The Puerto Rico Energy Commission and the Federal Fiscal Oversight and Management Board Should Take Over Puerto Rico’s Electric Company Now
Adult Supervision Urgently Needed for Rebuilding of the Grid and Creating and Investment Environment for Renewable Energy and Economic Recovery.
Nov. 14, 2017 (ICSE) — The Institute for Energy Economics and Financial Analysis and the Institute for Competitiveness and Sustainable Economics for Puerto Rico today called for the Puerto Rico Energy Commission and the federal Fiscal Oversight and Management Board of Puerto Rico to take control of the Puerto Rico Power Authority (PREPA).
“The ongoing governance crisis at PREPA, and now the denial by a judge of the appointment of a PREPA chief transformation officer, meant that the energy commission and the fiscal board must immediately combine efforts to restore electricity to the island,” the institutes said in a joint statement noting that more than half of the residents of the storm-stricken island remain without electricity almost two months after Hurricane Maria.
The statement from the two institutes follows Tuesday’s refusal by a federal judge to grant a motion by the Fiscal Oversight and Management Board of Puerto Rico (FOMB) to appoint an outside “chief transformation officer” to oversee PREPA. The board, created by Congress under the statute known as PROMESA (the Puerto Rico Oversight, Management, and Economic Stability Act), had proposed appointing U.S. Air Force Colonel Noel Zamot, who has worked with the board on other matters, to run PREPA. Judge Laura Tailor Swain blocked the appointment, saying that the board did not have the authority to put Zamot in charge.
“The well-known scandal around PREPA’s contract with Whitefish Energy is only the most recent example of the agency’s poor contracting policies and procedures,” said IEEFA Director of Tom Sanzillo, who credits the Puerto Rico Energy Commission for exposing many of PREPA’s common problems.
“In its various orders and findings, the commission has revealed waste and mismanagement at PREPA on the order of hundreds of millions of dollars,” Sanzillo said. “This waste has included money spent for consulting fees on a failed debt deal, overly expensive and mismanaged renewable energy contracts, and poor selection of energy and engineering consultants.”
Tomas Torres, executive director of ICSE-PR, said the FOMB “cannot afford to see the commission’s powers reduced, especially now after ruling by Judge Swain.”
“The pain that we Puerto Ricans have suffered, along with the ravages to our economy, require leadership in all its forms to step forward, break down barriers and rebuild Puerto Rico now.”
“Puerto Rico needs a coherent recovery plan and a strong show of unity as it presses for supportive legislation and federal financial assistance,” Torres said. “The formula for success exists already in federal and commonwealth law, and a can-do spirit of accountability and cooperation will help Puerto Rico rebuild under strong policy guidelines.”
Sanzillo and Torres noted that PREPA just this past September submitted a motion to the Federal District court in Puerto Rico to reduce the commission’s powers. PREPA argued that the commission had usurped the authority of PREPA and the fiscal board. On November 3, the commission submitted a motion to the court proposing a resolution of any potential jurisdictional overlap between the commission and the fiscal board.
“The areas where coordinated action is most urgent include contract review and finance,” Torres said. “The FOMB board and the commission need to also work together on a strong oversight to PREPA including budget reviews and approval, rate-setting and resource planning. The Puerto Rico Energy Commission brings a level of technical expertise in these areas that the FOMB does not have.”
“More than ever, lack of coordination between the two institutions will delay the restoration of power and the re-design of the Puerto Rico electrical system.”
Sanzillo said the “No. 1 priority” for the FOMB and Puerto Rico Energy Commission is the restoration of electricity on the island.
“FOMB and the commission bring the adult supervision needed to bring discipline to the long-term rebuilding of the grid and create an investment environment for renewable energy and economic recovery.”
Tomas Torres, executive director, ICSE, 787- 630-9990, email@example.com
Karl Cates, director of media relations, IEEFA, 917-439-8225, firstname.lastname@example.org
The Puerto Rico Institute for Competitiveness and Sustainable Economy (ICSE-PR) is an business-oriented organization that creates difficult alliances to foster reforms for the sustainable socio-economic well-being of Puerto Rico.
