‘CUC should consider revising corporate structure’

The CNMI Office of the Public Auditor said in a draft audit completed last month that the Commonwealth Utilities Corp. is unable to operate as an independent public agency due to interferences by Legislature, various governors, and past board of directors.

The audit, obtained by Saipan Tribune yesterday, covered a review of the CUC legal structure, management practices, financial performance, and other relevant documents from 1985 to the present.

The OPA found that CUC is better off with a total overhaul of its corporate structure and recommends that CUC be revised as a cooperative, municipal corporation, or private entity.

CUC under a cooperative corporate structure calls for the election of a board of directors by the users of the utility. Any profit obtained by the users would be paid back in the form of dividends. The cooperative corporate structure has seen its success in Hawaii as the Kauai electrical cooperative.

OPA wrote that the municipal corporation is similar to CUC’s current legal structure and allows for the direct election of the corporation’s board of directors, which in turn hires the executive director to run the organization. According to the OPA, this structure has seen some success in Guam.

Privatization, the last and definitely the least recommended by the OPA, was seen as an alternative since it was allowed under current law. It was, however, noted by the OPA that the legislative mandated value of the assets are unrealistic at $259 million.

With the privatization of CUC, the OPA predicts that a higher rate structure would be seen.

Also taken into consideration by the OPA in regards to the privatization of CUC is the CNMI and CUC history of attracting qualified investors and conducting the transfer of authority and assets in a transparent and accountable manner is “very uncertain.”

“This model would also require a highly experienced and legally able public utility commission to monitor and regulate the rate structures,” wrote the OPA.

The draft audit was sent to CUC board chair Adelina Roberto and CUC executive director Gary Camacho. CUC was given 30 days since then to submit their response but it is yet to be known whether CUC has issued a formal response on the audit.

CUC might have been destined for failure

CUC documents from 1985 showed that various interferences have affected its sustainability. According to the OPA draft audit, “the Legislature, despite requiring CUC to recover all costs through an adequate rate structure, passed laws that did not provide CUC with sufficient autonomy to do so and, on occasion, legislated rate and fee reductions.”

Mistakes on previous board members also contributed to the inability of CUC to financially sustain itself. CUC is mandated to adjust its rate structure so that collections sufficiently recover the cost of operations and delivery of utility services. However, a review of the CUC revenue performance done by the OPA indicates that utility rate levels have been insufficient to recover the full cost of operations since Fiscal Year 1988.

In light of CUC’s failing financials, past CUC board members still pursued major projects.

CUC reported a deficit of $76.5 million despite forgiveness of the Commonwealth Development Authority amounting to $170.5 million in 2009. CDA agreed to an equity swap involving the forgiveness of accumulated interest and principal development loans in return for preferred stock issued by CUC to CDA.

The OPA also mentioned the influence of past governors. CNMI governors retained the authority to appoint the members of the CUC board of directors. Over the years, OPA found that CUC board members have begun submitting courtesy resignations at the election of a new governor, providing governors with continuing influence over the CUC board.

The governor’s ability to declare emergencies and issue executive order further strengthens the governor’s influence to the CUC board. According to the OPA, emergencies allowed governors to provide emergency infusions of funds to CUC, suspend procurement regulations, override personnel legislation, effectively suspend the CUC board, suspend the Commonwealth Public Utilities Commission’s regulating authority over CUC, initiate procurement contracts, and appoint CUC’s executive director with full authority for CUC. For various reasons, governors have kept CUC under emergency declarations since 2005, wrote the OPA.

“No other CNMI autonomous agency has experienced this degree of legislative and executive branch interference,” wrote the OPA in the draft audit.