Gcg Vs Cost of Debt

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					   G E O R G E T O W N C O N S U L T I N G G R O U P, I N C.
                              7 1 6 D A N B U R Y R D.
                          R I D G E F I E L D, C T. 0 6 8 7 7

Jamshed K. Madan                                                      Telephone (203) 431-0231
Michael D. Dirmeier                                                    Facsimile (203) 438-8420
Edward R. Margerison
Jean Dorrell

November 4, 2009

Harry M. Boertzel, Esq.
Administrative Law Judge
The Commonwealth Public Utilities Commission

Re:    Evaluation of the CUC Filed Interim Financial Plan (IFP)

Dear Judge Boertzel:

In a transmittal dated October 15, 2009, you directed Georgetown Consulting
Group, Inc. (GCG) to file a report on the Commonwealth Utilities Corporation’s
(CUC) Interim Financial Plan (IFP) made on September 29, 2009 pursuant to a
Stipulated Order approved by U.S. Federal District Court between the Department
of Justice (DOJ), Environmental Protection Agency (EPA), and CUC. You indicated
this report should address the requirements set forth in the Commonwealth
Public Utilities Commission's (CPUC) September 3, 2009 Docket 09-2 order and
other matters GCG considers appropriate.

This report discusses key components absent in the IFP as filed by CUC and
required by paragraphs 48 and 49 of the Federal Stipulated Order, which would
be useful in: i) enhancing revenue; ii) reducing unreasonable expenses; and iii)
providing information necessary to set just and reasonable rates (revenue cycle
audit, timely filing of financial data, unaccounted for commodity losses, timely filing
of detailed annual budgets, compliance with regulatory orders, etc.)

GCG’s Initial IFP Review

We have reviewed the CUC filing of an Interim Financial Plan (IFP) made on
September 29, 2009 in Federal District Court, which was intended to enable CUC
to comply with stipulated requirements for the restoration of its water and
wastewater systems pursuant to Federal District Court’s Stipulated Order No. 1
dated March 11, 2009 in USA vs. CUC and CNMI. Attachment A is an excerpt from

the Federal Stipulated Order and is a restatement of paragraphs 48 and 49 which
describe the requirements for CUC’s preparation of the IFP. In the limited time
available to GCG between the September 29, 2009 filing in Federal District Court
of the IFP by CUC, we have conducted the following analysis and provide herein
our initial observations

Our review of information contained in CUC’s IFP filing with EPA, as well as
recently provided CUC data (i.e., limited financial worksheets, water department
billing cycle information), indicates that there have been significant changes in
the projections for sales of water services1 and other projections for the water
and wastewater departments since our original filing and recommendations made
in this docket in testimony submitted on March 6, 2009 which adversely impact
our previous findings. While the IFP as filed by CUC does make detailed and
reasoned projections of Water and Wastewater Departments operating expenses
and Stipulated Order requirements, other areas of the IFP are unmistakably
deficient. In particular:

    1. Revenues have not materialized to the extent forecast earlier. This is a
       result of declines in the number of Water Department customers and
       commodity sales, water metering issues, and the impacts of the current
       world-wide recession. No attempt was made to adequately project
    2. Additional levels of debt have been identified for the Wastewater
       Department that was not disclosed in the earlier proceeding. CUC
       indicated that changes are currently being negotiated to these obligations
       that have not been reflected in the IFP. For certain debt,2 a large portion of
       the payment is assumed to come from the Electric Department, which we
       believe is not acceptable and violates local law3 and the clear intent and
       requirements of the Stipulated Order.
    3. Changes in personnel and operating expenses have occurred related to the
       initial implementation of certain Stipulated Order requirements and the
       passage of time. These have been reflected in the initial IFP.
    4. The IFP does not include capital improvement projects (CIPs) that CUC
       either has in process or scheduled for FY 2010 through 2012. We
       requested and received estimates of these CIPs from CUC on October 21,
       2009. Funding sources for these CIPs is not certain and in many cases no
       source of capital funds has been identified.
    5. The IFP as filed by CUC implies that the CPUC and EPA should simply
       accept and endorse significant cash subsidies over a period of at least four
       (4) years from the Electric Department to the Water and Wastewater
       Departments for power expenses and administrative and general
       expenses. We have not reviewed fully this proposition but believe it
  This also impacts wastewater customers as they are billed on the volume of water purchased.
  Debt owed by CUC to the Commonwealth Port Authority.
  4 CMC § 8411[c]

       violates the legislative directive of 4 CMC § 8411[c] and EPA requirements
       pursuant to the Federal District Court Order that there be no cross subsidy
       between CUC’s various operating departments.

We have examined the IFP requirements contained in paragraphs 48 and 49 of
the Federal Stipulated Order as shown in Attachment A and present our
compliance assessment in summary form in the table below. This table lists each
of the requirements of paragraphs 48 and 49 (those dealing with CUC’s
requirement to provide EPA an IFP) of the Federal Stipulated Order and as shown
in Attachment A.

