Monday, June 25, 2018

Can Puerto Rico take the monopoly out of the electric power game?

By on May 31, 2018

Editor’s note: The following first appeared in the May 31-June 6, 2018, issue of Caribbean Business.

Puerto Rico Electric Power Authority CEO Walter Higgins predicted that privatizing the power utility will be a lengthy and complicated process; that it would take about six to eight weeks to have all customers energized; and the utility still has work to do to be ready for the upcoming hurricane season.

Higgins took over as Prepa’s CEO in March. He previously served as CEO of Ascendant Group Ltd., a Bermuda-based energy and infrastructure holding company.

The veteran energy expert is at the helm of Prepa’s transformation into a well-run private entity despite inheriting a public company whose staff shrank from 8,000 to 6,000 in less than two years.

A better utility, private or not

Gov. Ricardo Rosselló has proposed privatizing Prepa in a twofold manner by selling its generation assets and putting the transmission & distribution (T&D) system under a private concessionaire. The Legislature is expected to heavily amend the measure.

“Our goal and our policy are to carry on the governor’s vision with respect to privatization,” he said, adding that Prepa needs to become “a better utility,” whether it is privatized or not.

He admitted there are constraints to privatization. “The [T&D] probably cannot be privatized easily because of all the FEMA [Federal Emergency Management Agency] money that is invested in the system to restore it and make it more resilient; all that money would have to be paid back because a private company cannot receive aid under the Stafford Act…. If it is repaired, then the money that was invested in repairing it could be clawed back by FEMA, [since] it is a private entity and not a public entity operating for the benefit of the public. I am not saying privatization cannot happen. But what is the true cost of privatizing; it could be that the true cost is whatever the system is worth in its current condition minus whatever FEMA wants to have back in the event it is privatized,” he said.

When Caribbean Business noted the governor’s privatization bill does not talk about selling Prepa’s T&D system but rather puts it under a private concessionaire, Higgins said that when he talks about privatizing, he is talking about selling the business. “A concession is perfectly acceptable,” he said.

Higgins said he does not foresee problems with the sale of the powerplants because FEMA has not invested money in them in terms of restoration and recovery.

As to who should be the ideal companies or persons to take over the powerplants or to do the concession, Higgins said the process of privatizing Prepa and putting its T&D under a concessionaire are two different matters.

Putting the T&D system under a private concessionaire would be a lengthy and complicated process that involves a lot of money over a long period and would have an impact on people’s lives. “And that means the proponents must have experience…. This is not ‘let’s have some fun,’ three of us here in San Juan, and put together some money,” he said.

Selling the powerplants could happen in a competitive market or through a common market that entails the Legislature’s approval and the issuance of requests for proposal in which the buyer provides details on its future plans for facilities and how much it would charge per kilowatt-hour to do it. The buyer must have financial viability and expertise. “If they are going to take a powerplant and run it, the commonwealth must know it will be run safely and according to environmental regulations,” he said.

Has Higgins already received offers to buy Prepa? “There is a lot of loose talk,” he said, declining to provide names. “Having been doing this a long time, I’ve heard every imaginable story, both credible and incredible, about what people will do, right up until they have to put money on the line and prove they can actually do it,” he added.

The Prepa CEO emphasized that his job is to get Prepa up and running as efficiently as possible for its next step and not to choose its buyers. Neither U.S. House Committee on Natural Resources Chairman Rob Bishop (R-Utah) nor Alaska Republican Sen. Don Young, the author of a draft bill to privatize Prepa, have contacted him to discuss the power utility’s fate.

Drill, drill, drill…

Prepa “still has work to do” to be ready for the new hurricane season that starts in a few days, Higgins acknowledged. The utility, at the time of the interview, had done one commonwealth-wide drill and was on its way to do three more drills to ascertain its readiness. During the drills, workers “walked through” the scenario of a disaster, including how they will communicate and assess damage. “You get everybody together. They take their positions. They work their way through. How will they fight the battle; that is the best practice,” he said. The biggest problem after Hurricane Maria was the lack of communication. Prepa has generators for all its critical facilities.

