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The Puerto Rico Electric Power Authority (Prepa) needs at least $894 million in funds to execute the agreement with LUMA Energy, according to a report by the Financial Oversight and Management Board (FOMB).

The support is necessary for the funding of operations and maintenance agreement with LUMA, as the public utility’s “cash balances are insufficient to self-fund cash needed for the LUMA conversion,” as per Oversight Board documents filed in December 2020 on “Creditor Mediation and Cash Support Materials.”

The FOMB indicated that the plan is for the commonwealth government to loan the $894 million to Prepa. “To ensure the Island has a viable and reliable electricity utility, the Commonwealth may loan the LUMA Funding Requirement,” stated the document.

The rationale given for the move includes “energy reform is one of the most essential structural reforms in the Commonwealth Fiscal Plan, and will help make Puerto Rico more competitive and pro growth, leading to a contribution of surplus in excess of [an estimated] $11 billion over 30 years that funds creditor recoveries.” At the same time, “if not funded through a loan from the Commonwealth, Prepa would need to fund reserves via alternate means, such as a rate adjustment that would dramatically increase electricity rates in the short term (i.e., the expected period between now and when the reserves will need to be funded).”

The FOMB said important considerations for the financial support are that “LUMA’s service commencement is conditional on the funding of operating and capital accounts and Prepa has insufficient cash to satisfy the operating and capital accounts.”

Moreover, Prepa will also need to fund an estimated $500 million in expenses to exit Title III bankruptcy, the FOMB said.

The 15-year private-public partnership contract with LUMA is for the operation and management of Prepa’s transmission and distribution system. FOMB Executive Natalie Jaresko has repeatedly defended the deal, saying it will help reduce costs by about $100 a million a year and will lead to a more efficient and reliable grid, which will help move the Puerto Rico economy forward.

She has also underscored that Prepa needs to restructure its debt because as long as the corporation is in bankruptcy, energy rates will be higher for consumers. She explained that every fuel supplier that sells fuel to the public utility has a risk premium, in which they charge more because they are selling to a bankrupt entity.

“I think that for employees, [LUMA] will be a good employer with solid pay. It will depoliticize Prepa… Having an entity that focuses on service, that’s incentivized, that is paid because it does well—if not, they don’t get the same pay… I think that every person will see that this will lead to more reliable energy for them, not many shutoffs all the time… Simply being in bankruptcy costs everybody more,” Jaresko said, as previously reported by THE WEEKLY JOURNAL.

IEEFA Questions the Move

Meanwhile, the Institute for Energy Economics and Financial Analysis (IEEFA) said the plan raises questions about the reported savings on the transmission and distribution agreement.

“In theory, the [$894 million] loan will stabilize Prepa’s finances and send a strong signal that the newly privatized Prepa will be able to honor its commitments to vendors,” stated financial analysts Cathy Kunkel and Tom Sanzillo in a recent IEEFA commentary.

“One of the reserve accounts that Prepa needs to cover is for federally-funded capital expenditures, amounting to $283 million. If this amount is to be federally funded, why is it included in the total loan from the commonwealth? The [FOMB] document also notes Prepa will need to pay approximately $500 million in fees for its exit from Title III bankruptcy within the next two years. Is this expense going to come out of electricity rates, or is Prepa going to borrow again to pay the fees?”, asked the IEEFA.

At the same time, the Institute questioned the issue of savings. “The FOMB document implies that repayment can be financed with savings from the contract. This raises the obvious question: How much does Prepa expect to save?... The LUMA contract does not mandate any level of savings. Even the financial performance metrics that allow LUMA to earn an additional incentive fee are structured around LUMA staying within annual budgets—not for achieving any baseline level of savings.”

The terms of the loan may be costly for Puerto Rico, said the IEEFA. “A 6 percent loan (comparable to loans Prepa previously received from the Government Development Bank of Puerto Rico) over the 15-year contract would cost PREPA $92 million annually. Even a zero-interest loan would cost Prepa $60 million annually, more than enough to eliminate all of the ‘hypothetical’ savings of the LUMA contract.”

Asst. Editor/Reporter for The Weekly Journal. She is a journalist with more than 20 years of experience. Rosario received both of her bachelor’s and master’s degrees in International Politics from Georgetown University’s School of Foreign Service.

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