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AES Gives Government of Puerto Rico an Ultimatum for Economic Bailout

The company’s president warns that if the Government does not assume the costs and ownership of the coal company, they will cancel the existing contract citing “force majeure.”

January 26, 2022

Email exchanges, meetings with key personnel from the Puerto Rico Electric Power Authority (PREPA) and the discussion of a Memorandum of Understanding to renegotiate AES Puerto Rico’s (AES-PR) contract with the government of Puerto Rico six years before it expires. This all has happened over the past 11 months, away from public scrutiny.

However, a letter from Natalie Jaresko, executive director of the Fiscal Control Board, to PREPA’s Governing Board uncovered what until today had been a secret between AES executives and members of Pedro Pierluisi’s administration: that the coal energy producer is going through its worst economic crisis and to get out of it, is demanding that the government of Puerto Rico come to its rescue.

“The cash flow problem at AES-PR is dire,” AES President Jesús Bolinaga Serfaty said in a letter written on March 24, 2021 to PREPA executives that had been kept secret, but that the Center for Investigative Journalism (CPI, in Spanish) and La Perla del Sur obtained after months of requests and the filing of a request for Mandamus for access to public information.

Screenshot of the communication. Read the document here.

The documents show that as of June 2021 AES is looking to transfer ownership of its coal-fueled power plant in Guayama to the public corporation or any other government entity, that PREPA grants it a new contract, this time only an “operator” of the facility, and that the government of Puerto Rico assumes all its expenses, including buying the coal and more than $150 million in environmental costs.

These include expenses incurred to comply with environmental laws, rules, and regulations such as the export of ashes and groundwater monitoring, among others.

AES requests “cooperation” from PREPA

In the March 24 letter, Bolinaga Serfaty alleges that AES-PR’s fragile financial situation was aggravated by Law 5 of 2020, which prohibits the disposal of coal ash in the island and “dramatically increasing our cost to manage CCRs”, or coal combustion residues.

In at least two of the documents delivered last week by PREPA and the Puerto Rico Energy Bureau following the lawsuit, the president of AES-PR states that the “unprecedented ban” on coal ash disposal has meant “at least $167 million in additional costs” through 2027, the year in which its electricity sales contract with the government of Puerto Rico expires.

The letters state that the contracting of vessels to export thousands of tons of coal ash to Jacksonville, the transfer of that load in trucks to a landfill in Georgia and the payments for its disposal in that landfill entail a cost of $18 million annually between 2019 and 2027, and $20 million per year in 2021 and 2022.

It adds that in 2020 AES-PR required 26 vessels to ship 529,949.97 tons out of the island for disposal.

Similarly, it points to expenses assumed by the company for the maintenance of the Las Mareas Pier, its shipping port in Guayama in the South coast, and the dredging of that bay, which it estimated at $7.8 million. It also mentions PREPA sanctions for breaches of contract in the dispatch of electricity, which in two years are around $11.4 million.

“New operational costs like these… have negatively impacted AES-PR’s cashflows and pose an existential threat to the company, should they remain unchecked,” warns the executive in one of the letters sent in March 2021 to Fernando Padilla, PREPA’s director of Projects and Fiscal Affairs, and Efrán Paredes Maisonet, executive director of PREPA.

“AES-PR expects to operate at a net negative cashflow for the foreseeable future,” adds Bolinaga Serfaty in the same letter. “And, as tax exemptions wear off, these cash deficits are expected to continue to worsen.”

In total, Bolinaga Serfaty assures in the documents that AES-PR’s new operating costs would add expenses of $186 million for the period 2019-2027, and that to keep the coal fueled power plant operating “it is essential that AESP-PR receives PREPA’s cooperation with addressing these uncontrollable new costs, so that AES-PR at least maintains enough cash to cover its bare minimum costs to operate, with reasonable cushion to deal with possible contingencies.”

“Without this cooperation, PREPA would be jeopardizing AES-PR’s ability to provide reliable, uninterrupted power,” it further warns.