Lights out

Over the past few weeks, there have been numerous reports of communities in rural areas whose residents have been without power for over nine months. Higgins could not say when all the island’s energy customers would be fully energized, but they will still have to wait.

“I cannot give you the exact date that there would be not a single person on the island who still does not have power…. We are six to eight weeks from being completely done,” he said.

Renewables

Higgins was asked about the 14 renewable-energy projects whose sponsors want the Financial Oversight & Management Board to classify as critical. For the most part, these consist of solar energy projects in Barceloneta, Cabo Rojo, Dorado, Guánica, Guayama, Morovis, Salinas, Vega Baja and Yabucoa. However, there are also “peaking units” planned for different Prepa plants and a proposed hydroelectric project at Carraízo Dam.

“I cannot speak about which projects may have previously been reviewed by Prepa and were determined not to be good projects. I don’t know if there are any like that. I just don’t know. I also don’t know if there are any that had previously been looked at by Prepa and they said, ‘this is a pretty good project, but we can’t do it right now because we have Title III,’” he said.

Caribbean Business then mentioned a renewable energy integration study Prepa commissioned a few years ago that placed a 600-megawatt (MW) limit on renewable generation that could be integrated, and concluded net-metering projects should not exceed 65 MWs. He replied that renewable-energy resources, which are only available when the sun or wind shines, are different from “typical utility resources” that were thought to be available almost all the time.

“What you then did was determine which resource to run, based on the cost of fuel and, of course, the cost of power matters because it affects the customer’s bill,” Higgins said. “So in theory, in the old days, you have resources that you could choose any time and you choose resources based on cost and those are the ones you ran on any particular day.

“When you have solar or wind, you have to think a step further, and a step further is, is it available right now? And what effect does it have on the system when it runs? And that is both the immediate effect such as where it is. But it is also the effect of knowing that if it suddenly stops running; you have to make up for that by having other resources pick it up, so the customers don’t lose power,” Higgins explained.

“So, I think, at the end of the day, every solar project that is strictly solar or every wind project that is strictly wind, not a combined project with battery storage and things like that, everything has to be evaluated on where it is located, what the cost is and whether or not our system is able to take that energy in safely for the system, and is competitive in price and it helps to meet the renewable goals of the commonwealth, then Prepa ought to be in favor of it, and that would be the way I would evaluate the projects,” he said.

Energy alphabet soup

The oversight board and Puerto Rico Energy Commission (PREC) have required Prepa file an integrated resource plan (IRP) to determine the island’s energy needs for the next 20 years. Higgins said the IRP is needed to make determinations on the project because it provides the action plan for the next two or three years and helps make long-term decisions on things like contracts and fuel supplies.

“And the projects are not just building hardware; sometimes, the projects help customers use less energy because that is the legitimate resource. Sometimes, the projects are helping them use the energy at a different time because we have to meet peak loads. So, you take all possible resources into account and come up with a plan that represents, based on sophisticated analysis, what’s the best way to meet Puerto Rico’s needs. And there might be two or three different plans, if you want more solar, because you have a higher-policy renewable-goal cause that…solar is more and more cost competitive all the time. Some would say it is already competitive with certain resources, so more solar, but solar in places where you won’t have a problem…. The bottom line is everything needs to channel through an [IRP]. If that’s what the oversight board’s goal is, we want those projects to be considered as a part of the IRP,” he said.

The IRP, which is due before the FOMB on Oct. 1, is also needed for Prepa to be able to complete its fiscal plan, which is currently incomplete. Higgins said the timetable is a challenge because, while an IRP takes over a year to complete, Prepa is doing it in less time through a private contractor. While Prepa’s board of directors has to approve the IRP, Higgins said members could take a look at it in draft form before approving the final product sent to the FOMB.

Higgins said he has “no feelings” about whether the Aguirre Offshore GasPort—a floating storage regasification unit and subsea pipeline off Puerto Rico’s southern coast, just outside of Jobos Bay Reserve—should be in the IRP.

“It has been considered in the past, and there are probably people who would like to see it today. If you were going to decide you want to continue to burn oil or would rather burn liquefied natural gas, it is a very easy choice, environmentally, carbon-emission-wise and cost-wise…. You go for that, assuming all policy matters could be resolved, like the cost of doing it…. If it costs too much, no matter whether you get all the benefits or not, you at least will be able to make a decision based on good information,” he said.

