BEFORE THE PUBLIC UTILITIES COMMISSION

OF THE STATE OF HAWAII

In the Matter of the Application of

KAUAI ISLAND UTILITY COOPERATIVE ) DOCKET NO. 2016-0091 ) For Waiver or Exemption With Respect to ) Proposed Refinancing of the 2002 RUS ) Term Loan, Pursuant to Hawaii Revised ) Statutes, Section 269-31(b). ) )

3 3 7 43 DECISION AND ORDER NO.

Tf CZ cr- oco f or“ CZ* im T1 zs. --ire:T 1 C/>—1 cr r™ c/> — cn BEFORE THE PUBLIC UTILITIES COMMISSION

OF THE STATE OF HAWAII

In the Matter of the Application of

KAUAI ISLAND UTILITY COOPERATIVE Docket No. 2016-0091

For Waiver or Exemption With Respect to ) Decision and Order No. Proposed Refinancing of the 2002 RUS ) Term Loan, Pursuant to Hawaii Revised ) 3 3 743 Statutes, Section 269-31 (b). ) . )

DECISION AND ORDER

By this Decision and Order, the commission approves the requested relief set forth in the Application filed on

April 4, 2016, by KAUAI ISLAND UTILITY COOPERATIVE {"KIUC")

Specifically, pursuant to HRS § 269-31(b), the commission approves the requested waiver from any requirement that KIUC obtain approval from the commission in order to consummate its proposed refinancing of the remaining balance of the 2002 United States Department of

^"Application; Exhibit 1; Verification; and Certificate of Service," filed on April 4, 2016 (collectively, the "Application"). The Parties to this proceeding are KIUC and the DIVISION OF CONSUMER ADVOCACY OF THE DEPARTMENT OF COMMERCE AND CONSUMER AFFAIRS ("Consumer Advocate"), an ^ officio party to • this proceeding pursuant to Hawaii Revised Statutes ("HRS") §' 269-51 and Hawaii Administrative Rules ("HAR") §' 6-61-62(a). No persons moved to intervene or participate in this proceeding. Agriculture Rural Utilities Service ("RUS") Term Loan, as set

forth in the Application ("Proposed Refinancing Term Loan").

I.

Background

KIUC is a Hawaii not-for-profit electric cooperative

formed pursuant to HRS chapter 421C, engaged in the production,

transmission, distribution, purchase, and sale of electric energy-

on the island of Kauai, State of Hawaii.^ KIUC is member-owned

and governed by a board of directors who are members of the

electric cooperative and who are democratically elected by members

of the electric cooperative pursuant to applicable bylaws.^

KIUC has been an operating public utility since

November 1, 2002, when it purchased substantially all of the assets

and assumed the operations of the Kauai Electric division of

Citizens Communications Company, as approved by the commission in

Order No. 19658, as amended by Order No. 19755.-^ In those Orders,

the commission approved, among other things, KIUC's request to

^See In re Citizens Communications, Co., Kauai Elec. Div. and Kauai Island Util. Co-Op., Docket No. 02-0060, "Decision and Order No. 19658," filed on September 17, 2002 ("Order No. 19658"), as amended by "Decision and Order No. 19755," filed on October 30, 2002 ("Order No. 19755").

^See Order No. 19658 at 14.

^See Application at 3 (see footnote no. 5, below, for an explanation of the amendment in Order No. 19755).

2016-0091 2 finance the entire $215 million purchase price through a

25-year term loan with RUS, secured by a first mortgage lien and security interest on all assets and revenues of KIUC

("2002 RUS Term Loan").^ It is this loan that KIUC seeks to refinance.

II.

Application

On April 4, 2016, KIUC filed its Application pursuant to

HRS § 269-31(b) requesting:

1. A waiver or exemption from any requirement

that KIUC obtain approval from the Commission

in order to enter into and consummate the

Proposed Refinancing; and

2. Any other relief as may be deemed required,

applicable, or otherwise appropriate, just,

and reasonable under the circumstances in order

to allow KIUC to enter into and consummate the

Proposed Refinancing Term Loan.®

®See Application at 3 (noting that through Order No. 19755, the commission amended Order No. 19658 to reflect the change in the financing loan term from 30 years to 25 years).

®See Application at 1-2.

2016-0091 A.

