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Puerto Rico Electric Power Authority Under Risk of Receivership

By on March 7, 2019

Editor’s note: The following was first published in the March 7 – 13, 2019, issue of Caribbean Business.

The more time Puerto Rico is without an energy policy framework that can deal with the P.R. Electric Power Authority’s (Prepa) unwillingness to change, the higher the risk that Prepa will be put under receivership, said Senate Vice President Larry Seilhamer (NPP-at large).

“[If] we do not pass a bill clearly establishing what all stakeholders can expect, we run the risk of having a trustee [over the Puerto Rico Electric Power Authority]. To make matters worse, U.S. Congress is already trying to impose bills to handle Prepa,” Seilhamer said while defending P.R. Senate Bill 1121, which he authored, to establish the utility’s legal framework.

As of presstime, passage of a regulatory framework was delayed by nearly three months, from the original December 2018 deadline. It is a necessary precursor for Prepa to achieve the timely concession of its transmission and distribution systems, which was slated for the summer and then pushed to December.

As a matter of fact, the inaction of a public policy, as well as the energy utility’s mismanagement, high level of politization, pattern of noncompliance with orders of the regulator, the Puerto Rico Energy Bureau, and nonperformance of generally accepted utility practices are just some of the reasons cited by bond insurers seeking a court order to put Prepa under receivership.

In 2017, U.S. Judge Laura Taylor Swain struck down a previous receiver bid by bond insurers, only to have an appeals court remand the matter back to her in August 2018. The insurance companies, National Public Finance Guarantee Corp., Assured Guaranty Corp., Assured Guaranty Municipal Corp. and Syncora Guarantee Inc., which guarantee payments on about 27 percent of Prepa’s $8.3 billion in outstanding bonds, claim they have statutory and contractual rights to obtain a receiver after the utility began defaulting on bonds and filed for bankruptcy. They contend Prepa’s behavior is putting their collateral at risk.

“Prepa has a record of mismanaging its generation, transmission and distribution assets; its human resources; its customer service; its collection practices; its budgeting, financial controls, accounting and recordkeeping; and its procurement and contract negotiations. It does not appear that Prepa has meaningfully changed its behavior or processes in recent months,” said three experts hired by creditors in a court proceeding.

Jeff D. Makholm, managing director of National Economics Research Associates (NERA), who conducted energy studies on behalf of the World Bank as well as European and Latin America countries, said Prepa’s conduct, historically and through the present, “including in its ongoing regulatory proceeding, evidences obstructive and self-justifying behavior consistent with an enterprise strongly resisting objective scrutiny or regulatory control.”

Prepa has historically resisted the orders of its regulators. On Aug. 13, 2018, Gov. Ricardo Rosselló signed into law legislation consolidating the P.R. Energy Commission (PREC) under the umbrella of the Public Service Regulatory Board, renaming it the Puerto Rico Energy Bureau (PREB) and increasing its commissioners to five. Only one commissioner from the former PREC—Ángel R. Rivera de la Cruz—serves as a PREB commissioner.

PREB presides over three regulatory proceedings related to the determination of rates for Prepa: The prior rate case initiated by PREC in May 2015, a proceeding that deals with the implementation of such rates ordered by PREC, and the current rate case initiated by PREB in May 2018. In each of these cases, Prepa has displayed a pattern of disobedience toward the regulator. In the rate implementation case, Prepa requested numerous time extensions to the point that PREB had to issue a final warning to Prepa regarding any further delays, threatening it with fines of up to $25,000 a day.

In the current rate case, Prepa began by attempting to effectively dismiss the case, then refused to produce certain critical information, and now has proceeded to request numerous time extensions. Despite an original deadline in summer 2018 and the expiration of more than half the fiscal year, FY 2019 rates still have not been set, nor has Prepa’s revenue requirement been determined, Makholm noted.

Sandra Ringelstetter Ennis, who also works with NERA, said rather than seeking to comply with PREB’s initial May 4, 2018 deadline to set new rates for FY 2019, Prepa filed a legal brief in which it argued against PREB’s order and instead proposed its own plan for the rate case. “Prepa argued that PREB’s order and rate case was incompatible with the fiscal plan and “impossible or impractical in various other respects…. Prepa further argued, among other things, that it was inconsistent with Puerto Rico and federal law, and the stated objectives of the government related to the energy sectors’ transformation. Essentially, Prepa attempted to dismiss the current rate case as soon as [PREB] instituted it,” she said.

