Monday, December 9, 2019

Critical Puerto Rico Infrastructure Projects Left in Limbo

By on April 26, 2019

Some $8 billion in once-touted Title V works frozen

Editor’s note: The following was first published in the April 25 – May 1, 2019, issue of Caribbean Business.

BY PHILIPE SCHOENE ROURA & EVA LLORÉNS VÉLEZ

Come June 2019, the Puerto Rico Oversight, Management & Economic Stability Act (Promesa) will mark its third year of existence, with little going down as the bill’s authors had expected when they were drafting the law in 2016. Back then, in those salad days of tweaking, considerable political capital was invested by U.S. House Natural Resources Chairman Rob Bishop (R-Utah) to appease creditors, who wanted the law to include mechanisms that would right Puerto Rico’s fiscal ship with structurally balanced budgets, while providing such mechanisms as Title VI for consensual action and Title III for orderly restructuring of debt in bankruptcy-like proceedings.

Title V’s Cooper

The authors also put in significant time drafting Title V for completion of critical projects. That herculean task was headed by a handful of people on the Hill, foremost among them were Bill Cooper, a senior policy adviser to Bishop and former point man on the Subcommittee on Energy & Mineral Resources; and Maryam Sabbaghian Brown, who spearheaded the effort as former House Speaker Paul Ryan’s policy and senior energy & environment counsel.

Although much has been written about sticking points in Title III, the need to bind the holdouts in Title VI and firewall provisions for pension plans, little attention had been given to the statecraft driving Title V, until it was made public that Cooper, the former president of the Center for Liquefied Natural Gas (CLNG), a trade association of LNG producers, shippers, terminal operators and developers, had been offered the post of executive director of Promesa’s Financial Oversight & Management Board (FOMB).

Early on, when Puerto Rico’s debt crisis came knocking at the door of U.S. Congress, the ghost of bailouts past came to the fore in epic infighting between creditor groups defending the priority of their credits. The many subplots underpinning the legislation enabling Promesa that brought conflicts of interest to the fore have morphed into an ideological divide that has Gov. Ricardo Rosselló—and the OBoard, for that matter—reluctant to use Title V.

“I think there is some confusion there, [that the FOMB] has said they do not need to use Title V for any reason because the Puerto Rico government has already enacted all the rules and regulations to expedite projects,” said Falcon Cyber Investments partner Javier Ortiz, who is also the executive director of FixPuertoRico.org, an advocacy group dedicated to educating the public on issues pertaining to Puerto Rico. “It is confusing, quite frankly, because I think Congress sometimes works in interesting ways—they define a very specific set of circumstances as an emergency, all of which have occurred in Puerto Rico, that provide a unique ability for the federal government and the local government to work in a prescriptive way to move important projects forward quickly. And it is really baffling—looking at it from the outside—to read that the government of Puerto Rico thinks it doesn’t need the power and the tools that a federal law provides them to expedite projects. But maybe they have figured out how to get the federal government to expedite projects.”

Title V tossed to COR3

Two sources on the Hill told Caribbean Business that Puerto Rico’s government is being allowed to ignore Title V as a conduit to expeditious construction of projects by the FOMB because board member Arthur González had infected the rest of the board members with the notion that Title V was a throwaway option. In other words, because of contentiousness between the OBoard and the Rosselló administration characterized the road to structural balance in budgets and fiscal plans, it was best to let the government have its way channeling recovery and reconstruction works through the Central Office for Reconstruction, Recovery & Resiliency (COR3), rather than through Title V, where there is more than $5 billion in special projects certified by former Revitalization Coordinator Noel Zamot, who resigned from his post out of “frustration.”

Zamot, a former U.S. Air Force commander who was tasked with identifying, coordinating and fast-tracking the execution of infrastructure projects under Title V of the federal law Promesa, said he envisioned giving the seal of approval to projects that were cost-efficient, highly technological and create jobs. It did not take rocket science for him to identify the financing challenges inherent in putting critical projects in motion.

In a story first reported by Caribbean Business, Zamot resigned from his post because of new requirements imposed by the FOMB that had the effect of slowing down the process of expediting critical projects for the island, which he felt went against the language of Promesa.

