Sunday, October 21, 2018

Caribbean Business uncovers the true state of the power utility’s inventory

By on December 15, 2017

Editor’s note: The following article originally appeared in the December 14 print edition of Caribbean Business.

When a wind beast named Maria tore through Puerto Rico on Sept. 20, 2017, the Category 4 hurricane did more than gut every nook and cranny across the metropolis and countryside—it laid threadbare the truly fragile state of a decrepit power grid years in neglect. Weeks before those first 155-mph sustained winds ran roughshod over the island, Ricardo Ramos, who was the then-executive director of the Puerto Rico Electric Power Authority (Prepa), told Caribbean Business that the bankrupt utility could not withstand the brunt of a Category 4 storm—“If during Hurricane Georges, 100 lines went down in 1998, today, the same [kind of] hurricane would bring down 1,000 lines,” the former executive director said at the time.

Perhaps Ramos would have multiplied those projections 50-fold, if he had listened to one of his field workers, a 23-year veteran Ernesto Guerrero (not his real name), who told this newspaper: “If a hurricane like this one [Harvey] hits us, the system is not going to come online, I’d say, in over six months. Right now, the warehouses don’t even have the materials. I’m talking about the utility poles and other stuff.”

The Prepa field worker’s estimates published in the Sept. 7 edition of Caribbean Business have proven prophetic. Nearly three months after Maria’s departure, more than 36 percent of the island remains without power thanks to a confluence of factors underpinned by the utility’s depleted inventory and a broken bank.

The Edison Electric Institute’s white paper, “Understanding the Electric Power Industry’s Response & Restoration Process,” posits a speedy recovery that is predicated on “significant logistical experience, along with skilled workers and specialized equipment.” All three elements were missing in Prepa’s response.

Prepa’s failure to line up mutual assistance (MA) prior to Maria’s onslaught underscores the lack of logistical experience. Most utilities have a playbook in place that includes a checklist to make certain there is alignment of proper resources and specialized equipment. Synchronicity is a tenet put in place to avoid the mistakes of recoveries past such as that documented by T&D World, an energy trade publication, which reported: “Following super storm Sandy, however, some utilities learned they did not send the right resources. For example, one utility sent overhead transmission crews to provide mutual aid in areas with underground distribution.”

Bare Bones Inventory

In Puerto Rico, a culture of austerity in the transformation of the utility under AlixPartners shrunk the inventory of concrete, wood and metal distribution poles down to a bare minimum that left Prepa without the necessary materials to rebuild its devastated grid. All told, some 116 towers for 230 kV lines and 574 poles for 115 kV lines were destroyed—of that total 43 of the 230 kV towers and 122 of the 115 kV towers have been repaired to date. That status update obtained by Caribbean Business tells only part of the story as 52,480 total poles are required of which 6,228 have arrived and 8,500 are expected to arrive over the next two weeks. Add to that total, 17 million conductors that are needed of which 347,000 have arrived and some 4.5 million are expected to arrive over the next two weeks and there are only 7,639 insulators where 184,750 are needed. When the MA crews from New York, Georgia and Florida arrived, they did not have enough materials to fix the distribution lines they targeted for recovery.

“We have to keep in mind that Puerto Rico went through two events back-to-back; first Irma, then Maria,” said José Ortiz Vázquez, a former executive director of the Puerto Rico Aqueduct & Sewer Authority (Prasa) and former Prepa board chairman, who is currently vice president of Development for CSA Group Inc., a full-service project delivery company established in Puerto Rico and exporting its services throughout the Americas. “Irma ate up the little inventory that Prepa had. If you recall, we had at least 20 percent of the island without power. Then Maria arrives, and you have a utility without power and without liquidity. Everyone knows that the U.S. Army Corps of Engineers [Usace] is very slow in reacting, but it offers two advantages—first,that the government doesn’t have to take out money because FEMA [Federal Emergency Management 

Agency] pays them directly and, number two, you have delivery. When you have an agency that is without communications and perhaps without expertise to do the recording of everything to ensure eligibility of all the tasks you are undertaking, you run the risk that FEMA pays you and you later have to reimburse them because you don’t have the adequate documentation. When it is done by Usace, it is automatically qualified and in compliance.”

Prepa’s top brass found themselves between a rock and a hard place, without money and facing reconstruction costs amounting to at least $3 billion in the emergency-repair phase, according to conservative estimates. All told, eight of the nine primary lines that supply power generated in the South to populations in the North were downed, 116 towers were destroyed, and more than 50,000 concrete, wood and steel distribution poles were snapped or twisted, and the entire island was in the dark.

“Right now, we are in a ‘Band-Aid’ approach, in a race against time to connect the primary lines as we continue to receive concrete, wood and metal distribution posts to continue bringing people back online—that will take us into 2018,” said one Prepa engineer employed at the Central San Juan Powerplant, who chose anonymity for fear of reprisals. “Once we get through this Band-Aid stage, we can start to focus on building new microgrids at critical points such as hospitals.”

