The second attempt to restructure the Puerto Rico Electric Power Authority’s (PREPA) debt is in a kind of limbo. To pull it out of there, the Fiscal Control Board (JCF, in Spanish), which directs the island’s finances, will modify the terms of the negotiation it established with the public corporation’s bondholders prior to the pandemic. These amendments could lead to substantial changes in light of the effects COVID-19 has had on the island’s ailing economy and the new appointments to the JCF.
The new Legislature that will start working in 2021, represented by a Popular Democratic Party (PPD, in Spanish) majority, will have to evaluate this revised deal or Restructuring Support Agreement (RSA, in English) and approve or reject it. During the past electoral campaign, the leaders of all political parties had expressed their views — from reservations to rejection — about the RSA that was on the table.
The JCF, created under the federal PROMESA law for Puerto Rico to restructure its public debts, had until December 9, 2020 to explain to the US District Court how the pandemic has affected the fiscal assumptions that led to the RSA and if it should be modified. The JCF, however, again asked US District Judge Laura Taylor Swain for additional time (until March 10, 2021) to respond.
The restructuring of about $9 billion in debt with its creditors is a condition for the public corporation to be able to return to the bond market. The RSA proposed so far would increase the cost of electricity to levels never seen on the island before and would harm almost half of the population that lives below the poverty level, according to six experts that the CPI interviewed. It is a decisive transaction for the energy system and, at the same time, for the future of the cost of living in Puerto Rico.
New Progressive Party (PNP, in Spanish) Gov.-elect Pedro Pierluisi has said that the effects of the pandemic have to be considered to determine the viability of the RSA. Carlos Delgado, a former candidate for governor and president of the PPD, had pointed out that the proposed agreement disincentives consumers. The leaders of the Citizens Victory Movement (MVC, in Spanish), the Puerto Rican Independence Party (PIP, in Spanish) and the Dignity Project oppose the RSA. The outgoing legislature controlled by the PNP also rejected it in January 2020, because it implies an increase in monthly bills.
“The Oversight Board has continued to conduct diligence into the RSA and the affordability and sustainability of electricity rates on the island given the still changing economic landscape and the effects of the COVID-19 pandemic, as well as to analyze the optimal means of implementing the RSA transactions even though required legislation has not been enacted,” the fiscal entity stated in its submission before the court, while disclosing it had made “important strides” in its analysis.
The official Uninsured Creditors Committee, which mostly represents Puerto Rican companies that provide services to the government and those that have no guarantee of recovering the money invested, stated in a motion submitted in August that the current RSA “is no longer a viable agreement.”
The JCF’s new Chairman, David Skeel, said in an editorial on November 24 that the restructuring plans for the central government and PREPA’s debt had “been put on hold and must be renegotiated due to the COVID-19 virus.” Skeel now has four new members in the JCF, including Justin Peterson, who has lobbied for bondholders and criticized the handling of negotiations to restructure the central government’s debt.
“It’s likely that he will have the same stance with PREPA,” said Attorney Rolando Emmanueli, who represents the Electric Industry Workers Union (UTIER, in Spanish) in the bankruptcy proceeding, referring to the favorable position Peterson has expressed toward bondholders.
The three other new members that President Donald Trump appointed in December are Betty A. Rosa (D-NY), John E. Nixon (R-Utah), and Puerto Rican Antonio L. Medina, former executive director of the Puerto Rico Industrial Development Company.
The details of the RSA amendments are being kept secret. “It’s a matter which all Board members will definitely look at, including the new members,” JCF Spokesman Edward Zayas said.
The RSA and its impact on poor families
The RSA proposed to date only cuts the debt with bondholders by 23% and puts their recovery over the population’s priorities in case of hurricanes, since the public corporation could only borrow money to repair infrastructure when a major disaster occurs and sets an additional charge on the bill to pay for it. These are some of the main points that must be modified, said Tomás Torres, who represents consumers before PREPA’s Governing Board.
The loan that the public corporation would take out to address disaster expenses cannot mean that bondholders will not be paid ahead of everything else or affect the rating of previously issued PREPA bonds, the RSA states.
“This agreement is in clear benefit of the bondholders and not of the consumers or the people of Puerto Rico,” Torres said.
The outcome of the negotiations will affect the current and the next generation of Puerto Ricans. In 2049, the electricity rate will be about 47.9 cents per kilowatt hour (kWh), according to the public corporation’s fiscal plan. If the RSA on the table were approved, it would add 4.5 cents for the transition charge (on the consumer to pay off debt), and electricity would cost 52 cents per kWh in 2049. That’s more than twice the current cost.
