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U.S. lawmakers inquire about controversial LUMA, New Fortress contracts with Prepa

By on July 24, 2020

House committee hearing discussion focuses on troubled utility’s transformation efforts

SAN JUAN – The controversial contracts granted to private companies, namely LUMA Energy LLC and New Fortress Energy, to operate and modernize the Puerto Rico Electric Power Authority’s (Prepa) transmission and distribution system (T&D) and convert utility generators to run on natural gas, became the focal point of a U.S. House Committee on Natural Resources hearing held Thursday on the transformation of the troubled public utility.

The Prepa executive director, the utility regulator chief, and the head of the public-private partnerships agency defended the contracts during the hearing, saying they are vital to ensure the modernization of the island’s power grid. However, the president of the public utility’s largest union and a member of a community group advocating solar-powered energy denounced the privatization of Prepa operations as a giveaway to private companies that will not ensure the meeting of renewable goals and will lead to higher electricity rates.

Committee chairman Raúl M. Grijalva (D-Ariz.) opened the hearing expressing his concerns over privatization of Prepa functions, saying that they should be centered on “guaranteeing the best way Prepa would be rebuilt so it could withstand future extreme weather conditions, provide the residents of Puerto Rico with reliable, inexpensive and clean power, and prevent the displacement of Prepa’s workers.”

“Nearly three years after the outset of hurricanes Irma and Maria and billions spent by FEMA [Federal Emergency Management Agency] and the U.S. Army Corps of Engineers to turn the lights back on, Puerto Rico’s electric grid, unfortunately, remains fragile and vulnerable, in part due to recent earthquakes that further impacted Prepa’s infrastructure,” the lawmaker said.

Grijalva said that while “everyone agrees that reforming Prepa is necessary” to provide clean and low-cost electricity, he noted that it is still uncertain whether the course the public utility has embarked on will achieve those goals.

Ortiz touts utility’s ‘progress’

Prepa Executive Director José Ortíz said that the public utility had “made a good deal of progress in several fronts despite the devastation of hurricanes Irma and Maria, the massive damage by earthquakes, and the near shutdown of the Puerto Rico economy due to Covid-19.” He said that the utility’s “better position and compliance with Promesa” [the federally created Puerto Rico Oversight, Management and Economic Stability Act] was demonstrated by the recent certification of Prepa’s 2020 fiscal plan by Puerto Rico’s Financial Oversight & Management Board (FOMB).

Ortiz said that the highlight of the fiscal plan was the conclusion of a public-private partnership agreement with the LUMA Energy LLC consortium to operate, maintain and improve the utility’s T&D system. He described LUMA as a “Puerto Rico company owned by two experienced utility sector companies – ATCO and Quanta Services — working with Innovative Emergency Management [IEM] for its federal funding expertise.”

The Prepa chief said that LUMA will “carry out the transformation of Prepa as required by bipartisan-supported laws,” noting that the consortium brings “an experienced leadership team and a comprehensive plan” to build a modern grid system.

Puerto Rico Public-Private Partnerships Authority (P3A) Executive Director Fermín Fontanés said that the $1.4 billion contract with LUMA, a result of an 18-month procurement process, is a “historic milestone in the government’s objective of providing modern, affordable, resilient and reliable power to the island.”

He said that the 15-year LUMA deal addresses a number of Prepa challenges, including a “lack of managerial continuity and planning has led to an electrical system that is in poor condition,” adding that the situation has blocked the utility from getting access to capital markets.

“After the [2017] hurricanes, the government not only sought to rebuild the electrical grid but to transform it into a reliable, resilient, modern, and eco-friendly system,” he said. “The most effective way to achieve this was to partner with a world-class private operator with the expertise, experience and knowhow to complete the much-needed transformation.”

Fontanés said that LUMA’s goals to reduce operations and management costs and stem losses in energy could results in savings of nearly $300 million a year by 2027, adding that this “demonstrates that the contract will pay for itself.”

