CUC consultants: Set six-month power rates

Consultants hired to investigate power rates has recommended that the Public Utilities Commission set provisional electric rates for CUC for the next 18 months, with periodic reviews and possible changes during that time.

“The instability associated with CUC’s electricity sales leads us to a recommendation we believe to be the only practical and prudent course of current action,” the consultants wrote in the 58-page report.

The Public Utilities Commission hired Georgetown Consulting Group, Inc. to conduct the investigation to help PUC set the utility rates. PUC must review and set utility rates before the Dec. 31, 2008, deadline set by law. If the PUC fails to meet this deadline, CUC will be forced to reduce power rates down to 17 cents per kWh—a prospect that will make it impossible for CUC to pay for fuel supply and maintenance of its engines and to pay its independent power producers.

The first review of set rates should take place in June 2009 with subsequent reviews conducted six and 12 months after, the report states.

The consultants recommend that instead of setting a monthly electric fuel charge, PUC establish a levelized energy adjustment charge tariff that remains in place for six months. The formula used for the tariff would be transparent to PUC as well as ratepayers, the consultants note. With CUC’s cooperation, the consultants believe a tariff could be set by Jan. 1.

A six-month set rate would benefit CUC by recovering all prudent costs and maintaining viability. A set rate would benefit the customers by allowing them to plan ahead for their bills, according to the report.

CUC executive director Antonio Muña could not be reached for comment yesterday, while PUC officials cannot comment until the public hearing later this month.

The Georgetown Consultants also recommend CUC officials work with them to create a review of revenues and expenses to be submitted to PUC by April 15, 2009. CUC, pursuant to Public Law 16-17, should also create a business plan that addresses the following:

-power plant rehabilitation program;

-emergency generation;

-private sector assistance agreements;

-debt restructuring;

-investment capital for rehabilitation;

-environmental compliance and operating permits;

-renewable energy and fuel diversification;

-accounts receivable;

-operation and maintenance staffing levels; and

-other business planning issues.

“Currently, the power plant facilities of CUC are in horrendous condition—exception being those power plants under the day-to-day management of private parties under contract to CUC—and are in various states of disrepair,” the report states, adding that many engines are well past the maintenance schedules. “This situation is totally intolerable and demonstrates a level of past management neglect that we’ve never before witnessed by an electric utility. It is this ‘single’ systemic failure that has led to the prolonged outages experienced by consumers and the resultant financial impact upon businesses, tourism, and the local economy.”

Because of the scope of the work needed in order to rehabilitate of the Power Plants, “there is almost a 100 percent chance that the Aggreko contract will need to be extended,” the report states. The Aggreko contract will expire in September 2009, with an option of adding six more months.

The business plan also should outline how CUC should overcome the $70 million of outstanding debt, principal among it the $61.5 million that is owed to the Commonwealth Development Authority.

Environmental compliance and operating permit issues must be considered, the consultants said, including hazardous waste. Besides the Telesource-managed plant on Tinian, CUC does not have a single operating permit for its generating plants, the report notes. Renewable energy and staffing levels will need to be addressed as well.

If CUC were to correct its accounts receivable problem, it would provide most of the needed cash for the rehabilitation projects, according to the report. In fiscal year 2007, the accounts receivable was approximately $31.2 million, with $9.6 million of that from government accounts. That year’s external auditor, the report notes, reserved $12.7 million as uncollectible and wrote off $2.4 million as bad debt.

“An amount in excess of ten times the average write-off for a utility the size of CUC,” the consultants wrote of the $2.4 million bad debt write off. The report also notes that the 2007 audit did not indicate the allowance amount given to government accounts for uncollected fees.

The balance sheet indicates a high level of non-fuel inventory, approximately $7.5 million. Based upon the inventory turnover ratio of 0.5 it indicates, “CUC inventory is either overstocked or contains items that are obsolete or items that are very slow moving,” the report states.

According to the report, during fiscal year 2007, CUC on a cash basis operated at or slightly below a breakeven basis. The electric fuel charge collected slightly more than $2 than CUC actually spent on fuel expenses.

“However, the income statement is adversely impacted by a very large write-off for bad debt and an extraordinarily high interest expense on debt of $11.4 million. This high level of interest expense is driven by the CDA default and the interest charge associated with the acceleration $177.5 million of principal and interest of all of the CDA loans,” the report says.

The report says there are a number of factors contributing to CUC’s current state: fuel price volatility; tardiness in collections; loss of industry customers; loss of retail customers from garment industry; decline in tourism; and the failure of several generating units due to neglect and a lack of resources.

“The primary impact of these factors has created a liquidity crisis causing CUC to put in place among the most austere measures we have ever witnessed at an electric utility,” the report states.

All capital expenditures have ceased because every dollar available from any source goes to paying the fuel supplier and expenses for payroll and other operating expenses.

“Using all the liquidity available has led to the current situation where there are no funds available for undertaking essential rehabilitation projects, normal maintenance activities, and the payment of debt service to the Commonwealth Development Authority. Evidence gained during discovery and in interviews with CUC representatives strongly suggest that this liquidity crisis has been ongoing for years and is a major factor in CUC’s inability to secure short-term financing and to access the long-term debt markets,” according to the report.

CUC must respond to the report by Dec. 8. PUC will conduct a public hearing on Dec. 12 at 6 pm in the Senate chamber. A business meeting will be held Dec. 19 at 6pm at the Saipan Chamber of Commerce.