PREPA privatization will hurt consumers and slow economic recovery

Many promises have been made regarding the benefits of privatizing the Puerto Rico Electric Power Authority (PREPA). Despite these promises, there has been no public assessment of how much privatization will cost Puerto Rico’s people. This report asks and answers the question: How much will electricity prices change under a newly privatized system?

The privatization plan will impose an unnecessary burden at an unreasonable cost. If implemented the current plans to privatize Puerto Rico’s electricity system will result in 2024 electricity prices for consumers of 27 cents/kWh. That is 18% higher than 2018 levels and 35% higher than the 20 cents/kWh goal established by PREPA’s financial plan. The system would risk future price increases tied largely to volatility in the natural gas markets. The result will be a step backwards for affordable electricity, an economically uncompetitive system and a lost opportunity to maximize least cost renewable energy.

During the last several years, as debate has continued over PREPA and its future, key stakeholders have made several critical points regarding affordable electricity:

• PREPA and the Financial Oversight and Management Board (FOMB) have set a long-term goal of electricity at 20 cents per kWh.
• Business groups have pressed for electricity rates at 16 cents/kWh in order to make Puerto Rico economically competitive.
• The biggest costs to the system are fuel and debt service. These must be substantially reduced to achieve affordability objectives.
• Under current conditions, electricity rates are likely to rise to nearly 30 cents per kWh, according to the PREPA Fiscal Plan certified by the FOMB, if legacy debt is paid in full.
• PREPA has failed to prioritize renewable energy and energy efficiency investments that can help bring down costs. This is the finding of the Puerto Rico Energy Bureau, the FOMB, and business and labor organizations. The Puerto Rico Senate recently passed a law calling for 100% renewable energy by 2050, but there is no plan for PREPA to meet that goal.

If implemented, the existing and ever-changing framework for privatization of the Puerto Rico Electric Power Authority would achieve none of the affordability objectives articulated by government entities and stakeholders. It would instead result in a system that is more expensive, less accountable and fraught with uncertainty for any investor. As designed, the privatization projects are likely to receive approval outside of Puerto Rico’s formal Integrated Resource Plan (IRP), a practice that only further underscores the lack of planning and controls and the continued reliance on political processes to award large government contracts with significant health and safety implications for the public.

IEEFA’s modeling of a future system uses the following conservative assumptions, which are based largely on the statements of Puerto Rico’s public officials and the evolving laws and regulations regarding privatization.

• By 2024, generation will consist of 67% natural gas, 13% coal and 20% renewable energy.
• The economy of Puerto Rico will continue to show negative or flat growth and electricity demand will decline due to depressed economic activity and rising use of distributed renewable generation among businesses and households.
• Natural gas prices will not rise beyond $5/MMBTU (in real dollars) through 2050.
• The cost of capital to be charged by private developers to Puerto Rico will be 11% for debt and 17% for equity contributions. Puerto Rico’s emergence from bankruptcy will constitute a high risk investment environment for the foreseeable future.
• The pending restructuring agreement for PREPA’s legacy debt, which calls for substantial repayment of bond principal at an initial cost of 2.6 cents/kWh, will be adopted.
• PREPA and Puerto Rico’s current procurement processes as outlined in the statutes for privatization do not require competitive bidding. The system as designed includes no reforms from past abuses and preserves the Governor’s prerogative to award contracts without adequate oversight. Therefore, we assume a 10% “corruption tax” based on PREPA’s documented history of mismanagement of the annual $1-2 billion fuel procurement budget, the Whitefish contract, excessive political hiring, misuse of proceeds from prior bond issuances, weak regulatory oversight, failure to produce mandated audits on a timely basis and the lack of controls over financial, legal and accounting advisory costs.

There are two significant risks that if realized would cause substantial damage to PREPA and Puerto Rico more generally.

1. The failure to adopt a modern electricity system that is reliable, resilient, affordable and both financially and environmentally sustainable will undermine Puerto Rico’s economic growth plans. The energy market worldwide is relying increasingly on technological advantages provided by a growing renewable energy industry. Puerto Rico’s ideal geographic positioning for solar makes it imperative that these energy technologies achieve a high degree of market penetration.
2. The current privatization arrangement runs a very high risk of triggering another round of defaults. Puerto Rico’s economy cannot sustain paying for its legacy debt and the capital costs of a new system. Another round of defaults will cause investment to falter still further and require an ongoing struggle over the use of federal resources to meet the needs of the electricity system and Puerto Rico’s other social and economic needs.

In the final section of the report, we discuss alternative options for finance and governance under a public ownership model.

Press release: IEEFA report: Privatizing the Puerto Rico Electric Power Authority is not the answer

Please view full report PDF for references and sources.