Bond insurer urges Gov. Rosselló to increase electricity rates

SAN JUAN — Assured Guaranty, a bond insurer that recently filed action to place the Puerto Rico Electric Power Authority (Prepa) in receivership, urged Gov. Ricardo Rosselló and the commonwealth’s financial oversight board to immediately green light an increase to electricity rates on the island.

“Prepa rate increase is long overdue. The longer a rate increase is delayed, the greater the funding shortfall faced by Prepa. Given the decline in oil costs and the low rates currently charged, we urge that Prepa, the commonwealth, and the oversight board act in a fiscally responsible manner and raise rates immediately,” stated Dominic Frederico, president & CEO of Assured, in a letter sent Friday to the governor and the board’s chairman, José Carrión.

Puerto Rico Gov. Ricardo Rosselló (CB Photo)

Earlier this week, Assured and other Prepa creditors holding a majority of the utility’s roughly $9 billion in debt filed a motion in federal court seeking the appointment of an independent receiver at  Prepa. The monoline and another bond insurer, National, also seek to have the court declare as valid a restructuring support agreement (RSA) struck two years ago by the government and Prepa creditors, but which the board failed to approve. The latter led to Prepa’s bankruptcy filing under Title III of the federal Promesa law.

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In his letter, Frederico mentions that the cost of electricity in Puerto Rico has been a focal point of recent discussions concerning Prepa’s fiscal plan, as well as the most recent negotiations over the now-terminated RSA.

“This has been the case despite the fact that electricity rates have long been undercharged by Prepa, and have in fact declined precipitously over the past five years for the benefit of consumers and commercial users. Notwithstanding the foregoing, additional rate savings were agreed to by Prepa’s creditors through several recent rounds of RSA renegotiations,” the letter added.

Assured’s Frederico went on to say that the island’s fiscal board “inexplicably and unlawfully” failed to approve the RSA, which would have allowed Prepa to keep currently subsidized electricity rates for some time “before allowing for a gradual return to normalized levels that reflect the actual costs of running an island,” according to the insurer.

Assured further argues that debt service represents less than 20% of the overall rate structure of Prepa, so the utility must focus on improving operations and reliability rather than “extract yet more concessions from current capital providers.”

Prepa rates have decreased and are, currently, 19 cents per kilowatt hour, mostly due to lower fuel prices. Prepa creditors also say that relending arrangements reached during the past few years have also allowed the utility to charge lower rates to clients.

“From 2008 to 2014, the average electricity rates charged by various other electric utilities on other U.S. and Caribbean islands was approximately 33 cents per kWh. Over the same period, the rate charged by Prepa was approximately 24.7 cents per kWh, or 25% less than the comp set average,” Frederico stressed in his letter, which adds that recent reports show that oil prices will continue to fall in the near future.

The communication to the governor and the board chairman also mentions that Prepa is legally required to have rates that cover both current expenses and debt service requirements. The latter would have been covered by a three cent transition charge negotiated as part of the restructuring deal that the oversight board rejected.

A Chronicle of Prepa’s RSA Saga

“Thus, rates are artificially depressed and are not compliant with applicable law or the Trust Agreement. Failure to immediately increase rates to reflect the actual cost of providing electricity will perpetuate Prepa’s past failures—i.e., the failure to collect sufficient funds to responsibly manage and invest in the utility for the ultimate benefit of the ratepayers,” Frederico said.

Earlier this month, the fiscal board commenced a Title III bankruptcy proceeding on behalf Prepa, after a majority of board members failed to approve the RSA.

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