Energy public policy by law sought in Puerto Rico utility’s transformation

SAN JUAN – Public hearings to evaluate the proposed privatization of the Puerto Rico Electric Power Authority (Prepa) ended Tuesday with a categorical request from witnesses that the current administration introduce and gives the force of law to a long-term energy policy plan.

The executive director of the State Office of Energy Public Policy (OEPPE by its Spanish initials), Francisco Rullán, said that since 2001, each change in administration has promoted a different public policy, which has hindered the electric utility’s transformation.

“For us, it would be absolutely desirable to be able to prepare a long-term plan and that it not be changed it in a few years because the administration changed. It’s a serious problem we are having,” Rullán said. “If we want to transcend beyond that, we have to do it by law.”

Rep. Víctor Parés (Courtesy)

Both Rullán and the president of the Engineers & Land Surveyors Association, Pablo Vázquez, and the other witnesses at the hearing were in favor of transforming the electrical system, but emphasized that it would not be achieved without first transparently forming a regulatory and legal framework.

The chairman of the Committee on Economic Development, Planning, Energy, Telecommunications and Public-Private Partnerships, Víctor Parés, made reference to an executive order signed by former Gov. Pedro Rosselló in 1993, in which a plan of up to 20 years was proposed to modernize the electric grid.

Although the order proposed generating power from alternative and renewable sources–specifically, solar on the islands of Caja de Muertos and Mona–Rullán said only 3% of electricity on the island is generated with renewable sources.

Gov’s rep to Puerto Rico fiscal board: Utility privatization bill won’t be withdrawn

“The governor [Ricardo Rosselló] instructed us about the concept of energy democratization in the long term and that the consumer chooses [their supplier], and that we can prepare a work plan and a defined plan on that particular, that transcends the elections,” he added.

Parés stressed that Act 57 of 2014 (Act for the Transformation and Energy Relief of Puerto Rico) could be the initial mechanism that allows the public energy policy of the island to be pushed. The law tasked the OEPPE with the development and oversight of compliance with Prepa public policy.

To reduce dependence on imported oil, the executive director of the OEPPE proposed to take renewable energy generation to 50% in 20 years. This long-term objective requires the implementation of a consistent public energy policy that requires compliance with these parameters.

Economist: Puerto Rico utility’s privatization will raise electric bill

On Monday, Senate Vice President Larry Seilhamer announced that the privatization of the public corporation will be completed with the approval of two bills; one that includes the concession of Prepa’s transmission and distribution system via a public-private partnership and another that will include the regulatory and legal framework as well as public policy.
Vázquez favored this position, which the leaders of the House and the Senate together with several lawmakers suggested in a meeting to representatives of Gov. Ricardo Rosselló, who must approve the proposal before allowing its execution.

“As we have expressed before, we were seriously concerned about the absence of a clearly established policy and the absence of a regulatory framework that would lead to clarity from the participants in the process, before even a request for proposals was made,” Vázquez said.

A futile attempt?
In the same hearing, Popular Democratic Party minority Rep. Luis Vega Ramos said the evaluation process of Senate Bill 860 and its counterpart in the House (1481) has been futile, since the future of Prepa will depend on the fiscal plan that the island’s financial oversight board will certify this week.

Vega Ramos argued that the calls for a transparent process, a regulatory framework and public policy will be subject to the fiscal board’s decision and warned that the panel could seek to have a say over Prepa’s privatization process.
futile

“What I want to posit with this is that this exercise we are carrying out today is a nice but useless exercise, because the public policy, the absence of transparency and the regulatory framework will be, in one way or another, defined in the next 48 hours by the fiscal plan, which will govern the fate of Prepa for the next five to seven years,” he stressed.




Gov’s rep to Puerto Rico fiscal board: Utility privatization bill won’t be withdrawn

By Génesis Ibarra and Eva Llorens

SAN JUAN – The representative of the governor to the fiscal oversight board, Christian Sobrino, denied Monday that the privatization bill of the Puerto Rico Electric Power Authority (Prepa) that is currently being considered by the Legislative Assembly will be withdrawn.

“Withdrawing the privatization bill of the Electric Power Authority has not been agreed to. Today we held a meeting with the legislative leadership to discuss the bill and technical and procedural questions regarding it. Any change that is necessary to clarify the bill will be worked on in the current legislative process,” Sobrino said in a statement.

GDB President Christian Sobrino, the governor’s representative to the fiscal oversight board for Puerto Rico (CB/Juan J. Rodríguez)

The official comment was issued after Senate President Thomas Rivera Schatz recently said the privatization bill will be worked on in conjunction with another that would establish the regulatory framework, a bill the administration of Gov. Ricardo Rosselló has yet to send to the Legislature.

On Monday, Senate Vice President Larry Seilhamer revealed that Senate Bill 860 will be amended to eliminate language that refers to privatization and keep only that on a public-private partnership (PPP) to transfer Prepa’s energy transmission and distribution (T&D) to a private company.

Economist: Puerto Rico utility’s privatization will raise electric bill

Although only one private company would control the public utility’s T&D–similar to the PPP with Aerostar Airport Holdings to operate Luis Muñoz Marín International Airport–Seilhamer said it would not be a monopoly because “the sale of [Prepa] assets is not included.”

The senator, who is also the chairman of the Special Committee on Energy Affairs also announced that the U.S. Department of Energy contracted the Southern States Energy Board–which is composed of governors and state legislators from 16 states, Puerto Rico and the U.S. Virgin Islands, as well as a presidential appointee–to draft along with the Rosselló administration the second bill that will contain the regulatory framework, the legal framework and the public energy policy.

The second bill “could be left for the next session, and I emphasize the time schedule given by the federal Department of Energy, which at the end of the day wants a reliable and resilient Puerto Rico electrical system,” Seilhamer said.

The Southern States Energy Board will have nine months to prepare the regulatory framework.

As currently written, the Prepa privatization bill has numerous critics who believe it could result in high energy costs.

Prof. José Alameda Lozada, an economist, conducted a study, commissioned by the Puerto Rico Electric Power Authority’s Irrigation & Electrical Workers Union (Utier by its Spanish acronym), in which he concluded, among other things, that contrary to what the government alleges, the public utility’s privatization would result in higher residential bills.

