LOS ANGELES -- A measure authorizing Hawaii's largest electric utility to issue $170 million of tax-exempt revenue bonds to fund capital improvements is on Gov. John Waihee's desk.

The bill allows the state department of budget and finance to issue conduit revenue bonds on behalf of Hawaiian Electric Co. and its two subsidiaries, Hawaii Electric Light Co. and Maui Electric Co. The utilities are wholly owned by Honolulu-based Hawaiian Electric Industries, an investor-owned holding company.

The bill, introduced in January by Rep. Robert Bunda, D-Central Oahu, won approval by both houses of the legislature this month. Bunda described the legislation as a "very noncontroversial," way to help the utility avoid selling taxable bonds whose higher interest rates ultimately would be passed on to retail customers.

Waihee spokeswoman Carolyn Tanaka said yesterday the governor is expected to sign the bill "unless serious technical or legal flaws are found."

Since 1985, Hawaii's budget and finance department has issued six tax-exempt bond issues totaling $380 million for Hawaiian Electric, said Gary Sharpe, director of investor relations for the utility.

About $218 million bonds are outstanding, and they are rated BBB by Standard & Poor's Corp. and Baa 1 by Moody's Investors Service.

Smith Barney Shearson handled the two most recent negotiated financings, but Sharpe said it would be wrong "to say we have formally anointed them as our underwriter." Concerning underwriter selection, "strictly speaking, the state makes the call," he said.

However, said Gordon Wong, public debt manager for the state department of budget and finance, the state "generally uses whoever the utility company has a banking relationship with."

The utility's use of long-term debt to finance capital improvements bucks utility industry trends.

Investor-owned and municipal utilities across the country are scaling back their debt issuance for capital projects because of uncertainty over the impact of deregulation and increase competition. "Over the last couple of years there has been slower growth in demand and many utilities are in an over-capacity situation," Sharpe said. "But we're still in the construction mode to serve the growth of this community."

Hawaiian Electric serves 95% of Hawaii's population. The other 5% is served by Stamford, Con..-based Citizens Utilities, which operates a subsidiary on the island of Kauai.

The pending legislation earmarks $70 million of bond proceeds to Hawaiian Electric Co., $45 million to Hawaii Electric Light Co., and $55 million to Maui Electric Co.

The utility has compiled a nearly 500 different projects that would be eligible to be financed by proceeds from the revenue bonds.

Among proposed projects are new fossil fuel plants. Sharpe said low-sulfur fuel oil current is the source for about 75% of the utilities' energy, and coal provides 15%. Geothermal energy, sugar cane waste, and incinerated solid waste provide the remainder.

In testimony before the state Senate committee on science, technology, and economic development, Paul A. Oyer, the utility's financial vice president and treasure, said the utility "recognizes the state's goal to reduce its dependence on imported oil.

"However, alternate energy sources are not yet available in sufficient quantities to meet our customers' needs for electricity," Oyer said. "Therefore, these fossil fuel generating units are necessary to provide reliable electric service."

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