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Puerto Rico power company takes center stage on Capitol Hill

By on July 25, 2018

SAN JUAN – The Puerto Rico Electric Power Authority (Prepa) took center stage on Capitol Hill once again during a House Committee on Natural Resources hearing, which unfolded against the backdrop of political gamesmanship.

One such example was Gov. Ricardo Rosselló’s rejection to testify because his “attendance would legitimize a political exercise that was organized for the sole purpose of promoting flawed legislation that would severely hamper our reconstruction,” as he put it in a letter to committee Chairman Rob Bishop (R-Utah).

The dominant theme underpinning the hearing, outlined in its memo, had Bishop stressing a need to free the utility of political influence for a proper transformation. Sources, who spoke to Caribbean Business during a visit to the Hill last week concurred, although they are skeptical of the Rosselló administration’s ability to privatize the monopoly.

Chairman Rob Bishop (Screen capture of www.naturalresources.house.gov)

“If you look at the legislation that was just passed…it says we are going to sell off all the assets to pay for the pensions,” a Natural Resources Committee aide told Caribbean Business.

“At the end of the day, you are not going to see the transformation that needs to occur without the de-politicization of Prepa and that is just not going to occur until you remove Puerto Rico politics from Prepa, and they just are not going to do that. That is unfortunate.”

The hearing was prompted by a spate of events two weeks ago, when Prepa Executive Director Walter Higgins, who had been at the utility’s helm for only four months, suddenly resigned when the legality of his bonus compensation was called into question by Puerto Rico Justice Secretary Wanda Vázquez, and five independent members of Prepa’s governing board suddenly resigned over the governor’s refusal to rubber-stamp their selection of Higgins’ successor, Rafael Díaz Granados.

Sources close to recent developments at Prepa shared stories characterized by their disillusion over the gutting of a governing board that had been working in lockstep with the Transformation Advisory Committee (TAC), 11 independent energy experts who helped draft new doctrines seeking best practices that are essential to the transformation of the utility.

“Again, I think that the status quo of the legislation—even with the TAC, presuming everything goes right—I just feel that there is so much outside pressure from the government on this that you will never see the transformation. And you just look at the flipping between one party and the other—AGP [former Puerto Rico Gov. Alejandro García Padilla] put in all of that reform, the PREC [Puerto Rico Energy Commission], the board. And Rosselló comes in and modifies that law. In two years’ time, will we have another governor who comes in and just modifies what Rosselló is doing. There is no certainty,” one source said.

That lack of certainty has given some traction once again to a movement on the Hill to federalize Prepa’s overhaul through a congressional bill.

Bishop, however, began the proceeding by saying that contrary to what he had heard his goals were for the hearing, “we’re not talking about federalizing anything,” nor “selling assets to the highest bidder” or “making Puerto Rico a fossil-fuel island.”

During testimony, common themes of lack of certainty and the need for a more robust regulatory framework came to the forefront time and again.    

In one telling exchange during the hearing, Rep. Don Young (R-Alaska) inquired about the timeline for Prepa’s transformation.

Congressman Young took exception to the five- to 10-year estimate for Prepa’s privatization provided by Bruce Walker, assistant secretary for the Office of Electricity at the U.S. Energy Department. “We are going to privatize that utility; we are going to get it done,” Young chided Walker as he stressed it had to happen in months.

Bruce Walker, assistant secretary for the Office of Electricity at the U.S. Department of Energy (Screen capture of www.naturalresources.house.gov)

Young drafted the Puerto Rico Electricity Modernization & Reform Act of 2018, which would, if passed in its present form, empower the U.S. Treasury secretary to review proposals and set the terms for applicants interested in investing private capital “to purchase Puerto Rico’s electricity generation, transmission and distribution systems….”

His draft legislation includes provisions for the creation of the Puerto Rico Electricity Investment Assurance Program to provide up to $3 billion to cover any revenue shortfalls incurred by transmission and distribution entities, which would be evaluated in six-month blocks.

Walker had earlier gone into three key energy recovery components: Strategizing an electric energy policy and regulatory framework; the completed DOE report on resilience solutions for the Puerto Rico grid; and grid-modeling support.

To questions from Doug Lamborn (R-CO), Walker replied he had not seen mismanagement of funds at the utility, but emphasized that his visit to the island was as part of the recovery efforts after Hurricane Maria, not to evaluate Prepa.

Walker suggested that the appointment powers to Prepa’s Governing Board and the Puerto Rico Energy Commission should be removed from the governor, but assured, “We don’t want the federalization of Prepa,” because that would shift the burden to stateside taxpayers.

Walker argued that Prepa should be modernized before being opened to the market, saying the long-term resilience and reliability of Puerto Rico’s electric grid will require “capable leadership, strategic investments, a strong culture of safety, and well-defined regulatory oversight.

“The Southern States Energy Board (SSEB), in association with DOE, is working in coordination with the governor and legislature of Puerto Rico to establish a reliable, affordable, and sustainable electric energy grid system, and to advise on a policy and regulatory framework for possible privatization efforts,” he said.  

