Manufacturers Association Blasts Prepa’s Planned Transition Charge

SAN JUAN—The Puerto Rico Manufacturers Association (PRMA) rejected on Wednesday the transition charges sought by the Puerto Rico Electric Power Authority (Prepa) to pay for the utility’s securitization and restructuring because, according to the PRMA, it is not based on economic studies.


Puerto Rico Electric Power Authority central offices in San Juan

On April 7, 2016, the Prepa Revitalization Corporation, a special purpose public corporation and instrumentality, submitted its Verified Petition for Restructuring Order to the Puerto Rico Energy Commission (PREC). The transition charge is needed to implement the securitization mechanism, according to the petition, which is essential to achieve investment-grade rating of new bonds that would be exchanged with creditors.

Nonresidential customers (commercial and industrial) would see their rates increase by an initial 3.055 cents per kilowatt-hour (kWh). The charge will be adjusted every three months, and during the next two years, it will fluctuate, reaching 4.2 cents per kWh in 2018, the petition stated.

Almost two months after asking for the imposition of a transition charge, Prepa last week filed its official rate hike request to the PREC.

Meanwhile, the Manufacturers Association says the transition charge, as well as the hikes in basic rates, would increase energy costs by 25%, further hurting production costs for industries that are trying to stay afloat amid the economic recession. The PRMA also says the securitization charge is based on the direct payments by consumers of a $6.84-billion debt that would be revised every year.

“The association’s energy committee and other private entities that have participated in the process have alerted that there are no studies to sustain such charges” said Tomás Torres, head of the PRMA’s Energy Commission and executive director of the Competitiveness and Sustainability Institute.

He said that instead of investing in securitization, all efforts must be headed toward investing in the generation and transmission of energy.

Earlier this month, four entities argued that the costs of the securitization were not distributed evenly among all consumers.  The Windmar Group noted that the fixed charge penalizes low energy consumers, rewards high-energy consumers, and goes against federal policies that promote the use of renewables. The upfront financing costs of the restructuring are $124 million, which will be paid for by consumers.

Prepa to Submit Rate-Hike Request of About 4 Cents per kWh

SAN JUAN–The Puerto Rico Electric Power Authority (Prepa) is on its way to submitting a rate-hike request of about 4.2 cents per kilowatt-hour (kWh) to the Puerto Rico Energy Commission (PREC), as previously reported by Caribbean Business.

Lisa Donahue, Prepa Chief Restructuring Officer

Lisa Donahue, Prepa Chief Restructuring Officer

After Prepa’s board gave its green light, Carlos Gallisá, one of two consumer representatives on the board, said that as early as August, consumers will see a provisional hike of 1.3 cents per kWh on their bills but after the November elections, there will be another hike of about 2.9 cents per kWh.

The proposed hike, combined with a proposed transition charge, is expected to result in a rate hike of 28.6% for residential, 22.1% for commercial and 26.2% for industrial users.

“The average hike will be 26.5%,” Gallisá told Caribbean Business.

Based on Prepa documents obtained by Caribbean Business, the utility has been using 2014 rates for comparisons, which are higher than most recent rates. Due to factors affecting supply and demand, oil prices began to drop in the summer of 2014 and continued to be low in 2015 and so far in 2016.

Gallisá said he voted against the hike, which was approved by the rest of the board in a 6-1 vote. Carlos Santini Gaudier, the other consumer representative, was absent from the recent meeting, which was convened to evaluate the rate hike, and was not announced on Prepa’s website because it was not a regular meeting.

He noted that the hike was less than what the board had originally been told because Prepa managed to reduce operational costs by $55 million, which coincides with recent lending from bondholders.

The request for a hike in the utility’s base rate, part of the process for restructuring its $9 billion debt, was agreed to with bondholders.

The utility has not changed its base rates since 1989. The rates for residential customers are $4.35 for the first 4.25 cents kWh of consumption and 4.97 cents per kWh for anything above that. The rate includes a $3 fixed rate. The rates for commercial and industrial customers are higher and vary.


