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IEEFA Puerto Rico: Electric Company, Off the Mark on Its In-House Outlook, Is Spending Twice as Much on Fuel Than Projected

PREPA’s Low-Balling of Oil Prices Will Drive Power Rates Higher; FY 2017 Total May Exceed Estimate by $600 Million; Agency Forecast Ignored Professional Consensus

The Puerto Rico Electric Power Authority is seriously underestimating the price of oil in the fiscal-year budget it put into effect on July 1.

The result is likely to be higher-than-predicted and increasingly unaffordable power rates for residents and businesses of Puerto Rico, an island commonwealth that gets most of its electricity from oil-fired generators.

Fuel costs make up nearly 30 percent of PREPA’s operating budget.

The agency puts its fuel budget for Fiscal Year 2017 (July 1, 2016-June 30, 2017) at $655 million, a little less than half the $1.2 billion it spent in the preceding fiscal year. 

PREPA set its fuel budget for the entire 2017 fiscal year as if the price of oil would be $28 per barrel, even though that price at the start of the fiscal year was closer to $50. After hitting a decade low of $28 in January and February of this calendar year, oil prices have risen and stayed in the $43-$54 range since the start of the fiscal year in July. 

In July and August,  the only months for which information is publically available for this PREPA fiscal year, fuel costs came in 105 percent over budget: PREPA budgeted $109 million for fuel for those months but spent $223 million.

If oil prices stay relatively flat for the remainder of the fiscal year—as they will by most accounts—PREPA will spend $1.2 to $1.4 billion for fuel in FY2017, about twice its budgeted amount. This will add approximately 3.8 cents per kilowatt hour more to the bills of PREPA customers than is presented in a proposed rate increase, which is currently projected to raise rates to 20.1 cents per kilowatt hour. These fuel-cost increases will be passed on to PREPA customers in quarterly adjustments to the rate.

PREPA’s low-ball forecast for fuel prices this fiscal year stands  considerably outside the consensus of professional forecasts:

In January of this year,  the U.S. Energy Information Administration projected $40-50 oil prices for 2016-2017.  

Also in January, PREPA’s own principal financial consultant on its debt reorganization, AlixPartners, published an outlook for the same period that put oil prices in the $45-$65 range.

Forecasts by the World Bank and International Monetary Fund have oil prices at $50-$55 for 2017.

PREPA, whose management is ostensibly reforming and modernizing the agency, is falling short on many fronts. On this particular one, it appears to be devoting far more effort to protecting its bondholders than to ensuring the accuracy of its budgets.

Ratepayers—households and businesses alike—will suffer for it.

Cathy Kunkel is an IEEFA energy analyst. Tom Sanzillo is IEEFA’s director of finance.


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IEEFA Puerto Rico: Debt Restructuring Deal for Commonwealth’s Electric Company Only Makes Matters Worse
IEEFA Filing: Oct. 25, 2016, Testimony to the Puerto Rico Energy Commission


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