A letter authored and signed by Speaker Nelson N. Pelep of the Pohnpei State Legislature on September 21 lists for Governor Johnny P. David of Pohnpei, six reasons why the Governor should not sign the supply contract or the asset purchase agreement negotiated between the FSM Fuel Task Force and Mobil.  According to the letter the six reasons were developed as a result of a leadership meeting held on Monday, September 17.

The FSM Congress passed the “Federated States of Micronesia Petroleum Act of 2007” on September 7 establishing the new public corporation.  The bill was only passed after members were assured that all of the States had signed an endorsement of the Petroleum Corporation Bill at the Chief Executive’s Council.  Senator Dohsis Halbert of the Pohnpei State Delegation on the day of the second reading of the Petroleum bill expressed surprise and skepticism that Lt. Governor Jack Yakana had signed off for Pohnpei, on the CEC’s endorsement of the bill.

According to Speaker Pelep’s letter that signature was based on certain assurances.  One of those perceived assurances included the Legislature’s second reason for not signing the agreements.  The letter said that Yap State also requested the same assurances.  The State governments had requested that Congress legislate the ability for States to “divest fuel farms located within their jurisdiction upon payment by each State of the value of the fuel farm assets.”  The letter says, “…the FSM Petroleum Corporation signed into law by the President does not allow Pohnpei to control its own destiny with respect to the Dekehtik fuel farm.”

Pelep’s letter says that instead of the promise, the “FSM Code provides that divestment can only occur with the unanimous consent of the [Chief] Executive Council (the President and four State governors) and only so long as the FSM Government no longer has any contractual obligations.”

The first of the reasons that Speaker Pelep mentions in his letter is a “Potential Antitrust liability”.  Because of a ruling in 2006 in which Pohnpei was held liable for “treble damages”.  Pohnpei State was ruled to be a “person” and was held liable under the law that prohibits “anticompetitive practices in the FSM and provide[s] the potential for treble damages for any ‘person’ found to have violated these provisions. Anticompetitive practices are broadly defined and include acts which create restrictions in commerce…”

Pohnpei State says that they would be at “too high a risk of future antitrust liability” because of the five year exclusive supply agreement with Mobil contained in the agreement.

Another reason stated for the Legislature’s recommendation that the documents should not be signed regards environmental impact and the potential problem of releasing Mobil from environmental damage liability that may or may not have arisen from their operations in Dekehtik.  

The letter says that “releases of Petroleum products into the soil have occurred and that the land ‘has contaminated subsurface conditions to the extent described’” in the report.  Because the Legislature has not received a copy of the “ESA” report they can’t tell the extent of the problem but are being asked in the agreement to hold Mobil harmless for any environmental damage.  ESA was not defined in the Speaker’s letter but by the context we take it to mean “Environmental Site Assessment”

The Speaker lists as another reason a concern that “Pohnpei might not get full benefits” under the agreement.  It quotes a line in the agreement concerning “equitable terms for all customers of the Corporation.  As an example the Speaker says that “the proposed fuel supply agreement gives Pohnpei the lowest transportation cost from Guam to the fuel farm, but Pohnpei might not receive that benefit if the Corporation evens out the price to help other States.”

He also points to the poor credit history of some customers of Mobil in the past.  He is concerned that political pressure may force the Corporation to extend credit to less responsible customers.  In that event “Pohnpei might end up subsidizing fuel use in other States instead of getting the full benefit of the transaction.”  In the worst case scenario, Speaker Pelep says that “Pohnpei might lose its fuel supply.”

Yet another stated reason was legal liability for annual fuel quantities agreed to but not purchased.  It’s called a liquidated damages provision.  He says that a provision like this could run into fees of millions of dollars and that the current Mobil contract does not contain any liquidated damages provision.

The last reason that Speaker Pelep brought to the Governor’s attention is the “inability of Pohnpei to bring competition to the fuel market.”  The Speaker says that even though the law establishing the public corporation has no provision to operate as a monopoly the effect of the agreement with Mobil practically causes it to be a monopoly for the first five years.  He says that other companies have expressed interest in bringing fuel to Pohnpei and that they might be able to compete for Pohnpei’s fuel business in the near future.  Pohnpei, because of the exclusive supply agreement with Mobil and the liquid damages provision no competitor would be able to enter the market for the next five years.

