KIUC deal ‘worst alternative’

Although all three of the governmental intervenors in the application for

approval of the takeover of Kauai Electric by Kaua’i Island Utility Cooperative

have recommended to the PUC that the transaction should be rejected, KIUC is

still trying to defend the deal it negotiated. As usual the cadre of KIUC

organizers are offering misleading platitudes and failing to tell us what we

need to know.

The core fact, which no amount of KIUC bluster can

disguise, is that the price KIUC agreed to pay is greatly in excess of the true

value of KE. The burden of this price will preclude KIUC’s ability to keep the

representations that it has made that it will not increase electric rates.

The economics of a regulated public utility are really quite simple. In

exchange for a monopoly the public utility is given an assured income from its

operations. This is achieved by allowing the utility to set fares which will

generate revenue equal to the sum of its operating costs plus its capital

costs. For an investor owned utility the capital costs are a return on its

invested funds or in other words its profits; for a cooperative which is

capitalized by its borrowings the capital costs are basically the interest it

pays. Let’s see how this works.

In 1999 KE’s revenues from its current

rates were about $79 million, its operating costs were about $61.5 million and

thus its profits were about $17.5 million. If KIUC were to take over the

business and keep the existing rates, its expected annual revenues and

operating costs would be the same as KE, so its capital cost allowance would

need to be $17.5 million or less.

But here is the fly in the ointment. In

fact, KIUC’s interest costs will be about $24.5 million per year and in

addition it will have a charge to amortize the premium paid for the KE tangible

assets over their book value amounting to about $3.5 million per year or a

total financial cost of $28 million per year. Given these realities, KIUC would

have no choice but to violate its promises and raise rates as soon as it can.

The culprit for this $10.5 million differential ($28M-$17.5M) is, of

course, the excessive price KIUC agreed to pay for the KE tangible assets. In

order to reduce KIUC capital costs to $17.5 million per year the price for the

KE tangible assets would need to be reduced from the agreed $270 million to

$185 million. In order to try to mask this $10 plus million shortfall it would

have, KIUC is projecting that its operating costs will be lower than those of

KE. Incredibly KIUC is claiming that it will cut KE’s operating costs by $11

million per year in the categories of depreciation and general and

administrative expense.

There are two problems with this gambit by KIUC.

First, all of the intervenors examined this claim and concluded it was not

sustainable. Second, the regulatory approach would be that to the extent such

costs were reduced the revenue allowance would be correspondingly reduced, and

KIUC would remain with the impossible assignment of trying to fit $28 million

in financial costs into the allowed $17.5 million container. KIUC may well try

to divert attention from the financial realities to escape their devastating

impact, but it is also vulnerable in other respects. Beyond being maneuvered

into too large a purchase price in its agreement with Citizens Utilities, more

importantly KIUC released Citizens from responsibilities for environmental

risks and waived all warranties of condition as to the properties acquired.

This is like buying a house without asking for a termite inspection. The costs

of these concessions cannot readily be quantified, but they could be huge.

Also in its anxiety to curtail those who would become members of KIUC

having any meaningful opportunity to accept or reject the transaction

negotiated by the cadre of KIUC organizers, KIUC adopted Bylaws which stifled

the democratic rights members of cooperatives normally have. Shamelessly,

however, KIUC continues to talk about member control of KIUC affairs and member

election of KIUC directors. In fact, the hand-picked KIUC Board of Directors

was not elected by the members. Control for the foreseeable future is in

practice vested in this small group considered by the Consumer Advocate to be

inadequately qualified.

It is vital that the people of our island look

beyond the propaganda that KIUC issues about the benefits of the cooperative

form and local ownership and recognize the factors that caused all of the

governmental authorities, each of whom is acting in the public interest, to

reject the proposed transaction. The truth is that the proposed transaction

cannot rationally be considered in the interests of Kauai’s ratepayers.

Don’t be misled by KIUC “beauty contest” surveys which suggest

that the deal has public support, because when the people have taken the time

to get the facts, they will surely realize that the proposed transaction would

be a tragedy for Kauai and a windfall for Citizens. The KIUC organizers have

threatened the community that there is no alternative to their proposed

transaction. As we have pointed out, however, if the deal now proposed did

occur it would be far worse than continued ownership of KE by Citizens. In

fact there are at least three other choices if Citizens continues to wish to

sell KE.

First, KE could be sold to an investor owned utility such as

HECO. For practical purposes this would be about the same as KE under its

present ownership.

Second, Kauai County may wish to acquire KE. This would

have tax saving advantages and the County’s borrowing costs would be quite low

but the County would need to acquire management.

Third, a restructured

deal could be made with KIUC or another cooperative. The benefits of such a

deal would depend on its price and terms and the quality of its management.

The worst alternative for the rate payers of our island is the

consummation of the KIUC deal in its present form, and understanding this is

important to our well being.

William F. Brennan, Princeville

Raymond

L. Chuan, Hanalei

Edward Coll, Lihue

Michael Edwards,

Kilauea

Charles Lanphier, Princeville

Walter Lewis,

Princeville

P.Neil, Kilauea,

David Seielstad, Princeville