Our review found that, while meeting the requirements of section 48 and 49 of
the Federal Stipulated Order which deal with Water and Wastewater Department
operating and maintenance expense related activities, CUC failed to meet the key
requirements of the Stipulated Order dealing with determining user fees and
revenues to support operations, other sources of capital to support capital
investment, and power plant facility oil management. Specifically, we found CUC’s
IFP filing to be devoid of any definitive and/or detailed information concerning
how CUC intends to finance the day-to-day operations, maintenance, and capital
needs of its water and wastewater systems in a manner necessary to meet the
requirements of the Clean Water and Safe Drinking Water Acts.

A fatal flaw contained in the IFP is the continued reference by CUC to the use of
subsidies from the Electric Department—which currently is unable to meet its
own capital needs—even though the use of subsidies from the Electric
Department appears to be inconsistent with existing CNMI law and the
requirements of the Federal Stipulated Order itself. Shown below is a compliance
matrix showing each area within paragraph 48 and 49 where CUC fails to meet
the requirements of the Federal Stipulated Order.

                          CUC Compliance Assessment
Stipulated Order: IFP Requirements                        Satisfied   Unsatisfied
Paragraph 48—Interim Financial Plan
 Submit IFP within 180 days of Entry Date                                  
 Master Plan preparation:
   Detailed cost breakdown                                  
   Funding source identified and secured                                  
 Financial management plan (sufficient revenues for):
   System operation and compliance activities               
   Kagman wastewater treatment plant planning and
   Power plant facilities oil management                                  
   Oil spill prevention and response                                      
   Existing and expected debt service                       

                   CUC Compliance Assessment (continued)
Stipulated Order: IFP Requirements                              Satisfied   Unsatisfied
Paragraph 48—Interim Financial Plan (continued)
    Section 49 financial reserve (debt service & operations)                   
    Rate structure adequate to generate sufficient revenue                     
 Detailed schedule of expenses for each IFP calendar year:
    Projected expenses for personnel, staffing, operations,
     maintenance, repair and accounting.
    Identify how annual expenses will be covered                               
 Annual budgets during IFP term adequate to finance O&M:
    Detailed breakdown of projected costs and reserves            
    NEPA related costs for Kagman plant & system
    PP facilities oil management costs, pipeline repair and
     Stipulated Order #2 compliance
    Detailed implementation schedule for user fees, rates,
     or taxes/other revenue sources to meet projected costs
    Management plan to ensure that revenues are used
     solely for water and wastewater system expenses.
Paragraph 49—Financial Reserves
 Financial Reserves for implementation of Master Plan:
    Debt service reserve fund                                    N/A          N/A
    Emergency O,M,R&R reserve                                                  

Substantial inadequacies exist in the IFP submitted by CUC to EPA. These
deficiencies and inaction by CUC have potentially exposed CUC and its ratepayers
to the risk of receivership and have the potential to create a vacuum between CUC
and its customers (i.e. a total lack of local governance and consumer input to CUC
policy and operations). We recommend that CPUC proactively fill this void by the
adoption of a regulatory plan that will enable CUC to meet its water quality and
financial obligations under the Stipulated Order. Further, we believe the
collaborative model that the CPUC has attempted in the recent past has not been
effective. We recommend in moving forward that the CPUC’s actions be fully
documented, objectively oriented to meet specific goals for CUC, and less focused
on a strict collaborative approach to implementation of its findings and
recommended implementation activities.

EPA’s IFP Review

EPA’s review of CUC’s IFP filing is summarized in an October 16, 2009 letter to
CUC (see Attachment B) wherein its voices serious concern with CUC’s lack of
compliance with the Federal Stipulated Order. EPA concluded in its letter to CUC
that the IFP as submitted by CUC is incomplete and not in compliance with the
requirements of the Federal Stipulated Order. In its letter dated October 16,
2009 EPA states the following:

       Paragraph 48: CUC has not yet submitted the complete Interim
       Financial Plan required under Paragraph 48. You indicated you
       were still working on the IFP and had obtained some input on it
       from the consultant of the Commonwealth Public Utilities
       Commission (CPUC), Georgetown Consulting. On September 26,
       2009 CUC emailed a partial IFP submission to EPA, without a cover
       letter. During the September 30, 2009 call, we reiterated our
       request that CUC provide a cover letter with each submission,
       confirming that it is the company's official submission and that
       copies have been sent to all the designated parties. On October 1,
       2009 CUC hand-delivered the partial submittal with a cover letter to
       EPA. The partial submittal does not satisfy the requirements of
       paragraph 48 and provides no date for when CUC will submit the
       complete IFP. As stated in our September 25, 2009 correspondence,
       stipulated penalties began to accrue on September 25, 2009 and as
       of October 16, 2009 have amounted to $22,000.

We are concerned that EPA makes a specific reference on page two of its October
16, 2009 letter (excerpt above) to what appears to be a CUC representation that
GCG is somehow involved in crafting the IFP for CUC. To the contrary, CUC made
the decision not to have GCG involved in the development of the IFP document
filed with EPA. Since CUC failed to engage in the collaborative process outlined in
the Hearing Examiner’s April 24, 2009 scheduling memo, GCG's role has been
limited by the Commission's September 3, 2009 Order in Docket 09-2 to
preparing this report, which: a) critiques CUC's September 26, 2009 filing;
b) proposes a regulatory process by which the CPUC should conduct rate
proceedings during the three-year interim term; and c) any other items we find

EPA has voiced urgent concerns about critical deficiencies of the IFP (i.e., waste
oil management) and has imposed significant stipulated penalties that if CUC is
required to pay can only be funded by water and wastewater rates approved by
the CPUC.

