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IEEFA Puerto Rico: Time for an Electricity Inspector General

January 06, 2017
Cathy Kunkel and Tom Sanzillo

The rate case currently before the Puerto Rico Energy Commission is like none we have ever seen.

As we outlined in a commentary a couple of weeks ago, the Puerto Rico Electric Power Authority seems to have no qualms about starving its electricity grid to pay its bondholders.

An honest rate case requires a certain level of trust between a utility and its regulator. The regulator must know that all budgets and financial information pertinent to the rate request are accurate, for instance, and that such information will be presented by the utility without stonewalling. It must be able to trust that the utility’s books and records offer a complete picture of the utility’s finances.

These elements are not present in the current rate case.

Commission advisors Jeremy L. Fisher and Ariel I Horowitz note that “PREPA’s provision of documentation to support its capital budget demonstrated gross managerial incompetency” and that “PREPA made so little documentation of the process and values underlying the [operations] budget available to Commission advisors that we have no choice but to consider the budget and the allocation thereof to be, in effect, unsupported.”

That’s not even the half of it. At recent public hearings, utility witnesses admitted to financial transactions among PREPA subsidiaries that are not on the utility’s books.

Trust has been further undermined with the sudden resignation of an upper-level manager who was the only PREPA employee to submit testimony in support of the agency’s savings initiatives.

The case is marred additionally by conflicts between PREPA employees responsible for fixing PREPA’s failing infrastructure and the politically-appointed managers and consultants responsible for negotiating PREPA’s bond deal. As we have noted previously, the latter are not using the full scope of tools at their disposal in negotiations with bondholders.

Moreover, it is not clear if a rate increase would go toward infrastructure improvements or would be siphoned off for PREPA’s bloated budget for administrative expenses and consultants. Commission advisors note that PREPA’s “administrative and general” spending increased from $80 million in FY 2010 to $134 million in FY 2016 (a 67 percent increase) and they have “absolutely no further information about what, exactly, PREPA spent these funds on.” And, as in a previous PREPA case before the commission (the Transition Charge case), the same consultants who are testifying to the reasonableness of PREPA’s cost structure are those whose fees are embedded in rates and who were chosen without competitive bidding.

What, then, can the Energy Commission do?

It is statutorily mandated to issue an order by Jan. 11, but there’s no way commissioners can either get a handle on PREPA’s true costs or address the serious managerial problems by then. The commission must move aggressively in this direction anyway, as it has already started to do. Last month it announced a comprehensive management audit of PREPA, which is a good start. We recommend that the commission consider naming an independent private-sector inspector general, who could be empowered with the combined support of the commission and the newly established PROMESA (Puerto Rico Oversight, Management, and Economic Stability Act) board.

Such an appointment could serve to establish a kind of management receiver to address personnel, operations and expenditure priorities along with day-to-day budgeting, while working with a team of forensic accountants to put in place controls that PREPA’s partners and that the market can believe in.

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

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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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