PUC says nine issues are key to KE sale

At a Kaua’i County Council workshop, the state Public Utilities Commission identified nine issues it is considering while deciding whether or not it will approve the sale of Kauai Electric to Kaua’i Island Utility Co-op for $215 million.

Those for and against the sale, naturally, have very different takes on those nine items.

– Whether the purchase and sale agreement should be approved.

The county’s position is that there are too many unanswered questions and assumptions made about the buyer’s loan agreements and other factors.

Representatives of the state Division of Consumer Advocacy, in the state Department of Commerce and Consumer Affairs, charged with protecting the interests of ratepayers in utility sales and rate-increase proposals, disagree.

Cheryl Kikuta, an attorney in the consumer advocate’s office and its utilities administrator, determined KIUC is fit, willing and able to provide the service, and that the transaction is in the public interest.

– Whether the transfer of KE’s franchise to KIUC should be approved pursuant to state law.

The county’s preliminary position statement is that Citizens Communications, parent company of KE, should maintain ownership of KE until the sale of its assets can be achieved in a fair and orderly process.

The consumer advocate in its stipulation agreement in lieu of a preliminary position statement, signed also by representatives of the U.S. Navy (Department of Defense), buyer and seller, is that under certain conditions the transfer should be approved.

The buyer and seller both approved of those conditions, Citizens agreed to provide $3 million in rate relief within one year of the sale closing date, and other factors led the consumer advocate to conclude that the stipulation agreement made a good deal even better.

– Whether the sale of all KE assets to KIUC should be approved pursuant to state law.

The county indicates the transactions as proposed should be rejected, and the sale “remains without sufficient benefits to the public to merit commission approval.”

Again, the consumer advocate disagrees, and recently brought before the County Council a financial consultant familiar with both the 2000 and 2002 bids by KIUC to purchase KE. The expert said a lower purchase price, exemption from certain taxes, lower guaranteed financing and other factors make this deal good for consumers.

– Whether financing KIUC is proposing to obtain should be approved pursuant to state law.

The county agrees that continued pursuit of low-interest, federal loans is a good idea, with nonprofit, cooperative financing options only encouraged to the extent necessary to cover the portion of the purchase price the federal loans will not.

The consumer advocate’s financial expert said because interest rates are lower, the purchase price is lower, and assumptions used to prepare the projections are more reasonable this year than during the 2000 buy attempt, he is comfortable with the 100-percent financing scheme KIUC has in place with the government and private lenders.

– Whether KIUC is fit, willing and able to perform the services currently offered by the for-profit KE.

The county maintains KIUC remains financially unfit, and has failed to incorporate fundamental concepts of a functioning cooperative.

Again the consumer advocate disagrees, saying that by agreeing to retain nearly all of the current KE employees, including management, KIUC has demonstrated the ability to operate KE as it does now if the PUC approves the sale next month.

Financial arrangements already discussed give the consumer advocate confidence that KIUC is financially fit.

The stipulation agreement mandates KIUC work with the consumer advocate to develop informational materials for membership so as to promote accountability by the cooperative to its members.

“I think that given the cooperative’s proposal to make everybody automatically a member and then you’re opted out,” if desired, Kikuta said, will make for effective governance.

– Whether KIUC’s acquisition of the KE assets is reasonable and in the public interest.

The county contends that the acquisition, and purchase price in particular, are unreasonable and contrary to the interests of the public.

The consumer advocate disagrees, with the financial expert telling the council that the $215 million sale price is at the low end of the range “of reasonable and fair values for the Kauai Electric business enterprise,” and “within the range of values suggested by the R.W. Beck appraisal approach.”

The Beck study was paid for by the county, and has been used by Mayor Maryanne Kusaka’s administration as evidence that KIUC is paying too much for KE.

The co-op could actually pay more than $215 million for KE and still service its acquisition debt, said Michael Broesh, the consumer advocate’s financial consultant.

– Whether it is reasonable for KIUC to use current KE rates, tariffs and rules and regulations for its financial projections.

The county position is that KE’s current rates are not just or reasonable, and “cannot continue – by KE or KIUC – without customary financial and economic justification.”

“Utility rates are based upon the cost incurred to run the business and, unfortunately, Kauai Electric’s costs are not expected to decline,” said Broesh.

He added that if KE remains an investor-owned utility, a rate increase is eminent or highly likely, because it is not currently earning its authorized rate of return, and the addition of the Kauai Power Partners unit at Lihue Energy Service Center “implies higher expenses to the company that have not previously been recognized in setting its rates.”

– Whether any other relief as may be just and reasonable should be granted under the circumstances.

The county’s preliminary position continues to contend that an evidentiary hearing be held in the matter, as it is a large user of electricity, the island’s governing body, and a potential owner of KE in the event of failures by KIUC.

Representatives of the co-op point to the overwhelming support the sale received at the Lihu’e public hearing convened by the PUC.

– Whether any other conditions or provisions are required to ensure that the proposed transaction is in the public interest.

The county contends that several things need to occur before PUC approval of the sale, including restructuring the co-op’s organization and functioning; the co-op obtaining IRS tax-exempt status; that KIUC perform a loss-of-load analysis for potential users leaving the grid; and that the co-op prepare justifications for its initial rates, among other conditions.

The consumer advocate countered that the loss-of-load scenario exists no matter who owns KE, especially if rates go higher or remain high, and that the buyer has justified its initial rates.

KIUC has made it clear that co-op members will be the ones to choose board members, and thereby dictate governance matters, once the sale is approved by the PUC.


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