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Final Puerto Rico T&D Concession Key Precursor for Generation Asset Sale

By on January 25, 2019

Editor’s note: The following originally appeared in the Jan. 24-30, 2019, issue of Caribbean Business.

Omar Marrero, director of the Puerto Rico Public-Private Partnerships Authority (P3A), said the sale of the island’s powerplants will not be able to occur until after the leasing of the transmission and distribution systems (T&D) is put in place by September.

Nonetheless, the P3A is working on a draft of the request for qualifications (RFQs) for the sale of the P.R. Electric Power Authority’s (Prepa) powerplants, which he said may be announced in the coming days. “They have to be working in parallel but also in a sequential manner because it is the way you disintegrate a monopoly,” Marrero said about Prepa.

There is ample interest in the powerplants “but you are not going to have a final offer for any generation assets until it is known how much the concession will charge and how much it is going to cost,” he said. “We not only want a resilient system but also an efficient one.”

The qualifying proponents from the five statements of qualifications received after the RFQs were opened Oct. 31 are Duke Energy Corp., Exelon Corp., Public Service Enterprise Group (PSEG), and a consortium composed of ATCO Ltd., IEM and Quanta Services Inc. (collectively, the Quanta Consortium). The P3A described Duke Energy as a company that serves about 7.6 million customers in six states and has a T&D “system that extends more than 295,000 miles.” Exelon “is a Fortune 100-listed company. In 2017, Exelon served more than 10 million customers and generated revenues of about $33.5 billion. PSEG Services Corp. provides services to about 3.8 million customers, covering about 2,600 square miles of territory.” A fifth company that participated in the pre-qualification was left out because it failed to submit required documentation.

The contract for the concession of the T&D system, which is slated to be negotiated in September, will entail a management fee and “reasonable rate” over capital investments, which will be determined by the government and Energy Bureau.

“Once we define that, we will know the charge that will be paid by the power generators,” Marrero said. Besides Prepa, the energy system’s independent producers include AES P.R. and EcoEléctrica as well as independent producers that provide renewable energy such as Pattern in Santa Isabel and Ilumina.

“There are firms interested in the powerplants…. But we have to have the T&D on the way,” said Marrero, who also heads the Central Office for Recovery, Reconstruction and Resiliency (COR3).

Two of the utility companies vying to lease Prepa’s T&D system were assessed as having a high-risk business profile by Moody’s Investors Services. The report concluded Exelon and Public Service Enterprise Group (PSEG) have the highest levels of operating risk due to their generation assets in competitive markets.

Marrero said as a financial lawyer he has worked with credit rating agencies in the past, and sometimes those ratings do not have anything to do with the company but with a project on which the company is working or a business line. “At the end of the day, what we want is to see is their proposals, and we will know for sure the elements, if they will inject capital or if they have the expertise to manage the grants,” he said.

What will happen with Prepa’s $9 billion debt? The privatization transaction is being done with the Financial Oversight & Management Board while Citigroup is designing the transaction. Marrero said the privatization of the T&D system as well as the sale of the generation assets are being done along with Prepa’s debt restructuring through the Title III bankruptcy process under the federal law Promesa. “All investors know there is no business that goes bankrupt and leaves worse off, so all see the Title III [process] as beneficial. So, the restructuring has to be dealt with [along with] the privatization,” Marrero said.

Once the selected company takes over the T&D, how will customers be charged? Would it be through Prepa? “The reality is that Prepa will stop existing but will be there as owner of the assets. The operations and maintenance and all incidental services such as billing will also be passed on to the private sector,” he said.

Any complaints a client may have about a utility bill will be handled by the Energy Bureau as is done now. Prepa was required as of April 1 to establish a permanent rate, which on average is 0.03 cents lower than the current provisional rate of 1.29 cents.

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