The minefield in Puerto Rico Electric Power Authority privatization

Low appetite for generation, unfunded pension liabilities hard to digest.

Is it food yet at Prepa Diner?

The transformation of the Puerto Rico Electric Power Authority (Prepa), a work in very slow progress two administrations in the making, is a path lined with mines that threaten to blow the entire process to kingdom come. The bankrupt utility has a fiscal plan that establishes as priorities overarching goals of “reforming the energy sector” through transactions related to transmission & distribution (T&D) and generation assets; delivering a revised integrated resource plan (IRP) and the finalizing of a preliminary restructuring support agreement (RSA) with Prepa’s various creditor groups.

All this is yet to take place against the backdrop of creditor constituents who claim a lien on their assets, while Prepa seeks $14 billion—seemingly $9 billion is a more realistic number—in reconstruction funds from the Federal Emergency Management Agency (FEMA) to storm-harden and overhaul the fragile grid.

The utility had already secured the passing of the Puerto Rico Energy Public Policy Act in March 2019. Although that law set a rather ambitious renewable energy target of 100 percent by 2050, Prepa’s use of renewables in 2019 is a mere 2 percent. Many indicators suggest a move to natural gas, with renewables a mere afterthought to be kicked down the road for future administrations.

Naturally gas

“We are bringing in natural gas to be the dancing partner of the growth of renewables because it’s the cheapest and cleanest [fuel apart from renewables],” Prepa Executive Director José Ortiz told Caribbean Business during a recent interview. “You have to bring in natural gas while you eliminate oil-fired units. With today’s technology, it’s very difficult [to aggressively bring renewables into the mix], but in 30 years I have no doubt that you will be able to operate 100 percent with renewables with the technology that should be developed by then.”

Suscribe to read the rest of this report here, in the Oct. 3 issue of Caribbean Business.




The Writing on the Wall

Editor’s note: The following was first published in the Sept. 19, 2019, issue of Caribbean Business, the Front Page report for which delves further into the threat to Act 154.

If there is any truth to the Beatles’ classic song “Taxman”—“Let me tell you how it will be; there’s one for you, 19 for me. Should 5 percent appear too small, be thankful I don’t take it all”—the administration of Gov. Wanda Vázquez ought to be counting its lucky stars that the creditability of Act 154 is going to be phased out over a three-year period and not over a fortnight.

As this newspaper was going to press, two Capitol Hill sources told Caribbean Business that the governor’s team will be working with U.S. Treasury policy wonks to prepare models to replace the 4 percent excise tax paid under Act 154 by multinationals operating in Puerto Rico—which is credited by the U.S. Treasury against certain federal taxes—for a phaseout and replacement.

Thankfully, members of former Gov. Ricardo Rosselló’s administration, led by former Treasury Secretary Teresita Fuentes, had gotten a beat on new tax models to anticipate the demise of the tax credit. Fuentes told Caribbean Business that she met with former Treasury Secretary Melba Acosta, who under the pro-commonwealth Gov. Alejandro García Padilla had spent countless hours working with U.S. Treasury teams trying to secure a permanent ruling from the Internal Revenue Service on the creditability of the excise tax. The most they obtained was a notice—not an opinion—to allow a five-year extension of the tax’s creditability.

Fuentes told this newspaper that Acosta helped her tremendously, setting the groundwork for the models she drafted.

Sadly, Fuentes was unable to conclude her work as she resigned because she had ethical concerns with the administration prior to the governor himself resigning during a summer of massive discontent when a highly offensive chat between him and his cabinet members became public.

So, chickens have come home to roost and it is time for the next man up, Treasury Secretary Francisco Parés, to make quick work of the tax craft engineered by his predecessors. Two sources close to the matter told Caribbean Business that Parés had a productive meeting with Acosta. He will have about six months to present palatable proposals to the U.S. Treasury, which would unfurl over a three- to five-year period.

Time to get cracking.

Act 154 was one of the top revenue generators for Hacienda in fiscal 2019, with some $1.83 billion collected, up from $1.68 billion in fiscal 2018. This constitutes almost one-fifth of the $11.38 billion in net general fund revenue last fiscal year.

The writing was on the wall—that the tax credit was not permanent—long before its inception. When it was first passed under the administration of then-Gov. Luis Fortuño, the governor had near corporate mutiny on his hands because large stateside companies operating in Puerto Rico—those selling more than $75 million to their U.S. mainland distributors—felt hoodwinked as the tax was passed over a weekend without debate.

