Hawaiian Electric Industries, Inc. Business Information, Profile, and History

History of Hawaiian Electric Industries, Inc.

Hawaiian Electric Industries (HEI) is a diversified electric utility holding company formed in 1983. HEI's principal subsidiary is the Hawaiian Electric Company (HECO), which serves five of Hawaii's six major islands and 95 percent of the state's total population. By the early 1990s, HEI's nonutility subsidiaries consisted of a federal savings bank, a maritime freight transporter, and a residential real estate developer. The majority of HEI's income was generated by the electric utility and the savings bank.

Hawaiian Electric Company was incorporated in Honolulu on the island of Oahu during the reign of the republic's last monarch, Queen Liliuokalani, in 1891. Her predecessor, King David Kalakaua, had been instrumental in the introduction of electricity to the island in the 1880s. Kalakaua was a progressive leader who had learned of Thomas Edison's revolutionary electrical experiments and visited the inventor at his Menlo Park, New Jersey, laboratory in 1881.

By the time HECO was created, there were several private electrical generators in operation on Oahu, including one at the monarchy's Iolani Palace that provided light for the streets of downtown Honolulu and almost 800 private residences. Jonathan Austin, a community leader and the driving force behind the founding of HECO, formed the joint stock company in 1891 to supply light and power to Honolulu. The company was incorporated with William W. Hall as president and Austin as treasurer. At that time, HECO customers were charged a flat rate of 50 cents per light per month and 20 cents per 1,000 watts per month.

In 1891 King Kalakaua died of a stroke, and agitation for union with the United States intensified after Queen Liliuokalani ascended to the throne. Pro-annexation forces deposed the queen and formed a provisional government in 1893. By 1895, Hawaii had become a Territory of the United States.

In 1893 HECO was awarded an exclusive ten-year franchise, wherein HECO paid the government 2.5 percent of its gross earnings from all electric light and power furnished to consumers and agreed to bring power to everyone in the district of Honolulu who requested service. Jonathan Austin died in 1893; he was replaced as treasurer by William Hall, and Hall's vacant presidency was filled by William G. Irwin.

The company expanded rapidly during the remaining years before the turn of the twentieth century, focusing on adding services and augmenting its customer base. HECO purchased the generator at Iolani Palace and moved it into a larger powerhouse. The new, coal-fired plant was equipped with a 150-horsepower Ball engine and generator and two 45-kilowatt Edison dynamos. Before the advent of the electric refrigerator, the company used its excess capacity to manufacture ice, beginning in 1894. HECO extended light and power service to Waikiki in 1897 and used the proceeds from additional stock offers to buy a 2,000-volt generator. That year, HECO was also able to pay its first dividend, which amounted to five percent of the company's $350,000 capitalization.

Just before the turn of the century, HECO president Irwin and another manager resigned, prompting a reorganization of the company's upper level management positions. From that time until 1943, HECO's day-to-day affairs were directed by a general manager, while the president's responsibilities resembled those of a board chairman. Alonzo Gartley was selected as the new general manager, and Frederick Macfarlane became president.

HECO opened the twentieth century with the acquisition of the People's Ice and Refrigeration Company, its largest competitor in that industry, for $75,000. The merger increased the company's capitalization to $500,000, but fostered a monolithic image of HECO in the eyes of the press and the general public. The acquisition of People's Ice brought more management changes in 1902, when John A. McCandless, a partner in the ice company, succeeded Frederick W. Macfarlane as president of HECO. By this time, the company's flat rates for electric power had been increased to $1 for each 16-candle power lamp in use until midnight, and $1.25 for those who kept their lights on after 12:00 p.m.

When HECO's franchise from the provisional government ran out in 1904, the company requested a new contract from the United States government. Congress traded rate reductions for a perpetual franchise. By 1906, HECO had registered over 2,500 customers, who used 500,000 kilowatts of electricity annually. Use had grown with the invention of electric fans and irons, the expansion of government offices after annexation, and the construction of the island's first major hotel, the Moana. HECO responded to the increased demand by switching from coal to oil as a fuel source, which saved the company $17,000 annually. The company increased its capacity with the installation of Hawaii's first steam-driven turbine, a 750-kilowatt steam turbo-generator, in 1908. The new generator was augmented with a 1,500-kilowatt unit in 1910 and a 2,500-kilowatt unit in 1913.

