Trying to understand the CNMI power crisis

About four or five years ago—during the second-half of the administration of former governor Juan Babauta, the CNMI began experiencing the start of what has now been a continuing power crisis. The Commonwealth Utilities Corp.—the autonomous agency charged with managing and operating the power utility—began experiencing problems, both internal and external in nature. The external problems had mostly to do with what-we-now-know as the start of what has been a continuing and unrelenting increase in the price of crude oil worldwide for at least four to five years now.

Unable to purchase fuel for the CNMI power plant based on the utility rate being assessed power customers at that time, the CUC had to do something to cope with the start of the continuing increase in the price of crude oil since. The utility agency made the “politically unpopular” decision to raise the utility rate, by about 50 percent (a hefty one-time increase at the time) and decided to call the increase a “surcharge.”

Not accustomed to having any utility rate increase for about 10 years previously, the public outcry over the “surcharge” was immediate and loud. The gubernatorial campaign for the 2005 general election seized on the power surcharge issue as one of its battle cry, and the rest is history, as they say. The Fitial Administration was elected to office by the slimmest of margin in CNMI history, on its promise to do away with the CUC surcharge. It did “abolish” the surcharge, but in name only because it immediately increased the power rate to one that was even higher than the previous rate and surcharge cost combined. On this, there is no question that the Fitial Administration failed to deliver on its campaign promise. The reason for this, of course, was that it was a promise that no one could fulfill.

The internal problems that facilitated the CUC power crisis we have been experiencing for a long time now, as many of us know, are several. They range from the issue of competence (on the part of the CUC board and management officials and, to some extent, its professional staff), the failure to follow sound business practices, and the apparent lack of proper planning for the short and long term growth of CUC. The agency appears to have had no realistic goals and objectives to strive for and to achieve. It also appears that CUC did not have any well-thought out policies and procedures to guide the agency and to implement during times of emergency and crisis. As a result, CUC officials dealt with the power crisis with “off-the-cuff and on-the-spot” decision-making, where the margin of error is clearly much greater than if emergency plans were in place.

To compound CUC’s policy-making and management problems, politics interfered many times with respect to how CUC was being run and managed. Such political interference and intrusion has continued to the present. Created as an autonomous agency in 1985 pursuant to Public Law 4-47, and intended to be financially self-sustaining and operated as if a privately-run public utility, CUC in practice came nowhere near what CUC’s enabling legislation intended it to be. CUC, for all practical purposes, became a “political agency” and was treated as such by the two political branches. This fact has been one of CUC’s biggest internal problems since it was created twenty years ago.

So what went wrong? Who is at fault? And what can be done now to alleviate the power crisis that we suffering from? To answer these questions we need to look at the overall problem at CUC and try to come up with the reasons why CUC has failed, and then propose realistic solutions that every resident could understand and appreciate.

Like most problems we encounter in life, we need to first flesh out the issues as simply as we can, and then come up with proposed solutions that are realistic and makes good sense. We cannot find solutions to our power crisis if we continue to squabble among ourselves. We should not allow the power crisis to develop into a situation similar to that of the Tower of Babel, with everyone shouting at each other with frustration and each one of us offering different solutions, all at the same time. On a ship that is sinking, the captain alone has to give the orders, unless he is incompetent as Captain Bligh was on the HMS Bounty.

As noted earlier, there are several fundamental reasons for the CNMI power crisis. Many of them are fairly obvious and could easily be resolved. For example, the matter of board member competence simply requires the governor to begin appointing board members who have the necessary expertise and background experience in running a public utility. He may have to disappoint his political cronies and supporters, but in the long run the general public would be well served. The same is true with the hiring of the management officials and key professional staff for the power utility. These people should be hired based on expertise, and not for political reasons. If these two recommendations were implemented, the CUC will hopefully start acting as it should–independently and competently. CUC, as a public utility firm, has not performed well during the past five to 10 years, to put it mildly, because of these two internal problems.

The legislation establishing CUC has not been adhered to and followed for some time now, as the spirit of that law intended. Public Law 4-47 intended CUC to be an independent, autonomous instrumentality of the CNMI government. Independence, by definition, means just that: no outside interference by the political branches. Other than making and confirming appointments to the CUC board, the political branches have no business telling the CUC what to do. If it turns out that the board appointees are incompetent, such reason is a cause for removal by the governor, under the NMI Constitution.

In order to have a reasonably good picture of some of the other reasons for the continuing power crisis, we have to look back at the 23-year history of CUC. We need to have some historical perspective to understand how the CUC started, how it has been managed and operated since 1985, and what eventually caused its failure to cope with the power crisis that began in earnest about five years ago.

For the first 10 to 12 years after its creation—from 1985 to about 1997 (the “first phase”), things went fairly well at CUC. Even as the CNMI population grew and the demand for power increased, CUC was able to manage and operate the power system without much difficulty during its first decade of existence. (The water system is another story for another day.)

During the first phase of CUC, there was still enough money generated by the agency to buy fuel without difficulty. There was no power crisis of any sort except for the failed CUC-Enron affair, which cost the CUC several million dollars trying to plan for a much larger power plant that never materialized. (The Enron proposal failed to materialize, as many of us know, without CUC showing anything positive for the fairly large expenditure of public funds.) Indeed, during this period, it was our next door neighbor, Guam, which was having a serious power crisis. Guam eventually fixed its power problem, but about the same time the initial problem at CUC started with what I would refer to as small cracks in the system. These “hairline” cracks, as engineering professionals refer to with respect to structural defects, were policy and management issues pertaining to board member and management staff competence. It also relates to the agency’s neglect in carrying out power plant maintenance and repair work, effectively and on a regular basis. As government administrations changed every four years, these minor problems started getting bigger. Until about five years ago, however, these problems were still “under control.”

