Maui News

Guernsey Reps: Savings Could be Higher Than Estimated

January 18, 2016, 2:02 PM HST
* Updated January 18, 4:46 PM
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Guernsey representatives at the Jan. 15 energy press conference. Photo credit Wendy Osher.

Guernsey representatives Vernie Savera, Suhas Patwardhan and Jared Stigge at the Jan. 15 energy press conference. Photo credit Wendy Osher.

An electric utilities study conducted by Guernsey, an Oklahoma-based engineering and architecture consulting company, recommended that Maui County seek outside operators—either an independent systems operator (ISO) or regional transmission operator (RTO)—to oversee the electric grid and energy market.

Guernsey report. Photo by Wendy Osher.

Guernsey report. Photo by Wendy Osher.

The 35-page study, “Analysis of Alternative Forms of Ownership and Alternative Business Models for Maui County’s Electric Utility Company” explores alternative forms of ownership and different business model options for Maui County’s electric utility.

According to the report, the ISO/RTO would be tasked with three priorities: to ensure energy security and resiliency, regulate fair electricity costs, and encourage and improve renewable energy integration systems.

Maui County Mayor Alan Arakawa held a press conference on Friday, Jan. 15, to outline energy Guernse’s options to the proposal put forth by NextEra-Hawaiian Electric (see VIDEO: Report Recommends Electric Utility Options).

After the announcements by Maui Mayor Alan Arakawa, Managing Director Keith Regan and Office of Economic Development Director Teena Rasmussen, Communications Director Rod Antone introduced Guernsey representatives for a question-and-answer session with the media.

During the session, Guernsey reps reported that an optimistic timeline could be as short as “a year or two” and the savings to Maui ratepayers could be even higher than their conservative estimate of 6%.

Senior Vice President Jared Stigge responded to the first question regarding a timetable for the implementation of the project.

“The timeline is highly dependent on which path forward is chosen and how much partnership you see from the utility on whether it’s interested in pursing that path or not,” said Stigge. “So when you have willing parties on both sides, and large agreement on the terms, you can see transactions move at a very quick pace. I would say you could see this done in a year or two.

“If you have a lot of resistance, the timeline can lengthen, and we have seen it take five years or longer,” said Stigge. “At this time it’s quite unknown. I think what the mayor announced in moving forward to a second step, the county will be doing quite a bit of diligence in what is the desired path forward, and then we’ll be able to develop a more concrete timeline…”

Stigge was then asked how the electric grid for Maui County’s three islands would be connected.

“The recommendation is somewhat split between Maui and the two other islands,” Stigge replied. “The ISO would be the most effective on Maui. Whether or not that entity would be ideal for the two smaller islands is uncertain.

“As far as whether you move forward with the municipal utility or cooperative utility—obviously, if you choose the municipal route, that would need to be a single entity operating across all three islands,” said Stigge.

“If you were to go with a cooperative route, you could have one co-op for all three islands, you could have one co-op for one island and one that would handle two, you could have a separate coop for each island, you could have multiple coops on any island,” said Stigge.

“The number is really up to the prudent decision of the county’s government,” said Stigge.

The next question addressed the price of MECO’s assets: “… a third party could expect to pay from a low of $525 million (book value) to a high of $867 million (replacement cost new less depreciation), depending on negotiations or the result of a condemnation/eminent domain action,” the Guernsey report states.

The question was whether or not Maui County’s taxpayers would be supplying this money.

“This is the investment that the new utility would need to make into purchasing those assets,” said Stigge. “So by making that investment, the utility would need to recover its investment from the ratepayers. …to the extent that the taxpayers consume electricity, they would be paying for those assets through their purchases of electricity.

“That being said, the ratepayers are currently paying for those assets, because the $525 million is the estimated net book value of MECO’s existing assets,” Stigge explained. “So when you pay your electric rates, there’s a component of your electric rate that covers the capital cost which is that net book value.

“The returns for that investment that MECO has made are currently being paid by the ratepayers,” Stigge continued. “If a utility purchases those assets, and pays dollar for dollar, the customers of that new utility will be paying for those assets, but the amount they are paying does not change, they’re just paying it to a different entity.”

“They [ratepayers] have already paid for it and will continue to pay for it as long as they buy electricity,” added Suhas Patwardhan, Guernsey CEO and president. “So that is not going to change. Maui ratepayers will have to pay whoever is the owner of the distribution network.”

“One thing that our study pointed out is there are some inherent advantages of what we call ‘public power ownership,’” said Patwardhan.

In simple terms, Patwardhan said, this means municipally owned or cooperative.

According to the Guernsey report, of the two primary alternatives for third-party ownership—municipal or cooperative—Guernsey believes that the most practical choice for Maui is the cooperative business model.

