Will LUMA Keep Its Prize?
The company that will run the Puerto Rico Electric Power Authority’s network lobbied in Washington and landed a contract with minimum requirements for the reliability of the electricity system.
On the other side of Ponce de León Ave., across from the Puerto Rico Electric Power Authority’s (PREPA) headquarters in San Juan, Canadian executive Wayne Stensby sees the spray-painted messages against the company he runs: “Out with LUMA.” “No to privatization.”
The statements try to cover the posters that LUMA posted on an abandoned building in the Santurce neighborhood to counter its detractors: “Learn the facts.” “Know the truth.”
The company is running an aggressive advertising campaign in the media and on streets and avenues where PREPA employees flow. It won the contract to manage cables, poles, and the rest of the critical electricity transmission and distribution infrastructure in Puerto Rico
The Center for Investigative Journalism (CPI, in Spanish) discovered that while LUMA was competing to be picked, one of the companies in its consortium, Texas-based Quanta Services, lobbied before Congress and the Donald Trump White House on issues related to federal funds and power infrastructure repairs affected by Hurricanes Harvey and María, as well as to “PREPA”, as described in a general and imprecise manner in the reports to Congress.
In 2019 and 2020, after the hurricanes that hit the Caribbean and the southeastern United States, Quanta Services made a strong lobbying bid before the federal government. The $120,000 it had invested in lobbyists in 2016, doubled to nearly $280,000 in 2019, according to congressional data compiled by Open Secrets.
The CPI confronted Stensby with the fact that the request for proposals (RFP) to manage the power grid indicates that participants cannot lobby simultaneously on the same contract.
“I don’t know what was in that lobbying, if indeed it happened,” Stensby said.
The CPI showed him documents showing Quanta’s lobbying. There was a long silence on his part.
“I don’t know. I wasn’t there.”
A LUMA spokeswoman later told the CPI that Quanta regularly has officials from Congress and the Executive Branch “apprised of important projects around the world in which it is participating. Our participation in the PREPA transformation was one of a number of matters of which we kept federal government officials apprised.”
Given the political relationship between the US and Puerto Rico, in which federal agencies provide recovery funds for the energy grid, isn’t lobbying and “keeping in touch with Congressional officials a way to influence in the process? the CPI asked.
“Apologies if there is any confusion or misunderstanding but, to be clear, any contacts the consultants made with federal officials were for fact finding purposes only and to better understand the road to recovery for Puerto Rico. The fact finding was to understand the federal government’s plan and contemplated investments in Puerto Rico. ‘Being in contact’ and ‘lobbying’ are two different things, and, for the avoidance of doubt, it should be noted that no lobbying took place. An assertion or implication to the contrary is incorrect,” LUMA spokesperson Jenna Jackson emailed after the interview with Stensby.
The CPI, however, got the information from Congress’ official databases, where the efforts are described as “lobbying activities.”
One of the firms that Quanta hired to carry out this task at the US capital was DMM Strategies, founded by Daniel McCarthy, a Republican who provided legislative advisory services in the White House during the George W. Bush administration.
The consumer representative on PREPA’s Governing Board, Tomás Torres, said this is an example of why the discussions related to the LUMA contract had to be open to the public.
“The Energy Bureau did not have that open process,” Torres said. “Having the public discussion to clear up all the doubts of the contract is necessary, which now includes its lobbying efforts during the bidding process. It’s important that this is made public so that this contract is legitimized.”
LUMA’s mission, according to the contract, is to restore PREPA’s fragile power grid. As a result, it is assumed that the island’s more than 3 million residents will not lack power as often, or for as long as they did when Hurricane María caused in Puerto Rico one of the longest blackouts in the history of the world three years ago.
