PREPA's privatization a headless and backwards process

25 May 2018

Among the many players involved in the privatization of the Puerto Rico Electric Power Authority (PREPA), none have any solidarity, and that’s a problem for the governor’s 18-month time frame, said four industry experts.
 
“When a government decides to privatize an asset it must state whether it’s doing so to raise funds or to improve a service, and I’m of the belief that your motivation should always stem from the latter,” said one of the industry experts, Puerto Rico Energy Commissioner Jose Roman.
 
But the Financial Oversight and Management Board (FOMB), the Puerto Rico Energy Commission (PREC), the US Congress, PREPA creditors, and Puerto Rico’s own legislature are on different pages. Adding to the uncertainty is PREPA’s Title III restructuring unfolding in bankruptcy court under the aegis of the Puerto Rico Oversight, Management, and Economic Stability Act.
 
“It takes a lot of guts for an investor to invest in an asset with an unresolved bankruptcy – not to mention that the bankruptcy extends to all of Puerto Rico,” said an energy expert who is close to potential PREPA investors.
 
With a plan of adjustment that is still very much up in the air, the way in which Puerto Rico and the FOMB have structured the privatization is suspect as well, said three of the four people. Four months ago, Governor Rossello proposed to privatize PREPA in 18 months.
 
Cart before the horse
 
Among the problems to the privatization process is establishing predetermined rates per kilowatt hour (kWh) as a starting point. Both Rossello’s legislative proposals and fiscal economic growth plan (FEGP) propose a rate of roughly 20 cents per kWh. The FOMB certified the FEGP on 20 April.
 
But the idea of setting costs before knowing input is absurd because a business is not going to sell below costs, said Christopher Dillon, a fund manager for Mariner Investment Group.
 
“It’s all well and good to mandate 20 cents per hour, but what are you going to do if the reality is more expensive? Is the FOMB just going to turn off the lights?” said a second energy expert, an attorney that’s worked with PREPA in the past.
 
PREPA will need to cover not just the cost of fuel, but also to fund the repair and replacement of lines and substations and other things that go with running an electric company, Dillon said. The debate should not be the rate PREPA can charge but the amount that the utility sets aside for debt service.
 
The FOMB corrects the record
 
The FOMB, however, rejected the notion that it is engaged in setting any rates, and said rates are the responsibility of the regulator, according to a statement sent to Debtwire Municipals.
 
“The under 20-cent rate put forward by the board is a target that the board believes PREPA can and should aspire to in order to deliver power to Puerto Rico at rates that are affordable and support economic growth in Puerto Rico,” the statement reads.
 
“The target was developed through a combination of top-down and bottom-up analysis. The top-down perspective is based on setting a target that would make Puerto Rico’s rates competitive with electricity rates in analogous and potentially competing island economies such as Jamaica and the Dominican Republic. The bottom-up modeling is based on a least-cost optimization of PREPA’s operations and generation mix – so the rate PREPA could potentially deliver power at if it fully transformed its operations and its generation mix to be more efficient and cost effective.”
 
“Achieving this rate based on a bottom-up model will require implementation of all measures included in the fiscal plan, operational transformation, a transaction, new private and federal funding. Load assumptions for this optimization are consistent with PREPA’s load forecasts for Puerto Rico,” the FOMB wrote.
 
Show me the data
 
To move forward with its restructuring and privatization, PREPA lacks an updated Integrated Resource Plan (IRP), a document that should serve as one of the cornerstones of PREPA’s intended privatization, said Roman.
 
“The IRP should be there from the beginning, given it will help define what sorts of products and services a consumer needs,” Roman said.
 
The FOMB’s statement emphasized that in addition to the regulator, PREPA’s rates should also be informed by the IRP.
 
“There is a difference between privatizing and structuring a market,” Roman added. “The IRP would help structure the market and that in turn should determine what needs to be privatized.”
 
Through an order issued earlier this month, the Puerto Rico Energy Commission mandated that PREPA present an updated version of its IRP by October 2018, especially considering Hurricane Maria’s traumatic effects on Puerto Rico and the federal funding flowing in to mitigate those damages.
 
PREPA submitted a response contesting the order, arguing that the IRP only needs to be updated every three years and the deadline should be set to 2020. Nearly 80 years after its foundation, PREPA submitted its first ever IRP in 2015, though the plan was officially sanctioned in 2017.
 
The Energy Commission rejected that response because it is empowered to request an update if it deems it necessary, said Roman.
 
As PREPA battles to extend deadlines, the utility has retained Siemens to prepare the new IRP.
 
PREPA did not return calls for comment.