Summary of Findings and Next Steps

   1. The October 16, 2009 letter from EPA is stark and clear. It is voluminous
      and cites numerous violations and non-compliance with the requirements
      of the Stipulated Orders. Our reading of the situation is that the lack of
      compliance is a crisis and the substantial inadequacies evidenced by CUC’s
      lack of compliance, of which the non-compliance of the requirements of the
      IFP are only one item, have put consumers at risk to pay for significant
      fines and consequences of potential receivership. We have stated before if
      this were to occur, as in Guam with the landfill situation, there will be
      significant consequences including the payment of receiver fees in addition
      to the payment of potential fines that have been estimated by EPA to have

        accrued to $634,000 through October 16, 2009. Control of the compliance
        process will be shifted from local governance to the Federal Courts and a
        receiver—all of which could have a significant detrimental effect on CNMI
        general fund revenues and/or CUC ratepayers. In the October 16, 2009
        letter EPA summarized as follows:

                 The Stipulated Orders were extensively and carefully
                 negotiated between the parties and judicially approved in
                 March 2009. CUC's noncompliance with the Orders during
                 the first six months after the entry date has been alarming.
                 CUC must immediately fulfill its obligations under the
                 Stipulated Orders in a complete and timely manner.
                 Stipulated penalties are accruing for the above violations.
                 While this letter is not a demand for payment of these
                 stipulated penalties, EPA is currently evaluating our next
                 steps for enforcement of the Orders.

    2. CPUC, we believe, can and we recommend should play a major role in the
       review and completion of the IFP that EPA has stated is inadequate and for
       which CUC has not provided a completion date. We observe many of the
       elements of preparing an appropriate IFP are identical to those elements
       that we have already identified in our companion letter on the
       requirements to determine what further rate increases are necessary.4
       Later in this report we will propose a schedule for the various elements
       and when put together, a complete IFP. As stated in the recommendations
       in the companion letter the following should be undertaken consistent
       with an overall management plan under the direction of CPUC and the
       Hearing Examiner, all of which impact the development of an appropriate
       IFP in determining reasonable revenues, expenses, capital projects,
       determination of financing required and rate increases:

             a. Obtain meaningful and accurate accounting and financial data that
                has been requested previously of CUC:

                  i.  FY 2008 audited statements as well as monthly financial
                  ii. FY 2009 monthly and YTD annual financial statements with
                      individual statements for each of the electric, water and waste

 A rate increase for consideration by the CPUC for implementation in the November regulatory session
was originally scheduled by the Hearing Examiner. Given the lack of compliance by CUC to earlier
CPUC Orders to implement water and waste water rate increases ordered to be implemented July 1,
2009 and September 4, 2009 and the lack of information provided by CUC to assist in the determination
of an appropriate rate increase, we recommended that no rate increase be implemented during the
November regulatory session. Some preliminary analysis was undertaken to determine the scope of
what the proposed rate increase would be was undertaken and provided in a letter to the Hearing
Examiner on October 21, 2009.

          water departments.       The procedure for allocation of
          administrative and general expenses was collaboratively
          established with CUC (with the assistance of Deloitte) in the
          March rate proceeding, but to our knowledge has not been
          applied since then.
   iii.   Updates of billing determinants for FY 2009 such as number of
          customers and usage by class of customers for each
   iv.    Fully documented operating and capital budgets for FY 2010.
    v.    Updates of the financial statements for the approved
          implementation of the Commonwealth Development Authority
          (CDA) agreement for the conversion of the original loan to
          preferred stock.
   vi.    Updates of arrangement between CUC and Commonwealth
          Port Authority (CPA) regarding a debt obligation of CUC to CPA
          that has not to date been recorded on CUC’s accounting
          records. The terms for repayment of the loan should also be
          reviewed and approved by the CPUC.
  vii.    Updates of the arrangement for payment for the settlement
          related to the Agingan outfall should also be presented to the
          CPUC for review and approval.

b. Operations review of the wastewater system to determine whether
   customers are connected to the system where it exists and is
   required by statute and CUC rules and regulations. There are
   approximately 2000 customers currently being billed for
   wastewater service; however, it appears likely that a larger number
   of customers are actually connected to the wastewater system.
   Such an operations review has the potential to discover unknown
   connections to the wastewater system. To accelerate the process of
   finding connected, but unbilled accounts, we recommend
   consideration be given to the implementation of some form of an
   amnesty program enabling these unbilled connections to become
   regular customers of CUC without penalty if such conversion takes
   place in a period of say 60 days. After which any customers
   discovered by CUC to be connected to the system, but unbilled
   would be required to make restitution in accordance with existing
   CUC service rules and regulations.

c. Current CUC practice for customers with meters that do not have a
   visible reading, but that can nonetheless be read correctly and
   accurately by meter readers, categorize these customers as non-
   metered customers and they are then billed on the basis of an
   estimated usage of 6000 gallons for residential customers and
   18,000 gallons for commercial customers. This situation appears to
   result in a significant loss of revenues for CUC since the estimated

     figures currently being used for billing these customers are less
     than the average usage in each of these rate classifications. We
     recommend that alternate solutions for this issue be studied and
     presented to the CPUC during the March regulatory session.

