Governor announces plan to privatize Puerto Rico electric utility
SAN JUAN – “The Puerto Rico Electric Power Authority [Prepa] will cease to exist as it deficiently operates today.” With that statement, the governor of Puerto Rico, Ricardo Rosselló, announced in a televised address that his administration is preparing to initiate the privatization of the utility’s power generation.
With the sale of the public corporation’s assets to companies that “will transform the generation system into a modern, efficient, and less expensive one for the people,” the governor said that part of the profits would be used to capitalize the utility’s employee retirement system. Prepa owes its bondholders some $9 billion, or about twice what it is estimated to be worth.
Tesla, Sonnen GmbH and Arensis Corp. have all been in talks with Puerto Rico officials about buying Prepa, two sources with knowledge of the discussions said. While Sunnova reportedly had expressed interest in buying Prepa, company officials have denied it.
After an account of the problems Prepa has experienced for more than a decade, which worsened when Hurricane Maria tore the electric grid apart on Sept. 20, the governor said the privatization process that “is about to begin” would last 18 months.
It consists of three phases, the first of which would be defining the legal framework through legislation, to then issue a request for proposals. The second is to evaluate the “technical, economic, and financial” merits of the submitted proposals. Finally, the terms and conditions for contracting the companies that have complied with the requirements would be negotiated.
“With this transformation of PREPA, you will cease being its hostage. You will have the power to choose between several options, the one that best serves you,” said Rosselló, assuring the new system will be built with advanced technology and be able to resist major weather events as well as produce less expensive energy.
The governor did not mention how the model affects the utility’s ongoing bankruptcy-like process under Title III of the Promesa federal law. However, the island’s fiscal oversight board had expressed being in favor of the public corporation’s privatization in August, which bodes well for the move to be presented in court.
In reaction to the news, the president of the opposing Popular Democratic Party (PDP), Héctor Ferrer, questioned what was the plan to restore energy during the next 18 months. He also warned that the administration has poor track record with contracts, and mentioned the one with Whitefish Energy Holdings to repair the grid and the more recent Housing contract to repair some 75,000 homes damaged by Maria.
“Bravo,” tweeted, PDP Senate Minority Leader Eduardo Bhatia, who nonetheless has been a longtime proponent of privatization. “Let the transition begin for the government to become a strict regulator…and competition opens up.”
Puerto Rico Senate President Thomas Rivera Schatz and House Speaker Carlos Méndez both favor the proposal, but Rivera Schatz was emphatic Monday that he would wait for the measure to be presented. “When we have the legislation, we will evaluate it carefully,” he said.
In an interview on the TV show “Jugando Pelota Dura” (“Playing Hardball”), Chief of Staff William Villafañe said the measure was not consulted with the fiscal board, which would have to approve the new model to ensure compliance with the government’s fiscal plan.
Villafañe did not answer what would happen to utility workers, beyond saying there is the possibility of applying for jobs with stateside utilities. However, in a release issued by the governor’s office, Public Affairs Secretary Rosario Cortés said Prepa employees “will be an important part of the transformation,” adding that the “bad decisions to maintain a monopolized system that does not respond to the best interests of Puerto Ricans,” was the reason for the decision to privatize.
The chief of staff also said the government was prepared to face opposition from the Prepa unions’ leadership, adding that the move to privatize is a no-brainer and has to be made.
In Rosario’s release, which includes statements from several industry leaders, the secretary said the governor’s proposal includes a defined concession term for the distribution and transmission of energy to “end the monopoly of the production and sale of energy on the island and promote investment and competition for the benefit of customers as occurs in other jurisdictions in the United States.”
United Retailers Association President Nelson Ramírez added that “the announced changes will allow Puerto Rico to become a competitive jurisdiction, ending a monopoly that discourages investment and the creation of jobs.”
Retail Trade Association President Iván Báez was also quoted, saying, “For many years the private sector has requested the total transformation of the energy system in Puerto Rico, which, due to its inefficiency, prevents our economic development.”
For his part, the president of the Hotel and Tourism Association, Miguel Vega, and the vice president of the Foundation for Puerto Rico, María Jaunarena, said they “hope this proposal will be realized,” since the “cost of energy and its inefficiencies are obstacles to the development of the tourism industry.”
Similarly, the president of the destination marketing organization, Jon Borschow, said “it is essential that our energy generation and distribution is updated to the 21st century.”
Among the others in favor of the move were the heads of the Physicians Association, the Hospital Association, the Chamber of Commerce of Puerto Rico, the CPA Society, Restaurants Association, Manufacturers Association, the Chamber of Food Marketing, Industry & Distribution, Association of Realtors and the Ana G. Méndez University System.
Four months after the passage of Maria, the most powerful hurricane to make landfall in Puerto Rico in more than 80 years, it is estimated that nearly half a million of the power utility’s customers remain without electricity. According to government data, power generation stood Monday at 84.5% generation compared with the same day last year. The utility is only being able to provide 67.58% of its subscribers with service.
