State Of The Commonwealth Utilities Corp.

Editor’s Note: The following is the official text of the speech that Lt. Gov. Timothy Villagomez gave on April 21, 2006, at the Multi-Purpose Center in Susupe.

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Good morning! Let me begin by thanking the Legislature for including me in this Constitutional obligation to report annually the affairs of the CNMI to the Legislature. I am humbled to deliver to you today this special report on the state of the Commonwealth Utilities Corporation.

The Commonwealth Utilities Corporation signifies “life” in many different respects. Our dependence on CUC is significant and obvious.

It is the source of power that provides us with light.

It is the source of power that provides us with water.

It is the source of power that preserves our health and sanitation needs by way of managing the wastewater system.

It is the source of power that enables us to keep our appliances running.

It is the source of power that enables businesses to provide services and produce goods.

It is the source of power for the CNMI! Power lines runs through every home, every business, every building. Utilities are considered a necessity for our livelihood much in the same way food and transportation are. It affects our health and safety. Yet, the hub, the source of our residents’ utilities, has been deteriorating and is now on the verge of a complete breakdown. The woes of the Commonwealth Utilities Corporation are apparent and have trickled down to our businesses, our homes, and even potential investors. Concerns of the government and our residents are at their height and solutions are desired.

The questions are the same. How did the problems of CUC start? How and why did it escalate? What measures have been taken to stop the problem? What are CUC’s plans now to alleviate the problem? When will the residents and businesses see some relief?

The State of the Commonwealth Utilities Corporation undeniably presents you, the legislators, the Governor, myself and other public officials of the CNMI with a tough challenge. That challenge is exacerbated by the downfall in the world market and many other factors that has resulted in the negative impact on our economy, which in turn affected and continues to affect our government, our businesses, but most importantly the residents of the CNMI. The entire Commonwealth is depending on us to implement solutions that will bring relief to our residents, our businesses, and even our government. As elected leaders, I have no doubt that we will neither refuse nor disregard our duty and challenge to bring about such relief… not just immediate relief…but long term relief… relief to pave the way for our children, our grandchildren, and future generations. We will not shy away or cower from this challenge. We will not throw in the towel during these challenging times. We will not give up when our journey to finding solutions throws us a curved ball. We will not surrender and pass the buck to the next legislators or the next administration. We will work collaboratively and we will work diligently to end the crises that have resulted from forces outside of our control, as well as from past mismanagement. We cannot afford to lose focus. We must not get discouraged.

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Over the past few years, a combination of several factors quickly crippled CUC:

* poor operating and management practices.

* ineffective senior level management.

* micro-management from the Board of Directors, which prevented CUC from fully implementing policies and procedures.

* rapid escalation of fuel prices.

* aging and inadequate utilities infrastructure.

* failure to utilize preventative measures causing the breakdown and deterioration of power plants.

This is how the problem started.

However, upon identifying the problems, instead of taking steps to cure the problems, they were allowed to escalate. Ineffective operating and management practices were not halted or altered. One major failure was the mismanagement of the Power Generation Division. Power plants were breaking down, yet a full-time plant engineer was non-existent. Every utility company in the region and in the mainland United States employs an on-site plant engineer and in many cases an engineering department dedicated to power generation. CUC did not. The lack of such expertise resulted in recurring problems such as journal bearing and crankpin seizures, liner cracks, overheating, and lubrication problems in Power Plant I. These are all documented in the incident and breakdown records. Still, management did not hire an engineer. Indisputably, had CUC hired an engineer without delay, our Power Plants would not be in the shape they are in today. Without a dedicated power plant engineer to establish troubleshooting procedures and to identify immediately the root causes of incidents and breakdowns, power generation staff fixed, or rather attempted to fix problems without any connectivity on the initial causes of incidents or breakdowns. In other words, the power generation staff experimented and hoped they fixed or attacked the right problem since they lacked a plant engineer to properly identify the root of the problems. Nevertheless, the power generation staff clearly deserves commendation for troubleshooting to the best of their abilities and carrying the burden of the power plants this far.

