What is happening with the Launiupoko Irrigation Company?
To judge from its most recent financial statements provided to the Public Utilities Commission, the company seems to have done little more than collect payments from customers and salt away most of its income for eventual payments of interest on loans it has received from majority owner Peter K. Martin.
The company’s July financial report, for example, shows LIC received $46,361 in income from its customers, while it put on its books as an expense all of that, and more — $50,395.21 – in the category “Interest Expense Shareholder.”
None of the July expenses went for repairs and maintenance, water testing, well reading, or fuel. The company did report electrical costs of $916, office rent of $548 (to an affiliated company), merchant fees of $411, and accounting costs of $969. Also, it paid out $10,390 for insurance.
Altogether, subtracting income from expenses, the company reported a net loss of $19,063.60 for the month. But for the “interest expense,” it would have seen a net profit. And, even after paying out $12,232 in July operational and administrative expenses, there would have still been more than $34,000 left over to be invested in the kind of work that was promised in the rate case, and which the PUC had expected would be undertaken.
The 12-month total in logged interest expenses (August 1, 2023 to July 31, 2024) came to $602,792.74, eating up almost exactly three-fourths of the total reported income of $803,768.66. If the interest expense was not booked, and income was used only to pay for operational and administrative expenses, then LIC would have posted a net income of $635,052. Instead, it reported to the PUC a loss of $972,329.78.
In May 2022, when the PUC gave conditional approval to a temporary rate hike requested by the company, one of the conditions was that the company “shall not use the additional revenues permitted by this order for any purpose other than restoring normal service to its customers, such as paying off unapproved loans.”
Driving home the point, the order went on to state, “The commission will not look kindly of any evidence that Launiupoko spent its increased revenues on anything other than restoring normal services to its customers.”
Just last month, LIC insisted to the PUC that it “has not used any of the additional revenues to pay loans or interest related to its loans.”
But effectively, by not using income to pay for the improvements required to restore normal service and instead banking it against the day that LIC pays off Martin, the company would appear to be out of compliance with the conditions of the LIC temporary rate approval.
Environment Hawai`i asked LIC to explain how these expenses comported with the Public Utilities Commission’s prohibition on interest payments.
“LIC has not used additional revenues to pay loans or interest expense related to the loans,” the company replied. (The reply was anonymous.) Instead, the company said, it uses the accrual basis for accounting, plugging in each month as an accrued expense the amount that is owed to Martin. (The company then kindly provided an explanation, from AI, of the difference between cash and accrual bases of accounting. Also, it expressed puzzlement “that you have access to the bimonthly reports when they are not on the PUC website.” In fact, the PUC website is the source of all of the information used in our reporting.)
There’s a history to the prohibition on loan payments, described more fully in the July issue of Environment Hawai`i. We reported that in its general rate request, which is still pending, LIC had sought permission from the PUC to pay off around $10 million in loans from Martin, none of which had received the prior required PUC approval. In a related rate case brought by sister company Launiupoko Water Company, in which similar after-the-fact approval of loans had been sought, the PUC turned down the company’s request, stating that the company would be required to produce audited financial statements if it wanted to continue seeking PUC approval of the loans. After that decision, Launiupoko Irrigation Company withdrew from its general rate application the request that the PUC approve the Martin loans.
No Pumping
In May of 2022, the PUC approved a temporary rate hike for LIC that increased customer rates by around 129 percent. The hope was that this would allow the company to make improvements that would restore normal service to customers that had seen frequent curtailments and low water pressure for months.
But since last December 19, the company has pumped no water from its irrigation wells. At that time, it notified the PUC that it would stop pumping groundwater to recharge its reservoirs and would rely on stream water alone “until such time as a supplemental temporary rate or general rate is approved that will allow LIC to at least break even.”
As a result of relying entirely on stream flows, customers have received whipsawing notices as to the availability of irrigation water. On July 15, customers were told, “There has not been enough rain in the mountains to maintain stream flows above the instream flow standards. Kaua`ula Reservoir (upper most reservoir) is empty. Makila and Launiupoko reservoirs still have some water. The majority of LIC’s customers will experience low to no pressure.”
Then, on July 26, this was the alert: “Rain in mountain [sic] has increased stream flows to levels above the required instream flow standards, allowing LIC to divert and distribute irrigation water. Please use non-potable water while it is available.”
Three days later, yet another notice: “There has not been enough rain in the mountains to maintain stream flows above the instream flow standards. Makila Reservoir is empty, Kaua`ula and Launiupoko reservoirs still have some water. The majority of LIC’s customers will experience low to no pressure. Hopefully there will be rain soon that will increase stream flows so that LIC is able to divert water and deliver irrigation water to its customers.”
What happens when customers, most of them owners of expansive estates with thirsty lawns and gardens, have no irrigation water?
