Prepa’s Fiscal Plan Comes Up Short
By Vicente Feliciano
Puerto Rico’s economy needs low-cost energy and financially sound energy firms in order to move forward. The Puerto Rico Energy & Power Authority’s (Prepa) draft fiscal plan assumes first, that to have financially sound energy firms, Puerto Rico needs a financially sound Prepa. Second, it assumes that the only way to achieve a financially sound Prepa is to take advantage of its monopoly power to gouge the Island’s businesses and households by maintaining high rates. The fiscal plan is wrong on both accounts.
If it chooses, Puerto Rico could move forward to transform all the generation and distributions assets of Prepa into public-private partnerships (PPPs) properly regulated by the P.R. Energy Commission. Concessionaries could get a projected return of 7.8% on the project assets, the average granted by regulatory agencies to utility companies in the U.S. over the last five years. Under this scenario, Puerto Rico would have lower electricity rates. The money obtained through the PPPs would provide Prepabondholders much less than what was negotiated in the restructuring support agreement (RSA).
Obviously, we cannot expect Prepa to commit suicide and propose its own demise through a PPP process. Thus, it would be up to the P.R. Fiscal Agency & Financial Advisory Authority (AAFAF) and the P.R. financial oversight board to analyze this option. Privately run electricity systems are the norm in the United States. The fact that Prepa already purchases electricity from AES, Eco-Eléctrica and a handful of renewable energy generators shows that this is a viable alternative.
In the alternative scenario of maintaining Prepa, this government-owned corporation could achieve financial health through a combination of tough decisions and renegotiation of all its existing contracts with creditors, labor unions and suppliers. Instead, Prepa’s fiscal plan takes advantage of its monopoly position and places most of the burden of the adjustment on its clients. Higher electricity prices resulting from the Prepaproposed fiscal plan would impinge on the competitiveness of manufacturing and tourism, as well as reduce the disposable income of local households. The consequence of the higher electricity prices would be a smaller economy with fewer tax revenues to provide for essential services and pay non-Prepa creditors.
Through the Promesa legislation, Prepa could achieve significant debt reductions. The RSA for Prepa debt needs major modifications. Lisa Donahue, the former chief restructuring officer for Prepa, has stated that the RSA was the best possible agreement that could be reached previous to Promesa. However, the Energy Commission ordered Prepa to take advantage of Promesa to obtain maximum debt relief. And yet, the draft fiscal plan proposes only minor modifications to the RSA.
As it stands, the proposed minor modifications on the RSA would require little sacrifice from bondholders. Under these proposed modifications, fuel-line creditors who bought the loans at 66 cents on the dollar from local commercial banks, would still get 100 cents on the dollar. Hedge funds who bought the bonds at 50 to 60 cents on the dollar, would still get 85 cents on the dollar. The monolines, which insured bonds in case Prepa could not pay, would still get 100 cents on the dollar. Only retail investors, who originally bought the bonds at par and who do not have the same lobbyists as the monolines, would see a fall in value of their investment, and this would only be 15%.
At a time when major sacrifices are rightly requested from the people of Puerto Rico, including pensioners, the University of Puerto Rico and credit unions, it is unacceptable that Prepa’s draft fiscal plan recommends only minor improvements on the RSA. For policy makers dealing with Puerto Rico debt, doing likewise would erode the moral standing of requesting sacrifices from other groups.
Taking advantage of Promesa, the labor contract agreement with the labor union UTIER should be scrapped and renegotiated from scratch. The clauses that limit productivity, such as those requiring unneeded personnel to perform certain tasks must go. The clauses covering payment for non-work time (vacations, sick pay, holidays, different licenses) must be reviewed and adjusted downward.
The draft fiscal plan states that in addition to the $9 billion debt load, Prepa has an actuarial deficit in its retirement plan of $3 billion. This retirement plan must be accorded the same treatment as that which was implemented for most government workers by the pension reform law of 2013. Vested benefits could be respected, but from this point onwards all employees, present and future, should be transferred to a defined contribution system. The draft fiscal plan calculates the savings from this adjustment to the retirement plan at $48 million per year but does not assume any change in the retirement plan.
Under Promesa, Prepa could renegotiate the power-purchase agreements that it has with renewable energy generators. These agreements currently have escalator clauses in which the price of the electricity provided to Prepa goes up every year. As part of the renegotiations, the escalator clauses must go and a review should be performed of the base rate charged by these electricity generators.
The future of the economy of Puerto Rico is intertwined with the ongoing debt renegotiations. The main focus of the Prepa fiscal plan should be the well-being of the economy of Puerto Rico. Thus, something significantly different from the Prepa proposed fiscal plan is required.
Economist Vicente Feliciano is the president of Advantage Business Consulting.