[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
EXPLORING ENERGY CHALLENGES AND OPPORTUNITIES FACING PUERTO RICO
=======================================================================
OVERSIGHT HEARING
before the
SUBCOMMITTEE ON ENERGY AND
MINERAL RESOURCES
of the
COMMITTEE ON NATURAL RESOURCES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
Tuesday, January 12, 2016
__________
Serial No. 114-27
__________
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COMMITTEE ON NATURAL RESOURCES
ROB BISHOP, UT, Chairman
RAUL M. GRIJALVA, AZ, Ranking Democratic Member
Don Young, AK Grace F. Napolitano, CA
Louie Gohmert, TX Madeleine Z. Bordallo, GU
Doug Lamborn, CO Jim Costa, CA
Robert J. Wittman, VA Gregorio Kilili Camacho Sablan,
John Fleming, LA CNMI
Tom McClintock, CA Niki Tsongas, MA
Glenn Thompson, PA Pedro R. Pierluisi, PR
Cynthia M. Lummis, WY Jared Huffman, CA
Dan Benishek, MI Raul Ruiz, CA
Jeff Duncan, SC Alan S. Lowenthal, CA
Paul A. Gosar, AZ Matt Cartwright, PA
Raul R. Labrador, ID Donald S. Beyer, Jr., VA
Doug LaMalfa, CA Norma J. Torres, CA
Jeff Denham, CA Debbie Dingell, MI
Paul Cook, CA Ruben Gallego, AZ
Bruce Westerman, AR Lois Capps, CA
Garret Graves, LA Jared Polis, CO
Dan Newhouse, WA Wm. Lacy Clay, MO
Ryan K. Zinke, MT
Jody B. Hice, GA
Aumua Amata Coleman Radewagen, AS
Thomas MacArthur, NJ
Alexander X. Mooney, WV
Cresent Hardy, NV
Darin LaHood, IL
Jason Knox, Chief of Staff
Lisa Pittman, Chief Counsel
David Watkins, Democratic Staff Director
Sarah Parker, Democratic Deputy Chief Counsel
------
SUBCOMMITTEE ON ENERGY AND MINERAL RESOURCES
DOUG LAMBORN, CO, Chairman
ALAN S. LOWENTHAL, CA, Ranking Democratic Member
Louie Gohmert, TX Jim Costa, CA
Robert J. Wittman, VA Niki Tsongas, MA
John Fleming, LA Matt Cartwright, PA
Glenn Thompson, PA Donald S. Beyer, Jr., VA
Cynthia M. Lummis, WY Ruben Gallego, AZ
Dan Benishek, MI Lois Capps, CA
Jeff Duncan, SC Jared Polis, CO
Paul A. Gosar, AZ Vacancy
Raul R. Labrador, ID Vacancy
Paul Cook, CA Vacancy
Garret Graves, LA Vacancy
Ryan K. Zinke, MT Vacancy
Jody B. Hice, GA Vacancy
Alexander X. Mooney, WV Raul M. Grijalva, AZ, ex officio
Cresent Hardy, NV
Rob Bishop, UT, ex officio
------
CONTENTS
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Page
Hearing held on Tuesday, January 12, 2016........................ 1
Statement of Members:
Grijalva, Hon. Raul M., a Representative in Congress from the
State of Arizona........................................... 14
Prepared statement of.................................... 15
Lamborn, Hon. Doug, a Representative in Congress from the
State of Colorado.......................................... 2
Prepared statement of.................................... 3
Pierluisi, Hon. Pedro R., a Delegate in Congress from the
Territory of Puerto Rico................................... 4
Prepared statement of.................................... 5
Statement of Witnesses:
Donahue, Lisa J., Managing Director, AlixPartners, New York,
New York; Chief Restructuring Officer, Puerto Rico Electric
Power Authority............................................ 16
Prepared statement of.................................... 18
Rivera-Velez, Carlos, Ph.D., PE, President, Puerto Rico
Manufacturers Association, San Juan, Puerto Rico........... 36
Prepared statement of.................................... 38
Rossi, Josen, Chairman of the Board, AIREKO; Chairman,
Institute for a Competitive and Sustainable Economy of
Puerto Rico, Caguas, Puerto Rico........................... 41
Prepared statement of.................................... 42
San Miguel, Jorge L., Chair, Environmental Law, Energy & Land
Use, Ferraiuoli, LLC, San Juan, Puerto Rico................ 24
Prepared statement of.................................... 26
Sanabria-Hernandez, Jaime L., Co-President and General
Manager for Finance and Administration, EcoElectrica, L.P.,
Penuelas, Puerto Rico...................................... 45
Prepared statement of.................................... 47
Additional Materials Submitted for the Record:
Carbo-Lugo, Agustin F., Chairman, Puerto Rico Energy
Commission, January 12, 2016 Letter submitted for the
record..................................................... 70
Pla-Cortes, Jaime, Executive President, Puerto Rico Hospital
Association, Prepared statement of......................... 68
OVERSIGHT HEARING ON EXPLORING ENERGY CHALLENGES AND OPPORTUNITIES
FACING PUERTO RICO
----------
Tuesday, January 12, 2016
U.S. House of Representatives
Subcommittee on Energy and Mineral Resources
Committee on Natural Resources
Washington, DC
----------
The subcommittee met, pursuant to notice, at 10:08 a.m., in
room 1324, Longworth House Office Building, Hon. Doug Lamborn
[Chairman of the Subcommittee] presiding.
Present: Representatives Lamborn, Thompson, Lummis,
Benishek, Labrador, Graves, Bishop; Costa, Gallego, Polis, and
Grijalva.
Also Present: Representatives Serrano, Gutierrez,
Velazquez, and Pierluisi.
Mr. Lamborn. The Subcommittee on Energy and Mineral
Resources will come to order. The subcommittee is meeting today
to hear testimony on exploring energy challenges and
opportunities facing Puerto Rico.
Under Committee Rule 4(f), any oral opening statements at
hearings are limited to the Chairman and Ranking Member and the
Vice Chairman and the designee of the Ranking Member. This will
help us to hear from our witnesses sooner, and help Members
keep to their schedules.
Therefore, I ask unanimous consent that all other Members'
opening statements be made part of the hearing record if they
are submitted to the Subcommittee Clerk by 5:00 p.m. today.
[No response.]
Mr. Lamborn. Hearing no objection, so ordered.
I also ask unanimous consent that the gentleman from Puerto
Rico, Mr. Pierluisi; the gentlelady from New York, Ms.
Velazquez; the gentleman from Illinois, Mr. Gutierrez; and also
the gentleman from New York, Mr. Serrano be allowed to sit on
the dais and participate in today's hearing. And last, should
his schedule permit, I also ask that the gentleman from Alaska,
Mr. Young, be allowed to sit on the dais and participate.
[No response.]
Mr. Lamborn. Hearing no objection, so ordered.
Before we get started, it is important to explain that this
hearing is not about Chapter 9 of the bankruptcy code. The
bankruptcy code is within the jurisdiction of the House
Judiciary Committee. This hearing and any subsequent hearings
held by this committee will focus on other issues.
I now recognize myself for an opening statement.
STATEMENT OF THE HON. DOUG LAMBORN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF COLORADO
Mr. Lamborn. Today we are here to discuss the very
challenging energy situation in Puerto Rico. At the forefront
is the Puerto Rico Electric Power Authority, or PREPA, which is
a fiscal and managerial disaster. With over $9 billion in debt
and an increasingly uncertain future, PREPA represents one of
the greatest challenges facing Puerto Rico.
This crisis did not arise overnight. Rather, it has
developed because of major issues within PREPA that were
allowed to stagnate into the situation that we face today. One
cannot begin to address the issues surrounding PREPA without
first discussing the aged infrastructure that is overwhelmingly
reliant on oil. Because of this, Puerto Ricans have
historically paid one of the highest electrical rates within
the United States. And, despite oil prices being the lowest
they have been in decades, Puerto Rico residents are still
paying on average 50 percent more for electricity than the
United States' national average.
However, what this statistic fails to capture is the impact
the price of energy has on the average resident. When median
income is accounted for, keeping an air conditioner on for 24
hours has five times the economic impact on the average Puerto
Rican than it does for the average citizen on the mainland.
Thus, keeping the lights on for an extra hour or two is a
serious decision that average residents on the island may face
daily.
As mentioned, PREPA currently relies on an outdated
infrastructure of which over 80 percent of PREPA's power plants
were constructed before 1977. Not only are these plants
inefficient, but they are environmentally deficient and
unreliable. In fact, PREPA recently acknowledged that
modernizing its facilities over the next 20 years would cost
approximately $5 billion.
The state of energy infrastructure in Puerto Rico
represents the sad truth that PREPA cannot make the politically
tough decisions. Although it was granted unilateral control
over establishing rates, PREPA has failed to update its base
rate in 27 years. In other words, PREPA has not been recovering
its basic operational and maintenance costs for nearly three
decades.
Further, PREPA's failure to collect and bill customers has
crafted the notion that electricity is not a commodity that
needs to be paid for, but rather is an entitlement.
Exemplifying this is the shocking fact that PREPA has $1.75
billion in accounts receivable as of September of 2014, of
which over $750 million of this was owed by various entities
within the Puerto Rican government. In fact, one-third of the
island receives subsidized rates, paying fractional amounts or
nothing at all.
Finally, the management of PREPA has contributed to an
indifferent working environment, as bureaucracy and political
connections have stood in the place of merit and hard work. For
instance, each new Puerto Rican administration since 2001 has
gutted the administration of PREPA. As such, there has existed
no path to leadership and has encouraged an environment without
individual accountability or goals.
Going forward, PREPA not only needs to address its
overwhelming financial crisis, but it must also address the
systemic issues that hamstring its ability to become an
efficient and adaptive utility.
For instance, increased privatization through public-
private partnerships or power purchase operating agreements
would provide opportunities for PREPA to evolve, by putting
electric generation in private entities not bogged down by
political and bureaucratic concerns.
Unfortunately, for PREPA, there is no easy solution.
Blanket grants of debt restructuring would be irresponsible and
would merely punt the hard decisions to future generations. The
way forward will be politically challenging, but we owe it to
the future not to bypass this opportunity.
[The prepared statement of Mr. Lamborn follows:]
Prepared Statement of the Hon. Doug Lamborn, Chairman, Subcommittee on
Energy and Mineral Resources
Today, we are here to discuss the very challenging energy situation
in Puerto Rico. At the forefront is the Puerto Rico Electric Power
Authority, or PREPA, which is a fiscal and managerial disaster. With
over $9 billion in debt and an increasingly uncertain future, PREPA
represents one of the greatest problems currently facing Puerto Rico.
This crisis did not arise overnight. Rather, it has developed
because of major issues within PREPA that were allowed to stagnate into
the situation that we see today.
One cannot begin to address the issues surrounding PREPA without
first discussing the aged infrastructure that is overwhelmingly reliant
on oil. Because of this, Puerto Ricans have historically paid one of
the highest electrical rates within the United States. And despite oil
prices being the lowest they have been in decades, Puerto Rico
residents are still paying on average 50 percent more for electricity
than the United States' national average.
However, what this statistic fails to capture is the impact the
price of energy has on the average resident. When median income is
accounted for, keeping an air conditioner on for 24 hours has five
times the economic impact on the average Puerto Rican than it does for
the average citizen on the mainland. Thus, keeping the lights on for an
extra hour or two is a serious decision the average resident on the
island must face daily.
As mentioned, PREPA currently relies heavily on an outdated
infrastructure of which over 80 percent of PREPA's power plants were
constructed before 1977. Not only are these plants inefficient, but
they are environmentally deficient and unreliable. In fact, PREPA
recently acknowledged that modernizing its facilities over the next 20
years would cost approximately $5 billion.
The state of energy infrastructure in Puerto Rico represents the
sad truth that PREPA cannot make the politically tough decisions.
Although it was granted unilateral control over establishing rates,
PREPA has failed to update its base rate in 27 years. In other words,
PREPA has not been recovering its basic operational and maintenance
costs for nearly three decades.
Furthermore, PREPA's failure to collect and bill customers has
crafted the notion that electricity is not a commodity that needs to be
paid for, rather it is an entitlement. Exemplifying this is the
shocking fact that PREPA had $1.75 billion in accounts receivable in
September 2014, of which over $750 million of this was owed by various
entities within the Puerto Rican government. In fact, one-third of the
island receives subsidized rates, paying fractional amounts or nothing
at all.
Finally, the management of PREPA has contributed to an indifferent
working environment, as bureaucracy and political allegiance have stood
in the place of merit and hard work. For instance, each new Puerto
Rican administration since 2001 has gutted the administration of PREPA.
As such, there has existed no path to leadership, and has encouraged an
environment without individual accountability or goals.
Going forward, PREPA not only needs to address its overwhelming
financial crisis, but it must also address the systemic issues that
hamstring its ability to become an efficient and adaptive utility. For
instance, increased privatization through Public-Private Partnerships
or Power Purchase Operating Agreements provides opportunities for PREPA
to evolve, by putting electric generation in private entities not
bogged down by political and bureaucratic concerns.
Unfortunately for PREPA there is no easy solution. Blanket grants
of debt restructuring would be irresponsible, and would merely punt the
hard decisions to future generations. The way forward will be
politically challenging, but we owe it to the future not to bypass this
opportunity.
______
Mr. Lamborn. At this point I would like to recognize the
Ranking Member of this subcommittee, or his designee, for an
opening statement.
Mr. Pierluisi. Thank you, Chairman Lamborn.
I ask unanimous consent that my longer statement be
included in the record.
[No response.]
Mr. Lamborn. I see no objection; so ordered.
STATEMENT OF THE HON. PEDRO R. PIERLUISI, A DELEGATE IN
CONGRESS FROM THE TERRITORY OF PUERTO RICO
Mr. Pierluisi. This is the sixth hearing on Puerto Rico in
the 114th Congress. While Congress has debated this matter, the
situation has gone from bad to worse.
In 2015, migration from Puerto Rico to the states was the
highest in modern history. The territory government has been
unable to provide tax refunds, pay contractors, and make
pension contributions. Two public entities missed payments to
bond holders, leading to a lawsuit by two bond insurers. There
will likely be larger defaults and more lawsuits later this
year. I don't know which stakeholders think they will benefit
from this situation, but I know it will not be my constituents
or the vast majority of Puerto Rico's creditors.
The crisis in Puerto Rico is the joint responsibility of
the Puerto Rico government, whose policies and practices have
often been irresponsible, and the Federal Government, whose
policies toward Puerto Rico have clearly been inequitable. As a
territory, Puerto Rico lacks democracy, justice, and power.
This undignified status must be discarded. If these hearings
are merely a forum for Congress to criticize the Puerto Rico
government while disregarding its own contribution to the
crisis, this is not a constructive exercise.
My constituents are hurting and they are seeking a hand up,
not a hand out. Congress should empower them, not reprimand
them. Although it is not the subject of this hearing, Congress
should enact legislation that authorizes Puerto Rico to
restructure a meaningful portion of its debt as every state is
authorized to do. And that provides Puerto Rico with better
treatment under Federal programs.
I would support the creation of a board to help the Puerto
Rico government improve its fiscal practices, but only if
Congress provides Puerto Rico with reasonable tools and more
equitable treatment. Of course, the high cost of electricity
for households and businesses in Puerto Rico hampers economic
growth and spurs migration. So, the legislation could include
provisions to make power more affordable in the territory.
For example, Congress has enacted a law requiring the
Secretary of the Interior to appoint a team of experts to
develop an energy action plan for Puerto Rico; but Interior
claims it does not have the funding to proceed. Congress should
reassign responsibility for the plan to the Department of
Energy and ensure it is swiftly prepared.
Congress also should treat Puerto Rico equally under
LIHEAP, which helps households pay their electric bills. I
persuaded the Federal Government to take administrative steps
to increase Puerto Rico's LIHEAP funding from $4 million to $50
million a year; but state-like treatment could translate into
$24 million a year.
On the other hand, Federal tax credits to encourage
households to install renewable energy technology do not
benefit Puerto Rico. Congress should authorize the Puerto Rico
government to offer the credits through its local tax system,
with the Federal Government reimbursing the territory
government for the lost revenue.
Congress also has authorized, but never funded, two
territory-specific grant programs to help Puerto Rico reduce
its dependence on foreign oil and to improve its electricity
distribution system. Congress should appropriate money for
these programs.
In addition, Congress should enact my legislation to
increase the number of ships qualified to transport LNG from
the states to Puerto Rico, and require DOE to prepare a report
on the prospect of the territory becoming a hub for the
distribution of American-produced energy in the Caribbean
region.
Meanwhile, on the Puerto Rico level, operations at PREPA
require fundamental reform. After becoming PREPA's chief
restructuring officer in 2014, Ms. Donahue, who is here today,
observed that PREPA was far behind the industry in virtually
every respect. I will ask Ms. Donahue for a progress report
during the course of this hearing.
PREPA must diversify its fuel supply, reducing reliance on
petroleum and boosting use of natural gas and renewable energy.
The private sector should have a larger role in developing
Puerto Rico's energy system. PREPA currently purchases
electricity generated by two private companies; additional
public-private partnerships could benefit consumers.
Finally, I will ask Ms. Donahue about the debt
restructuring agreement PREPA signed with 70 percent of its
bond holders, now pending before the Puerto Rico legislature.
As Ms. Donahue will note, it took PREPA over 15 months to
negotiate the agreement, because PREPA lacks access to an
orderly debt restructuring process such as Chapter 9. The
burden is on the government of Puerto Rico to make the case
that this agreement is in the best interests of the American
citizens of Puerto Rico.
Thank you. I yield back.
[The prepared statement of Mr. Pierluisi follows:]
Prepared Statement of the Hon. Pedro Pierluisi, a Delegate in Congress
from the Territory of Puerto Rico
introduction
Thank you, Chairman Lamborn. And I want to thank Congressman
Lowenthal for giving me the opportunity to serve as Ranking Member for
this hearing.
Let me begin by describing the factual backdrop against which the
Subcommittee on Energy and Mineral Resources meets today. This is the
sixth hearing on Puerto Rico that Congress has held in the past 11
months. Later this month, another subcommittee of the Natural Resources
Committee is expected to hold a seventh hearing about Puerto Rico.
During the time period in which Congress has debated this matter, but
done nothing, the situation in the U.S. territory has gone from bad to
worse. Since 2004, when Puerto Rico's population was at its peak, the
territory's population has fallen by about 10 percent, from 3.82
million to 3.47 million--and preliminary data indicate that, in 2015,
the level of migration from Puerto Rico to the states was the highest
in the modern era. The Puerto Rico government has been unable to pay
hundreds of millions of dollars in tax refunds it owes to taxpayers, in
payments it owes to private-sector companies that sold products to or
rendered services for the government, and in contributions it is
required to make to its various public pension funds. According to a
November 2015 report, for every dollar the government of Puerto Rico
owes in pension payments to retired workers (former central government
employees, municipal government employees, employees of all but one
public corporation, public school teachers, and judges), it only has
4 , on average, to meet those obligations. Two of the roughly 18 public
entities in the territory that issue bonds--the Puerto Rico
Infrastructure Financing Authority (PRIFA) and the Puerto Rico Public
Finance Corporation (PFC)--have missed scheduled payments to
bondholders, and those missed payments led to the filing of a lawsuit
against the government of Puerto Rico by two providers of financial
guaranty insurance, known as bond insurers or monolines. If the present
course continues, it is a virtual certainty that there will be
additional--and far larger--defaults on bonded debt in mid-2016,
followed by more lawsuits. Apart from lawyers and consultants, it is
unclear who will benefit from this pattern of defaults and ensuing
litigation. Certainly not my constituents, nor the vast majority of
Puerto Rico's individual and institutional creditors.
Congressional hearings can serve a valuable purpose, providing the
evidentiary basis for legislation designed to address a complex problem
of national importance--like the situation in Puerto Rico. But hearings
can also become a substitute for legislative action or, put
differently, a cover for legislative inaction.
Every objective observer recognizes that there is a genuine crisis
in Puerto Rico, and that it is the joint responsibility of the Puerto
Rico government, whose policies and practices have often been
irresponsible and inept, and the Federal Government, whose policies
toward Puerto Rico have been immoral, inequitable, and incoherent. If
hearings such as this one lead to legislation--that is, if discussion
culminates in deeds--then these hearings will have been worth the
effort expended.
However, if these hearings are merely a forum for Members of
Congress to preach and pontificate about the Puerto Rico government's
shortcomings, while disregarding or downplaying the Federal
Government's own major contribution to the crisis in the U.S.
territory, then all of these hearings will have been a colossal waste
of time. This would be the ultimate insult to my constituents, who are
truly hurting and who are asking only for a hand-up, not a hand-out,
from their national government--in which they have no vote.
On December 16, 2015, Speaker Ryan issued a public statement,
noting that he had instructed the committees of jurisdiction in the
House to develop a ``responsible solution'' to the crisis in Puerto
Rico by March 31, 2016. Since then, I have spoken with Speaker Ryan,
House Majority Leader Kevin McCarthy, House Natural Resources Committee
Chairman Rob Bishop, and House Judiciary Committee Chairman Bob
Goodlatte. They assured me that they are cognizant of the need for
congressional action to tackle this crisis. I thought then--and I
continue to think now--that these assurances were made in good faith. I
also believe that Speaker Ryan and his fellow Republican leaders
recognize that I am a pragmatic legislator that is open to principled
compromise and has no agenda other than helping the American citizens I
represent, who have received a raw deal from both their local
government in San Juan and their national government in Washington, DC.
As I emphasized at previous hearings, it is necessary and
appropriate for Congress to enact a legislative package that authorizes
Puerto Rico to restructure a reasonable portion of its roughly $70
billion in debt, while ensuring that Puerto Rico fulfills the
obligations to creditors enshrined in our own constitution. Creditors
that have opposed a fair and orderly legal framework in which Puerto
Rico can restructure some of its debt obligations are making a serious
mistake, advocating a position that will not ultimately be in their
self-interest. I hope they realize their error in judgment before it is
too late. Whether they do or not, it is Congress' job to legislate in
the broader public interest, and not to be dissuaded from legislating
by powerful players making poor arguments.
This legislative package should also provide Puerto Rico with more
equitable treatment under key Federal spending programs like Medicaid
and Medicare \1\ and Federal tax credit programs like the earned income
tax credit and the child tax credit, because the cumulative impact of
such disparate treatment has been devastating for quality of life in
Puerto Rico and for the fiscal situation of the territory government,
which has over-spent local funds and over-borrowed in the capital
markets in order to compensate for the shortfall in Federal support.
Given the jurisdiction of this subcommittee and the narrow scope of
today's hearing, I want to emphasize that this legislative package
could also include provisions aimed at ensuring that affordable and
reliable electric power is available in Puerto Rico. I will describe a
number of specific options later in my testimony.
---------------------------------------------------------------------------
\1\ There has been recent progress on the Medicare front. The
Consolidated Appropriations Act for Fiscal Year 2016 (Public Law 114-
113), enacted in December 2015, included the language of my bills to
provide Puerto Rico hospitals with the same base payment rate as
hospitals in the states for treating Medicare patients (H.R. 1417), and
to make Puerto Rico hospitals eligible for the same Medicare bonus
payments as hospitals in the states for converting to electronic health
records (H.R. 1225). Nevertheless, Puerto Rico (and the other U.S.
territories) continue to face numerous disparities under Medicare, and
I have introduced legislation to eliminate or mitigate each of these
disparities. See H.R. 2635 (Pierluisi) and S. 1961 (Schumer), Improving
the Treatment of the U.S. Territories Under Federal Health Programs
Act, and H.R. 4163 (Pierluisi) and S. 2342 (Nelson), the Territories
Medicare Prescription Drug Assistance Equity Act.
---------------------------------------------------------------------------
If provisions granting the Puerto Rico government authority to
adjust debt and improving the treatment of the territory under certain
Federal programs are included in the legislative package, I will not
oppose a provision establishing a temporary and independent board that
would ensure that the Puerto Rico government complies with sound
budgeting standards and fiscal metrics. However, I will adamantly
oppose any Federal oversight unless Congress provides Puerto Rico with
the reasonable tools and the fair treatment we require and deserve.
Such a one-sided approach would be a political stunt, not a practical
solution to a serious problem.
energy
I now turn to the specific subject of today's hearing--energy
challenges and opportunities in Puerto Rico.\2\
---------------------------------------------------------------------------
\2\ See generally Puerto Rico Territory Energy Profile, U.S. Energy
Information Administration, U.S. Department of Energy (last updated
April 16, 2015), available at http://www.eia.gov/state/?sid=RQ.
---------------------------------------------------------------------------
The most pressing energy-related challenge in Puerto Rico is the
high cost of electric power. Puerto Rico is an island jurisdiction that
produces no petroleum, natural gas or coal, and that relies heavily on
imported fuel--mainly petroleum--to generate electricity. Based on the
best available data, the price of electricity for residential customers
in Puerto Rico peaked in February 2013 (when the price of crude oil was
about $116 per barrel) at 30.6 per kilowatt hour, compared to a U.S.
national average of 11.6 per kilowatt hour and a Florida state average
of 11.3 per kilowatt hour. In recent years, as the price of oil has
decreased substantially, the price of electricity paid by consumers in
Puerto Rico has fallen as well, but remains high relative to the
national average. For example, in November 2015 (the last month for
which Puerto Rico data is available, when the price of crude oil was
about $44 per barrel), the price of electricity for residential
customers in Puerto Rico was 19.3 per kilowatt hour, compared to a
U.S. national average of 12.7 per kilowatt hour and a Florida state
average of 11.6 per kilowatt hour. Of course, there is no guarantee
that the price of oil will remain this low in the future, as oil prices
are volatile and can rise or fall depending on events occurring
anywhere in the world.
In Puerto Rico, the high price of electricity is compounded by the
low ability to pay. Median household income in the U.S. territory is
about $19,500 a year, versus about $52,000 in the states, and island
households have to devote a significant portion of their limited
monthly income to pay their electricity bills. This makes it harder for
households to purchase other products and services, which serves as a
drag on overall consumer demand, business sales, and economic activity.
Likewise, businesses of all sizes in Puerto Rico invariably cite the
high cost of electricity as one of the major challenges they confront.
They emphasize that expensive electricity bills affect their ability to
earn a profit, to expand operations, and to retain existing workers and
hire new workers. Some larger companies in Puerto Rico have responded
by disconnecting from the island-wide electric grid and generating
their own electricity on-site, but this is not a feasible option for
most businesses.
The goal, then, must be to reduce the cost of electric power for
the residential sector, the commercial sector, and the industrial
sector in Puerto Rico. The argument that Puerto Rico households and
businesses ought to pay higher electricity prices--a view I have heard
expressed only by individuals who do not live on the island--should be
treated with extreme skepticism. Before outlining various steps that
can be taken at the local level and the Federal level to improve the
energy system in Puerto Rico and to provide cost savings to consumers,
a bit of background will help frame the discussion.
background
Puerto Rico's electricity is supplied by the Puerto Rico Electric
Power Authority, known as PREPA, a public corporation established in
1941. PREPA has a governing board consisting of nine individuals, six
of whom are appointed by the Governor of Puerto Rico with the advice
and consent of the Puerto Rico Senate. Senior managers include an
executive director, a vice-executive director, and various functional
directors. PREPA has about 9,500 employees, including about 6,700
unionized workers affiliated with four separate unions. PREPA has its
own employee retirement system, a defined benefit pension plan. About
14,000 individuals are currently receiving benefits under this plan. In
2014, PREPA had operating revenue of about $4.7 billion. PREPA is in
severe financial distress, and the outstanding principal amount of
bonds that PREPA has issued exceeds $8 billion. Like nearly all bonds
issued by public entities in Puerto Rico, PREPA bonds have been
downgraded by the three main credit rating agencies to non-investment
grade--or junk--status.
PREPA owns and operates all but two of the electricity generating
stations--power plants--in Puerto Rico. The PREPA system is composed of
four main power plants. They are as follows:
The ``Costa Sur'' plant in the municipality of Guayanilla,
located on southwest coast of Puerto Rico, which consists
of four units.
-- Unit 3 and Unit 4 burn Number 6 residual fuel oil (bunker
fuel). Unit 3 and Unit 4 would operate on ``limited use''
status in the event that the Mercury and Air Toxics
Standards (MATS), promulgated by the U.S. Environmental
Protection Agency (EPA) pursuant to the Clean Air Act, take
effect.
-- Unit 5 and Unit 6 are capable of burning either bunker fuel
or, due to a $60 million investment made in 2012, natural
gas.
The ``Aguirre'' plant in the municipality of Salinas,
located on the southeast coast of Puerto Rico, which
consists of four units.
-- Unit 1 and Unit 2 burn bunker fuel.
-- Combined Cycle Unit 1 and Combined Cycle Unit 2 burn Number 2
fuel (diesel fuel).
-- In recent years, efforts to enable the Aguirre facility to
burn natural gas were commenced but not completed. Before
these units can burn natural gas, a means of delivering
natural gas to the facility must be secured. To this end,
Excelerate Energy--a Texas-based company--has proposed to
construct (1) an offshore berthing platform off the
southeastern coast of Puerto Rico to receive LNG from
ships, and (2) a 4-mile-long subsea pipeline connecting the
berthing platform to the Aguirre facility. In July 2015,
this proposal was approved by the Federal Energy Regulatory
Commission (FERC), but it still requires approval from
other Federal agencies. PREPA is seeking a loan guarantee
from the U.S. Department of Energy to finance up to 80
percent of the project cost, but DOE has been unable to
approve the loan guarantee application due to PREPA's
financial condition and the associated risk that the public
corporation would be unable to repay the loan.
The ``Palo Seco'' plant in the municipality of Catano, in
the San Juan metropolitan area, which consists of four
units.