Terms of the Proposed Refinancing Term Loan

Since entering into the 2002 RUS Term Loan, KIUC has been able to pay down more than $80,000,000 of the $215,000,000 initial loan balance, resulting in a remaining balance of approximately $133,000,000.”^ Given the current lending environment, KIUC is seeking to refinance the remaining balance of the 2002 RUS Term Loan, and has obtained a term sheet from

National Rural Utilities Cooperative Finance Corporation ("CFC") with the following significant terms and■conditions:®

Principal Loan Amount: Up to $133,000,000, but not to exceed 105% of the balance on the RUS loans being refinanced Loan Term: Up to 12 years

Maturity Date: October 31, 2027 {same as the existing 2002 RUS Term Loan)

Security Interest: First mortgage lien and security interest on all assets and revenues of KIUC (same as the exisiting 2 0 02 RUS Term Loan)

Interest Rate: Two options 1) 2.70% - Including Patronage Capital 2) 2.60% - With no Patronage Capital®

~^See Application at 3-4.

^Application, Exhibit 1 at 1.

®CFC has agreed to "lock" these interest rates until July 5, 2016. See Application at 5. 2016-0091 KIUC stated that it intends to select the 2.70% interest rate that allows for the inclusion of patronage capital, which is expected to reduce the effective interest rate to 2.51%.^°

The 2.51% interest rate "is about 115 basis points lower ,than the approximately 3.66% current weighted interest rate of the existing

2002 RUS Term Loan .... which would result in estimated interest payment savings of approximately $10 million over the remaining term of the loan."ii

B.

Justification for Waiver or Exemption

KIUC contends that approval of its waiver or exemption request to enter into and consummate the Proposed Refinancing

Term Loan is reasonable, appropriate, and would serve the public interest, for the. following reasons:

(1) As an electric cooperative, KIUC's ownership structure and interests are not subject to the need to balance shareholders' concerns of profitability and customers' concerns of service;

^°See Application at 5.

^^Application at 5.

^^See Application at 8. 2016-0091 (2) Granting a waiver or exemption in this situation is consistent with previous commission rulings

(3) The commission has previously reviewed and approved the existing 2002 RUS Term Loan in Docket No. 02-0060, and the only material differences with the Proposed Refinancing Term Loan are (a) a different lender, (b) an improved interest rate, and (c) a lower amount of approximately $133,000,000 to be refinanced;

(4) The realization of immediate and future cost savings to KIUC and its members/customers due to an estimated interest payment savings of approximately $10,000,000 over the remaining term of the loan; such savings increase

KIUC's ability to use operating cash flows to fund operating expenses, meet its financial obligations, and carry out its

2013-2025 Strategic Plan;^^ and ^

(5) The regulatory process for an electric utility cooperative would be streamlined and the associated regulatory

J-^See Application at 8-9 {citing Decision and Order Nos. 32459 and 32833 in Docket Nos. 2014-0017 and 2014-0060, respectively, where KIUC was waived from required commission approval to enter into a new $42.5 million secured loan, and a sublease agreement, respectively).

^‘*See Application at 9.

^^See Application at 10-11.

2016-0091 6 burdens and expenses would be reduced, in conformance with the intent of HRS § 269-31.1®

C.

Commission Authority to Grant Waiver or Exemption

Pursuant to Act 57 (2013) ("Act 57"), HRS § 269-31 was amended by adding subsection (b) to provide the commission with the authority to:

waive or exempt an electric cooperative from any or all requirements of this chapter [(i.e., HRS Chapter 269)] or any applicable franchiscv charter, decision, order, rule, or other law, upon a determination or demonstration that such requirement or requirements should not be applied to an electric cooperative or are otherwise unjust, unreasonable, or not in the public interest.

Moreover, subsection (b) requires that the commission "at all times consider the ownership structure and interests of an electric cooperative in determining the scope and need for any regulatory oversight or requirements over such electric cooperative."!®

The purpose section of Act 57 explains that this authority provides the commission "the flexibility and discretion to determine the applicability of existing regulatory requirements

!®See Application at 11.

i~^Se6 Application at 6 (citing HRS § 269-31 (b))

i®HRS § 269-31 (b) .

2016-0091 to electric cooperatives in furtherance of the public interest."^®

The rationale for this section is that not-for-profit electric cooperatives and their customers do not share the same tensions that exist between an investor-owned utility's profit motive and

the interests of its customers.Therefore, upon considering the

ownership structure and interests of an electric cooperative,

it may be just, reasonable, in the public interest, or otherwise

appropriate for the commission to grant the electric cooperative

a waiver or exemption from certain electric utility regulations.

In addition to the statutory requirements of

HRS § 269-31, KIUC asserts that commission "should also consider

other factors" when determining whether to grant a waiver or

exemption, including:

(a) streamlining and easing the regulatory process as well as the burden for an electric cooperative under the circumstances; and (b) avoiding the wasteful duplication of compliance, regulatory, and oversight efforts due to the fact that electric cooperatives are currently under the regulation of both federal and state agencies.21

The reason this assertion is incorrect is provided in detail below.

