ENERGY FOR TOMORROW …

                                     ENERGY FOR TOMORROW

           OUTLINE SUMMARY OF COMPREHENSIVE ENERGY PACKAGE


Package Summary:        I. Introduction
                        II.     "Empowering Hawaii's Consumers"
                        III. "Fuels through Farming"
                        IV. "Savings through Efficiency"
                        V.      "Independence through Renewable Energy"
                        VI. "Security through Technology"
                        VII.      Draft Administrative Directive
                        VIII.     Letter to the Public Utilities Commission


Part I. Introduction.
         This package comprehensively addresses Hawaii's decades-long overdependence on
imported oil for its energy by establishing a bold, strategic energy policy framework of integrated
measures to encourage and support market-based development of reliable, cost-effective, and
self-reliant energy systems. The package's integrated, coordinated, and complementary measures
constitute a network of policy pathways to achieve results over the near-, mid-, and long-term.
This energy vision will enable Hawaii to attain a niche leadership role in the global hydrogen
energy economy by accelerating the development of the state's own indigenous, renewable energy
resources. The package's parts and overall purposes are:

Part II. "Empowering Hawaii's Consumers" - - Improve Petroleum and Energy Industry
and Market Transparency and Competition, and Energy System Information Reporting
and Analyses.

   a. Repeal price caps; deploy "Import Parity Pricing Indicator" (IPPI).

   b. Establish monitoring program to achieve petroleum industry and market transparency.
      Include use of "Import Parity Price Indicator" (IPPI), similar to Australia's IPPI, one
      component of its monitoring and transparency program after repeal of Australia's
      wholesale gasoline price caps.

   c. Develop petroleum and energy industry data, information database and analytic system.
      Increase statewide energy systems data sharing (DBEDT and PUC) with enhanced



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      internal data/information security provisions; i.e., data on fuels, electric and gas utilities,
      and independent power producers.

      Immediate Impact: Relief from price caps volatility and uncertainty.

      Mid-Term Impact:
      (1) DBEDT and enforcement agencies (AG, DoTax, PUC, and DCCA) receive expanded,
      in-depth information on each level of Hawaii's petroleum market.

      (2) IPPI enhances competition and competitive gasoline pricing through heightened
      market awareness. Australia's example shows lower prices after repeal of price caps
      under watchdog monitoring and use of import parity indicator (IPI).

      (3) Strengthen State data analytic capacity for total energy systems to support informed
      policy decisions and all programs' assessments of renewables, energy efficiency, leading
      to hydrogen in long term.

      Cost: Currently PUC Special Fund supports 3.0 FTE, and program total annual cost of
      $311,769. After FY 07, may need General Funds. PUC FTE needed for gas caps may be
      savings.

   d. Repeal Divorcement (Anti-Encroachment Law).

      Immediate Impact: According to U.S. Federal Trade Commission executive staff report of
      econometric analysis of 6 states (including Hawaii) and D.C. with divorcement added an
      average 2.7¢/gallon at retail/self-serve on regular unleaded gasoline, which may be saved
      by repeal.

   e. Enact legislation to prohibit price gouging in petroleum fuel sales, in particular. Enhance
      State's enforcement authority by specifically making it an unfair or deceptive trade
      practice for any petroleum-related business to sell or offer to sell any petroleum product
      for an unconscionably excessive price during any abnormal market disruption, irrespective
      of disruption location.

      Approach: Legislative (DCCA initiative).


Part III. "Fuels through Farming" - - Develop and Increase Use of Alternative
Transportation Fuels.

   a. Require that State diesel fuel purchases include a purchase preference for biodiesel blends.

      Approach: Legislative or Administrative (including funding and staff resources).



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   Immediate Impact: Reduce engine wear; diversify fuel sources; and support local fuel
   production.

   Cost: Minimal. Biodiesel is currently lower cost than petroleum-based diesel fuel.

b. Offer incentives for purchasers of gasoline-efficient hybrid and alt fuel vehicles: allow
   "AFV" or "HEV" license plates; allow vehicles with "HEV" and "AFV" plates to be
   exempt from vehicle registration fees.

   Approach: Legislative.

   Near- to Long-Term Impact: Increases consumer use of fuel-efficient and fuel-diverse
   vehicles.

   Cost: Minimal (vs. tax credits for purchase of vehicles).

c. Reconcile vehicle purchase requirements in Chapter 103D, Hawaii Revised Statutes, to
   allow alternative fuel vehicles and to be consistent with federal alternate fuel vehicle
   requirements.

