An avalanche in the horizon

I fully anticipate reading a headline on the Saipan Tribune in the near future titled Avalanche hits CNMI. Let me explain the rationale for this. Apparently the majority of our Commonwealth Utilities Corp. board of directors have never lived in an alpine or mountainous environment; otherwise they would have given greater thought to the severe consequences that the fuel surcharge rate increase will have on the CNMI’s economy. Experienced alpine residents know very well that some snowballs commence their downward journey from the mountaintop as small objects, but by the time they reach the bottom, they can become devastating avalanches! That is precisely what the CUC board of directors has set in motion by implementing the rate increase and passing this directly onto the consumers. While the need for this rate increase is patently obvious, what with oil prices escalating daily, the method by which this increase is being passed on will be detrimental to the economic well-being of the entire CNMI. It appears that the CUC board and our elected leaders have not considered the adverse impact of the rate increase on all CNMI residents. A trend known as “the multiplier effect” is about to be unleashed on our already fragile economy. To explain such, permit me to prognosticate and set the economic scenario in the CNMI one year from the rate increase. Keep in mind that our economy is more closely intertwined than other similar demographic regions in the U.S. mainland, the CNMI is an insular economy, and even more so when sub-insular regions such as Tinian and Rota are factored in. The economies on Tinian and Rota do not have the flexibility to spread adverse economic trends over a larger population base and economic area and a slightly more diverse economy such as that on Saipan. So the multiplier effect will be more dramatic and pronounced in those islands.

Within the first quarter after the implementation of the increase, businesses in the CNMI will review their financial statements, and take obvious notice of the dramatic rise in their utility costs. A business such as a supermarket or department store with substantial utility costs for lighting, refrigeration etc., will now have no alternative but to pass this utility increase on to the consumers through price increases on staple goods, primarily food items. Similarly, other businesses will also pass this utility increase on to their clients and customers, the list of which encompasses all types of businesses currently operating in the CNMI, including everyone in the alphabet from accountants to zoos. As most businesses in the CNMI do not automatically provide annual wage increases to their employees or provide inflation-indexed salary increases, the CUC rate increase will be a two-fold blow to the average family in the CNMI. The consumer will incur a higher monthly utility expense, thus reducing disposable income, while the same consumer will have to contend with substantially increased prices in food items and other related expenses. Gas, the new set of clothes for the children, that extra case of beer or soft drinks, cable TV, insurance, and nonessential or so-called luxury items will have to be cutback or eliminated altogether.

I would expect that savvy CUC consumers have already implemented power saving measures in their residences and businesses, which will alleviate some of the rate increases. However, the impact of this will be lower kilowatt usage and demand and a resulting revenue decrease for CUC, who without substantially reducing operating costs, will have to implement further rate increases to offset this revenue decrease—a classic never-ending downward spiral! We can anticipate further rate increases in the 5–10 cent range. The consumer will then have no option but to further reduce expenditures for basic items and this will have an effect on business providing or selling such. Many businesses will then experience a noticeable reduction in gross revenues, (less gross revenue taxes for the government!) putting the businesses and the government in a position where they will both most likely implement cost-cutting measures that realign their bottom line. The most utilized method by which to realize a positive bottom line is reduction in force (RIF) or a reduction in weekly work hours. These soon-to-be-unfortunate ex-employees will still have to contend with the increased cost of basic items, and most likely will have to stretch their monthly food stamp allocation even further. Government revenues, already threatened with the impending reduction in tax revenues from garment businesses, will suffer dramatic decreases in BGRT, excise duties and income tax collections, thus causing substantial budget shortfalls throughout all government departments. The result of which will be further reductions in force or most likely reduced hours for government workers. This again will have a multiplier effect, in that these “RIF’d” or “32 hours a week” employees and their families will still have to purchase basic items at the CUC-rate-induced higher prices. I don’t know of any situation where a wage earner can fully explain to his or her children that, because the weekly wage has been reduced by 20 percent, children will have to eat 20 percent less per week! Keep in mind that the nonessential or luxury items will already have been eliminated from the family expenditure, so basic food items will be the only alternative source for cost-cutting measures.

Most likely, those employed in the visitor industry and peripheral businesses will be the least affected in that these companies will be able to offset the utility rate increase with these higher rates passed directly on to items or services purchased by the visitors, who may well not notice such due to the declining dollar-yen/won exchange rate. For hotels and restaurants, they will have to wait till yearend to negotiate next year’s room and meal coupon rates with tour wholesalers and hope for the best. In the meantime, they always have the RIF factor to cushion their bottom line. While the abovementioned scenario will be damaging to Saipan’s economy, it will be utterly devastating to Tinian and Rota, which are much more reliant on their own self-generating or internal dependent economies and do not have the luxury of having a substantial safety valve tourism sector to absorb severe and immediate economic downturns.

While world oil prices are out of the control of CUC—and this is one of its major costs—I would welcome reading about their cost-cutting plans in other aspects of their operations. Most of the recent publicity reported in the news media has mostly concentrated on the rate increase issue. Are there studies and recommendations on possible and realistic cost-reductions available? Without a thorough and concise review of operational costs and implementation of cost-reduction measures, I fear that CUC will continually reach for the easy way out of their financial situation, namely constant rate increases on a quarterly or semi-annual basis. While CUC publicly berates the CNMI government for failing to pay its utility bills and using such as a pretense for the rate increase, we should consider that the CUC is in actuality a part of the government. Granted that it has an autonomous veneer; however we really are just talking about moving bills from one pocket to another on the same trouser. What is urgently needed is a complete top to bottom, side to side review of the total broad economic impact this rate increase will have, and implement measures throughout all sectors of the CNMI economy, both private and public, to satisfy CUC’s needs and mitigate the effects of such rate increases on the businesses and general public.

John White
Chalan Piao