Sunday, December 16, 2018

Gaps in Prepa Vacuum Exposed

By on November 19, 2018

Editor’s note: The following originally appeared in the Nov. 8-14, 2018, issue of Caribbean Business.

While there is consensus that the Puerto Rico Electric Power Authority (Prepa) needs improvement, the bet that privatization will end the utility’s monopoly and bring lower prices and better conditions is not a sure one, argued one of the island’s top urban planners.

According to David Carrasquillo Medrano, president of the Puerto Rican Planning Society (SPP by its Spanish initials), when expanding Prepa’s energy sources, “it takes a lot of money to make that transition. The concern is how much the cost of energy is going to be in the end. If the transition is done in a way that generates debt, it’s going to be a problem because it will inevitably increase the cost of energy. Likewise, [the cost] will increase if certain services that are now free get privatized.”

The planner explained that a privatized model would likely result in increased charges for upkeep during the distribution stage, “which now is a nominal fee.” If more than one company were competing to provide energy services, the increased charge would also need to include the expansion of distribution.

Regardless of the model chosen, Carrasquillo Medrano argues that the government will need to account for the environmental and economic realities of the island’s particular regions, as well as decide the areas in which it wants to promote growth. Furthermore, questions about the protocols in case of a natural disaster also need to be determined.

How much room for competition?

Puerto Rico is experiencing a severe case of urban sprawl that presents the false impression that what has been built is larger than it actually is, the urban planner argued. In a 2010 land study by University of Puerto Rico’s Graduate School of Planning, he explained that these constructed areas covered no more than 15 percent of the island.

“The incredible thing is that despite being such a small number, there are no [large] continuous conservation areas; it is all sprawl. Despite being 14 percent [of the land area,] you can’t find a significant percentage of [solid] conservation because everything is [intersected] by streets and urbanizations,” Carrasquillo stated.

The lack of continuous conservation areas also means a lack of continuously developed areas, which would make it difficult to sustain regionalized for-profit models, because there would not be enough clients in certain areas disconnected from urban centers, especially the urbanizations that are neither urban nor rural but are construction adjacent to highways.

Carrasquillo argues that for-profit models could result in the promotion of urban developments that are not sustainable for the environment and do not respond to the island’s economic realities. In fact, Puerto Rico has about 325,000 houses—between summer homes and vacant homes—currently not in use.

While the SPP president explained that deciding which model Puerto Rico implements needs to be the result of adherence to the Land Use Plan and explicit and concrete decisions by the government about which areas it wants to develop, he also believes certain areas need a service-based system.

Another issue affected by privatization, Carrasquillo Medrano explained, is the distribution and transmission stage of the island’s energy supply system. If the distribution and transmission stages, which do not generate profit, are separated from energy generation, the government or private company that acquires this concession would need to charge either consumers or the energy generation companies for upkeep of the distribution infrastructure.

Those charges still presume that regardless of the number of companies generating energy, consumers would not be selecting the provider; however, if competition enters into the equation, the matter gets more complicated.

“The thing is that to compete, you need to have separate infrastructure,” Carrasquillo Medrano said. The Planning Society president warned that this doesn’t just mean the added costs of building more infrastructure but also the logistics of where to build it. Increasing infrastructure could result in needing to yield or hand over portions of land, or the disruption of more dense zones such as in the San Juan metropolitan area.

Establishing rates more complex

The average U.S. residential electric rate is 13.12 cents per kilowatt-hour (kWh), more than 8 cents lower than Puerto Rico’s 21.17 cents per kWh, but the U.S. average is actually the result of a wide range of rates. According to the U.S. Energy Information Administration (EIA), Washington state has the lowest rate at 9.74 cents per kWh and Hawaii is at the top with an average yearly residential rate of 33.45 cents per kWh.

Although not included in the EIA chart, Puerto Rico would be in third place, wedged in between Alaska at 23.43 cents per kWh and Connecticut, whose annual rate average was 20.88 cents per kWh, although in August, the New England state reported 21.28 cents per kWh.

Likewise, public and private models or combinations can be found throughout the U.S. The Washington Energy Co., which supplies natural gas, was privatized in 1997, but the bulk of its energy in Washington State is provided by Bonneville Power Administration (BPA), one of the four Power Marketing Administrations (PMAs) of the U.S. Department of Energy. In 1995, the Administration Asset Sales & Termination Act allowed for sales of Alaska Power Administration assets such as Municipal Light & Power.