Gov. Wanda Vázquez’s administration announced the chosen company in June 2020 — in the midst of the pandemic — but the future of the transaction is at stake in the next elections. Four out of the six candidates competing for governor — Juan Dalmau, Alexandra Lúgaro, Carlos Delgado and Eliezer Molina — have vowed that they will cancel that contract if elected. Pedro Pierluisi and César Vazquez have said they will not cancel it, but modify it instead.
Stensby told the CPI that LUMA is more than qualified to operate in Puerto Rico. “We have business in hurricane prone regions in the southern US and emergency response businesses that have done work in Mali, Afghanistan, Kosovo and the Bosnian conflict. In many corners of the world where there are difficult conditions,” said the engineer and executive.
Canada’s Atco, another company in the consortium, operates isolated telecommunications and electrical systems in northern Alberta, Canada. Stensby refers to areas where the only way to deliver fuel is through icy roads, six weeks out of the year.
“We’re in the stone age”
José Rivera, a PREPA linesman in the mountainous area, warns that the work will not be easy for LUMA in the hillsides of the Pellejas neighborhood in Adjuntas. “The gringos abandoned their jobs after Hurricane María, because they said those weren’t adequate conditions,” he said.
As part of their daily work, Rivera and the rest of the brigade of linemen make their way “with machetes through the mountains.” They cut through the paths to carry cables up to 1,500 feet long from one hill to another, in the absence of helicopters. At times, because PREPA’s trucks do not reach hard-to-access locations, they have had to tie electricity transformers weighing about 300 pounds to bamboo poles and carry them on their shoulders.
His brigade companion, Julio Alvarado, with 26 years of experience as a linesman, assures that the work becomes harder given the neglect of the network. “This is another world. We’re in the stone age.” In Adjuntas, Utuado and Jayuya,, the municipalities in the Central mountainous region in which they work, there were communities without electricity for almost a year after Hurricane María.
PREPA will cease to exist as they know it.
One of the contractual conditions for LUMA to begin to provide service is that PREPA is divided into two public companies. One is GenCo, which will manage all the power generation plants in Puerto Rico. The Public-Private Partnership Authority (AAPP, in Spanish) has been trying since August 2020 to get one or several private entities or co-ops to manage those assets. The second corporation, GridCo, will be responsible for the transmission and distribution network that LUMA will manage.
The consortium is unclear on how the public corporation will be divided between GenCo and Gridco, or who will be held accountable for it. This lack of clear accountabilities may delay the start of LUMA’s operations, the company said in its August 2020 transition report to the Puerto Rico Energy Bureau.
Public-private partnerships, known in English as P3’s, are a sort of light privatization. They help governments to get funds, provide them with some service and share the risk of investments. They also allow the government to retain ownership of the assets, which enables it to issue debt, among other fiscal moves.
LUMA will carry out activities that go beyond managing the transmission and distribution system. It will also offer customer service and manage collections; will be in charge of administrative matters such as human resources and electrical grid planning; will handle operational power supply and demand issues; and will coordinate the development of microgrids and generation with renewable sources, among other matters.In other words, it will implement part of the new energy public policy.
At the moment, there will not be a competitive system that provides several alternatives to consumers. This results in Puerto Rico’s energy system shifting from a public monopoly to a private monopoly, according to Attorney Rolando Emmanuelli, who represents the Electric Industry Workers Union (UTIER, in Spanish) in the public corporation’s bankruptcy case.
The company has the responsibility of transmitting the energy produced by public and private generation plants, according to the contract. That means that, in addition to operating the grid, LUMA has the key to all the energy generated in Puerto Rico, which is a departure from the industry norm.
“In many US jurisdictions, a separate operator is hired to guarantee independent energy provision and to benefit consumers,” Tomás Torres explained. “The independent systemoperator must be established in Puerto Rico, separate from LUMA.”
LUMA won’t bring in money, it will be paid
PREPA does not need to be private to provide a resilient, clean and affordable service, the CPI told former PREPA Executive Director José Ortiz in an interview in December 2018. Why then do you have to hire a company to manage the electrical system?
