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T&D agreement for Puerto Rico power grid sets off alarm bells

August 04, 2020

Key Takeaways:

Electricity grid operating agreement with LUMA likely to reproduce longstanding operational and financial dysfunction

LUMA agreement replicates many of the flaws of PREPA’s past contracting failures

August 4, 2020 (IEEFA U.S.) – In testimony submitted to the U.S. House Committee on Natural Resources, IEEFA’s director of finance Tom Sanzillo warned of significant problems with a recent agreement for LUMA Energy to take over transmission and distribution (T&D) of Puerto Rico’s electric power grid.

The agreement fails to address three major challenges, according to Sanzillo: ensuring affordable rates for island residents, meeting legislatively established green energy targets, and building productive relations with organized labor.

Puerto Rico’s Electric Power Authority (PREPA) agreement with LUMA Energy Services does nothing to address the legacy of dysfunction and mismanagement of the island’s electric system. The agreement provides no accountability mechanism for LUMA to meet either ratepayer savings or renewable energy goals.  This, in fact, will likely only exacerbate the problems faced by an already struggling energy sector and economy,” said Sanzillo.

First, Sanzillo said, Puerto Rico’s households and businesses need affordable and stable electricity rates. While the Public Policy Act of 2019 established a goal of 20 cents per kWh rate  and PREPA’s recent fiscal plan shows this to be operationally achievable, the LUMA Agreement includes no incentives for meeting, or penalties for failing to meet, this critical economic goal

Second, Puerto Rico has established a goal of 100% renewable energy by 2050. By overbuilding natural gas capacity and failing to adopt a more ambitious green investment plan, the LUMA contract is a critical missed opportunity.

Third, PREPA and the Financial Oversight Management Board (FOMB) have decided to disregard collective bargaining agreements at PREPA. Sanzillo calls this move “singularly shortsighted” and one that will prove costly over time.

Further, failing to contain rate increases would cause a cascade of new problems for households and businesses, including potentially life-threatening hardship for families with no or severely limited access to electricity.

“The LUMA agreement replicates many of the flaws of PREPA’s past contracting failures,” Sanzillo testified. “The underlying problems of corruption, poor management and lack of contract oversight would be better resolved by the appointment of an Independent Private Sector Inspector General to monitor the use of federal funds within PREPA and to prevent waste, fraud and abuse.” 

Full testimony: Testimony to U.S. House Committee on Natural Resources hearing on Puerto Rico T&D agreement by Tom Sanzillo, August 4, 2020

Tom Sanzillo ([email protected]) is IEEFA’s director of finance.

Media Contact: Vivienne Heston ([email protected]), +1 (914) 439-8921


Tom Sanzillo

Tom Sanzillo is Director of Financial Analysis for IEEFA. He has produced influential studies on the oil, gas, petrochemical and coal sectors in the U.S. and internationally, including company and credit analyses, facility development, oil and gas reserves, stock and commodity market analysis, and public and private financial structures. He also examines such areas as community and shareholder activism, institutional investment, public subsidies and Puerto Rico’s energy economics.

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