HB974 SD1

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, further anticipated in its first Integrated Grid Planning request for proposals, and other proposals. These proposals will 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 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 associated with a power purchase agreement subject to a step-in agreement and reserve fees that are on deposit in a power purchase costs trust fund. 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 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 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) 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 the 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 an 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" 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 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.

"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 without limitation, 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, without limitation, all categories of costs recoverable under the energy cost recovery clause and the purchased power adjustment clause under their 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.

"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 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, as described in section 269-B(a); provided that the department's payment obligation under the 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 defined 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 from a due diligence investigation by the department of an obligee and the proposed step-in agreement. 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; provided that before entering into any step-in agreement, the department shall conduct due diligence on the obligee, including through communication with the prospective obligee, within thirty days of the effective date of this Act. Pursuant to the 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 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; 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 that under no circumstances shall the department be liable for any costs, expenses, 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 except for those revenues from the power purchase charges and reserve fees attributable to the covered power purchase agreement 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 termination of a power purchase agreement by the electric utility under bankruptcy law.

(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 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 further that no such election by the electric utility shall be 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 that 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 inconsistent with the covered power purchase agreement.

(g) As consideration for the department entering into the 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 agreement to the extent of the amounts owed to the 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 and clear 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 under 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 pertaining 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 may 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 may 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 reserve account established under the fund shall 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).

(k) If an obligee provides notice to the department that the electric utility has failed to timely file any submission as described in subsection (j), the department shall promptly file, or direct the electric utility to file, pursuant to section 269‑F(a), and the public utilities commission shall allow to become effective, a substitute filing as if the filing had been submitted by the electric utility under subsection (j). The electric utility shall implement the power purchase charges in the substitute filing 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 promptly provide the electric utility with a copy of the notice of the 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 the 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, with 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 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 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, 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 obligee to any funds of the State. An obligee shall only have the benefit of moneys derived from power purchase charges and the reserve fee 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, any monetary relief, or compensatory damages.

§269-E Reserve account; establishment. (a) By August 1, 2025, the public utilities commission may create a utility-wide nonbypassable surcharge, referred to as reserve fees, which shall be deposited into an account within the fund and 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 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. 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 directly 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 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 fee 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 fee. 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 and 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 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, 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 may 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).

(f) The department's contract with 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.

HOUSE OF REPRESENTATIVES	H.B. NO.	974
THIRTY-THIRD LEGISLATURE, 2025		H.D. 1
STATE OF HAWAII		S.D. 1