   Immediate Impact: State fleets will be able to comply with Federal law, 10 CFR 490.604.
   Penalties for noncompliance are $5,000 per violation for civil penalties, $10,000 per
   willful violation, and $50,000 if violations are willful and repeated; the law also includes
   provisions for withholding of Federal funding as a penalty for non-compliance.

   Cost: Will be a savings, as avoids potential Federal fines or withholding of Federal funds.
   Continue to build fuel diversification ability into State fleets, to allow the eventual use of
   alternative fuels when available and when less costly than gasoline.

d. Establish a Renewable Fuels Standard (RFS) of 20% of highway fuel demand to be
   provided by renewable fuels by 2020. Interim standards would be 10% in 2010 and 15%
   in 2015. "Renewable fuels" include:
   (1) Ethanol;
   (2) Biodiesel;
   (3) Hydrogen, or other liquid or gaseous fuels, produced:
        i. From renewable feedstocks, including wastes; or
       ii. From water, using electricity from renewable energy sources.

   Mid- to Long-Term Impact: Demand-pull for diversification of transportation fuel
   sources; development of local fuels production capability; support of transition to
   hydrogen; stabilization and reduction of fuel costs.




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   Cost: No General Funds. At historical rates of increase in demand, a requirement for
   20% renewable fuel by 2020 would simply capture the projected growth in ground
   transportation fuel demand. The E10 blending requirement beginning in April, 2006, will
   result in renewable fuels contributing about 7% of the ground transportation fuel demand
   in 2006 and 9% in 2007.

e. Extend the expiration date for the alcohol fuels State excise tax exemption from December
   31, 2006 to December 31, 2009.

   Approach: Legislative.

   Near-Term Impact: Lower fuel costs for Hawaii motorists; increased public and retailer
   acceptance during introduction of ethanol blended fuel.

   Long-Term Impact: Increased likelihood of successful transition to and expansion of local
   fuels production capability; stabilization and reduction of fuel costs.

   Cost: Whether or not the measure would require an adjustment to the State budget
   depends on what is being assumed for ethanol facility income tax credits and excise tax
   revenues on gasoline. If neither is assumed in the State budget, no adjustment would be
   needed.

   When the excise tax exemption for E10 was originally enacted (in 1980), there was no
   sunset date. The sunset date was added in 2000, when the ethanol facility incentive was
   enacted. The intent was to allow for a limited period of overlap between the excise tax
   exemption and the facility tax credit, to aid in the establishment of the industry and
   provide retailers and consumers with a certain period of excise tax exemption. To date,
   neither the ethanol facility incentive nor the excise tax exemption have been utilized.

   It is not anticipated that the ethanol facilities currently being planned for construction in
   Hawaii will be taking the ethanol facility tax incentive until 2008 at the earliest, since none
   of the projects have yet broken ground. Project developers are projecting early 2007
   startup dates; the facilities cannot take the credit until and unless (after) they have
   produced at least 75% of their nameplate capacity for the year. Tax incentives paid out
   to ethanol production facilities cannot exceed $12 million per year. It appears highly
   unlikely that any ethanol production facility incentives will be expended in 2006 or 2007
   and it also appears unlikely that the full amount will be expended in 2008.

   The retail price assumed for gasoline determines the cost of the extension of the excise tax
   exemption. If gasoline is assumed to have an annual average pre-tax retail price of $1.70
   (Honolulu pump price of $2.28), the excise tax that would be collected per gallon of
   gasoline would be about $0.071. If 230 million gallons of gasoline are assumed to be used
   between January 1, 2007 and June 30, 2007, the cost of the extension of the exemption


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      would be $16 million. Higher gasoline prices would result in a higher figure; lower
      gasoline prices would result in a lower figure.

   f. Provide appropriation to quantify potential for ethanol and biodiesel production in
      Hawaii for motor fuels, electricity production, and as a potential hydrogen carrier for the
      future. Facilitates supply-push.

      Approach: Legislative. May be implemented administratively. Funding and staff
      resources need to be provided.

      Near- to Long-Term Impact: Facilitates development of local fuels production capability.
      A 2003 study commissioned by DBEDT projected that an ethanol industry of 90 million
      gallons per year "could add as much as $300 million to the local economy in direct and
      indirect value." A statewide multi-fuel biofuels production assessment will provide a
      longer term and comprehensive evaluation of potential feedstocks, technologies, and
      economics of the various renewable fuels pathways.

