State lawmakers voted this year to expand an energy tax on imported fossil fuels such as oil, propane and liquefied natural gas but carved out a special tax break for coal that was sought by industry lobbyists.
The exemption for coal was pursued by AES Hawaii Inc., which produces about 20 percent of Oahu’s power at any given time by burning about 700,000 tons of coal per year at its plant in Campbell Industrial Park.
The tax break approved by lawmakers could benefit AES for as many as seven years. Jeff Walsh, president and general manager of AES, said the savings to the company from the tax break would be "significant," but declined to be more specific.
That special tax exemption for coal is being questioned by representatives from some local environmental groups, who contend the energy tax should apply equally to all fossil fuels.
"It seems pretty nonsensical to me," said Richard Wallsgrove, program director for Blue Planet Foundation, a nonprofit organization that promotes the use of clean energy.
The temporary exemption for coal included in the final version of Senate Bill 359 this year is almost identical to language proposed by AES this year and also in 2013 when lawmakers considered a similar energy tax, so "there’s no doubt that this exemption came from the coal industry," Wallsgrove said.
Henry Curtis, executive director of Life of the Land, said the state should be imposing energy taxes and regulatory requirements evenly.
"Fossil fuel is fossil fuel. Coal, oil and natural gas should all have the same tax rate imposed on them," Curtis said.
But Walsh said AES sells power to Hawaiian Electric Co. by contract at a fixed price, and the company would have no way to pass the cost of a new tax on to HECO or the utility’s customers.
That power the company produces by burning coal is "by far" the cheapest electricity being produced in Hawaii, he said, which is good for consumers. Walsh described AES as "the bridge and the backbone of the grid" on Oahu.
The tax break for coal was included in a bill to expand Hawaii’s so-called "barrel tax" on oil. The barrel tax was first imposed in 1993, and the levy is now $1.05 per barrel on all oil that is imported into the state. The tax proceeds are distributed among state environmental protection and cleanup programs as well as state programs to promote clean energy, reduce the use of fossil fuels and promote local agriculture.
This year lawmakers proposed measures to expand the reach of that tax with new language that would impose a new levy on synthetic gas, liquefied natural gas, propane and coal.
financial hardship
The original proposal by House lawmakers would apply the tax to those fuels according to their capacity to generate energy as measured in British thermal units, or Btu, with the new tax set at 19 cents per million Btu of fossil fuel.
AES objected strongly, protesting that the bill would increase its operating costs significantly and create a financial hardship for the company. AES operates the single largest generator connected to the HECO system, according to the company.
Among other problems, AES explained its agreement to sell power to Hawaiian Electric would not allow it to pass the cost of the new tax on to HECO, "and thus would further burden an already financially struggling business."
"The business would be further stressed to maintain (an) adequate level of maintenance and capital investment, which could impact grid reliability and stability," warned Walsh in written testimony to lawmakers.
Walsh asked lawmakers to either exempt coal entirely from the Btu tax or insert language into the bill exempting coal that is used to generate electricity under power purchase agreements in effect before June 30 of this year. That would include the AES agreement with HECO, which a HECO spokesman said is scheduled to expire in 2022.
Lawmakers agreed. The House Energy and Environmental Protection Committee on Feb. 17 inserted the AES proposal into a House bill that was later incorporated into another measure, Senate Bill 359. That final bill includes language AES requested exempting coal used under power purchase agreements that were in effect before June 30.
Senate Bill 359 was then approved by the House and Senate, and is now pending final action by Gov. David Ige, who can sign or veto the measure. A spokeswoman for Ige said the bill is undergoing legal and policy review.
Charles Toguchi, a lobbyist for AES who also served as chief of staff under former Gov. Ben Cayetano, declined to discuss the coal tax break, saying through an intermediary that he does not speak with the media on behalf of his clients.
Walsh, however, said that in his view the bill is not special treatment.
"We have no ability whatsoever to pass any kind of tax or fee or however it’s classified on to the rate-payer, whereas HEI, Hawaii Gas, all the utilities do, and they would simply utilize it in that aspect; they just pass it on to the ratepayer, whereas we don’t," Walsh said.
House Energy and Environmental Protection Committee Chairman Chris Lee said the whole idea of amending the barrel tax was to close a "loophole" that allowed fossil fuels such as propane and coal to avoid the barrel tax that was being paid by oil importers.
Lee said the exemption for coal is only a temporary step that was taken because there is a current power purchase agreement in place for AES, and "we didn’t want to impact something that would cause a problem contractually."
"I believe they are coming up for renewal next year," he said. The bottom line is that "when they renew that power purchase agreement, they’ll then be subject to this like everybody else."
CONTRACT TALKS
However, HECO spokesman Darren Pai said the discussions between the utility and AES for an amendment to the power purchase agreement "are ongoing, and there is no timetable for completion."
"We’ve been negotiating with AES to explore the possibility of an amendment to its contract for terms that would be in the best interests of our customers," Pai said in a written statement. "Any amendment to the existing contract would need to be submitted to the (Public Utilities Commission) for review and approval."
Lee (D, Kailua-Lanikai-Waimanalo) said that if the language applying the tax to coal needs changes "to ensure greater fairness, we’re all for that. I’m happy to return next year and correct anything that needs to be corrected."
Other lawmakers who were involved in the passage of the bill said the coal provision was not their primary focus.
Sen. Mike Gabbard (D, Kapolei-Makakilo), who was chairman of the Senate Energy and Environment Committee, said the provision on coal was inserted into the final bill late in the session by the leadership of the House Finance and Senate Ways and Means committees.
House Finance Chairwoman Sylvia Luke and Senate Ways and Means Chairwoman Jill Tokuda (D, Kailua-Kaneohe) said their focus was on other aspects of the bill, including the way the proceeds from the barrel and Btu tax are to be allocated, and new methods of financing government worker positions that are funded by the barrel tax.
"We were aware of it," said Luke (D, Punchbowl-Pauoa-Nuuanu), but she added that the details of that language in the bill were overseen by the energy committees in the House and Senate.
It is unclear whether the tax break approved by lawmakers would apply to any Hawaii company other than AES. The Hawaiian Commercial & Sugar Co. plant at Puunene on Maui also burns imported coal to produce electricity, but a spokeswoman for Alexander & Baldwin Inc. said she is unsure whether the language in the bill would apply to the company’s plant at Puunene.
HC&S has been renegotiating its power purchase agreement with Maui Electric Co., and an amended agreement is pending approval by the Public Utilities Commission, said Dana Gusman, assistant manager for government and community relations.
HC&S adds imported coal to the bagasse it burns to stabilize the power output of its Puunene plant.