d. A review of the current rules and regulations for other than the
   issues listed above should also be undertaken to update and
   modernize the rules and regulations and make them more efficient,
   equitable, and transparent. This should be provided to the CPUC
   during the March 2010 regulatory session for review and approval.

e. CUC efforts to ensure accurate billing for customers should
   continue unabated; however, must be accelerated. As part of the
   revenue cycle audit previously stipulated to consideration should
   be given to outsource these efforts to specialty personnel and/or
   firms having the appropriate expertise. Attachment C outlines the
   key elements of a recommended revenue cycle audit which should
   be implemented immediately and the results considered during the
   March 2010 regulatory session.

f. Previously a detailed review of the revenue cycle has been
   stipulated to and should be implemented as soon as possible based
   on the scope and principles contained in the stipulation. Efforts
   that were initiated to obtain partial funding from EPA, OIA, or
   others should be pursued. A key portion of this exercise should be
   an evaluation of the accounts receivable and the implementation of
   a program to collect and reduce the balance. Connection and
   disconnection policies should be reviewed and appropriate
   recommendations be made during the March 2010 regulatory

g. The development of a financing plan including an analysis of
   whether external financing will be needed during the term of the
   IFP. This analysis should determine when CUC will need to access
   capital markets, capital required, timing and alternate sources of
   capital. The financing plan should identify obstacles to CUC
   assessing capital markets (liquidity, full cost-recovery, lack of
   corporate governance, current state of emergency).

h. Identification of the requirements associated with the Federal
   Stipulated Order and cost of such requirements.

i.   Development of an appropriate IFP as required by the Stipulated


    3. In undertaking the “next steps” identified above we recommend that
       consideration be given by the CPUC to establishing a Scheduling Calendar
       for the various tasks above in this November 2009 regulatory session. We
       offer the following for CPUC consideration:

             November 2009 Regulatory Session

                CPUC accept GCG report and findings concerning the current status
                 of the IFP and the deferral of further FY 2010 rate relief including
                 lifeline considerations
                CPUC adoption of process to revise, approve, and implement a
                 viable IFP for EPA reconsideration
                CPUC should review and act on the GCG May 18, 2009 letter and
                 recommendations (Attachment D) regarding proposed reporting
                 CUC requirements, which will enable CPUC to monitor and confirm
                 CUC compliance with CPUC Orders and requirements that water
                 and wastewater increase be implemented and revenues dedicated
                 and used for specific purposes.6

             March 2010 Regulatory Session

                CPUC to consider initial FY10 rate relief, including targeted water
                 and wastewater lifeline rates
                Commission review and action on GCG recommendations for
                 revision of CUC water and wastewater service rules and regulations
                CPUC review of report(s) on CUC’s revenue cycle and unaccounted
                 for commodity losses.
                Review of potential near-and long-term financing alternatives and
                 rate implications.
                Review of CUC water/wastewater FY10 CIP budget per contract
                 protocol order, including GCG initial report on need, timing and
                 obstacles to external financing of capital projects
                CPUC review of IFP revision and implementation activities
                 developed by GCG

             June 2010 Regulatory Session

                CPUC review of final reports on revenue cycle and commodity
                 losses and issuance of implementation orders

  The development of the IFP will contain much of the data in the presentation of three consecutive
annual rate filings.
  The May 18, 2009 letter has been attached as Attachment D for convenience.

             September 2010 Regulatory Session

                Rate proceeding regarding necessary FY11 water/wastewater rate
                 relief, CIP ceiling
                CPUC review of IFP and revenue cycle audit implementation

      4. Given the EPA October 16, 2009 letter regarding lack of compliance, it is
         clear that CUC has not developed and presented to EPA an IFP that meets
         the clear requirements of paragraphs 48 and 49 of the Stipulated Order as
         contained in Attachment A.

If you wish to discuss the report, please do not hesitate to call us.


Jamshed K. Madan

Cc:      Anthony Muna, Exec. Director, CUC
         Alan Barak, Esq, Counsel CUC
         Robert Torres, Esq. Counsel GCG
         Larry Gawlik

                                Attachment A
                        Interim Financial Plan Excerpt

                      STIPULATED ORDER NUMBER ONE


48. The Interim Financial Plan ("IFP") shall be submitted to EPA within one
    hundred eighty (180) days after the Entry Date and shall include, but not be
    limited to, the following:

   a. A detailed breakdown of the costs associated with preparation of the
      Master Plan, including sources of funding to ensure adequate preparation
      of all preliminary assessments;
   b. A financial management plan which can generate sufficient revenues to
      cover drinking water and wastewater operations and compliance
      activities, planning and design of the proposed Village of Kagman
      wastewater treatment plant, the proper management of oil and used oil
      from the PP Facilities, oil spill prevention and response activities, as well
      as any other anticipated related expenses, including all existing debt and
      expected debt service and the build-up of a financial reserve, discussed
      more fully below, including the establishment of a rate structure to
      generate sufficient revenues, until development of the Final Financial Plan
      based on an approved Master Plan;
   c. A detailed schedule of all projected expenses for each calendar year that
      includes all components of budgeting, including, but not limited to:
      personnel and staffing; operations; maintenance; repair; and accounting.
      This schedule shall spell out how these expenses will be covered through
      the calendar year; and
   d. The Annual Budget, designed to ensure adequate financing of operation
      and maintenance, repair and replacement, when necessary, of CUC’s
      drinking water and wastewater systems.

