Thursday, August 16, 2018

[Editorial] The Prepa Piggy Goes to Market

By on March 23, 2018

Editor’s note: The following editorial originally appeared in the March 22-28 print edition of Caribbean Business.

When Gov. Rosselló announced he was putting the Puerto Rico Electric Power Authority (Prepa) up for sale two months ago, speculators chomped at the bit while the many different creditor constituencies grimaced. The latter—bondholders, monoline bond insurers and fuel line lenders—who have liens on Prepa and find themselves embroiled in Title III bankruptcy proceedings, will not relent in their claims as that little piggy goes to market.

Yes, although Prepa is a clunker of a utility with obsolete plants in need of complete overhaul and a $9 billion debt load pending, there are some investors eyeing the public energy company. Who would pay for Prepa or its parts, and the Transmission & Distribution (T&D) concessions Gov. Ricardo Rosselló is planning? The answer is: “We, the people” in ballooning rates, if we do not strap an independent regulatory framework on the bloated beast.

The truth is there are diverging opinions on the shape of regulation to come because the Rosselló administration had a preference for a new body that would throttle the existing Puerto Rico Energy Commission (PREC), which was enabled by Law 57 under the previous administration. Although Rosselló had reportedly desisted in his plan to gut PREC, because it was bad public policy frowned upon by the Financial Oversight & Management Board (FOMB), there seems to be a movement afoot in the Puerto Rico House of Representatives to water down the energy commission. As this newspaper was going to press, the House voted to rid PREC of its independent oversight by merging it with the Public Service Commission. Bad form.

The FOMB is not inclined to let that one pass because they know some of the kleptocrat oligarchs on the utility’s governing board cannot be trusted to head this transformation. The many vested interests are bound to cloud their judgment when making decisions on the shape of things to come.

Since its creation three years ago, PREC’s oversight called into question rate calculations that were askew and would have eventually cost the people dearly not too far afield. In one such instance—a restructuring support agreement (RSA) included a bond-exchange mechanism securitized by rates that would have blown to the stratosphere, costing ratepayers and Puerto Rico’s business community as much as a 25 percent hike in electricity costs. That is not exactly the definition of affordable.

Now, as the Prepa Privatization Bill (Ley para Transformar el Sistema Eléctrico de Puerto Rico; Senate Bill 860 and House Bill 1481) wends its way through the Puerto Rico Legislature, it is time for the people and the business community to keep an eye peeled for midnight riders and language that attempts to break the regulatory backbone already in place. Mucho ojo.

Although there are wide-ranging views on exactly how robust the regulatory framework must be, there are too many examples of energy costs run rampant when utilities are left to their own devices.

On the dark end of that spectrum, a prime example took place in the late 1990s, when Enron in California was left to its own devices as it deployed a plan for systematic power outages that helped gouge ratepayers while the investment bankers who owned the power companies made a killing.

As Puerto Rico’s energy grid crawls back to its feet at a torturously slow pace, opportunities exist to rebuild a more resilient system that can deliver energy at affordable costs. The technology is there but should not be thrown together with the carelessness of children playing with Erector Sets.

“Requiring utilities to make grids more resilient by adopting distributed, renewable energy is not easy, but regulatory change is essential,” wrote Jenne C. Stephens, associate director of Northeastern University’s Global Resilience Institute, in a position piece that ran in the Wall Street Journal. She is well-acquainted with the value of regulation, not only as it pertains to affordable energy, but in taking a stronger stand in forcing utilities to pursue distributed renewable power.

Gov. Rosselló’s energy transformation brigades have adopted core doctrines—Transparency, Resilience, Sustainability and Democratization of Energy—as guiding principles. They should establish independent regulation as a real goal. It takes more than mantras to transform energy in Puerto Rico. The sooner this administration realizes that self-evident truth, the better off the business community will be.

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