“On average, citizens would be paying on average $986 per year. Commercial customers would pay $13,600 more and industrial customers would spend $827,000 more per year,” Alameda said during a hearing last week held by the Joint Committee on Economic Development, Planning, Telecommunications, Public-Private Partnerships, Energy and Government of the House of Representatives.

Alameda also mentioned that the decrease in energy demand, whether due to newer electrical equipment using less power or the island’s population decline, does not help reduce the cost of generating electricity in Puerto Rico.




Puerto Rico power utility chairman assures no rate hikes amid privatization

SAN JUAN – A resounding “no” to a possible rate increase was expressed by Ernesto Sgroi, chairman of the Puerto Rico Electric Power Authority’s (Prepa) governing board, when categorically refuting the possibility of the panel allowing any consumer rates to be raised amid the creation of the controversial Law to Transform the Puerto Rico Electric System.

Sgroi was replying to questions from the chairman of the Puerto Rico House of Representatives’ Economic Development, Planning, Energy, Telecommunications and Public-Private Partnerships Committee, Rep. Víctor Parés, in the continuation of work with the chairman of the Government Committee, Rep. Jorge Navarro, both of whom are analyzing the sale of the public power company’s assets, as well as  the transfer of operations, functions and services.

“The objective is to lower the cost of the kilowatt-hour, that it be predictable and low; this is of great importance for the Puerto Rican people. If the sale contract of Prepa affects the [power] authority’s customers, the governing board won’t approve it,” he said while favoring House Bill 1481 to privatize the public corporation.

Prepa Governing Board Chairman Ernesto Sgroi (Courtesy)

“The bill is compatible with the fiscal plan we have in the Authority. We, Prepa’s governing board, endorse the testimony given last week by engineer Justo González on behalf of Mr. Walter M. Higgins,” the utility chairman said.

He also said the measure allows the proposals of interested companies to be evaluated and confirmed that discussions are underway and no bids have been received.

The Government Committee chairman then required him to provide the committees a list of the entities interested in the privatization.

To questions by Rep. Parés about the hiring of Prepa’s new director, Sgroi acknowledged that the $450,000 annual salary was high.

“We sought a person who would make decisions to the benefit of customers, that…process will be carried out by Mr. Higgins. We reiterate here our selection of the new executive director, we cannot make the same changes that have been made in the past years, we have [to do] something different to see changes,” he said.

The president of the Puerto Rico Society of CPAs (CCPA by its Spanish initials), Ramón Ponte, supported the general concept of transforming the island’s electric power system. However, he voiced concern over the “lack of clarity and gaps in the current language of the measure that could hinder or even impede the goal of achieving the transformation proposed by the bill.”

“It’s crucial for the industrial development of Puerto Rico to have reliable energy sources that are produced at costs that allow maximum development of this,” said Jaime García, the legal adviser of the Puerto Rico Manufacturers Association (PRMA).

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“It is of vital importance that every private operation of generation, transmission, distribution, and commercialization of electric power of Puerto Rico remain under the jurisdiction of the Puerto Rico Energy Commission (PREC) as a supervisory and independent entity that establishes uniform and impartial rules, guidelines and parameters applicable equally to all components of this industry,” the PRMA president added.

Likewise, the president of the United Retailers Association (CUD by its Spanish initials), Nelson J. Ramírez, endorsed the measure after first suggesting the bill provide for the transfer to privatize hands not only the generation, but also the transmission, which is what delayed the restoration of power on the island after the passage of Hurricane Maria.

Lastly, Alicia Laboy, Chamber of Commerce president, supported the transformation into a modern, efficient and cost-effective entity. She alluded to the change as necessary to stabilize the manufacture of products, commerce and services on the island “with the objective making us a viable and competitive investment alternative.”




Puerto Rico energy regulator testifies at hearing over utility’s privatization

SAN JUAN – Public hearings over the privatization of the Puerto Rico Electric Power Authority (AEE) that the Senate Special Committee on Energy Affairs is holding began Wednesday with the appearance of the Puerto Rico Energy Commission’s (PREC) interim president, who underlined the importance of the regulatory agency’s participation in the transformation of the island’s energy sector.

PREC chief José Román asked the committee presiding over Senate Bill 860’s hearings to allow the regulator to be directly involved in the transformation of Puerto Rico’s electric power system.

Puerto Rico Energy Commission interim President José Román (CyberNews photo)

“What we are requesting is that PREC be allowed to do its job and duty as a regulator throughout the entire process. If the regulator is removed, as a specialized entity, it cannot be guaranteed that the result will be beneficial for the people. The objective of this process must be to provide the people of Puerto Rico with the best energy product, in the most efficient way and with the best performance,” the official said.

Román explained the main role of the commission as an independent government entity in charge of regulating, supervising and ensuring compliance with the government’s energy policy.

Hearings to privatize Puerto Rico power company begin

He also said the purpose of regulation is to oblige the best performance from entities, producing benefits of public interest.

“Regulation must produce results comparable to those that would be produced effective competition: reasonable costs and high-quality services. The objective is the same no matter if you are regulating a monopolistic provider or if you are forging competitive markets,” he said.

Román said that just as in all jurisdictions around the world, the regulator is in charge of carrying out rate reviews, the orderly planning of resources and the transformation or restructuring of the energy system.

PREC is the entity responsible for making decisions about the island’s energy market, or the performance of the Puerto Rico Electric Power Authority (Prepa) and other providers of power generation and electrical services.

The official’s testimony included several concerns regarding provisions of S.B. 860 and in which he proposes excluding PREC from the initial negotiation phase with private entities.

Among the most relevant points discussed during the hearing was the environment for creating abusive rates, a disorderly transition, balancing the sale with the modernization of the grid, and the market structure.

Judge Swain won’t intervene on behalf of Puerto Rico Energy Commission in case against fiscal board

As final observations, PREC recommended that the Senate’s Special Energy Commission follow an orderly process to produce the best performance in the restructuring of the energy system.

Public hearings to discuss House Bill 1481 began Wednesday in the lower chamber. The measure to establish the legal parameters to create a public-private partnership with Prepa, privatize and open the energy market on the island, began with the testimony of the public utility’s deputy director, Justo González.

