Puerto Rico’s Energy Transformation: A Critical Need

Puerto Rico’s Energy Transformation: A Critical Need

“Energy Reform is one in the series of structural transformations that Puerto Rico must successfully undertake to ensure its growth…. Puerto Rico must move forward to rebuild the power grid as soon as possible and thus boost economic activity.” – El Nuevo Dia, Puerto Rico’s largest paper, editorial board op-ed, Oct. 28, 2019

Transformation of Puerto Rico’s electric system is crucial to avoiding another Hurricane Maria-like disaster. Hurricane Maria caused 1.5 million customers across the island to lose electricity, resulting in the largest blackout in United States history.** In the months following the September 2017 storm, rolling blackouts occurred, including one as late as April 2018 that affected all of Puerto Rico. It took 328 days after Maria to restore power to the last neighborhood that lost electricity. Lack of reliable power transmission accelerated residents’, employers’ and professionals’ relocation to the mainland.

PREPA’s June 2019 fiscal plan outlines the modernization of Puerto Rico’s energy generation, with current PREPA units expected to be replaced with new and efficient renewable and natural gas units, consistent with an Integrated Resource Plan (IRP) proposed by the Puerto Rico Energy Bureau.

The plan calls for the separation of the generation and the transmission / distribution services into separate entities, each to be independently operated by experienced electric utility service providers. The process to select an efficient operator for the management of the grid is already underway.

While PREPA’s electric rates must cover its obligations to pay pensioners, bondholders, current employees and other parties, any rate increases will also fund salaries, employee benefits and much needed improvements. These efficiency improvements should eventually offset any gradual rate increases.

PREPA’s rates are much less than the electricity rates of comparable islands, and in fact below those charged by some U.S. mainland states, and are insufficient to cover costs.

PREPA Restructuring Support Agreement (RSA)

The PREPA RSA reduces PREPA’s debt by more than 30%, an unprecedented reduction for a distressed electric utility, and saves PREPA and its ratepayers $3 billion.

“Resolving the debt is important not only to reduce electricity rates from what they would have otherwise been under the contracted debt, but also to enable PREPA to exit bankruptcy, which reduces uncertainty, important to any potential private operator and investors in new generation,” Oversight Board Executive Director Natalie Jaresko stated back in June 2019.

The RSA is aptly described by Puerto Rico’s Oversight Board as “a watershed moment in PREPA’s transformation from a bankrupt entity to an efficient, modern power provider and in the overall restructuring of Puerto Rico.”

Honoring the PREPA RSA ensures an efficient resolution to PREPA’s legacy debt and a reduction in costly litigation expenses while avoiding delays towards the much needed transformation of the electric system.

Catalyzing PREPA’s transformation process through prompt PREPA RSA approval will encourage and attract investment into not just PREPA but the island more generally. Scrapping yet another PREPA RSA and disrupting the plans for PREPA’s transformation will alarm current investors and ward off potential investors from island development.

Bottom Line: The PREPA RSA offers the quickest and most cost-efficient path to reliable power, system resiliency, environmental responsibility and essential investment in the island.

Related Information

Puerto Rico gets near-failing grade on infrastructure report card
(Reuters, 11/12/19)

Report: Puerto Rico’s infrastructure failing as federal aid remains on hold: Engineers group says hurricane-ravaged island needs up to $23 billion investment over 10 years
(Roll Call, 11/12/19)

Modernizing the power grid in Puerto Rico will take a decade: The government presented a plan that would focus on customers, resilience, and sustainability
(El Nuevo Dia, 10/25/19)

Puerto Rico Board Opposes U.S. House Input in Utility Dispute
(Bloomberg Law, 11/14/19)

Rep. Bishop et al Letter Regarding PROMESA
(House Natural Resources GOP Twitter Account, 11/12/19)

The power grid modernization is a priority (opinion)
(El Nuevo Dia, 10/28/19)

“The transformation plan the Puerto Rico government and the Oversight Board agree to with bipartisan legislative support enables a complete overhaul of PREPA. Its implementation reduces the cost of operating and maintaining the grid, and the cost of fuels.” – Puerto Rico Oversight Board Executive Director Natalie Jaresko, June 2019

“The [PREPA Restructuring Support] agreement is a watershed moment in Prepa’s transformation from a bankrupt entity to an efficient, modern power provider and in the overall restructuring of Puerto Rico. We are moving forward with the negotiations for a plan of adjustment that would be the foundation for a new Prepa, as a privately operated, financially healthy electricity company able to attract investors.” – Jose B. Carrion, Chairman of the Puerto Rico Oversight Board, May 2019

The PREPA restructuring is expected to save PREPA and Puerto Rico residents about $3 billion in debt service payments over the next 10 years compared to a prior preliminary restructuring support agreement, and reduce certain PREPA debt by up to 32.5 percent.

** It took 11 months to restore power to Puerto Rico after Hurricane Maria. A similar crisis could happen again. (Vox, 8/5/18).