The Puerto Rican legislature will soon consider a debt restructuring deal for Puerto Rico’s Electric Power Authority (PREPA) that is unaffordable and risks jeopardizing the island’s economic recovery, according to a report released today by the Institute for Energy Economics and Financial Analysis (IEEFA).
The report, “Puerto Rico Electric Power Authority debt restructuring: A weak deal plagued by scandal,” said the agreement fails in five critical areas, namely:
- Utility rates would increase by at least 13% based on the ‘transition charge’ and rise even further once additional costs are added;
- The transition charge will increase at a faster rate than projected economic growth in Puerto Rico;
- The debt deal will place additional pressure on PREPA’s fiscal plan exacerbating budgetary imbalances;
- Puerto Rico’s economy is weak and the security protections for investors shaky; and,
- Some of PREPA’s debt may have been obtained illegally based on questions raised in recent legal actions.
“The terms of the debt agreement are not in the best interests of the people of Puerto Rico,” said IEEFA finance director Tom Sanzillo. “The Financial Oversight and Management Board (FOMB) declared that PREPA was insolvent in 2011. Ratepayers could be saddled with repayment of legacy debt without any investigation of whether this debt was legally issued.”
Recent scandals that led to the resignation of Gov. Ricardo Rosselló raise additional concerns over the reliability of financial reporting and monitoring of the electric utility and Puerto Rico’s debt restructuring more generally.
According to the IEEFA report, the deal imposes an increase in electric rates over the next 47 years, even as Puerto Rico’s population and economy are projected to continue declining.
“The result will be to exacerbate the same dysfunction that has driven the electrical system into physical and financial ruin during the last decade,” said Sanzillo. “By prioritizing the repayment of legacy debt, the electrical system will be starved of funds for operational needs and greater financial risk will be imposed on those who seek to make new investments in the electrical system.”
Whether the debt deal goes forward or not, the report recommends introducing an independent private sector inspector general to provide day-to-day monitoring of PREPA’s operations with a goal of eliminating waste, fraud, and abuse.