“Because the government doesn’t have the fiscal capacity to maintain it and take it to the required standards,” Ortiz said at the time.
That year, the administration of former Gov. Ricardo Rosselló approved the Law to Transform the Puerto Rico Power System, which establishes public policy to privatize PREPA. That administration, since its inception in 2017, touted the public-private alliances with Metropistas and Aerostar as examples to follow.
Given the lack of government money to carry out works on the PR-22 and PR-5 highways, as well as the Luis Muñoz Marín International Airport, both consortiums have invested more than $340 million in private funds to improve this critical infrastructure, according to a report by the House of Representatives.
But the agreement with LUMA does not anticipate that it will invest money. In fiscal year 2021, it will be the opposite: payments to the company during the transition will trigger a deficit of up to $132 million at PREPA, according to the public corporation’s Fiscal Plan approved by the Fiscal Control Board, the entity that runs Puerto Rico’s finances. That amount corresponds to services and reimbursable expenses, according to the AAPP.
And LUMA can ask the Energy Bureau for an increase in the cost of energy to pay for that deficit, according to the contract.
During this transitional period for LUMA, Stensby and his employees are meeting with the public corporation’s executives and workers to develop the roadmap to manage the electricity grid. “We’re bringing these many disparate or sometimes disconnected plans that PREPA has historically produced into one plan…,” Stensby said. “That will tell us where the next dollar of investment is best spent.”
The company is establishing all the components of its business model, from the organizational structure, through an accounting system, to a web page where customers ask questions or report a blackout. “We’re creating a new company.”
After this transition period, PREPA will pay LUMA $105 million annually for the network operation and maintenance service for 15 years, plus bonuses.
Considering the experience of Aerostar and Metropistas investments, the Center for a New Economy believes that this could have been a better deal. “LUMA isn’t being required a penny in capital investment,” said Sergio Marxuach, director of public policy at that think tank, claiming that everything revolves around the federal government spending billions of dollars and that savings generated by LUMA will be bigger than what consumers will pay .
“I’m concerned about the conclusion of the alleged savings. The government hasn’t detailed well how it came to this calculation. That’s the heart of the transaction. If there are no savings and we spend more on them, it doesn’t make sense,” Marxuach explained.
In 2027, LUMA must save, for example, $293 million in operational, administrative and energy loss expenses, versus the approximately $141 million that it will receive as payment and bonuses in that year, according to the AAPP. In other words, for every dollar PREPA spends on LUMA in 2027, PREPA should save two.
When in 2018 the AAPP began the process to choose the company that will manage the network, it did not do so seeking cheaper energy, despite the high costs of electricity, but rather the transformation of the public corporation. “The most important thing is to provide quality service to the client and to eliminate political influence from an entity that provides essential services,” said Fermín Fontanés, executive director of the AAPP.
Meanwhile Stensby downplayed the expense PREPA’s clients will face to pay for its services, taking into account the benefits that LUMA will allegedly produce in exchange. “When we’re able to create a more reliable electricity system, that will generate huge economic benefits for Puerto Rico, which will far outshadow the $105 million fee that many people point out. A reliable sustainable electricity system is the basis of economy, no matter where you are in the world.”
PREPA employs experienced workers and has the ability to increase its workforce with engineers graduated from the prestigious University of Puerto Rico Mayagüez Campus. Can’t the job be done with the public corporation’s talent? the CPI asked Stensby.
“This is not solely an engineering problem,” he said. “You have a great history of tremendous infrastructure. But if you look at the last 15 years, there have been economic and political problems that have left the construction and development of infrastructure somewhat stagnant.”
Rescuing electricity in a raft
The decisions about the energy future that are made in the headquarters in San Juan seem like a conversation from another planet for the brigade of mountain linemen. They go in two trucks to the Pellejas neighborhood of Adjuntas to repair a line that had left nine houses without electricity for six days.