With potable water still available in unlimited quantities from LIC’s sister company, Launiupoko Water Company, drinking water is used instead of the non-potable irrigation water. Of the 407 customers of LIC, 375 are also customers of LWC.
In testimony to the PUC, Glenn Tremble, general manager of the water company, described the effect that curtailments of irrigation water have had on the draw of potable water. When irrigation water was rationed, this caused “customers with approved cross connections to use potable water for irrigation purposes, which artificially increased LWC’s demand for potable water.” (That testimony was in connection with the Launiupoko Water Company’s application last December for a rate increase. In June, the PUC determined that the company would need to amend the request and refile it. Since then, LWC has submitted nothing new.)
Water Conservation
For the better part of four years, the irrigation company has also had a rate increase application pending before the PUC, and now the relationship between LIC and LWC is receiving heightened scrutiny from the commission, as well as other aspects of its financial reports.
On August 7, the PUC submitted five information requests to LIC, all but one of which involved multiple questions.
The first of these requests concerned LIC’s Water Conservation Policy, filed with the PUC in June 2022. That same month, staff with the Commission on Water Resource Management had reported that, “At every site visit staff has recorded multiple properties in Launiupoko irrigating lawns during midday hours.”
The PUC noted that under state administrative rules, “all [water use] permittees, unless exempted by the [Commission on Water Resource Management], shall submit a water shortage plan … subject to approval or modification” by CWRM. The irrigation company’s own rule regarding “Conservation Measures and Interruption of Water Supply” allows the company to restrict the use of water “by any reasonable method of control. In determining the priorities in restricting the use of water, the health and safety of the public shall be given first consideration over other uses.” In the case of “negligent or wasteful use of water,” the company may discontinue the service.”
The information request asked the company to “provide any water shortage plan that LIC has submitted to CWRM,” and if none has been submitted, to provide “any written communication with CWRM about the formulation of such plan.”
The response, provided to the PUC on August 22, was lengthy – but the short answer is: “There is no written communication specifically relating to a water shortage plan.”
The PUC also asked how the company determines when to deploy special conservation measures and how it “determines the priorities in restricting the use of water.” The answer lists several factors that play into such determinations, including: availability of stream and groundwater, conditions of pumping infrastructure and fuel (“currently dependent on funds available given LIC’s financial state and the ongoing rate case”), and “consumption demand by customers.” But ultimately, the decision rests in the “Best judgment of the company, based on the above factors and others of how to allocate water in a way that serves all customers equitably.”
Referring to paragraph 5 of the company’s Termination of Service rule, the PUC asked the company to explain whether it has ever “refused to grant service or discontinue existing water service to any premises to protect itself against fraud, abuse, or unauthorized use of water.” (LIC replied with one word: “No.”)
Also, how does the company even determine whether “negligent or wasteful use of water exists on any premises,” the PUC wanted to know. “The definition of ‘negligent or wasteful use of water’ is currently under legal review in connection with the drafting of warning notices to heavy users,” the company replied.
Has the company ever received complaints about waste of water? the commission asked.
“To its best recollection, LIC received one complaint from a Pu`unoa homeowner in 2023 about another lot owner watering his dirt. LIC investigated and found that the water use was for someone compacting soil for a new building pad and may have been potable water.”
Has LIC ever issued “written notices” to customers suspected of negligent or wasteful use of water? Answer: No.
Has it ever discontinued service due to negligent or wasteful water use? No.
Does it “regularly monitor” for this? “LIC has not monitored use on customer premises,” it answered, but it “is currently working with the meter software company on a new report to monitor ‘negligent or wasteful use of water’ based on metered use.”
Regarding the relationship between declines in irrigation water usage or availability and increases in potable water draws, the PUC asked the company to explain what guidance it has given customers about what they should do when LIC provides “little or no” water pressure. Has it “ever instructed customers to instead rely on potable water from affiliate Launiupoko Water Company, Inc. when LIC fails to provide water?” And how many customers have their irrigation systems cross-connected to the LWC potable water system?
Answer: “In 2018, subsequent to the [Commission on Water Resource Management’s] imposition of [interim instream flow standard] regulations limiting Kaua`ula Stream water use, LIC provided guidance to customers on options to use potable water.”
The guidance, attached as an exhibit to the information request response, shows that it was actually the water company, not LIC, that provided this guidance. On April 12, 2018, LWC sent out a letter to customers headed “Mitigation Option for Irrigation Water.” Both of the options described would allow potable water to be used in lieu of irrigation water, with the difference between the two options being whether or not the irrigation connection was disabled. (Disabling the connection would incur a fee, while keeping the irrigation connection would require more complicated installation of backflow preventers.)
And how many LIC customers have their irrigation systems cross-connected to the potable water system? LIC replied, “There are 62 approved cross-connections, but LIC suspects there are more that are not approved.”
