[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]


    THE STATUS OF THE PUERTO RICO ELECTRIC POWER AUTHORITY (PREPA) 
                    RESTRUCTURING SUPPORT AGREEMENT

=======================================================================

                           OVERSIGHT HEARING

                               BEFORE THE
                               
                  SUBCOMMITTEE ON INDIAN, INSULAR AND
                         ALASKA NATIVE AFFAIRS

                                 OF THE

                     COMMITTEE ON NATURAL RESOURCES
                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                       Wednesday, March 22, 2017

                               __________

                            Serial No. 115-3

                               __________

       Printed for the use of the Committee on Natural Resources
       
       
 
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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
  Chairman Emeritus                  Madeleine Z. Bordallo, GU
Louie Gohmert, TX                    Jim Costa, CA
  Vice Chairman                      Gregorio Kilili Camacho Sablan, 
Doug Lamborn, CO                         CNMI
Robert J. Wittman, VA                Niki Tsongas, MA
Tom McClintock, CA                   Jared Huffman, CA
Stevan Pearce, NM                      Vice Ranking Member
Glenn Thompson, PA                   Alan S. Lowenthal, CA
Paul A. Gosar, AZ                    Donald S. Beyer, Jr., VA
Raul R. Labrador, ID                 Norma J. Torres, CA
Scott R. Tipton, CO                  Ruben Gallego, AZ
Doug LaMalfa, CA                     Colleen Hanabusa, HI
Jeff Denham, CA                      Nanette Diaz Barragan, CA
Paul Cook, CA                        Darren Soto, FL
Bruce Westerman, AR                  Jimmy Panetta, CA
Garret Graves, LA                    A. Donald McEachin, VA
Jody B. Hice, GA                     Anthony G. Brown, MD
Aumua Amata Coleman Radewagen, AS    Wm. Lacy Clay, MO
Darin LaHood, IL
Daniel Webster, FL
David Rouzer, NC
Jack Bergman, MI
Liz Cheney, WY
Mike Johnson, LA
Jenniffer Gonzalez-Colon, PR

                       Jason Knox, Chief of Staff
                      Lisa Pittman, Chief Counsel
                David Watkins, Democratic Staff Director
                                 ------                                

       SUBCOMMITTEE ON INDIAN, INSULAR AND ALASKA NATIVE AFFAIRS

                       DOUG LaMALFA, CA, Chairman
             NORMA J. TORRES, CA, Ranking Democratic Member

Don Young, AK                        Madeleine Z. Bordallo, GU
Jeff Denham, CA                      Gregorio Kilili Camacho Sablan, 
Paul Cook, CA                            CNMI
Aumua Amata Coleman Radewagen, AS    Ruben Gallego, AZ
Darin LaHood, IL                     Darren Soto, FL
Jack Bergman, MI                     Colleen Hanabusa, HI
Jenniffer Gonzalez-Colon, PR         Raul M. Grijalva, AZ, ex officio
  Vice Chairman
Rob Bishop, UT, ex officio

                                ------                                
                                C
                                ONTENTS

                              ----------                              
                                                                   Page

Hearing held on Wednesday, March 22, 2017........................     1

Statement of Members:
    Gonzalez-Colon, Hon. Jenniffer, a Delegate in Congress from 
      the Commonwealth of Puerto Rico............................     5
    LaMalfa, Hon. Doug, a Representative in Congress from the 
      State of California........................................     1
        Prepared statement of....................................     2
    Torres, Hon. Norma J., a Representative in Congress from the 
      State of California........................................     3
        Prepared statement of....................................     4

Statement of Witnesses:
    Benitez Hernandez, Luis, Chairman, PREPA Governing Board, San 
      Juan, Puerto Rico..........................................    37
        Prepared statement of....................................    38
        Questions submitted for the record.......................    42
    Bergonzi, Adam, Managing Director and Chief Risk Officer, 
      National Public Finance Guarantee Corporation, Purchase, 
      New York...................................................    44
        Prepared statement of....................................    46
    Bryngelson, Rob, President and CEO, Excelerate Energy LP, The 
      Woodlands, Texas...........................................    51
        Prepared statement of....................................    53
        Questions submitted for the record.......................    56
    Carrion, Jose B., III, Chairman, Financial Oversight and 
      Management Board of Puerto Rico, San Juan, Puerto Rico.....    27
        Prepared statement of....................................    29
        Questions submitted for the record.......................    31
    Matosantos, Ana J., Member, Financial Oversight and 
      Management Board of Puerto Rico, Sacramento, California....    57
        Prepared statement of....................................    59
        Questions submitted for the record.......................    61
    Rossello, Hon. Ricardo, Governor of Puerto Rico, San Juan, 
      Puerto Rico, accompanied by Gerardo Portela-Franco, 
      Executive Director, Puerto Rico Fiscal Agency and Financial 
      Advisory Authority.........................................     7
        Prepared statement of....................................     9
    Spencer, Stephen, Managing Director, Houlihan Lokey, 
      Minneapolis, Minnesota, on behalf of Franklin Advisers, 
      Inc. and Oppenheimer Funds, Inc............................    63
        Prepared statement of....................................    64

Additional Materials Submitted for the Record:
    List of documents submitted for the record retained in the 
      Committee's official files.................................    84
                                     


 
   OVERSIGHT HEARING ON THE STATUS OF THE PUERTO RICO ELECTRIC POWER 
           AUTHORITY (PREPA) RESTRUCTURING SUPPORT AGREEMENT

                              ----------                              


                       Wednesday, March 22, 2017

                     U.S. House of Representatives

       Subcommittee on Indian, Insular and Alaska Native Affairs

                     Committee on Natural Resources

                             Washington, DC

                              ----------                              

    The Subcommittee met, pursuant to notice, at 10:07 a.m., in 
room 1324, Longworth House Office Building, Hon. Doug LaMalfa 
[Chairman of the Subcommittee] presiding.
    Present: Representatives LaMalfa, LaHood, Bergman, 
Gonzalez-Colon, Bishop; Torres, Gallego, Soto, and Grijalva.
    Also present: Representatives Serrano and Velazquez.
    Mr. LaMalfa. Good morning. The Subcommittee on Indian, 
Insular and Alaska Native Affairs will come to order.
    The Subcommittee's subject today, we are meeting to hear 
testimony on the status of the Puerto Rico Electric Power 
Authority (PREPA) Restructuring Support Agreement.
    Under Committee Rule 4(f), any oral opening statements at 
hearings are limited to the Chairman, the Ranking Minority 
Member, and the Vice Chair. This will allow 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, or 
the close of the hearing, whichever comes first.
    No objection, so ordered.
    OK, I will now recognize myself for 5 minutes.

 STATEMENT OF HON. DOUG LaMALFA, A REPRESENTATIVE IN CONGRESS 
                  FROM THE STATE OF CALIFORNIA

    Mr. LaMalfa. First of all, the current PREPA debt sits at 
approximately just under $9 billion. On July 1, a very 
important major bond payment of $455 million of combined 
principal and interest is due. According to figures released 
just yesterday by the Fiscal Agency and Financial Advisory 
Authority of Puerto Rico, PREPA will be completely out of cash 
on or around May 17, 2017.
    In light of these alarming facts, it is incumbent upon this 
Subcommittee to drive a productive conversation here today. Our 
goal will be to inquire on where things stand in the current 
negotiations between the new Rossello administration and the 
various creditor parties who have been working on finding a 
resolution.
    The 3.4 million American citizens residing in Puerto Rico 
need assurance that there is a solution to this troubling 
issue, and that it is coming soon. Further delay will only 
result in further complications for the island's populace.
    For context, PREPA for decades has put politics before 
basic, logical standards for operating an electric utility 
supplying the entire island grid. The structure within PREPA 
and a total lack of regard for operating in an efficient and 
consistent manner has led to severe financial and liquidity 
troubles, outdated and obsolete generation facilities, and 
crippling debt. PREPA is unable to access the capital markets 
and has been for some time now.
    In order to get PREPA back on track and stabilize the power 
generation for the residents and the businesses of the island, 
serious decisions need to be made by leaders in the government 
of Puerto Rico, the Governing Board of PREPA, and the various 
creditor communities. The island cannot afford a delay any 
longer.
    We look forward to hearing today from the Governor as to 
what his administration plans to do about PREPA's imperiled 
position, and upcoming debt payment deadlines. We will hear 
from the Oversight Board established by PROMESA on how they 
believe the pending Restructuring Support Agreement (RSA) will 
impact the island's future recovery. We will hear from the 
chairman of the PREPA Governing Board on the long and arduous 
process of negotiation that the government of Puerto Rico, 
PREPA, and its creditors undertook over the past 2 years to get 
an RSA to this point. And we will hear from individuals who 
represent various positions of the creditor and business 
community.
    It is important to note that all witnesses mentioned have 
the same goals in mind: to come to an agreement on the debt 
resolution of PREPA and to help achieve viable energy 
generation for the island, going forward.
    I thank the witnesses for appearing today before this 
Subcommittee, and for their travel. I look forward to having a 
productive and meaningful conversation with them and our 
Members.
    [The prepared statement of Mr. LaMalfa follows:]
Prepared Statement of the Hon. Doug LaMalfa, Chairman, Subcommittee on 
               Indian, Insular and Alaska Native Affairs
    The current PREPA debt sits at roughly $8.9 billion. On July 1, a 
major bond payment of $455 million of combined principal and interest 
is due. According to figures released just yesterday morning by the 
Fiscal Agency and Financial Advisory Authority of Puerto Rico, PREPA 
will be completely out of cash on or around May 17, 2017.
    In light of these alarming facts, it is incumbent upon this 
Subcommittee to drive a productive conversation here today. Our goal 
will be to inquire on where things stand in the current negotiations 
between the new Rossello administration and the various creditor 
parties who have been working on finding a resolution. The 3.4 million 
Americans residing in Puerto Rico need assurance that there is a 
solution to this troubling issue and that it is coming soon. Further 
delay will only result in further complications for the island's 
populace.
    For context, PREPA for decades has put politics before basic, 
logical standards for operating an electric utility supplying the 
entire island grid. The structure within PREPA and total lack of regard 
for operating in an efficient and consistent manner has led to severe 
financial and liquidity troubles, outdated, obsolete generation 
facilities, and crippling debt. PREPA is unable to access the capital 
markets and has been for some time now.
    In order to get PREPA back on track and stabilize the power 
generation for the residents and the businesses of the island, serious 
decisions need to be made by leaders in the government of Puerto Rico, 
the Governing Board of PREPA and the various creditor communities. The 
island cannot afford a delay any longer.
    We look forward to hearing today from the Governor as to what his 
administration plans to do about PREPA's imperiled position and 
upcoming debt payment deadlines. We will hear from the Oversight Board 
established by PROMESA on how they believe the pending Restructuring 
Support Agreement will impact the island's future recovery. We will 
hear from the Chairman of the PREPA Governing Board on the long and 
arduous process of negotiation that the government of Puerto Rico, 
PREPA and its creditors undertook over the past 2 years to get an RSA 
to this point. And we will hear from individuals who represent various 
positions of the creditor and business community.
    It is important to note, that all the witnesses mentioned have the 
same goals in mind, to come to an agreement on the debt resolution of 
PREPA and to help achieve viable energy generation for the island going 
forward.
    I thank the witnesses for appearing before the Subcommittee today 
and I look forward to having a productive and meaningful conversation 
with them and our Members.

                                 ______
                                 

    Mr. LaMalfa. At this point I would like to recognize our 
friend, the Ranking Minority Member, Mrs. Torres, for an 
opening statement.

  STATEMENT OF THE HON. NORMA J. TORRES, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Mrs. Torres. Thank you, Mr. Chairman. The passage of 
PROMESA was the first step to give Puerto Rico relief from 
their crippling debt. I voted in opposition to the bill because 
I didn't feel that it did enough, and I still believe that more 
forms of support are needed.
    For the Puerto Rican economy to grow, their leadership must 
step up and make some tough decisions. Additionally, Congress 
must step up and assist the island further--in particular, with 
their healthcare costs, as well as with an additional mechanism 
to attract investment and jobs.
    For these reasons I am eager to hear from our witnesses 
today about any progress under PROMESA, and specifically about 
the restructuring agreement for PREPA.
    For some time now, PREPA has been in a state of crisis and 
unable to be a modern, world-class utility. PREPA's problems 
did not arise overnight, but were the result of management and 
other strategic decisions that were too often based on 
political or electoral considerations rather than their best 
practices, or best business practices.
    In late December of 2015, PREPA reached an agreement with 
creditors holding or controlling approximately 70 percent of 
its debt. However, to date this agreement has not been 
finalized, and was recently extended to the 31st of this month. 
This agreement has not been met with universal support, and 
Puerto Rico's own governor, who is one of our witnesses today, 
will explain why he believes the agreement should be 
renegotiated to get a better deal with PREPA's creditors.
    I am also looking forward to hearing from members of the 
Financial Oversight and Management Board of Puerto Rico, which 
unanimously voted last week to certify Puerto Rico Governor 
Rossello's fiscal plan. The Oversight Board was a key component 
of the PROMESA legislation, and one that I am most concerned 
with.
    As the bill was written, nothing--nothing--guaranteed that 
the board members would represent a diverse set of backgrounds 
or a diverse set of expertise. I felt strongly that the 
Oversight Board reflect the diverse interests of Puerto Rico 
and a long-term commitment to the Commonwealth.
    This is because PROMESA gave significant power to the 
Oversight Board, and required the government of Puerto Rico to 
submit a 5-year fiscal plan to the Oversight Board. I, along 
with many of my colleagues, continue to be concerned that 
nothing in the fiscal plan will lead to economic growth, but 
could cause further contraction in the Puerto Rican economy.
    Thank you to the witnesses for being here today, and I look 
forward to hearing from you on the best approaches to provide 
Puerto Rico with the tools it needs to prevent further dramatic 
depletion of their population.
    [The prepared statement of Mrs. Torres follows:]
    Prepared Statement of the Hon. Norma J. Torres, Ranking Member, 
       Subcommittee on Indian, Insular and Alaska Native Affairs
    Today's hearing is a very important one--it is the first hearing to 
evaluate any part of the Puerto Rico Oversight Management and Economic 
Stability Act, (PROMESA) since it was approved by Congress last June 
30. The passage of PROMESA was a first step to give Puerto Rico relief 
from their crippling debt. However, I voted in opposition to the bill 
because I didn't feel that it did enough, and I still believe more 
forms of support are needed.
    For the Puerto Rican economy to grow, Congress needs to step up and 
assist the island further, in particular with their healthcare cost as 
well as with an additional mechanism to attract investment and jobs.
    For these reasons, I am eager to hear from our witnesses today 
about any progress under PROMESA, and specifically about the 
restructuring agreement for PREPA.
    For some time now, PREPA has been in a state of crisis and unable 
to be a modern, world-class utility. PREPA's problems did not arise 
overnight but were the result of management and other strategic 
decisions that were too often based on political or electoral 
considerations rather than best practices or business imperatives.
    In late December 2015, PREPA reached an agreement with creditors 
holding or controlling approximately 70 percent of its debt. However, 
to date this agreement has not been finalized and was recently extended 
to the 31st of this month. This agreement has not been met with 
universal support, and Puerto Rico's governor--who is one of our 
witnesses today--will explain why he believes the agreement should be 
renegotiated to get a better deal with PREPA's creditors
    I am also looking forward to hearing from members of the Financial 
Oversight and Management Board for Puerto Rico, which unanimously voted 
last week to certify Puerto Rico Governor Rossello's fiscal plan. The 
Oversight Board was a key component of the PROMESA legislation, and one 
that I was most concerned with.
    As the bill was written, nothing guaranteed that board members 
would represent a diverse set of backgrounds and experiences. I felt 
strongly that the Oversight Board reflect the diverse interests of 
Puerto Rico and a long-term commitment to the Commonwealth. This is 
because PROMESA gave significant power to the Oversight Board, and 
required the government of Puerto Rico to submit a 5-year fiscal plan 
to the Oversight Board.
    I, along with many of my colleagues, continue to be concerned that 
nothing in the fiscal plan will lead to economic growth but could cause 
further contraction in the Puerto Rican economy.
    Thank you to our witnesses for being here, and I look forward to 
hearing from you on the best approaches to provide Puerto Rico with the 
tools it needs to prevent further dramatic depletion of their 
population due to lack of jobs and crippling austerity measures.
    Thank you, Mr. Chairman.

                                 ______
                                 

    Mrs. Torres. Mr. Chairman, thank you so much, and I ask for 
unanimous consent for Representatives Velazquez and Serrano to 
join us today.
    Mr. LaMalfa. With no objection, so ordered.
    The Chairman. Mr. Chairman? Mr. Serrano is here. Let's do 
the UC to him being allowed to be here and participate fully on 
this Committee.
    Mr. LaMalfa. I am sorry?
    The Chairman. Redo the UC. Mr. Serrano is the only one 
here. Allow him to be here, and recognized to be a full member 
of this Committee and participate.
    Mrs. Torres. Then I would ask for unanimous consent for Mr. 
Serrano to be allowed to be here.
    The Chairman. Perfect.
    Mr. LaMalfa. OK. So ordered. Thank you.
    Now I would like to recognize our Vice Chair, Miss 
Gonzalez, for an opening statement.

 STATEMENT OF THE HON. JENNIFFER GONZALEZ-COLON, A DELEGATE IN 
         CONGRESS FROM THE COMMONWEALTH OF PUERTO RICO

    Miss Gonzalez-Colon. Thank you, Mr. Chairman. As Puerto 
Rico's sole representative in this Congress, I want to thank 
you, Chairman Bishop and Chairman LaMalfa, Ranking Member 
Torres, and fellow members of this Committee for holding this 
hearing.
    For the past year-and-a-half, Congress led, for the most 
part by this Committee, the most difficult part to confront 
this crisis. The result of the territorial system that is based 
on economic and political inequality of its citizens, a model 
that denies millions of American citizens the most basic right 
in a democracy--the right to vote and to equal representation, 
and treats hundreds of thousands of Puerto Rican veterans as 
equal in war but not in peace.
    To that effect, the bipartisan PROMESA not only established 
a fiscal oversight board, but also created a bicameral and 
bipartisan task force of Members of Congress to make 
recommendations on the impediments to economic growth in Puerto 
Rico, including equitable access to Federal healthcare 
programs.
    In its final report in December, the task force identified 
numerous programs where Puerto Rico's lack of equal treatment 
constrains the island's economic growth potential and provided 
specific recommendations for this Congress to consider. These 
recommendations included providing Puerto Rico with equitable 
and sustainable funding under the Medicaid program, as well as 
addressing the island's Obamacare-imposed Medicaid cliff early 
in calendar year 2017.
    Mr. Chairman, I have already introduced legislation that 
will implement many of these recommendations, and I urge that 
the task force report serve as a road map for this Committee, 
moving forward. This will provide the island with much-needed 
tools to complement PROMESA and restore economic growth for our 
people.
    Furthermore, the ongoing discussions regarding the 
replacement of Obamacare, the tax reform, and increased funding 
for infrastructure projects, among others, present Congress and 
the Trump administration with a golden opportunity to address 
decades of unequal treatment for Puerto Rico and the 
territories. More specifically, I request that this Committee 
support the ongoing efforts to ensure that Puerto Rico and the 
other U.S. territories are treated equally in the American 
Health Care Act, or any other upcoming Obamacare replacement 
legislation to be considered by this Congress.
    I will also like for the Governor and the chairman of the 
Oversight Financial Board to comment on this issue during their 
respective turns.
    Just last week the fiscal Oversight Board created under 
PROMESA approved Governor Ricardo Rossello's fiscal plan, a 
plan that his administration was able to develop in just 58 
days. I consider this to be a giant step in the right 
direction.
    Now we are compelled to quickly shift our focus and engage 
in the good-faith negotiations that address the debt service, 
provide sufficient capital for PREPA's infrastructure 
investment, and set power rates that will not overburden Puerto 
Rican families and businesses.
    What should be clear by now is that PROMESA objectives for 
Puerto Rico will not be achieved unless economic growth is 
restored to the island, and that securing an efficient and 
affordable production of electricity is critical to the 
island's vitality and needed economic recovery. That is the 
reason we are here today in this hearing.
    I am optimistic that an agreement can be reached and 
achieved in the best interest of the people of Puerto Rico and 
our economy. Such an agreement could be set as a precedent for 
other negotiations to follow.
    The government of Puerto Rico is taking the steps to repair 
Puerto Rico's credibility, trigger economic growth, and seek an 
end to the territorial status that is the root problem for 
Puerto Rico's economic crisis. Through the process of the 
island becoming the 51st State of the Union. Make no mistake 
about it. Puerto Rico's territorial status is the real problem, 
and the problem will not go away by ignoring it. Failure to 
address it will be like treating the symptoms of the very sick 
patient instead of the underlying disease.
    I look forward to the testimony of our witnesses, and to 
hearing all sides in this very important discussion for the 
future of our beloved island.
    Thank you, Mr. Chairman. I yield back.
    Mr. LaMalfa. Thank you, Madam Vice Chair. At this point we 
will introduce our witness for the first panel. We are joined 
today, and thank you for your time and travel, by the Honorable 
Governor of Puerto Rico, Ricardo Rossello.
    You, of course, know the rules, 5 minutes of oral 
testimony. If you have an entire statement that you would like 
to have appear in the hearing that may be longer, you can 
please submit that, as well.
    You will see that when you light the microphone, you will 
get a green light. After 4 minutes the yellow light, and then 
the red light will be the end of our current 5-minute round for 
your opening statement. So, you will need to press the talk 
button on that, and we will be ready to go.
    Governor Rossello. Good morning, Chairman Bishop, Chairman 
LaMalfa, Ranking Member Torres, Vice----
    Mr. LaMalfa. Hold on. I am sorry, Governor. Please hold on 
for a moment.
    I recognize our Ranking Member for a moment.
    Mrs. Torres. I apologize, Mr. Chairman and Governor. I 
would like to request unanimous consent to allow Ms. Velazquez 
to sit and participate at the hearing today.
    Mr. LaMalfa. Seeing no objection, so ordered.
    All right, Governor. I re-recognize the witness, Governor 
Rossello.

  STATEMENT OF THE HON. RICARDO ROSSELLO, GOVERNOR OF PUERTO 
  RICO, SAN JUAN, PUERTO RICO, ACCOMPANIED BY GERARDO PORTELA-
   FRANCO, EXECUTIVE DIRECTOR, PUERTO RICO FISCAL AGENCY AND 
                  FINANCIAL ADVISORY AUTHORITY

    Governor Rossello. Well, once again, good morning, Chairman 
Bishop, Chairman LaMalfa, Ranking Member Torres, Vice Chairman 
Jenniffer Gonzalez, and other members of the Subcommittee. 
Thank you for the opportunity to appear today before the 
Subcommittee to discuss issues related to Puerto Rico's energy 
infrastructure and financial restructuring.
    I understand the Subcommittee is interested specifically in 
the ongoing restructuring of the Puerto Rico Power Authority, 
or PREPA. Before addressing the specifics of the PREPA 
restructuring, it is important to recognize the critical need 
to transform the energy infrastructure of the island. Puerto 
Rico needs a reliable, cost-effective, and efficient electrical 
system, as well as an effective program of conservation and 
maximization of its water resources in order to support the 
island's socio-economic transformation.
    My vision for PREPA is one that involves a modern and 
resilient transmission and distribution system with diverse 
sources of fuel including renewables, and supported by private 
capital to invest in a new and efficient generating capacity. 
The goal is to be able to deliver reliable energy at 
sustainable rates to the people and businesses of Puerto Rico. 
That vision includes a successful restructuring of PREPA.
    I also note that in the past PREPA was frequently cited as 
an example of governmental dysfunction, where political 
considerations over-rode true economic goals. In that regard, 
it is my view that the restructuring of PREPA must incorporate 
a governance model that facilitates investor and consumer 
confidence and minimizes political interference.
    At the same time, PREPA's governance cannot be disconnected 
from the overall energy policy of the island. In my view, the 
appropriate governance structure is one that takes into account 
the concerns of all stakeholders.
    Unfortunately, PREPA's challenges, including its aging 
infrastructure and significant debt burden, have resulted in 
inefficiencies and rising costs, which have, in turn, caused 
Puerto Rico residents and businesses to endure high electricity 
costs.
    Today, we pay substantially more for electricity than do 
residents of the continental United States, and this in an 
economy where the median family income is approximately 33 
percent of that in the United States. The high electricity 
costs negatively impact both the ability of Puerto Rico to 
attract capital and to compete in the global economy. This 
situation is not sustainable for our residents or for our 
economy.
    Since I took office, my team has worked diligently to 
assess both the long-standing and fundamental operational 
changes facing PREPA, and the proposed transactions set forth 
in the Restructuring Support Agreement, or RSA, that was 
negotiated by the prior administration with significant 
creditor constituencies. While we recognize and appreciate the 
efforts of many parties put into the RSA, and understand that 
it provides a useful framework for discussion, my 
administration believes that any consensual restructuring 
requires modifications to the terms set forth in the RSA.
    Without providing an exhaustive list, our concerns include: 
(1) the impact of the transition charge on the Puerto Rican 
ratepayer; (2) the effect the transaction may have on the 
capital and liquidity available to PREPA to complete its 
operational transactions; (3) the failure of certain creditor 
groups to provide significant concessions; (4) the reality that 
the RSA does not provide for sufficient capital to close the 
transaction; and last (5) that in the current conditions, the 
RSA would not be sustainable for the bondholders.
    After the RSA was signed in December of 2015, Congress, 
aided by this Subcommittee, passed PROMESA, which was signed 
into law by the President on June 30, 2016. It is noteworthy 
that Congress specifically stated in the very last provision of 
PROMESA that it was its sense that ``any durable solution for 
Puerto Rico's fiscal and economic crisis should include 
permanent, pro-growth fiscal reforms that feature, among other 
elements, a free flow of capital . . .''.  I do share that 
belief.
    A critical part of PROMESA's effectiveness stems from the 
creation and certification of a fiscal plan. After much work, 
collaboration, and thoughtful exchange, the Oversight Board 
certification of our plan on March 13 represented an important 
first step in moving forward with Puerto Rico's good faith 
negotiations with its creditors and stakeholders. Our plan was 
validated because we had the opportunity to elaborate it, give 
it careful consideration to both our fiscal objectives and the 
best interests of the people of Puerto Rico.
    Efforts now turn to consensual agreements under the Title 
VI process to avert potentially costly and litigious 
bankruptcy-type proceedings under Title III. My administration 
fully supports and is pursuing these types of consensual 
agreements as the most productive path for Puerto Rico to 
emerge from its current fiscal and economic crisis as quickly 
as possible. I recognize that certain PREPA constituents would 
prefer that we simply accept the deal in the RSA without review 
or modification. But these constituents must recognize that 
PREPA's restructuring does not exist in isolation. PREPA's 
restructuring is an important component of Puerto Rico's 
overall restructuring efforts, and central to Puerto Rico being 
able to meet its overall fiscal plan.
    As a result, any RSA or any other transaction with 
constituents must provide and allow for not only an acceptable 
financial restructuring, but also must lead to a transformed, 
rationalized, and operationally improved PREPA. Our objective 
here would be to offer broad economic upside based on utility 
efficiencies, a sustainable, affordable rate structure, public-
private infrastructure investment, and reliable energy for 
Puerto Rican consumers.
    I believe it would be irresponsible to simply accept the 
terms of a financial restructuring without fully understanding 
the path it provides for PREPA to improve its operations, 
increase its reliability, diversify, and access new capital. 
Our analysis of PREPA's operations and the interplay with the 
RSA is ongoing, and we continue to focus on potential 
modifications to the RSA that would recognize the interests of 
the Puerto Rican ratepayer, as well as creditors and other 
constituents.
    I am committed to continuing this hard work toward 
meaningful restructuring in order to transform PREPA into a 
modern utility that will support the people of Puerto Rico and 
a strong and growing Puerto Rican economy. We were able to 
achieve what many thought was impossible: a fiscal plan that 
was comprehensive, that was thoughtful, and addressed fiscal 
and economic concerns and the well-being of the people of 
Puerto Rico. Now we aim to do the same with this RSA.
    Thank you again for the opportunity to discuss these 
issues.
    [The prepared statement of Governor Rossello follows:]
   Prepared Statement of the Hon. Ricardo Antonio Rossello Nevares, 
                        Governor of Puerto Rico
    Chairman Bishop, Chairman LaMalfa, Ranking Member Torres, Vice-
Chairman Jenniffer Gonzalez and members of the Subcommittee: thank you 
for the opportunity to discuss issues related to Puerto Rico's energy 
infrastructure and financial restructuring. My tenure as Governor of 
Puerto Rico began less than 3 months ago, on January 2, 2017. Despite 
having only been in office for a limited time, I have come to truly 
appreciate how crucial the work before this Committee and the U.S. 
Congress is to the economy of Puerto Rico and, most importantly, to the 
welfare of the citizens of Puerto Rico.
    I understand the Subcommittee is interested specifically in the 
ongoing restructuring of the Puerto Rico Power Authority or ``PREPA.'' 
Before addressing the specifics of the PREPA restructuring, it is 
important to recognize the critical need to transform the energy 
infrastructure in Puerto Rico. Puerto Rico needs a reliable, cost-
effective and efficient electrical system, as well as an effective 
program of conservation and maximization of its water resource in order 
to support the island's socio-economic transformation.
                           issues with prepa
    Unfortunately, Puerto Rico does not currently have an energy and 
water service system suited to its current needs. Without changes, 
PREPA and the other corporations that render these essential services 
will stagnate and be unable to grow.
    PREPA's operations are negatively impacted by the age of its 
generating assets and the lack of capital to make the investments 
necessary to assure reliable service. PREPA's median plant age is more 
than 25 years older than the U.S. industry average. Without significant 
investment, PREPA cannot meet the applicable environmental standards. 
The problems with PREPA's infrastructure result in a high number of 
forced outages, poor efficiency within the system, a lack of 
reliability with the system and high costs. PREPA also owes over $9 
billion to its creditors and operates under serious liquidity 
constraints.
    This all translates into high electric rates. Today Puerto Ricans 
pay substantially more for electricity than do residents in the 
continental United States, and this in an economy where the median 
family income is approximately 33 percent of that in the United States. 
The high electricity costs negatively impacts both the ability of 
Puerto Rico to attract capital and to compete in a global economy. This 
situation is not sustainable for residents or for the Puerto Rican 
economy.
                         vision for the future
    My vision for PREPA is one that involves a modern and resilient 
transmission and distribution system with diverse sources of fuel 
including renewables and supported by private capital to invest in new 
and efficient generating capacity. The goal is to be able to deliver 
reliable energy at sustainable rates to the people and businesses of 
Puerto Rico. That vision includes a successful restructuring of PREPA.
    My specific plan for PREPA involves attracting private capital to 
develop new infrastructure, the use of clean fuel combined cycle 
technology to increase the dispatch of gas to the south coast, and the 
development of renewables and other cost-effective energy solutions 
including hydro-electric assets. We are also evaluating the viability 
of the Aguirre Gas Port.
    I also note that in the past, PREPA was frequently cited as an 
example of governmental dysfunction where political considerations 
over-rode true economic goals. In that regard, it is my view that the 
restructuring of PREPA must incorporate a governance model that 
facilitates investor and consumer confidence and minimizes political 
interference. At the same time, PREPA's governance cannot be 
disconnected from the overall energy policy of the island. In my view, 
the appropriate governance structure is one takes into account the 
concerns of all stakeholders.
                  the restructuring support agreement
    Since I took office, my team has worked diligently to assess both 
the long-standing and fundamental operational challenges facing PREPA 
and the proposed transaction set forth in the Restructuring Support 
Agreement or RSA that was negotiated by the prior administration with 
significant creditor constituencies. While we recognize and appreciate 
the efforts that many parties put into the RSA and understand that it 
provides a useful framework for discussion, my administration believes 
that any consensual restructuring requires modifications to the terms 
set forth in the RSA. Without providing an exhaustive list, our 
concerns include the impact of the transition charge on Puerto Rican 
ratepayers, the affect the transaction may have on the capital and 
liquidity available to PREPA to complete its operational transition, 
the failure of certain creditor groups to provide significant 
concessions, and the reality that the RSA does not provide for 
sufficient capital to close the transaction. I also note that there are 
material conditions beyond the control of the RSA parties such as the 
completion of the validation proceedings and the requirement of an 
investment grade rating that have not been achieved.
    After the RSA was signed in December of 2015, Congress, aided 
tremendously by this Subcommittee, passed PROMESA, which was signed 
into law by the President on June 30, 2016. It is noteworthy that 
Congress specifically stated in the very last provision of PROMESA that 
it was its sense that ``any durable solution for Puerto Rico's fiscal 
and economic crisis should include permanent, pro-growth fiscal reforms 
that feature, among other elements, a free flow of capital . . .''. I 
share that belief.
    Congress through PROMESA has provided Puerto Rico the tools 
necessary to achieve the fiscal and economic reforms needed to restore 
Puerto Rico's standing in the financial markets which will aid in its 
recovery. Indeed, the Oversight Board's certification of Puerto Rico's 
fiscal plan on March 13 represented an important first step in moving 
forward with Puerto Rico's good faith negotiations with its creditors 
and stakeholders with the intent and desire to achieve consensual 
agreements under the Title VI process and avert a potentially costly 
and litigious bankruptcy-type proceeding under Title III. My 
administration fully supports and is pursuing these types of consensual 
agreements as the most productive path to Puerto Rico emerging from its 
current fiscal and economic crisis as quickly and expeditiously as 
possible.
    With regard to PREPA specifically, the RSA remains in place at 
least through its current termination date of March 31, 2017. We intend 
to request an extension of that date from the RSA parties to allow for 
continued discussions at least through the expiration of the PROMESA 
stay. We are also looking forward to receiving the feedback of the 
Oversight Board on the PREPA fiscal plan so that we can proceed to 
certification of that plan.
                               conclusion
    I recognize that certain PREPA constituents would prefer that we 
simply accept the deal in the RSA without review or modification. But, 
these constituents must recognize that PREPA's restructuring does not 
exist in isolation. PREPA's restructuring is an important component of 
Puerto Rico's overall restructuring efforts and central to Puerto Rico 
being to meet its overall fiscal plan. As a result, any RSA or other 
transaction with constituents must provide and allow for not only an 
acceptable financial restructuring but also must lead to a transformed, 
rationalized and operationally improved PREPA offering broad economic 
upside based on utility efficiencies, a sustainable and affordable rate 
structure, public-private infrastructure investment and reliable energy 
for Puerto Rican consumers.
    I believe it would be irresponsible to simply accept the terms of 
any financial restructuring without fully understanding the path it 
provides for PREPA to improve its operations, increase its reliability, 
diversify and access new capital. Our analysis of PREPA's operations 
and the interplay with the RSA is ongoing and we continue to focus on 
potential modifications to the RSA that would recognize the interests 
of Puerto Rican ratepayers as well as creditors and other constituents. 
I am committed to continuing this hard work toward a meaningful 
restructuring in order to transform PREPA into a modern utility that 
will support the people of Puerto Rico and a strong and growing Puerto 
Rico economy.
    Thank you again for the opportunity to discuss these issues.

