IEEFA: PREPA debt plan – new gimmick uses federal money to pay off old electric authority debt

Puerto Rico’s Debt Plan Prioritizes Bondholders Over Building a Reliable Energy Future – Watch Needed

The Puerto Rico Electric Power Authority’s (PREPA) debt restructuring plan is heading for final adoption. the proposalwhich has been running for a few years, presents PREPA bondholders with a 75% recovery rate – maybe more, maybe less, depending on who you ask.

Puerto Rico’s Federal Board of Oversight and Management (FOMB) rejected an earlier agreement in 2017 which was very similar to this one, as Puerto Rico’s economy couldn’t afford it. According to the recent Commonwealth Tax Plan, Puerto Rico’s economy still faces a period of sustained negative growth after experiencing a short period of positive growth driven by federal spending. However, the proposed PREPA debt plan ignores Puerto Rico’s financial vulnerability and jeopardizes the future of its energy network.

Proposed PREPA debt plan ignores Puerto Rico’s financial vulnerability and jeopardizes the future of its energy grid

Current expectations are that federal spending will play a critical role in Puerto Rico’s power grid finances. The Biden administration has promised at least $12 billion to rebuild the network. This large sum could go a long way toward rebuilding the island’s power grid. The federal money is vitally important from a financial standpoint, as it is intended to replace the grid without imposing new debt on the taxpayers of Puerto Rico.

In theory, this is a wise use of a large amount of federal money, given Puerto Rico’s weak economy. It creates a new asset that should improve the reliability of the electricity network. Eliminating debt service will keep electricity rates at a level conducive to economic recovery. Without debt service, the utility budget should be able to maintain sufficient funds to support operations and maintenance, as well as creating a modest cash reserve.

The proposed PREPA debt deal, however, would undermine this otherwise positive scenario. It aims to force utility customers to repay bondholders for $8.2 billion of inherited debt. The agreement imposes a new layer of debt servicing in the form of a significant rate increase, starting at 2.7 cents/kWh and increasing to 4.6 cents/kWh over four years. By imposing new debt service to pay off old debt, the PREPA debt agreement would nullify any benefit of federal funds, forfeiting the possibility of creating a financially viable and functioning electricity system.

Instead of using federal funds to build a stronger electrical system, PREPA would actually use the money to repay bondholders. It’s tax scam.

The mishandling doesn’t stop there.

PREPA, system operator LUMA and the P3 Public-Private Partnership Authority are moving forward with major natural gas infrastructure construction, including recently announced plans to convert new units to the San Juan Natural Gas Generating Station and the construction of another new natural gas plant in the San Juan area. PREPA’s integrated resource plan, which is supposed to guide the rebuilding of the network, calls for aggressive investments in renewable energy, which is the least expensive option. Instead, they are recklessly pursuing a damaging course of action that will perpetuate a fuel cost burden that is expensive, volatile, and inconsistent with the principles of sound financial management.

Equally disconcerting, after all the concerns expressed about corruption in Puerto Rico, no additional formal oversight has been put in place to ensure that federal money will be well spent. PREPA has an 8 billion dollar debt and the network is in a state of deep disrepair. Another $12 billion is on the way, but no one is monitoring how the money will be used.

Under the previous bankruptcy provisions, taxpayers’ money went to fossil fuel producers and bondholders. The new plan will also sequester taxpayers’ money to pay fossil fuel producers and bondholders. Again, money taken from commercial and residential taxpayers do not be used to establish a strong, solid and sustainable energy system. Financially, the only difference with the new regime is that taxpayers will also see their rates increase.

Tom Sanzillo ([email protected]) is the director of financial analysis for the IEEFA.

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