PREPA Gives Green Light to Rate Increase

The board of directors of the Puerto Rico Electric Power Authority has given the green light to possible rate increases.

PREPA is in negotiations with its creditors concerning its roughly $8.96 billion in debt. It has reached agreements with two of its three main creditor groups. Any monetary default on its bonds would be the greatest bond default in United States municipal history.

On Tuesday night the board met with PREPA chief restructuring officer Lisa Donahue. According to accounts first reported in El Vocero and El Nuevo Día news websites, the board authorized her to offer several changes to the authority in her negotiations with the authority’s creditors.

Among the changes the board authorized Tuesday night could be increases in the electricity charge and a change in the composition of the PREPA board and how the board is selected, according to press accounts. In particular, bondholders could be given representation on the board.

“The recovery plan that PREPA proposed to creditors on June 1, 2014, included a number of important measures to transform PREPA into a modern day utility,” PREPA Governing Board Chairman Harry Rodriquez said in a statement following the reports. “Those measures included a competitive bidding process to solicit bids from third parties to make investments in PREPA's outdated infrastructure and to engage a search firm to assist the governor in identifying independent, non-political board members with relevant experience, conditioned on the creditors' agreement to make certain concessions.

“In addition, the June 1 proposal identified the need to close the 7-8 cent rate gap – that is, the difference between current costs and the base rate – through equitable burden sharing among all stakeholders, including creditors. PREPA is still negotiating the terms of a comprehensive recovery plan that may include these concepts.”

PREPA’s forbearing bondholders and the holders of the lines of credit are in forbearance to the authority until the end of Oct. 15. Granting Donahue the right to offer these changes to PREPA may improve her ability to reach agreements with these two groups as well as the bond insurers, which are not in formal forbearance but are negotiating with PREPA.

While Puerto Rico Gov. Alejandro García Padilla in recent months has indicated his preference against electric rate increases, in the past others connected to PREPA have indicated their openness to them. In November 2014, Natalia Guzman, advisor to the Government Development Bank of Puerto Rico president, said in an investor webcast, "The resolution for PREPA will require contributions from all stakeholders."

In early September, Donahue said in a video interview with the El Vocero news web site said that in comparing PREPA's revenue needs with its electricity rates there was a hypothetical 8 cent gap per kilowatt hour in consumer rates to be filled. Referring to then just-achieved deal with forbearing bondholders, "What this deal serves to do is mitigate that 8 cents. So we're starting to chip away at it," she said. "So as all the deals are done then we'll have a vision on what the shared burden is and the amount that we will go to the [Puerto Rico] Energy Commission to talk about what we believe the rate increase needs to be."

Any negotiated rate increase would have to be brought to the Puerto Rico Energy Commission for its approval. In late September the commission rejected the request of one of PREPA’s bond insurers, National Public Finance Guarantee, for a rate increase. The commission said National didn’t provide enough information.

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