Puerto Rico picks operator for power transmission and distribution system

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Thirty months after Puerto Rico’s governor started what he said would be an 18-month privatization process for the island’s electric power authority, a new governor announced a deal for private management of its transmission and distribution grid.

All local government parties including the Oversight Board have approved the deal to hire a U.S.-Canadian consortium to operate the Puerto Rico Electric Power Authority’s transmission and distribution system. The consortium has created LUMA Energy to run the grid. As currently planned, there will be a one-year transition period followed by 15-year period with LUMA.

LUMA Energy LLC is a joint venture between Quanta Services and Canadian Utilities Limited, an ATCO Ltd. Company, and is also being supported by Innovative Emergency Management.

Guayanilla PREPA power plant
The PREPA power plant at Guayanilla, Puerto Rico

There has been discussions of and negotiations toward a PREPA debt restructuring since summer 2014. Parties have reached a proposed deal (restructuring support agreement) but the COVID-19 virus has pushed back hearings on it. As of July 31, 2018 the authority had $8.3 billion in bonds outstanding and $9 billion in total debt outstanding.

The agreement between LUMA and the Puerto Rico Public-Private Partnership Authority is the first concrete step toward privatizing PREPA. The government is still seeking to sell, lease or otherwise collaborate with the private sector on the authority’s generation assets.

“The people of Puerto Rico deserve a power system that can withstand hurricanes to ensure they are safe in their homes, and Puerto Rico’s businesses deserve to open every day without relying on backup generators to ensure they can serve their customers,” said Oversight Board Chairman José Carríon. “Puerto Rico deserves manufacturing and the service industry jobs created by investors who don’t turn away because its electric power system is unreliable and antiquated.”

On Monday, a LUMA leader said that his company’s first priority would be to increase the reliability and resilience of the system. He also said that over the long term he believed LUMA could bring lower electrical costs to the island.

After Hurricane Maria hit the island in September 2017 it took 11 months to fully restore electrical service.

LUMA will operate, manage, maintain, repair, and restore PREPA’s transmission and distribution system.

Evercore Director of Municipal Bond Research Howard Cure said: “This agreement is based on the assumption that a private operator can control high costs and service problems. Certainly the electric transmission/distribution system has to be upgraded to ensure reliability and provide the comfort for business and industrial users to retain and even expand their facilities in Puerto Rico."

“PREPA needs to complete its Title III [bankruptcy] process under PROMESA," Cure continued. "This privatization can expedite this delayed process and provide some additional comfort to bond holders.” He said the success of current debt agreement remains in doubt because the governor and legislature may have to approve it and they have indicated their opposition.

A group of PREPA bondholders provided a statement to The Bond Buyer: “Following the retention of professional management at PREPA, it’s now all the more critical to advance the PREPA restructuring agreement and exit bankruptcy expeditiously, or this privatization transaction could become a ‘bridge to nowhere’ and result in hundreds of millions of dollars in wasted electricity charges paid by residents of the island.”

Cure asked, “The question is can LUMA reduce personnel levels, wages and benefits, which are considered high, for former PREPA employees?"

In another PREPA development, on Monday Title III Judge Laura Taylor Swain approved PREPA contracts with EcoEléctrica and Gas Natural Aprovisionamientos SDG. The contracts will benefit power and natural gas availability in the southern part of Puerto Rico, which experienced a series of earthquakes in January that damaged the authority’s infrastructure.

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Puerto Rico Electric Power Authority Puerto Rico Commonwealth of Puerto Rico