An open letter to Gov. Juan N. Babauta

It is with great sadness and surprise that I find it necessary to write this letter, but I believe the good people of Saipan deserve an explanation of some of the real reasons for CUC’s present condition. As a chemical engineer with 35 years experience in both petroleum and power generation, I have the technical qualifications to make the statements below.

It is with sadness because, as a resident of Saipan now opening an office in China, I know the affects rolling blackouts and higher electric prices are having on the poor people on Saipan and the businesses trying to survive in an already depressed economy.

It is with great surprise to me that your administration allowed CUC to get into its present condition when you had several viable alternatives presented to you over the past four years. As I have personally explained to you, the Lt. Governor, many Legislators, to CUC board members and executives during those years, that without certain changes, the condition CUC is now in today would occur if certain steps were not taken in advance to prevent it from happening.

It did not take a mental giant to predict what would happen if CUC maintained the course it was on two to three years ago. But no one was listening.

No one took any action on the alternatives, except to allow our company to remove about 200,000 gallons of waste oil. Both current fuel suppliers currently marketing on Saipan (who brought the oil to Saipan and sold it initially) refused to take it back. But due to our concern for Saipan’s fragile ecology, we removed it from Saipan about two years ago.

As you know, among the alternatives our company presented to your administration, the Legislators and CUC were:

We bid for the CUC fuel supply in 2002 and our bid was “not considere” because it was deemed “unresponsive” due to a technicality in the manner it was written. Our bid was about $1 million a year lower than the competition.

In 2003 and 2004, we presented several proposals regarding how CUC could save money and use the savings to begin replacing their generators. We even brought a representative from two different refineries (a year apart) to explain a plan to you, the Legislature and CUC. The CUC board was supposed to meet with us as well, but they declined our invitation to meet.

The then congressman Salas sponsored two meetings, attended by about 30-40 people, including Legislators and CUC board members and executives proposing that they accept our proposals and follow our advice, but nothing happened except that everyone got a free lunch and had a good time.

Some of these proposals centered on using a fuel that both Korea and Japan power plants use almost exclusively, called “LSWR.” It costs less than heavy fuel oil, which has 5 percent sulfur (which, according to the newspapers, is now being considered by CUC as an alternative for diesel), and it only has 0.5 percent sulfur. I’m sure you know that Saipan DEQ’s sulfur regulations state that the fuel burned in the power plant must not exceed 0.5 percent sulfur. Heavy fuel does not meet their regulations.

Using LSWR would have saved CUC about $500,000 a month, or about $6 million a year. But no one was interested.

Our proposals showed how the savings could be used to replace all of the existing generators and pay for them in full in less than year. If this had been done 18-24 months ago, as we proposed, the people of Saipan would not be suffering today.

The new generators would have used 50-percent less fuel per kilowatt than the present generators, thus, after they were installed and paid for, CUC’s total monthly savings over buying diesel fuel from its present supplier for its present generators would have been about $800,000 a month. But no one was interested.

Some of our proposals showed how to use part of the savings to remove the waste oil in tank 104 (about 300,000 gallons as I write this even though the DEQ’s regulations limit the storage of waste oil on Saipan to a total of 275 gallons), restore the tank to meet International Industry Standards and use it either to increase CUC’s fuel storage or to store gasoline.

We proposed the gasoline be used to supply the government’s fleet of vehicles, saving your government about $500,000 per year in fleet fuel costs. But no one was interested.

There were seven companies that picked up CUC’s RFP for fuel supply last January. There was only one company that bid, which is CUC’s historical supplier. I do not know why the others did not submit a bid, but we did not because the RFP was written in such a way that it was totally one-sided and only the current supplier could have won the bid.

CUC was not interested in getting the lowest cost fuel and a way to replace their aging generators, some of them installed in 1979. They were looking for a way to maintain the status quo.

After you declared a State of Emergency, before a supply contract was signed with the current supplier, I flew from China to Saipan and met with the Lt. Gov. Diego T. Benavente and presented yet another proposal as to how we could save over $500,000 a month. He listened, but did not consider our proposal as he eventually agreed to sign the current supplier’s supply contract. He did not even answer a letter sent to him on the subject.

We even offered to bring in an emergency spot load of diesel at about $0.20/gallon less than CUC was paying then, to take the pressure off of your Administration and put your Administration in a better bargaining position. As it was, negotiating with a sole supplier who kept threatening to cut off the fuel gave your Administration no bargaining position or leverage at all.

We also recommended that the CUC supply be split between two suppliers. Almost every large power plant in the world uses two or more suppliers because it insures uninterrupted supply. In addition, they use the supplier who has the lowest price to force the other supplier(s) to reduce their price to match the lowest priced supplier. In this manner, they have bargaining strength. But no one was interested.

What benefit will privatization provide? As I understand it, the private company must spend money for new generators, yet, they must buy the fuel from CUC who will buy it from its present supplier at its present supplier’s high prices. They will be squeezed even worse than CUC was squeezed by the fuel prices because they have to invest money and get a return on it.

Both companies interested in taking over CUC are publicly traded companies. Their shareholders will demand a profit from invested funds.

Since at least one company will borrow the money to capitalize the venture, they will have to pay interest on the money in addition to making a return on it, which means they will have to make a greater profit than if they capitalized it internally.

As a private company, they must make a profit, yet, it will be a losing proposition for them if they have to invest money unless they either they reduce their costs by changing fuels and suppliers or, if they are bound by the supply contract CUC signed recently, they must raise the cost of electricity to the people of Saipan.

My understanding of the supply contract CUC signed recently states that CUC has to buy fuel from the current supplier regardless of whether they privatize. If that is the case, then the private company is bound by the pricing formula CUC agreed to.

If they cannot lower fuel costs, then they must raise electricity prices to recover their investment. Switching to heavy fuel oil (if the DEQ permitted it) alone will not be sufficient. As you must know, heavy fuel must be heated to pump and CUC’s heating system is not operational. They need about $1 million to make it operational.

I am sorry to have to write this letter, as I know you to be an honest, intelligent man, and a most capable administrator. I question whether those around you are. There are still avenues open for you to bring in lower cost fuels and also get new generators if you choose to take them.

I am in China opening an office because I spent more than four years trying to help CUC from getting into the position it now finds itself. I failed, so I gave up and I am dealing with the Chinese who appreciate saving money.

Richard Reddy
CEO, Pacific Petroleum