At this critical juncture, Puerto Rico’s people and a rapidly vanishing small- and midsize-business community are reeling from a spate of questionable decisions by the Rosselló administration’s top brass early in the recovery stage. Prepa is truly in a race to stem the tide of shuttered businesses—some 5,000 have closed thus far—and massive outmigration, the estimates of which range between 100,000 and 200,000 people over a three-month period.

When Hell Freezes Over

Members of the U.S. Congress, who have before them a request from Gov. Ricardo Rosselló for some $94 billion in aid, including some $18 billion for Prepa, seem disinclined to approve any additional funding without the proper oversight. Reluctance on the Hill traces to Prepa’s post-Maria response, which has been widely called into question, the criticism largely centering on Prepa’s failure to request mutual aid (MA) from the American Public Power Association (APPA), which is available to all members, and the hiring of Whitefish Energy, a small Montana-based company hired to the tune of $300 million, in a deal rife with irregularities that raised suspicion from friend and foe on Capitol Hill.

Rep. Rob Bishop (R-Utah), who chairs the U.S. House Natural Resources Committee, has said time and again that he would like to see the Financial Oversight & Management Board (FOMB) and the Rosselló administration work together to rebuild a more resilient Puerto Rico. To that end, Bishop hoped the Puerto Rico government would accept the oversight board’s appointment of Revitalization Coordinator Noel Zamot to rule over all things Prepa as the utility’s Chief Transformation Officer. Much to the dismay of Bishop and representatives on the Hill tied to the GOP, who invested significant political capital in passing the Puerto Rico Oversight, Management & Economic Stability Act (Promesa) to provide a mechanism to restructure the island’s $69 billion debt load, the Rosselló administration filed suit against the board on the claim that the FOMB had overstepped its bounds. Federal Justice Laura Taylor Swain, who is hearing bankruptcy proceedings under Title III of Promesa, decided in favor of  the government.

“It is not a secret in Washington that the governor is not interested in working with the board and there is no interest in Washington to further the notion that Puerto Rico is a colony,” said one source on the Hill with ties to the GOP. “So, an elegant way of dealing with both of those [issues] is to say [in the appropriations bill] you are going to get the $10 you are asking for, but you are going to have to obtain approval from the board before we actually make the transfer.”

The controversy over self-rule underpinning Promesa’s colonial vestiges throws a complexity into the mix for policymakers at loggerheads over regulatory oversight of a public power company that is coming to grips with its long-held myth of abundance. Matters of debt restructuring and operational overhaul at Prepa are never simple. The complexity traces to a legacy of malfeasance decades long—cronyism run amok, obsolete powerplants dependent on crude bunker C, decrepit transmission and distribution, and debt soaring to $9 billion.

Prepa recently appointed energy and restructuring expert Todd W. Filsinger as its chief financial officer to lead the public corporation through its restructuring. He will work under a contract that is capped at $5 million. His appointment follows that of Lisa Donahue and her firm AlixPartners in 2014, which earned $44 million during her tenure.

One former Prepa adviser interviewed by Caribbean Business, who chose anonymity, pointed out: “Prepa is going to need a Chief Restructuring Officer—let’s call it by the name—to come in with the best interests for the utility and can have the ownership of how to privatize the instrumentality. That is what Prepa ultimately needs: bring someone in who can help knock this out and transform the company and privatize it; define what should be the new model of the utility. Someone who can manage the transformation and modernize the utility.”

Grid of the Future

Whoever heads Prepa’s long-term transformation will face vast challenges in building a more resilient grid. CSA Group’s Ortiz says he has the ideal blueprint for Prepa’s enhanced resilience. “What would we do with the grid to make it more resilient? The electric poles with the highest voltage should have metal posts as high as possible, making certain their surroundings are clean [free of trees and shrubs] and also have underground distribution lines for all critical installations. Not all lines should be underground—that doesn’t make sense. Nor does it make sense to bury the high-voltage lines,” Ortiz explained. “Everything that is high-voltage (230 kV [kilovolt] lines) has to remain high up. So, transmission above ground; distribution in critical areas, underground.”

The critical facilities about which Ortiz speaks are the principal ones belonging to the water resources authority—Carraízo, Sergio Cuevas, La Plata, the Superaqueducto—hospitals, the banking district and commercial centers. “We are always off running to fix these things and it takes us a month and a half to power those things up and then dedicate ourselves to the general population. So, if you bury the lines that feed critical infrastructure, the day after the event you can go straight to the population,” Ortiz added.

The former Prasa executive director sees Eastern Puerto Rico as an ideal location to set up a microgrid driven by a smaller powerplant because there are none in the region. The lack of a powerplant in the island’s Eastern sector challenges reason, says Ortiz, because “we generate 23 percent of the island’s economic activity in the area between Juncos, Las Piedras and Humacao. You have Amgen, Medtronic with two plants, several GE plants, Johnson & Johnson—the list is long.”

