IEEFA: Savings from Puerto Rico grid privatization off to a bad start

April 08, 2021

Cathy Kunkel

Puerto Rico’s key electrical system privatization initiative has been a longshot to save money for the people of Puerto Rico—and the odds are getting longer, according to an analysis of the 15-year contract with LUMA Energy and its proposed budgets for the next three years.

An Institute for Energy Economics and Financial Analysis (IEEFA) review of the contract between the Puerto Rico Electric Power Authority (PREPA) and LUMA Energy finds that the private company hired to replace most of the functions of the island’s utility has been given no savings targets or penalties for failing to achieve savings—only a small incentive for remaining within budget.

The contractor is not off to a good start. LUMA now expects to be 11% over its contractual operating budget of $135 million for the year-long transition period before it takes over as operator of the system on June 1. And the three-year budget that the company submitted to the Puerto Rico Energy Bureau isn’t looking great either, claiming only that unspecified “efficiencies” will help it meet its public promise to not raise rates.

By 2024, these “efficiencies” are projected to save $110 million. LUMA, however, provides no explanation of how the savings will be made, other than a vague reference to “loss reduction.” There is also very little consequence for LUMA if it does not achieve these savings.

In addition to its vague “efficiencies,” LUMA’s budget is unrealistic. It fails to account for the repayment of an $894 million loan from the Commonwealth of Puerto Rico to PREPA that the Financial Oversight and Management Board has stated will be needed to cover expenses for the first few months of the contract. Repaying this loan over the 15-year life of the loan will cost at least $60 million annually. Assuming LUMA goes over its budget, the penalty is fairly minimal—a reduction of its annual incentive payment by about $1 million.

The contract gives LUMA important responsibilities over generation planning and prioritizing new power generation projects—but again, there are no consequences to LUMA if Puerto Rico fails to meet its renewable energy targets. Electricity rates are going up again in Puerto Rico this month as oil prices continue to rise, serving as another reminder of the need to move away from fossil fuels if the island’s electrical system is going to achieve long-term fiscal stability.

The LUMA contract is also poised to create another major expense for the people of Puerto Rico. The contract does not provide for the automatic transfer of current electrical system workers into LUMA. It doesn’t recognize collective bargaining agreements and other worker benefits. As a result, LUMA had only received about 1,000 applications by early March from the 4,500 current employees of PREPA who work in transmission and distribution.

Under Puerto Rico law, PREPA employees who do not take a position with LUMA will be transferred to other government jobs. If PREPA’s workers are transferred within the government of Puerto Rico, it will cost approximately $200 million annually. Such an outlay would simply move the expense from PREPA’s budget to the commonwealth’s budget, instead of being counted as a savings.

Part of PREPA’s fiscal problems were created when it relied on budget estimates that were not credible. Yet its core electrical system transformation initiative fails to take seriously the need to achieve budget balance and long-term affordable, stable rates.

Cathy Kunkel ([email protected]) is an IEEFA energy finance analyst.

Spanish translation: El ahorro de la privatización de la red de Puerto Rico tiene un mal comienzo

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