CUC ‘risks collapse or insolvency’

By DENNIS B. CHAN
dennis_chan@saipantribune.com
Reporter

Legislative “takeaways,” government debt that has ballooned past $30 million, and unwillingness to make up for the losses with rate increases recalls the catastrophic period of rolling blackouts from 2007 to 2010 for Commonwealth Utilities Corp. executive director Alan Fletcher.

Meanwhile, another $350,000 in revenue was lost when CUC regulators did not renew a surcharge after it expired this month.

In a quarterly progress report to the U.S. Environmental Protection Agency, Fletcher said long periods of non-payment result in underfunded operations.

In the first half of this fiscal year, government accounts have only paid a combined 58.9 percent of utility bills. This has amassed a fiscal year deficit of $4.73 million, Fletcher wrote. Government debt sits at $30 million in unpaid utility bills.

Leading this debt is the island’s hospital, or the Commonwealth Healthcare Corp., with a “staggering debt” of $15.6 million, Fletcher wrote. The hospital currently enjoys a temporary restraining order that bars disconnection of services.

Adding to this is CUC’s lack of an adequate rate base, Fletcher said.

Pointing to legislation enacted in recent years, Fletcher said these actions have reduced CUC’s power, water, and sewer revenues by $5.7 million, or 12 percent of its operating budget.

He also noted pending legislation to transfer responsibility of the payment of streetlights to CUC. This would result in an additional $2 million loss if made into law, he wrote.

“The result of all these legislative actions is that CUC is unable to achieve cost recovery for services and projects,” he said.

Fletcher also said that Public Law 18-71 contains an added $5 million cut in the utility accounts for the Public School System.

“Employing a circuitous logic, this law expressly assigns and offsets unrelated PSS and CHCC utility obligations against the CNMI’s payment into” court-ordered projects.

Fletcher said total legislative actions have reduced CUC’s revenue by a staggering $10.7 million, or 25 percent of the budget this fiscal year.

Adding in the current fiscal year’s $4.7 million in under-collection starkly shows that CUC is in “severe distress.”

“Regrettably, there exists a lack of political will to provide necessary funding for operations through a recover-charge and temporary surcharge. These decisions question as to whether the utility has met its fiduciary responsibility under CNMI law and the Stipulated Orders [from federal court] to ensure that it recovers its cost of operations and safeguards system reliability and environmental compliance,” Fletcher said.

These fiscal and operational constraints have combined to threaten CUC’s stability and its ability to meet the requirements of stipulated orders.

“There is serious concern as to the future financial health and operational stability of CUC. These unrecovered and operational costs, the lack of political will to recover deficits in rates, combined with legislative “takeaways” in operating revenues can only be managed by reducing operation and program expenditures and by not reinvesting in infrastructure.”

“All of these factors together reduce the reliability of services and potentially risks catastrophic failure similar to what the utility experienced in 2007-2010. Regrettably, if CUC is unable to change course and recover its costs of operations, the utility may well be faced again with collapse and/or insolvency,” Fletcher said.

In April, CUC presented to its board a $14 million cash loss in its predominant fuel charge due to government non-payment. The board was asked to approve a recovery-charge of 2.2 cents per kWh to recover this loss. On top of this, a 3.1-cent per kWh surcharge was proposed to make up for the “expected” future unpaid bills of the government. This charge would have been temporarily levied on residents and businesses until the government paid its bills.

But in a split vote, the board rejected the recover charge and the government surcharge out of the desire to not increase rates for customers.

The consequence of not recovering this money means that CUC has removed $14 million from its power, water, and wastewater operation funds to buy fuel.

According to CUC chief financial officer Matthew Yaquinto, CUC is losing between $700,000 and $1 million a month in under-collections.

CUC is “unsure what your cash flows are going to be,” he said in a presentation to the CUC board on Tuesday. “Do we buy fuel or do we pay salaries? We might come to that point soon in the future in the next few months,” Yaquinto said, alluding to the possibility of “rolling blackouts” if this continues.

Yaquinto said they lost $350,00 in revenue when a 2.1-cent “PIMC” surcharge expired late April. The public utility commission rejected the renewal of this charge last week. They’ve opted to hear the case again later this year.

On top of this, over $9 million with interest and principal is owed the Commonwealth Development Agency and the Commonwealth Ports Authority.

CUC board chair Adelina Roberto appeared to disagree with the urgency of the debt to CDA, noting that CDA has not expressed a desire to be blamed for rate increases.

“It just doesn’t make sense. I for one will not support the idea that we have to jack up our rate because we have to pay CPA or CDA. It’s been there, it’s been sitting there for the longest time,” Roberto said.

“Until this day we have not dropped a penny on that sinking fund. Maybe we should be looking into ways to create financing and start dropping half a percent on sinking fund to pay them. When we filed for that infrastructure rate, we should have anticipated all this and incorporated all this, and instead of a 2.1-cent charge we should have gone 3 cents,” she said.

She suggested that they ask CDA for a moratorium of six years that would also halt interest.

“We’ve got to start a drastic cut in our costs as well,” she added. “We can’t keep going back to CPUC saying we need a rate increase so we can start paying our debts,” she said, to which CUC counsel James Sirok interjected.

“A couple of things need to be brought back up,” the lawyer said. “Even if we put money into a sinking fund, that money that we put there have to be from our rate payers and it has to be in our rates. You’re going to have to do some balancing one way of the other. If you put that in your rates, you have to put something else out of there, if you don’t want an increase. You can’t put it in our rates and not have a raise one way or the other.

“Number two is even if we deal with the sinking fund issue with CDA for five years, the interest on the port authority debt continues to grow at 6.25 percent,” he said, to which Roberto suggest that they do a moratorium for the CPA debt as well.

“My only statement to the board as legal counsel is this: Each of you has a fiduciary duty to manage this corporation in a fiscally responsible manner. That means that it is a priority that you look at the debt service that this corporation has and do something to take care of that debt service. If you are not doing that, then in my opinion, as your legal adviser, then you are not fulfilling your fiduciary responsibility,” Sirok said.