-- All four units burn bunker fuel.
-- Unit 1 and Unit 2 would operate on ``limited use'' status if
MATS take effect.
The ``San Juan'' plant located in the municipality of San
Juan, which consists of six units.
-- Unit 5 and Unit 6 burn diesel fuel.
-- Unit 7, Unit 8, Unit 9, and Unit 10 burn bunker fuel. Unit 7
and Unit 8 would operate on ``limited use'' status if MATS
take effect.
In addition to the four power plants owned and operated by PREPA,
PREPA purchases power generated by two plants owned and operated by
private companies.
A plant in the municipality of Penuelas, located on the
southwest coast of Puerto Rico, which is owned by
EcoElectrica, a Puerto Rico corporation. The plant has been
in operation since 2000. The plant burns natural gas, which
is imported mainly from Trinidad and Tobago, as well as
from Belgium, Nigeria, Norway and Spain, and is delivered
to Puerto Rico on foreign-flagged ships. I understand that
EcoElectrica's offshore import terminal--which receives LNG
from a ship approximately twice a month--operates at about
half its capacity and could accept additional LNG
deliveries. EcoElectrica has 80 employees. EcoElectrica has
entered into a power purchasing agreement with PREPA.
-- In addition to purchasing electricity generated from natural
gas at EcoElectrica's plant in Penuelas, PREPA also
purchases natural gas from EcoElectrica for use at Unit 5
and Unit 6 at PREPA's own Costa Sur plant in nearby
Guayanilla. There is a natural gas pipeline connecting the
EcoElectrica facility in Penuelas and the PREPA facility in
Guayanilla.
A plant in the municipality of Guayama, located on the
southeast coast of Puerto Rico, which is owned by AES
Puerto Rico, a subsidiary of the AES Corporation, based in
northern Virginia. The plant has been in operation since
2002. The plant burns coal, which is imported from Colombia
and delivered to Puerto Rico on foreign-flagged ships. AES
Puerto Rico has 110 employees. AES has entered into a power
purchasing agreement with PREPA.
According to the latest statistics published by the U.S. Energy
Information Administration within the U.S. Department of Energy, in
2013 Puerto Rico generated 55 percent of its electricity from
petroleum, 28 percent from natural gas, 16 percent from coal, and 1
percent from renewable sources. In terms of renewables, Puerto Rico
enacted legislation in 2010 that established a Renewable Energy
Portfolio Standard, or RPS. Under the RPS, PREPA is required to obtain
12 percent of its electricity from renewable sources by 2015 (a
standard it failed to meet), 15 percent by 2020, and 20 percent by
2035. Renewable sources in Puerto Rico include solar, wind and
hydroelectric. AES Puerto Rico owns and operates the largest solar farm
in Puerto Rico, which opened in 2012 in the municipality of Guayama.
The electricity generated from this solar farm is sold to PREPA.
In May 2014, the Puerto Rico government approved Law 57-2014, the
Puerto Rico Energy Transformation and RELIEF Act. The core of Law 57 is
the creation of an Energy Commission, composed of three commissioners
appointed by the Governor with the advice and consent of the Puerto
Rico Senate, to regulate PREPA and any other ``energy company'' that
operates in Puerto Rico. Pursuant to Law 57, electricity rates
established by PREPA, which previously had not been subject to
meaningful review, must now be approved by the Energy Commission before
taking effect. The intent of Law 57 is sound; how effectively the
legislation will be implemented remains to be seen.
In August 2014, PREPA entered into ``forbearance agreements''--
providing a grace period during which PREPA's creditors refrained from
pursuing certain legal actions against PREPA--with fuel line lenders
and some bondholders and bond insurers. These agreements were
subsequently extended many times, through late 2015.\3\
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\3\ See http://www.bgfpr.com/investors_resources/prepa.html.
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In September 2014, PREPA's governing board appointed Lisa Donahue--
one of today's witnesses--as chief restructuring officer. In this role,
Ms. Donahue is charged with crafting and implementing structural and
operational reforms at PREPA and negotiating a consensual debt
restructuring agreement with creditors.\4\
---------------------------------------------------------------------------
\4\ See Lisa Donahue, Testimony Before the Committee on Energy
Affairs and Water Resources, Puerto Rico Senate (April 14, 2015),
available at http://www.aeepr.com/Docs/Lisa%20
Donahue%20PR%20Senate%20Statement%204-14-15.pdf.
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Because Puerto Rico, unlike every state, does not have access to
Chapter 9 of the Federal bankruptcy code, the Puerto Rico government
did not have the option of enacting legislation to authorize PREPA (or
other instrumentalities) to seek the adjustment of its debts in a fair
and equitable manner under the supervision of a Federal judge. The
Puerto Rico government could not even use the prospect of a Chapter 9
filing by PREPA as a means to foster swift and successful negotiations
between PREPA and its creditors. As a result of Puerto Rico's exclusion
from Chapter 9, the territory government enacted a local law in July
2014 that sought to authorize certain public entities in Puerto Rico--
including PREPA--to restructure their debts in the Puerto Rico court
system. In February 2015, a Federal district court invalidated that law
on the ground that it is preempted by Chapter 9 (even though Chapter 9
excludes Puerto Rico) and, in July 2015, a Federal appeals court
affirmed that decision. However, in December 2015, the U.S. Supreme
Court granted certiorari to review the appeals court's conclusion, and
that case will be argued and decided later this year.
Late last year, after a process that can only be characterized as
lengthy and laborious, PREPA--led by Ms. Donahue--reached an agreement
with fuel line lenders and bondholders and bond insurers controlling
about 70 percent of PREPA's bonds, called the Restructuring Support
Agreement (RSA). Implementation of the RSA is contingent on the
completion of a number of steps that must still be taken, including
enactment of a bill called the PREPA Revitalization Act by the Puerto
Rico Legislative Assembly. I have reviewed the English and Spanish
versions of this legislation, but the text of the bill is still
undergoing material changes.
In testimony delivered in support of the PREPA Revitalization Act
before the Puerto Rico Senate on November 10, 2015, Ms. Donahue stated
as follows:
Since entering into the Forbearance Agreements, PREPA has
negotiated extensively with its creditors with the ultimate
goal of reaching agreement on a comprehensive restructuring
plan that addresses both PREPA's financial and operational
challenges. The lack of an available legal framework within
which to restructure its debts has complicated and extended
PREPA's negotiation process. We have no ability to compel
anyone to agree or even participate in the process. Therefore
the overall solution, which must be consensual, has to be fair,
balanced and holistic.\5\ (emphasis added)
---------------------------------------------------------------------------
\5\ See Lisa Donahue, Testimony in Support of PREPA Revitalization
Act Before the Committee on Energy Affairs and Water Resources, Puerto
Rico Senate (November 10, 2015), available at http: / / www.aeepr.com /
Docs / PREPA %20-%20 Donahue%20 Statement%20 Testimony% 20to% 20
Legislative%20Assembly%20-%20Nov%2010.pdf. When Ms. Donahue testified
on November 10th, PREPA had yet to reach agreement with the three
monolines ensuring roughly 28 percent of PREPA's debt. Since that
testimony was delivered, PREPA has reached agreement with two of the
monolines, Assured Guaranty Corporation and National Public Finance
Guarantee Corporation (a subsidiary of MBIA Inc.), rolling them into
the RSA. To date, agreement has evidently not been reached with the
third monoline, Syncora Guarantee Inc.
As a matter of principle, I am a strong advocate of consensual debt
restructuring negotiations between Puerto Rico's bond-issuing public
entities and their creditors--and I have criticized the current
administration in San Juan for not being sufficiently proactive in
pursuing such negotiations. As a matter of practice, I have concerns
that consensual negotiations--if not backstopped by a legal framework
that creates the proper incentives for the parties to reach an accord--
can drag on for an excessive period of time, result in an agreement
that is unfair or unbalanced, and lack a suitable mechanism to bind
``holdout'' creditors who disapprove of the terms of the deal. It bears
emphasis that Chapter 9 is not intended to substitute for consensual
negotiations--indeed, a debtor generally cannot obtain Chapter 9 relief
unless it demonstrates that it sought in good faith to negotiate an
out-of-court accord with its creditors--but rather to facilitate such
negotiations.
During the question-and-answer session, I will ask Ms. Donahue to
explain in simple terms (1) why she believes that the RSA--as embodied
in the PREPA Revitalization Act now pending before the Puerto Rico
Legislative Assembly--meets her self-imposed test of being ``fair,
balanced and holistic''; (2) what provisions in the agreement give her
the most pause; (3) whether the agreement is in any tension with Law
57, especially the provisions of Law 57 that vest the Energy Commission
with the power to approve electricity rates; (4) the practical
implications of the fact that creditors controlling 30 percent of
PREPA's bonds have not signed the RSA; (5) whether the agreement will
position PREPA financially to make necessary capital improvements to
power plants, power lines and other energy infrastructure; and (6) what
impact the agreement is likely to have on electricity rates for island
households and businesses in the short, medium and long term.
I am willing to support this agreement, but the burden of proof is
on PREPA and its creditors to convince me that the terms of the deal
are beneficial for the people of Puerto Rico. I will also ask the other
witnesses on the panel for their perspective on the agreement.
recommended policy steps at the puerto rico level
There are four main policy steps that must be taken at the Puerto
Rico level in order to improve the delivery of affordable and reliable
power to households and businesses on the island.
First, operations at PREPA must be fundamentally reformed. Ms.
Donahue's April 2015 testimony before the Puerto Rico Senate--regarding
the welter of deficiencies she found at PREPA--makes for sobering
reading. As Ms. Donahue notes: ``When I arrived at PREPA [in September
2014], it was clear to me that PREPA was far behind the industry in
virtually every respect.'' Among the many problems she identifies are:
power plants that are old and technologically outdated, result in a
high rate of forced power outages, and rely on expensive and
environmentally unfriendly fuel; strategic decisions--like whom to hire
and what capital improvement projects to pursue--that are frequently
based on political considerations rather than on sound business
judgment; the absence of a comprehensive plan to ensure that PREPA's
power plants will be able to comply with Federal environmental
standards like MATS; a baffling rate structure that requires
substantial revision; a lack of institutionalized procedures and
processes; outdated information technology systems; the inability or
unwillingness to collect payment from customers and to prevent theft of
electricity; poor inventory control, procurement practices and customer
service; and an unsafe working environment for employees. The situation
that Ms. Donahue describes is totally unacceptable. PREPA can--and
must--change the way it conducts business. I am heartened that Ms.
Donahue has testified that improvements are in fact being made, and I
will ask her to describe in more detail what reforms have occurred and
what reforms still need to occur.
Second, PREPA must diversify its fuel supply, reducing its reliance
on petroleum (which is not used in the 50 states to generate
electricity) and increasing its use of natural gas and renewable energy
sources. With respect to natural gas, it must be emphasized that the
United States became the world's largest producer of natural gas in
2011, and the first export terminals necessary to deliver that gas to
other jurisdictions (whether non-contiguous states like Hawaii, U.S.
territories like Puerto Rico, or foreign nations) will come on-line
later this year. Puerto Rico should have the option of purchasing
natural gas from the states, rather than from foreign countries,
because it may be able to do so more efficiently and at lower cost.
However, there are no Jones Act-compliant tankers available to
transport natural gas from the states to Puerto Rico, which is why I
introduced legislation to authorize modern tankers built outside the
United States but otherwise compliant with the Jones Act to fill this
gap.
Relatedly, if the Jones Act issue is addressed, I think Puerto Rico
is well-positioned to serve as a U.S. natural gas hub for the Caribbean
region. Specifically, a large tanker could transport natural gas from
the states to Puerto Rico, whereupon the natural gas could be placed on
smaller vessels for transport (so-called ``milk runs'') to other
islands in the area. With respect to renewables, I have been
disappointed by the lack of progress made by the current administration
in San Juan to comply with either the letter or the spirit of the RFS.
With strong leadership and smart planning, Puerto Rico can do a much
better job harnessing the power of the sun, the wind, and the water.
Parenthetically, I also believe that Puerto Rico has the potential to
develop a biofuel industry, and (1) to use biofuels to blend with
diesel fuel at those PREPA plants that still rely on Number 2 fuel, and
(2) to use biofuels for transportation fuel, as is required in the U.S.
mainland pursuant to the Renewable Fuel Standard (RFS) program.
Third, it is absolutely clear that there must be a larger role for
the private sector in developing Puerto Rico's energy system--whether
it is electricity generation, transmission or distribution. One model
is the EcoElectrica and AES model, in which PREPA enters into a
contract to purchase power generated by a private corporation in a more
cost-efficient manner than PREPA could generate on its own. Another
model worth analyzing would be for a private corporation to generate
electricity and then to deliver this electricity using PREPA's
transmission and distribution lines (a process known as ``wheeling'').
Fourth, PREPA must undertake a smart and serious capital
improvement program to modernize its generation, transmission and
distribution system. The problem, of course, is that PREPA is in severe
financial distress, does not have access to credit markets, and will
thus struggle to pay for new infrastructure or to upgrade existing
infrastructure. Investors are understandably wary of entering into a
contract with a public corporation that is financially unstable and may
not be able to fulfill its contractual obligations. Thus, unless PREPA
can achieve financial stability, whether as a result of the pending RSA
or through other means, it will be difficult for PREPA to finance the
capital improvements necessary to benefit consumers.
recommended policy steps at the federal level
Hopefully, one purpose of this hearing is to explore ways in which
the Federal Government--both the executive branch and Congress--can
help Puerto Rico improve its energy system and provide affordable
electricity to consumers. Here, then, are seven constructive steps the
Federal Government could take:
Appropriate Funds for the Congressionally Authorized
``Energy Action Plan'' for Puerto Rico: In December 2014,
Congress enacted the Fiscal Year Consolidated and Further
Continuing Appropriations Act (P.L. 113-235). At my
initiative, the law contains a provision requiring the
Secretary of the Interior to appoint a team of technical,
policy and financial experts to develop an ``energy action
plan'' for Puerto Rico. The plan must include
recommendations for how Puerto Rico can: (1) reduce its
reliance on foreign fuels; (2) develop and utilize U.S.
fuel energy sources; and (3) improve performance of energy
infrastructure and overall energy efficiency. To date, the
Secretary of the Interior has not appointed the required
team, claiming that the Department does not have sufficient
funding to prepare the plan. Congress should reassign
responsibility for the plan from the Department of the
Interior to the Department of Energy, which is better
suited to prepare the plan, and then ensure that the
Department of Energy prepares the plan without delay.
Provide Equality for Puerto Rico Under LIHEAP: The Low
Income Home Energy Assistance Program (LIHEAP), which is
administered by the U.S. Department of Health and Human
Services (HHS), helps low-income households pay their
electricity bills. Puerto Rico has always been treated
unequally under LIHEAP, receiving far less funding than it
would if it were a state. Specifically, in the 1981 Federal
law that established LIHEAP, Congress directed HHS to
allocate each year, for the five territories to share, no
less than 0.10 percent and no more than 0.50 percent of the
total LIHEAP appropriation. According to the law, the
percentage annually allocated by HHS is supposed to be
determined on the basis of need in the territories.
However, from the inception of LIHEAP until Fiscal Year
2013, HHS provided exactly 0.135 percent for the
territories each year, just barely above the minimum level
authorized by law. I led an effort by the five territory
delegates to persuade HHS to increase the funding provided
to the territories to the maximum amount allowed under
law--0.50 percent--and this effort was successful.
Accordingly, Puerto Rico received about $15 million in both
Fiscal Year 2014 and Fiscal Year 2015, compared to the less
than $4 million that Puerto Rico received under the old
formula in Fiscal Year 2013. However, Puerto Rico is still
treated unequally under the LIHEAP statute, compared to the
states. Congress should amend the LIHEAP statute to provide
Puerto Rico with state-like treatment, which--according to
one estimate--would result in Puerto Rico receiving about
$24 million a year.
Extend Federal Renewable Energy and Energy Efficiency Tax
Credits to Puerto Rico Households: Congress has enacted
various Federal tax credits to encourage households to
install renewable energy technology and energy efficiency
technology. For example, there are Federal tax credits for
households that adopt solar-electric, solar water-heating,
fuel cell, wind energy, and geothermal heat pump
technology, and Federal tax credits for households that
make their homes more energy efficient, such as by
purchasing certain appliances or installing insulation. See
Internal Revenue Code Sec. Sec. 25C, 25D, 45L and 45M.
However, because Congress has exempted Puerto Rico
households from paying Federal income taxes on income
earned in Puerto Rico, most households in the U.S.
territory cannot benefit from these important credits.
Therefore, as it has done with respect to other Federal tax
credits, Congress should amend current law to apply these
renewable energy and energy efficiency credits to Puerto
Rico through a ``cover-over'' mechanism. Under this
mechanism, the U.S. Treasury Department would authorize the
Puerto Rico government to offer these credits to households
through the local Puerto Rico tax system, and the U.S.
Treasury Department would make an annual grant to the
Puerto Rico government to compensate it for the foregone
tax revenue.
Expand USDA Electricity-Cost Reduction Programs in Puerto
Rico: The U.S. Department of Agriculture (USDA) administers
multiple grant programs aimed at reducing the cost of
electricity, including the Rural Energy for America Program
(REAP) and the High Energy Cost Grant Program. Under REAP,
USDA provides grants up to $500,000 and loan guarantees to
farmers and small businesses to help them purchase and
install renewable energy systems or make energy efficiency
improvements. While multiple farmers and small business
owners in Puerto Rico have received grants under this
program, it is clear that more can be done to expand the
number of REAP applications from Puerto Rico, and so I urge
USDA to enhance its efforts to educate potential applicants
in the territory about the program. By contrast, the High
Energy Cost Grant Program has not been put to use in Puerto
Rico. This program was established in 2000 to provide
assistance to communities most challenged by high energy
costs. Grants may be used to improve energy generation,
transmission or distribution facilities serving eligible
communities, or to install renewable energy systems and
make energy efficiency improvements in eligible
communities. However, under current program rules, grants
are only available in communities with annual residential
energy costs exceeding 275 percent of the national average.
Given that under the PREPA rate structure, a single island-
wide rate is charged to customers, Puerto Rico has not been
in a position to benefit from this important grant program.
I urge USDA and PREPA to meet so that they can review
whether there are ways in which this program could be
modified in order to assist Puerto Rico communities, given
the very high cost of electricity in the U.S. territory.
Update the Existing Jones Act LNG and LPG Exemption in
Puerto Rico: Congress should enact my legislation, the
Puerto Rico Interstate Commerce Improvement Act, in order
to increase the number of maritime vessels authorized to
transport LNG and liquified petroleum gas (LPG) from ports
in the U.S. mainland to ports in Puerto Rico. The Jones Act
has three main pillars. It requires that products
transported between ports in the United States be carried
on vessels that are predominantly owned by U.S. citizens
and registered in the United States, built at shipyards
located in the United States, and operated with mostly U.S.
citizen crews. In 1996, Congress granted Puerto Rico a
narrow exemption from the Jones Act. That law authorizes
two categories of vessels to transport LNG or LPG from
ports in the U.S. mainland to ports in Puerto Rico, even
though those vessels do not satisfy all three pillars of
the Jones Act. The first category are vessels built outside
of the United States prior to October 1996. The second
category are vessels built in the United States prior to
October 1996, but then registered by their owners in
foreign countries. Under the Jones Act, once a vessel has
been registered outside of the United States, it cannot
subsequently be re-registered in the United States.
According to the best available statistics, only about 60
of the 450 or so foreign-built LNG tankers in the world
qualify for the 1996 exemption under category one. The
average age of those 60 tankers is about 30 years old,
while the average age of all LNG tankers in operation is
about 12 years old. In addition, there are only about 11
LNG tankers that qualify for the 1996 exemption under
category two, and all are at least 35 years old. My
legislation would update the 1996 exemption, allowing any
vessel built outside of the United States, not merely those
built before October 1996, to transport LNG and LPG from a
port in the U.S. mainland to a port in Puerto Rico. This
will benefit energy producers in the states, who will gain
access to an important new U.S. market. It will also
provide a direct benefit to consumers in Puerto Rico, who
will see their electricity bills decrease and their
environment improve.
U.S. Department of Energy Report on the Potential for
Puerto Rico to Become a Transshipment Hub for U.S.-Produced
LNG in the Caribbean Region: Either as part of the energy
action plan for Puerto Rico mandated by Congress in P.L.
113-235 (described above), or independent of that plan, the
U.S. Department of Energy should prepare a report for
Congress and the public on the feasibility and desirability
of Puerto Rico becoming a transshipment hub for the
distribution of U.S.-produced LNG and other energy products
throughout the broader Caribbean region. If necessary,
Congress should enact legislation requiring this report.
Sustain and Strengthen USDOE Technical Assistance to
Puerto Rico: In October 2014, with my support, the
government of Puerto Rico and the U.S. Department of Energy
signed a memorandum of understanding that provides a broad
framework under which the parties are working together to
shape an energy policy for Puerto Rico that is in the
public interest and rooted in transparency, efficiency, and
strong citizen participation. These efforts complement the
process initiated by the Puerto Rico Energy Commission
under Law 57 to help PREPA transform itself. USDOE--through
subject matter experts in its Office of Energy Efficiency
and Renewable Energy (EERE), Office of Fossil Energy,
National Energy Technology Laboratory (NETL), and Office of
Intergovernmental Affairs--has been periodically meeting
with government and private-sector stakeholders in Puerto
Rico to review progress, come to a consensus on a common
vision, and set realistically attainable energy
diversification goals. Specifically, the Energy Commission
is currently reviewing the draft Integrated Resource Plan
(IRP)--which PREPA contracted with Siemens to prepare--that
addresses generation, transmission, distribution and fuel
options. Stakeholders are providing input on the IRP with
USDOE technical assistance. I urge USDOE to sustain and
strengthen this technical assistance.
______
Mr. Lamborn. I thank Mr. Pierluisi for his statement. I
would now like to recognize the Ranking Member of the Full
Committee, Mr. Grijalva of Arizona, for an opening statement.
STATEMENT OF THE HON. RAUL M. GRIJALVA, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF ARIZONA
Mr. Grijalva. Thank you very much, Mr. Chairman, for your
courtesy. We appreciate you scheduling this hearing in response
to Speaker Ryan's instructions to this committee to craft a
responsible solution to Puerto Rico's budget disaster and deep
crisis by the end of March.
While exploring the energy challenges and opportunities
facing Puerto Rico is a worthwhile topic, albeit somewhat
disjointed from the fiscal reality that is going on right now
in Puerto Rico, there is a larger issue here in Congress.
Congress is denying Puerto Rico the ability to have an
orderly restructuring of its unpayable debt. It is a major
reason for the debt crisis, it is the main barrier to recovery,
and is even one of the primary energy challenges facing Puerto
Rico. That is what we should be discussing today.
According to the Treasury Department, which has been
assisting the island with its debt issues, Puerto Rico is
insolvent. Last June, Governor Garcia Padilla announced that
Puerto Rico could not pay its debts. His government defaulted
on $58 million in bond principal and interest payments in
August and again in January. The Governor has been looking
through the cushions of his government's couch to find ways to
maintain these bond payments. This means other bonds have had
to go unpaid, causing some insurers of Puerto Rican bonds to
file suit against the government. It is just the beginning of
what is expected to be a flood of expensive, chaotic litigation
which only a Federal debt restructuring process can prevent.
The Puerto Rican government is robbing Peter to pay Paul.
Some time in the next 3 to 6 months they will no longer be able
to pay Paul or anyone else. This will profoundly deepen the
humanitarian crisis on the island that we have been warned
about, which is coming. We cannot allow this to happen. Our
fellow American citizens in Puerto Rico deserve much better.
The island continues to suffer from decades of economic
decline and will not be able to turn things around without
congressional action. They cannot repair their economy until
they deal with the debt problem. They cannot provide cost-
effective energy until they raise billions of dollars to
upgrade their old and dysfunctional power generation and
distribution infrastructure. These billions will be impossible
to raise or borrow until an orderly debt restructuring brings
everyone to the table and helps them repair their credit.
Meanwhile, Puerto Rican families are forced to suffer more and
more from brutal budget cuts.
Last September, my staff put out a report called, ``Profit
at Any Cost: How Hedge Funds Win By Making Sure Puerto Rico
Loses.'' It shows how vulture hedge funds helped cause the
Puerto Rican debt crisis and are now standing in the way of
resolving it. Since then, these funds have been using their
influence in the courts and through political channels to stop
all debt restructuring plans not on their terms. They are
relying on their status as Puerto Rico's only remaining lender
to push extreme cuts to basic services that will, if enacted,
increase their profits even more.
In the meantime, the island continues to bleed residents
who see relocation to Florida or elsewhere on the mainland as
their only hope for survival. By some estimation, up to 100,000
Puerto Ricans are expected to have left the island in 2015.
Much more pain in the name of austerity will be inflicted
on the people of Puerto Rico if Congress continues to put the
demands of hedge funds ahead of the needs of families. There is
no reason they should have to pay for the risky investment
decisions made by other people.
I urge this committee to put the American citizens of
Puerto Rico first and allow this island to access bankruptcy
protection.
Mr. Chairman, again, thank you for your courtesy. I yield
back.
[The prepared statement of Mr. Grijalva follows:]
Prepared Statement of the Hon. Raul M. Grijalva, a Representative in
Congress from the State of Arizona
Mr. Chairman, we appreciate you scheduling this hearing in response
to Speaker Ryan's instructions to this committee to craft a
``responsible solution'' to Puerto Rico's budget disaster by the end of
March.
While ``Exploring the Energy Challenges and Opportunities Facing
Puerto Rico'' is worthwhile, there's a larger issue here. Congress is
denying Puerto Rico the ability to have an orderly restructuring of its
unpayable debt. It's a major reason for the debt crisis. It's the main
barrier to recovery. It's even one of the primary energy challenges
facing Puerto Rico. That's what we should be discussing today.
According to the Treasury Department--which has been assisting the
island with its debt problems--Puerto Rico is insolvent. Last June,
Governor Garcia Padilla announced that Puerto Rico could not pay its
debts. His government defaulted on $58 million in bond principal and
interest payments in August and again in January.
The Governor has been looking through the cushions of his
government's couch to find a way to maintain these bond payments. This
means other bonds have to go unpaid, causing some insurers of Puerto
Rican bonds to file suit against the government. It's just the
beginning of what is expected to be a flood of expensive and chaotic
litigation which only a Federal debt restructuring process can prevent.
The Puerto Rican government is robbing Peter to pay Paul. Some time
in the next 3 to 6 months they will no longer be able to pay Paul or
anyone else. This will trigger the humanitarian crisis on the island
that we have been warned is coming. We cannot allow that to happen. Our
fellow American citizens in Puerto Rico deserve better.
The island continues to suffer from a decade of economic decline
and will not be able to turn things around without congressional
action. They can't repair their economy until they deal with the debt
problem. They can't provide cost-effective energy until they raise
billions of dollars to upgrade their old and dysfunctional power
generation and distribution infrastructure. These billions will be
impossible to raise or borrow until an orderly debt restructuring
brings everyone to the table and helps them repair their credit.
Meanwhile, Puerto Rican families are forced to suffer more and more
brutal budget cuts.
Last September, my staff put out a report called ``Profit at any
Cost: How Hedge Funds Win by Making Sure Puerto Rico Loses.'' It shows
how ``vulture'' hedge funds helped caused the Puerto Rico debt crisis
and are now standing in the way of resolving it.
Since then, these funds have been using their influence in the
courts and through political channels to stop all debt restructuring
plans not on their terms. They are relying on their status as Puerto
Rico's only remaining lender to push extreme cuts to basic services
that will, if enacted, increase their profits even more.
In the meantime, the island continues to bleed residents, who see
relocation to Florida or elsewhere on the mainland as their only hope
for survival. By some estimation, up to 100,000 Puerto Ricans are
expected to have left the island in 2015.
Much more pain in the name of austerity will be inflicted on the
people of Puerto Rico if Congress continues to put the demands of hedge
funds ahead of the needs of families. There is no reason they should
have to pay for risky investment decisions made by other people.
I urge this committee to put the American citizens of Puerto Rico
first and allow the island to access bankruptcy protection.
______
Mr. Lamborn. Thank you. I would now like to introduce our
witnesses. I appreciate every one of you being here today and
serving as witnesses on this panel.
We have Ms. Lisa Donahue, Managing Director of
AlixPartners; Mr. Jorge San Miguel, Chair of Environmental Law,
Energy & Land Use of Ferraiuoli, LLC; Mr. Carlos Rivera-Velez,
President of the Puerto Rico Manufacturers Association; Mr.
Josen Rossi, Chairman of the Institute for a Competitive and
Sustainable Economy of Puerto Rico; and Mr. Jaime Sanabria-
Hernandez, Co-President and General Manager for Finance and
Administration of EcoElectrica, L.P. I hope I pronounced every
one of those names and organizations correctly.
Let me remind the witnesses that under our Committee Rules,
they must limit their oral statements to 5 minutes; but their
entire statement will appear in the hearing record. When you
begin, the lights on the witness table will turn green.
After 4 minutes, the yellow light comes on. Your time will
have expired when the red light comes on. At that point, I
would ask that you complete your statement.
I would also like to ask the entire panel to testify before
the Members at the dais ask any questions.
We will now start in order, and the Chair recognizes Ms.
Donahue to testify.
STATEMENT OF LISA J. DONAHUE, MANAGING DIRECTOR, ALIXPARTNERS,
NEW YORK, NEW YORK; CHIEF RESTRUCTURING OFFICER, PUERTO RICO
ELECTRIC POWER AUTHORITY
Ms. Donahue. Thank you, Chairman Lamborn, Ranking Member
Lowenthal, Full Committee Ranking Member Grijalva, Resident
Commissioner Pierluisi, and members of the subcommittee. My
name is Lisa Donahue. I am the Chief Restructuring Officer of
the Puerto Rico Electric Power Authority, or PREPA.
