Response to KIUC naysayers

Editor’s note: This is the first of a two part letter sent to The Garden Island in response to recent letters published on the Forum page. Due to the length of the letters, they are being presented as guest commentary.

I’d like to congratulate the management and staff of KIUC for coming up with four very good renewable and alternative generation projects, which combined with KIUC’s solar hot water loan program will reduce our dependence on increasingly expensive oil. As a founding Director of KIUC and a past elected Director of KIUC, I’m very familiar with what is going on. I have no official connection with KIUC now, other than being a member, but I’ve got family working at KIUC, and many friends there who are as close to me as family.

In the first of two notes to set the record straight I will correct the financial errors and economic misinformation from the perennial KIUC naysayers in TGI Letters, April 1, and May 18. Even with four years of co-operative ownership proving every single dire prediction they made was wrong, those guys never seem to let go. Here are a few of their misstatements and the correct facts.

“Alleged owners” n First, technically, the members are absolutely the owners: each owner has a capital credit account showing their portion of ownership. And absolutely no one else n no stockholders, no big corporations, no government n owns KIUC. Second, from a practical point, the members are absolutely the owners of KIUC. Just a couple of weeks ago the member-owners of KIUC voted in the KIUC election and chose three new Directors to join six existing elected Directors to govern KIUC. Together those nine Directors represent us, the 23,300 owners of KIUC, and set the strategic goals for KIUC. The whole reason KIUC is doing alternative energy projects is because those Directors listened to members’ voices n that’s real ownership.

“Inflated price” n The simple truth is the purchase price was found to be correct and fair by the State of Hawai‘i Public Utilities Commission and the State of Hawai‘i Consumer Advocate. These government bodies have no reason to support a deal at a high price n and they proved it when they sent KIUC back to the bargaining table to get a better price when they found the first offered priced too high. The price was also found to be fair by the investment banker that brokered the deal who signed a fairness letter that makes his firm liable if the deal was found to be unfair. And, don’t forget the County of Kaua‘i had the purchase price estimated by expert consultants, and although the County kept the report secret during the purchase process, those County experts estimated a purchase price more than a year before the sale that turned out to be exactly what KIUC ended up paying.

“Huge loan” n Mortgages are a big part of anyone’s expenses. Certainly my mortgage payment is a big part of my monthly expenses, and the same is true for many businesses. However, in the 2004 annual budget KIUC’s loan payments of eleven million dollars amounted to less than ten percent of KIUC’s revenue, by no means a huge part of KIUC expenses.

“Paying off the loan for decades” n The loans will absolutely take a long time to pay off, in fact, that is the way a well-run utility is supposed to work – every year some loans get paid off and other loans are taken out for new equipment. It would be financially irresponsible for KIUC to operate any other way since operating at 100% equity would place an unfair burden on today’s ratepayers to foot the bill for tomorrow’s ratepayers. (Every textbook on utility rate-setting explains this, but I hope this simple example will help make it clear: If KIUC installs a new circuit to the Northshore to increase reliability and that circuit costs one million dollars and lasts 30 years, who should pay for it? If we operate at 0% debt which the naysayers seem to imply with talk about “paying off the loan” then all the ratepayers this year pay the full one million dollars in their rates. And all the ratepayers for the next 29 years get to use the new circuit for free.) The correct loan structure nexactly the loan structure KIUC uses, matches the terms of the loan to the expected life of their equipment so each years ratepayers pay for what they use.

“Stranded capital” n There really is such a concept and it is an important one in today’s utility world. However, it doesn’t apply here. There is very little capital left to be stranded in KIUC’s oil-based generation equipment. D1 and D2 purchased in 1964 are completely depreciated out. S1 purchased in 1968 is completely depreciated out. D3, D4, and D5 purchased in 1968 are completely deprecated out. GT1 purchased in 1973 is completely depreciated out. GT2 purchased in 1977 is completely depreciated out. Even D6 and D7 purchased in 1989 and D8 and D9 purchased in 1991 have been substantially depreciated. Even including recently built KPS, by far the largest portion of the capital owned by KIUC is in the poles, wires, and substations. Idling diesel generators will not have any significant negative financial impact on KIUC. And with KIUC’s loan expenses less than ten percent of revenue, this seems really obvious.

“Dishonestly charging ERAC” nFirst, from a technical point the ERAC formula is set into KIUC rates by the State of Hawai‘i PUC. ERAC charges are monitored by the State of Hawai‘i PUC and State of Hawai‘i Consumer Advocate. Furthermore, KIUC is audited by an independent auditing firm to ensure it correctly charges ERAC. Using ERAC to attack KIUC is an easy, but false, charge to make. Just like everyone else, ERAC is a huge part of my electric bill. But just because it’s huge number doesn’t mean it’s wrong. KIUC’s rates haven’t been changed since oil cost $12/bbl. Anything the co-op has to pay for fuel in excess of that old price gets added into the ERAC charge. With oil at $60/bbl – five times oil price included in KIUC’s base rate – of course ERAC is a huge part of our bills.

The naysayers’ assertion about overcharging points out a fundamental misunderstanding about how rates work for electric co-ops. KIUC is a non-profit corporation owned by the members. There is no big company trying to make a profit and no place to stash a corporate profit. It is structurally impossible for co-ops like KIUC to overcharge ratepayers. At the end of the year and after all expenses are paid (like paying for all those barrels of diesel fuel) KIUC takes whatever is left over and uses some to pay down the loan and the rest is returned to members in the form of pat cap refund checks. That’s it n there simply is nowhere else for the money to go. And it isn’t just me saying this. It is the annual independent financial audit proving it.

We pay a lot for electricity on Kauai, and I’m like everyone else n I’d like to pay less. Electric rates n not just fuel ERAC charges n have gone up in the last four years elsewhere in the state: the base electric rates increased more than three percent on O’ahu. And while that was happening there, KIUC has refunded more than four percent of rates as refunds. It is a simple fact that having a not-for-profit co-op has saved Kaua‘i ratepayers almost ten percent compared to what we would have paid an investor-owned for-profit utility for electricity.

• Walt Barnes is a former director of KIUC and resident of Wailua Homesteads.


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