A decade ago, Kauai Island Utility Cooperative became the first utility in Hawaii to switch from private to public ownership — a process that took roughly 40 months.
It also became in 2002 the state’s first not-for-profit generation, transmission and distribution co-op owned and controlled by the members it serves. However, like the other utilities, the state Public Utilities Commission still regulates it.
The switch was prompted when Connecticut-based, private investor-owned Citizens Communications announced it was getting out of the electricity business, selling all its utility companies and shifting its focus to telecommunications. It put Kauai Electric up for sale in 1999. A group of Kauai business executives, Gregg Gardiner, a publisher of tourist magazines on the island, formed a cooperative to gain control of their energy future. They envisioned a locally owned and democratically administered utility that provided reliable, low-cost electric service in an environmentally responsible manner — which has carried through today, said David Bissell, KIUC president and CEO.
The PUC valued Kauai Electric’s property at $170 million, but reportedly a bidding war between the co-op and a mainland company set the utility’s value much higher — $100 million more.
KIUC had to come up with the funds to purchase Kauai Electric, as well as get PUC approval to make the purchase. It applied for, and received, a low-interest federal loan from the U.S. Department of Agriculture’s Rural Utilities Service. The National Rural Utilities Cooperative Finance Corporation provided financing for the acquisition.
KIUC’s first application to acquire the assets of Kauai Electric was filed on April 6, 2000, and the purchase price was $270 million. The PUC denied the application Aug. 14, 2000, saying the deal was too high and the co-op would incur too much debt. KIUC’s second application was filed March 15, 2002. The purchase price was reduced to $215 million and the PUC approved the transaction on Sept. 17 that year said Dean Nishina, public utilities and transportation officer for the state Division of Consumer Advocacy.
KIUC serves more than 32,000 electric accounts, of which roughly 25,000 are residential. The total accounts also include streetlights. The co-op last year generated $155 million in revenue and has $28 million in assets, Bissell said.
A major difference between an electric co-op and an investor-owned utility, or IOU, is whom they’re accountable to. Because it is profit-driven, an IOU has obligations to its stockholders and owners. These stockholders may not be customers or live in the service area. KIUC, on the other hand, is focused on residents and businesses — its members, who own and have a voice in how the co-op is run. KIUC is open for anyone to join. Every member retains one voice, one vote.
Open meetings are held regularly, allowing KIUC members to elect fellow consumers to serve on its nine-member board of directors, get involved in the governance of the utility and give input. They also have access to planning alternatives, reports, cost estimates and budgets. There’s a direct relationship to the board and the utility’s management, Bissell said.
Electric co-ops were created as one of President Franklin Roosevelt’s New Deal programs in order to promote rural development. The first electric co-op was born in 1934 in the back of a furniture store in Mississippi. Within a few years, it had thousands of counterparts across the nation. Today, America’s 930 electric cooperatives are the sole source of electricity for 42 million people in 47 states. They control $100 billion in assets and $31 billion in member equity.
KIUC’s rates are higher than the rest of the state at 45.8 cents per hour, according to its PUC-approved rate schedule effective March 1.
But KIUC members also get money back. Last year, KIUC returned $24.5 million in credits and patronage refunds — the money it has left over after reasonable reserves are set aside to pay back government loans, as well as after all of its operation costs and other expenses are paid in a given year. KIUC sets aside any collected revenue not needed to cover the cost of providing service and divides it among the members in proportion to their patronage, meaning how much electricity they paid for during the year, Bissell said.
“Our focus is always on service, not profits,” he added.
Other advantages are KIUC can take a longer-term outlook and has access to low-cost government sponsored financing — both allow it to explore the development of hydroelectric energy projects and have the financial strength to move forward on this project. Earlier this year, USDA Rural Utilities Service approved a loan guarantee of $110 million, making available significant funding for renewable projects, Bissell said.
Challenges exist. While most co-ops purchase electricity from large coal-fired power plants and huge hydroelectric power stations that can be hundreds of miles away, KIUC must generate all of its power on-island. These smaller generating plants are powered by imported fossil fuels and are less efficient and more expensive than mainland power sources. KIUC spends $60 million to $100 million annually on imported fossil fuel to generate electricity, Bissell said.
To reduce its power cost, decrease its use of imported fossil fuels and increase energy generated from the island’s resources, KIUC launched a strategic initiative to generate 50 percent of its electricity from renewable sources by 2023, he said.
Approximately 11 percent of KIUC’s electricity comes from renewable sources, such as hydropower and solar resources. The other 89 percent comes from the burning of imported fossil fuels, said Shelley Paik, KIUC spokeswoman.
Bissell thinks KIUC is an example that an electric co-op can work in Hawaii, as evidence of its accomplishments like the equity earned.
“When KIUC started 10 years ago, the starting equity ratio was 0 percent. We set a goal of 19 percent equity by the end of last year,” he said. “We exceeded that goal, reporting a percentage of 21 percent, which means that our members collectively own 21 percent of KIUC. This is a major accomplishment.”