‘CUC payments to CDA would require rate hike’

The preferred stock agreement between the Commonwealth Utilities Corp. and the Commonwealth Development Authority has created a new obligation for the utility agency—an obligation that would require a rate hike to pay for the required dividend payments.

The dividend payment structure was integrated in the rate application filed by CUC with the Commonwealth Public Utilities Commission in January, just before CPUC shut down due to the lack of commission members.

The CPUC had denied the proposed rate hike as a result of the testimony of CDA executive director Manuel Sablan, who testified against the electric base rate hike due to its negative impact on the economic and commercial development of the islands.

“We won’t have the ability to make any dividend payments until we have an opportunity to meet before the commission again and make another request for a rate increase to cover dividend,” said CUC chief financial officer Charles Warren.

Warren and deputy executive director Alan Fletcher on Friday attended the CDA board meeting to take part in an “informal” discussion about CUC’s financial ability to meet its dividend payment obligation.

Based on the agreement between the two, CUC is expected to start making its dividend payments to CDA for the former’s $45 million liability converted into preferred stocks.

The agreement also gave CUC a three-year dividend deferral period to allow the agency to set aside funding for its dividend payments, which is expected to begin on Oct. 1.

Warren explained that CUC, as a public utility agency, is obligated to submit rate applications based on generally accepted ratemaking standards, which are used as basis for setting rates endorsed by CPUC.

He said CUC uses the “cash basis” standard wherein the agency is only allowed to recover its cash expenses within the “test year” or the 12-month period following its rate application. Included in these cash expenses are operating expenses, capital outlays, and actual debt principal and interest on existing obligations and those that are to be incurred in the test year.

With this rate structure, CUC could only recover costs, pay debts, and establish operating reserves without generating any profit or revenue, Warren said.

“We have rates to cover our cost. We don’t have any rates to give us a profit. So there is no excess,” Warren told the CDA board.

Fletcher, for his part, underlined that CUC is in a “tenuous” position. “We are literally living week to week. We have no working capital, we have no financial reserves.”

Although CUC projects to earn an estimated $45 million in fiscal year 2013, its operating expenses are estimated at $42 million, according to Warren.

Fletcher pointed out that the $3 million balance is earmarked for non-operating expenses, resulting in “a balanced budget where revenues equal expenditures.”

Warren emphasized, “Whatever we do, we’re just going to have to get it from our ratepayers, one way or another.”

Board member Marcie Tomokane argued that it would be unfair for the public if CUC would increase its rate just to accommodate the dividend payment obligation.

Board member Diego Songao recommended that CUC employ cost-saving measures like investing in a permanent building instead of renting one. He also raised concerns about CUC’s new vehicles.

Both Warren and Fletcher emphasized that CUC continues to work on efficiencies and that most of its capital programs, including the majority of their new vehicle purchases, are grant-funded.

Warren pointed out in an email response that CUC rates are essentially limited to recovering costs. Even if the agency is able to lower its costs, the commission would require the rates to be reduced to eliminate any “profit” from which the dividends could be paid, he added.

The two agencies mutually welcomed the recommendation that CUC pay dividends to CDA, and the payments will then be reverted to CUC as CIP funds.

While this is a “potential” solution and has “significant” merit, Warren said there is a need to identify the mechanism to generate sufficient funds for the initial dividend payment and legislative approval assuring dividend payments.

“What is important, and it was clear to me, that the CDA board and staff are anxious to work with CUC on this matter and do so in a way that minimizes any impact on rates. We sincerely appreciate CDA’s cooperation and their concern for ratepayers,” Fletcher told Saipan Tribune.

Both agencies agreed to formulate a plan by June and present it to the Legislature in July.