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IEEFA Update: Status-Quo Politics Imperil Public Confidence in Puerto Rico Grid Rebuild

February 28, 2018
Cathy Kunkel and Tom Sanzillo

While the reform-minded Puerto Rico Energy Commission has survived its latest assault by Gov. Ricardo Rosselló, the governor still seems bent on the commission’s destruction.

Earlier this month, Rosselló sought to consolidate the energy commission with four other regulatory agencies and eliminate its independence by having all members serve strictly at his pleasure. Puerto Rico lawmakers rejected the scheme.

The governor has been waging war on the regulatory commission on a number of fronts, including through the island’s failing Puerto Rico Electric Power Authority, which submitted a fiscal plan to the federal Financial Oversight and Management Board arguing that the commission should just be gotten rid of (the oversight board was created by Congress in 2016 to supervise Puerto Rico in its search for a way out of its long-festering fiscal mess).

This all smacks of politics and—as we have cautioned before—any electricity system built on inside deals and favors in the end will not be in the best interest of Puerto Ricans.

Where regressive policies will very likely only perpetuate a political culture that has hobbled an island economy for too long.

We disagree especially with the Puerto Rican government’s notion that the commission is fundamentally unsuited to regulating privately owned entities. Indeed, the commission has already shown its ability to regulate contracts between private entities and PREPA, by ordering PREPA to police recent renewable energy contracts that gave excessive profits to developers. The commission also recently issued draft regulations to encourage more privately owned microgrids, a policy that would create more grid resiliency on an island that is in dire need of it (PREPA fought both orders).

The commission also has the power to exercise its rate-setting authority in ways that would incentivize energy conservation and efficiency and prudent fiscal practices. The commission has the authority to issue siting certificates and to regulate wheeling rates (which dictate how third parties sell power to each other and pay PREPA for the use of its transmission system). The commission’s enabling statute also gives it broad powers to regulate electric power service companies in addition to transactions related to the power grid and to electricity infrastructure in Puerto Rico.

Granted, some components of the commission’s governing statute may require modification but that can be done easily enough by tweaking existing law rather than wrecking the commission outright.

ON REGULATORY POLIC, PREPA ITSELF HAS WARNED that “ill-defined jurisdiction and authority will not create or support investor confidence.”

We don’t see how disbanding the commission, which has built up several years of deep independent understanding of the utility’s physical system and finances, will do much for investor or public confidence.

The governor’s push to eliminate the commission is part and parcel of his broad mismanagement of the utility. In the immediate wake of Hurricane Maria, Rosselló first foray into grid reconstruction resulted immediately in a contracting scandal (the full nature of the notorious reconstruction deal with the Montana-based Whitefish Energy isn’t fully known yet). Rosselló’s initial regulatory “reform” plan called for a toothless board to sign off on whatever the governor wanted. PREPA’s initial fiscal plan under Rosselló was so defective that it was rejected by the island’s federal oversight board. And while the governor now effectively runs PREPA, the lights are still off for many Puerto Ricans almost six months after Maria.

PREPA, and Rosselló, seem intent on establishing a regulatory system committed to approving certain ill-defined privatization transactions. Such a move would simply codify deals that may not meet professional standards and would only perpetuate a political culture that has hobbled the island for too long.

The last time PREPA had the Puerto Rico legislature pass a bill to support an inside deal it did not end well. The Revitalization Act of 2016 stripped the Commission of its authority to scrutinize the details of a PREPA debt securitization deal that would have resulted in an $8 billion surcharge on electric bills and would have siphoned off $100 million to consultants with no public benefit to show for it. That deal, thankfully, was rejected by the oversight board, which found that the Puerto Rican economy could not support such debt repayment.

The most effective way to restore investor confidence in Puerto Rico’s electricity system would be to allow the existing independent regulator—the Puerto Rico Electricity Commission—to do its job without political interference.

Cathy Kunkel is an IEEFA energy analysis. 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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