IEEFA Op-Ed: Keeping Puerto Rico’s Electric Utility on a Short Leash Until It Proves Accountability

March 07, 2018

Tom Sanzillo and Cathy Kunkel

Power outages that swept the capital of San Juan last week serve as a sobering reminder of what Puerto Rico is up against as it struggles to rebuild its battered electricity grid.

Almost 1 million people live in the area affected by the blackout, which is just the latest symptom of an electricity system in crisis and a public utility that continues to be hobbled by fiscal challenges and policy problems.

Barely two weeks ago, a bankruptcy judge approved a $300 million loan to keep the Puerto Rico Electric Power Authority (PREPA) operational through March. U.S. District Court Judge Laura Taylor Swain allowed the loan to go forward because it is needed for day-to-day costs that include fuel, labor, insurance and maintenance.

PREPA’s larger looming expenses are related to the emergency rebuild the utility is undertaking after the devastation of Hurricane Maria. Those costs are covered by FEMA.

The short-term loan, which Swain approved after denying a $1 billion request because it lacked adequate documentation, exposes some core problems. PREPA remains unaudited. Its cash flow records are confusing and incomplete. And the loan comes from Puerto Rico’s government, which is bankrupt and obviously in no position to be lending out hundreds of millions of dollars every few months. Such central-government lending only perpetuates out-of-control practices that put Puerto Rico beyond the brink to begin with.

SWAIN HAS KEPT PREPA ON A SHORT LEASH, WHICH IS NOT A BAD IDEA, because it means PREPA must come back for additional resources sooner rather than later, which means in turn that it must show some accountability — a standard it is perfectly capable of meeting.

Granted, PREPA will require support from external sources for quite some time to come — in both operational and capital funding. The utility is essentially out of money because it cannot produce sufficient billable electricity to cover its expenses. This situation is not going to improve anytime soon. Further, PREPA’s cash-flow projections show revenue peaking at $40 million per week even as its budget requires $57 million per week — and that’s before any debt service is paid.

There is nothing here for PREPA’s bondholders. Even when the lights are back on throughout Puerto Rico, the electrical system will be antiquated and unreliable, in dire need of investment. Bondholders who continue to assert their legal right to be made whole nevertheless are now a menace to a solution.

PREPA’s submissions on the loan request prove that the utility can file a coherent financial plan, which is an encouraging development. Further, the utility’s manager need not figure all this out on their own. Both PREPA and its federal oversight board can avail themselves of useful work performed by the regulatory Puerto Rico Energy Commission.

Congress should take note a longer-term revenue stream is needed to restore full power and to plan logically beyond initial recovery.

The $300 million gets PREPA to next month. What gets them to the next step remains to be seen.

Tom Sanzillo is IEEFA’s director of finance. Cathy Kunkel is an IEEFA energy finance analyst. This column first appeared, yesterday, in The Hill.

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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.

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