A privatization approach to Puerto Rico’s energy needs based on “controlled introduction of competition in regional markets” could achieve the goal of aligning electricity generation with the island’s changing socioeconomic landscape.
Furthermore, the change would represent no costs to the government, consumers and businesses, according to an analysis included in the latest issue of “Pulse,” a report generated by economic research firm H. Calero Consulting Inc.
In the wake of the destruction that Hurricanes Irma and María inflicted on the Puerto Rico Electric Power Authority’s infrastructure, calls for privatization have gained “historical levels,” making the possibility seemingly irreversible, the firm noted.
“That possibility now seems irreversible, particularly given the Fiscal Oversight Board’s drive to impose austerity across the public sector and the government’s market-friendliness inclination,” the report noted. “However, not all privatization processes are the same and, by extension, not all lead to the same outcome.”
The idea is to divide the island into regional power markets while breaking PREPA up into two privately-owned companies in each area.
“Initially, the two companies would have to compete for regional demand operating with a smaller scale than PREPA currently does. This initial stage would see the start of a trajectory of prices set in response to the other firm’s prices,” H. Calero Consulting stated.
In a second phase, more players would be allowed to enter the regional markets, to expand competition and complement the power generation and service already in place.
This model was implemented in Brazil in the late 1990’s to put Telebras — the country’s former publicly owned telecommunications monopoly — in private hands.
“From a public policy perspective, the market would go from a monopoly to two price setters, after which other firms would strive to set further competitive prices based on consumer demand,” the report stated.
Introducing competition on regional levels would make market activity self-regulating and subject to trial and error until demand vs. pricing balanced out. Cross-regional subsidies would be eliminated, leading to differentiated pricing across regions.
“In the long run, supply would tend to match demand and, ultimately, population growth. Investments and risk mitigation practices would become a permanent feature at the company level, something desperately lacking at the moment,” the analysis concluded.
Market prices would be driven by regional traits, such as population and economic activity.
“In this sense, it may be the case that a region operates optimally only with two players — and thus limited competition — while others require more firms, thus driving economies of scale across the market,” H. Calero Consulting stated in the report.
This type of privatization needs an independent regulator to guarantee competition across all of the regional markets. Meanwhile, to draw interest from would-be suitors, the government would need to ensure the appropriate regulatory framework is in place to incentivize investments.
“Rather than directly subsidizing electricity costs to foreign investors, policy will likely see subsidized loans, deferred taxes conditioned on reaching productivity gains or even cost-free land leases for new investment, among other initiatives,” the firm predicted.