Furthermore, the Cato Institute, a conservative think tank that strongly advocates for a “private sector utility model,” explained in “Privatizing Federal Electric Infrastructure,” that the PMAs can have lower rates compared to private utility companies.

“PMA rates are low partly because the utilities rely on inexpensive hydropower. But in 2008, the EIA found that PMA rates are much lower than those of nearby private utilities. BPA rates were 38 percent lower than the average rates of nearby utilities, which also depend on hydropower. Similarly, the rates of the other PMAs averaged 28 percent below the rates of nearby utilities. Those below-market rates resulted in PMA customers saving about $2.4 billion per year,” the Cato Institute bulletin reads.

The bulletin also argues that the advantage public corporations have is that they don’t need to pay taxes. The bulletin argues that this advantage is unfair.

“In Northern Virginia, electricity is provided by the for-profit Virginia Power, which is taxed on its earnings from generation, transmission and distribution. It pays hundreds of millions of dollars a year in federal and state corporate income taxes, which in recent years have averaged 8.5 percent of its revenues. By contrast, in Washington state, many households receive tax-free power that flows from federal dams through BPA transmission lines and is delivered by local government utilities,” reads the January 2018 bulletin.

What about the source?

Aside from discussions on whether Puerto Rico will end up with a private, public or combination electricity model, the island also needs to identify its sources of energy.

The current frontrunner is natural gas, said Prepa Executive Director José Ortiz, which Carrasquillo said has benefits over oil but is not the ideal source for the island because “the logistics of handling gas in Puerto Rico are extremely difficult.”

“The transition to gas has many virtues because it is a material, compared with what is currently used, that is far cleaner. However, its handling, its logistics [quickly] become complicated. When we are talking about gas, the reality is that the maximum-level generation plants are on the coasts. All our generation plants are in flood or tsunami-risk zones,” the urban planner said. In the case of a catastrophic disaster, he added, containing the natural gas would be more difficult than the oil.

According to Carrasquillo Medrano, given federal safety and environmental regulations, the closest generation plant to the San Juan metropolitan area that could provide sufficient generation from natural gas would be the Cambalache Powerplant in Arecibo. This site would still require a gas pipeline to cross the northern portion of the island.

Given that Puerto Rico is an island, bringing in natural gas would also have its complications, such as needing to liquefy the gas and creating the infrastructure for the ships to do the energy delivery. Puerto Rico would also be subject to other factors that could reduce the supply or increase the cost. For example, on October 18 the EIA announced that the rupture of the Canadian pipeline Enbrigde’s BC natural gas affected the supply for Idaho, Oregon and Washington, which had to cut gas-related productions. The rupture also had a domino effect increasing the prices of other sources such as crude oil.

In terms of prices, natural gas is also not a guarantee of lower energy rates. For example, Alaska’s main source of energy is natural gas and, although Washington uses natural gas, the main source of energy comes from hydroelectric power.

Carrasquillo said that hydroelectric power could be one of the sources to power the island but for environmental reasons, the planner cautioned that hydroelectric revival should be limited to the dams that are already adapted for such use.

The SPP president also advocated for the research on the viability of wind-power energy and thermal energy but ultimately “all the studies that have been conducted suggest that the most effective [source] for Puerto Rico would be the sun.”

Carrasquillo suggested that harnessing solar power energy includes incorporating the roofs of building clusters and communities. The challenges that solar energy needs to address include how much of the level of consumption can be met through the solar-power generation and the environmental effects of establishing large areas for solar panels.

The collective Queremos Sol suggests establishing incentives for residents and businesses to make changes to their schedules or operation times so the energy load in peak times would be reduced, as well as other measures that would reduce the consumption in general.

The environmental concerns over solar-power trace to extreme temperatures generated. When a small number of roofs have solar panels, the temperatures of the buildings are lower, but large areas covered by solar panels produce a solar heat island effect, which increase the temperature of the area.

Carrasquillo argued to embark on any transition, Prepa needs to research and have a board and executives whose primary loyalty is not with any party.

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