      (i)    A detailed breakdown of the total projected costs for the coming year
             to operate, maintain, repair, and replace (as necessary) the drinking
             water and wastewater systems, including monies required to ensure
             adequate staffing, energy, materials and supplies, financial reserves,
             and to cover other expenses;
      (ii)   A detailed breakdown of the total projected costs to complete any
             National Environmental Policy Act review, including activities

             related to the Kagman wastewater treatment plant, within thirty- six
             (36) months after the Entry Date and production of final engineered
             designs for the collection system, treatment operations, conveyances
             and outfall within sixty (60) months of the Entry Date;
     (iii)   A detailed breakdown of the total projected costs for the coming year
             to ensure the proper management of oil and used oil from the PP
             Facilities, conduct infrastructure repairs at the PP Facilities and the
             CUC Pipeline and to maintain compliance with the Stipulated Order
             Number Two;
     (iv)    A detailed schedule of how to implement user fees, taxes,
             assessments, or other sources of revenue to guarantee that CUC can
             meet the projected costs as set forth in the budget for the coming
             year, including increases or adjustments required to meet the Annual
             Budget; and
      (v)    A financial management plan ensuring that all user fees, taxes,
             assessments, or other sources of revenue collected for the drinking
             water and wastewater systems are applied to the operations,
             maintenance, repair, replacement, and compliance activities of those

49. Financial Reserves. cue shall develop the following financial reserves for the
    implementation of the Master Plan:

   a. A debt service reserve shall be established and maintained in accordance
      with bond covenants and debt service covenants. After issuing a bond or
      securing a loan, CUC shall submit to EPA information regarding the amount
      of this reserve, including an explanation of how this amount was
      determined; and
   b. An emergency operations, maintenance, renovation, and replacement
      reserve shall be established and maintained and be equal to three (3)
      months of budgeted expenses for operations, maintenance, renovation,
      and replacement of CUC's drinking water systems and wastewater
      systems. CUC shall submit to EPA for approval the proposed amount of this
      reserve. CUC must make monthly deposits to the reserve to ensure that the
      balance matches current needs. The reserve shall be used only to cover
      operations and maintenance expenses not in the original budget. This
      reserve can be replaced by the availability of an equivalent emergency line
      of credit.

Attachment B

                                      Attachment C
                                    —Work Scope—
                              CUC Revenue Cycle Assessment

This work scope has been developed in furtherance of the conditions of stipulations resulting
from prior CPUC regulatory sessions. Specific revenue cycle assessment objectives to be
accomplished in undertaking a revenue cycle assessment of the Commonwealth Utilities
Corporation (CUC) include but are not limited to:

      Assess compliance with existing rules and regulations for collection/revenue
      Measure the effectiveness and efficiency the current billing, collection, and revenue
       protection functions
      Reduce the risk of revenue loss resulting from unmetered or inaccurately metered use
       of electricity and water by customers
      Maximize CUC revenue and net margin under current rates and charges
      Recommendations for change and implementation schedule

                                       Work Program

The work program identified below is applicable to the electric, water, and wastewater
departments and shall include the following:

   1. Conduct kick-off conferences with key CUC revenue cycle personnel. Determine
      departmental contact persons and discuss the proposed work program with the
      objective to specifically identify:
         a. Potential issues
         b. Resource constraints impacting the revenue cycle audit
         c. Project schedule

   2. Initial background interviews with appropriate personnel. Document interviews.
      Discuss and initiate review of revenue cycle matters associated with existing CUC
      revenue programs:
          a. Discuss and document internal control systems such as control points
          b. Identify existing systems and procedures for approvals and authorizations
          c. Identify duties of revenue cycle personnel
          d. Review reconciliation of meter reading and billing system practices and issues
          e. Review reconciliation processes associated with computer generated error
              listings and exception reports

3. Overview CUC’s financial management of the electric, water, and wastewater
      a. Adequacy of monthly financial, operational and other management reporting
      b. Determine annual bad debt reserve and write-off. Calculate bad debt allowance
      c. Review monthly trend in the average number of delinquent accounts
      d. Review monthly trend in average days outstanding-receivables
      e. Summarize current level of receivables—current, 30-60, 60-90, 90-120, beyond
      f. Determine the number of active customers with receivables over 60 days
      g. Review existing service charges for reasonableness

4. Review the CUC revenue cycle
      a. Collect existing policy and procedures manual and summary of monthly reports
      b. Obtain prior internal or external revenue cycle reports
      c. Review the mission and/or management statements of CUC
         departments/divisions associated with the revenue cycle
      d. Collect revenue flow charts and related documents
      e. Identify the distribution of manuals and flow charts to individuals involved in
         revenue cycle
      f. Determine the extent of automated processes at CUC—identify process issues
      g. Assess whether revenue cycle practices are uniform on Tinian and Rota
      h. Determine revenue cycle organizational responsibilities
             i. Meter reading, billing, customer service, and so forth.
            ii. Responsibilities and empowerment of supervisors
      i. Assess the credit, delinquency collection, and bad debt write-off policies to
         ensure a minimum of lost revenues
      j. Review ongoing and recent revenue cycle training activities
      k. Contrast CUC revenue cycle to industry best and innovative practices

