Tuesday, October 16, 2018

[Editorial] Same Old Tricks in Prepa Circus

By on August 3, 2018

Editor’s note: This editorial first appeared in the Aug. 2-8 print issue of Caribbean Business.

When you prompt the same dog to perform an old trick, you usually get a lukewarm reaction from the crowd attending the circus—whether the animal spins in the air, stands on front paws—doesn’t matter. In the case of the Puerto Rico Electric Power Authority (Prepa), where the dog is walking blindfold, a biped back-peddling on hind feet—the same adage applies—the people are not impressed.

You see, when it comes to the Prepa “Dog and Pony” show, people want to see the dog jumping through hoops, but only if it does not cost them too much.

The most recent announcement of a preliminary deal between Prepa and its bondholders includes a transition charge to help pay for a bond exchange with creditor constituencies that do not include the monoline bond insurance companies and the fuel-line lenders. This is akin to stalled hyper-mitosis in cell division prior to birth—a Prepa deal takes at least two-thirds of the creditor groups brought into the fold to bind the holdouts in a consensual deal. Much work remains to be done.

Early in Puerto Rico’s debt game, the complex makeup of that bankrupt utility’s creditor constituencies—somewhat emblematic of Puerto Rico’s debt—made it an important target in the restructuring jamboree inside the Puerto Rico Oversight, Management & Economic Stability Act (Promesa).

Thus, Promesa’s circus master, U.S. House Natural Resources Committee Chairman Rob Bishop (R-Utah) tasked staff director Bill Cooper to codify the deal into law when he was enacting Promesa in 2016. But the rate case then, as now in this latest iteration, is likely to sting.

Try as they might to privatize Prepa, members of U.S. Congress who have invested considerable political capital—some with midterms upon them, no less—would like to see a securitization mechanism that will not blow Puerto Rico’s rates sky high. After all, the discourse employed by the energy brigades on Capitol Hill—that Puerto Rico needs affordable and reliable power to chart a path to growth—rings a bit hollow if the people have to foot the bill for a 20 percent hike in their electric bills five years afield.

The inevitability of a rate hike first reared its ugly head when Prepa’s Chief Restructuring Officer Lisa Donahue took a crack at restructuring the power company’s massive $9 billion debt load under the administration of then-Gov. Alejandro García Padilla. Donahue managed to work out 17 forbearance agreements with creditors that showed a propensity to push debt-payment deadlines down the road as they tried mightily to strike a bond exchange. Then, as now, somebody was going to pay dearly—the answer always came back to shared pain by the people.

Back in the Alix days of Prepa overhaul, Caribbean Business first broke the story of rate-case calculation by Navigant. The company had based its projections on numbers using Puerto Rico’s population in 2014, which was 100,000 more folks than in 2016—based on those numbers this newspaper reported the rate hike would have been higher than 20 percent. Así no se puede.

Today, the declining population continues to present high-wire dangers in the restructuring of Prepa’s debt. There seems to be no way around the transition charge as the deal is currently structured. The transition charge, which is a fee that will be used to pay for debt service, will be 2.35 cents per kWh for years one to five; 2.7 cents for years six to 10; and 2.8 cents for year number 11. However, starting in year 12, there will be annual 2.5 percent increases over the prior year’s transition charge. Shared pain by the people, indeed.

In fact, the language in a draft bill to privatize Prepa, authored by Rep. Don Young (R-Alaska) and circulated on the Hill several weeks ago, implies significant challenges in the privatization of the utility tied specifically to a shaky profit and loss forecast absent rate hikes. That self-evident truth prompted the inclusion of language enabling a $3 billion backstop structure financed by U.S. Treasury to fill any funding gaps by investors who purchase Prepa generation assets.

This newspaper made a quick visit to Capitol Hill two weeks ago to see firsthand which way the currents of change were blowing. Frustration was a very common emotion etched on faces of those dealing with Prepa. As one House Natural Resources aide put it: “We could have had this done two years ago and avoided all this mess.” Yes; but at what cost and paid for by whom? If the answer is by “we the people,” then the Prepa overhaul for the people, by the people is a sham. And economic development will be a decades’ old memory, a story told in history books, but not seen in our lifetime.

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