Justice Secretary Wanda Vázquez, and officials representing the Government Development Bank, the Fiscal Agency and Financial Advisory Authority, and the Public-Private Partnerships Authority also testified in Wednesday’s House hearing and praised the legislation’s viability.

Bill that would consolidate Puerto Rico Energy Commission passed by House




Hearings to privatize Puerto Rico power company begin

SAN JUAN – With the overwhelming endorsement of House Bill 1481 by various agency officials, hearings began Tuesday over a measure authored by the majority party to establish the legal parameters for public-private partnerships with the Puerto Rico Electric Power Authority (Prepa) and open up the island’s energy market.

After the Government Development Bank (GDB), the Fiscal Agency and Financial Advisory Authority (AAFAF), the Public-Private Partnerships Authority (AAPP) and the Justice Department supported the bill, everything seems to indicate that the sale of the public corporation is imminent.

The hearings were convened by the Puerto Rico House Economic Development, Planning, Telecommunications, Public-Private Partnerships & Energy Committee, chaired by Víctor Parés, and the Government Committee, chaired by Jorge Navarro.

Rep. Víctor Parés, chairman of the House Economic Development, Planning, Telecommunications, Public-Private Partnerships & Energy Committee (Courtesy photo)

“Puerto Rico’s electric power system collapsed. It no longer works, and with a corporation in bankruptcy,” Parés said at the beginning of the hearing, “I think we have the opportunity to change that and do it as a priority amid what we have faced and lived through with the passage of [Hurricane] Maria.”

The first witness called was Prepa Deputy Director Justo González, who praised the bill and assured it was is the right step toward strengthening the island’s grid.

“It will be possible to carry out the entire transformation of the energy system that is needed in Puerto Rico and it is consistent with the vision for the energy future that was recently adopted by Prepa’s Governing Board,” González said.

“With a new electric power system, losses are minimized. All this must be thought of for the benefit of the people of Puerto Rico,” he added.

The official further said the privatization of the utility, which according to the administration has an about $14 billion debt, would make it possible to leave the fragile economic situation in which it finds itself and offer Puerto Rico a new alternative to conduct business.

In addition, González indicated that the participatory public-private partnerships concept is key for the corporation’s recovery in the short and medium terms and indispensable for its long-term transformation.

Prepa Deputy Director Justo González (Courtesy photo)

Meanwhile, Justice Secretary Wanda Vázquez endorsed the draft proposal from the legal point of view and assured the bill establishes the legal framework to probe the market and open the call for companies interested in participating in the transformation of the electrical system.

“We recognize the need for this legislation to be approved in order to address the urgent need to provide better services to the public and that this can be realized without delays that affect the public interest,” Vázquez said.

Regarding the public utility’s employees, the Justice secretary stressed that during the transition process the rights acquired by Prepa employees will be guaranteed.

The government’s economic component, composed by the GDB, the AAFAF and the AAPP, presented its joint endorsement and said the legislation’s approval would be beneficial.

Omar Marrero, the executive director of AAPP, stressed “it is extremely important that Prepa transactions be carried out efficiently while ensuring transparency in the processes. The public-private partnership structure we are proposing allows for precisely that, insofar as it provides an efficient, competitive and open process that has already been proven successful in the past.”

Marrero further stated that the Puerto Rico energy industry will undergo significant changes as a result of the AEE Transactions.

“In all likelihood, they will require modifications to the regulatory framework. Partnership contracts awarded as results of Prepa transactions will be responsibly audited,” he said.

In response to questions from Parés about what specifically will be sold by the utility, the AAPP’s executive director said it would be the corporation’s power generation assets.

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However, following Marrero’s testimony, Popular Democratic Party minority Rep. Luis Vega Ramos denounced that the bill does not mention that the privatization of assets would be limited to those that produced electric power.

Meanwhile, the spokesman of the Puerto Rican Independence Party (PIP), Rep. Denis Márquez, said that he and the institution he represents have historically defended and maintain that Prepa should remain a public corporation.

In his turn to debate, Popular Democratic Party (PDP) Minority Spokesman Rafael “Tatito” Hernández stressed that “the element of transparency is important,” adding, “We can present bipartisan amendments to include a transparency mechanism.”

GDB and Aafaf Chairman Christian Sobrino replied to the lawmaker that “we are always available to the members of the committees to be able to fulfill the objectives of the bill.”

Bill that would consolidate Puerto Rico Energy Commission passed by House




Governor won’t commit to 15 cents per kWh in Puerto Rico

SAN JUAN – Gov. Ricardo Rosselló did not commit Friday to bring the price of electricity to 15 cents per kilowatt-hour (kWh) as requested by Puerto Rico’s industrial and manufacturing sector.

Rosselló also said the Puerto Rico Electric Power Authority (Prepa) privatization bill is only the first step in the transformation of the public corporation.

His remarks at the Puerto Rico Manufacturers Association Caucus suggested that changes in Prepa will take longer than originally established. The governor has said the power company’s transformation should take 18 months.

Bill to privatize Puerto Rico utility eliminates provisions to prevent power rate hike

Rosselló said he will try to bring the kWh “to less than 20 cents” but did not promise to try to lower the price to 15 cents a kWh as the private sector requests.

He also said that before the request for proposals (RFP) to sell the utility is issued, the fiscal plan, which will contain information on the transformation process, must first be certified. Completion of the integrated resource plan, which is being re-evaluated, is also necessary.

Rosselló stressed that “the regulator must be a key component” in efforts to control the price of electricity. The Prepa privatization bill, however, prevents the Puerto Rico Energy Commission, which regulates the industry, from interfering in the sale of utility installations. The process would not be required to abide by what is established in the Prepa’s integrated resource plan.

“Once all of that has begun, then the RFP starts,” he said.

“Privatization is a mechanism but not the end goal, which is to have a modern and efficient system,” he added.




Bill to privatize Puerto Rico utility eliminates provisions to prevent power rate hike

SAN JUAN – The Puerto Rico Electric Power Authority (Prepa), which has been widely criticized for its poor management historically, will be in charge of selling its own assets and facilities, a process that cannot be supervised or regulated by the Puerto Rico Energy Commission (PREC).

