February 20, 2009

The Kaselehlie Press

Pohnpei, FM - On January 8, 2009 Deloitte and Touche released their independent audit findings of financial activities of Pohnpei Utilities Corporation for fiscal years 2007 and 2008. They found no material weaknesses in financial reporting at PUC.

Included in the audit is a management discussion and analysis of the factors that caused changes in the financial standing of PUC. The document which was prepared by PUC management says that the existing tariff was approved in 1996 and should be revisited and reformed.

According to the management discussion, in 2008 PUC cut back on salaries by nearly a quarter of a million dollars. They realized a total reduction in expense of nearly $900,000 but those measures were still not enough to keep the corporation from suffering a loss.

Previous audits have shown that PUC has been operating at a loss nearly every year for at least a decade. Last year's surge in fuel prices didn't help the corporation to improve that situation though in 2008 the loss was $2.7 million while in 2007 the loss was at over $3 million for the year. These losses were despite significant PUC cutbacks in all other categories of expense.

Customer demand fell by over 7% in 2008 but in that year PUC collected total power revenues of $12.6 million, up from $10.1 million in 2007. The increase in revenue was due to the fuel tariff that PUC had to charge its customers per kilowatt hour. The average fuel tariff per kilowatt hour in 2008 was 34 cents, up from 23 cents in 2007. Customers paid as much as 51 cents per kilowatt hour in 2008.

In 2008, operating revenues at PUC were $13.8 million before the corporation was forced to write off over $200,000 worth of bad customer debts. It cost PUC over $16.2 million to provide utilities service in Pohnpei.

According to PUC management it cost the utility 52 cents on average to produce and sell one kilowatt hour in 2008 but they charged an average of 44 cents. It also cost $2.42 to produce and sell 1000 gallons of clean water but the utility charge and average of $1.80 per 1000 gallons.

PUC says that there are several factors that caused the cost versus price disparity.

By regulation PUC does not charge customers for depreciation expense which costs them 5 cents per kilowatt hour produced and $1.05 per 1000 gallons of clean water delivered.

Based on the U.S. consumer price index costs are 40% higher since 1996 when the current approved tariff rate was set. PUC says that because of inflation tariff reform is overdue.

Saying "PUC encountered rough times paying the high cost of fuel in 2008," PUC management was forced to dip into its current assets like investments and the cash they had in banks to make up the difference.

By charging a fuel tariff PUC is supposed to recover its fuel costs but in 2008 they collected $1.6 million less than the $11.5 million it cost them for fuel.

PUC's ramshackle office building in downtown Kolonia and the utility's shortage of spare parts such as transformers give evidence that maintenance funds have been necessarily diverted to cover the cost of fuel. Often when transformers fail in one area of Pohnpei repair crews have been forced to remove transformers from poles in places where there are no customers before they can repair the problem adding hours to the repair process. Currently a brand new transformer for residential service costs the utility $1,215.

PUC said that the cost of lubrication oil and solvents is not built in to the fuel pass- through tariff that changes when the cost of fuel changes. They said that last year they spent nearly $400,000 on lubrication oil and solvents. PUC said that they are experiencing technical and non-technical line losses of 20.4 percent.

An expert on the subject of utilities delivery not associated with PUC said that technical line losses occur in every electrical service system and that those losses are just a function of the resistance of the lines and in the transformers. A portion of the power is lost due to resistance and is instead converted into heat. He said that in a well maintained system technical line losses usually amount to less than 5%.

He said that other line losses can occur when power services are incorrectly installed which can cause the meter to register lower power usage than is actually being provided. Other types of line losses include theft of power when meters are completely bypassed by customers. He said that a typical well maintained utility in the United States experiences combined technical and non-technical line losses of around 5%.

The fuel used to produce the power that is lost through technical or non-technical line losses is not billable to a customer and the cost is not recovered by the tariff.

Of the 6,363 customers who have meters in Pohnpei only 311 (nearly 5%) commercial and government customers still have conventional meters. Those customers consume 46% of PUC's annual sales. PUC says that it was only on July 1, 2008 that PUC reduced the billing cycle for those customers from 90 to 45 days. In times of increasing fuel prices those customers are charged a cheaper fuel price than the actual cost of the fuel. They say that this is another factor that contributed to the mismatch of current revenue and fuel expense.

PUC management projects that 2009 will be financially better. They say that when the world oil price hit $147 per barrel in July 2008 they were paying $5.12 per gallon of diesel. As of January 8, 2009 PUC was paying $2.42 per gallon.

"Since the world oil price has fallen below $40, PUC anticipates its price to go down as far as $1.39 per gallon if prices are influenced only by the world market price and the price per barrel remains the same for the rest of the year."

They say that if that happens they could save as much as $8 million.

Because fuel costs saved are passed on to customers under the approved tariff regulations any savings would not affect PUC's balance sheet. However, because PUC would reduce the cost of power charged to its customers there is a potential for non-fuel revenue sales to increase next year. Non-fuel revenues fund PUC's operations.