Hawaii Supreme Court Rules that PUC Must Consider Out-of-State GHG Emissions in LNG Import Projects Rate Case – Update from Manko Gold Katcher Fox

June 16, 2020

Brenda Hustis Gotanda

MGKF Special Alert

The Hawaii Supreme Court, in an appeal from a rate case involving two liquified natural gas (“LNG”) import projects, ruled that the state’s Public Utilities Commission (“PUC”) erred when it excluded from consideration GHG emissions occurring outside the state, such as from LNG production, development and transportation. In a unanimous decision in In re Application of The Gas Company, LLC dba Hawaii Gas (“In re Hawaii Gas”), No. SCOT-19-0000044 (June 9, 2020), the Court ruled that the PUC must consider all GHG emissions, including out-of-state emissions, and that the PUC failed to fulfill its statutory obligation to explicitly consider the hidden and long-term costs of the state’s reliance on fossil fuels when it geographically limited its review to only those GHG emissions occurring within Hawai’i.   

Hawaii Gas had recently begun importing LNG from the mainland in order to diversify its fuel supply and reduce its dependence on oil-based feedstocks from the local refinery, which are needed for it to manufacture synthetic natural gas (“SNG”). The imported LNG serves to replace a portion of the manufactured SNG. Application was made to the PUC in order to include the costs of its two LNG projects in its rate base. Two non-profit groups, Life of the Land and Hui Aloha `Āina o Ka Lei Maile Ali`i (the “Groups”), alleging concerns about climate change impacts on the environment and the rights of Native Hawaiians, sought to intervene in the rate case. The PUC denied the motion to intervene but granted the Groups a limited participant role while restricting consideration of any GHG impacts beyond the state’s borders. The PUC ultimately approved a stipulated rate increase in the matter.   

The Groups appealed the PUC approval contending, among other things, that the PUC failed to fulfill its statutory duties under Hawai’i Revised Statutes (“HRS”) §269-6(b) because it limited consideration of GHG emissions to those occurring within the state and because it adopted, without substantiation, the representations made by Hawaii Gas that the LNG projects would result in decreased GHG emissions.

The statute, at HRS §269-6(b), provides that the PUC shall, in exercising its duties, consider the need to reduce the State’s reliance on fossil fuels through energy efficiency and increased renewable energy generation and that, in making determinations as to the reasonableness of utility system costs, “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 Hawai’i Supreme Court previously interpreted this statutory provision, in its decisions In re MECO, 141 Hawai’i 249 (2017), and In re HELCO, 145 Hawai’i 1 (2019), to require the PUC to explicitly consider the “hidden and long-term” environmental and public health costs of reliance on fossil fuels, including climate change due to GHG emissions, and to substantiate its findings.   

The Groups had argued that the statute requires consideration of the GHG emissions generated out-of-state in earlier stages of the LNG process such as in extraction, development, production and transportation of the imported fossil fuels, but that no data on these emissions had been presented in the rate case. They contended that these out-of-state GHG emissions are “quite literally” the type of “hidden” GHG emissions that the PUC is required to consider. The Court agreed with the Groups’ contention, noting the transient nature of air pollution that is “heedless” of state boundaries, and ruled that the PUC did not fulfill its statutory obligations. Although not requiring the use of any particular methodology to quantify out-of-state GHG emissions, the Court stated in a footnote that “[i]t is important to note that the EPA, California and Oregon have all adopted, in some form, Argonne National Laboratory’s “Greenhouse gases, Regulated Emissions and Energy use in Transportation” (or “GREET”) Model” and therefore, such information is available for the calculation of lifecycle GHG emissions. The Court also held that the PUC fell short of its affirmative duty under the statute to explicitly consider GHG emissions because it “simply repeated” the representations by Hawaii Gas that the LNG projects would decrease GHG emissions without making any independent factual findings to substantiate its conclusions concerning the GHG emissions. Citing to its ruling in In re HELCO, the Court explained that the PUC must substantiate its findings sufficiently to allow a reviewing court to track the steps by which the agency reached its decision.

Another issue tackled by the Court on appeal was the Groups’ contention that the PUC’s limitation of the issues to only in-state GHG emissions violated their due process rights by denying them a meaningful opportunity to be heard concerning the full impact of GHG emissions associated with the LNG projects. The PUC had argued that the Groups’ extensive participation in the rate case proceedings and the PUC’s framing of the issue had afforded them meaningful opportunity to be heard and due process. In response, the Court discussed its prior holding in In re MECO where it recognized a “protectable property interest” under article XI, section 9 of the state constitution in the “right to a clean and healthful environment” as defined by state statute, including specifically HRS §269-6(b). The Court then held that because the statute requires consideration of all GHG emissions, the PUC’s decision to limit consideration of GHG emissions to only those within the state truncated the Groups constitutionally-protected property interest and violated due process. 

The Court, however, rejected other issues raised on appeal by the Groups. They had argued that the PUC had abused its discretion by creating policy on measuring GHG emissions by way of ad hoc adjudication in a rate case rather than through rulemaking. The Court explained that agencies have broad discretion in policymaking and that policymaking via adjudication is only an abuse of discretion in this type of case if there is a sudden change of policy that results in undue hardship for those who relied on past policy. Applying that test, the Court ruled that there was no abuse of discretion in this case because the PUC did not attempt to bypass a rule, amended rule, or pending rule concerning measurement of GHG emissions and the Groups did not suffer undue any hardship. Rather, the Court observed, among other things, that the Groups participated in the contested case without objection and in the appeal and should have initiated a rulemaking petition if that is what they desired.

The Court declined to rule on arguments advanced by the Group that the PUC did not fulfill its constitutional obligations to protect native Hawaiian customary and traditional rights or to serve as public trustees over the state’s natural resources. It explained that record was not sufficiently developed on these issues due to the PUC’s improper curtailment of the Groups’ substantive participation and directed the PUC to consider its constitutional obligations on remand.  The Court vacated the PUC decision and remanded it for further proceedings consistent with its decision.

If you have questions about this alert, please contact Brenda Gotanda at 484-430-2327 or 808-892-4334.