PREPA produces and delivers virtually all of the
Commonwealth's electric power. PREPA owes approximately $9
billion to creditors. Absent a financial restructuring, it will
run out of money in the first half of 2016. Its problems are
the results of choices made over decades, often driven by
political or electoral considerations rather than best
practices or business imperatives.
Energy costs in Puerto Rico are high, but PREPA's costs are
not fully covered by its existing rate structure. The rate
deficit--that is the difference between the rate charged and
PREPA's actual costs including existing debt service--is nearly
8 per kilowatt hour. PREPA also faces challenges because its
infrastructure is outdated, inefficient, and does not currently
comply with environmental regulations.
PREPA has developed a recovery plan to transform into a
modern utility. The recovery plan is based on an equitable
burden-sharing approach and involves three core goals: one,
improving operations, efficiency, and therefore, cost
structure; two, investing in infrastructure; and three,
achieving a sustainable capital structure.
PREPA has focused its operational improvement efforts
across the enterprise. Through continued focus and use of
cross-functional teams, PREPA has achieved hundreds of millions
of dollars in one-time and recurring savings.
PREPA has also developed a comprehensive, long-term capital
plan that assumes $2.4 billion in new investments. The plan
improves fuel diversity by shifting away from fuel oil toward
natural gas and renewables. The plan also provides for critical
investments in the transmission and distribution system. The
plan includes an RFP to solicit bids for third-party investment
in its infrastructure. We are interested in attracting the most
efficient capital and expertise to help us execute the plan.
PREPA's leaders and employees will continue to be critical
to ensuring that it is able to execute the plan. Governance
reforms pending before Puerto Rico's legislative assembly will
promote independence to ensure that the changes are
sustainable. In parallel, PREPA is working to instill a culture
of meritocracy and accountability. It is also focused on
achieving a sustainable debt structure.
We cannot expect any one constituent to carry all of the
burden. All stakeholders should contribute and support PREPA's
transformation. To that end, in December of 2015, PREPA reached
a restructuring support agreement, or RSA, with creditors
representing approximately 70 percent of its debt. The RSA
outlines a comprehensive restructuring plan to reduce PREPA's
debt burden while also increasing liquidity.
These are all positive developments, but PREPA's
transformation is far from complete. The RSA is subject to many
contingencies.
First, the RSA is with only a portion of our creditors. In
order to consummate the restructuring agreement, additional
bond holders must participate. Approximately $2.7 billion in
bonds have not yet agreed to the restructuring, and we need $2
billion of those bonds to be exchanged voluntarily for the deal
to become effective.
Second, the new securitization bonds must receive an
investment-grade rating, which is challenging as the rating
will depend, at least in part, on the Commonwealth's financial
situation.
Third, the Puerto Rico legislature must approve legislation
acceptable to the RSA creditors to reform PREPA's governance,
authorize the securitization bonds, and make other changes to
facilitate the transformation.
If it became available, an orderly restructuring regime
under the bankruptcy code would greatly help PREPA efficiently
implement the agreement with its creditors. It would allow the
super-majority of supporting creditors to bind holdout
creditors. It would improve the deal economics by ensuring 100
percent participation, and it would provide a faster process
with greater legal certainty under the leadership of a Federal
judge.
The stakes are high and the human consequences of inaction
are real. It goes without saying that electricity is the life
blood of the Commonwealth. If the RSA terminates or we cannot
consummate the recovery plan, we will be back to square one.
PREPA could run out of money. Fuel supply could dry up. The
safety and welfare of the Commonwealth and its people would be
endangered. For these reasons, consummating PREPA's
restructuring is critical to the social and economic well-being
of the Commonwealth and its people.
Thank you for the opportunity to participate in this
hearing. I look forward to your questions.
[The prepared statement of Ms. Donahue follows:]
Prepared Statement of Lisa J. Donahue, Chief Restructuring Officer,
Puerto Rico Electric Power Authority
Chairman Lamborn, Ranking Member Lowenthal, Commissioner Pierluisi
and members of the subcommittee: My name is Lisa J. Donahue, and I am
the Chief Restructuring Officer of the Puerto Rico Electric Power
Authority (PREPA). I am also a Managing Director and the leader of the
Turnaround and Restructuring Practice at AlixPartners, a global
business and advisory firm. I am a Fellow of the American College of
Bankruptcy, and a Director-elect for April 2016 of the American
Bankruptcy Institute.
Prior to my appointment as PREPA's Chief Restructuring Officer, I
served as an executive at a number of other power and energy companies,
including as executive vice president and chief financial officer at
Calpine Corp., an independent power producer operating in Texas,
California, Canada and Mexico; chief financial officer at Atlantic
Power Corp., a power and infrastructure company publicly traded on both
the New York and Toronto stock exchanges; and chief restructuring
officer at SemGroup, L.P., a mid-stream oil & gas, pipeline, storage
and commodity trading company.
I want to thank the subcommittee for giving me the opportunity to
participate in this hearing on behalf of PREPA. PREPA was created for
the purpose of conserving, developing and utilizing Puerto Rico's
energy resources to promote the general welfare of the Commonwealth's
residents and to increase commerce and prosperity. PREPA produces and
delivers virtually all of the electric power consumed in the
Commonwealth. Its future is central to the subject matter of this
hearing--and in fact the economic well-being of Puerto Rico.
PREPA's Governing Board selected and appointed me as Chief
Restructuring Officer (CRO) in September 2014. Since then, I have
reported directly to the Board and worked alongside PREPA's management
to address fundamental operational problems that have hindered PREPA
for decades, and to help lead PREPA's financial restructuring efforts,
particularly its discussions with creditor representatives.
general background and challenges
PREPA is currently in a state of crisis, and for years has been
unable to transform into the modern, world-class utility that Puerto
Rico deserves. In the summer of 2014, PREPA faced a severe financial
and liquidity crisis, created by a combination of recurring negative
cash-flows, an ongoing recession, outdated generation facilities,
substantial debt maturities and an inability to access the capital
markets. This crisis threatened PREPA's ability to operate, mainly by
threatening its ability to continue purchasing fuel to run its power
plants and provide energy to Puerto Rico.
PREPA's problems did not arise overnight, or even in a few years--
they developed and intensified over a period of decades. During this
time, management and other strategic decisions, including staffing and
capital investment, were too often based on political or electoral
considerations rather than best practices or business imperatives. As a
result of this dynamic, PREPA suffered from regular employee
reassignments and had difficulty conducting rational long-term
planning, which compounded existing challenges.
Today, PREPA owes approximately $9 billion to its bondholders and
fuel line lenders, and continues to face very serious liquidity
constraints. Absent a financial restructuring, between now and July 1,
2016, PREPA faces contractual obligations to pay $700 million under its
fuel lines of credit and approximately $428 million in principal and
interest under outstanding bonds. This is more than twice the amount of
cash PREPA currently has on hand, and PREPA will not be able to make up
the difference with revenue from operations during this period. As part
of the recently announced restructuring support agreement (RSA), a
group of PREPA creditors recognized PREPA's liquidity constraints by
agreeing to relend to PREPA $115 million of interest paid to
bondholders on January 4, 2016.
Our financial situation would be much worse if our creditors had
not agreed to forbearance agreements in August 2014 and more recently,
the RSA. These agreements have given PREPA temporary relief from its
obligations to creditors, including relief from its obligation to make
more than $600 million in sinking fund payments. Absent these
agreements, PREPA would already have run out of money.
One contributing factor to PREPA's current financial situation is
that its existing rate structure does not capture its operating costs
and debt service. PREPA's base rate has not changed since 1989 despite
increases in costs and debt service obligations. However, the all-in
cost fluctuates based on the cost of fuel and purchased power, and
reached highs of approximately 28 per kilowatt hour (kWh) in August
2014. Today, the all-in cost has fallen with oil prices to
approximately 21 per kWh, which is high in comparison to the U.S.
mainland, and has a disproportionate impact on Puerto Rico residents
given their income levels and other economic factors. The ``rate
deficit'' between existing rates and the rates PREPA would need to
charge to cover operational costs, including debt service over the next
3 years, is approximately 7.8 per kWh.
Closing this rate deficit is critical to PREPA's sustainability.
But PREPA's customers cannot carry this burden alone. Even the
creditors who are party to the RSA agree with this point. To help close
the rate deficit, we need to implement operational reforms to improve
efficiency, and we need concessions from our creditors.
ongoing reform efforts
When our team arrived at PREPA in September 2014, we encountered a
large and complex organization facing a range of challenges that had
been decades in the making. Like a number of companies, including many
that I have personally worked with in my turnaround management career,
PREPA needed outside assistance to help restructure its operations and
finances and create a plan to assure long-term sustainability.
Operational Improvements
PREPA has focused its operational improvement efforts on core
business functions to improve organizational efficiency, increase
revenue generation and instill a culture of safety in the workplace. By
addressing shortcomings in accounts receivable and collections, fuel
inventory, procurement, inventory management and safety, PREPA has
begun the process to transform into a modern utility.
PREPA has made great strides in its accounts receivable and
collections processes with respect to government and private customers
alike. PREPA has directly engaged with the central Commonwealth
government and its agencies to set appropriate Fiscal Year 2016 budgets
and has implemented payment plans for past due government accounts.
Given the current financial situation within the Commonwealth, these
efforts have become even more important.
PREPA has also analyzed data to prevent theft and other non-
technical losses, developed workforce training in its call center and
implemented customer care and billing improvements. Taken together,
these reforms create a platform for PREPA to work collaboratively with
customers to reduce past due accounts and improve customer service.
PREPA has also worked to improve fuel inventory controls. In
September 2014, PREPA's controls were sporadic at best. PREPA did not
consistently measure based on industry standards or test for variations
in consumption. Additionally, PREPA lacked a uniform process to
forecast its fuel requirements based on optimized dispatch and deliver
power at the lowest possible cost, leading to unnecessarily high fuel
inventory levels and limitations on PREPA's ability to negotiate better
terms.
Our team has worked with PREPA to implement an integrated process
that addresses these issues. We measure and track fuel inventory and
investigate variances point to point. We have also improved inventory
controls and reduced inventory levels with respect to all inventory. In
addition, we have implemented a Request for Proposal (RFP) process and
negotiated with fuel suppliers to secure more favorable fuel purchase
terms.
One issue of importance to PREPA, especially as it transitions to
burning a significantly higher percentage of natural gas, is the Jones
Act, which increases the cost of transporting fuel from the mainland to
Puerto Rico. The impact of the Jones Act on PREPA's operations today is
in the range of $3 to $5 million per year, due to the required use of
Jones Act-compliant barges to distribute fuel oil between units. Based
on current operational assumptions, this impact could increase by
approximately $20 to $30 million per year if the Aguirre Offshore Gas
Port (AOGP) is constructed and PREPA elects to source liquefied natural
gas from the mainland. Relief from the Jones Act's stringent
requirements could allow PREPA to save these amounts over time, and
those savings would be passed along to its customers.
The safety of employees should be at the heart of every well-run
utility. In the past 10 years, PREPA has had 15 fatalities and
approximately 14,000 safety incidents. Its incident rate is
significantly higher, in fact more than double, than that of its
industry peers. In September 2014, we ran an RFP process and engaged
industry leader DuPont to conduct an analysis of safety practices and
procedures. PREPA is currently implementing the short- and long-term
recommendations made by DuPont and tracking its performance in those
areas. During 2015, PREPA reduced its incident rate by 15 percent,
which represents a productive first step, but falls short of our
ultimate goal.
PREPA is also working to improve its organizational culture and
instill a focus on excellence. Many of PREPA's employees have embraced
this effort and the board and management have also committed to these
critical changes. Work is underway to introduce carefully selected key
performance indicators (KPIs) to heighten the visibility of key
priorities within the organization and focus process improvements where
they will have the greatest possible impact. PREPA's workforce and
organizational structure is being evaluated to reduce overlapping
roles, streamline cross-divisional work and clarify job descriptions.
PREPA is also undertaking succession planning for key positions to
address potential retirements and other retention pressures.
All of these efforts have already had a significant financial
impact, and show that PREPA can take actions to reduce costs, improve
efficiency and apply industry standards. PREPA has achieved $150
million in one-time cash generation savings and approximately $162
million in recurring annual savings. As new operational initiatives are
phased in, we expect additional one-time savings of $185 million and
recurring annual savings of up to $280 million. These savings are
important because they contribute to closing the rate deficit and
because we are asking creditors and other stakeholders to contribute to
PREPA's transformation.
Vision for a New PREPA
We have developed a comprehensive vision for a new, modern and
self-sustaining PREPA. This is necessary because PREPA's outdated and
inefficient generation fleet and transmission system have been major
causes of rising costs and decreasing reliability to customers over
time.
The system is under extreme stress. Generating units are old, and
PREPA has not made the investments necessary to maintain their reliable
service. PREPA's median plant age is 44 years, compared to a U.S.
industry average of 18 years. Approximately 80 percent of PREPA's
generating fleet is more than 25 years old, and PREPA's oldest thermal
unit is 56 years old. Its heavy reliance on fuel oil creates price
volatility for consumers and environmental compliance challenges for
PREPA under Federal Mercury and Air Toxics Standards (MATS) and other
regulations. PREPA's outdated transmission system makes it difficult to
accommodate unplanned unit outages and integrate renewable generation
sources. Overall, PREPA's outdated infrastructure is a key cause of
high forced outage rates, poor efficiency, low reliability and high
costs.
We have developed a comprehensive long-term capital plan that
assumes $2.4 billion in new investment--funded either through cash
resources or new public-private partnership investments. Our capital
plan is driven by PREPA's integrated resource plan (IRP), which was
undertaken in response to local law requirements. To help develop the
IRP, PREPA engaged Siemens Industry, Inc., an industry leader. The IRP
was filed with the Puerto Rico Energy Commission (PREC), a newly
established regulatory body, in July 2015 and was updated in August
2015. PREC is currently reviewing the IRP with input from other
stakeholders.
Importantly, PREPA's capital plan includes the construction of the
Aguirre Offshore Gas Port (AOGP), which will allow PREPA to receive
natural gas directly and efficiently at the Aguirre complex, as well as
the conversion of the Aguirre generation facility to burn natural gas.
This transition from fuel oil to natural gas will improve fuel
diversity and enable the Aguirre steam power generating units to comply
with environmental regulations like MATS. Construction on AOGP has been
delayed given certain permitting issues and PREPA's financial
situation, but we anticipate that PREPA will be in position to commence
construction in the second or third quarter of 2016, and to complete
the project by late 2017 or early 2018.
PREPA is pursuing cost-effective financing for AOGP, including
through discussions with the U.S. Department of Energy (DOE) regarding
a potential loan guarantee under DOE's Section 1703 program. At this
time, PREPA understands that DOE and other potential financing partners
are awaiting a resolution of PREPA's overall financial situation before
committing to invest in the project.
Other key projects in the capital plan include the construction of
new units at PREPA's Palo Seco plant, the installation of new
transmission and distribution equipment throughout PREPA's system, and
the long-term repowering or replacement of generation units at Aguirre
and Costa Sur. These investments, which will include flexible
generation units, will improve PREPA's ability to utilize existing and
incorporate additional renewable energy sources, which are a key
component of PREPA's vision for efficient, sustainable energy in Puerto
Rico. Execution of the capital plan will also help PREPA comply with
MATS for steam power generating units and reduce reliance on fuel oil.
These initiatives will dramatically improve the efficiency of
PREPA's system and reduce its environmental impact. The installation of
newer and more efficient units will reduce the volume of fuel needed to
power Puerto Rico and minimize the price volatility that results from
relying on fuel oil for so much of Puerto Rico's supply. In addition,
the shift to cleaner fuel sources will yield significant benefits.
Today, 52 percent of total electricity generation in Puerto Rico is
powered by fuel oil and coal, with 44 percent powered by natural gas
and only 4 percent from renewable sources. Under PREPA's capital plan
as contemplated in the IRP, by 2030, 83 percent of total electricity
generation will be powered by natural gas and renewable sources (with
renewables increasing to 14 percent of the total) and only 17 percent
will be powered by fuel oil and coal (with fuel oil driven down to
below 1 percent).
PREPA is focused on facilitating an increase in the usage of
renewables as a means to further diversify energy sources in Puerto
Rico and contribute to PREPA's environmental compliance efforts. The
IRP forecasts renewable capacity growth from 207 MW in 2016 to 1,193 MW
in 2030, an increase of almost 600 percent. Power produced from
renewable sources is expected to increase by an average of 9 percent
annually, which will reduce overall demands on PREPA's system and
displace traditional thermal generation.
PREPA's capital plan is comprehensive and achievable. We intend to
fund the plan with enhanced liquidity from operational savings,
creditor concessions and a new transparent rate structure. PREPA will
also pursue bids from third parties to finance and build new power
generating units through an open and competitive RFP process to ensure
that we are attracting the most efficient capital and expertise to help
us execute the plan.
Another critical element of PREPA's vision for the future is
governance reform. PREPA's leaders and employees are critical to
ensuring that PREPA is able to execute on its capital and business
plans. To this end, governance reforms embedded in the PREPA
Revitalization Act that is currently pending before Puerto Rico's
Legislative Assembly, including the appointment of an independent
board, will promote independence in PREPA's leadership and management
to ensure that the changes we are implementing and planning are
sustainable. In parallel, PREPA is working to instill a culture of
meritocracy, and as discussed above, implement concrete policies in
line with that culture, including rewarding employees based on KPIs.
creditor negotiations and prepa's restructuring support agreement
In late December 2015, PREPA reached agreement with creditors
holding or controlling approximately 70 percent of its debt, including
bondholders, fuel line credit lenders and bond insurers, regarding a
comprehensive restructuring plan to address its fiscal and operational
challenges. It took PREPA over 15 months to negotiate the RSA in large
part because PREPA lacks access to an orderly debt restructuring
process and its accompanying ``guard rails.'' In most situations of
extreme financial distress, the possibility that a debtor will seek
court protection incentivizes creditors to compromise more quickly.
Moreover, in a typical situation, a bankruptcy process permits a
supermajority of creditors to bind all creditors--it reduces the free-
rider and holdout problem.
After many months, we were able to reach agreement but our work is
far from complete. The RSA remains subject to significant contingencies
and creditor termination rights.
The key economic terms of the RSA include the following:
Bondholder Agreement. All holders of uninsured PREPA bonds will
have the option to exchange their outstanding bonds for new
securitization bonds at 85 percent of the current face amount of their
bonds. The new securitization bonds, which under the RSA must receive
an investment grade rating (meaning a rating of at least BBB- or Baa3),
will be interest-only bonds for the first 5 years, with an interest
rate that is lower than the current rate on PREPA's existing debt based
on the RSA pricing grid. An ad hoc group of bondholders representing
approximately 40 percent of the outstanding bonds has agreed to
exchange all uninsured bonds held by the group for new securitization
bonds.
Fuel Line Agreement. PREPA's fuel line credit lenders will have two
treatment options. The fuel line credit lenders may convert their
existing credit agreements into term loans, with a fixed interest rate
of 5.75 percent per annum, to be repaid over a period of 6 years in
accordance with an agreed amortization schedule. This will decrease the
annual interest rate PREPA is currently paying on its fuel line credit
debts from 7.25 percent to 5.75 percent and extend the maturity date
for $700 million of debt by 6 years from the consummation of the
restructuring transactions. Alternatively, they may exchange all or
part of the principal due under the existing fuel line credit
agreements for securitization bonds to be issued on the same terms as
those issued and exchanged for the uninsured bonds.
Bond Insurers. To finance the restructuring transactions, PREPA's
bond insurers will issue surety insurance policies in an aggregate
amount up to $462 million, which will support a portion of the debt
service reserve fund for the securitization bonds.
Remaining Contingencies
PREPA's ability to execute on the RSA is far from certain. Its
ability to do so will require the satisfaction of many conditions, the
occurrence of a number of events outside its control and the continued
cooperation of a diverse creditor body over a long period of time.
A few of the key contingencies are set forth below:
Creditor Participation. At present, creditors representing
approximately 30 percent of outstanding PREPA debt are not party to the
RSA. In order to consummate the bond exchange contemplated by the RSA,
additional bondholders (who are not parties to the RSA now) holding
more than $2 billion in bonds (i.e., all but $700 million) must
voluntarily choose to exchange their existing bonds for securitization
bonds at a discount. If these holders do not choose to exchange their
bonds, the deal will not work for PREPA, and the parties will be forced
to return to the drawing board in hopes of developing a new, workable
restructuring plan. The availability of a legal mechanism such as the
Federal Bankruptcy Code would ensure 100 percent participation among
existing bondholders because a supermajority of bondholders could bind
holdouts. In addition, it would greatly increase the odds that PREPA
would be able to implement its deal, particularly given its existing
widespread support among key creditor groups.
Securitization Bond Rating. Pursuant to the RSA, the creditors
required that the new securitization bonds to be issued in the exchange
offer must receive an investment grade rating from a recognized rating
agency. While the restructuring transactions are designed to maximize
the new securitization bonds' rating, achievement of an investment
grade rating will likely depend at least in part on the rating
agencies' views of the overall financial situation of Commonwealth of
Puerto Rico and its instrumentalities. Without the legal guard rails
that would be provided by access to a Federal court, it is difficult to
see how 18 different issuers in the Commonwealth will resolve their
financial distress. A disorderly, litigious, and drawn-out process will
jeopardize our ability to execute our deal.
Commonwealth Legislation. Under the terms of the RSA, the
Commonwealth must enact legislation that is acceptable to the RSA
creditors in accordance with the RSA. This legislation must include,
among other things, a legal framework for the issuance of
securitization bonds and certain noneconomic terms relating to such
bonds as well as governance reforms to depoliticize PREPA, allow it to
function like a modern utility and implement long-term operational
savings and reforms. The legislation will also authorize and set forth
a structure for a transparent process to allow third party investors to
submit competitive bids to invest in PREPA's infrastructure, and is
currently pending before Puerto Rico's Legislative Assembly.
Securitization Bond Validation Process. The RSA requires that the
new securitization bonds be validated by a Commonwealth court pursuant
to a newly established process, which may itself be the subject of a
court challenge. This is necessary because PREPA does not have access
to a Federal bankruptcy court to confirm a debt adjustment plan for
PREPA. The benefits of plan confirmation are therefore another way in
which access to a Federal court process could facilitate and expedite
PREPA's restructuring efforts. A Federal court order approving the
validity and enforceability of the securitization bonds would also be
helpful to the rating agency process.
conclusion
PREPA and its advisors continue to work tirelessly to close the
restructuring transactions in the RSA. Fixing PREPA's capital structure
is but one element of PREPA's overall transformation, but doing so is a
necessary predicate to all of the other work PREPA is doing to
modernize Puerto Rico's generation, transmission and distribution
capacity for the long-term benefit of its people and the Puerto Rico
economy.
The recent announcement of the RSA in late December 2015 shows that
PREPA and a significant portion of its creditors can work together to
craft a comprehensive solution. It remains unclear whether PREPA will
be able to execute on its restructuring transactions despite the
support of 70 percent of its creditors. In many ways, the RSA is a
tenuous agreement, filled with process checkpoints, creditor
termination rights and other conditions that may not be satisfied,
despite PREPA's best efforts. Access to a restructuring regime would
allow PREPA to implement the restructuring contemplated by the RSA,
without so many contingencies and open issues. In fact, the RSA
contemplates implementing the restructuring transactions by using the
Federal Bankruptcy Code or a proceeding pursuant to Puerto Rico's local
restructuring law, if either becomes available to PREPA.
If PREPA cannot execute on the RSA, agreed-upon creditor
concessions will be lost and the governance improvements, cost savings
measures and capital projects that form the core of PREPA's recovery
plan will not go forward. In addition, the cost of energy to the people
and businesses of Puerto Rico--who already face a financial crisis--
would increase dramatically. This would have a tremendously adverse
impact on the people and economy of Puerto Rico. Creditors would begin
to take enforcement actions against PREPA, and fuel and other suppliers
would tighten credit terms and refuse to deliver goods. PREPA could be
forced to ration its existing fuel supply and employ rolling blackouts,
and its ability to carry out core functions such as meeting payroll,
and conducting critical maintenance on plants and distribution
networks, would be in doubt.
The stakes are high, and have real human consequences. It goes
without saying that electricity is the lifeblood of the Commonwealth.
Any interruption in service would severely threaten the public health,
safety and welfare of the Commonwealth and its people and could
jeopardize other economic development and growth initiatives the
Commonwealth is currently pursuing. For these reasons, we believe that
consummating PREPA's restructuring transactions is critical to
maintaining and protecting the social and economic health and well-
being of the Commonwealth and its people.
I would like to thank the subcommittee for giving me the
opportunity to participate in this hearing on behalf of PREPA.
______
Mr. Lamborn. OK, thank you.
The Chair now recognizes Mr. San Miguel to testify.
STATEMENT OF JORGE L. SAN MIGUEL, CHAIR, ENVIRONMENTAL LAW,
ENERGY & LAND USE, FERRAIUOLI, LLC, SAN JUAN, PUERTO RICO
Mr. San Miguel. Thank you, Chairman Lamborn, Ranking Member
Pierluisi, and members of the committee. Good morning.
Puerto Rico's energy crisis has a solution and must be
resolved now. Energy, after all, is the backbone of our economy
and the basis of our future. As I will discuss, most of the
remaining actions required are local. Yet, given the historic
juncture, the risks involved, and our poor track record, it is
my view that Congress should consider providing certain
structured leadership and reform oversight.
By way of background, PREPA has faced internal challenges
for decades now. Its 1941 structure is outdated and unfit for
today's economy. PREPA is a government-controlled, top-down
structure. Its median generating plant age, for example, is 44
years, compared to an industry average of 18. In fact, 80
percent of such plants are over 25 years old.
Further, PREPA electricity losses are estimated at 15
percent, due to technical and non-technical losses, where
industry standard is estimated at 7 percent. This alone means
approximately $200 to $300 million a year in losses, and there
is much more.
There are also external challenges, like the island's
deepening recession and migration uptick, among others. The
result? Historically high and volatile energy prices, as well
as inconsistent power quality, has weighed down hard and strong
on our economy and our citizens.
PREPA needs a new focus. It must shift attention to the
transmission and distribution business, divorce itself from the
energy generation component, and leverage the private sector
expertise and capital to construct and efficiently operate new
generation facilities. Reforms must be quick and clear to
achieve: number one, price reductions and stability; number
two, modernization; number three, environmental protection; and
number four, economic development and growth.
Transparency and credibility will be key ingredients in any
restructuring effort. PREPA today appears to be achieving
levels of internal transparency not seen before, though much
more is needed. Operational efficiencies are starting to take
hold. Yet the most important steps remain ahead of us. And,
significantly, most of these are within Puerto Rico's control.
Let's review three such key actions.
First, the government of Puerto Rico must quickly approve
the PREPA Revitalization Act, or a similar version. This bill
was proposed by the current Administration on November 4, 2015.
Second, we need an emergency permit reform. Permitting in
Puerto Rico is a historic and unacceptable nightmare. Large
infrastructure projects normally take 8 to 10 years to fully
permit and construct. Puerto Rico does not have the luxury of
time to modernize and reform its energy infrastructure.
Fortunately, under Act 76 of 2000, the Emergencies Act, the
Governor is expressly authorized to declare an emergency and
provide for expedited permitting authority via Executive Order.
Emergencies under this law exist if there is any event or great
problems of deterioration in the physical infrastructure for
the rendering of essential services to the people. Electricity
is an essential service, and by the government's own admission,
its infrastructure is significantly deteriorating.
As for the third key action, Puerto Rico's Energy
Commission must expedite the approval of a revised rate
schedule and complete the evaluation of the integrated resource
plan, the IRP. Given the advanced negotiations between PREPA
and most of its creditors, the Energy Commission should take
all necessary temporary rate adjustment measures while the
formal application process is completed. As to the IRP, it
should complete the approval process to enable PREPA to
establish the footprint of its infrastructure reform and
business plan.
Now, regarding a Federal role--as in any other state,
infrastructure projects will require Federal approvals. Yet
Federal interagency action can also take considerable time.
Congress could consider a structure, like a temporary emergency
permitting and oversight task force or a control board, to
dovetail with a local enhanced permitting structure. This board
could be tasked with expediting the joint review and approval
of permits, in addition to grants, loans, and loan guarantees
from existing programs. It could also ensure, with
congressional authority, that PREPA is, in fact, reformed for
good.
With these action items in place, PREPA will begin
regaining needed credibility. Immediately thereafter, in
collaboration with both local and Federal Government, as well
as the private sector, PREPA must quickly address the power
quality of the grid. This is affecting new manufacturing
investment on the island and seriously threatening existing
ones. In other words, jobs, both existing and new.
Concurrently, and to provide the lowest possible cost of
electricity, it must maximize operational efficiencies, quickly
leverage private sector capital and proponents to construct new
state-of-the-art base load generation capacity, and maximize
the expansion and assimilation of renewable energy portfolio.
In closing, it is clear that PREPA's structure is outmoded
and an impediment to growth. Unleashing long-term private
sector efficiencies and credibility is key. Puerto Rico has the
tools to finish the job at PREPA. Together with the Federal
Government, we must. There is no turning back or a later
chance. It is time to move forward now. Inaction is not an
option, and further studies less so.
We know the way; the question is will we have the will. The
perfect cannot be the enemy of the good. We need to stop saying
no and begin working on yes, and that means putting special
interests and personal pride aside for the good of our economy,
its growth, and opportunities. Thank you very much.
