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Is Puerto Rico's energy future rigged?

June 01, 2020
Tom Sanzillo and Ingrid M. Vila-Biaggi
Document

Key Findings

PREPA’s non-compliance with its own RFP process guidelines—as well as NFE’s continued access to the authority’s consultants, officials and information—provided NFE an unfair advantage to the detriment of PREPA, other bidders and the public interest.

This report places the NFE contract against PREPA's historic pattern of mismanagement and lack of accountability.

The process of privatizing PREPA appears to be driven by private financial and energy interests, not the best interests of the people of Puerto Rico.

Executive Summary

This report raises serious legal and policy questions regarding the award of a contract by the Puerto Rico Electric Power Authority (PREPA) to New Fortress Energy (NFE) for the conversion to natural gas and fuel deliveries to San Juan power generation stations 5 and 6.

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Examining the New $1.5 Billion Fortress-PREPA Deal

The $1.5 Billion contract marks PREPA’s first major generation project since Hurricane Maria devastated the island in September 2017. The Institute for Energy Economics and Financial Analysis (IEEFA) and CAMBIO’s review of documents obtained through litigation with PREPA, PREPA’s bankruptcy filings and public documents provide the facts that compel an answer to the question: Did PREPA grant an unfair advantage to NFE in the award of this contract? The facts we have gathered are clear—there was an unfair advantage—but it will be up to oversight authorities with greater authority to more thoroughly render a final judgment.

  • PREPA and its financial advisor, Filsinger Energy Partners (FEP), met repeatedly with New Fortress Energy representatives in early 2018 to discuss the project prior to PREPA issuing a Request for Proposals. PREPA and its advisors received an unsolicited proposal from NFE in late 2017/early 2018, reviewed it, met with NFE, received a revised proposal and drafted the RFP in April 2018.
  • FEP representatives continued to meet with NFE during the drafting period of the RFP and to review matters related to NFE’s environmental assessment required to move the project forward. FEP took the lead role in preparing PREPA’s response to NFE’s formal environmental assessment.
  • During this period, PREPA and NFE entered into a confidentiality agreement that provided NFE with specialized knowledge of the project. In May 2018, PREPA staff learned of the plans to competitively bid the proposal. The head of PREPA’s Engineering and Technical Services Division expressed concerns about NFE’s advantaged position.
  • During the RFP process, PREPA didn’t tell prospective bidders that NFE held valuable leases on strategically important property. Similarly, PREPA did not inform other bidders of NFE’s long-standing communications with PREPA.
  • PREPA’s Evaluation Committee for the proposals included individuals from FEP who had been in regular contact with NFE representatives; who had reviewed NFE’s original unsolicited proposal; and who had assisted with preparing its environmental permitting documents.
  • PREPA used an outside counsel to negotiate the contract. That firm also represented entities of NFE’s parent company, Fortress Investment Group. It is unclear if any conflict of interest issues were reviewed by PREPA and its own counsel.

PREPA’s non-compliance with its own RFP process guidelines—as well as NFE’s continued access to the authority’s consultants, officials and information—provided NFE an unfair advantage to the detriment of PREPA, other bidders and the public interest.

The final contract, signed in March 2019, has experienced considerable delays in implementation. Its financing provisions raised objections from one of Puerto Rico’s Energy Bureau commissioners. The federal Financial Oversight and Management Board approved the project even though purported budget savings from the new investment had been substantially overstated by PREPA and NFE, and no provisions in the contract required NFE to meet actual savings targets despite PREPA’s dire budgetary straits.

This report places the NFE contract against PREPA’s historic pattern of mismanagement and lack of accountability. PREPA is currently engaged in a major “transformation” plan that will rely heavily on private contracting, and it was recently announced that NFE is on the short list for another lucrative PREPA contract. The NFE contract for the San Juan project appears to repeat many of the same offenses that has brought the agency and Puerto Rico to its current state of insolvency.

PREPA’s organizational structure requires a complete overhaul, including a new way to appoint executive directors who are free from political interference.

IEEFA and CAMBIO recommend three immediate steps:

  • Cancellation of the NFE contract and new procurement to include distributed rooftop solar and storage as a generation option. This is PREPA’s first major generation project. It cannot be allowed to repeat past patterns of mismanagement. PREPA’s contracting must also be realigned with its renewable energy and sustainability goals.
  • Immediate review by an official task force comprised of federal and state law enforcement and regulatory agencies such as U.S. Attorney’s Office, Puerto Rico Department of Justice, U.S. Securities and Exchange Commission, U.S. Bankruptcy Court and Puerto Rico Comptroller's Office. The task force should include independent and reputable Puerto Rico and US legal and criminal experts to ensure transparency and trust.
  • The creation of an Independent Private Sector Inspector General (IPSIG) for PREPA. The IPSIG can work with management to install effective, efficient management practices that root out waste, fraud and corruption. This is particularly critical as PREPA has announced imminent plans to move forward with billions of dollars of energy transformation initiatives.

Press release: IEEFA and partners renew call to write off Puerto Rico bond debt as part of restructuring plans to ensure low prices, resilient grid

Please view full report PDF for references and sources.

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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