                                 ______
                                 

    Mr. LaMalfa. Governor, thank you for your opening 
testimony. And again, we will remind the Members that Committee 
Rule 3(d) imposes a 5-minute limit on questions for our 
Committee members, as well.
    So, the Chairman will recognize Members for any questions 
they may have. I will recognize myself first.
    Thank you again, Governor, for your presence today.
    Governor Rossello. Thank you, Chairman.
    Mr. LaMalfa. I will launch right into it here with--
yesterday's news was that, Governor, your administration 
released a proposal to address the PREPA debt situation. Has 
this proposal been provided directly to the creditors involved, 
where we have had an ongoing negotiation agreement, et cetera? 
Have they been made fully aware of the provisions of the 
proposal?
    Governor Rossello. As you know, there are several 
stakeholders involved in this proposal, and our team has 
engaged with many of them. Some of them, the meetings have not 
been able to be set up; but it is my understanding that we are 
continuing to pursue those meetings so that full information, a 
full disclosure, a conversation can ensue, and it is my 
understanding that tomorrow some of these negotiations will 
ensue, as well.
    Mr. LaMalfa. At this point they don't have the details on 
the proposal by administration yet?
    Governor Rossello. It is my understanding that they all do.
    Mr. LaMalfa. Pardon me?
    Governor Rossello. All of the uninsured bondholders have 
it.
    Mr. LaMalfa. All right. Again, there has been some delay in 
the process. I understand that you are new to the position 
there, and I appreciate that, being sworn in and getting 
started. But indeed, with the situation, there is not a lot of 
extra time for the island.
    So, do you believe that it has been worth delay and the 
time and the risk to implementation of the previous plan? Is 
this really bringing confidence for those folks that you must 
negotiate with?
    Governor Rossello. Well, if it is a non-sustainable plan, 
we feel that it is opportune for us to have a conversation. As 
you well alluded to, Chairman, I have been in office for 78 
days; and it has been my effort to design a fiscal oversight 
plan for Puerto Rico that includes all of these components.
    As you all know, the original RSA was proposed in December 
2015. We all know that a lot of things have changed since then. 
This Committee was fundamental in pushing forward the PROMESA 
Act that essentially changed the paradigm of governance in 
Puerto Rico. And it does affect and change the negotiations.
    So, in our view, we understand that there has been a lot of 
time, a lot of discussion previous to our administration. What 
I can assure you is that we are fully committed to having these 
discussions, these conversations, so that we can actually have 
a plan that provides affordable rates for the people of Puerto 
Rico and the businesses of Puerto Rico, that allows for 
economic growth to ensue in Puerto Rico that actually is 
sustainable----
    Mr. LaMalfa. Pardon me, Governor, timewise here--if PREPA 
is pushed to go into litigation because it would be required to 
under PROMESA, a Title III process, do you expect that outcome 
would be better for Puerto Rico, if indeed it was mired in 
litigation?
    Governor Rossello. No. As I stated in my opening statement, 
I champion and I value consensual renegotiation efforts. Now, 
that does not take a back seat to making thoughtful, careful 
analysis of the evidence that is out there. And what we are 
asking all of the bondholders and all of the stakeholders is 
for us to have an opportunity to evaluate, as we did the fiscal 
oversight plan, have some meaningful conversations, see what 
the baseline, what the reality of Puerto Rico is, and then come 
to a better agreement that allows for economic growth, 
sustainable rates in Puerto Rico, and again, a sustainable path 
forward.
    The RSA cannot be looked upon as something in isolation. It 
is not independent. As soon as the President signed into law 
the PROMESA bill on June 30, 2016, it gave the governor of 
Puerto Rico and its government the responsibility of making 
sure we had a strategy of the whole of government. And that 
includes PREPA.
    So, with our view, and our efforts in the fiscal plan, we 
cannot just separate PREPA from the whole of government that is 
involved in Puerto Rico.
    Mr. LaMalfa. OK. Well, again, recognizing there is a time 
crunch involved in coming to this, and much negotiation and 
good-faith agreement has been put in place, this Committee, I 
think, is going to see much urgency in coming to this, because 
we are going to be in a problem.
    With that, I will end my time here and recognize our 
Ranking Member, Mrs. Torres, for 5 minutes.
    Mrs. Torres. Thank you, Mr. Chairman. Governor, welcome to 
our Committee, and congratulations.
    Governor Rossello. Thank you.
    Mrs. Torres. I think that you have a very unique 
perspective, and a great opportunity given to you, where you 
don't have to own the past, but you have the unique experience 
of having been on the sidelines and having seen it from a very 
intimate way on how your father governed. So, congratulations 
also on your efforts to address Puerto Rico's debt crisis.
    Governor Rossello. Thank you.
    Mrs. Torres. We expect much from you. The number of young 
working-age people that are leaving the island is alarming. 
Every single day, more and more of the young people come to the 
mainland. They, frankly, do not see a future for themselves on 
the island. Work is scarce, and rents are very high, and 
certainly utilities are very high.
    How are you planning to address and incorporate these young 
people's needs into your plan for growth in Puerto Rico?
    Governor Rossello. Right, it is a great concern for us. 
Thank you for your comments, Ranking Member. It is a great 
concern and a priority for our administration to see how we can 
tackle the massive exodus and diaspora that we have in Puerto 
Rico.
    Of course, the exodus is an effect of certain actions that 
have been taken and that are occurring in Puerto Rico: a 
dwindling economy, problems in the healthcare system, a 
bureaucratic educational system that does not provide access, a 
best access, to the tools for our kids, and security concerns 
have been the driving force to having most of our young 
professionals leave Puerto Rico.
    So, what we have done is we have not totally proposed, but 
we have taken action. Since we have taken office, we have 
already converted into law 16 bills, most of them that go into 
the direction of fixing the fiscal problem in Puerto Rico and 
addressing the economic limitations that we have. But we are 
also committed to seeing other drivers, and how we can fix them 
so that we can make the quality of life for the people of 
Puerto Rico appropriate so they can stay.
    We are working, for example, on a healthcare model that 
will reduce costs, but that will actually give more access to 
the people of Puerto Rico, that will empower the people of 
Puerto Rico.
    Mrs. Torres. In your statement, sir, you also mention your 
plan for PREPA, that it involves attracting private capital for 
the purpose of developing new infrastructure using clean fuel, 
renewables, and other cost-effective energy solutions, such as 
hydro-electric assets. What is your outlook to make Puerto Rico 
less dependent on imported oil?
    Governor Rossello. It is a priority. And we have stated--I 
have for the Committee--and will submit what our strategy and 
our platform are; it is a detailed strategy and platform. And 
we have the fiscal plan, as well, and they include different 
strategies so that we can push that forward.
    Specifically, we are looking forward to having Puerto Rico 
be at least 15 to 20 percent in renewables. We are looking for 
a transition into gas. We are looking for infrastructure that 
can be generated through the private sector in collaboration 
with the government, using P3 models. We have made various law 
changes that will facilitate this effort, and understanding the 
time it takes to create novel infrastructure, we really want to 
get going, as soon as possible.
    Just a couple of weeks ago--well, about a week ago--there 
was a new Director of PREPA that was installed, and he is 
already making some of the critical changes in management, and 
he is already establishing the public policy and the 
discussions with stakeholders, so that we can have that path 
forward toward a less dependant energy--oil dependency.
    Mrs. Torres. One last thing I would like to say to you, 
Governor, is, having come from California, when I was first 
elected we had a $30 billion deficit that we have to deal with. 
Decisions that you have to make are not easy. Decisions that 
the government has to make are not easy. But I would caution 
that making those decisions on the backs of your public 
employees is not the best recipe for restructuring your debt. 
So, please revisit that and think of your public employees as 
an asset to your community.
    Governor Rossello. Well, if I may add, our fiscal plan is 
specifically directed to addressing that concern. We are 
committed to not only not having to have lay-offs, but also we 
don't have to reduce the time that the employees are actually 
working.
    It is a commitment. What we are doing is an operational 
shift. Puerto Rico, right now, has 131 agencies. That is way 
too much. We have a plan developed so that we can, in the next 
4 or 5 years, start reducing that to a structure that is more 
akin to 30 to 35 agencies, without having to impact public 
employees.
    How do we do this? We have a new P3 law that will enable 
collaboration with the private sector. We have government as a 
single employer law that will allow us to put public employees 
in the areas where they can most serve our people. So, it is 
part of our commitment, and I take that advice to heart.
    Miss Gonzalez-Colon [presiding]. Thank you, Ranking Member 
Torres. Now I will defer to the Chairman of the Full Committee, 
Mr. Bishop, for your turn.
    The Chairman. I will go last.
    Miss Gonzalez-Colon. OK. Thank you, Mr. Chairman. Then I 
will recognize myself for my 5 minutes. Chairman, I have never 
expected to be presiding on this hearing, and be interviewing 
and making questions to my governor. It is quite an honor to be 
here to do that.
    Governor Rossello. The honor is mine.
    Miss Gonzalez-Colon. I welcome Secretary of State, Luis 
Rivera Marin, and leaders from our island, legislators, and 
other officials.
    Governor, what provisions in the agreement give you the 
most pause here?
    Governor Rossello. Well, there are several concerns. Of 
course, as I said, our higher-level vision is to have a 
sustainable path that can have stable rates for Puerto Rico, 
and that could push forward our economy, that it is a vision 
that is encompassed in our holistic view of the fiscal 
situation in Puerto Rico, and the powers that the PROMESA bill 
has dictated to our government to enact change in a holistic 
view in government. So, that is one of the elements that 
preside over all of the concerns that we are viewing.
    There are several components that we understand. Number 
one, there is a new paradigm. After the signing of the PROMESA 
bill and it turns into law, it is a different set of 
circumstances that need to be generated over here.
    Number two, our team is concerned that the impact on rates 
might not be sustainable, and that will have a negative impact 
overall in the structure of the RSA, pushing forward.
    We also see that there is a lack of concessions from 
certain creditor groups that we feel need to sit down at the 
table and see how we can get to a common-sense agreement that 
is actually sustainable.
    There has been concern over the continuing validating 
proceedings, as well, because--some point to the July 1 
deadline, but the reality is, with the continuous proceedings, 
this agreement is not going to be signed before then, anyway. 
So, it is sort of a--it is not relevant to that discussion.
    So, those are some of the concerns. And again, Vice 
Chairwoman, what we want to do is have the opportunity to sit 
down--our team has done so, and we are willing to do it again--
and look for the best, most rational solution to this problem 
to see how all stakeholders have to participate, and that we 
can establish a long-standing, sustainable path for Puerto Rico 
growth.
    Miss Gonzalez-Colon. How much time you are looking forward 
to do those negotiations and sit and look for that plan?
    Governor Rossello. Well, certainly it is hard to tell. But, 
obviously, we are all aware of the time crunch. Our team is 
aware of the limitations, of the deadlines, but we are still 
pursuing them aggressively. I think it is in everybody's 
interest in these negotiations for us to have actual time to 
discuss what the important issues are.
    And I will give you an example. With the fiscal oversight 
plan that was certified, we asked for an extension. And now, 
history has showed that that extension was probably the 
difference between having our democratically-elected government 
put forth a plan that was certified, viable, realistic, versus 
having no chance at all to submit a plan.
    So, essentially, what we are asking is the same opportunity 
here. Let's sit down at the table, let's look at the 
opportunities, let's see what is the best path forward for all 
of the stakeholders involved over here, but let's always 
consider that this is an important effort, so that the people 
of Puerto Rico, the businesses of Puerto Rico, can enjoy 
sustainable rates.
    My view is the following: Let's not go over something that 
is not very well constructed, that is probably not sustainable, 
and that will put us in these chairs again in a couple of 
years. Let's do it, let's fix it once, and let's fix it right.
    Miss Gonzalez-Colon. Governor, you know that the date would 
be March 31?
    Governor Rossello. Yes.
    Miss Gonzalez-Colon. When do you understand any agreement 
could be reached, in your own view? Months? Weeks? How many? 
How much longer?
    Governor Rossello. If the Chair allows, I would like our 
Director of AAFAF to answer that question.
    Miss Gonzalez-Colon. I would like him to identify himself 
for the record.
    Mr. Portela-Franco. Good morning. My name is Gerardo 
Portela, Executive Director of AAFAF. We are currently 
negotiating with PREPA bondholders. We expect to resolve as 
quickly as possible this RSA. We are aware of the deadline, so 
we need to step to the table and talk to not only uninsured 
bondholders, but also monolines and the fuel line--PREPA.
    Miss Gonzalez-Colon. Thank you. Right now my time is 
finished, so I recognize Mr. Soto.
    Mr. Soto. Thank you, Chairwoman.
    Governor, bien venidos, welcome. We appreciate you being 
here today.
    Governor Rossello. Thank you.
    Mr. Soto. As you know, I come from Central Florida. Our 
areas are strongly linked, both culturally and economically, 
and a lot of those young people we want to make sure to have 
opportunities in Puerto Rico are landing in our district. And 
while we welcome them, we understand it is at the detriment of 
the island. So, we need to work together.
    PROMESA addressed the debt process, but it failed to 
address any economic stimulus. And our long-term goal, I think, 
is united, in that we need long-term economic prosperity for 
the island of Puerto Rico. And I believe we cannot get there 
through austerity alone.
    I want to applaud you, Governor, for your success in 
negotiating to avoid job cuts. That was a huge win, and an 
early one. Obviously, we remain concerned, all of us, about 
furloughs and pension cuts that I know you are continuing to 
negotiate. And I want to encourage my fellow peers on the 
Committee to consider other relief, whether it be Medicaid and 
Medicare parity, whether it be applying the earned income tax 
credit or the child tax credit to the first and second child--
since it only applies to the third--and beyond, as well as 
access to SBA and Ag. loans. I think the solution lies in the 
success of the Puerto Rican people, not austerity alone.
    Turning to PREPA, it appears that the average kilowatt 
hours, 18.88 cents in Puerto Rico, while it is an average of 
12.75 cents per kilowatt hour across our Nation. And knowing 
that energy is the life blood of any economy, what would the 
economic outcome be of the current plan, if it was implemented, 
Governor?
    Governor Rossello. Well, if it is implemented without--one 
of the critical aspects of this whole negotiation is that there 
needs to be an operational change linked to whatever the 
financial change is. We cannot just look upon making some 
financial changes and leaving our old infrastructure as is. 
This is one of our critical concerns.
    We want to establish sort of a path forward, where the 
financial renegotiation is also linked to establishing a modern 
infrastructure, collaboration with the private sector. So, 
those are our critical components. If we don't embark in that 
view--and our team's view is that it is filled with obstacles, 
the path forward, unless we have a credible and established 
plan to do so.
    The rates are going to go high. They are going to get 
higher, and this impacts the average citizen of Puerto Rico, 
but it also impacts growth. It impacts our industry. It will 
provoke more exodus of Puerto Ricans, and it will provoke more 
exodus of industry in Puerto Rico, which will reduce the 
overall rates that are being generated, the overall monies that 
are being generated from PREPA, which would make the agreement 
unsustainable.
    So, this is our concern. What we want to make sure is that 
whatever plan is established needs to have the operational 
component, so that we can modernize the infrastructure, as 
well.
    Mr. Soto. Has the administration done any economic analysis 
to show what decline in domestic product you would have on the 
island per any increase, or beyond that, so that we could get 
an idea of, as this stranglehold comes down with higher energy 
prices, what is the corresponding decline in economic output 
for the island, making this even a bigger problem then?
    Governor Rossello. Right. Our new executive director just 
got into PREPA, and he is putting together the team. They are 
working fast and diligently so that we can have these 
assessments.
    However, it is a clear obstacle to growth. It is a clear 
obstacle to quality of life. If you cannot pay your energy 
bills in Puerto Rico, it becomes harder to have a good quality 
of life. And people tend to point to that as one of the reasons 
that they leave, as well. If you have an unsustainable and 
unpredictable price or rate increases in Puerto Rico, it 
hampers industry, it hampers confidence for new industries to 
come in Puerto Rico.
    Now, connecting that to your first statement, we have 
already taken steps in Puerto Rico so that we can make a pro-
growth push. We have established certain models, such as the 
destination marketing organization for Puerto Rico, labor 
reform, we have a permits reform that will be enacted probably 
next week. We have a comprehensive taxing reform that we are 
looking at. But that is just part of the equation.
    There is--and I thank you for soliciting the aid of your 
fellow colleagues--there is another part that needs to come 
from Congress now. Different from the past, somebody would sit 
here and probably say, ``Give me more, give me more, give me 
more.'' We are here, as a government, showing that we are doing 
our part, that we are pushing forward an agenda, that we really 
want to make change, that we really want to focus on 
governance, that we want to reduce and take charge for that 
responsibility of reducing cost in government and pushing 
forward the economy.
    But that, in and of itself, will limit us. If the Congress 
can see that equal treatment, collaboration, and certain 
efforts be part of our holistic strategy, this will certainly 
help Puerto Rico push forward with a common-sense approach, 
with a committed government, and transparency efforts for its--
--
    Miss Gonzalez-Colon. Thank you, Governor. Thank you, Mr. 
Soto. Now we are having Mr. LaHood from Illinois.
    Mr. LaHood. Thank you, Madam Chair, and thank you, 
Governor, for being here today, for your testimony.
    Last year, when we passed PROMESA and debated that in this 
Committee, and there was a lot of work and effort and 
commitment that went into that legislation, and I think a lot 
of us thought, because of all that, we passed that and would 
not be hearing from you, and would not be dealing with this 
issue coming into 2017. But here we are.
    And in listening to you today, Governor, and this proposed 
financing deal, maybe walk me through. If this deal fails, what 
are the short- and long-term ramifications for the island?
    Governor Rossello. Well, of course, our aim is for this 
deal to be successful. Of course, PROMESA has some provisions 
that include Title III restructuring-like efforts. If a deal is 
not able to be executed, then those provisions, not only for 
PREPA but for other components of the government, would be 
executed.
    Now, it has been my strong view and our public policy that 
we want to engage in consensual renegotiation efforts. So, what 
we are asking is for that opportunity. Don't ask us to rubber-
stamp a deal that we have not had ample time to discuss, that 
we have not seen what the ramifications are, that we are 
concerned that it is not even going to be sustainable for the 
bondholders, let alone for the ratepayer in Puerto Rico. Let's 
sit down, see what the data is, and then let's come up with a 
common-sense solution.
    We have done it in the past. I mean this Committee did it 
in the past, passing PROMESA, which I know was a challenge. We 
have done it a couple of weeks back, when we passed a fiscal 
oversight plan for Puerto Rico, which was a challenge, as well. 
I feel we can do the same. What I am asking is for us to have 
the opportunity for our team to sit at the same table, to talk 
with the available evidence, with the data, and see what the 
best path forward is for Puerto Rico and mitigate some of the 
concerns that we have on this deal.
    Mr. LaHood. There was a Wall Street Journal article on the 
Puerto Rico crisis--I think it was from January 23--that talked 
about some of the consequences of Puerto Rico not being able to 
renew contracts with healthcare providers without the financial 
relief. Can you give me a status on that?
    Governor Rossello. Yes, it is a critical component for this 
effort. We are actually asking for Puerto Rico to have the same 
consideration, and I commend the Vice Chairwoman's leadership 
on this effort for Puerto Rico to get an extension, as well, 
for the Medicaid and Medicare funds. And here is why.
    In order for us to have the appropriate renegotiation or 
negotiation tools, we need to have the funding accessible to us 
now. We are making certain efforts so that we can reduce costs 
in our healthcare system. I can let you know that we have 
already proposed to reduce administrative fees as part of our 
plan. We have capped our per-member per-month as a strategy for 
a novel plan that will empower the citizen and the patient to 
have more of an effect. We are financing our own efforts to 
detect fraud. And here we feel there are vast areas of 
opportunities. And we are rationalizing what the system offers, 
so that we do not have overages and uses.
    So, we are putting our part. We see that in the first year 
we can have $300 million in reductions in the healthcare 
system. And, with the novel plan that we are proposing, which 
we think would be a model to follow in the United States, as 
well, we can see an additional $500 million without affecting 
the access of health care to the people.
    So, what I am stating over here right now is we are putting 
our part. We have a strategy. Stakeholders, everybody in Puerto 
Rico, is sharing in part of this decision making, is sharing in 
part of the actions that are being taken. I feel that Congress 
really needs to act in the next coming weeks, particularly in 
the continuous resolution, so that Puerto Rico can have the 
space to negotiate those contracts.
    Mr. LaHood. And, Governor, in that same article that I 
referenced earlier, there is a statement in here that Puerto 
Rico currently owes $17 billion in sales tax bonds and another 
$13 billion in general obligation bonds. Since this January 
article, has that increased? And is that the highest obligation 
that Puerto Rico has ever had?
    Governor Rossello. It has not increased, and I believe it 
is the highest. But it has not increased.
    Mr. LaHood. OK. And that is the highest in the history of 
the island, correct, where it is at right now?
    Governor Rossello. Well, if you see the path of the debt, 
it has been progressive, right? So, it has been higher. But I 
will defer to our fiscal agent to respond to that.
    Mr. Portela-Franco. Good morning. Yes, between GOs and 
COFINAs, it is around $30 billion. There have not been any 
issuances since the last one. In 2014, there was a GO issuance. 
So, it is $30 billion right now, it has not increased.
    Mr. LaHood. Thank you. Thank you, Chair.
    Miss Gonzalez-Colon. Thank you, Mr. LaHood. Now we 
recognize our Ranking Member, Mr. Grijalva.
    Mr. Grijalva. Thank you very much, Madam Chair, and 
welcome, Governor. Glad you are with us.
    Governor Rossello. Thank you, Mr. Grijalva.
    Mr. Grijalva. Before he left office, your predecessor 
submitted a fiscal plan to the Oversight Board, which they 
rejected. They called it unrealistic, and particularly 
unrealistic in its reliance on Federal assistance, which they 
said was uncertain. And given the whole Medicaid discussion and 
debate we are having about health care in this country and what 
happens to Obamacare, I would say that they were pretty 
accurate about that uncertainty, in terms of not only extending 
the program, but the number of people that would be covered by 
that program. And I understand the reimbursement issue that has 
been unfair from the beginning for Puerto Rico.
    They initially, if I believe correctly--you could correct 
me, Governor--rejected your fiscal plan. Then, on March 13 of 
this year, they certified your amended plan. The plan, as I 
understand it, includes eliminated subsidies to municipalities 
and University of Puerto Rico and non-profit entities. It also 
reduces government spending by $300 million, which was 
mentioned, in health spending. And it deals with some 
reductions in pensions, between $2,500 to $10,000 monthly 
payments, and the privatization of certain government entities 
and functions within Puerto Rico.
    Given all that, and the fact that, as you have indicated in 
your testimony, more needs to be done in terms of coming to a 
final agreement to lessen the pain on the citizens of this 
country and Puerto Rico, essentially to move forward, what are 
we talking about here, Governor? Are we talking about an 
additional period of time in order to continue to work on the 
details of a fiscal plan, going forward? Or is it a question of 
additional time now for negotiations and collaboration, as you 
stated?
    Or in order to reach a level--I mean you proposed so much 
reductions, the Oversight Board proposes another set of 
reductions. Are we looking for a middle ground between those 
two points? If I may, thank you.
    Governor Rossello. Yes. So there are two issues over here, 
right? There is the RSA component, and then there is a fiscal 
oversight plan. Let me state that the board never rejected our 
proposal, they just established a letter with some of the 
concerns that they had. That allowed us to have the opportunity 
to sit down, our team to sit down and look for, to share 
numbers, have a discussion.
    And what I can assure you is that the policy implemented in 
our plan is essentially intact, the previous version and the 
modified version. What we did make some changes to was in terms 
of some of the underlying economic projections. So, everything 
that we proposed--and I brought the two versions of our copy, 
we brought our proposal that has been established, it is 
written in English as well, so that you can see the policy, and 
we have the two versions of the fiscal plan, as well, so that 
they can be worked on. So, in terms of the fiscal plan, it is 
certified, we are working on it, we are pushing forward. And, 
we did so without having to eliminate access to health care. We 
did so with the opportunity to better our education system. We 
did so by guaranteeing that the reductions and the right-sizing 
of government did not affect our workers, and we did so with 
establishing a path for the reduction, in terms of the 
pensions, to be progressive so that those that have the least 
would not be affected.
    Now, what we are discussing here today is the opportunity 
to essentially do the same with the RSA, to sit down, to see 
all of the data, to see what the new paradigm is, and to not 
expect a new administration to rubber-stamp a deal that has 
several concerns, from our view. And, without proper discussion 
and looking for a path that will ensure a stable rate for 
Puerto Ricans and that will ensure a path of growth in the 
economy, we are not going to rubber-stamp it.
    We are, however, willing to sit down. And, of course, if we 
do have more time, that is much better. But the timelines were 
not set by our administration. The timelines were set 
previously. We are working with them. If we do get more time, I 
can assure you that our team will be working diligently to get 
the best solution for all stakeholders, but particularly to the 
people of Puerto Rico.
    Mr. Grijalva. Thank you.
    Governor Rossello. Thank you.
    Mr. Grijalva. I yield back.
    Miss Gonzalez-Colon. Thank you, Mr. Grijalva. Thank you, 
Governor. Now we recognize General Bergman.
    Mr. Bergman. Thanks, Madam Vice Chair.
    Governor, thanks for your time today.
    Governor Rossello. Thank you.
    Mr. Bergman. These are not easy times for you, I am sure. 
What is your level of concern about what is going to happen to 
Puerto Rico, as a whole, and its access to credit, as a whole, 
if the RSA is not agreed to in a timely manner?
    Governor Rossello. Well obviously, all of these things are 
concerning. But the reality is that I would be more concerned 
if we signed a deal that was not good and that would put us 
back in the position in several years where we demonstrated it 
was unsustainable.
    So, I think, if we can agree to sit down, look for the 
various alternatives, see and make sure--I mean I know 
stakeholders, and particularly some stakeholders, are going to 
be here for the long haul. So, it is in their best interests, 
as it is in our best interest, to have a strategy of growth for 
Puerto Rico.
    And what we want to do is, we want to make sure that the 
RSA complies with that. We want to make sure that it has the 
best components. We want to make sure that certain creditors 
make the necessary concessions that they need to make, and we 
want to make sure we have, again, a path for sustainable growth 
in Puerto Rico, and stable rates.
    Mr. Bergman. OK, thank you. Since becoming governor, have 
you had any dialogue with certain creditors? And were there any 
changes that you might have offered or they might have offered, 
but especially that you have offered that they have been 
supportive of?
    Governor Rossello. We have established a conversation with 
our fiscal agent. They are empowered--the AAFAF is empowered to 
lead these conversations--of course in coordination and having 
talked with the fiscal Oversight Board, as well. And our 
Director of AAFAF, Mr. Portela, could probably answer that 
question better than I can.
    Mr. Portela-Franco. Good morning. We have had 
conversations, preliminary conversations, with different 
bondholder groups. But before then, and as I expressed when we 
started office, we needed to focus on getting a fiscal plan 
approved and certified. We did that last week after continuous 
20-hour days.
    When we got that plan certified, we now have the number, 
that surplus, that we can work with, and we do not have to 
negotiate in a vacuum. Once certified, we have been in constant 
dialogue with some bondholders. And again, we want to have 
good-faith negotiations with all bondholders in a Title VI, 
including PREPA bondholders and stakeholders, as well.
    Mr. Bergman. Thank you. Madam Vice Chair, I yield back.
    Miss Gonzalez-Colon. Thank you, General. Now it is the turn 
of the Chairman of this Committee, Mr. Bishop.
    The Chairman. OK, thank you. And, Governor, I want to thank 
you for being here, taking the time to do it. I appreciate the 
way you have approached this position and this situation, and I 
appreciate that you and your administration have come up with 
data that--we have long been waiting to see that data. And you 
are doing it the appropriate way.
    I do have one sense of frustration, simply because this 
Committee cannot actually create more time. I guess if we were 
Senators we could. We could just declare 7 days to be 1 day, 
and you can get away with it.
    [Laughter.]
    The Chairman. So, the question I have, and this is going to 
be very quick because we do have another panel of experts that 
we need to have testify--just in your opinion, what do you 
think is the likelihood of that March 31 deadline being 
extended? We have all played around with that. What do you 
think is the likelihood of actually getting that extension?
    Governor Rossello. Well, I mean, this deadline has been 
extended in the past. I think it is in everybody's best 
interest to do so. If we feel we can find a better common-sense 
solution--and again, I am not asking you to----
    The Chairman. You are comfortable it actually can be 
extended?
    Governor Rossello. I am, and I hope it can----
    The Chairman. What would the consequences be if it were not 
extended?
    Governor Rossello. Well, again, we are still going to be 
working within the timetable. We recognize what the deadlines 
are. And, as I stated earlier, our team is going to be meeting 
or is asking for several meetings. We must admit we have had 
difficulties setting meetings with some of the creditors. But 
we are asking for that so that we can use whatever time we have 
as best and as efficiently as we can.
    The Chairman. Thank you. I appreciate that. And once again, 
I appreciate you being up here.
    Governor Rossello. Thank you, so much.
    The Chairman. Thank you for that. Let me yield back. We 
have two other people who are not part of our panel. I 
appreciate them being here as well. Let me give them a chance 
to get some questions done. I will yield back.
    Miss Gonzalez-Colon. Thank you, Mr. Chairman. Now we 
recognize Mr. Serrano.
    Mr. Serrano. Thank you so much. Thank you, Mr. Chairman, 
for allowing us to be here today, and Madam Vice Chair. And, 
very briefly, you remind me when I was in the State Assembly 
and we could not pass a budget, we stopped the clock at 
midnight. And sometimes Friday lasted until Tuesday, and it was 
a very long Friday.
    [Laughter.]
    The Chairman. Just don't tell them how to do that.
    [Laughter.]
    Mr. Serrano. No, this is something they should not learn 
how to do.
    So, Governor, thank you for being here and congratulations 
on your victory, on your administration's victory.
    When Ms. Velazquez and I voted for PROMESA, we took a lot 
of heat. That is fine. And we took it during a primary season. 
That is not fine.
    [Laughter.]
    Mr. Serrano. But things worked out well. The criticism is 
still there. There are still some folks who think we have the 
ability to undo PROMESA.
    One of the concerns was that PROMESA was going to over-run 
Puerto Rico, that Puerto Rico would not have anything to say. 
This government would just be there as puppets, if you will.
    My question is not on factual stuff, but actually on 
procedure, and so on. What is the relationship--and please 
don't say it is fine. We know it is fine.
    Governor Rossello. How about it is good?
    [Laughter.]
    Mr. Serrano. How do you interact with this other governing 
body? Because it is a unique situation. We lived through it in 
New York City in the 1970s, when I first got to the State 
Assembly. And I remember that we had two governments at the 
same time.
    Governor Rossello. Yes.
    Mr. Serrano. How do you deal with that? And how much 
trouble has it been? And you can be honest and tell us if there 
have been times when you have had to lock heads to work on 
something.
    Governor Rossello. Well, certainly, I can tell you that it 
has been respectful, it has been a continuous conversation. 
Otherwise, I don't think we would have had a fiscal plan that 
was certified. So, it is a continuous process, it is a new 
paradigm.
    I think, even relative to the New York situation, it is a 
new paradigm, because New York is a city, it always has its 
state to back it. Puerto Rico is a colonial territory, and we 
have no other way of having certain empowerments, or certain 
impact in terms of the way Congress will be acting, as opposed 
to our non-voting delegate that--she is doing everything, and 
we are very proud of her efforts here in Washington.
    So, the relationship has been respectful. We have been able 
to engage in dialogue. I think that is critical. But we need to 
recognize what the dividing lines are. And I say this with all 
respect. The fiscal Oversight Board here is established so 
that, number one, we can meet or we can reduce or eliminate the 
gap between what the revenues and expenses are in government, 
and then we can gain access to the markets. They are not here 
to determine what the public policy for Puerto Rico is. That is 
my job. That is my government's job.
    Up until now, I can say that we have been able to execute 
that way. This is why we are content that we were able to pass 
a plan for Puerto Rico, a fiscal plan, based on the public 
policy that we proposed. It is an ongoing relationship. I can 
tell you that, up until now, it has been respectful and we have 
had opportunities. And, of course, as in any type of 
relationship, we are going to have disagreements, and those are 
going to be clear. We have disagreements based on what the 
policy should be for implementing a plan.
    There was a suggestion, that in the right-sizing of 
government we have to lay off somewhere close to 45,000 people. 
Our approach was significantly different. We approached with 
attrition. We established a path forward for a new government. 
We reduced certain subsidies. In that sense we were able to 
maintain our public workforce, pushing forward.
    And we did the same for health care. Reducing access to 
health care was not an option for us. We want to have the 
people of Puerto Rico insured, and we want to have them have 
the power to choose how they get their services, and the same 
for education, the same for pensions.
    So, up until now, it has been respectful. And my hope is 
that it remains that way.
    Mr. Serrano. Very briefly, you went into my second 
question, which was how did you--you said you were working on 
reducing government and so on without hurting the workers. 
Could you expand a little bit on that? Because----
    Governor Rossello. Of course.
    Mr. Serrano [continuing]. That sounds like a contradiction. 
I mean usually it is firing people, you know.
    Governor Rossello. It does. We will leave the fiscal plan 
for the members to ensue, but essentially, it stems from 
recognizing that the vast majority of expenses come from 
operational costs in our government. And it is precisely 
because we have a 131-agency structure in Puerto Rico now. That 
surprises many people when we state, because typically, in 
their local governments, they have a much more reduced 
operational structure. So, that is one.
    Number two, we started reducing, by executive order on the 
same day I swore oath, our political appointees, we started 
reducing what the contracting paradigm was for Puerto Rico, as 
well, at least 10 percent. But we are making headways to 
increase that.
    We started putting more controls into what the expenditures 
were because what we typically had was over-budgeting and over-
expenses that would then be translated into those deficits.
    So, I would say, Congressman, that we are having a 
responsible government that is actually reducing the expenses, 
but it is taking the opportunity to make a more effective 
government than what we have had in the past--131 agencies that 
do not communicate with each other that are marred with 
bureaucratic processes, that duplicitousness is not healthy for 
Puerto Rico.
    So, in this time of crisis, in these times of challenges, 
we found opportunities. And in certain--in our area of right-
sizing government, it is explained in detail.
    Miss Gonzalez-Colon. Thank you.
    Mr. Serrano. Thank you very much. Let me just close with 
this. Your biggest challenge, Mr. Governor, is that promise you 
made to get Team Rubio to Puerto Rico by tomorrow.
    [Laughter.]
    Governor Rossello. How about if you dye your hair, I will 
dye mine?
    Mr. Serrano. Because they all have to go back to spring 
training by tomorrow morning.
    Miss Gonzalez-Colon. Thank you, Mr. Serrano. Right now we 
will recognize Ms. Velazquez.
    Ms. Velazquez. Thank you so much. I want to thank the 
Chairman, Mr. Bishop, and the Ranking Member, Mr. Grijalva, and 
both the Subcommittee Chair and Ranking Member, and the 
gentlelady from Puerto Rico.
    I also want to commend Governor Rossello for revisiting the 
original PREPA and for seeking more favorable terms for the 
people of Puerto Rico.
    I also would like to ask, Governor--you said that when we 
passed PROMESA it provides the tool for the government of 
Puerto Rico and the board to restructure the public debt, and 
that we should not treat the PREPA deal or the PREPA crisis 
isolated from the whole island fiscal crisis, that they are 
both intertwined. Isn't it?
    Governor Rossello. Yes. That is correct.
    Ms. Velazquez. I was born and grew up in Puerto Rico. I 
know all about politics in Puerto Rico. My question to you, Mr. 
Governor, part of the crisis of PREPA is embedded in the fact 
that, as an institution, it has been traditionally politicized 
and that, for the first time, finally, it is de-politicized, 
that there is a new board with top-rate professionals, 
including management of top energy companies in the United 
States.
    So, is it your intention to allow for that board to 
continue, those board members to continue in their capacity?
    Governor Rossello. It is my intention to have a 
conversation. And, of course, if they are willing, or whoever 
is willing to push forward our public policy, then that will be 
the new board.
    So, this is a very important point: We can have the best or 
grade-A professionals, but if their public policy opposes our 
fiscal policy and our operational changes policy, then they 
cannot be part of this.
    Ms. Velazquez. OK. And I hope that when appointments are 
made, they are made based on what is best for the interests of 
the people of Puerto Rico.
    Governor Rossello. Of course, always. I will, however, 
caution that these appointments were made in December 2016. I 
was already elected governor. There was no conversation with me 
about this. It was just essentially imposed. And again, 
everybody knew at this juncture that I have to present the 
fiscal oversight plan for Puerto Rico that would take the 
government, as a whole, in terms of its view. So, I think it 
needs to be----
    Ms. Velazquez. Thank you, Governor. My colleague from 
California, Mrs. Torres, asked you if you intend to have a plan 
to increase the energy sector in Puerto Rico, to diversify the 
energy, the generation of energy in Puerto Rico, is it part of 
that plan to privatize some of those functions?
    Governor Rossello. It is part of the plan to create P3s, 
public-private alliances, yes. We want to create P3s for 
generations. Puerto Rico or PREPA does not have the cash right 
now or the wherewithal to generate such structure, and we feel 
that it would be beneficial.
    In fact, we have passed into law a version that part of 
that margin that gets generated would go into the pension 
systems. One of the effects that will allow us to have more 
cash into the pension systems, as well, would allow us to have 
stable rates in Puerto Rico. And, of course, a stable energy 
system.
    Ms. Velazquez. Thank you, Mr. Governor. Governor, if 
voluntary negotiations with all 12 bondholder groups and other 
creditors of the central government are unsuccessful in 
producing a sustainable level of debt that is consistent with 
the certified fiscal plan on or before the expiration of 
PROMESA's automatic stay against litigation on May 1, would you 
support the Oversight Board use of Title III to restructure the 
debt?
    Governor Rossello. It is part of the structure that we 
have. But our aim, again, is a Title VI renegotiation effort. 
And I must stress----
    Ms. Velazquez. I understand that. But my question is, if 
those negotiations are proven to not be successful, will you 
support the board to use one of the most powerful tools that 
were provided under this bill?
    Remember one thing: Congressman Serrano and I, we brought 
this legislation to the finish line. I can promise you that. 
So, we did it, and we voted for it, because we believe that it 
was the best tool for Puerto Rico.
    Governor Rossello. Right. Well, everything is on the table, 
Madam, but what we understand is that it is the best solution 
for all stakeholders to seek a Title VI renegotiation effort.
    So, this is our caution, and this is our message. We are 
willing to do so, we are willing to sit down, we are willing to 
be rationale. We have already presented a plan that has been 
certified. It has been validated. We can do the same with our 
renegotiation efforts, so our call to all 19 creditors is for 
us to----
    Ms. Velazquez. May 1.
    Governor Rossello. Yes.
    Ms. Velazquez. The clock is ticking. The people of Puerto 
Rico are suffering. And we need to restructure the public debt 
in a way that you have the liquidity and the capital that you 
need in order to provide services for the children, safety of 
the people of Puerto Rico.
    Thank you, Mr. Chairman.
    Governor Rossello. Madam, I was elected on this platform, 
to renegotiate. I was elected by the people of Puerto Rico. And 
this is what they elected me to do, and I will do so.
    Mr. LaMalfa [presiding]. All right, thank you.
    Governor, again, we do thank you for your testimony. It has 
been very valuable to the Committee and for Members, for their 
questions. If there are additional questions for the Governor, 
we will ask you to respond to those Members, to the Committee, 
in writing. Under Committee Rule 3(o), members of the Committee 
must submit witness questions within 3 business days following 
the hearing, and the hearing record will be held open for 10 
business days for these responses.
    So, Governor, I wish you the best of luck on this. Indeed, 
with the challenges you face with RSA extension just 9 days now 
needed, and then a large PREPA payment due by July 1, this 
Committee is very interested in the results that are needed, so 
that Puerto Rico and its people will be well served. So, best 
wishes to you on that, and we look forward to seeing good 
things happen.
    Thank you again for your testimony and your attendance 
today.
    Governor Rossello. Thank you, Mr. Chairman. Thank you to 
all the Members. And again, I reiterate that we will be working 
hard. Our team is available to do this, and we want to fix it 
once, and we want to fix it right.
    Mr. LaMalfa. OK, thank you. Thank you, sir. You are 
excused.
    Now we want to introduce our second panel of witnesses 
here. In order, we will have Mr. Jose Carrion, III. He is 
Chairman of the Financial Oversight and Management Board of 
Puerto Rico--please take your seats as I name you.
    We also have Mr. Luis Benitez, who is the Chairman of the 
PREPA Governing Board.
    And we have Mr. Stephen Spencer, who is the Managing 
Director of Houlihan Lokey, and on behalf of Franklin Advisers 
and Oppenheimer Funds.
    OK, we have next Adam Bergonzi, Managing Director and Chief 
Risk Officer of the National Public Finance Guarantee 
Corporation--just please go ahead and take your seats as we go.
    Next, we will have Rob Bryngelson, President and CEO of 
Excelerate Energy.
    And finally, we have Ms. Ana Matosantos, a member of the 
Financial Oversight and Management Board of Puerto Rico.
    So, as you are seated here, I will remind the witnesses 
that, under our Committee Rules, each of you must limit your 
oral statements to 5 minutes. But again, the entire statement 
will be allowed to appear in the hearing record, should it be 
longer than that.
    And again, the same rules apply on the 5 minutes. The 
lights on the microphone will turn green as you start. After 4 
minutes, the yellow light will come on. And then, when the red 
light comes on, I would ask you to please complete your 
statement to be timely here.
    OK. And you know about pressing the button when you are 
ready to go. We are going to have the entire panel give all 
their testimony before we will go to questions from our 
Members. So--OK? Yes, we will do that. So----
    Mr. Carrion. Shall I begin?
    Mr. LaMalfa. We will hold off a minute while everybody gets 
settled back in.
    [Pause.]
    Mr. LaMalfa. OK. If we could please finish finding our 
seats. The Chair would like to go ahead and recognize Mr. 
Carrion for your testimony for 5 minutes.

