guest viewpoint – A BETTER KAUA‘I

The change from fossil fuel

by Walter Lewis

In September 2002, a little more than five years ago, the newly formed Kauai Island Utility Cooperative acquired the Kaua‘i electric utility business of Citizens Communications Company for a $215 million purchase price. Soon thereafter KIUC bought the Kapaia naptha-fueled generating plant for about $35 million. As KIUC had no assets at the time of its creation the two transactions were funded with borrowings and resulted in about $250 million of debt for the fledgling enterprise. Assuming the borrowings were made at an average interest rate of 5 percent and assets were amortized over 25 years, the indebtedness required initially charges of over $20 million annually from revenues. At year end 2007 the outstanding debt remains a formidable $225 million.

To date fossil fuel has been almost entirely the source of the power KIUC generates. However, KIUC has recently announced that it intends over the next 15 years to convert at least fifty percent of its generating capacity to sustainable energy such as bio-fuels, hydro, solar and wind power. To some extent KIUC is doubtless motivated by a sense of environmental responsibility and a desire to minimize carbon emissions that are contributing to global climate change. But there are also impelling financial considerations.

With rising petroleum prices and a market that is looking at almost $100 per barrel price for oil the costs of electric power for KIUC’s customers has been soaring and for residential users is now just short of 40 cents a kilowatt hour. This level is partly caused by the consequences of hurricane ‘Iniki and in part by the premium KIUC paid to acquire the business, but it mainly reflects the galloping increases in the costs of fuel. Disturbingly it is at least twice the prevailing electric cost on the mainland and higher than other locations in Hawai‘i.

KIUC is a full-service electric utility having both generation and distribution facilities. Generation is provided by the Kapaia facility mentioned above with a 27.5-megawatt capacity and by an aging steam and diesel facility plant in Port Allen with a rated capacity of about 80 megawatts. As it is the lower cost producer primary reliance is placed on the Kapaia plant to meet the nearly 40 megawatt hours of power supplied on the average to customers monthly.

KIUC’s announced plans to convert over half of its generating capacity to sustainable energy will be a serious challenge to achieve. There will be technology, environmental and political problems to surmount. It seems most likely that KIUC will need to seek generating capacity with a variety of types and with each source only supplying a modest amount of the capacity to be required.

In the near future and to some extent later the debt load that KIUC bears will be a troublesome factor. At present, servicing the borrowings amounts to over 15 percent of KIUC’s total costs. This burden will be ongoing even as KIUC obtains additional power sources and will likely be compounded to the extent that KIUC must invest in the properties producing the power. The debt obligations also unfavorably affect customer conservation programs as they adversely affect KIUC revenues and make the impact of the debt even greater. Because debt service, distribution costs and administrative costs will remain essentially unchanged, even though the acquired power sources may provide power at lower cost it will be difficult to pass any significant savings on to KIUC’s customers.

Early along the way it’s most probable that KIUC will need to embark on a rate case with the State Public Utilities Commission. At its outset KIUC hoped that it would be free from governance by the Commission. And the Commission was poorly placed to deal with KIUC as its role had been exclusively to monitor for profit entities and it had no regulations to cover the position of KIUC. So KIUC, on acquisition of Kauai Electric, was allowed to continue the rate structure that had been approved in 1996 for its predecessor. At this time, however, KIUC’s rate structure needs a cost of service analysis,consideration needs to be given to tariffs for stand by charges and the energy rate adjustment provisions and these need to be approved by the PUC.

The management and directors of KIUC are to be commended for taking the initiative to end the utility’s almost complete reliance on fossil fuel for its power generation. The goal is unquestionably correct. Changing technologies, financial needs and uncertain governmental approvals will complicate the path. A public understanding of the steps necessary for the conversion of generation facilities and the problems to be faced by both the utility and its customers is vital.


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