The public corporation may also permanently or temporarily transfer or delegate any of its operations under the framework provided by the Public-Private Partnerships Act of 2009, as long as not in conflict with the proposed legislation to privatize its facilities. The Energy Commission would also be prevented from intervening or regulating this type of contract.

That is what Senate Bill 860 would establish, with its sister bill in the House of Representatives (HB 1481) establishing the purchase of Prepa that was submitted to the Legislature on Tuesday.

Prepa’s Palo Seco power complex between the municipalities of Cataño and Toa Baja. (Felipe Torres/CB)

According to the proposed legislation, all Prepa property will be for sale, including its facilities, as well as generation and metering systems.

Any transaction the power company makes, whether it be a sale or transfer of operations through a public-private partnership, would not have to comply with the long-term integrated resources plan approved by PREC. That plan, among other things, establishes goals regarding the use of renewable energy.

Although the definition of a public-private partnership is used to refer to a contract in which a service is handed over to a private entity, under the proposed law it would be amended to include the process of selling electrical installations.

Prepa may establish a sale process under Article 6 of the Public-Private Partnerships Act, which establishes the creation and approval of regulation for the processes leading to the establishment of partnerships, including identifying the functions to be carried out under the alliance, as well as which candidate companies are chosen to request proposals from and their evaluation.

However, any transaction made by Prepa would not have to comply with Articles 6C, 7 and 10 of the Public-Private Partnerships Act, which prevent ownership of public facilities from being transferred to private hands, require desirability and convenience studies, and establish the content of a partnership contract.

Selling Puerto Rico’s electric power utility won’t be easy

The transactions Prepa undertakes related to its facilities would not have to comply with the requirement of an energy relief plan because the obligation to comply with that provision is eliminated.

Any transaction-related payment received by Prepa may be used to contribute to the utility’s employee retirement system to increase its capitalization.

Although the Energy Commission or its successor entity may not intervene with any transaction made with Prepa facilities, nor establish regulations for these, it may oversee the contractor’s performance under the partnership agreement as well as review the applicable rates after the transaction is completed.

The law nor the partnership or privatization contract cannot be used by the government to dismiss Prepa employees in regular positions. As for utility personnel who wish to remain employed by the government, they would be assigned in accordance with applicable statutes and retain their acquired rights. The government and Prepa, however, may offer voluntary transitions or voluntary resignation plans to those employees.



PC1481 TransformacióN De AEE (Text)




Strong regulatory framework needed to attract Puerto Rico power utility buyers

Caribbean Business Executive Editor Philipe Schoene, Prepa Project Management Officer Fernando Padilla and Julia Hamm, president and CEO of Smart Electric Power Alliance (CB photo)

SAN JUAN – If Puerto Rico wishes to privatize its bankrupt Electric Power Authority (Prepa), it must count on a strong regulatory framework to attract buyers and modernize its grid, energy industry experts said Monday.

During a panel discussion at the Puerto Rico Investment Summit moderated by Caribbean Business Executive Editor Philipe Schoene, Prepa Project Management Officer Fernando Padilla and Julia Hamm, president and CEO of Smart Electric Power Alliance, said Prepa should not dismiss the use of small modular reactors for Puerto Rico. There is a debate, nonetheless, within the energy community about whether to classify SMRs as distributed energy resources.

“I don’t see why any option should be off the table. Now is the time for Puerto Rico to think about all options,” said Hamm, a renewable energy advocate, who is widely considered a world expert on distributed energy resources.

Padilla said that once there is a final version of Prepa’s integrated resource plan, Prepa will have a clear vision as to what is needed.

Puerto Rico Investment Summit to showcase opportunities

When asked how to privatize a bankrupt entity, Padilla said the first consideration is the Promesa federal law, which will give Prepa the “oxygen tank” needed to reorganize. Between the law’s Title III, the bankruptcy process, as well as Promesa’s Title V, which would help expedite permits for projects, there is room to privatize Prepa.

Hamm said the bankruptcy process was not a “showstopper” for privatization because there was a lot of interest in Puerto Rico and a desire to bring investors. But she stressed the need for strong regulatory framework designed in a way that can truly draw private capital to the island.

Julia Hamm, president and CEO of Smart Electric Power Alliance (CB photo)

As for how much solar could Prepa use, Padilla said one of the issues will be the transformation to renewable sources to meet demand because the system is not flexible enough to allow for such integration. It also involves making changes to the energy transmission system, which was virtually destroyed by Hurricane Maria in September.

“I do see larger generation coming in the North. I do see more flexible and lower capacity in the South,” he said.

The two experts agreed with the Financial Oversight and Management Board on the need for a strong regulatory body overseeing Prepa. The fiscal board asked the government to introduce legislation by this summer to create a robust and independent regulatory body for Prepa, rejecting proposed government legislation to merge it with other entities.  

Hamm said there are different types of regulatory bodies. While Puerto Rico could have an independent energy regulator as it does now, she also noted that some power utilities have their own governing bodies that exercise oversight.

“It is not the style of regulatory body, but it is absolutely critical that there is a strong and independent regulator, looking out for customers and to ensure things are done in a transparent manner,” she said. “That is what will attract private capital to the island.”

Prepa Project Management Officer Fernando Padilla (CB photo)

Padilla said that as Prepa shifts into “Prepa 2.0,” the regulatory framework not only should help attract private investment, but also contain a mix of customer protections.

The experts posited that it will be difficult for the utility to keep its billing rates low as its customer base shrinks. Hamm also stressed it will be important to take into account the needs of all stakeholders during Prepa’s transformation.

 




With Prepa Filing for Title III, Privatization Looming

Editor’s note: This article originally appeared in the July 13, 2017, print edition of Caribbean Business.

Now that the Puerto Rico Electric Power Authority’s (Prepa) deal has been blown to smithereens and the utility is seeking Title III bankruptcy-like filing, would privatizing the utility end—once and for all—its fiscal and operational inefficiencies? That is a tall order by any measure.