For more on this story, check out this Thursday’s print edition of Caribbean Business.

Energy Commission Rules Prepa Must Submit at Least two Options for Rates

SAN JUAN—The Puerto Rico Energy Commission has determined that the Puerto Rico Electric Power Authority (Prepa), the island’s electric utility, must provide to the panel “at least two alternatives” for the implementation of provisional electricity rates, including one for each customer class.

A provisional rate is defined as a temporary base rate that is authorized and approved by the Commission as part of a rate review case. Prepa is slated to submit on Friday its request for a hike in the utility’s base rate as part of the process for the restructuring of its $9-billion debt, as agreed with bondholders.


Puerto Rico Electric Power Authority central offices in Santurce

In a ruling Thursday, following a clarification requested by Prepa, the three-member Energy Commission said that the first alternative for a provisional rate “must contemplate the application of a uniform percentage change in base rate across all customers”.

The second alternative must contemplate “the application of a specific percentage change in base rate for each customer class, provided that said percentage change must be applied uniformly within each class.”

The commission said all alternatives must be accompanied by an explanation detailing the implementation, administration and impact on existing base rates and any other pertinent information.

It also ordered Prepa to provide alternatives for a mechanism for the utility to track, credit or collect from customers the difference between the provisional rate and the permanent rate.

The utility has not changed its base rates since 1989. The rates for residential customers are $4.35 for the first 4.25 cents per kilowatt-hour (kWh) of consumption and 4.97 cents per kWh for anything above that. The rate includes a fixed rate of $3, while the rates for commercial and industrial customers are higher and they vary.

In a separate process, Prepa is also seeking the commission’s approval of a transition charge that will be used to pay for the restructuring and of an integrated resource plan.

Prepa Board: Aguirre Gasport to Begin Operations February 2018

SAN JUAN–The Puerto Rico Electric Power Authority (Prepa) board held its regular meeting late Tuesday, providing updates on the electric utility’s restructuring, as well as the status of its operations, infrastructure projects and the completion of the proposed Aguirre Offshore Gasport.


Prepa central offices in Santurce

Sonia Miranda, planning director at Prepa, revealed the floating offshore liquefied natural gas (LNG) regasification facility off the southern coast of Puerto Rico, which would help diversify energy sources for Puerto Rico and reduce utility bills, is slated to begin operations February 2018 as officials are still working to obtain numerous permits.   

Though Miranda did not touch on the subject, Caribbean Business learned that the date represents a delay in the project’s completion, as Prepa had presumably told bondholders recently that it did not expect the Aguirre Offshore Gasport to start operating until July 1, 2017.

The facility, which will help Prepa comply with federal MATS (Mercury and Air Toxics Standards) regulations, is expected to help consumers save $3 billion in energy costs over a period of 20 years, as estimated by the utility. However, Miranda said the completion of the permits “has been a headache” so far.  During a presentation, she listed more than a dozen permits that were still needed, including permits from the Environmental Protection Agency, the Environmental Quality Board and U.S. Fish and Wildlife Service.

“We have been working since 2012 on getting the permits and we are not finished,” she said.

The project includes construction of a floating liquefied natural gas terminal featuring a floating storage and regasification unit (FSRU), infrastructure to moor the vessel, and a subsea pipeline to facilitate the gas supply onshore. Miranda did not exactly say how the project would be financed.

Later during the meeting, Martin Pérez García, an engineer at Prepa, discussed the network of high voltage power lines that are being built around the island. He revealed that the utility’s Integrated Resource Plan calls for the expansion of these power lines to bring power from stations in the southern part of the island to the north, where 70% of the utility’s customers live,  Using videos depicting Prepa helicopters carrying towers as well as workers fixing power lines, Pérez García said expanding the network of power lines is more efficient than building additional power plants to bring electricity to people’s homes.

