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Fiscal dysfunction continues to be the order of the day as Puerto Rico’s now partially-privatized electrical system moves toward the June 30 end of its fiscal year. 

On May 25, the federal Financial Oversight and Management Board (FOMB) issued a notice of violation to LUMA, the private operator that last year took over Puerto Rico’s transmission and distribution systems, in response to LUMA’s first submission of a fiscal plan for the electrical system. The 13-page notice chronicled a long list of deficiencies that suggest little progress has been made on fundamental issues since the first budget and fiscal plans were submitted by the Puerto Rico Electric Power Authority (PREPA) in 2017 and 2018. 

Neither the LUMA nor FOMB websites provide the proposed fiscal plan that is the subject of the May 25 FOMB letter and subsequent follow-up letters on June 7. The public has only seen the criticisms. 

The oversight board points out that LUMA’s fiscal plan: 

  • Lacks a specific timetable for the reorganization of PREPA; 
  • Fails to contain a competently developed scenario analysis for PREPA’s legacy debt; 
  • Provides an uncoordinated schedule of capital projects; 
  • Fails to provide a clear plan for fuel procurement and savings; 
  • Projects multi-year deficits when LUMA is required to submit a balanced budget;  
  • Lacks basic budget data; 
  • Lacks vegetation management metrics; 
  • Inadequately addresses historical problems with maintenance spending; 
  • Underfunds the pension system; and
  • Does not provide a proper resource plan and industry trend analysis. 

None of these items are new—most have plagued the utility for many years under PREPA’s management. IEEFA’s review of PREPA’s FY 2018 fiscal plan identified many of the same problems in the FOMB letter. The fiscal plan apparently does not contain any provisions to pay back legacy debt. Since the FOMB’s 2017 creation, plans to pay back the debt have been based on substantial rate increases. Two proposed debt plans have been rejected because they asked for unrealistic rate increases. 

It would be fair to say that LUMA’s fiscal plan, which is still not publicly available, appears to offer no improvement to PREPA’s fiscal condition, and in most instances is worse (although the company has had almost two years to develop a competent plan). Although the responsibilities of LUMA and PREPA are set out in its privatization agreement, there is constant disagreement between the parties over rates, budgets and spending priorities.

The fiscal plan lacks credibility

In a similar vein, the Puerto Rico Energy Bureau (PREB) scheduled a June 10 virtual technical conference for the joint PREPA and LUMA electrical system budget starting the new fiscal year on July 1. The conference was postponed since PREPA and LUMA could not present a unified budget. Each side seemed to accuse the other of shirking their responsibilities in the budget process. The meeting was adjourned for a week, with each side admonished by the chairman to work together to present a budget. 

The exchange at the hearing had LUMA asking PREPA to file for rate increase since it the authority apparently wanted to spend more money on maintenance of PREPA’s highly unreliable power plants than LUMA found necessary. The PREB chairman pointed out that any rate increase would need to be filed by LUMA, according to the privatization contract. 

The fiscal plan lacks credibility, according to the FOMB. LUMA has submitted a budget to the PREB, but PREPA does not agree with it. To the degree we know anything, it appears that there is insufficient revenue to cover the budget. Any new debt agreement negotiated by the FOMB that places further pressure on rates is likely to exacerbate the budgetary imbalance and increase the fiscal dysfunction of the electrical system. 

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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