Sunday, March 18, 2018

IEEFA Op-Ed: Keeping Puerto Rico’s Electric Utility on a Short Leash Until It Proves Accountability

By on March 9, 2018

By Tom Sanzillo, Institute for Energy Economics and Financial Analysis’ (IEEFA) director of finance, and Cathy Kunkel, an IEEFA energy finance analyst. This column first appeared in The Hill.

Power outages that swept the capital of San Juan last week serve as a sobering reminder of what Puerto Rico is up against as it struggles to rebuild its battered electricity grid.

Almost 1 million people live in the area affected by the blackout, which is just the latest symptom of an electricity system in crisis and a public utility that continues to be hobbled by fiscal challenges and policy problems.

Barely two weeks ago, a bankruptcy judge approved a $300 million loan to keep the Puerto Rico Electric Power Authority (PREPA) operational through March. U.S. District Court Judge Laura Taylor Swain allowed the loan to go forward because it is needed for day-to-day costs that include fuel, labor, insurance and maintenance.

PREPA’s larger looming expenses are related to the emergency rebuild the utility is undertaking after the devastation of Hurricane Maria. Those costs are covered by FEMA.

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The short-term loan, which Swain approved after denying a $1 billion request because it lacked adequate documentation, exposes some core problems. PREPA remains unaudited. Its cash flow records are confusing and incomplete. And the loan comes from Puerto Rico’s government, which is bankrupt and obviously in no position to be lending out hundreds of millions of dollars every few months. Such central-government lending only perpetuates out-of-control practices that put Puerto Rico beyond the brink to begin with.

SWAIN HAS KEPT PREPA ON A SHORT LEASH, WHICH IS NOT A BAD IDEA, because it means PREPA must come back for additional resources sooner rather than later, which means in turn that it must show some accountability — a standard it is perfectly capable of meeting.

Granted, PREPA will require support from external sources for quite some time to come — in both operational and capital funding. The utility is essentially out of money because it cannot produce sufficient billable electricity to cover its expenses. This situation is not going to improve anytime soon. Further, PREPA’s cash-flow projections show revenue peaking at $40 million per week even as its budget requires $57 million per week — and that’s before any debt service is paid.

A woman uses a flashlight while trying to connect a transformer to a car battery, after Hurricane Maria hit the island in September 2017, in Maunabo, Puerto Rico January 27, 2018. (REUTERS/Alvin Baez)

There is nothing here for PREPA’s bondholders. Even when the lights are back on throughout Puerto Rico, the electrical system will be antiquated and unreliable, in dire need of investment. Bondholders who continue to assert their legal right to be made whole nevertheless are now a menace to a solution.

PREPA’s submissions on the loan request prove that the utility can file a coherent financial plan, which is an encouraging development. Further, the utility’s manager need not figure all this out on their own. Both PREPA and its federal oversight board can avail themselves of useful work performed by the regulatory Puerto Rico Energy Commission.

Congress should take note a longer-term revenue stream is needed to restore full power and to plan logically beyond initial recovery.

The $300 million gets PREPA to next month. What gets them to the next step remains to be seen.

Editor’s note: The Institute for Energy Economics and Financial Analysis (IEEFA) conducts research and analyses on financial and economic issues related to energy and the environment. The Institute’s stated mission is “to accelerate the transition to a diverse, sustainable and profitable energy economy.”

IEEFA receives its funding from philanthropic organizations, including the Rockefeller Family Fund,  Energy FoundationMertz-Gilmore FoundationMoxie FoundationWilliam and Flora Hewlett FoundationRockefeller Brothers FundGrowald Family FundFlora Family FundWallace Global Fund, and V. Kann Rasmussen Foundation.

–The views expressed in the Opinion section are the writers’ own and not necessarily the view of Caribbean Business.