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Puerto Rico grid privatization flaws highlighted in first two months of operation

August 01, 2021
Cathy Kunkel and Tom Sanzillo
Document

Key Findings

The privatization of Puerto Rico’s electrical system, announced in January 2018, was former Gov. Ricardo Roselló’s flagship initiative to transform the system after the devastation of Hurricane Maria. The deterioration in service quality experienced by Puerto Rico is a direct result of problems with the LUMA contract.

LUMA lacks experienced and trained workers, several thousand ex-PREPA employees have been transferred to other positions within the government of Puerto Rico under Law 120- 2018. Based on recent PREPA labor budgets, these transfers represent an additional cost to the bankrupt commonwealth government of approximately $230 million annually.

In addition to the labor and oversight issues that directly affect the quality of service, IEEFA has noted that the contract contains no financial incentives or penalties for LUMA Energy to ensure Puerto Rico’s energy goals are met.

Executive Summary

IEEFA reviewed the first two months of the implementation of Puerto Rico’s contract with LUMA Energy, the private operator hired to manage the island’s electric transmission and distribution system. The privatization of the grid, first announced in 2018 by former Gov. Ricardo Rosselló, is a key element of the Financial Oversight and Management Board (FOMB) plan to transform the island’s electrical system. In this report, IEEFA finds that since the June 1 takeover:

  • Puerto Ricans have experienced significant problems with the implementation of the contract, including longer service restoration times, voltage fluctuations and poor customer service. High-level government officials have acknowledged that service has worsened under LUMA, which already has been paid almost $180 million.
  • LUMA’s problems stem from its shortage of experienced employees. It has hired fewer than 30% of the former Puerto Rico Electric Power Authority (PREPA) workers. LUMA has been trying to operate the system with about 60% of the number of PREPA employees who did the same work.
  • LUMA has refused to provide information requested by the Puerto Rico Legislature, and no oversight documents related to LUMA’s performance in the last two months have been made public.
  • Implementation problems can be directly traced to flaws in the contract, including its treatment of PREPA’s workforce and its weak oversight provisions.

LUMA was selected for this contract by an opaque procurement process that raised red flags about the due diligence conducted by Puerto Rican officials in charge of the contracting process.

The FOMB was charged with improving the effectiveness of government contracting and restoring public faith in the contracting process. However, the board has failed to demand greater transparency and stronger oversight of contracting processes. In this case, the board has aggressively defended a privatization contract that so far has resulted in worse service for the people of Puerto Rico.

Press release: Puerto Rico update: CAMBIO and IEEFA gain unprecedented access to PREPA’s documents and electrical system data

Please view full report PDF for references and sources.

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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