KIUC - Kauai Island Utility Co-op

The economic downturn and recent dramatic declines in oil prices have reduced KIUC's revenue to the point that a general rate increase will be required to stabilize the cooperative's finances.

But I haven't cut back that much on my electricity use. How can you say the economic downturn has affected KIUC's revenues that noticeably?

Empty hotel rooms and vacation rentals do not use as much electricity as when they are occupied, and small changes made by thousands of consumers (turning off lights, adjusting thermostats, etc.) do add up.

KIUC's total electricity sales in 2008 were down 3% from 2007. In the 4th quarter of 2008, when the nation's economy went into a tailspin, KIUC sales declined 9% compared to the previous year.

In addition, more homes and businesses are beginning to generate their own electricity by using renewables like solar energy. That is good, but at the same time it does reduce KIUC revenues.

Each 5% reduction in energy sales reduces KIUC's financial margins by approximately $2.5 million annually.

How do declining oil prices affect KIUC's financial position? I thought those high fuel costs were just passed through using the Energy Adjustment on my bill.

Lower oil prices have reduced KIUC's revenues and have also reduced KIUC's financial margins because of the way the Energy Adjustment works.

The Energy Rate Adjustment Clause (ERAC) contains a financial incentive for KIUC to make sure its generators are operating efficiently, to get as much electricity as possible out of the fuel it burns to power the generating turbines that make electricity.

Hawaii's Public Utilities Commission set a "target heat rate" of using no more than 11,230 BTU of heat energy to produce one kilowatt hour (kWh) of electricity. One kWh is enough electricity to light ten 100-watt light bulbs for one hour.

KIUC has consistently outperformed the target heat rate, allowing it to consistently achieve the incentive earnings. As fuel costs went up, so did the amount KIUC earned from the efficiency incentive.

The money KIUC earned from that efficiency incentive allowed the co-op to do many good things:

It enabled the co-operative to return over $13 million to its members in its first 7 years while growing member equity from 0% to 17%.
It paid for many improvements that make the electric system more reliable.
It helped KIUC finance the purchase of the fuel-efficient Kapaia Power Station.
It allowed KIUC to operate since 1996 without any increase in its base rates to cover the non-fuel expenses.

The recent dramatic decline in oil prices has but also shrunk the amount received for the efficiency incentive.

Taken together, the reduction in efficiency incentives plus the loss of electric sales due to the economic downturn mean that a rate increase is necessary to stabilize KIUC's finances.

What are the standards by which KIUC's financial strength is judged?

KIUC is legally required by its lender, the Rural Utilities Service (RUS), to maintain its financial margins at a certain level. Those margins, which are the co-op world's equivalent of business net income, must be sufficient to pay the annual interest cost by 1.25 times. This is called a TIER, or Times Interest Earned Ratio.

KIUC must meet that TIER requirement two out of three years. It is a basic measurement of financial stability among electric cooperatives, since they are not-for-profit and owned and controlled by the members.

Among other electric cooperatives around the country, the median TIER is 2.2 to 2.3. KIUC was at a TIER of 2.7 in 2007, but with the decline in sales and revenue from the efficiency incentive, it may fall below the 1.25 minimum TIER in 2009.

Another financial measure is the co-op's equity level -- how much of the system's value is owned by the members rather than owed to lenders. As a brand new cooperative, KIUC began life in 2002 with 100% debt and zero equity.

By 2008, the equity level had risen to 17% --- quite an accomplishment in seven years, but still short of the target equity level of 27% to 30% that KIUC has pledged to reach. Most co-ops around the country keep their equity levels in the 47% to 49% range. This means they can finance more of their capital needs by using member equity rather than borrowing cash, thus saving on interest cost.

When was the last rate increase?

The last rate case was completed in 1996. Since then, costs that were included in the base rate, such as materials and labor, have increased while the base rate has remained unchanged. Increased revenue from the efficiency incentive made up the difference.

It should be noted that the base rate does include fuel costs at the 1996 rate case test year levels and the Energy Adjustment accounts for the difference in fuel costs from that level.

In other words, the base rate includes some energy costs and the Energy Adjustment provides margins that pays for some non-energy costs.

KIUC will ask the PUC to change the rate structure so that the base rate does not include anything for fuel or purchased power costs. KIUC will also ask to remove the efficiency incentive from the Energy Adjustment so that it contains all fuel and purchased power costs and nothing else.

This will give KIUC clear and transparent rates.

However, it does mean that the base rate must go up enough to cover the non-fuel costs -- but it also means the Energy Adjustment increases would be smaller when fuel costs rise.