    STATEMENT OF JOSE B. CARRION, III, CHAIRMAN, FINANCIAL 
OVERSIGHT AND MANAGEMENT BOARD OF PUERTO RICO, SAN JUAN, PUERTO 
                              RICO

    Mr. Carrion. Thank you, Chairman LaMalfa, for your 
leadership in holding this hearing. Many thanks also to Ranking 
Member Torres, Vice Chair Gonzalez-Colon, and, indeed, all the 
members of the Subcommittee, for their interest in this matter.
    Before addressing the subject of the Puerto Rico Electric 
Power Authority's Restructuring Support Agreement, I would like 
to take this opportunity to tell you of the important progress 
the Oversight Board has made since its appointment last year.
    At our five public board meetings thus far, we have adopted 
the board's bylaws and codes of ethics; identified the Puerto 
Rico entities, including PREPA, subject to financial oversight 
under PROMESA; assessed the fiscal plan initially proposed by 
the prior governor of Puerto Rico, and listened to testimony 
from a wide range of stakeholders.
    One of the most difficult issues the board has had to 
tackle in advancing the PROMESA agenda has been determining as 
accurately as possible just what the government of Puerto 
Rico's revenues and expenses are. To assist in that process, we 
hired a group of advisors and key senior staff. The board and 
its advisors have worked closely with the government of Puerto 
Rico and its advisors, with the former governor, Alejandro 
Garcia Padilla, and, since January, with Governor Ricardo 
Rossello Nevares.
    We have also participated in dozens of meetings with Puerto 
Rico creditor groups, resuming conversations that were 
commenced in the prior administration. On January 18, we sent 
Governor Rossello a substantial letter outlining the baseline 
scenario for a fiscal plan required by PROMESA, and the kinds 
of savings and the additional revenue that would be required to 
achieve fiscal balance.
    At Governor Rossello's request, we extended the stay of 
creditor enforcement efforts from February 15 to May 1, and 
gave the new administration a short extension of our original 
deadline for certifying a fiscal plan to March 15, 2017.
    On February 28, the Governor submitted their proposed 
fiscal plan. Upon careful evaluation, we notified the Governor 
of certain deficiencies that would have to be corrected for the 
plan to comply with PROMESA. Shortly thereafter, the Governor 
submitted an amended fiscal plan, which the board certified 
with a couple of additional amendments last Monday, March 13.
    The certified fiscal plan charts a path to achieve fiscal 
equilibrium in 3 years, provide adequate funding for essential 
services, maintain the solvency of government pension plans, 
restructure the government's long-term debts and obligations, 
and adopt the structural reforms necessary to restore economic 
growth and opportunity to all in Puerto Rico.
    Achieving these objectives will not be easy. The cuts are 
deep and, in some instances, unfortunately, will be painful. 
Over time the government has made commitments to its 
constituents, including employees, pensioners, college 
students, enrollees in healthcare programs, bondholders, and 
others that cannot be met based on realistic measures of tax 
revenue the economy can currently support. However we define 
the problem, whether in terms of budget deficits, indebtedness, 
unfunded pensions, or the imminent risk of simply running out 
of money to pay bills, Puerto Rico faces a nearly existential 
financial shortfall.
    Now, with a certified fiscal plan in place, the 
administration and the board can discuss specific restructuring 
proposals with creditor groups. We hope to secure consensual 
restructurings under the provision of Title VI of PROMESA 
before other tools such as Title III are utilized. Much work 
remains to be done, but the certification of a detailed fiscal 
plan was a major milestone, one that we trust will provide the 
foundation for real economic growth and, over time, restore 
opportunity to the people of Puerto Rico.
    But even as we pursue and accomplish PROMESA's required 
objectives of fiscal equilibrium, balanced budgets, and debt 
restructuring, Puerto Rico will hardly come out of its economic 
and fiscal crisis unless it also manages to restore economic 
growth. Reversing the economic contraction that has afflicted 
Puerto Rico's economy for far too many years and restoring 
economic growth for the island are at the core of the board's 
position in support of the government of Puerto Rico's stated 
intention to review the terms and negotiate amendments to the 
PREPA RSA to lower the projected increases in energy costs that 
it requires.
    The efficient production of electricity is critical to the 
economic recovery of Puerto Rico, which, in turn, has a strong 
correlation to government tax revenue growth, and would have a 
significant impact in the future of primary surplus available 
for debt service on Puerto Rico debt obligations. For this 
reason, the board supports an expedited PREPA RSA negotiation 
between the government and creditors that results in the lowest 
electric power rate possible.
    Finally, the board also supports initiatives to strengthen 
the Puerto Rico Energy Commission. We believe that the model of 
an independent commission with oversight authority over the 
utility is the right approach to providing the necessary checks 
and balances as PREPA moves forward in its transition process.
    Thank you, Mr. Chairman, for your leadership. And thanks to 
all Members for your attention to this matter.
    [The prepared statement of Mr. Carrion follows:]
    Prepared Statement of Jose B. Carrion III, Chairman, Financial 
             Oversight and Management Board for Puerto Rico
    Good morning. My name is Jose Carrion. I am the Chairman of the 
Financial Oversight and Management Board for Puerto Rico.
    I would like to thank Chairman LaMalfa for his leadership in 
holding this oversight hearing on ``The Status of the Puerto Rico 
Electric Power Authority Restructuring Support Agreement.'' I would 
also like to recognize and thank Ranking Member Torres, Vice Chair 
Gonzalez-Colon and, indeed, all the members of this Subcommittee for 
their interest in and attention to this matter.
    Before addressing the specific subject of this hearing, though, I 
would like to take this opportunity to apprise the Subcommittee of the 
important progress the Board has accomplished since its appointment on 
August 31 of last year.
    During the debates leading to the enactment last June of the 
bipartisan Puerto Rico Oversight, Management and Economic Stability Act 
(``PROMESA'') that created the Oversight Board, Puerto Rico's 
devastating financial crisis was constantly in the news. Since then, 
however, there has been relatively little coverage outside of Puerto 
Rico.
    So it is fair to ask: what kind of progress has the Oversight Board 
made in the last few months?
    The short answer is ``a lot.''
    At our five public board meetings thus far--two in Puerto Rico and 
three in New York--we have adopted the Board's bylaws and Code of 
Ethics, identified a number of Puerto Rico entities--including the 
Puerto Rico Electric Power Authority (``PREPA'')--as subject to the 
financial oversight requirements of PROMESA, carefully assessed the 
fiscal plan initially proposed by the prior governor of Puerto Rico, 
and listened to testimony from a wide range of stakeholders. In 
addition to the public meetings, the Board has met constantly both in 
person and by phone.
    One of the most difficult issues the Oversight Board has had to 
tackle in advancing the PROMESA agenda has been determining as 
accurately as possible just what the government of Puerto Rico's 
revenues and expenses are. This is a far more challenging task than 
you, as Federal lawmakers, may imagine. The Government's most recent 
audited financial statements cover the period ending June 30, 2014. If 
Puerto Rico's finances were straightforward, it might not be difficult 
to bring these numbers up to date. But the government of Puerto Rico 
has well over 100 different governmental entities, and there are 18 
different issuers of debt.
    To assist in the process, we have hired a remarkable group of 
advisors, including two key senior staff officers, interim executive 
director Ramon Ruiz-Comas and general counsel Jaime El Koury, as well 
as a strategic advisory firm, two economists, a financial advisory 
firm, and an accounting firm, as well as an outside law firm and local 
Puerto Rico legal counsel. The Oversight Board and its advisors have 
worked closely with the government of Puerto Rico and its advisors, 
first with former Governor Alejandro Garcia Padilla and, since January, 
with the new administration of Governor Ricardo Rossello Nevares.
    Although assessing Puerto Rico's revenues and expenses and setting 
the parameters for the fiscal plan have been our primary objectives, we 
also have participated with Governor Rossello's advisors in dozens of 
meetings with Puerto Rico's creditor groups, resuming conversations 
that were commenced in the prior administration.
    On January 18, we sent Governor Rossello a substantial letter 
outlining the ``baseline scenario'' for a fiscal plan--that is, the 
difference between Puerto Rico's revenues and expenditures, assuming 
that Puerto Rico does not receive any new funding from Congress. Our 
findings confirmed just how dire Puerto Rico's financial crisis is. The 
average expected deficit is $7 billion each year over the next 10 
years. The letter outlined the kinds of savings that would need to be 
made and the additional revenue that would have to be generated in 
order to obtain fiscal balance.
    At Governor Rossello's request, during our January 28, 2017 
meeting, we extended the stay on creditor enforcement efforts from 
February 15 to May 1, as we were authorized to do under PROMESA, and 
gave the new administration a short extension of our original deadline 
for certifying a fiscal plan to March 15, 2017.
    On February 28, the Governor and his advisors submitted their 
proposed fiscal plan. Upon careful evaluation, we notified the Governor 
of certain deficiencies that would have to be corrected in order for 
the plan to comply with the 14 requirements set forth in PROMESA. On 
March 8, the Board released an independent analysis conducted by Ernst 
& Young to confirm the Government's baseline projections for the fiscal 
plan and also the bridge between the last audited financial statements 
of Fiscal Year 2014 and the Fiscal Year 2017 projections. Shortly 
thereafter, the Governor submitted an amended fiscal plan which the 
Board certified--with a couple of additional amendments--last Monday, 
March 13.
    The certified Fiscal Plan charts a path to achieve fiscal 
equilibrium in 3 years, provide adequate funding of essential services, 
maintain the solvency of government pension plans, restructure the 
Government's long-term debts and obligations, and adopt the structural 
reforms necessary to restore economic growth and opportunity to all in 
Puerto Rico.
    Achieving these objectives will not be easy. The cuts are deep and, 
in some instances, will be painful.
    Overtime, the Government has made commitments to its constituents--
including employees, pensioners, college students, enrollees in 
healthcare programs, bondholders and others--that cannot be met based 
on a realistic measure of the tax revenues the economy can currently 
support. However we define the problem, whether in terms of budget 
deficits, indebtedness, unfunded pensions, or the imminent risk of 
simply running out of money to pay bills, Puerto Rico faces a nearly 
existential financial shortfall.
    In any financial crisis, there is the temptation to believe that 
one can emerge without undue sacrifice if only others would bear the 
costs or if the elusive economic turn-around finally happened. The fact 
is that any real solution must involve all parties sharing in the 
effort, especially if it is painful. But all should also share in the 
opportunity for a better, more secure and prosperous future.
    Now, with a certified Fiscal Plan in place, the administration and 
the Board can discuss specific restructuring proposals with creditor 
groups. We hope to secure consensual restructurings under the 
provisions of Title VI of PROMESA. This is the main focus of the Board 
in the coming weeks. We believe that discussions with creditor groups 
need to yield a viable restructuring path on or before May 1, when the 
PROMESA stay expires, and before other tools under PROMESA are 
utilized, such as Title III.
    Throughout the process, the Board has been strongly committed to a 
``once and done'' approach to Puerto Rico's financial crisis. This 
means establishing a set of policy changes and debt restructuring 
agreements that, at least in expectation, should put the budget and 
economy back on track. We believe such an approach is necessary for 
Puerto Rico to effectively use the tools PROMESA has provided to 
genuinely solve Puerto Rico's long-standing crisis, and to put the 
island on the path to a better future.
    PROMESA was enacted to build a path to fiscal stability, economic 
growth, equitable restructuring of the government's debt and restored 
access to capital markets. Make no mistake: without the bipartisan 
PROMESA legislation, the island would be facing a financial and legal 
chaos right now, without hope of reversing the economic decline, and 
the sad exodus of more Puerto Ricans seeking to build a prosperous life 
for their families. Without truly massive changes, though, and without 
using the tools provided under PROMESA, Puerto Rico would face 
continued decline and deprivation. The people of Puerto Rico deserve 
better than that, and the Board has pledged its efforts to work toward 
a better future for everyone on the island.
    We are fully aware of how much work remains to be done. But the 
certification of a detailed fiscal plan on March 13 was a major 
milestone, one that we trust will provide the foundation for real 
economic growth and, over time, restore opportunity to the people of 
Puerto Rico.
    As a matter of fact, the restoration of economic growth for the 
island is at the core of the Board's position in support of the 
government of Puerto Rico's stated intention to review the terms of the 
PREPA Restructuring Support Agreement (``RSA'') subject of this 
hearing.
    One thing that every economist and consultant has agreed on is that 
PROMESA's objectives for Puerto Rico cannot be attained without 
returning to positive economic growth. Even as we pursue and accomplish 
the required objectives of fiscal equilibrium, balanced budgets and 
debt restructuring, Puerto Rico will hardly come out of its economic 
and fiscal crisis unless it also manages to restore economic growth.
    To that end, the Oversight Board continues to work pursuant to 
PROMESA on formulating actions Puerto Rico can take to promote economic 
growth, including commercialization and privatization.
    In that spirit, recognizing the importance of reversing the 
economic contraction that has afflicted Puerto Rico's economy for far 
too many years, the Board supports the administration's stated 
objective of negotiating amendments to the PREPA RSA to lower the 
projected increases in energy costs that it requires.
    The efficient production of electricity is critical to the economic 
recovery of Puerto Rico, which in turn has a strong correlation to 
government tax revenue growth, and would have a significant impact in 
the future Primary Surplus Available for Debt Service on Puerto Rico 
debt obligations.
    For this reason, the Board supports an expedited PREPA RSA 
negotiation between the Government and creditors that results in the 
lowest electric power rate possible.
    A lower Transition Charge and a more efficient PREPA are the two 
components that could result in retail rates that are affordable for 
consumers and low enough to attract and sustain commerce and industry 
in Puerto Rico.
    Finally, the Oversight Board also supports initiatives to support 
and strengthen the Puerto Rico Energy Commission. Although it has a 
relatively short track record, as it was created only a couple of years 
ago, we believe that the model of an independent Commission with 
oversight authority over the utility is the right approach to providing 
the necessary checks and balances as PREPA moves forward in its 
transformation process.
    Thank you, Mr. Chairman, for your leadership. And thanks to all the 
Members for your interest in and attention to this matter.

                                 ______
                                 

       Questions Submitted for the Record to Jose B. Carrion III
                   Questions Submitted by Rep. Bishop

    Question 1. If discussions with creditor groups fail to yield a 
viable restructuring path on or before May 1, what is the Board's 
timeline to seek Title III restructuring?

    Answer. The Board does not have a strict timeline for starting a 
Title III proceeding. That being said, we are continuing with our 
efforts to arrive at a voluntary consensual agreement with the various 
creditor groups and are preparing for any eventuality should those 
discussions not progress to completion.

                  Questions Submitted by Rep. Grijalva

    Question 1. Has the Board received the report? [Report under 
PROMESA Section 208(b) setting forth tax abatement agreements granted 
by the Commonwealth.]

    Answer. Pursuant to Section 208(b) of PROMESA, the Secretary of the 
Treasury of the Commonwealth of Puerto Rico provided tax-related 
information in a report (with attachments) dated February 28, 2017, 
copies of which are attached. Subsequently, a representative of the 
Board met with the Secretary to request additional information to 
satisfy the requirements of Section 208(b) of PROMESA, and on March 30, 
2017, the Board wrote to the Secretary to follow up on such request. A 
copy of the Board's letter is attached.

    Question 2. How could a fiscal plan be agreed to that cuts 
Government spending for public services and for payment of debts so 
drastically that does not require any further contribution from 
companies that represent a third of the GDP and high net worth 
individuals on top of that who pay so little in tax now?

    Answer. There have been material tax increases in Puerto Rico 
during the last couple of years. Further increasing taxes on 
corporations and individuals risks higher migration rates out of Puerto 
Rico that could undermine an economic recovery of the island.

Attachment

                               ATTACHMENT

         FINANCIAL OVERSIGHT AND MANAGEMENT BOARD  
                                    FOR PUERTO RICO

                                      San Juan, Puerto Rico

                                                     March 30, 2017

Hon. Raul Maldonado
Secretary of the Treasury
10 Paseo Covadonga
San Juan, PR 00901

    Dear Secretary Maldonado:

    We are in receipt of the PROMESA Tax Incentives Report prepared by 
the Governor of Puerto Rico and the Secretary of the Treasury, 
delivered to the Oversight Board on February 28, 2017 (the ``Report'') 
and provided to comply with the obligations of Section 208(b) of the 
Puerto Rico Oversight, Management, and Economic Stability Act 
(``PROMESA'').
    PROMESA Section 104(a)(2) requires the Government, notwithstanding 
any other provision of law, to provide the Oversight Board with copies 
of all documents necessary to enable the Oversight Board to carry out 
its responsibilities under this Act. Pursuant to PROMESA Sections 
104(a)(2) and 208(b), the Oversight Board requests prompt delivery of 
the documents listed in this letter.
    The Oversight Board is tasked with extensive responsibilities under 
PROMESA for the purpose of ensuring that the Government of Puerto Rico 
achieves fiscal responsibility and access to the capital markets. As 
part of the Oversight Board's responsibilities, it must obtain detailed 
reports regarding the finances, obligations, cash flows and other 
significant fiscal information from the Government of Puerto Rico, so 
that the Oversight Board can provide its own assessments of Puerto 
Rico's fiscal situation and propose solutions. As tax revenues are an 
essential part of the fiscal stability of Puerto Rico, information 
regarding the tax abatement and other tax relief agreements that the 
Government of Puerto Rico has entered is important to assist the 
Oversight Board in its duties. Under Section 208(b) of PROMESA the 
Governor is obligated to provide a report ``documenting all existing 
discretionary tax abatement or similar tax relief agreements to which'' 
the Government of Puerto Rico (or one of its instrumentalities) is a 
party.
    The Report does not meet the requirements of Section 208(b) of 
PROMESA. The Report itself primarily contains a summary of how various 
statutory and other provisions of Puerto Rico law operate to provide 
tax incentives, along with a series of exhibits listing various tax 
incentive provisions (as well as one exhibit listing the total amount 
of tax credits offered, in aggregate, under various categories).
    Section 208(b) of PROMESA requires the provision of more 
information. PROMESA mandates that ``all existing discretionary tax 
abatement or similar tax relief agreements'' are to be documented in 
the report. Further, the agreements to be provided include those 
entered into by the Government of Puerto Rico plus any ``territorial 
instrumentality''--which would include political subdivisions such as 
municipalities. A report that principally contains mere citations of 
various tax incentive provisions, with a spreadsheet setting forth the 
aggregate tax credits provided under broadly-defined categories, is 
insufficient.

    To comply with Section 208(b), the Report must be supplemented by 
the following information, at the minimum:

     A copy of every discretionary tax abatement or other tax 
            relief agreement entered into by Puerto Rico or any 
            instrumentality (including municipalities) of Puerto Rico 
            that is currently effective and that has resulted in, or 
            could result in, aggregate tax savings to the taxpayer that 
            is a party to such agreement of an amount equal to or 
            greater than $5 million, including amendments, 
            modifications, or adjustments thereto--including any 
            closing agreements that meet the above conditions that the 
            Puerto Rico Treasury Department issued before the 
            restrictions on the Treasury Secretary's authority under 
            Section 6051.07 of the Puerto Rico Internal Revenue Code of 
            2011 became effective;

     For each such agreement, a description of the material tax 
            benefits (including beneficial tax rates, credits, partial 
            or total exemptions to tax, or other adjustments applicable 
            to such taxpayer) granted by such agreement;
     For each such agreement, a description of any and all 
            material obligations of the taxpayer, Puerto Rico or the 
            relevant instrumentality of Puerto Rico imposed by such 
            agreement--including, without limitation, any requirements 
            imposed on taxpayers with respect to investments in Puerto 
            Rico, employment of residents of Puerto Rico, or the like;

     For each such agreement, a summary of the total value of 
            the tax benefits granted under such agreement to the extent 
            calculable; and

     For each such agreement, a summary of any other material 
            term or provision of the agreement (including, without 
            limitation, effective dates or expected dates of 
            expiration, if any, for such agreement).

    Without the information specified above, the Government has failed 
to comply timely with Section 208(b) of PROMESA. To remedy such 
violation, the Oversight Board requests that the above information be 
provided in the form of a supplemental report by April 30, 2017. As you 
and Ramon M. Ruiz-Comas, the Oversight Board's Deputy Executive 
Director, discussed during a meeting this past Monday, March 27, 2017, 
we understand that the required information is not centralized in a 
single location and that this poses certain difficulties in terms of 
document production, but we expect that you will exert your best 
efforts to comply with the requirements of Section 208(b). To the 
extent, if any, the Government believes a requested document is outside 
the scope of PROMESA Section 208(b), the Oversight Board also requests 
the document pursuant to Section 104(a)(2) of PROMESA.

            Sincerely,

                                       Jose B. Carrion III,
                                                         Chairman.

Attachment

                                PROMESA:

(b) REPORT ON DISCRETIONARY TAX ABATEMENT AGREEMENTS.--Within six 
        months of the establishment of the Oversight Board, the 
        Governor shall submit a report to the Oversight Board 
        documenting all discretionary tax abatement or similar tax 
        relief agreements to which the territorial government, or any 
        territorial instrumentality, is a party,''

INTRODUCTION OF PUERTO RICO TAX INCENTIVES
The Government of Puerto Rico provides tax incentives or benefits to 
promote Economic Development. Tax incentives are directed to encourage 
specific industries and activities such as manufacturing, agriculture, 
tourism, exports, technology, among others that are considered key 
industries or activities for Puerto Rico's economy. The tax benefits 
are codified in the Puerto Rico Internal Revenue Code of 2011, as 
amended, (``Code'') and various tax incentives acts. Granted tax 
incentives are nondiscretionary, but must be issued according to 
specific requirements provided by law and regulations.

In general, the tax incentives include reduced income tax rates, tax 
exemptions on dividends and profit distributions, special deductions 
and credits, and exemptions on property and local/municipal taxes. Some 
of these tax incentives are claimed by taxpayers in their income tax 
return, subject to compliance as required by law and regulations.

Puerto Rico's tax incentives require a pre-approval from one or more 
agencies of the Government of Puerto Rico and the issuance of a tax 
incentive certificate or a grant of the tax benefits, i.e. agreement 
between the Government of Puerto Rico and a taxpayer with force of 
contract.

The Administration of Governor Ricardo Rossello has started a 
comprehensive analysis of all Puerto Rico's tax incentives acts. The 
purpose of said analysis is to determine the economic benefit of each 
incentive vis-a-vis the Governmental expenditure. The goal is to create 
a new legal framework for incentives with ascertainable and measurable 
impact to the economic growth of Puerto Rico.
REPORT
The information included in this report is limited to income tax 
benefits or incentives, i.e. preferential rates, deductions, exemptions 
and credits to income tax. This report does not include property or 
local/municipal tax incentives that are provided by law and the 
municipalities of Puerto Rico.

Exhibit A. Lists the Puerto Rico tax incentives acts.

The Government of Puerto Rico may exercise certain level of 
subjectivity in the evaluation and approval of an application based on 
the economic development elements of the law and regulations.

Exhibit B. Contains the quantity of grants of tax incentives under the 
most prominent tax incentives acts.

Exhibit C. Includes a summary of the outstanding tax credits issued 
under various tax incentives acts, and the tax credits that are under 
evaluation. Please note that taxpayer's credit requests through tax 
returns are not included in this report.

Most of our incentive acts allow a tax credit to be sold by one 
taxpayer to another. This means that a taxpayer with a credit grant may 
sell the credit if it does not reduce the taxpayer's taxes; This 
ability to sell credit grants results in the credits to be almost 
always claimed in full.