      Cost: General Funds $200,000.00

Part IV. "Savings through Efficiency" - - Stimulate State and Consumer Energy
Efficiency.

   a. Improve Energy Efficiency in State Facilities and Vehicles:
      (1) Direct that new State building construction strive to meet the U.S. Green Building
      Council's Leadership in Energy and Environmental Design (LEED) guidelines, with a goal
      to achieve Silver certification; at minimum agencies shall follow commissioning and
      retrocommissioning requirements, as well as appropriate LEED checklists;
      (2) Retrofit and renovate existing State facilities using energy efficient design and
      equipment;
      (3) Require solar water heating where cost-effective; exempt Hawaiian Home Lands to
      allow clients to participate in utility rebate programs for solar water hearing;
      (4) Require that all new residential facilities three stories and below, built using any
      portion of State funds and/or located on State lands, meet minimum roof and wall
      standards to prevent heat gain and, if air conditioned, minimize cool air loss. Work with
      Counties to adopt similar requirements in their building codes;
      (5) Purchase environmentally preferable products;
      (6) Include waste management programs for all construction and demolition projects;
      (7) Incorporate reduce, reuse, and recycle as a standard operating practice; and
      (8) Promote purchase of fuel-efficient vehicles and use of alternative transportation fuels.

      Approach: Legislative. Statute would provide clear and strong policy statement. May
      be implemented administratively. Funding is essential to ensure compliance and meet
      projected impacts.


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   Near- to Long-Term Impact: If agencies are properly funded to conduct retrofits using
   energy efficient equipment, the state facilities could reduce consumption by 14% and save
   about $10 million a year. If agencies are provided sufficient funding for new buildings to
   design to Leadership in Energy and Environmental Design (LEED), Silver Standard, the
   added costs for new facilities would be about 5% to 10% per new facility, but the
   operating costs would be reduced by 30%. State agencies also will continue and
   strengthen programs for efficient vehicles and alternative transportation fuels, recycling,
   and environmentally preferable purchasing.

   Cost: General Funding for programs and staff is essential, consisting of 2.0 FTE and
   $500,000 in program support to provide training and technical assistance to agency
   personnel and conduct demonstration projects in state facilities. Agencies with facility
   requirements need additional funding of 5% to 10% of construction cost to meet LEED
   standards and Energy Star standards.

b. Amend State Energy Tax Credit Law:
   (1) Remove the sunset date of January 1, 2008 for the renewable energy tax credits;
   (2) Increase the dollar cap from $1,750 to $10,000 for single family residential taxpayers
       who purchase and place into service photovoltaic systems;
   (3) Increase the dollar cap from $350 per unit to $1,000 per unit for solar water heating or
       photovoltaic systems installed by taxpayers in multi-unit residential buildings;
   (4) Increase the dollar cap from $250,000 to $500,000 for commercial taxpayers who
       purchase and place into service a solar thermal or photovoltaic energy system.

   Approach: Legislative.

   Immediate Impact: For each $1 in tax credits paid, $1.82 in tax revenues is generated from
   solar water heating, which presently constitutes about 100 percent of the tax credits
   claimed.

   Mid- and Long­Term Impact: Increased revenues, jobs, and environmental benefits.

   Cost: Increase in tax credits paid of $1.75 million. Possible impact on the tax credits paid
   due to increased number of commercial photovoltaic installations is estimated at $1.5
   million more than presently paid out. The residential photovoltaic impact is estimated to
   be $250,000 per year. (Between 2001 and 2004, 46 net metered residential photovoltaic
   systems were installed statewide. If that number were to be installed in a single year, at
   an estimated net cost after the Federal tax credit of $15,000, the revenue impact would be
   $241,500.) The tax credit impact for multi-unit residential solar water heaters is not
   expected to be significant.




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Part V. "Independence through Renewable Energy" - - Significantly Increase Use of
Renewable Energy Resources.

   a. Encourage the Public Utilities Commission to establish "advanced pricing measures" for
      electrical consumers.

      Approach: Legislative. Statute would provide clear and strong policy statement. May
      be implemented administratively through Public Utilities Commission docket process.

      Near-Term Impact: Electricity conservation and peak energy demand reduction.

      Cost: None directly to state. Advanced pricing tariffs could involve improved residential
      metering, which may ultimately be paid for through savings.

   b. Re-direct existing utility demand-side management (DSM) surcharge to directly support
      energy efficiency and renewable energy programs for electricity customers (i.e.,
      ratepayers); change designation to "Public Benefits Charge." If enacted, Public Benefits
      Fund and programs could be administered by a government entity or out-sourced to
      professional third party. Eighteen (18) states have active Public Benefits Charge-funded
      energy efficiency (EE) and renewable energy (RE) programs.

