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Prepa’s administrative costs exceed generation costs due to restructuring

By on December 7, 2016

SAN JUAN – The Puerto Rico Electric Power Authority’s (Prepa) administrative and general spending were higher than its entire budgeted expenditure for generation in part because of debt-restructuring related efforts.

The information came to light during Puerto Rico Energy Commission hearings to determine an adequate revenue requirement to design a new rate structure. The commission has until Jan. 11 to release an order on the rate structure, which is expected to contain numerous other requirements for the utility.

The commission discussed a report that finds that a major component of the utility’s operational spending was in administrative and general functions (A&G), which has increased in recent years for unexplained causes. The report by Ariel Horowitz and Jeremy Fisher, one of several expert witnesses’ reports discussed at the hearing, finds that Prepa’s expenditures in A&G increased by $50 million since 2010. The utility had spent $165 million in 2016, of which $134 million fell into a discretionary fund described as “General Miscellaneous Expenses Controlled by Responsibility.”

“Prepa’s A&G spending in the [General Miscellaneous Expenses Controlled by Responsibility] area has increased from approximately $80 million in FY [fiscal year] 2010 to $122 million in FY2015 and a staggering $134 million in FY2016. In other words, Prepa’s spending last year on miscellaneous A&G-related expense was more than its entire proposed budget for generation expenses in FY2017,” the report says.

A chart in the report shows that the operational budget for generation for fiscal 2017 is $122 million while the amount budgeted for A&G is $148 million.

Prepa headquarters in San Juan (CB photo/Eduardo San Miguel Tió)

Prepa headquarters in San Juan (CB photo/Eduardo San Miguel Tió)

The experts contended that they couldn’t ascertain the details of the money spent.

“Problematically, Prepa describes that it is ‘an inefficient bureaucracy’ that is ‘overly staffed with non-value added administrative personnel,’ and that ‘the executive directorate and executive team is oversized.’ It is difficult for us to overstate how concerning this is,” the experts said.

Prepa’s chief financial officer, Ernesto Ramos, said the increase occurred because of what the utility had to spend in restructuring efforts.

He added the utility not only had to invest in consultants starting in 2015, but also once the forbearance with creditors went into effect, the utility had to pay creditors $1 million to $1.5 million a month to forebear, subject to a certification that says the creditors have spent in excess of the amounts Prepa has paid them. He also noted that the utility has a separate fund for restructuring costs.

The utility also had to reimburse the Government Development Bank (GDB) for the costs of consultants the bank hired to help Prepa in its restructuring. While Prepa has a debt with the bank in that line item, Ramos said there were plans to do a debt exchange using the deposits in the GDB that Prepa has been unable to withdraw because of the liquidity problems at the bank.

Horowitz and Fisher expressed concern that Prepa didn’t inform them about the debt with the GDB.

Ramos said that for 2017, Prepa budgeted $28 million because it had assumed that the utility would have completed its securitization by January, something that isn’t expected to happen. Prepa expects that the amount budgeted for restructuring will rise as the process has yet to be completed.

“We expect to overdraft in that portion,” Prepa’s CFO said, adding that the utility will use money geared toward capital expenditures in projects “they know” they won’t be able to do after their Integrated Resource Plan was rejected by the commission.

The utility has three major contracts with a law firm that is working restructuring alternatives; a contract with bond counsels; and the contract with AlixPartners, which has examined Prepa’s operations and led restructuring efforts.

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