Exhibit D. English Version of Section 6051.07 of the Code regarding 
Closing Agreements by the Secretary of Puerto Rico Treasury Department

Under Section 6051.07 of the Code, the Secretary of the Treasury is 
authorized to enter into written closing agreements with any person 
regarding the tax liability levied by the Code for any taxable period. 
The Secretary is not authorized to enter into closing agreements to 
offer preferential/lower rates and/or grant tax deductions or credits 
to taxpayers not otherwise recognized by law.

                                 *****

Exhibit A.--Puerto Rico Tax Incentives
     1. Act No. 73-2008 (Puerto Rico Economic Development Incentives 
Act)
     2. Act No. 183-2001 (PR Conservation Easement Act)
     3. Act No. 27-2011 (Film Industry Economic Incentives Act)
     4. Act No. 74-2010 (Tourism Development Incentives Act)
     5. Act No. 98-2001 (Housing Infrastructure Investment Tax 
Incentives Act)
     6.  Act No. 77-2015 (Housing Rehabilitation for Elderly and Low 
Income Families Incentives Act)
     7. Act No. 212-2002 (Revitalization of the Urban Centers Act)
     8.  Act No. 159-2011 (Solid Waste Reduction, Disposal and 
Treatment Facility Investment Incentives Act)
     9. Act No. 46-2000 (Capital Investment Fund Act)
    10. Act No. 178-2000 (Santurce Theater District Creation Act)
    11. Act No. 1-2011 (Internal Revenue Code of 2011)
    12. Act No. 225-1995 (Agriculture Tax Incentives Act)
    13. Act No. 20-2012 (Act to Promote the Exportation of Services)
    14. Act No. 22-2012 (Act to Promote the Transfer of Investors to 
Puerto Rico)
    15. Act No. 14-2017 (Medical Professional Incentives Act)
    16.  Act No. 120-2014 (PyMES Employment Generation and Retention 
Incentives Act)
    17. Act No. 135-2014 (Young Entrepreneurs Incentives and Financing 
Act)
    18. Act No. 83-2010 (Renewable Energy Incentives Act)
    19. Act No. 168-1968 (Hospital Facilities Tax Incentives Act)
    20.  Act No. 135-1945 (Public Carrier in the Passenger Air 
Transportation Business Incentives Act )
    21. Act No. 148-1988 (Fine Arts Institution Tax Incentives Act)
    22.  Act No. 47-1987 (Public & Private Sector New Housing Operation 
Co-participation Act )
    23. Act No. 165-1996 (Low Income Elderly Rental Housing Program 
Act)
    24. Act No. 244-2003 (Early Life Assistance Housing Project 
Creation Act)
    25. Act No. 239-2004 (General Cooperative Act of 2004)
    26. Act No. 516-2004 (Integral Development of the Book Industry 
Incentives Act)
    27.  Act No. 489-2004 (Comprehensive Development of the Special 
Planning Institute of Cano Martin Pena)
    28. Act No. 185-2014 (Private Equity Fund Act)
    29. Act No. 52-1989 (International Banking Center Regulation Act)
    30. Act No. 7-1955 (Historical Zone Tax Incentives Act)
    31. Act No. 148-1948, (Fine Arts Institution Tax Incentives Act)
    32. Act No. 72-1962 (Puerto Rico Milk Industry Tax Incentives Act)
    33.  Act No. 14-1970 (Production and Sale of Puerto Rican Literary, 
Artistic and Craftsmanship Work Act)
    34.  Act No. 54-1971 (Flowers and Ornamental Plant Commercial 
Production Tax Incentives Act)
    35. Act No. 124-1993 (Low-Income Housing Subsidy Program Act)
    36. Act No. 75-1995 (Rio Piedras Rehabilitation Special Act)
    37. Act No. 14-1996 (The Castaner Development Special Act)
    38.  Act No. 213-2000 (Low-Income Housing for handicapped and 
Elderly Individuals Act)
    39.  Act No. 140-2001 (Low or Moderate Income Family Housing 
Construction or Rehabilitation Investment Incentives Act)
    40. Act No. 399-2004 (International Insurers and Reinsurers Act)
    41. Act No. 132-2010 (Real Estate Market Stimulus Act)
    42. Act No. 216-2011 (Transition to the Housing Impulse Program 
Act)
    43.  Act No. 226-2011 (Program to Stimulate the Acquisition and 
Investment of Accumulated New Housing Inventory)
    44. Act No. 273-2012 (International Financial Center Incentives 
Act)
    45. Act No. 1-2013 (Employment Now Act)
    46. Act No. 24-2015 (Puerto Rico Talent Retention Incentives Act)
    47. Act No. 135-1997 (Tax Incentives Act of 1998)
    48. Act No. 8-1987 (Puerto Rico Tax Incentives Act of 1987)
    49. Act No. 126-1966 (Maritime Transportation Act)
    50. Act No. 78-1993 (Tourism Development Incentives Act of 1993)

Exhibit B.--Current Tax Decrees and Exemptions

    Act No. 120-1994 & 1-2011 (Internal Revenue Code of 1994 & 2011): 
15

    Act No. 225-1995 (Agriculture Tax Incentives Act): 4,207

    Act No. 7-1955 (Historical Zone Tax Incentives Act): 286

    Act No. 20-2012 (Act to Promote the Exportation of Services): 607

    Act No. 22-2012 (Act to Promote the Transfer of Investors to Puerto 
Rico): 971

    Act No. 73-2008 (Puerto Rico Economic Development Incentive Act): 
555

    Act No. 74-2010 (Tourism Development Incentive Act): 250

    Act No. 8-1987 (Puerto Rico Tax Incentive Act): 16

    Act No. 27-2011 (Film Industry Economic Incentives Act): 121

    Act No. 78-1993 (Tourism Development Incentives Act of 1993): 359

    Act No. 75-1995 (Rio Piedras Rehabilitation Special Act): 1

    Act No. 83-2010 (Green Energy Act of Puerto Rico): 72

    Act No. 126-1966 (Maritime Transportation Act): 1

    Act No. 135-1997 (Tax Incentives Act of 1998): 991

    Act No. 168-1968 (Hospital Facilities Tax Incentive Act): 111

    Act No. 52-1983 (Tourism Development Incentive Act of 1983): 13

    Act No. 273-2012 (International Financial Center Incentives Act): 
21

Exhibit C.--Tax Credits
[GRAPHIC] [TIFF OMITTED] T4754.006


.epsExhibit D.--Section 6051.07 of the Code
Law 33207 (2011-PRIRC Sec. 6051.07)--Closing agreements.

(a) Authorization. The Secretary or his authorized representative is 
authorized to enter into an agreement in writing with any person 
relating to the liability of such person, or of the person or estate 
for whom he acts, in respect of any tax levied by this Code, for any 
taxable period. Provided that in a closing agreement the Secretary 
shall not:

    (1)  accept, after June 30, 2016, future tax payments that are not 
owed by the taxpayer at the time of the executing the closing 
agreement;

    (2)  grant or apply to a transaction covered by the closing 
agreement, preferential or lower rates than those established in this 
Code or in any other special law applicable thereof;

    (3)  grant or apply deductions or tax credit that are not allowed 
by this Code or by any applicable special law;

    (4)  classify as overpayment or apply as an overpayment, an amount 
not consisting of taxes previously paid;

    (5) extend statute of limitations, except as allowed by this Code;

    (6) condone interest or surcharges, except when allowed by this 
Code;

    (7)  modify the basis nor the amount of the gain on the sale of 
assets, in a manner contrary to the provisions of this Code;

    (8)  waive the requirement of filing returns, unless the return is 
part of and is included with the closing agreement; or

    (9)  grant agreements on matters or issues for which he is not 
expressly authorized to exercise his discretion.

(b) Finality. Such agreement once executed shall be final and 
conclusive, and except upon a showing of fraud or malfeasance, or 
misrepresentation of a material fact----

    (1)  The case shall not be reopened as to the matters agreed upon 
nor the agreement modified by any officer, employee, or agent of the 
Government of Puerto Rico, and

    (2)  In any suit, action, proceeding, such agreement, or any 
determination, assessment, collection, payment, abatement, refund, or 
credit made in accordance therewith shall not be annulled, modified, 
set aside, or disregarded.

(c) Every closing agreement shall expressly establish that the 
provisions regarding or applicable to taxable events occurring after 
the execution of the closing agreement shall be subject to any law 
amendment approved after the date of the execution of the referred to 
agreement.

(d) Penalties. The penalties for violations of closing agreements are 
contained in section 6030 of this subtitle.

(e) The Secretary shall establish a registry of closing agreements 
identifying each agreement per taxpayer. Each taxpayer may have access 
to the registry via internet but only to the agreements executed by him 
with the Treasury Department.

                            Historical Notes

In 2015,

Act 159-2015 amended sub sec. (a) of this section to add the provision 
containing 9 limitations to the Secretary's authority. Approved and 
effective September 30, 2015.

                                 ______
                                 

    Mr. LaMalfa. Thank you, Mr. Carrion.
    Next we will recognize Mr. Benitez for 5 minutes.

STATEMENT OF LUIS BENITEZ HERNANDEZ, CHAIRMAN, PREPA GOVERNING 
                  BOARD, SAN JUAN, PUERTO RICO

    Mr. Benitez. Thank you, Chairman LaMalfa, Ranking Member 
Torres, Commissioner Gonzalez, and members of this Committee. 
My name is Luis Benitez, and I am the Chairman of PREPA's 
Governing Board. PREPA produces and delivers virtually all the 
electric power consumed in Puerto Rico. Its future is central 
to the economic growth and the well-being of Puerto Rico.
    Thank you for inviting me to this discussion on PREPA's 
progress in restructuring over the past several years. I will 
speak briefly about the challenge of PREPA to the RSA, how the 
RSA addressed those challenges, and the current status of the 
RSA.
    As I described in my written testimony, in summer 2014, 
PREPA faced a severe financial and liquidity crisis. That 
threatened PREPA's ability to deliver electric power to Puerto 
Rico. To respond to those challenges, after many months of 
negotiation, PREPA and bondholders of 70 percent of its debt 
signed the RSA, the Restructuring Support Agreement.
    Importantly, the RSA requires a sharing of the burden of 
the PREPA transformation to ensure neither the ratepayer nor 
the creditors should carry the burden alone. The RSA provides 
PREPA with restructure of the debt principal, significant 
interest rate relief, and liquidity to continue this operation. 
Besides a financial restructuring, the RSA set in motion a top-
bottom reform of PREPA, including improvement of operation, an 
independent government, and investment in infrastructure.
    Over the last few years, PREPA has attained great efforts 
to implement improvement in transactions contemplated by the 
RSA. PREPA obtained passage through the PREPA Revitalization 
Act of Puerto Rico last year, in February 2016, which, among 
other things, authorized the exchange of PREPA legacy bonds for 
new securitization bonds and creates a new independent 
governing board through extended executive search process 
outside the political process.
    PREPA also obtained approvals from its regulator, the 
Puerto Rico Energy Commission, to a rate increase and new 
securitization charge required to implement the RSA. Together 
that rate will increase by approximately $.04 per kilowatt 
hour.
    PREPA received Energy Commission approval of a modified 
Integrated Resource plan which permits PREPA to implement 
substantially all of this capital plan envisioned by the RSA. 
PREPA continues to resolve legal challenges to the PREPA 
Revitalization Act and propose securitization challenge 
invalidation proceeding before the Puerto Rico court. To date 
we have won summary judgment in the most significant case, and 
we have obtained dismissal in two cases.
    After Congress passed PROMESA in June 2016, PREPA 
immediately began intensive discussion with creditors of a 
potential change to the RSA in light of PROMESA and concern 
about the cost of electricity in Puerto Rico. The creditors, 
however, hesitated to agree to any changes because of the 
possibility that the incoming governor and his new 
administration would have different views about the RSA and 
PREPA's restructuring.
    Finally, in late January 2017, after several extensions of 
the RSA, PREPA and its creditors reached agreement in principle 
to modify certain terms of the RSA, subject to approval by the 
Puerto Rico Fiscal Agency and Financial Advisory Authority 
(AAFAF).
    Ultimately, this modification will help provide additional 
savings to PREPA and decrease by $.01 per kilowatt hour the 
electricity rate contemplated by the RSA for each of the next 5 
years. In addition, these modifications will eliminate the 
investment grade rating requirement for the securitization 
bonds. However, the agreement, in principle, was not executed, 
because AAFAF assumed responsibility for creditor negotiations 
on January 27, 2017, following the enactment of Act 2 of 2017 
by the legislature of Puerto Rico. This Act grants AAFAF the 
sole responsibility to renegotiate, restructure, and reach 
agreement with PREPA's creditors since PREPA's Governing Board 
have that leader involvement with the restructuring discussion.
    Although Puerto Rico is not currently involved in base 
discussion, PREPA's Governing Board continues to support the 
transformation and modernization of PREPA, as contemplated by 
the RSA, in addition to governing board support, all efforts to 
improve the RSA for relief of Puerto Rico and PREPA's consumer.
    Mr. LaMalfa. We need to wrap up, sir, thank you.
    Mr. Benitez. We stand ready to help implement any 
agreement, and sincerely hope agreement can be reached in the 
near term so that PREPA can focus on providing infrastructure 
and obtaining third-party investment. Thank you for the 
opportunity to participate in this hearing on behalf of PREPA 
and the Governing Board. Thank you.
    [The prepared statement of Mr. Benitez follows:]
   Prepared Statement of Professor Luis Benitez Hernandez, Chairman, 
         Governing Board, Puerto Rico Electric Power Authority
    Chairman of the House Committee on Natural Resources Bishop, 
Subcommittee Chairman LaMalfa, Ranking Member Torres, Commissioner 
Gonzalez and members of the Subcommittee: my name is Professor Luis 
Benitez Hernandez, and I am the Chairman of the PREPA Governing Board. 
I have served in this role since November 2016. Prior to becoming 
Chairman, I served as the Vice Chair and the Chairman of the Finance 
Committee of the PREPA Governing Board since June 2014. I am also the 
former President of the Puerto Rico Economists Association, the former 
Chief Economist and Director of the Economic and Social Planning 
Program of the Puerto Rico Planning Board, and the former Co-President 
of the Special Commission for the Fiscal and Tax Reform. I have served 
as an economics litigation expert witness and an adjunct professor of 
economics at the University of Puerto Rico.
    I want to thank the Subcommittee for giving PREPA the opportunity 
to participate in this hearing. Despite significant progress over the 
past few years, PREPA continues to face a difficult financial situation 
and we greatly appreciate the Subcommittee's interest in our ongoing 
restructuring efforts.
    PREPA was created for the purpose of conserving, developing and 
utilizing Puerto Rico's energy resources to promote the general welfare 
of Puerto Rico's residents and to increase commerce and prosperity. 
PREPA produces and delivers virtually all of the electric power 
consumed in Puerto Rico. Its future is central to the economic growth 
and well-being of Puerto Rico.
    Since my appointment to the PREPA Governing Board, I have been a 
part of PREPA's efforts to address the fundamental operational 
deficiencies and financial difficulties that have hindered PREPA and 
the people and businesses it serves. Our efforts to restructure PREPA 
led to the execution of the Restructuring Support Agreement (RSA) in 
December 2015 that is the subject matter of today's hearing.
                               background
    As the Subcommittee may recall from prior testimony before the 
Subcommittee on Energy and Mineral Resources in January 2016, PREPA has 
experienced financial difficulties for several years. As demand for 
power declined during the recession, PREPA took on considerable debt to 
fund its operating expenses rather than raise base rates. By the summer 
of 2014, PREPA faced a severe financial and liquidity crisis, created 
by a combination of recurring negative cash-flow, the ongoing 
recession, outdated generation facilities, substantial debt maturities 
and an inability to access the capital markets. This crisis--magnified 
by PREPA's inability at that time to access a Federal restructuring 
regime--threatened PREPA's ability to operate and imperiled PREPA's 
ability to 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 rate setting, 
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.
    These deep-rooted problems demanded a comprehensive solution. 
First, the PREPA Governing Board and its advisors stabilized the 
situation by PREPA's signing of long-term forbearance agreements with 
creditors representing more than 60 percent of PREPA's debt, including 
its fuel line lenders. These agreements gave PREPA relief on $700 
million of maturing debt, increased the threshold necessary for the 
exercise of bondholder remedies, provided relief from PREPA's 
obligation to make over $600 million in annual interest and sinking 
fund payments, and permitted a reallocation of construction reserves to 
operating expenses. Second, the PREPA Governing Board retained 
financial advisors and implemented cash-flow forecasting and other 
operational controls. Last, the PREPA Governing Board and its advisors 
designed a comprehensive business and restructuring plan, based on the 
principle of burden-sharing across stakeholders, and worked closely 
with PREPA's creditors to negotiate the RSA and subsequent amendments 
and supplements.
          key terms of prepa's restructuring support agreement
    In December 2015, PREPA and creditors holding or controlling 
approximately 70 percent of its debt, including bondholders, fuel line 
credit lenders and bond insurers, signed the RSA to address PREPA's 
fiscal and operational challenges. The RSA required all of PREPA's 
stakeholders to contribute to its rehabilitation and transformation. It 
is the product of good faith negotiations by all parties, particularly 
considering that when it was signed, PREPA had no access to any legal 
mechanism like PROMESA to facilitate its restructuring.

     For the uninsured bondholders, the RSA provides for a 15 
            percent principal haircut, a fixed interest rate that is 
            lower than the current rates and a 5-year principal 
            holiday. Although most of the media attention has been on 
            the 15 percent principal haircut, the most important 
            financial benefit of the RSA is that it reduces the 
            interest rate from approximately 5.5 percent to 4.75 
            percent per annum and extends principal maturities by 5 
            years. In exchange, bondholders would receive 
            securitization bonds to be issued by a new, bankruptcy 
            remote entity known as the PREPA Revitalization Corporation 
            that is authorized to impose and collect a non-bypassable 
            transition charge to cover the costs of refinancing at a 
            discount PREPA's legacy bond debt.

     PREPA's fuel line credit lenders were given the option of 
            converting 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, or exchanging 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, including the 15 percent principal 
            haircut.

     PREPA's bond insurers agreed to issue approximately $460 
            million in surety insurance policies to support a 
            significant portion of the debt service reserve fund 
            requirement for the securitization bonds.

    The RSA, however, is not just about a financial restructuring. The 
RSA is the heart of PREPA's overall strategy to transform into a modern 
and reliable utility.
    As part of the RSA, PREPA agreed to seek reasonable rate increases, 
given that PREPA's base rates had not been increased since 1989 and 
that its current rate structure did not fully cover its costs. At the 
time we executed the RSA, our financial advisors estimated that there 
was an 8-cent-per-kilowatt-hour gap between the existing base rate and 
the rate needed to cover PREPA's costs including capital improvements 
and debt service. Consistent with the RSA, PREPA sought and obtained 
the approval from the Puerto Rico Energy Commission to implement a rate 
increase of approximately 4 cents per kilowatt hour (including both the 
new transition charge and a PREPA rate increase).
    Pursuant to the RSA, PREPA obtained more than $400 million in short 
term ``relending'' financings from the creditors who had signed the 
RSA. Under these financings, RSA creditors agreed to purchase new PREPA 
bonds in the same amount they received in debt service payments from 
PREPA on various principal and interest payment dates. These relending 
arrangements allowed PREPA to continue making debt service payments 
while conserving liquidity in an uncertain time. Without these 
relending arrangements, PREPA would have run out of money.
    In addition, the RSA contemplates important operational 
improvements with a goal of increasing efficiencies, reducing costs and 
implementing best industry practices. PREPA had long been plagued by 
inadequate procedures and controls for managing fuel supply, inventory, 
and collection efforts. During this time, we worked with our advisors 
to achieve $267 million in one-time savings and $212 million in 
recurring annual operating expense savings.
    The RSA also provides a framework for the modernization of PREPA's 
outdated and inefficient generation fleet and transmission system, 
which have been responsible for rising costs and decreasing reliability 
to customers over time. It was also necessary to overcome limitations 
on diversifying PREPA's fuel mix, and to implement necessary safety 
procedures and compliance measures.
    The long-term capital plan that was developed as part of the RSA 
and PREPA's Integrated Resource Plan calls for approximately $2.4 
billion of investment in new infrastructure--including sustainable 
renewable energy initiatives--over the next 10-15 years. Phase 1 of the 
investment plan calls for upgrades at the Palo Seco plant and 
construction of the Aguirre Offshore GasPort to improve fuel diversity, 
meet Federal Mercury and Air Toxics Standards (MATS), and increase 
system reliability. Phase 2 comprehends improvements in energy 
efficiency and upgrades to the existing the fleet through repowerings 
or public-private partnerships (P3).
    While PREPA presently could use the savings achieved through 
operational improvements and the debt restructuring to fund this 
capital improvement plan, our goal has been to provide a platform for 
third-party investment through a competitive bidding process. We 
believe there is substantial interest by the private sector in making 
new infrastructure investments as demonstrated by a successful Request 
of Expressions of Interest process we ran in Fall 2015. At that time, 
31 proposals were received from 16 participants, which included many 
major market players. All participants expressed an interest in helping 
PREPA modernize its infrastructure, whether through P3s or other 
approaches. Importantly, all of the participating investors said that 
PREPA must fix its balance sheet before the investors would make any 
investments.
    The RSA also required the creation of an independent governing 
board comprised of non-political appointees with substantial private 
sector experience. Pursuant to the RSA and the PREPA Revitalization Act 
(Act 4-2016), PREPA retained an independent, internationally recognized 
search firm (Russell Reynolds) to identify and interview qualified 
candidates. Governor Padilla then appointed a slate of candidates from 
the list of nominees prepared by the search firm, and the Puerto Rico 
Senate confirmed the Governor's appointments in December 2016.
    Implementation of the RSA has required significant effort. For 
example, PREPA obtained passage of the PREPA Revitalization Act in 
February 2016. Among other things, this law authorized the issuance of 
the securitization bonds in exchange for PREPA's legacy bonds. In June 
2016, PREPA obtained Energy Commission approval of the transition 
charge to support the securitization bonds and also obtained 
provisional approval of a 1.3 cents per kilowatt hour rate increase. In 
January 2017, PREPA obtained final approval of a 1.03 cents per 
kilowatt hour permanent rate increase. This rate increase has to be 
seen in the context of the rate saving contributions from creditors (so 
far in the range of approximately 5 cents per kilowatt hour) and the 
operational improvements of approximately 1.4 cents per kilowatt hour 
(the equivalent of $250 million). In addition, in the summer of 2016, 
PREPA received Energy Commission approval of a modified Integrated 
Resource Plan that permits PREPA to implement substantially all of the 
capital plan envisioned by the RSA, except for the Aguirre Offshore 
GasPort Project (AOGP). We continue to pursue approval of the AOGP 
project, which is also included in Governor Ricardo Rossello Nevares' 
energy reform plan.
    In addition, PREPA has been working to resolve pending challenges 
to the RSA transactions. As part of the PREPA Revitalization Act, 
Puerto Rico established a process allowing all interested parties to 
challenge the PREPA Revitalization Act and the RSA transactions before 
the expiration of two statutes of repose. In total, seven different 
lawsuits were filed challenging the RSA transactions. Three of these 
lawsuits have been dismissed, leaving four remaining. PREPA won summary 
judgment in one of the remaining four cases, and that case is now on 
appeal before the Puerto Rico Supreme Court. The remaining three cases 
are administrative law cases, which have been consolidated into one 
proceeding by the courts, and we hope to resolve them in the next 3 or 
4 months. PREPA will need to continue to vigorously defend against 
these lawsuits and remains confident that the courts should rule in 
PREPA's favor.
                          enactment of promesa
    As this Subcommittee knows, Congress passed the Puerto Rico 
Oversight, Management and Economic Stability Act (``PROMESA'') in June 
2016. Following its passage, PREPA immediately began discussions with 
creditors about potential changes to the RSA in light of PROMESA. For 
example, the RSA assumed that approximately $700 million in PREPA 
legacy bonds would remain obligations of PREPA after consummation of 
the restructuring because we assumed that some creditors would not 
voluntarily participate in the exchange. PROMESA gave us the 
opportunity to bind all bondholders to the exchange into securitization 
bonds, as long as we met the requisite voting threshold, but we needed 
to adjust parts of the deal (particularly the size of the debt service 
reserve or the amount of the monoline surety). In addition, after 
executing the RSA, it became clear that the rating agencies were not in 
position to immediately assign an investment grade rating. At the same 
time, to make the deal work for PREPA, we needed to fix the interest 
rates at the lowest interest rate contemplated by the RSA, even without 
an investment grade rating.
    As PREPA and its advisors were thinking about ways to adjust the 
RSA in light of PROMESA, we were also hearing heightened concerns from 
the public, the Oversight Board and the Congressional Task Force on 
Economic Growth in Puerto Rico about the costs of electricity in Puerto 
Rico and the potential negative impact such costs could have on Puerto 
Rico's economy. With that in mind, the current Governing Board 
instructed PREPA's advisors to seek additional creditor concessions 
that maintained the key economics of the RSA but also provided rate 
relief over the next 5 years.
    As we approached an RSA automatic termination date of December 15, 
2016, our management and advisory teams held intensive discussions with 
our creditors. We believed, and continue to believe, that maintaining 
the RSA was critical to PREPA's future. Then, as now, if the RSA were 
terminated, $700 million in fuel line debt and more than $375 million 
in relending bonds would become immediately due. In addition, 
termination would trigger potential disputes with fuel suppliers and 
other counterparties who may seek to terminate contracts or otherwise 
reduce credit. At the same time, we were (and continue to be) keenly 
aware that many people in Puerto Rico are expecting improvements to the 
deal in light of the availability of the restructuring regime provided 
under PROMESA.
    Not surprisingly, PREPA's creditors were hesitant to address any 
changes in December given the uncertain political situation and the 
possibility that the incoming Governor and his new administration would 
have different views about the RSA and PREPA's restructuring. As a 
result, the creditors and PREPA agreed to extend the RSA until January 
31, 2017 to give PREPA and its creditors more time to finalize 
adjustments in light of PROMESA and to allow the new administration to 
weigh in with its views.
    In the face of this deadline, in late January 2017, PREPA and its 
creditors reached an agreement in principle to modify certain terms of 
the RSA, subject to approval by the Puerto Rico Fiscal Agency and 
Financial Advisory Authority (AAFAF). Among other things, these 
modifications included eliminating the investment grade rating 
requirement on the securitization bonds and increasing the amount of 
the surety to be posted by the monoline insurers. In total, these 
modifications would have reduced the electricity rates contemplated by 
the RSA for each of the next 5 years by approximately 1 cent per 
kilowatt hour. The agreement in principle, however, was not executed 
because AAFAF assumed responsibility for creditor negotiations on 
January 27, 2017.
                   current status of rsa discussions
    The enactment of Act 2-2017 by the Legislature of Puerto Rico in 
January of this year granted AAFAF the sole responsibility to 
renegotiate, restructure and reach agreement with PREPA's creditors. As 
a result, PREPA and its Governing Board have not been involved with the 
restructuring discussions since January 27, 2017, when AAFAF assumed 
this role. Of course, PREPA's Governing Board continues to support the 
transformation and modernization of PREPA, especially efforts to 
improve PREPA's infrastructure and obtain third-party investment 
through P3 projects and otherwise. In addition, PREPA's Governing 
Board--whose members have significant experience working with 
distressed companies such as General Motors--supports ongoing efforts 
to improve the terms of the RSA for the benefit of the people and 
businesses of Puerto Rico. The enactment of PROMESA presents a once-in-
a-lifetime opportunity to address PREPA's financial situation and to 
obtain the best deal possible from the creditors, and Puerto Rico's 
economic and fiscal situation demand that PREPA succeeds in doing so. 
We therefore stand ready to implement any agreement that is reached 
with the creditors to improve the terms of the RSA.
    I would like to thank the Subcommittee for giving me the 
opportunity to participate in this hearing on behalf of PREPA and its 
Governing Board.

                                 ______
                                 

    Questions Submitted for the Record by Rep. Grijalva to Mr. Luis 
                Benitez, Chairman, PREPA Governing Board
    Question 1. PREPA has had several problems. Perhaps the biggest--
and the one that has adversely affected Puerto Ricans and the 
territory's economy the most--is that PREPA is two-thirds dependent 
upon imported oil and has inefficient power plants and an unreliable 
distribution system. This has resulted in extremely high power rates.
    PREPA's plan to improve its infrastructure under the agreement is 
extremely unaggressive, with the improvements not being completed until 
2030! The net result of the plan and the PREPA Restructuring Support 
Agreement would be that creditors will be paid almost all of what they 
were due, consumers will pay higher rates, and rates will not be able 
to be reduced through more efficient and reliable infrastructure.
    Major companies have proposed investing their own money to build 
much more efficient power plants with power purchase agreements and 
improve electricity distribution. The last governor did not act on 
this. PROMESA includes provisions to expedite such projects. These 
sorts of agreements with the private sector would put PREPA in a much 
better position to pay creditors.
    What is being done to take advantage of private sector offers and 
PROMESA to improve energy infrastructure so that substantial amounts of 
money can be saved in fuel costs, customer rates can be substantially 
lowered, PREPA's financial position can be improved--including for the 
benefit of creditors?

    Answer. Thank you again for the opportunity to testify before the 
Subcommittee and your continued support for our efforts to revitalize 
PREPA and Puerto Rico. In response to your question, I want to assure 
you that PREPA is very focused on improving its infrastructure and 
promoting private investment. Over the past few years, our goal has 
been to transform PREPA into an efficient, world-class utility, which 
transformation requires an operational restructuring as well as a 
financial restructuring. At the same time, our goal has been to ensure 
that PREPA's electricity rates are as affordable and reasonable as 
possible.
    Our advisors estimated that without any restructuring or rate 
adjustment, the gap between PREPA's all-in electricity rates and costs 
would be more than 8 cents per kilowatt hour (kWh). Our goal has been 
to eliminate this gap through equitable burden sharing. Although the 
media and policy makers have focused on the 15 percent principal 
haircut embodied in the RSA, the main savings under the RSA is a 
reduction in the interest rate (from an average of 5.5 percent to 4.75 
percent) and a 5-year principal holiday. As I mentioned in my 
testimony, after the enactment of PROMESA, PREPA's Governing Board 
negotiated additional improvements to the RSA which would have reduced 
the projected electricity rates by approximately 1 cent per kWh each 
year for first 5 years following the restructuring. While as noted in 
my written testimony, the Puerto Rico Fiscal Agency and Financial 
Advisory Authority assumed full and complete responsibility to 
negotiate, restructure and reach agreement with PREPA's creditors, the 
PREPA Governing Board supports the Rossello administration's efforts to 
improve the RSA even more.
    You are correct that, as I noted in my testimony, for several 
decades PREPA did not operate with the level of efficiency associated 
with the private sector or even comparable units of government in other 
jurisdictions. In too many instances, PREPA's decisions were based on 
political or electoral factors rather than sound business practice. For 
that reason, the RSA required PREPA to implement a new governance 
structure, with independent board members with private sector 
experience. In 2016, the Puerto Rico legislature passed a law (Act 4-
2016) implementing the governance reform contemplated by the RSA. New 
legislation has also been proposed to allow the Governor to name new 
members of the PREPA board, but it has not passed the Puerto Rico 
Senate.
    PREPA has been working with its advisors to identify operational 
improvements that could provide PREPA and its ratepayers with near- and 
long-term benefits and cost savings over the long term. In 2015 and 
2016, PREPA achieved $267 million in one-time savings and $212 million 
in recurring, annual operating expense savings. These savings provide 
important benefits for PREPA, its customers, all residents of Puerto 
Rico. Indeed, achieved cost savings have already reduced PREPA's 
approved, regulated rates from what they otherwise would have been.
    We are aware that operational improvements are only part of the 
solution, particularly when PREPA remains burdened by aging 
infrastructure and, as you note, an inefficient generation fleet that 
is overly reliant on one fuel source. PREPA's Integrated Resource Plan 
(IRP), which was recently approved, as modified, by the Puerto Rico 
Energy Commission (PREC), identifies PREPA's key medium to long-term 
goals, namely, (1) modernization of PREPA's aging infrastructure, 
particularly its generating fleet, and improving fuel diversity, (2) 
improving system reliability and flexibility, (3) achieving 
environmental regulatory compliance, including compliance with Federal 
Mercury and Air Toxics Standards (MATS), and (4) providing the 
framework that will permit the accelerated deployment of additional 
renewable resources. PREPA's Governing Board recognizes that access to 
and the intelligent deployment of private capital are essential to 
achieving these goals.
    Even prior to the passage of PROMESA, PREPA's Governing Board had 
taken important steps to identify possible private sector partners. In 
late 2015, PREPA issued a request for expressions of interest (REOI) 
seeking to test the market for interest in private investment that 
would upgrade PREPA's generating fleet. In response, PREPA received 
over 30 proposals from 16 energy market participants, including many 
major energy players of the kind you referred to in your inquiry. These 
submissions expressed a willingness to invest in new infrastructure 
projects, but only after PREPA first fixed its balance sheet. Although 
these expressions of interest were a welcome and positive sign for 
PREPA's future, PREPA must finally resolve its financial crisis before 
it can expect any influx of private capital.
    PREPA desires to capitalize on the opportunities new investment can 
support, consistent with prudent utility practice. Our vision for PREPA 
includes a modern and resilient transmission and distribution system 
with diverse sources of fuel, including renewables, and supported by 
private capital to invest in new and efficient generating capacity. 
That being said, achieving those goals and seizing on the opportunities 
offered by private sector partners similarly cannot be accomplished 
immediately. They will take time to implement, but PREPA is not just 
starting that task.
    For instance, as with any utility, achieving fuel diversity 
requires the requisite infrastructure. This challenge is compounded in 
an island economy like Puerto Rico, which currently must import 
substantially all of its fuel and generate all of its electricity. In 
the IRP, PREC has authorized PREPA to continue its efforts to secure 
permits for and conduct other preliminary work, such as engineering and 
planning, on the Aguirre Offshore GasPort (AOGP) and four related fuel 
conversions (Aguirre thermal 1 and 2 and Aguirre CC 1 and 2), subject 
to a $15 million, going forward, aggregate spending limit, pending 
PREPA's submission and PREC approval of further AOGP economic analyses. 
If finally approved, the project would increase Puerto Rico's ability 
to import natural gas, reducing reliance on oil-fired generation. In 
the IRP, PREC also directed PREPA to pursue permitting of several dual-
fuel, combined cycle plants, including new generation facilities and 
the repowering of certain existing facilities.
    Under PREPA's capital plan, PREPA's preferred approach to the 
required system modernization is to run a competitive process to allow 
private investors to submit bids for public-private partnerships (P3s) 
and then select winning bids through a transparent and open process. 
The cost to PREPA from such P3s will of course need to be passed 
through to PREPA's customers, subject to PREC approval, but it is 
anticipated that the private sector will provide cost efficiencies that 
might not otherwise be available (efficiencies which will also inure to 
the benefit of PREPA's ratepayers). In any event, the modernization 
projects will be phased beginning in Fiscal Year 2018. Overall, the 
plan provides for $2.4 billion in capital improvements over 10 years.
    Of course, we realize that private investment is not cost-free. The 
cost of this (and all) privately invested capital to be applied to the 
renewal and recovery of PREPA will be passed through to PREPA by these 
investors. PREPA will be required, upon PREC review and approval, to 
include such additional capital cost in its rates to be paid by PREPA's 
customers, as is the case with every investor-owned and governmental 
electric utility operating in the United States. In addition, as noted 
earlier, the ultimate cost to PREPA of that privately invested capital 
will depend in very large measure on PREPA's credit rating because 
PREPA will be the sole user of the assets financed with such private 
capital. It will be PREPA's financial condition and creditworthiness 
and, because PREPA does not operate in a vacuum, that of the government 
of Puerto Rico, that will determine the return on investment demanded 
by such private investors (subject to negotiation). As noted above, 
because private capital will not be available to PREPA until after 
PREPA's restructuring is completed, it is critical for PREPA to move 
forward expeditiously with its financial and operational restructuring.
    Again, thank you for your interest in PREPA's transformation.