5. Customer information system data base
      a. Compare rate class to customer name. Each customer record should be verified
         to insure assignment to correct rate classification
      b. Identify all active customer accounts without a billing meter
      c. Review rate code assignments to each customer rate classification
      d. Identify potential miscoding of customer records to meter route
      e. Identify and remove all non-revenue producing accounts
      f. Identify the number of temporary accounts
      g. Assess all temporary accounts older than 9 months—identify corrective actions

6. Current meter reading practices
      a. Assess CUC meter reading tools, procedures, and practices

      b. Assess the adequacy of meter reading personnel empowerment
      c. Assess whether meter routes are in sequence
      d. Assess performance of meter reading process:
              i. Meter reading skip rate
             ii. Meter reading error rate
            iii. High-Low billing exception rate
            iv. Readings/day/meter-reader
             v. Out of sequence rate—corrective actions taken
      e. Assess the process for uploading readings to billing system--issues
              i. Process by which meter readers review readings and exceptions prior to
                 inputting data to billing to flag potential errors and issues
      f. Test a sample of fifty (50) accounts from the zero consumption report to ensure
         compliance with CUC policies
      g. Identify potential changes to existing meter reading processes
      h. Meter inventory procedures—are meter codes tied to billing system?
      i. Potential future role of automated meter reading

7. Current CUC billing processes
      a. Determine billing system performance
              i. Error rate
             ii. Re-reads ordered
      b. Adequacy of procedures to minimize lag between meter reading upload to
         billing system and mailing to customer—can it be reduced to no more than 3
      c. Assess CUC exception procedures for handling meter reading errors
      d. Assess CUC exception procedures for zero consumption-number of accounts
      e. Assess any ongoing processes to clean-up billing records process for the
         purpose of reducing exceptions , misbilled, or not billed accounts
      f. Review the trail billing process
      g. Review the current meter re-read process—average number of re-reads?
      h. Review customers usage and revenue for accounts requiring manual
      i. Back billing—reasonableness of current procedures and service order
         generation policies with regards to low and zero consumption readings
      j. Final billing process

8. Zero consumption and unread meter reading practices
      a. Determine the average number of zero consumption accounts
      b. Identify the actions taken to identify issues causing zero consumption
      c. Assess procedures of billing unread meters (estimated)

      d. Determine the average number of accounts where estimated bills are provided
         for two successive months
      e. Identify actions taken to identify successive estimated bills
      f. Current plans to work missed reads and billing exception listing

9. Meter tampering and current diversion policies and procedures
      a. Assess existing procedures for handling diversion
              i. Average number of incidents per discovered per year
             ii. Adequacy of procedures
            iii. Enforcement efforts and performance
            iv. Estimate revenues for penalties, fees, and commodity charges
      b. Assess potential establishment of incentive fees to find meter tampering

10. Assess current CUC payment methods and policies
       a. Identify payment plans such as pre-pay and level payments
       b. Credit card procedures and applicable fees
       c. Acceptance of debit cards and fees
       d. Identify other payment options—walk-in, auto debiting, internet, other
       e. Cost effectiveness of payment options

11. CUC customer service/collection policies and procedures
       a. Prepare ratio/trend analysis calculating:
               i. Receivable turnover ratio
              ii. Number of days' sales outstanding
             iii. Average collection period
             iv. Customer delinquency rate
       b. Compare ratio/trend analysis to prior periods and industry standards
       c. Assess adequacy of interest and fees on delinquent accounts
       d. Review adequacy of fees and overhead rates for extensions of service. Other
          construction type activities
       e. Review termination notice practices
       f. Assess late payment terminations-are they timely
       g. Identify the timeliness of how often terminations are processed
       h. Identify average number of termination processed daily
       i. Outstanding service orders—average backlog
       j. Daily average processed and closed
       k. Performance measures
               i. Disconnect processing
              ii. Final bill processing

12. Connect processing/delinquent account collection/revenue protection
       a. Assess coordination with meter reading and collection-issuing of service orders

       b. Revenue protection performance
               i. Collections—revenues and collection rate performance
              ii. Collection time
            iii. Write-off s
             iv. Administrative fees and costs
       c. Review the effectiveness of actions taken against customers violating service
       d. Actions taken to find illegal hookups and actions taken against parties.
       e. Timely use of collection agencies or small claims court
       f. Reporting to credit reporting agencies
       g. Role of the security deposit

13. Meter management practices
       a. Review and assess existing meter management practices to ensure accuracy of
          meters in the field. Are they effective in minimizing lost revenue and unbilled
          electricity and water?
               i. Existing metering equipment and accuracy
              ii. Determine frequency of testing/calibration
             iii. Determine the average error rate—in excess of +/- 2 percent
             iv. Review current programs for testing and replacement of questionable
                  meters reported by meter readers or billing personnel
              v. Replacement rate resulting from inoperative meters
       b. Review existing meter resealing program and practices
               i. Current meter sealing practices
              ii. Conduct field observation to determine compliance
             iii. Identify programs to insure meter seals are in place on all meters
             iv. Determine existing demand meter seals practices and procedures
              v. Identify needed changes to resealing program for large commercial and
                  government accounts (large users)
             vi. Consider implementation of color coding for active, disconnect, inactive,
                  tampering, medical alert, other classes
            vii. Develop a replacement cycle for all meter seals
       c. Assess large power customer accounts and metering
               i. Prepare a summary table of meter multipliers by rate class
              ii. Explore past misbillings and other problems with large power customers
             iii. Examine current efforts to reduce mistakes due multiplier errors.
             iv. Process for verifying existing PT’s and CT’s metering for large accounts
                      1. How often are meter multipliers checked?
              v. Semi-annual review process of multipliers