Similarly, it points out that, if the “cashflow shortfall” persists and leaves no room to assume obligations and eventualities, “we will have no choice but to exercise our legal rights” to invoke the “force majeure” clause and unilaterally cancel the contract with PREPA.

Bolinaga Serfaty alleges that the financial situation of AES-PR worsened with Law 5 of 2020, which prohibits the disposal of coal ash in Puerto Rico.
Archives.

What AES doesn’t say

The president of the coal energy company added to the equation the economic impact of the Department of Natural and Environmental Resources’ (DNER, in Spanish) new regulation to comply with Act 5 that imposes sanctions on the coal company “subject to fines and imprisonment,” if it stores its waste for more than 180 days on the premises of its industrial site in the Jobos neighborhood in Guayama.

In his letter, Bolinaga Serfaty failed to mention that his company guaranteed PREPA that the ashes and their derivatives would not be stored on the island for more than 180 days and that they would never be disposed of anywhere in Puerto Rico, according to the original contract signed on October 11, 1994.

It also skips over the fact that on May 1, 1996, AES accepted to dispose of the ashes outside of Puerto Rico, “including the possibility of returning them” to the coal’s place of origin, Colombia, as stated in the Location Permit approved by the Planning Board.

After failing to comply with these terms for more than a decade, AES-PR managed to get the administration of then Governor Alejandro García Padilla to amend clause 6.6 of the contract on July 17, 2015 and allow it to discard thousands of tons in local landfills, saving millions of dollars for handling.

A request for an interview with AES-PR was not answered before press time.

AES asks for a full bailout

To free AES-PR from all its financial debts and “intrinsic obligations”, including current and future environmental costs, Bolinaga Serfaty has called, at least since March 2021, for an alliance with PREPA to transfer the ownership and control of the coal company to the government of Puerto Rico.

Likewise, that the government contract AES — or the company they designate — to “operate and maintain the Guayama plant,” and that in the meantime the company and PREPA renegotiate the current contract or PPOA (Power Purchase and Operating Agreement) to go from 454 megawatts of electricity produced with coal to between 280 and 500 megawatts of solar energy and battery storage.

The new contract would have a duration of no less than 25 years and the price that AES-PR would charge per solar kilowatt-hour would be similar to the one charged with coal as raw material: about nine cents.

These and other terms appear in the proposal of the Memorandum of Understanding, or MOU, that the president of AES-PR submitted on June 28 to the then executive director of PREPA, Efrán Paredes-Maisonet.

Not a word about the title transfer proposal and the million-dollar debts that the company wants to cede to the government of Puerto Rico was mentioned by representatives of AES in the presentation that the company made to a subcommittee of the US Congress that met on June 30 to investigate the adverse effects of toxic coal ash on the health of Puerto Ricans and discuss options for plant closure.

Jones Act and accidents

The documents also show that the president of AES-PR describes the Jones Act as an aggravating factor for the company’s fragile financial outlook.

The Jones Act, a federal statute that regulates maritime trade between the United States and Puerto Rico, requires the company to use exclusively US vessels for the export of its waste to the continent, and those, in addition to being “scarce,” are “expensive to reserve,” the senior executive of AES states.

“If just one barge is unavailable, the fragile delivery chain can be disrupted if not broken entirely,” he pointed out in another letter to the PREPA Governing Board on August 11.

The stranding of the Bridgeport, a barge that on March 22 was transporting 12,000 tons of toxic coal ash to Jacksonville, and the subsequent spill of a large part of its cargo in the tourist area of Atlantic Beach in Florida, left the coal energy company without one of the largest vessels in its fleet, according to the letter obtained.

Although Bolinaga Serfaty wrote to PREPA that his company was not responsible for this maritime incident as the charterer of the vessel, La Perla del Sur confirmed that the Florida Department of Environmental Protection imposed a $38,500 fine on AES-PR on September 24, and two of its shipping providers, Dann Ocean Towing and Moran Towing Corporation, for violating state environmental laws and regulations.