During a recent interview with Caribbean Business, Fortuño expressed he might have done it differently. However, he knew that the creditability offset would be attractive to stateside companies. First, the governor needed a solid legal opinion, which he obtained from Steptoe & Johnson. With that in hand, he signed the law and jetted for Washington, D.C., where he met with Treasury officials to present the legal opinion that secured the notice of creditability.

The five-year excise tax was to have commenced at 4 percent, scaling down to 1 percent in its final year prior to phaseout. The tax, projected to generate $1.2 billion in its first year, was to have complemented the drop in revenue provoked by a very attractive tax reform.

The truth is that for all the revenue generated, Act 154’s excise tax credit has been the source of uncertainty among U.S. companies—because of the way it was first passed; because it was extended twice, in 2013 and then again in 2017. And not a single person could say for certain whether a permanent ruling would be obtained.

In fact, back during the García Padilla administration, two people close to the process with the U.S. Treasury told this newspaper the thorny issues were stuck in the labels—whether to call Puerto Rico “foreign” or “domestic.” The folks at Treasury were presented with three different options to fit the island under a territorial label, which is where we stand today.

In his work chiseling out a new formula, we wish Parés Godspeed and the vision to know that we should not put all our eggs in one basket. Figure out how to create jobs that can pay taxes. No more gimmicks—se nos va la vida.




Alphabet Soup Disaster Aid

In the days of old, when the reps were bold and Promesa had just been invented, they placed their hopes upon the law and walked along contented. Yes, in the days immediately following the run-up to passing the Puerto Rico Oversight, Management & Economic Stability Act (Promesa), the members of Congress were hopeful that in drafting Title V of the law—assuming that energy reform in Puerto Rico would be a net positive—they would provide the mechanism by which affordable energy would be achieved through an expedited process.

The preamble for affordable energy in Title V was on full display during Promesahearings and in the hallowed halls of U.S. Congress. The permitting process in Title V was to have stood on its own with broad powers given to the Oboard to put critical infrastructure works on a fast track. The drafters hoped that once environmental regulatory hurdles were cleared, projects certified by la Junta could be up and under construction within 30 days. The drafters had no idea how that would play out under the actual Promesa mandate. Now, nearly three years after Promesa was signed into law, the answer is: “Not very well.”

The critical infrastructure works certified by former Revitalization Coordinator Noel Zamot (see Column, p. 15), who resigned in frustration after several hundred projects worth $8 billion were put on ice by the Oboard because of philosophical differences among members of the FOMB, were treated as a throwaway option under Title V to focus debt restructuring.

In other words, because of contentiousness between the Oboard and the administrationof then-Gov. Ricardo Rosselló over structural balance in budgets and fiscal plans, it was best to let the government have its way, ignoring Title V as a tool for the construction of critical infrastructure. Instead, the Oboard allowed the Central Office for Recovery, Reconstruction & Resiliency (COR3) to run amok as the agency in charge of green-lighting infrastructure works, which has resulted in a disastrous track record and given room for the Federal Emergency Management Agency (FEMA) to drag its feet with layers of bureaucracy.

All told, only 131 projects have been certified with fixed-cost estimates, from a list of 9,200 projects. Although the holdup is multifactorial, tracing to mistrust in the vestiges of corruption in the Rosselló administration and a reported tug-of-war between FEMA and COR3, allegations by several sources interviewed by this newspaper claim the impasse resides in the disaster alphabet soup.

In fact, civil engineer Carlos Pesquera, a former New Progressive Party gubernatorialcandidate, who has skin in the disaster-recovery game with his firm, CapitalImprovements Program Management, claims FEMA is downright complicit in the trickling down of funds and approval of projects. In this edition’s Cover Story, Pesquera claims the recovery process was disrupted June 6 when FEMA assumed control of the process establishing a new business model layered with bureaucracy (see table National Workflow, pages 10 and 11.)

The sticking point is in Section 428 of the Stafford Act, which has been ignored by FEMA in granting municipalities 18 months to submit Damage, Description & Dimension (DDD) reports for fund disbursement. The deadline for submission is Oct. 11—a near-impossible milestone given that it will take collaboration between FEMA and COR3 to nail down the estimates.

And FEMA is moving at its typical glacial pace while using contractors who are not fromPuerto Rico, thus inflating costs, and worse still, selecting stateside disaster-relief capitalists who will not leave a dime in Puerto Rico.

At this writing, the Oct. 11 deadline under Section 428 seems likely to be extended.However, FEMA continues to insist on conducting site inspections although the law permits the use of local resources to conduct that work.

Two months ago, the U.S Government Accountability Office sounded the alarm over inconsistencies in FEMA’s procedures on a case-by-case basis, pointing to the federal agency’s ongoing development of a cost factor for use in the fixed-cost estimatingprocess as the culprit in slowing the pace of FEMA obligations.