Opposition to LUMA deal voiced

However, representatives from the Electrical Industry & Irrigation Workers Union (Utier by its Spanish acronym), the utility’s largest union, and the Queremos Sol Coalition, which advocates community-based solar renewable energy systems, voiced their opposition to the LUMA deal during the hearing.

Utier President Ángel Figueroa Jaramillo said the LUMA contract is one-sided and favors the interests of the consortium over the interests of the people of Puerto Rico. The union filed a lawsuit earlier this month at the Puerto Rico Court of Appeals seeking to overturn the Puerto Rico Energy Bureau’s (PREB) approval of the deal.

“Despite being a private entity, LUMA will make public policy decisions and manage at its own discretion the $18 billion in federal funds assigned to Puerto Rico. In fact, LUMA has already started to brag about those federal funds to its investors and affiliates,” Figueroa said, noting that the contract has no guarantee that utility workers would be retained by LUMA. “LUMA was incorporated in January for the sole purpose of signing the contract and was created as a limited liability company to avoid responsibility. The contract has an exemption from expressed liability for any damage that LUMA may cause.”

Figueroa noted that Prepa’s own recently FOMB-certified fiscal plan states that the annual fees it would have to pay LUMA would sink the bankrupt utility deeper into deficit. He said this would result in an increase in electricity rates, stressing that this will disproportionately affect low-income families.

The labor union leader contended that the contract provides LUMA with veto power over the utility’s debt restructuring process, which would lead the oversight board and the federal bankruptcy court “being pressured to accept a debt restructuring deal that is not necessarily in the best interest of the people of Puerto Rico.”

Moreover, Figueroa claimed that the LUMA contract allows the consortium to bail out if it faced emergency situations similar to the aftermath of the disastrous hurricanes Irma and Maria, which struck the island nearly three years ago.

Ruth Santiago, a member of the Queremos Sol Coalition, “composed of community, environmental, professional organizations and academia that have come together to promote the transformation of Puerto Rico’s electrical system as a public service,” also called for the annulment of the LUMA contract, saying it would perpetuate Prepa’s top-down structure and give federal funding to the consortium to “rebuild the existing transmission system instead of transforming it.”

“Prepa needs to transform its governance structure to integrate residents, employees and businesses,” Santiago said in her testimony, noting that the utility should focus on the development of “on-site solar and battery systems and energy efficiency programs.”

“The high poverty rates and the economic crisis require energy conservation, efficiency, demand response programs, and renewable energy technology… to substitute the fossil generation and centralized transmission and distribution system,” she said.

“Queremos Sol opposes the use of billions of dollars to rebuild and so-call harden the T&D system and add more fossil generation, especially natural gas infrastructure,” she continued. “We propose that Prepa work with the federal government to initiate a transparent process involving the procurement of solar equipment and battery systems to be installed and maintained by the dozens of Prepa employees that have been trained in renewable energy already. The LUMA contract is a 20th century approach that will not prepare Puerto Rico for the climate crisis, as it will dismantle Prepa while providing LUMA with multiple opportunities to abandon its responsibilities under the agreement.”

Lawmakers inquire about contract clauses

In fact, later in the hearing, Rep. Paul Tonko (D-NY) brought up the inclusion of a so-called “extended force majeure” clause in the LUMA contract, which allows a contractor to suspend or terminate the performance of its obligations when certain circumstances beyond their control arise. The lawmaker expressed his concern that the consortium could activate this clause just after a direct hit from a hurricane and when grid work would be most needed.

Fontanés acknowledged that such clauses are usually included in such contracts “to account for delays in services and operations,” but that in LUMA’s case it is “not intended to address the response to a hurricane.”

“This what the LUMA team excels at. These are the companies that are called to work in disasters, not only in the United States but all over the globe,” he said, noting that the firms have handled the fire disasters in California and Australia, as well as hurricanes in Texas and Florida. “This is really one of their major strengths. One of the things they are doing now during the transition period is working with Prepa so that, even though they have not commenced operations officially, they help Prepa in the event of a hurricane during this season.”

