A thorough and data-packed recent report on the potential impact of Puerto Rico’s PREPA debt restructuring plan proves what should be obvious: electricity prices that are already unaffordable will keep rising for the foreseeable future to pay for outstanding debt. The deal does not work for the people of Puerto Rico, will hurt economic recovery, and won’t solve the energy grid’s debt problems.
The debt deal, known officially as the Restructuring Agreement (RSA), is the solution being proffered by the Financial Oversight and Management Board (FOMB) and the Puerto Rico Electric Power Authority (PREPA). It will go before Puerto Rico’s Legislature in the next session, and the Legislature and Governor will have to make a final decision.
The RSA will add another financial problem to an already heavily burdened population.
In his report, Baruch College sociology professor Héctor Cordero-Guzmán examined the repercussions of the proposed debt deal on electricity prices and household incomes. His findings demonstrate that, if approved, the RSA will have a profound impact on Puerto Rico’s people, with the biggest burden falling on the poorest, hurting the economy and reducing demand for electricity.
It will also undermine PREPA’s ability to secure new funds needed to rebuild the grid.
To fully understand the gravity of the situation and how much more serious it will become under the proposed debt deal, it is helpful to compare electricity costs in Puerto Rico to those in the mainland U.S.
- Today, Puerto Rican households pay 21 cents per kWh for electricity. On the mainland, households pay on average 13 cents per kWh.
- As part of its last major energy reform bill, the Puerto Rico Legislature established 20 cents per kWh as an affordable electricity price. The proposed debt deal would raise electricity rates in Puerto Rico to 26 cents per kWh. The Institute for Energy Economics and Financial Analysis (IEEFA) projects that the rates will be even higher.
- The median annual income in the United States in 2017 was $61,372, while in Puerto Rico it was only $19,743. 72 % of the population depends on earnings that are classified as ranging from low-income to extreme poverty.
- The average mainland U.S. household uses 911 kWh of electricity per month; Puerto Rican households average 433 kWh.
- The average amount spent on electricity in the United States is 2.1% of income; in Puerto Rico, the average household spends 4% of its income.
- However, the poorest people in Puerto Rico pay an astounding 33% of their income for electricity, according to Cordero-Guzmán.
- If the debt deal is passed, Puerto Rico’s poor population will pay 42% of their income for electricity.
In sum, compared to the mainland, Puerto Rico’s median income is one-third that of the U.S.; Puerto Ricans use half the amount of electricity and pay 60% more for it. The new RSA agreement will cause electricity rates for all Puerto Rican residents and businesses to go up steadily over the next 40 years.
These increases will pay for old debt that is owed on money that has already been spent and spent badly on an energy system that now requires to be replaced from the ground up. In addition, Puerto Rico’s population is expected to decline and with it, the demand for electricity.
Cordero-Guzmán finds that the impact of the RSA unfairly punishes island residents. He is right. The plan also is not a solution to the debt problem.
Cordero-Guzmán’s research confirms what has already been recognized in the Commonwealth’s Fiscal Plan, approved by the FOMB, namely, that the gross domestic product (GNP) of Puerto Rico will remain flat to negative through 2049. Under such a scenario, wages and profits will also stagnate.
According to Citi’s investment advisor for PREPA, the RSA should meet the standard that electricity prices should not grow faster than the Puerto Rican economy. Yet the deal raises electricity prices faster than the economy is growing and, in fact, will make growth much less likely. Beyond stress on residential households, Puerto Rico’s leading business think tank has said the electricity prices from the debt deal will harm new investment.
In light of the many drawbacks of the RSA, it is likely that Puerto Rico will continue to struggle to achieve bankable scores from leading credit agencies and secure needed funds for maintaining and improving its electricity system.
Puerto Rico’s politicians are being cajoled by Wall Street and other interests to go along with this plan. As electricity prices rise to pay for the old debt, there will be additional pressure for more price increases to cover rising operational costs and the replacement of the grid. As higher prices push people and businesses off the island, demand will decline, and it will be necessary to charge even more to the diminishing number of remaining residents.
PREPA or its successor will drown in a sea of red ink. It will continuously cut costs on customer service, maintenance and improvements. This is how the system originally fell into disrepair and failed. The result is cutbacks to the system, political interference in price-setting and a state of continued dysfunction.
These problems are not going away. In September, Filsinger Energy, PREPA’s appointed expert, filed a brief with the bankruptcy court stating that the quality of PREPA’s budget figures was questionable, expenditure numbers unreliable and the only way the authority was able to run a surplus was that it underspent its budget while remaining in a state of perpetual mismanagement.
Puerto Rico is not addressing the fundamental problem of making electricity affordable to all.
Here’s an example of how that goal was achieved successfully. When a young congressman from Texas, Lyndon Johnson, tried to explain the benefits of electrification to his rural constituents, he was surprised by their skeptical reception. As one farmer put it: “It costs five dollars and a lot of people don’t have five dollars.”
The future U.S. president found a solution. He secured loans for power plants with terms that met the needs of his constituents and won the creation of electric cooperatives that employed an army of new utility workers to help farm families use the electricity resources efficiently.
The difference between Texas then and Puerto Rico now is that there are no politicians willing to fight for those who do not have five dollars.
Cordero-Guzmán has provided political leaders and relevant experts with an exemplary piece of research. His data compilation is statistically sound, analytical conclusions carefully drawn and the real-world household budgets of Puerto Rico’s families are presented in practical terms.
This report stands in stark contrast to the FOMB, PREPA and the previous work of their over-priced, self-serving consultants, whose assumptions and recommendations have been neither good for the public, nor have they addressed the underlying economic crisis.
Elected leaders may be fooled by the pleadings of these outside consultants now, but, in time, they will have to face the pain of the Puerto Rican people and the stagnation of the island’s economy.
That may lead once again to political interference in the utility’s price-setting, with the only beneficiaries being the consultants who will again demand high fees to fix the problem they themselves helped create.
The RSA is not a solution. It is an ugly charade.