If U.S. Congress has concerns over the use of funds destined for recovery, it should provide oversight without slowing the flow of disaster aid, and hold FEMA accountable for the proper use of local resources that lead to job creation and not a jumbled alphabet soup of disaster relief.




Disaster Politics

Editor’s note: The following was first published in the Sept. 5, 2019, issue of Caribbean Business.

You know there is true disdain for President Donald Trump when nine in 10 people in Puerto Rico were vehemently vocal in hoping that Hurricane Dorian had struck his Mar-a-Lago resort directly. It is unfortunate to wish such a thing because there must be some decent folks living in the area who are undeserving of the devastation wrought by a Category 5 Wind Beast. Trust us; we know. Nevertheless, the Bounty-tossing president has earned the ill will of Puerto Rico’s people with tweets and comments that our politicians—some of whom were downright corrupt and complicit in using a natural disaster for populist advantage—invited with their acts of malfeasance.

Politics is like pornography—for adults only.

Think about this: Donald Trump cancels a meeting in Poland to deal with Hurricane Dorian but ends up playing golf the day it was spinning menacingly along the coast of Florida, all the while, he snubs Prime Minister Benjamin Netanyahu even after he heeded the president’s wishes to deny his nemesis congresswomen entry only weeks before the Israeli leader’s future will be decided in elections.

Meanwhile the president takes the time to tweet such stupidity as: “Wow! Yet another big storm heading to Puerto Rico. Will it ever end? Congress approved 92 Billion Dollars for Puerto Rico last year, an all time record of its kind for ‘anywhere.’”

He goes on to tweet that Puerto Rico is one of the most corrupt places on earth, punctuating his remarks with the assertion that he is the best thing that ever happened to Puerto Rico.

In a rebuke of the president’s hillbilly elegy, actor Morgan Freeman posted the fitting retweet: “You’re shaming Puerto Rico for being in a storm path?!!! Mr. President, go F[**]K yourself with a nine iron.” We would have suggested using a Big Bertha driver.

It would not matter. Like an addict, Trump cannot contain himself from tweeting stupid remarks; he reminds us of our son when he gave up the pacifier at age 5; we suffered tremendously when he searched for hidden “bobos” with eyes glazed over in the throes of withdrawal. Hide Trump’s cellphone and see what happens.

Trump explains that Congress earmarked those $92 billion when the truth is only $40 billion are obligated. But Trump, the master of negotiation, is playing a numbers game looking ahead to the general election in 2020. He is hoping that his rhetoric will ring true in two important swing states, Pennsylvania and Florida, where 25 percent of the population has familial ties to Puerto Rico.

The strategy is as follows—play to those constituents with familial ties to Puerto Rico; tug at their heartstrings—tell them they were uprooted because of a handful of children in government who were ill-equipped to handle Puerto Rico’s recovery in the aftermath of one of the greatest natural disasters to have struck planet Earth.

Tell the dispossessed that the Rosselló administration squandered the funds earmarked for disaster relief. It does not matter that Trump is mixing a half-truth with a full lie, that nowhere near $92 billion has been given to Puerto Rico and the island has only been able to use somewhere in the vicinity of $18 billion. But few Puerto Rico politicians tell this truth.

For instance, in a recent public statement, Puerto Rico Senate President Thomas Rivera Schatz intimated that a contingent from Puerto Rico would be visiting the week of Sept. 8 to knock on Capitol Hill doors. There will be no red carpet for them at the White House. Two sources with ties to the GOP told Caribbean Business that Resident Commissioner Jenniffer González extended an olive branch to the White House, where she is trying to secure a meeting between Gov. Wanda Vázquez and Trump.

Advisers in Trump’s camp would have an interest in that meeting if the Vázquez administration were to agree to a relief number closer to $40 billion, in which case an additional $22 billion in disaster-relief funds would be released for Puerto Rico to continue infrastructure repair.

The resident commissioner, on Vázquez’s behalf, will have none of it, basing that stance on estimates that put Puerto Rico’s storm-hardening north of $100 billion. The sad thing here is that time and the truth—thanks to a small band of crooks—is not on our side. Trump will use those recent events to the hilt and Puerto Rico’s people will pay the consequences. That blue tarps are all that cover the rooftops of nearly 30,000 homes torn by torrential gusts nearly two years ago is a testament of malfeasance difficult to dispute.




Promesa’s Cracker Jack Surprise

Editor’s note: The following was first published in print, in the Aug. 29, 2019, issue of Caribbean Business.