At times, CUC contracted experts to repair incidents and breakdowns. However, when such measures were taken, contractors were never obligated unless specifically instructed by CUC to establish the cause of problems that occur on the engines. Moreover, contractors excluded the power generation staff members from participating in the troubleshooting or repairing of problems, which resulted in CUC’s continued reliance on contractors.

The problems continued to escalate. Consequently, the board of directors decided in 2003 to privatize Power Plant I and Power Plant II. That decision further aggravated the problems, not because it was a thoughtless decision, but because of the subsequent actions after deciding to privatize. The growing crisis was masked knowing that once privatized, it would be the Independent Power Producer’s burden to fix CUC’s disaster. So, the following actions were taken: funds were diverted to compensate for the grossly deficient fuel payments, meanwhile neglecting the required maintenance on the engines and purchasing of much needed parts. While this decision and action may have been acceptable if the privatization of the power plants were carried through, the power plants were not privatized. Eventually, the requests for proposals for the two power plants were shelved. Monies were shuffled around and crucial components of the power division were neglected, and eventually the towel was thrown in. The result of that act was an even greater crippling of an already disabled CUC.

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Perhaps, it can be rationalized that while the decision was faulty, the board at least recognized the necessity of continuing payments for fuel. Unfortunately, shuffling of funds would only last for a short while. There was a failure to fully realize the need to gradually implement a full cost recovery by way of increasing rates to reflect the rise in CUC’s operating expenses. The power rates for the CNMI have remained stagnant from 1989 to the present. That’s 17 years. Everything else rose, including the cost of fuel, but CUC maintained the same rate: 11 cents for residential customers and 16 cents for businesses and government customers.

The consequences of stagnant power rates were obvious, but ignored. Left unaddressed.

To illustrate CUC’s fuel dilemma further, I deliver to you at this time the annual fuel bill from fiscal year 2002 to the present.

CUC’s annual fuel bill went from $27.5 million in fiscal year 2002 to nearly $59 million in fiscal year 2005. An increase of over 120 percent in a three-year period. In fiscal year 2003 and the first few months of fiscal year 2004, CUC was paying an average of around $38 per barrel. CUC’s latest tanker delivery came in at an aggregate amount inclusive of all costs associated to bring the fuel to Saipan, Tinian, and Rota at roughly $93 per barrel. This represents the highest fuel price ever paid by CUC thus far. CUC is anticipating that its fuel bill before the end of this fiscal year will reach over $74 million if the price continues its current trend. Even within the last three years, there is approximately a $47 million difference in fuel price. But remember, the power rates are still the same; the same since 1989, when fuel was even cheaper than 2003.

Fuel expenses alone account for over 70 percent of CUC’s annual budget—70 percent. Even with the implementation of the Emergency Fuel Surcharge Fee in April 2005, a fee that brings in an average of $1.2 million per month, CUC still expects a deficit between $30 – $32 million dollars before the end of the year. Even if the $2 million monthly payment, totaling $24 million annually, by the central government is subtracted from the government’s obligations under the court issued temporary restraining order, CUC will remain in the negative to the tune of $6 – $8 million. This deficit amount, however, is still deceptive, as it does not factor the costs for neither the operations and maintenance on its engines at Power Plant I nor the costs for operating and maintaining the water and waste water division, since those funds are diverted for fuel purchases.

During these times when the government revenues are decreasing rapidly, the $24 million given to CUC is not tenable considering the needs of other important government agencies such as the Department of Public Health, Department of Public Safety and the Public School System. CUC was created to be an independent, autonomous agency. That means that it should have been self-sufficient. The central government should not have had to step in and bail out CUC and in the process allow other critical agencies to suffer.

