On June 30 of this year the Kaua‘i Island Utility Cooperative filed its application for rate increases and certain other lesser matters with the State Public Utility Commission. The utility is seeking a 10.5 percent across the board rate increase
On June 30 of this year the Kaua‘i Island Utility Cooperative filed its application for rate increases and certain other lesser matters with the State Public Utility Commission.
The utility is seeking a 10.5 percent across the board rate increase for all of its classes of customers, which under its assumptions it says will amount to about $13 million annually.
This is the first Kaua‘i electric utility application since the Utility Commission’s decision in 1996 establishing rates for KIUC’s predecessor Kaua‘i Electric. The application requests the commission to hold a public hearing on the case in Kaua‘i.
The utility is also asking for a correction of the Energy Rate Adjustment Clause, which allows for a charge if fuel costs exceeds 1996 levels but also includes an incentive.
In recent years as fuel costs have sharply risen the incentive has subsidized the utility’s non-fuel cost increases. The utility now proposes to substitute a Cost of Power Adjustment to provide an adjustment for fuel cost changes but no incentive.
In 2004, KIUC agreed with the Utilities Commission to use its best efforts to obtain lender approval for distribution of 25 percent of its margins to its members annually. KIUC is now seeking to end this commitment.
In 2008, as fuel costs and ERAC charges soared, KIUC’s revenues climbed to a record $189 million, but as fuel costs mitigated and the effects of our economic conditions stimulated customer conservation efforts, 2009 revenues are expected to be only $137 million.
Without the requested rate increase KIUC is projecting revenues in 2010, its selection for a test year, to be $124 million and $137 million with the requested increase.
The application is comprehensive, thoughtfully considered and well written — the application and its exhibits comprise over 1,250 pages — but several points require further consideration.
The primary justification offered by KIUC for its proposed rate increases is to facilitate its prospective compliance with a requirement in its financing from USDA’s Rural Utilities Service. That loan agreement, which covers about $200 million of KIUC debt, specifies that KIUC must keep margins (excess of revenue over costs) of 125 percent or greater of its interest expenses in at least two years out of three.
Results for 2008 were in compliance with the TIER requirement, 2009 may not be and 2010 would not. It should be noted that KIUC does not contend that the rate increase is needed so that its revenues would exceed its costs or that insolvency is threatened or that it lacks the funds to service its debt obligations. The application indicates that with the requested increase the KIUC TIER in 2010 would be 250 percent.
Failure to be in compliance with the TIER covenant poses no immediate threat to KIUC. RUS is unlikely to seek remedial action from KIUC so long as KIUC is meeting its payment obligations. Inquiry to KIUC officials reveals that their concern is that RUS might be unwilling to provide further financing if KIUC needed it to meet its plan to develop alternate energy production. That risk needs evaluation.
KIUC has announced no specific plan to seek alternate energy by programs that would require it to borrow money. Is the mere possibility that future financing may be required sufficient to impose currently significant new charges on its customers?
In 2002 RUS was willing to provide KIUC with low interest rate financing on the Kaua‘i Electric customer rates in a larger amount than the present balance. At that time KIUC had no net worth while currently it approaches a respectable $50 million. In 2002 the RUS financing was arranged with a wink and a nod from Senator Inouye — he is still our senator.
The major problem with the requested rate increase is whether it can be justified to require Kaua‘i citizens and businesses to incur $13 million of additional costs annually when KIUC has no solid business reason for the added revenue? And there is also the nagging issue as to why KIUC is asking for a rate increase now when its future plans for meeting and financing alternate energy requirements are unsettled.
A further question about the application proposal is that it seeks an across the board increase of 10.5 percent for all customers. That sounds reasonable, but KIUC recently performed a cost of service survey which discloses that the rates for KIUC’s residential class customers yield revenue that is about 24 percent below the costs KIUC incurs to service such customers.
For many electric utilities, residential rates are subsidized as a matter of policy, but the differential for KIUC is very high. The concern is that the tilt toward residential class customers means that large users are paying rates in excess of the properly allocated amounts and this increases the prospect that one or more of them might leave the grid.
There are other troubling issues related to the application. KIUC says it has reduced its operating costs as much as it can and it certainly has trimmed its expenses. But a good many KIUC customers question whether it should continue to sponsor sports events, make charitable contribution and circulate a glossy magazine when it is asking its customers for financial support.
Opportunity for all of KIUC’s customers to raise items of concern to them will occur when the Public Utility Commission holds its public hearing on the rate increase proposal probably later this year. At that time we may also hear matters that may trouble the Commission and the Consumer Advocate about the KIUC position and its application.
It is perhaps unfortunate that the rate increase request is occurring in these unsettled economic times. In more favorable conditions it would be easier to accept.
• Walter Lewis is a resident of Princeville and writes a biweekly column for The Garden Island.