Ortiz had designs on energy independence bolstered by the right mix of renewables during his tenure under the administration of former Gov. Luis Fortuño (2009-2012). The quest for a new energy paradigm under the Fortuño administration was addressed in recommendations contained in a report by Álvarez & Marsal, an energy valuation firm. The report calls for a hard jog toward natural gas by Prepa with the building of the controversial and now-defunct Vía Verde gas pipeline based on the cost of natural gas at about $8 per MMBTU in 2012.

“Today, you talk about natural gas, but in Puerto Rico propane is less expensive than natural gas,” explained CSA’s Ortiz. “In the United States, natural gas is cheaper, but when you calculate the importing and having to freeze it at minus-273 degrees for it to become liquid, the cost rises to above $10 per MMBTU. Propane costs you $8—the handling and shipping is much less expensive.”

With that equation in mind, Ortiz believes Prepa should build “three-fuel” units—natural gas, propane and diesel—“so you have that mix to play with.” The power and water resources veteran explained that the smaller and more efficient combined-cycle plants are quick-response units. “The new plants operate almost from zero to 300 MWs, and it is not a problem to operate within that range. And it goes from being shutdown to coming online in eight minutes,” Ortiz explained.

The need for quick response by microgrid islands is made tacitly clear in the grid’s long haul to recovery as the system came down seven times prior to stabilizing generation in the North with a loop made possible by connecting the 50900 line to power generated in the South. Each outage led to lengthy blackouts because it takes Prepa plants eight hours to power up when they come down.

“It is a nightmare; those plants are there for baseload, to leave them there running at full capacity. We should be aspiring to build the quick-response units because you can bring more solar with them as well,” Ortiz added. “Aguirre doesn’t respond to solar; Costa Sur doesn’t respond to that, San Juan doesn’t, nor does Palo Seco. Those obsolete powerplants don’t allow you to grow. Because you have clouds passing and the equipment detects that part of the system has dropped off, it powers down. Those powerplants are the ones limiting our use of solar, which is extremely affordable now.”

“Take those units and sell them as scrap to the Chinese if you want, and build new units because the value of those sites is that you are interconnected in Puerto Rico, the value that you have is the grid. So, let’s improve the quality of the grid.”

Although Ortiz, too, understands that overhaul will have to come after restoration of power across Puerto Rico, he believes it is possible to achieve a more resilient grid within five years.

Blowing Down the House

In this age of climate change, there is plenty of debate over the path to resilience by policy wonks in the energy realm. In a special report on Energy, as part of the Wall Street Journal’s Big Issues series, the question was asked: “Should Governments Require Utilities to Make the Electric Grid More Stormproof?”

In the argument for greater public regulation of utilities, Jennie C. Stephens, associate director of Northeastern University’s Global Resilience Institute, says “utility commissions are not adequately promoting sufficient grid resilience investment for the public good. More regulation is needed to ensure that as utility companies stormproof their grids, they are innovating for the good of society, and not just maximizing shareholder returns.” Stephens, like Ortiz, believes “the tragedy in Puerto Rico, where Hurricane Maria effectively destroyed the grid, is an opportunity to rebuild with distributed renewable design…regulators should require utilities to upgrade, upgrade and innovate.”

In a counterpoint, Paul Stockton, managing director of the economic & security advisory firm Sonecon LLC, stresses that utilities “don’t need more regulation. Instead, industry and government leaders need to build consensus on how best to prepare for the storms to come and how the utilities recover the costs of those investments.”

Puerto Rico is not the exception to the arduous debates between competing interests in the overhaul of energy. “Prepa is a cash cow for anyone and most of the people involved have part interest—I mean power,” said the former Prepa adviser. “Many of the people want to make a quick buck or they are drunk with power. It is the second-largest public utility in the United States. And individual interests always clash with the utility’s interests.”

Joy Hughes, executive director of Solar Gardens Institute from New Jersey, asked the Puerto Rico Energy Commission (PREC) for expedited rule making that would spur community renewables.

The request was made as part of PREC’s probe into the state of the electric system following the passing of Hurricane Maria.

Hughes said community solar offers an opportunity for electricity customers, including those with low to moderate incomes, to own shares in solar energy farms close to their residence or place of business. “This model for distributed energy development has been implemented successfully in several states, including Washington, Colorado and Minnesota, and new programs are beginning implementation in the District of Columbia, Maryland, New York and Hawaii,” he said.

An expedited implementation process could allow the first projects to begin operations within 12 months. He said the projects will be recommended by an official with the help of organizations dedicated to renewables.

Prepa’s culture of kleptocracy, and a myth of abundance underpinning a massively unfunded pension system that costs nearly $39 million monthly in benefits to retirees and their families, has put the utility squarely in the sights of U.S. Congress as the utility rebuilds. Republicans on the Hill see the selection Filsinger as a step in the right direction to restore value to a utility that was voted tops in the United States in the early 1970s, only three decades after it was founded as La Autoridad de Fuentes Fluviales in 1941. Yet concern remains on the Hill that history will repeat itself after recovery—the resilient reconstruction left for another day.

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