‘$10M fuel credit could violate law’

The House leadership has warned that Gov. Juan N. Babauta and the Commonwealth Utilities Corp. may be violating the Constitution for entering into a $10-million loan with the Bank of Guam—to address the current emergency power situation—without legislative approval.

Vice Speaker Timothy Villagomez, who is chair of the House Committee on Public Utilities, Transportation, and Communications, said the $10 million letter of credit that the administration obtained from BoG last week is a public debt.

“In essence, the governor and the CUC are incurring a public debt, which has not been sanctioned by the Legislature as required by Article 10, Section 3 of the Commonwealth Constitution,” said Villagomez in a May 23 letter to CUC executive director Lorraine A. Babauta.

He defines a letter of credit as “an instrument under which a bank, at a customer’s request, agrees to honor a draft or other demand for a payment made by a third party, as long as a draft or demand complies, with specified conditions.”

Press secretary Pete A. Callaghan clarified, though, that what the governor obtained from BoG was a standby letter of credit.

“It is not a letter of credit per se. It is a standby letter of credit. It’s different. It doesn’t mean that we’re going to use the money. It means that if we have to, the Bank of Guam would guarantee it. Right now, there is no intention of using that money, but it offers guarantee to Mobil that they are going to get paid,” said Callaghan.

He said this gives the CNMI government a better bargaining position with Mobil for a long-term fuel contract. He stressed that there is no intention of using the BoG money because there are other funds available within the government under the emergency declaration.

“The standby letter of credit is an immediate relief to let the Mobil know that there’s money behind our words,” he added.

Lt. Gov. Diego T. Benavente and governor’s consultant Adam Turner, who are spearheading negotiations with Mobil, could not be reached for comments as of press time.

Notwithstanding the governor’s state of emergency declaration at CUC, Villagomez said a public debt may not be authorized without the affirmative vote of two-thirds of the members of each house of the Legislature.

“Moreover, granting the CNMI government’s full faith and credit to BoG…requires legislative approval. These events have not taken place and the governor and CUC may be acting in violation of the CNMI Constitution,” said the lawmaker.

A copy of the BoG’s $10-million “standby letter of intent” showed that the money would be used to purchase fuel. It says that 50 percent of the amount is payable upon signing and the balance will be issued over three quarters at a 1.5-percent fee per annum.

The agreement lists that the first lien would be set against all business assets, including the revenues of CUC.

The agreement, which was signed between Babauta and BoG executive vice president and chief operating officer William D. Leon Guerrero on May 20, a day after the governor declared the state of emergency, provides that the borrower will deposit sufficient revenue into an account with the bank to cover 30 days of fuel cost.

It also calls for the “subordination” of the Commonwealth Development Authority’s loans to the Bank of Guam.

The bank also requires the borrower to submit an audited financial statement no later than 120 days after the fiscal year ends.

The agreement also calls for an issuance of an opinion from the borrower’s counsel and the CNMI Attorney General’s Office stating that the loan is legal and binding and does not violate any existing agreements or laws.

It also asks for legislative approval “if necessary.”

Further, the agreement requires the CUC to review its fuel cost in January 2006 and quarterly thereafter and pass any increase of fuel costs “to the ratepayers” by the end of each quarter.

The agreement also provides that the CUC will negotiate a long-term payment with its fuel supplier on prior billings.

The administration resumed negotiations with CUC’s oil supplier, Mobil Oil Marianas Inc., for a long-term fuel supply contract.

Last week, the parties had discussed how to address payment of CUC’s $8.5-million debt to Mobil, which the utility firm incurred over the course of its two-year contract with the oil company.

Last Friday, the government partially solved CUC’s emergency fuel needs by getting Mobil to commit to deliver 1.4 million gallons on June 2, 2005. The delivery is expected to provide CUC enough fuel to run its power generators through June.

The governor’s declaration of a state of disaster emergency resulted in him assuming control of CUC last Thursday for a period of 30 to a maximum of 90 days. This gives the governor the authority to reprogram all available funds to respond to the emergency situation.