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Industry Group Challenges Prepa Transition Charge

By on August 18, 2016

SAN JUAN—The Institute for Competitiveness and Sustainable Economy for Puerto Rico (ICSE-PR) filed Wednesday a lawsuit in the San Juan Superior Court challenging the Puerto Rico Electric Power Authority’s (Prepa’s) restructuring deal that includes transition charges and adjustment charges to pay the utility’s debt.

The Puerto Rico Electric Power Authority (PREPA) logo is displayed in San Juan, Puerto Rico, on Friday, April 29, 2016. The indebted Caribbean island, home to 3.5 million U.S. citizens, has juggled dwindling resources from one hand to another for months now, to keep creditors at bay. The crisis is set to tip into a new phase this weekend when $422 million of payments are due and, as things stand, unlikely to be made in full -- threatening the biggest default yet. Photographer: Erika Rodriguez/Bloomberg via Getty Images

The Puerto Rico Electric Power Authority (PREPA) logo is displayed in San Juan, Puerto Rico, on Friday, April 29, 2016.  Photographer: Erika Rodriguez/Bloomberg via Getty Images

A consortium of other private sector organizations filed a second lawsuit recently on similar grounds. These include the Puerto Rico Manufacturers Association, the United Retailers Association, the Puerto Rico Products Association, the Chamber of Marketing, Industry and Food Distribution (MIDA), Puerto Rico Hospitals Association, the Puerto Rico Hotel & Tourism Association, the Puerto Rico Builders Association, and the Association of Contractors and Consultants of Renewable Energy.

ICSE-PR, which describes itself as an action-oriented non-profit educational organization whose purpose is to foster the socio-economic well-being of Puerto Rico, seeks to invalidate Prepa’s restructuring of its $9-billion debt because it violates laws that call for an increase in the production of energy through renewable sources, with the private sector consortium alleging the same in its own suit.

The organization decided to file a separate lawsuit from the consortium of business groups because it was an intervenor in the Puerto Rico Energy Commission’s (PREC) process to determine Prepa’s transition charge and it wanted to ensure its claim was not dismissed for lack of standing.

Besides Prepa, the lawsuit included the PREC and Prepa’s Revitalization Corporation as defendants.

Currently, the Energy Commission is evaluating Prepa’s petition for a rate hike after giving the green light to a provisional rate hike of 1.299 cents that went into effect Aug. 1. The ICSE-PR as well as other business groups are acting as intervenors in the rate hike process as well as in the proceedings for an integrated resource plan.

Prior to passing the provisional rate hike, the PREC authorized a transition charge on June 21 that includes an adjustment mechanism to pay debt to bondholders as part of a bond exchange with the Revitalization Corp.

These restructuring bonds are structured with a 15% reduction of Prepa’s pre-existing debt and a lower interest rate.  When issued, these restructuring bonds (or “restructured debt”) shall substitute current outstanding bonds of participant bondholders.

According to the commission’s restructuring order, the initial transition charge would be of 3.1 cents per kilowatt-hour (kWh) supplied by Prepa to residential, non-residential and governmental customers. The Transition Charge shall not apply to fixed block public housing customers and to “grandfathered” net-metering customers.  For “non-grandfathered” net metering customers, the Transition Charge shall be computed based on the customer’s gross electricity consumption and shall not consider any credit for electricity produced behind the meter and delivered to Prepa.

If necessary, the transition charge will be adjusted quarterly to reflect variances from planned/expected collections, according to the Commission.

The ICSE-PR said that the hike as well as the transition charge include adjustment mechanisms that “inevitably will increase hikes to the point that they will be unmanageable.”

Prepa is currently in violation of laws that state that between 2015 and 2019, 12% of Prepa’s energy production must come from natural resources. By 2035, that number must be at 20%. If Prepa were to fall short on the laws’ requirements, it faces hefty fines.

They noted that there is no evidence on the record that excluding renewable energy from the charges would prevent the payment of the debt.

“The corporation and the commission cannot say that they cannot discriminate in favor of renewable users because that is and has been the policy of the commonwealth and it continues to be,” the Institute suit says.

At a news conference, representatives from different organizations said that they did not object to the payment of a transition charge but that the problem with the charge is that it will be applied to the renewable energy that a person produces behind the meter and that is delivered to Prepa.

Tomás Torres, coordinator for the Institute for Competitiveness and Economic Sustainability of Puerto Rico, said the charge endangers Puerto Rico’s transition to a sustainable economy.

“As approved, these charges are an unnecessary and direct hit to Puerto Rico’s already struggling economy,” said Torres.  “It also goes against national and international market trends toward expansion of renewable energy and distributed generation. If electricity rates are allowed to continue to increase, and options for establishing own generation are blocked with excessive surcharges, production costs would considerably rise and Puerto Rico will lose competitiveness in the manufacturing and other important sectors of our economy, with fewer options for economic development.”

Tom Sanzillo, director of finance for Institute for Energy Economics and Financial Analysis (IEEFA), an organization that did an economic evaluation of Prepa’s restructuring, noted that because the transition charge includes an adjustment mechanism, it may go up between 40% to 55% over the next year because the utility has ignored factors that will cause it go up.

He noted that the restructuring “assumes that electricity rates will remain flat…But we have seen sales declining over the past five to six years.” In addition, he noted that the securitization of Prepa’s deal will be for about $12 billion.

“The transition charge allows for increases without any limits,” he warned.

Luis Garden Acosta, president and founder El Puente and the Latino Climate Action Network, said Prepa refuses to acknowledge that Puerto Rico is an island with sun and wind. He noted that while Hawaii has higher energy rates than the island, it is increasing the use of renewables.

Also participating in the press conference were Rodrigo Masses, president of the Puerto Rico Manufacturers Association and Carlos Nieves, director of servicing, District Council 9 Painters & Allied Trades.

Edward Previdi, president of the Association of Contractors and Consultants of Renewable Energy, said:  “The Puerto Rico Energy Power Authority is launching a direct attack on renewable energy generation as well as any other form of auto-generation such as co-generation, fuel cells, etc.… Thousands of jobs, including those created by the construction and upkeep of green projects as well as jobs saved in businesses that are benefiting from net metering are being threatened right now by these retrograde measures taken by Prepa to protect their failing monopoly on electrical energy. We will fight these unjust charges at all venues available to assure that Puerto Rico stays in the World’s mainstream of renewable energy production goals.”

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