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IEEFA Puerto Rico: PREPA privatization plan overlooks unionized workers as best asset

February 25, 2019
Tom Sanzillo and Cathy Kunkel

Puerto Rico’s Senate and House of Representatives are finalizing an energy policy bill that amends the existing privatization plan for the Puerto Rico Electric Power Authority (PREPA). One of the remaining issues is whether to require future private utility owners to honor existing PREPA collective bargaining agreements with labor unions. The legislature should protect these agreements.

According to PREPA’s Certified Financial Plan in FY 2020, labor expenses are projected to be $281 million (8% of total expenses). These expenses cover salaries, benefits and pensions. Although this item is the smallest part of PREPA’s budget, it has the greatest consequence for Puerto Rico’s residents. PREPA’s workforce supports approximately 6,000 households, and the utility is a major source of jobs on the island. Fuel, subsidies, contracts and maintenance all cost more than labor. If some level of legacy debt payment were to be included, the percentage of dollars required for employees would drop even further.

Labor costs are not the problem.

Labor expenses are not and never have been PREPA’s main problem. About half of PREPA’s $3.4 billion in annual expenses goes off island to pay for oil, gas and coal. Historically, a significant amount of ratepayer dollars went also to investors, most of whom do not live in Puerto Rico. PREPA’s intention is to save $500 million in fuel costs by using natural gas and renewable energy. The agency must also lower its annual debt payments by hundreds of millions of dollars if it is to survive financially.

PREPA’s fiscal plan contains a number of statements that suggest that workforce rules, medical benefits and pension costs are at the root of PREPA’s financial problems. However, there are currently no publicly released studies or analyses that offer evidence for this problem or specific solutions. Making unsubstantiated complaints with unspecified solutions does not balance budgets. It does, however, cause division and frustration at a time when stakeholders must pull together.

INDEED, THE FISCAL PLAN POINTS TO A DIFFERENT LABOR PROBLEM: THE DIFFICULTY OF ATTRACTING AND RETAINING SKILLED LABOR. News articles have highlighted the exodus of skilled electrical workers from the island for better-paying jobs on the mainland. Workforce shortages add to the utility’s risk and require the hiring of high-priced, short-term consultants who have historically overcharged and underperformed.

The labor problem is not labor costs but the political mismanagement of PREPA. A Financial Oversight Board study revealed that there are more than 200 political employees on the Authority’s payrolls. The constant turnover of management to serve political ends has created chaos and inefficiency. The Puerto Rico Energy Commission has also found widespread mismanagement within PREPA.

The claim that new private companies coming into Puerto Rico to manage PREPA will not accept union contracts is wrong. PSEG, a qualified bidder for PREPA’s transmission and distribution system, currently holds a large operations contract with the Long Island Power Authority (LIPA) which is being held up as a model for Puerto Rico’s privatization program.

Collective bargaining agreements are, in fact, part of longstanding privatized operations at LIPA. PSEG took over LIPA operations in 2013 from National Grid. Both companies honored pre-existing collective bargaining agreements as contractual obligations. PSEG is required to honor the union and its wage, benefits and salary agreements. The International Brotherhood of Electrical Workers is a named organization in the operating agreement and was acknowledged in most public reporting of the contract. PSEG has 12,000 employees across the company’s entire operations, 8,000 of whom are union workers covered by collective bargaining agreements, a fact the company proudly displays in its investor presentations.

LIPA’s bond rating is A+ and PSEG’s is BBB. Both of them are investment-grade utilities and have been thus rated for decades. Both companies barely mention labor risks as part of their formal SEC filings. HONORING THE LABOR AGREEMENT IS SEEN AS A POSITIVE PART OF THEIR PRIVATIZATION DEAL.

The wages paid to PREPA workers are part of Puerto Rico’s remaining middle class. The dollars spent in the local economy are precious to the rebuilding effort and essential if local businesses are to survive. Political leaders who want to abandon the principle of a unionized workforce at PREPA harm Puerto Rico’s economic recovery. They continue the misguided policies of the past which took money made in Puerto Rico and shipped it out to off-island economic interests.

Labor is an economic asset with a very human face. After Hurricane Maria, PREPA’s management could not keep the lights on. They made one misguided, life-threatening decision after another. The governor was nowhere to be found. The equipment did not work and management was paralyzed, but the unionized employees at PREPA showed up every day to do their jobs and to rebuild Puerto Rico.

The way out of Puerto Rico’s fiscal and economic problems is for all stakeholders to work together to become part of the solution. All sectors–business, policy, community, labor, academic and finance–need to pitch in. As long as political leaders continue to divide opinion in order to achieve short-term political gains, they will continue to sabotage Puerto Rico’s recovery.

Spanish language version: El proceso de privatización del sistema eléctrico de Puerto Rico pasa por alto a los trabajadores sindicalizados como el mejor activo de la compañía

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IEEFA report: Privatizing the Puerto Rico Electric Power Authority is not the answer

IEEFA Puerto Rico: PREPA privatization means crushingly high electric rates

IEEFA Puerto Rico: New natural gas deal fits same old pattern for choosing contractors



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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Cathy Kunkel

Cathy Kunkel is an Energy Consultant at IEEFA.

Cathy also served as an IEEFA Energy Finance Analyst for 7 years, researching 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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