                                 ______
                                 

    Mr. LaMalfa. Thank you. OK. We are going to go a little out 
of order here--we are going to move to Mr. Bergonzi.

 STATEMENT OF ADAM BERGONZI, MANAGING DIRECTOR AND CHIEF RISK 
    OFFICER, NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION, 
                       PURCHASE, NEW YORK

    Mr. Bergonzi. Good morning. I am the Chief Risk Officer of 
the National Public Finance Guarantee (National), a monoline 
financial guarantee insurance company. I would like to thank 
Chairman LaMalfa and fellow members of the Subcommittee on 
Indian, Insular and Alaska Native Affairs for allowing me the 
opportunity to come and speak to you today.
    For over 40 years, National has been in the business of 
guaranteeing the debt of municipal issuers in the U.S. public 
finance market. Our insurance product enables municipalities to 
save on interest expense, and attracts investor confidence 
because they know that their repayment is guaranteed. National 
believes the restructuring contemplated today will stabilize 
PREPA's finances, create a framework for financing long-overdue 
improvements to its electric generation infrastructure, and put 
PREPA, importantly, on a path to restored market access.
    National guarantees debt issued by cities, states, 
counties, airports, roads, and public utilities. We effectively 
lend our high credit ratings to the borrower, thereby reducing 
their debt cost. We have shared these savings with the 
borrower.
    Municipal issuers, therefore, save money when using our 
product. Our policies are irrevocable. We are not traders, we 
do not profit from debt restructurings, other than by limiting 
defaults or losses. We are akin to long-term, buy-and-hold 
investors, and we can only lose money in these situations. We 
will be invested in Puerto Rico for many years to come.
    National has nearly $3.6 billion exposure to Puerto Rico 
issuers, including $1.4 billion to PREPA. We are, in fact, the 
utility's largest single creditor. Together with assured, the 
monolines represent approximately $2.2 billion of the $9 
billion of PREPA's debt. Since 2015, National has labored in 
good faith, alongside PREPA's institutional bondholders and 
Puerto Rico, to achieve a sustainable long-term solution for 
PREPA. We very carefully analyzed PREPA's operations and 
finances, and we have negotiated the restructuring with the 
following key goals in mind:
    (1) Create a stable financial platform that will provide 
eventual access to the capital markets for the utility.
    (2) De-politicize PREPA through the creation of an 
independent board. We believe this is vital to avoid the past 
mistakes of policy being driven by past administrations.
    (3) Position the utility to address significant O&M savings 
for further rate reduction.
    (4) Lower PREPA's debt burden, and provide near-term 
liquidity for reinvestment and planning.
    (5) Assure a steady fuel supply to the utility. All of 
these can be said to serve the ultimate goal: again, of 
facilitating private investment over time in cheaper and more 
efficient generation from better fuel sources for the utility.
    The parties to the RSA include PREPA and 70 percent of its 
bondholders. We believe the restructuring achieves a fair 
balancing of interest among Puerto Rico, PREPA, its ratepayers, 
bondholders, and trade partners.
    The provisions are, really, three: (1) an exchange of 
uninsured PREPA bonds at an 85 percent of par discount into a 
newly-formed bankruptcy-remote entity. This will be backed by a 
special assessment collected by PREPA; (2) the fuel line 
lenders are repaid now over a 6-year period, and have reduced 
the interest on the fuel-line loans; and (3) the monolines have 
agreed to provide surety bonds of up to $462 million to fund a 
debt reserve fund for the securitization bonds. This is to, in 
effect, compensate for the fact that the utility cannot 
currently raise capital, nor can it currently expend cash on 
hand to raise that financing.
    Importantly, the surety supports an eventual rating of this 
transaction, and supports the credit and trading of the 
secondary market bonds for the securitization. Creditors have 
importantly needed to address significant liquidity needs for 
the utility during this period, and the RSA, through the 
collective action of creditors, has purchased $375 million of 
bonds on behalf of creditors for the utility.
    We have waived reserve requirements to release an 
additional $500 million of liquidity to PREPA, granted the use 
of general funds for capital improvements prior to debt 
service, and finally, have permitted PREPA to use cash on hand 
in unspent construction funds.
    The RSA debt is only 3.3 cents per kilowatt hour of an 
overall $.22. This is 15 percent and is in line with similar 
institutions and similar utilities across the country. More 
importantly, $.11 is for fuel and purchased power, and this is 
where we urge the real savings over time before the utility can 
occur. We do not believe PREPA is over-indebted; it is very 
inefficient.
    Finally, the punch list on PREPA, the RSA has been 
substantially negotiated, as you have heard. We do have some 
issues with implementation under PROMESA. These are positive 
aspects that might actually add value to the transaction. The 
RSA complies with all legislative and regulatory requirements, 
including Act 4 of 2016, and the Energy Commission's 2016 PREPA 
restructuring order.
    PREPA is a defendant in several judicial validation 
proceedings that are challenging the RSA and brought in court 
to facilitate closure of that transaction, but that is going 
well. The first case has been rendered positively in front of 
PREPA.
    Finally, I would just say that the RSA is a pre-existing 
voluntary agreement under PREPA. Section 104, which provides 
for a streamlined process for final approval--this statute was 
designed to encourage consensual agreements like the RSA, and 
we think this could be a lost opportunity to reform the utility 
and provide a foundation for economic growth in Puerto Rico, 
and it may call into serious question whether the PROMESA board 
and Puerto Rico can foster similar consensual agreements to 
restore market access.
    I thank you for the time.
    [The prepared statement of Mr. Bergonzi follows:]
 Prepared Statement of Adam Bergonzi, Managing Director and Chief Risk 
         Officer, National Public Finance Guarantee Corporation
                        introduction to national
    National Public Finance Guarantee (``National'') is a municipal-
only monoline insurer with over 40 years of experience in the municipal 
market. Through its municipal bond insurance products, National has 
delivered savings to municipalities across the United States and 
provided credit protection to individual investors, thereby 
facilitating the selling and purchasing of municipal bonds which are 
critical to finance essential public infrastructure projects.
                national's partnership with puerto rico
    For over 30 years, National has partnered with Puerto Rico and its 
bondholders and currently insures approximately $3.6 billion of Puerto 
Rico bonds issued for energy, transportation, higher education and 
general government purposes. A summary of this activity is as follows 
and notes where National has contributed capital in the form of Claims 
Paid and Relending Bonds over the past 2 years:

[GRAPHIC] [TIFF OMITTED] T4754.001


                         .epsnational and prepa
    National insures nearly $1.4 billion of PREPA bonds--making 
National PREPA's single-largest creditor. National has worked 
constructively with PREPA and the Puerto Rico Government toward an 
optimal consensual outcome for all stakeholders over the past 2 years. 
Our objective is the same as Puerto Rico's: a sustainable, long-term 
solution. Accordingly, in December 2015, 70 percent of PREPA's 
creditors, including National, reached a voluntary agreement known as 
the Restructuring Support Agreement or ``RSA'' that would allow PREPA 
to restructure its debt on consensual terms.
    The RSA is designed to achieve the following objectives:

  a.  create a stable financial platform to permit access to the 
            capital markets;

  b.  depoliticize PREPA through the creation of an independent board 
            of directors;

  c.  position PREPA to reap the benefits of operational and 
            maintenance savings, thereby creating opportunities for 
            further rate reduction;

  d.  assure a steady fuel supply for the island; and

  e.  achieve the necessary financial stability to encourage future 
            private investment in generation, transmission, and 
            distribution of electricity.

          overview of the prepa rsa and creditor contributions
    The RSA entails the following:

  a.  Exchange of uninsured PREPA Bonds at 85 percent of par into a 
            newly formed bankruptcy-remote entity (``SPE''). The entity 
            would be backed by a special assessment charged by PREPA 
            (the ``securitization charge'').

  b.  Fuel line lenders are repaid $650 million of currently due loans 
            over 6 years. Interest rate on fuel line loans reduced by 
            150 basis points.

  c.  Monolines to provide sureties of up to $462 million to fund a 
            Debt Service Reserve Fund (``DSRF'') for the securitization 
            bonds which would be used after a $65 million cash funded 
            DSRF.

    In addition to the concessions made in the RSA, National and other 
creditors have made important contributions over the past 2 years that 
have allowed PREPA to continue operating despite its lack of access to 
the capital markets:

  a.  Purchased $375 million of new bonds--over a third of which came 
            from National.

  b.  Additional bond purchase avoided payment defaults and prevented a 
            contraction of fuel vendor credit terms.

  c.  Waived collateral requirements (thereby releasing over $500 
            million in needed liquidity to PREPA).

  d.  Permitted the use of general fund monies for capital improvements 
            prior to debt service.

  e.  Permitted PREPA to use cash in the construction fund, providing 
            further liquidity.

    All of the above actions have enabled PREPA to operate at levels of 
liquidity necessary to serve Puerto Rico.
              benefits of the rsa to prepa and puerto rico
    The RSA lowers PREPA's overall debt burden and provides near-term 
liquidity for reinvestment. According to PREPA's petition for a 
Restructuring Order filed in April 2016, the RSA leads to $1.7 billion 
of savings over a 10-year period. To the extent the RSA is enacted 
through a Title VI proceeding under PROMESA, the savings will be even 
greater, as uninsured bondholders (including those not currently 
parties to the RSA) would all take a principal deferral and a 15 
percent principal discount.

[GRAPHIC] [TIFF OMITTED] T4754.002

    .epsThe RSA also starts PREPA on a path to restored access to the 
capital markets and third party investment. The debt restructuring 
would allow PREPA to achieve a higher credit rating. Closing the RSA 
would also facilitate integration of P3 investment in PREPA, as third 
party investors would be unlikely to extend credit or provide financing 
to PREPA absent a resolution of its debt restructuring. The SPV may 
also provide a go-forward financing vehicle for select capital 
projects. In sum, closing the RSA provides a bridge for PREPA to access 
the capital it needs for critical investments that will transform the 
utility.
    Finally, the RSA has contributed to significant business 
improvements at PREPA. The stability provided by creditor forbearance 
has restored trade terms with fuel vendors and PREPA currently has 
payables balances of over $350 million with terms of up to 60 days. The 
RSA also requires increased transparency and improved PREPA governance. 
Closing the RSA will allow management to shift their attention to 
critical issues facing the business, and allow PREPA to proceed with a 
much-needed operational transformation to provide cheaper and more 
stable service to the island.
                    risks of termination of the rsa
    If the RSA is terminated, PREPA would likely default on its over 
$450 million bond payment due July 1, 2017. This would in turn lead to 
bondholder litigation (post-expiration of stay) for receivership and 
the enforcement of liens for Special Revenue debt. Active litigation 
with bondholders would deter critical private investment, and delay EPA 
compliance and renewable integration. In addition, approximately $730 
million in payments for matured fuel lines, which lenders are currently 
forbearing from exercising remedies due to RSA, would come due and 
current fuel vendor credit terms ($342 million of current payables 
balances) that were enabled by the RSA could be withdrawn--all of which 
could generate additional litigation and affect PREPA's operations. 
Furthermore, a default would undermine PREPA's creditworthiness and 
delay PREPA's re-entry to the capital markets.
    Puerto Rico also risks losing credibility with investors--and 
therefore renewed access to the capital markets--if the RSA falls prey 
to the vagaries of local politics or to a change of administration. The 
RSA and its implementing legislation, Act 4-2016, recognized the 
importance of a nonpolitical, professional board of directors for PREPA 
as a way to insulate PREPA from political risk and guarantee a 
competent, expert-driven, and evidence-based stewardship for the 
utility. The RSA is the only fully negotiated solution that creditors 
and the Puerto Rico government have reached in the last 3 years. 
Abandoning it at this time bodes ill for future negotiations with 
creditors on PREPA and other Puerto Rico government entities.
    In the event a defensive Title III proceeding was filed, such a 
proceeding would not create stability for PREPA. Title III-related 
creditor litigation would still occur and liquidity and trade 
contraction could remain obstacles to PREPA's recovery.
    Termination of the RSA would also lead to the loss of voluntary 
creditor concessions. PREPA's former CRO, Lisa Donahue, has stated in 
testimony to the Puerto Rico Energy Commission, that bondholders would 
likely receive 100 percent recovery in litigation. In the interim, 
PREPA would be unable to access capital markets or public-private 
partnerships until any litigation is resolved, which could take 
[years]. This is all compared to the current RSA, which contemplates a 
15 percent principal haircut, interest rate reduction, 5-year principal 
deferral, and extension of up to $462 million of credit by the 
monolines.
    Puerto Rico has benefited in the past few years from a significant 
decrease in electricity rates thanks in large part to historically low 
oil prices. PREPA chose to pass on all of those savings to consumers, 
while creditors were not being paid full debt service. PREPA needs to, 
and is statutorily and contractually obligated to, increase rates to 
account for debt service. However, it had not (until last year) 
increased its base rate since 1989, despite having expenses that 
exceeded revenues. The required increase is limited to 3.3 cents/kwh 
under the RSA, compared to an increase of an average of 4.6 cents/kwh 
from FY2017-FY2020 if PREPA had to pay its status quo projected debt 
service (see Exhibit A for a detailed breakdown of PREPA's rate).
                    current status of the prepa rsa
    The PREPA RSA has received support and approval from key 
stakeholders. Approximately 70 percent of PREPA's legacy bond creditors 
and all of PREPA's bank creditors support the restructuring. Under 
Governor Padilla's administration, the Puerto Rico government put in 
place the legislative and regulatory framework needed to implement the 
RSA. In February 2016, the Legislature enacted Act 4-2016, which 
carried out central provisions of the agreement, most notably the 
securitization structure and transition charge necessary for PREPA's 
transformation into a financially stable utility. In June 2016, PREPA's 
regulator, the Energy Commission, approved a transition charge 
methodology. The Puerto Rico courts, meanwhile, are in the process of 
validating the securitization structure (see further below). 
Additionally, both the Puerto Rico Legislature and Congress expressed 
their support for the RSA by carving out PREPA from the Moratorium Act 
and PROMESA.
    PREPA is in the midst of validation proceedings, where challengers 
are questioning both the validity of Act 4-2016 and the validity of the 
Energy Commission's 2016 PREPA Restructuring Order (both of which must 
be upheld as a condition to the RSA). The first decision recently came 
out in favor of validity of Act 4 and other Phase I cases were 
voluntarily dismissed (the decision in the UTIER case is being 
appealed). The Phase II cases have been consolidated.
    In January 2017, National participated in discussions with PREPA's 
advisors regarding adjustments to the RSA needed to close the 
restructuring under PROMESA. Near the end of the month, however, 
Governor Rossello appointed AAFAF to take over the negotiations on 
behalf of PREPA, and creditors agreed to extend the RSA from January 
31, 2017 to March 31, 2017. Since then, no one from AAFAF has shared 
any proposal with National to close the restructuring.
               opportunities for prepa post-restructuring
    According to PREPA's most recent business plan, chronic 
underinvestment and inconsistent management have led PREPA's facilities 
to fall significantly behind industry standards. For example, PREPA's 
median plant age is 44 years (compared to an industry average of 18 
years), and PREPA's facilities experience significant forced outages 
(16 percent, compared to industry average of 11 percent). Once the 
restructuring has closed, PREPA will be able to pursue the investments 
needed to achieve cheaper, cleaner and more reliable energy.

    PREPA's long-term investment program seeking compliance with 
environmental requirements totals over $4.5 billion from FY2016-FY2035 
($2.4 billion in first 10 years). Significant projects include:

  a.  AOGP ($517mm): Facility is expected to be built in 18 months 
            (post-permitting). AOGP would improve fuel diversity, as 
            needed to achieve environmental compliance, and would allow 
            for construction of new units that rely on gas rather than 
            diesel

  b.  New Units/Fleet Upgrade ($1.7bn): Investment in new fleet would 
            reduce costs and enhance system reliability (reduce 
            outages). Average PREPA thermal unit is 30 percent less 
            efficient than a new combined cycle gas unit

  c.  Transmission and Distribution ($250mm): Improve distribution 
            system reliability (reduce energy losses)

  d.  Increasing share of Renewable Energy from 2 percent to 17 percent

    Besides achieving regulatory compliance, improved reliability and 
improved efficiency, these investments will create jobs in Puerto Rico 
and attract new third-party capital investment. PREPA conducted a 
Request for Expressions of Interest in Sept/Oct 2015 for the 
development of new generation assets to gauge interest from third 
parties on modernization solutions for PREPA. Thirty-one proposals were 
received from 16 participants, demonstrating robust interest in P3s 
from the private sector.
    The closing of the debt restructuring also enables management to 
refocus on improving the business in several areas. In terms of 
receivables collection, the past due balance from government customers 
remains above $150 million, the equivalent of $113 per residential 
client. PREPA can also work to decrease energy losses. Energy losses 
not due to technical issues (primarily theft) totaled 5 percent of net 
generated energy in October 2016, according to the Donahue Handover 
Report. Total energy losses as a percentage of total power generated/
sourced was 14 percent for PREPA in 2015, compared to U.S. municipal 
average of 4.6 percent, according to EIA data. Finally, PREPA must 
continue to focus on improving safety for employees. DuPont performed a 
safety analysis showing PREPA performs below ``fundamental'' levels 
(the lowest designation) on each of the 12 metrics they analyzed.
                     path forward through title vi
    The RSA parties believe that implementation of the PREPA 
transaction through Title VI of PROMESA would be advantageous as it 
would, among other things, (a) increase the speed and certainty of 
process and outcome and (b) demonstrate that consensual deals are 
achievable and build momentum for the remaining issuers.
    The RSA is a ``pre-existing voluntary agreement'' under PROMESA 
Sec. 104(i)(3) and is therefore deemed to be in conformance with the 
section of PROMESA concerning certification of Pre-existing Voluntary 
Agreements. As such, certification and approval of the RSA is subject 
to a streamlined process. Once the RSA/Qualifying Modification is 
approved and binding under Title VI, the PREPA deal will ``go 
effective'' upon satisfaction by PREPA of the closing conditions under 
the RSA.

 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * 
* * * * * *
Background Note on Monoline Insurers
    Monoline insurance companies insure investors against the risk of a 
bond defaulting--i.e., guarantee the scheduled payment of principal and 
interest for the duration of the life of a bond (often up to 30 years). 
Insurance on bonds is often called a ``credit wrap,'' or simply a 
``wrap.'' Monolines are akin to the issuer of a bond, and it is their 
obligation to make full principal and interest payments even if an 
agreement calls for investors to receive a discount to par.
    A wrapped bond has the same credit rating as the insuring monoline, 
which is generally higher than the credit rating of the issuer. The 
guarantee and higher credit rating allows the issuer to obtain a lower 
cost of financing than it may have otherwise received (with the spread 
in cost being shared between the monoline and the issuer). In addition 
to lowering financing costs for issuers, monolines enhance capital 
markets access by attracting a larger group of investors and 
facilitating greater trading/liquidity.

[GRAPHIC] [TIFF OMITTED] T4754.003


                .epsExhibit A: Breakdown of PREPA Rates
[GRAPHIC] [TIFF OMITTED] T4754.004


                                 .eps__
                                 

    Mr. LaMalfa. All right. Thank you, Mr. Bergonzi.
    We will now recognize Mr. Bryngelson for 5 minutes.

  STATEMENT OF ROB BRYNGELSON, PRESIDENT AND CEO, EXCELERATE 
                ENERGY LP, THE WOODLANDS, TEXAS

    Mr. Bryngelson. Thank you, Chairman LaMalfa, Ranking Member 
Torres, Vice Chairman Gonzalez. My name is Rob Bryngelson and I 
am the President and Chief Executive Officer of Excelerate 
Energy. I appreciate the opportunity to appear today before the 
Subcommittee to provide some testimony regarding Excelerate's 
experiences cooperating with the Puerto Rico Electric Power 
Authority on the development of the Aguirre Offshore GasPort 
Project, supporting PREPA's efforts in developing the 
Restructuring Support Agreement, and, finally, supporting 
PREPA's continuing efforts to comply with the requirements of 
PROMESA. My more extensive written testimony has been filed 
with the Subcommittee.
    Excelerate is a Texas-based energy company, and we are 
engaged in the development of liquified natural gas 
transportation and regasification infrastructure. We are a 
provider of LNG storage and regasification services and an 
importer of LNG. The company operates a fleet of nine purpose-
built floating storage and regasification units, or FSRUs, as 
they are referred to, that are capable of regasifying LNG on 
board the vessel for delivery as gaseous natural gas to 
downstream customers around the world.
    Our solutions are proven in over a decade of operation and, 
in many instances, our projects supply more than 20 percent of 
all gas consumed in a given country. Established in 2003, we 
are headquartered in The Woodlands, Texas, just north of 
Houston. We have operations in Argentina, Brazil, Israel, the 
United Arab Emirates, and Pakistan, with projects in Bangladesh 
and, hopefully, Puerto Rico slated to come on-line in 2018.
    The Aguirre Offshore GasPort Project is a critical 
initiative for PREPA. For many years, PREPA and the government 
of Puerto Rico have worked to bring an energy solution to the 
island that will minimize the environmental impacts from power 
generation, allow PREPA to be compliant with the Federal 
Mercury and Air Toxic Standards, or MATS rule, and help lower 
energy costs. The Aguirre Offshore GasPort Project is the most 
economical and time-efficient solution to meet PREPA's urgent 
goals.
    In 2011, PREPA selected Excelerate for the development of a 
floating offshore LNG delivery system, incorporating 
Excelerate's FSRU technology, a decision based on Excelerate's 
industry-leading expertise. Excelerate proposed an offshore 
delivery system with a capital cost of approximately $266 
million, which includes infrastructure construction, 
permitting, and development costs. Annual operation and 
maintenance expenses are estimated to be approximately $6.2 
million.
    In the spirit of partnership established with PREPA, 
Excelerate has constructed the FSRU, and the vessel stands 
ready to support the project. Cost reduction, environmental 
enhancement, and increased efficiency are the primary drivers 
for bringing LNG as a new source of fuel to PREPA. Under the 
current U.S. EPA regulations, utilities must reduce air 
emissions from operations, requiring PREPA to switch from heavy 
fuel oil to a cleaner burning fuel source--likely natural gas. 
Not only will natural gas allow PREPA to be compliant with the 
new regulations, but it is considerably cheaper than fuel oil 
and will provide substantial savings over the life of the 
project.
    The successful conversion of the Aguirre power plant will 
be the first step in upgrading PREPA's system to provide safe, 
clean energy for citizens of Puerto Rico.
    One of the long-term benefits of the project will be 
improved air quality on the island, especially for the 
residents of the surrounding community of Aguirre. By switching 
to natural gas at the Aguirre power complex, an overall 
reduction in air emissions of 64 percent is estimated, with 
greenhouse gases, specifically CO2, reduced by 
nearly 30 percent. This decrease is equivalent to eliminating 
more than 335,000 passenger cars from the road.
    Excelerate Energy and Siemens Engineering conducted a 
financial analysis of the project, and determined that PREPA 
would realize $25 million in savings per month or more in 
operating costs, once the project is in service. Over the 15-
year life, nearly $5 billion in savings can be recognized.
    The Aguirre Offshore GasPort Project is near completion of 
its comprehensive environmental analysis, which began in 2011. 
During this review process, in conjunction with regulatory 
bodies, we completed multiple studies to evaluate site 
locations, interconnecting pipeline routes, and construction 
techniques.
    The Aguirre Offshore GasPort Project has undergone rigorous 
design reviews since introducing the floating concept to PREPA 
in 2008. Preliminary design is being completed and reviewed by 
the FERC, the U.S. Army Corps of Engineers, and the Department 
of Transportation Office of Pipeline Safety.
    In conjunction with the design of the Aguirre Offshore 
GasPort Project, the work required to convert the Aguirre Power 
Plant has been underway cooperatively between PREPA and 
Excelerate, to ensure both projects are completed at the same 
time. Advanced engineering design is scheduled to begin in the 
second quarter of 2017, and construction to begin in the third 
quarter of 2017.
    My testimony today is intended to provide information to 
the Subcommittee regarding Excelerate's efforts to support 
PREPA's successful restructuring, and not to discuss the 
mechanics of the RSA and other financial efforts currently 
underway by the Puerto Rico Government.
    Excelerate's involvement with the development of the 
Aguirre Offshore GasPort Project became a critical piece of the 
overall restructuring of the utility. The intent and scope of 
this project is to bring about the reduction of fuel costs for 
the facility and, in turn, provide a reduction in electricity 
rates for ratepayers. Efforts by past Commonwealth 
administrations to facilitate recovery of the island's economy 
resulted in direct impact to continued development of the 
project.
    Our position is support the passage of the RSA as quickly 
as practicable and help PREPA begin restructuring the utility.
    And I will shorten this, since I have gone to the edge of 
my time here.
    Mr. LaMalfa. Yes.
    Mr. Bryngelson. Excelerate remains a committed partner to 
PREPA in this project, and to the government of Puerto Rico. 
Today's hearing is obviously focused on getting PREPA's 
Restructuring Support Agreement implemented as soon as 
possible. Again, we stand ready to support these efforts, and 
will continue to offer all assistance we can to PREPA and the 
government of Puerto Rico. Thank you very much.
    [The prepared statement of Mr. Bryngelson follows:]
Prepared Statement of Robert Bryngelson, President and Chief Executive 
                     Officer, Excelerate Energy, LP
    Thank you Chairman LaMalfa, Ranking Member Torres and members of 
the Subcommittee. My name is Rob Bryngelson, and I am the President and 
CEO of Excelerate Energy, LP (Excelerate). I appreciate the opportunity 
to appear before the Subcommittee today to provide testimony regarding 
Excelerate's experiences cooperating with the Puerto Rico Electric 
Power Authority (PREPA): (1) with the development of the Aguirre 
Offshore GasPort Project (AOGP); (2) supporting PREPA's efforts in 
developing the Restructuring Support Agreement (RSA); and finally, 
supporting PREPA's continuing efforts to comply with the requirements 
of the Puerto Rico Oversight, Management, and Economic Stability Act 
(PROMESA).
Excelerate Energy, LP
    Excelerate is a Texas-based energy company engaged in the 
development of LNG transportation and regasification infrastructure, a 
provider of LNG storage and regasification services, and an importer of 
LNG. The company operates a fleet of nine purpose-built Floating 
Storage Regasification Units (FSRU), LNG carriers capable of 
regasifying LNG on board the vessel for delivery as gaseous natural gas 
to downstream customers worldwide.
    Established in 2003 and headquartered in the Woodlands, Texas, 
Excelerate also has facilities in Singapore, Dubai, Kuwait City, Buenos 
Aires, Israel, and Rio de Janeiro.
Aguirre Offshore GasPort Project
    The AOGP Project is a critical initiative for PREPA. For many 
years, PREPA and the government of Puerto Rico have worked to bring an 
energy solution to the island that will minimize the environmental 
impacts from power generation, will allow PREPA to be compliant with 
the Federal Mercury and Air Toxics Standards (MATS) Rule, and help 
lower energy costs. AOGP is the most economical and time efficient 
solution to meet PREPA's urgent goals.
    Since natural gas is one of the most environmentally-friendly and 
cost-competitive fuel sources available, PREPA recognized early on that 
converting its power generation from fuel oil to natural gas would 
provide the most immediate benefits to the island. PREPA initially 
considered conventional energy infrastructure solutions and sought to 
utilize land-based pipelines to bridge existing resources for the 
distribution of natural gas. Ultimately, the pipeline projects 
encountered considerable financial, environmental, and public opinion 
challenges, and were canceled. As a result, PREPA turned its attention 
to other, more advanced alternatives--specifically Excelerate's 
floating LNG regasification terminals.
    In 2008, Excelerate introduced the concept of an offshore LNG 
import terminal to PREPA as a viable alternative solution to access 
natural gas. Floating regasification terminals, such as the proposed 
AOGP project, can be designed and constructed at a fraction of the cost 
of similarly sized land-based LNG import facilities. More importantly, 
floating regasification terminals require minimal infrastructure and 
land-use, thus reducing environmental impacts and long-term effects on 
the surrounding environment.
    In 2011, PREPA selected Excelerate, following a Notification of 
Interest and Request for Proposal process, as the most qualified 
technology provider to collaborate on the development of a floating, 
offshore LNG delivery system incorporating Excelerate's FSRU 
technology--a decision based on Excelerate's industry-leading 
experience. For the project site, PREPA selected the Central Aguirre 
Power Complex as the location for LNG importation as it is the facility 
with the greatest power generation capacity on the PREPA system, 
providing the most cost-savings and benefits to the surrounding 
environment. Excelerate proposed an offshore delivery system with a 
proposed capital cost of approximately $266 million, which includes 
infrastructure construction, permitting and development fees. Annual 
operation and maintenance expenses are estimated approximately $6.2 
million. Excelerate has purchased and constructed the FSRU, and the 
vessel stands ready to support the Project.
    In April 2013, Excelerate formally commenced the permitting process 
with the Federal Energy Regulatory Commission (FERC) which started its 
rigorous review under the National Environmental Policy Act. After an 
extensive permitting process, FERC published the Final Environmental 
Impact Statement (EIS) for the project in February 2015. The EIS 
document describes the effects of the project on the land, water, air, 
ecosystems in the project area as well as the social, cultural and 
economic impacts. The document also provides ways to mitigate, lessen 
or remove, any potential impacts. To ensure that the AOGP was, in fact, 
the appropriate solution, the EIS also analyzed other alternatives to 
supply natural gas to Aguirre.
    In July 2015, FERC issued its order authorizing the project. Both 
documents concluded that, as proposed, the project will have no 
significant impact on the environment and determined that it is the 
best, proposed alternative for bringing LNG to the island.
                            project benefits
    Cost reduction and environmental enhancement are the primary 
drivers for bringing LNG as a new source of fuel to PREPA. Under the 
current U.S. EPA regulations, utilities must reduce air emissions from 
operations requiring PREPA to switch from heavy fuel oil to a cleaner-
burning fuel source, like natural gas. Not only will natural gas allow 
PREPA to be compliant with the new regulations, but it is considerably 
cheaper than fuel oil and will provide several billions of dollars in 
fuel cost savings over the life of the project. In addition, there is 
an abundance of LNG available in the international market which will 
allow PREPA to take advantage of competitive pricing. The successful 
conversion of the Aguirre power plant will be the first step in 
upgrading PREPA's system to provide safe, clean energy for the citizens 
of Puerto Rico.
Environmental Benefits
    One of the long-term benefits of the project will be the improved 
air quality on the island, especially to the residents of the 
surrounding community of Aguirre. By switching to natural gas at the 
Aguirre Power Complex, an overall reduction in air emissions of 64 
percent is estimated, with greenhouse gases, specifically 
CO2, reduced nearly 30 percent. This decrease is equivalent 
to eliminating greenhouse gases from more than 335,000 passenger cars.
    Additionally, the project will improve the water quality in the 
local area. The power complex is located adjacent to the Jobos Bay 
Estuarine Sanctuary and currently receives its fuel via cargo tankers 
which must traverse the environmentally sensitive bay to reach the 
plant. The AOGP terminal will be located outside the bay and would 
eliminate approximately 90 percent of the barge traffic reducing the 
risks of any inadvertent fuel spills.
Economic Benefits
    Excelerate and Siemens Engineering conducted a financial analysis 
of the AOGP project and determined that PREPA would realize $25 million 
in savings per month, or more, in operating costs once the project is 
in service. Over the 15-year life of the project, nearly $5 billion 
will be saved in fuel costs.
    As PREPA converts its many power generating facilities to natural 
gas, the fuel cost savings will be substantial translating to lower 
energy costs for consumers. With lower electricity rates, industries 
will be encouraged to expand current operations, and industries that 
have left will have the incentive to return.
Community Benefits
    It is Excelerate's goal that the AOGP terminal will become an 
integral part of the community of Aguirre. During the construction 
phase of the project, local fishers will be employed to assist with 
directing local fishing traffic safely around the active construction 
area. When in operation, Excelerate will work with the local mariner 
unions to train local members to perform some duties of the FSRU crew.
    Excelerate will patronize local businesses as the primary source of 
supplies and services for the construction crews. During operations, 
local tugboat operators will be utilized to guide the large refueling 
tankers that will call upon the AOGP facility. The terminal will also 
procure food and other supplies for the vessel crew from local 
providers.
                             project status
Permitting
    The AOGP project is near completion of its comprehensive 
environmental analysis which began in 2011. During this review process 
and in conjunction with regulatory bodies, Excelerate completed 
multiple studies to evaluate site locations, interconnecting pipeline 
routes, and construction techniques.
    Public participation was integral in the development of this 
project. In addition to FERC's public hearings, both Excelerate and 
PREPA held more than two dozen community meetings to ensure complete 
transparency throughout the entire permitting process. Excelerate 
worked closely with the residents in the project area to present the 
details of the project and explain the potential benefits the project 
would bring to their community. Residents had the opportunity to share 
their input regarding the project location, construction activities, 
and any possible impacts to the fishing community. Both Excelerate and 
FERC considered the community's feedback during the analysis and design 
of the project.
    The National Marine Fisheries Service (NMFS) is currently 
completing its review of any biological impacts the project will have 
to the location and finalizing its mitigation requirements for the 
project to lessen or remove any of these potential impacts. Excelerate, 
NMFS, and FERC will complete these mitigation plans by April 2017. All 
other permits, local and Federal, will be finalized after the 
consultation.
Engineering
    The AOGP project has undergone a rigorous design effort since 
introducing the floating concept to PREPA in 2008. Preliminary design 
has been completed and reviewed by FERC, the U.S. Army Corps of 
Engineers, and the Department of Transportation Office of Pipeline 
Safety. Separate from the engineering design efforts for the AOGP 
structure and subsea pipeline, additional work has been completed to 
design the horizontal directional drill under the Boca del Infierno. In 
conjunction with the design of the AOGP project, the work required to 
convert the Aguirre power plant has been underway cooperatively with 
AOGP to ensure both projects are completed at the same time. Advanced 
engineering is scheduled to begin as early as second quarter 2017 and 
construction to begin in the third quarter of 2017.
                 prepa restructuring support agreement
    My testimony today is intended to provide information to the 
Subcommittee regarding Excelerate's efforts to support PREPA's 
successful restructuring, and not to discuss the mechanics of the RSA 
and other financial efforts currently underway by the Puerto Rico 
Government. Excelerate's involvement with the development of the AOGP 
project became a critical piece to the overall restructuring of the 
utility. The intent and scope of the AOGP project was to bring about 
the reduction of fuel costs for the facility and in turn result in the 
eventual reduction in electricity rates for the ratepayers. Efforts 
taken by the past Commonwealth administration to facilitate the 
recovery of the island's economy resulted in direct impacts to the 
continued development of the AOGP project. Law 21 \1\ passed by the 
Padilla placed a moratorium on the ability for creditors to seek 
payment for obligations incurred by government entities. Because the 
critical AOGP project was currently in active development, the 
potential that Excelerate would be prevented from seeking payment of 
current invoices was a serious development. If enacted, Excelerate 
would have to suspend activities until either the Law was repealed or 
specific waivers could be granted. The timing of this law impacted 
negotiations between the Restructuring Officer (RO) and the bondholders 
who were progressing to a point where some funding for the AOGP project 
could be released for continued development. However, without the 
ability to ensure payment of invoices, Excelerate would be required to 
suspend development activities. Excelerate's position is to support the 
passage and implementation of the RSA as quickly as practicable to 
allow PREPA to begin the critical restructuring of the utility. 
Continued delays to RSA implementation will have detrimental impacts to 
the continued development of the AOGP project. The longer the AOGP 
project is delayed, the longer it will be until PREPA can pass the 
potential fuel cost savings to their utility ratepayers.
---------------------------------------------------------------------------
    \1\ Law 21, ``Puerto Rico Emergency Moratorium and Financial 
Rehabilitation Act,'' 6 April 2016.
---------------------------------------------------------------------------
                                promesa
    In April, 2016 Congress introduced H.R. 4900 entitled the Puerto 
Rico Oversight, Management, and Economic Stability Act (PROMESA), 
establishing an oversight board, a process for restructuring debt, and 
expedited procedures for approving critical infrastructure projects. In 
our opinion, the AOGP project was clearly a project that the met the 
criteria as a critical infrastructure project. Excelerate has had 
several meetings with congressional members responsible for the 
PROMESA, briefing the members on the attributes and development status 
of the project. Most recently Excelerate met with the Chairman of the 
Fiscal Oversight Board and the Revitalization Coordinator to present 
the project. The Fiscal Board will be establishing a Critical Project 
Program in April 2017, and Excelerate will present the AOGP project for 
consideration of the Fiscal Board. The AOGP project is in the final 
stages of permitting and is scheduled to commence the initial 
procurement phase of construction in the 3rd quarter of 2017, pending 
final approval of project financing. Approval by the Fiscal Board will 
have a direct positive impact on the implementation of PREPA's RSA.
                               conclusion
    The Aguirre Offshore GasPort project is a critical initiative for 
PREPA. For many years, PREPA and the government of Puerto Rico have 
worked to bring an energy solution to the island that will minimize the 
environmental impacts from power generation, will allow PREPA to be 
compliant with the Federal air emission rules, and help lower energy 
costs. AOGP is the most economical and time efficient solution to meet 
PREPA's urgent goals.
    Excelerate has remained a committed, cooperating partner for PREPA 
and for the government of Puerto Rico. The purpose of the hearing today 
has focused on getting PREPA's Restructuring Support Agreement 
implemented as soon as possible. Excelerate supports these efforts and 
will continue to offer assistance in any way need by PREPA or the 
Governor.
    We look forward to our continued participation in the process with 
our ultimate goal of bringing the AOGP project in-service, bring clean-
burning natural gas to PREPA and being a part of the Governor's efforts 
to revitalize the Puerto Rico economy. I thank you on behalf of 
Excelerate Energy for allowing me to provide this testimony.