In 1910 Alonzo Gartley left the post of general manager and was replaced by president McCandless's son-in-law, Harry M. Hepburn. The company continued to extend its electric network to residential districts in outlying areas of Oahu.

At the same time, however, momentum was building to bring the increasing powerful utility under public regulation. Led by W. R. Castle (who, not coincidentally, was an executive of the Honolulu Gas Company), anti-HECO forces accused the electric company of charging exorbitant rates. General manager Hepburn responded to the accusations by noting two recent rate cuts. The utility's opponents introduced a bill to the territorial legislature that called for the creation of a Public Utilities Commission (PUC) and an end to HECO's government-sponsored monopoly on electric power.

The legislature passed the bill, but when Hawaii's governor vetoed it, the bill was returned to the legislature, where anti-HECO representatives won out in 1913. HECO president McCandless and his two brothers sold their controlling interest in the company for over $500,000 and resigned their posts. Their shares were purchased by Richard and Clarence Cooke, who became president and secretary, respectively, and Frank C. Atherton, who became HECO's treasurer. Frank E. Blake succeeded Hepburn as general manager. Ironically, this forced change brought increased prosperity to HECO: Cooke and Blake, who would stay with the company for 28 and 14 years, respectively, immediately slashed rates and ended the flat rate payment schedule. The lower rates brought a large influx of new customers and revenues.

This increased demand led HECO to develop a network of substations in 1914 that facilitated the distribution of power from the main plant to Honolulu's burgeoning suburbs. In 1915, the company also opened a merchandising department that sold electric appliances, like the newly introduced refrigerator. Within five years, this division's profits topped $60,000.

In 1922 HECO added a 10,000-kilowatt generating unit, continuing the expansion of electrification to more isolated regions in the mountains of Oahu. But in 1923, just as these new customers became accustomed to the modern convenience, a severe storm struck. Heavy rain and high winds uprooted trees and downed power lines, causing $100,000 damage to the island, $10,000 of which was borne by HECO. But repairs were accomplished quickly, and the company was even able to bring another 10,000-kilowatt Westinghouse condensing turbo-generator on line that year.

The company's next major project helped beautify Honolulu through the development of an underground conduit system. HECO further enhanced Hawaii's capitol when it constructed a new headquarters in 1927. The Spanish Colonial-style building was later nominated to the National Register of Historic Places as one of the most elegant buildings in the state.

HECO was insulated from the stock market crash of 1929 that defined the decade of the 1930s for most of the rest of the world. By 1931, the company claimed 40,650 residential customers and profits nearing $100,000. HECO had also just made one of its largest capital investments--$1.5 million--for a new plant that was equipped with a 20,000-kilowatt turbo generator. The 1930s saw the modernization of several of HECO's older generators with the installation of more efficient "topping turbines." These units significantly increased the pressure exerted by HECO's existing boilers, which simultaneously increased efficiency and generating capacity. These and other improvements brought the company's total capital investments to almost $3 million in the early 1930s.

General Manager Frank Blake retired in the middle of the decade and was replaced by his son-in-law, Leslie H. Hicks. Hicks continued to expand capacity with a new 7,500-kilowatt turbo-generator on the shores of Pearl Harbor. A second unit with 15,000 kilowatts of capacity was built in 1940. The power plants helped HECO meet the increasing needs of U.S. military establishments and growing sugar and pineapple plantations. Richard Cooke's presidency ended with his passing at the age of 57. He was succeeded by older brother and HECO secretary, Clarence.

Although Hawaii and HECO were largely unaffected by the first World War, World War II landed the territory in the middle of the Pacific theater. After Pearl Harbor came under surprise attack on December 7, 1941, Honolulu was placed under a strict blackout and the government spent over $300,000 to reinforce HECO's primary power plants against further air attacks. But even the total blackout did not lessen the need for electric energy. With U.S. troops working around the clock on the island, the company built two 44,000-volt lines to service primary military bases. HECO power plants furnished more than one million kilowatthours of electricity each day at the height of the war effort.

