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Solving the Prepa puzzle: will robust regulation secure lower rates?

By on March 26, 2018

Editor’s note: The following article originally appeared in the March 22-28 print edition of Caribbean Business.

SAN JUAN — Using the experiences of other U.S. jurisdictions as a barometer, a robust and independent power regulator that would oversee Puerto Rico’s energy sector, which is headed for deregulation, is still not a guarantee to achieve affordable electricity rates or prevent corruption.

The Puerto Rico government has decided to sell off the island’s Electric Power Authority (Prepa) through a plan in which power generation would be sold off but transmission and distribution would be put under a concession or a preferential allowance. The entire process, which will be completed without the oversight of the energy regulator, the Puerto Rico Energy Commission (PREC), is expected to take 18 months.

Unlike Puerto Rico’s public electric utility, in U.S. states, mostly private energy suppliers are overseen. (CB Photo)

In the United States, energy regulators oversee private or investor-owned utilities. These energy regulators go by different names, such as the Public Utilities Commission or Public Service Commission. The commissions set the retail rates charged by private energy utilities for their services and ensure they respond to customer service requests and maintain the infrastructure. Public utilities—owned by the government, cities or cooperatives—are generally exempt from supervision by state regulators, but a few states do subject them to regulatory oversight.

Who has the power?

Contrary to what is seen in most states, Puerto Rico’s government created PREC to oversee Prepa, the latter of which has a monopoly on energy service, to put a stop to decades of mismanagement, bring power rates down and make it more efficient. PREC, however, is having problems exercising its oversight over Prepa and is embroiled in a legal dispute with the Financial Oversight & Management Board (FOMB) to assert its jurisdiction over the power utility. PREC does not want Prepa to have to follow FOMB orders that go against what PREC has dictated. The problem is that there are conflicting laws on the matter.

As part of the court dispute with PREC, the Oversight Board insists it has broad powers over Prepa by virtue of representing the power utility, which has $14 billion in liabilities and is in a bankruptcy process under Title III of the Puerto Rico Oversight, Management & Economic Stability Act (Promesa).

The FOMB says it has the power to accept or reject Prepa’s contracts, prevent the transfer of properties and issue debt for the utility. The Oversight Board rejects the idea of having to coordinate with PREC the contents of Prepa’s fiscal plan, arguing that a 2017 law delegated to the P.R. Fiscal Agency & Financial Advisory Authority (Fafaa) the task of coordinating with the FOMB the sustainable use of resources and the fiscal plan.

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“This case may have repercussions over the regulation of electric utilities in Puerto Rico because the Oversight Board may try to get control over what the energy regulator does because of the impact that energy service has on the island’s economic development. PREC has to stand firm in its jurisdiction, and that may turn out to be a problem,” a source within PREC said.

The substitute bill that created PREC in 2014 was not being adequately applied to Puerto Rico’s market, which was different from what has been done in other jurisdictions. The goal of having PREC was to reduce power rates, but so far, it has not accomplished that goal.

It was the Alliance of Active & Retired Prepa Employees who pointed out in 2014 that the PREC bill was not going to result in lower rates because the contents of the legislation merely called for periodic hearings every two years to review rates and ensure they represent the true costs to run the utility. The island’s basic energy rate continues to be about 20 cents per kilowatt-hour (kWh) despite the existence of the Energy Commission.

Although the FOMB wants PREC to be independent, the House voted this week to merge it with the public service commission.

A glance at energy regulators

Energy markets are divided into two kinds: regulated and unregulated. In a regulated market, businesses and residents can only receive power from the local utility company and pay whatever price is offered. Unregulated markets include those in which consumers can choose their energy suppliers, allowing for competition and price flexibility.

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In a regulated market like Puerto Rico, Prepa would be what is known as a vertically integrated utility because it owns and controls the entire flow of electricity, including generation, transmission, and distribution.

“The distinction is important because the only intention of [the Energy Commission] is to change Puerto Rico’s market from one that is regulated to one that is deregulated,” Ángel Figueroa Jaramillo, president of the Irrigation & Electrical Workers Union (Utier by its Spanish acronym), said at the time.

As a result of the U.S. energy crisis in the 1970s, deregulation began with the passage of the Public Utilities Regulatory Policies Act (Purpa), which created a structure for Independent Power Producers. But the market opened in 1992 with the Energy Policy Act, which eliminated restrictions on prices that would be charged for wholesale electricity.

Because of the deregulation, states used existing public service commissions to supervise private energy suppliers. The oversight of public utilities was done by consumers, who elect the utilities’ governing members.

In Puerto Rico, as a matter of fact, a 1940 Supreme Court ruling stated the Public Service Commission (PSC) is the entity in charge of regulating the energy industry, citing a 1917 law. The PSC is a member of the National Association of Regulatory Utility Commissioners. The latter is one reason Utier and other unions said there was no need to spend about $3 million to create a separate energy regulator. They also said at the time that only by allowing the public to intervene in the decisions made by Prepa, would a reduction in utility rates be achieved.

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Nonetheless, the government created the Energy Commission, whose structure was also incorporated in the federal Promesa law as one of the entities that must give the green light in approvals of critical energy projects.

Private utility oversight sometimes fails

With the reality that energy regulators in the U.S. oversee investor-owned utilities, or private utilities, have their supervision resulted in lower energy rates and more efficient companies? Not always.

Read the rest of this article in Caribbean Business’ epaper here.


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