Study: Lower rates if county buys Kaua’i Electric

Increase expected under current ownership

Kaua’i County could, if it bought KE, offer customer rates nearly 5 percent lower than if a cooperative buys the utility, a financial feasibility study states.

But if present-owner Citizens Communications continues to operate Kaua’i Electric, a rate increase of around 10 percent can be expected within three years, according to the county-commissioned assessment made by the consulting firm of R.W. Beck Inc.

Wallace Rezentes Sr., Mayor Kusaka’s administrative assistant, said the report also states that if Kaua’i Electric is sold and continues to be operated as an investor-owned utility, rate increases likely would be higher than one anticipated by Connecticut-based Citizens Communications.

That assumes a purchase price equal to or above KE’s net book value, estimated to be $174 million. The study concludes that investor ownership probably would not offer more than net book value for KE, although one did during the bidding war with Kaua’i Island Utility Co-op that sent KE price up to $270 million last year.

The co-op is still negotiating to buy Kaua’i Electric, but at a price now thought to be in the neighborhood of around $200 million, including inherited debt and other acquisition expenses.

The KIUC board has not yet met to discuss the county’s released information about the feasibility study, but board chairman Gregg Gardiner this morning offered some comments on the study’s results.

“I find the timing and content of the press release somewhat curious. Usually you wait until the analysis is complete before you come to any conclusions,” Gardiner said.

“The statement about future rates if KIUC were successful in acquiring KE is incorrect,” he said. With the financial analysts working with KIUC, “We have more confidence in our analysis which demonstrates no need for a rate case in the 10-year projection horizon at a price higher than $185 million,” he said.

Further, Gardiner said, “Market value, not book value, is the only basis on which Citizens will decide to sell or not sell KE. Market value is established by what a willing buyer and a willing seller agree to in a transaction.

“It appears that by ignoring market value, the R.W. Beck report is simply making a case for the seizure of KE through condemnation, quite the opposite of a willing buyer and willing seller.”

The state PUC’s approval is necessary to finalize any sale. The commission last year rejected the $270 million offer, saying a price that high would likely lead to increased rates for consumers and questioning the financial ability of the co-op to own and operate KE.

The county and a co-op could individually pay as much as $185 million for Kaua’i Electric. If the county did, it could offer rates 4.5 percent lower than a co-op could, according to the report. That purchase price would likely allow a cooperative to keep rates at current levels for around five years, the report adds.

Any purchase price that is above the price an investor group would pay would effectively transfer a portion or all of the benefit of public ownership from the utility’s customers to Citizens Communications, the report continued.

The study anticipates a rate increase may be needed, perhaps as early as 2006, under both public ownership scenarios.

According to Rezentes, one of the most important conclusions of the study is that the sale of the utility to either a cooperative or the county can result in substantial savings, which may or may not result in lower rates for customers, depending on the purchase price.

Rezentes stressed that the feasibility study is a cash-flow analysis, consisting of 10-year financial projections under four types of ownership scenarios. He said that should not be confused with R.W. Beck’s ongoing appraisal of Kaua’i Electric’s assets.

Russ Mitten, Citizens vice president and general counsel, said no entity should expect to pay above market value for Kaua’i Electric, but that the county shouldn’t be able to acquire Kaua’i Electric for a price below market value.

Staff writer Paul C. Curtis contributed to this report.