Should Customers Own The Power Company?
As a for-profit monopoly, Hawaii's electric utilities are beholden first to their bottom line, not consumers'
Global political, economic and environmental pressures compel changes in the way electricity is produced and distributed in the islands.
For Hawaii's electric companies and their customers, the outlook for conversion from fossil fuels seems bright because of the wealth of potential here in renewable or alternative resources. However, the need for new power development and the drive to trim usage place the power companies at odds with consumers.
Hawaiian Electric Industries, the parent company for the state's three largest power generators, is a for-profit enterprise with a fiduciary duty to gain maximum returns for its investors. To do so, it must balance expenses against revenues, like other businesses.
But as essential services and virtual monopolies, HEI's affiliates on Oahu, Maui and Hawaii island also are obligated to provide electricity at rates that do not unduly burden consumers or stifle the state's economic interests. Moreover, they are probably the only companies in the strange position of asking customers to use less of what they sell.
Public ownership of the companies, much like that on Kauai, might help resolve many of the problems Hawaii faces in transforming power generation to fit a new model.
Tom Brandt, a planning and economic development specialist, discusses this prospect in this essay.
BIPARTISAN support of efforts to reduce Hawaii's dependence on imported oil is refreshing. So is the apparent increased willingness of Hawaiian Electric Industries -- the parent company of Hawaiian Electric Co. on Oahu and its Maui County and Big Island affiliates (collectively referred to here as the electric utilities) -- to use more local renewable energy, as evidenced by HEI's ongoing PR campaign. But why is HEI spending so much of our money on TV and newspaper ads telling us how energy "independent" it intends to make us, instead of spending it on actually increasing efficiency and reducing dependence on imported oil -- and why now?
A CYNIC might say HEI wants to reduce opposition to a planned new power plant in Campbell Industrial Park, which HEI now promises will be capable of using locally grown, renewable fuel crops (such as sugarcane) -- in addition to oil -- to generate electricity. I want to believe the electric utilities have the best intentions. Nevertheless, their elaborate public relations effort -- as well as local news coverage -- fail to address what might be the biggest obstacle to achieving the most cost-effective mix of energy efficiency and energy independence in Hawaii: the Oahu, Maui County and Big Island electric utilities essentially are for-profit monopolies whose maximum rates of return on investment (currently averaging more than 10 percent, according to HEI's Web site) are determined by the Public Utilities Commission.
In the past, this might have been justifiable to create a reliable electrical generation and distribution network at minimal cost to Hawaii's residents. But this form of ownership might become increasingly dysfunctional in the future. Here's why: If more consumers are able to use less electricity from the utilities via improved efficiency and/or by generating more of their own, fiduciary responsibility might compel the utilities to ask the PUC to raise electricity rates for remaining customers to offset revenue losses as long as they remain for-profit monopolies.
In fact, HECO already wants to charge customers who generate their own electricity to stay connected to the grid in case of emergency. This seems reasonable unless this "standby" fee offsets any savings from self-generation, which already has happened. The electric utilities also might always limit "net metering" -- allowing customers to sell surplus electricity they generate back to the utilities -- to the extent this is profitable rather than technologically possible and cost-effective for customers.
Technological advances might make it increasingly cost-effective for more businesses, neighborhoods, apartment buildings and perhaps individual households to generate at least part of their own electricity -- perhaps sooner than many people think. Also known as "distributed generation" and "co-generation," this and future technological increases in energy efficiency might pose the biggest long-term threats to the pocketbooks of electricity consumers as well as HEI shareholders -- especially if the electric utilities remain for-profit monopolies.
OFFSET THEIR LOSSES
Many hope the electric utilities will be compelled to import significantly less oil via better regulation and better consumer and/or producer tax incentives for using local renewable energy sources. Such measures continue to be discussed by our elected leaders, the PUC and the electric utilities.
For example, an attempt was made to compel the electric utilities to spend all money they are allowed to collect from customers for renewable energy and efficiency programs on such programs. (In 2004, HECO reportedly spent less than half of more than $19 million it collected for this purpose.) In response, HECO said part of this money is used to offset the lost revenue from consumers who already are more energy efficient to avoid passing this cost back to all consumers. This fact might summarize the biggest obstacle to maximizing efficiency, reducing oil dependence and controlling the cost of electricity in Hawaii, even though HECO has agreed to transfer future administration of this money to an independent third party.