The lack of materials and the weakness of the electrical system still remind them of the apocalyptic days that followed Hurricane María, when José Rivera asked a neighbor to borrow a boat he had built with boards. He rowed to the middle of a mouth of Lake Caonillas to rescue the tip of a submerged cable. There was no new material to restore the electrical system and they were patching it up. The same one that LUMA will now have to fix.
Julio Alvarado says he still has to dig up lines, tie scrap copper wires together, and collect screws and bolts from some posts to patch something up elsewhere. “This is normal for us.”
Added to this normality of a lack of materials is the need for skilled labor. Of the approximately 30 linesmen that existed 25 years ago between Utuado, Adjuntas and Jayuya, only 12 remain, according to the UTIER. Six months ago, a colleague said goodbye and moved to the state of Florida, after working at PREPA for a quarter of a century.
While he gets paid double over there, his coworkers here lost benefits such as changes in the corporation´s contributions to the medical plan. Since 2008, PREPA has lost 40% of its workforce, mainly highly skilled workers, according to the 2019 fiscal plan.
“Customers complain about bad service. But it’s not bad service. It’s a lack of personnel,” said Julio Alvarado.
The problem is compounded by the lack of protective gear. Alvarado demonstrated a pair of gloves needed to handle a live power line: they’re outdated. The UTIER alleges that the public corporation allowed the expiration of the certification of the machine that checks this equipment, which averts the danger of the linesmen being electrocuted. Consequently, due to a lack of safe gloves, the linesmen have to “kill” the cables to minimize the risk of being hit by an electrical current. But that implies that there are people who are going to be without electricity. “How’s it possible that PREPA, a monopoly, allowed itself to fall apart?”, Alvarado added. “If PREPA had been well managed, there would be no need for LUMA.”
The brigade partly blames the austerity period under former Gov. Alejandro García Padilla’s administration, when PREPA hired AlixPartners, run by consultant Lisa Donahue, which left employees “unprotected,” José Rivera said. “There was no procurement of materials, they took away benefits, they created the need for privatization.”
Funding commitment during election period
In the actual relationship between PREPA and LUMA, the government continues to own the electrical infrastructure, so it can receive federal funds from the Federal Emergency Management Agency (FEMA) and the U.S. Department of Housing and Urban Development (HUD).
On September 18, 2020 — almost three years after Hurricane María and less than two months before the presidential elections — President Donald Trump made the announcement. FEMA committed $9.5 billion for the restoration of Puerto Rico’s electrical system, nearly 90 days after the LUMA contract was signed.
Now, LUMA will manage those funds and the recovery projects that will go to public bids. Some of these projects will be done by other subcontractors, which could be some of the companies belonging to LUMA’s consortium, according to page 28 of the contract.
“That will generate thousands of jobs not only for Puerto Rican engineers but for Puerto Rican people in every sector of the electricity industry…,” Stensby said, referring to direct and indirect jobs the agreement would create. “It will be a huge economic impact.”
If LUMA does not bring in money and only comes in to manage, what’s the risk it is assuming? The CPI asked Fontanés, who signed the contract with the company.
“It’s not a traditional alliance in the sense that there’s an exchange in which the government gets money to pass on the risks. They have to meet its requirements and if not, there will be contractual consequences. It’s a gigantic reputational risk for them. It’s an organization that will face international consequences for non compliance.”
When asked, Agustín Irizarry, professor of electrical engineering at the UPR Mayagüez Campus and former consumer representative at PREPA, said that the contract with LUMA is “zero risk” for the company. Its profit will increase, through bonuses, if it meets some “very loose” established goals, he added.
PREPA experiences an average of five blackouts per year, the contract states. LUMA was required to reduce that number to two, rather than take it to one blackout per year, which is the average for public companies in the US, Irizarry noted.
The contract states that PREPA accrues 11 hours of blackouts per year. LUMA was asked to reduce them to five. The average for US-based electric companies is one hour.
