The Puerto Rico Energy Commission rejected National Public Finance Guarantee's petition for an electricity price increase, a setback for the bond insurer's efforts to cut its losses in the island's power utility debt restructuring.
National, the municipal bond unit of MBIA Inc., sought a 4.2 cent per kilowatt hour increase based on the Puerto Rico Electric Power Authority's bond indentures. The commission said it rejected the petition in a statement late Wednesday, citing a lack of supporting information.
PREPA has reached debt restructuring agreements with forbearing bondholders, including a 15% reduction in principal and delays in payments, and with entities holding its lines of credit. It hasn't yet reached agreements with its bond insurers.
"The rate denial by the commission puts the insurers at a disadvantage in their negotiations with PREPA," said Howard Cure, director of municipal research at Evercore. After the insurers broke from their forbearance their leverage was the threat of raising rates and imposing a receiver, he said. Now this threat seems less imminent.
"We are disappointed with the Energy Commission's decision," National said in an email. "Our petition sought to impose reasonable deadlines on a legally required rate review process and to institute a modest, temporary rate increase that would permit PREPA and the commission to comply with Puerto Rico law. We are reviewing our options, including seeking an appeal, to enforce our rights and to cause PREPA to comply with its legal and contractual obligations."
According to the commission, any appeals would be made to the commission itself.
National was seeking an increase to PREPA's base electrical rate, which has not changed since 1989.
PREPA's rates also include adjustments for fuel costs. Because of the decline in the price of oil, the overall price of PREPA's electricity fell to 18.6 cents per kilowatt hour in September, according to PREPA, from 28 cents in August 2014, according to National. By comparison, the average electrical rate in the United States as of 2013 was 9.8 cents per kilowatt hour.
National insures nearly $1.4 billion of PREPA's total debt of $8.96 billion as of Sept. 24, according to PREPA and the commission.
The Puerto Rico Energy Commission denied National's requests for a rate increase, to consolidate its petition with PREPA's own rate review, to order PREPA to respond to the petition, and to complete the rate review within four months.
"In its rate review process, the commission must thoroughly evaluate PREPA's entire financial and operational condition in order to be in a position to approve rates," the commission stated in a press release. "This must include detailed information related to PREPA's plant investment, income statements, financial statements, projections and forecasts, and the cost of service, among other things."
"The information submitted as part of National's petition does not meet the standards and submission requirements set forth on Regulation 8620 [that regulates PREPA rate filing requirements]," the commission continued.
Ram-n Luis Nieves, the president of the Senate Energy Affairs Committee, said the decision showed the value of 2014 energy reform legislation that created the commission. "We protected the people from a rise in the cost of electricity promoted by a PREPA bond insurer," he said. "If the Senate energy reform created under the leadership of [Puerto Rico Senate President] Eduardo Bhatia had not been legislated, PREPA would have increased the electricity rate, but now we could make the bondholders face Law 57. I am proud to have overseen passage of this energy reform that is creating justice and protecting the people."
Cure commented on the decision, saying, "I am not sure how much more evidence the commission needs concerning the financial and operational condition to permit a rate increase since PREPA's situation is so obviously dire.
"Also, given that PREPA still has a heavy dependence on oil based generation, and given the current low cost of oil, it doesn't bode well for creditors when they try and get a rate increase in what currently is a more advantageous rate environment," Cure said. "On the other hand, the commission may also be considering the sensitivity to raising rates and its potential impact on a struggling economy."
Reuters reported Thursday that a source had said that it was likely the forbearing bondholders and line of credit holders would agree to extend their forbearance from the end of Thursday to the end of Oct. 15.
