SHOULD HAWAIIAN ELECTRIC BE CUSTOMER-OWNED?

By Tom Brandt

3/27/02

As a government-regulated monopoly, Oahu’s Hawaiian Electric Company (HECO) and its Maui and Hawaii County affiliates are protected from competition in order to deliver reliable electricity at the lowest possible cost. But as a private, for-profit company, HECO must also generate a return on investment for its shareholders. The Public Utilities Commission (PUC) currently sets this at 9.23%. HECO must also pay income taxes. As a result, under current ownership, HECO may not be able to lower electricity costs as much as possible, and may not invest as much as possible in other potentially desirable changes. These include:

· burying power lines;

· investing in local, renewable, technologically feasible energy sources, which could keep more money—and create more jobs—in Hawaii by reducing Hawaii’s huge dependency on importing oil to produce electricity; and

· maintaining the electricity transmission grid if technological advances continue to make decentralized power generation cost-effective.

So what are the alternatives?

Theoretically, more competition might force HECO to change in desirable ways. But there may be a “natural” lack of competition in Hawaii due to its small size and geographic isolation. Furthermore, competition could reduce power reliability. And customers--including most residential customers--who could not easily switch to another power source could also pay more to compensate for HECO’s revenue loss from customers who can switch.

Changing HECO behavior politically is difficult, but not impossible--as evidenced last year when Hawaii's legislature required HECO to exchange electricity at retail rates with customers who can generate their own power. Creation of government bonds to be paid back by savings from investment in energy efficiency--rather than by taxpayers--may also be possible. (This idea is already being considered in San Francisco.) And legislative efforts to increase PUC oversight and control of HECO might help if politically feasible. But due to HECO’s political clout, efforts to change HECO legislatively may always be limited in effectiveness. Furthermore, as long as HECO remains investor-owned, HECO’s primary legal responsibility will still be to its shareholders.

Government-owned utilities are common elsewhere, so perhaps the State and/or county governments should just buy HECO and its affiliates. Theoretically, this could be financed by tax revenues and/or borrowed money, and gradually paid back with profits currently going to HECO shareholders. Or perhaps ownership could be transferred gradually by also using annual tax breaks for HECO to reduce borrowing costs. (A HECO subsidiary invested in a similar “ownership transfer” power project in China.) After buying HECO, profits now going to HECO shareholders could help pay for the changes mentioned above, and/or to reduce customers’ electricity bills.

But under government ownership, profits currently going to HECO shareholders could be squandered by bureaucratic inefficiencies and/or diverted to other government programs. Government buyouts also seem unlikely at present due to inadequate tax revenues and increasing government debt loads—especially on Oahu. Furthermore, HECO can’t be forced to sell without a potentially long and costly condemnation process.

However, if HECO customers became its owners, HECO profits would go to its customers instead. And as a customer-owned, non-profit organization, HECO would also be exempt from federal and state income taxes. As owners, customers might choose to reduce their electricity bills directly rather than invest in alternatives with longer-term environmental and economic benefits. But unlike government ownership, HECO customers could decide as long as power remained reliable, and the cost savings might eventually be sufficient for both.

Customer ownership is already close to reality on Kauai, the only county where Hawaiian Electric Industries, Inc. (HEI) doesn’t own the electric utility. According to Gregg Gardiner, leader of the Kauai effort to convert to customer ownership, 930 customer-owned mainland utilities already exist--primarily in rural areas. On Kauai, no state or local government funding will be necessary if a customer buyout is approved by the PUC. Hawaii’s congressional delegation helped obtain a federal Rural Utility Service (RUS) loan for the entire purchase price ($215 million). And due to the cost savings of customer ownership, Gardiner says loan payments will not increase monthly electric bills and, sometime after three years, a rate reduction should be possible.

Kauai Electric serves about 30,000 customers, so the acquisition cost per customer will average about $7,000 plus interest (although residential customers’ shares would be much less than average). By comparison, the cost of buying HECO and its neighbor island affiliates can only be estimated because all are part of HEI, along with American Savings Bank and other minor subsidiaries. HEI’s current market value is about $1.3 billion, and electricity sales accounted for about 77% of HEI’s gross revenues in 2000. So, if the electric utilities account for a similar percentage of HEI’s market value, they might be worth about $1 billion at present, or approximately five times the cost of Kauai Electric. But HECO and its affiliates also have almost 400,000 customers, and—unlike Kauai—no hurricane repairs to pay for. So the acquisition cost per customer might average about $2500 plus interest—or less than half the cost on Kauai--with residential customers’ shares again being much less than average. Like Kauai, loan payments may not increase monthly electric bills due to cost savings resulting from customer ownership.

However, the current owner on Kauai--Citizens Communications Company--is a willing seller because Citizens feels it can reinvest elsewhere for a better return. In contrast, HECO and its affiliates are currently not for sale. Nevertheless, ongoing technological changes, political pressure, and better investment returns elsewhere might eventually compel HEI shareholders to consider selling. It might also be feasible to offer even more than fair market value to entice a sale. While other neighbor islands might qualify for RUS loans, other private and/or governmental sources would be necessary on Oahu, where the purchase price would be highest. If borrowing all the money proves impossible, perhaps a surcharge averaging up to $25 per customer per month--but much less for residential customers—could be added to electricity bills for about 100 months to pay for the purchase. This could gradually be refunded to customers after they become owners. At the very least, customer buyouts on some or all of the other neighbor islands alone might be possible.

Customer ownership is not a quick fix. But, in the long run, it may result in changes desired by HECO critics more readily than other options.

Tom Brandt, a planning and economic development specialist, has studied ways to broaden capital ownership--including customer and employee stock ownership plans--as a Ph.D. candidate at U.H. - Manoa.

Tom Brandt

225 Queen St. 14H

Honolulu, HI 96813

523-1024