On December 20, the Launiupoko Water Company filed an amended request for a rate increase. The filing, an amendment to the request filed in late December 2023, was in response to the Public Utility Commission’s determination last June that the company would not be able to include repayment of loans from its majority owner, Peter K. Martin, in applying for a rate hike. The loans had been issued to the company without prior approval from the PUC.
At the same time the PUC voided the loans, it ordered the company to file an amended rate request and more accurate assumptions for the test year – the costs and revenues for the 12-month period on which the rate request is based.
The original request had sought a rate hike of 64.7 percent. In this amended request the proposed rate hike has been reduced to just over 48 percent.
Much of the increase in revenue in the current proposed rate hike derives from an increase in the standby charge for meters. For meters with the smallest, 5/8-inch connections, standby fees would increase 23.3 percent (from $35 a month to $43.15). For the largest connection in the system, 1.5 inches, the charge would rise from $57 to $215.75. According to the company, the proposed rates reflect multiples of “meter equivalents,” so the standby charge for the largest connection is five times that of the smallest.
Standby fees have no effect on usage, so conservation is unaffected by this proposed change.
The company is proposing no or minimal change in usage rates for the customers in the three lowest rate categories, up to 40,000 gallons per month. This, too, has no effect on water conservation – especially given that there are few, if any customers, in these three categories.
For customers using more than 40,000 gallons per month, rates would go from $3.28 per thousand gallons to $6.05. The estimated daily usage per water meter in 2024, according to the amended rate filing, is 1,680 gallons per day, or more than 50,000 gallons per month.
This new rate structure, the company says, “is designed to create a financial incentive for consumers to use water more efficiently and to avoid or minimize excessive consumption.”
But this, too, may not have any effect on consumption. Most of the 375 meters provide water to multi-million-dollar homes with pools, spas, water features, and lush landscaping. Given that, it is unclear how sensitive customers would be to something less than a doubling of their usage rates.
The amended application consists of four volumes of records, affidavits, reports, and supporting documents that LWC has adduced to justify the request for the substantial interest in customer rates.
Craig Nakanishi, one of the lawyers representing the company in the rate case, states in his opening letter to the commission that the company has “not issued any promissory notes” and it has “no other indebtedness.”
But the loans that form the very reason why LWC has had to amend its original request – the denial of LWC’s inclusion in its proposed rate base of loans of $1.3 million from Martin and $6,000 from general manager Glenn Tremble – continue to figure into the utility’s justification for the rate hike.
Specifically, the consultant analyzing the company’s finances in order to determine a proper rate of return to the owners has relied on a balance sheet in which the loans are included. By including the indebtedness in calculating the company’s financial health – and its potential attractiveness to investors – the suggested rate of return is, as a result, higher than it would be without the debt.
The 40-page report from Matthew Howard of Framingham, Massachusetts, concludes that LWC should be receiving a rate of return of 11 percent of income. This, he says, is based on a “hypothetical” capital structure of half long-term debt (to which he assigns a hypothetical interest rate of 8 percent) and half equity investment (which he figures at 14 percent). Taking the weighted average of capital costs, he arrived at the 11 percent figure.
Although the title page of Howard’s report describes it as “amended,” it is word-for-word, page-for-page identical to the report that was included as part of LWC’s original rate hike application.
Howard, who advises investor-owned utilities on rate-of-return questions, based his analysis on a review of the finances of six investor-owned utilities, all orders of magnitude larger than LWC. This he described as the “utility proxy group,” but, he acknowledged, LWC has little in common with any of them.
Relying on a balance sheet summary showing the company’s financial position at the end of 2022, Howard wrote: “the company’s debt balance is over twice the value of its assets,” with assets at $584,796, and debt at $1,251,629. By comparison, “the utility proxy group companies are in good standing from a creditor perspective.” The average equity ratio for that group is 50.27 percent, he wrote.
Another difference between the proxy group and LWC is the fact that both debt and equity are held by the same parties.
“The company’s financial situation … impacts equity investors because debt holders are senior to equity holders,” he wrote. “Because that is the case, the company is obligated to address debt-holder claims first, i.e., paying down its accrued interest and making regular payments on its outstanding debt prior. It is clear LWC faces significantly increased risk compared to the utility proxy group, and as a result, requires an increased return.”
This is true for publicly traded companies, where debt has a stronger claim on a company’s revenue than investment. But LWC’s debt, and presumably the unpaid, accumulated interest on it, has been voided by the LWC – a fact that does not enter into Howard’s “amended” report. If debt had been eliminated from the analysis, LWC’s financial picture would look much rosier.
Environment Hawaiʻi asked Howard whether he was aware of the PUC’s order voiding loans. We did not hear back by press time.
Another factor plays into Howard’s recommended return on investment, and that is the very small size of the company. The models he used to calculate this add a premium of 3.9 percent in the proposed rate of return to account for the risk inherent in investing in small enterprises. He wrote that using the average of three different models applied to the proxy utility group, he determined the appropriate return on investment to be in the range of 9.6 percent to 10.6 percent. He then added a “size premium” of 3.9 percent “which takes into account both LWC’s smaller size and significant risks relative to the utility proxy group, resulting in a recommended [return on equity] range applicable to LWC of 13.5 percent to 14.5 percent.”
