Prepa’s Restructuring Accord Lacks Meaningful Reforms
The Puerto Rico Electric Power Authority (Prepa) will have a difficult time reaching a debt-restructuring agreement with its creditors because the temporary agreement recently reached with some bondholders does not contain meaningful reforms and the power utility appears to be rejecting being regulated. Such is the assertion by two sources with ties to Prepa bondholders.
Referring to the previous restructuring support agreement (RSA) reached through mediation by AlixPartners, the sources said under the old RSA “a lot of people” made concessions by providing additional capital. There were credible changes in governance, including those that took place through Act 57, or the Transformation & Energy Relief Act of 2014. Under the previous RSA, the parties relied on the expertise of the Energy Commission, now called the Puerto Rico Energy Bureau (PREB). “We don’t see any of that. It is having an impact on the approach to it…. We don’t think the temporary agreement reached with bondholders achieves the required meaningful reforms,” said a source close to Prepa bondholders.
The sources noted that Prepa will not be able to achieve a transformation and complete its Integrated Resource Plan without a robust regulatory body. In an interview with Caribbean Business, the sources, who represent creditors who hold Prepa debt, are advocating having Prepa under the purview of the Federal Energy Regulatory Commission.
Would there be a Prepa deal without oversight? “I cannot say, definitely. But it will be far more difficult,” one of the sources said.
The main concerns raised by the sources center around Prepa’s proposed conversion of Units 5 and 6 of the San Juan powerplant to use natural gas and what appears to be its refusal to be regulated. The Energy Bureau learned about the conversion through a notice for a request for proposal (RFP) published in August and followed up on the matter. Prepa officials told Caribbean Business that the RFP was for fuel supply and it did not need to go through PREB.
The sources said the conversion of the San Juan units makes sense, but their quarrel is over the “deliberate abandonment of the process through which the…[Energy] Bureau gets to review such matters, and by the logic they are using to describe how [the conversions] need their approval because it’s a fuel issue. If you apply that logic to the extreme, the [Aguirre Offshore GasPort] would have already been built because everything was just a fuel arrangement.”
PREB allowed the project to move forward but with the caveat that it must have oversight of the winning bidder and the terms of the contract. “It is detrimental to Prepa and to Prepa’s customers to have the utility and the government running roughshod over the regulatory process,” the sources said.
They noted the conversion of San Juan Units 5 and 6 would require some infrastructure changes, including for the imported natural gas, which is different from liquid oil.
The regulatory process also provides a credible proceeding to establish rates for Prepa, the sources noted. PREB establishes rates by determining Prepa’s revenue requirements, which the sources said is a better method than using a base rate, to which fuel costs and the 11 percent contribution in lieu of taxes (CILT) is added. Prepa has yet to establish the 2017 rates. PREB recently gave Prepa until Oct. 31 to file a detailed work plan with relevant steps and deadlines to perform the reconciliation between the current provisional rate and the permanent rate that must go into effect in December.
Prepa Executive Director José Ortiz and Gov. Ricardo Rosselló recently announced a rate reduction, effective this month, citing certain savings that were achieved. As verified by Caribbean Business, this process did not include consultation with PREB.
Johnny Rodríguez, head of the Prepa Retirees Union, said he worked at operating plants and, after the summer, which is the peak energy use, rates tended to go down because there is a need to purchase less fuel. Rodríguez said he believes the proposed reduction is part of a scheme to prepare customers for a possible hike in Prepa’s basic rate.
The sources close to the bondholders said rates tend to fluctuate because Prepa estimates the amount of fuel it may need two months in advance and then makes adjustments. So, in the month of October, it would be making adjustments for the energy used in August.
Do the creditors object to the reduction? “If it is truly a function of the operations of the adjustment clause, then as a technical matter, I don’t have an objection to it. If it is more akin to a political maneuver, where political influence had an effect on adjustment rate, then I would object to it. In 2012, they did the same thing,” one of the sources said.