Monday, September 24, 2018

Congress Watchful of Prepa Moves

By on August 10, 2018

Editor’s note: This article first appeared in the Aug. 9 – 15 issue of Caribbean Business.

Sitting in his large office overlooking Ponce de León Avenue, José Ortiz, executive director & CEO of the Puerto Rico Electric Power Authority (Prepa) since July 20, says the government has received 10 offers to buy the bankrupt power utility, whose grid is being hardened through $10 billion in federal disaster aid and $250 million to be approved by Congress. Prepa’s grid is being transformed to an “intelligent system of distributed energy generation” that will handle small grids powered by renewables or natural gas facilities built by the private sector. The utility’s executive director says he plans to shutter some of the powerplants in south Puerto Rico, whose names he declined to mention, and possibly build a baseload powerplant in the east where there are no powerplants.

 

While natural gas will play a major role in satisfying the island’s energy needs, Ortiz anticipated the proposed Aguirre Offshore GasPort, a liquefied natural gas facility in Salinas, will not be built because Prepa does not have the $500 million needed for the massive project.

“I am not here to improve Prepa; I am here to replace it,” he said. After 78 years of mishaps as a public utility, he said it is time for Prepa to be controlled by the private sector.

José Ortiz, executive director & CEO of the Puerto Rico Electric Power Authority (CB photo)

Ortiz was appointed in mid-July after his predecessor, Walter Higgins, and his immediate replacement, Rafael Díaz Granados, stepped down over salary issues that also led to the resignation of five Prepa board members. Before Ortiz’s appointment, the governor named P.R. Aqueduct & Sewer Authority (Prasa) Executive Director Eli Díaz Atienza and engineer Ralph A. Kreil to Prepa’s board. The appointments raised concern among observers in Puerto Rico and Washington, D.C. over political influence at Prepa and Ortiz’s past experience as Prepa’s board chair. Ortiz served as Prepa’s chairman from 2011 to 2013 and as Prasa’s executive director from 2007 to 2013. He also chaired the island’s Infrastructure Financing Authority from 2009-2012, as well as the interagency board for Puerto Rico that managed American Recovery & Reinvestment Act (ARRA) funds from President Barack Obama’s stimulus package.

Many of the concerns about Ortiz’s leadership stem from some 60 renewable energy contracts reportedly signed with high costs, seven of which were recently approved again by the Puerto Rico Energy Commission, and also amid reports he artificially reduced energy rates.

Ortiz arrived at Prepa with a $250,000 salary, which was much less than the $750,000 offered to Díaz Granados for the job. “They compared it [the salary] with what is paid in the industry. The problem is that Prepa is bankrupt. We are living on an island that has suffered a lot, and those things hit hard. I cannot say my salary is adequate. Maybe if everyone were making a good salary, my salary could be higher,” he said.

Prepa currently has $19 million in contracts that do not include the $32.7 million contract paid to Filsinger Energy Partners as chief financial adviser and the $18 million contract with Ankura Consulting for services associated with the Title III bankruptcy process. The board recently approved both contracts with objections. Members said the Filsinger contract exceeds the scope of responsibilities allocated to the CFA under the certified Fiscal Plan and encroaches on the roles and responsibilities of Prepa’s CEO, who is the person in charge of daily operations. Just last week, Prepa signed a $3.6 million contract with Intelligent Grant Solutions to help with federal funding applications.

Ortiz said he believes the board is correct in its assertions and has already met with officials of Ankura and of Filsinger to amend the contract. “I am asking for adjustments [related] to each company. They entail examining their roles and determining how much we are willing to pay,” he said.

However, Ortiz noted he needs to hire experts, particularly in the area of natural gas.

“We also need experts, even though we are working with Citi Group, to mount the models to put the grid under concession and to put our generation assets on the market. We do not have the expertise here,” he said.

Prepa pact only settles fraction of debt

Prepa recently reached a preliminary debt-restructuring agreement with the Prepa Ad Hoc Group of Bondholders, which Ortiz said comprises $5 billion in unsecured debt. “And we negotiated with 35 percent of them [the creditors], or about $2.7 billion. The rest we are going to have to pay…that has not been said publicly,” he told Caribbean Business.

“I think this agreement is excellent,” he said. While fuel lenders and monolines are not part of the agreement, Ortiz said they will end up joining the agreement after fighting tooth and nail against it.