Since the 1990s when privatization of public services became a global trend, dozens of governments and states have privatized or deregulated their electrical utilities, contending it would boost efficiency, reduce taxes and shrink the size of government. Privatization also gives governments a much-needed cash infusion to operate.

While privatizations of public power companies have resulted in better customer service, they have not always gone smoothly. The privatization experiences around the world often have led to higher utility rates for the general population, according to some research. As publicly owned energy plants become investor-owned, private-sector managers are reluctant to engage in practices that can help make power service affordable to the poor because of the need to protect investments. Critics of privatization, on the other hand, contend privatization has not necessarily translated into improved efficiency or eliminated corruption.

Puerto Rico has had its share of successes and failures in the area of privatization of different essential services, most of them enacted to raise funds for the government. Decades ago, the central government sold the Navieras shipping carrier, leaving the shipping of goods entirely to the private sector. Nowadays, and following the debate over the impact of U.S. maritime shipping laws on the cost of goods in Puerto Rico, some have often wondered if it was the right choice to sell Navieras because of the high cost of bringing food and other goods into Puerto Rico using private U.S. shipping companies, with the expense then passed onto consumers.

The sale of the Puerto Rico Telephone Co. in the 1990s to private interests and the increasing competition from other telephone operators have led to a reduction in prices for telephone services, which have led to better service for the population. However, that industry is also being regulated by the Telecommunications Regulatory Board.

Some say that putting the Luis Muñoz Marín International Airport under a private operator, Aerostar, has also improved the quality of services at the airport. However, almost two decades ago, the government put the Puerto Rico Aqueduct & Sewer Authority under the hands of private operators—twice. The government ended up cancelling the contract in 2004 when the then-private operator, Ondeo, had problems with the servicing and billing of customers as well as with the U.S. Environmental Protection Agency.

The current fiscal plan approved by the Financial Oversight & Management Board proposes the privatization of the Highways & Transportation Authority, the Public Buildings Authority and the Municipal Revenue Collections Center, among other entities, as part of the overall restructuring to help pay the island’s $73 billion debt.

Arguments for privatization

More recently, however, four of the seven members of the oversight board rejected Prepa’s restructuring deal, which took three years in the making and had been extended more than a dozen times, arguing that the deal would be costly for customers, both residential and businesses, and the publicly owned utility should be privatized so the funds for much-needed infrastructure improvements could be obtained.

As the Center for a New Economy (CNE), a Puerto Rican think tank, put it in a 2009 report: “Prepa’s operations are substantially less efficient than the operations of its U.S. counterparts and it underperforms in virtually every area of operation under consideration. While mainland utilities have reduced costs by shifting to natural gas, Prepa relies on outmoded oil-fired generating plants. The company also loses 12% of sales revenues to faulty billing and theft, three times the U.S. average.

“Prepa has languished under heavy administrative overhead and politicized management, which contribute to its failure to deliver reliable, cost-effective energy.

We believe that only privatization will enable Prepa to attract the investments it needs to lower costs and provide more reliable power throughout the island. By shifting from a government entity to a well-regulated private utility, Prepa can modernize its power supply, depoliticize its management, reform pensions, and renegotiate labor and other contracts to operate more efficiently,” CNE said.

Would the privatization of Prepa work? “In my experience it should not be a matter of public versus private…. It is best to have a mix because each model has its strengths and weaknesses,” said an energy consultant who wished to remain anonymous.

There are different forms of privatization that run the gamut from privatizing some services offered by the public entity, to putting the public utility under a private operator and selling it. Prepa’s former chief restructuring officer, Lisa Donahue, also proposed putting Prepa under a private operator, arguing that partisan politics were preventing needed changes at the utility, but she did not suggest selling it.

Then there is deregulation, or allowing for private competition. Technically, according to some analysts, Prepa is not a monopoly in the truest sense of the word because 15% of the island’s energy is provided by two private companies that sell energy to Prepa.

Privatization of energy in other jurisdictions: Chile

In the early 1980s, Chile became among the first countries to embrace privatization not only of energy, but also other utilities. The privatization of its energy sector was completed in the 1990s, according to published reports. There are four separate electricity grids in Chile: the Central Interconnected System, which serves the central part of the country; the Norte Grande Interconnected System, which Serves the desert mining regions in the north; and the Aysén and Magallanes systems, which serve small areas of the extreme southern part of the country.

The privatization helped bring much-needed electricity to rural areas and sparked numerous projects. Right now, almost 100% of the country’s population has reliable access to energy.

Chile ranked 40th in a list of 127 countries in the categories of energy access & security and electricity prices per industry in the 2017 Energy Architecture Performance Index of the World Economic Forum. About 18% of the country’s energy is produced from renewable and Chile expects to increase this number to 20% by 2025. The Energy Forum report, however, ranks the country 77th in its production of carbon monoxide.

The privatization of Chile’s energy sector has not been without problems. From 2000 to 2010, electricity rates rose 166%. In 2014 alone, the cost of electricity for a low-income family making $254 a month was 10% of their income. Much like in Puerto Rico, whenever there is a natural disaster, such as the 8.8.-magnitude earthquake in 2010 off the coast of central Chile, it can take months to get energy restored. However, in general, the level of power outages as well as their duration is low.

Texas

In Texas, a research paper titled, “Deregulation & Privatization: Texas Electric Power Market Evidence,” which used means testing of U.S. Energy Information Administration data from 1970 to 2011 to statistically analyze electricity prices following deregulation Texas, pre- and post-deregulation, relative to U.S. electricity prices, found higher electricity prices following deregulation.

“Relative to U.S. electricity prices, Texas electricity prices during the deregulation and privatization period (2002-2011) rose four times faster than increases in Texas electricity prices before deregulation (1970-2001). The Texas electricity market is much less efficient now as a result of deregulation. Higher relative electricity prices after deregulation are a liability for Texas residential electricity consumers and put Texas at a competitive disadvantage compared with regulated electric utility states when attempting to attract new industry and jobs,” the study stated.

The researcher wrote that during a cold weather period in January 2014, two large powerplants unexpectedly closed down because of incomplete weatherization, which resulted in the danger of rolling blackouts. As a result, Texas wholesale electricity-market prices spiked higher—from a usual $30 to $100 per megawatt-hour (MWh) to more than $4,500 per MWh.

