Think Tank: Puerto Rico Trapped Between ‘Immovable’ Prepa, ‘Apparently Unstoppable’ LUMA Energy
Center for a New Economy Analyzes Transformation of Island’s Energy System
“Puerto Rico is at a difficult juncture regarding the future of Puerto Rico’s electrical system. On the one hand, we have the Puerto Rico Electric Power Authority (“PREPA”), a bankrupt public corporation with serious administrative and performance problems and on the other hand a defective operation and maintenance contract with a private company, LUMA Energy. At the Center for a New Economy (CNE) we have been pointing out the deficiencies in this agreement since August 2020. We recommended then and reiterate it now: this agreement requires significant revisions.”
That is what CNE’s policy director, Sergio M. Marxuach Colón, said Monday during his remarks before the Commission for Economic Development, Planning, Telecommunications, Public-Private Partnerships and Energy of the Puerto Rico House of Representatives regarding House Resolution Number 136.
“We are trapped between the immovable object of PREPA and the apparently unstoppable force of LUMA Energy. Unfortunately, the public debate on this transaction has been skewed and at times acrimonious; dividing Puerto Rican society into two camps, one in favor of the contract and the other against,” added Marxuach.
He indicated that the problem Puerto Rico faces is complicated and cannot be resolved with “binary or simplistic solutions for or against LUMA or PREPA,” according to a CNE statement.
“The objective reality is that PREPA is a disaster in every sense of the word and the deal with LUMA Energy is flawed. It is up to you, the officials elected by the people of Puerto Rico, to determine how to protect the common good,” he said.
During his presentation, policy director pointed to what he the press release called deficiencies in the agreement with LUMA Energy and offered recommendations on performance metrics, the calculation and auditing of savings, the relationship between LUMA and the two subsidiaries of Prepa “that are supposed to enter into a bona-fide and arm’s length agreement, capital improvements by the operator or its affiliates, and coordination” with other reforms.
“It is apparent from our analysis of the Operation and Management (O&M) Agreement that it does not equitably allocate risks between the parties. In our opinion, the government of Puerto Rico needs to develop a greater capacity to clearly establish the public policy objectives it seeks to achieve and to successfully negotiate this type of agreement, if it wants to continue implementing public-private partnerships in the future,” added Marxuach.
“The transformation of PREPA is imperative for the future development of the island’s economy. The O&M Agreement is a first step in this transformation, but it is far from perfect. Therefore, in our opinion, the most prudent course of action at this time is to renegotiate the O&M Agreement with LUMA to better allocate and balance risks between the parties. If it is concluded that the deficiencies of the O&M Agreement cannot be corrected, then its cancelation should be considered and a new process to improve and transform Puerto Rico’s electrical transmission and distribution system should begin,” said Marxuach.
In addition, he explained what he sees as the risks of substituting a public monopoly for a private one.
“If the currently-favored privatization process is limited simply to transferring the assets or operation of a corrupt company in the public sector to a group of investors in the private sector, without disrupting or dismantling the existing rent-seeking network, then we will have achieved absolutely nothing. In other words, privatization, in and by itself, will not solve Puerto Rico’s electricity problems, if all it does is substitute a group of rent-seekers for another,” added Marxuach.
The policy director explained that “rent-seeking describes the behavior of different groups in relation to PREPA where interest groups, such as suppliers, political parties, beneficiaries of subsidies, unions, bondholders, bankers, and the politically connected have organized to extract undeserved benefits from PREPA at the expense of the rest of the population of Puerto Rico,” the think tank added in the release.