Gov. Ricardo Rosselló's proposed privatization of the Puerto Rico Electric Power Authority faces opposition from local political leaders and may prove to be a tough sell to potential investors.
Rosselló presented the idea Monday of an 18-month privatization of the utility, which has $8.2 billion of bond debt. The Puerto Rico Oversight Board has put PREPA into a Title III bankruptcy process, creating potential hurdles for any plan to alter its ownership, though the board members have expressed support for the idea.
The plan was dismissed by one key legislator as political posturing as the utility struggles to restore electricity four months after Hurricane Maria.
“It’s a way of taking off the heat, on the re-energization of the houses and stores,” said Puerto Rico House Minority Leader Rafael Hernández Montañez.
Though Puerto Rico’s government says 66% of the authority’s customers have electricity, Hernández Montañez said that the reality was that only 40% of customers have electricity.
Rosselló knows that neither the Puerto Rico House nor Senate will approve the measure, so he is just posturing for public support, Hernández Montañez said. Members of Rosselló’s own party in the legislature, the New Progressive Party, oppose him on this topic, the representative said. Hernández Montañez is a member of the opposition Popular Democratic Party.
As part of the Title III bankruptcy, parts of PREPA are likely to be sold, the representative continued. However, Title III Judge Laura Taylor Swain will decide on this and not the governor.
Doubt over proposed regulations may pose another obstacle.
“We fail to see how any investor would put money into Puerto Rico with a regulatory system like that proposed by Gov. Rosselló,” said Tom Sanzillo, director of finance at The Institute for Energy Economics and Financial Analysis. Under the governor's plans, Sanzillo said, “he appoints and can fire board members at will. Under the current system board members have staggered, fixed terms and can only be fired for cause.
“This means the whim of every new governor sets rules and contracts. This makes energy investing highly risky, contracts uncertain and a politicized investment environment,” Sanzillo said.
The Puerto Rico Energy Commission’s oversight should be strengthened and it should implement any transformation of PREPA, said Tomás Torres, project director at the Institute for Competitiveness and Sustainable Economy.
“However, last Thursday the Governor submitted to the PR state legislature a bill … that eliminates the Energy Commission and substitutes it by a Public Service Commission which is a merge of Telecom, Transportation & Public Services, and the Energy Commission," Torres said. "The three commissions/boards that are to be merged in this new body add to 15 commissioners, but the new boards will only be of three members.
“The recently proposed Energy Commission reorganization and consolidation with other public service regulation would be a huge step backward,” said Jose Rossi Coughlin, chairman of the Institute for Competitiveness and Sustainable Economy. This was because it would interrupt key regulatory processes; allow each new governor to select all commission members when they came into office – contrary to widely prevailing United States practice; and probably be legally incompatible with [Puerto Rico Oversight, Management, and Economic Stability Act] Title V’s Puerto Rico Energy Commission statutes.
Moody’s Investors Service had a more mixed view. “The privatization itself is positive because it is another source of capital to help solve PREPA’s fiscal problems,” said Moody’s Vice President Rick Donner. “However, there are still challenges; including negotiating a price in an environment of declining Puerto Rico population, investing in rebuilding aging infrastructure, and how PREPA’s pension liability will be handled. The 18-month timeline appears quite aggressive.”
The PREPA Bondholder Group said they would support a “private operator” to “immediately” take over operations, subject to the Puerto Rico Energy Commission oversight.
“We believe the only path for any proposal to deliver low cost and reliable power will be if it respects property rights, since failure to do so will result in years of litigation from multiple parties,” the group said in a prepared statement. “The sole way to achieve this is to break the pattern of continued disregard for the law and past obligations and reach a consensus resolution with assorted stakeholders.”
In statement sent out by the governor’s office some representatives of Puerto Rico’s business world supported the proposal.
“The announced changes will allow Puerto Rico to become a competitive jurisdiction, ending a monopoly that discourages investment and the creation of jobs,” said Nelson Ramírez of the United Center of Retailers.
Puerto Rico Senate Minority Leader Eduardo Bhatia Gautier said the proposal was a step in the right direction but that "the devil is in the details."
The island's electrical system should be decentralized into 20 to 25 microgrids, Bhatia Gautier said. With the help of the U.S. Department of Energy, Puerto Rico should try for widespread installation of solar panels on rooftops.
Though Rosselló said the Puerto Rico legislature will privatize PREPA the realtity is that the Title III judge will have to be involved, Bhatia Gautier said.
Sue Kelly, president of the American Public Power Association, said that privatization was not a "panacea." She noted that in the last decade there have been seven electrical power utility privatizations and the creation of four public power utilities. The largest privatization served 10,000 customers.
"Public power utilities conducting sellout evaluations have often found that the utility is worth far more to the community than it is to a potential buyer," Kelly said.
