State regulators have denied a request by Hawaiian Electric Co. to recover $1.4 million in costs it incurred nearly two years ago while transferring oversight of its energy-efficiency program to a private contractor.

The Public Utilities Commission also rejected other modifications sought by HECO, including increasing its budget for the program and reallocating a portion of unspent program funds at HECO’s sister utilities on the Big Island and Maui.

HECO said it ran into some problems during the transition to Science Applications International Corp., which was hired by the PUC in April 2009 to take control of the program that promotes energy-saving measures. SAIC operates here as Energy Hawaii. Among other things, the program provides customer rebates for purchases of solar water heaters, energy-efficient appliances and compact fluorescent light bulbs.

When HECO operated the program, it was treated as an operating cost that was built into customers’ bills. Under Energy Hawaii the program is funded by the so-called public benefits fund surcharge, which is broken out as a separate line item on customers’ bills.

The PUC said it began receiving complaints in April 2009 from installers and vendors that HECO was not making good on rebate payments. On June 5, 2009, a PUC staff member called HECO to inquire about the "large outstanding balance" of rebate payments.

"In response, HECO submitted a letter to the commission stating that there was an ‘apparent misunderstanding’ and that they believed SAIC would honor commitments made by the HECO companies prior to the date of the transition of the (energy efficiency) programs," according to the PUC filing.

HECO asked the PUC at that time for the program modifications that included the recovery of an additional $1.4 million from rate payers.

In denying HECO’s request, the PUC chastised the utility for not doing a better job of managing the costs associated with the energy efficiency program.

"The HECO companies failed to take any preventative measures, choosing to rely on inconclusive statements from SAIC that SAIC would continue the program and pay out the incentives to installers for rebates that had been promised by HECO," according to the PUC order.

"Based on the above, the commission finds that the HECO companies acted willfully in violation of the commission’s prior orders and was not acting reasonable, prudent, nor in the public interest."

HECO said part of the problem it encountered during the transition period was the result of abnormally high demand for rebates on solar-powered water heaters.

"Our goal during the transition of the energy efficiency programs was for solar water heating installations to continue without interruption," said HECO spokesman Darren Pai.

"All of the rebates from the transition period have been paid. While we are disappointed with the PUC’s decision, the important thing is the solar water heater rebate program remains successful."