^^Application at 7 (citing Act 57, § 1).

^°See Application at 6-7.

^^Application at 7-8 (citing Justification Sheets submitted with H.B. No. 815 (2013) and S.B. No. 1045 (2013)). However, it should be noted that *as further discussed below, the commission does not agree with this assertion.

2016-0091 In light of the foregoing, and under these

circumstances, KIUC contends that with respect to the

Proposed Refinancing Term Loan, it- would be unjust, unreasonable,

and not in the public interest or in the interest of KIUC and its

customers and members for KIUC, to expend the time and resources

associated with a typical regulatory approval process. 22

Accordingly, KIUC asserts that the commission should grant the

requested waiver or exemption.

III.

Consumer Advocate's Statement of Position

On April 22, 2016, the Consumer Advocate filed its

Statement of Position ("CA SOP") stating that it recommends

approval of KIUC's request to waive or exempt, pursuant to

HRS § 269-31(b), any of the regulatory requirements related to the

review and approval of KIUC's Proposed Refinancing Term Loan.22

In conducting its review, the Consumer Advocate

issued Information Requests ("CA-IR") and .reviewed the

Proposed Refinancing Term Loan to determine, in part, whether its

terms appear competitive. To make such a determination,

the Consumer Advocate compared the Proposed Refinancing Term Loan

^^See Application at 11-12.

^^See Consumer Advocate Statement of Position, filed on August 25, 2014 ("CA SOP"), at 1.

2016-0091 9 with CFC24 and another loan offer obtained by KIUC from CoBank,

ACB ("CoBank") .25 Both CFC and CoBank are member-owned cooperative financing institutions whereby any margins (the difference between interest income and cost of operations) are allocated to its member borrowers on a patronage basis.

The chart below provides a comparison between the interest rates contained in the two loan offers.

Interest Rate Interest Rate with with Patronage No Patronage Capital Capital CFC Proposed Refinancing 2.70% 2.60% CoBank 3.15% 2.55% Source: Attachment CA-IR-2

The Consumer Advocate noted that "the rates offered by the CFC and CoBank appear competitive and are, in all scenarios, lower than the current weighted average interest rate of 3.66% of

24CFC is a member-owned, non-profit cooperative financial institution which funds its loans through the sale of commercial paper, secured bonds, syndicated bank credit facilities, and member capital. CFC has a loan portfolio of approximately $21.5 billion, of which approximately $21 billion is lent to electric cooperatives and $0.4 billion of which is lent to telephone cooperatives. See Application at 4.

25CoBank is an agency within the Farm Credit System, which is a network of banks and retail financial institutions chartered to support the borrowing needs of U.S. agriculture and the rural economy. CoBank has a loan portfolio of approximately $89 billion, of which approximately $19.5 billion is lent to electric cooperatives and independent power producers through the rural infrastructure portfolio. See Response to CA-IR-2.a.

^^See Response to CA-IR-2.a.

2016-0091 10 the RUS Term Loan."^? -phe other key terms of the loan offers are very similar, including, a borrowing limit of $133 million, term lengths of approximately twelve years, required debt service coverage ratios of 1.35, and no origination fees.^s

KIUC expressed a preference for CFC as a lender because

KIUC believes that: (1) the CFC patronage is likely to be more consistent, 29 ^nd (2) the refinancing process will be more streamlined because CFC already has a relationship with the RUS.^*^

After/conducting it analysis, the Consumer Advocate concluded that

"the key terms of the CFC Proposed Refinancing appear reasonable and consistent with the public interest.

In further support of its position, the Consumer Advocate states:

(1) As an electric cooperative, KIUC does not have the same conflict as investor-owned utilities that balance their profit motive against the interests of their customers;

2^CA SOP at 8.

^^See Attachment CA-IR-2.a.

^^According to KIUC, CFC patronage come from loans provided to the electric cooperative business, while CoBank patronage is largely derived from the agriculture and food processing business, which is cyclical and, thus, less certain or consistent.

^°See Response to CA-IR-2.a.

3^CA SOP at 11. .

2016-0091 11 (2) The Proposed Refinancing Term Loan will be utilized for purposes that are consistent with the prior commission approval of the underlying loan; ^2 ^nd

(3) The waiver or exemption in this docket is consistent with the intent of Act 57 which attempts to streamline and increase the effectiveness and efficiency of the regulatory process for electric cooperatives by avoiding duplication of compliance, regulatory, and oversight efforts, and ultimately resulting in lower costs to the electric cooperative.