But it did. It did, because the measures taken by CUC once the problems became a disaster was what can be referred to as the band-aid approach. Temporary and unreliable! Not an attempt to “cure” the problem, but to temporarily stop the hemorrhaging. Out of sight, out of mind.

The delayed maintenance and overhauls resulted in power generation staff responding to problems as they arose. Instead of performing preventive maintenance on the engines, the generation staff was responding to more of a breakdown reactive maintenance.

Most of the generators have exceeded their Preventative Maintenance Interval schedules, with some units exceeding 25,000 hours. In particular, one of the generators at Power Plant I was last overhauled nearly seven years ago—61,000 plus running hours.

The consequence of delaying the much-needed maintenance escalates with the amount of overdue hours. This means generator components and parts are most likely past the reconditioning stage and need replacements. A very costly practice. Even more difficult today with the price of steel and fuel having gone up drastically in the last few years and the demand for the same generator parts by other utilities in our region and throughout the world.

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How has all this affected our CNMI families and business? To properly outline how consumers have been affected really encompasses all branches of CUC. Power Generation, Power Distribution, Water, and Wastewater. All utilities are dependent on power to produce water and move wastewater through the distribution, collection, and treatment processes.

Whenever CUC takes any feeder system down as a result of power plant problems, all areas are immediately impacted. Wells do not produce water; sewer lift stations do not operate and begin to overflow onto streets and residences, which translates to health hazards and environmental concerns.

The business community, both small and large, represents a significant portion of CUC’s customer base—roughly 56 percent. The obvious loss in revenue and income by businesses is difficult to quantify.

Still, CUC’s operations have a great impact on commerce and economic growth and development. The supply and stability of public utilities and infrastructure is a big factor on whether or not investors ultimately decide to invest in the CNMI. CUC is generally one of the first government agencies that potential investors gather information from. Questions and concerns are usually centered on the ability of CUC to provide stable and constant power, water, and wastewater services.

At the moment, there is about 15MW of unconnected load within the CUC power distribution system. The majority of these unconnected loads are large resort hotels and a handful of garment factories. The reasons that these hotels and garment factories self-generate have generally been the perceived cost of self-generating versus the cost of power from CUC, and the reliability and quality of power supply from CUC. This is unacceptable. CUC must be able to accommodate those commercial customers.

The domino effect of the band-aid approach to this point is dreadful. Criminal activity rises when there are power outages. Businesses lose revenues, which in turn lessen government tax collections. Residents become ill due to food spoilage in their refrigerators, lack of water for their sanitary and hygiene needs. The list is endless. The hospital sees a rise in sick individuals, government functions are interrupted, tourist activities are compromised.

With the collaborative efforts of our legislators, our governor, myself and CUC, we must “cure” the problem, not continue to cover it up with a “band-aid,” cross our fingers, and hope that it holds.

At present, CUC maintains eight engines at Power Plant I, six at Power Plant II, and 10 at the privately managed Power Plant VI in Puerto Rico.

All the generators have a combined installed capacity of 116MW. However, because of maintenance issues and various engine problems, only 69MW is available as of today. Power Plant I has a design capacity of 81.24MW, yet, the present operating capacity is only 53MW. This represents 65 percent of installed capacity at 100 percent fuel consumption.

With the peak load on Saipan averaging at approximately 64-65MW, CUC is in a very precarious situation with practically no reserve capacity: a forced outage at any of its engines would cause CUC to immediately implement load shedding, or worse, cause an islandwide blackout at any given moment. The reserve capacity margin of CUC’s peak load at the very least should be between 15-20 percent. Because most of the larger units take weeks and even months to overhaul or maintain, in practice the reserve margin should be even higher.

In addition to not having enough generating capacity, half of the engines at Power Plant I are more than 20 years old, with Engines No. 1, 2, and 3 more than 25 years in service. This means half of the engines are nearing the end of their practical service life. This also means that they do not burn fuel and provide power as efficiently without some costly upgrading and rehabilitation.

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So, now that the crises have been presented, what is the solution? Where is the relief for our residents and businesses?