[The prepared statement of Mr. San Miguel follows:]
Prepared Statement of Jorge L. San Miguel, Esq.*, Chair, Environmental
Law, Energy, and Land Use, Ferraiuoli, LLC
*The views, opinions and discussions presented in this document are
those of the author, and do not necessarily reflect the views of
Ferraiuoli, LLC.
Thank you for holding this hearing and the opportunity to testify
and work constructively to address one of Puerto Rico's principal
challenges.
The following provides some context into the Island's energy issues
and challenges, discuss some of the root causes for such challenges,
and some suggestions as to what is needed going forward from local
leaders, and from Washington, DC in a supportive role. I trust this
information will provide additional color on our situation and help
guide and execute solutions that are well known and urgently needed.
Puerto Rico's energy crisis has a solution and must be resolved
now. Energy, after all, is the backbone of our economy and the basis of
our future. As we will discuss, most of the remaining actions required
are local. Yet, given the historic juncture, the risks involved and our
poor track record, it is my view that Congress should consider
providing certain structured leadership and reform oversight.
introduction
The Puerto Rico Electric Power Authority (PREPA) is a public
corporation that was created through Act 83-1941. One of its main
objectives was:
``. . . the purpose of conserving, developing and utilizing,
and aiding in the conservation, development and utilization of
water and energy resources of Puerto Rico, for the purpose of
making available to the inhabitants of the Commonwealth, in the
widest economic manner, the benefits thereof, and by this means
to promote the general welfare and increase commerce and
prosperity; and the Authority is granted and shall have and may
exercise all rights and powers necessary or convenient to carry
out the aforesaid purposes, . . .'' \1\
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\1\ Article 6 of Act 83-1941, as amended, known as PREPA's Enabling
Act, 22 L.P.R.A. Sec. 196. (Emphasis added).
Unlike the mainland United States, PREPA is Puerto Rico's single,
government-owned, electric power provider.\2\ Since its beginnings,
PREPA essentially operated as a vertically integrated self-regulated
monopoly.\3\ At that time Puerto Rico was predominantly rural and
private capital was limited for infrastructure projects. Therefore,
PREPA's monopoly may have been perceived as necessary to push Puerto
Rico's economic growth.\4\ Yet, the historic lack of multiple electric
power service providers (i.e., competition) has put the residential,
commercial and industrial consumers at the mercy of one single energy
provider in Puerto Rico.\5\ As a result, this has deprived the public
(i.e., residential, commercial and industrial consumers) of the ability
to choose from various providers, creating healthy market
competition.\6\
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\2\ Until 1979 PREPA was known as the Puerto Rico Water Sources
Authority (Autoridad de Fuentes Fluviales). The original name reflected
the prevalent use of hydroelectric power at the time. http://
www.aeepr.com/Aeees/historia.asp.
\3\ PREPA owns and operates Puerto Rico's power generation plants
and transmission and distribution infrastructure, except for two co-
generators (i.e., Ecoelectrica L.P. and AES-Puerto Rico) and a few
utility scale renewable energy projects that sell their energy to PREPA
under Power Purchase Agreements (PPAs). During its first decade, PREPA
acquired and consolidated under a single company the main generation
and infrastructure owned by private parties. Sergio M. Marxuach,
Restructuring the Puerto Rico Electricity Sector, Center for the New
Economy, August 22, 2005, pages 3-5, http: / / grupocne.org / 2005 / 08
/ 22 / restructuring-the-puerto-rico-electricity-sector/. See also,
Statement of Motives, Act 57-2014, as amended.
\4\ Id.
\5\ There are consumers, however, that own and operate distributed
generation systems. Yet, the majority are connected to the PREPA grid.
\6\ Interestingly, PREPA's first bond issuance took place in 1945
to enable PREPA's acquisition of the main electric power companies in
Puerto Rico. In 1981, with the acquisition of the electric power system
owned by the Municipality of Cayey, PREPA completed the consolidation
of all Puerto Rico electric power systems under a single entity. See,
http://www.aeepr.com/Aeees/historia.asp.
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In 1941, with prices of oil at $1.14 \7\ per barrel, it may have
made sense to operate a self-regulated monopoly to ensure the
construction of generation and transmission infrastructure. Today it
does not make sense for many reasons. As a self-regulated government
controlled monopoly, PREPA has failed. The original statutory
infrastructure objectives have been achieved. However, the price of oil
has changed dramatically and, more so, the variances/volatility of such
prices.\8\ Today there is electric service throughout the Island, and
there are new technologies, fuels and other disruptive forces that have
impacted PREPA's original business model. The energy industry has
evolved but PREPA's model has remained stuck. As a result, PREPA's
structure has inflicted serious damage on our economy and the people of
Puerto Rico. It is widely agreed that the single most important
impediment to economic growth in Puerto Rico is the price/kWh, its
variability, the power quality and the social cost inflicted as a
result of environmental impacts. Without economic growth, there is no
recovery, and without recovery, no real opportunity for the island's
residents.
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\7\ https://www.eia.gov/dnav/pet/hist/
LeafHandler.ashx?n=PET&s=F000000_3&f=A.
\8\ See, Attachment A.
PREPA cannot pretend to obtain different results by doing the same
thing--or essentially the same thing. That would constitute insanity as
defined by Albert Einstein. Real and effective change at PREPA is long
overdue. The Enactment of Act 57-2014,\9\ began to put an end to
PREPA's self-regulated monopoly and enabled the Puerto Rico Energy
Commission (Energy Commission) to approve, among other things, PREPA's
energy rates. This process is in its initial stages, however, and is
only one of the multiple measures needed to effectively address Puerto
Rico's energy crisis.
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\9\ Act 57-2014, as amended, known as the Transformation and Energy
Relief Act.
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current situation and causes
In 2015, the cost of energy per kWh in Puerto Rico averaged
20.98 .\10\ In contrast, the average energy cost in mainland United
States for the same period was 10.47 .\11\ During the last 5-year
period, the average energy cost per kWh in the mainland was 10.06
while in Puerto Rico it was 25.10 .\12\
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\10\ See, Attachment B. These recent prices have been aided by the
somewhat unexpected reduction in the price of oil in the world market.
Prior to that, Puerto Rico was experiencing energy prices of up to
.30c/kWh.
\11\ See, Attachment C.
\12\ See, Attachment D. Out of the 50 states, the only state with
an energy cost higher than Puerto Rico's is Hawaii which averaged 33.04
c/kWh in 2015. See, Attachment E. Hawaii's situation differs from
Puerto Rico, among other things, in the complexity of its electric
power grid system.
No one denies the energy crisis. PREPA residential customers
frequently face the decision of paying the electric bill, buying food
and/or medicines. Commercial and industrial clients must decide between
increasing prices and/or services or closing operations based on
unsustainable energy costs, price fluctuations or, worse yet, the power
quality issues inflicted by a less than optimal energy grid. The
private business sector (i.e., industrial, commercial and small
business) has complained for years about the variability of prices, the
inefficiencies that affect such prices and the quality of the electric
service provided.\13\ Puerto Rico's ability to attract new
manufacturing investment is being affected by issues relating to power
quality--voltage and frequency stability. Moreover, our existing
manufacturing base is threatened by the same problem, thus putting at
risk Puerto Rico's ability to protect and retain existing jobs.
---------------------------------------------------------------------------
\13\ In the past, private sector representatives have complained
about the cost, quality and reliability of PREPA's service. See, Sergio
M. Marxuach, Restructuring the Puerto Rico Electricity Sector, Center
for the New Economy, August 22, 2005, page 3, http://grupocne.org/2005/
08/22/restructuring-the-puerto-rico-electricity-sector/.
It is evident that the energy crisis is not new. It has been
diagnosed for years.\14\ What seems new(er) is the magnitude and the
opportunity cost (economic impact) of our current challenges. The
consequences and implication of the energy crisis have been highlighted
more recently because it coincides with the larger issue of fiscal and
economic dilemmas that Puerto Rico is facing. In 2010, Puerto Rico
formally recognized the energy crisis and initiated a path to address
it.\15\ Unfortunately, the measures taken to begin addressing the
crisis were hindered and/or discontinued by a change in government and
by PREPA's political, internal and operational obstacles.
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\14\ See, Sergio M. Marxuach, A new Look at Puerto Rico's
Electricity Sector, Center for the New Economy, January 2009, http: / /
grupocne.org/2009 /01 /22 /a-new-look-at-puerto-ricos-electricity-
sector-january-2009/; Sergio M. Marxuach, Restructuring the Puerto Rico
Electricity Sector, Center for the New Economy, August 22, 2005, http:/
/grupocne.org/2005/08/22/restructuring-the-puerto-rico-electricity-
sector/; Intersectorial Committee on Environmental Compliance and
Energy Alternatives, Report on the Necessary Measures to Comply with
the New EPA Regulations, and the Conversion to, and Use of Natural Gas
in, the Northern Power Plants, June 15, 2012, http: / / www.aeepr.com /
INVESTORS / DOCS / Financial%20Information / Budgets / Report
%20on%20the%20necessary%20measures%20to%20comply%20with%20new%20
EPA%20regulations.pdf.
\15\ See, Executive Order No. OE-2010-034 of July 19, 2010 (http://
estado.pr.gov/en/executive-orders/); Executive Order No. OE-2011-013 of
April 12, 2011 (http://estado.pr.gov/en/executive-orders/); Executive
Order No. OE-2011-047 of October 6, 2011 (http://estado.pr.gov/en/
executive-orders/); Executive Order No. OE-2012-019 of April 9, 2012
(http://estado.pr.gov/en/executive-orders/); Executive Order No. OE-
2012-052 of October 5, 2012 (http://estado.pr.gov/en/executive-orders/
); and Executive Order No. OE-2013-038 of May 14, 2013 ( http : / /
estado.pr.gov /en /executive-orders/).
Puerto Rico's high energy costs and the related variability are the
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result of, among other things, the pervasive challenges listed below:
PREPA's Dependency on Oil
After PREPA relegated the use of hydroelectric power, it began
relying heavily in the use of liquid fossil fuels.\16\
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\16\ See, Attachment F. Intersectorial Committee on Environmental
Compliance and Energy Alternatives, Report on the Necessary Measures to
Comply with the New EPA Regulations, and the Conversion to, and Use of
Natural Gas in the Northern Power Plants, June 15, 2012, http: //
www.aeepr.com/INVESTORS /DOCS/Financial%20Information/Budgets/
Report%20on%20the%20
necessary%20measures%20to%20comply%20with%20new%20EPA%20regulations.pdf;
and Sergio M. Marxuach, Restructuring the Puerto Rico Electricity
Sector, Center for the New Economy, August 22, 2005, page 3, http://
grupocne.org/2005/08/22/restructuring-the-puerto-rico-electricity-
sector/.
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PREPA's Obsolete Infrastructure
PREPA's generation fleet is very old and inefficient. PREPA's
median generating plant age is 44 years compared to an industry
average of 18 years.\17\
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\17\ See, PREPA's Transformation, A path to Sustainability, June 1,
2015. http://www.aeepr.com/Docs/RecoveryPlan.pdf.
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Intrusion of politics in PREPA
Currently, the PREPA board has two seats of ex officio members
from the Secretary of the Department of Economic Development
and Commerce and the Secretary of the Department of
Transportation and Public Works and four members appointed by
the Governor with the advice and consent of the Senate.
Additionally, there are three members who are representatives
of the Public Interest (one for residential customers, one for
commercial customers, and one for industrial customers).\18\
Management is transferred or moved at least with every
electoral cycle, if not more frequently. Hiring is influenced
in many instances not by qualifications of the candidate but by
political influences. Many decisions are made contemplating
potential political costs rather than sound business judgment
and practices.\19\
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\18\ The Board of Directors selects its Chair and Vice-Chair and
the Executive Director. The Board of Directors has a key role in the
company's administration since it is charged with the responsibility of
leading the strategic management of PREPA and the delegating to the
Executive Director and/or other PREPA officials the administrative
duties and works of the public corporation. Section 4 of Act 83-1941,
as amended.
\19\ Based on information available, upon the designation of a
Chief Restructuring Officer, AlixPartners (Lisa Donahue), measures to
address these and other operational inefficiencies at PREPA have been
put in place and the operational improvements are beginning to take
root and are projected to generate annual savings of $245-$390 million
in addition to one time savings. http://www.aeepr.com/Docs/
RecoveryPlan.pdf.
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PREPA's Operational Inefficiencies
For a long time PREPA has had significant operational issues,
including but not limited to employee performance, energy
theft, energy losses, lack of adequate fuel inventory controls,
deficient collection efforts \20\ and inadequate procurement
processes.\21\
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\20\ FTI Capital Advisors prepared a report on November 15, 2014
regarding PREPA's Accounts Receivable and CILT Report which highlighted
that, as of September 30, 2014, PREPA had a total of $1.75 billion in
accounts receivable. Out of the $1.75 billion, $931,578,000 were
uncollected payments from general clients and $757,690,000 from the
government. See, Accounts Receivable and CILT Report of November 14,
2014. http://www.aeepr.com/Docs/restructuracion/
PREPA%20AR%20and%20CILT%20Report%20Final.pdf. According to CRO Lisa
Donahue, ``PREPA has made great strides in its accounts receivable and
collections processes with respect to government and private customers
alike. PREPA has directly engaged with Hacienda and other agencies
regarding the setting of appropriate Fiscal Year 2016 budgets and has
implemented payment plans for past due government accounts.'' Lisa
Donahue Statement Testimony before House of Representatives November
11, 2015. See, http://www.aeepr.com/Docs/Donahue
%20Testimony%20to%20House%20of%20Reps%20-
%20Leg%20Reform%20(Final%208am).pdf.
\21\ Lisa Donahue Statement Testimony before House of
Representatives November 11, 2015. See, http://www.aeepr.com/Docs/
Donahue%20Testimony%20to%20House%20of%20Reps%20-%20
Leg%20Reform%20(Final%208am).pdf.
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PREPA's Historic Monopoly
Having a self-regulated--government controlled--monopoly did
not provide any incentive for PREPA's adequate management and
operational efficiencies since it was allowed to pass all its
costs directly to the clients and had no competition.\22\
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\22\ See, Sergio M. Marxuach, A new Look at Puerto Rico's
Electricity Sector, Center for the New Economy, January 2009, http: / /
grupocne.org/2009/01/22/a-new-look-at-puerto-ricos-electricity-sector-
january-2009/. See also, Statement of Motives, Act 57-2014, as amended.
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PREPA's Obsolete Rate Structure
The rate structure has not contemplated and adequately captured
PREPA's operational costs.\23\
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\23\ This should be addressed in the evaluation and approval of the
new rate to be proposed by PREPA in the application it is required to
file with Energy Commission as per the provisions of Act 57-2014. See
also, PREPA's Transformation, A path to Sustainability, June 1, 2015.
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PREPA's Lack of Planning
PREPA lacked strategic infrastructure and environmental
compliance planning and implementation. Priorities on
infrastructure planning and investments are shifted with
management changes that more than often coincide with electoral
cycles.\24\ Among other things, this lack of planning, has
caused compliance issues and the aging of its infrastructure to
coincide with the lack of funds to replace it.
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\24\ PREPA's deficient environmental compliance record has resulted
in complex litigation against it by the U.S. Department of Justice,
after the persistent intervention of community groups and the U.S.
Environmental Protection Agency. The efforts to bring PREPA into
compliance began in 1992. Thereafter, ``[i]n 1999, the U.S. Department
of Justice and PREPA entered into a consent decree under which PREPA
agreed to take certain actions to come into compliance with multiple
environmental laws at a cost of approximately $200 million; pay a $1.5
million penalty; implement additional projects to benefit the
environment, costing approximately $3.5 million; and spending $1
million to hire an environmental contractor to oversee compliance with
the consent decree.'' In 2004, after EPA identified PREPA violations to
the 1999 Consent Decree, the parties negotiated modifications to the
original consent decree to bring PREPA plants into compliance with
certain air emissions standards and added a supplemental project for
the benefit the communities around certain PREPA generating plants.
http://www.justice.gov/archive/opa/pr/2004/June/04_enrd_433.htm.
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Subsidies
PREPA has been forced by legislative provisions to provide
services at subsidized rates to a significant amount of
customers and to make certain contributions in lieu of
municipal taxes with municipalities.\25\
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\25\ See, PREPA's Transformation, A path to Sustainability, June 1,
2015. Under the Contributions in lieu of Taxes, PREPA provides a
municipality electric service in exchange of an exemption from
municipal taxes. http://www.aeepr.com/Docs/RecoveryPlan.pdf.
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Corruption
Lack of Transparency of PREPA's internal procedures has
resulted in allegations of corruption in areas such as the
purchase of fuel.\26\
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\26\ See, Marrero Rolon et al v. Autoridad de Energia Electrica
(Case No. 3:15-cv-01167) https://ecf.prd.uscourts.gov/cgi-bin/
iqquerymenu.pl?115501. The lawsuit, filed on Feb. 24, 2015 in the U.S.
District Court for the District of Puerto Rico names 20 defendants
(including PREPA, Vitol, Petrobras, among others) for allegedly
receiving kickbacks and payments for colluding to raise fuel oil prices
that were directly passed on to users of electricity, by agreeing to
use non-complaint fuel oil and falsifying lab tests. http://
www.businesswire.com/news/home/20150224005237/en/Hagens-Berman-Puerto-
Rico-Residents-Businesses-File; PREPA v. Vitol, Inc. et al (Case No.
3:2009cv02242). This case was filed on December 14, 2009. https://
ecf.prd.uscourts.gov/cgi-bin/iqquerymenu.pl?77028.
The convergence of these factors throughout the past decades have
resulted in a state run/controlled utility that, as a monopoly, has
succeeded in becoming highly politicized, bureaucratic, inefficient,
aged, expensive and accumulating nearly $9 billion in outstanding debt.
This eventually added to the pressure of other external challenges,
like the island's deepening recession and migration uptick. No less
important is the availability today, of disruptive technologies and
practices that affect PREPA's historic and narrow business model. All
this, with the anticipated and foreseeable result of contracting sales
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and revenues.
Public opinion on the Island today is overwhelmingly in favor of
wholesale restructuring of this public utility.
moving puerto rico's energy infrastructure forward
The key to any serious restructuring effort is understanding the
current state of affairs and its root causes, in order to design the
path toward sustainable reform. The goal here is to implement reforms
that take root, cannot be reversed, modified or watered down, so that
we do not fall into the same pitfalls in years to come.
PREPA needs a new focus. It must shift attention to the
Transmission & Distribution business, divorce itself from the energy
generation component, and leverage private sector expertise and capital
to construct and efficiently operate new generation facilities. Reforms
must be quick and clear to achieve: (i) price reductions and stability;
(ii) modernization; (iii) environmental protection; and (iv) economic
development and growth.
Transparency and credibility will be key ingredients in any
restructuring effort. PREPA today appears to be achieving levels of
internal transparency not seen before, although much more is needed.
Operational efficiencies are taking hold.
In the case at hand, time is of the essence given the many other
variables and developments of the central government, the local economy
and the alternatives available to the public beyond the traditional
centrally supplied electricity.
Privatization of Generation
As many other jurisdictions have done, and particularly given the
fiscal and operational challenges of PREPA, it must aggressively
consider and use a privatization model. The models that seems most
suitable to implement them are:
------------------------------------------------------------------------
Model Characteristics Benefits
------------------------------------------------------------------------
Long-Term Concession 27
PREPA No need for
retains ownership. PREPA to have
Long-term access to
contract for the financing.
construction and Would allow
management of the PREPA to replace
generation of its fleet in a
power. shorter term.
A third Ability for
party would be the third party to
under better obtain financing.
conditions than Expertise
PREPA to obtain the from third party.
necessary Ability to
financing. terminate agreement
The third under certain terms
party would bring and conditions.
its expertise. Examples of
The successful
contract can be projects:
terminated under -- Highway PR-22
certain pre- -- Highway PR-5
established terms -- Luis Munoz
and conditions. Marin Intl. Airport
------------------------------------------------------------------------
Power Purchase Agreement
(PPA)
.................... ....................
Assets are No need for
owned by the third PREPA to have
party. access to
Contract financing.
for the purchase of Would allow
power generated by PREPA to replace
the third party. its fleet in a
Ability for shorter term.
the third party to Ability for
obtain financing. the party to obtain
Expertise financing.
from third party. Expertise
Ability to from third party.
terminate agreement Ability to
under certain terms terminate agreement
and conditions. under certain terms
and conditions
Examples of
successful PPAs:
-- EcoElectrica 28
-- AES-Puerto Rico
29
-- Pattern Santa
Isabel 30
-- Punta Lima
(GoGreen) 31
------------------------------------------------------------------------
27 Act 29 2009, as amended, known as the Public Partnership Act. Act 20-
2009 establishes as public policy of the Commonwealth of Puerto Rico
``to favor and promote the establishment of public-private
partnerships for the creation of priority projects, and among other
things, to further the development and maintenance of infrastructure
facilities, to apportion between the Commonwealth and the contractor
the risk involved in the development, operation or maintenance of such
projects, to improve the services rendered and the functions of the
Government, to foster the creation of jobs, and to promote the socio-
economic development and the competitiveness of Puerto Rico. Pursuant
to the public policy set forth above, the . . . following projects . .
. [can] be subject to a partnership contract:
. . .
(3) The construction, operation or maintenance of existing or new plants
for the production of energy that use alternate fuels other than oil
or that use renewable energy sources, such as wind, solar and oceanic-
thermal energy, among others, as well as the transmission of energy of
any kind . . .'' See, Act-29-2009, Section 3.
28 EcoElectrica, is a privately operated independent power producer and
the only private energy generation facility in Puerto Rico that
currently generates electric power using natural gas. The facility is
located in southern Puerto Rico, has its own marine LNG terminal and
has been operating successfully since the year 2000. It has a
generation capacity of 507 MW, combined cycle unit. The natural gas
used by EcoElectrica is imported from Trinidad and Tobago.
EcoElectrica has storage capacity of 1,000,000 barrels of LNG, and it
is the only facility on the island with the capability to import,
store, regasify, and export natural gas. All of the electric power
generated by EcoElectrica is sold to the PREPA. http://www.aeepr.com/
Documentos/Ley57/EcoElectrica/EcoElectrica1.htm and http://
ecoelectrica.com/.
29 AES Puerto Rico LP has a coal-fired co-generation plant located in
Guayama, Puerto Rico. Since 2002, AES sells its energy to PREPA under
a 25 year PPA. AES Corp. commenced the development of this plant in
Puerto Rico in 1993. http://www.aeepr.com/Documentos/Ley57/AES/
Contratos%20AES1.htm and http://www.aespuertorico.com/.
30 Pattern Santa Isabel is a 101 MW project located on the south coast
of Puerto Rico. The project commenced commercial operations in 2012
and sells its energy to PREPA under a 25 year PPOA. This was Puerto
Rico's first commercial wind power project. http://www.aeepr.com/
Documentos/Ley57/CONTRATOS/
Contrato%20Pattern%20Santa%20Isabel%20LLC%202010-P00047.pdf and http://
patternenergy.com/en/operations/facilities/santa_isabel/.
31 Punta Lima is a 23 MW wind farm located in the east coast of Puerto
Rico. Punta Lima commenced commercial operation in 2013 and sells its
energy to PREPA under a 25 year PPOA. http://www.aeepr.com/Documentos/
Ley57/CONTRATOS/Contrato%20Punta%20Lima%20 (Go%20Green)%202010-
AI0001.pdf and http://www.gestampren.com/en/node/2916.
Professionalization and De-politization of PREPA
PREPA is not a for-profit entity. However, since it provides an
essential public service to the people of Puerto Rico, it must be
administered based on sound business judgment and practices. It is
critical that PREPA decisions be free of political influences. The
Authority needs to be administered and led by individuals with
qualified management/business experience in order to ensure that
decisions are not biased or influenced by political issues.\32\
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\32\ See generally, PREPA's Transformation, A path to
Sustainability, June 1, 2015.
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Local Permitting + Energy Crisis = Fast Track
Permitting Issues
Permitting processes in Puerto Rico have been identified as a
significant challenge for the Island's economic development due to the
multiplicity of permits required and the time it takes to complete a
permitting process.\33\ In Puerto Rico, obtaining the approvals for the
development of a large infrastructure projects (e.g., utility scale
energy generation) may take between 8 to 10 years, excluding potential
litigation.\34\ Some of the permitting improvements introduced by the
2009 permitting reforms \35\ were eliminated by amendments to the
permit law approved by the current administration.\36\ This has been
without doubt a step back in the advancements made to improve Puerto
Rico's position to jumpstart economic development and improve its
global competitiveness.
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\33\ Puerto Rico was classified by the World Bank Group on the Ease
of Doing Business as 41 of 189 countries in 2014, 47 of 189 countries
in 2015 and 57 of 189 countries in 2016. In other words, during the
last 3 years, Puerto Rico has lost 16 positions in this classification.
See, Doing Business Report. Retrieved from http://
www.doingbusiness.org/reports/global-reports/.
\34\ Unlike the U.S. mainland, in Puerto Rico environmental
activism has a selective agenda. While certain groups oppose projects
that would replace old, polluting and noncompliant infrastructure,
those same opponents are conveniently silent to the environmental
impacts and pollution about maintaining the ``status quo''--that is,
maintaining the existing/old infrastructure. Adequate and good faith
public participation improves the discussion and evaluation of
projects. When abused (e.g., litigation without merits), however, it
can certainly result in a very effective delay mechanism with
detrimental impacts on economic development and additional
environmental and health degradation.
\35\ The 2009 permitting reform was focused on streamlining the
local complex permitting system that had placed Puerto Rico in a
disadvantaged global competitiveness position. For example, as part of
the reforms, a determination on an environmental document was deemed a
component of the development or construction approval/permit, and as
such it could be challenged together with the determination on the
approval/permit. This ensured public participation while consolidating
potential challenges to a project, to minimize the historical use of
inefficient and delay tactics. See, Act 161-2009.
\36\ The amendments to Act 161-2009, among other things, returned
the challenges to environmental documents and location approvals/
permits to the pre-2009 bifurcated path. See, Act 151-2013.
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Executive Orders--Declaration of Emergency
The Governor of Puerto Rico can utilize existing statutory tools to
declare an energy emergency and enable the relevant agencies to
activate expedited permitting processes in order to jumpstart the
replacement of PREPA's old generation fleet and improve/replace
transmission and distribution infrastructure. In 2010, the Governor
issued an Executive Order (EO) declaring a state of emergency in
connection with the infrastructure of the electric power utility in
Puerto Rico. The EO's effective date was extended on multiple occasions
until 2012, as per the provisions of Act 76-2000, as amended (Act 76).
Pursuant to those EOs, expedited permitting proceedings were activated
to approve multiple projects related to the generation of energy using
alternate sources of fuel to those traditionally used (e.g., petroleum
derived sources). Act 76 was enacted to address certain emergencies,
provide expedited processes for the application and granting of
permits, endorsements, consultations and/or certifications related to
the solution of emergencies so declared.\37\
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\37\ It is important to note that the provisions of Act 76 must be
interpreted in the broadest sense possible in order to achieve the
effective interpretation of the public policy contained therein. Also,
the provisions of Act 76 will prevail over any general or special
provision of law or regulation that is inconsistent therewith. See, 3
L.P.R.A. Sections 1944 and 1945.
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Act 76 grants the Governor the authority to issue an EO declaring
an emergency covered under its provisions. Under the Act, an emergency
shall be deemed to exist if, among others, there is an event or grave
problem of deterioration in the physical infrastructure for the
rendering of essential services to the people.\38\ Upon the issuance of
an EO declaring a state of emergency under Act 76, and for the duration
of the emergency, the Governor activates: (a) an expedited permitting
process under which certain permitting agencies \39\ can fast track
permit applications, related to works that may provide an immediate
solution to the situation created by the emergency, which entail the
issuing of a permit, endorsement, consultation and/or certification,
and approval of an environmental document; (b) the specific and non-
deferrable period during which other agencies can file their
endorsements or opposition to permit applications; (c) the period for
the relevant evaluation of environmental documents; and (d) the period
for the evaluation of location consultations by the Planning Board.
Although it establishes an expedited permitting procedure, the
provisions of Act 76 include public notification mechanism which ensure
public participation and establishes the remedies available to a party
adversely affected by any resolution or order issued by any agency
under the provisions of Act 76.
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\38\ Section 15 of Act 76 defines the term ``emergency'' as: ``. .
. [a]ny serious abnormality such as a hurricane, tidal wave,
earthquake, volcanic eruption, drought, fire, explosion, or any other
kind of catastrophe, or any serious disruption of the public law and
order, or an attack by enemy forces through sabotage or through the use
of bombs, artillery or explosives of any nature, or by atonic,
radiological, chemical, or bacteriological means, or by any other means
that the enemy may use in any part of the territory of the Commonwealth
of Puerto Rico, that merits the mobilization and extraordinary use of
the damages caused of that could be caused. Likewise, the term
``emergency'' covers any event or grave problems of deterioration in
the physical infrastructure for the rendering of essential services to
the people, or that endangers the life, public health, or safety of the
population or of a sensitive ecosystem. See, 3 L.P.R.A. Section
1931(a). (Emphasis added).
\39\ The definition of the term ``agency'' included in Act 76
includes both central government governmental entities and
municipalities. See, 3 L.P.R.A. Section 1931(b).
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This legal mechanism helped significantly in the development of
multiple renewable projects that today are selling energy to PREPA.\40\
Nevertheless the emergency declaration was discontinued by the current
administration.\41\
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\40\ Projects include Pattern Santa Isabel, Punta Lima, AES
Illumina and others. Some projects which obtained approvals under the
expedited procedure were latter affected by the internal protracted
PREPA reviews and approvals (e.g., issuance of final Minimum Technical
Requirements, interconnection evaluations and other PREPA technical
evaluations). By the time PREPA completed its internal processes, the
Authority's fiscal situation had a detrimental impact on the ability of
project developers to obtain financing.