Additionally, the Consumer Advocate recommends "that an executed copy of the Proposed Refinancing Term Loan with CFC be filed with the Commission and the Consumer Advocate to verify that the terms and conditions of the Proposed Refinancing have remained the same as described in the instant application."^^

IV.

KIUC'S Response Statement of Position

On April 26, 2016, KIUC filed its Response Statement to the Consumer Advocate's Statement of Position ("Reply SOP").

^^See CA SOP at 11 (citing Order No. 19658, as amended by Order No. 19755) .

33CA SOP at 11-12.

34CA SOP at 13.

2016-0091 KIUC stated that it does not object to the Consumer Advocate's stated position, including the recommendation that KIUC file with the commission and the Consumer Advocate an executed copy of the

Proposed Refinancing Term Loan with CFC.^^

( V.

Findings And Conclusions

1. KIUC is seeking a waiver or exemption from any requirement that KIUC obtain approval from the commission in order to enter into and effectuate the Proposed Refinancing Term Loan pursuant to HRS § 269-31{b) and (c), which provides as follows:

(b) Notwithstanding any provision of this chapter or any franchise, charter, .law, decision, order, or rule to the contrary, the public utilities commission, sua.sponte or upon the application of an electric cooperative, may waive or exempt;an electric cooperative from any or all requirements of this chapter or any applicable franchise, charter, decision, order, rule, or other law upon a determination or demonstration that such requirement or requirements should not be applied to an electric cooperative or are otherwise unjust, unreasonable, or not in the t public interest. Notwithstanding the above, the public utilities commission and the consumer advocate shall at all times consider the ownership structure and interests of an electric cooperative in determining the scope and need for any regulatory oversight or requirements over such electric cooperative. To the extent any other provision of this

35See Reply SOP at 1-2. 2016-0091 13 chapter or any franchise, charter, law, decision, order, or rule is contrary to or otherwise conflicts with this section in any manner, the provisions of this section shall govern and apply.

(c) For purposes of this chapter, an "electric cooperative" is a cooperative association or entity that is:

1) Owned by its members; 2) Formed pursuant to chapter 421C; 3) Operated on a not-for-profit basis; 4) Authorized pursuant to a legislatively granted franchise or other legislative authority to manufacture, sell, furnish, and supply electric light, electric current, or electric power to its members or a designated service area; and 5) Governed by a board of directors who are members of the electric cooperative and who are democratically elected by members of the electric cooperative pursuant to applicable bylaws.

2. As noted above, in addition to the statutory requirements of HRS § 269-31(b), KIUC wrongfully asserts, as it did in Docket No. 2014-0117, that the legislative history of Act 57 provides that the commission

should also consider other factors such as the interests in: (a) streamlining and easing the regulatory process as well as the burden for an electric cooperative under the circumstances, and (b) avoiding the wasteful duplication of compliance, regulatory, and oversight efforts due to the fact that electric cooperatives are currently

2016-0091 under the regulation of both federal and state agencies.^®

KIUC again erroneously bases its assertion on Justification Sheets submitted with H.B. No. 815 (2013) and S.B. No. 1045 (2013) and testimony submitted by the commission.

3. However, the commission strongly’reiterates that

Justification Sheets are merely explanatory documents, generally written by the proponent of a measure, that accompany a senate bill or house bill to provide the rationale for introducing the particular bill. The Justification Sheets are not voted on by any legislative body or made a part of the legislative history of a bill, and therefore are of dubious value when deciphering legislative intent. Similarly, testimony submitted on a bill, even by the commission, is merely reflective of the testifier's opinion of the bill at that point in time. Justification Sheets and testimony are not necessarily indicative of the ultimate legislative intent and do not establish legal requirements. Accordingly, the commission will not apply the asserted additional requirements.^'^

4. For the foregoing reasons, the commission strongly recommends that KIUC be careful in the characterization of the assertions put forth in their filings with the commission.

^®Compare Docket No. 2014-0117, In re KIUC, "Application, Exhibit A, Verification, and Certificate of Service," filed May 22, 2014, at 5-6, with Application at 7-8.

37Docket No. 2014-0117, KIUC, "Decision and Order No.> 32459, filed November 18, 2014, at 14.

2016-0091 15 5. As a preliminary matter, the commission finds that

KIUC meets the statutory requirements for an electric cooperative,

as provided under HRS § 269-31 (c). Specifically, KIUC is a member-owned, not-for-profit electric cooperative formed pursuant

to HRS chapter 421C and engaged in the production, transmission,

distribution, purchase, and sale of electric energy on the island

of Kauai, State of Hawaii. Additionally, KIUC is governed by a

board of directors who are members of the electric cooperative

and who are democratically elected by members of the

electric cooperative pursuant to applicable bylaws.As an

electric cooperative, KIUC's waiver or exemption application

is appropriate and may be granted by the commission pursuant to

HRS § 269-31(b).