Legislative attempts also have been made to prevent the electric utilities from fully passing on to consumers increases in the cost of imported fossil fuels, which critics claim reduces the incentive to use more local renewable sources. Instead, the PUC was instructed last year to find a way to share the risk of fossil fuel cost increases "fairly" between the utilities and customers, while at the same time "encouraging" the utilities to develop more renewable resources and also somehow "protecting" utility profit margins.
This might be difficult without campaign finance reform reducing the utilities' political clout. For example, it was reported that four HECO employees -- while still being paid by HECO -- served as "volunteers" for state legislators last year. (The Legislature discontinued this practice last year, but efforts to prohibit it have been unsuccessful.) Some also fear the utilities might meet Hawaii's existing mandated renewable energy target for the year 2020 -- reducing the percentage of imported fossil fuels from more than 90 percent to 80 percent or less of all electricity sources -- without any large-scale changes. In fact, even the state's primary energy consultant forecasts total fossil fuel use in Hawaii still might increase even if this goal is met.
Some think the best response to these problems would be to eliminate the electric utilities' monopoly and allow free market competition to determine the most cost-effective mix of electricity sources in Hawaii. Critics of this solution point out what a disaster deregulation has been on the mainland, and believe this would be infeasible in Hawaii anyway due to our inability to buy and sell electricity from and to other states. HEI also probably would do everything in its power to prevent competition. But even if it didn't, critics of deregulation also think unrestrained competition could undermine the reliability of our power supply.
Public ownership of our electric utilities might be a more desirable option. Already quite common elsewhere, public ownership can take two forms: government ownership or direct ownership by electricity consumers. Customer ownership might be preferable for the following reasons.
Theoretically, a government buyout of the electric utilities could be financed by tax revenues and/or borrowed money, and gradually paid back from the following sources: the profits that now go to HEI shareholders, the taxes the utilities pay as for-profit businesses and the money being spent on public relations. HEI also no longer would have to risk customers' money on investments to try to increase returns on investment for shareholders.
It might be possible to reduce the cost of a customer buyout by giving annual tax breaks to HEI shareholders in exchange for gradually transferring ownership. After such a purchase was complete, the former profits, taxes, public relations expenditures and other investments could help pay for the possibly higher cost of local, renewable energy sources without increasing consumers' electricity bills, and/or to bury power lines, and/or to simply lower what we pay for oil-based electricity. However, customer-owned electric utilities still would be subject to Hawaii's legislative mandate to provide at least 20 percent of our electricity from non-fossil fuels by the year 2020. Much of HEI stock is now owned by institutional investors outside of Hawaii, so profits accruing to these owners also do not directly benefit Hawaii residents.
But both our state and local governments already have what some regard as excessive debt levels, so financing a buyout of the electric utilities with money borrowed by local governments might be both politically and economically infeasible. A direct cash buyout by government in the form of installment payments also might be infeasible because current state government surpluses could disappear. Some believe government could simply use its powers of eminent domain to force HEI to sell the utilities in the public interest. But this could be challenged by HEI, and could be tied up in court for years. This might increase, rather than reduce, the purchase price. Furthermore, under government ownership, the money that now goes to HEI shareholders as profit and to the government as taxes also might be squandered by bureaucratic inefficiencies or diverted to other government programs, along with the money HEI spends on public relations and other investments.
However, if customers became utility owners, all income would theoretically go back to customers. And, unlike government ownership, customer-owners could choose how to use this money as long as the power supply remained reliable. Perhaps most important, if distributed generation and co-generation become feasible and cost-effective on a significant scale, the transition from centralized power generation might be much less politically, legally and economically contentious and painful if the utilities become customer-owned first.
HOW TO DO IT
Customer ownership already is reality on Kauai, the only county where HEI doesn't own the electric utility. Nearly 1,000 customer-owned utilities already exist on the mainland; many are affiliated with Touchstone Energy, a national advocacy and support organization.