\41\ See, Executive Order No. OE-2013-038 of May 14, 2013 (http://
estado.pr.gov/en/executive-orders/).
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Federal Permitting
Regarding a Federal Role, as in any other state, infrastructure
projects will require Federal approvals. The typical agencies include
the USEPA, USCOE, USDA (Rural Development), USDOE and the FERC. Yet
(Federal) interagency action can also take considerable time to
complete.
Congress could consider a structure--like a temporary Emergency
Permitting and Oversight Task Force or Control Board--to dovetail with
a local enhanced permitting structure. This Board could be tasked with
expediting the joint review and approval of permits, in addition to
grants, loans and loan guarantees from existing programs. It could also
ensure, with Congressional authority, that PREPA is in fact reformed--
for good.
Program Considerations to Support Puerto Rico Energy Sector
Development
1. Maximize the use of existing loan, loan guarantee and grant
programs, such as those provided by the Department of
Energy and the USDA Rural Utilities Service.\42\ These
programs are intended specifically to assist public and
private sector energy infrastructure expansion and
improvement initiatives and the fund allocations to
implement these assistance programs has already been
approved and issued.
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\42\ http://www.rd.usda.gov/.
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2. Expedite the required NEPA Review Program by:
a. Prioritizing NEPA reviews associated with Puerto Rico
project reviews.
b. Streamlining the procurement process to obtain
additional internal/external support needed to implement these
review programs in a timely manner.
c. Coordinate local and Federal permitting review programs
such that, if they cannot be consolidated and conducted
jointly, they are at least conducted simultaneously and not
sequentially.
d. Realizing that time is of the essence in these programs,
streamline the Federal legal challenge process by:
i. Prioritizing the review of Puerto Rico project
proceedings, and
ii. Ensuring any opposing petitioners have true
standing and are pursuing legitimate concerns, not
simply employing delaying tactics to oppose change.
3. Implement the temporary Oversight Task Force/Control Board to
help ensure that:
a. Comprehensive planning is implemented to help minimize
the occurrence of additional unanticipated expenses.
b. Program implementation is achieved and not unnecessarily
delayed or diverted by political influence or other external
pressures placed on the process.
c. Funds are used efficiently and for the intended purpose.
Strategic Planning--Integrated Resource Plan
The PREPA Integrated Resource Plan (IRP), currently under
evaluation by the Energy Commission, should be the footprint and guide
for any budget and business plans to be developed by PREPA in order to
ensure timely and adequate availability of funds for required
investments and to avoid falling back into the existing crisis. The IRP
identifies the preferred strategy for satisfying PREPA's electric power
requirements over a 20-year planning horizon (Fiscal Years 2016 to
2035, July 1, 2015--June 30, 2035).\43\ It also provides to PREPA a
projection of its long-term electricity needs in a reliable, flexible
and cost effective manner under a variety of market, regulatory and
economic conditions/scenarios.\44\ The IRP also aims to prepare PREPA
for the achievement of compliance with the Mercury and Air Toxics
Standards, known as MATS,\45\ and the Clean Power Plan,\46\ two sets of
regulations for which the generation fleet is unprepared.\47\
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\43\ http://www.aeepr.com/Aeees/ley57.asp and http://www.aeepr.com/
Docs/Ley57/Presentacion %20IRP%20-%20AEE%2020151106.pdf.
\44\ Note that there are a multiplicity of interveners in the IRP
approval process before the Energy Commission. http://energia.pr.gov/
plan-integrado-de-recursos/. The participation of the interveners
should enable and foster an ample discussion of the IRP's compliance
with applicable requirements established in Act 57-2014.
\45\ On June 2015, the U.S. Supreme Court, in Michigan v. EPA,
ruled that the EPA erred by failing to consider costs when deciding
whether it was ``appropriate and necessary'' to regulate emissions of
mercury and other hazardous air pollutants from power plants like those
owned by PREPA. The Court, however, did not invalidate the MATS rule,
it simply returned the MATS rule to the lower court for it to determine
whether the rule should be simply remanded to EPA to correct the
deficiencies outlined by the Supreme Court or invalidate the rule
completely. Therefore, the MATS rule is in suspense until the lower
court makes its final determination. Notwithstanding the foregoing,
PREPA has stated that it will continue to work to modernize its power
system and achieve permanent, consistent compliance with the Clean Air
Act. To comply with emission requirements set by the new Federal
regulations, it is estimated that PREPA must burn a minimum of 80%
natural gas. For purposes of the IRP, PREPA is considering the MATS to
still be in effect and be applicable. See, IRP Volume IV, http://
www.aeepr.com/Docs/Ley57 / PREPA%20IRP%20Volume%20IV%20-
%20Draft%20for%20PREC%20review%20-%20%20 Air%20Quality.pdf.
\46\ Although the Clean Power Plan is not applicable to Puerto Rico
at the moment, it is reasonable to anticipate that its applicability
will be extended to Puerto Rico in the future and that PREPA must take
it into consideration when replacing its fleet in order to ensure it
can achieve compliance with it without significant additional capital
investments. Id.
\47\ See, IRP Volume IV, http://www.aeepr.com/Docs/Ley57/
PREPA%20IRP%20Volume%20IV% 20-%20Draft%20for%20PREC%20review%20-
%20%20Air%20Quality.pdf; http://www.noticel.com /noticia / 165741/epa-
anticipa-incumplimiento-ambiental-de-aee-busca-reunion-con-
donahue.html; and http://www.elnuevodia.com/Interstitial/
?oasSitePage=elnuevodia.com/interstitial&oasReturn Page= http://
www.elnuevodia.com/noticias/locales/nota/aeeapagaravariasplantas-
2031648/.
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Energy Commission--Rate Procedure
Given the advance status of the negotiations between PREPA and its
creditors, the Energy Commission and PREPA should, with all their
corresponding ministerial powers, work together to initiate and
promptly approve a new rate.\48\ The Energy Commission should move
expeditiously, within the applicable legal framework, to evaluate
PREPA's application for such new rate.
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\48\ Act 57-2014 gave the Energy Commission primary and exclusive
jurisdiction to approve rates and charges established by PREPA and
established an initial review process in which PREPA files a request to
modify its rates to the Energy Commission. This review process should
have begun on or before November 28, 2014 and be completed by May 28,
2015, as per the provisions of Act 57-2014. On February 12, 2015, the
Energy Commission initiated an investigation to obtain the operations
and performance of PREPA, including technical, administrative,
financial, accounting, and tax related information to evaluate the
existing rates of PREPA. During the investigation, which is still
ongoing, the Energy Commission issued data requirements from PREPA to
which the Energy Commission has stated that PREPA has responded to the
most part. All the information provided by PREPA is confidential and
thus, not available to the general public. Notwithstanding the
foregoing, on May 29, 2015, the Energy Commission initiated the first
review preceding by issuing an order which described the procedural
steps the Energy Commission will take to manage the rate case and
directed PREPA to file a request for new rates consistent with the
requirements therein and the rate filing regulation enacted on July 24,
2015. On December 3, 2015, the Energy Commission issued an order
stating that PREPA's rates review process would begin once PREPA files
its formal request before the Energy Commission and the latter
determines that the request is complete. As of December 31, 2015, PREPA
has not filed a request for the review of its rates. On September 17,
2015, National Public Finance Guarantee Corporation (National),
successor in interest MBIA Insurance Corporation and the insurance
payment of principal and interest of about $ 1.4 billion of bonds
issued by the PREPA filed a request for a revision of PREPA's rates and
the establishment of a temporary rate. In its request, National
requested that the Rico Energy Commission (i) show cause requiring
PREPA to respond to this Petition within fourteen (14) days of service;
(ii) consolidating this proceeding for all purposes with the existing
rate case initiated by the Energy Commission on May 29, 2015; (iii)
requiring that the consolidated rate review proceeding be completed no
later than four (4) months after the filing of this Petition and
establishing appropriate interim deadlines and procedures therefore;
and (iv) establishing a temporary increase in the base electricity rate
of at least 4.2 per kWh over existing rates while the Energy
Commission's rate review is pending. The Energy Commission denied the
request on September 30, 2015. With regards to the temporary rate, the
Energy Commission held that the request did not meet the standards and
requirements of Regulation No. 8620 which established the procedures
and information requirements that must be filed before the Energy
Commission when requesting a revision of the PREPA current rates and
did not provide sufficient evidence to support such request. Regarding
the request that the tariff review process be completed within four (4)
months from the filing of the request, the Energy Commission held that
it could not responsibly establish a specific date for completion of
the rate review process because, as established in Order No. 2015-0001-
AP-CEPR, once the request from PREPA is received by the Energy
Commission and the latter determines that it is complete, the Energy
Commission will establish a procedural schedule with dates for
technical and public hearings, where all persons or entities wishing to
participate in the process can submit a requests to intervene. The
Energy Commission urged National to use this mechanism, as intervening
party, in order to have active participation in the PREPA rate review
process. http://energia.pr.gov/revision-tarifaria/.
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The Energy Commission should use all of its available powers to
take the necessary temporary rate measures while the application is
adjudicated, as per clear and express provisions of Act 57-2014.\49\
The Commission has a key role in the transformation of PREPA. As an
independent regulatory entity, it needs to bring an unprecedented
transparency and accountability to the PREPA rate setting procedure.
The result of this rate setting process should be the establishment of
a rate that is fair and reasonable, which in fact must take into
consideration PREPA's costs to ensure the quality and reliability of
the service.
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\49\ As per the Energy Commission's own interpretation of Act 57-
2014, as amended, under Article 6.3 thereof, the regulatory entity has
the authority to establish emergency and/or temporary rates. See,
Testimony of the President of the Energy Commission before the Puerto
Rico Senate, November 10, 2015. http://www.oslpr.org/2013-2016/
ponencias/A3BBMBI3.pdf.
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Implementation
Given the importance of resolving the Puerto Rico energy crisis,
the implementation of the IRP and of the solutions proposed by PREPA
should be subject to short and mid-term oversight and supervision by a
qualified and professional (e.g., a designation similar to the Chief
Restructuring Officer) or Federal agency such as the Department of
Energy.
closing
The Federal Government's time and efforts, as well as that
of the local government, is best used by focusing on the
few action items that remain, in order to finalize a PREPA
structural and financial reform. In fact, Federal support
may be conditioned upon the prompt completion of such
actions on the part of Puerto Rico.
The revival of the local economy is a pre-requisite for
long-term debt repayment. As such, an electric demand
elasticity trend correction is a ``sine qua non''
ingredient for debt restructuring to succeed in the
shortest possible time.
Talk of default and bankruptcy only distracts from the
realizable objectives that Puerto Rico and PREPA have
within reach--and may otherwise have detrimental long-term
effects in Puerto Rico's ability to obtain future
financing.
Most of the actions required to complete a reform of the
utility and the energy infrastructure of the island are
local. The Federal Government can provide leadership,
structure and oversight--but Puerto Rico has the tools
needed to finish the job at PREPA.
Most of the proposals demanded of, or coming from,
Congress do little to address the underlying structural and
policy issues that gave rise to our current energy crisis.
Real legislative help for Puerto Rico should take account
of the bigger picture--spurring economic growth and job
creation. Only then will we progress toward economic
opportunity for residents, a lower cost of living and
better quality of life, with higher productivity and job
growth. Although most of the responsibility for better
energy policy lies with the local government, Congress can
help as generally outlined above.
______
Mr. Lamborn. Thank you.
The Chair now recognizes Mr. Rivera-Velez to testify.
STATEMENT OF CARLOS RIVERA-VELEZ, PH.D., PE, PRESIDENT, PUERTO
RICO MANUFACTURERS ASSOCIATION, SAN JUAN, PUERTO RICO
Mr. Rivera-Velez. Good morning. My name is Carlos Rivera-
Velez, and I am here today on behalf of Puerto Rico's Private
Sector Coalition, representing 100 percent of the private
sector and comprised of 30 organizations. We thank you, Mr.
Chairman and subcommittee members, for today's hearing.
I am also the elected Chair of the Puerto Rico
Manufacturers Association, PRMA, which is the largest trade
association comprised of approximately 1,200 companies
representing the manufacturing sector. Employing almost 350,000
U.S. citizens and over 80,000 Americans stateside,
manufacturing alone represents 50 percent of the island's GDP.
We pay the highest wages, generate three jobs for every direct
job, and provide over one-half of the local government's
current tax base.
I am also Vice President of Manufacturing and General
Manager of Federal Life Sciences in Puerto Rico, which directly
employs approximately 1,000 U.S. citizens.
Recently, the PSC met with a number of your colleagues to
recommend a five-point program toward economic development,
highlighting energy as a top issue. Energy costs in Puerto Rico
far outweigh similar costs on the mainland and hamper our
ability to compete globally. We know the current MOU between
the DOE and Puerto Rico must be renewed and restrategized now.
We also ask the Insular Affairs Office of the Interior
Department to be funded now to complete the work with Puerto
Rico on modeling and implementing a competitive and sustained
energy solution.
Locally, we advocate for an agenda intended to transform
the electrical system and enable sustained economic
development, including things like debt restructuring; the
reintegration of renewable energy sources; the modernization of
the infrastructure; cleaner and cheaper fuel sources; and the
full empowerment of the Independent Energy Commission
representing consumers and industry to oversee the whole
process of setting utility prices, among others. Dedicated and
sound resources are needed to provide robust tools to allow the
local commission to impact and do its job on a level playing
field.
My main responsibilities as an operational leader include
ensuring expected results are met within the planned budget for
the year, while reducing costs annually in order to ensure
production remains competitive globally. Energy costs play a
major role in the daily management of any operation, especially
those that are equipment-intensive. Energy costs in Puerto Rico
for the last 15 years have been unstable and unpredictable,
trending upwards from 11 a kilowatt hour in 1999 all the way
up to 30 a kilowatt hour in 2012. Today, we are almost twice
the U.S. average, despite lower oil prices.
To make things worse, there are proposals to increase
energy prices even more above the current ones in order to
facilitate restructuring and debt servicing. This amount could
top an additional 7.8 /kWh taking the worst case; resulting in
average Puerto Rico prices for all sectors combined versus that
of the United States to be 3.3 times 2014 prices. Anyone with a
simple understanding of operating a business appreciates how
devastating this change would be and its consequences to our
economy.
As you know, PREPA has depended on oil to power its
electricity generators. Since the 1940s, history has taught us
that oil prices can change drastically in a short period of
time, and Puerto Rico is vulnerable to these price swings.
PREPA has been very slow to evolve.
Many local businesses and manufacturers have taken their
own initiatives to lower costs. In the case of my facility, as
an example, we have invested over $1 million just to convert to
LED lighting and install more efficient equipment as part of an
energy cost reduction strategy. Similar large operations in
manufacturing, consumer products, and retail markets have
actually installed their own electricity generation capacity on
site to ensure adequate power at a lower price, like
cogeneration with propane, large solar panel arrays, et cetera.
Notably, PREPA has resisted the ability of these companies
to sell back to the grid or to initiate the practice of
``wheeling'' and sell to a neighboring facility. So, small
businesses cut costs by turning off the air conditioner or use
it partially, use only a portion of the lights in the showroom,
and lay off employees. In many cases, energy costs are
significantly higher than payroll expenses. In the end,
consumers will face higher prices and we look elsewhere,
reducing demand, costing jobs for U.S. citizens in Puerto Rico
and the mainland.
Let me illustrate the example of a manufacturing plant.
Despite our current challenges today in Puerto Rico, we
continue to be a manufacturing powerhouse. Every time there are
energy cost increases, the following dynamics occur in any
manufacturing plant in Puerto Rico: the general manager needs
to explain the financial variances and the reasons for it; he
or she needs to look at implementing ways to compensate for the
cost increase, typically reverting to decisions involving
downsizing employment, delaying or canceling new investments or
expansions.
Corporations defer from bringing new products to the local
plants if they are heavy on capital equipment. Workers at all
levels become very aware of the previous challenges in the
working place. When combined with their own energy cost
challenges as consumers, it contributes to a suboptimal working
environment.
For these and many other reasons, we believe providing a
competitive and modern, long-term energy platform and low cost
is key to Puerto Rico's economic recovery.
Thank you all, and I look forward to your questions.
[The prepared statement of Mr. Rivera-Velez follows:]
Prepared Statement of Dr. Carlos Rivera-Velez representing the Puerto
Rico Private Sector Coalition
Good morning. My name is Carlos Rivera-Velez and I am here today on
behalf of Puerto Rico's Private Sector Coalition (PSC).
I would first like to thank you Mr. Chairman, Ranking Member
Lowenthal, and the members of the subcommittee for conducting this
hearing this morning and for this opportunity to testify. We have noted
in previous visits our availability to collaborate and establish a
strong partnership with you so together with the Federal and local
administrations we foster the development of practical, effective
solutions to the current fiscal situation and the formulation and
implementation of medium- and long-term plans that enable a
competitive, productive and sustained economy in Puerto Rico. I want to
recognize that this is the first invitation in recent times that the
Puerto Rico Private Sector Coalition as an entity has formally received
from Congress to testify on any issue affecting Puerto Rico and I would
like to thank you Chairman Lamborn and Congressman Lowenthal for the
opportunity and reiterate our availability to collaborate on this and
other challenges.
As a proud Puerto Rican and U.S. citizen living on our island, I
also want to thank Chairman Rob Bishop, Congressman Pierluisi, Don
Young, and all the Members of the House Resources Committee and their
staffs who are tirelessly working to assist our Commonwealth and your
fellow citizens in Puerto Rico in finding realistic and practical
solutions to the current fiscal situation.
Our 3.5 million U.S. citizens are active participants in the
American dream of a better life for our families. Today, Puerto Rico is
a key part of the U.S. values and supply chain. In fact, Puerto Rico
consumers and business purchased $20 billion in products and services
from mainland suppliers and retailers this past year, being the largest
buyer per capita of U.S. goods in the world.
By way of establishing for the record my formal background, I am
the elected Chairman of the Puerto Rico Manufacturers Association
(PRMA), which is the largest, and one of the oldest trade associations
in our Commonwealth, founded in 1928. The PRMA is comprised of
approximately 1,200 companies and represents the Puerto Rican
manufacturing sector, suppliers, and service providers, which together
employs almost 350,000 U.S. citizens on the island and over 80,000
Americans on the U.S. mainland. Manufacturing by itself represents 50
percent of the island's GDP or $51B and close to 70 percent of GDP when
all impacted aspects of the economy are taken into account. It pays the
highest average wages, generates three jobs for every direct job, and
generates over one-half of the local government's current tax base.
I am also Vice President of Manufacturing and General Manager for
Edwards Lifesciences Corp. in Puerto Rico, a global leader in
hemodynamic monitoring medical devices, established in the island since
1972, and directly employing approximately 1,000 U.S. citizens.
During my progressive career of almost 30 years, I have occupied
diverse professional and executive positions of increased
responsibility in the island. I have worked for Digital Equipment
Corporation (computers/electronics), Allergan Inc. (pharmaceuticals/
medical devices), Advanced Medical Optics Inc. (medical devices),
Johnson & Johnson Company (pharmaceuticals/medical devices) and now
Edwards Lifesciences Corp.
I have served as an engineer, engineering manager, manufacturing
manager, strategic planning director, engineering director, operations
director, plant manager, general manager, and now vice president, among
others. I have also served as president or board member of several
business, academic, and philanthropic organizations.
I have an engineering degree from the University of Puerto Rico; a
master's degree in Technology and Business from the University of
Pennsylvania; and a doctoral degree in philosophy from the Advanced
Studies Center for Puerto Rico and the Caribbean.
I also serve as a founding board member of the Puerto Rico Private
Sector Coalition (PSC), which represents 100 percent of the private
sector. Some of my fellow board members include: Dr. Jose E. Vazquez-
Barquet, President and Chairman of the Board of the Puerto Rico Chamber
of Commerce; Ramon A. Perez Blanco, Esq CPCU, President of the
Association of Products from Puerto Rico; Zulmarie Urrutia-Velez, CPA,
Esq, LLM, President of the Puerto Rico Society of Certified Public
Accountants; and Dr. Francisco Montalvo-Fiol, Coordinator of the
Private Sector Coalition and Department Chair at the Interamerican
University, Bayamon Campus. Together we came to Washington last
December 2015 and are the core team of the PSC consisting of almost 30
organizations.
The entire private sector has come together in a united front to
work on the issues affecting Puerto Rico, with energy one of the most
critical ones, and we look forward to working with you and your
colleagues prospectively. The World Economic Forum (WEF), has listed
high energy cost and non-competitive electrical infrastructure as a
significant challenge for the Island's economy and as a weakness in the
WEF'S Global Competitiveness Report for the last 5 years. Business
investment decisions have been negatively impacted by Puerto Rico's
high energy costs.
Last month, the PSC met with a number of your colleagues here on
Capitol Hill and recommended a five-point program toward sustained
economic development. At the top of our agenda was energy. As most of
you know, energy costs in Puerto Rico far outweigh similar costs on the
mainland and are a significant drag on our ability to compete with our
neighbors in the Caribbean Basin or even other regions of the World. I
will speak more about this next from an operational perspective but the
PSC recommends at the Federal level that the current MOU between the
Department of Energy and the Government of Puerto Rico be revitalized.
We also ask that the Insular Affairs Office of the Department of the
Interior is appropriated with the necessary funding to complete work
with Puerto Rico on modeling and implementing a competitive,
transparent, diverse, and dynamic energy solution that can become a key
catalyst toward economic recovery and sustained development.
At the local arena, we have been advocating for the implementation
of the following elements intended to enable the beginning of the
transformation of the agency and economic development: structured and
competitive-conscious debt restructuring; assertive integration of
renewable energy sources into the Puerto Rico Electric Power Authority
(PREPA) infrastructure; immediate implementation of wheeling; the
modernization of the current generation plants network and the
incorporation of cheaper and cleaner fuel sources (i.e. LNG); the
transparency of information and modernization of the information system
platform; and the total empowerment and resourcing of the Energy
Commission as an independent body representing consumers, commerce, and
industry to oversee the whole process of developing and setting energy
tariffs. Dedicated resources are needed to provide robust tools,
funding, and technical expertise to the Commission which will allow the
Commission to do its job on a level playing field.
I want to offer some of my personal experiences as an operational
leader managing a global company. One of my main responsibilities is to
ensure expected results are provided within the planned budget for the
year within a fair degree of certainty, while improving costs year over
year in order to ensure products remain competitive in the global
market place. Utility costs are a major component of the cost equation,
in which energy prices come to play a major role in the daily
management of any operation, in particular if it is relatively capital
or equipment intensive. The same analogy applies whether you have a
manufacturing plant or a store, at the end the customer pays for it or
a portion of it at the risk of being surpassed by cheaper prices from
competitors that have managed to achieve lower costs through different
cost reduction strategies or better operating conditions, like
operating in a place where energy is very cheap.
Energy costs in Puerto Rico for the last 15 years have been
unstable and unpredictable, trending upwards from 11 /kWh in 1999 all
the way to almost 30 /kWh in 2012. Average U.S. prices for all sectors
combined in October 2014 were 10.34 /kWh while in Puerto Rico that
figure was 26.70 /kWh, almost 2.6 times more than in the mainland. When
we take the same averages for October 2015, U.S. energy prices for all
sectors combined was 10.34 /kWh while in Puerto Rico we were at 19.66 /
kWh, almost twice that of the United States, the improvement driven
mainly from the dramatic drop in oil prices during 2015. To make things
worse, there are proposals to increase energy prices even more above
the current ones in order to facilitate PREPA's restructuring and debt
servicing. This amount could top an additional 7.8 /kWh taking the
worst case; resulting in average Puerto Rico prices for all sectors
combined versus that of the United States to be 3.3 times using 2014
prices or 2.6 times using 2015 prices.\1\ Compared to Singapore, Costa
Rica, and Dominican Republic, just to take these three competitors, and
using 14 /kWh as a fair point in the combined range at 2015 prices,
Puerto Rico will be almost double. Anyone with a simple understanding
of operating a business appreciates how devastating this change would
be and its consequences to our economy.
---------------------------------------------------------------------------
\1\ Sources: Independent Statistic & Analysis U.S. Energy
Information Administration and Estadisticas PREPA Serie Historica 2015
---------------------------------------------------------------------------
As you know, PREPA has depended on oil to power its electricity
generators since the 1940s. Thankfully, today's oil prices are low but
history has taught us that the price of oil can change drastically in a
short period of time and Puerto Rico is vulnerable to these price
swings. PREPA has been slow in evolving a significant amount of its
infrastructure to LNG and renewable energy sources which have enabled
Puerto Rico to stay competitively behind; now things are even worse as
a result of the financial challenges at the agency (i.e. Aguirre Gas
Port construction is halted).
Many local businesses and manufacturers have taken their own
initiatives to lower energy costs. In the case of the facility I
personally oversee, we have spent over a $1 million to change our
lighting to LED lighting and install more efficient equipment as part
of an energy cost reduction strategy. Several large operations in
manufacturing, consumer products, and retail markets, have actually
installed their own electricity generation capacity on site to ensure
adequate power at a lower price (i.e. cogeneration with propane, large
solar panel arrays, and energy cost reduction programs). Notably, PREPA
has resisted the ability of these companies to sell back to the grid or
to initiate the practice of ``wheeling'' and sell to a neighboring
facility.
Small businesses have also become creative within their limited
budget to attenuate energy costs: turn off the air conditioner or use
it partially; use only a portion of the lights in the show room; place
timers to control ON time on continuous operation electrical devices;
lay off employees; among other mitigations. There are instances for
many businesses in Puerto Rico where energy costs are significantly
higher than payroll expenses.
If we do not turn around these energy cost trends, this will be a
disaster for consumers, commerce, and the manufacturing industry.
Despite all of our challenges to operating in Puerto Rico, we continue
to be a manufacturing powerhouse, as demonstrated by our GDP figures.
Any significant increase over current energy prices, that are already
less than competitive, will kill the manufacturing industry; local
business and manufacturing will be forced to revise its cost structures
once again resulting in job reductions to compensate or pass the costs
to the consumer. In the end, local consumers will be once again hurt
with product cost increases while global customers will look at other
product options, reverting in lower demand for Puerto Rico made
products, and as a consequence trigger less jobs for U.S. citizens in
Puerto Rico and the mainland. We need to focus all our efforts in
achieving lower competitive energy costs over a modern, diverse,
compliant and agile infrastructure.
Let me now offer more details from the operations perspective by
illustrating the example of a manufacturing plant. Every time there are
energy cost increases the following dynamics occur in any manufacturing
plant in Puerto Rico: the general manager needs to explain the
financial variances and the reason for it; he or she needs to look and
implement ways to compensate for the cost increase. Typically reverting
to:
1. cutting jobs or holding up on other capacity improvement projects
or plant expenses;
2. holding up capital investment geared toward new products;
3. holding up capacity or capabilities improvements is held in order
to implement energy cost reduction projects;
4. new annual budget for electricity is increased and challenged by
corporate officials by its lack of predictability and
uncertainty;
5. capital dollar pool is limited in order to provide space for
energy saving related projects.
The impact means that no new energy projects could put at risk the
plant's future in Puerto Rico; corporations desist from bringing new
products to the local plants if they are heavy on capital equipment.
Workers at all levels become very aware of the previous challenges at
the working place, when combined with their own energy cost challenges
as consumers, it contributes to a suboptimal working environment. For
these and many other reasons, we believe providing a competitive long-
term energy platform is one of the cornerstones toward Puerto Rico's
economic recovery.
Other non-energy related recommendations of the PSC from the past
December visit included parity with respect to Chapter 9 bankruptcy
protection and Medicare/Medicaid reimbursements; establishment of a
Federal Fiscal Oversight Board; a preferred partnership with Puerto
Rico to promote manufacturing and the export of products and services;
the establishment of an economic development board; ``do no harm'' with
respect to international tax reform; and the inclusion of the private
sector in crafting workable and effective solutions.
With respect to this last point, the private sector pays a
significant amount of tax revenue in Puerto Rico and is our island's
largest employer. On that basis alone we hope that the Congress will
follow the example demonstrated today by Chairman Lamborn and Ranking
Member Lowenthal and this subcommittee and actively solicit the
expertise and participation of the private sector in assisting the
Congress, the Administration and the government of our Commonwealth in
resolving this fiscal situation.
In conclusion, thank you for the opportunity to testify and I would
be pleased to respond to any questions you might have. We look forward
to working with you in a collaborative and productive fashion.
______
Mr. Lamborn. Thank you.
The Chair now recognizes Mr. Rossi to testify.
STATEMENT OF JOSEN ROSSI, CHAIRMAN OF THE BOARD, AIREKO; CHAIR,
INSTITUTE FOR A COMPETITIVE AND SUSTAINABLE ECONOMY OF PUERTO
RICO, CAGUAS, PUERTO RICO
Mr. Rossi. Thank you, Chairman Lamborn; and thank you,
committee members. I also want to thank you for electing to
talk about energy challenges and opportunities facing Puerto
Rico. In doing so, I believe you are also talking about the
possibility to restructure Puerto Rico's economy for the good
if we restructure the energy system, not just PREPA.
I am Chairman of Aireko Enterprises. I was past president
of the Puerto Rico Manufacturers Association. We battled to
bring a regulatory framework, an independent body similar to
what the U.S. states and U.S. citizens enjoy when they consider
their future energy plans.
I am happy to say that we have that kind of regulatory
framework in Puerto Rico today, thanks to winning those battles
politically. It was enacted in 2014 and it started working in
2015. It seems to be disregarded currently, not just by PREPA,
but by a lot of our political leadership, as an important tool
to legally, morally, and politically restructure our energy
system. PREPA should be completely subject--as well as its
future plans, including the Integrated Resource Plan that is
present in proceedings in our Energy Commission in Puerto
Rico--to provide the information and be subject to the scrutiny
of our regulatory body.
