The government of Puerto Rico negotiated an energy transmission and distribution contract with LUMA Energy that increases costs annually. This agreement does not include options that allowed the company Ondeo to exit just 18 months after starting operations with the Puerto Rico Aqueduct and Sewer Authority (PRASA).
In addition to service instability, breakdowns, and power fluctuations experienced by Puerto Ricans, the operational costs of the privatized LUMA Energy continue to rise.
“LUMA has stayed within its annual budget for each fiscal year,” the Puerto Rico Energy Bureau (NEPR), which oversees and ensures the implementation of public policy for electrical services, said in written statements. However, these statements are misleading as they give the impression that budget allocations have not increased since LUMA took over the transmission and distribution system management.
The regulatory entity approved increasing the operational and capital improvement budget from $636 million to $693 million, funded by the local government, for the fiscal year 2024-2025. This budget maintains and operates the energy transmission and distribution system.
Additionally, the government pays an annual fee to the consortium for managing the system. Since the supplementary contract came into effect in 2021, LUMA has also requested and received approval for increases in its compensation, cumulatively reaching $500 million by June 30, 2025.
In its first year managing the network, LUMA charged $115 million, a figure subject to annual review for inflation, as stipulated in the supplementary contract. Initially, $100.6 million was budgeted for the fiscal year 2021-2022, confirmed NEPR to the Center for Investigative Journalism (CPI). “The fee for fiscal year 2025 is $135 million,” the company said in written statements.
When LUMA Asks for More Money: Ondeo’s Case Resonates
Following continuous blackouts and massive power outages in June, the business sector, non-profit organizations, and politicians who supported LUMA’s hiring have called for greater oversight and even the cancellation of the contract.
The call to cancel the agreement recalls the historical moment when former Governor Sila María Calderón’s administration resumed public operation of the water supply system by canceling the privatization contract with Ondeo, awarded just a year and a half earlier.
Former Governor Pedro Rosselló González privatized PRASA in 1995, awarding a contract to PSG Water Company, a subsidiary of the Franco-Spanish company Vivendi. According to reports from the Office of the Comptroller, the company accumulated a deficit of $325 million and did not improve service.
This contract expired in 2002, and under Calderón’s administration, it was decided to keep the operation in private hands and open the process to receive proposals from other companies. In 2002, the government chose Ondeo, a subsidiary of the French company Suez, for $400 million annually.
It was a ten-year contract with a globally recognized company in water system management. Calderón’s administration canceled it 18 months later because the company requested $100 million to cover the first year’s deficit and an increase of $27 million to the annual payment, said Juan Agosto Alicea, who led the process of awarding and canceling the contract with Ondeo, in an interview with CPI.
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“There are substantial differences between the contract with Ondeo and LUMA’s. For example, Ondeo had penalties for poor performance. Additionally, unlike LUMA, a company with experience managing water systems was chosen back then. LUMA was created to contract in Puerto Rico,” said Héctor Rosario Hernández, who was also part of the committee that worked on the agreement with Ondeo. LUMA is a Texan-Canadian consortium formed in January 2020 by ATCO, Quanta Services, and IEM.
According to Agosto Alicea, Calderón’s administration also ensured that the company assumed any additional costs beyond the annual amount agreed for the operation. The certified public accountant, then called “the Super Secretary,” served as Secretary of the Treasury in 1985 and later as Chairman of the Board of Directors of the Government Development Bank and PRASA, the latter position during the contract with Ondeo.
Agosto Alicea and Rosario Hernández pointed out that the contractual clauses safeguarding the company’s proper operation, execution oversight, and budget limits facilitated the contract’s cancellation at Ondeo’s first attempt to increase the annual public funds agreed upon.
“The most important part of such a contract is that the company assumes the deficit because it manages it,” said Agosto Alicea. He explained that this clause — initially resisted by Ondeo — was recommended by the members of an advisory group that evaluated all jurisdictions and countries where the water system had been privatized.
Rosario Hernández and Agosto Alicea agreed that a strategic move that allowed the government to resume water system operations was forcing the privatizer to maintain the workforce.
“You keep the institutional memory. Here, LUMA was not required, and part of what we see is that the personnel they hired [LUMA] are unaware of the system’s daily operations,” said Rosario Hernández. One of the most evident examples was the transformer transfer to Santa Isabel, which not only didn’t work, but in other circumstances, PRASA staff could have moved it at a lower cost and in less time, as it was part of the corporation’s regular tasks, he argued.
“The only experience LUMA has is managing a very small system in Montana [in the United States], where the winter climate naturally ‘prunes’ vegetation. It is evident that they do not understand that our pruning, which they have attributed to breakdowns and blackouts, must be done regularly,” he added.
Former Governor Sila María Calderón declined to comment on the process that led to Ondeo’s contract cancellation.
“The first thing we should do is to legislate so that the contract’s administration, instead of being under the Public-Private Partnerships Authority, is transferred to the Electric Power Authority, where there is expertise to oversee its compliance.,” recommended Rosario Hernández, who was executive director of the Electric Power Authority and part of PRASA’s Board of Directors during the contracting process with Ondeo.
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