How much will the rate increase be?

Four different studies must be completed before final numbers are known.

In August 2008, high fuel prices forced KIUC to charge residential members a record high 49 cents per kilowatt hour. By February 2009, that had fallen to 22 cents.

Compared to price swings that large, it is expected that the base rate increase will be modest.

What studies must be completed before you can say what the rate increase will be?

Before it can determine what its future rates should be, KIUC must review four detailed studies in the next two months. This amounts to hundreds of pages of data that have been nearly a year in the making. They are:

A depreciation study
An equity management plan
A cost-of-service study
A revenue requirements study

Two of the studies are scheduled to be ready for review in March, the other two not until April.

The depreciation study will evaluate what KIUC's plant and equipment is worth, how long it can be expected to last, and what it will cost to add or replace equipment as needed. Such studies typically are updated every five years.

The equity management plan addresses the co-op's financial needs over the next ten years as it seeks to pay off loans and build up equity, earn sufficient margins to satisfy the requirements of its lenders, and obtain the capital required to add renewable energy sources as demand for electricity grows, with a goal of getting 50% of KIUC's power from renewables in the next decade.

The last equity management plan was completed in 2004. Such studies typically take a 10-year outlook on the financial picture.

The cost-of-service study will look at how much it costs to serve each class of customer (residential, commercial, and industrial) and whether the current rate structure distributes the costs fairly.

KIUC has one residential rate and several different rate programs for commercial and industrial accounts.

As KIUC reviews the revenue requirements study, they have an opportunity to address questions such as lifeline rates, efficiency and conservation incentives, and separating fuel costs from the base rate to help reduce rate volatility as oil prices rise and fall.

Once those reports have been analyzed, KIUC's board of directors will review the findings and may accept or modify the recommendations and put them into its application for a rate increase.

The studies are being conducted by R.W. Beck, an international engineering and consulting firm that has long had the reputation of being one of the nation's leading experts in the field.

With all that work to be done, KIUC is not expected to know final numbers on the proposed new rates until shortly before it formally files the rate increase application. The target date for that is May 2009.

Do you have any preliminary indications from those studies?

Although final numbers are not complete, there is some indication that the depreciation study may show that our equipment may last longer than originally expected, which will translate into a savings for ratepayers; it is the reward for taking good care of the equipment.

Another preliminary indication from the cost-of-service study is that commercial and industrial accounts may be paying more than the actual cost of serving them, while residential members pay slightly less.

Such variations can occur over time in any utility as customer equipment and usage habits change. It is not uncommon to see regulators seek to correct those imbalances so that each class of customers pays its fair share. Often such adjustments are phased in over time.

Why are KIUC's rates so high?

As a self-contained utility on an island with 24,000 members, KIUC has no chance to use the economies of scale that are possible on the mainland. KIUC must pay for its own generation, high voltage transmission, distribution, and operations without being able to partner with neighboring utilities.

KIUC also does not use coal or heavy fuel oil, which are lower cost fuel sources, due to environmental and other concerns and KIUC does not have access to natural gas which is commonly used as a lower cost fuel source on the mainland.

The current rates also include Hurricane Iniki recovery costs.

How do KIUC's rates compare to the other islands?

KIUC has only about half as many customers as Maui or the Big Island, and merely one-eigth as many as Oahu.

Looking back at 2007, before oil prices went crazy, the average KIUC residential rate was 35.6 cents/kWh, while that of Hawaii Electric Light Company�s (HELCO�s) was 32.8 cents/kWh, Maui Electric Company�s (MECO�s) was 28.1cents/kWh, and Hawaiian Electric Company�s (HECO�s) was 20.5 cents/kWh.�

After the recent large decrease in oil prices, by December, 2008, KIUC's December rate of 27 cents/kWh was second lowest in Hawaii.

If economy were not in such bad shape, would KIUC still need to increase its rates?

The answer is yes, though perhaps not as soon. KIUC had been planning to ask the Public Utilities Commission to "clean up" its rate structure so that the base rate contained no fuel or purchased power costs and so that the Energy Adjustment contained all of the fuel and purchased power costs and nothing else.

That would have required raising the base rate anyway. Declining sales due to the economic downturn, declining oil prices, and other factors have required KIUC to speed up the process so it can stabilize its finances.

Could you lower rates if you didn't have to pay back patronage capital?

People have asked from time to time why KIUC has to raise its rates and then give money back in the form of patronage capital refunds. Why not just lower the rates?