14. Assess unmetered street lights, highway lights, and traffic signal usage
       a. Identify metering practices, if any
              i. Number of metered accounts
      b. Billing and energy accounting practices for unmetered accounts:
              i. Number of unmetered lights by size
             ii. Current billing practices
            iii. Proper energy accounting for unmetered accounts

15. Commodity accounting (electricity and water sales) practices--Determine the extent of
    unaccounted for commodity and identify corrective actions
       a. Assess weaknesses in existing kWh and kGals commodity accounting systems
       b. Determine current loss levels
               i. Percentages of production
              ii. Total loss commodity
             iii. Value of excessive lost commodity
       c. Review ongoing loss mitigation activities-electric and water
       d. Review system to quantify authorized and unmetered uses such as streetlights,
          fire hydrants flushing, main breaks,
       e. Identify potential unauthorized losses and their revenue and expense impacts

16. Final report—Identify strengths and weaknesses of the system. Discuss areas of
    greatest risk and exposure and provide:
       a. Assessment of management practices
       b. Assessment of potential for lost revenue—calculate revenue lost
       c. Observations and recommendations
                 i. User manuals-policy and procedures
                ii. Training requirements
                       1. Meter readers
                       2. Billing personnel
              iii. Organization recommendations
               iv. Changes to revenue cycle functions
                v. Role of key accounts managers
               vi. IT functions

                                               Attachment D

           G E O R G E T O W N              C O N S U L T I N G            G R O U P, I N C.
                                       7 1 6 D A N B U R Y R D.
                                   R I D G E F I E L D, C T. 0 6 8 7 7

Jamshed K. Madan                                                           Telephone (203) 431-0231
Michael D. Dirmeier                                                         Facsimile (203) 438-8420
Edward R. Margerison
Jean Dorrell

May 18, 2009

Harry M. Boertzel
Hearing Examiner
Commonwealth Public Utilities Commission
P.O. Box 500806
CK, Saipan MP 96950

Re:     Reporting Requirements—Water Rate Increase—Docket 09-02

Dear Mr. Boertzel:

This letter report responds to the request that Georgetown Consulting Group, Inc. (GCG), pursuant
to Ordering Provision No. 4 in the Commonwealth Public Utilities Commission’s (CPUC) April 2,
2009 Decision, develop proposed reporting requirements, which will enable CPUC to monitor and
confirm Commonwealth Utilities Corporation’s (CUC) compliance with the requirement that water
increase revenues be dedicated and used for specific purposes.

GCG was directed to propose reporting requirements to assure this objective of the CPUC is
accomplished. Specifically, the reporting procedures should identify that water revenues collected
each month from the first half (April 1 increase) of the water rate increase is used for expenses
directly applicable to the water department. Likewise, once the suspended half (June 1 increase) of
the water rate increase is placed into effect this portion of the rate increase should only be used for
expenditures directly related to CUC’s compliance with the US District Court Stipulated Order,
which was entered by the United States in United States of America v. Commonwealth Utilities
Corporation and Commonwealth of the Northern Mariana Islands, Civil Case No. 08-0051 (entered
March 11, 2009)—the Federal Stipulated Order.

This action by the CPUC in its April 2, 2009 Decision is consistent with the mandates of both the
Federal Stipulated Order and section 8122(b) of Public Law (PL) 16-17 the Sixteenth Northern
Marianas Commonwealth Legislature which required CUC to implement a plan by December 31,
2008, by which it would establish rates, meter, bill and collect fees in a fair and rational manner so
that it will be “financially independent” by October 1, 2009, or as soon as possible thereafter.
Further, §8143 requires CUC to eliminate inter-utility subsidies and requires CUC to bill all
consumers—including government and all government buildings—for electric, water, and
wastewater services at not less than the full cost of production, operation, and maintenance of those
services. We interpret financially independent to mean that each utility has sufficient revenues to
pay for its reasonable operating expenses, to access external financial markets and to appropriately
fund from internal revenue sources a portion, if not all, of their required construction programs.

It is prudent for the CPUC to establish an interim reporting protocol that can be modified as CUC
develops greater financial reporting capabilities. For instance, CUC does not have a chief financial
officer (CFO), and it has had in place for a long period the practice of co-mingling all revenues
from all sources. In other words, at CUC there does not exist any physical separation of revenues
by utility function (electric, water, and wastewater departments), only the limited ability to report
on the use of funds by utility function after the fact. It will take some time to correct the state of the
fiscal and physical systems at CUC and bring it into compliance with the Federal Stipulated Order,
Public Law (PL) 16-17, and the CPUC April 2, 2009 Decision. Current executive management at
CUC is committed to accomplishing these objectives.

