With New ‘Transition Charge,’ Electricity Bills to Jump 17% to 21%
By: Eva Lloréns Vélez & Rosario Fajardo
Assuming the Puerto Rico Electric Power Authority’s (Prepa) restructuring request is approved, as early as June of this year, residential and industrial clients could see an estimated 21% increase in their electricity bills, while commercial clients could see an estimated 17% increase.
This increase will be reflected in clients’ bills as a “transition charge” to cover securitized debt. The transition charge and adjustment mechanism, which must be approved by the P.R. Energy Commission, will go to pay for a series of new bonds that will be exchanged for current Prepa bonds through the Prepa Revitalization Corp.
An additional charge for new investment is expected before the end of the year.
Beginning June, nonresidential customers (commercial and industrial) will 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, according to Prepa’s “Verified Petition for Restructuring Order.”
The entire document comprises about 600 pages.
Prepa financial records for February 2016 show that two months ago, industrial clients paid 14.23 cents per kWh, while commercial clients paid 17.89 cents per kWh. Thus, the proposed immediate increase (rounded up to 3.06 cents) would be 21.5% for industrial clients and 17.1% for commercial clients. Government facilities are considered commercial users and the proposed charges would increase the commonwealth’s budget deficit.
Beginning June, the transition charge for residential clients will be $11.98 a month. The charge will be adjusted every three months, and during the next two years, it will fluctuate from a high of $18.21 per month to a low of $11.06 a month.
Prepa financial records for February 2016 show that during that month, residential clients consumed an average 335 kWh, at a rate of 16.74 cents per kWh. By multiplying both numbers, an average monthly electricity bill of $56.08 is reached. The proposed immediate increase ($11.98 a month) would represent a 21.4% increase for residential users.
Appendices 1-6 of the restructuring petition state how residential customers will get a fixed charge for debt payment, while all other customers would get a charge per kWh. Attachment 3.02 of the petition provides a schedule through 2027, with rates for residential customers reaching a high of $18.21 a month in 2023.
Interestingly, Attachment 3.02 of the Prepa document uses 2014 figures, when electricity rates were much higher, which would result in a lower increase for clients. However, using the more recent figures of February 2016 results in a higher increase for clients, as rates have gone down as the price of oil has plummeted.
It also should be noted that the aforementioned increases cover only debt payments. Prepa is submitting a second rate case to pay for required new investment, including those necessary to comply with new U.S. Environmental Protection Agency regulations. Bearing this in mind and assuming that this is also approved, the overall rate increase for clients could be 30% to 40% by the end of the year.
According to Attachment 3.03 included in Prepa’s restructuring petition, the restructuring is slated to save $1.1 billion over a five-year period in debt service and around $1.65 billion in 10 years. The maximum annual debt-service payment under the restructuring scenario is $673 million, while under the current status quo it is $752 million.
“There are two active things that you have to think about when you talk about Prepa and the rate with the energy commission, and the process we are going through. The first is…the SPV [special-purpose vehicle] filing that is the securitization debt, the debt where the unsecured bonds are exchanging at 85 cents,” explained Prepa Chief Restructuring Officer Lisa Donahue. “The commission will look at our full filing and they will determine whether they need additional information. But what they are looking for as part of the SPV—they want to make sure that it is transparent, they want to make certain the mechanics work great, the true up works great, the mathematics and the way we have put it together works right and the system works right.
“The Prepa rate case is a separate filing and that is to cover everything that is left behind at Prepa. Remember the securitization is only for the bond debt—that is going to be like a normal rate case—justifying the cost, justifying that it is covering the cost, but it is also the lowest possible cost per the statute of what we are putting together. We are moving forward to make certain it is a transparent invoice and a transparent bill so that when customers get the invoice, they understand what they are paying for through line item billing. So you won’t have the 9% tariff that becomes a large mathematical exercise for the consumer as well. The goal for all of us is simplicity, transparency and, of course, stable rates,” Donahue added.
When Donahue was asked to explain the math, she demurred and told Caribbean Business that “the best place to start is to go to the Navigant report. They are the experts on that.”
Ralph Zarumba, director of the Energy Practice’s Power Systems, Markets & Pricing Group at Navigant, the firm that did a cost of service and rate revision for Prepa, at first said Caribbean Business’ calculations were incorrect and then acknowledged there would be an increase in clients’ electricity bills. While the Revitalization Corp.’s numbers will cause an overall rate increase (the transition charge is separate from the rate), the alternative would be much worse because, in reality, the debt restructuring will result in a reduced debt service, he said.
Prepa being disingenuous?
“Prepa is being disingenuous,” commented a Caribbean Business source with knowledge of the matter. “Prepa fails to mention that the new securitized debt, collateralized with Prepa revenues, would have a higher payment priority than the original noncollateralized debt. Thus, a decision by the U.S. Supreme Court upholding the local bankruptcy law, or a restructuring mandate from the proposed federal fiscal-control board, would result in lower payments on the original bonds and a significantly lower [the] charge to consumers than on the new securitized bonds.”
This could explain the urgency of bondholders to close the deal, the source indicated. “Much less understandable is Prepa’s urgency to set up a debt charge equivalent to 20% of electricity bills when there is another separate rate review that could bring total electricity costs up by 40%.”
The source also noted that the so-called $1.1 billion in “savings” is not really savings because the debt service is simply pushed down the line. In other words, the debt service must still be paid at a later date.
—Executive Editor Philipe Schoene Roura contributed to this story.