As pertains to the Puerto Rico Oversight, Management & Economic Stability Act (Promesa), the value of the law is in the eye of the bondholder. If you ask the government, the defaulters-in-chief will tell you that Title III is of tremendous value because it provides a mechanism for bankruptcy-like proceedings to restructure the towering debt owed to numerous creditor constituents. As the law was being drafted, there were even some creditors who saw the most usefulness in Title VI, because it contained mechanisms to achieve consensual deals—something like consensual action clauses—that could bind holdouts in complex deals managing to bring 70 percent of the creditors on board.

Such was the case in a deal involving the Puerto Rico Electric Power Authority (Prepa), whose nearly $9 billion in debt included fuel-line lenders, monoline bond insurers, ad hoc creditors and retail bondholders. For the monoline insurers, who were on the hook for more than $4 billion of the utility’s debt load, Title VI was the holy grail for the art of the possible. They saw the utility on the verge of sealing a deal when Bill Cooper—one of the drafters of Promesa, who was a senior staffer for then-House Natural Resources Chairman Rob Bishop—codified into law the first restructuring support agreement between Prepa and 70 percent of its creditors. Bishop’s legislative brigades thought they were off to Title VI to bind the holdouts. Surprise, surprise—no sooner did Ricardo “the departed” Rosselló take office than his advisers were taking a second crack at the deal, thus blowing it to smithereens. Yes, the titles in Promesa are like Cracker Jack boxes—a little surprise in every one.

Perhaps the biggest letdown has been in the timid use of Title V in Promesa, the one area of the law intended to bring economic development to Puerto Rico. That provision was to have enabled the fast-tracking of critical infrastructure projects. At one point late in 2018, Revitalization Coordinator Noel Zamot had put his Good Housekeeping seal of approval on a list of critical projects worth some $8 billion that were waiting to be green-lit by the Financial Oversight & Management Board (FOMB). However, much to Zamot’s chagrin, the Oboard changed the rules for certification midstream, forcing many investors to drop out of deals.

Sources with knowledge of the Title V process told Caribbean Business that the FOMBsters made a concerted effort to dismiss the Title V route for critical projects as a way to validate the Rosselló administration’s insistence on using the Central Office for Recovery, Reconstruction & Resiliency (COR3) as the entity responsible for certifying critical projects. Zamot, as you will recall, resigned in frustration.

Now, months after Zamot’s resignation, the Oboard is making public the certification of a $5.3 million expansion of the Fajardo Municipal Landfill as a critical project. The landfill, which serves nine municipalities in the northeast of Puerto Rico, is slated to overrun its capacity within the next three years. The expansion would increase that capacity to 20 years. Importantly, the Fajardo Landfill “has a 4-megawatt (MW) gas-to-energy operation, using special equipment that uses methane as fuel to generate electrical energy,” according to a statement released by the FOMB.

The energy produced is not the real hair-splitting item in the release, but rather that the FOMB is at long last utilizing Title V as it was intended. In the release, FOMB Executive Director Natalie Jaresko is quoted as saying: “The project complies with the fundamental criteria to be considered a critical project and addresses two of the island’s most pressing issues: the need to diversify energy generation and to tackle the solid waste management crisis.”

That Jaresko remains as the interim revitalization coordinator nearly six months after Zamot’s abrupt departure seemingly indicates that Title V is really not a priority at this time. Instead, the focus will be on overhauling Prepa and closing debt-restructuring deals when the Promesa sweepstakes kick back into high gear at the end of the 120-day stay imposed by Judge Laura Taylor Swain. What a crying shame to see economic development relegated to the back of the line, pushing Puerto Rico’s sustainable growth further away for yet another lost generation.




Prepa Overhaul Faces Obstacles

Low Appetite for Renewables; Considerable Challenge to Fiscal Plan

Editor’s note: This report first appeared in the Aug. 22 issue of Caribbean Business.

As Hurricane María cut a devastating swath on a diagonal path across Puerto Rico, creditors of the Puerto Rico Electric Power Authority (Prepa)—some in the path of the storm, others from afar—watched with dread as the public utility’s assets were twisted to the ground. In those months after the disaster, concerns over the value of the utility’s assets gave way to taming a humanitarian crisis—it was nature’s stay on negotiations in the context of Title III proceedings under the Puerto Rico Oversight, Management & Economic Stability Act (Promesa).

Nearly two years after the historic 2017 hurricanes, the debt game is back in full swing and the utility is in a race against time to overhaul the antiquated power company as it struggles mightily to restructure nearly $9 billion in debt. Prepa Executive Director José Ortiz stressed last week that he expects the Federal Emergency Management Agency (FEMA) to grant the $14 billion requested to repair the electrical grid to make the concession of the transmission and distribution (T&D) system viable.

