Study foresees adverse PREPA debt plan impact on Puerto Rico businesses
The current cost of energy in businesses in Puerto Rico is five times higher than that in the United States and is expected to worsen with the proposed payment to the bondholders of the Puerto Rico Electric Power Authority (PREPA), leading to further increases in food prices, job losses and the potential bankruptcy of 180 businesses, a study conducted by economist José Caraballo-Cueto revealed.
The study, titled “Impact of Energy Costs on Puerto Rico’s Trade,” was commissioned by the Supermercados Selectos chain and found that Puerto Rico has the second-highest business utility bills, only surpassed by Hawaii. However, considering that household income in Puerto Rico is less than half that of all of the United States, costs effectively increase fivefold.
Caraballo-Cueto said the proposed PREPA Debt Adjustment Plan includes a “legacy cost,” an additional charge on electricity bills for 35 years to pay off the debt, which will have a dual impact on supermarkets: It will reduce sales and increase operational costs.
“With the proposed payment to bondholders, this cost will increase even more, affecting the ability of the population to afford the basic food basket and food security in Puerto Rico because people will reduce the amount of food they consume,” Caraballo-Cueto said.
The University of Puerto Rico (UPR) Río Piedras campus professor estimated that this legacy cost would increase supermarkets’ monthly electricity bills by between $1,700 and $2,300.
“There is a statistically significant relationship between this energy cost and the price of meats and seafood in general,” Caraballo-Cueto, who is also the president of economic and demographic consulting firm Econometrika, said of the impact on refrigerated products.
He highlighted that Puerto Rico’s overall energy cost is twice the average cost in the mainland U.S., and said the analysis is particularly relevant as 24% of employees work in the commercial sector, making it the second-largest sector in the island’s economy.
He recommended that the Financial Oversight and Management Board eliminate the legacy charge, even if it has to extend the debt adjustment plan’s maturity.
The study’s methodology utilized multivariable regressions and analyzed data from the Economic Development Bank (EDB), the Puerto Rico Trade & Export Co. and the U.S. Energy Information Administration, as well as supermarket bills, to understand specific losses and get a detailed view of the sector’s condition.
“The Debt Adjustment Plan only mentions the increase in the cost per kilowatt-hour but does not go into detail about PREPA customers’ consumption,” he said. “For this reason, it was so important to conduct this analysis. We didn’t ask merchants if they would be affected by an increase in energy costs; instead, we sought specific losses through the analysis of bills to get a better picture of the sector in detail, supermarkets in general, and the economy.”
The study was presented during the Selectos Innova section of the chain’s 30th annual convention, coinciding with its 45th anniversary. A forum to discuss the findings included Dr. David Sotomayor, a professor at UPR’s Mayagüez campus; the engineer Johann Gathmann, a representative of the Green Building Council; Ariel Torres, the chair of Supermercados Selectos; and Caraballo-Cueto.
Study submitted to Bankruptcy Court
Torres, of the supermarket’s board, said Selectos recently approached the Bankruptcy Court to file an amendment to its initial motion objecting to the approval of the PREPA Debt Adjustment Plan filed on June 8. The amendment aims to have U.S. District Judge Laura Taylor Swain, who oversees the related proceedings, consider Caraballo-Cueto’s study as part of the evidence.
“The findings of this study are extremely concerning for Puerto Rico’s food security,” Torres said. “Supermercados Selectos’ stance is that the PREPA Debt Adjustment Plan is not good for Puerto Rico. We stated this in the Bankruptcy Court earlier this year, and we maintain that the revised plan is also not beneficial, as demonstrated by this study.”
The executive director of the Puerto Rican chain, Mayreg Rodríguez, said: “The implications of the proposed bondholder payment will affect businesses in Puerto Rico, jobs and access to food. It is essential that we analyze the findings of this study before approving a plan that could affect us for 35 years.”