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IEEFA: Puerto Rico’s Governor cancels unaffordable electrical system debt restructuring agreement

March 11, 2022
Tom Sanzillo

After almost three years, the proposed debt restructuring agreement (RSA) for the Puerto Rico Electric Power Authority (PREPA) has been cancelled. Pedro Pierluisi, the governor of Puerto Rico, announced on Tuesday his government is withdrawing from the RSA which would have imposed an increase in electricity rates of 2.7 to 4.6 cents per kilowatt hour (kWh) for the next 47 years to pay off over $6 billion in PREPA’s outstanding legacy debt. The Financial Oversight and Management Board (FOMB) expressed support for the governor’s decision. It is a good decision.

In his announcement, Pierluisi expressed interest in negotiating a new debt deal. The governor stated that any new agreement should meet the following objectives: getting PREPA out of bankruptcy as quickly as possible, promoting “the transition to renewable energy sources and, in the short term, the increased use of natural gas,” protecting pensions, complying with Puerto Rico Law 17 which calls for 40% renewable energy by 2025, and respecting the role of the Puerto Rico Energy Bureau (FOMB) in overseeing implementation of Puerto Rico’s Integrated Resource Plan (which also calls for a rapid transition to renewable energy and no new investment in natural gas). 

The Governor missed an opportunity to underline that the ratepayers cannot pay the old debt

As a financial matter, the Governor missed an opportunity to underline that the ratepayers cannot and should not pay the old debt. This is the second bond proposal to get a thumbs down. There are alternatives for ensuring that bondholders are treated fairly without raising rates. Pierluisi needs to take a closer look at those alternatives. 

From an electricity standpoint, the governor’s plan to increase natural gas usage “in the short term” is illogical and impossible, given the infrastructure investments required. While PREPA is pursuing plans to convert existing units to natural gas, it has also acknowledged that converting the remaining units at the San Juan power plant to natural gas will take at least 5 years, and possibly as long as 10 years, to complete. 

MEANWHILE, COMPREHENSIVE GRID MODELINNG HAS DEMONSTRATED THAT Puerto Rico could achieve 75% renewable energy in fifteen years, without any new natural gas investment, through the widespread deployment of rooftop solar and storage. Designating some of the more than $14 billion in federal grid reconstruction funds towards this end would result in rates of approximately 15 cents per kWh. But PREPA and private grid operator LUMA Energy currently plan to use none of the federal funds for renewable energy or storage.

Currently, Puerto Rico’s electrical system is both unaffordable and extremely fragile

Currently, Puerto Rico’s electrical system is both unaffordable and extremely fragile. Years of deferred maintenance have resulted in distribution, transmission and generation assets that are in extremely poor condition; this is exacerbated further by LUMA’s short-sighted decision not to hire most of PREPA’s existing workforce. This situation has resulted in, by far, the least reliable electrical system the country has ever seen with widespread power outages encountered on a regular basis.

Puerto Ricans pay more than 25 cents/kWh for this system, largely because 80% of the electricity is generated from oil and natural gas (and most of the remainder from coal). These fossil fuel costs are going up, not down.

The Governor has made a wise decision to cancel the deal. While lots of promises have been made about converting Puerto Rico’s grid to renewable energy and lowering costs, up to now, nothing has actually been done to reach those goals. The only way to lower rates below 20 cents/kWh, the affordability threshold recognized by the FOMB, would be a large-scale investment in renewable energy. This would reduce the cost of fuel for PREPA, a critically important part of any plan to get out of and stay out of bankruptcy. This option is within reach but it won’t happen overnight. In the meantime, it is irresponsible and financially unsound to layer debt on top of the current dysfunctional system and expect that somehow it will magically get repaid.

 

Tom Sanzillo ([email protected]) is IEEFA’s director of financial analysis.

Spanish translation: Gobernador de Puerto Rico cancela acuerdo inasequible para la reestructuración de la deuda del sistema eléctrico

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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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