Meanwhile, the time it takes to restore electricity after each incident is just over two hours. But LUMA was not required to improve it.
“Hey, we’re already paying it to increase reliability, why do we have to pay them bonuses? The goals don’t even bring us to the US reliability standards,” Irizarry added.
This means that the most important thing that consumers ask for, that power doesn’t go out as often or for so long, is not completely insured with LUMA. “I don’t see how this contract is useful for us. It looks like a steal to me,” Irizarry said.
The contract with LUMA is part of a process that PREPA began 20 years ago with energy purchase contracts from private generation plants, among which is the AES coal ash plant in Guayama, and Ecoeléctrica in Peñuelas, which operates with gas. Controversial and expensive contracts for private renewable energy projects were also signed during former Gov. Luis Fortuño’s tenure, most of which failed.
The UTIER believes that Alix Partners, through cutbacks and administrative decision making, created the basis for the privatization that led to LUMA’s hiring. Today, PREPA’s decisions are influenced by Filsinger Energy Partners, one of 30 private consultancy and law firms, most of them based in the US, that began to replace public servants in high management positions, the CPI found. The privatization did not start with LUMA.
LUMA is an example of the existence of revolving doors, as the situation in which a senior government official goes to a private company is known, producing conflicts or the appearance of conflicts of interest. Pamela Patenaude, who until January 2019 served as deputy secretary at HUD, is now an executive of Innovative Emergency Management (IEM), a federal funds management company that belongs to the LUMA consortium and that landed two contracts for $25 million to provide administrative services to the Puerto Rico Department of Housing in handling HUD funds.
The federal agency where Patenaude worked will also contribute about $1 billion to complement FEMA funds in PREPA.
Stensby does not consider this to be a conflict. “What I see at IEM is deep expertise. In many cases, this expertise is created by employees that have had previous roles within the federal government.”
PREPA wasted its infrastructure money
Before Hurricane Maria damaged almost the entire electricity grid, PREPA was already dragging a spiral of mismanagement of finances. The public corporation has a $9 billion debt with its bondholders and more than nearly $5 billion with the pension plan.
Loans from power companies are often invested in infrastructure. But PREPA only used 24% ($2.7 billion) of the $11.4 billion in bonds it issued between 2000 and 2012. The rest was spent on operations, payments to consultants, interest and refinancing of old loans, while ignoring repayment of the original debt, according to a 2015 report from the House of Representatives.
This pattern occurred under successive administrations of the Popular Democratic Party (PPD, in Spanish) and the New Progressive Party (PNP, in Spanish).
The Comptroller’s Office also issued an adverse opinion on the public corporation’s capital improvement program. A report that analyzed operations between 2010 and 2018 noted that PREPA spent more than $192 million on land purchases and infrastructure projects that didn’t get off the ground, or were not completed, or were useless.
These include more than $62 million in the cancellation of the controversial Gasoducto del Sur, proposed by the former governor and current candidate for Resident Commissioner Aníbal Acevedo Vilá (PPD), to transport methane gas between Peñuelas and Salinas. There is also the $32 million of the so-called Vía Verde project proposed by former Gov. Luis Fortuño (PNP), who sought to transport gas through pipelines, from the southern coast of Peñuelas, passing through the mountainous area, up to Arecibo, in the North, and from there to the Capital.
There are purchasing and service payments for about $86 million so that units at the Cambalache, San Juan, Palo Seco and Aguirre power plants could burn gas. The Comptroller’s audit reveals that PREPA failed to comply with the principles of transparency and accountability regarding contracts and amendments, and that after 78 years of being a public corporation, it does not have an accounting standards and procedures manual.
The public corporation also faces serious administrative instability. Since 2017, it has had six executive directors: Javier Quintana, Ricardo Ramos, Justo González, Walter Higgins, José Ortíz and Efrán Paredes.
