Little chance new fiscal recovery plan for Puerto Rico’s electric company will succeed

Puerto Rico’s bankrupt electric utility cannot afford to pay back the utility’s creditors over the next five years without jeopardizing much-needed investment in the rebuilding and resiliency of the island’s power grid.

Nor can the utility continue to pay fossil fuel producers exorbitant amounts for oil, coal and gas.

{mosads}Those are the two major takeaways from a report we released last week on the Puerto Rico Electric Power Authority’s five-year fiscal plan. The plan, certified by the federally appointed Financial Oversight and Management Board (FOMB) in April, is being offered as a road map for the physical and financial transformation of PREPA and is meant to be the first step in restoring investor confidence in PREPA.

It acknowledges two important realities for PREPA:

• That its $9.2 billion legacy debt is unaffordable.
• That the utility will continue to be financially crippled until it reduces its dependence on fossil fuel imports, for which it paid over $1.2 billion last year alone.

The FOMB-certified budget includes zero payment for debt service over the next five years and it calls for 31 percent of electricity to be generated from solar and wind by 2023.

But there are significant risks that the balanced budget the plan aims for will not be realized. Some hurdles to success are within PREPA’s control and some are not. The risks are many:

• a weak economy could drive lower electricity demand
• PREPA customers might be forced to pay some of PREPA’s $9.2 billion in legacy debt
• budgeted federal aid for reconstruction might not fully materialize
• fuel and purchased power costs might be higher than expected
• many of PREPA’s proposed operational savings initiatives (which are poorly documented in the fiscal plan) might not materialize

We estimate that PREPA will likely see a budget shortfall of $170 million in the first year of the plan, and that that shortfall will grow, to approximately $1 billion annually.

The plan is also weak on accountability. Its savings initiatives are badly conceived and are unlikely to improve the situation. PREPA has decided to try to weaken the role of organized labor, for instance, essentially undermining the only asset PREPA really has at its disposal. The budget document doesn’t add up fundamentally, purported efficiencies are undocumented, and savings in one place are undermined by contrary, shortsighted actions in others.                                                                                                       

Political risk looms large as well. Recent actions by Rep. Rob Bishop (R-Utah) are good example of how political interference can undermine the goals of the FOMB-approved plan. In March, Bishop sent a letter to the FOMB criticizing it for rejecting a bond deal negotiated between PREPA and its creditors that would have left PREPA ratepayers on the hook for more than 85 percent of the legacy debt. Last month, Bishop — who is important here for his role as chairman of the House Natural Resources Committee, proposed expanding Puerto Rico’s reliance on natural gas by building additional import facilities and power plants — a policy that would only worsen Puerto Rico’s overdependence on imported fossil fuels.

PREPA’s creditors would do well to recognize all these risks. Further economic decline in Puerto Rico will likely push revenues lower than PREPA projects, while the difficulty of transforming PREPA’s physical infrastructure and achieving operational efficiencies are likely to drive expenses higher. Budget gaps will mean that less capital will be available for investment in transmission and distribution resiliency and in renewable energy generation, so that the overall transformation of the system away from fossil fuels is likely to take longer than planned.

Bondholders do have options for partial recovery of their investments, from bond insurers and by pursuing claims against the underwriters and financial advisors that helped put PREPA so deep in the hole. Insistence on extracting payment from PREPA itself are unconstructive and unlikely to succeed.

It’s only fair to say that this plan has taken a few steps to make sure the lights stay on, but the politics and bad management that have plagued the utility in the past are alive and well still, and they continue to jeopardize PREPA’s future.

Cathy Kunkel is an energy analyst at the Institute for Energy Economics and Financial Analysis (IEEFA).

Tom Sanzillo is IEEFA director of finance.