“While the solution as opposed by the National Fuels Task Force is not right for Pohnpei, we must continue to work to find the best possible answer to our energy problem.  The Legislature stands ready to work with the Executive to find a Pohnpeian solution to this problem.

On Wednesday, the 26th of September, Congress voted to agree to Mobil’s terms.  Former President, now Senator Joseph Urusemal of Yap, before the vote on the resolution entered into the record a response to the two States of Yap and Pohnpei.

The text of his speech follows:

“Mr. Speaker. A few days ago this Congress adopted the Standing Committee Report prior to its passage of the Bill establishing the national fuel corporation.

“In that report it was clearly stated that the immediate purpose for the corporation was “simply to provide the ‘legal entity’ to finalize agreements with MOMI”, arrange financing and take ownership of assets.  The secondary purpose was to operate the fuel storage and distribution facilities for some interim period pending divestment of its assets to the States.

“I note that at least a couple of our great states, including my own state of Yap, would have preferred the corporation bill to have allowed the States the opportunity to assume the ownership and control of the MOMI fuel facilities at a time of their own choosing.

“However, because of the nature of the negotiations with Mobil Oil and with the bank for financing, that was simply not possible at this time without placing the whole Fuel Task Force initiative at risk. During the hearing process there was testimony from the FSM energy advisor and from persons actively involved in those negotiations that any “splintering” of the four state operation would complicate the pending agreements with MOMI, including the fuel supply agreement and cause delays that could place continued short term fuel supplies to all of the states at risk.

“I wish to state that I, for one, support the concept of State ownership and control of the various distribution facilities under a unified fuel supply contract and will work to accomplish that as soon as the opportunity arises. At this point, however, I must continue to rely on the words of the Report adopted by this Congress:

• “The Committee believes that the current Bill is drafted in such a way as to maximize future flexibility regarding the state ownership and control of assets and operations while promoting the immediate goal of securing a steady, secure and reasonably priced source of fuel for all of the States of the FSM. It must be cautious of any provisions that may compromise the commercial viability of the Corporation during its existence.

• The Committee considers the adoption of (the Corporation) to be only a “next step” in assuring future energy supplies for the nation. With the immediate need for the creation of a legal entity accomplished, this Committee and Congress will have the opportunity in future months to give further attention to the specific visions and expectations of each of the states with regard to the future of the proposed FSM Petroleum Corporation.

“I would like to urge this Congress to stand by those words.

“During my time in that other branch of this government I would occasionally find it helpful to think of this great nation in terms of a fine piece of furniture with each of its four strong legs individually carved by the centuries of experiences and traditions of each of the states. Those four legs hold up a yet unscarred top upon which sits the future of Micronesia.

“Each of the legs is different from the other but they all work together to support the top. Take any one of them away, and the table needs a wall to lean against to be stable.

“Any one of the legs might stand on its own without the top to hold it upright, but with the slightest breeze will wobble and fall.

“All five pieces together make a fine and strong piece of furniture, but individually, we are just pieces of wood.

“Nowhere is this imagery more vivid than with this country’s efforts to advance the process of taking control of its own energy future.

“At this moment, this country is at a crucial crossroads in that process and more than ever we must all stand together.

“The resolution approving the agreements is a second step in that process and will give this Congress the opportunity to live up to its promise to the States in the future by giving further attention to the specific visions and expectations of each of the states with regard to the future of the proposed FSM Petroleum Corporation.

“I urge passage of this resolution and call upon all of our fine states to join with the national government in this process to gain control of our own energy future.”

The Senators and the gallery gave him a hearty round of applause for his speech.

Without Pohnpei and Yap’s participation, the petroleum corporation cannot put into place the mechanisms to begin to do the work Congress wants them to do.  

National government officials say that the September 30 date announced for a “pull out” by Mobil is a work deadline and that there is still some time to deal with the controversial issues brought to the fore by Speaker Pelep.

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