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Rebuilding, privatization of Puerto Rico’s electric utility debated at U.S. House hearing

By on April 10, 2019

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Despite legislation toward renewables, LNG was main concern; federal coordinator urged as FEMA grants island disbursement authority

SAN JUAN – In a hearing Tuesday, called by U.S. House Committee on Natural Resources Chairman Raúl Grijalva (D-Arizona), the privatization of the Puerto Rico Electric Power Authority (Prepa) was discussed amid calls for a federal coordinator to manage hurricane relief funds and criticisms about the utility’s politicization and slow pace toward utilizing renewable sources of energy.

In Puerto Rico, there is debate about the island’s capacity to move to renewables, with some saying it would be difficult in the near future. The governor has yet to sign Senate legislation that calls for Prepa to use renewables by 2050.

“Is Prepa prepared to work to meet that goal?” one of the lawmakers asked. There is “a lot to be done,” he said. “The grid cannot receive this renewable” without $2 billion in federal funding.

“It’s just unrealistic,” said the former chairman of the committee that oversees Puerto Rico, Ranking Member Rep. Rob Bishop (R-Utah), who has received about half a million dollars from the fossil fuel industry since he took office.

Prepa Executive Director José Ortiz also said the island’s electrical grid is not ready for another category 5 hurricane like Maria, which struck the island in 2017 but that residents would not go months without power as was the case in the hsitoric storm’s aftermath. He said the utility has agreements with 30 power companies to help in repairs and that radio communication is in place.

Bruce J. Walker, the assistant secretary in the Office of Electricity at the U.S. Department of Energy (DOE), gave an overview of his office’s efforts in helping Prepa restore power.

“DOE’s support for Puerto Rico did not wane after electricity service was completely restored. Our contributions to the recovery effort in Puerto Rico have focused on modeling, analysis and technical assistance to support the Commonwealth and the Federal government in the joint effort to improve system reliability and resilience,” he said.

Regarding still-needed utility investments, Walker spoke of the cost and reliability benefits of increasing natural gas generation capacity in San Juan by adding 1,200 megawatts (MW) to 1,600 MW of capacity.

“Moving to natural gas generation could also help bring Prepa into compliance with EPA’s Mercury and Air Toxics Standards,” the President Trump appointee said. “DOE believes increasing natural gas generating capacity in the San Juan area would be one of the single most valuable investment for Prepa’s long-term recovery. However, pursuing this investment may be at odds with the island’s energy policy should the governor choose to sign the Puerto Rico Energy Public Policy Act, which calls for the use of 100% renewables by 2050.”

He also said Prepa needs better vegetation management to reduce transmission line damage. The entity said that 18 power substations were significantly damaged by Hurricane Maria, and poor maintenance at many others could leave the system susceptible to the failure of these critical grid components.

Prepa needs incremental investments in metering infrastructure, communications, smart grid devices, and grid monitoring and control systems because they would improve the functioning of the distribution system, Walker said.

“The single most important element regarding any new investments in Puerto Rico is the presence of a skilled, knowledgeable workforce capable of operating and maintaining an advanced energy system like the one envisioned by Puerto Rico,” he stressed.

Ortiz said that while the integrated resource plan, the blueprint for the island’s energy needs for the next 20 years, remains under review by the Energy Bureau since it was rejected, the utility will continue soliciting proposals for projects related to energy storage, rooftop solar, peaking units and hydroelectric units. The utility plans to put its transmission (T&D) and distribution system under private concession.

“The P3 [Public-Private Partnerships] Authority invited four pre-qualified respondents to submit responses to the [utility’s] transformation RFP [request for proposals] and organized management presentations for some respondents last week and this week,” Prepa’s chie said.

The transformation of the utility’s generation assets, which is in early stages, will take place under a process that has yet to be finalized and independent from the T&D transformation.