Rep. Alan Lowenthal (D-Calif.), chair of the House Subcommittee on Energy and Natural Resources, asked Ortiz if LUMA would allow labor union organization among its ranks.

The Prepa chief replied that one of the companies in the LUMA consortium, Quanta Services, is the biggest private utility company with the most unionized workers, adding that the company “devotes a lot of time” training its workers.

Lowenthal asked Ortiz about the actions Prepa and LUMA would take to address the public utility’s underfunded workers’ pension system. The Prepa chief acknowledged that the pension plan’s shortfall is about $4.3 billion – the difference between $5.5 billion in liabilities and $1.2 billion in assets.

“Certainly, it will be Prepa’s responsibility to find that money,” Ortiz said. “We can’t get the money from the workers, obviously. We are looking for ways to reduce the rates so we can plug in some money to support the pension fund. There is no other way, unless tax money is used.”

He added: “LUMA is not going to fix it; they will just stop the bleeding so that we can deal with what is in arrears – the $4.3 billion.”

Federal funding ‘critical’ for successs

Ortiz also acknowledged that the success of both the LUMA deal and the resilient rebuilding of the island’s electrical grid will rely on the expected influx of billions of dollars in federal funding, mostly from FEMA.

He said that Prepa expects to reach an agreement with FEMA on fixed-costs estimates on all permanent reconstruction work “very soon,” saying the utility already has a two-year plan that includes microgrids and a “robust system” for critical assets such as hospitals, shelters and water services.

Ortiz said the utility has so far received $2.5 billion in federal disaster reconstruction funding, which he claimed has allowed Prepa to make “significant progress in rebuilding Puerto Rico’s electrical system and restructuring Prepa itself.”

“We have undertaken these efforts with real financial constraints, during the transformation of Puerto Rico’s energy sector – a truly complex challenge. The federal government support remains critical to our success and we continue to look for ways to expedite the flow of federal funds,” he said. “We have completed the agreement of the estimates for the full modernization of the grid, and that would be disclosed in the next few days, probably.”

For the next year and a half to three years, he said, Prepa will embark on a $1.7 billion program to harden the electrical grid at critical infrastructure sites such as hospitals, water systems, shelters, the Río Piedras Medical Center, the Luis Muñoz Marín International Airport, among other facilities.

Puerto Rico Resident Commissioner Jenniffer González asked Ortiz about the $1.9 billion in Federal Community Development Block Grant-Disaster Recovery (CDBG-DR) funding earmarked for the public utility. Ortiz replied that this funding would be used “at the end of the line,” after FEMA Section 428 funds are exhausted, adding that grid hardening projects should begin by “the end of the third quarter this year.”

Ortiz said federal funding will be spent to achieve a “decentralized system consisting of about 40 percent of renewables by 2025, being supported by cleaner fossil fuel — natural gas in San Juan, EcoEléctrica and Costa Sur.” He said the Costa Sur plant, damaged by the January earthquakes, should be in full operation by year’s end.

“We will divide the island into eight minigrids that will basically operate independently. Assuming a hurricane strikes, we may lose one or two of those areas, but the rest of Puerto Rico will be able to continue working,” he said, noting that plans include the underground placement of lines in the island’s southeast, where many of the strongest storms have made landfall, and in industrial zones.

In response to a question by Rep. Tonko, Ortiz said that Prepa’s plans to use CDBG-DR for the building of community-based resiliency projects and renewable energy systems, such as rooftop solar, for low and moderate income families.

“The solar system cannot only be for wealthy families in Puerto Rico. We have to be very careful. When we talk for sun for everybody, it’s really not that way,” he said, noting that the money will be “focused” on the 1,800 megawatts of solar power that will be needed by 2025.

Rear Adm. Peter J. Brown, the White House special representative to Puerto Rico, suggested last week that that federal funding could be used to build small nuclear power plants on the island. However, when asked about this during Thursday’s hearing, Ortiz rejected the idea as politically unfeasible.