An ordinary business tries to set its prices so that it covers its expenses and earns a profit.

A cooperative utility is somewhat different. It must set its rates high enough to cover the expenses, plus a little cushion (the TIER and equity requirements) required by lenders.

KIUC is required by its loan covenants to make sure it collects enough money so that its margin (net income) will be enough to pay annual interest expense 1.25 times (that's TIER), at a minimum, and also enough build up equity.

Once those goals are met, the co-op can either return excess revenues or put the money to work building power lines, etc. However, in its decision to approve the purchase of Kaua`i Electric by KIUC, the Public Utilities Commission required KIUC to request the RUS to allow KIUC to return 25% of its margins to the members every year until the next rate case.

If KIUC were a for-profit company, millions of dollars would have left the island as dividends for faraway investors. Because KIUC is a locally-owned cooperative, those dollars have stayed at work in the local economy.

What is KIUC doing to cut back on expenses?

To help control costs, KIUC has put salary increases on temporary hold for non-bargaining unit employees, has also instituted a hiring freeze on all except critical positions, and is continuously examining every area of spending to identify cost savings, such as taking the frills out of the annual meeting.

However, it is important to remember that KIUC did not "spend its way" into the current situation. The true culprits are the economic downturn and loss of revenue due to declining oil prices.

Many of KIUC's costs are fixed costs, meaning they must be paid regardless of how much electricity is sold. The mortgage payments on the power plants, poles, wire, and substations must be paid even if they are only running at half of their capacity.

In the long run, the most promising relief is to reduce KIUC's dependence on oil. However, that will require "up front" money to buy and install other technology, like renewables.

Fuel and purchased power are the largest items in KIUC�s budget, accounting for 36 cents of every dollar.

When would the rate increase take effect?

On March 3, KIUC filed official 60-day notice of its intention to apply for a general base rate increase, but the actual application will not be filed until May.

Then it could take a year or more before a final ruling. If the PUC believes upon a review of the record that KIUC is "entitled" to interim rate relief, that could happen sooner. The PUC normally grants "interim relief" within 11 months of accepting a complete application, if it finds such relief is warranted.

How much electricity does Kauai need? Where are we getting it now?

KIUC has 114 MW of firm, net generating capacity, and half of those generators (57 MW) were installed over 30 years ago.

KIUC is required to maintain enough firm generating capacity to meet the total peak customer demand with the largest unit out of service, and the morning peak customer demand with the largest and third largest units out of service. The all-time peak demand on the KIUC system is 78 MW, and the largest units are Kapaia�s CT-1 (27.5 MW), Port Allen�s GT-2 (22.6 MW), and Port Allen�s GT-1 (17.5 MW). Plans are currently underway to increase firm generation to ensure adequate supply.

KIUC currently relies on highly refined oil products (diesel and naphtha) for over 90% of its energy supply. In contrast, most of the state�s energy is supplied from coal and residual fuel oil (RFO), both of which are significantly cheaper - coal is about 1/10, and RFO is about 3/5, the cost of diesel or naphtha. The U.S. Mainland, on average, produces 50% of its electricity from coal, 19% from nuclear, and 19% from natural gas, each of which are also significantly cheaper than diesel or naphtha.

Is renewable energy cheaper?

Wind is free and sunshine is free, but the equipment to turn them into electricity is not.

Moreover, the wind does not always blow and the sun does not always shine when electricity is needed.

That means we must always have backup power available, which in turn dictates that even as we convert to more renewable sources of power, we have to pay for duplicate generating capacity.

However, Kauai's situation is unique. Because Kauai is so dependent on oil and has no ability to hook up to large power plants (whether coal, nuclear, or hydro), we are acutely vulnerable to increases in the price of oil, and that makes switching to renewables more urgent.

Does KIUC support renewable energy?

Yes. KIUC's goal is to get half of its electricity from renewables by 2023, through a combination of solar, biomass, and energy conservation and efficiency. This is more aggressive than state requirements or the Hawaii Clean Energy Initiative.What are state renewable requirements and the Hawaii Clean Energy Initiative, and what is KIUC doing to meet them?

Hawaii�s Renewable Portfolio Standard (RPS) mandates cost-effective renewable energy development with goals of 10% renewable net electricity sales by 2010, 15% by 2015, and 20% by 2020.

In 2007, KIUC achieved 11.4%. It is important to note that this percentage includes demand-side conservation (6.0% of net sales) as well as supply-side generation (5.4% of net sales).

KIUC recognizes that significant additional renewable generation is required to meet the State�s mandate of 20% by 2020, and the co-op is actively working to develop utility-scale renewable projects.