“But in truth, we need continued federal support to fully achieve it. Prepa remains eligible for FEMA [Federal Emergency Management Agency] disaster relief funding and for funding of permanent works. Prepa has requested, through COR3 [Puerto Rico’s Central Office for Recovery, Reconstruction and Resiliency] $2.5 billion in FEMA funding to support rebuilding and hardening its T&D system to withstand future hurricanes. As of April 1, 2019, FEMA had obligated $1.88 billion in Category B [emergency protective measures] funding for Prepa’s benefit, of which it had disbursed $1.34 billion. FEMA has obligated no dollars for permanent works,” he said.

In response to a question from Rep. Jenniffer González, Puerto Rico’s resident commissioner, about the delay in permanent work funding, Ortiz said there are three peaking units that Prepa still needs to stabilize the system.

González noted that energy rates on the island are, on average, 22 cents per kilowatt-hour. What are you doing to reduce rates, she asked. Ortiz replied he was bringing natural gas to San Juan, a move that would result in lower rates by August; renegotiating contracts with cogenerators AES and EcoEléctrica, which will be announced next week; and Community Development Block Grant funding to support and foster the use of renewables. He mentioned having requested of AES that it use biomass instead of coal to generate energy.

While Puerto Rico would like to buy U.S. liquefied natural gas, no LNG carriers that qualify under the Jones Act exist to move LNG in bulk quantities from the U.S. mainland to Puerto Rico. The island gets its natural gas from Trinidad Tobago.

“Unless Puerto Rico receives a Jones Act waiver until a sufficient number of qualifying LNG carriers become available to transport LNG from the U.S. mainland to the island, Puerto Rico will lose hundreds of millions of dollars in savings from low-priced U.S. LNG supply sources, and U.S. LNG suppliers will also lose the opportunity to enter the Puerto Rico market,” Ortiz said.

After Prepa is privatized, how will it go accessing capital after a storm, a lawmaker asked.

“The ones that are participating; we have four companies that have better credit than Prepa,” Ortiz said. Also, Puerto Rico has been respectful of long-term contracts, which he said are needed.

Asked if he had separated workers linked to corruption at Prepa, Ortiz said “I have not been addressed about corruption at Prepa.”

In his testimony, the Center for a New Economy’s policy director, Sergio Marxuach, noted what he called “rent-seeking groups” that hinder the efforts to transform Prepa, in that each of the groups that benefit from the status quo is well-organized and has a strong interest in protecting its benefits, while consumers are disorganized and the costs of acting collectively exceed the individual benefit each consumer would receive.

“Therefore, any effort to transform the electrical system of Puerto Rico needs to consider the predatory behavior of Prepa’s internal and external interest groups that benefit from the current situation and provide mechanisms for limiting or eliminating that behavior. If the currently favored privatization process is limited to transferring a corrupt company in the public sector to a group of corrupt investors in the private sector, we will have achieved absolutely nothing. In other words, privatization, in and by itself, will not magically solve Puerto Rico’s electricity problems,” he said.

Marla D. Pérez Lugo, a professor of Environmental Sociology at University of Puerto Rico-Mayagüez, underlined the high level of politicization at Prepa and a lack of transparency and accountability as well as of stakeholder representation.

“Political parties have tried to cover up the politicization in Prepa’s board by balancing its powers with the creation the Energy Commission, the State Office for Energy Policy, and the Independent Office of Consumers Advocate and the professionalization of Prepa’s board members. Those two strategies have proven to be problematic at best, meaningless at worst, in terms of actual stakeholder representation,” she said.

The president of the Puerto Rico Manufacturers Association, Rodrigo Masses, stressed the need for federal funds to pay for grid repairs. He noted that most of the funding has been awarded to stateside contractors.

Of the FEMA disbursed funds, nearly 90% are being managed by U.S. mainland-based contractors. The island’s Financial Oversight and Management Board estimated that only 13% of the Hurricane Maria-related FEMA funds have benefited the local economy.

“The Stafford Act should be complied with in Puerto Rico as it has been in other U.S. jurisdictions, a need particularly important for local construction and engineering companies. I would like to bring to the attention of the committee that FEMA granted the local government responsibility for the management of FEMA funds for the reconstruction process. This is a recognition of the fact that the local government has the required capacity, and that there has not been a single accusation against the local government for mismanagement of federal funds,” Masses said.