Though the rate case was originally scheduled for completion by July 31, 2018, the end is still not in sight nearly nine months from when it commenced.

Prepa’s pattern of noncompliance with PREB is not limited to the rate proceedings. In its Integrated Resource Plan (IRP) case, Prepa also requested numerous time extensions to the point that PREB resorted to fining Prepa and stating that Prepa’s delays were harming its credibility and stakeholders, Makholm said.

Prepa did not comply with the 2016 IRP. “Relatedly, Prepa attempted to circumvent the IRP process by issuing a request for proposal [RFP] for conversion of two turbines to natural gas-burning capability without first notifying PREB—despite the fact that Prepa was required by regulatory law to do so. PREB was forced to open a special proceeding to investigate Prepa’s noncompliance in this regard,” Makholm said.

The Energy Bureau ordered Prepa to provide documentation on the RFP as well as analysis to show that the proposed conversion is the least-costly option and in the public’s best interest. PREB also stated that Prepa did not inform the Energy Bureau of its plans, did not provide the RFP “nor has Prepa offered any explanation for these actions, which do not comply with the approved IRP and the approved action plan.”

On Nov. 21, 2018, a majority of PREB nonetheless determined that Prepa could continue with the RFP process under several conditions. However, one of the five Energy Bureau commissioners, Ángel R. Rivera de la Cruz, wrote a dissenting opinion. He wrote that Prepa’s analysis of the San Juan conversion was evaluated as a single resource and “detached” from the IRP process, which “goes against these best regulatory and resource planning practices and may result in a more expensive system over the planning horizon.

Finally, in a proceeding to create a draft microgrid interconnection regulation—a critical prerequisite for Prepa’s contemplated energy sector transformation—Prepa has repeatedly refused to comply with PREB’s orders, instead submitting argumentative briefs that it was very diligently constrained by “limitations” such as “resource constraints, including loss of staff, and conflicting demands in terms of its service obligations to its customers and requirements from the Fiscal Oversight & Management Board [FOMB], the Government of Puerto Rico and the [Energy] Bureau,” Ringelstetter Ennis said.

Prepa has also fallen behind schedule on its reporting requirements to the FOMB, as documented by letters from the FOMB. Prepa is required to submit reports to the FOMB comparing its budget-to-actual revenues and expenditures for each fiscal year. These reports, which are used to identify deviations from the budget to hold government entities accountable, are due within 15 days after the last day of each quarter.

Ringelstetter Ennis also noted the high level of politicization at Prepa, not only because of its high level of trust employees but also through documents produced during litigation. An analysis of the fee applications indicates that Prepa has paid significantly, or close to $40 million, for the work of its advisers, including Ankura, Citigroup, Filsinger Energy Partners, McKinsey and Rothschild.

Despite having retained these advisers, as well as many past advisers and consultants, Prepa still struggles with nonperformance of generally accepted utility practices, as well as long-overdue initiatives that are uniformly recommended by their advisers, Ennis Ringelstetter said. The example of Filsinger Energy Partners illustrates the point. Filsinger’s initial contract with Prepa allowed for wide-ranging authority, similar to that of a CEO. Prepa’s Aug. 1 fiscal plan gave Filsinger Energy Partners responsibility for several initiatives, including the Work Plan 180 initiatives. Later, in August, a revised contract limited the scope of Filsinger’s authority, making him clearly subordinate to Prepa’s executive director. “At the same time, the status reports from the Work Plan 180 Initiatives show that several of the initiatives have been delayed due to the failure to obtain ‘management’ approval from Prepa,” she said.

Asked about Prepa’s willingness to listen to advisers, Ed Batalla, an energy director with Navigant, one of the consulting firms, said Prepa had been reluctant to implement transformational change. “Transformation is a big change…. We have to gain their trust. We have world and global knowledge to transform systems and what we find encouraging is that we are actually being invited to their premises to sit side by side with them…. It took us a few months to get there, but now they have opened up their doors,” he said.

The monoline bond insurers also contended there is a need for a receiver to hasten the concession of the utility’s transmission and distribution systems and the sale of its assets, an event that is not expected to take place until 2020.

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