      Approach: Legislative.

      Near-Term Impact: Up to $8.8 million of additional EE & RE programs could be
      provided for ratepayers with no additional cost beyond what Hawaii utilities currently
      charge for existing DSM programs. For example, in 2003 HECO applied a $0.0023
      kilowatt hour surcharge, raising about $16.6 million to fund five DSM programs. Of this
      surcharge amount,
          · $6.2 million (37%) was paid for DSM program services,
          · $9.1 million (55%) was used for lost sales recovery payments, and
          · $1.3 million (8%) was paid for shareholder incentives.

      63% of these funds went to the utility to pay for electricity it did not sell due to energy
      efficiency and shareholder incentives.

      Cost: None. This is a transfer of payment, with a goal to put bulk of money raised to
      direct program support. Administrative costs funded by the Public Benefit Fund, limited
      to no more than 10% of the fund.

   c. Fund programs and additional positions in Strategic Industries Division to support above
      EE & RE installations in state facilities and implement Chapter 196-12-29, Hawaii
      Revised Statutes. Total costs of the above programs included above (total of 2.0 FTE and



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   program funds for total funding support of $630,000 per year). Could be supported with
   Public Benefit Fund.

d. Require Renewable Portfolio Standard (RPS) targets be achieved only by electricity
   produced from renewable energy resources, and repeal definition of energy efficiency
   gains as renewable resources. Eliminate "off-ramps" and direct the PUC to develop
   penalties for utilities' non-attainment of RPS target. Provide for an opportunity for the
   utilities to earn a fair rate of return. Establish a methodology to establish a price for
   renewable energy, a competitive bidding process, and an approval process for long-term
   fixed price renewable energy contracts.

   Approach: Legislative.

   Near- to Mid-Term Impact: Strengthens mandate for RE development, and encourages
   private investment and development of RE.

   Cost: None, accommodated by existing mechanism.

e. Provide funding for Department of Land and Natural Resources (DLNR) to inventory
   State lands available for renewable energy, and establish renewable energy resource
   development sub-zones, streamline permitting for sub-zones; e.g., eliminate contested
   case provisions.

   Approach: Legislative. Appropriation of $200,000 requested.

   Near- to Mid-Term Impact: Identifies State assets that can be used to facilitate RE
   development, encourages private investment.

   Cost: $200,000 General Fund appropriation to DLNR.

f. Streamline permitting of renewable energy projects by directing that State agencies (Land
   Use Commission, DLNR, Department of Transportation, Department of Health, etc.)
   with permitting jurisdiction give priority over conventional fuel energy projects

   Approach: Legislative.

   Mid- to Long-Term Impact: Facilitates renewable energy projects by reducing permit
   time.

   Cost: None.




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   g. Direct the PUC to pursue utilities' sharing of the risk of oil price increases through
      modification or elimination of the fuel price adjustment clause, and de-link the payment of
      oil-based avoided cost to renewable energy producers and developers.

      Approach: Legislative.

      Immediate Impact: Consumer savings from both measures.

      Mid- to Long-Term Impact: Sharing oil price volatility drives utilities' cost-effectiveness
      and attractiveness of renewables. De-coupling payments to RE producers eliminates
      inequity; i.e., windfall profits from higher payments for RE when oil prices rise when
      actual production costs do not change.

      Cost: None.

   h. Through the Department of Agriculture, work with local producers to stimulate the
      production of energy crops and use of agricultural waste streams for energy. Position
      local agricultural industries to take advantage of the Energy Policy Act and Farm Bill
      incentives.

      Approach: Legislative appropriation.

      Near-Term Impact: By providing resources to the Department of Agriculture assistance
      to agricultural community interested in developing energy projects and seeking external
      funds can be increased.

      Cost: $150,000 General Fund appropriation to DOA.

Part VI. "Security through Technology" - - Establish Hawaii as Leader in Renewable
Hydrogen Research and Development.

   a. Establish a world class renewable hydrogen program ­ The State's combination of
      abundant renewable resources, high fossil fuel prices, limited geographic area and
      recognized expertise in hydrogen research and development makes Hawaii an ideal leader
      for hydrogen R and D. The hydrogen program would also develop hydrogen education
      and outreach programs to accelerate use of renewable energy to produce hydrogen and
      create public private partnerships to expand development.

      Approach: Legislative. Statute would provide clear and strong policy statement.