“Legal issues aside, there are practical considerations such as public procurement laws, collective bargaining and bond ratings that make the municipal route more problematic than following a cooperative path,” the reports says.

“These do not have the profit motive that MECO has,” Patwardhan explained. “They don’t have to pay taxes. So just simply based upon what could be the savings under a different kind of ownership… we pointed out in the big picture that currently it looks like you could save up to 6%. But that could be just the beginning of the savings. There could be additional possible savings if the new entity can manage the fuel sources more effectively; if they can manage the labor component more effectively. So I would say the initial percentage we calculated is somewhat conservative. The actual benefits could be higher.”

The bottom line is, Stigge said, “The net book value is essentially the amount of investment that MECO has made that has not yet been paid for by the ratepayers. Their actual investment has been in the billions of dollars, but a lot of that has be amortized or depreciated over time.”

The 545 million as the amount that has yet to be paid down by the ratepayers, said Stigge.

That is based on a book value, which is not necessarily equivalent to what the assets are worth, said Stigge. He explained that some of MECO’s equipment may not be worth its book value, because that type equipment may not help the county move forward to meet its 2045 energy goals.

In this case, Stigge said, “the county would try to argue that they should not even pay book value… they should pay a much lower value….”

“But net book value is a common base upon which utilities negotiate transactions,” said Stigge.

The next question addressed a coop model and the need for unionized workers.

Stigge said, “For calculating the potential 6% savings… we assumed, for example, that there would be no efficiency in labor costs” or procurements. “The only two efficiencies we assumed were… that they would not be subject to income taxes and they would have a lower cost of capital, because they are not trying to meet a profit objective of shareholders.

“So those two efficiencies result in the 6% estimated savings,” Stigge said. “If they are able to attain additional savings through more efficient labor arrangements or… more effective fuel procurements, those would be over and above the 6% estimated savings which were based purely on taxes and the cost of capital.”

The next question addressed the type of fuels the utility would use.

“If you want to move toward the requirements of 2045, if you’re needing firm power, obviously fossil fuel was the common answer across the country,” Stigge said. “For here, you’d probably be looking at something like a biofuel that could be produced locally. All those details would be sorted out during phase two of this effort. The fuel choice would be something that would be decided based upon input from the local community.”

Stigge’s replied to another question confirmed that fuel sources would likely be a collaboration of non-firm power sources, like wind and solar, along with firm power like fossil, biofuel, batteries and pumped hydro sources, among other emerging resources.

A firm power capacity is necessary component, he said.

“The question is is it ideal to do it with fuel-oil-fired generators that aren’t very efficient… or in the long-run are we better off looking to other alternatives,” said Stigge.

The new energy commissioner and the county will be working on these issue in the following phases of the project, he said.

The county receives an income from Maui Electrics franchise tax and public service tax. Last year, that income was $25.5 million. “If MECO goes away, what happens to that income?” asked a member of the media.

Stigge replied that it depends on what the county choses to do. In Oklahoma, a tax is assessed on the electricity provider, and the utility pays it to the community coffers. Then those funds are allocated through the budgetary project to other areas of the city. It is the choice of the county government whether they want to levy that payment.

The report also looked at NextEra.

Stigge said, “The recommendation of the ISO more squarely addresses that. The ISO acts as a third party that does two primary things: it makes the decisions as to what energy is dispatched at any given time; it provides clear and transparent pricing signals so not only existing power producers can understand the market, but new entrants that might want to develop new renewable resources might understand what sort of market they would be getting into.

“The second primary function of the ISO: If NextEra were to own the transmission and distribution system, they would be the one to make the decisions—where the system is upgraded,  what areas of the island need to be improved, where it’s expanded—and those decisions directly impact the ability of the grid to absorb renewables and the ability to of the grid not have to curtail wind wind power even when it’s being produced,” said Stigge.

Either MECO or NextEra would actually construct those improvements, but the planning will be done by the third-party ISO. Regardless of who actually will own the wires in a municipal or cooperative system, it is this independent entity that will plan for that infrastructure, Stigge said.

Bernie Savera, a managing consultant with Guernsey, talked about some of the past experience the company has had helping to form municipal electric utilities form investor-owned utilities other areas, as recent as seven months ago.

“Its not totally common, but it does happen, said Savera. “There usually an instance where the investor-owned utility rates are very high and the municipality has figured out a way to provide the same services at a lower cost.”

Stigge said their project in Boulder, Colorado, is probably most similar to what is going on here. The municipality’s electric service was sufficient and the cost was not high, but Boulder wanted to incorporate renewables.

“Their view was that their current provided was not the right answer to accomplish that, so they moved forward,” said Stigge.

For more information, visit http://www.co.maui.hi.us/mayor/economic.

MAUI NOW STORY LINK
VIDEO: Report Recommends Electric Utility Options

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