“If we keep the RSA as it is now, PREPA will operate for a few years and then it will go bankrupt again. And that would be the worst outcome for Puerto Rico,” said Sergio Marxuach, director of public policy at the Center for a New Economy think tank.
Economist Ramón Cao, meanwhile, published two studies, in 2019 and 2020, which conclude that the proposed RSA is unsustainable. “We as consumers would be embargoing ourselves for 47 years. I won’t be alive when the RSA expires. And it’s very likely that you won’t be either. We’re embargoing the next two generations. We’re talking about my children’s grandchildren. Look who we’re embargoing now,” Cao blasted.
One of the issues that must be addressed in the RSA amendment is to comply with the goal of keeping the cost of electricity below 20 cents per kWh, as provided by Act 17, which establishes the new energy policy.
“How is someone living on a limited budget going to pay for such an expensive bill? Nobody has money for expenses like electricity, plus internet, telephone, schools, mortgages. That kind of debt load reduces the people’s resilience to disasters,” said Attorney Maritere Padilla, director of public policy for the Hispanic Federation, a nonprofit organization that sponsors the development of solar energy generation in health centers located in the mountain region. “If the cost of transition was already being paid during an emergency like the current pandemic, that debt would pile up for families who are facing this crisis in need.”
Her claim is not hypothetical. “We’ve seen cases of people with accrued debt that have been worsened by the crisis we’re living,” Hannia Rivera, executive director of the Independent Office for Consumer Protection, which defends consumers before PREPA and private electric power companies in the United States, told the CPI.
This year, 259,450 families were eligible to receive federal energy subsidy funds, which the Department of the Family (DF) manages. That is almost 20% of PREPA’s clients.
This is a significant 312% increase in program beneficiaries compared to 2015, when 62,940 families received it. A spokeswoman for the DF said the reason for it is that the aid is granted automatically now to families eligible for the Nutritional Assistance Program (PAN, in Spanish).
The DF also received 25,952 applications for the Energy Crisis, a parallel program that provides funds to households that have suspension notices because they are late in their electricity payments. Some 15,832 families (61% of the applicants) were approved, the DF confirmed.
The Hispanic Federation’s observations on the RSA’s effects on people living below the poverty line coincide with a study that sociologist Héctor Cordero Guzmán prepared for the UTIER. It states that the increases contemplated in the RSA are unfair and disproportionate.
“When you effect the increase per kilowatt hour, it affects everyone, but not everyone feels it in the same way,” Cordero told the CPI. “It’s an impact that feels different, disproportionate and significantly high for poor families, if you compare it with families with more resources.”
“Because electricity is a basic necessity, you can lower consumption, but there is a minimum that can be reached without affecting the quality of life and health of those indigent households. The agreement can put the physical and economic health of many families at risk through an electricity bill that isn’t proportional to their income level,” added Cordero. “If you’re someone who depends on certain equipment in addition to refrigerators, such as oxygen machines, which are not luxuries, but rather a necessity. The blow is going to hit them harder.”
If approved, the RSA will worsen outmigration, which will continue to affect the economy and consequently PREPA, the study states.
COVID-19 disrupted the assumptions of the Fiscal Plan
On July 31, 2020 — four months after the island’s economic activities shut down due to COVID-19 — the JCF filed a motion stating that it was evaluating the RSA’s viability in light of the pandemic’s effects on the economy. The situation was compounded by a period of drought and uncertainty due to the forecasts of an active hurricane season. The year started with an earthquake measuring 6.4 on the Richter scale that knocked out the Costa Sur power plant, one of the island’s most important facilities, causing a general blackout. The approximate cost of the repairs was $25 million. The JCF warned that the Fiscal Plan it had certified for PREPA was pending.
“The agreement is officially in limbo,” said Marxuach. “It’s based on premises that aren’t true now. The first is the economic growth that was going to happen as a result of federal investment from Hurricane María, which is extremely overdue, and the structural changes that the Government of Puerto Rico was going to implement to improve the economy. Electricity consumption goes hand-in-hand with the economy. We know that the economy has been wiped out because of the pandemic. In terms of economic growth, we aren’t going to be where the plan said we were, and electricity consumption is going to drop further.”