Ortiz said the funds were needed so bidders for the T&D concessions don’t have “to make up the difference,” adding that U.S. District Court Judge Laura Taylor Swain’s date change to address the debt’s restructuring could also affect the process to attract companies to operate the system. He said proposals should be received around October, and that “it is important that we have agreed on the matter with the creditors.”

Prepa’s restructuring and operations brigades have been very aggressive in their attempts to interconnect a large block of renewables, but two sources with knowledge of the negotiations told Caribbean Business they have not seen much response from the capital markets. “It probably has to do with the costs; the current PPOAs [power purchase and operating agreements] that were negotiated in 2012 were priced at 14 [cents] to 17 cents per kilowatt-hour [kWh]. The market in the U.S. is between 2 [cents] and 5 cents,” explained the executive director of the Prepa Project Management Office, Fernando Padilla. “We can’t compare market to market; there are key differences—labor is higher here; transportation is higher here. So, we have negotiated the PPOAs down from 17 cents to between 9 [cents] and 12 cents—we still think that is a tad high.”

Time will tell

The sources out stumping the capital markets say Prepa could be issuing requests for proposal (RFPs) during the next three or four months to gauge the appetite for new renewables. Having proponents from the realm of renewables interested in the assets is important because meager participation skews the utility’s fiscal plan.

The fiscal plan calls for the submittal of a proposed Integrated Resource Plan (IRP) that will serve as the planning document for new generation investment by private developers. The IRP includes plans to transition to new renewables in the generation mix, primarily in solar photovoltaics and battery storage.

Investment banker Citi was also hired by the Financial Oversight & Management Board (FOMB) to help secure the T&D concession. Prepa is looking to achieve long-term concessions with contracts late in the year, somewhere between October and December, said one of the capital sources, adding that Prepa was down to two proponents on that front.

Once the T&D contract is awarded, Prepa’s overhaul troops will commence work on the generation phase. “We know that there is an appetite for Costa Sur, Mayagüez and San Juan—there is a real appetite for that. And, we also see potential appetite for Palo Seco,” the adviser told Caribbean Business. “As Prepa looks for a potential federal funding structure to secure a 300-megawatt combined-cycle unit at Palo Seco, there is some appetite in Costa Sur, and this is what we think is going to happen—as they ramp up the PPOA for EcoEléctrica, they may launch an RFP for an operation/maintenance contract for Costa Sur.”

The adviser sees the operation brigades at Prepa focusing on wrapping up the EcoEléctrica deal to start addressing matters with the Public-Private Partnerships Authority and the FOMB to begin the sale of Costa Sur.

Naturally gas…

The second source in Prepa’s consulting camp confirmed that a term sheet had been secured with Naturgy Energy Group for the use of natural gas that will help Prepa save upward of $120 million. “So, they secured commercial terms two months ago, but there was a whole array of technical aspects of testing, of new infrastructure—that they had to negotiate to align those commercial deals. So, if PREB [the Puerto Rico Energy Bureau] and FOMB approve this transaction, it would be stating that Costa Sur and EcoEléctrica will remain online and there is no need for a new combined-cycle [plant] in Costa Sur,” the source told Caribbean Business.

Still being debated is whether a new liquefied natural gas (LNG) terminal will be built in Palo Seco or Yabucoa. Conventional wisdom at Prepa, based on independent assessments performed by engineering firm Sargent & Lundy, seem to indicate that Yabucoa is a better fit to develop LNG storage infrastructure than Palo Seco—the harbor is one issue, the population density is another and there is strong access to transmission lines and key generation. “The Department of Energy and some federal stakeholders feel that Palo Seco may be a better fit, but we will have a better outline over the next three months. So, by the end of the year, we should have a better idea of whether we will be pursuing a Palo Seco combined-cycle or storage-generation facility in Yabucoa.”

The Naturgy deal essentially needs to reduce some $108 million in fixed costs of the EcoEléctrica PPOA. To get there, Prepa needs to transform the fuel structure. “They are estimating net savings between the fixed-cost reduction and the new fuel contract is going to be a bit north of $120 million,” the adviser added. “The more you use EcoEléctrica and Costa Sur, the more savings you are going to achieve. Our independent evaluation is that if they cap Costa Sur and cap EcoEléctrica, Prepa could be achieving savings somewhere in the vicinity of $150 million.”




Federal Disaster Aid Not Around the Corner?

The Rosselló Administration’s Implosion Has Set in Motion Discussion in the Federal Realm to Rescind Disaster Funds

Editor’s note: The following was first published in print on the Aug. 2, 2019, edition of Caribbean Business.