Prepa headquarters in San Juan

How is the rest of Prepa’s $9 billion debt going to be paid? Ortiz said the debt will be covered with a 2.63-cent charge on utility bills. He expects to lower utility rates, which he said will never go to 30 cents per kilowatt-hour (kWh) as some have claimed, by facilitating the use of natural gas and renewables and obtaining federal backing.

“We need to get cheap land and rent it to potential [project] developers because power can be as cheap as 10 cents per kWh and that would make us more competitive,” he said.

Ortiz also said the collective bargaining agreement needs to be changed to make it more flexible, so workers can perform different types of jobs. He also needs the $3.5 billion pension debt managed and to obtain $25 million in savings in health insurance benefits.

About $10 billion in federal aid will be used not only to make the energy grid stronger but to also increase its capacity so it can incorporate renewables and natural gas. “Wind and solar power is not very consistent, and we need batteries and peaking units to manage the voltage,” he said.

While Puerto Rico is not paying its debt to Prepa creditors because of the bankruptcy process, he said “that will not always be the case and we will end up paying,” he said.

However, Ortiz said rates will not be high because Prepa is going to start using economic fuels to provide for the island’s energy needs.

Sale of energy assets

Ortiz said the sale of Prepa’s generation assets has to move quickly. “We need capital to change the generation equipment. Every unit that is changed represents 30 percent in savings. We have to do it fast to help the economy,” he said.

Ortiz said he does not foresee the closing of powerplants in the north, such as the Palo Seco Powerplant, the closing of which was recommended in a report. But he predicted powerplants in the south will close. “I don’t want to say which ones because what if someone decides to buy one of the powerplants?” he asked.

The only cardinal point where Puerto Rico does not have a powerplant is in the eastern region, the site of numerous pharmaceutical companies, including Johnson & Johnson, Medtronic and Amgen, and hotels such as the Palmas del Mar resort. Ortiz said he is evaluating plans to propose the construction of a baseload power plant.

Power structure

As mentioned, Prepa will organize itself into a system of distributed generation, in which consumers will have power closer to their homes and businesses through microgrids that operate with renewables or natural gas. The government plans to sell power-generation assets to private companies but also maintain control of transmission and distribution through a concession within the next two years.

Despite its deteriorated infrastructure and debt, Ortiz said 10 companies are interested in buying Prepa’s assets in a market process completed by professionals of the Financial Oversight & Management Board. Ortiz did not reveal names of the interested parties.

While most environmentalists and consumers hope to see Puerto Rico fully powered by renewables, as is the island of Samoa, Ortiz said the problem at this juncture is that renewables are an unreliable source of energy and are not convenient for Puerto Rico, which has industries and manufacturing. He plans to reinforce wheeling programs, in which utility areas with too much supply can transmit excess power to other utilities with too much demand. The ultimate goals are to move the least-cost power to where it is needed and maximizing efficiencies.

“We are going to have a model with a private power generator and a grid being administered through a concession,” he said.

He said Prepa will use the $10 million in federal aid to make a stronger and intelligent grid but will not use it for new capital projects because those will be completed by the private sector.

Ortiz also said the contribution in lieu of taxes for municipalities’ use of electricity will not be eliminated but caps will be implemented to force towns to save energy. “We are going to have a grid that manages different forms of energy,” he said.

Congress provides $250 million

This past week, Ortiz met with members of Congress and, more importantly, reached an agreement with the U.S. Department of the Treasury, the Office of Management & Budget and the Federal Emergency Management Agency that will result in an additional $250 million for the island’s energy needs.

While a bill in Congress to sell Prepa would provide $3 billion to the utility—the same amount it needs in its fiscal plan for capital improvements—Ortiz said there is no mood in Congress to take control of the power utility. “Their approach toward us is to support us technically,” he said.

David Owens, president of Prepa’s Transformation Advisory Committee, recently expressed concern that the utility’s governing board could lose its independence and become politicized in the fight to transform Prepa into a more efficient corporation. Ortiz said he spoke to Owens and got his support.

“I told him we wanted them to bring us the experience from retail models from Texas because, in the end, retailers will sell to consumers and we needed help in negotiations for natural gas,” he said.

Ortiz also revealed that as a member of Prepa’s Regulatory Framework Committee, he believes the energy regulator, the Puerto Rico Energy Commission, will be totally depoliticized because, in the end, it will only be overseeing private companies.

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