SSEB will collect data and analyze the economic, financial and insurance impacts of Prepa’s “potential privatization to inform the development of regulatory framework models. It will also identify components of Prepa’s “privatization economics, e.g., generation, transmission, distribution; priority; rate structure; feasibility; and transparency aspects to balance the needs of the Puerto Rico government with interest from the private investment community,” he explained.  

Additionally, SSEB will establish a Blue-Ribbon Task Force and solicit input from the Task Force on the possible regulatory framework models that provide Puerto Rico with a transparent and robust regulatory regime, all according to Walker’s testimony.

He made certain other recommendations, including requiring the governor to have mutual aid agreements to provide support during a future weather event. He said the PREC, the energy regulator, should coordinate a joint study with the Puerto Rico Telecommunications Regulatory Board to “determine and enforce safe loading requirements of distribution poles carrying both electric and telecommunications infrastructure.”

PREC should “finalize microgrid regulations and establish effective and efficient interconnection requirements and wheeling regulations with Prepa” to allow customers to “design their systems to add reliability and resilience to Prepa’s system,” he said.

Walker proposed that generation plants be placed on the north side of the island to reduce the kilowatt-hour rate, as most generation is produced on the southern part of the island, while power consumption is highest in the north.

Among the others testifying was Puerto Rico Senate Minority Leader Eduardo Bhatia, who prior to the hearing had anticipated legislation would allow the U.S. Energy Department to take over the utility.

Puerto Rico Senate Minority Leader Eduardo Bhatia (Screen capture of www.naturalresources.house.gov)

Bhatia, who authored Act 57-2014, which gave way to the beginning of the largest Prepa transformation since its creation, brought before the commission several matters he said must be addressed: The need to eliminate the monopoly that is the utility and opening a regulated market with private providers, including using the cooperative energy model, and new technology, mainly utilizing renewable energy.

“Privatizing Prepa without realizing the enormous opportunity to create a new open energy market is akin to privatizing a payphone company in the 1990s,” the former Senate president said.

He also stressed the need to strengthen and provide PREC with resources, and denounced that the island’s fiscal oversight board has said the commission is problematic and has suggested cutting the regulator’s budget by 70%.

Bhatia also criticized the governance of the power company during the past year, which included five executive directors and two different boards.

Also participating was Thomas Emmons, a partner at Pegasus Capital Advisors who said he was testifying because of his “experience financing renewable energy projects.”

Rep. Glenn Thompson (R-PA) expressed concern that if progress was made at Prepa, future island administrations could revert those improvements. Bhatia suggested a federal mandate could protect any progress made, but Rep. Raul Labrador  (R-ID) said that, “as a conservative,” he has a problem with mandates.

Thompson stressed that when the vice chairman of the committee asked, “Who’s in charge of Prepa?” he received five different answers.

James Spiotto, managing director of Chapman Strategic Advisors LLC of Chicago, said his “remarks are based on my experience in workouts and restructurings of corporate and municipal debt obligations.” He previously submitted written testimony to House and Senate committees with respect to Puerto Rico in 2015 and 2016.

James Spiotto, managing director of Chapman Strategic Advisors LLC (Screen capture of www.naturalresources.house.gov)

In his submitted testimony, he said “the proposal for a change in oversight and supervision of PREPA under PROMESA is worthy of this Committee’s consideration. Congress has under the Territorial clause of the U.S. Constitution the power ‘to make needful rules and regulation’ for Puerto Rico and to adjust oversight and supervision under PROMESA for PREPA in order to provide Puerto Rico, PREPA and creditors with an enhanced opportunity to find a consensual resolution.”

(Screen capture of www.naturalresources.house.gov)

Another witness, David Svanda, principal at Svanda Consulting of Maryland, testified that during his visit to Puerto Rico, he saw evidence that “there was no comprehensive emergency response plan” and “no strong independent agency requiring the utility to take appropriate actions to manage” its assets.

He argued that, although its intentions were good, PREC hadn’t depoliticized the utility.

Emmons, a partner at Pegasus Capital  Advisors, who has experience financing renewable projects said Prepa “is in no condition to be an acceptable offtaker of power in any energy project financed by the private sector.”

“In the world of project financing – particularly energy and natural resource financing – the whole financing package revolves around the offtaker. An offtake agreement is an agreement between a producer of a resource (such as electricity from solar) and a buyer of a resource, and the buyer of the resource is the offtaker. Essentially, the producers, who are investing in the production of a resource, need to know that the offtaker will be able to pay for the resource or product if and when it is delivered. In the case of investing in Puerto Rico’s energy infrastructure, the offtaker is PREPA. In my opinion, PREPA is currently unacceptable in its current financial condition to be the cornerstone for a project in Puerto Rico. In a financing package, the offtaker is the source of financial strength for the project. Without a strong offtaker, the project is not financeable. This is very black and white in the renewable energy project finance world,” he wrote in his submitted testimony.

-Eva Lloréns Vélez contributed to this report.

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