Prepa debt repayment plan deemed unfeasible, analyst warns
The Puerto Rico Electric Power Authority’s (Prepa) proposed plan to resolve its $9 billion debt crisis “is not feasible,” according to a release by the Institute for Energy Economics and Financial Analysis (IEEFA) regarding the testimony offered in federal court by Tom Sanzillo, director of financial analysis at the nonprofit research organization that advocates for a transition to a sustainable U.S. energy system.
In his April 28 testimony to the U.S. District Court for the District of Puerto Rico, Sanzillo warned that the Financial Oversight and Management Board (FOMB) for Puerto Rico’s proposal could further destabilize the island’s fragile electrical system.
The bankruptcy of Prepa, which has more than $9 billion in debt, is one of the largest municipal debt restructurings in the United States. The oversight board’s proposal would repay $5.68 billion of the bond debt over several decades through new, “double-digit rate increases,” the release says.
Puerto Rico’s electrical rates exceed 26 cents per kilowatt-hour (kWh), more than double the United States average, IEEFA notes, adding that the island’s median income is less than half that of the poorest U.S. state, and its electrical grid requires billions of dollars in investment to restore service to a reliable state.
In his testimony on behalf of the Irrigation and Electrical Workers Union (Utier, in Spanish), the utility’s largest, Sanzillo argued that the board’s plan “underestimates the future capital and operational needs of the electrical system and overestimates the rate that the economy can support.”
Sanzillo said that “once these factors are taken into account, there is no headroom to support repayment of the legacy debt through rates.”
IEEFA recalled that, in 2018, the board set a goal of achieving rates below 20 cents per kWh within five years. However, the organization said, “rates are even higher than they were in 2018, and the FOMB’s proposal will keep rates far above the previous 20 cents/kWh goal.”
Sanzillo testified that, “historically and currently, under such conditions, Prepa has been unable to execute the operational reforms and transformation to renewable energy needed to ensure reliable and affordable electrical service.”
Transitioning to renewable energy is crucial for lowering and stabilizing rates, IEFFA says, pointing out that 97% of the utility’s electricity is generated from fossil fuels and that their costs recently exceeded 60% of operating expenses. Sanzillo warned that implementing the proposal would continue to delay the transformation to a reliable and affordable electrical system. Consequently, he said, the island “will continue to suffer from unacceptably poor, life-threatening electricity service.”
The analyst said that bankruptcy proceedings are meant to provide “a fresh start,” but that the current “plan of adjustment is not a fresh start; it is the same old quagmire wrapped in different paper.”
The U.S. District Court for the District of Puerto Rico is slated to hold a hearing on the plan in late July.
Just last month, another government watchdog, Espacios Abiertos, or Open Spaces, questioned the board regarding the data it used to reach deals to restructure Puerto Rico’s public debt with bondholders. The nonprofit organization said the board “advanced the deficit projections” to 2027, differing from its initial outlook that estimated the deficit would occur by 2044. Espacios Abiertos’ research director, Daniel Santamaría-Ots, criticized the board for not providing a clear explanation for the change in projections and questioned the data and models used. He urged the fiscal panel to measure the impact of the structural reforms already implemented and provide more transparency about its projections.
