For several months, Hawaiian Electric Co. failed to pay local contractors the $1,000 rebate they were owed after installing solar water heaters, prompting some of the small businesses to lay off workers.

The state Public Utilities Commission ordered HECO to rectify the situation last week, and the electric utility responded by mailing out nearly $2.5 million in rebate checks late last week.

"We still need to understand how it got this far behind," said Carl Caliboso, PUC chairman. "We have some information and are trying to get more detailed information as to what occurred when and why."

The payment backlog mars HECO's otherwise successful solar water heater rebate program, under which contractors knock $1,000 off the price of a system for homeowners and then apply to the utility for reimbursement. HECO has advertised the program as an "instant" rebate for homeowners and pays for it with a surcharge on residential customers' electric bills.

More than 50,000 systems have been installed through the program during the past 13 years, and today an estimated one out of every three single-family homes in the state is equipped with solar water heating.

While some contractors say they have no problems with HECO, others are hailing the PUC action, saying the utility's tardy payments had mounted this year and came at a time when they were struggling to make payroll because of an economic slowdown.

Hawaiian Island Solar Inc. in Kailua said it was owed $295,000 — and that $154,000 of that amount was at least 90 days past due.

"We've had to let people go," said Hawaiian Island President Gary Ralston. "We've had to do things like take out loans and make ends meet when we should have been paid this money."

The utility apologized for the late payments and acknowledged the hardship it caused contractors.

"We acknowledge it's a bad situation," HECO spokesman Peter Rosegg said on Wednesday. "We're trying to get this situation rectified so that everyone can move forward."

On Friday, Rosegg said $2.4 million in rebate checks were mailed to contractors and another $100,000 would be mailed tomorrow.

"We thank the vendors, developers and contractors for their patience," Rosegg said.

HECO said the backlog grew out of a collection of circumstances, some outside of its control, including a surge in installations after electricity rates spiked last year, and issues rising out of the program's recent transfer to another company.

HECO-RUN PROGRAM

The solar water heater initiative is part of energy conservation and efficiency programs mandated by the PUC and run by HECO until July 1. The Hawai'i Energy Efficiency Program as run by HECO encompassed a variety of informational and financial incentives for utility customers to cut back on energy use, including rebates for buying Energy Star appliances and coupons for compact fluorescent lights.

Money for the program comes from a PUC-approved Public Benefits Fund Surcharge on HECO's residential bills. One of the bigger recipients of the money is the solar rebate program, which requires contractors to agree to certain standards for installations. Their work also had to pass a 100-point inspection before HECO reimburses contractors for the rebate.

Solar water heater contractors say they almost have no choice but to be listed by HECO as a participating firm if they want to get residential work. But they say the agreements signed with HECO don't include deadlines for reimbursement nor do they have the ability to get interest on late payments.

UNPAID 'FOR MONTHS'

As HECO's payment processing slowed, the contractors said they had trouble making payments to their own suppliers.

Michael Hallinan, a partner in Solar Professionals LLC, said his company was owed $85,000.

"Every time we sell a water heater, it puts us farther behind," he said.

At Giant Solar in Waipahu, Andre McBride said he's been owed money by HECO ever since he started working in the program.

"We do a job and don't get paid for months," said McBride, who said he's had to lay off two people because of the slow payments and economy.

HECO's Rosegg said the backlog stemmed in part from the Hawai'i Energy Efficiency Program being transferred to Science Applications International Corp., a San Diego-based company also known as SAIC.

The PUC decided to move the solar rebate program away from HECO because of the conservation initiative's conflict with the utility's main business, that of selling kilowatts to customers. Rosegg said HECO has worked to make the transition with SAIC seamless but that timing of payments got caught up in discussions on who would handle what payments when.

Moreover, there was a boom in the solar water heater business last year in which HECO may have approved more systems than what was budgeted.

Rosegg said HECO didn't cut off work authorizations to keep up the program's momentum. Stopping authorizations also would have cut off work for contractors, he said.

$1.44M SHORTFALL

As it stands now, there is a $1.44 million shortfall between what HECO's collected from residential customers to pay for the conservation program and what's currently owed. HECO has asked the PUC to raise the Public Benefits Fund Surcharge to recover this money, which would work out to an increase of about 40 cents in the typical residential bill on O'ahu.

Rolf Christ, owner of R&R Solar, a supplier whose been indirectly affected by HECO's tardy payments, said he believes the problem may have been avoided if there had been more communication between HECO and the PUC.

"I feel maybe the shortfall should have been anticipated earlier and dealt with earlier," Christ said.

"It's a lot of money that's owed to people."

Christ said the new program operator, SAIC, has indicated it will pay faster.

Caliboso said the PUC also has discussed budgets and customer incentives with SAIC and that the PUC is trying to collect data on what occurred with HECO's payment problem.

"It's something we need to make sure we have the facts on and make sure everything works smoothly," he said.