PREPA transmission and distribution system operator approved, questions remain

On June 22, 2020, the contract for the PREPA transmission and distribution system operator was approved. The question is if this agreement will benefit Puerto Rico’s electricity consumers.  This type of agreement is normally approved by the regulator (in Puerto Rico the Energy Bureau) with broad citizen participation due to the impacts it has on all sectors of the economy.

Included below are three main reasons of why this agreement should be subject to approval in a open adjudicatory process, with public participation, before it comes into effect:

1. The agreement was approved without of public participation and good regulatory practices: 

  • The transmission and distribution (T&D) system operator’s agreement was submitted by the Puerto Rico Pubic-Private Partnerships Authority to the the Puerto Rico Energy Bureau in May 18, 2020. 
  • Act 17 of 2019 amended the Puerto Rico Electric Power System Transformation Act, Act 120 of 2018, not only to provide 30 days to determine compliance of the T&D operators agreement with the current regulatory framework and the energy public policy, but also to allow for broad public participation. The 30 days period allowed by Act 17, provided minimum time for public scrutiny. 
  • The approval of the T&D system operator’s agreement was made by the Energy Bureau on June 17, 2020 on a three to one vote, without any public participation.
  • The public has no information for what is “on the record” for this transaction. The information needs to be disclosed, discussed and challenged though official regulatory proceedings. 
2. The insolvency and Bankruptcy of PREPA
  • PREPA’s insolvency and deficit indicators are beyond normal parameters. Based on March 2020 interim financial statements, PREPA’s total liabilities are $17,215 million.
  • The proposed debt restructuring agreement (RSA) between PREPA and its bondholders does not solve its insolvency problem, since it only addresses long-term obligations related to bond issues. This means that even if all the bond issues for $8.3 billion are discarded as part of the bankruptcy processes – when the current RSA only considers a cut between 32.5% and 22.5% –  PREPA remains in parameters of insolvency.
  • There is no organization that can operate under these parameters. Until a restructuring plan is submitted to resolve PREPA’s profound insolvency under Title III of PROMESA in federal court, PREPA’s insolvency will remain. Therefore, the T&D operator’s agreement should be approved and implemented only after there is a defined road-map towards PREPA’s debt restructuring.
  • Executing the T&D system operator’s agreement amid PREPA’s bankruptcy is not a good or reasonable practice. It would not only frustrate the present effort – without the opportunity to evaluate the transaction – but, would also discourage any other future efforts.
3. Additional Costs to Consumers
  • Under the T&D system agreement the operator gets an annual payment of a fixed amount of $105 million plus $20 million in incentives for a maximum value of $125 million per year, which is adjusted for inflation at the beginning of each year.
  • Initially, this additional cost of $125 million is equivalent to almost four percent (4%) of current costs or approximately 1 cent / Kw-h. Considering PREPA’s present rates, and taking into account its current deficit, this additional cost will create upward pressure on electricity rates.
  • If the the T&D system operator cannot generate savings that neutralize the additional cost of this agreement, the operator will have to file for a request to increase the rates with the regulator.

ICSE has just filed on the Energy Bureau a request for an adjudicatory process to question the approval on this contract. The lack of public participation, transparency and good regulation; the execution of this agreement amid PREPA’s bankruptcy, with insolvency and deficit indicators beyond normal parameters; and the uncertainty in terms of the impact that this agreement will have on rates are enough reasons to evaluate the  T&D agreement in a regulatory process, with broad public participation, before it comes into effect.

ICSE continues to work in other proceedings for the benefit of all sectors in Puerto Rico such as the re-opening of the San Juan 5 & 6 Conversion, and the EcoElectrica Power and Natural Gas Purchase Agreement with the intent to have an in depth public and transparent discussion. 

Publication via ICSE Monthly Newsletter