The Green Energy LLC biomass plant, which will have a capacity of 6.4 MW, is scheduled to come online in 2010. KIUC is also actively working toward adding other renewable sources of energy, including hydro, wind, solar, and landfill gas (LFG).

Potentially more significant than Hawai`i�s RPS requirement, Hawai`i�s Greenhouse Gas (GHG) legislation requires a reduction in GHG emissions to 1990 levels by 2020.

This requirement may effectively exceed the RPS. For example, KIUC�s 2020 load is projected to be roughly double what it was in 1990, therefore KIUC would be required to generate 50% of its energy from carbon-neutral or non-carbon sources. This may seem like an effective increase of the RPS, but other solutions such as improved efficiency, demand side management, and carbon cap and trade could help meet GHG targets while not counting toward RPS. In any case, it is prudent for KIUC to install generators that are, or have the ability to be, carbon-neutral.

On January 31, 2008, Governor Lingle signed a Memorandum of Understanding with the U.S. Department of Energy (DOE) for the Hawaii Clean Energy Initiative (HCEI). The goal is to decrease energy demand and accelerate use of renewable, indigenous energy resources in Hawaii in residential, building, industrial, utility, and transportation end-use sectors, so that renewable energy resources will be sufficient to meet 70% of Hawaii�s energy demand by 2030. KIUC supports and is playing an active role in HCEI.

Will this rate increase proposal help promote renewable energy?

No utility can move forward on renewables unless it is financially solvent, and that is why stabilizing KIUC's finances is so important. In order to finance investments in renewable energy, KIUC must be financially stable both before and after implementing renewables.

How will this rate increase proposal stimulate conservation and energy efficiency?

It makes no sense to invest a great deal of money to switch to renewable energy without also pursuing energy conservation and efficiency. In terms of the environment and carbon emissions, a kilowatt hour saved is the same as a kilowatt hour generated by solar energy or wind.

(Conservation means doing less "work," whether that means running motors, lights, water heaters, or air conditioners. Efficiency means doing the same amount of "work" with less energy).

Part of KIUC's rate proposal will include laying the financial groundwork to encourage renewables, conservation, and greater energy efficiency.

A critical first step is to separate fuel costs from the base rate and non-fuel costs from the Energy Adjustment, so that all non-energy costs are covered by the base rate and all energy costs (fuel and purchased power) are covered by the Energy Adjustment.

This eliminates a hidden penalty for implementing conservation, efficiency, and renewables. Right now, for example, when KIUC loses revenue because more customers generate their own power with solar panels, it jeopardizes the co-op's ability to meet the financial requirements of its lenders.

In 2008, customer-owned electric generation, principally solar units, tripled to 2.8 megawatts. Although that is just a few percentage points of the total electric requirements of the island, it nevertheless affected KIUC's financial margins slightly.

Likewise, ambitious conservation or efficiency efforts would hurt KIUC's revenues and margins by reducing total sales, just as the economic downturn has done.

To oversimplify so as to illustrate the point, KIUC is seeking to have rates designed so that it will have enough money "to keep the poles and wires operating" and meet the lenders' financial requirements regardless of whether the energy is generated by its own power plants, renewable energy sources on the KIUC system, purchased power agreements with independent power providers,or renewable energy sources installed by members at their homes and businesses.

As rates are currently designed, they contain a hidden financial penalty if KIUC is "too successful" in promoting renewables, conservation, and efficiency.

It's nobody's fault. Back in 1996 when the current rate structure was designed, no one had heard of $4 gasoline, and understanding of climate change was nowhere near its current level.

How can members get information and make their voices heard?

KIUC members, the State of Hawai`i�s Department of Commerce and Consumer Affair�s Division of Consumer Advocacy and the PUC will all have a say in the final determination.

Members will be kept informed throughout this process. This will include additional information on the website, in Currents newsletter and the media, and by conducting public meetings for members to provide input.

If you or any members or media people have questions about the rate increase or the process, contact Anne Barnes at 246-4383.

How can I control my energy use and monthly bill?

KIUC has many ways to help you control your monthly bills:

Free home visits;
Solar incentive programs including solar rebate and solar loans for water heaters;
Efficient appliance rebate program;
Appliance meter service so you can see if you have an appliance that uses too much electricity;
Solar water heating savings pilot program;

Also, our member advantage programs includes:

residential surge protection pilot program;
qualifying member appliance replacement program.

If you are interested, contact Ray Mierta at extension at 246-8284.