Additionally, I propose that the Federal Government has a
role in this. There have been promises by the White House Task
Force on Puerto Rico to do so over the years, as it engages
private-sector leadership in Puerto Rico. Similar to Resident
Commissioner Pierluisi's comments, the DOI has been tasked with
that as well, but Congress has not acted on it.
In early 2015, the DOE started implementation of its
playbook with an MOU with the government of Puerto Rico to
assist technically with these improvements to our capacity
building. Everybody in the private sector coalesced around the
idea that the Federal Government could, through the DOE's
technical expertise, improve our regulatory framework. Nothing
of any substance has happened with that yet.
In essence, I wanted to convey to the panel and the
subcommittee today that Puerto Ricans have tools, legal tools,
similar to proven tools that U.S. citizens use every day in the
mainland to implement competitive, sustainable energy solutions
through participation as I now do chairing the institute that
presented testimony to you today to achieve a balance that will
favor the most amount of investment in the future to resolve
the 50 percent part of the system that is obsolete, does not
work, or has no value to us. We should not be paying rates to
support that. Nobody here in the states would allow it as an
intervener in a regulatory commission to legally pass those
costs to us.
From there, we can plan not just a 5-year restructuring
plan, but we can plan for a restructuring of the whole system
that attracts private-sector capital, competitive-sector
capital that is sustainably reviewed by an independent body,
not just by PREPA.
In addition, I would like to mention that ideas have been
brought forth that I fully support, and many others in Puerto
Rico. I just want to comment briefly on them.
Puerto Rico should be excepted from the Jones Act
provisions regarding natural gas maritime transports for the
reasons mentioned here: Federal debt guarantees, DOE has
capacity, legal capacity, or a modification to ITC tax credits
for renewable energies in Puerto Rico given the tax situations,
cash grants would be a better option to spur the type of
investment that Federal and state governments here have spurred
in new innovative distributed energy solutions. I would support
that.
Additionally, I would support that Federal guarantees be
provided to new strategic natural gas storage and distribution
infrastructure in Puerto Rico, as long as the Federal
Government is not supporting the creation of a new monopoly on
key fossil fuel, not just to lowering costs in Puerto Rico to
16 a kilowatt hour, which has been the goal that we have been
advocating in Puerto Rico Manufacturers Association every year.
We also need to make sure we pass on natural gas to businesses
and commerce in a competitive manner. Thank you.
[The prepared statement of Mr. Rossi follows:]
Prepared Statement of Josen Rossi, Chairman of the Institute for a
Competitive and Sustainable Economy of Puerto Rico
In response to the invitation to the hearings of January 12, 2016
by the Subcommittee on Energy and Mineral Resources, I am pleased to
offer the following testimony. I am thankful to you, Ranking Member
Alan Lowenthal, and fellow committee members beyond the invitation to
speak, as you have chosen to focus on ``energy challenges and
opportunities facing Puerto Rico'' and in doing so you also focus on
the best opportunity U.S. citizens in Puerto Rico have to actively
participate in the renewed investment and economic growth in our
beloved island. The White House Task Force report on Puerto Rico of
2010, the Puerto Rico Private Sector Coalition Supranational Goals
report of 2008, the promises of our local politicians over the years,
others testifying at these hearings and important public forums over
the years bear witness to this generally accepted truth that a
transparently planned and wisely supervised energy reform that
sustainably lowers our electrical energy costs in Puerto Rico is key to
our economic, social and environmental well-being.
I begin by stating that in Puerto Rico it is important to first
comment on potential conflicts of interest if you are to give or
receive opinions on energy reform given the historical, unusual and
very detrimental political and big-government heft of our failed
electrical energy public monopoly. In my case as Chairman of Aireko
Companies I could benefit short term from a shortsighted re-structuring
resulting in higher electrical energy prices in Puerto Rico because of
our Energy Efficiency and Renewable Energy business.
On the other hand our general construction company, our workers and
families can most benefit if the electrical system is reformed to
attain the maximum amount of sustainable investments that promptly fix
the current system's ridiculous 50 percent dependence on obsolete oil
fired generation. Said obsolescence and present incapacity of the
system to replace it is the primary challenge to low-cost grid access
for competitively priced intermittent renewable energy generation that
the Federal and most state governments solidly support.
Given present circumstances in Puerto Rico I believe a well-
implemented electrical system reform, with a Puerto Rico Energy
Commission (PREC) approved Integrated Resource Plan (IRP) can support,
as they regularly do in the rest of the United States and the civilized
world, the maximum public and private sustainable investment that
consumers and our economy can benefit from. Additionally, the goals of
the Institute for a Competitive and Sustainable Economy of Puerto Rico
(ICSE-PR) which I chair as Intervener in the PREC's IRP evaluation, are
also the goals of the broadest sectors of our specific community to:
(1) attain the lowest sustainable base system cost; (2) actively
support a robust implementation of our independent regulatory body, the
PREC, per State Law 57 of 2014 and all applicable Federal laws and
regulations; and (3) unleash the best private and public-private
competitive solutions to replace the 50 percent of the system that no
longer works.
The local public sentiment and that of most experts I have heard is
that fiscal reform must go hand in hand with structural economic
reform. For energy reform to become structural reform the diminishing
number of ratepayers of unpredictable local electrical bills, as well
as the responsible investor must regain confidence in our public policy
and institutions. I mean the type participative, open, clear rules
regulatory institutions that can replace the obscure and broken public
financing schemes that broke our energy system prior to 2015 when we
enacted Law 57 and the PREC. As responsible electricity ratepayers
Aireko, its more than 600 workers and many more in Puerto Rico can
support the financing of a competitive electrical energy system,
similar to other modern industrialized islands like Ireland and
Singapore which use modern regulatory frameworks to turn their
electrical energy into a competitive economic advantage, instead of
profit opportunities for the few, the well-connected, or the corrupt.
Puerto Rico is an industrialized archipelago with a 2014 GDP of
$103.6 billion. Manufacturing directly contributes $49.3 billion (47.5
percent) of total GDP, an unusually high component of our economy when
compared with all states of the union. The manufacturing GDP of Puerto
Rico is comparable on its own and even higher than the total GDP of
many incorporated states like Hawaii's total GDP of 76.17 billion,
Alaska's $56.64, or Vermont's $29.31 billion. Our very competent hi-
tech manufacturing and related services labor which supports 95 percent
of our total export capacity, can only make their and Puerto Rico's
economic future thrive if strategic energy infrastructure investment,
including a modern regulatory capacity result in electrical energy
costs which increase productivity and wages for all.
As proposed by the Puerto Rico Manufacturers Association when I
presided it in 2008, transparently planning and executing reforms that
achieve 16.0 /kWh energy solutions for our hospitals, industrial
manufacturing and similar type base-load ratepayers that underpin a
solid electrical system is a requisite starting point to this economic
structural reform. I specifically mean a reform that: (1) sustainably
lowers energy costs to that of most competitive industrial island-
states (presently an industrial intermediate rate in the range of 14 /
kWh); (2) continuously increases grid access to best-cost renewable
generation, at all scales, using our natural solar and wind resources;
and (3) an institutional reform that eliminates shortsighted partisan
politics and big uncompetitive participants in our energy sector.
The type integral energy reform that Law 57 of 2014 began with the
2015 implementation of the PREC and its legal power to act on behalf of
the consumer, is presently challenged in our state legislature by some
of the same shortsighted politics and a narrative of fear of facing a
complete re-structuring of the failed public utility as a needed step
to successfully transform the whole system for sustainable success. You
must know our public utility has not yet fully complied with court
ordered system information pursuant to the PREC's IRP process, and is
still engaged in debt negotiations with bondholders that still have not
presented for public evaluation the capacity nor the legality of
ratepayers and our economy to further finance its failures thru rate
increases. I certainly support our utilities efforts to fairly re-
negotiate its debt and enact improvements to its operating costs that
may require legislative authority. But no one should again accept in
Puerto Rico nor the Federal Government that revitalization of this
public corporation, our electrical system, nor our economy can occur
going back to less, rather than more independent supervision, expert
consulting and legal power on behalf of the consumer.
Puerto Rico's modernly regulated Telecom sector is an undisputed
competitive tool for the betterment of a key public services
infrastructure and thus our local economy. Since inception over 25
years ago, the Puerto Rico Telecommunications Regulatory board has been
staffed by Puerto Ricans, and is testament to our capacity to do
exactly the same with the electrical system. Correctly valuing the PR
Telephone Co as the PRTC Regulatory Board was enacted and new private
investment flowed to further productivity and consumer choice, remains
a stellar example of our capacity for structural economic reform. What
our failed power monopoly is now incredibly proposing to local
legislators and the public in its proposed ``Revitalization Act'' ?--to
value itself, with no independent expert supervision until it
``securitizes'' the value and converts it into ``a new long-term debt''
within a new corporation outside regulatory powers. The consequences of
accepting this along with the other good portions of the proposed Act
would be the arbitrary limiting of new private investments that could
otherwise structurally and competitively reform energy productivity,
harness renewable natural resources innovatively, and do it under the
independent, modern and legal regulatory scrutiny that our PREC
presently requires from anyone interested in doing business in our
grid.
In 1999 the Puerto Rico Manufacturers Association and our local
Chamber of Commerce publicly criticized the lack of competent planning,
procurement and regulation of our electrical energy system as costs
started diverging from the more competitive norm of the 60s, 70s and
early 80s. By 2000 the average energy cost for Puerto Rico was 11.96 /
kWh and the national (US) average was 6.81 /kWh, a 75.6 percent higher
cost difference. From then on as other local Non-Governmental
Organizations clamored unsuccessfully for local implementation of the
modern independent energy regulatory structures that became the norm in
the rest of the United States in the 80s and 90s, our local energy
incompetency became a cause or our general economic incompetency in the
past 15 years. During 2015 (January to October) electricity cost 100
percent more at 20.97 /kWh in Puerto Rico than the equivalent national
(US) average same period of 10.45 /kWh. If we consider the substantial
decrease in oil cost during 2015, and our continued dependency on oil
for over two-thirds of our generation capacity, Puerto Rico is poised
for further economic distress as fossil fuel costs rise again in the
future, as they did unexpectedly in 2012 when costs rose above the 30 /
kWh, approximately 250 percent higher than continental United States
and 100 percent higher than best-in-class industrialized island-states,
unless we valiantly do something about it.
Puerto Rico nor our economy can afford further timid, incomplete
energy system reform without broadly understood and competitive future
energy costs scenarios and expect to again attract growing industrial
investment with well-paying jobs. Even the best scenarios proposed by
our more recent public utility leadership with scant system information
would have short term energy costs in the range of 24 to 25 /kWh, in a
very low oil cost scenario. Toward the future as oil costs went up, and
the proposed and undefined monopoly ``Securitization Transition
Charges'' kicked-in Puerto Rico would be vulnerable to the significant
industrial investment and energy consumption losses of the past 15
years and further economic distress that would grow as our energy
competitiveness gap grew again.
The continued focus by our failed monopoly to again propose
unsupervised financial solutions with limited re-structuring to itself,
and incomplete information on future energy cost scenarios, along with
lack of understanding of some in our local political leadership
regarding implementation of a modern regulatory framework with full
legal power is in my opinion the immediate challenges that must be
addressed in Puerto Rico for truly sustainable energy system reform.
These challenges in my opinion can be overcome if the U.S. Congress and
our local leaders present today pay attention to the unfulfilled
promises by the Federal and to some extent local Executive branches of
government. Unfulfilled promises by the White House Task Force
officials that engaged with local private sector leaders, as well as
unfulfilled expectations in the DOE implementation playbook of the 2014
MOU with the Puerto Rico government, depict a Federal Government that
has timidly shied away from technical assistance and other available
efforts at capacity building of our most immediately fundamental
infrastructure--the PREC and its expert capacity in valuing the present
failed public utility and assessing the best IRP solutions for local
energy competitiveness.
Congress must be aware that growing private sector alliances of
leading longstanding NGOs as well as new organizations like the ICSE-PR
are currently educating the public and engaging our political leaders
so that we keep the good of what is proposed to subject future
procurement practices to independent scrutiny but we strike out all
uncompetitive and non-transparent portions of the monopoly proposed
``revitalization law.'' Most important going forward are that Congress
influences our Executive to rapidly help strengthen the PREC regulatory
capacity, the failed public utility disclosures of system information
and thus the confidence of local and outside investors that similar to
the Telecom re-structuring of long ago we will not shy away from real
structural reform this time again in our energy sector.
With regards to additional solutions and ideas which I support,
beyond the focus on the emergency capacity building of our regulatory
framework, I want to stress the following, with the understanding it is
not a complete list:
1. Exempt Puerto Rico from Jones Act provisions regarding Natural
Gas maritime transport.
2. Provide Federal debt guarantees for strategic:
a. Infrastructure investments in natural gas transport and
storage as long as Puerto Rico government and the public
monopoly credibly commit to private business access to said
infrastructure at competitive natural gas prices. We do not
another infrastructure monopoly, this time federally aided.
b. Replacement of old thermal generation with new dual-fuel
cogeneration capacity specifically procured to provide best-
cost access to intermittent renewable generation at all scales
of the system.
My deepest thanks to you, Ranking Member Alan Lowenthal, and to
this honorable committee for the opportunity to participate in these
hearings. I trust you will understand that I expect the alarm and grave
concerns that are part of this testimony are directed at a needed
awakening from the passivity that has oftentimes accompanied Puerto
Rico energy reform and economic reform talks in the halls of power here
and locally. We can certainly achieve an awakening of Puerto Rico's and
outside investor's confidence in our ability to overcome obstacles and
responsibly take all opportunities in our energy sector reform if we
focus on emergency regulatory framework capacity building and other
opportunities where Federal Government can be helpful such as the
public-private procurement process options that can be implemented in
parallel with the needed regulatory evaluations. In the ICSE-PR and the
growing local private sector alliances we are doing our part.
______
Mr. Lamborn. Thank you.
The Chair would now recognize Mr. Sanabria-Hernandez to
testify.
STATEMENT OF JAIME L. SANABRIA-HERNANDEZ, CO-PRESIDENT AND
GENERAL MANAGER FOR FINANCE AND ADMINISTRATION, ECOELECTRICA,
L.P., PENUELAS, PUERTO RICO
Mr. Sanabria-Hernandez. Mr. Chairman, Ranking Member, and
members of the subcommittee, thank you for inviting me to
discuss our perspective on some of the energy challenges faced
by Puerto Rico.
As you are aware, we submitted a more detailed testimony
than what we will be presenting here this morning. I ask that
you incorporate that detailed testimony as part of the record
in today's hearing.
I would like to start out by pointing out a few simple
facts that underscore the urgency of our work. Electricity is
an essential building block of the modern world. Application of
affordable and dependable energy makes everything we do better,
including food production, manufacturing, health care,
transportation, heating and air conditioning, et cetera.
In our experience, there are three important components of
any healthy economic sector: profitable companies; satisfied
consumers; and confident investors. Profitable companies need
satisfied consumers. Consumers need to get a good and
dependable product at prices they can afford. Investors need
assurances that the company is run well and that political
involvement is limited.
EcoElectrica--and, as you know, I am Co-President at
EcoElectrica--was the first independent power producer to
supply clean, reliable, and safe energy at a competitive cost
to the Puerto Rico Electric Power Authority under a 22-year
Power Purchase Agreement. Our facility includes a 507-megawatt
power plant and an LNG terminal with a regasification
capability of 366 million cubic feet per day. The 507 megawatts
of installed capacity represents approximately 9 percent of the
total installed power capacity on the island, but we supply as
much as 17 percent of all the electricity consumed in Puerto
Rico on a daily basis.
There are a few systemic problems in Puerto Rico's energy
sector. First, consumers are paying more for energy than they
should because of the unstable business environment. The system
could attract new investment if the business environment were
better. The financial crisis in Puerto Rico is real and has
caused a deterioration of the overall credit environment. Our
counterparties are experiencing some erosion of their
creditworthiness and that has compromised the certainty of
getting paid on time. Because we are a private business, we
depend on getting paid.
There is, unfortunately, a lack of certainty in the legal
and regulatory framework. Companies, consumers, and investors
in the energy sector in Puerto Rico all need and want PREPA to
be successful. To achieve a more stable environment that is
conducive to investment, we need to see improvements in the
following elements of business.
First, independence. We think PREPA should be operated as a
private business and divorced from intervention from the Puerto
Rico government and its institutions.
Second, we need more stable leadership at PREPA. During the
last several years, PREPA has had numerous CEOs--in one
particular case, the person was there for no more than 3 days.
That has its impact on how the business is run.
Next, having certainty, confidence, and the durability of
the legal and regulatory framework is critical. Investor
confidence is undermined if that legal and regulatory framework
is not structured and does not represent a confident framework
on which to operate.
Last, we need an improved credit environment. It might
serve Puerto Rico's interest to institute and monitor a program
of Federal guarantees as a means toward increased
sustainability.
In conclusion, in many respects Puerto Rico faces the same
challenges as the rest of the United States. Businesses should
be run like businesses, without bureaucracies or political
institutions substituting their judgment for those of the
people actually trying to operate the business.
At the same time, while we are fixing the current system,
we need a bridge. The financial crisis in Puerto Rico is real
and will require some time and assistance to be resolved. We
look forward to working with you on these issues.
Thank you again for inviting me, and I look forward to your
questions. Thank you.
[The prepared statement of Mr. Sanabria-Hernandez follows:]
Prepared Statement of Jaime Sanabria-Hernandez, General Manager for
Finance and Administration, EcoElectrica
Mr. Chairman and members of the subcommittee, thank you for
inviting me to discuss our perspective on some of the energy challenges
faced by Puerto Rico.
I would like to start out by pointing out a few simple facts that
underscore the urgency of our work.
Electricity is an essential building block of the modern world.
Application of affordable and dependable energy makes everything we
do--food production, manufacturing, health care, transportation,
heating and air conditioning--better.
Nations that have reliable and low cost electricity systems are
better able to do things--refrigerate vaccines, grow and transport
enough food for their citizens, treat wastewater--that improve life.
Their citizens live longer lives and have a greater range of
opportunities.
In short, we are talking about something very important today.
In our experience, there are three important components--profitable
companies, satisfied consumers, confident investors--of any healthy
economic sector. Profitable companies need satisfied consumers.
Consumers need to get a good and dependable product at prices they can
afford. Investors need assurances that the company is run well and that
political involvement is limited.
ecoelectrica
EcoElectrica was the first independent power producer to supply
clean, reliable and safe energy at a competitive cost to the Puerto
Rico Electric Power Authority (PREPA) under a twenty-two (22) year
Power Purchase Agreement (PPOA). Our facility includes a 507-megawatt
power plant and a Liquified Natural Gas (LNG) terminal with a
regasification capability of 366 million cubic feet of gas per day that
could be expanded if the sector is developed properly.
The 507 megawatts represent approximately 9 percent of the total
installed power capacity on the island, but supplies up to 17 percent
of the total electricity consumed on a daily basis.
The shareholders of EcoElectrica--Gas Natural Fenosa, Engie
(formerly known as GDF Suez) and Mitsui & Co.--are among the largest
operators of power plants and gas suppliers, throughout the world.
These three shareholders have the combined financial resources to
successfully support selected project development commitments made.
The EcoElectrica tri-fuel combined cycle power plant is one of the
cleanest and lowest-cost producers of electricity with the best
efficiency and lowest emissions to the environment in the PREPA system.
EcoElectrica employs eighty (80) highly skilled full time personnel
who have worked more than 1 million hours without a lost time accident.
The EcoElectrica LNG terminal provides the required infrastructure
for the supply of natural gas on the island. The above ground LNG tank
contains 160,000 cubic meters of storage capacity and is capable of
receiving as many as sixty (60) LNG transport ships annually. The
terminal currently provides natural gas to the EcoElectrica power plant
and to PREPA for use at Costa Sur, PREPA's largest power plant.
The natural gas imported into Puerto Rico by EcoElectrica, for use
at its power plant, has been mainly sourced from the Caribbean Basin
out of Trinidad & Tobago. Today, some of the natural gas received at
the LNG terminal destined for use by PREPA is also sourced from the
Middle East and Africa.
EcoElectrica is active in social and community organizations that
contribute toward the improvement of public policy with an emphasis on
the energy sector, as well as charitable causes close to the community.
EcoElectrica is proud of the support it provides to neighboring
communities through numerous initiatives, including scholarship
programs that have provided close to $700K in grants to university
students commencing their first year; the continuing biological
monitoring that cares for and protects marine life; and donations to
build facilities for the care and custody of manatees found injured,
among other things.
With all that in mind, I would like to touch on a few of our
challenges.
challenges
There are a few pervasive and probably systemic problems in Puerto
Rico's energy sector.
Consumers are paying more for energy because the overall
system could attract new investment in more efficient and
reliable generation if it were part of a stable business
environment.
Capital spending should be focused on reducing consumers'
overall costs. An example of this opportunity is the
existing LNG terminal, where untapped capacity for greater
use can serve to lower the cost of new infrastructure.
The financial crisis in Puerto Rico is real and has caused
deterioration of the overall credit environment. Our
industry is going to need an improved credit environment to
help get financing at reasonable costs.
Our counterparties are experiencing some erosion of their
creditworthiness. This shows up in variety of ways,
including late payments (now averaging around 30 days
beyond contract terms). PREPA cash-flow has deteriorated
over time, and those of us in the energy sector need
PREPA's cash position to be better managed. Without surety
of payment, it will be difficult for anybody to justify
investment in the Puerto Rican energy sector.
The Government should not undermine the commercial value
of assets through the creation of government regulatory
bodies. An example of this is the legislatively created
Puerto Rico Energy Commission's Regulations that prohibit
the recovery of fees that are reimbursable under the PPOA
terms. Our counterparties' efforts to meet contractual
obligations should not be impeded by government actions.
There is, unfortunately, a deficiency of certainty in the
legal and regulatory framework. It is pretty simple: when
legal and regulatory frameworks are constantly changing,
investor confidence is undermined.
solutions
We want to see PREPA be successful. Companies, consumers, and
investors in the energy sector in Puerto Rico all need and want PREPA
to be successful. PREPA itself is attempting to address some of these
challenges in their business planning process known as an Integrated
Resources Plan.
Along with PREPA's plan, we think that part of Puerto Rico's and
PREPA's financial recovery will include finding and relying on
expertise in the following areas:
Expansion of fuel diversification efforts, specially
increasing the use of LNG;
Investments in state-of-the-art modern efficient power
plants;
Investments in renewable energy generation assets; and
Professional management of power assets and/or the
utility.
The elements that should characterize the future state of PREPA and
the sector are:
Independence. PREPA's operations have been very closely linked to
the agenda of the Puerto Rican government. PREPA should be operated as
a private business and divorced from intervention from the Puerto Rican
government and its institutions. For example, it cannot continue to
provide legislated subsidies for multiple purposes.
Leadership. More stable and predictable leadership from people
experienced in operating power grids is needed at PREPA. During the
last 8 years there have been six (6) CEOs with one of them remaining at
the position for no more than 3 days. Continuity in the roles with a
medium to long-term vision is key to providing the stability we all
need to succeed.
Certainty. Confidence in the durability of the legal and regulatory
framework is also a key element necessary to facilitate strong
financial leadership at the utility. Leadership needs to focus on
improving the business environment through honoring contractual
commitments while protecting the rights and obligations of the parties.
Credit. An improved credit environment throughout Puerto Rico will
enable financing at reasonable costs and should also help stabilize
PREPA's finances. Because recovering creditworthiness is a high
priority and would take time, it might serve Puerto Rico's and PREPA's
interests to institute--and monitor--a program of Federal guarantees as
a means toward increased sustainability. The liquidity at PREPA
requires special focus in the management of their cash position to
facilitate meeting current obligations.
Focus. Long-term fuel supply, power generation and overhaul of the
transmission system are business issues that need immediate attention
to help PREPA overcome its financial difficulties.
Knowledge. Experienced private investment knowledgeable of the
Puerto Rico energy market can serve to accelerate the implementation of
the solutions required to overcome the financial recovery.
conclusion
In many respects, Puerto Rico faces the same challenges as the rest
of the United States. Businesses should be run like businesses, without
bureaucracies or political institutions substituting their judgment for
those of the people actually trying to operate the business and, in
this case, supplying the affordable, dependable electricity on which
Puerto Ricans rely.
At the same time, while we are fixing the current system, we need a
bridge. The financial crisis in Puerto Rico is real and will require
some time and assistance to be resolved.
EcoElectrica is a good example--and has the potential to be an
excellent example--of how private sector approaches can provide real
economic, environmental and social benefits to the citizens of Puerto
Rico.
We look forward to working with you on these issues. Thank you
again for inviting me, and I look forward to your questions.
______
Mr. Lamborn. Thank you. I want to thank all five of our
witnesses for your valuable testimony and for being here today
on this very important issue. I will start with the first set
of questions. I would remind all of the Members that Committee
Rule 3(d) imposes a 5-minute limit on questions. I will begin,
then we will go with the Ranking Member, and then we will
continue on from there.
Ms. Donahue, could you comment--I know you have only been
there for a year-and-a-half, but are there decisions or
policies in place, previous decisions that have been made on
Puerto Rico, on the island, that affect the competitiveness or
the strength of the economy that you think should be revisited?
Ms. Donahue. Thank you, Chairman. I think, as I mentioned
in both my written and oral testimonies, that the PREPA issue
was years, probably decades, in the making. And, as other
witnesses and Resident Commissioner Pierluisi mentioned, one of
the challenges that PREPA has which makes it virtually
impossible to do long-term strategic planning, is with every
change in administration the top 150 leaders in the company are
switched out. So you are starting fresh.
This type of business involves long-term planning and long-
term investment, which is one of the reasons why we have a 20-
or 30-year IRP plan that we are looking at. You have to make
critical, long-term investment decisions. The permitting
process is long and those decisions have frequently been
completely overturned, in some cases as much as building a
pipeline, only to dismantle it.
So, I do think that the structural challenges within PREPA,
as a result of the shifting political agendas with subsequent
administrations, make it very difficult for a long-term
business to actually operate.
Mr. Lamborn. Do you have any thoughts about employee
benefits or wage loss?
Ms. Donahue. We did do some benchmarking on the wages; we
looked at the baseline salaries; and then, of course, we looked
at the benefit packages and compared PREPA to public utilities
across the United States, as well as like industries in Puerto
Rico.
And we found, as far as salaries were concerned, we were
employing a very skilled labor base, so the salaries were
fairly in line. It was on the benefit side that we felt that
they were higher--in some cases significantly higher--than like
utilities across the United States, and like businesses across
Puerto Rico.
Mr. Lamborn. Thank you.
Mr. San Miguel, you talked about privatization of the
generation portion, not the transmission and distribution, but
the generation portion of PREPA. Could you elaborate on that a
little bit? And would that be well received, do you believe, in
Puerto Rico?
Mr. San Miguel. Sure. Thank you, Mr. Chairman. The concept
there is really going more to a mainland-based business model.
We have sitting here with us the representative from
EcoElectrica. It is one of the two main IPPs, independent power
producers, on the island since the 1990s. Both EcoElectrica and
the other IPP baseload operation are the two cheapest sources
of our energy into the PREPA grid. I think that is sufficient
exhibit as to the efficiencies with which the private sector
operates the power generation facilities, not just on the aging
component, on the number of employees and so forth, but it is
clear that the private market is much more efficient in that.
To the extent that we create the right structure through
the IRP that Ms. Donahue has been mentioning, and that has been
presented for finalization with the Puerto Rico Energy
Commission, that blueprint then sets the stage and the business
model for processes to be engaged, like RFPs for long-term
concessions or public-private partnerships, or RFPs that allow
the private sector to seek the most efficient capital,
construct at the greatest speed, and then operate with the
greatest efficiency.
So, that is generally what I am alluding to.
Mr. Lamborn. Are you aware that there may be investors
waiting in the wings to make those kinds of investments, should
the structure you are talking about be put into place?
Mr. San Miguel. In fact, I understand there are quite a
few. I know from personal knowledge, having been contacted by
people who may be interested but are waiting to see if in fact
the things I mentioned in my short version, if the Puerto Rico
legislature approves the Revitalization Act and then the Energy
Commission approves revised rates and the IRP, that is when the
private sector has visibility and certainty.
That is why I mentioned credibility as a key factor in this
reconstruction of PREPA and our energy infrastructure to propel
economic development. There are plenty of world-class and U.S.-
class proponents waiting to put together transactions that
should be very favorable. My strong emphasis on the private
sector carrying the generation component is more so because I
think, as Ms. Donahue has explained and the IRP details, most
of the assumptions made in the IRP are rather conservative, so
they assume that PREPA will be carrying some or a great part of
the capital expenditure.
The view I am trying to push is that that should not be on
PREPA's back. You let the private sector do that. They do it
much more efficiently and those efficiencies are passed on to
consumers.
Mr. Lamborn. Thank you. I would now like to recognize the
Ranking Member of this subcommittee, the Delegate from Puerto
Rico, Mr. Pierluisi.
Mr. Pierluisi. Thank you, Chairman. I should say Ranking
Member for a day.
[Laughter.]
Mr. Pierluisi. But I am enjoying it. I would say, for
starters, that there is ample consensus in Puerto Rico, believe
it or not, that we need more private capital in the energy
sector. Even if you poll it, people want to see more companies
like EcoElectrica and AES--who is not here, represented--doing
business in Puerto Rico. They want to see more renewable
projects like the one has, it is a wind project in the south of
Puerto Rico.
