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IEEFA op-ed: Latest Puerto Rico utility privatization plan is as flawed as the original

June 19, 2018
Cathy Kunkel and Tom Sanzillo

In its version of a bill to privatize the Puerto Rico Electric Power Authority, the Puerto Rico legislature has improved some on Governor Ricardo Rosselló’s original proposal, but lawmakers are ultimately failing the Puerto Rican people every bit as badly as Rosselló has.

We’ve criticized the governor’s original privatization proposal for essentially aiming to set up a process that would enable the implementation of politically driven contracts devoid of regulatory oversight.

The amended legislation contains some improvements, but—crucially—it does not say how privatization would solve the two fundamental problems of Puerto Rico’s electrical system: its over-reliance on imported fossil fuels and its crippling debt.

Key improvements in the revised privatization bill:

  • A somewhat greater role for independent regulatory oversight. The independent Puerto Rico Energy Commission would have the authority to accept or reject proposed privatization contracts, although it would still have no authority to amend contracts, and its enforcement role would be subordinate to the Public-Private Partnership Authority, an existing government agency charged with managing the privatization transactions.
  • A requirement that the Puerto Rico legislature approve any sale of PREPA power plants to third parties.
  • A requirement that privatization transactions be consistent with a forthcoming energy public policy and regulatory framework unless a transaction is specifically exempted by the legislature, which has given itself a deadline of 180 days after the passage of the privatization bill to develop this framework.
  • Prohibition on a single company owning the entire generation system.
  • Requirement of an RFP process for generation asset sales.

Unfortunately, the bill retains many flaws from the governor’s original proposal:

  • It lacks any provision for the maintenance of collective bargaining agreements under private contractors, and labor organizations are excluded from oversight and partnership committees. In combination with the recent legislative decision to remove employee protections against dismissal without just cause, the bill has no protection against termination of workers transferred to private entities. These deficiencies undermine some improvements made to the bill, including a requirement that PREPA employees transferred to other government positions retain collective bargaining rights, pensions and benefits; and that private contractors establish occupational classifications, seniority, salaries and benefits equivalent to what employees had under PREPA.
  • It leaves negotiation and enforcement of contracts under the direction of the Public-Private Partnership Authority, an entity effectively controlled by the governor, and it includes no indication that these contracts will prioritize renewable energy, transitioning off of imported oil, enhancing grid resiliency or integrating distributed generation and microgrids.
  • It restructures the Puerto Rico Energy Commission, making it a five-member board whose members must meet certain professional qualifications and are to be selected from a list submitted to the governor. This follows the directives of the federal Financial Oversight and Management Board, and while this structure is reasonable in theory, in practice it gives Rosselló the power to appoint the majority of the commission during the period of the privatization transactions, even though the governor has made clear his hostility to the current commission and to renewable energy.
  • It allows privatization contracts to be exempt from compliance with the integrated resource plan (IRP) at the recommendation of the partnership committee (controlled by PREPA and the Public-Private Partnership Authority) and with the advice of the Puerto Rico Energy Commission. Given that Rosselló would be able to appoint the majority of the commission, it seems likely that the IRP—and any true commitment to sound energy planning—will fall by the wayside.
  • It omits any competitive bidding requirement for the leasing of transmission and distribution-related functions and lacks any requirement that the contract process include a determination by the contracting agency that the vendors chosen meet certain standards: that they do not owe taxes to Puerto Rico, that they have a clean track record with regard to past performance in Puerto Rico, and that they disclose fines and penalties from other jurisdictions and conflicts of interest.

Authors of the legislature’s privatization bill, to their credit, appear to recognize that privatization is a means to an end, not an end in itself. But while their bill requires that privatization transactions comply with a new public energy policy, which is mandated but not yet written, it is nevertheless backwards—and risky—to authorize privatization without good policy in place.

In their intent to hasten private investment in Puerto Rico, the governor and the legislature now are creating policy that fails to spell out what role the public sector will play in the financing of the these transactions; where future ownership of electricity assets will lie; how development and management of those assets will proceed; whether labor-force decisions will be in the best interest of Puerto Ricans.

We fail to see how the proposed privatization of PREPA would result in a more affordable, resilient, or financially sustainable electrical system. The privatization plan that the legislature has produced has no clear policy vision, lacks a commitment to energy planning, and creates yet more opportunity for politics to interfere in the negotiation and enforcement of contracts.

Cathy Kunkel is an IEEFA energy analyst. Tom Sanzillo is director of finance. This commentary originally appeared this morning in The Hill.


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Cathy Kunkel

Former Energy Finance Analyst Cathy Kunkel has written reports and given expert testimony on the finances of Appalachian natural gas pipelines and drilling; electric utility mergers, rates and resource planning; energy efficiency; and Puerto Rico’s electrical system. She has degrees in physics from Princeton and Cambridge.

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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. He also examines such areas as community and shareholder activism, institutional investment, public subsidies and Puerto Rico’s energy economics.

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