However, Higgins acknowledged that Prepa has not been pursuing construction of the Aguirre Offshore GasPort [AOGP]. PREC had ordered Prepa not to pursue the project amid concerns about its costs. “I don’t have any plans to pursue it…. I have no idea about the AOGP or if it would make the cut,” he said.

Before Hurricane Maria hit the island Sept. 20, Prepa officials prohibited the use of the Palo Seco Powerplant amid a report it was at risk of collapse. In October, Prepa contracted General Electric for $4.7 million to repair the “structural problems” at the plant.

Higgins acknowledged he has not been to Palo Seco. “I have not been there…. It is not uncommon for coastal powerplants, which are open to the atmosphere and subject to saltwater, air and wind or rain to look a little rusty…. But I have also been told by people who know something about Palo Seco that the plant has not been receiving the maintenance it should have received in the past. The budget, I am told, is now sufficient to take care of the plant,” he said.

Asked if Palo Seco would remain open, he said that decision would be up to the IRP process because “Palo Seco is just another resource choice” and would depend on the cost and if environmental requirements are met. “I have no opinion,” he said.

He believes natural gas is a “just a bridge to the future. The future will be something different than what it is today. It is not going to be conventional powerplants or big new boilers…. It is definitely not going to be coal…. It is going to be some other technology, perhaps solar with batteries…maybe some hybrid systems…those kinds of systems are where the future is going,” he said.

Regulate this

Higgins said FERC, the Federal Energy Regulatory Commission, is not involved in Prepa’s operations but the U.S. Department of Energy is providing technical advice and paying for studies to strengthen the grid and to use newer technologies. “We are working with the U.S. Department of Energy, which has many branches and arms; some of which are helping Prepa with technology and solutions to some of the challenges Prepa is facing, like our weak transmission system,” he said. “The department wants to make Puerto Rico a ‘model’ for the rest of the United States, in how a grid could be rebuilt to be more resilient, more renewable, more sustainable,” he said. Prepa is getting federal funds for energy projects.

A study is about to start to provide engineering solutions that would improve the grid’s reliability and flexibility and help decentralize the system to resolve the problem of “too much generation in the south and too much load in the north.” There are proposals to add, on a short-term basis, resources in the north to bolster the transmission system.

PREC recently announced it was going to start a new round of hearings on Prepa’s power rates at a time when the oversight board says the cost per kilowatt-hour (kWh) should be lower than 20 cents. “We agree with what PREC says, that Prepa needs enough income from customers to pay for the true cost of providing service, in the way we decide to provide service as a commonwealth…. Prepa needs to take in enough money to be able to do that reliably and safely…. We also agree the rates ought to be lower than they are today. Some of the fixes for high rates are long-term fixes, such as switching to natural gas or substituting renewables for oil…so the outcome of the IRP, whose goal is to identify what those needs are, is very important,” he said.

On the other hand, he said the FOMB cannot create a plan that would make Prepa “go broke,” so if they are pushing for low rates, it is because they believe it can be done. “Time is the only question,” he said when asked if Prepa will be able to significantly reduce its rates. Higgins said one thing he is doing to reduce costs is implementing a program in which Prepa employees provide ideas about what could be done to improve the efficiency and lower the cost of doing business for Prepa. He said the cost of fuel is variable for Prepa, so when it is down, Prepa’s costs can remain low and the island is better off by stopping the use of the fuel. However, he also said solar projects need to be evaluated based on their costs and the costs of other alternatives.

Regarding the adequacy of energy subsidies, including a proposed economic development subsidy mentioned in the past, Higgins left it up to the commonwealth to decide if it will grant incentives because Prepa ultimately is in charge of transferring subsidies among parties. However, in the end, Prepa must recover 100 percent of its costs. “Generally speaking, I don’t favor setting rates that provide subsidies because it distorts market signals. Customers ought to know what energy costs and make their decisions based on that,” he said. “But we will do whatever the commonwealth wants us to do.”

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