Tuesday, March 26, 2019

Puerto Rico utility creditor group calls for private manager to expedite power grid restoration

By on January 19, 2018

SAN JUAN – As much of Puerto Rico remains in the dark since Hurricane Maria destroyed the island’s electrical grid on Sept. 20, a representative of the Ad Hoc Group of Puerto Rico Electric Power Authority (Prepa) bondholders believes the solution to accelerate recovery efforts calls for a private operator.

Maria made a direct hit as a Category 4 hurricane, leaving the island completely in the dark. Two weeks earlier, Hurricane Irma had left about a million people without power. And four months after the hurricanes hit, nearly 40% of the utility’s customers still lack service. The long road toward power restoration has been hindered by Puerto Rico’s topography, lack of materials and mismanagement.

The bondholders said a private operator–who would work together with Prepa’s regulator, the Puerto Rico Energy Commission (PREC)–would not be encumbered by the existing problems with Prepa’s energy restoration and would be free to make decisions needed to ensure that recovery happens as quickly as possible.

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Last year, the Ad Hoc Group and some monoline bond insurers unsuccessfully sought to lift the federal Promesa law’s stay to ask the local courts to appoint a receiver. At the time, they argued that Prepa’s trust agreement requires the utility to set its rates high enough to pay its debt. The court ruled against the Ad Hoc Group, arguing that such a move would require consent of the island’s Financial Oversight & Management Board. In a letter sent Dec. 8 to board Executive Director Natalie Jaresko, to convince the board to accept a receiver, the Ad Hoc Group said it was willing to agree to limit the order lifting the automatic stay so it did not give the receiver power to seek to raise rates over the course of the Title III case, without prejudice to the rights of the receiver or creditors to seek to lift the stay for such purposes in the future.

“The current situation is not working. We think there is a better solution that involves putting in place a private operator that would work consistent with Puerto Rico’s existing laws and the Energy Commission. And in that context, we would support moving forward without an immediate rate hike until power is restored,” said Stephen Spencer, financial adviser to the group.

The government, however, has proposed the repeal of the Energy Commission even though the 50 States have utility commissions that oversee the energy sector. While the administration of Gov. Ricardo Rosselló has proposed to repeal PREC to save money, observers believe there are political motives behind the commission’s throttling that trace to the commissioners’ ties to the Popular Democratic Party, which was in power when it enabled the energy commission.

PREC has also clashed with the fiscal oversight board. The panel recently asked U.S. District Court Judge Laura Taylor Swain, who is overseeing the island’s bankruptcy-like process under Promesa, to stop the fiscal board from pre-empting its decisions.

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The Prepa bondholders’ position in favor of an independent private manager is shared by other energy industry insiders who believe power needs to be restored first and foremost to all utility customers before thinking about drafting a fiscal plan or devising solutions to deal with the public utility’s $9 billion debt. Prepa filed for bankruptcy protection under Promesa last year after the oversight board rejected a debt-restructuring agreement that had been negotiated with bondholders.

“Let’s get the system operating first. and second. we can start thinking about different solutions and different approaches to this,” said one adviser with knowledge of Prepa’s challenges.

Two separate sources in the creditor camp steered clear of calling for the public corporation’s privatization because of the huge amount of work that must take place for that to reach fruition. In the past, Puerto Rico unsuccessfully tried to privatize its water utility.

“What we need right now is a solution to turn the power back on,” one source said.

A private manager does not entail, however, bringing one person but a team of more than 30 people to oversee the generation side, the transmission side, the crews in the field and other operational areas.

The proposal for a private manager is different, sources familiar with the discussion said, to proposing a chief restructuring officer akin to when AlixPartners and Lisa Donahue were hired to negotiate the utility’s debt restructuring. They said the chief restructuring officer (CRO) ultimately had to answer to Prepa’s board, so decisions are not made thinking about how to solve Prepa’s problems in the long term. The outside manager would answer to PREC and would also cost less, they argued.

If there were a strong manager and proper oversight through PREC, Prepa would be able to attract cheaper power generation systems, they noted, adding that private managers in other jurisdictions, such as New York, have turned power utilities around and made them more efficient.

While the fiscal board has not provided specific reasons, it has rejected the idea of a private manager because it would entail giving up control over Prepa. The board tried to appoint its revitalization coordinator, Noel Zamot, to take control of the utility amid growing political fallout following a $300 million contract awarded to Whitefish Energy Holdings, a small Montana-based firm, to restore the battered grid. The court, however, ruled against the board.

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In keeping with Promesa, to obtain a private operator, the fiscal board would have to agree to it. Part of the reluctance is the fact that the board wants to have a say in Prepa’s transformation.

While the government hopes to transform Prepa’s grid into one that relies on renewable sources for generation, some energy insiders have expressed concern the government may be relying on untested technology. PREC recently issued preliminary regulations to spur the implementation of microgrids. The governor has said the technology will help prevent islandwide power outages because each system will be independent.

However, some industry experts contend microgrids are not a reliable solution to provide power to large areas.

“What is needed is more generation in other parts of the island,” another source said. The San Juan metropolitan area, where half the island’s population lives, gets energy from the powerplants in the island’s southern region.

Asked how a private manager would operate differently from the utility’s current board, given the fact the public corporation has few human resources and no money, the sources said Prepa has failed to function for an extended period and its problems are endemic. One former adviser, who is well-acquainted with Prepa’s conditions, summed it up with this: “One person is not going to change [the situation] if ultimately they have to report to the board and ultimately to politics.”

 

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