The challenge is how you attract that capital to Puerto
Rico. These days it is very tough. What is happening is that
Ms. Donahue spent 15 months negotiating a debt restructuring
deal with the major creditors of PREPA and managed to get a
deal from 70 percent of the creditors. The challenge now is how
do we enforce it on all, or at least attract all others to be
part of this deal?
I have to raise the fact that we did not have Chapter 9
when you started. We still do not have it, and some really do
not like Chapter 9 because it is bankruptcy and so on. But bear
in mind that when you have Chapter 9, one of the benefits of it
is that a Federal bankruptcy judge can enforce the plan on all
the creditors, all stakeholders. You would not have the issue
that you still have today. So, I raise that and I would like
you to comment further as soon as I finish.
The second issue I am going to raise, which has been
mentioned before here by several of the witnesses, is that we
now have in Puerto Rico an Energy Commission, and that is
important. I should acknowledge the presence of the President
of the Senate of Puerto Rico, Eduardo Bhatia, who had a lead
role in making that happen. It is important to have an Energy
Commission, because you need to regulate PREPA. PREPA is pretty
much like a monopoly.
So, one concern I am raising, Ms. Donahue, and I want you
to deal with it, is that I hear that this deal might not be
respecting all the powers of the Energy Commission. I want to
make sure that the Energy Commission will be approving any rate
increase--and I don't want any, by the way, because it affects
the economic development of Puerto Rico--or any other charge. I
want the Energy Commission to oversee your restructuring
proposal.
Could you comment on both of these angles--the fact that it
is hard to attract capital when you are not financially stable,
which is PREPA's case, and second, the Energy Commission.
Ms. Donahue. Thank you, Commissioner. On the private
capital, if I can expand on Mr. San Miguel's comments, we did
run a request for expression of interest proposal. We went out
and we got enormous interest, both in PREPA and also in the
greater Puerto Rico. But, I will say that one caveat from all
of the participants is a stable and fixed PREPA as a
counterparty.
The people that participated, the people that submitted
proposals, were real. They were real financial players, real
operational players. We are intending to use the results of
that request for expression of interest to help us hone the
RFP, to test the market, and see the likelihood of actually
getting private capital and getting it into PREPA.
As I mentioned in my written and oral testimonies, we want
the best capital for the people of Puerto Rico and we want the
fastest capital. The only way we are going to determine the
likelihood and really be able to analyze if it makes any sense
is to go out for a proposal. So that is point one.
Point two, as far as the Energy Commission--I have enormous
respect for the Energy Commission. We have had several formal
meetings and informal meetings, and we worked in parallel with
them on the CILT Regulation that came out in the fall. What the
proposed PREPA Revitalization Act contemplated was not going
around the Energy Commission. The only piece to that Act is we
did contemplate accelerating their approval process.
We were never contemplating that they would not have full
approval over the rate case that will be filed upon ultimate
acceptance of the regulation. We had only contemplated changing
a 6-month approval process to a 3-month approval process. Part
of the reason for that is because of the very real possibility
that PREPA will run out of cash in the summer, and because it
was relying on the heavily negotiated contributions from the
creditors that involved de-leveraging, as well as liquidity, as
a means to bridge that rate gap that I had talked about.
So, the Commission is an important element to PREPA and to
the people of Puerto Rico and we are intending to continue
working constructively with those folks.
Mr. Pierluisi. Thank you.
Mr. Lamborn. The Chair now recognizes the representative
from the great state of Wyoming, Mrs. Lummis.
Mrs. Lummis. Thank you, Mr. Chairman. This is my first
introduction to this subject, so please bear with me and be
kind of creative here. While I have never been to Puerto Rico
and I do not speak Spanish, I was my state's treasurer and I
worked on energy issues a lot. So, this subject really piques
my interest. I want to brainstorm with you a bit, please bear
with me.
Let's assume that a Chapter 9 bankruptcy authorization
would occur. If it did, presumably, based on what I have heard,
it would take very specific milestones as conditions precedent
to this Congress allowing Chapter 9 to be entered. So, I want
to ask my questions based on that assumption. Let's assume we
are going to authorize bankruptcy, but certain conditions would
have to be met before it could ever be entered.
Now, some of the things that I have heard--if you thought
that was the scenario that Congress was interested in
considering, I want to know what some of those steps should be.
And I want some of you to tell me what DOI and DOE have started
with regard to assisting with improvements. So, somebody be
thinking about that question.
I want to know what kind of milestones, specific
milestones, we would have to enact prior--as conditions
precedent to authorizing a bankruptcy; how we can separate the
Puerto Rican Congress from interference with PREPA; how we can
work toward privatizing, so to speak, PREPA; how DOE
specifically is discussing debt guarantees or modifications to
tax credits.
I know that is a mouthful, but that is only the beginning
for me. But since I have blown through half of my time, just
please have at it.
Mr. Rossi. If I was a bankruptcy judge--and I am not a
lawyer, and I have never been in bankruptcy court, but a lot of
people have been talking about it in Puerto Rico for PREPA,
particularly, given the dire situation everybody understands--I
would start by saying, going forward, if this is going to be a
viable business, under what regulatory framework?
Mrs. Lummis. Yes.
Mr. Rossi. I would say the strongest----
Mrs. Lummis. Can I interrupt you? What does the Energy
Commission do now? Does it function like a public service
commission?
Mr. Rossi. It battles in court to get PREPA to hand over
documentation.
Mrs. Lummis. Oh, man.
[Laughter.]
Mr. Rossi. It asks interveners for help in framing the
correct questions regarding the Integrated Resource Plan that
would be key to private capital coming in, because they
understand that the ratepayers will be able to finance the
burden. Eventually, it is going to be on the backs of the
ratepayers. Those are the people financing the electrical
system anywhere in the world.
I think it is key that you have the strongest regulatory
body, because that is where those decisions are made.
Mrs. Lummis. May I ask Mr. San Miguel to weigh in on this
huge array of questions I have asked?
Mr. San Miguel. Sure, thank you. A couple of thoughts. I
mean the specter of Chapter 9, let me say--and certainly my
short and long version into the committee did not touch on that
subject, as I did not believe it was part of the jurisdiction
or subject matter to be evaluated, but now that it is on the
floor, so to speak, and even going to the response that Mr.
Rossi provides--I would say that, for example, on the PREPA
scenario I would not grant any kind of potential specter or
access to Chapter 9 if they do not do the things I have
outlined.
The three steps I have outlined are all within Puerto
Rico's control; they can happen tomorrow. And I would not come
beg, as an American citizen, from the Congress unless I have
done everything I can and then I need more. Under that
scenario, I would then go ahead and plead for additional
support with the credibility and the track record that I have
done what I can, some may remain and I need some assistance to
finish the job.
Having said that, on the Chapter 9 issue, I think I feel
very strongly and I differ a bit from Congressman Pierluisi,
who I trust tremendously and have known for over 25 years. On
the Chapter 9 issue, as a person who believes in our right to
statehood, I cannot think of it unless we resolve the political
relations issue with Puerto Rico.
Mrs. Lummis. Yes, yes.
Mr. San Miguel. For that we have H.R. 727, which he has, I
think, very properly sponsored.
But I cannot, as a jurisdiction, ask for more stateside
rights without the responsibilities. And principally--and
certainly Congressman Pierluisi aside, because he also believes
in the statehood cause--the principal proponents of this from
Puerto Rico are people who do not wish to become a state. They
want the goodies of the state, but none of the
responsibilities. Fundamentally, I have an issue with that.
Now, from a credibility perspective, you were asking what
should the Congress do as precondition. You know, the first
precondition is credibility. We are running now into the third
fiscal year with no financial audited statements. S&P came out
in early January with their own assessment. Our local think
tank, the Center for the New Economy, came out publicly in
December with that. How can you grant someone the right to go
bankrupt if they have not shown you the numbers?
Mrs. Lummis. Yes, and I thank you. My time has expired, but
this is fascinating. Mr. Chairman, I yield back.
Mr. Lamborn. Thank you. The Chair now recognizes the
Ranking Member of the Full Committee, Mr. Grijalva.
Mr. Grijalva. Thank you very much, Mr. Chairman. Ms.
Donahue, I have some quick questions.
Would it be easier to raise money to upgrade Puerto Rico's
aging energy infrastructure that has been talked about here
with or without Chapter 9?
Ms. Donahue. Well, with Chapter 9, presumably we would be
able to get super-priority financing. So, potentially, that
could be used as a bridge.
Mr. Grijalva. Would----
Ms. Donahue. If I can just expand quickly, though, what we
are talking about as part of our plan is trying to fund it just
to correct what Mr. Rossi said. Part of the plan is funded by
the concessions from the creditors. Part of the upgrade in the
system is funded by that. I just want to make sure that people
are clear on that.
Mr. Grijalva. Thank you. Would ratepayers have lower bills
with or without Chapter 9?
Ms. Donahue. I don't know the answer to that.
Mr. Grijalva. OK. Would manufacturers and other businesses
be more likely to invest in Puerto Rico with or without Chapter
9?
Ms. Donahue. I can't answer that, but what I can say is--
and this goes a bit toward your earlier question--with Chapter
9, at least as it relates to PREPA, I would use it as a
mechanism to facilitate the deal that we have on the table. The
deal that we have negotiated with the creditors is good with a
Chapter 9, without a Chapter 9. It is fair, it is equitable.
So, where a Chapter 9 would make sense for PREPA is to
facilitate the deal very quickly. It would pull in the holdouts
to the extent that there are holdouts, so we do not have an
Argentina problem. It would allow us to very quickly move on to
the next phase, and the milestones are outlined in the
restructuring support agreement. It involves an RFP, it
involves acceptable legislation. It involves----
Mr. Grijalva. That wouldn't be begging at that point? You
mentioned, Ms. Donahue, in your testimony that the
restructuring support agreement does not include the 30 percent
PREPA debt. If PREPA had access to Chapter 9, wouldn't any
restructuring include 100 percent of that debt and, therefore,
mean a bigger savings down the road for ratepayers?
Ms. Donahue. Yes, it would.
Mr. Grijalva. One concern I have about the restructuring
support agreement that you have reached with some of PREPA's
creditors is that ratepayers will be left with a lot of the
debt, while the hedge funds who paid pennies on the dollar for
the debt are guaranteed 85 percent on the dollar under this
pending agreement. Wouldn't you get a better deal for Puerto
Rican families and PREPA under Chapter 9 than through the RSA,
given those numbers?
Ms. Donahue. It is not clear to me that the economics of
the deal would change in a Chapter 9. The PREPA bonds are
arguably special revenue bonds, which is why I have mentioned
that I think the deal that we have constructed, independent of
the secondary market considerations, is a fair deal. It gets
PREPA de-leveraging, as well as liquidity relief in the form of
5 year's interest-only payment.
So, I am not sure that a Chapter 9 would get a better
economic deal. It would get a more efficient deal. But as far
as the 85 percent, 5-year interest-only, I am not convinced of
that, no.
Mr. Grijalva. The last question--I notice that, at least in
the RSA and the restructuring for PREPA, the heavy reliance on
natural gases to replace one fossil fuel. In that plan, was
there a look at renewables as part of the portfolio that would
be provided, i.e., you know, Hawaii, 20 percent of the island
is renewable; Virgin Islands, 20 percent solar powered during
peak periods; even Texas, 20 percent wind power.
So my point being, in setting up a portfolio, aren't we
begging the question that we are removing one reliance on one
fossil fuel, replacing a reliance almost entirely on natural
gas, without a portfolio that is ample enough to accommodate
renewables?
Ms. Donahue. The IRP and the PREPA transformation plan does
rely on fuel diversification and, as part of that, does
integrate renewables into the system over time----
Mr. Grijalva. What percentage of that in the RTA would you
say is a renewable part of the----
Ms. Donahue. Well, we are going from 200 megawatts of
commercial grade up to approximately 1,200 by the end of the
IRP.
One of the challenges that a system like PREPA has is, as
we mentioned, the age of the fleet.
Mr. Grijalva. OK.
Ms. Donahue. With the older fleet we have very inflexible
units. In order to make sure that we have system reliability,
we have to carefully integrate and make sure that the systems,
when we get newer units that can power up and down, we can
integrate faster.
Mr. Lamborn. Thank you. The Chair now recognizes Mr.
Thompson for questions.
Mr. Thompson. Thank you, Chairman. Thank you to the
witnesses for being here. I want to talk about or ask
questions, get some clarifications on the Aguirre facility and
the conversion to LNG. I am from Pennsylvania and we have had
our own economic issues, but one of the things that has been
really a godsend for us has been the use of natural gas.
Specifically, one of those has been looking at, actually, the
construction of even new power plants, using that resource.
So, I wanted to just get a clarification, in terms of what
was the situation in Puerto Rico. In 2012, a report by Alvarez
and Marshall that was presented before the Government
Development Bank of Puerto Rico suggests the future of PREPA
depends upon converting to natural gas for power generation.
The findings are furthered in the Integrated Resources Plan
that was released by PREPA earlier this year, and indeed, PREPA
premises much of its future compliance with environmental
regulations, including mercury or toxin standards on the
development of the Aguirre facility, which PREPA concludes will
provide 900 megawatts of compliant, clean liquid natural gas
power.
Ms. Donahue, what is the current status of the Aguirre
facility?
Ms. Donahue. The Aguirre gas port--our environmental impact
study is complete. We are now dealing with comments from the
Corps of Engineers that came right before the Christmas
holidays. And working with our partners, we are hoping to
continue to move that along. Our expectation is to begin
construction some time in 2016, second to third quarter,
depending on the permitting issues, and have it COD by the end
of 2017 or into early 2018.
Mr. Thompson. Thank you. In reading the IRP, it appears
that much of the future of PREPA is dependent on the approval
and the construction of that facility.
Ms. Donahue, what would PREPA do if that facility fails to
come on-line?
Ms. Donahue. Well, as you know, it is a big piece of our
IRP and, therefore, also getting to EPA compliance on mass
regulations. However, what we have looked at, because we do
need a fallback plan--I have an oil and gas expert as part of
my team who has been working with the EcoElectrica folks to
understand the permits, the expansion, et cetera, because, as
Mr. Sanabria-Hernandez just testified, they have a natural gas
terminal and they have gasification.
So, we have looked at that, we have looked at the timing of
the permits. That would, of course, require a pipeline to move
it beyond EcoElectrica. That is a fallback that we have been
considering, but we are moving forward with the Aguirre gas
plant right now.
Mr. Thompson. Good. Mr. San Miguel, if this facility is not
constructed, what opportunities in the private sector exist to
expand electric generation on the island as both
environmentally compliant and financially feasible?
Mr. San Miguel. The first thought on your premise of if the
offshore gas plant does not occur was you have to really
accelerate any RFP process on the generation side.
I think EcoElectrica is obviously a natural Plan B, so to
speak, although I am a strong believer in, you know, we cannot
create another mini-monopoly. Competition is healthy. I like
Jaime Sanabria-Hernandez very much; he has done a very good job
over the years. But I would really press the pedal to the metal
to make sure that we had competing power generation sources and
capital that, in competing, makes it more efficient, more cost
effective, and less expensive for the customers.
Mr. Thompson. Thank you. Mr. Sanabria-Hernandez, could the
EcoElectrica facility be expanded to accommodate an increased
LNG intake? And if so, by how much and how much potential
megawatts could be produced, based on that increased intake?
Mr. Sanabria-Hernandez. The existing LNG facility,
EcoElectrica, in terms of capacity, could expand by 50 percent,
as we speak today, subject to authorization from FERC. It is
our estimate that authorization would take a year to work with
the permits and get FERC comfortable to authorize it; and that
expansion does not require any construction at all.
In addition to that, EcoElectrica has the facility ready
for development and construction of a second LNG tank. That
second LNG tank could expand by 100 percent the existing
EcoElectrica capacity, should it get the initial 50 percent
expanded. We can go from approximately 24 to 26 standard
cargoes of LNG, of 119,000 cubic meters each to almost three
times that, up to 60 cargoes a year.
That means we would be able to power not only additional
power, such as EcoElectrica and Costa Sur, which together they
both represent about 1,300 megawatts. We could power an
additional, let's say, 500 megawatts with the 50 percent
increase, up to 1,800, and double that capacity with an
additional second tank.
The only thing with the second tank is it is another
process of its own. It will take probably close to 5 years to
initiate all the permitting, go through FERC, then after FERC
the financing and constructing of the tank. It will take about
5 years.
Mr. Thompson. Thank you. Thank you, Chairman.
Mr. Lamborn. Thank you. The Chair now recognizes a member
of this subcommittee, Mr. Polis, from the great state of
Colorado.
Mr. Polis. Thank you, Mr. Chairman from Colorado, as well.
I appreciate that.
Before I jump into my questions, I want to briefly mention
how peripheral many of the topics in today's hearings are, in
light of the crippling debt crisis facing Puerto Rico. Puerto
Rico holds over $70 billion in public debt that, without access
to Chapter 9 and an opportunity to restructure their debt, is
effectively unpayable.
While we are discussing energy development, an issue that
is important in its own right, I do not see how it is even
possible to de-link PREPA's financial challenges from Chapter
9, which I think has to be dealt with, in terms of how Puerto
Rico can emerge from this crisis, not just with regard to
energy policy within Puerto Rico.
Ms. Donahue, your written testimony notes how fragile the
restructuring support agreement is for PREPA. Can you expand on
how important it is for additional PREPA creditors to join the
agreement, and how necessary it is for PREPA to have access to
Chapter 9 bankruptcy?
Ms. Donahue. Yes. The restructuring support agreement
requires that after the exchange only $700 million of debt of
the current existing bonds remain outstanding. So that means,
of the $2.7 billion of debt that is currently not part of the
restructuring support agreement, $2 billion of it must
voluntarily exchange. If they do not, then we cannot consummate
the deal.
Mr. Polis. What happens if the outstanding creditors, which
are about 30 percent of the debt, are not party to the
restructuring support agreement?
Ms. Donahue. The deal cannot be consummated unless we get
$2 billion of them to agree. The deal consummates--$700 million
cannot participate, but the other $2 billion must.
Mr. Polis. And without debt relief, PREPA is projected to
run out of cash in June of this year, so in about 5 months, and
default on its debt obligations. What are the short- and long-
term impacts of a default, both to PREPA, its customers, and to
Puerto Rico?
Ms. Donahue. Well, I think that PREPA faced it in July of
2014, which was the inflection point to getting a CRO and
actually getting the negotiation point. There was an issue
where the main fuel supplier at the time, Petrobras, refused to
ship without cash in advance. So, if there are no suppliers
that will be willing to supply fuel, then that would mean that
they will not be able to generate power, and that would also
mean that we would be in a situation where there would have to
be blackouts and major, major conservation.
It would be, in my opinion, a disaster if PREPA were to run
out of cash, and not have the ability to----
Mr. Polis. And these are both residential blackouts, as
well as businesses that would lose power?
Ms. Donahue. It would be blackouts across the island, yes.
Mr. Polis. Yes, which in terms of maintaining
competitiveness and jobs and the tax base, that would evaporate
very quickly if there was not a reliable power source.
One thing that I notice in the background is that, unlike
most areas in the mainland, Puerto Rico uses quite a bit of
fuel oil with regard to power generation. I would like to ask
whoever's area of expertise this is, the impact of the
reduction of oil prices from about $90 a barrel down to $30 a
barrel, how much does that lead to cost reduction of
electricity on the island of Puerto Rico?
Ms. Donahue. It has been a significant factor. The
initiatives that the team has implemented have resulted in
approximately 1 . The difference between the high point, in
August of 2014, it was about 28, 29, it is now closer to 17 or
18.
Mr. Polis. I also saw that Puerto Rico has a renewable
portfolio standard of 12 percent by 2015 and 15 percent by
2020. To put that in contrast to the state that Mr. Lamborn and
I hail from, we have a 30 percent renewable energy portfolio
standard by 2020, roughly twice that of Puerto Rico.
Ms. Donahue, would you be able to address how higher
renewable portfolio standards can lead to more predictable
electricity pricing over time and make the economy less subject
to spikes in oil prices?
Ms. Donahue. I think it would allow the fuel
diversification that we talked about. You would have less
reliance; but, until there is stored power, solar still remains
intermittent. So, you still would need the reserve power.
Unlike the great state of Colorado, we do not have the ability
to shed load. We are a closed system.
It is that much more important that we have the reserve
power and the backup power to make sure that when the sun does
not shine, that the power and the system can still reliably
provide. That is part of the reason why our standards are
lower, because of the older systems. Once we have newer systems
that can power up and power down much faster, we can integrate
much faster.
Mr. Polis. I thank the Chairman for the time, and hope that
we can soon continue our committee's work with the issues
surrounding Chapter 9. I yield back.
Mr. Lamborn. Well, we would, except that is outside the
jurisdiction of our committee.
The Chair now recognizes the gentleman from Idaho, Mr.
Labrador.
Mr. Labrador. Thank you, Mr. Chairman; and I want to thank
each and every one of you for being here today.
Before I begin my questioning, I really want to make an
important point, something that I am very concerned about, that
nothing said in this hearing, nothing said by the leadership of
this conference or this Congress, should in any way be
interpreted as encouraging the government of Puerto Rico or
PREPA to delay addressing their own fiscal situations. I think
that is really, really important.
I, and other Members of Congress, will not support Federal
legislative action on this issue if those responsible for the
debt do not act in good faith to work to come up with their own
viable solutions. You do not need Congress to help you be
responsible. There are a lot of things that you can do to
become responsible. Significant reforms must be made and
serious negotiations with creditors should be undertaken and
finalized, including the restructuring agreement that PREPA
reached with its creditors in December.
Ms. Donahue, thank you for being here today. If the Puerto
Rican legislature fails to pass both the operational and
securitization portions of the legislation by January 22, what
happens?
Ms. Donahue. Two things happen--the restructuring support
agreements will no longer be valid, and we have negotiated with
our creditors that they will lend back to us $115 million that
we paid in January to help us bridge our liquidity crisis that
they will not be required to do that, as well.
Mr. Labrador. Thank you. Briefly, could you describe the
additional provisions that you are seeking the legislature to
approve?
Ms. Donahue. We are looking for an ability to actually
implement a meritocracy--meaning key performance indicators and
bonuses based on performance. We are looking for the ability
for PREPA to run an RFP process that would go out and
understand the appetite of private capital. We are looking for
the securitization, the ability for rate restructure, which we
would then go to the Energy Commission for approval on. Those
are the main components----
Mr. Labrador. OK, it is not a test. I was just trying to
get a----
[Laughter.]
Ms. Donahue. You had me a little nervous.
Mr. Labrador. All right. There has been talk about the need
to bifurcate this legislation. Would that work? Why, or why
not?
Ms. Donahue. At the Puerto Rican level?
Mr. Labrador. Yes.
Ms. Donahue. I believe it won't work, and I believe the
reason why it won't work--and when you say ``bifurcate,'' I am
assuming you mean take the securitization and all the other----
Mr. Labrador. Correct.
Ms. Donahue. The PREPA transformation is important, in that
it deals with operational issues, culture issues, and financial
issues. They are all intertwined. I think if we bifurcate and
only focus on the securitization, that would only deal with one
element of all of the issues that are happening in PREPA. We
need to be able to really depoliticize, instill a cultural
meritocracy, get the savings that are embedded in other
elements of the legislation. I think it is important that the
legislation, the elements of it, are together.
Mr. Labrador. So, we need to make hard choices is what you
are saying, correct?
Ms. Donahue. Yes.
Mr. Labrador. Mr. San Miguel, Jorge, good to see you. As
someone living on the island and having worked with PREPA in
the past to negotiate power purchase operating agreements, are
these legislative fixes necessary, and would they help PREPA
operate in the future?
Mr. San Miguel. And your reference is to the Revitalization
Act?
Mr. Labrador. Correct.
Mr. San Miguel. As I mentioned in my earlier testimony,
Congressman, I do not think it is a perfect piece, but it is a
move way ahead of where PREPA has been. So, I urge that, yes,
it be approved with the amendments that should properly be made
without discouraging the creditor group that has already been
agreeable to the revitalization draft that we have in front of
the legislature.
I think it is important that all of this revolves around
the fact of whether Puerto Rico truly wants to reform PREPA. I
believe it is a separate issue from Chapter 9, and that is why
I would----
Mr. Labrador. I do too, by the way.
Mr. San Miguel [continuing]. Like not to touch that,
because I think that Ms. Donahue and the team, the CRO team at
PREPA, has done a tremendous job. Fifteen months is a bit
misleading, in my opinion from the outside. Ms. Donahue was
brought in, and she has not just done debt restructuring work,
she has done structural reform work, and has been, I think,
assigned additional duties.
What she found there was not as easy as was originally
designed or thought. And 15 months under that scenario I don't
think is that bad. Any scenario under other legal structures or
pathways would have taken probably that much for this size of
debt and complexity within Puerto Rico.
Mr. Labrador. Real quick, Ms. Donahue, I am really
concerned about PREPA's history of not collecting from
municipal accounts, and that PREPA has not pursued collection
for severely past due accounts. What are we doing now and what
else needs to be done? Is there something legislatively, or is
it just that PREPA needs to do its job better?
Ms. Donahue. I think the legislative component has already
been passed with Act 57--that happened 2 years ago--that
outlined measures and limits to each of the different
municipalities. Then, further to that, the Energy Commission
came out in the fall with regulation that further strengthened
the for-profit elements of municipalities and carved them out
of the CILT, and also strengthened the ability above the limits
that PREPA has the ability to collect the cash.
As far as collections from governments and other customers,
my team has been working tirelessly with the folks on the
ground, where we have restructured that whole organization,
reconciled accounts, and have set up multiple payment plans.
And the cash balances that were quoted earlier have been
significantly reduced.
Mr. Labrador. Thank you very much. I yield back.
Mr. Thompson [presiding]. The gentleman's time has expired.
The Chair now recognizes Mr. Serrano for 5 minutes.
Mr. Serrano. Thank you, Mr. Chairman. And thank you to both
the committee and the subcommittee for allowing myself and Ms.
Velazquez to participate. While we are not members of this
committee, we were both born in Puerto Rico, and Puerto Rico is
never far from our hearts, our legislative thoughts, or our
thoughts in general. So I thank you.
Ms. Donahue, I have a question that concerns me a lot. A
recent AP report indicated that PREPA was about to cut off
electricity to several hospitals in Puerto Rico. Ms. Velazquez
has been saying that this is becoming not a fiscal crisis but a
humanitarian crisis. I believe--and I may be wrong, and maybe
you can help me--that in New York you are not allowed to shut
off heat, purposely, of senior citizens, for instance, in
winter time, their lights and so on. So, how does PREPA get
away with cutting off electricity to hospitals? And doesn't
that just make things worse, from a fiscal crisis to a
humanitarian crisis, and a health issue?
And, speaking of health issues, please forgive my throat.
[Laughter.]
Ms. Donahue. That is OK. Let me just clarify. PREPA did not
actually cut off the power. They posted a notice in the paper,
as required by law, that if they did not pay, they would be
entitled to cut off power. And what ended up happening is they
paid.
Mr. Serrano. They paid?
Ms. Donahue. Yes.
Mr. Serrano. So this issue, then, is gone?
Ms. Donahue. The issue is gone.
Mr. Serrano. Are there any laws in Puerto Rico at this
time--and probably a question if we had the President of the
Senate on the panel, but we don't--that prohibit groups like
yours or agencies like yours from cutting off power without
some sort of negotiating or preventing it totally?
Ms. Donahue. I am not an expert on all Puerto Rican laws, I
am sorry. But what I will say is--again, in this particular
instance--there were many efforts to negotiate. To the extent
that we were intending to ever cut off power, we followed the
procedure where we are required to notice. And as I said, once
we filed the procedure, we were able to get paid.
As far as what other requirements there are, I would have
to defer that to my colleagues who were actually in the
collection group.
Mr. Serrano. OK. We would like to know that. And I think,
with all due respect, the committee may want to know that.
Last on this part, are there other hospitals, medical
institutions, or any schools that are in arrears right now?
Ms. Donahue. The Department of Education is definitely in
arrears. I am going to have to get back to you on the specifics
of individual accounts, but I am aware that we are trying to
work out a payment plan with the Department of Education, as
well.
Mr. Serrano. OK. For anyone on the panel who wishes to
answer this--and it is a question we ask ourselves here all the
time--many would say why, during a fiscal crisis, have a
hearing on the energy issue in Puerto Rico. What is, briefly,
the relationship between energy issues, the economy, and the
fiscal crisis right now? Anyone who really wants to----
Mr. San Miguel. Thank you, Congressman. One of the things I
mentioned in my short piece was the power quality issue.
Generally speaking, energy and electricity are the backbone of
our society, our island, our homes, and our businesses.
One little item on power quality that has to do with
voltage and sustainability of that voltage, for example, is
affecting our capacity to attract new manufacturing investment
and it is threatening existing manufacturing. There are, for
example, 10 manufacturing entities on the island that currently
generate almost a third of the revenues, tax collections for
the government of Puerto Rico. If we do not take care of that
sort of infrastructure ailment, we threaten not just a
hospital, we threaten thousands of jobs and 33 percent or 30
percent of our general revenues right now.
There are huge elements behind the importance and
significance of this energy infrastructure crisis that we are
so near and close to finalizing with the RSA--approval by the
legislature, quick action by the Energy Commission, and then
letting the CRO and the PREPA team go on to the securitization
and the rest of the issues that must be taken care of.
Now, just a footnote. Chapter 9--no judge under Chapter 9
is going to approve the Revitalization Act. They are not going
to approve the rates, they are not going to approve the IRP,
and they are not going to help with securitization. In fact,
Chapter 9 specter could actually lower the possibilities of
getting a positive credit rating on a securitization structure.
