Thursday, October 17, 2019

Puerto Rico power company’s integrated resource plan a moving target

By on April 5, 2018

Editor’s note: The following was originally published in the April 5-11 print edition of Caribbean Business.

It is likely the Financial Oversight & Management Board will receive Thursday yet one more revised version of the Puerto Rico Electric Power Authority’s (Prepa) fiscal plan intended to chart a course for the utility’s transformation through privatization and the restructuring of $9 billion in debt.

The delivery of the document is not likely to end the saga of the Prepa Fiscal Plan, which requires the control board’s certification as a precursor to the plan of adjustment to restructure the utility’s debt under the Puerto Rico Oversight Management & Economic Stability Act’s Title III bankruptcy proceedings.

If the number of revisions requested by the board is any indication of the shape of milestones to come, more likely than not the plan will become yet one more bone of contention tracing to the impossible math underpinning rate benchmarks that have Prepa’s restructuring brigades hard-pressed to hit those targets.

Fiscal board Chairman José Carrión III and Executive Director Natalie Jaresko (Juan J. Rodríguez / CB)

“We have been working together on several issues, and the truth is that the Integrated Resource Plan [IRP] is far from etched in stone,” said one adviser for the administration of Gov. Ricardo Rosselló who chose to remain nameless. “So, you could see a scenario where there is partial certification of the fiscal plan. But there are still many questions as to the exact mix in the generation formula and how to achieve rates in the 20-cent ballpark.”

In a letter sent to Gov. Rosselló, the control board requests several revisions to the Prepa fiscal plan including: “Aspirational rate projections that fall below 20 [cents per kilowatt-hour (c/kWh)] by FY2023: The Latest Fiscal Plan must include rate projections, inclusive of all legacy obligations, that can meet this target and outline a path to achieving it from lower fuel and purchased power costs, lower non-fuel operational costs, savings from [Contribution in Lieu of Taxes (CILT)] reform, and a modernized grid funded by both private investment and the federal government. Further, the Latest Fiscal Plan must show a year-over-year decline from current prices to FY2023.”

The legacy obligations include all debt owed by Prepa. “It includes all debt that is outstanding—that means the $9.1 billion and outstanding revenue bonds; it assumes full face value with the terms and conditions, interest rates for that outstanding debt,” the Prepa adviser said. Advisers for the Commonwealth and the FOMB had a kickoff meeting on Friday, March 30, to go over the projections in the fiscal plan and map out a strategy for the repayment of debt that will not blow the rate structure into the stratosphere.

The adviser says there is a rate portrayed in projections that is as high as possible just to show in court that Prepa cannot meet its obligations. “We are trying to establish what the actual value of the company is in order to make the transaction…. And that is not limited to the concession of [transmission & distribution (T&D)] or privatization of the generation they want to establish the baseline case in court to show within the current state this would be the value of the Prepa bonds.”

The board is seeking to have Prepa achieve lower rates through lower fuel and purchased power costs, an exercise based on fuel load curves in indexes that provide best guestimates, two people familiar with the matter told Caribbean Business.

“We use a trustworthy index and base the projections on that,” said one of the Prepa sources. “And we are basing our macroeconomic indicators on the same numbers contained in the Commonwealth’s fiscal plan. For instance, we use their population and inflation indicators and insert those numbers into our calculations. The base case that our forecasting model presents what we have to do to produce energy to satisfy the demand of the population based on the trends that we are seeing. Even though the population is dropping, we can assume we will have the same density in San Juan, that we will have the same load in the south.”

The IRP, say sources close to the matter, is still in the works. “Prepa is going to start an IRP in the next month or two, and whatever that plan is, and if the Prepa governing board approves it—if it has the blessing of public policy and the governor, and it has to be aligned with the fiscal plan, so all of this is going to change again,” said the government adviser.

Prepa’s Project Management brigades are hard at work with advisers at Fillsinger Energy laying the groundwork for a request for proposal (RFP) that would bring an independent consultant into the fray. “The RFP closes in two weeks, and Prepa is following the lead of the Transformation Advisory Committee [TAC] in seeking out an institution that is not necessarily large but perhaps with a less conventional wisdom.”

The adviser explained that Puerto Rico has a blank slate to transform energy and that will benefit from different vision along the lines of that seen in the rural energy sector in the United States. It will take creativity to meet rate targets, say experts with knowledge of distributed renewables. That will be an important part of Prepa’s transformational equation that will run headlong into some of the realities of the existing grid.

Energy Commission rejects Prepa’s reconsideration of its resource plan

The FOMB letter asks for procurement of limited utility-scale distributed renewables, which is not necessarily an ideal fit for some of Prepa’s existing sites. For now, Prepa’s operations brigades are looking at the ideal mix for baseload and commodity distribution.

“We don’t produce energy commodities here; we have sun and wind, and that cannot satisfy our demand. I think the vision now is to decentralize generation and become less dependent on the T&D system—that is the conventional wisdom now. We want a system that is less dependent on fossil fuels—ultimately more resilient and more effective in delivering and maintaining power,” the adviser added.

As previously reported by Caribbean Business, the draft fiscal plan Prepa delivered on March 23 warns there is no money available to pay the debt to its bondholders, unless rates are increased or another income source is found. The draft is incompatible with remarks made by Gov. Rosselló that would bring the price of electricity to 20 c/kWh or less because this scenario could only become real if the debt is not met.

The debt’s sustainability analysis, which presents various levels of rate hikes, shows a rate hike of 5 c/kWh to meet debt obligations would generate about $1 billion. An energy rate of 30 c/kWh would generate about $5 billion. The report states Prepa’s rate structure is divided into basic and provisional charges, and fuel and power cost adjustments.

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