As the drama over the succession of Gov. Ricardo Rosselló unfolds—amid rumors of pending arrests tied to further acts of malfeasance—Puerto Rico’s government is collapsing like a house of cards. By the time the last joker hits the deck, no one seems to know which vacant cabinet posts will be in place to deal with a Puerto Rico Oversight, Management & Economic Stability Act (Promesa) board that essentially manages all of the island’s financial affairs. The big question looming on the federal horizon as the local carnage of governance unfolds—“will the crisis of confidence claim federal relief funds as collateral damage?” 

So severe has been the injury inflicted to the confidence in Puerto Rico’s ability to govern that some members of the U.S. Congress are discussing the use of rescission to divert funds earmarked for Puerto Rico’s disaster recovery to be pulled back and rerouted. 

“There’s a lot of talk right now—very privately in U.S. Congress—among members on both sides of the aisle of Congress to use rescission for all of the unspent money that was allocated for Puerto Rico; that is a pretty big deal,” one Capitol source with ties to the GOP told Caribbean Business on the condition of anonymity. 

Rescission is a budget process of the United States—the cancellation of a budget authority previously provided by U.S. Congress—whereby the president may propose to Congress that funds be rescinded. According to a report in the Wall Street Journal: “Congress may always—and sometimes does—cancel appropriations that it has made, but the Congressional Budget & Impoundment Control Act of 1974 provides for special rescission legislation that is considered under expedited procedures, making it easier for a simple majority of each chamber of Congress to revisit spending decisions.

The executive and legislative branches haven’t rescinded appropriations in this manner in nearly two decades, but the Trump administration recently sent rescission proposals to Congress. The administration has proposed cutting only 0.4 percent of the federal budget with its first rescissions package. Although the idea is not without merit—after all the federal debt is reaching crisis proportions—using the process in an overtly political manner could, in the long run, hamper the ability of Congress to make future bipartisan deals.” 

The GOP source went on to explain that the idea is to use rescission “to do a different appropriation to direct the administration to use a very specific entry in the Promesa law, where OMB [Office of Management & Budget] will write a disbursement directive. So, OMB will say to all the agencies that any money destined for Puerto Rico will have to be sent to” the Financial Oversight & Management Board. 

Rescind and Conquer 

Two sources with knowledge of the initiative told Caribbean Business that several members of Congress are suggesting privately to the legislative affairs office at the White House that rescission could be just the mechanism that the federal government needs to reroute funds so the Oboard has the final say about how the funds are used. 

—Read the rest of this story in the Aug. 2, 2019, print edition of Caribbean Business.




[Editorial] Something Wicked This Way Comes

Editor’s note: The following was first published in print on the Aug. 2, 2019, edition of Caribbean Business.

First, greed; then, fear—that is the paradigm in the realm of corporate and government malfeasance that often ensues when officers commit high crimes. As pertains to Gov. Ricardo Rosselló’s administration, high crimes—32 indictments against two former agency heads and contractors—and the publishing of private messages between the governor and an inner circle of high-ranking officials did the government in. The Ricky Leaks—889 pages of a Telegram app chat laced with profanity and mockery against the LGBTT community, women, obese people and those who suffered preventable deaths—led to massive protests that forced the governor to submit his resignation, which is effective Friday, Aug. 2.

As this newspaper was going to press, most people in Puerto Rico were on pins and needles, focused on the naming of a suitable secretary of State to succeed Rosselló. This fly in the ointment came after Secretary of Justice Wanda Vázquez, who was next in line after the resignation of former Secretary of State Luis G. Rivera Marín, announced she had little interest in occupying La Fortaleza—via Twitter, no less.

As everyone is focusing on this crisis of succession—asking will the successor be former Resident Commissioner Pedro Pierluisi, former Senate President Kenneth McClintock, former Treasury Secretary Teresita Fuentes, Senate V.P. Larry Seilhamer or Dr. Iván González Cancel—there are movements afoot by some members of U.S. Congress who are not particularly concerned about who is ultimately named the designated survivor.

To quote one source on Capitol Hill with ties to the GOP: “We don’t really care, but ultimately it should be someone who speaks American English and is a good administrator. On the other hand, if they were for independence, that might be music to our ears.” That source knows that members on both sides of the aisle, along with President Trump, are contemplating using rescission to reroute disaster funds already earmarked for Puerto Rico’s recovery.

Rescission is a process whereby the president proposes that funds in a previously provided authority by Congress be canceled. In this week’s Cover Story, Caribbean Business reports that the initiative to rescind the money is being discussed by representatives on the Hill who have reached out to the White House’s Legislative Affairs office to gauge Trump’s appetite for rescission. If the process gains traction, the plan is to use rescission “to do a different appropriation to direct the administration to use a very specific entry in the Promesa law where the OMB [Office of Management & Budget] would write a disbursement directive. So, OMB will say to all the agencies that any money destined for Puerto Rico will have to be sent to the [island’s fiscal oversight] board.”