Title V provides for a process of expedited permits, both local and federal, for those infrastructure projects that are certified as critical by the FOMB. The laws call for the revitalization coordinator to assess “critical projects” to improve the performance of energy infrastructure and overall energy efficiency; expedite the diversification and conversion of fuel sources for electric generation from oil to natural gas and renewables; promote the development and utilization of energy sources found in Puerto Rico; contribute to transitioning to privatized generation capacities on the island; and support the Puerto Rico Energy Bureau (PREB) in achieving its goal of reducing energy costs and ensuring affordable energy rates.

FOMB changes rules midstream

Two sources on the Hill with knowledge of Zamot’s trajectory pointed to frustrations that arose when a pipeline with nearly $8 billion in related projects was set up for a fast track in permits, but came to a screeching halt when the FOMB issued new guidelines and changed the rules for solicitors midstream.

A letter sent out by the FOMB in July informed existing proponents on the critical pipeline list that “the Oversight Board adopted a new policy regarding Title V on July 31, 2018 [Policy], effective immediately.”

“As explained in the Policy…the revitalization coordinator will require that any public project, defined in the Policy as one that requires obtaining a contract award or RFP [request for proposals] award from a commonwealth government agency or public corporation before it can be executed, obtain such contract award or RFP award before it can be considered by the revitalization coordinator under Title V.”

The goal of the policy is to focus the revitalization coordinator’s efforts on those public projects that have obtained the requisite contract or RFP award, and on projects that are not public, such as those that are private-to-private or with a municipal government. Doing so will enable the revitalization coordinator to prioritize those projects that are most likely to have the greatest impact because they are most likely to be executed or nearest to completion.

“Accordingly, effective immediately, if your project is a public project, you must obtain the requisite contract or RFP award to proceed with the critical projects process. That means when the FOMB votes whether to approve or disapprove your project as a critical project, it will expect that you have complied with the Policy, i.e., you have obtained the requisite contract or RFP award. This applies regardless of whether the revitalization coordinator has already completed a critical project report for a project.”

Two of this newspaper’s sources participating in the development of critical projects point to that change in policy as a defining moment that helped prevent many projects from kicking off.

“You were already certified as a critical project and then this requirement was added, stating that you had to have a letter of intent or RFP with the government,” said one of the sources from the construction industry. “When you do that in the middle of the game, it tends to shake one’s confidence.” The numbers support the chilling dynamic as only $50 million of the $8 billion project pipeline is actually underway.

Zamot resigns: A big failure for Title V

“I think Noel [Zamot] felt he did not have the proper authority; he wasn’t able to accomplish what we intended Title V to be. It is a big failure of Title V to date,” said a former committee aide who worked closely with the drafting of Promesa. “I don’t know how much of that is due to the Oversight Board’s general misunderstanding or general take on Title V. Or whether it is more of a ‘we screwed up by trying to appoint him the head of Prepa [P.R. Electric Power Authority].’ So, I don’t know if his departure is more of a consequence of that, and the Oversight Board has not wanted to do anything with his role as a consequence of that. So, I don’t know if they are going to refill that position, but Title V is a major component [of the law] that has been overlooked by the board. And that is rather unfortunate because I think if they had worked hand-in-hand with the governor and tried to streamline a lot of these projects, we would have had a much more robust regulatory stake down there than we see right now.”

Cooper: The Fortuño connection

There’s a history of disdain for Title V, which was looked upon with skepticism by some lobbyists on the Hill who were critical of Cooper’s potential selection as executive director of the FOMB in 2016. Cooper’s initial recruitment to become the eventual nominee pointed to the strategic importance of energy in the eyes of the GOP. Sources tied to the GOP on the Hill have told Caribbean Business that former Gov. Luis Fortuño was instrumental in seeking out Cooper—asking for his availability to hold the post and that members of the OBoard, who are in Fortuño’s corner, were ready to confirm Cooper once a chairman was named.

“Cooper’s involvement and Brown’s role in the work done on Title V and their ties to the energy sector are no coincidence,” said one high-level source on the Hill with knowledge of the amendments that went into Title V.

When confronted with the potential conflict of interest, one staffer on the Hill tied to Ryan’s office replied: “Of course, you are going to want an energy expert working on the overhaul of energy. We are not going to want a chef, right.”

