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Puerto Rico power utility’s new fiscal plan calls for formula to modify rates

By on January 25, 2018

SAN JUAN – The Puerto Rico Electric Power Authority’s (Prepa) fiscal plan revealed Thursday proposes a revision of the public corporation’s electricity rates by using a formula rate mechanism (FRM) that would modify rates annually to “update and reconcile costs.”

The Puerto Rico Energy Commission (PREC) had rejected the FRM and called for fixed rates in December 2016, arguing the FRM did not promote better utility performance nor would it eliminate the risk of imprudent spending, for which customers would end up paying.

Because of that decision, the fiscal plan chided the PREC, describing it as an obstacle to the transformation of the island’s energy sector.

Earlier this year, the governor proposed abolishing PREC in favor of another energy regulator. On Jan 23, Gov. Ricardo Rosselló announced a plan to change the island’s energy sector model by privatizing Prepa and promoting private investment.

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The fiscal plan for Prepa provides more detail about the the public power utility’s proposed privatization. The government intends to sell Prepa’s generation assets, develop new generation and establish concessions with the private sector to use the utility’s transmission and distribution (T&D) infrastructure.

Prepa’s current rate structure is composed of four primary components: Base Rate, Provisional Rate, Fuel Adjustment and Purchased Power. Three primary customer categories comprise 96% of Prepa’s revenue as follows: Commercial (47%), Residential (37%) and Industrial (12%).

PREC approved a permanent rate structure that has yet to be implemented, which would eliminate the 11% surcharge and include, instead, direct pass-through line items on customers’ bills to cover the contribution in lieu of taxes and other subsidies provided to customers and the private sector.

During PREC hearings to establish rates, Prepa had proposed an FRM that would vary rates according to the utility’s fiscal plan budgets and other needs. The energy commission rejected the FRM.

“PREC rejected Prepa’s FRM proposal, adopting instead a plan not tied to the approved Fiscal Plan (in contravention of Promesa [Puerto Rico Oversight, Management & Economic Stability Act] and otherwise applicable law) that attempts to improperly take over effective control of Prepa’s operations, budgets and priorities,” the fiscal plan states.

In justifying PREC’s abolishment and calling for a new rate structure, the fiscal plan includes the following arguments, calling them “key challenges”:

  • “PREC consistently tries to assert direct and excessive operating control over Prepa, well beyond traditional rate and IRP [Integrated Resource Plan] review, including areas where Prepa is implementing government policy or the approved government Fiscal Plan.
  • “PREC asserts jurisdiction over Prepa budgets and spending/investment even when approved by the Financial Oversight & Management Board.
  • “PREC processes do not respect, and impose timelines inconsistent with, Prepa’s operating or budgetary needs.
  • “Prepa did not approve a robust annual reconciliation process to address ongoing changes in budgets, costs and sales because adjustments for changes require extraordinary action or PREC permission and prolong processes and timelines.
  • “PREC denied Prepa’s requests to reconsider its order regarding some aspects of the annual rate update mechanism, including budgeting and rate adjustment timelines.
  • “Prepa has appealed aspects of PREC’s order to the Puerto Rico Appeals Court and will propose a Promesa-linked formula rate mechanism and updated rates consistent with the oversight board-approved Fiscal Plan.
  • “Prepa’s current rate structure does not send effective price signals to customers and is potentially economically deflationary – there is no incentive to increase efficiency or impetus to reduce expenditure on high-cost refined fuels for generation, which results in a greater-than-necessary transfer of resources to off-island interests.
  • “In most economically and regulatorily developed jurisdictions, average electric power rates are lower for industrial and commercial customers relative to residential customers, consistent with the relative per kWh [kilowatt-hour] Cost of Service (COS). In no U.S. state is the rate for industrial or commercial [charges] higher than residential, as it is in Puerto Rico. This is mainly due to the heavy subsidization of certain Prepa residential classes.”

In describing how the utility is slated to be transformed, the fiscal plan calls for three different processes to be run in parallel. They are: Giving concessions of Prepa’s transmission and distribution system; having public-private partnerships build new generation assets; and selling existing generation assets or powerplants to private investors or retiring some of them.

Regarding the handling of Prepa’s transmission and distribution system, the plan says the concession model for the T&D network calls for leasing, or renting, the power distribution system for 25 years to private companies with a proven track record.

Regarding power generation, the plan says “franchisees can acquire useful generation assets now owned by Prepa under [the] Title III process.”

.“Energy sales can occur through negotiated contracts [power-purchase and operating agreements (PPOAs)], subject to market power test and backup regulation,” the plan reads.

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