IEEFA Update: The Puerto Rico Electricity ‘Privatization’ Discussion Is a Distraction

Should the Puerto Rico Electric Power Authority be privatized?

That question, being kicked around in the wake of the collapse of the island’s grid, is serving mostly as a distraction from two fundamental challenges that hobbled Puerto Rico before Hurricane Maria and that continue to cripple it in the aftermath of the storm:

(1) The island’s electricity system is based on an outdated, non-resilient, and overly centralized model that funnels more than $1 billion a year to off-island oil and gas interests at the expense of the Puerto Rican economy.

(2) The Puerto Rico Electric Power Authority (PREPA) is shackled by $9 billion in legacy debt that it simply cannot repay, especially considering how it is looking now at having to spend billions of dollars to rebuild.

What prompts the privatization discussion is the recognition that the PREPA business model has run its course. Public patience with PREPA was wearing thin even before Maria. The agency treated the island’s electricity system with reckless disregard, it clung to an unprofessional and misguided policy approach to PREPA’s energy future, it mismanaged its labor force, it behaved with financial imprudence, and it allowed politics to trump professionalism.

Privatization in and of itself would hardly be a panacea, however.

To begin with, no private entity will acquire a bankrupt utility without some plan in place for how that utility will emerge from bankruptcy and become a going concern. In the case of PREPA, the $9 billion legacy-debt question would have to be addressed first.

Further, no privatization would not be inherently more suited to modernizing Puerto Rico’s electrical system than public ownership. If the goal—as it should be—is to transform the utility into one with a more decentralized network that includes microgrids and customer-owned distributed solar resources, a traditional private utility business model in fact would likely stand in the way.

A typical private utility earns profits from investments in utility-owned infrastructure—a model that incentivizes utility ownership of large generation projects rather than ownership of a grid that can integrate large amounts of locally owned, distributed solar.

Private and public utilities alike are threatened by the loss of sales and the potential inability to recover their fixed costs as customers install solar. This is one reason why so many utilities have fought back in regulatory commissions across the U.S. to discourage solar. This challenge would be even more acute for a private utility attempting to operate in Puerto Rico, where a 23 percent decline in electricity sales over the next decade was seen as likely before Hurricane Maria struck, due to deteriorating economic conditions that were already in place.

THE QUESTION, THEN, IS NOT WHETHER TO PRIVATIZE or not to privatize, it is how to most sensibly go about finding a solution that is affordable and that helps the island’s struggling economy grow. Puerto Rico must strike the right balance between public and private incentives—and accountability. A well-planned new system will create reliable electricity, provide stable employment and a nurture a predictable economic climate.

As Puerto Rico and PREPA emerge from bankruptcy, private capital will invest in the island again. This reality is apparent already in the solar energy interests lining up now to take a chance on Puerto Rico’s future. Their success will require incentives and oversight and will not come about through pure privatization—a circumstance in which private investors bear all costs and risk. Indeed pure privatization of electricity doesn’t occur anywhere—where electricity privatization exists, it does so in partnership with government.

Granted, PREPA needs management reform and depoliticizing. The most responsible way to achieve both is through the appointment of a publicly accountable inspector general empowered with overseeing change and monitoring compliance.

Nothing will be gotten right so long as the day-to-day operation of the agency is governed by short-term political gain, fee-driven debt deals and outside oil and gas interests.

Privatization is not how to frame the debate on Puerto Rico’s electricity future, and indeed is a red herring that draws attention from discussion of a serious solution.

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

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