The outbreak of war coincided with the first attempts at unionization at HECO. In 1941, HECO employees John Hall, John Hendrick, and Walters Eli established the Hawaiian Electric Union to lobby for higher wages, sick leave, and paid vacations and holidays. Later that year, the National Labor Relations Board certified the International Brotherhood of Electrical Workers (IBEW) to represent HECO's trades and crafts personnel. The first labor agreement was drafted in 1942, but it was not until 1943 that trades and crafts employees began to join the IBEW. The early years of the management-union relationship were marred by hostile negotiations. Talks grew so rancorous that union leaders petitioned for municipal ownership of the utility in 1943. The movement was soon quelled, however, and management-labor relations were soon normalized.

The year 1943 also saw the end of HECO leadership by the Cookes and the Athertons when Clarence Cooke died after a 32-year association with the company and Frank Atherton retired from the Board after 36 years of service. Leslie Hicks was named president, and the corporate hierarchy was reorganized so that the position was made responsible for daily operations.

The wartime blackout was lifted in May 1944 and martial law ended that fall. Over the course of the war, HECO's kilowatthour sales had grown from less than two million to more than 12.5 million kilowatthours. Income for the same period had climbed from $5.3 million to $9.3 million, and generating capacity had jumped from 82,500 kilowatts to 117,500 kilowatts. Pressure on the system was relieved with the 1944 construction of a 42,000-kilowatt unit at the Honolulu power plant and a 50,000-kilowatt unit at the Waiau plant in 1945.

Although many of the troops left Hawaii at the end of the war, the territory's economy had been transformed. Beginning with the postwar era, Hawaii's economy was dominated by military spending, tourism, and construction. Construction of the $30 million Ala Moana Shopping Center, for example, took over a decade, from 1952 to 1966. It was soon recognized as one of HECO's biggest projects--the shopping center was larger than downtown Honolulu, and cables had to be run underground in reclaimed swampland.

HECO also undertook two expansion projects in the 1950s. The company built a new power plant on the Honolulu waterfront in 1954. The 116,000-kilowatt plant was named after HECO president, Leslie Hicks. New technologies, like a high-capacity (138-kilovolt) line and hydraulic-powered booms that did the heavy work of placing utility poles, helped HECO expand its service area to the relatively undeveloped northeast side of Oahu, across the Koolau mountain range.

These three large projects spanned from 1959 to 1963 and cost HECO $56.8 million. Hawaii became the 50th state of the United States in 1959. The political change helped bring HECO to the attention of the investment community. Hicks retired that year, and was succeeded by Ralph Johnson.

After seven years of research into population growth and residential and industrial expansion, HECO started construction of a new power plant at Kahe Point in West Oahu. Kahe was powered by the state's first reheat steam turbine generator, which cost $16 million. The plant was brought on line with a generating capacity of 86,000 kilowatts, and a second unit with the same capacity was started up in 1964. By the early 1990s, the Kahe plant had six units with a total generating capacity of 648,000 kilowatts and a total cost of $184 million. The expansion helped HECO keep up with demand, which more than doubled during the 1960s.

HECO sold a subsidiary, the Honolulu Electric Supply Company, for $3.79 million in the early 1960s and reinvested the proceeds in technical improvements. In 1964, the company initiated a microwave communications system and an automatic dispatch system (ADS) for control and efficiency. In 1966 Russell Hassler succeeded Ralph Johnson as president when Johnson died unexpectedly. With plans for more expansion underway, HECO made its first public stock offering of $90 million in 1965, then invested the proceeds in its physical plant. The first stage of HECO's 138-kilovolt Halawa Valley station, which would become the utility's largest transmission station, was in operation by 1967.

Acquisition also helped HECO grow in the 1960s. In 1968, the company purchased Maui Electric Company in a friendly takeover, and in 1970 it acquired Hilo Electric Light Company (later known as Hawaii Electric Company), which produced electricity for the "Big Island" of Hawaii. That year, HECO converted its two oldest plants, at Honolulu and Waiau, to low sulfur oil. Though the fuel was more expensive, it reduced air emissions. After three years as president, Russell Hassler died and was succeeded by Lewis W. Lengnick. Lengnick remained president for four years, when he retired and was replaced by Carl H. Williams in 1973.

