Monday, August 3, 2020

[Editorial] Close Encounters of the Fourth Kind

By on October 2, 2018

Editor’s note: The following editorial originally appeared in the Sept. 27, 2018, issue of Caribbean Business.

The edition of Caribbean Business you are holding in your hands includes the first in a series of stories under the section CB Zoom, which provides a 360-degree perspective—in print and online—of complex issues in the government’s transformation plan. This newspaper chose to scrutinize the energy sector first because of the pressing concerns and challenges exposed when Hurricane Maria laid threadbare the decrepit state of the Puerto Rico Electric Power Authority (Prepa).

The title of the Cover Story—“Build Back Better Yet to Commence”—only hints at the layers of complexity in the reconstruction process. The special report explains that the “Build Back Better” storm-hardening plan is to commence on the island-municipalities of Vieques and Culebra with the construction of a microgrid and overhaul of Transmission & Distribution (T&D) with metal and concrete poles able to withstand the fury of 150 mile-per-hour winds. In the special report, the Prepa T&D System Director José Sepúlveda let on that it will take several months for reconstruction to begin because the plan must pass muster with federal agencies, among which are the Environmental Protection Agency and the U.S. Department of Energy.

One Prepa source with knowledge of the challenges underpinning the utility’s overhaul explained it has “about $350 million remaining with which it could undertake reconstruction of the backbone lines through year’s end in work performed by Cobra and other Prepa contractors.”

Add to that four high-level projects—the Prepa brass calls it going from emergency to mitigation—which includes the Vieques-Culebra model; storm-hardening critical San Juan metro-area facilities such as hospitals, the ports, the airport and water pumps; adding another 230-kV loop parallel to the 50400 and 50100 lines through the West; the building of peaking units that can quickly come online and the establishment of a pharmaceutical corridor with an independent microgrid.

The plans are the result of the brutal education leveled by Maria—a Close Encounter of the Fourth Kind—that the Rosselló administration would like to fast-track regardless of the Integrated Resource Plan (IRP). The question that remains is which of these projects is run through Title V of the Puerto Rico Oversight, Management & Economic Stability Act (Promesa), which already provides an avenue for the development of critical infrastructure. No one seems quite sure yet; because it is as though Revitalization Coordinator Noel Zamot, who would have oversight of these projects, has become more of a consultant than an official with authority. This is a question that begs to be answered.

That those challenges are being tackled against the backdrop of Alternating Currents (A/C)—not Direct Current (D/C)—in the laboratory of debt restructuring under Title III proceedings makes this a monumental undertaking. Yes, this experiment is more Frankenstein than sexiest man alive.

For all the best practices adopted in new Prepa doctrine and the sound thinking put into the preliminary IRP, it still runs headlong into the confluence of interests held by so many creditor groups holding Prepa debt. A preliminary term sheet exists with Prepa Bondholders on board. But there is work to be done with Monoline Bond Insurance companies and fuel line lenders. It will take significant work at the negotiating table to bring enough creditors to the 70 percent threshold that would bind the holdouts in the deal. Again, the underlying issues have everything to do with the revenue projected in mirror bonds. The devil is in the details of the rate structure.

As this newspaper was going to press, the government was still hard at work trying to figure out the math in several equations. In an exclusive interview with this newspaper, FOMB Executive Director Natalie Jaresko acknowledged the delicate nature of Prepa’s transformation in the implications for rate structures. “If you have more microgrids, we are going to be hurting revenue potential…. Even if you are getting energy from a microgrid, there will be something put in place or a legacy charge to ensure payment of the debt.”

Therein lies the ultimate challenge in the Prepa IRP—how do you make a rate case on overhaul underpinned by diminishing returns. That self-evident truth was addressed in U.S. Rep. Don Young’s draft legislation for the federalization of Prepa’s privatization. That shelved document contains a provision that enables the U.S. Treasury to create a $3.5 billion assurance fund to fill privatizers’ revenue gaps as a tacit admission that rates would blow sky high if the funding were not granted. So, we create this fictitious narrative that rates will remain low when they might blow the economy to kingdom come 10 years afield.

If we don’t get it right this time—Puerto Rico’s business community will have Hell to pay down the road. Jobs will be lost and sustainable economic development will remain an elusive goal.

A Clean Prepa in ‘Build Back Better’ Yet to Commence

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