Thursday, March 23, 2023

No New Tax on Electricity Consumption

By on December 23, 2016


The Puerto Rico Electric Power Authority (Prepa) needs to pay for its operating expenses, new investments and financial expenses. Anything beyond this is a new tax on electricity consumption.

In this Feb. 4, 2016 photo, a worker from the Energy Theft Control Unit of Puerto Rico's Electric Power Authority places a security seal on an electric meter until an investigation is completed in Carolina, Puerto Rico. The island is cracking down on people who steal power, cheat on their taxes or don't pay other bills as the U.S. island territory struggles to raise money to make bond payments. (AP Photo/Carlos Giusti)

(AP Photo/Carlos Giusti)

The Restructuring Support Agreement (RSA) between Prepa and its creditors is partly to pay for reasonable financial expenses and partly a new tax on electricity consumption to pay for old debt. The former should be approved and the latter should be rejected by both the P.R. Energy Commission (PREC) and the federal oversight board.

Prepa is requesting authorization from the PREC to pay $503 million for the RSA, plus $314 million to pay for the debt that is not part of the RSA, for a total of $817 million in annual financial costs. The argument is that a government-owned utility should be assigned whatever funds it needs to pay its debts and that rates should increase to whatever it takes to pay such debt. Under normal circumstances this would be the case, but Puerto Rico is currently anything but normal.

In most cases, a regulator for an investor-owned utility would assign what is known as a cost-of-service finance allocation. This would be the assets of the utility multiplied by a reasonable rate of return. In the case of Prepa, it would be $6.782 billion in assets multiplied by 7.8% in cost of capital. This 7.8% is the average cost of capital assigned to U.S. utilities over the past five years. The total would amount to $529 million per year.

The difference between the $817 million to pay for whatever is owed and the $529 million that would be the reasonable financial cost of an investor-owned utility is essentially a new tax on electricity consumption. This new tax on electricity consumption would be $288 million per year. Mr. Stephen Hill, adviser to PREC, recommended that the commission order Prepa to work with the federal oversight board to lower debt payments over and beyond the specifications of the RSA.

The RSA would pay fuel credit lines at 100¢ on the dollar. All three local banks (Popular, Oriental and First Bank) recently unloaded their positions at about 67¢ on the dollar. Under the RSA, the “monolines” that insured the Prepa bonds in case the utility would be unable to pay, are also supposed to get 100¢ on the dollar. Thus, the RSA treats creditors as if they had bought U.S. government bonds with zero risk, which is wholly inappropriate.

At a time when retirees could see cuts in their pensions, Puerto Rico needs a better deal than the RSA.

In January 2016, the price of electricity stood at 17.4¢ per kilowatt-hour (kWh). By August 2016, it had increased by 1.3¢ due to a provisional increase in rates approved by PREC and another 1.4¢ due to increases in fuel costs, for a total of 20.1¢ per kWh.

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. (Erika Rodriguez/Bloomberg via Getty Images)

(Erika Rodriguez/Bloomberg via Getty Images)

Each 1¢ per kWh increase is equivalent to some $165 million in additional costs to Prepa customers, or a 0.75 percentage point increase in the sales & use tax.

By January 2017, the price of electricity will have gone up some additional 3¢ due to fuel-cost increases already observed since August 2016. If the RSA is completed, it would entail another increase of 3.1¢ to pay for debt. Thus, electricity rates would reach 26.2¢ per kWh.

This represents a 50% increase compared with the cost of electricity in January 2016.

According to economist Ramón Cao, the proposed increases in electricity rates will contract the economy, reduce employment and reduce tax collections. It stands to reason that the proposed increases would also impact the government’s capacity to pay non-Prepa bondholders. Prepa just signed an extension of the present RSA with the intention of modifying it within the framework of the Puerto Rico Oversight, Management & Economic Stability Act (Promesa). However, the Prepa debt negotiation is not just an issue between Prepa and its creditors. Prepa is a mere conduit between residents and businesses operating in Puerto Rico and Prepa’s creditors. Thus, the RSA needs to be renegotiated within the context of the needs and realities of Puerto Rico’s residents and business community.

column vicente felicianoVicente Feliciano, founder & president of Advantage Business Consulting, has a bachelor’s degree in economics from Harvard University and an M.B.A. from Switzerland’s IMD. His consulting practice has included advising clients in New Mexico and the U.S. Virgin Islands, as well as the Puerto Rico government, hospitals and clinics, and financial institutions.

You must be logged in to post a comment Login