The requests for proposal for the Home Repair, Reconstruction or Relocation program projects in the coming phase of disaster recovery funds require proponents to show evidence of liquidity, a price list on more than 3,000 items, as well as designs in advance. Construction managers looking to perform work within a large area must prove sufficient bonding capacity to cover, at a minimum, $25 million. For smaller contractors, the minimum is $5 million.

As this historic vortex pulls confidence in Puerto Rico down the drain, the island’s Legislative Assembly will be filing measures to enable referendums on constitutional amendments. If nothing else, if this crisis of confidence leads to amendments that improve our Constitution so a lieutenant governor is included on the ballot and the ability to conduct recall elections, as is the case in 19 states, something positive will have been achieved.

As to the prospects of the rescission of disaster-relief funding for Puerto Rico being employed, we must keep our eyes peeled. The message underpinning the indictments and the offensive discourse in the chat is that acts have consequences. Unfortunately, on this occasion, the consequences are dire for Puerto Rico’s reputation as a fertile jurisdiction for investment and for the prospects of sustainable development on this island, which has been mired in a 12-year economic slide.




[Editorial] Pension Reform Comes Home to Roost

Editor’s note: The following was first published in the June 27 to July 3, 2019, issue of Caribbean Business.

When it comes to the myth of abundance, few are the areas where it is most painfully exposed than in the realm of pensions that are too good to be true. In Puerto Rico, sadly, the rude awakening commenced with some bitter medicine prescribed by the Financial Oversight & Management Board in its fiscal plans for pensions to be cut up to 25 percent. An agreement on the about $50 billion in unfunded pension liabilities that affects more than 300,000 beneficiaries could not come a moment too soon.

For decades, this newspaper has been warning about the need for defined contributions to backstop the Puerto Rico government’s severely unfunded Employees Retirement System (ERS). In one story after another, Caribbean Business sounded an alarm that not a single person heeded.

In 2003, we reported that the unfunded obligation of the ERS represented $4,038 per capita while the average stateside was $1,458 per capita. A 2003 actuarial report prepared by Mellon Human Resources & Investors Solutions, former actuaries of the ERS warned: “At present levels, the contribution deficit will continue to deteriorate the financial status of the ERS. The strained actuarial condition is not expected to correct itself anytime soon without significant additional contributions from the government.”

And, thus, the massive deficit continued its unrelenting growth as confirmed in a 2008 actuarial valuation report prepared by Milliman, the ERS actuaries at the time. Such was the catastrophic magnitude of the pension black hole that unfunded liabilities skyrocketed 500 percent from 1989 to 2009. Yet, not one administration had the political resolve to defuse the ticking pension time bomb.

In 2010, then-Gov. Luis Fortuño announced the creation of a special commission to reform the public pension system. At the time, most observers calculated the unfunded pension obligations at $14 billion. This newspaper reported that they actually reached $18.9 billion. Caribbean Business explained at the time that “this means that while the ERS obligations were $18.9 billion, net assets to pay those benefits were only $1.85 billion”—less than $1 for every $10, the lowest funding ratio anywhere in the United States and its territories at the time.

Alarming as those numbers were, little concrete action came from the Fortuño administration. The same held true for Fortuño’s successor, Gov. Alejandro García Padilla, whose pension reform may have just as well been written on toilet paper. What we got instead was the Puerto Rico Oversight, Management & Economic Stability Act (Promesa), which brought the chickens to roost in the form of an Oboard tasked with reining in benefits.

To be fair, the runaway gifts paled in comparison to the Christmas tree pensions given to the employees at the Puerto Rico Electric Power Authority (Prepa), where retirees’ entire families were entitled to benefits amounting to nearly $70,000 annually in some cases. Not too shabby for 30 years’ service. Such was the retirement bonanza at Prepa that expenditure amounted to nearly $39 million monthly for the government’s predictably bankrupt energy utility. Time was when people got jobs at Prepa, they were made in the energy shade. Now, Prepa pensions will likely be targeted for fiscal tightening.

Every pensioner will feel the pain. That those cutbacks in benefits in the ERS and Prepa are inevitable, have not sunk in with everyone. Particularly off putting is the insistence of Rep. Lourdes Ramos, who presides over the House Retirement & Veterans Affairs Committee, in benefiting from Act 301 of 2012, which allows former government employees to accumulate benefits despite not having worked at those government agencies in years.