So, we are very close, without having this dark cloud near
us. I think de-linking this from Chapter 9 is critical. We are
very close to getting a PREPA transaction done. With respect to
the holdouts--I am not privy to the detail of the transaction,
but if the offer made onto the RSA is above their current
trading price, which is pretty low, it is likely those holdouts
will come in. And if they do not come in, the deal does not
necessarily fall through. Existing creditors could step in for
part of that debt.
I think we need to be very cautious and not introduce into
a very advanced negotiating stage something that could be very
unsettling and that does not resolve my Revitalization Act
approval, my energy rate revisions, and my IRP completion.
Mr. Rivera-Velez. I would also like to add, if you allow
me, being the representative of the manufacturing sector and
the private sector, energy is one of the main components of the
equation called operation costs. An example today in the local
news, Procter and Gamble, after 30 years, is closing their
facility and they are going to eliminate 130 jobs. One of the
reasons stated in the communication was operational cost
challenges. You will never hear energy, energy, energy; but
when you talk to colleagues, you know that energy is a very
important component.
One of the main issues that we have been fighting for the
last 15 years is this trend going up, up, up, and the
uncertainty that the whole situation brings--holding
investments in the manufacturing facilities typically are
geared toward improving capacity, bringing new products in. In
reality, when you look at the whole scenario, everybody is
waiting to see what happens. In reality--now, and not
tomorrow--again, cheaper energy costs--when I compare, let's
say when I look at Singapore, Costa Rica, and the Dominican
Republic, and then I look at Puerto Rico at twice those rates--
I cannot compete even inside the manufacturing networks that we
already have. So, it is a little bit of a challenge.
And last, I want to say that it is important that whatever
we talk about here, sustained economic development is key.
Whatever we do in energy is in a sustained way; and we, the
private sector, want to work with you doing that. Because, you
know what? If not, in 5 or 10 years we will be here talking
about the same issue again.
Mr. Thompson. Yes, thank you, Mr. Rivera-Velez.
Mr. Rivera-Velez. Thank you, Mr. Chairman.
Mr. Thompson. I now recognize the gentleman from Michigan,
Dr. Benishek, for 5 minutes.
Dr. Benishek. Thank you, Mr. Chairman. I thank you all for
being here this morning.
Apparently, PREPA's power generation is a combination of
PREPA-owned generation, as well as contracted power generation.
What is your opinion as to whether that combination should be
changed? Ms. Donahue?
Ms. Donahue. I think that, for sure, the EcoElectrica
facilities and the AES facilities, as other witnesses have
testified, are more efficient and cheaper energy providers than
the outdated PREPA systems. One of the things that we are
looking at is the possibility of going out for an RFP to
determine the best way to get the most reliable, cheapest form
of capital and source of power onto the island. So, we are
looking at that, yes.
Dr. Benishek. All right. Mr. Sanabria-Hernandez, do you
have an opinion there?
Mr. Sanabria-Hernandez. Well, I believe and I said it in my
testimony, that PREPA should look at privatizing its
operations, either through actual privatization or through
private management of the utility. The generation piece,
obviously, would be more competitive; and it would contribute
more in terms of lower cost to Puerto Rico if it were
completely privatized to compete, one way or the other.
Dr. Benishek. Thank you. Apparently, an Alvarez and Marsal
presentation on June 11, 2012, suggested that the future for
PREPA depends on converting to natural gas for power
generation. But there is very little natural gas
infrastructure. They say that there should be either LNG or a
pipeline, but neither one of these things has happened.
Can new gas infrastructure be achieved? What is the
solution there? Ms. Donahue, do you have an answer?
Ms. Donahue. Yes. The Aguirre gas port is the project that
is currently under consideration. It has gone through most of
the permitting process. We still have some questions with the
Army Corps of Engineers, and we are hoping to resolve that
shortly so that we can finalize the permitting process, begin
construction, and have the Aguirre natural gas port on-line by
the end of 2017 or beginning of 2018.
Dr. Benishek. Mr. Sanabria-Hernandez, do you have any
comments?
Mr. Sanabria-Hernandez. We mentioned a little while ago
there is capability of expanding, in EcoElectrica's case, the
existing LNG terminal. So, that is an option that PREPA has.
Obviously, they have the IRP in process and it is to their best
interest to do the most effective and efficient development for
PREPA.
But the options are there to increase the intake of LNG
into the island and to maximize its use in power generation.
Dr. Benishek. All right, thank you. This really emphasizes
the importance of energy in our economy--and to me, Puerto Rico
is sort of a microcosm of our entire country. We are subject to
increased energy costs because we have standards that we want
to have a clean environment. Other places around the world do
not have those standards, and they are outcompeting us for
industry because we are not taking a strong stance on our
international partners on making sure we have a clean planet
and, really, excessively harming our industry here.
So, Mr. Rivera-Velez, I really appreciate your testimony as
to the struggles of the manufacturing sector and your comments
about your competition in the area, and for encouraging us to
find solutions so that we are not uncompetitively challenged by
our partners and our neighbors. Thank you, I yield back.
Mr. Thompson. The gentleman yields back. I am pleased to
recognize Ms. Velazquez for 5 minutes.
Ms. Velazquez. Thank you, Mr. Chairman. I too want to thank
the committee for allowing Congressman Serrano and myself to be
here. As you know, we were born in Puerto Rico, and we have
almost 5 million Puerto Ricans in the mainland who really care
deeply about what is going on in Puerto Rico.
I also believe that PREPA, the monopoly, has to come to an
end. We need to diversify the energy sector in Puerto Rico.
But, I do agree with my colleague, Mr. Labrador, in saying that
Puerto Rico has to take responsibility.
I also will say that Congress has to take responsibility.
It was Congress who gave Puerto Rico bankruptcy protection from
1933 to 1984. When the law was reformed, Puerto Rico was
excluded. When you check the Congressional Record, there is no
reason whatsoever why Puerto Rico was excluded. So that is one.
What about Medicare and Medicaid parity for American
citizens who gladly, when they are called to go to war and to
participate in every single conflict, show up. So Puerto
Ricans, American citizens in Puerto Rico, deserve to have the
same parity that we enjoy here in the mainland.
Also is the lack of uniformity when it comes to the
territories. When you look at the Virgin Islands and the Jones
Act, when you look at how much reimbursement they get compared
to Medicaid and Medicare for Puerto Rico, there is a lack of
uniformity. Then we provided tax incentives that were taken
away to promote economic development in Puerto Rico, and we did
not replace that with anything.
But here we are dealing with a fiscal crisis. Ms. Donahue,
your testimony and your response to my colleague,
Representative Polis, notes how fragile the RSA is. It requires
that holders of more than $2 billion in bonds still come to the
table. It requires that the new bonds receive an investment-
grade rating. Given that the island's economy is deteriorating
rapidly and the creditor holdouts persist, how likely do you
believe it is for the RSA to be executed?
Ms. Donahue. Thank you. I like to be an optimist. I would
like to say that the RSA will be executed, because all of us,
not just the PREPA team, but the creditors and their advisors
as well, worked very hard on coming up with a fair and balanced
solution.
I do think that getting the 2 billion holders, some are
retail holders, not all of them are hedge funds, some of them
are original issuers, as well, so they are at 100 percent--will
be a challenge. I think another challenge is the requirement
for the investment-grade rating. That, of course, is needed to
get the interest rate savings as part of the deal.
And we cannot look at PREPA as a microcosm. It cannot be
looked at stand-alone, because so many of its customers are the
government, and also its customers are the manufacturing base
in Puerto Rico. So I do think, at least in part, the investment
grade rating will depend on what is happening in the macro-
commonwealth.
Ms. Velazquez. Let's assume as a point of discussion, if
these conditions are not met, the RSA falls apart. It would
fall apart.
Ms. Donahue. It would fall apart. We would certainly have
to be back at the table with our creditors.
Ms. Velazquez. OK. So, we recognize how tenuous the RSA is.
But many are suggesting that things--RSA is in place, PREPA is
in the clear. But, when you look at--from the New York Times
article to Bloomberg, all the papers--they just look at this as
Puerto Rico is coming up and we are going to have a real
solution.
The whole discussion is to demonstrate that without Chapter
9 it is going to be an uphill battle. Don't you think so?
Ms. Donahue. As I mentioned, I think that for PREPA, we
would use Chapter 9 as part of a pre-packaged deal. We have the
agreement with our creditors. We would use it to more
efficiently accomplish and facilitate the restructuring that is
on the table.
I do not think you can say that PREPA is completely done. I
think the RSA, although again, is highly negotiated, highly
structured, good faith, good intentioned, there are
contingencies that must be met. If they are not met, we will be
back at the table.
Ms. Velazquez. And you are going to have thousands and
thousands of Puerto Ricans leaving the island, coming here, to
the mainland.
Mr. Chairman, I think that it is the responsibility--and I
know someone raised the issue that this is not the committee of
jurisdiction when it comes to bankruptcy. Well, the
Administration sent a proposal here with four pillars, and one
of them is territorial bankruptcy. That will fall under the
jurisdiction of this committee.
We need to do something. I hope that, collectively, we seek
for a legislative solution that will provide the kind of peace
to the people in Puerto Rico, the choice and options for Puerto
Ricans to deal with their own destiny, and for people to be
able to make the choice to stay in Puerto Rico without being
forced out of the island to come to the mainland.
Thank you. I yield back.
Mr. Thompson. The gentlelady's time has expired. The Chair
now recognizes the distinguished Chairman of the Full Natural
Resources Committee, Mr. Bishop, for 5 minutes.
Mr. Bishop. Thank you. Let me ask a couple of questions
here, quickly, and I am going to stay within 5 minutes.
Ms. Donahue, if I could ask you, in your testimony you
summarize basically that PREPA needs financial restructuring,
operational improvements, Federal permits for an LNG facility,
energy loan guarantees, government reforms, and the legislative
assembly to approve the RSA. I am assuming that all of these
are critical to remain a viable entity. But how many of these
are in PREPA's control?
Ms. Donahue. The operational efficiencies are in PREPA's
control, and we are executing on those.
Mr. Bishop. The rest are simply out of----
Ms. Donahue. The rest are----
Mr. Bishop. You need some assistance to do that.
Ms. Donahue. That is--I wanted to think through it, but
that is correct.
Mr. Bishop. Does PREPA have the so-called trust employees?
And what are trust employees?
Ms. Donahue. PREPA does have trust employees. PREPA has
approximately 170 trust employees; and the trust employees are
what they sound like, they are trusted people that are put in
with the administrative changes.
Mr. Bishop. All right. Mr. Sanabria-Hernandez--I hope I am
coming close on your name--EcoElectrica originally entered into
a 22-year contract with PREPA. How many years do you have left
on that contract?
Mr. Sanabria-Hernandez. Six years.
Mr. Bishop. In your testimony you noted, ``Without surety
of payment, it will be difficult for anybody to justify
investment in the Puerto Rican energy sector.'' How does that
statement actually relate to EcoElectrica?
Mr. Sanabria-Hernandez. EcoElectrica--and what we want to
do is present the facts as they exist today--EcoElectrica, for
the last 8 years, has been collecting from PREPA on a past-due
basis. Our receivables are not current. PREPA is not paying on
a current basis. But as soon as Ms. Donahue stepped in as chief
restructuring officer, we were able to sit and negotiate a
scheme for payment. And she has been meeting that for the last
year-and-a-half. We have been able to continue to operate and
our investors are content with the environment right now, as it
stands.
But that does not take away the matter that our
receivables, in terms of past due are, on average, around 30
days over the contract terms. And the contract terms itself
were 40-some days after the close of the month. So, receivables
are collected on a 77-calendar-day basis----
Mr. Bishop. OK.
Mr. Sanabria-Hernandez [continuing]. Or above that.
Mr. Bishop. I've got it. Then how do you envision Puerto
Rico recovering its creditworthiness? And you have, like, 1
minute to do that. I am sorry.
Mr. Sanabria-Hernandez. There are many steps Puerto Rico
needs to take. First of all, to realize that it needs to meet
all its commitments. Contractual commitments are signed because
you intend to meet them. From that perspective, you need to
ingrain and install that framework of mind now.
The way we envision that we may proceed would be if there
were some type of assistance or aid, be it in the form of
guarantees, be it in the form of other types of assistance that
can help EcoElectrica and any future investor feel confident.
Mr. Bishop. Would those guarantees then give what you
said--deficiency of certainty in legal and a regulatory
framework, would those guarantees be part of that process?
Mr. Sanabria-Hernandez. That would be part of the process.
But also, the legislature in Puerto Rico needs to realize that
they cannot focus on undermining--if that is the right word--
the contractual relations that exist whenever legislation is
enacted.
Mr. Bishop. So, you need legislative assistance at the same
time.
Let me yield 1 minute to Mr. Labrador, if I could.
Mr. Labrador. Thank you, Mr. Chairman.
Just quickly, I completely agree with Ms. Velazquez, that
there are a lot of things that we could do. But I agree with
Mr. San Miguel, and I think he said it better than anybody
else, that in order to get the goodies of statehood, you also
need to have the responsibilities of a state. And that only
comes through becoming a state.
Really quickly, though--I think something you and I can
agree on--I think, if I heard you correctly, Ms. Donahue, can
you respond to the issue of the Jones Act? I think in your
testimony you state that current impact on the Jones Act on
PREPA's operations is in the range of $3 to $5 million per
year, and that this may increase to $20 to $30 million per
year. Can you address how reform of the Jones Act would
actually help PREPA, and help the people of Puerto Rico?
Ms. Donahue. Yes. The Jones Act, as you know, requires
American flagged vessels, American-built vessels, and American-
crewed vessels. Because at the moment our sources are not
uniquely mainland to get number six and number two to run our
units--it is minimal--when the Aguirre gas port becomes
operational, and we enter into long-term LNG contracts, one of
the ways we have been able to save money is by index hedging,
different indexes and buying from different parts of the world.
If we do not have the ability or if we source from the
United States, that will be increased approximately $20 to $30
million based on usage. So, that would save money and then
would ultimately save the ratepayer, as well.
Mr. Labrador. Mr. Rossi, can you address that issue, as
well. Do you agree with that?
Mr. Rossi. I think it is important that we have better
infrastructure to get LNG, natural gas, into Puerto Rico, and
that it be structured in a way that is available to small
business and to industrial.
[Sound system issues at the end]
[Whereupon, at 12:04 p.m., the subcommittee was adjourned.]
[ADDITIONAL MATERIALS SUBMITTED FOR THE RECORD]
Prepared Statement of Jaime Pla-Cortes representing the Puerto Rico
Hospital Association
Chairman Lamborn, Ranking Member Lowenthal and members of the
subcommittee, thank you for the opportunity to provide this Statement
for the Record on behalf of the Puerto Rico Hospital Association. Our
organization represents the 69 hospitals serving approximately 3.5
million U.S. citizens residing in the U.S. Territory of Puerto Rico; a
population larger than 20 states. Notably, we are particularly proud
that not only was our organization founded in 1942 but we are the home
of the America's oldest continuously operated hospital: El Hospital La
Concepcion of San German, founded in 1524.
We appreciate the interest of the Natural Resources Committee in
the energy challenges and opportunities facing Puerto Rico; as well as
the current state of Puerto Rico's economy. Unfortunately, our island's
high energy costs, weak economy, high level of poverty, record
unemployment and troubled government finances are contributing to the
challenges we face in managing a health care system designed to provide
the best quality care for the U.S. citizens we serve each and every
day.
Energy is a major cost for Puerto Rico's hospitals. Today's health
care and its technologies are energy intensive. Electricity used to
power our medical equipment, lighting and cooling systems generates
costs representing up to 5 percent of a typical operating budget; a
proportionally higher cost than Mainland hospital budgets.
Unfortunately, Puerto Rico's dependence on using old fashioned
technologies and inefficient oil burning generators has kept our
electricity costs sky-high. In fact, our electricity rates are two to
three times the U.S. average and if they go higher it could further
cripple our health care system. Today's costs are subject to change
drastically should oil prices climb back to the record highs of recent
years.
Energy costs in Puerto Rico for the last 15 years have been
unstable and unpredictable, trending upwards from 11 /kWh in 1999 all
the way to almost 30 /kWh in 2012. Today we are almost twice that of
the U.S. average even with recently lower oil prices. To make things
worse, there are proposals to increase energy prices even more above
the current rates in order to facilitate PREPA's restructuring and debt
servicing; resulting in average Puerto Rico prices for all sectors
combined versus that of the United States to be 3.3 times 2014 prices.
Anyone with a simple understanding of operating a business appreciates
how devastating this change in electricity costs would be and its
consequences to our health care system and overall economy. Our
hospitals will be pushed further into their own financial crisis due to
inadequate reimbursements and high operating costs due to energy.
As you consider solutions to Puerto Rico's energy challenges, we
encourage you to keep a basic goal in mind of lower electricity rates
as high rates have hampered the ability of our economy to grow. We also
encourage you to review existing grant and tax incentive programs to
ensure that they are applicable in Puerto Rico and available to health
care providers such as hospitals.
Frankly, we face an even larger challenge as we work to deliver
quality health care. Our Medicaid funding is capped and our treatment
under Medicare has been significantly less than that received by
identical stateside hospitals. However, we are expected to deliver the
same level of quality care for our citizens and visitors as that
provided by our sister stateside institutions.
The government of Puerto Rico is behind in its Medicaid
reimbursements to the tune of at least $200 million today. Since 43
percent of our local population is living in poverty, every one of our
member hospitals serves Medicaid patients. This combined with our
lesser Medicare reimbursement levels has put an incredible strain on
the operations of every hospital. We also note that 40 percent of our
island's population is Medicare eligible.
We recently surveyed our member hospitals and found that over the
past 12 months almost every institution has been forced to scale back
operations in some way due to the government of Puerto Rico's delayed
Medicaid payments. This reduction in services has resulted in employee
cutbacks and reduced hours impacting thousands of employees, with many
hospitals reducing beds, closing floors and eliminating specialized
services as well as an additional delay in payment of bills and
payroll. One hospital has already closed its doors after the local
government owned electrical utility cut off its electricity service due
to late payment of bills. PREPA has since threatened three other
hospitals as well with an electricity cutoff.
The facts show that Puerto Rico's hospital system is in a crisis
due to the combination of the government's delay in reimbursing its
medical providers and the secondary treatment our hospitals receive
under Medicaid and Medicare. We are struggling to maintain our staff
and see many of our experienced doctors and other health professionals
recruited away with offers of better compensation by stateside
hospitals. Overall, Puerto Rico has experienced a net reduction in
population of 10 percent over the past 10 years; essentially, 500,000
of our better educated young people and their families have left our
island and moved to the mainland in search of a better quality of life.
You've noted in your opening statements as well as through comments
by individual Members during this hearing that you wish to focus on
solutions that can be enacted under the House Natural Resource
Committee's jurisdiction; particularly energy and a potential financial
oversight authority to preside over a debt restructuring process. We
urge solutions that actually result in lower electricity rates and wish
to work with you toward that goal.
We also note that there are many areas in health care where the
disparity in treatment can be identified; my intent with this statement
is to draw your additional attention to the leading priority initiative
where Congress can make a difference in the short term. In fact, this
initiative addresses a fairness issue resulting from disparate
treatment of Puerto Rico hospitals. This is our immediate priority.
fix the impending medicaid cliff
Background
Medicaid, the health program for low-income individuals, is funded
in part by the Federal Government and in part by the state or territory
government. In the states, Federal funding for Medicaid is open-ended,
with the Federal contribution-known as an FMAP-ranging from 50 percent
for the wealthiest states to 83 percent for the poorest states. By
contrast, the amount of funding that the Federal Government provides to
support the Medicaid program in each territory is capped.
Puerto Rico has a population of 3.5 million U.S. citizens residing
within the Territory. Unfortunately, she also has the Nation's highest
poverty level of 46 percent of the population. Due to the high level of
poverty, every health care provider serves the Medicaid population.
Through 2009, Puerto Rico's cap was only $260.4 million a year and
the FMAP was just 50 percent. In 2010, Congress enacted the Patient
Protection and Affordable Care Act (ACA). Rather than simply removing
the cap, the bill provided $6.4 billion in additional Medicaid funding
for Puerto Rico. This funding can be drawn down by the territory
between the fourth quarter of Fiscal Year 2011 and the end of Fiscal
Year 2019.
As a result, Puerto Rico now receives $1.1 to $1.3 billion a year
in combined Federal Medicaid funding. This is a major improvement but
still far less than Puerto Rico would receive if it were a state.
Oregon, which has roughly the same number of people as Puerto Rico with
a much lower poverty level, receives $5 billion a year.
Here's The Problem
Notably, this extra funding expires at the end of the Fiscal Year
2019. This has been called the Medicaid funding cliff. The Puerto Rico
government has less than $3.5 billion of its $6.4 billion allocation in
funding remaining, and could deplete this funding in 2018 or even 2017.
If this funding is not replenished, Puerto Rico will go back to
receiving less than $400 million a year. This will have a devastating
impact on local health care providers including Puerto Rico's
hospitals, doctors and health centers. The government of Puerto Rico is
already behind by over $250 million in Medicaid reimbursements to
health providers. The impending situation for our health care system is
dire.
Potential Solutions
H.R. 2635 and S. 1961, offered by Congressman Pierluisi and Senator
Schumer would provide the territories with state-like treatment under
Medicaid within well-defined parameters. Each territory's Medicaid
program could cover individuals whose family income is equal to or less
than 100 percent of the Federal poverty level, with the Federal
Government providing state-like funding for that purpose. In essence,
as long as a territory government covers individuals whose household
income is within these limits, the Federal Government would fund the
territory's Medicaid program as if it were a state Medicaid program.
That means that the annual funding cap would be eliminated. Each
territory would receive an FMAP based on its per capita income.
However, the limiting principle is that if a territory wants to cover
individuals earning above 100 percent of the Federal poverty level, it
will generally be required to use territory dollars, not Federal
dollars.
At a minimum, Congress should address the impending cliff and
ensure a floor in Federal Medicaid funds are provided for the
foreseeable future equal to the current level provided currently
through the Affordable Care Act. While working toward an eventual
lifting of the cap, Congress can prevent the ``cliff'' from occurring
as early as April, 2017, as part of the package now being assembled.
Failure to provide stable funding could bring about the collapse of our
entire health care system.
Next Steps
Speaker Ryan has stated that he is committed to meaningful
resolution of the fiscal and economic challenges facing Puerto Rico.
These issues involve more than just the Chapter 9 Bankruptcy issue and
some form of Federal financial oversight of the government and its debt
restructuring. We urge inclusion of meaningful initiatives to bring
energy costs down to a much lower level of rate in combination with
changes in unfair treatment of Puerto Rico's health care providers
under Medicaid. We must not allow the ``cliff' from devastating our
health care system which serves 3.5 million U.S. citizens.
Again, we appreciate the opportunity to submit our statement to the
record for this hearing and look forward to working with each of you to
bring about meaningful change which solve our challenges and create an
opportunity for a better future for Puerto Rico.
______
Comision De Energia De Puerto Rico
Hato Rey, Puerto Rico
January 12, 2016
Hon. Doug Lamborn, Chairman,
House Subcommittee on Energy and Mineral Resources
1333 Longworth House Office Building,
Washington, DC 20515.
Dear Chairman:
The Puerto Rico Energy Commission (``Commission'', ``Energy
Commission'', ``PREC'') is the government agency tasked with the
regulation and supervision of the electric power industry in the
Commonwealth of Puerto Rico and the enforcement of its energy public
policy. It is a specialized and independent regulatory body created on
May 27, 2014, by virtue of Act 57-2014, as amended, known as the Puerto
Rico Energy Transformation and RELIEF Act.
As Puerto Rico's electric power industry regulator, one of the
Commission's key functions is regulating the Puerto Rico Electric Power
Authority (``PREPA''), the Commonwealth's only electric utility. PREPA,
a government-owned corporation, is by far the largest and most
important player in Puerto Rico's electric power industry, with a
dominant role in the Island's electric generation activities, as well
as its sole provider of electricity transmission and distribution
services. The following is a brief description of the Commission's
duties, functions, and the current challenges it faces, with particular
regard to the future of PREPA and electric generation in Puerto Rico.
The Commission's broad mission is to achieve a reliable, efficient,
and accountable electric system, capable of providing electric service
to all citizens at just and reasonable prices. In order to accomplish
this task, the Commonwealth Legislature delegated broad regulatory and
adjudicative powers as well as specific duties to the Commission,
including for example, the adoption of standards and guidelines
necessary for highly efficient electric power generation; to assess,
approve, and ensure compliance with the resource and operational plans
presented by PREPA and other electric service companies, in order to
ensure the orderly development of Puerto Rico's electric system; and to
review, set and approve the rates and charges proposed by PREPA and
other electric service companies for their services on the Island.
Likewise, the Commission has the power to certify all electric
service companies that intend to offer their services in Puerto Rico,
as well as the power to rule in cases and controversies arising by
virtue of the laws and regulations related to the electric power
industry and service. The Commission has ample power to carry out the
necessary investigations to fulfill its duties and responsibilities,
and to ensure the utmost adherence with the laws and regulations that
govern the electric power industry in Puerto Rico.
It is therefore evident that the Commission has a significant task
to carry out, with multiple responsibilities, the performance of which
is of vital importance for Puerto Rico. One of the challenges facing
the Commission in this task has been the necessary work of creating a
new organizational structure, requiring crucial groundwork during the
Commission's first months of operation as a newly created entity. This
work included adopting the Commission's first regulations, issuing its
first orders in compliance with its regulatory functions, the
initiation of the necessary investigations for these functions, and the
timely and continuous public disclosure of its activities, in order to
ensure the utmost accountability and transparency.
The Commission's substantive work has focused primarily on the
following major projects: (1) the adoption of the regulation, and the
assessment and approval of PREPA's first Integrated Resource Plan
(``IRP''); (2) the adoption of the regulation on the contribution in
lieu of taxes (``CILT'') from PREPA to the municipalities; (3) the
adoption of the regulation on information disclosure criteria, the
certification requirements and procedures, and annual fees, applying to
electric service companies operating--and intending to operate--in
Puerto Rico; and (4) the initiation of the first adjudicatory procedure
to review PREPA's rates (``rate case''), which is the first formal rate
review in over twenty-six years.
The first of these projects, the IRP, has dominated the
Commission's agenda in the last several months. Pursuant to the
Commission's regulations and resulting from a detailed planning
process, the IRP will consider all the reasonable resources to satisfy
the demand for electricity services during a twenty year planning
period, taking into account both supply- and demand-side electric power
resources. In broad terms, the IRP will include an assessment of the
planning environment, a careful and detailed study of a range of future
load forecasts, present generation resources, present demand-side
resources, current investments in electricity conservation
technologies, existing transmission and distribution facilities, and
the relevant forecast and scenario analyses in support of PREPA's
selected plan, upon which the Commission shall issue a ruling. This
adjudicative process, in which key stakeholders from both industry and
civil society take part, is currently ongoing.
Another key project taken up by the Commission is the establishment
of a new regulatory scheme for the CILT. The contribution in lieu of
taxes represents a significant part of PREPA's operating costs. It is
also a vital component of Puerto Rico's electric power service at the
municipal government level. Within a rigorous public participation
process that lasted several months, on October 16, 2015, the Commission
finalized and enacted the set of rules governing the specific
mechanisms, criteria, and procedures by which PREPA shall compensate
Puerto Rico's 78 municipalities, pursuant to the provisions of Section
22 of Act No. 83, as amended by Act 57-2014.
Furthermore, the procedures and criteria related to operational
plans, annual fees and the certification of electric service companies,
has required the Commission to engage in an ongoing rulemaking process.
This includes addressing the concerns of industry participants, which
the Commission shall take into consideration in the formulation of a
forthcoming amendment to its original regulation on this matter,
enacted in July 2015. The information requirements for electric service
companies, the criteria by which they will be evaluated for
certification, and the filings necessary for the assessment of their
regulatory fees, are all sensitive matters in which the Commission's
role is essential in order for the Commonwealth's energy policy,
industry's valid concerns, and the public interest, to be
satisfactorily addressed.
Lastly, another major project the Commission has engaged in during
its brief period of operational existence is the undertaking of PREPA's
first rate case by an independent ratemaking authority. This process,
for which the Commission began to formally prepare in February 2015 by
initiating an investigation into PREPA's financial and rate structure,
and ordering PREPA an extensive information request, is perhaps the
most sensitive at this juncture, given the public awareness of PREPA's
financial problems and its ongoing negotiations with its creditors. It
is especially important to note that PREPA has not yet presented its
rate proposal to the Commission, even though the Commission has duly
prepared the groundwork for this procedure, adopting a regulation on
filing requirements specifically for this first rate case, as well as
several orders pursuant to it. This process has also included a
petition by one of PREPA's monoline insurers to initiate a rate case
before the Commission, demanding the adoption of a temporary rate
increase, which the Commission rejected in its subsequent resolution
based on lack of information and failure to follow the Commission's
established procedure. The petitioner challenged the Commission's
ruling before the Puerto Rico Court of Appels. The Commission has
maintained its work plan in this process and expects PREPA to file its
rate proposal within the first quarter of 2016.
As mentioned, this brief summary of the Commission's present work
puts into perspective the challenges that this young regulatory entity
faces going forward. The Commission welcomes the insight from all
points of view with regard to the issues discussed above, as well as
any suggestions as to what could be further done to ensure that its
regulatory work translates into a strong electric power sector that
brings forth the greatest possible benefit for the people of Puerto
Rico.
We wish to thank the House Committee on Natural Resources for this
opportunity to provide useful insight into our work and our role in
shaping Puerto Rico's energy outlook. Once again, we remain at the
disposition of this Committee and of this House of Representatives in
order to share ideas and proposals that, in unity of purpose, serve the
best interests of the Commonwealth of Puerto Rico and its citizens.
Cordially,
Agustin F. Carbo-Lugo,
Chairman, Puerto Rico Energy Commission.