In 2017, Puerto Rico experienced two catastrophic Category 5 hurricanes, Hurricane Irma and Hurricane Maria. These storms had a devastating effect on the island’s fragile electrical grid, leaving 100% of the island — over 1.5 million people— without electricity. The Puerto Rico Electric Power Authority (PREPA), a public corporation within the Government of Puerto Rico and the only electric utility in Puerto Rico, which owns and operates the electrical grid, including electricity generation, transmission, and distribution facilities, was ill-prepared for the impact.
Prior to 2017, PREPA experienced ongoing issues with financial mismanagement, aging infrastructure, and administrative problems which were only exacerbated by these natural disasters. As a result, the Puerto Rico Electric Power System Transformation Act (Act 120-2018) was passed in 2018, which authorized the legal framework to sell or transfer the assets and services of the authority. The act further outlined that the transformation of the authority would take place through a public-private partnership and the use of the framework detailed in the Public-Private Partnership Act (Act 29-2009), which also established the Puerto Rico Public-Private Partnership Authority.
In June 2020, PREPA and the Puerto Rico Public-Private Partnership Authority selected LUMA Energy (LUMA) to maintain and modernize the electricity and transmission system in Puerto Rico over a 15-year contract period. However, LUMA has since faced criticism from both elected officials and residents regarding its performance, especially after the island once again faced a 100% loss of power after Hurricane Fiona this past September.
Background
There are multiple contributing factors to Puerto Rico’s failing electrical grid, which impact LUMA’s ability to manage PREPA. Despite access to some renewable resources, almost all of the electricity in Puerto Rico is generated by imported fossil fuels since the island does not produce fossil fuels itself. According to the U.S. Energy Information Administration, Puerto Rico consumes nearly 27 times more energy than it produces. These factors result in a costly and unsustainable solution.
In addition to costly electricity production and electrical grid operation, Puerto Rico and PREPA have accumulated large amounts of debt. In 2015, Puerto Rico announced that its government owed over $70 billion in debt and $50 billion in public pension liabilities that it was unable to repay. In addition, PREPA is indebted at almost $9 billion. Consequently, the United States Congress passed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA).
As a result of PROMESA, the Puerto Rico Financial Oversight and Management Board was established to restructure Puerto Rico’s debt and oversee the bankruptcy process for the commonwealth. The board established a plan that reduced Puerto Rico’s debt by 80%, set limits on borrowing, and suggested political changes to avoid future mismanagement. The Oversight and Management Board, however, has been criticized for a slow process that will cost Puerto Rican taxpayers over $1 billion when no federal funding was provided through PROMESA. The board will also remain in operation until Puerto Rico demonstrates four consecutive years of a balanced budget. Although Puerto Rico has formally exited bankruptcy, Puerto Rican Governor Pierluisi canceled the debt restructuring deal in place for PREPA that was negotiated in 2019, citing the COVID-19 pandemic and inflation. Without a permanent debt restructuring deal in place, the contract with LUMA is not permanent, and PREPA cannot solidify a long-term plan for its operations.
This debt issue, moreover, complicates LUMA’s operations. LUMA is a Canadian-American consortium of ATCO, Quantum and IEM. According to the public-private partnership contract, LUMA’s performance (and financial incentives) is evaluated in three categories:
- Customer Satisfaction;
- Technical, Safety;
- Regulatory and Financial Performance.
Assuming performance metrics are satisfactory, LUMA stands to earn a fixed fee of $1.625 billion and an incentive fee of up to $309 million for its management of PREPA. Thus, LUMA should be incentivized to repair and responsibly invest in the electrical grid; however, the lack of a permanent debt restructuring deal introduces uncertainty about LUMA’s future relationship with PREPA.
Given that no alternative service providers exist, Puerto Rican residents must pay for the electric services, regardless of its stability or cost. In addition, their taxpayer dollars fund the Puerto Rico Financial Oversight and Management Board as well as aspects of PREPA and the Puerto Rico Public-Private Partnership Authority.
These issues with PREPA’s operations have caused the United States Federal Government to get involved. Recently, the House Committee on Energy and Commerce expressed their concerns in a letter to LUMA and requested information from the company. The U.S. government has also provided significant aid to Puerto Rico as a result of natural disasters, infrastructure issues, rising energy costs, and the COVID-19 pandemic.
The Policy Problem
PREPA and Puerto Rico’s Public-Private Partnership Authority intended to modernize Puerto Rico’s electrical grid and improve services provided to residents through the public-private partnership with LUMA Energy. However, since the commencement of the contract, electricity prices for residents have increased seven times, forcing Puerto Ricans to spend 8% of their income on electricity, as opposed to only 2.4% paid by U.S. mainland residents. Furthermore, blackouts persist frequently, despite one of the goals of the public-private partnership being to make them less frequent.
In order to decide the fate of Puerto Rico’s electrical grid, three entities voted last November on the future of the public-private partnership between PREPA and LUMA Energy: The Puerto Rico Financial Oversight and Management Board, Puerto Rico’s Public-Private Partnership Authority and PREPA’s Board. Despite public dissent and the concerns expressed by the U.S. government, the temporary contract for LUMA Energy’s operation, maintenance, distribution and modernization of Puerto Rico’s electrical grid was extended.
Puerto Rico Governor Pierluisi defends the LUMA energy contract as the only way to continue recovery efforts and modernize the electrical system. LUMA Energy claims that since the commencement of their contract in 2021, they’ve reduced outages by 30%, initiated 251 projects with the Federal Emergency Management Agency (FEMA), and actively prepared for and responded to Hurricane Fiona. The consequences of canceling the contract with LUMA Energy would have cost the Puerto Rican government over $600 million.
Conclusion and Next Steps
PREPA’s multi-billion dollar debt still needs to be negotiated so the agency can move forward with a long-term plan. Once that occurs, LUMA’s temporary contract will become permanent for a 15-year period. At that point, additional aspects of the public-private partnership model will be implemented, such as performance measures including bonuses and penalties. Next year, LUMA Energy will be paid about $122 million, an increase from their previous payment due to inflation.
President Biden recently visited Puerto Rico to survey restoration efforts. He announced a $60 million investment in Puerto Rico’s coastal areas to assist with preparation for future natural disasters and disruptions to the electrical grid. In addition, the Infrastructure Investment and Jobs Act (2021) provided almost $700 million in infrastructure investments for Puerto Rico.
While most stakeholders are satisfied with this outcome, it is important to note that many Puerto Rican residents are not, and are still facing frequent blackouts and higher electricity prices. PREPA and/or LUMA Energy should consider options to solicit resident feedback regarding operations such as a resident advisory board or public hearings. Administrators of public funds, such as those that will subsidize energy costs for residents, should focus on lessening administrative burdens and accelerating processes when possible.
About the Author
Ashley Rosado (she/her/hers) is a second-year MPP student at the McCourt School of Public Policy. Ashley currently works as a Public Policy Clerk at Baker Donelson law firm and previously worked as an economic development intern at Local Initiatives Support Corporation. In her free time, Ashley can be found reading, watching a series, or trying a new restaurant.
