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Despite having enough cash, Prepa proposes rate hike to cover rising fuel costs

By on September 24, 2020

The Puerto Rico Electric Power Authority’s Palo Seco plant in Toa Baja (File)

Energy Bureau chair inclined to prevent charges be passed to ‘defenseless’ utility customers 

SAN JUAN — The Puerto Rico Electric Power Authority (Prepa) is proposing to increase electricity rates to cover higher fuel costs, but the public utility acknowledged Wednesday that it had enough cash flow, including an expected influx of federal funding and insurance payments, to defray the rising expense. 

On Sept. 18, Prepa submitted a quarterly financial reconciliation report to the Puerto Rico Energy Bureau (PREB), which regulates the utility, that reportedly included a request for an increase in electricity rates of about 3 cents per kilowatt-hour (kWh) during the last quarter of this year, or from October and December. The utility justified the need for a rate hike by citing nearly 38 percent higher than projected fuel costs in June, July and August. 

Acting Prepa Executive Director Efran Paredes Maisonet said in a news release, in which he made no mention of the proposed rate increase, that utility customers will be informed of any rate changes for the upcoming quarter as soon as PREB completes its evaluation and issues an order. The bureau’s officials said Wednesday that they have until Sept. 30 to make the determination. Caribbean Business left requests for comment with Prepa.

During a teleconference PREB hearing held Wednesday on Prepa’s quarterly finances, Prepa Fuels Office Administrator Edwin Barbosa said there was a “marked increase” in fuel costs from June to August. He noted that this rise in fuel expenses was driven by a combination of factors, mainly greater demand due to higher than normal temperatures, climbing oil prices and increased dependence on peaking generation units burning more expensive fuel over those months. 

Prepa’s fuel expenses during those three months totaled $343.4 million, or 37.6 percent higher than the $249.6 million projected, Barbosa said, noting that power generation increased by nearly 12 percent during the same quarter compared to projections.  

The average price of a barrel of fuel oil used by Prepa surged from a year low of $38 in April to more than $55 in July, Barbosa said, stressing that between July and August the utility relied on more expensive diesel-driven peaking units due to the unavailability of cheaper gas-powered units. He acknowledged, moreover, that Prepa fuel contracts do not allow the utility to buy in bulk and benefit from savings as a result. 

Crude oil was trading at $41 Thursday.

Prepa’s operations manager, Gary Soto, said that the coal-fired AES co-generation units 1 and 2 were taken offline for programmed maintenance, stressing that there were delays in completing the work due to cracks spotted in one of the boilers of the 500 megawatt (MW) plant, which supplies 25 percent of Prepa’s power demand with the cheapest fuel. Combined-cycle units in Costa Sur and Aguirre were either offline or generating below capacity due to repairs, he said. 

José Gandía, manager of economic and financial analysis at Prepa, said the utility would have to pass on to customers the about $93.8 million in fuel costs that were above projections. 

However, other Prepa officials admitted during the hearing that Prepa had enough cash on hand, including an expected influx of federal and insurance funds, to adequately cover the increased fuel expenses. 

Nelson Morales Rivera, Prepa’s chief financial officer, said that as of Sept. 18 the utility had “$471.8 million in cash.”  

“With the $90 million, the liquidity of [Prepa] should not be affected,” Morales told PREB commissioners. “We could function in terms of working capital if we do not have those $90 million immediately. [Prepa] monitors its cash flow on a weekly basis. We could defer the $90 million if [PREB] determines that.” 

Barbosa, on the other hand, was more cautious about the impact of fuel purchases on Prepa’s cash flow, saying the $72.9 million for fuel purchased in May amounted to almost 21 percent of the utility’s cash flow. He acknowledged, however, that some $7.1 million had to be returned to utility customers due to overpayment on billing for power-purchase agreements with private co-generators during the June-August period. 

Federal funds coming

Moreover, Maricarmen Rivera, head of the Prepa office that handles disaster management funding, said the utility should expect to receive a Federal Emergency Management Agency (FEMA) obligation of $384 million in the next 30 days, mostly to defray extra fuel expenses due to disruptions in power generation caused by the January earthquakes that struck the island’s southern region, where most utility power is generated. The tremors damaged the key 820 MW Costa Sur power complex in the southern municipality of Guayanilla, which forced its generation units offline for months of repairs. 

Sammy Rodríguez, manager of the Prepa office of risk management, said that as of Sept. 18, earthquake-related insurance claims filed by Prepa totaled $140.8 million, which includes $75.7 million in incremental costs related to the substitution of generation that is not available at Costa Sur units 5 and 6.  

“After the deductible of $25 million and the $25 million advance we have received, we have a net claim of $90.8 million,” he said during the hearing. 

PREB Chairman Edison Avilés hinted that while the regulating entity’s commissioners have until Sept. 30 to determine whether Prepa’s proposed rate hike should proceed, he said the evidence presented Wednesday indicates that this would be unlikely, and that customers may even be entitled to a refund from the utility. 

“There are $186 million that should be returned to customers,” Avilés said, referring to the impact of the expected FEMA and insurance payments to the utility. “You are asking for a reconciliation to pass on to customers close to $90 million in fuel costs. Therefore, that federal funding can defray the petition of the reconciliation of the $90 million in fuel costs this quarter—with money to spare to reimburse customers.” 

Avilés said the information provided during the hearing will “help us to avoid passing on charges to customers, who have been in a defenseless state for months, not to say years.”  

“We must make sure they do not continue to suffer,” the PREB chairman said. “We do not want to charge them so that they are reimbursed afterward. That does not do them justice. We do not want to charge them to make them look for money they do not have now. We will take your information very seriously in our analysis.” 

Upon the conclusion of the three-and-a-half-hour hearing, PREB commissioners requested more complete documentation on Prepa’s fuel purchase transactions and general finances. 

Nevertheless, Prepa’s troubled finances, as with those of the commonwealth government, are being subject to bankruptcy and debt restructuring proceedings under the federal Puerto Rico Oversight, Management, and Economic Stability Act (Promesa). The utility has not made payments on about $9 billion in debt held by bondholders as well as to the public corporation’s employee retirement system since it requested bankruptcy protection under Promesa’s Title III in 2017.

At the same time, the White House announced last week a record-setting $10 billion FEMA obligation for the permanent rebuilding of the island’s electrical grid, which was ravaged by hurricanes Irma and Maria in 2017. One major credit rater, Moody’s Investors Service, issued a media release Wednesday noting that this development was “credit positive” for both Prepa and the commonwealth government. Moody’s maintained a “Ca” rating for both entities—“highly speculative and likely in, or very near, default, with some prospect of recovery of principal and interest”—with a “negative outlook.”

Gov. Wanda Vázquez Garced, who came out Wednesday against Prepa’s proposed rate hike, had touted in May that PREB approved 19.2 percent lower electric bills starting in June. The reduction in rates—from 21.59 cents per kWh to 17.46 cents per kWh—was due to the plunge in oil prices in March as a result of the Covid-19 crisis and a price dispute between Saudi Arabia and Russia. 

The current Prepa proposal would bring the price back up to over 20 cents per kWh. 

In fact, as recently as May, former Prepa Executive Director José Ortiz, who resigned last month, said that such decreases in electricity rates would last through next year.  

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