On the other hand, officials reported savings in oil purchases that were estimated at $144 million yearly. The savings, coupled with a reduction in oil prices, has resulted in $1.8 billion in savings for consumers since 2014.

Prepa officials also reported advances in curbing non-payment in utility bills. The utility said corporations and agencies are current with their bills and that past balances totaling $250 million have not increased.

The authority has also significantly reduced energy theft, officials said, with the utility planning to send 20 more investigators on the field to gather information on consumers who are stealing energy service. In 2014, the utility recuperated $13 million in energy theft, while in 2015 it recuperated $18 million, and so far this year is on target to recuperate $22 million. The target for 2017 is to recuperate another $22 million in energy theft.


Scotiabank, Insurers, U.S. CofC Against Recovery Act

SAN JUAN — Scotiabank de Puerto Rico, the Association of Financial Guaranty Insurers and the U.S. Chamber of Commerce are urging the U.S. Supreme Court in legal briefs to uphold the illegality of the Puerto Rico Debt Enforcement & Recovery Act.  

On March 22, the top court will hear arguments over the Recovery Act, a local statute that allows for the debt restructuring of the island’s financially battered public corporations that was found to be unconstitutional at the federal district and appellate levels. The local government contends that because Puerto Rico’s public corporations cannot file under federal bankruptcy law, it can enact its own bankruptcy law to fill in the gap.  

Scotiabank, in an amicus brief filed after reaching joining in a restructuring agreement with the Puerto Rico Electric Power Authority (Prepa), says local banks that comprise the fuel-line syndicate, which pays for the utility’s oil, play a vital role in the island’s economy and support initiatives to address its fiscal problems.

“But the Recovery Act, moreover, is so unfavorable to creditors—and so much less protective of creditors’ rights than the federal Bankruptcy Code—that it will inevitably affect the financing available to Puerto Rico,” Scotiabank warns.   

The group of banks of which Scotiabank is part of has extended approximately $550 million in credit to Prepa, including Oriental Bank and Firstbank Puerto Rico.

For over a year, Prepa and its creditors, including the local banks, have worked tirelessly to negotiate a consensual restructuring of Prepa’s debt, with an agreement in place between the utility and about 70% of its creditors.

“Although Prepa asserts in its amicus brief that the Recovery Act spurred negotiations on a consensual restructuring, the opposite is true. The Recovery Act reduced Prepa’s incentive to negotiate, and little progress was made before the district court struck down the Act on February 6, 2015. Only after that decision—on June 1, 2015—did Prepa deliver a proposed recovery plan to creditors, as required by its forbearance agreements. And only then could Prepa and its creditors begin to negotiate in earnest on a consensual restructuring,” the bank says.

Supreme Court of the United States

U.S. Supreme Court building

The Association of Financial Guaranty Insurers (“AFGI”), the national trade association of the leading insurers and reinsurers of municipal bonds and asset-backed securities, says its interest in the outcome of this case extends well beyond the debt issued by Puerto Rico and its public corporations. “The prospect of States or territories enacting their own municipal bankruptcy laws would have grave consequences on the monoline insurance industry, as well as on the municipal bond market as a whole. Upholding the Recovery Act would establish, and signal to monoline insurers and other creditors, that contractual terms with municipalities could be altered in unpredictable, inconsistent and selfserving ways. This would create a chilling effect on credit markets and increase the cost of financing to municipal borrowers (and, therefore, to taxpayers),” the organization argues.  

AFGI says the government has painted a grossly inaccurate picture of the purported catastrophes that supposedly await Puerto Rico residents without the Recovery Act. “This false portrayal of the potential impact of applying existing federal and Commonwealth law to the bond contracts at issue is an attempt to shift focus from the ‘straightforward’ issue of federal preemption here and from the dramatic negative effects that permitting laws like the Recovery Act would have on the nationwide municipal securities market,” the group adds.