As for the cost of debt, Howard recommended 8 percent be allowed for that. “As indicated by the company, the interest rate on all outstanding debt is currently 8 percent,” a rate he described as reasonable.
In the balance sheets appended as exhibits to the amended rate increase request, the loans and accumulated interest continue to be reflected, months after the PUC order.
The most recent balance sheet is dated October 31, 2024. It shows that unpaid interest on Tremble’s loan stood at $2,699.45 on this date. Unpaid interest on Martin’s loan of $1,269,000 amounted to $294,738.60.
On January 21, the PUC issued an order finding that the application was complete, as of December 20. Within six months, that is, by June 20, the commission must make a decision on it.
The PUC will hold a public hearing on the rate request March 3, 5:30 p.m., at Lahaina Intermediate School.
An Unreported Loan
The application does not mention it, but Launiupoko Water Company has received a loan of $401,834.46 from the state’s Drinking Water Treatment Revolving Loan Fund. According to the Department of Health’s report to the Legislature on the fund finances for the 2023-2024 fiscal year, the loan is for a backup generator and SCADA upgrades (Supervisory Control and Data Acquisition). Olowalu Water Company, also controlled by Peter Martin, received a loan for the same purpose in the amount of $150,231.33.
Irrigation Company Responds To Information Requests
On December 18, the Public Utilities Commission asked a series of questions to the Launiupoko Irrigation Company, which, like the Launiupoko Water Company, is another company closely held by Peter Martin and which covers the same service area of around 3,300 acres of West Maui. Like LWC, the irrigation company has a pending rate hike request before the PUC. Also, like the water company, the irrigation company also has outstanding loans issued to it by Martin, loans that were not approved in advance by the PUC.
Unlike LWC, the irrigation company’s outstanding debt to Martin is more than $10 million. The company’s regular financial reports to the PUC show that carrying charges on those loans amount to more than $50,000 a month, or, for 2024, $604,742.52.
Following the PUC’s determination that the loans from Martin to the Launiupoko Water Company were void, on June 21, the irrigation company informed the PUC that it was withdrawing its request for approval of the loans in its own rate case.
“In the event that the commission deems the loans void, LIC submits that there is no impact to the rate case numbers as filed,” Arsima Miller, attorney for the company, stated in her letter. The “hypothetical” capital structure used in the rate case … is comprised of 47 percent debt and 53 percent common equity.”
In September, Environment Hawaiʻi reported that the company continued to include carrying charges related to the Martin loan on its balance sheets. In nearly every month, the “Interest Expense Shareholder” line item, logged as a debt, prevented the company from showing a net profit.
An intervenor in the LIC rate case, Na Aikane o Maui, then asked that the PUC clarify whether the inclusion of interest on unapproved loans affected the commission’s consideration of the reasonableness of the requested rate increase. It also asked the PUC to require the utility to resubmit all reports that included interest charges against the unapproved loans.
In October, LIC began submitting two versions of its financial reports. One included the interest charges; the other without them. By December, however, the company filed just one version – the one with the interest charges.
On December 11, the PUC declined to require refiling of any profit and loss statements. It did however, affirmatively void the Martin loans.
It also asked parties to the docket to say whether LIC should be required to return to ratepayers any part of the increases paid under the temporary rate hike the PUC granted to the company in 2022.
All of the parties agreed in their responses that figuring out how much, if any, of a rebate customers should receive was impossible to calculate, given facts on hand.
A week after its December 11 order, the PUC issued questions about the company’s system efficiencies and finances. The PUC referred to a number of previous statements from the company to the effect that work needed to restore normal operations awaited approval by the PUC of the pending rate request. It then asked the company to identify any lawful debts the company has incurred “that may stall or prevent LIC from obtaining any financing” for needed projects.
Company attorney Arsima Muller replied by letter dated January 3, “LIC has not incurred any debts that may stall or prevent LIC from obtaining financing…”
The PUC also wanted documentation of loan applications or other correspondence submitted to lenders regarding bringing electricity to wells or completing a required archaeological inventory survey.
Responding to this, Muller provided an email describing a December 11 phone conversation between Tremble and a vice president of First Hawaiian Bank, but no loan application.
Finally, the PUC wanted to know why, for the first nine months of 2024, the company reported no expenses related to diesel fuel, but in October and November, recorded diesel fuel expenditures of $11,746 in October and $19,597 in November.
“LIC stopped pumping in December 2023 because it no longer had the financial ability to continue pumping operations… After LIC discontinued pumping ground water in December 2023 and limited its operations, it was finally able to pay off its debt to [the diesel fuel provider] in April 2024.
“In the meantime, settlement discussions were ongoing between the parties… LIC anticipated that a final settlement would be approved by all parties within a matter of months, which would coincide with the wetter months, where surface water was more readily available. As a sign of good faith to its customers, LIC began limited pumping on a trial basis… LIC notes that the pumping is occurring at the sacrifice of other entities. The aging accounts for West Maui Land and Hope Builders continue to grow.” (Both those companies are also owned by Martin.) “If LIC is unable to keep up with payments for the diesel fuel provider, LIC with either further reduce the pumping hours or cease pumping altogether.”
— Patricia Tummons