                                 ______
                                 

Questions Submitted for the Record by Rep. Grijalva to Rob Bryngelson, 
                 President & CEO, Excelerate Energy, LP
    Question 1. You testified that the proposed Aguirre Offshore 
GasPort would cost $266 million to build and $6.2 million to operate 
and maintain.
    Caribbean Business reported December 16 that PREPA has estimated 
that the project will cost $522 million to build, $51 million a year to 
lease, and other costs, presumably operation and maintenance. http://
caribbeanbusiness.com/prepa-may-be-too-deep-in-aguirre-offshore-gas-
port-to-look-at-other-options/
    How do you explain the differences between your testimony and what 
PREPA has been reported to have said?

    Answer. The Aguirre Offshore GasPort (AOGP) project comprises two 
general parts. These are:

  (i)  a floating storage and regasification unit (FSRU), which is 
            essentially a floating facility that receives LNG and 
            converts it into vaporous natural gas, and

  (ii)  an offshore jetty to which the FSRU will moor and a pipeline 
            necessary to bring vaporized natural gas ashore (Fixed 
            Infrastructure).

    Under the agreements in place with PREPA, Excelerate Energy will 
finance and own the FSRU and lease it to PREPA, while PREPA will 
finance and own the Fixed Infrastructure.
    The cost referenced in my testimony of $266 million pertains to the 
capital cost of the Fixed Infrastructure that PREPA will own and 
finance (also noted in the article). The operating costs of $6.2 MM per 
year also pertain to the Fixed Infrastructure. The $51 million per year 
noted in the article is for the lease of the FSRU from Excelerate.
    The cost of $552 is a broader cost provided by PREPA that not only 
encompasses the AOGP project itself, but also includes upgrades 
required to allow existing power generation facilities to switch to 
natural gas from fuel oil.

    Question 2. Caribbean Business also reported that your hope is to 
finance your project with an 80 percent U.S. Energy Department loan 
guarantee.
    Is this correct? If so, what assurance do you have of such a 
guarantee? Can you finance the project without the guarantee?

    Answer. Under the agreements in place between Excelerate Energy and 
PREPA regarding the AOGP project, it is PREPA's responsibility to 
finance and own the Fixed Infrastructure referenced in the previous 
question. As such, PREPA has been pursuing the U.S. Department of 
Energy loan guarantee, and not Excelerate Energy. We have no additional 
insight into this process or assurance that such guarantee will be 
provided. In Excelerate Energy's view, it is critical for PREPA's debt 
restructuring to occur in order for financing for this project to be 
obtained in any form, or for guarantees to be granted.

    Question 3. The Puerto Rico Energy Commission has prohibited PREPA 
from spending more than $15 million on the Aguirre Gas Port.
    How would the Commission explain its action on your proposed 
project?

    Answer. Recognizing the importance of the AOGP project, the Puerto 
Rico Energy Commission (PREC) authorized the spending of up to an 
additional $15 million for ongoing engineering, design, and permitting 
activities to allow the project to maintain schedule. Excelerate Energy 
is working closely with PREPA to proceed with these additional 
engineering and related activities.
    In its decision, PREC stated that PREPA was not authorized to 
commence construction of the AOGP project, and was clear that this was 
not a denial of the project. Rather, PREC requested additional 
information from PREPA regarding the project's economic benefits to 
Puerto Rico.
    At this stage Excelerate Energy is completing the permitting 
process for the AOGP project. Until that process is completed and the 
Federal Energy Regulatory Commission (FERC) has provided its notice to 
proceed, the AOGP project is not able to commence construction--
regardless of the position taken by PREC.
    Excelerate Energy expects to have the final authorizations to 
proceed to construction in the third quarter of this year.

                                 ______
                                 

    Mr. LaMalfa. All right, thank you. I appreciate it.
    We will now recognize Ms. Matosantos for 5 minutes.

STATEMENT OF ANA J. MATOSANTOS, MEMBER, FINANCIAL OVERSIGHT AND 
    MANAGEMENT BOARD OF PUERTO RICO, SACRAMENTO, CALIFORNIA

    Ms. Matosantos. Good morning, Chairman, Ranking Member, and 
other Committee members. Thank you for the opportunity to 
address you today. I would like to start by adding my support 
to Chairman Carrion's comments regarding the important progress 
the board has made since our appointment last year.
    With a certified fiscal plan now in place, we aim to 
partner with the government of Puerto Rico to balance the 
budget, restructure long-term obligations, and take the 
decisive action necessary to restore economic growth and 
opportunity for the people of Puerto Rico. The fiscal plan 
certified by the Oversight Board is premised on ending the more 
than a decade-long economic contraction Puerto Rico has 
experienced, and on restoring economic growth.
    A transformational PREPA to provide reliable energy at a 
lower cost is critical to achieving that growth. In this 
context, we believe that the Governor's determination to review 
and negotiate amendments to PREPA's RSA is reasonable. Costly 
and at times unreliable energy is a major drag on Puerto Rico's 
economic growth. It is not enough to maintain that energy costs 
under the RSA will compare favorably to energy costs in some 
other jurisdictions, as lower energy costs, rates that compare 
favorably to the Dominican Republic, to the mainland, and to 
others, are key to reversing the negative economic growth 
trajectory that largely drove Puerto Rico's budgetary crisis 
and threatens the well-being of the millions of the island's 
residents.
    It is important to note that, to date, the board has not 
had the RSA before it for approval. The prior government did 
not present it for review. And Governor Rossello has expressed 
interest in modifications. We stand ready to review it and have 
already advised Governor Rossello that the board would approve 
an RSA amended to reflect the improved economic terms, 
including lower transition costs he is requesting in 
negotiations.
    Because the PREPA RSA was, to some extent, grandfathered by 
PROMESA, PREPA creditors do not bear under the RSA anything 
remotely comparable to the losses to be borne by creditors of 
other Commonwealth entities. Under the RSA, the uninsured PREPA 
bondholders agreed to take a 15 percent discount on their 
principal claims. The insured bondholders retained their claims 
to 100 percent of their principal.
    The monoline insurers who were paid premiums in exchange 
for their promises to make all debt service payments that PREPA 
does not make will not be making any debt service payments of 
principal once the deal is implemented, and they have not shown 
us any interest payments they will make. Instead, they are 
posting some surety bonds that are returned to them as cash 
reserves are built up. Additionally, hundreds of millions of 
other debts are not experiencing any discounts.
    It is important to understand how other Commonwealth 
creditors are likely to fare under the recently certified 
fiscal plan. Between 2009 and 2014, Puerto Rico's annual 
deficit averaged $3.9 billion. With a deficit of this magnitude 
and lack of access to capital markets, this year Puerto Rico 
was only able to fund essential services by defaulting on much 
of its debt, delaying payments to vendors, and delaying the 
issuance of taxpayer refunds.
    Next year, Puerto Rico's fiscal situation will worsen. Most 
all pension funding will be exhausted. Likewise, the Affordable 
Care Act funding is scheduled to begin phasing out. Puerto 
Rico's annual deficit is projected to grow to $7 billion over 
the next several years, about 50 percent of their ongoing 
revenue.
    To balance the budget, the certified fiscal plan includes 
hundreds of millions of dollars in reductions to each of the 
following: healthcare programs, the University of Puerto Rico, 
and to public employment. To ensure liquidity and to generate 
necessary budget savings, the Oversight Board inserted two 
amendments requiring higher pension cuts, averaging 10 percent, 
to be implemented in a progressive manner, and, to the extent 
necessary, cancellation of the Christmas bonus for public 
employees and a furlough program of up to 4 days per month. 
These measures are acutely painful, but necessary for 
liquidity, achieving structural balance, funding essential 
services and pensions, as well as providing some funding for 
debt service.
    The fiscal plan, as certified, provides for less than 25 
percent of contractual debt service due between now and 2026. 
In short, the sacrifices the implementation of Puerto Rico's 
certified fiscal plan will require from the people of Puerto 
Rico and other Commonwealth creditors are far greater than 
anything being asked of PREPA's creditors.
    In conclusion, the Oversight Board stands ready to review 
the PREPA RSA, and supports efforts to lower energy costs and 
ameliorate projected electricity rate hikes to avoid 
exacerbating the prevailing negative economic growth trend.
    Thank you--and thank you for all your interest and 
attention to this matter.
    [The prepared statement of Ms. Matosantos follows:]
Prepared Statement of Ana J. Matosantos, Member, Financial Oversight & 
                    Management Board for Puerto Rico
    Good morning. My name is Ana Matosantos. I am a member of the 
Financial Oversight and Management Board for Puerto Rico.
    Thank you, Chairman LaMalfa for your leadership in holding this 
oversight hearing on ``The Status of the Puerto Rico Electric Power 
Authority Restructuring Support Agreement.'' Thanks also to Ranking 
Member Torres, Vice Chair Gonzalez-Colon and, indeed, all the members 
of this Subcommittee for your interest in and attention to this matter.
    Before addressing the specific subject of this hearing, I would 
like to add my voice in support of Chairman Carrion's statement 
regarding the important progress the Board has made since our 
appointment last year.
    For the last 6\1/2\ months, we have worked to understand the facts 
on the ground, the options available to the government, and the 
implications of different approaches to addressing the financial and 
economic crisis facing the island. Throughout, we have sought to 
partner with the government of Puerto Rico and to use the tools made 
available under PROMESA to help provide a better future for the people 
of Puerto Rico, not just for today, but for our children and future 
generations. Our people love their home and they deserve to be able to 
build a future on it, not forced to move away to support their families 
and their dreams.
    The Board provided guidance and proposed actions on many fronts to 
ensure there is sufficient cash to fund essential services on the 
island, to put the budget on a path to structural balance, and to 
restore economic growth. The Rossello administration incorporated the 
Board's guidance, as well as its own initiatives, in a Fiscal Plan that 
the Board was able to certify in compliance with PROMESA. With that 
Fiscal Plan now in place, over the course of the next few years, we aim 
to partner with the government of Puerto Rico to balance the budget, 
restructure long-term debt obligations, and take the decisive action 
necessary to restore economic growth and opportunity for the people of 
Puerto Rico.
    With respect to PREPA, I would like to state at the outset that the 
Fiscal Plan that the Oversight Board certified on March 13, 2017 is 
entirely premised on ending the more than a decade-long economic 
decline Puerto Rico has experienced and on restoring economic growth by 
no later than Fiscal Year 2022.
    In that regard, I echo Chairman Carrion's statement that the 
Board's approach to PREPA's Restructuring Support Agreement (``RSA'') 
must focus on its potential impact on economic growth.
    The Governor's determination to review and negotiate amendments to 
PREPA's RSA is reasonable and supported by the Oversight Board's 
initial review of the draft Fiscal Plan PREPA's management has 
submitted to the Board.
    We believe that the two main goals of PREPA's Fiscal Plan should 
be: (1) comprehensive transformation of PREPA's business model, 
including the substitution of old, inefficient and unreliable 
transmission and distribution (T&D) and generation infrastructure; and 
(2) implementing operating efficiencies and other changes that can 
lower energy costs for the people of Puerto Rico and our businesses.

    The Board has done a preliminary review of the draft PREPA Fiscal 
Plan submitted to the Board on February 21, 2017 and has the following 
observations:

  a.  The draft Fiscal Plan does not provide for the comprehensive 
            transformation of PREPA necessary to lower electricity 
            costs for the People of Puerto Rico.

  b.  It does not sufficiently address the need for institutional 
            change in processes and procedures, outdated systems and 
            information technology.

  c.  It does not capture enough operating expense savings.

  d.  It does not contain an ambitious plan to change its business 
            model, and replace inefficient legacy assets with new 
            assets, especially regarding power generation via Public-
            Private Partnerships (``P3s'') or privately sponsored 
            projects.

  e.  The capital expenditures plan seems to be concentrated in legacy 
            assets and their maintenance.

    In our view, it is not enough to maintain that although the 
resultant energy cost under the RSA will increase, it will still 
compare favorably to energy costs in some other jurisdictions. Energy 
costs in Puerto Rico are high when compared to the mainland, to the 
Dominican Republic and others. Costly and at times unreliable energy is 
a major drag on Puerto Rico's economic growth. The RSA increases the 
cost of electricity, thereby increasing the cost of living and doing 
business in Puerto Rico. That only makes it more difficult to reverse 
the negative economic growth trajectory that largely drove Puerto 
Rico's budgetary crisis and threatens the well-being of the island's 
residents.
    Further, in respect to the PREPA RSA, it is important to note what 
PROMESA requires the Oversight Board to do and not to do. For most 
consensual deals, PROMESA requires the Oversight Board to make three 
decisions. But for the PREPA RSA, the Board only makes two decisions.
    PROMESA section 104(i) generally requires the Oversight Board to 
decide whether a Restructuring Support Agreement is consistent with the 
borrower's debt sustainability, and its certified fiscal plan, if it 
has one. But the PREPA RSA was entered into prior to May 18, 2016. 
Therefore, under PROMESA section 104(i)(3), the PREPA RSA is deemed to 
be consistent with PREPA's debt sustainability and the Oversight Board 
has no power to say otherwise.
    PROMESA section 601(e) provides that the Oversight Board must 
determine whether to authorize an entity to invoke Title VI to 
implement an RSA. Because Title VI does not deal with the restructuring 
of anything other than bond debt, other obligations cannot be 
restructured in Title VI. If PREPA requires relief of other contractual 
obligations, the Oversight Board's use of Title VI would be inadequate. 
The Board could approve the implementation of the PREPA RSA, as 
amended, in a Title III case, making it possible for PREPA to address 
other contractual obligations driving significant costs.
    Finally, PROMESA section 207 provides the Oversight Board must 
authorize the issuance of new debt, and the PREPA RSA includes issuance 
of new debt.
    To date, the Board has not had the RSA before it for approval as 
the prior government did not present it for review and now Governor 
Rossello has expressed an interest in modifications. The Board stands 
ready to review the PREPA RSA upon its submission for the Board's 
consideration. The Board has already advised the Governor that it would 
approve an RSA amended to reflect improved economic terms, including 
lower transition costs, as the Governor is requesting in negotiations.
    It is important to note that because the PREPA RSA was 
grandfathered to some extent by PROMESA, PREPA creditors do not bear 
under the RSA anything remotely comparable to the losses to be borne by 
creditors of other Commonwealth entities.
    To avoid overlooking the obvious, I will just mention briefly that 
while the uninsured PREPA bondholders agreed to take a 15 percent 
discount on their principal claims, the insured bondholders retain 
their claims to 100 percent of their principal. The monoline insurers, 
who were paid premiums in exchange for their promises to make all debt 
service payments that PREPA does not make, will not be making any debt 
service payments of principal once the deal is implemented and they 
have not shown us any interest payments they will make. Instead, they 
are posting some surety bonds that are returned to them as cash 
reserves are built up. Additionally, hundreds of millions of other 
debts are not experiencing any discounts.
    The sacrifices the implementation of Puerto Rico's certified Fiscal 
Plan will require from the people of Puerto Rico and other Commonwealth 
creditors are far greater than anything being asked of PREPA's 
creditors.
    It is important to understand how other Commonwealth creditors are 
likely to fare under the recently certified Fiscal Plan. To accomplish 
PROMESA's mandate that Puerto Rico balance its budget, fund essential 
services and pensions, as well as work to restore access to capital 
markets at cost-effective rates, the Oversight Board worked to 
understand Puerto Rico's actual financial condition and operating 
deficits.
    Between 2009 and 2014, Puerto Rico's annual deficit averaged $3.9 
billion. With a deficit of that magnitude and lack of access to capital 
markets, this year, Puerto Rico funded essential services by defaulting 
on much of its debt, delaying payments to vendors and delaying the 
issuance of refunds to taxpayers. Next year, Puerto Rico's fiscal 
situation will worsen.
    Most all pension funding will be exhausted in Fiscal Year 2018, 
necessitating general fund expenditures starting at $989 million per 
year. Likewise, Affordable Care Act funding from the Federal Government 
of $800 million per year will cease during Fiscal Year 2018.
    Against that background, the Oversight Board had to evaluate the 
prior governor's proposed fiscal plan for the Commonwealth, and 
determined it contained many violations of the terms of PROMESA section 
201(b).
    The prior governor declined to revise his proposed fiscal plan, 
leaving it to the new Governor who was not inaugurated until January 2, 
2017.
    Understandably, the new Governor requested more time to propose a 
fiscal plan and the Oversight Board provided him until February 28, 
2017, so that the Board could certify the Governor's plan or its own 
plan by March 15, 2017.
    Further, an analysis of initial spending projection included in the 
Government's Fiscal Plan conducted by Ernst & Young at the Board's 
request, concluded that spending in Fiscal Year 2017 was potentially 
understated by a range between $360 million and $810 million.
    The Board acknowledged that the Governor revised his proposed plan 
to accommodate the best available spending, revenue and economic 
projections. The revised plan also includes substantial increases in 
the depth of reductions being made to balance the budget including 
hundreds of millions of dollars in reductions to healthcare programs, 
to the University of Puerto Rico and to public employment. The Fiscal 
Plan, as certified, provides funds for less than 25 percent of 
contractual debt service due between now and 2026.
    In addition to the Governor's changes, the Oversight Board inserted 
two amendments requiring (i) higher pension cuts averaging 10 percent, 
to be implemented in a progressive manner, and (ii) to the extent 
necessary, cancellation of the Christmas bonus for public employees and 
a public employee furlough program of up to 4 days per month.
    These additional measures are acutely painful, but their 
implementation may be necessary for liquidity, achieving structural 
balance, funding essential services and pensions, as well as providing 
some funding for debt service.
    As stated before, on March 13, 2017, the Oversight Board certified 
the Governor's Fiscal Plan for the Commonwealth, with the two 
amendments I just described, and provided the Government until April 
30, 2017 to submit its proposed budget in accordance with the certified 
Fiscal Plan.
    In conclusion, the Oversight Board stands ready to review the PREPA 
RSA upon its submission for the Board's consideration. The Board 
supports efforts to lower energy costs and ameliorate projected 
electricity rate hikes to avoid exacerbating the prevailing negative 
economic growth trend.
    Thank you, Mr. Chairman. And thanks to all the members for your 
interest in and attention to this matter.

                                 ______
                                 

        Questions Submitted for the Record to Ana J. Matosantos
                   Questions Submitted by Rep. Bishop
    Question 1. In your testimony, you state: ``under PROMESA section 
104(i)(3), the PREPA RSA is deemed to be consistent with PREPA's debt 
sustainability and the Oversight Board has no power to say otherwise.''
    Section 104(i) states: ``The Oversight Board shall issue a 
certification to a covered territory or a covered territorial 
instrumentality if the Oversight Board determines, in its sole 
discretion, that such territory or covered territorial instrumentality, 
as applicable, has successfully reached a voluntary agreement with 
holders of its Bond Claims to restructure such Bond Claims'' if a 
fiscal plan has been certified in a manner that provides for a 
sustainable level of debt. There are other qualifiers if the fiscal 
plan has not been approved.
    Section 104(i)(3) states: ``Any voluntary agreement that the 
territorial government or any territorial instrumentality has executed 
before May 18, 2016, with holders of a majority in amount of Bond 
Claims . . . shall be deemed to be in conformance with the requirements 
of this subsection.''
    So, the plain language of the statute deems that the pre-existing 
voluntary agreement for PREPA meets the requirement for a certified 
fiscal plan that provides for a sustainable level of debt. Furthermore, 
it deems the PREPA deal as being in conformance with the certified 
plan, isn't that correct?
    If those criteria are met, then the statute dictates that the Board 
is to issue a certificate saying so, isn't that correct?
    Why hasn't the Board done so?

    Answer. As mentioned in my testimony. the RSA has not been 
presented to the Board for its review and approval as the prior 
administration did not submit it for review and the current 
administration sought amendments to the agreement. The Board remains 
committed to taking action on the RSA consistent with the PROMESA 
statute when an RSA is submitted to the Board.

    Question 2. In your testimony, you state: ``The Board could approve 
the implementation of the PREPA RSA, as amended, in a Title III case, 
making it possible for PREPA to address other contractual obligations 
driving significant costs.''
    Could not the same be achieved through the Board's approvals of the 
fiscal plan and budgets for PREPA?

    Answer. The mechanism provided by Title III to address reductions 
in PREPA's operational costs is different in nature from the process of 
certifying PREPA's fiscal plan and budget. Under Title III , existing 
contractual arrangements can be judicially modified, whereas no such 
option exists under the certification process.

    Question 3. In your testimony, you state: ``The sacrifices the 
implementation of Puerto Rico's certified Fiscal Plan will require from 
the people of Puerto Rico and other Commonwealth creditors are far 
greater than anything being asked of PREPA's creditors.''
    Do you agree that the Commonwealth government and PREPA are two 
different entities?
    Do you agree that the circumstances leading to the accumulation of 
debt are different?
    Do you agree that the Commonwealth government and PREPA have 
different revenue streams?
    Do you agree that the Commonwealth government and PREPA have 
different securitizations, different debt obligations?

    Answer. Yes, I agree.

    Question 4. So, is it your testimony that the financial situation 
of the Commonwealth government should govern how the PREPA debt should 
be restructured, or should each be examined as separate entities?

    Answer. The Commonwealth and PREPA are separate entities and should 
be examined as such. As discussed in my testimony, the intersection 
between PREPA and the economic and demographic reality in the 
Commonwealth requires careful consideration as PREPA plays an important 
role in the economy of Puerto Rico and the economic and demographic 
reality of Puerto Rico impacts PREPA's future. As repeatedly 
acknowledged in PROMESA, the energy situation of Puerto Rico is a key 
issue affecting economic development. Hence, the priority for critical 
projects that reduce the cost of energy given priority under Title V of 
PROMESA.
                  Questions Submitted by Rep. Grijalva
    Question 1. Has the Board received the report? [Referring to the 
report under PROMESA Section 208(b) setting forth tax abatement 
agreements granted by the Commonwealth.]

    Answer. Pursuant to Section 208(b) of PROMESA, the Secretary of the 
Treasury of the Commonwealth of Puerto Rico provided tax-related 
information in a report (with attachments) dated February 28, 2017, 
copies of which are attached. Subsequently. a representative of the 
Board met with the Secretary to request additional information to 
satisfy the requirements of Section 208(b) of PROMESA, and on March 30, 
2017, the Board wrote to the Secretary to follow up on such request. A 
copy of the Board's letter is attached.

    Question 2. How could a fiscal plan be agreed to that cuts 
Government spending for public services and for payment of debts so 
drastically that does not require any further contribution from 
companies that represent a third of the GDP and high net worth 
individuals on top of that who pay so little in tax now?

    Answer. The certified Fiscal Plan includes corporate tax reform to 
maintain the current level of revenues including contributions from 
pharmaceutical and other companies. Further. it includes other measures 
to increase revenues by hundreds of millions of dollars annually, 
including through efforts to increase collections. The fiscal plan 
includes changes to generate an additional $1.5 billion in revenue to 
close the fiscal gap. Puerto Rico has a track record of assuming higher 
revenue projections and not realizing those revenues. The fiscal plan 
strikes a balance between increased revenue, deep reductions, 
restructuring and structural changes to encourage economic growth.

Attachment--[Attachment can be found on page 32 with Mr. Carrion's 
responses.]

                                 ______
                                 

    Mr. LaMalfa. OK. Thank you. We appreciate your testimony.
    We will go now to Mr. Spencer for 5 minutes.

   STATEMENT OF STEPHEN SPENCER, MANAGING DIRECTOR, HOULIHAN 
LOKEY, MINNEAPOLIS, MINNESOTA, ON BEHALF OF FRANKLIN ADVISERS, 
                INC. AND OPPENHEIMER FUNDS, INC.