Bolinaga Serfaty accepted the fine on September 30.

Meanwhile, the documents received after the Mandamus also reveal that the indefinite absence of the Bridgeport altered AES-PR’s schedule to extract a large part of the 100,000 tons of coal ash that is still piled up on its industrial site, as well as to build a barrier or liner that stops the contact of the toxic waste with the area’s soil and the aquifer.

Still, as recently as January 11, the US Environmental Protection Agency (EPA) questioned the method and effectiveness of the project, which could force changes and other costs for the company.

Chain reaction

Analyzing Bolinaga Serfaty’s arguments in the letters, Congresswoman Katie Porter, chairwoman of the federal commission that is investigating the coal energy company in the House Subcommittee on Natural Resources, stated that AES-PR “once again has shown they are a corporation that puts profits over people.”

“For years they have spread toxic ash all around the island, sickening communities, and polluting groundwater,” she said in written statements. “And now they are threatening to turn off the plant if PREPA’s ratepayers don’t pay them $23 million per year for 8 years for the pollution that they caused. PREPA is trying to dig itself out of debt while AES earned $8.3 billion last year,” she said referring to the parent company.

“There are ways to close this plant early,” the California congresswoman said.

Meanwhile, the attorney for the Electric Industry Workers Union (UTIER, in Spanish), Rolando Emmanuelli Jiménez, said: “After having polluted the environment, now they tell us ‘get me out of the problem, you keep the plant, relieve me of all obligations and give me a contract to continue profiting from the people of Puerto Rico’.”

“It’s an act of cynicism that AES is threatening PREPA with canceling the contract due to the force majeure clause,” he continued, “when they are the ones who have incurred environmental damage and it’s precisely this irresponsibility that forces them to assume losses that make its operation in Puerto Rico unviable.”

The lawyer and member of the White House Environmental Justice Advisory Council, Ruth Santiago Quiñones, agreed with his expressions, stressing that “in effect, AES is threatening the government of Puerto Rico, invoking alleged force majeure, when that does not apply in this case.”

In her opinion, the clause of force majeure or “Act of God” must be applied in situations that are beyond the control of the contracting parties, such as wars, disasters or strikes, “and the alleged shortage of vessels to transport the ashes is not convincing.”

“AES’ main allegation here is the cost of transporting the ashes out of the island and that may be the result of a miscalculation by AES, because it increased the cost of handling their waste as it doesn’t have a beneficial use. And that’s not force majeure,” she noted.

She also stated that the underlying problem in this matter does not lie with AES, but rather with key figures in the government of Puerto Rico, who “have not yet taken the measures within their power to free us from AES’ grip.”

“The government could seek the historical amount of funds from FEMA and HUD assigned to PREPA to massify renewable energy on roofs, together with batteries in all homes, businesses, schools and other institutions in Puerto Rico. In contrast, the AES scheme aims to occupy land with industrial-scale solar systems and keep the island dependent on a centralized transmission and distribution system, while facilitating the continued burning of coal.”

“We don’t have to continue being held hostage by AES,” she said.

For his part, Emmanuelli Jiménez stated that if the AES plan materializes and its contract with PREPA is renegotiated, the company will still have to comply with the Integrated Resource Plan “and for that, the Puerto Rico Energy Bureau (PREB) has to approve the transaction and call for a discussion of the matter with all interested parties, including the communities near the coal company and environmental groups.”

At the close of this report, PREB Communications officer Maricela Díaz assured that PREPA had not filed a request for amendment, contract renegotiation or request for a new contract with AES Puerto Rico or AES Corporation, its parent company, before that agency.

Emmanuelli Jiménez also explained that an agreement between AES and PREPA would have to get the endorsement of the Fiscal Control Board, something its Executive Director Natalie Jaresko confirmed in the letter warning about the coal company’s plan. In that letter, Jaresko encouraged PREPA’s Governing Board to consider renegotiating the existing contract with AES-PR.

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