6. Under HRS § 269-31 (b) , a waiver or exemption may be

granted "upon a determination or demonstration that such

requirement or requirements should not be applied to an electric

cooperative or are otherwise unjust, unreasonable, or not in the I public interest. For the following reasons, the commission

finds and concludes that KIUC has demonstrated that its requested

waiver is in the public interest and should be granted:

38See Order No. 19658 at 3.

39See Order No. 19658 at 14

40HRS § 269-31 (b) .

2016-0091 As an electric cooperative, KIUC's ownership

structure and interests are not subject to the need

to balance shareholders' concerns of profitability

and customers' concerns of service; this ownership

structure mitigates, but does not eliminate,

the need for regulatory oversight.

The underlying 2002 RUS Term Loan, which will be

refinanced under the Proposed Refinancing Term Loan

with CFC, has already undergone extensive

regulatory scrutiny by the Consumer Advocate and

the commission in Docket No. 02-0060.

Aside from a reduced interest rate from the

weighted rate of approximately 3.66% under the

2002 RUS Term Loan to a rate of 2.70% under

the Proposed Refinancing Term Loan, many of

the key terms will remain the same as under the

2002 RUS Term Loan, including the maturity date and

the security.

Since the approval of the 2002 RUS Term Loan,

KIUC has paid down approximately $80 million of the

initial $215 million loan.

The current lending environment provides lower

interest rates than those existing when the

2002 RUS Term Loan was executed, as evidenced by

2016-0091 17 the loan offers obtained by KIUC from CFC and

CoBank; accordingly, the commission finds that the

pursuit of refinancing comparatively costly loans

is a prudent endeavor.

f. KIUC estimates that the Proposed Refinancing

Term Loan will result in estimated interest payment

savings of approximately $10 million over the

remaining term of the loan.

g. KIUC states that the savings will provide it

with an improved ability to use operating cash

flows to fund continuing operations, meet its

financial obligations, and better carry out its I

2013-2025 Strategic Plan.

h. The Proposed Refinancing Term Loan will be used for

purposes that are consistent with commission

approvals granted in Docket No. 02-0060.

7. For the foregoing reasons, and based on a review of the entire record, the commission finds that KIUC has demonstrated that approving its requested waiver relating to the

Proposed Refinancing Term Loan is in the public interest because the granting of the waiver will render unnecessary a lengthy, rigorous, and costly regulatory review which, given the facts, would have a very high probability of approval.

2016-0091 8. However, the commission will- continue to examine all waiver requests on a case-by-case basis. Thus, our waiver in this instance should not be construed as a basis for failure to file any and all waiver requests in the future.

9. Finally, the commission adopts the

Consumer Advocate's recommendation that KIUC file an executed copy of the Proposed Refinancing Term Loan with the commission and the Consumer Advocate to verify that the terms and conditions of the Proposed Refinancing Term Loan have remained the same 'as described in the Application.

VI.

Orders

the commission ORDERS:

1. Pursuant to HRS § 269-31 (b) and (c) , KIUC is granted a waiver from any requirement that it obtain approval from the commission in order to enter into and consummate the

Proposed Refinancing Term Loan;

2016-0091 19 2. KIUC shall provide the commission and

Consumer Advocate with an executed copy of the

Proposed Refinancing Term Loan within thirty (30) days of its

execution; and ^

3. This docket is closed, unless ordered otherwise by the commission.

DONE at Honolulu, Hawaii JUN - 6 2016

PUBLIC UTILITIES COMMISSION OF THE STATE OF HAWAII

Randall Y. lhair

loner

Lorraine H. Akiba

APPROVED AS TO FORM:

Shannon Mears . , Commission Counsel

2016-0091.tik

2016-0091 CERTIFICATE OF SERVICE

The foregoing order was served on the date of filing by mail, postage prepaid, and properly addressed to the following parties:

JEFFREY T. ONO EXECUTIVE DIRECTOR DEPARTMENT OF COMMERCE AND CONSUMER AFFAIRS DIVISION OF CONSUMER ADVOCACY P.O. BOX 541 HONOLULU, Hawaii 96809

KENT D. MORIHARA, ESQ. KRIS N. NAKAGAWA, ESQ. LAUREN M. IMADA, ESQ. MORIHARA LAU & FONG LLP 841 BISHOP STREET, SUITE 400 HONOLULU, Hawaii 96813

Attorneys for Applicant KAUAI ISLAND UTILITY COOPERATIVE