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PREPA contract procedure to buy natural gas ‘circumvented rules’

A lucrative contract to deliver natural gas to a Puerto Rico power generation plant was awarded through a process plagued by irregularities that provided unfair advantages to a company with limited experience on the island, according to a report co‑authored by Tom Sanzillo of the Institute for Energy Economics and Financial Analysis (IEEFA) and Ingrid Vila of CAMBIO.

The award to swap diesel for natural gas at the San Juan power generating stations 5 and 6 was made to New Fortress Energy (NFE) after months of extensive contacts with the Puerto Rico Electric Power Authority that occurred outside the normal contract process, the report shows.

According to the authors, the contract provides “another example of the poor management and lack of accountability that have brought the agency and the territory to its current insolvent state.”

“This is PREPA’s first major generation project since the hurricanes. After serious contract and other scandals, PREPA needed to build public confidence that the agency has learned lessons from past mismanagement and scandal. In this case, PREPA has failed,” said Sanzillo, IEEFA’s director of finance.

“Based on the facts we gathered, PREPA must account for the unfair access it granted to NFE prior to the award of the contract. We found a pattern of meetings that NFE had with PREPA and its consultants that no other bidders had,” said Sanzillo.

“The facts raise serious questions about the information given to other bidders and the way the evaluation was conducted. There are just too many red flags to let this contract move forward without more scrutiny,” he said.

The project, estimated at $1.5 billion, completed after months of delays on May 22, means PREPA is likely to continue to fall short of meeting renewable energy and sustainability goals as the island increases its electrical grid’s reliance on fossil fuels, the nonprofit said.

“PREPA officials have continuously failed to pursue much-needed modernization to overhaul governance, ensure transparency and effective stakeholder participation as well as invest in distributed renewable resources,” Vila said.

“Our examination of public documents shows a piecemeal, project-by-project approach by PREPA that opens the door for outside interests to push their own projects and makes it more likely that PREPA will overbuild its generation system while failing to meet renewable energy goals,” she added.

Documents obtained through litigation by IEEFA and CAMBIO, found PREPA not only ignored its own rules but also failed to conduct rigorous evaluations on the environmental, safety and health impacts of the project, the organizations said.

PREPA failed to perform a fiscal analysis to show how the gas conversion would save money for consumers and failed to require those savings as part of the contract, they added.

NFE claimed the project would save $285 million annually, more than PREPA’s estimate of $150 million in savings per year and far exceeding the Financial Oversight and Management Board for Puerto Rico’ estimate in its letter of approval.

“PREPA proceeded with the San Juan 5, 6 natural gas conversions without a desirability and convenience study even though it was required by its own regulations. It also moved forward without an environmental impact statement which would have required public participation,” Vila said.

“Neighboring communities only learned through media reports of the project after it was awarded. The risks associated with increased natural gas vehicle traffic in San Juan Bay and the evaluation of more sustainable alternatives, such as rooftop solar and storage, have been swept under the rug,” Vila added.

According to the report:

  • After receiving an unsolicited proposal from NFE, PREPA and its financial advisor, Filsinger Energy Partners, met repeatedly with NFE before the authority drafted its request for proposals in April 2018.
  • While the RFP was being drafted, PREPA and New Fortress Energy signed a confidentiality agreement that gave NFE advance information regarding San Juan 5 and 6.
  • PREPA failed to tell prospective bidders about NFE’s lease of strategically important property for the project nor did the authority inform other bidders of NFE’s unsolicited proposal and of its numerous communications with the authority.
  • PREPA evaluated proposals with a committee that included Filsinger Energy Partners representatives who had talked regularly with NFE, had reviewed their unsolicited proposal, and had assisted with evaluating its environmental permitting documents.
  • PREPA used an outside counsel to negotiate the contract. The firm also represented entities owned by NFE’s parent company, Fortress Investment Group.

The report calls for the contract to be revoked and reviewed by an official task force comprised of federal and state law enforcement and regulatory agencies, such as the U.S. Attorney’s Office, the Puerto Rico Department of Justice, the U.S. Securities and Exchange Commission, U.S. Bankruptcy Court and the Puerto Rico Comptroller’s Office.

“The task force should include independent and reputable Puerto Rico and U.S. legal and criminal experts to ensure transparency and trust,” the report states, recommending setting up an Independent Private Sector Inspector General for PREPA.

“The San Juan 5 and 6 project should be thoroughly vetted by an independent, third-party review authority,” Sanzillo said.

“PREPA staff raised questions about the fairness, a member of the Energy Bureau questioned the integrity of the payment system and the FOMB said savings from the contract would be far less than anticipated. The questions mount as each new fact emerges,” he said.

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

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