Puerto Rico Moves to Privatize Troubled Electric Utility

Published February 26, 2018

With approximately one-third of Puerto Rico’s 3.3 million public utility customers still without power five months after Hurricane Maria battered the U.S. territory, Gov. Ricardo Rosselló announced plans to sell the insolvent Puerto Rico Electric Power Authority (PREPA).

In a January 22 televised address to the country, Rosselló said it might take up to 18 months to privatize PREPA, the largest public utility in the United States based on the number of customers.

Aging Infrastructure

Even before Hurricane Maria, PREPA had multiple problems. The utility had not been reinvesting its revenue into updating and maintaining its infrastructure as most utilities do. As a result, its infrastructure was 45 years old on average, compared to about 18 years for utilities on the U.S. mainland.

In addition, PREPA burned oil to generate electricity. Oil is a relatively expensive fuel and is used to generate less than 1 percent of the electricity on the mainland United States, deployed by utilities to power backup generators when a power plant’s main boilers are taken offline for maintenance. Also, like the government which owns it, PREPA is in financial trouble, with the governor’s office having had to work out a restructuring plan for the utility’s bondholders in April 2017.

‘Cannot Continue’

In a televised address announcing his privatization plan, Rosselló cited a variety of problems with the utility.

“PREPA has become a heavy burden on our people, who are now hostage to its poor service and high cost,” Rosselló said. “What we know today as the Puerto Rico Electric Power Authority does not work and cannot continue to operate like this.

“The deficiencies of the system penalize the consumer with a suboptimal service, with frequent interruptions, and high rates for consumption,” said Rosselló. “The Puerto Rico Electric Power Authority will cease to exist as it deficiently operates today.”

Calls for Modernization

Rosselló said the goal of the privatization will be to modernize the power system to make it more efficient and less expensive.

“Over the next few days the process will start, through which PREPA assets will be sold to companies who will transform the generation system into a modern, efficient, and less expensive one for the people,” Rosselló said. “This change and transformation of PREPA is focused on the integration of advanced technology to the electrical system and better service for the consumer.”

The plan Rosselló outlined is not a full privatization. Rosselló says the state would sell the power generation portion of the utility and then establish a time-limited concession to operate the power transmission and distribution portion of the system. Rosselló did not say what the term of the concession would be or whether it could be extended.

‘A Tool for Redistribution’

Robert J. Michaels, an economics professor at California State University–Fullerton and a policy advisor to The Heartland Institute, which publishes Environment & Climate News, says government ownership created the problems with Puerto Rico’s power system.

“Like some other governments, Puerto Rico treated its utility as a tool for [wealth] redistribution, taking customer payments and using them to finance various government programs, as opposed to how a well-functioning private utility would have operated by reinvesting in new and modernized facilities,” Michaels said. “Puerto Rico’s system limped along with glue and baling wire for the longest time, and one consequence was its total inability to recover from Hurricane Maria.”

‘Little Reason for Optimism’

Michaels says the same Puerto Rican government commission which had oversight and set terms for PREPA will remain in charge of any private company running the system.

“The Puerto Rico Energy Commission is responsible for a master plan covering all levels of the industry, and the Commission’s charter directs it to ‘[o]versee the quality and reliability of the electric power services provided by PREPA and any other electric power company certified in Puerto Rico,'” Michaels said. “As part of this charter it will also ‘review and approve, and if applicable, modify the rates or fees charged by electric power service companies in Puerto Rico in connection with any matter directly or indirectly related to the provision of electric power services.'”

Any private company considering buying PREPA’s generation and transmission assets, which will require the investment of billions of dollars, will be concerned about the Energy Commission’s continued involvement in and authority over the power system, says Michaels.

“The big questions in the present instance are about the future, and Puerto Rico’s past offers little reason for optimism,” Michaels said. “This is basically the same regulatory mechanism that ran Puerto Rico’s system into the ground and carries with it the implied threat of expropriation of electric utility assets.

“Any rational buyer would insist on guarantees that would not be credible for a system with Puerto Rico’s utility past and its ongoing charter,” said Michaels. “Thus it will be hard to imagine true independence of the utility from the island’s government, and since capital markets already know this, absent extraordinary circumstances, they will have factored corruption and inefficiency into the ultimate price.” 

Kenneth Artz ([email protected]) writes from Dallas, Texas.