On Kauai, no state or local government funding was necessary. Hawaii's congressional delegation helped obtain a federal Rural Utility Service loan for the entire purchase price of $215 million five years ago. Due to the cost savings of customer ownership, the main architect of the Kauai buyout claimed loan payments would not increase monthly electric bills and -- sometime after three years -- a rate reduction would be possible. However, I believe Kauai customers have not seen much savings yet, primarily due to lingering hurricane repair costs and other management problems. Kauai Electric served about 30,000 customers at the time of the buyout in 2002, so I estimate the acquisition cost on a per customer basis was about $7,000 plus interest ($215 million divided by 30,000).
By comparison, the cost of buying the Oahu, Maui County and Big Island utilities can only be estimated because all are part of HEI, along with American Savings Bank and other minor subsidiaries. When I first attempted this analysis, I estimated that electricity sales accounted for about 75 percent of HEI's gross revenues. HEI's market value is now about $2.5 billion. If the electric utilities account for a similar percentage of HEI's fair market value, HEI's electric utilities now might be worth about $1.8 billion. The utilities also have about 430,000 government, commercial and residential customers, most on Oahu. So the cost to buy the utilities at current fair market value might average about $4,200 per customer (75 percent of $2.5 billion, divided by 430,000). This is still less than the average cost per customer to buy Kauai Electric -- about $7,000 -- even before adjusting for inflation since the Kauai buyout. HEI utilities also have no lingering hurricane costs.
As a result, as long as the average cost per customer to buy the Oahu, Maui County and Big Island utilities is the same or less than the cost to buy Kauai Electric (adjusted for inflation), it might be even more likely -- compared to Kauai -- that loan payments to buy HEI utilities would not require increases in monthly electric bills for their customers, and rate reductions might be feasible even more quickly for Oahu, Maui County and Big Island customer-owners compared to existing customer-owners on Kauai.
However, the former owner on Kauai -- Citizens Communications Co. -- was a willing seller because the company thought it could reinvest elsewhere for a better return. In contrast, the HEI utilities are not for sale. Nevertheless, ongoing technological improvements in distributed generation and energy efficiency, consumer pressure and better investment returns elsewhere might eventually compel HEI shareholders to consider selling.
Furthermore, if my admittedly simplistic estimates are close to correct, it might be feasible to offer even more than fair market value to HEI shareholders to entice a sale. At the very least, customer buyouts on other neighbor islands might be possible. The fair market value of HEI utilities also could gradually decline over time if electricity revenue does not grow faster than operating costs.
While other neighbor islands might qualify for federal Rural Utility Service loans, different governmental and/or private lenders would probably be necessary on Oahu, where the purchase price would be highest. Some venture capitalists who specialize in buying companies to convert them into employee-owned firms also might be qualified to structure a customer buyout of HEI electric utilities. The other major subsidiary of HEI -- American Savings Bank -- also might be able to help finance a customer buyout, or at least do more to help reduce the upfront cost for customers who want to invest more in energy efficiency and self-reliance by amortizing more of these costs in new or refinanced mortgages.
If it proves impossible to obtain 100 percent debt and/or equity financing for a buyout, a monthly surcharge -- which might currently average about $42 per month, but much less for most residential customers -- might be feasible over about 100 months, or a little more than eight years. ($42 per customer per month for 100 months, multiplied by 430,000 customers equals about $1.8 billion). This monthly amount could be reduced and stretched out over a longer period if necessary.
Whichever buyout formula is agreed upon, all or part of these payments could gradually be refunded to customers from future savings after they become owners. Some suggest it might be cheaper for the public to buy and own only the utilities' transmission grids, while letting the utilities retain ownership of their generating capacity, and then subject them to competition from more decentralized suppliers of other local, renewable sources of electricity. Whether this would be more feasible and appealing to current HEI owners than a complete buyout is the type of thought and discussion I hope to stimulate, including more detailed analysis of the technological and financial feasibility of more dramatic decentralization of electrical generation.
Customer ownership is not a quick fix. But, in the long run, it might result in greater energy efficiency and independence at less cost than our ongoing legislative and regulatory efforts to compel the HEI electric utilities to behave differently. If so, our goal for 2020 should be 100 percent customer ownership.
Tom Brandt has been a strategic planning and economic development specialist in Hawaii for nearly 20 years. Brandt also studied strategic planning and comparative analysis of various economic development policies -- including ways to increase and broaden local capital ownership -- as a doctoral candidate at the University of Hawaii-Manoa.