[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
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available via the World Wide Web: http://www.fdsys.gov
or
Committee address: http://naturalresources.house.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
24-754 PDF WASHINGTON : 2017
----------------------------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Publishing Office,
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center,
U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free).
E-mail, [email protected].
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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\
---------------------------------------------------------------------------
\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]