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CNE: ‘Best-case scenario may be to make PREPA, LUMA agreement work’

In its most recent analysis, the Center for a New Economy (CNE) took a closer look at Puerto Rico’s current electric power situation, the cancelation language included in the Puerto Rico Electric Power Authority’s (PREPA) and LUMA agreement, and possible scenarios of how to move forward, including the possibility of making the deal work.

In the September issue of the “CNE Review,” the think-tank includes both a policy brief and an editorial that analyzes in detail the public-private agreement between the government of Puerto Rico and LUMA Energy focusing primarily on the current situation and offering solutions on how the government can best protect the interests of the Puerto Rican people.

In the publication, CNE’s Policy Director and Author, Sergio M. Marxuach provides details on the current energy situation and explains how in the case of the agreement between LUMA and PREPA after 15 months of operation LUMA “is not measuring up to expectations.”

“So far LUMA has incurred in budget overruns, has failed to meet key performance metrics regarding the duration and frequency of outages, is behind schedule in meeting certain maintenance goals [for example, controlling vegetation growth around important lines], and has shown little evidence that it is achieving the savings it represented it would generate from a more efficient management of the transmission and distribution system,” Marxuach said.

“It is up to the government of Puerto Rico, then, to defend the interests of the Puerto Rican people,” he said.

While he said the agreement can be cancelled “perhaps the easiest course of action, in legal terms, would be not to seek the extension of the interim operation period that ends on Nov. 30. The Supplemental Agreement currently in effect provides for the automatic termination of both agreements — the Operation and Maintenance Agreement as well as the Supplemental Agreement — on that date unless the government of Puerto Rico seeks to extend it effectiveness.”

However, Marxuach said each proposed solution carries with it some consequences that must be analyzed beforehand to avoid mistakes or making a difficult situation even worse. If the contract is left to expire on Nov. 30th, the automatic termination of the agreements would trigger the occurrence of several events:

  • First, PREPA would be required to pay LUMA a termination fee of $115 million in 2020 dollars, adjusted for inflation, which is not currently budgeted.
  • Second, the termination of both agreements would trigger the clock on a transition period, which could last up to 12 months and during which LUMA would wind up its operations and transfer them to a successor operator. PREPA would be responsible for paying a fee to cover the cost of LUMA’s operations during this period.

“The problem with this and any other termination scenario is that it appears there are no candidates to be a successor operator in the event of termination. That is, there appears to be no Plan B. Who will then oversee Puerto Rico’s transmission and distribution system?” Marxuach questioned.

In addition, Marxuach said the possible impact of terminating the O&M Agreement on the disbursement of the FEMA and CDBG-DR funds allocated for the reconstruction of the grid must be considered.

“The likely scenario is that both agencies would adopt a wait-and-see attitude with respect to such disbursement as legal and operational wrinkles are worked out. This means that the reconstruction of the grid would take even longer than the currently projected 10 years,” he said.

So, although he concluded that it appears that the best-case scenario may be to make the agreement between PREPA and LUMA work, there are questions on the table that should be asked and analyzed:

  • Why has LUMA been unable to meet basic performance objectives during the past 15 months?
  • What is the government of Puerto Rico willing and able to do about it?
  • What are the consequences of terminating the current agreement?
  • What are the viable alternatives to LUMA, that is what is Plan B?

“Going forward, the analysis stated, at a minimum, that the P3 Authority hire an independent world-class firm of engineers with no business or political connections to Puerto Rico, to relentlessly and unwaveringly supervise LUMA’s performance of its obligations pursuant to its agreement,” he said.

“There are no effortless solutions to Puerto Rico’s energy problems. It will take several years of steadfast hard work to rebuild the system and to decrease energy rates. There are no shortcuts, no easy answers, no straightforward ways out. The only option is to work through it. Otherwise, we face the unpleasant prospect of several more years of economic decline and the social stagnation that would entail,” Marxuach concluded.

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This story was written by our staff based on a press release.

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