The early 1970s were marked by the oil crisis, when the cost of fuel oil increased almost one-third from 1970 to 1971. HECO filed for its first rate increase in 17 years in 1971, and despite widespread public opposition, the PUC permitted a 5.9 percent increase the following year. The cost of fuel oil continued to increase throughout the decade, from under $2.50 per barrel in 1970 to $42 per barrel in 1981. HECO's only labor strike occurred in 1973 and lasted two weeks.

In 1980, Carl Williams retired and C. Dudley Pratt, Jr. took over. The following year, the islands of Kauai and Oahu were battered by Hurricane Iwa: 97 percent of HECO's customers lost power at the height of the storm, and it took the company two weeks to restore the entire system. The utility used "rolling blackouts," wherein customers had electricity cut off for an hour every two hours for five to six days, to manage demand while customers were brought back on line. Much of the physical plant was rebuilt to withstand hurricane-force winds. Two other island-wide blackouts in the 1980s left the island without power for half-days. The first, triggered by a fire, occurred in 1983, and another resulted from a transformer explosion the following year.

Following an industry trend, HECO applied to the PUC to form a holding company as a vehicle to diversify the electric company's interests, which would help the company weather periods of low utility profits yet shelter it from bad investments. The reorganization was approved in 1983, and HECO became a subsidiary of Hawaiian Electric Industries, Inc. (HEI). The ensuing years saw the creation and/or purchase of several endeavors: HEI Investment Corp. (1984); Hawaiian Electric Renewable Systems (a wind farm; 1985); Malama Pacific Corporation (real estate); Hawaiian Tug & Barge (inter-island freight; 1986); Hawaiian Insurance Group (1987); and American Savings Bank's Hawaii branches (1988). By far HEI's largest acquisition, American Savings Bank soon provided one-fourth of the holding company's annual income. Dudley Pratt was replaced by Harwood D. Williamson as president and CEO of HECO in 1990, and Robert F. Clarke was appointed president of Hawaiian Electric Industries.

HEI's rapid growth was halted by two events. First, electricity demand increased dramatically in the final years of the 1980s, soaring 5.6 percent in 1988 alone. Having invested in diversification for most of the decade, HEI was unprepared for the pressure on its electrical systems. The company scrambled to purchase power from independents as customers, politicians, and regulators complained of rotating blackouts, restricted use, and frequent outages. In 1991, for example, the entire island of Oahu was totally blacked out during routine maintenance. The blackout lasted 12 hours, but the backlash raged on during the early 1990s. HEI hoped to inaugurate a five-year, $1 billion capital improvements program in 1992. The program intended to add capacity and transmission and distribution capabilities throughout the service area.

Then, on September 11, 1992, Hurricane Iniki's 160-mile-per-hour winds devastated the island of Kauai. Although it was the only island to which HEI did not supply power, HEI's Hawaiian Insurance Group (HIG) had sold many islanders hurricane insurance, and 98 percent of HIG's policyholders filed claims, which totaled $300 million. The claims bankrupted HIG, leaving the insurer with a negative net worth of $80 million. HEI abandoned the company, leaving it to a guaranty fund supported by the insurance industry. It was one of the largest insurance insolvencies in the state's history. Early in 1993, Hawaii's insurance regulators brought suit against the holding company, charging breach of fiduciary duty, misrepresentation, and negligence.

HEI's planned $1 billion capital improvements campaign was halted by the news of HIG's insolvency. In the last quarter of 1992, HEI's stock fell ten percent, and Standard & Poor's floated the idea of downgrading both HEI's and HECO's ratings. HEI put off a stock offer planned for early 1993 that would have furnished funds to start the capital improvements program.

Principal Subsidiaries: Hawaiian Electric Co., Inc.; HEI Investment Corp.; Malama Pacific Corp.; Hawaiian Tug & Barge Corp.; HEI Diversified, Inc.