What Should Be Done to Get PREPA on the Right Track?
Indebted Puerto Rican state power company PREPA in early September announced that it has hired Lisa J. Donahue of AlixPartners as chief restructuring officer as part of an August agreement with creditors that allowed the company to delay payment on some credit lines. Donahue's role will be to negotiate with creditors and develop a business plan, which must be presented by Dec. 15, and then a full restructuring plan, due by March 2. What are the biggest challenges facing PREPA and Donahue's efforts? What should be done to get the company on the right track?
José J. Villamil, chairman of the board of Estudios Técnicos, Inc. in San Juan: "I have stated many times that most of PREPA's problems are not of PREPA's making. A long history of political interventions is, to a large extent, the reason for its present situation. Subsidies have been generously legislated, government agencies don't pay their electricity bills, and municipalities don't pay for their energy consumption (in lieu of taxes that would generate much less than PREPA's foregone income). In addition to the company's appallingly high debt, dealing with political considerations is possibly the biggest challenge faced by PREPA and Donahue. We need to distinguish two very different areas of concern. One is the financial situation and the impact on creditors. The other is the cost of energy. The former is Donahue's main concern, the latter is what concerns locals the most. Not much can be done to resolve the cost problem unless there is a major restructuring of PREPA's debt. There is broad agreement that Puerto Rico needs to move to more diversified energy sources and a more competitive system in order to lower costs, but unless PREPA's debt burden is significantly lowered, it won't be possible, at least for the foreseeable future. Should PREPA out-source electricity production, as with Eco-eléctrica and AES now, and continue to operate the distribution network, lowered production costs would almost certainly result. Major improvement in costs to consumers, however, would require significant investment in new network infrastructure, something not feasible at this moment. Outsourcing production, but not distribution, could improve PREPA's bottom line, but would probably not do much for lowering energy costs. It is almost certain that Puerto Rico will continue to be a high energy cost jurisdiction for many years. This, however, is not Donahue's main concern."
Carlos J. Fernández Lugo, chair of the Environmental, Energy & Land Use Practice Group at McConnell Valdés LLC: "PREPA faces numerous daunting challenges in addition to its level of debt. Among them, a trend of declining revenues spanning many years; energy losses in excess of industry standards; a high level of past-due accounts receivable (led by government accounts); excessive dependence on expensive fuel oil as its main source of energy; an outdated generation fleet that will not comply with U.S. Environmental Protection Agency regulations; insufficient capital to substitute generating units or convert them to natural gas; conversion plans behind schedule; and no clearly articulated strategy to address the generating units on the north coast of the island. In addition, PREPA must comply with statutory mandates in the recently enacted energy reform and will be subject to regulation by the newly created Energy Commission. On top of it all, we must remember that PREPA is not a 'regular' utility. It is owned by the Commonwealth, and its policies are shaped by the government. Consequently, there are limits to what it can do. PREPA's approach to pull out of the hole it is in must be economic and scientific, attacking major problems that can make the greatest difference in the shortest time. PREPA must also be prepared to follow strategies it has not pursued in the past, such as private investment in key elements of its infrastructure, including generation. Due consideration should be given to new legislation that could help expedite PREPA's efforts. The integration of renewable energy sources should also serve to diversify PREPA's portfolio and help stabilize energy prices, but steps must be taken by
PREPA to permit the financing of such projects in the current environment. Ultimately, PREPA's situation and the involvement of the chief restructuring officer may provide cover for measures that may previously have been too costly to implement from a political standpoint."
Julián Herencia, executive director of the Renewable Energy Producers Association (APER) in San Juan: "Balancing revenue generation to meet the enormous financial needs (creditor responsibilities, infrastructure projects, supplier payments) while facing a sharp reduction in demand as customers seek energy efficiency and alternate sources of energy generation, as well as complying with the requirements of Law 82 of 2010 (Renewable Energy Portfolio Standard) and Law 57 of 2014 (Energy Reform) are the biggest challenges PREPA and its chief restructuring officer will face over the next several months. PREPA must right-size its operations and reduce all cost components. With the obvious need for private capital to support a restructuring plan, through either privatization or private public alliances, it is imperative to devise ways to bring certainty and ensure that these private partners will get a shot at getting a fair market return on their investment. Private-capital financed utility-scale renewable energy projects provide for immediate cost reductions and mitigate or avoid future costs stemming from imminent penalties that the EPA will impose by April 2015 when PREPA continues violating environmental regulations. The only piece remaining is to provide an acceptable level of probability that this cost-effective energy can be paid. APER is confident that, finally, a professional with the capacity to navigate this difficult environment recognizes the important role renewable energy plays in pulling PREPA out of its abyss. Moreover, PREPA can be a key partner in achieving consistent and permanent compliance to current and future environmental regulations, improving air quality, and avoiding the detrimental effects of potential fossil fuel price fluctuations, while creating jobs and stimulating the local economy."
Ivonne Lozada, executive director of the Public Policy Institute at the Ana G. Méndez University System: "There is little doubt that Ms. Donahue and AlixPartners have the expertise to face the serious financial and operational problems that torment PREPA. The challenge is to bring an outdated powergenerating company to 21st-century standards without raising costs for financially-stretched Puerto Ricans and without firing employees. At least that is the political desideratum. The reality that Alix has never faced in its successful record is the strong political tides, both partisan and non-partisan, that move the Puerto Rican government structures. Unions and management do not behave the same way as in the United States. The power of the media, especially newspapers and radio political analysts, is unheard of stateside; and PREPA is, simply put, bankrupt, cashless and without credit. Donahue's largest challenge is concocting a formula whereby PREPA becomes more efficient in its personnel and administrative endeavors while trying to maintain the same quantity of employees. Privatization is a dirty word in the island's politics, particularly in the center-left spectrum that is the dominating force in the ruling Popular Democratic Party. Energy production should shift to gas and renewables, but those capital-intensive solutions are simply not available unless private parties are part of them. The final challenge is to produce a plan in a couple of months that not only convinces PREPA, but also the political system, the people of Puerto Rico, the creditors and the ratings agencies—not necessarily in that order."