“Removing politics from PREPA and the absence of management continuity has an economic impact that cannot be quantified. This is part of the return on investment of the LUMA service,” continued Fontanés. “Now with LUMA we have a 15-year contract. This continuity is essential for these savings to be seen.”
The future of pensions
Linesmen José Rivera and Julio Alvarado feel the weight of the years gone by. “We’re already dragging our boots,” said Alvarado. “I’m not talking about the work in the big city. We suffer a lot here. We work with spurs to climb the posts.” Rivera raises his right arm with difficulty to show that he injured his shoulder in a fall down a hillside. LUMA is supposed to improve working conditions, as the company claims it will increase safety and offer better equipment.
“What I need is stability, benefits and a dignified retirement,” Alvarado said. “LUMA isn’t necessary. What’s lacking is for PREPA to recruit personnel and manage it as it should … What I want is the same public company, but with equipment. With our health plan and benefits, and that we are not assigned excess work.”
The dignified retirement Alvarado speaks of remains to be seen. PREPA does not have the money to pay $3.8 billion, or almost 80% of its debt with the pension plan, which could become insolvent in five years if reforms are not applied, according to the fiscal plan.
The public corporation must pay $266 million to the pensions plan in 2020, but the fiscal plan projections indicate that PREPA will only deposit $71 million, or 27%.
That’s why Emmanuelli, the lawyer for the UTIER, points out that the union opposes LUMA getting paid before PREPA fulfills its commitment to fund the retirement plan, on which some 18,000 employees depend.
The Fiscal Control Board submitted a motion for Judge Laura Taylor Swain, who oversees PREPA’s bankruptcy process under the PROMESA law in court, to consider that any payment to LUMA during the transition process be considered an administrative expense that it is obliged to pay. The judge approved that motion on October 19, meaning that if the public corporation’s debt adjustment plan is approved, LUMA would get paid before any creditor.
The consortium has already started submitting its expense reports for the first three months of the transition, which amount to $26 million. Among these are about $282,492 for legal expenses and $162,113 for “communications,” which the UTIER criticized, since LUMA should generate savings.
PROMESA establishes that the pension plans systems be adequately financed, Emmanuelli said. But the Fiscal Control Board’s Executive Director, Natalie Jaresko, told the CPI that the pensions, along with the debt, are claims that exist prior to the bankruptcy filing, which are included in the adjustment plan, while payments to LUMA are administrative expenses that have to be paid and cannot be put in the same basket as other debts.
LUMA is not responsible for any of the public corporation’s debt. The employees it hires will be able to contribute to PREPA’s current retirement system. Those who want to, and those who have been in the public corporation for less than 10 years, may contribute to a pension plan created by LUMA. This option “will bleed the current retirement plan, because those who transfer to the new system aren’t going to contribute to the old system, and that will drain it,” Emmanuelli warned.
The consortium has rejected the collective bargaining agreement with the workers, according to page 29 of the contract. “It’s outrageous because Law 120 protects the rights of employees,” Emmanuelli said. The new agreement will not validate acquired rights such as merits, seniority in the position and accrued service.
The transfer of employees to LUMA has also created an environment of uncertainty. The consortium is only obliged to interview workers in good faith who are already at PREPA but has no obligation to hire them. PREPA assured its employees that those who do not get or accept a position at LUMA will be transferred to other government agencies, according to the Administration and Transformation of Government Human Resources Act (Act 8 of 2017).
The brigade that works in the mountains says that they are already being displaced since before LUMA. PREPA has outsourced companies for jobs they used to do, such as pruning branches that interfere with lines. The UTIER maintains that these companies charge $51,240 for each mile of cutting back branches. The union assures that PREPA’s public workers can do it for $6,972, almost seven times less.
“That’s the reason for the anxiety. That will break down anybody’s nerves,” José Rivera lamented, supported by a colleague who added, “If there’s money to pay for these contracts, how do you explain that PREPA is bankrupt?”