A report by London Economics International (LEI) has concluded that the Transition Charge outlined in the Puerto Rico Electric Power Authority’s (Prepa) Restructuring Support Agreement (RSA) will rise to 4.55 cents per kilowatt-hour (kWh), which will be paid for by customers for the next 47 years.
“As contemplated in the [$8.3 billion] settlement, the current bonds would be exchanged for new securities, which will be funded through a non-bypassable charge on all electricity customers’ bills. The non-bypassable charge, referred to as the ‘Transition Charge,’ will be 2.77 cents/kWh in the initial years, but will rise to 4.55 cents/kWh (and that level of Transition Charge will remain fixed for the remainder of the term of these new securities).
“The nominal term of these new securities is 47 years; in other words, customers will be paying for this settlement for several decades. The Transition Charge will increase the rate paid for electricity by every customer on the Prepa system. The only way to avoid the Transition Charge is for a customer to leave the Prepa system by disconnecting from the grid entirely,” according to a copy of the confidential report obtained by THE WEEKLY JOURNAL.
The proposed Transition Charge also threatens the economic viability of the utility, as it “will accelerate and amplify challenges to the sustainability of Prepa’s utility business,” according to the 126-page document.
“It will speed up the decline in electricity demand. Customer defection from the Prepa system will, in turn, exacerbate the energy burden on remaining customers taking service from Prepa (lower income customers who will not be able to afford the increasing rates), potentially creating a vicious cycle that intensifies and creates difficulties for Prepa,” states the report. At the same, this scenario could undermine the utility’s goals in terms of clean energy and improving resilience.
Without including the Transition Charge, LEI forecasts that Prepa’s rates will need to increase to an average 26.7 cents per kWh, from 2020 to 2024. The current rate is around 21-22 cents per kWh. “Under the Base Case scenario, the long-term rates would need to increase to over 60 cents per kWh by fiscal year 2036,” according the document.
The study by LEI, a global consulting firm, was commissioned by the Official Committee of Unsecured Creditors of the Puerto Rico Electric Power Authority. The report, dated Oct. 2019, has been classified as “confidential” and has not been released publicly. However, U.S. Magistrate Judge Judith Dein recently ordered the document be made public.
The LEI report also explains how a “rising energy burden” through increased rates, may further hit the local economy. In essence, the loss of customers increases rates for those remaining, while businesses could see a drop in their profit margins as they cannot fully pass on electricity rate increases to their own customers.
Higher electricity prices also have an impact on Puerto Rico’s ability to attract manufacturing and tourism dollars vis-à-vis other jurisdictions. “Puerto Rico needs to experience real economic growth in order to get to a point of sustainability with its fiscal policies. Therefore, the trajectory of electricity rates is of vital importance to get Puerto Rico’s economy back on track,” states the document.
Based on audited financial statements, Prepa has over $15.6 billion of debt and other liabilities, including some $3 billion in underfunded pension obligations, but the book value of its assets totals only $9.6 billion.
The Prepa RSA has been filed before U.S. District Judge Laura Taylor Swain, who is overseeing the commonwealth’s debt restructuring process under the Puerto Rico Oversight, Management and Economic Stability Act (Promesa). Hearings on the Prepa RSA have been postponed several times; the hearing will now be held in March.
The unveiling of LEI’s report comes as Prepa’s woes continue to be ever present in the minds of many Puerto Ricans, especially since the January earthquakes underscored how fragile the electrical system—and the local economy remains—even though it has been more than two years since Hurricane Maria.
FOMB Stays Firm
Despite strong opposition from a number of sectors in Puerto Rico, the Financial Oversight and Management Board (FOMB) has remained firm in its support of the RSA, noting, for example, that the deal would reduce Prepa’s debt service by $3 billion over the next 10 years. In response to leaders in the Puerto Rico Legislature, who said they would not pass legislation on the RSA, as it would increase electricity rates, the FOMB said there would be “risks” if the deal did not go forward.
A primary risk is that if the RSA is not approved, Puerto Rico could be paying around $7 billion in debt over the next 10 years. Prepa has been in bankruptcy since 2016 and bondholders have not been paid since 2015. Another risk is that the stay on debt service could be lifted by Judge Swain and a trustee for Prepa could be appointed.
“The Oversight Board’s sole interest is the ultimate transformation of PREPA into a modern power company that provides the people and the business community of Puerto Rico with access to reliable, lower cost and cleaner energy. That transformation has four elements: the exit from bankruptcy; the support of the federal government to repair the damage of natural catastrophes that have hit the island; private management of the grid and the transmission system to improve service; and substantial change to the fuel mix used to generate energy,” said the FOMB in a statement.
“Legislation is required for the PREPA restructuring and exit from bankruptcy as contemplated by the RSA that would support all four elements of this transformation. The Oversight Board urges the Puerto Rico Legislature to enact the legislation before the court hearing on the RSA. Otherwise, PREPA and the people of Puerto Rico will incur risks the Legislature can eliminate,” the FOMB added.
FOMB Executive Director Natalie Jaresko said they would look for "other alternatives" to implement the RSA, but she did not elaborate.
Gov. Wanda Vázquez, who is now running for La Fortaleza, despite saying previously that she would not, seems to be ambivalent to the Prepa RSA, according to multiple media reports. The latest news, from former Chief of Staff Zoe Laboy, is that Vázquez now opposes the deal.
Democrats in Congress Want Changes to Prepa’s RSA and Fiscal Plan
Citing the recent earthquakes, U.S. Rep. Nydia M. Velázquez (D-NY) and 12 members of Congress have written to the FOMB, saying that Prepa’s RSA and Fiscal Plan need to be changed to take into account lost capacity and the economic effects of the tremors.
“While some areas of Puerto Rico experienced power restoration relatively quickly after the earthquake, a complete overhaul of the island’s electric system will take years. The electrical grid’s failure after Hurricane Maria, coupled with the recent earthquake and its associated aftershocks, harshly remind Puerto Ricans that they rely on antiquated energy infrastructure,” states the missive.
The lawmakers noted that the Costa Sur generation plant, which accounts for nearly 20 percent of the island’s capacity, will be offline for a year, as the facility was seriously damaged. “In order to make up for that lost capacity, Prepa will be forced to rely on older, more inefficient and costly generation facilities that use expensive and highly polluting Bunker C oil and diesel fuel. The reliance on these decades-old facilities will alter Prepa’s cost structure, likely forcing it to increase rates immediately just to keep the lights on in the short-term,” according to the letter dated Jan. 23.
With regard to the RSA, the Democrats said it was a “bad transaction,” as they echoed some of the arguments brought forth in the LEI report. The deal “needs to be renegotiated to (1) reduce the outstanding principal by an amount sufficient to allow Prepa to operate as a sustainable entity in the future; (2) decrease the proposed Transition Charge, which is scheduled to increase from 2.768 c/kWh to 4.552 c/kWh, an increase of 64 percent that is neither reasonable or viable; and (3) eliminate disincentives for investing in renewable generation technologies,” they said.
Their calls for revisions to the Fiscal Plan include: (1) taking into account Prepa’s loss of capacity at Costa Sur; (2) including a new forecast of operating expenses in light of Prepa’s new cost structure; and (3) incorporating “the materially adverse economic effects of the earthquakes, which will likely be exacerbated by higher rates charged by Prepa,” the lawmakers said.