Brazil

Brazil, which has renewed an effort to privatize its electricity sector, recently announced measures that would facilitate asset sales by state-controlled power holding firm Eletrobras. President Michel Temer’s administration wants to attract private investment because the sector has struggled financially, partly because of changes made in 2012 when the previous government administration renewed operating licenses for hydroelectric powerplants at conditions now seen as unprofitable, according to published reports.

Temer’s plan says the state-owned hydroelectric plants “tendered live in a regime of regulated tariffs,” which ends up generating more expensive energy. With the changes, the powerplants will be based on the market principles of supply and demand.

In addition, the Brazilian reform proposes that the resources obtained from competition in the electricity sector be divided equally between the National Treasury and consumers. Brazilian officials acknowledge that this would lead to a 7% increase in energy tariffs, arguing that they would be offset by reducing charges and subsidies currently paid by taxpayers.

Historically, the Brazilian energy sector has changed from private to state, and then back to private hands, with many of the state governments owning much of the energy distribution sector. When privatization was mentioned in Brazil in the 1990s, the generation and transmission sectors were running reasonably well, but it was the distribution sector that was having problems. Privatization of the power sector was seen as a solution to clear Brazil’s debt, but the country became entangled in the debate of its social obligation to provide energy and making the sale attractive to buyers. Right now, there is a mix of private and publicly owned electric companies in the country.

According to the Center for Energy Economics, before Brazil’s power sector reform, energy tariffs were cheap. Fearful that high prices would lead to inflation, reformers used contracts that progressively released the low-cost existing power to be sold at its “opportunity cost.” The effect of this policy was a continuous increase in the average tariff for consumers from 1995 to 2005, from 150 Brazilian reais per MWh to 300 Brazilian reais per MWh. The country also has an energy regulator.

Still, a recent study at the American Journal of Political Science found the public utility model has some setbacks. As a result of poor funding, public utilities can fail to meet federal public regulations, as is the case in Puerto Rico. The study also found that because private utilities prioritize their investors rather than their customers, they have little incentive to create rate structures for low-income households.

Moreover, the model’s reliance on public support can compromise its ability to make crucial infrastructure upgrades or increase rates to make them a reality. For instance, residents of a small, poor town in Fresno County, Calif., recently voted down a proposed $30 monthly increase to their water bills, even though it may mean having their water cut off.

But that is not always the case. This month, Boulder City, Colo., residents will see a slight rise in electricity costs that is part of a series of increases approved by the city for the next few years. The new rates go into effect July 1 and are the second of a four-year phased increase that began in October. The amount the electric rates will increase is $0.0043 per kilowatt-hour (kWh), which the city estimates will cost a family about $4 more a month.

The need for an energy regulator

If the island’s energy sector becomes privatized and is deregulated, there will be more need for an energy regulator.

José Román, head of the Puerto Rico Energy Commission, said the entity, which regulates the energy sector, including power rates, has the “responsibility to regulate all public and private service companies and under any kind of structure, whether with competition or as a monopoly.” Román was answering a question from Caribbean Business on what its role would be if Prepa were privatized.

Carlos Gallisá, a former consumer representative on Prepa’s board, said there is no study showing the utility’s situation will improve with privatization. However, Prepa does have a study that shows energy demand will go down by 23% in a few years, which will bring electricity rates up to 28¢ per kWh. “I talked to many technicians and all of them told me it is impossible to bring power rates down to less than 16¢,” he said, adding that he does not know how privatization can put a stop to a hike in energy rates if demand goes down.

He supports Prepa’s bankruptcy process because he said the restructuring support agreement would have been disastrous. “They should have done that a long time ago,” he said about killing the deal.

A Chronicle of Prepa’s RSA Saga

There are few things more emblematic of complexities ensnaring Puerto Rico’s debt crisis than the Puerto Rico Electric Power Authority (Prepa)—much as the island itself, the ailing public utility is bankrupt and has numerous creditor constituencies. The restructuring of Prepa’s $9 billion debt was essential for Puerto Rico because it would have provided a showcase for the art of the possible. More importantly, without sealing the restructuring support agreement (RSA) achieved in October 2016, Prepa would not be able to implement an Integrated Resource Plan (IRP) that requires access to capital for the overhaul of an obsolete and bureaucratically bloated public agency.

Time and again, the reform of Puerto Rico’s energy apparatus came to the forefront in public debate over Puerto Rico’s debt crisis—early in Gov. Alejandro García Padilla’s administration when the Energy Relief Act was passed; again, in May 2014 when the former Deputy Managing Director of the International Monetary Fund Anne Krueger pointed to exorbitant electricity costs as a categorical impediment to economic development in Puerto Rico; and later on Capitol Hill when the Prepa RSA was debated in hearing after hearing during the months prior to the passage of the Puerto Rico Oversight, Management & Economic Stability Act (Promesa) in June 2016.

Such was the importance of Prepa’s overhaul that House Natural Resources Committee Chairman Rob Bishop (R-Utah) tried to have his staff director Bill Cooper codify the Prepa deal into the law, but they found opposition from the Dems across the aisle. Then the final draft of the bill came down the pike, language stipulated that all deals done prior to Oct. 18, 2016 would qualify as prearranged protected deals heading down a path to Title VI for consensual negotiations.

The last thing Bishop expected was for the incoming administration of Gov. Ricardo Rosselló to take another crack at the deal and in so doing, toss the protections of the original deal into the trash. In one fell swoop, the Rosselló administration blew to kingdom come a deal four years in the making. Ahead are the defining moments of a Prepa RSA that cost Puerto Rico far too much—about $100 million in legal and financial fees—with far too little to show.

Here we come to save the day (May 2014)

Gov. García Padilla takes office, knowing that credit-rating agencies are bound to downgrade Puerto Rico credit to junk status. At the top of the heap in Puerto Rico’s towering debt is Prepa with a whopping $9 billion debt load. The administration sets out to transform its energy apparatus through Act 57. The bill enables the creation of the Puerto Rico Energy Commission (PREC), which is ultimately tasked as the watchdog of the people, for the people and by the people to throttle the affronts of a utility that behaved as an oligarch gone wild—forgiving public agencies their electric debt and overcharging consumers to cover those costs.

