Jose Jimenez Tirado / Getty Images file

PREPA’s Agreement is Terrible for Puerto Rico

, energy analyst | May 23, 2019, 10:10 am EDT
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A new agreement on Puerto Rico Electric Power Authority’s (PREPA) debt represents a major setback for the future of the island.

It’s not new that PREPA is in bankruptcy and that the priority of Gov. Roselló is its privatization. It’s also not new that Puerto Ricans have been worried about the possible disastrous consequences that the privatization can generate. These include the excessive increase in electricity rates and the exacerbation of public health and environmental problems due to the improper handling of ashes, air pollution and emissions causing the climate crisis.

These concerns are being confirmed with the recent announcement of the agreement reached between the Fiscal Control Board, the majority of PREPA’s bondholders, a PREPA bond insurer and Rosselló’s government.

To explore the implications of this agreement I talked with Dr. Agustín Irizarry, a professor of Electric Engineering at the University of Puerto Rico in Mayagüez.

What is this agreement about?

Through this agreement, a “debt charge” will be required to cover the deficit inherited from PREPA. This charge must be paid by all PREPA users starting this summer until 2067.

Additionally, the debt charge will apply to those who currently have or will install their own generation system in the future.

Why is the PREPA agreement concerning?

For several reasons:

  • Puerto Ricans will pay more than double the value of PREPA’s debt. The agreement establishes that Puerto Ricans must pay the debt charge for 47 years to cover a deficit of close to $9 billion. The current rate of 22 cents per kilowatt hour (kWh) will rise 2.8 cents/kWh in 2020 (before the election); it will rise 4.55 cents/kWh starting on 2043 and it will remain that way for more than 20 years. This means that for a debt of about $9 billion, Puerto Ricans will pay more than $23 billion without including between $100 million and $200 million to cover administrative expenses.
  • Autonomous generation users will also have to pay the debt charge. This is a moment in which people are searching for alternatives to avoid going through what so many had to endure, living months and months without energy after Hurricane Maria. That’s why after Maria everybody wants a solar system on their roof with a battery to store the energy. Hurricane Maria demonstrated the tremendous vulnerability of our centralized electric system. Therefore, autonomous generation systems should be promoted. On the contrary, the agreement establishes that the debt charge will also apply to those who own or install their own generation systems. Those who start generating their own energy with solar panels beginning on September 30, 2020 should pay the charge immediately after installing the system. And those who have installed their own generation systems before this date and are connected to the network, should start paying the debt charge for the energy they produce as of 2040.
Imágenes satelitales de Puerto Rico por la noche antes y después del huracán María.

Puerto Rico a oscuras después de María.

What are the choices?

The agreement guarantees the payment of the debt but does not offer any alternative for:

  • increasing the reliability of the electrical network,
  • reducing air pollution by improving the health of Puerto Ricans, and
  • reducing the emissions that produce the climate crisis.

Since 1989, electricity rates have not risen, contributing in part to the lack of investment in the electricity infrastructure. This has had a negative impact in the quality of the service.

What must happen is that the agreement should not be signed because it only benefits bondholders. Instead, a planned rate increase should serve to settle the debt before 15 years, improve the reliability of the electric grid and help Puerto Ricans in their transition to a decentralized system. This decentralized system should provide an optimal service and respond to the challenges of our time. This will be a key step to increasing the resilience of the system in preparation for natural disasters such as María.

How to prevent PREPA’s agreement from moving forward?

The agreement must first pass through the legislature, the energy commission and the bankruptcy court before being approved. We must alert the public so that they know what is being proposed and act to prevent the approval of this agreement. Only by doing this will we be able to protect our energy future.

 

 

 

 

 

 

 

Jose Jimenez Tirado / Getty Images file

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  • SM

    Anyone who has had a mortgage knows that the interest payments over the life of the mortgage can add up to a very big number. The point is that the repayment of the debt is being stretched out over many years. A dollar paid 25 years in the future is only worth a small fraction of that in “present discounted value”–how much one would have to put in the bank right now to end up with a dollar in the bank account after 25 years, with regularly compounding interest.

    A better question to ask would be, how high will electricity rates per kwh be in Puerto Rico compared to other parts of the United States? (Comparing electricity charges relative to income per capita, in Puerto Rico versus other locales, would also be possible.) Another question would be, how much of that charge is actually being collected by the electric company; PREPA does not have a golden record on that matter in the past. (See citation below.) One might also ask, how much will it actually cost to maintain the electrical power grid in Puerto Rico? The bottom line is that bondholders, many of whom are Puerto Rican, should not be asked to fix all that ails electric power provision in Puerto Rico.

    Certainly privatization can entail risks, and privatized entities will ideally be regulated in an efficient manner consistent with good governance. With privatization, though, shareholders will have a stake in avoiding waste and fraud on an epic scale. And that would not be a bad thing in the context of Puerto Rico. As an economist said in the context of deforestation in the state-owned forests in another country, ownership by all can be tantamount to ownership by none.

    https://www.reuters.com/article/us-usa-puertorico-utility-specialreport/special-report-the-bankrupt-utility-behind-puerto-ricos-power-crisis-idUSKBN1C92B5

  • PJ

    This article brings up some good points. My thoughts:

    It appears unlikely that $9 billion in debt is just going to suddenly be forgotten about. It
    also appears unlikely that the debt-holders will care much about how the grid gets rebuilt / who owns the utility in the future / what the sources of generation are in 5 years, etc. Debtholders’ focus is, presumably, just getting paid back as much as they can.

    Assuming a debt repayment deal is someday approved, one strategy could be the court simply blessing the overall global terms of the debt repayment (ie PREPA must repay $X over Y years), then let the science of rate design be handled by the utility’s regulator, the only entity whose job it is to regulate rates. It would be great if the regulator was actually empowered to do full-blown rate cases, with ample public participation and jurisdiccional review.

    Isn’t that how the wonky details of rate design, including all the details of how ratepayer revenue goes towards paying utility debt, is handled everywhere else regulated utilities are regulated?

    https://media3.giphy.com/media/2ja0O7qCR57Py/giphy.gif