The accrued negative impact of COVID-19 on Puerto Rico’s economy will be $6.6 billion in 2020 and 2021, according to the Fiscal Agency and Financial Advisory Authority (AAFAF, in Spanish). Up to 30% of small businesses are at risk of closing permanently due to the effects of the restrictions, Economic Development and Commerce Secretary Manuel Laboy said.
This is the second major economic collapse that Puerto Rico has suffered in three years, following Hurricane María’s impact in 2017. A total of 1,509,034 people (almost one in two Puerto Ricans) depend on help from the PAN to bring food to the table, according to the DF.
“The economy won’t be able to sustain another increase in the cost of electricity. That’s why the Board has to review the RSA in light of the pandemic,” said Torres.
The Unsecured Creditors Committee (UCC) submitted a motion to the court on August 18, 2020, requesting the annulment of this restructuring process to prevent it from “entering an indefinite limbo.” It noted that, since before the pandemic, the JCF had postponed the hearing to discuss the RSA 11 times, delaying the process by more than 15 months (they are 18 months late). Judge Laura Taylor Swain, who handles the bankruptcy cases, rejected this motion. On December 4, the UCC filed an appeal.
The UCC alleged that government representatives “have no interest” in approving the RSA. The group noted that former PREPA Executive Director José Ortiz said during an energy industry conference that the RSA had to be renegotiated and that he did not see an agreement happening until 2021. PREPA Governing Board Chair Ralph Kreil made similar assertions during a discussion at the Puerto Rico Chamber of Commerce on November 18, 2020: “I think it should be renegotiated.” Later, he told CPI that it was his personal opinion and that he was referring to modifying the same agreement that is being discussed and not starting a new one.
On September 25, the JCF told the court that because of a lack of a vaccine against COVID-19, it did not know how long the effects of the pandemic would last on the island’s economy and said that it has to deal with a change of government to finalize the debt restructuring.
The JCF wants to keep the same agreement in place, but renegotiate certain terms, according to its motion. The entity argued that it cannot start over from scratch: “Redoing it would be difficult, perhaps impossible.” The regulatory body explained that many of the original creditors sold their bonds, and now they would not be negotiating with the same group, so the current consensus would be lost.
PREPA’s situation is worse than publicly discussed
The process that was leading to the RSA’s approval prior to the onset of the pandemic would not have solved the public corporation’s insolvency and deficit problems, as it carries a debt much greater than the $9 billion that is mentioned in the debt negotiations, according to a study by economist Cao, commissioned by the consumer representative before PREPA’s Governing Board. The debt not only includes what is owed to bondholders, but also pensions, credit lines to buy fuel, accounts payable, financial SWAPs, and what is owed to the Government Development Bank, for a total of $17.7 billion.
“The RSA that was on the table solves absolutely nothing and really limits future possibilities. After PREPA spends the $10 billion that the federal government has given it to restore the electricity grid, it still has a lot to do regarding the transmission and distribution and generation systems. The reasonable way to do that is by going to the bond market. But with financial metrics and annual operational deficits, there’s no way you can find someone to lend you money unless they are a loan shark who lends money at a high interest rate. The agreement, before the pandemic and earthquakes, did not solve the problem. And now with the pandemic, it’s worse,” warned Cao.
The public corporation’s assets are only $9.9 billion. This means that PREPA has a deficit of $7.8 billion.
For an RSA to be viable, PREPA needs to cut its total debt from $17.7 billion to about $5 billion, which is sustainable, Cao said.
Between 2006 and 2010, PREPA was already on the brink of insolvency. In 2011 it became insolvent and could not cover operational costs and pay its debts, according to Cao’s analysis of the public corporation’s financial statements. The economist questioned how PREPA could continue to borrow under these conditions. He insists that the debt must be audited before reaching a restructuring agreement, because some of it may be illegal. The bond issues during those years were carried out under the administrations of former PDP Gov. Aníbal Acevedo Vilá (2005 to 2009) and PNP Gov. Luis Fortuño (2009 to 2013).
The financial problems gained relevance in 2014, when PREPA ran into trouble to pay the bonds and the fuel it needed to generate electricity. During the administration of former PPD Gov. Alejandro García Padilla (2013 to 2017), PREPA began restructuring its debt under the guidance of Lisa Donahue, from the firm AlixPartners, to which it paid more than $45 million.
But in June 2017, the JCF announced it was rejecting that first agreement, stating that it did not promote the structural and operational reforms needed to attract capital, and that the most appropriate course of action was through bankruptcy via Title III of PROMESA, which is now before the court’s consideration.