IEEFA Op-Ed: 5 Reasons Puerto Rico’s Electric Debt Deal Is a Rip-Off

The new debt proposal announced by Gov. Ricardo Roselló for the Puerto Rico Electric Power Authority (PREPA) and its bondholders on April 6 will make an already untenable economic situation for the island’s residents and businesses even worse.

The electric system’s $9 billion debt is only one piece of Puerto Rico’s overall debt of $72 billion that is now under the oversight of the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) board. While most of this debt is being restructured in a way that makes bondholders shoulder a reasonable portion of the pain, PREPA’s proposed workout isn’t.

The latest plan, unfortunately, is much like a deeply flawed previous plan hammered out by PREPA and its previous consultants — Alix Partners and Navigant Consulting — and endorsed by the Puerto Rico Energy Commission in June 2016 but never signed off on by all parties. Participating bondholders under the April 6 proposal will see the face value of their bonds reduced by 15 percent, and the new debt issuance would cover at least $6.8 billion of PREPA’S overall debt burden.

This new deal has some additional bells and whistles. Among them is an understanding that investors will receive no principal or interest payments for five years and that the debt will be paid in full over the 25 years after that — in essence dragging things out until the year 2047.

Because Puerto Rico’s new debt oversight agency, the Puerto Rico Fiscal Agency and Financial Advisory Authority (FAFAA), isn’t behaving as transparently as it should, my organization, the Institute for Energy Economics and Financial Analysis, has made some independent calculations of the impact of the new plan.

Here are five reasons the deal is a rip-off for Puerto Rico:

1. It requires PREPA ratepayers to continue to live with an onerous debt load they cannot afford. Roselló’s own budget plan asserts that Puerto Ricans can shoulder only 20 percent or so of Puerto Rico’s existing public debt, yet the PREPA workout allows for a full 90 percent of that portion of the debt to stand.
2. It means every dollar of Puerto Rico’s projected economic growth between now and 2047 will be swallowed by PREPA debt service. We estimate that the deal will cost PREPA ratepayers approximately $17.7 billion through 2047, including $6.8 billion in principal payments for past borrowings and an estimated $10.9 billion in interest. We see a 0.5 percent annual increase in Puerto Rico’s GDP through 2047, which translates into a total GDP expansion of $16 billion, or $1.7 billion less than what this debt restricting will cost. Puerto Rico’s economic growth for an entire generation, then, will go largely to off-island financiers rather than into the Puerto Rican economy — and that’s even before one considers the crippling effect of the rest of the commonwealth total $60 billion debt!
3. It is not likely to reduce electric rates, even though that’s what the governor and others have promised. Indeed, we see marginal short-term rate improvements at best and higher rates down the road, a trend that will sustain Puerto Rico’s dubious distinction of being home to the second-highest electricity rates in America (second only to Hawaii). 
4. It offers no clear pathway for PREPA to reenter the capital markets. The plan hinges in part on the assumption that PREPA will issue unrated bonds and use the proceeds simply to refinance old debt and that it will be effectively be shut out of crucial bond markets that service public debt everywhere else in the U.S. 
5. It leaves no room in PREPA’s budget for a transition to the sort of modern renewable energy economy that is taking root locally, regionally and nationally around the world. Instead it leaves Puerto Rico addicted to an electricity-generation system supplied completely by imported fossil fuels and one that ignores the fact the island is blessed with abundant sunshine.

Puerto Rico’s leaders will be wasting an opportunity for the PREPA debt crisis if they go forward with the plan that is on the table, and if they succeed they will only further hobble an already battered economy.

There is still time and space to choose a way forward that serves the interests of Puerto Ricans over those of Wall Street. The PROMESA board can still salvage this bad deal. So can Gov. Roselló. The Puerto Rico commission can block it outright. And it’s too soon to rule out the influence of the Legislative Assembly of Puerto Rico, whose members may very well be reluctant to let this ruinous scheme proceed.

Tom Sanzillo is director of finance for the Institute for Energy Economics and Financial Analysis. [This op-ed first appeared in The Hill].

RELATED POSTS:

IEEFA Letter to Congress: The PREPA Restructuring Plan Before Congress Is Not Realistic and Does Not Hold All Players Accountable

IEEFA Puerto Rico: How to Play Hardball With Bondholders

IEEFA Puerto Rico: Time for an Electricity Inspector General