GCG recommends that the initial Water Department revenue reporting protocol recognize that the
water rates as approved on April 1 will only cover about 50 percent of the Water Department’s
actual expenses. The reporting process should further recognize that while expenses were allocated
between the electric, water and waste-water departments for the recent water and wastewater rate
case and separate statements of income and expenses were developed for each of the operating
departments, these statements are not currently being routinely produced on a monthly basis.
Therefore, we believe, that an appropriate starting point for the reporting protocol required by the
April 2, 2009 CPUC Decision does not currently exist.7

In addition to the above, it is also important to understand that as paragraph 8 of the CPUC’s April
2, 2009 Decision states, the full rate award (both portions) will cover only 60% of the Water
Department’s operating deficit. Given the estimated water deficit to be $5.99 million, with the first
phase of the rate increase there will still exist an annual deficit of $4.2 million. With the second
phase of the rate increase implemented, there will be an annual estimated deficit of $2.4 million. In
short, water revenues, with the approved rate increases, will not cover water expenses.

Given the continuing deficit situation we propose a Water Department revenue reporting protocol as

    1. Monthly financial reports for each department (electric, water, and wastewater) should be
       established as soon as possible and be considered a high priority. CUC should provide a
       work plan for this effort no later than June 1, 2009.

    2. For transparency purposes, CUC no later than July 1, 2009 should establish a physically
       separate account for the Water Department. This account should be named the “Water
       Department Account”.

        a. Any Water Department related revenues received by CUC shall be deposited into the
           Water Department Account.
        b. Water Department accounting records should include separate subaccounts for
           operations and maintenance expenses, capital improvements, restricted and unrestricted
           fund balances applicable to the water department, and other assets and liabilities of the
           Water Department.

 We understand that the task of producing the monthly separated statements has been delegated to Deloitte. We are
currently unaware of the status of the effort.
   c. All Water Department operation and maintenance and capital expenses shall be paid
      from the Water Department Account. To the extent funds from water related revenues
      are insufficient, CUC should identify the source of funds used for the payments.
   d. All Water Department related subsidies received from the Electric Department or from
      any other sources used to pay Water Department operation and maintenance and capital
      expenses shall be separately identified and deposited into the Water Department
   e. The chart of accounts used by the Water Department for all reporting shall be the
      National Association of Utility Regulatory Commissioner’s Chart of Accounts for Class
      A water utilities.

3. At a later date determined by the CPUC and after appropriate monthly financial reports for
   each operating department are being prepared and filed, CUC shall provide the CPUC a
   monthly report of the Water Department Account. Information that should be considered
   includes the items below—after review and approval by the CPUC of the final reporting
   format and protocol. While the list may appear to be large, it is only descriptive and we
   believe includes the normal range of items a CFO would undertake. The final list should be
   determined, if possible, after discussions and input from the CFO:

       a.   Water revenues before the April 1 increase
       b.   Incremental water revenues attributable to the April 1 increase
       c.   Incremental water revenues attributable to the June 1 increase
       d.   Collection ratio—collections actually received divided by total water revenues
       e.   Operations and maintenance expenses exclusive of power and Stipulated Order
       f.   Power expenses
       g.   Stipulated Order expenses (O&M related)
       h.   Capital improvement expenditures—non Stipulated Order related
       i.   Capital improvement expenditures—Stipulated Order related
       j.   Debt related expenditures/amortization
       k.   Reserve and contingency funding
       l.   Investment funds (restricted and unrestricted)
       m.   Other Water Department related expenditures
       n.   Required transfers (subsidies) to the Water Department
       o.   Water Department Account surplus and transfers, if any
       p.   Financial reporting statistics such as
                 i. Total days outstanding by customer class
                ii. Aged account receivable by customer class
               iii. Allowance for uncollectable accounts by customer class

4. After the suspended half (June 1) water rate increase is implemented, CUC shall provide
   quarterly its latest estimate of:

       a. Stipulated Order operations and maintenance expenditures including, but not limited
          to, staff positions such as a regulatory or environmental compliance monitor, chief
          financial officer, chief engineer, and engineering and operational support personnel.
          Other routine expenditures such as the costs for operator certification, ongoing
          reorganization costs, preventive maintenance water meter maintenance, water supply

                disinfection and monitoring costs and operator, financial and administrative training
                programs shall be identified.
             b. Stipulated Order capital expenditures associated including, but not limited to, leak
                detection, rehabilitation projects, construction projects identified in the Stipulated
                Order, master plan (financial plan) development, emergency plans, development of
                maintenance manuals, standard operating procedures, vulnerability assessments,
                financial standard operating procedures, annual budgeting, 5-year operational
                planning, and financial reserves.

         Items 4 (a) and (b) can be provided to the CPUC by extracting from CUC’s quarterly
         compliance report to the US EPA the pertinent parts of that report.

      5. Monthly reporting to the CPUC shall be initiated on June 1, 2009 with the plan for the
         production of separate monthly operating reports and monthly thereafter with the reports as
         described in paragraphs 1 and 2 above.

If you wish to discuss the above matters, please do not hesitate to call.

Best regards,

Larry Gawlik

cc:      Alan J. Barak, Esq.
         Tony Muna, CUC
         Bruce Meggar, CUC
         Jim Madan, GCG
         Rob Torres, Esq.
         Lillian A. Tenorio, Esq.


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