Financial Issues
The second information request concerned the company’s use of additional revenues that were received as a result of the PUC approving a temporary rate increase in May 2022. In the orders approving that increase, “the Commission expressed concerns that LIC’s statements ‘consistently showed that LIC seeks a temporary rate increase to staunch its financial losses, not to restore service to its customers.’ The Commission ordered that LIC shall not use the additional revenues permitted by the temporary rate increase for any purpose other than restoring normal service to customers.” Normal service would entail not just diversion of stream water but also pumping of groundwater, which LIC, as stated earlier, has not done since last December.
The PUC asked the company to “[p]lease explain whether LIC is complying with [the temporary rate increase order] given that LIC appears to no longer be providing normal service to customers” and to “elaborate on why LIC believes it has no other options than to discontinue groundwater pumping, especially in light of the fact that LIC has continued making payments to affiliated interests … for regular expenses.”
LIC replied by stating that since the temporary rate application had been initially filed, in June 2020, “the cost of fuel had increased by 88 percent” and “the temporary rate was no longer sufficient to cover LIC’s expenses.” Still, with the temporary rate, “LIC was able to pump water from its wells when there was insufficient stream water until December 2023. At that point, LIC was no longer able to bear the financial costs related to pumping groundwater from its wells.”
And, it insisted, “LIC has not used any of the additional revenues to pay loans or interest related to its loans.”
Litigation Costs
The third set of information requests involved claims that the company made in a court case brought against it by Ke`eaumoku Kapu and others who receive water from Kaua`ula Stream as it is diverted by LIC infrastructure. Their traditional rights to stream water were recognized in an agreement that LIC signed in 2003.
In a court filing on July 15, the company claimed that it “continues to incur substantial additional costs to adjust LIC’s water system” in order to provide water to Native Hawaiians and tenants of Kamehameha Schools. “Please verify where the ongoing ‘substantial additional costs…’ appear in LIC’s bi-monthly reports,” the PUC asked.
The reply stated that the costs were listed under the category “CWRM Field Operations.” From August 2023 through July 2024, these costs totaled $58,882, as reported in the company’s most recent filing. That’s less than 10 percent of the amount paid under the rubric “Interest Expense Shareholder” over the same period.
CWRM Expenses
The fourth information request related to expenditures that LIC has made in connection with decisions of the Commission on Water Resource Management. Payments in this category were made to the law firm of Cades Schutte and also to companies affiliated with LIC, including Hope Builders, Inc., and West Maui Land Company. The PUC wanted to know how these expenditures would benefit the company’s ratepayers.
The payments to Cades Schutte, totaling $1,620, were for the firm’s work in connection with the litigation tied to water deliveries to the kuleana users, LIC stated. In addition, “Cades Schutte is LIC’s legal counsel regarding the designation of the Launiupoko Aquifer as a surface water and groundwater management area.”
The PUC also wanted to know why LIC’s costs included work on water-use applications for new – and not just existing – customers. “New water use permits were completed and submitted together with existing water use permits for efficiency…. Concurrent review would shorten the review period before LIC could apply for a new groundwater use permit for its proposed LIC Well 2…. Provided CWRM approves the additional source, it could allow more opportunity for beneficial green space and irrigated spaces to mitigate fire risk.”
LIC also submitted invoices from West Maui Land Company and Hope Builders that purport to detail date and amount of time for each employee who worked on issues associated with CWRM’s designation of water management areas as well as work done in relation to a CWRM notice of alleged violation. However, LIC pointed out, “CWRM has not issued any Notice of Violation to LIC between September 10, 2003 (when LIC received its [PUC license]) to present. CWRM has never found LIC in violation of a CWRM order.”
Maui Vacation Getaways
The PUC was curious about a payment for $701 that LIC made to Maui Vacation Getaways, LLC. How, it wanted to know, did that relate to the CWRM’s decision to designate West Maui as a water management area?
In response, LIC stated that it had retained Becky Sparling as an independent contractor. Sparling’s business is called Maui Vacation Getaways. “Ms. Sparling was hired to assist with various administrative tasks for LIC and other entities.”
Invoices of services provided to LIC by West Maui Land suggest that, at least for LIC, Sparling was involved in responding to or cataloging emails. Invoices to LIC from West Maui Land in July 2023 include the task, “WMA photo request eblast/fwd all emails to Becky & respond.” Her invoice to West Maui Land show she spent a total of 12.75 hours working on water management area issues on behalf of LIC. For this she was paid $55 an hour.
The last information request has just one question: “Has LIC ever sold water to any person or entities outside its service territory?” If so, the PUC wants details.
“No,” it answered.
— Patricia Tummons
The July issue of Environment Hawai`i contains additional reporting on Launiupoko Irrigation Company and Launiupoko Water Company.
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