In Ramos’ case, she is suing to have her time working at Prepa despite not having worked at that agency over the past 14 years. Ramos is also demanding to have her highest salary as a representative as the benchmark for her benefits. All told, this allegedly would represent a benefit of some $11,000 annually.

This newspaper condemns Ramos’ move as an affront to good and decent public service. In Puerto Rico, we have a saying—tiene cara’e lata, which literally translates to having the face of a can, but meaning to have no shame. There are hundreds of thousands of dollars being cut from retirees in the Promesa sweepstakes. Ramos deserves to suffer the same consequences, not a higher privilege. Hopefully, the people will make her suffer defeat at the polls in the 2020 election. Bad form.




[Editorial] Ticking Time Bomb RSA

Puerto Rico electric bill hike may force our grandchildren back to the stone age

Editor’s note: The following was first published in the May 9 – 15, 2019, issue of Caribbean Business.

When is an agreement not an agreement? When it is a restructuring support agreement (RSA) among the various creditor constituents holding Puerto Rico Electric Power Authority (Prepa) debt. The $9 billion owed by the ruptured cash cow belongs to retail bondholders, fuel-line lenders and monoline bond insurers on the hook for billions, all of whom have lived through too many forbearance agreements and two previous RSAs—all to recoup what little value of their paper they may.

In two previous incarnations of term sheets under previous Prepa RSAs, the sticking point always came down to the math in transition rates underpinning bond exchange formulas—when looked at closely, the rates always blew to unsustainable levels.

The first RSA struck by Prepa’s restructuring brigades, bondholders, fuel-line lenders and bond insurers in 2016 was ultimately rejected by the wise men and women sitting on the Financial Oversight & Management Board (FOMB) due to errant math in electricity-rate projections.

Navigant, the energy-consulting firm crunching those numbers, based their rate case on 2014 population figures—the mass exodus of some 64,000 people that year and each of the following two years from the island, heading for less trying jurisdictions—exposed electricity rates that would have skyrocketed by more than 25 percent not too far afield. Not good.

In those days, you had nearly 70 percent of the creditor constituents on board, which would have taken the accord to Title VI of the Puerto Rico Oversight, Management & Economic Stability Act (Promesa), where you could bind the holdouts for a final agreement. It was not to be.

Important creditors and Gov. Ricardo Rosselló’s restructuring squad are telling all who will listen that RSA 2.0 is different because it has the FOMB’s Good Housekeeping Seal of Approval. Never mind that under the most recent RSA you have a razor-thin majority of 51 percent of the creditor constituencies on board; that is a far cry from what you had under Prepa RSA 1.0 struck in the dawning of the age of Promesa back in 2016—where you had nearly two-thirds of the creditors on board in an RSA that one of Promesa’s founding fathers, Rob Bishop (R-Utah), thought was ironclad because he codified it into law. Ask Bishop how that went.

But that is only a small detail. The OBoard insists that under Title III it will not matter that the fuel-line lenders and the monoline bond insurers National and Syncora are not onboard. Instead, those who support the RSA are touting the bond exchange, which includes a swap of their power revenue bonds for two types of securitizations. Series A bonds will comprise about 67.5 percent of the value of the existing bonds while Series B bonds will be growth bonds linked to the island’s economic recovery and the repayment of the Series A bonds. The repayment of the bonds will be backed by a fixed transition charge on customers’ bills that would start at 1 cent per kilowatt-hour (kWh) in July, increasing to 2.768 cents per kWh upon closing and increasing thereafter to 4.552 cents per kWh during the 40-year maturity of the bonds.

So, the four-and-a-half-cent increase will take place so far down the road that we the people will not feel it, although our grandchildren may be forced back to the stone age.

Advisers with knowledge of the details behind Prepa’s transformation told Caribbean Business that an essential component of the utility’s most recent attempt to restructure debt hinges on greater efficiencies achieved through privatization of the utility’s assets. This includes deals struck with natural gas suppliers who have agreed to significant discounts worth nearly $180 million—nowhere in the Title III world is that expected. According to sources, “they understood that the contract in the context of the IRP, would render the deal as not viable; if they did not do that—it would be a nonperforming contract for Prepa.”

¿Y los renewables pa’ cuándo?

How altruistic of the natural gas companies to enter into agreements at such affordable rates. What we should be asking ourselves is whether they will show such kindness a decade down the road when the time comes to renegotiate those contracts. Will we be anywhere near the renewable energy goal of 50 percent renewables in our baseload by then? These are important questions to ask now, lest the people and the business community be blown to smithereens by the ticking time bomb of unaffordable energy in a not-so-distant future.