Puerto Rico’s government is proposing lower rates for utilities that are rated junk or near junk, saying savings from fraud reduction, lower oil prices and other measures will make up for lost revenue.

Puerto Rico Gov. Alejandro García Padilla announced Monday that the Puerto Rico Electric Power Authority would reduce its rates by 17% effective the month of May. When a PREPA power plant switches to natural gas in July there may be a further decrease, a source close to the governor said.

Additionally, the Puerto Rico Aqueduct and Sewer Authority plans to increase water rates this summer substantially less than the 67% level that had been anticipated, said Efraín Acosta, PRASA’s chief financial officer.

A special committee made the rate recommendations to the governor recently.

“We demonstrated today that constructive dialogue pays off,” García Padilla said. “Through the efforts we have made within the government and the cooperation of different sectors of society, we can tell the country that we will permanently reduce electricity rates and also that the proposed water rate increase will not go as it was submitted. The amount of water rate increases will be significantly reduced for the vast majority of consumers.”

Additionally, García Padilla said that he is proposing legislation that would allow PREPA to charge lower electrical rates to PRASA, its biggest customer.

PREPA’s debt is rated BBB-plus by both Standard & Poor’s and Fitch Ratings and Baa2 by Moody’s Investors Service. PRASA’s senior revenue bonds are rated Ba1 by Moody’s, BB-plus by S&P and BBB-minus by Fitch Ratings.

PRASA is taking several initiatives to allow for the decrease in water rates, which also cover sewer service, Acosta said. By getting the special electric rate from PREPA, PRASA will save $50 million a year.

By pursuing its unaccounted water program, PRASA will crack down on water theft and gain $10 million to $12 million a year, he said.

A subsidy for water use that currently goes from the housing department to public housing residents will instead be paid directly to PRASA. Some of this money has not ended up in PRASA’s hands and now that it will, it will provide the authority an additional $1.5 million a year, he said. The savings will allow for smaller rate increases for the 57% of customers who are low volume, and generally low income, users, Acosta said.

Since both revenues and costs will be dropped by the same amount, the proposed smaller rate increases will not affect bond holder interests, Acosta said.

An independent examiner is expected to present a report with rate recommendations in the second week of June. PRASA’s board will have the right to accept, reject or modify the proposed rates. The board will have the final say on rates and is expected to decide in June.

García Padilla pointed to three factors in explaining the cut in electricity rates. The prior governor “fictitiously” lowered the electrical rates prior to the election. Rectifying this has allowed PREPA to gain $74 million, he said. Second, the price of oil has fallen in recent months. Third, the authority has been able to reduce other costs.

Robert Donahue, managing director at Municipal Market Advisors, saw things differently.

“Earlier this year, Gov. García Padilla announced he would increase water rates at PRASA in accordance with bondholder covenants — a positive step demonstrating the new administration’s pledge to balance the finances of PRASA,” he wrote in a report. “PRASA’s projected deficit for fiscal year 2014 is estimated at $340 million and rises in future years if remedial action is not taken.”

Donahue said the governor is backing away from the rate increases because they proved politically unpopular.

“MMA views today’s announcement to water down PRASA’s rate hike, offset by a complex arrangement with PREPA, as a step back from the much-needed political will to resolve PRASA’s dependency, as we had hoped to see,” Donahue wrote. “The action also jeopardizes PREPA’s already fragile financial condition, especially should crude oil prices shoot back up.”

MMA hasn’t reviewed the proposal to determine whether it ““constitutes financial wizardry or reckless political maneuvering,” Donahue wrote. “PRASA’s revised plan lacks details and is based on speculative assumptions that could expose bondholders to significant execution risk should the plan(s) fall short of projections.”

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