As for the U.S. Chamber of Commerce—which represents 300,000 direct members and indirectly the interests of more than 3 million companies and professional organizations of every size—says there can be no bankruptcy uniformity if states and territories could break contracts for the special benefit of distressed municipalities. The result would be a municipal bond market with reduced access to the low-cost capital the investor class has always supplied.

“The economy is likely to suffer in the end. Municipal bonds fund infrastructure projects that keep the backbone of our economy in good condition. Safe roads, bridges, and airports, good schools, and well-equipped public safety departments create the conditions that spur economic growth,” the chamber notes.

Gov. García Padilla Issues a Final Call for Unity

On April 25, 2013, Gov. Alejandro García Padilla said he was proud to announce Puerto Rico was on its way to a full recovery, lauding how in 100 days, his administration had ended mismanagement at the water and electric utilities, saved the pension systems and reactivated the economy by creating jobs, among other quick coups.

About three years later and delivering his fourth and final State of the Commonwealth address, the governor said, “the path toward a new dawn has not ended,” as Puerto Rico finds itself in the toughest stretch of the road, with critical months ahead for a cash-strapped commonwealth in an economic free fall.

As the Puerto Rico government continues its crusade in Washington, D.C., to achieve an orderly debt restructuring, García Padilla urged the country to join together in one voice and demand immediate action from Congress if the island is to wash away its fiscal and economic misfortunes.

“I can understand the gluttony of the Wall Street sector because their interests are different. But what I can’t understand is that Puerto Rico politicians join Wall Street against Puerto Rico,” said the governor, while warning once again about the potential defaults this summer if timely congressional action is not achieved. Puerto Rico owes more than $2.5 billion in debt payments between May and July.

García Padilla noted during his speech how his administration has reduced spending without layoffs; increased employment; and transformed the Puerto Rico Electric Power Authority. Also highlighted were achievements in civil rights and economic development, particularly those in the tourism, aerospace and service and agriculture industries. He supported the decriminalization of marijuana, while urging a serious public discussion on whether it should be legalized.

For Resident Commissioner Pedro Pierluisi, the governor’s address was very disappointing, with “achievements that result from fantasy.” The New Progressive Party president and gubernatorial hopeful said the administration has no credibility and has a confrontational attitude that is wrong. “[García Padilla] talked about Wall Street. If anything, they were the ones who lent money to the government of Puerto Rico,” Pierluisi said.

Meanwhile, with expectation building up beforehand, García Padilla addressed the looming transition to a value-added tax in April, along with a tax hike on business-to-business transactions, but fell short of putting these plans on hold.

Instead, García Padilla called on Puerto Rico lawmakers to “correct the mistake” of having a majority of residents still paying taxes on their incomes, as initially proposed under his administration’s failed tax reform. “Eliminate income taxes,” he urged.

“In front of Congress and creditors, we can’t be divided,” the governor stressed during his message. Yet, achieving unity moving forward and “not passing the crisis on to the next governor,” as García Padilla stated, could prove particularly challenging as he finishes his fourth and final year before exiting La Fortaleza.

Commission Launches Hearings on Prepa’s Oil Purchases

The Special Commission for the Study of Norms & Procedures Regarding the Purchase & Use of Petroleum by the Puerto Rico Electric Power Authority (Prepa) was scheduled to launch public hearings Feb. 2, at 10 a.m., in the Capitol’s Leopoldo Figueroa Room, which are expected to extend throughout the month.

Among those summoned to testify are former Prepa executive directors under various past administrations, former presidents and members of the Government Board, past and present functionaries, fuel suppliers, and top management from labs and other experts. They are expected to testify regarding the purchase, management and use of petroleum.

“[Puerto Rico] should be very aware of the development of these public hearings,” said Aníbal José Torres, chairman of the commission. “We want people to know about Prepa’s operations regarding the purchase of fuel and the results that our investigation will reveal.”

Torres said the commission is ready to present Puerto Rico “the truth that we have discovered about Prepa’s fuel-purchase processes, the lack of formalities, the manipulation of processes and noncompliance that have had an impact on the cost of energy.