By Giff Johnson
For Variety

MAJURO — A detailed performance audit of the Marshalls Energy Company by independent auditors has given the local power company an overall grade of “B” and strongly urged the government to reject outside bids to buy the financially struggling utility company.
“The Marshalls Energy Company has performed in a satisfactory manner in each of the various areas considering the size of the utility, the island environment and the developmental nature of MEC in the Marshall Islands,” said authors Robert E. Nelson and Michael A. Conduff, who were hired through a grant provided by the U.S. Department of the Interior at the request of the government to assess MEC’s performance since it started in the mid-1980s and to evaluate bids by SK Networks of South Korea and Pacific International Inc. of Majuro to buy into or take over management of MEC.
“The major strengths of MEC have been the areas that are most important to the customer and the economy,” the report said. “Those areas are reliability and reasonably low cost electricity.” Economic development has been “greatly enhanced in Majuro” because MEC electric rates “were lower than in neighboring islands.” The report explained that over the years, MEC used the profits from the sale of fuel to fishing vessels to cover losses in electricity production and maintain low power rates.
The report said that MEC lost $5.7 million in 2004 and 2005, and identified two main areas of concern: The lack of financial reserves and the relatively high system energy losses.
“MEC has a history and record of being one of the most reliable electric utilities in the Pacific region,” the report said.
“The main factor leading up to the present financial difficulties facing MEC was Mobil Oil’s decision in early 2004 to discontinue the sale of fuel to MEC on a consignment basis, a practice that had served the Marshall Islands, MEC and apparently Mobil Oil well since that practice had been in effect for 13 years.” This, combined with skyrocketing fuel costs, put intense financial pressure on MEC. “MEC’s management, board and the Marshall Islands government were also late in recognizing that world fuel prices would not return to their 2003 levels. As a result they did not adopt a rate tariff that recognized the increased fuel cost until FY2005 resulting in two years of serious financial losses.”
Financial problems identified in the report include:
• MEC is owed $4.5 million, including $1.1 million from the government, Majuro Water and Sewer Company and other government parties.
• MEC has not developed or maintained any cash reserves, which the report describes as “a major failing of MEC.”
• To be considered a viable ongoing enterprise, a utility must assure that its revenues are at least covering actual operating costs.
“MEC has not been meeting this standard for many years. Although it has used other revenues to occasionally show positive income, in reality MEC has been in a negative income status for many years. The electric rates have simply not been sufficient, even with supplements from the sale of fuel to the fishing fleets and supplements from the U.S. Compact, to pay for operating expenses associated with providing electrical service.”
Among the main recommendations of the report are that the government should not allow short-term problems to overshadow the long-term values of MEC assets. It urges against any change that will “dilute the ownership share (of the Marshall Islands government) to the point that (it) no longer has the principal say in the direction of the utility.”
The report cautions against a change in MEC’s present status despite its mounting financial problems.
The report notes that in general the proposals from the two companies “request full possession of the fuel tanks and request some limitations on (the government’s) present eight cent per gallon import tax and three percent gross receipts tax,” and also propose to bring in new top management and supervisors for the various electric department functions.