Wednesday, February 8, 2023

IEEFA update: New debt deal throws Puerto Rico under the bus

By on August 2, 2018

Editor’s note: The following is a column by Tom Sanzillo, director of finance at the Institute for Energy Economics and Financial Analysis (IEEFA), and Cathy Kunkel, an energy analyst with the research group, whose stated mission is “to accelerate the transition to a diverse, sustainable and profitable energy economy.”

IEEFA receives its funding from such organizations as the Rockefeller Family FundEnergy FoundationMertz-Gilmore FoundationMoxie FoundationWilliam and Flora Hewlett FoundationRockefeller Brothers FundGrowald Family FundFlora Family FundWallace Global Fund, and V. Kann Rasmussen Foundation.

(CB Photo)

In a deal it announced this week between the Puerto Rico Electric Power Authority and some of its creditors, the federal Financial Oversight and Management Board, PREPA and the bondholders are only kicking the can down the road.

The agreement means that businesses and households across Puerto Rico will be hit with a 10% increase on already sky-high electricity bills—and just to service the agency’s legacy debt. As a result, PREPA customers will pay 26 cents per kilowatt hour kWh for electricity, twice what mainland power bills run and second nationally only to Hawaii. This despite the fact that the island’s median household income is lower than in any of the 50 states and about half that of Mississippi, the poorest state.

The deal covers less than half of PREPA’s $9 billion in debt, and few details beyond the various interest rates and the 40- to 45-year maturity have been offered. The utility still needs to settle the rest, so it seems there may still be more rate increases to come.

The preliminary term sheet released Monday leaves many questions unanswered, but is clear how much ratepayers would pay for the deal, which isn’t official unless the parties ratify a final agreement based on these terms by Aug. 27. The charge will start at 2.636 cents/kWh for the first five years, then increase to 2.729 cents/kWh for the next five years and then increase by 2.5% per year to 4.348 cents/kWh over 30 years.

In 2063, PREPA customers will still be paying for oil burned in 2008.

TO BE ECONOMICALLY COMPETITIVE, PUERTO RICO NEEDS ELECTRICITY RATES TO RUN SOMEWHERE BETWEEN 16 and 20 cents per kWh. The higher rates that would be imposed under this deal will impair the ability of the economy to generate enough revenue to service its debt. An economy like Puerto Rico’s with negative or zero growth cannot sustain the debt payments the deal imposes.

The good news for bondholders—in the short term, anyway—is that they get paid first from the rate increase through a lock-box mechanism. The first 2.6 cents of each kWh of PREPA power sold goes to them. If there’s not enough left to pay PREPA’s operational expenses, then either rates go up again or PREPA must continue to reduce service and  cut back on capital investment.

This year, even while charging over 23 cents/kWh, PREPA shortchanged its capital needs by $300 million. Postponing such investment only undermines the system.

Some are already saying that this deal will establish a model for settling Puerto Rico’s other public debts. If that turns out to be so, the results won’t be good.

As far as PREPA goes, this is deal is less a solution than a public-relations event.

The utility, battered by storms and hampered by mismanagement, needs to rebuild its grid and invest seriously in renewable energy rather than continuing to rely as it has historically on expensive imported fuel. PREPA’s fiscal plan, certified by the FOMB, lays out a scenario in which PREPA can bring down its annual fuel costs (which this year again were over budget) by about 25%, or $400 to $500 million by FY 2023, in part by investing more in the island’s abundant solar resources.

Saddled by debt service as they would be under this new deal, how can customers afford to support system improvements? Plainly, with rate-increase revenue dedicated to bondholders and with fuel costs so high, there is no change in the conditions that brought PREPA to bankruptcy in the first place.

PREPA needs also to simultaneously retain its existing workforce and attract new talent. How will it do so with a budget that pays bondholders first?

PREPA’s simultaneous pursuit of an ill-advised privatization plan just compounds the risk this deal introduces.

This agreement, based on fiscal gimmickry, legal quackery and political skullduggery, promises to create more fiscal dysfunction at PREPA and, if allowed to proceed, would inevitably lead to new defaults.

It is also negligent, and—not incidentally—contrary to Securities and Exchange Commission guidance that warns vividly against what’s happening:

“In authorizing the issuance of securities and related disclosure documents, a public official may not authorize disclosure that the official knows to be false; nor may a public official authorize disclosure while recklessly disregarding facts that indicate that there is a risk that the disclosure may be misleading.  When, for example, a public official has knowledge of facts bringing into question the issuer’s ability to repay the securities, it is reckless for that official to approve disclosure to investors without taking steps appropriate under the circumstances to prevent the dissemination of materially false or misleading information regarding those facts.”

Politicians in Puerto Rico and Washington can claim credit for having struck a deal. It’s a destructive proposition. But apparently any deal will do.

–The views expressed in the Opinion section are the writers’ own and not necessarily the view of Caribbean Business.

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