KIUC's Rate Case - Kauai Island Utility Cooperative

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KIUC CEO Randy Hee answers a question during the June 3 public meeting about KIUC’s recent application for a rate increase. Facing monthly losses for the first time since becoming a customer-owned cooperative, Kaua‘i Island Utility Cooperative (KIUC) is seeking a new rate schedule that will increase revenues by 10.5 percent—about $16 a month for an average residential consumer. The new rate proposal is scheduled to be presented to the state Public Utility Commission around July 1. KIUC Chief Financial Officer David Bissell said the utility’s revenues are slightly below costs for the first five months of the year. The rate proposal calls for slightly reduced pass-through costs when oil prices rise, but higher base rates, so bills will be somewhat higher for the same amount of power. The utility’s current rates were established 13 years ago. While costs have risen, the company has been able to delay increasing rates by balancing increased expenses with significant increases in efficiency of its power plants 12 KIUC CURRENTS KIUC’S RATE CASE and an increasing customer base. This year, however, the continued increase in costs plus a declining economy caught up with KIUC. The island’s last electric rate case was completed in 1996, when crude oil prices were around $20 a barrel, compared with nearly $70 in early June 2009. Because most fuel costs are passed directly through to the consumer, those don’t damage the co-op’s bottom line. But some fuel costs based on the 1996 oil price are included in base rates. Other costs also are hurting the co-op. During the past 13 years, virtually all the utility’s expenses have risen: salaries, lubricating oil, copper wire, utility poles and the trucks repair crews drive. The Consumer Price Index—the national standard for the changing cost of goods and services—has gone up from an annual average of 156.9 in 1996 to 215 for 2008. That is a 37-percent rise during a period when base electric rates on Kaua’i have stayed flat. KIUC President Randy Hee said improved operating efficiency has helped keep the company balance sheets positive. But electricity users have trimmed their power consumption to the lowest amount in the island’s recent history. In May, average monthly residential use dropped from a long-term average of 520 kilowatt-hours (kWh) to 430 kWh. That may be a conservation response to last year’s spike in fuel costs, or the current recession. It also might be a new energy-efficiency effort by the public. It has been suggested a cut in tourism means lower power use in rental home and condominium units. While it is unclear which factor plays the biggest role, power consumption is way down. That means KIUC is selling less power, and bringing in less revenue. The company launched a cost-cutting drive, reducing its operating costs by $1 million and its capital costs by $6 million for 2009, Bissell said, noting that has not been enough to keep the balance sheet in the black. KIUC’s sales in 2008 were down 3 percent from 2007. In the first quarter of 2009, they were down 8 percent from the same period in 2008. In May 2009, energy sales were down 14 percent from May 2008. The decline is unprecedented in Kaua’i electric utility history. The utility’s margins are reduced $2.5 million with every 5 percent drop in energy sales. “If sales stay down, our financials will continue to be under stress,” Bissell said. KIUC officials have recognized for some time that they would need more revenue, and that the cooperative should overhaul the way rates are calculated.
There are several significant problems with the 1996 rate structure: • Base rates are too low, since it now costs KIUC more to deliver power to customers than it can legally charge. • The portion of fuel costs included in the base rate doesn’t account for fluctuations in the price of fuel. • The portion of fuel costs passed through to members, called the Energy Rate Adjustment Clause (ERAC), provides an incentive to the utility when fuel prices go up, meaning consumers pay more than the equivalent rise in oil cost. In the ERAC under the new rate proposal, for every dollar fuel prices rise, the utility would charge 10 cents less than it now does. • Most of the increase is due to non-fuel charges, which have risen dramatically since the 1996 rate case. • Because of reduced revenues under the 1996 rates, the utility is in violation of one of the terms of its loan from the USDA’s Rural Utilities Service. KIUC is required to have enough revenue to cover its interest costs 1.25 times. This is called Times Interest Earned Ratio (TIER). KIUC needs a revenue boost to be in compliance with its TIER commitment. In preparation for determining a new rate structure , the utility has prepared four reports during the past several months: a depreciation study to calculate the value of equipment and what it will cost to repair or replace it; an equity management plan to determine major financial demands, such as paying down loans and investing in new renewable energy systems; a cost-of-service study to identify the direct costs to deliver power to different classes of consumers; and a revenue requirements study to look at issues such as lifeline rates, and efficiency and conservation incentives. There are three basic components to KIUC’s electric bill. Here is how they would change from current rates to proposed rates: basic customer charge, from $9.72 to $10.74; non-fuel charge, from $.12169 to $.16964 per kWh; and a fuel and power purchase charge (the ERAC), from $.16916 to $.15174 per kWh. For the average user of 500 kWh, the corresponding bill charges increase from $9.72, $60.85 and $84.58 ($155.15 total) to $10.74, $84.82 and $75.87 ($171.43 total). For more information about KIUC’s finances and its rate proposal, visit www.kiuc.coop. For answers to questions about the rates, call Anne Barnes at 246.4383. For information on how to control monthly bills, including the use of solar incentive programs, home energy audits and more, call Ray Mierta at 246.8284. KIUC CFO David Bissell, below left, and CEO Randy Hee, below right, discuss the reasons for the planned rate increase during a June 3 public meeting. JUNE/JULY 2009 13
Page 1 and 2: June/July 2009 KIUC’s Rate Case
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KIUC's Rate Case - Kauai Island Utility Cooperative

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