The Energy Relief Act tasked PREC with oversight of Prepa’s functions, “particularly the adoption of energy rates, energy generation and interconnection, compliance with the renewable portfolio standard adopted by Act 82-2010.”

Forbear with me (August 2014)

Led by former Chief Restructuring Officer (CRO) for the U.S. Treasury Jim Millstein, consulting firm FTI and Cleary Gottlieb, Prepa strikes a forbearance agreement with its creditors on debt payment of some $671 million, which was due in August 2014. The deal includes the Ad Hoc creditors, which hold some 40% of Prepa debt, fuel line lenders and bond insurance companies Assured, MBIA’s National and Syncora. The forbearance agreement stipulates the need to hire a CRO to oversee Prepa’s financial and operational overhaul.

In Lisa we trust (September 2014)

Prepa’s governing board appoints Lisa Donahue as CRO in September 2014. The newly appointed official is tasked with overseeing negotiations with the utility’s various creditor constituencies to achieve a sustainable debt-restructuring plan and overhaul the utility. Her first task is to look deep into the entrails of Puerto Rico’s energy beast to draft a five-year business plan by December 2014.

‘Si no me dan de beber, lloro’ (December 2014)

Puerto Rico’s never-ending Navidades arrive and Donahue fails to deliver the business plan because, say some sources with knowledge of negotiations—“there was not enough time granted for the due diligence to put together a solid plan.” Instead, Donahue presents a document that lays out Prepa’s status quo; the disclosure of what could best be described as worst practices is intended to open the eyes of creditors, but fails to impress. Creditors insist on a concrete five-year plan, which Donahue calls a work in progress that will have to wait until March 2015 because an incomplete plan could affect the price of Prepa bonds. Suffice it to say that Prepa bonds did not rally.

Speak softly and carry a big PREC (February 2015)

PREC issues a Feb. 12 order for the establishment of a new rate structure to be delivered for review in July 2015. The Puerto Rico Energy Relief & Transformation Act of 2014 stipulates that the new rates should be in place by mid-July, but will be in effect by mid-September. A tiny nagging impediment in the process, legislation demanding that “the commission shall guarantee that the approved rate will be sufficient to guarantee payment of principal and interest on bonds and other financial obligations,” is a harbinger of doom in negotiations that will manifest itself two years down the road.

I will gladly pay you Tuesday for a utility today (April 2015)

The Prepa Ad Hoc bondholders, composed of investors represented by Oppenheimer Funds, Franklin Templeton and Blue Mountain Capital, make a $2 billion offer to help finance Prepa’s first phase of converting its powerplants from oil to combined cycles using natural gas. Prepa rejects the offer calling it premature and insufficient, based on AlixPartners’ calculations that the utility’s overhaul would cost $4 billion. The offer comes on the heels of a 15-day extension of the forbearance agreement, which was scheduled to expire March 31. In those days, sources close to the negotiations admit it is likely Donahue’s restructuring brigades and Prepa’s creditors would be living “from extension to extension.” How self-prophetic.

An offer you just cannot refuse (May 2015)

Puerto Rico New Generation Partners (PRNGP), a consortium composed of York Capital Management, Transmission giant ITC and NRG Energy, a leading power generation company, make a $3.5 billion offer to overhaul Prepa’s infrastructure. PRNGP proposes to enter into a 30-year power-purchase agreement with Prepa, backed by the Government Development Bank (GDB). Replacing Prepa’s antiquated inefficient oil-fired fleet with state-of-the-art combined-cycle gas-fired units and utility-scale solar units would save the state-owned energy company up to $1.52 billion annually. Prepa rejects the deal as it pushed forward with preparation of its five-year plan that would include requests for proposal (RFP) for competing offers.

The woman with a plan (June 2015)

Donahue makes Prepa’s business plan public in June 2015. The plan details a 15-year capital improvement program of the utility’s powerplants. The report proposed repowering Units 5 and 6 at the Costa Sur powerplant and using diesel fuel for Units 1, 2 and 3 at the Palo Seco powerplant instead of the immediate construction of a natural gas powerplant at Aguirre and Costa Sur.

My name is Bond—Mirror Bond (November 2015)

Donahue’s brigades at AlixPartners strike a restructuring support agreement (RSA) with creditors on Nov. 5, 2015. The deal brings into the fold the Ad Hoc bondholders holding nearly 40% of Prepa bonds, fuel line lenders and the GDB; those holding out include bond insurance companies Assured, MBIA’s National and Syncora, who have billions in Prepa exposure. The RSA contemplates a transition charge to securitize bonds through a special-purpose vehicle that will allow some bondholders to exchange their credits for new bonds at a 15% haircut. The new bonds, however, require an investment-grade rating from the credit-rating agencies. Tough sledding ahead.

Safe to go back in the water? (November 2015)

In testimony before the Puerto Rico Legislature on Nov. 11, Donahue explains how the extensions on the original forbearance agreement that took place through November 2015 had saved the utility $1.3 billion in liquidity relief. She makes an urgent plea for passing the Prepa Revitalization Act, which includes amendments to wrest control of RFPs from PREC. The amendments receive staunch opposition from then-Senate President Eduardo Bhatia, who insists on keeping PREC’s Good Housekeeping seal of approval on all things Prepa.

A deal they cannot refuse (June 2016)

In the run-up to passing Promesa, Rep. Bishop is intensely lobbied by hedge funds, bond insurance companies and other creditors holding Prepa debt to codify the Prepa RSA into the law. Bishop’s Staff Director Cooper attempts to codify the deal into the law with language that would have made the Prepa RSA automatic once Promesa was signed into law by President Obama, but he meets stiff opposition from Dems. When the final bill comes down the pike, the language merely contemplates that all deals signed prior to Oct. 18, 2016 conform as prearranged deals qualifying to enter Title VI for consensual negotiation. What Bishop did not foresee was that a new administration may take another crack at the deal, rendering the old deal null and void.

The monolines join the party (July 2016)

After more than two years and 18 extensions on a forbearance agreement that included relending some $215 million and maturities extended, monocline bond insurance companies Assured, MBIA’s National and Syncora join the Prepa RSA, thus bringing nearly 70% of the utility’s creditors into the fold.