The Cleveland-based Institute for Energy Economics and Financial Analysis (IEEFA) conducts research and analyses on financial and economic issues related to energy and the environment.
Additional background on the mismanagement of the Puerto Rico Electric Authority (PREPA)
Renewable Energy Contracts
PREPA entered into 68 renewable energy contracts between 2008 and 2012, of which 58 are still in effect but of which only 11 have resulted in projects that are under development or currently operational. PREPA, in the first 11 months of Fiscal Year 2017, generated only 1.8% of its electricity from renewable sources, although Puerto Rico law requires PREPA to generate 12% of its electricity from renewables. In an order related to PREPA’s integrated resource plan, the commission noted that PREPA’s renewable energy contracts set prices that include excessive profits to developers.
Financial Consultant Contracts
PREPA has paid upwards of $100 million in fees to lawyers, financial analysts and bond consultants as part of its effort to reach a debt-restructuring agreement with its bondholders (the PROMESA board rejected the restructuring deal that came out of those expensive consultation). The Commission cited concerns “about the amount spent so far, the absence of effective limits on the fees, the lack of competitive bidding in the selection of the contractors, the quality of oversight of those fees, and the possibility of duplicative effort among the companies charging the fees.”
The consultants receiving the fees in question include Sidley Austin, Navigant, Millstein, R3 Law Firm, Quinones & Arbona Law Firm, Public Financial Management, and Cleary Gottlieb.
In a filing dated April 2016, PREPA had $44.7 million in upfront financing costs, consisting primarily of fees to law firms, advisors, accountants and underwriters. By the time of commission’s order was issued in June 2016 question the expenses some of these fees had already ballooned to much higher number. The original estimate for fees of $2.68 million to the restructuring advisor Millstein, for example, had increased to $9 million). Fees continued to increase until the bond deal was rejected in June 2017. Not included in the commission’s order was the $45.6 million spent on Alix Partners, the chief restructuring officer for PREPA.
Consulting Engineer Contract
Under the terms of a 1974 Trust Agreement, PREPA was required to hire a consulting engineer to provide reports to the financial community on PREPA’s physical and financial condition. This consulting engineer essentially falsified its reports, opining in 2013 that PREPA’s physical plant was in “good repair and sound operating condition” and that PREPA would be able to meet its debt service requirements in 2014. As described by the Commission, the consulting engineer “failed in multiple ways to inform the PREPA Board and the public about the deterioration of PREPA’s finances and of its physical system.” The commission required PREPA to fire its original consulting engineer and hire a new one.
Additionally, a review of PREPA’s 2013 bond issuance noted that the Consulting Engineer, URS Corporation was involved in issuing Power Revenue Bonds and that URS’s income “may have been directly tied to the outcome of the sale of the financial instruments of the corporation (PREPA) that it was contracted to analyze.”
 Commission order (September 2016) at p. 59-60: http://energia.pr.gov/wp-content/uploads/2016/09/23-sept-2016-Final-Resolution-and-Order-IRP-CEPR-AP-2015-0002.pdf
 Commission order (June 2016) at paragraph 261: http://energia.pr.gov/wp-content/uploads/2016/06/21-junio-2016-Restructuring-Order-English-1.pdf
 Attachment 2.01 to PREPA’s Petition for Restructuring Order (April 2016): http://energia.pr.gov/wp-content/uploads/2016/04/TransitionCharge-2.pdf; Commission order (June 2016) at paragraph 259 http://energia.pr.gov/wp-content/uploads/2016/06/21-junio-2016-Restructuring-Order-English-1.pdf.
 Commission Order (January 2017) pp. 13-4 and 106-7: http://energia.pr.gov/wp-content/uploads/2017/01/Final-Resolution-and-Order.pdf
 Puerto Rico Commission for the Comprehensive Audit of the Public Credit, “Pre-audit survey report”, p. 2, http://sptpr.net/wp-content/uploads/2016/10/Second-Interim-Pre-Audit-Report-on-2013-PREPA-debt-emission-con-anejos.pdf