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Highly charged
Kauai Electric
sale in limbo

A mainland firm put it up
13 months ago and soon thought
they had a deal, but the plug
was pulled on the sale

---

By Anthony Sommer
Star-Bulletin

LIHUE -- Thirteen months after putting Kauai Electric Co. on the auction block, Citizens Communications' efforts to sell its subsidiary appear mired in politics.

Although closed-door meetings between the players continue, all efforts toward completing a sale look to be at a dead stop and may stay that way for months or, some predict, for years.

In October 1999, Connecticut-based Citizens put Kauai Electric and two other power companies up for sale to invest more heavily in telecommunications.

Kauai Electric has the dubious distinction of having the highest rates of any company in the United States, about 24 cents per kilowatt-hour -- almost three times the national average of 8.2 cents for residential customers.

The primary reason for the high price, according to Kauai Electric, is that the island has too much land mass and too few residents to achieve economy-of-scale savings.

By Anthony Sommer, Star-Bulletin
The Citizens Utilities sign at the entrance to Kauai Electric
Co.'s Port Allen generating complex appears likely to
remain in place for some time.

Worse, major customers such as the large resorts and the military have contemplated building their own power plants. That would increase rates for the remaining customers who must pay for Kauai Electric's generation and transmission equipment.

Nonetheless, and despite the $170 million value placed on Kauai Electric's property by the state Public Utilities Commission when it last set rates for the utility, a group called the Kauai Island Utility Cooperative agreed to pay Citizens $270 million.

The co-op consists of a group of Kauai businessmen headed by Gregg Gardiner, who publishes a tourist magazine. They defended the high price by saying that a bidding war between the co-op and a mainland company set the ultimate value of the utility.

Last April 6, the co-op and Citizens took the proposed deal to the Public Utilities Commission for approval.

Opposition was immediate.

An unusual alliance was formed between environmental advocate Ray Chuan of Hanalei and a group of Princeville residents. They call themselves "The Nitpickers," adopting a label hung on them in a Garden Island newspaper column.

Strong opposition to the co-op purchase came from Kauai County, the Department of Defense and the state consumer advocate.

All said the co-op was paying far too much and was carrying so much debt that the slightest hiccup in projected costs would guarantee rate increases.

In August the three-member PUC rejected the proposal.

Almost immediately, Kauai County began to emerge as a possible buyer, a rival to the co-op. The threat of the county using its eminent-domain powers to condemn Kauai Electric has been a topic of conversation among all the players -- along with the years of court action that would almost certainly follow.

Meanwhile, the co-op announced it had cut a new deal with Citizens for a cheaper price. But Citizens would not agree to take the proposal to the PUC unless Kauai County (which ultimately may want to be the purchaser) agreed to endorse it.

The new deal is not in writing, and the co-op has not made its terms public. But Gardiner has not disputed the repeated use of $220 million as the new price.

Here is where the major players say they are today:

Citizens

The owner, as it has all along, is saying nothing. And Kauai Electric officials say they are not being told anything by their parent company, so they have nothing to talk about.

Some others in the game, however, believe Citizens is in a position where it must sell Kauai Electric to the co-op, Kauai County --or some investor-owned utility.

Hawaiian Electric Co.

No discussion of the sale of Kauai Electric ever is complete without mention of Heco, which owns all of the other electric utilities in the state. There has been considerable speculation that Heco has been waiting to step in if Citizens' deal with the co-op collapses.

But Bob Clark, chairman and chief executive officer of Hawaiian Electric Industries Inc., Heco's parent corporation, says it is not because there is no way his company is going to pay the high price Citizens is talking about.

The co-op

Gardiner insists he has the deal, and he has the financing to make it happen. What he doesn't have is the backing of Kauai County.

To woo county support, Gardiner says he has made "considerable concessions" on the question of governing the co-op. On the co-op's 13-member board of directors, he has offered three seats each to be filled by Mayor Maryanne Kusaka and County Council Chairman Ron Kouchi.

The county has not taken Gardiner up on the offer.

"I can't imagine the county wanting to play without having a majority," noted Nitpicker Walter Lewis, a Princeville attorney.

The county

Kusaka and Administrative Assistant Wally Rezentes insist they have made no decision about the county buying, either voluntarily or by condemnation, Kauai Electric. But they sure are sniffing around.

The first step in their study is an appraisal, which will require about four months, assuming Citizens cooperates. R.W. Beck, a Seattle-based consultant, was hired.

The other pieces of information are the legal interpretations, and the mayor has hired several law firms specializing in utility regulation.

State statutes have no provisions covering a municipally owned electric company because there never has been one before.

At present the county has not explored financing a purchase of Kauai Electric. The money probably would come from revenue bonds, which can be issued without a vote of the people.

The County Council has carefully avoided taking any position.

The Nitpickers

The alliance between the county and the co-op's detractors contains more than a little irony. Chuan is Kusaka's most ardent critic, but he wants her to buy Kauai Electric. The catch is, he does not want her to run it.

Where the county and the Nitpickers differ is over management of a county-owned Kauai Electric. Rezentes speaks exclusively in terms of "contracting out" the operation, which would leave policy decisions in the county's hands.

The Nitpickers favor the creation of a new entity: a separate power authority with an elected board of directors that answers only to the voters.

"The issue is credibility," said Lewis. "A lot of people look at the solid-waste mess and say the county can't manage anything." (Kauai County has had a solid-waste management plan since 1994 but has been unable to implement it.)

"Time is on our side, and there is no hurry to resolve this as far as we are concerned," said Nitpicker Chuan. "It may even be to our benefit to wait out the final two years of the Kusaka administration and work with a new mayor."