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OPA report blames elected officials, board members for CUC mess

THE actions of the Legislature, various governors and boards of directors have made it difficult for the Commonwealth Utilities Corp. to succeed, according to a draft report of the Office of the Public Auditor.

According to the report:

“Despite [an] impressive revenue growth over 27 years of operations, CUC demonstrated only six fiscal years where operating revenues sufficiently funded its operating costs. CUC’s inability to recover its costs and related organizational weaknesses have resulted in the following conditions (financial data based on CUC’s Sept. 30, 2014 audited financial statements):

“• CUC reported a deficit of $76.5 million, despite a debt for equity swap with [the Commonwealth Development Authority] of $170.5 million in 2009, and the receipt of $135.0 million in federal grants since 1988;

“• For various reasons, governors have kept CUC under emergency declarations since 2005;

“• Due to a lack of progress, the federal government has had oversight of various CUC operations via the stipulated orders;

“• The CNMI government and related agencies owed CUC in excess of $20 million;

“• Historically, CUC has been unable to pay required dividends to CDA;

“• Historically, CUC has not been able to timely hire or retain personnel for required management positions; and

“• Due to non-compliance, CUC has accumulated court stipulated penalties of $36 million.”

OPA said that over a 30-year period CUC has shown that,in its current form, the entity “is barely sustainable and is obviously inefficient. What we have witnessed is a series of failures, which have ultimately required government bailouts affecting the general fund, Marianas Public Lands Trust, and the CDA, to provide for emergency generation and other operations. These bailouts enabled CUC to continue, but at major financial cost and with disruption of services.”

OPA said CUC “consistently operates as an unsustainable public entity, unable to recover its cost of operations and struggling to retain qualified executive officers. CUC has experienced numerous emergency declarations and executive orders by the executive branch and endured repeated modifications of laws that continually fail to address long-term solutions. Additionally, CUC has survived several non-transparent attempts to privatize the production of electricity and water on Saipan, and suffered the intervention of federal authorities in its operations.”

OPA added, “To continue to assume that a politically appointed board of directors whose members are required to have minimal qualifications and who are subject to the orders and influence of the Legislature and the governor will lead the corporation to success and sustainability is to ignore the realities of CUC’s financial condition and operations.”

CUC’s sustainability, OPA said, “is critical to the future well-being of the commonwealth; as such its success should not be jeopardized by political patronage and an ineffective corporate model.”

OPA said “political influence and intimidation has affected [CUC] board and management decisions.”

A review of board minutes and other related documents, OPA added, “shows that various boards either failed or experienced difficulty upholding their fiduciary duties because of political pressures.”

Moreover, boards have been “directly involved…in the daily operations of CUC.”

Contrary to best practices, OPA said, “various boards have involved themselves in the management of CUC, creating ineffective relationships, which either led to the removal or departure of key personnel.”

According to OPA, “CUC’s history of operating losses due to inadequate utility rates, significant customer accounts receivable balances and its 1993 default on its substantial debt to CDA demonstrates CUC’s financial incapability of incurring new debt. However, various boards pursued major projects despite CUC’s struggling financial condition. A review of board minutes reveals that past and current boards lack an official strategic plan to guide management in making effective decisions.”

OPA said CUC was supposed to possess the powers of a public corporation and operate as a business in order to be independent of all legislative appropriations.

“In this way, CUC’s decision making and service capability would no longer be limited to the financial constraints of a legislative budgetary process. However, subsequent legislation affected the operations and hindered CUC from achieving self-sustainability.

“A review of the laws indicated that the legislative response to the soaring cost of oil during the early 2000s did not focus on the necessity of rate increases. Instead the Legislature attempted to undermine any increase in CUC’s rate and fee structure, and directly affected its operations….”

Governors have had “a continuing undue influence on boards of directors, particularly when the central government is both a major consumer and the largest debtor of the utility   corporation.”

OPA said “this is further complicated by the governor’s constitutional authority to declare an emergency and issue executive orders. Currently, the issue of executive orders has been upheld by the courts. We believe it is illogical for declared emergencies to be considered emergencies if they were caused by the actions or inactions of the Legislature and governors.”

In 2005, OPA said, “the financial deterioration of CUC, among other reasons, led to the next emergency declaration. CUC’s state of emergency continues to the present, with the most recent E.O. 2016-11, which cites CUC’s fiscal and technical worker crisis.”

OPA said “the fiscal crisis concerns the unpaid balances owed by government agencies to CUC, an event created by a lack of historical appropriations by governors and the Legislature to support the Public School System and the Commonwealth Healthcare Corporation. The technical worker crisis was identified and legislated in 2007 through P.L. 15-108, and is now further complicated by recent actions of the U.S. Citizenship and Immigration Services. In essence, CUC, various governors, and the Legislature have had nine years to resolve this issue but have made no significant progress.”

According to OPA, “No other CNMI autonomous agency has experienced this degree of legislative and executive branch interference.”

OPA recommends that the administration and the Legislature “promptly and diligently consider a revised corporate form for CUC.”

OPA said the following are “proven models” that could be considered to replace the current political structure of CUC: cooperatives; a municipal corporation that allows for the direct election of the board of directors, which then hires the executive director to run the organization; and  privatization.

A private firm, however, will “require a return on investment, which would typically create a higher rate structure, unless offset by efficiencies. Unfortunately, the CNMI’s and CUC’s track record of attracting qualified investors and conducting such transfers 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.”

Source: Marianas Variety : http://www.mvariety.com/cnmi/cnmi-news/local/94567-opa-report-blames-elected-officials-board-members-for-cuc-mess

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