The second coming of Macri (October 2016)

Before the 2016 election, gubernatorial candidate Rosselló pipes in live via Skype during a conference on Puerto Rico debt hosted by the Association of Financial Guaranty Institutions. Heavy hitters in the audience include the CEOs of monoline bond insurance companies, fund managers and financial news outlets. The general impression of those in attendance is that Rosselló could become the poster child for the creditor community. The upstart candidate promises to produce audited financial statements within months of taking office and payment of debt as it comes due—music to their ears.

A last hurrah (February 2017)

The moment the Rosselló administration made public that the Fiscal Agency & Financial Advisory Authority and the government’s lead financial adviser Rothschild & Co. would lead negotiations with Prepa bondholders, observers knew that AlixPartners was finished in its role of leading the utility’s restructuring process. That exit was put on a faster track than expected when a Feb. 1 letter of resignation signed by Prepa CRO Donahue established that the firm she leads would not be submitting a contract extension proposal. Prepa, according to a source, is expected to be run by a full-time CRO with the help of smaller consulting firms that will help out in the operations.

Putting a Denton in the deal (March 2017)

With only months at the helm of Puerto Rico’s government, Rosselló commences to sound the voice of alarm over the potential impact of debt restructuring on essential services—a scenario that he claims to avert at all costs. His concerns over the potential for crushing electricity rates contained in the Prepa RSA are addressed by advisers at Dentons, who take another crack at the Prepa deal to achieve a more stable rate structure in the securitization of a bond exchange mechanism and achieve greater liquidity. Although the Rosselló administration claimed to have achieved a better deal for Puerto Rico, those close to the negotiations know that as it was structured, Puerto Rico was exposed to potentially crushing electricity costs down the road if oil prices spiked and the consumer base continued to shrink.

We can’t go for that—no can do (June 2017)

With a June 29 deadline for certification of the Prepa RSA fast approaching and no movement in the Financial Oversight & Management Board’s (FOMB) bullpen, Republicans on the Hill begin to get antsy. The first sign of the board’s reluctance to certify came in veiled statements by FOMB Executive Director Natalie Jaresko during board hearings held at El Conquistador Resort in Fajardo. As word of the board’s resistance grows—Andrew Biggs, David Skeel, Ana Matosantos and Arthur González were particularly vocal—Republican leadership sounds the alarm in a missive from Bishop that fails to persuade the FOMB. Just before the stroke of midnight on June 27, the board makes public its refusal to certify the Prepa RSA under Title VI of Promesa. The utility’s debt is filed under Title III for bankruptcy proceedings. All told, Prepa’s negotiations cost Puerto Rico about $100 million.




Trump pushes for privatizing US air traffic control

WASHINGTON – President Donald Trump made his case Monday for privatizing the nation’s air traffic control system, arguing that it will enhance safety and reduce wait times for consumers.

Declaring the current system “stuck painfully in the past,” Trump called for separating air traffic control operations from the Federal Aviation Administration, an approach that U.S. airlines have long championed. But opponents worry the plan, which would require congressional approval, will give too much power to the airline industries.

“Today we’re proposing to take American air travel into the future. Finally,” Trump said.

Trump was surrounded by members of Congress as he signed a decision memo and a letter to lawmakers outlining his principles for the air traffic control plan. Joining him in the East Room were airline industry executives, union members and a pair of former transportation secretaries: Elizabeth Dole and Mary Peters.

“We’re really moving into the modern decade of technology in air traffic control. It’s a system where everyone benefits from this,” White House economic adviser Gary Cohn said in a conference call with reporters. Trump’s budget plan released earlier this year called for the changes, placing air traffic operations under an “independent, non-governmental organization.”

There are about 50,000 airline and other aircraft flights a day in the United States. Both sides of the privatization debate say the system is one of the most complex and safest in the world. Even under a congressional privatization plan, the FAA would continue to provide safety oversight of the system.

U.S. airlines have been campaigning for more than two decades to separate air traffic control operations from the FAA. That effort picked up steam last year when the union that represents air traffic controllers agreed to support a proposal by House Transportation and Infrastructure Committee Chairman Bill Shuster, R-Pa., to spin off air traffic operations into a private, nonprofit corporation. In exchange, controllers would get guarantees that they would retain their benefits, salaries and union representation.

White House officials said the new entity would be overseen by a 13-member board that will include members from the airline industry, unions, general aviation, airports and other stakeholders.

Airlines have been lobbying vigorously for the change, saying the FAA’s NextGen program to modernize the air traffic system is taking too long and has produced too few benefits. The changes would involve moving from the current system, based on radar and voice communications, to one based on satellite navigation and digital communications.

Airlines and the controllers union say that the FAA’s effort to modernize the air traffic system has been slowed down by the agency’s dependence on inconsistent funding from Congress and occasional government shutdowns and controller furloughs. As a result, the FAA has had difficulty making long-term commitments with contractors.

Union officials have complained that the FAA has been unable to resolve chronic controller understaffing at some of the nation’s busiest facilities and pointed to the modernization effort’s slow progress.

But FAA Administrator Michael Huerta has said the agency has made progress during the past decade in updating its computers and other equipment in order to move from a radar-based to a satellite-based control system.

Winning congressional approval would still be an uphill battle for Trump. Democrats have largely opposed the changes, warning that airline interests would dominate the proposed board, overseeing an estimated 300 air traffic facilities and around 30,000 employees.

Democrats have also pointed to the unprecedented safety under the current system and noted repeated computer system failures in recent years by U.S. airlines, questioning whether they are ready to handle complex technology modernizations.

Trump’s plan would also eliminate taxes on airline passengers in favor of user fees. Key members of tax-writing committees have questioned whether corporations can legally impose fees, which can be viewed as taxes, on air traffic system users.

Business aircraft operators, private pilots and non-hub airports have also expressed concerns they may pay more and receive less service under a private corporation. The airlines have promised that won’t happen.

President Donald Trump speaks during the Ford’s Theatre Annual Gala at the Ford’s Theatre in Washington, Sunday, June 4, 2017. (Carolyn Kaster/AP)