“This is not a technical problem; it is more a public policy problem,” he said, noting that the utility, instead, was eying offshore windmills for the island’s south coast. “I don’t foresee any community in the world saying they are for nuclear power. We could have the most advanced technology, very safe and all that, but with the myriad of events that have happened in the last four years in the world, I don’t foresee that pushed by any public official.”

Concern over New Fortress Energy project legality

Nonetheless, Queremos Sol’s Santiago, González and other lawmakers raised concerns over Prepa’s $1.5 billion contract with New Fortress Energy to build and operate a liquid natural gas terminal (LNG) at San Juan Harbor to convert San Juan power plant diesel-powered generation units to run on natural gas.

The Federal Energy Regulatory Commission (FERC) said last month that New Fortress Energy (NFE), which began operations at the site a year behind schedule in March, should have sought its approval before building the facility. It directed the company to “show cause why its construction and operation of the subject facilities are not subject to the prior authorization requirements,” FERC Deputy Secretary Nathaniel J. Davis wrote in a June 18 order.

A report released last month by the Institute for Energy Economics and Financial Analysis (IEEFA) argued that the contract process was plagued by irregularities that provided unfair advantage to New Fortress, which had limited experience in Puerto Rico.

New Fortress reportedly filed its response this week in which it argues that FERC has no jurisdiction over the project because the gasification of the San Juan power plant via a 75-foot pipeline is equivalent to providing such fuel to homes, and was built on public property, not privately owned land such as was the case of EcoEléctrica and the Aguirre Gas Shore Port, which did have to request FERC approval.

Ortiz said during the hearing that he was caught off guard by FERC’s directive regarding the need for New Fortress to get a permit for the project.

“The other agency with responsibility is the U.S. Coast Guard, and they said that no FERC permit was needed, so I don’t understand this last moment request,” he said, noting that if FERC orders a halt to New Fortress operations, “I’ll have to keep burning diesel, which is much more expensive and much more damaging to the environment, until they get the permit. So the people of Puerto Rico will be penalized.”

Asked by González about what the impact would be if FERC ordered the New Fortress project shut down, Ortiz replied that Prepa would be forced to rely more on generation plants located on the southern part of the island – an area that has been struck by strong earthquakes since January. In fact, one such quake heavily damaged the key 800 megawatt Costa Sur power plant, which had to be taken offline.

“We would be shifting the responsibility of providing energy to 70 percent of customers to the south,” he said. “And that was the biggest problem with Maria, when we lost the transmission from south to north [where most of the island’s population lives]. We lost power in the north for five months until we restored the central part of the island. We would be in a weakened position and we would be using in a limited way San Juan [units] 5 and 6. We would be limiting the reliability of the system.”

Ortiz said that Prepa has 3,200 MW of energy in reserve while demand is close to 2,800 MW.

While San Juan is Prepa’s main power plant, it cannot be powered up to full capacity if it can only use its diesel-powered generation units, given that the burning of such fuel at high capacity could violate U.S. Environmental Agency emissions standards. He said that besides it being environmentally safer, the use of natural gas at the plant could translate to savings of 1 cent per kilowatt hour, adding that a family that consumes $150 a month would be paying $12 less.

“The conversion projects should save Prepa and its customers about $280 million during the five-year term of the contract,” he said, noting that the natural gas project in San Juan is a 5-year project that may be extended for periods of five years, all depending on the need for injection of additional power, due to the condition of the system.

Ortiz said that natural gas is still needed in the system because renewable energy is inherently unstable.

“The thing here is that you cannot grow responsibly on renewables unless you have a very stable system that patches all the voids inherent to the renewable generation. After 9 p.m., you reach a peak in consumption but the batteries are already exhausted by then, so you need something to catch up,” he said. “The perfect partner in this dance of growing into renewables is this stable, cheap system with batteries. We have three battery projects, battery farms in the east coast of Puerto Rico and two in the north in the metropolitan area, good for 180 MW.”

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