      Near-Term Impact: To date small, but significant steps to advance this initiative have
      been taken by DBEDT in partnership with UH. The Governor's and Legislature's
      commitment to establish and fund a program will significantly ramp-up activity. The


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      program will plan, implement and/or conduct a range of developmental activities
      including:
      (1) Establishment of strategic partnerships;
      (2) Engineering and economic studies;
      (3) Electric grid reliability/security projects;
      (4) Hydrogen demonstration projects;
      (5) A statewide hydrogen economy public education and outreach plan;
      (6) Promotion of Hawaii's renewable hydrogen assets and opportunities;
      (7) Plans to more fully deploy hydrogen technologies and infrastructure through 2020;
          and
      (8) Evaluation of policy instruments and development of policy recommendations.

      Mid- to Long-Term Impact: Development and use of hydrogen technologies reduces or
      eliminates curtailment of renewable energy on Big Island, encourages more renewable
      energy production, attracts significant outside investment from the USDOE and private
      companies, and positions Hawaii as the U.S. leader in renewables to hydrogen conversion.

      Cost: General Funding for programs and staff is essential, consisting of 3.0 FTE
      ($250,000) and $500,000 in program funding to provide to manage and conduct hydrogen
      energy program activities; e.g., formation of partnerships, technical analyses, and project
      implementation.

      To ensure longer-term program sustainability, $10 million will be needed to establish a
      hydrogen investment capital revolving fund to leverage federal funding and partner with
      private investments for research, development, testing and deployment of renewable
      hydrogen systems in Hawaii. Contributions from public or private partners are expected
      to maintain the fund.

Part VII. Draft Administrative Directive

   a. Issue an Administrative Directive to all state agencies regarding Energy and Resource
      Efficiency and Renewable Energy and Resource Development. The Directive provides
      for following energy efficiency standards for state facilities, purchasing energy-efficient
      state vehicles, using alternative transportation fuels, and streamlining permitting
      requirements affecting renewable energy development

      Approach: Administrative Directive.

      Immediate Impact: If agencies are properly funded to conduct retrofits using energy
      efficient equipment, the state facilities could reduce consumption by 14% and save about
      $10 million a year. State agencies will use alternative transportation fuels, as appropriate
      and available. Reviewing permitting requirements for renewable energy projects with the



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      intent of identifying streamlining opportunities will generate increased interest from
      private developers.

      Near-Term Impact: If new buildings are designed to Leadership in Energy and
      Environmental Design (LEED), Silver Standard, the added costs for new facilities would
      be about 5% to 10% per new facility, but the operating costs would be reduced by 30%.
      State agencies also will continue and strengthen programs for efficient vehicles and
      alternative transportation fuels, recycling, and environmentally preferable purchasing.
      State agencies will purchase more fuel efficient vehicles and use alternative transportation
      fuels, as appropriate and available.

      Mid- to Long-Term Impact: Accrued reduced operating expenses by 30% if new facilities
      are built to LEED Silver Standard. Costs to design to LEED Silver Standard should
      decline below the projected 5% to 10% as private design firms and state agencies become
      familiar with LEED standard and implementation of the LEED checklists. Streamlining
      permitting requirements could help to expedite renewable energy developments.

      Cost: Initial funding for programs and staff consists of 2.0 FTE and $500,000 in program
      support to provide training and technical assistance to agency personnel and conduct
      demonstration projects in state facilities. Agencies with facility requirements would need
      additional funding of 5% to 10% of construction cost to meet LEED standards and
      Energy Star standards.

Part VIII. Letter to the Public Utilities Commission

   a. Advanced Pricing Tariffs

      Approach: Letter to the Public Utilities Commission suggesting the Commission consider
      encouraging the utilities to adopt advanced pricing tariffs.

      Immediate Impact: Ideally, the Commission will initiate a docket to examine the options
      and select the best for Hawaii.

      Near-Term Impact: Upon adoption, as ratepayers use advanced pricing tariffs, peak
      demand and energy use will begin to decline.

      Mid- to Long-Term Impact: In other states, utilities have cost-effectively achieved from
      7 to 23% reductions of peak load. This could result in reduced need to maintain very high
      reserve margins, and need for fossil fueled peaking units. If load curve is flattened due to
      reduction of peak, the electricity system overall will operate more efficiently, reducing oil
      use.




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Cost: None to State, other than PUC cost of holding a docket. Utility customers may
need to pay an additional fee for meters capable of measuring time of use and other
equipment, but these costs will likely be offset by future savings.


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