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Kauai's most important decision
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January 1, 2002 |
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by: Walter Lewis
 In October 1999 Citizens Utilities
Company (now Citizens Communications) announced its intention to sell
its utility operations, including Kauai Electric (KE). A group of Kauai
businessmen formed a cooperative they called KIUC and sought to buy KE.
Although their concept of bringing KE under local ownership had merit,
they had more enthusiasm than judgment. Without adequate investigation
they offered $270 million for the business and Citizens joyfully accepted.
This transaction was opposed by all objective parties and in August 2000
it was rejected as irresponsible by the Public Utilities Commission.
More than a year has elapsed since the PUC determination and a very interesting
situation has developed.
KIUC has arisen from the ashes of its humiliating rebuff and again seeks
to be KE’s buyer. Its chairman, Gregg Gardiner, admits “we made
some mistakes” in the earlier attempt, but claims KIUC is negotiating
a new deal with Citizens that will be a good deal for Kauai.
Meanwhile Kauai County recognized the benefit that public ownership of
KE could generate for Kauai and initiated an analysis of KE with a view
to its acquisition by the County.
In consequence at the present time there are two potential suitors, both
local entities, interested in buying the utility. No other party is known
to be considering a KE purchase at this time.
Because Kauai now has the highest charges for electric service in the
nation and they are strangling prospects for commercial development on
the island and raises all of our living expenses, it is important for
all of us to focus on the choices that will be presented.
In a purchase of KE both the County and KIUC would enjoy low interest
rates and tax exemptions that would allow them to operate KE at a lower
cost than it is under Citizens ownership. However, the savings in these
respects for the County are at least $4 million per year greater than
for KIUC. While this cost reduction would make the County the better choice,
KIUC points out that the County does not have a very good track record
in operating a business efficiently so the balance narrows. The County’s
position is clouded because although the County administration would like
to buy KE, the County Council seems unwilling to fund such a purchase
at least while KIUC remains a viable candidate.
KIUC has during the past few months been in negotiation with Citizens
to buy KE and an understanding in principle has been reached for a purchase
at $215 million. It is to be recognized that this is a significant reduction
from the prior $270 million deal. But the reasonableness of this price
is in question because the County has commissioned an appraisal of the
fair value of KE by an experienced independent firm, R. W. Beck. This
month it was indicated that the appraised amount was about $190 million.
The County and KIUC had earlier agreed that they did not want to compete
with each other as that would simply enrich Citizens to the detriment
of the people of our island and KIUC committed that if it could not negotiate
a deal with Citizens essentially (within 2%) of the appraisal amount it
would withdraw from seeking to buy KE. It will be interesting to see if
this agreement is honored by KIUC given that the presently proposed purchase
price exceeds the accepted limit by about 13%. A comparable conclusion
was reached earlier this year by a citizens committee formed by the Mayor
to consider the course which would be in the best interests of the people
of Kauai concerning KE. After nine months of study, the committee unanimously
concluded that if KE could not be bought for the Beck appraisal amount
or less the purchase transaction should be opposed.
A comparison between the relative benefit of a purchase of KE by the County
on the one hand and KIUC on the other involves other factors than the
mentioned cost savings. Some points to note are:
1. KIUC’s rates for electric service would be subject to regulation
by the Public
Utilities Commission, and KIUC does not intend to currently reduce
the
existing high rates. The County is exempt from such regulation
and it would
most likely be able to offer an immediate moderate rate reduction..
2. If KIUC bought KE it would borrow all of the purchase price and would
have no
initial equity. In the event of change in technology or desire
to convert all or any
major part of the generation facilities to sustainable fuel it
would be restricted
because of its financial limitations. The County has independent
financial
status and could invest as may be beneficial for the operation
of the utility.
3. If the County were to acquire KE it would most probably use a power
authority
which would largely insulate the operation of the business from
County political
affairs.
A basic problem with any acquisition of KE at the present time is that
the buyer is getting an obsolescent facility. Virtually all of KE’s
power is generated using fossil fuel. It is not a question of whether
but one of when this power source must be replaced. Any new power source
– wind, solar, tidal, fuel cell, etc, - will necessitate a major
new investment. Under the rules governing regulated utilities the owner
is entitled to recover all of its original investment as well as any new
investment in setting its rates. If KE is bought, for the $215 million
price KIUC now proposes, an amount considerably greater than its $175
million book value, this burden will be reflected in future rates regardless
of the power source. In consequence, it is most unlikely that if KIUC
becomes KE’s owner, rates will be reduced in the foreseeable future.
If, however, the County bought KE at the appraisal price and operations
are efficient, significant rate reductions should occur. In addition,
as noted above the County would be able to adopt the new technologies
with much greater facility than KIUC because of its greater borrowing
capability.
The acquisition of KE is the most important financial decision ever to
be made on this island and its outcome will importantly affect our island
and its people. All of us should try to understand the issues involved
and express our opinions.
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