fossil fuels are reasonable, considering the impacts resulting from the use of fossil fuels.

Resolution: The PUC did not fulfill its obligations under HRS § 269-6(b) because its Decision and Order simply reiterated HG's representations that its LNG projects would decrease GHG emissions. Further, the PUC's geographic limitation demonstrated that the PUC did not intend to consider GHG emissions from production, development, and transportation of LNG occurring outside of the state. Without that information, however, the PUC could not have explicitly considered the hidden and long-term costs of the state's reliance on fossil fuels.

C. Whether the PUC violated the Appellants’ due process rights by not affording the Appellants a meaningful opportunity to be heard concerning GHG emissions.

Resolution: The PUC violated the Appellants’ due process rights because the substantive limitations on their participation in this rate case rendered meaningless any opportunity to be heard on the GHG emissions issue.

D. Whether the PUC abused its discretion in developing a policy on measuring GHG emissions through adjudication rather than rule-making.

Resolution: The PUC did not abuse its discretion in proceeding through adjudication in this case. The PUC did not attempt to bypass a rule, amended rule, or pending rule concerning how it should measure GHG emissions. Further, Appellants were not unduly burdened in this rate case proceeding.

E. Whether the PUC fulfilled its affirmative constitutional obligation to protect native Hawaiian traditional and customary practices.

Because the PUC improperly curtailed Appellants’ substantive participation, the record is not sufficiently developed for us to address this issue. On remand, the PUC should consider its constitutional obligations.

F. Whether the PUC fulfilled its affirmative constitutional obligation as trustee over natural resources within the State's public trust.

Again, because the PUC improperly curtailed Appellants’ substantive participation, the record is not sufficiently developed for us to address this issue. On remand, the PUC should consider its constitutional obligations.

II. Background

A. HG's rate case application

In August 2017, HG filed an application with the PUC for approval to increase its existing gas utility rates and to revise certain rate schedules and rate rules. This "rate case" was brought pursuant to HRS § 269-16 (2007 & Supp. 2014), titled "Regulation of utility rates; ratemaking procedures." Under that statute, "All rates, fares, charges, classifications, schedules, rules, and practices made, charged, or observed by any public utility ... shall be just and reasonable and shall be filed with the [PUC]." HRS § 269-16(a) (2007 & Supp. 2014). HG explained that it needed a total revenue increase of $14.962 million, "or 14.58% increase over revenue at present rates, in order for HG to have the opportunity to recover its reasonably incurred expenses and earn its requested rate of return of 7.51% on its prudently incurred investments in utility property" since its last rate case in 2009.

Relevant to this appeal, HG sought to include the costs of two new LNG projects in its rate base: the SNG Backup Enhancement Project and the 30% SNG Conversion Project. HG explained that there is "no indigenous natural gas in Hawaii or access to natural gas distribution pipelines, which means that gas must either be synthetically manufactured or imported." HG stated that it manufactures its own SNG through a catalytic conversion process "utilizing a by-product of the oil refining process known as naphtha (i.e., SNG Feedstock)." HG depends upon Par Hawaii Refining, LLC to supply it with SNG Feedstock. HG explained that this imported oil product subjects gas rates to "meaningful price volatility." Therefore, HG had secured PUC approval to import LNG as a way to "diversify its fuel supply to reduce its dependence on oil-based feedstock and local refinery infrastructure."

The first of the two new LNG projects was the SNG Backup Enhancement Project. It involved the purchase of close to one million dollars in equipment, including three LNG ISO containers, a trailer chassis, a trailer-mounted mobile re-gasifier, and certain improvements to Pier 38, the location of the backup system. In 2014, the PUC issued an order that, inter alia, did not preclude HG from including these costs in its next rate case (PUC Docket No. 2013-0184).

The second of the two new LNG projects was the 30% SNG Conversion Project, which uses imported LNG to displace 30% of HG's SNG production. The PUC previously approved the project in 2016 (PUC Docket No. 2014-0315). HG estimated the project cost to be $13.9 million for ISO containers, LNG regasification and injection equipment, relocation of a plant maintenance building, and the ISO container site.

B. PUC Order No. 35112 setting the rate case issues

On December 18, 2017, via Order No. 35112, the PUC identified the issues raised by HG in its Application. All of the issues pertained to the economic reasonableness of the rate increase. The only other party to this proceeding was the Consumer Advocate, an ex officio party pursuant to HRS § 269-51 (2007 & Supp. 2014) ("The executive director of the division of consumer advocacy shall be the consumer advocate in hearings before the public utilities commission. The consumer advocate shall represent, protect, and advance the interests of all consumers ... of utility services. ... The consumer advocate shall have full rights to participate as a party in interest in all proceedings before the public utilities commissions."). See also HAR § 6-61-62(a) (1992) ("The consumer advocate is, ex officio, a party to any proceeding before the commission.").

C. This court's MECO opinion

Four days before the PUC set its procedural schedule in Order No. 35112, this court issued its opinion in In re Application of Maui Elec. Co., 141 Hawai‘i 249, 408 P.3d 1 (2017) (" MECO"). In MECO, we held that there is a "protectable property interest" in the "right to a clean and healthful environment guaranteed by article XI, section 9...