Cooper’s experience is not in question. Before joining the Natural Resources Committee in March 2015, Cooper had worked on energy issues for more than three decades. He also served as counsel to the U.S. House Energy & Commerce Committee, and reportedly had previously practiced law in Tennessee.

Cooper’s track record working with fossil fuels also became a concern for environmentalists. The first indication of challenges to the overhaul of energy came to the forefront during congressional hearings in January. The issue of permitting and the need to expedite the process caught the attention of lawmakers in attendance.

“Bill [Cooper] played an important role in adding language for the creation of an interagency environmental subcommittee. So, we were analyzing the laws that are here and how those can be expedited—so that is part of the reason we have Title V,” said one staffer on the Hill who worked on Title V.

The philosophy underpinning Title V—to expedite permitting for the overhaul of energy—still conjures the ghost of Vía Verde and Gasoducto del Sur, cornerstones for energy independence by two former governors from Puerto Rico’s two main political parties.

Fortuño has long touted energy independence because it gives Puerto Rico a fighting chance to promote a healthier business climate; most businesses are discouraged from establishing operations in Puerto Rico precisely because the island has a cost of about 22 cents per kilowatt-hour (kWh) that is about 11.5 cents per kWh higher than the U.S. national average, which is about 10.5 cents per kWh.

“Latin America: Energy Supply, Political Developments & U.S. Policy Approaches,” a report by the Congressional Research Service, examined Latin America’s political environment and the apparent effect on energy in the region. Thus, there is a shared vision in the U.S. Congress, State Department and Department of Energy that dependence on oil in the region is a threat to national security. According to the Department of Energy, oil dependency is a major problem among Caribbean island nations, where oil accounts for more than 90 percent of total energy consumed.

Prepa recently signed the first major contract related to its promised transformation of the electrical system after Hurricane Maria struck the island in 2017. The deal is for the conversion of two units at the San Juan powerplant to natural gas through a five-year contract with New Fortress Energy, which will supply gas, convert the units to burn gas, and develop liquified natural gas (LNG) infrastructure in San Juan.

The entire point of the project is to generate savings for Prepa customers, but because the project was decided on before Prepa’s integrated resource planning process was completed, there is no evidence that converting San Juan’s units 5 and 6 was actually the most cost-effective project for Prepa to pursue, according to the Institute for Energy Economics & Financial Analysis (IEEFA).

In a filing with the Securities & Exchange Commission last November, New Fortress Energy estimated the project would generate $285 million in annual savings. Prepa has variously estimated the project will save $1.2 billion over five years ($240 million per year) and $150 million per year.

Although Gov. Ricardo Rosselló recently enacted a green energy policy that would require Puerto Rico to meet energy needs entirely from renewables by 2050, Prepa’s integrated resource plan (IRP), which is under review by the Energy Bureau, paints an entirely different story.

The IRP, which is a 20-year plan for the transformation of Puerto Rico’s energy needs, presents several strategies and scenarios for long-term energy supply.

One scenario considers the option of developing LNG terminals at Yabucoa (on the east coast) and at Mayagüez (on the west coast) through ship-based LNG. The scenario also includes providing gas to the north through land-based LNG at San Juan, which could achieve permitting approval. The scenario assumes solar and storage costs, and availability based on reference-case assumptions.

Another scenario favored in the IRP, called “Energy System Modernization (ESM),” is based on several generation expansion additions. The ESM includes the construction of a new natural gas import terminal and gas plant in Yabucoa, a new land-based natural gas import terminal and gas plant in the San Juan area, a ship-based natural gas import terminal and conversion to natural gas of existing units at Mayagüez, as well as a new powerplant in San Juan. The economic simulation of the ESM case results in 900 megawatts of utility-scale photovoltaic additions over the first four years of the plan.

None of these things will be done through Title V. After Zamot left, Natalie Jaresko, executive director of the OBoard, became the interim revitalization coordinator. Nonvoting FOMB member Christian Sobrino has called for the appointment of a new revitalization coordinator. Meanwhile, on the FOMB’s website, the list of critical projects under consideration appears empty. Only one project, Viewpoint at Roosevelt, obtained such a designation.

At presstime, requests for an interview with Jaresko remained unanswered.

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