    Mr. Spencer. Chairman LaMalfa, Ranking Member Torres, Vice 
Chairman Gonzalez, and members of the Subcommittee, thank you 
for inviting me to testify today. I am here on behalf of 
Franklin Advisers and Oppenheimer Funds, who invested in PREPA 
bonds for more than 500,000 retail investors throughout the 
United States.
    It is important to remember who Puerto Rico's bondholders 
are. Beyond our half-million investors, there are hundreds of 
thousands more in every state and in every congressional 
district, including over 60,000 bondholders on the island.
    For almost 3 years, I have been working to advance a 
consensual restructuring of PREPA's debt on behalf of Franklin, 
Oppenheimer, and other bondholders. And look how much we have 
achieved:
    (1) Our deal offers the surest route back to the capital 
markets. It issues new, safe bonds, like bonds issued by 
utilities in New York and California that will get PREPA back 
into the capital markets to fund new, clean, and reliable power 
generation.
    (2) Our deal serves as a template for restructuring other 
Puerto Rico debts. The PREPA deal is the first and, so far, the 
only major restructuring agreement in Puerto Rico. It can be 
used as a model for successful restructuring by other 
government agencies such as Puerto Rico's sewer water 
authority.
    (3) Our deal stabilizes PREPA. In July 2014, PREPA faced a 
crisis. It could not get credit to buy fuel, and reserves 
dwindled to a few days' supply in peak hurricane season. To 
prevent disaster, bondholders gave PREPA hundreds of millions 
in bondholder reserve accounts, and literally kept the lights 
on.
    (4) Our deal provides cash for PREPA and savings for 
ratepayers. Since the crisis, creditors have invested hundreds 
of millions to support PREPA, and we have allowed PREPA to pass 
along over $2 billion in rate reductions from lower fuel costs. 
Under our deal, creditors will cut debt service by nearly $2 
billion more.
    (5) Our deal has been approved by Puerto Rico's 
legislature, which passed legislation to implement the deal by 
the Puerto Rico Energy Commission, which approved the deal 
after months of public hearings, a first in Puerto Rico, and by 
the Puerto Rico courts.
    Finally, when Congress passed PROMESA, they included 
provisions that encourage pre-existing voluntary arrangements 
and agreements like the PREPA deal. Congress gave Puerto Rico a 
tool to restructure; we are simply trying to use it. Despite 
these accomplishments, critics of the PREPA deal have directed 
misguiding or misleading attacks against it.
    For example, they say the deal raises rates. False. To 
quote the Puerto Rico Energy Commission, ``Restructured debt 
costs are far lower than they would be without restructuring.''
    PREPA's post-deal rates are significantly lower than 
comparable island utilities. Critics say, ``Debt should be cut 
further.'' False. No other public utility monopoly has ever cut 
its debt service. PREPA is the first. Bondholders have given 
enough to avoid litigation that we would eventually win.
    Critics say the deal does not restructure PREPA operations. 
False and misleading. Only PREPA can restructure operations. We 
agreed to reduce debt service to support PREPA's efforts to do 
so.
    They say the deal does not support renewable energy. False. 
The deal provides nearly $2 billion of debt service savings for 
PREPA to invest in new generation, including renewables.
    They say the deal does not support private generation or 
public-private partnerships. False again. The deal does not 
stop P3 deals, it gets them going by avoiding years of 
litigation.
    Finally, they say the PREPA deal is not executable. False. 
PREPA's fiscal plan provides a detailed description of the 
executable creditor agreement. The plan also shows that, 
without a deal, PREPA faces either a liquidity crisis or a 
large, immediate rate hike.
    We find ourselves in a strange position. The government, 
including the Energy Commission and PREPA, itself a government 
agency, has approved the deal, but the new administration will 
not commit to close it. The Governor wants to jam us into pay-
nothing bonds for 7 years.
    Changing a fully baked deal is wrong. It is reckless, and 
it is unnecessary. With creditor support, PREPA has actually 
improved over the last few years. Rates are dramatically lower 
today than they were in 2014. Completing the deal keeps PREPA 
on a path to better operation with lower rates benefiting all 
Puerto Ricans.
    We have extended our agreement 15 times. The last extension 
expires in 9 days--9 days, Mr. Chairman. The new administration 
must commit to close this deal now. Without it, their public 
disclosure yesterday indicates PREPA will soon run out of cash. 
Failure to close our deal helps no one. Failure hurts Puerto 
Rico's restructuring negotiations. It hurts municipal borrowers 
in places as disparate as the U.S. Virgin Islands, Illinois, 
and Guam. And it hurts the people of Puerto Rico.
    Members of the Committee, thank you for your legislative 
oversight on this important matter. I look forward to your 
questions.
    [The prepared statement of Mr. Spencer follows:]
Prepared Statement of Stephen J. Spencer, Managing Director, Financial 
                  Restructuring Group, Houlihan Lokey
                              introduction
    Chairman LaMalfa, Ranking Member Torres, Resident Commissioner 
Gonzalez, and members of the Subcommittee, thank you for inviting me to 
testify today regarding the Puerto Rico Electrical Power Authority 
(``PREPA'') and its Restructuring Support Agreement (``RSA'')--the 
``PREPA Transaction.''
    My name is Stephen J. Spencer. I am testifying on behalf of certain 
funds managed by Franklin Advisers Inc. (``Franklin'') and 
OppenheimerFunds, Inc. (``Oppenheimer'') in connection with their 
investment in $1.7 billion in bonds issued by PREPA.\1\
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    \1\ For the PREPA negotiations, I advise both Franklin and 
Oppenheimer, along with the investment interests of five separate asset 
investors.
---------------------------------------------------------------------------
    Franklin and Oppenheimer are Puerto Rico's largest bondholders and 
have been among Puerto Rico's largest investors, providing capital to 
finance critical infrastructure, such as roads, bridges and hospitals 
for more than 30 years. Over half a million individual retail investors 
across the United States invested in Puerto Rico bonds through Franklin 
and Oppenheimer. Untold thousands have invested through other funds, 
and at least another 340,000 individuals have invested directly in 
Puerto Rico bonds.
    The PREPA Transaction is backed by holders or insurers of about 70 
percent of all of PREPA's financial debt.
    Bondholders agreed to a 15 percent principal haircut, a 5-year 
holiday on principal payments, and a reduced interest rate--cutting 
debt service by billions of dollars over the next decade. The PREPA 
Transaction would be implemented through a proceeding under Title VI of 
PROMESA.
    The PREPA Transaction works because the new bonds would be 
``securitized''--that is, the new bonds will not be paid out of PREPA's 
cash-flow, but by a separate charge.
    Under the PREPA Transaction, total electrical rates paid by Puerto 
Ricans will be 25 percent below what Puerto Rican law otherwise 
requires.
    The PREPA Transaction does more than simply refinance PREPA's debt 
and restore access to capital markets--the first and last goal of 
PROMESA. The deal also puts PREPA on the path to fiscal 
responsibility--another goal of PROMESA. The deal also permits public-
private partnerships and facilitates necessary capital investment--
another goal of PROMESA.
    This deal is a crucial step in PREPA's journey from crisis to 
financial health--a journey from poor maintenance to capital 
improvement--a journey from Puerto Rico's reliance on diesel fuel to a 
more diversified energy base that includes cleaner natural gas.
    After 14 months of negotiation, my clients signed the PREPA 
Transaction in November 2015. The PREPA Transaction was authorized by 
Puerto Rico's legislature in February 2016, its implementation was 
approved by Puerto Rico's Energy Commission in the summer of 2016, and 
its constitutionality was recently upheld by a decision in a local 
Puerto Rican court.
    In 2016, Congress wrote provisions into PROMESA to help certain 
voluntary, ``pre-existing'' agreements, like the PREPA Transaction, 
that were entered into shortly before the passage of PROMESA. As a 
result, the PREPA Transaction is the only deal exempt from Oversight 
Board review and is ready to be finalized under PROMESA Title VI.
    My clients even agreed to additional concessions in January 2017. 
To be clear, the January 2017 deal is the deal inked in November 2015; 
the only changes are concessions by creditors, not by PREPA or Puerto 
Rico.\2\ The deal is executable.
---------------------------------------------------------------------------
    \2\ See PREPA's draft Fiscal Plan at pages 73-75. Fiscal Plan, 
Commonwealth of Puerto Rico, Puerto Rico Elec. Power Auth., at 73-75 
(Feb. 2017) [hereinafter ``PREPA's Fiscal Plan''], available at http://
caribbeanbusiness.com/wp-content/uploads/2017/02/PREPA-Fiscal-Plan.pdf.
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    Failure to close this deal would have ramifications far beyond 
PREPA.
    Failure to close a deal negotiated over 2 years would call into 
question Puerto Rico's good faith in negotiating other restructurings--
of great concern to Franklin and Oppenheimer, who hold over $6 billion 
of other Puerto Rico bonds.
    Failure would damage, if not destroy, Puerto Rico's ability to use 
securitization as a tool to restructure other entities such as the 
Puerto Rico Aqueduct and Sewer Authority, which is looking to use the 
PREPA Transaction as a model.
    Failure would have ramifications beyond Puerto Rico. It will 
negatively impact other challenged government entities as diverse as 
the U.S. Virgin Islands, Guam, the city of Chicago, and the state of 
Illinois.
    Finally, failure to close this deal would be bad for the people of 
Puerto Rico. The deal puts PREPA on a sound financial footing, but 
without it, PREPA is approaching imminent default and a liquidity 
crisis that could turn off the lights with the next operational hiccup 
or major storm.
    We have extended our Restructuring Support Agreement 16 times; the 
last extension expires 9 days from this hearing, on March 31. PROMESA's 
stay expires May 1.
                          prepa and prepa debt
    PREPA is a public corporation that generates most of--and delivers 
all of--the electric power consumed in Puerto Rico. PREPA sets and 
collects rates for its services to customers. Since 2014, PREPA's rates 
have been subject to review by the Energy Commission.
    Puerto Rican law specifically requires that the Energy Commission 
approve a rate that is sufficient to cover all debt service on PREPA's 
bonds.\3\
---------------------------------------------------------------------------
    \3\ Puerto Rico Elec. Power Auth. Organic Act of May 12, 1941, Act 
No. 83-1941, Sec. 6A(c), as amended.
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    PREPA has issued approximately $8.3 billion of outstanding revenue 
bonds to the public. The bonds are secured by PREPA's net revenues from 
its electric generation and distribution system, as well as reserve 
accounts held by the trustee. Approximately 30 percent of PREPA's 
outstanding debt is insured by three separate monoline insurance 
companies.
    PREPA also owes approximately $700 million in expired lines of 
credit that were used to purchase fuel for its generation.
               liquidity crisis and creditor organization
    PREPA has faced severe internal and external challenges. In the 
words of its former chief restructuring officer, Lisa Donahue of 
AlixPartners, PREPA had ``a lack of institutionalized processes and 
procedures, outdated systems and information technology and frequent 
changes of employee positions and responsibilities with each electoral 
cycle every four years.'' \4\
---------------------------------------------------------------------------
    \4\ PREPA Revitalization Act: Hearing Before the Puerto Rico S. 
Comm. on Energy Affairs and Water Resources, 17th Legis. Assemb., 2 
(P.R. Nov. 10, 2015) (testimony of Lisa Donahue, Chief Restructuring 
Officer of PREPA).
---------------------------------------------------------------------------
    PREPA started experiencing liquidity difficulty due, in part, to 
its existing rate structure, which charges a fixed ``base'' rate for 
non-fuel expenses, like administrative costs and debt service, and a 
floating rate for fuel costs, which fluctuates with the price of 
oil.\5\
---------------------------------------------------------------------------
    \5\ Changes in the price of natural gas and purchased power also 
affect the fuel charge, but to a far lesser degree.
---------------------------------------------------------------------------
    PREPA's base rate had not changed from 1989 to 2015, even as its 
costs rose significantly.
    PREPA's cash flow further suffered from a serious failure in 
collections: it persistently allowed individual customers, other public 
corporations, government agencies, and municipalities to avoid paying 
their bills.\6\
---------------------------------------------------------------------------
    \6\ See generally Accounts Receivable and CILT Report, FTI Capital 
Advisors, LLC, 16-17, 29-30 (Nov. 15, 2014) [hereinafter FTI Report], 
available at http://www.aeepr.com/Docs/restructuracion/
PREPA%20AR%20and%20CILT%20Report%20Final.pdf.
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    On June 28, 2014, the government of Puerto Rico enacted Act 71-
2014, entitled the Puerto Rico Public Corporation Debt Enforcement and 
Recovery Act (``DERA'').\7\ Governor Alejandro Garcia-Padilla and the 
Puerto Rico Legislative Assembly intended for DERA to provide Puerto 
Rico with its own insolvency regime for certain large government-owned 
businesses, including PREPA.\8\
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    \7\ DERA was later struck down by the federal courts as pre-empted 
by Section 903 of the Bankruptcy Code. Puerto Rico v. Franklin 
California Tax Free Trust, 136 S. Ct. 1938 (2016).
    \8\ DERA specifically excluded most major municipal issuers of debt 
in Puerto Rico, other than PREPA, PRASA, and PRHTA. Governor Alejandro 
Garcia-Padilla Presents Bill for Debt Enforcement and Recovery of 
Public Corporations, Commonwealth of Puerto Rico, Government 
Development Bank for Puerto Rico, 2 (June 25, 2014), available at 
http://www.gdb-pur.com/documents/06-25-14-PressRelease-RecoveryAct-
Final.pdf.
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    DERA signaled a dramatic escalation of political and financial risk 
for creditors. PREPA suffered a liquidity crisis as major vendors, 
including the utility's critical fuel suppliers, refused to ship their 
products to the Company on standard trade credit terms. Over the 
following weeks, the situation at PREPA rapidly deteriorated. By the 
end of July 2014, PREPA's fuel reserves fell to a level where the 
Company was left with only a few days of fuel supply. PREPA's resources 
were dangerously depleted, and brownouts were on the horizon as the 
island approached the peak of hurricane season. At the same time, 
mostly as a result of surging oil prices, PREPA's all-in rates for 
consumers rose to a high of approximately 28 cents per kilowatt-hour 
(``kWh'').
    To resolve the liquidity crisis and avert the potential for much 
wider chaos stemming from disruptions in Puerto Rico's power supply, 
PREPA's major creditors entered into around-the-clock negotiations with 
the island's advisors on a potential forbearance agreement.
    The major parties to the negotiations included PREPA; the 
Government Development Bank (``GDB''), Puerto Rico's fiscal agent; an 
ad hoc group of PREPA bondholders, including Franklin and Oppenheimer, 
holding over 35 percent of PREPA bonds (the ``Ad Hoc Group''); its 
monoline insurers; and parties involved in the fuel lines.
            forbearance agreement and business stabilization
    During several weeks in the summer of 2014, PREPA, Puerto Rico 
(acting through its fiscal agent GDB), and PREPA's major creditors 
worked to hammer out a compromise. Negotiations resulted in an extended 
forbearance and consent agreement (the ``Forbearance Agreement''), 
which allowed PREPA to avoid the threat of imminent default.
    In return, PREPA agreed to hire a chief restructuring officer and 
to develop a comprehensive 5-year business plan. The objective of the 
business plan was for PREPA to make detailed financial projections and 
to identify important operational and structural reforms to be 
implemented.
    The original Forbearance Agreement was executed on August 14, 2014 
and was extended 13 times.\9\ As part of the Forbearance Agreement, 
creditors extended liquidity to PREPA to help PREPA stabilize its 
business. They did so by allowing PREPA to make payments of debt 
service from reserve accounts instead of from cash from PREPA's general 
fund, suspending PREPA's obligations to transfer revenues to accounts 
controlled by the Trustee, and voluntarily agreeing to postpone some of 
their upcoming principal and interest payments.
---------------------------------------------------------------------------
    \9\ PREPA Reaches Agreements with Creditors, Commonwealth of Puerto 
Rico, Government Development Bank for Puerto Rico (Aug. 14, 2014), 
available at http://www.gdbpr.com/documents/
PREPA_Aug14Forbearance_PressRelease_081414_FINAL.pdf. The original 
Forbearance Agreement can be found at: http://www.gdbpr.com/documents/
BondholderForbearanceAgreementEXECUTED.pdf.
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                   operating pressures on prepa ease
    PREPA achieved further stability through favorable developments 
affecting its operations and financial performance and through reforms 
implemented by its chief restructuring officer.
    PREPA and other island-based electric utilities face challenges 
that mainland utilities do not. They include an absence of naturally 
occurring local fuel sources, which means they must rely on imported 
fuel, primarily fuel oil. Importing gas requires a high-pressure 
liquefied state, which is much more expensive than gaseous state 
pipeline deliveries on the mainland. An island utility needs more 
generating capacity and more individual generating units than a 
mainland utility does, since a mainland utility can draw from 
neighboring networks in order to provide reliable service during 
maintenance or outages.\10\ These challenges result in higher rates for 
island utilities than for mainland utilities.
---------------------------------------------------------------------------
    \10\ For more information on the rates of comparable island 
electric utilities, PREPA's historical rate, and the rate that PREPA's 
customers are projected to pay after the PREPA Transaction, see 
attached Annex A, which was prepared by Houlihan Lokey.
---------------------------------------------------------------------------
    Despite these factors, a sustained drop in the price of oil since 
2014 allowed PREPA to pass along significant electricity cost savings 
to customers, including a savings of more than $0.5 billion in Fiscal 
Year 2015, an incremental $1.3 billion of savings in Fiscal Year 2016, 
and another incremental $0.5 billion of savings in the first 4 months 
of Fiscal Year 2017.\11\
---------------------------------------------------------------------------
    \11\ Monthly Report to the Governing Board: June 2015, Commonwealth 
of Puerto Rico, Puerto Rico Elec. Power Auth., at 4 (June 2015), 
available at http://www.aeepr.com/INVESTORS/DOCS/
Financial%20Information/Monthly%20Reports/2015/June%202015.pdf (listing 
a total fuel adjustment surcharge for all customer classes of 
$2,633,256,000 in fiscal year 2013-2014 and $2,129,834,000 in fiscal 
year 2014-2015); Monthly Report to the Governing Board: June 2016, 
Commonwealth of Puerto Rico, Puerto Rico Elec. Power Auth., at 4 (June 
2016), available at http: // www.aeepr.com/INVESTORS/DOCS/
Financial%20Information/Monthly%20Reports/2016/June%202016.pdf (listing 
a total fuel adjustment surcharge for all customer classes of 
$1,365,977,000 in fiscal year 2015-2016); Monthly Report to the 
Governing Board: November 2016, Commonwealth of Puerto Rico, Puerto 
Rico Elec. Power Auth., at 4 (November 2016), available at http://
www.aeepr.com/INVESTORS/DOCS/Financial%20Information/Monthly%20 
Reports/2016/November%202016.pdf (listing a total fuel adjustment 
surcharge for all customer classes of $592,656,000 in fiscal year-to-
date as of November 2016); Monthly Report to the Governing Board: 
November 2014, Puerto Rico Elec. Power Auth., at 4 (November 2014), 
available at http://www.aeepr.com/INVESTORS/DOCS/
Financial%20Information/Monthly%20Reports/2014/November%202014.pdf 
(listing a total fuel adjustment surcharge for all customer classes of 
$1,113,188,000 in fiscal year-to-date as of November 2014).
---------------------------------------------------------------------------
    PREPA's financial situation also improved as a result of reforms 
PREPA's chief restructuring officer and management implemented, which 
have yielded significant benefits to PREPA and its customers. Over the 
past 2 years, PREPA revamped its fuel inventory and fuel procurement 
procedures, creating a one-time benefit of $36 million and a recurring 
annual benefit of $23 million.\12\ PREPA also developed new ways to 
combat electricity theft, generating additional revenue of $70 million 
per year.\13\ PREPA improved operational efficiency in other ways by 
reforming its capital maintenance practices, reducing labor costs 
through attrition, and improving its billing and collection 
procedures.\14\ These and other initiatives together generated $271 
million in one-time cash savings and $254 million in recurring annual 
savings for PREPA.\15\
---------------------------------------------------------------------------
    \12\ Puerto Rico Elec. Power Auth. Operational Transformation: 
Hearing Before the Puerto Rico S. Comm. on Energy Affairs and Water 
Resources, 17th Legis. Assemb., 7 (Oct. 4, 2016) (testimony of Lisa 
Donahue, Chief Restructuring Officer of PREPA).
    \13\ AlixPartners' Hand-Over Strategy to the Governing Board, 
Commonwealth of Puerto Rico, Puerto Rico Elec. Power Auth. (Feb. 1, 
2017), available at http://www.aeepr.com/jg/docs/
PREPA_Exit%20Strategy%2002-01-2017%20final.pdf.
    \14\ Puerto Rico Elec. Power Auth. Operational Transformation: 
Hearing Before the Puerto Rico S. Comm. on Energy Affairs and Water 
Resources, 17th Legis. Assemb., 5-13 (Oct. 4, 2016) (testimony of Lisa 
Donahue, Chief Restructuring Officer of PREPA).
    \15\ PREPA's Fiscal Plan at 11.
---------------------------------------------------------------------------
                   negotiating the prepa transaction
    Building on the Forbearance Agreement, PREPA and its financial 
creditors began the task of negotiating a comprehensive debt adjustment 
agreement, which culminated in a series of agreements with the Ad Hoc 
Group,\16\ the fuel line lenders, and two of its monoline insurers \17\ 
in late 2015, and finally with the last of its insurers in June of 
2016.\18\ These agreements were memorialized in greater detail in a 
comprehensive Restructuring Support Agreement (the ``RSA'').
---------------------------------------------------------------------------
    \16\ PREPA Reaches Agreement with Ad Hoc Bondholder Group, 
Commonwealth of Puerto Rico, Puerto Rico Elec. Power Auth. (Sept. 2, 
2015), available at http://www.aeepr.com/aeepr2009/
noticiasread.asp?r=DLGZEKPRAG.
    \17\ Assured Guaranty and PREPA Enter Restructuring Support 
Agreement, Assured Guaranty Ltd. Investor Relations and Corporate 
Communications (Dec. 24, 2015), available at http://
www.businesswire.com/news/home/20151223005779/en.
    \18\ PREPA Reaches Agreement with Its Creditors, Commonwealth of 
Puerto Rico, Puerto Rico Elec. Power Auth. (June 30, 2016), available 
at http://www.aeepr.com/aeepr2009/noticias read.asp?r=UUOHMSWEVE.
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Economic Components of the PREPA Transaction
    The RSA contemplates the creation of a new, special purpose, 
bankruptcy-remote public corporation called the PREPA Revitalization 
Corporation (``PREPARC'') through the enactment of new legislation. 
(The necessary Puerto Rican legislation passed in February 2016 and is 
discussed more fully below.) That new legislation grants PREPARC the 
authority to levy a mandatory, non-bypassable securitization charge (a 
``transition charge'') on customers' electric bills. The transition 
charge is collected by PREPA but does not belong to PREPA.\19\ PREPARC 
will issue new securitization bonds secured by the transition charge. 
PREPARC has no operations and will have an independent board.
---------------------------------------------------------------------------
    \19\ In addition to serving as PREPARC's servicer, PREPA will 
continue its usual functions, including energy generation and 
distribution and assessing and collecting rates related to the same.
---------------------------------------------------------------------------
    This securitization structure is based on widely used public 
utility ``stranded cost'' securitizations, which have been used in New 
York, California, Louisiana, and several other states.
    The transition charge is based on historical energy usage and will 
have a quarterly ``true-up'' to adjust the transition charge upwards or 
downwards to ensure, on the one hand, that the charge always covers 
debt service and, on the other, that customers are not charged more 
than is required for debt service. The transition charge and true-up 
mechanism were approved by Puerto Rico's public utility commission (the 
``Energy Commission''), as discussed below. At current oil prices, the 
transition charge plus the PREPA charges to customers for electricity 
are less than historical electricity costs and the rates at other 
comparable island utilities.\20\
---------------------------------------------------------------------------
    \20\ See Annex A.
---------------------------------------------------------------------------
    The major components of the transformation of PREPA's debt under 
the PREPA Transaction are:

     Uninsured PREPA Bonds. Uninsured bondholders will exchange 
            existing uninsured PREPA bonds for new PREPARC 
            securitization bonds. In exchange for the protections the 
            securitization offers, bondholders will accept an exchange 
            ratio of 85 percent of the par value of the original bonds: 
            that is, bondholders would voluntarily take a 15 percent 
            haircut in the principal amount of their bonds. The new 
            securitization bonds would have a 5-year principal 
            moratorium and a reduced interest rate.\21\
---------------------------------------------------------------------------
    \21\ The full terms of the exchange offer can be found in the RSA 
at Annex D and Schedule I-B thereto. See PREPA Public Disclosure, 
Electronic Municipal Market Access, Municipal Securities Rulemaking 
Board, Exhibit A (June 30, 2016), available at http://emma.msrb.org/
ES1020690.pdf.

     Monolines. Two of the monoline insurers \22\ will receive 
            the benefit of securitization bonds issued by PREPARC, 
            referred to as ``mirror bonds,'' that will economically 
            defease the existing insured PREPA bonds. These insured 
            bonds will be paid out of the transition charge, rather 
            than out of PREPA's revenues. In exchange, these monolines 
            will provide surety bonds to fund a portion of the debt 
            service reserve funds.\23\ Those reserve funds will help 
            the securitization bonds achieve higher ratings and 
            correspondingly lower interest rates, provide further 
            stability for bondholders, and reduce PREPARC's need for 
            cash reserves to cover potential shortfalls in bond 
            payments.
---------------------------------------------------------------------------
    \22\ PREPA's third monoline insurer, Syncora Guarantee Inc. 
(``Syncora''), agreed to a variety of different treatments of the PREPA 
bonds that it insures or owns. The full terms of Syncora's treatment 
can be found in the RSA at Annex D and at Schedule II-A thereto. See 
PREPA Public Disclosure, Electronic Municipal Market Access, Municipal 
Securities Rulemaking Board, Exhibit A (June 30, 2016), available at 
http://emma.msrb.org/ES1020690.pdf.
    \23\ The full terms of their treatment can be found in the RSA at 
Annex D and Schedule II thereto. See PREPA Public Disclosure, 
Electronic Municipal Market Access, Municipal Securities Rulemaking 
Board, Exhibit A (Mar. 15, 2016), available at http://emma.msrb.org/
ES1000543.pdf.

    The PREPA Transaction produces substantial savings on debt service 
by reducing outstanding principal of uninsured PREPA bonds by 15 
percent, lowering the interest rate, and offering a 5-year moratorium 
on principal payments. Under the terms of the PREPA Transaction, total 
debt service is reduced by approximately $1.1 billion in the first 5 
years and $1.7 billion in the first decade.\24\
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    \24\ See Attachment 3.03 of the PREPARC Verified Petition for 
Restructuring Order. In re: Puerto Rico Electric Power Authority 
Revitalization Corporation Verified Petition for Restructuring Order, 
No. CEPR-AP-2016-0001, Petition for Restructuring Order, Attachment 
3.03 (April 7, 2016), available at http://energia.pr.gov/wp-content/
uploads/2016/04/TransitionCharge-2.pdf.
---------------------------------------------------------------------------
    The passage of PROMESA in 2016 generated additional savings for 
PREPA. It meant that PREPA could use Title VI of PROMESA--which was 
drafted to accommodate voluntary, ``pre-existing'' agreements such as 
the PREPA Transaction--to apply the deal it reached with the Ad Hoc 
Group to all uninsured bondholders, not just those bondholders who were 
part of the RSA.
    Without the PREPA Transaction, PREPA's rates would go up 
substantially from where they are today and where they would be after 
the PREPA Transaction is completed in order to pay the full 100 percent 
of debt service at existing interest rates, as required by Puerto Rican 
law.
Noneconomic Components of the PREPA Transaction
    The RSA also contains several key noneconomic components. These 
include improvements related to (i) operations, (ii) governance, (iii) 
collections and billing processes, (iv) statutorily mandated subsidies, 
including a contribution in lieu of taxes (``CILT''), (v) a new rate 
structure and approval by the Energy Commission of a new PREPA rate, 
and (vi) a capital investment plan, including Energy Commission 
approval of a new integrated resources plan and moving forward with 
public-private partnerships.
    PREPA has a documented history of political interference 
compromising its decision making.\25\ The top 200 PREPA administrative 
positions, as well as--until recently--the majority of the board of 
directors, are political appointees.\26\ The large number of patronage 
positions at PREPA ensures that politics and political connections 
heavily influence corporate decision making and can stymie necessary 
reforms to PREPA.
---------------------------------------------------------------------------
    \25\ Charles R. Babcock, Alleged Puerto Rican Bribery Money Will Be 
Returned, Wash. Post (Dec. 9, 1980), https://www.washingtonpost.com/
archive/politics/1980/12/09/alleged-puerto-rican-bribery-money-will-be-
returned/a46e8a90-09df-454c-84fc-a9e9b45bb0d3.
    \26\ Section 4(a) of Act No. 83 of May 2, 1941, as amended through 
Act 57-2014 (22 L.P.R.A. Sec. 194(a)), states that six of the nine 
PREPA Board members are appointed by the Governor. PREPA's 200 top 
managers are also politically appointed and change with every 
administration, according to the testimony of PREPA's chief 
restructuring officer: ``[I]t's the top two hundred (200) people in 
that organization that switch out every four (4) years; so you've got 
no continuity for long-term strategic or financial planning.'' Puerto 
Rico Electric Power Authority Business Plan and Recovery Plan: Hearing 
Before the Puerto Rico S. Comm. on Energy Affairs and Water Resources, 
17th Legis. Assemb., 84 (Apr. 14, 2015) (testimony of Lisa Donahue, 
Chief Restructuring Officer of PREPA).
---------------------------------------------------------------------------
    Politics has also played a central role in PREPA's historical 
mismanagement, from procurement scandals for key goods and services 
such as fuel oil, to basic mismanagement like PREPA's failure to 
collect over $150 million for energy consumed by other government 
agencies.\27\,\28\
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    \27\ See generally   Amended Complaint,   Marrero Rolon  v.  
Autoridad de Energia Electrica   a/k/a P.R. Elec. Power Auth., No. 15-
cv-1167, Docket No. 367 (D.P.R. Aug. 5, 2016).
    \28\ The FTI Report showed that PREPA had $151.5 million of 
receivables 120+ days old. See FTI Report, at 16.
---------------------------------------------------------------------------
    The RSA allows PREPA to use debt service relief from the PREPA 
Transaction to support PREPA's operational restructuring initiatives 
through modernization of PREPA's aging power generation platform and 
other contractual, structural and managerial reforms. Modernization 
will also give PREPA flexibility to integrate alternative energy 
sources.
    The RSA also helps PREPA provide for necessary capital 
expenditures, as required under PROMESA. PREPA now has the opportunity 
to invest in highly efficient conventional generation assets, natural 
gas generation assets, and renewable generation assets of its choosing, 
which could add greater diversity and stability to power price and 
supply. Going forward, Puerto Rico will benefit from more stable, lower 
cost power generation--but the PREPA Transaction is a key predicate. 
Without it, PREPA will not have sufficient funding to commit to these 
investment initiatives without a far greater increase in electric rates 
resulting from higher interest costs. Disputes with creditors, 
including litigation over creditor rights, could deter private capital 
commitments the Governor has stated he intends to seek.
    The PREPA Transaction will also allow PREPA to fulfill one of the 
critical goals of PROMESA: regaining access to the capital markets. The 
issuance of new securitization bonds under the PREPA Transaction will 
mark Puerto Rico's first major new issuance of long-term financing 
since the passage of DERA locked it out of the capital markets. 
Securitization financing is a well understood structuring technique 
with an excellent track record of helping other utilities to service 
legacy debt obligations at lower cost.\29\ All but one of the major 
securitizations from 2006-2014 were rated AAA, according to a 2015 
Moody's report on the universe of utility securitizations.\30\ By 
executing the PREPA Transaction, PREPA and the island will be taking a 
major step toward reducing the political risk that has prevented Puerto 
Rico from issuing any new debt financing and will be compliant with one 
of the fundamental elements of PROMESA: restoring Puerto Rico's access 
to the capital markets on reasonable terms. The structure and 
regulatory approval process for the new securitization bonds is 
something that Puerto Rico can emulate in other new bond issues.
---------------------------------------------------------------------------
    \29\ For further reading on benefits of securitization financing, 
see Chris Mauro, U.S. Municipal Focus: Municipal Securitization--A New 
Financing Trend in the Municipal Market?, RBC Capital Markets (Nov. 6, 
2014), available at https://www.rbccm.com/municipalfinance/file-
826934.pdf.
    \30\ Pre-Sale Report: Entergy New Orleans Storm Recovery Funding I, 
L.L.C., Moody's Investor Service (July 13, 2015). The exception is one 
issuer that was rated AA by Moody's.
---------------------------------------------------------------------------
    Finally, the PREPA Transaction is being executed within the legal 
and regulatory framework established by Puerto Rico's executive and 
legislative branches and can and should be executed pursuant to Title 
VI of PROMESA.
                       energy commission approval
    As part of a full and transparent process, the Energy Commission 
reviewed PREPARC's petition seeking approval of the securitization 
mechanism for the proposed bond exchange under the PREPA Transaction. 
After extensive public hearings, the Energy Commission approved the 
transition charge in a voluminous report that found that the petition 
complied with all the requirements of Puerto Rican law.\31\
---------------------------------------------------------------------------
    \31\ In re: Pet. for Approval of Transition Order Filed by the 
PREPA Revitalization Corp., No. CEPR-AP-2015-0002, Restructuring Order 
(June 21, 2016), available at http://energia.pr.gov/wp-content/uploads/
2016/06/21-junio-2016-Restructuring-Order-English-1.pdf.
---------------------------------------------------------------------------
    On January 10, 2017, the Energy Commission approved PREPA's rate 
case. The Energy Commission ruling confirms that ``[t]he restructured 
debt costs will be recovered in a separate charge which is lower than 
the costs would be without restructuring.'' \32\ PREPA's Fiscal Plan 
illustrates that the PREPA Transaction eliminates what would otherwise 
be an immediate rate hike of approximately 25 percent to close a 
substantial status quo rate deficit.\33\
---------------------------------------------------------------------------
    \32\ In re: Puerto Rico Electric Power Authority Rate Review. CEPR-
AP-2015-0001, Final Resolution and Order (Jan. 10, 2017), available at 
http://energia.pr.gov/wp-content/uploads/2017/01/10-enero-2017-
Restructuring-Order-English-1.pdf.
    \33\ PREPA's Fiscal Plan at 41.
---------------------------------------------------------------------------
        the prepa revitalization act and validation proceedings
    The PREPA Transaction required the passage of new legislation in 
order to successfully transform PREPA. This included provisions that 
would allow for operational reform, enable the securitization structure 
to reduce PREPA's debt load, and set forth the process by which the 
Energy Commission reviews the PREPARC transition charge and the PREPA 
rate. The portions of the legislation dealing with the securitization 
structure are modeled on structures that allow entities to recover 
similar ``stranded cost'' charges from utility customers in other 
states, such as the restructuring charge assessed on Long Island Power 
Authority customers in New York.
    On November 4, 2015, members of the Puerto Rico Senate introduced 
legislation that would later become the PREPA Revitalization Act. Over 
the course of several months, legislative committees held hearings on 
the proposed legislation and received testimony from parties with 
different views on the PREPA Transaction. House legislators seeking to 
refine the legislation crafted and obtained passage of amendments to 
the bill. The legislation as amended was then debated on the Floor of 
both legislative chambers, passed by both chambers, and signed into law 
as the PREPA Revitalization Act on February 16, 2016.
    The PREPA Revitalization Act contemplates the initiation of 
lawsuits by interested parties to challenge and, by a court order 
finding in favor of the securitization structure, the validation of the 
transactions contemplated under the RSA. Such validation proceedings 
are frequently used in municipal financing, including in the public 
utility context, in many U.S. states.
    A critical component of the PREPA Transaction is the delivery of 
certain legal opinions as a condition to the issuance of the 
securitization bonds. The delivery of those legal opinions is dependent 
on the successful and expeditious completion of the validation 
proceedings.
    The past few months have seen positive developments in the 
validation proceedings. In one of the cases, a Puerto Rico court upheld 
the PREPA Revitalization Act; this decision is now on appeal in the 
Supreme Court. Another group of cases challenging the Energy 
Commission's decision have been consolidated and will be briefed over 
the next few months. The remaining cases have been dismissed.
                            challenges ahead
    Almost 3 years into the PREPA restructuring process, numerous 
important accomplishments and the majority of requisite steps to 
complete the deal have already been achieved.
    Years have been spent putting the PREPA Transaction into action. 
But the PREPA Transaction is now in jeopardy.
    The Oversight Board extended PROMESA's stay from February 15 to May 
1 by certifying that an additional 75 days were needed ``to seek to 
complete a voluntary process under title VI of this Act,'' \34\ but as 
of this date neither PREPA nor AAFAF have delivered a proposed 
``modification'' under Title VI or commenced a ``voluntary process 
under Title VI.''
---------------------------------------------------------------------------
    \34\ Puerto Rico Oversight, Management and Economic Security Act of 
2016, Pub. L. No. 114-187, Sec. 405(d)(1)(B).
---------------------------------------------------------------------------
    The RSA is currently set to expire on March 31--just 9 days after 
this hearing. The current administration has refused to commit to the 
terms of the PREPA Transaction--even though PREPA's former chief 
restructuring officer warned that bondholders would likely recover 100 
percent of claims on their revenue bonds in litigation.\35\
---------------------------------------------------------------------------
    \35\ Donahue Warns of Dire Consequences if PREPA Deal Collapses, 
Reorg Research (Dec. 1, 2016), available at http://platform.reorg-
research.com/app#company/1869/intel/view/28192.
---------------------------------------------------------------------------
    The consequences for rejecting the PREPA Transaction could be dire. 
At the very least, it will delay needed capital investment to upgrade 
the depreciated and inefficient generation infrastructure absent a 
significant increase in electric rates. More troubling, an expiration 
of the RSA in 9 days could precipitate another collapse in trade 
credit, draining PREPA of potentially hundreds of millions in liquidity 
virtually overnight. Unlike the 2014 liquidity crisis, PREPA has 
already spent cash in bondholder reserve accounts, leaving the company 
with no potentially available cash resources to purchase fuel, creating 
a very real possibility of rolling brownouts or outright service 
disruption as Puerto Rico enters its seasonal highpoint in electricity 
demand.
    And finally, Puerto Rico has to communicate to the Federal 
Government, national and international markets that it can abide by its 
laws, its contracts, and the good-faith negotiations it enters with its 
bondholders; that there is certainty in doing business on the island 
regardless of which political party is controlling the government. That 
is the way Puerto Rico will dig itself out of its fiscal crisis and 
return to a path of economic prosperity, which we all as American 
citizens want to see.

