The Subcommittee on Indian, Insular and Alaska Native Affairs held an oversight hearing on the status of the Puerto Rico Electric Power Authority Restructuring Support Agreement, pressing for certain specifics the island’s top administrators could not provide.
PREPA faces major structural and operational inefficiencies and is $8.9 billion in debt. The current RSA, which is the framework for ongoing voluntary restructuring negotiations over PREPA’s debt obligation and related structural reforms, is set to expire on Mar. 31, 2017.
Puerto Rico Resident Commissioner Jenniffer González, who co-chairs the subcommittee, asked Gov. Ricardo Rosselló “when do you understand any agreement will be reached — a month, weeks, how much longer?”
But Gov. Rosselló’s technical advisor couldn’t give a concrete answer in spite of the looming end-of-the-month deadline.
“The restructuring of PREPA must incorporate a governance model that facilitates investor and consumer confidence and minimizes political interference,” the governor said during the hearing.
Rosselló listed some concerns with the RSA, which include: the impact of the transition charge on Puerto Rican rate-payers, the effect 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, the reality that the RSA does not provide for sufficient capital to close the transaction, and that, under the current conditions, the RSA would not be sustainable for bondholders.
Additionally, he indicated that to accept the terms of any financial restructuring there must be full understanding of the path it provides for PREPA to improve its operations, increase its reliability, diversify, and access new capital.
With a major bond payment of $455 million due on July 1st, Subcommittee Chairman Doug LaMalfa (R-CA) stressed the importance of finding a consensual agreement for the utility to keep the lights on in Puerto Rico.
“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,” LaMalfa stated.
Witness Stephen Spencer, testifying on behalf of certain funds managed by Franklin Advisers Inc. and OppenheimerFunds Inc., talked about the dangerous outcomes of a jeopardized RSA.
“Failure to close this deal would have ramifications far beyond PREPA,” Spencer stated. “Failure to close a deal negotiated over two years would call into question Puerto Rico’s good faith in negotiating other restructuring.”
Members reviewed efforts of the Oversight Board — established under Puerto Rico Oversight, Management and Economic Stability Act last year — to support ongoing voluntary restructuring agreements and facilitate additional consensual negotiations between creditors and various other debt-ridden instrumentalities within the Commonwealth.
“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,” Oversight Board Chairman José Carrión said during the hearing.
“This is a far more challenging task than you, as federal lawmakers, may imagine,” Carrión added, in reference to the fact that the government’s most recent audited financial statements cover the period ending June 30, 2014.
Under PROMESA, the Oversight Board has tools, including subpoena power, to conduct an independent analysis of the financial condition of the Commonwealth and its covered instrumentalities.
“What should be clear by now is that PROMESA’s 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 vitally needed economic recovery,” González said during her opening statements.
“That’s the reason why we are here today. I am optimistic that an agreement can be reached in the best interest of the people of Puerto Rico and our economy. Such an agreement could set a precedent for other negotiations to follow,” she added.
During his testimony, Rosselló also pointed out that the high cost of energy has an impact when it is contextualized within an economy in which the median family income is approximately 33 percent of that of a family on the U.S. mainland.
“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,” the governor said.
He noted that the high electricity costs negatively impact both the ability of Puerto Rico to attract capital and to compete in a global economy, which is not sustainable for the residents or for the economy of the island.