The trade group representative also urged the House committee to exert its influence in assuring that reconstruction funds reach Puerto Rico promptly and on a par with stateside areas that were also affected by natural disasters.

“It is relevant to mention that of the $20 billion in CDBG-DR [Disaster Response] funds initially allocated by HUD [U.S. Department of Housing and Urban Development], only $1.5 billion has been made available. The discrimination against the 3.4 million U.S. citizens in Puerto Rico is obvious,” he said.

Noel Zamot, the former revitalization coordinator for the island’s fiscal oversight board, called for the appointment of a federal coordinator for Puerto Rico. Zamot said that while he was successful in creating a transparent process, only one project, a $25 million public housing project, was created despite the existence of $9.1 billion in interested private capital.

“I left my role on March 15 due to what [the fiscal board’s] Executive Director, Ms. Natalie Jaresko, accurately described as ‘frustration’ with the situation in Puerto Rico. I left in part because I could no longer do my statutory job under Promesa [the Puerto Rico Oversight, Management, and Economic Stability Act]. The reasons had nothing to do with the oversight board. They had to do with the impossibility of working in an environment where difficulties in doing business cause an astounding flight of private capital that the American citizens in Puerto Rico desperately deserve,” he said.

He added that those problems had nothing to do with the people of Puerto Rico but with the territorial government and its inefficiencies. For instance, he said Puerto Rico spends $1,800 more per student than states do. There are a large number of police officers who resort to the gig economy, he said.

“Prepa uses approximately six times more employees per megawatt generated than comparable public utilities in the continental United States. Yet the energy cost is higher than almost every state and has the lowest reliability,” Zamot said.

The fiscal board has taken on some of those shortcomings. However, incessant litigation and pushback by the island’s government create an environment where urgently needed process reforms are not accomplished, he said, specifying that a key area with broad impact is procurement reform.

“Currently there is a perception from the private sector–warranted due to widespread reports–that doling out contracts to political allies has been a historically effective way for the territorial government to retain political power and increase political party funding. These allegations again predate the current territorial administration, and have been the focus of several past investigations, indictments and penalties.

“I have heard from investors and developers first hand how pressure from extra-governmental actors has a chilling effect on economic growth. A truly transparent procurement process would have an enormous impact on the island, on private investment, on fiscal stability, on perception of trust from capital markets, and on federal trust in the territorial government. It would also ensure that every federal recovery dollar would be used responsibly and efficiently,” the former revitalization coordinator said.

He proposed the appointment of a federal coordinator as a trusted third party to ensure taxpayer dollars are put to good use.

“I support this concept because it is a straightforward, cost effective and streamlined method to ensure transparency in the execution of federal disaster recovery funds,” he said, adding it could be implemented through executive order.

In response to a question, Zamot said the federal government can appropriate funding but it would never reach the people who need it because the government does not have the processes needed despite FEMA having given it the power to distribute the funds.

Rep. Nydia Velázquez asked Zamot how a federal coordinator would help when 90% of contracts go to stateside, not local, firms. To which Zamot replied that the official would ensure contracts are transparent and award them on merits and not political considerations. Velázquez also asked Zamot if he had taken the allegations he had raised about corruption to the FBI. “I have afforded my concerns to proper authorities,” he said.

The president of the Irrigation & Electrical Workers Union (Utier by its Spanish acronym) Ángel Figueroa Jaramillo, said the Prepa workers organization requested in the utility’s Title III bankruptcy-like case under Promesa the appointment of an inspector to ensure the proper use of funds. He said no federal funds should be given to the utility until mechanisms that provide transparency are put in place.

Also testifying at the hearing were Nelson I. Colón Tarrats, president and CEO, Puerto Rico Community Foundation; Sierra Club board member Ramón Cruz; Tom Sanzillo, director of finance, Institute for Energy Economics and Financial Analysis (IEEFA); Tomás J. Torres, executive director, Puerto Rico Institute for Competitiveness and Sustainable Economy; and Douglas Holtz-Eakin, president of American Action Forum.

See the hearing here.

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