                                Annex A
[GRAPHIC] [TIFF OMITTED] T4754.005


                                 .eps__
                                 

    Mr. LaMalfa. Thank you, Mr. Spencer. I thank all the 
witnesses for your testimony.
    I remind members of the Committee that Rule 3(d) does 
impose a 5-minute limit on questions, and I am going to be 
tougher on that 5-minute limit here now.
    I will go ahead and recognize myself for the first 5 
minutes. Let's move, please, to Mr. Carrion. OK.
    Earlier in your testimony, you stated, ``We believe the 
discussions with creditor groups need to yield a viable 
restructuring path on or before May 1, when the PROMESA stay 
expires, and before other tools under PROMESA are utilized, 
such as Title III.''
    So, would you define for the Committee the viable 
restructuring path? What do you mean by that?
    Mr. Carrion. Right. Well, as you know--and I think the 
Governor touched on--the certified plan was just last week. And 
that, in essence, makes the process a little clearer, and it 
was essential that that be done before we can commence a viable 
restructuring conversation. Prior to that we were essentially 
listening, gathering information, and we hope to move forward 
with the government quickly in the coming days.
    I can tell you that, from conversations with our attorneys, 
we are looking to put forward a mediation proposal before the 
general obligation bondholders and COFINA, and certain term 
sheets for other bondholders relatively soon. As I have stated 
in the past, we are in alignment with the government, we are 
all about Title VI and moving forward on these issues.
    And we understand that Title III is there, but it is not 
our intent. It is only there as a last resort if we are not 
able to come to a consensual agreement. And if we are close to 
a consensual agreement, we would not be averse to forbearance 
with creditors, as well, if we were close.
    Mr. LaMalfa. Let me follow up on that, then. Do you mean 
that the consensual negotiation must be fully complete in order 
to, in your words, yield a viable restructuring path--so does 
it need to be fully completed in order to get to that path?
    Mr. Carrion. No, Mr. Chairman. We have not had a 
conversation specifically about any particular creditor class, 
but we do not close the door to a forbearance agreement if we 
were close, but not there in time for the stay to end.
    Mr. LaMalfa. OK, thank you.
    Mr. Spencer, with looking at Puerto Rico, we will have to 
sit down with many different creditor groups and classes to 
begin negotiating on many forms of debt that make up the rest 
of the $70 billion on the island outside of PREPA's $9 billion.
    How important is it that the creditor community have an 
open dialogue that is maintained with the full government of 
Puerto Rico, as well as the Oversight Board of PROMESA?
    Mr. Spencer. I think it is incredibly important. My clients 
in PREPA are also the largest investors in other Puerto Rico 
debt obligations--GO, COFINA, and other Puerto Rican debt 
issues. This deal sets the tone. This is why I think it is so 
important that we are focused on PREPA today, because it 
affects the broader restructuring negotiations that Puerto Rico 
intends to conduct.
    We are very concerned about what is happening in PREPA. We 
are very concerned about the possibility that that deal falling 
apart could negatively impact Puerto Rico's broader debt 
restructuring and negotiations----
    Mr. LaMalfa. Ripple through that.
    Mr. Spencer. Yes.
    Mr. LaMalfa. Let me ask if Mr. Bergonzi would like to touch 
on that same question, too, please.
    Mr. Bergonzi. Thank you. The dialogue is exceptionally 
important. I am just struck with the testimony I have heard 
today. Again, as the largest creditor of PREPA, we have had no 
positive engagement from this administration. We extended the 
RSA, along with the group represented by Mr. Spencer, in an 
effort to give the Governor time to get up to speed on the 
transaction, fully understanding that we have been living with 
it for over 2 years and he was going to have questions. So, I 
object to the term ``rubber stamping.'' No one has asked him to 
do that.
    But we have had zero outreach. In fact, until the plan that 
Rothchilds had put forward was blown out yesterday to all the 
public, we had not seen anything or heard anything about any 
asks on the part of the Governor as to how to improve this 
transaction----
    Mr. LaMalfa. So, after 78 days you are feeling a little 
frustrated with that, then?
    Mr. Bergonzi. Well, and 8 days from the expiry of the 
Restructuring Support Agreement.
    Mr. LaMalfa. Yes.
    Mr. Bergonzi. Yes. It is quite frustrating.
    Mr. LaMalfa. What do you think the probability is of coming 
to an agreement on the RSA before March 31?
    Mr. Bergonzi. Look, we have been constructive throughout 
this process. Our goal, as you have heard, is to get this deal 
done. We are, of course, eager to hear dialogue that is a 
little bit more on the terms of executing the RSA we have, 
rather than pitching a whole new transaction. But we would be 
all ears, and we are, at this point, quite concerned that we 
have not had that engagement.
    Mr. LaMalfa. All right----
    Mr. Spencer. Chairman, if I could offer one thing?
    Mr. LaMalfa. Certainly. I am going to----
    Mr. Spencer. Yes, relevant to the question asked.
    Mr. LaMalfa [continuing]. Break my own rule here, but----
    Mr. Spencer. This is the first time I have met Mr. Carrion, 
the first time I have met Ms. Matosantos, the first time I have 
heard the Governor speak about the terms of a deal that we have 
been trying to advance for 3 years.
    Mr. LaMalfa. OK, thank you. All right. Let me now turn it 
over to our Ranking Member, Mrs. Torres, for 5 minutes.
    Mrs. Torres. Thank you, Mr. Chairman.
    Mr. Hernandez, is it true--it is true, I should say--that 
PREPA officials acted recklessly with regard to their 
management of PREPA's indebtedness, as did Puerto Rico's 
elected officials. But doesn't the recent audit by the Puerto 
Rican Commission on Debt make it clear that PREPA's financial 
advisors, its engineers, lawyers, accountants, insurance 
companies, and perhaps bondholders bear some responsibility for 
PREPA's current, out-of-control debt practices?
    And what legal steps, if any, have been taken to address 
these bad actors? And shouldn't there be an apportioning of 
liabilities in a kind of global settlement, rather than placing 
all of the responsibility on PREPA's failings on the 
ratepayers?
    If you can be brief, sir.
    Mr. Benitez. Yes. PREPA doesn't work with that, we are 
working to operate the company.
    Mrs. Torres. I understand that. But the company's lawyers 
and all of its advisors failed the company. And that is my 
question to you. Has PREPA, have they taken any actions toward 
these bad actors that led you where you are now?
    Mr. Benitez. No, ma'am.
    Mrs. Torres. OK, thank you.
    Mr. Spencer, I could not agree more with you when you said 
that this deal sets the tone. And when you say that the 
Governor and none of these folks have reached out to you, 
weren't their meetings public, sir, so you could have attended 
any of them?
    Mr. Spencer. We did. There were very many creditors in 
attendance, and it was hard to talk about the specifics of the 
PREPA agreement.
    Mrs. Torres. OK. Do you find it unusual that the Governor 
and PROMESA board has found that the Commonwealth has the 
ability to pay 25 percent of currently outstanding debt, but 
you are here today, sir, asking that PREPA's ratepayers pay 89 
percent of the existing debt? Eighty-nine percent.
    Mr. Spencer. So, a couple of things. One, I disagree with 
the conclusions of the fiscal plan regarding the debt capacity 
of the Commonwealth--of Puerto Rico, excuse me. And we have not 
had a chance to do what we do in advising creditors in these 
restructuring negotiations and understand their underlying 
assumptions. We simply have not had any diligence.
    With respect to the figure that you cite, again, I don't 
know where that comes from. We are providing a $.15 haircut on 
my client's debts.
    Mrs. Torres. Simple subtraction, right, 100 minus 15?
    Mr. Spencer. One hundred minus fifteen, so an $.85 
recovery----
    Mrs. Torres. To the ratepayers?
    Mr. Spencer [continuing]. On the face amount----
    Mrs. Torres. To the ratepayers?
    Mr. Spencer. No, on the face amount of the bonds. We are 
exchanging bonds at $.85 a par, and we are offering a lower 
interest rate on the exchange debt.
    Mrs. Torres. Can you expand on your concerns that you have 
not been able to have some real-time conversations with the 
board, or with the Governor and the current administration?
    Mr. Spencer. It is a great concern, and I will address it 
in two areas.
    One, with respect to PREPA, it is fair to say that staffers 
of the Governor were briefed when he was a candidate for 
governor, when he was the Governor-Elect; and we have been 
trying to, as the governor, continue our dialogue with him to 
educate them on any areas of the deal that we have struck that 
they do not understand.
    But also, it is important to recognize that the Puerto Rico 
Electric Utility Commission issued an order approving our deal 
in an exhaustive public review process with thousands of pages 
of accompanying documentation. So, I don't understand where the 
confusion is on the part of the Governor.
    Mrs. Torres. That was on the previous administration, 
correct? And have you seen the public document that the 
Governor shared with us here today?
    Mr. Spencer. I have not.
    Mrs. Torres. Prior to today?
    Mr. Spencer. I have not seen the public document that he 
shared today. I don't know which one you are referring to.
    Mrs. Torres. Sorry, my time has expired. I yield back.
    Mr. LaMalfa. Thank you. Now we will yield to our Vice 
Chair, Miss Gonzalez, for 5 minutes.
    Miss Gonzalez-Colon. Thank you, Mr. Chairman. I would like 
to address the question to Mr. Bergonzi and Mr. Bryngelson. And 
I would like both of you to just answer directly the question.
    Is the value of the total of the bonds, both of you, like, 
$2.1 billion? Yes or no?
    Please, my time is limited, so yes or no.
    Mr. Bergonzi. Sorry, I don't understand the question. Are 
you asking what our exposure is?
    Miss Gonzalez-Colon. Yes, what is the total value of the 
bonds both of you have----
    Mr. Bergonzi. In PREPA or more widely?
    Miss Gonzalez-Colon. No, in PREPA.
    Mr. Bergonzi. In PREPA is about $1.4 billion.
    Miss Gonzalez-Colon. OK.
    Mr. Bryngelson. Sorry, we are an energy developer.
    Miss Gonzalez-Colon. OK.
    Mr. Bryngelson. We are not on the bond side of things, so 
we have no bond exposure.
    Miss Gonzalez-Colon. Perfect, $1.4 billion, so the $2.1 
billion that is public is not an official number?
    Mr. Bergonzi. I think what you may be referring to is the 
amount of bonds that we, together with Assured, another 
monoline insurer, wrapped for PREPA. That is----
    Miss Gonzalez-Colon. Exactly, so it is going to be $2.1----
    Mr. Bergonzi. I think--I have $2.2, but yes, I would have 
to check.
    Miss Gonzalez-Colon. If you took the same $.15 haircut, how 
much money will be if you are taking the same haircut, same as 
the creditors are taking? You will be $320 million, more or 
less?
    Mr. Bergonzi. Well, we pay over time, so you would have 
to--as the bonds would come due, I suppose we would pay 15 
percent--we would get 15 percent less than full recovery.
    Miss Gonzalez-Colon. Again, if you took the same $.15 
haircut, it would be like $320 million, more or less?
    Mr. Bergonzi. I think less.
    Miss Gonzalez-Colon. OK, less. For $440 million debt 
service contribution, how much are you charging for this 
surety?
    Mr. Bergonzi. That has not been negotiated yet, I do not 
believe.
    Miss Gonzalez-Colon. Are you required to reserve any money 
against that amount?
    Mr. Bergonzi. Yes, we have to reserve capital when we put 
these risks up.
    Miss Gonzalez-Colon. How much, 5 percent?
    Mr. Bergonzi. I would have to check. It is a percentage 
of--it is dedicated by rating agency requirements. To maintain 
our ratings we have to put an appropriate amount of capital up 
every time we write a new policy.
    Miss Gonzalez-Colon. Publicly, it has been said it is 5 
percent. So, can we say that it is, more or less, that amount?
    Mr. Bergonzi. I don't know where that amount came from. I 
would rather check and get back to the Committee.
    Miss Gonzalez-Colon. I have a question for Mr. Spencer. You 
have been saying that--the argument that the deal will raise 
the rates is misleading, and that it isn't true that the rates 
will be increasing. Why is that?
    Mr. Spencer. Don't take my word for it. Take the Puerto 
Rico Utility Commission's word for it. They state that 
restructured debt costs are lower than they would be without 
restructuring.
    They also state that, because PREPA is a non-government-
owned utility, or a non-profit government-owned utility, debt 
costs must be recovered from customers.
    So, to the rate issue, I think it is clear from the Energy 
Commission.
    Miss Gonzalez-Colon. Yes, but what the Energy Commission 
said is one thing, what the deal says is another thing. The 
deal says there will be an increase to pay the debt and to pay 
the service. So, that is the question I am asking to you.
    Mr. Spencer. But this is the Energy Commission's ruling on 
the deal, which states that restructured debt costs are lower 
than they would be if the restructuring were not put into 
effect.
    Miss Gonzalez-Colon. I will defer to you in your expertise 
besides the Puerto Rico Energy Commission. Do you understand 
that this deal will not increase in any way the rate of the 
kilowatt hour on the island?
    Mr. Spencer. Rates are lower under this deal than they 
would be without it----
    Miss Gonzalez-Colon. No, that is not the question. The 
question is there is going to be a high rate by this deal, yes 
or no?
    Mr. Spencer. There will not be a higher rate by this deal. 
As the EC states, this deal will lower the cost of debt 
service.
    Miss Gonzalez-Colon. But it will higher the rate.
    Mr. Spencer. There is confusion over this issue. Again, I 
would direct you to look at the exhaustive report from the 
Energy Commission on this particular issue.
    Miss Gonzalez-Colon. Thank you. I yield back. Mr. Chairman, 
I have different questions for the rest of the members of the 
Committee, so I will use the rules of the Committee and I will 
file those questions to the Committee in the next 2 days.
    Mr. LaMalfa. OK. I will now recognize Mr. Soto for 5 
minutes.
    Mr. Soto. Thank you, Mr. Chairman. As we understood from 
the Governor's testimony, energy is going to be the life blood 
of the Puerto Rican economy, and it is going to be so critical 
that we resolve this energy negotiation. And as our notes and 
our research have indicated, PREPA is not included in PROMESA.
    So, my first question--please make your answers brief--to 
both Mr. Carrion and Ms. Matosantos is does the PROMESA board 
have any authority in this negotiation? Briefly, a yes or no 
would be helpful.
    Mr. Carrion. Yes, we do have authority. There are two 
issues. The RSA is the issuance of additional debt, or new 
debt, and so the board has to pass judgment on that. And then 
the other element I think Ana can touch on.
    Ms. Matosantos. The second element is Title VI. If it is 
going through--for approval through a Title VI process, that 
would also come to the board. So, there is one element that it 
is exempt from, but those other two remain.
    Mr. Soto. So, it is for prospective debt, but not past 
debt.
    In your opinions--and this is, again, to Mr. Carrion and 
Ms. Matosantos--are PREPA creditors at an advantage over 
PROMESA-related creditors, currently, as it stands?
    Mr. Carrion. In my opinion, yes.
    Ms. Matosantos. Yes. Terms are more favorable here than on 
the fiscal.
    Mr. Soto. My next question is, could a new PREPA deal throw 
any PROMESA deal that you are working on off balance and make 
it harder to have a balanced PROMESA deal? Same two.
    Mr. Carrion. I would not like to speculate on that. We are 
looking at each separately. I have utmost sympathy, I must say, 
for the creditors, not just of PREPA, but for the entire 
creditors of Puerto Rico. At the end of the day, they are 
trying to recoup, and their only issue was they lent us money. 
And I understand where they are coming from.
    Having said that, we look at each individual situation 
individually.
    Mr. Soto. Ms. Matosantos?
    Ms. Matosantos. I think the inter-relationship between 
PREPA cost and economic growth has been talked about. And the 
assumption around economic growth is critical to the surpluses 
that are assumed in the fiscal plan being available. There is a 
big inter-relationship between lower-energy costs, economic 
growth, and having the capacity to be able to fund essential 
services and fund debt service. So, there is definitely that 
linkage.
    In terms of the RSA, a critical issue to consider is--the 
RSA basically changes the structure of the debt to a more 
secured debt. Is the 15 percent a level that makes sense, in 
terms of the reduction, in light of the change in the 
instrument?
    Mr. Soto. Mr. Chairman, this is just a comment for the 
Committee. With the $455 million July payment and a deal ending 
at the end of the month, if the parties are not able to come to 
agreement we should, as a Committee, consider whether to amend 
PROMESA to include PREPA negotiations, should the island not be 
able to negotiate on favorable terms that they can agree with 
to avoid rate hikes. Otherwise, we could see all these other 
creditors in PROMESA and the people, most importantly, under 
this deal still suffer under some of these exceptions like 
PREPA.
    I know you put this hearing together with the potential in 
examining that today, and I, for one, am concerned, if they are 
not able to reach a deal, that we should examine a potential 
amendment. And I would yield back the rest of my time.
    Mr. LaMalfa. All right. Thank you, Mr. Soto. We will yield 
to Mr. LaHood for 5 minutes.
    Mr. LaHood. Thank you, Mr. Chairman, and thank the 
witnesses for being here today.
    Chairman Carrion, when we passed PROMESA here there was a 
section there--section 201(b) made it clear that lawful 
priorities and liens set forth in the Puerto Rico constitution 
and related laws would be respected. And Puerto Rico's 
constitution states that when available resources are 
insufficient, constitutional debt shall be paid first.
    When this plan was certified by the Oversight Board, it 
treats constitutional debt as a last expense. I guess what I am 
wondering is, how can the Oversight Board certify this plan if 
it violates section 201(b) of PROMESA?
    Mr. Carrion. Well, we felt that the plan is PROMESA-
compliant, and we were assured that it is.
    If you are referring to--if this is a question, 
Congressman, related to the GO or the COFINA situation, that 
issue is being litigated, and we hope to have those folks 
together and have mediation so that we can resolve that issue, 
moving forward.
    Mr. LaHood. Do you believe it violates the Puerto Rico 
constitution?
    Mr. Carrion. No, I didn't say that. I am not an attorney, 
so I would defer to my attorneys with regards to that 
particular issue. We have not taken a position, the board has 
not taken a position on the GO, COFINA issue. Whenever we have 
intervened, it is to protect the stay and the people of Puerto 
Rico. But we have not taken a position as to the GO or the 
COFINA situation.
    Mr. LaHood. Do you have concerns about that provision in 
PROMESA and the potential ramifications for the board on that?
    Mr. Carrion. No, I do not.
    Mr. LaHood. Let me ask you, Mr. Chairman, when the 
Oversight Board and its advisors--well, let me ask you, did the 
board and your advisors perform a quantitative study to assess 
the potential impact the 77 percent haircut could have on 
financing and on the municipal market in Puerto Rico?
    Mr. Carrion. Ana, would you help me out with that?
    Ms. Matosantos. We considered all the different elements of 
PROMESA and considered the impact of this, as well as the 
impact on funding essential services, on pension benefits, and 
on other elements of not restructuring debt in the manner 
allowed under PROMESA.
    Mr. LaHood. Yes. And what was your conclusion with that, or 
what did the study specifically tell you?
    Ms. Matosantos. Our conclusion is that the plan is PROMESA-
compliant, that it requires significant sacrifice from a wide 
range of stakeholders, including creditors, but that it is a 
plan that moves toward structural balance and that meets the 
PROMESA requirements.
    Mr. LaHood. And what about the concern about access to 
finance, or to the municipal market?
    Ms. Matosantos. Access to municipal markets would be 
something that would be achieved in the long term under this. 
The priority is first to restructure the debt to a sustainable 
level and to fully utilize the tools under the PROMESA Act to 
be able to balance the budget, restore economic growth, and 
fund essential services, pensions, debt, and other obligations.
    Mr. Carrion. And it was also an integral part of the 
conversation.
    Mr. LaHood. Give me your level of confidence when you think 
about individual investors, the vast majority of municipal 
market investors, on their willingness to continue to invest in 
Puerto Rico after this kind of haircut.
    Mr. Carrion. Well, it is a very difficult situation, I 
concur. And I understand how problematic it is; but, as Ana 
stated, and as the fiscal plan demonstrates, we are asking for 
material sacrifices from all stakeholders, including our 
people. And we are in a difficult situation and we are in a 
tough spot, but we think that there is shared pain for 
everybody.
    Mr. LaHood. Mr. Spencer, in your statement you say that a 
failure to close the PREPA deal will ``negatively impact other 
challenged government entities as diverse as the U.S. Virgin 
Islands, Guam, the city of Chicago, and the state of 
Illinois.'' Can you elaborate on how the failure to close this 
deal will affect Illinois?
    Mr. Spencer. I advised the largest creditor in the city of 
Detroit's bankruptcy. We saw, after that plan was revealed, a 
negative impact in terms of a widening of spreads on Chicago 
bonds. The PREPA deal alone will be the single largest 
municipal restructuring deal, ever. If it goes badly, it will 
have an impact on municipal issuers at the lower end of the 
credit spectrum in municipal capital markets.
    Mr. LaHood. Thank you.
    Mr. LaMalfa. All right, thank you. We will do another quick 
second round of panel questions. For Mr. Bryngelson here, I 
wanted to just touch on one issue with the offshore gasport 
there, which you laid out would have great potential for cost 
savings, as well as reliability for the fuel supply and 
generation.
    If an agreement cannot be reached between the government of 
Puerto Rico, PREPA, and the creditor community--the offshore 
gas project, what kind of jeopardy will that be in? Either in 
the short term or even completely at all? What do you see 
happening there?
    Mr. Bryngelson. Well, we need PREPA to be able to move 
forward with that. The way the project is separated is it is a 
partnership between Excelerate and PREPA, where we provide the 
vessel. We have invested about $275, $280 million in that 
vessel. And PREPA would build the fixed infrastructure. Without 
the ability to move forward as a result of the restructuring 
process, the fixed infrastructure cannot be built and the 
project cannot come to fruition.
    So, it has a short-term impact if something does not happen 
in the next several months here. We start to delay the project 
at least day for day. And ultimately, there will be a point 
where the project eventually does have to fall off, because 
there is only a certain amount of time that we can hold an 
asset that costly open for a project.
    Mr. LaMalfa. So, reiterate what you think that would mean 
for the electricity ratepayers on the island.
    Mr. Bryngelson. Well, it does not accomplish three of the 
things that are core tenets of what everybody is saying.
    First is energy cost reduction. There would not be, through 
the diversification of natural gas, that same level of energy 
cost reduction. There is no other project out there that, 
within the next 5 years, because of the permitting process 
required, can bring natural gas as a fuel source. And that 
spills over, as well, to air emissions, the fines under the 
MATS rules that EPA will charge.
    Also, the efficiency aspects of it. With the natural gas 
there is greater efficiency in power production. It also 
attracts IPPs who have a known source of fuel to be able to put 
in that generation, upgrade the system, bring more reliability 
to the system.
    And, from the partnership perspective, I think it impacts 
the ability to attract partners to do these public-private 
partnerships, because we have been in this with PREPA off and 
on for 9 years under agreement since 2014, and working in the 
permitting process since 2011. So, I think it has a big 
detrimental impact on being able to bring more projects in on 
top of the other issues I discussed.
    Mr. LaMalfa. So, if there was success on this agreement, it 
sort of becomes successful, and soon, do you think this would 
be like a green light for more additional infrastructure 
similar to this, or other ones that will be modernized----
    Mr. Bryngelson. Absolutely, I do.
    Mr. LaMalfa. Is it a pretty big positive green light for 
that?
    Mr. Bryngelson. It is, because it does provide that fuel 
source for more power generation, but also shows that private 
projects can be done.
    Mr. LaMalfa. Yes. OK. I thank you, and I will yield to 
recognize our Ranking Member, Mrs. Torres, for 5 minutes.
    Mrs. Torres. Thank you, Mr. Chairman.
    Ms. Matosantos, welcome, and thank you for being with us 
today. As a Californian who has been through huge budget 
deficit, I respect your opinions on the issue at hand.
    In proposing legislation to address Puerto Rico's debt 
crisis, the Obama administration and fellow House Members 
called on Congress to reform Puerto Rico's Medicaid program. 
The goal is to raise the standard of care and prevent Medicaid 
unstable financing from intensifying Puerto Rico's financial 
crisis.
    There are still critical issues facing Puerto Rico's 
healthcare system, and the upcoming expiration of the ACA 
funding and limits imposed by the CAP Medicaid financing 
structure could greatly limit the island's economic recovery. 
Could you please explain to us why this is an important issue 
that needs to be addressed as part of the island's overall debt 
restructuring plan?
    Ms. Matosantos. I would be happy to. Puerto Rico's Medicaid 
funding is substantially below that funding available for other 
states. It receives a block grant that is in the neighborhood 
of $400 million. We take into consideration Medicaid and the 
State Children's Health Insurance Program.
    Under the ACA, it receives temporary funding at a higher 
level. The reduction of that ACA funding will increase the 
deficit by $1 billion next year, and it rises in the future. A 
sustainable solution on Medicaid that provides parity for 
Puerto Rico would be material not only for the healthcare 
system and for the services that Puerto Rico is in a position 
to provide, but also for available resources for a variety of 
priorities, including the potential surpluses available for 
debt reductions in a whole host of different areas.
    So, it is very material. It is $1 billion in the coming 
year, and it grows substantially in the future.
    Mrs. Torres. The Governor spoke to a plan that was created 
by his administration. Have you had an opportunity to look at 
that--and if, as he claimed, there would be more opportunities 
to insure more Puerto Ricans?
    Ms. Matosantos. The Governor's plan for the program 
reflected in the fiscal plan looks at making reductions to live 
within available resources. It reduces overall spending by 
about $750 million and growing into the future.
    It does so through a variety of measures, including 
different--basically a cap on the amount spent per beneficiary 
to drive less utilization and to drive other savings. It also 
potentially looks at elimination of some benefits similar to 
what you are familiar with in California's actions.
    It basically protects eligibility, but it makes a whole 
host of reductions in other areas to be able to protect access, 
but to generate the necessary savings in light of the fiscal 
situation.
    Mrs. Torres. Is it assuming current ACA benefits, or is it 
assuming the newly proposed healthcare plan?
    Ms. Matosantos. Puerto Rico's Medicaid program already 
provides less services than what is generally required on the 
mainland. It does not provide long-term care. It would be 
looking at additional benefit reductions in what are called the 
optional benefit categories, things like dental, things like 
vision, and some other benefits--but the program that is 
provided today is already narrower than what Medicaid covers on 
the mainland.
    Mrs. Torres. So that, in addition to encouraging people not 
to seek medical care?
    Ms. Matosantos. Looking at reducing costs to the extent 
possible, protecting the number of enrollees, but, yes, making 
due with substantial reduction.
    Mrs. Torres. Thank you. Mr. Chairman, I yield back.
    Mr. LaMalfa. Thank you. Last we will go to our Vice Chair.
    Miss Gonzalez-Colon. Thank you, Mr. Chairman.
    One thing. The Governor just said here that he was willing 
to sit and negotiate with good faith terms with all the 
stakeholders here. And I heard the creditors and the insurers, 
they know what the government offers. And, as a matter of fact, 
some government officials told me that each and every one of 
you last week, and even before that, some of them got some 
pushbacks from the insurers area.
    So, my question will be is there any space to sit again 
with the government and have a common-sense dialogue to reach 
an agreement with common-sense terms with the Governor's 
proposition and your own positions on the table? Can we have 
that meeting? All of you.
    Mr. Bergonzi. I would only take issue with you saying 
``again.'' That would imply that there were previous efforts. 
Yes, but we would like to talk. As long as we respect that this 
is a pre-negotiated transaction, and that such changes are more 
at the margins----
    Miss Gonzalez-Colon. Yes----
    Mr. Bergonzi [continuing]. I think we could have a 
constructive discussion. But if we are going to retrade the 
deal, as was released yesterday, that leaves us in a very 
awkward position.
    Miss Gonzalez-Colon. Again, I will say it ``again.'' Are 
you willing to sit with the new administration--remember, there 
is a new administration in place. We are asking a governor who 
has been in place just 75 days----
    Mr. Bergonzi. And has not contacted us.
    Miss Gonzalez-Colon [continuing]. To approve--fine.
    Mr. Bergonzi. Not fine.
    Miss Gonzalez-Colon. The government of----
    Mr. Bergonzi. No, it is not fine.
    Miss Gonzalez-Colon. Sorry, sir, I am having my turn. The 
government administration told me that they reached you last 
week, and even before. They get pushbacks from your staff. That 
is OK. My question now is, are you available to have that 
meeting?
    Mr. Bergonzi. Absolutely.
    Miss Gonzalez-Colon. Yes or no?
    Mr. Bergonzi. Yes, absolutely.
    Miss Gonzalez-Colon. Perfect. Can we have the same meeting 
with the creditors?
    Mr. Spencer. Vice Chairman Gonzalez, we would be happy to 
sit with the Governor and discuss how to get this deal done.
    [Speaking foreign language.]
    Miss Gonzalez-Colon. Thank you. Other questions I have 
here, and these will be for the Oversight Board. And I would 
love to have Ms. Matosantos and the Chairman of the Board to 
help me on this.
    Are you involved in any way in this deal or in this 
agreement? Yes or no.
    Mr. Carrion. Are you referring to the RSA, the previous----
    Miss Gonzalez-Colon. Yes.
    Mr. Carrion. Well, we support the Governor's position as 
presented to us 2 weeks ago, and we support the RSA with 
certain improvements that he stated he was interested in 
negotiating. After that takes place, then we will pass judgment 
on that, based on what we asked of him. But we agreed that the 
way to go was what he was proposing.
    Miss Gonzalez-Colon. So, you will be able to join the 
effort to--the insurance, the creditors, and all the 
stakeholders here, again, just to assure something is 
achieved----
    Mr. Carrion. Sure.
    Miss Gonzalez-Colon [continuing]. In the best terms for the 
people of Puerto Rico, and everything involved.
    Mr. Carrion. That has always been our intent, of course.
    Miss Gonzalez-Colon. Question to Mr. Spencer. Are you open 
to amend that RSA?
    Mr. Spencer. We have an executable deal. I would agree with 
what Mr. Bergonzi said, that--are we willing to talk about ways 
to execute the deal? If those are the concerns of the Governor, 
we are willing to sit with the Governor and his team----
    Miss Gonzalez-Colon. Fair enough.
    Mr. Spencer [continuing]. To figure out how to get it----
    Miss Gonzalez-Colon. Fair enough. I will yield back. Thank 
you.
    Mr. LaMalfa. All right. Thank you. I am going to thank the 
witnesses for their testimony, once again, and all the members 
of our Committee.
    Again, if the Members have additional questions, witnesses 
can respond to those in writing. Under Committee Rule 3(o), 
members of the Committee, again, must submit these witness 
questions within 3 business days following today's hearing, and 
the hearing record will be held open for 10 business days for 
those responses.
    So, if there is no further business, without objection, the 
Committee stands adjourned.

    [Whereupon, at 12:40 p.m., the Subcommittee was adjourned.]

[LIST OF DOCUMENTS SUBMITTED FOR THE RECORD RETAINED IN THE COMMITTEE'S 
                            OFFICIAL FILES]

  --  The Government of Puerto Rico's Fiscal Plan, by the 
            Puerto Rico Fiscal Agency and Financial Advisory 
            Authority. February 28, 2017

  --  Puerto Rico's Government Reform Program: A New Path 
            Forward, by the Government of Puerto Rico. October 
            13, 2016

                                 [all]