In order to stabilize the engines and recover some additional capacity, there are several immediate plans that CUC will be initiating in the next few weeks that will bring immediate results and benefits.

CUC will begin performing an immediate but phased in approach to repairing and overhauling all of the eight engines at Power Plant 1. This approach means that CUC will be overhauling and repairing one engine at a time, completing the project, and then moving on to the next engine. This will immediately improve the availability of the plant and greatly improve the plants capacity. CUC at the moment is in the process of thoroughly reviewing a proposal from a regional expert in the generation business that will recover as much as 20MW in a short period of time.

Because CUC has practically no reserve capacity, shutting down any one of the engines at Power Plant I will immediately force CUC to begin load shedding. Because this is unacceptable, it is for this very reason that the Administration and CUC entered into an emergency contract to immediately rehabilitate and repair all six of the EMD engines at Power Plant II. These engines originally scheduled for decommissioning are over 30 years old, with some of the engines down since 1994. With only two de-rated engines running and producing only 3.4 MW, they have been used primarily for emergency back up only because of its inefficiency. However, once this project is completed CUC will have an additional 10-12MW of capable reserve/back-up capacity. This will then allow the contractor for Power Plant I to safely shutdown any of the larger engines to begin the phased in repair and overhauls. CUC anticipates Power Plant II’s project to be completed before the end of next month.

By repairing and rehabilitating the larger more efficient engines at Power Plant I, CUC will be able to mitigate immediately some of the high fuel costs. In addition to the engines, improving the radiator cooling and lubrication systems of all eight engines will bring back more fuel savings and efficiency. If CUC implements just these two items, CUC could realize monthly savings of nearly $500,000 each month in fuel and lubricants. More importantly, just by implementing these repairs, CUC would realize a significant increase in reserve/ back-up capacity.

Once Power Plant I is operating at full capacity or at least 85 percent, meaning 67MW, the industry norm, Power Plant IV and Power Plant II can then be placed on reserve status, thus lowering CUC’s fuel and operational costs, translating to immediate savings to CUC, the Administration, and ultimately the ratepayers.

This outlines the short-term solution.

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The long-term solution to ensure reliability and efficiency for uninterrupted continuous power supply requires constant expertise and capability to keep up with the required needs and preventative measures of CUC. Tinian’s power plant is managed and operated by a private company, and Tinian does not share Saipan’s and Rota’s disaster. Saipan and Rota should also enjoy the same uninterrupted utility service that Tinian enjoys. Therefore, to prevent another disaster in the years to come, privatization of CUC’s power generation must be explored and implemented.

A gradual rise in utility rates is also inevitable given the rising cost of fuel versus the stagnant rate of 1989. No company can run with expenses exceeding revenues. Not even CUC. Rates must change given the almost 200 percent price increase in fuel since 2003. Imagine how much its increased since 1989.

Senators, Representatives, we are elected for four and two years respectively to accomplish our duties. Nevertheless, we must strive not to live out the duration of our terms to tackle and bring resolution to this disaster. We must cure this disaster sooner. We must move on to cure other issues to bring about a better Commonwealth of the Northern Mariana Islands.

I implore the legislators to do their part. Now is the time to turn into laws House Bills 15-55 and 15-64. Let’s create a commission whose duty will be to conduct rate studies so utility rates may be adjusted accordingly. Let’s authorize CDA to write off loans to CUC. Passing these bills and turning them into laws will bring relief to CUC, which in turn will bring relief to our consumers. It will once again allow CUC to obtain credit for required and necessary purchases, and it will also make the CNMI attractive to investors and tourists.

We may be at a low point, but this low point begs for our union; our joining together to strengthen and serve the CNMI. Your home, my home, our children’s home, and the home of many, many more generations to come. It’s time for a new CNMI.

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Timothy Villagomez is the Lieutenant Governor of the Commonwealth of the Northern Mariana Islands.