The problems got bigger during the latter part of CUC’s “second phase,” starting from about 1998 to about 2004. During this phase, CUC started having some difficulty paying for needed maintenance and repairs of the power plant. Most of the money that CUC was generating was now being used to purchase fuel for the power plant and for payroll. Fuel purchase alone was costing CUC several million dollars annually. The agency started relying on legislative appropriations for its capital repair and maintenance needs. But when reliance on legislative appropriations began, CUC’s independence as an autonomous agency started getting compromised. Political interference (which was not a real problem during the first 10-12 year phase of CUC) started to encroach in the affairs of CUC. The political branches started injecting themselves into CUC matters. Now quite dependent on the central government for funding, CUC was not able to operate and manage its affairs independently, as was intended by its enabling legislation.

As we all know, “the person who controls the purse calls the shots.” Like the banks and other lending institutions who give out loans, in the case of CUC, the Legislature and the Executive branches were in effect calling the shots for CUC. It is not clear though whether any conditions were set for the appropriations given CUC. At any rate, a dilemma arose as a result of this. Here is an autonomous agency, at least as far as the CUC law is concerned that, in practice, is not acting independently. Because it is no longer financially self-sustaining as was intended by its enabling legislation, it was incumbent on the political branches to ask the CUC what was going on. This question was apparently never asked, as the government continued to give CUC what essentially amounted to bail-out money. If the CUC could not operate the power utility system efficiently, effectively and reliably, then its purpose and ability to function should have been investigated by the Legislature and the Public Auditor. It was at that point that the possibility of privatization should have been raised; not now when all the power generators are beginning to malfunction and break down.

Instead of inquiring as to the reasons why the power crisis situation arose, the Executive Branch simply declared an emergency and took over the operations of the CUC. In light of the several executive orders removing the power of the CUC board, there has been, in practice for several years now, no autonomous agency running the power, water and sewer utilities. All of the functions of the CUC are being run by the Executive Branch for about five years now. In practice, therefore, there is no longer any CUC, the autonomous public corporation that was established by Public Law 4-47. One could argue theoretically that the CUC law has not been repealed, so there is still a CUC. Well, the sad fact is that both political branches have been acting and carrying on as if the CUC law enacted is no longer there. Indeed this legal and practical confusion regarding CUC, as a functioning agency, should be cleared up once and for all by the Legislature—by repealing the CUC law if this agency could no longer carry out its mandate independently.

The “third phase” of CUC is the “power crisis phase” that we have been in for several years now. As noted at the beginning of this paper, the crisis began about four or five years ago. When the economy of the CNMI started going under with the departure of the garment industry, the pullout of Japan Airlines, the start of the increases in the cost of fossil fuel and the start of the general decline in government revenue, the CUC board and management appeared to have been completely at a loss regarding what to do and how to cope with the crisis. Government revenue had started to decline dramatically, and CUC was no exception. The dramatic rise in the cost of diesel fuel needed to operate the power plant took the CUC board and management completely by surprise, or so it appeared.

Unable to cope with its financial shortfall, CUC instituted the surcharge mentioned earlier, which immediately became a political issue. Charges of incompetence and waste of public funds were leveled against the CUC board and management. Some of the charges appear to have basis, but the real reason for the surcharge was clearly the substantial increase in the cost of fuel. To validate this point, we have seen, over the past four years, a similar dramatic increase in the price of gasoline at the pump. A gallon of gasoline used to cost about $2.50 four years ago; now it has risen to almost $5 a gallon, a 100-percent increase. A barrel of crude oil used to cost about $50-$60 per barrel; it has since rose steadily to what is now $140 per barrel—an increase of almost 200 percent. All of these are economic facts that we are confronted with. It is, therefore, incumbent on each consumer to decide how much power usage it could afford. It is not an easy thing to do; but like any commodity, electricity based on fossil fuel has gotten to be a very expensive commodity.

Most of us could understand now that as the price of crude oil keeps rising, the power rate will keep increasing. Very few of us could argue with this point. The general public is pretty well resigned to that fact. The problem is that many of us can no longer consume the amount of power that we used to, five years ago. But having said that, most of us simply cannot understand why the CNMI government cannot run the power utility in an efficient and effective manner; in terms of quality of service, reliability, and cost effectiveness. The perceived attitude of the power utility toward the general public regarding the power crisis is “tough luck; you’ll just have to bear with it.” Such was apparently the reason why the public was literally up in arms last week over the constant and continuing, unannounced power outages. When power utility customers are paying a premium price for the cost of electricity, we should no longer be having two-to-four power outages during the day and at night, every day. If a consumer is paying a premium price for power consumption, then the power utility has an obligation as a public utility firm to provide quality service that the customers are entitled to and deserve.

The absence of reliable, efficient and quality service has now been the real cause of the public frustration with the power utility—not so much the power rate. Can the government get its act together? Apparently not, and this has been the source of much of the public frustration against the CNMI government. The power blackouts have nothing to do with the price of crude oil; it has everything to do with expertise and competence in managing and operating a reliable power utility system.

If the CNMI government cannot operate the power system efficiently, effectively and reliably, then the time has come for the power utility system to be privatized. It should be done, no question about it. Between the two concerns of reliability of the system on one hand, and the cost of power on the other hand, system reliability clearly takes the upper hand. It is time, I am convinced, for the government to privatize the CNMI power utility system. The privatization of the power utility is long overdue. But when we do take the steps to privatize the power system, let’s do it right the first time. Let’s not cut corners in the process (or compromise the bidding process) that would later come back to haunt us. [I][B](Jose S. Dela Cruz)[/B]

Jose S. Dela Cruz is a former justice of the CNMI Supreme Court.[/I]