The following is a translation of the governor’s full message:
My fellow citizens:
On September 20, nature made us live through the fury of the most powerful and devastating hurricane that has touched our Island.
Our people have faced situations of great sacrifices and together, with great effort, we are overcoming the effects that Hurricane Maria left us. We still lack a lot on the road to total recovery, but overcoming adversity, there are also great opportunities to build a new Puerto Rico.
And that is precisely what I wish to talk about with you today.
Great changes are needed to improve our quality of life. The development of Puerto Rico must happen now. There is no time for delays.
One of the great impediments that has stopped our opportunities for economic development is the deficient and obsolete system of generation and distribution of energy on our Island.
We have a generation system 28 years older than the average in the electric power industry in the United States. We have a dependence on oil that makes it increasingly expensive, more polluting, and less efficient.
Besides this dismal scenario, the public corporation has had a historically deficient administration that has maintained a virtual monopoly on power generation in Puerto Rico. The maintenance of its infrastructure was practically abandoned over the past decade.
The Puerto Rico Electric Power Authority (PREPA) has become a heavy burden on our people, who are now hostage to its poor service and high cost. What we know today as the Puerto Rico Electric Power Authority does not work and cannot continue to operate like this.
The Puerto Rico of today is not the same that existed when PREPA was created.
Over the past 10 years, the demand for energy on the Island has decreased by 18% and the reduction has reached 48% in the industrial sector. The main generation units are located in the southern area, while the highest energy demand is in the north. The energy system is not designed for the needs of the Puerto Rico of today.
The deficiencies of the system penalize the consumer with a suboptimal service, with frequent interruptions, and high rates for consumption.
An aggravating factor for this obsolete operation of the system has been the loss of 30% of PREPA’s employees over the past five years, of which the vast majority, 86%, have been employees assigned to the maintenance and operation of the power grid.
The employees who have remained working in PREPA have made a great effort to serve Puerto Rico. They are not the problem.
Honestly, with that PREPA, we cannot face the risks of living in an area of high vulnerability to catastrophic events, such as the two recent hurricanes.
Faced with this reality, I would like to inform you of one of the initiatives with the greatest impact for the construction of a new and modern Puerto Rico: the transformation of our energy system.
The Puerto Rico Electric Power Authority will cease to exist as it deficiently operates today. Over the next few days the process will start, through which PREPA assets will be sold to companies who will transform the generation system into a modern, efficient, and less expensive one for the people.
Let me summarize the process that is about to begin and that will have a term of approximately 18 months:
It consists of three phases: the first will define the legal framework through legislation. The market will be monitored and the call for companies interested in participating in the transformation of PREPA will be opened.
During the second phase, the offers of the companies will be received, and their technical, economic, and financial evaluation will proceed.
In the final phase, the terms of awarding and hiring the selected companies that meet the requirements for the transformation and modernization of our energy system will be negotiated.
To that end, I will describe to you a model of privatization of power generation and a concession, term-defined, of energy distribution and transmission.
The transformation that I present to you today will allow us to overcome the challenges that energy generation is having worldwide. We are taking a step towards a consumer-centered model, where you can have options. An innovative model that is sustainable, with advanced technology, and resilient before the ravages of nature. It should be financially viable, at a lower cost to you. This will be the leap towards the modernization of Puerto Rico.
I reiterate that this change aims to benefit the entire people of Puerto Rico: the consumer, the citizen, the female head of the family, who require a better service at a lower cost. This change will be aimed at benefiting the most vulnerable sectors, such as our pensioners and the elderly.
This change will allow us to promote as never before the economic development of Puerto Rico, benefiting the small and medium-sized businesses, with an efficient, reliable, and modern electric power system.
Also, this energy model will attract new industries and businesses that create jobs, adding value to our society.
If we want to facilitate the creation of new jobs and encourage investment on our Island, we have to change the obsolete energy system of the past, to one that serves as the engine of the economy, both for the reliability of those who produce energy, and for the commitment of the Government to regulate and stimulate a modern energy industry.
This change and transformation of PREPA is focused on the integration of advanced technology to the electrical system and a better service for the consumer. This represents an innovative energy model, based on renewable and environmentally friendly sources.
The transformation that we started is based on changing inefficiency for operational excellence. With this step we give an impulse towards the future, towards the modernity and the progress of Puerto Rico.
With this transformation of PREPA, you will cease being its hostage. You will have the power to choose between several options, the one that best serves you.
As my commitment to you in our Government program, part of the income generated by the transformation of PREPA will be used to capitalize the retirement funds of employees. For these purposes, the employees of PREPA will have participation and will be part of its transformation. That is my commitment.
We have the opportunity not only to make a new energy system, but to be a global model. With this transformation we can achieve the goal of more than 30% of renewable energy generation. Thus, we will achieve the ability to respond faster to natural disasters. That way we can end the frequent blackouts.
A new and better Puerto Rico is built with the will of those who do not shy away from adversity. We rise with the capacity to innovate and make the necessary changes that benefit our people, a reality.
To the people to whom I owe myself, I reiterate today, with this action, that a better Puerto Rico is possible.