Lahaina has forevermore been transformed by fire, and it looks like the company that provides electricity to 95% of Hawaii residents will be too.
Hawaiian Electric — and the state’s power utility sector in general — may be in store for reconstruction in the aftermath of the massive disaster as state leaders, regulators and litigators push for change and accountability.
Several law firms representing survivors are suing the Honolulu-based utility company. They allege that the company’s decision not to turn off power on Maui ahead of the forecast high fire-risk conditions of strong winds and dry brush resulted in damaged, live Hawaiian Electric transmission lines igniting the fire that destroyed the seaside town, burned over 2,200 mostly residential structures and killed over 110 people, with many more fatalities expected among the hundreds still missing.
A cause of the Aug. 8 fire has yet to be determined. Still, regardless of whether Hawaiian Electric is ultimately responsible, there will be major repercussions for the company, its customers and its stockholders.
Over the last week, the value of stock in the utility’s parent, Hawaiian Electric Industries Inc., tanked and the company’s credit rating dropped.
The stock free-fall and the lawsuits raised concerns that the company, which has about 3,800 employees and serves every county except Kauai, may have to seek bankruptcy protection to resolve litigation or sustain its financial needs.
Other potential post-disaster consequences include instituting “public safety power shut-offs” during fire-danger weather conditions; relocating pole-mounted power lines in high fire-risk areas underground; making Hawaiian Electric a customer-owned nonprofit cooperative; and establishing a statewide wildfire liability fund.
Some of these ideas are sure to be contentious because of financial and service reliability repercussions. But the determination for reform is strong.
Call to act
“The consequences (of the fire) are beyond measure,” said state Sen. Angus McKelvey (D, West Maui-Maalaea-South Maui). “I hope that this will be the mother of all wake-up calls. People need to have comfort that this won’t happen ever again.”
The loss of life in Lahaina, which has yet to be fully discovered, already represents the worst U.S. wildfire disaster in more than a century.
McKelvey, a state lawmaker for 18 years, said he has proposed legislation over the years to have Hawaiian Electric put power lines underground in critical areas such as Lahaina, but push-back over cost scuttled the bills.
“They fight it tooth and nail,” he said. “There’s zero excuse in my mind why power lines in Lahaina shouldn’t be underground now. No amount of money should be a reason not to do it.”
A new effort to do this, which McKelvey says is warranted at the Legislature next year, could apply to other areas in the state with dry brush land near populated areas, including parts of Leeward Oahu.
Randy Iwase, a former lawmaker representing Mililani who also previously led the state Public Utilities Commission, expects a lot of engagement over electric utility reform from the public, politicians, lawyers, regulators and the company.
The PUC, which regulates Hawaiian Electric, certainly will play a role given that extraordinary investments or payments as well as restructuring would be subject to commission approval.
Iwase also expects results of an independent investigation by an emergency management expert, being retained by the state Office of the Attorney General, to assess state and county emergency response policies, decisions and actions related to the fire, could influence the fate of Hawaiian Electric.
“I think the AG’s report is going to be instructive,” he said.
This work is expected to take months.
A U.S. Department of Justice fire investigation team also is at work on Maui to help determine the origin and cause of the Lahaina fire.
Hawaiian Electric has faced much criticism from survivors and their attorneys as well as from former PUC commissioner and Lahaina resident Jennifer Potter for not investing enough to reduce and better manage fire risks.
As of Friday afternoon, seven lawsuits had been filed against the utility, including two class-action cases, another suit that is partly on behalf of someone killed in the fire, and one representing the owner of an Upcountry Maui home in Kula destroyed by a fire that was also raging as most of Lahaina was burning.
The value of property losses in Lahaina has been estimated at $5.6 billion.
California experience
Wall Street analysts and many others have compared what Hawaiian Electric now faces with a similar recent tragedy involving a California power utility.
In 2020, PG&E Corp. agreed to pay $13.5 billion to roughly 70,000 victims of three wildfires — the Butte Fire in 2015, the North Bay Fires in 2017 and the Camp Fire in 2018.
Jonathan Reeder, a utility company analyst at Wells Fargo Corporate and Investment Banking, said California has an “inverse condemnation” liability standard that makes a utility liable if its equipment causes property damage, regardless of whether the utility acted prudently or negligently. Under this standard, if the utility wasn’t negligent, then damage payments may be passed onto ratepayers with regulatory approval.
Most other states have a liability standard based on negligence, Reeder said, and in this circumstance negligence by a utility company has to be proven for the utility to be held liable.
Hawaiian Electric on Friday said in a regulatory filing that no legal precedent exists for applying the California standard in Hawaii to an investor-owned utility.
PG&E used bankruptcy to survive a litigation onslaught stemming from the three fires, one of which killed 85 people. The company had faced hundreds of lawsuits and roughly $30 billion in damage claims.
PG&E, which like Hawaiian Electric is owned by shareholders, continued to operate under Chapter 11 and settled claims from fire survivors for $13.5 billion.
Half the settlement was cash. The other half was 478 million shares of PG&E stock conveyed to a trust for claimants.
As a result, fire survivors through the trust owned about 20% of PG&E stock at the time of settlement.
The arrangement was controversial. According to a 2019 New York Times story, about 250 local government officials argued against the then-pending deal, as many favored turning PG&E into a wholly customer-owned cooperative.
Ultimately, the settlement supported by many fire survivors was approved by a U.S. Bankruptcy Court judge and the California Public Utilities Commission.
PG&E, which sought bankruptcy in January 2019, exited in July 2020.
Since the beginning of 2022, the PG&E Fire Victim Trust has sold about 410 million PG&E shares in several increments totaling around $6.3 billion for distribution to survivors. The trust still holds 67 million shares, which at Friday’s closing price of $16.72 was worth a little over $1.1 billion.
At times over the last decade before bankruptcy, PG&E stock had been worth over $70 a share. It sank to under $4 during the company’s bankruptcy in 2019.
HEI finances
Hawaiian Electric shares plummeted 68% from $37.36 on Aug. 7, a day before the Lahaina fire, to $12.03 on Thursday. Shares rebounded 15% Friday to $13.77. The last time the company’s stock was in territory similar to this past week was 2009.
A low stock price and downgraded credit rating make it harder and more expensive for a company to raise capital if needed. Even if a stock drops to near zero, a company can keep operating. At the end of June, Hawaiian Electric reported having $314 million in cash or cash equivalents. The company also has relatively stable revenue, and is entitled to a reasonable rate of return on investment subject to PUC approval.
On Friday, Hawaiian Electric said in a U.S. Securities and Exchange Commission filing that it is seeking advice from outside experts as part of “prudent scenario planning,” and not in a restructuring effort.
“The goal is not to restructure the company but to endure as a financially strong utility that Maui and this state need,” the filing said. “Hawaiian Electric and (parent) HEI intend to be here for the long term, through the rebuilding effort and beyond.”
If Hawaiian Electric is deemed liable for Maui fire damage, or agrees to bear some responsibility for losses, it could be difficult or impossible for the company to cover such expense after potential insurance coverage without restructuring. Such a situation could affect not only stockholders but also ratepayers and fire survivors.
Even if the utility company isn’t liable, there could be impacts on customers.
Paying for change
In California, as a result of fire disasters involving PG&E, the company implemented public safety power shut-offs. PG&E reported no shut-offs in 2022, and four in 2021 that on average lasted 28 hours and affected about 19,000 customers.
Hawaiian Electric has no such program.
California lawmakers also created a wildfire liability fund partly financed by utility customers in the wake of the PG&E-related disasters.
This fund was authorized in 2019 through legislation to receive $21 billion for covering damage claims from any future wildfires that exceed $1 billion. Half the money for the fund is coming from three utilities including PG&E, and the other half is coming from their customers. At the end of 2022, $12.2 billion had been raised.
Iwase said there could be public resistance to paying for wildfire mitigation and claims in Hawaii where electricity rates are already the highest in the country. A recent example of such sentiment, he noted, is high-rise condominium owners opposing a mandate to install sprinkler systems in their buildings.
In response to a 2017 fire that killed four people in the Marco Polo tower in McCully, the Honolulu City Council made such systems a requirement by deadlines ranging from 2026 to 2033, depending on building height, if a rigorous safety evaluation can’t be passed by 2024. Condo associations are lobbying to have the law repealed because of costs.
The state or federal government, which has appropriated billions of dollars for infrastructure, could also help pay for wildfire risk mitigation and future damage.
Mina Morita, a former PUC chairperson who lives on Kauai where the utility company is a nonprofit cooperative owned by ratepayers, said past state leaders and regulators rejected an opportunity that could have put Hawaiian Electric in a stronger position to address challenges of modernizing its grid for mandated renewable energy expansion while also addressing other high priorities like mitigation of long-known wildfire risks.
In 2014, Hawaiian Electric agreed to being acquired by Florida-based utility giant NextEra Energy Inc. for $4.3 billion. The administration of then-Gov. David Ige opposed the deal, and it was killed in 2016 by a 2-0 vote by the PUC then led by Iwase, with one new member abstaining.
Ige was criticized for altering the PUC’s membership while the deal was pending, and Morita, who was replaced by Iwase, said Hawaiian Electric would have been in a better position to meet challenges if the deal had been approved.
“NextEra, in my opinion, was one of the few companies which had the financial backbone, technical expertise and management skills to take on this transformation for a new utility business model, largely utilizing renewable resources, to make Hawaii the utility model for the world,” Morita said. “To just say it was a political decision by the Ige administration to squash the merger is an understatement.
“That costly political decision has caused HECO to hobble through a mandated business model transformation taxing its limited capacity. This would be similar to demanding to have an old race car become a new race car but you have to upgrade or change all the parts and fuel the race car, and train your pit crew with hardly any money while the car is still racing and you’re not allowed to lose.”
Morita doesn’t suggest that the Maui disaster wouldn’t have happened if the NextEra deal had been done. In fact, she said a rush to judge Hawaiian Electric isn’t fair.
“I am concerned that the rush to put the blame directly on HECO is like cutting off your nose to spite your face,” she said. “HECO operates a critical and necessary infrastructure that serves the public good. The costs to operate and maintain this important infrastructure is largely borne by the ratepayer. There are so many complex technical and financial parts that HECO had to weigh given competing priorities. Any large investments or expenditures ultimately have to be approved by the PUC for cost recovery, impacting rates. Unfortunately, there were many political decisions that set HECO on an uphill trajectory where its pathway just to operate a well-functioning utility was a steep uphill climb.”
