The Lord works in mysterious ways, an eternal truth illustrated by the latest electric power blackout afflicting Puerto Rico on New Year’s Eve. Merely the latest manifestation of the reality that the island's electric grid is in desperate need of modernization, it is a reminder also that the sad saga of the Puerto Rico Electric Power Authority and its massive debts now has gone on for over 10 years, in a continuing cycle of mismanagement and escalating costs that have prevented PREPA from accessing the capital market for the needed modernization. The new governor of Puerto Rico, Jenniffer González-Colón, does not claim to be the Lord, but she is doing the Lord’s work when she argues that the island power system must shift to liquified natural gas rather than the 100% wind and solar system now required by 2050.
A bit of history: By early 2016, the PREPA debt was $9 billion. Notwithstanding loud claims by island politicians and others, the PREPA debt, while burdensome, was not overwhelming; the real problem was that the proceeds from the borrowing were used improperly to reduce rates rather than to modernize the system as intended.
And so PREPA defaulted on its debt. In November of 2015 a “restructuring support agreement” between the Puerto Rico government and the holders of PREPA debt was reached. This was no giveaway to the bondholders; the RSA imposed very substantial economic losses upon them. The bond debt was cut by 15%, several other major concessions were made by the bondholders, including a deferral of principal payments for over five years. PREPA customers were to pay electricity rates almost 40% lower than the average rates paid in (ascending order) Hawaii, Haiti, St. Lucia, Grenada, the Dominican Republic, and the Virgin Islands.
Congress then, in June 2016, enacted the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), creating a Financial Oversight and Management Board tasked with “achiev[ing] fiscal responsibility and access to the capital markets.” The reality has proven very different: The board a year later rejected the RSA. A new one was implemented in May 2019, which then was terminated by the Puerto Rico government in March 2022. Various private firms were hired to operate the power system, more agreements were reached with groups of bondholders, more court challenges ensued, and last summer, a court froze everything in place. Perhaps amusingly, the board has just held its 46th (!) meeting.
One might think that the board would recognize the need to move forward, particularly given the massive need for investment in the modernization of the island power system. And one would be wrong. The board has succumbed to political incentives to be seen as squeezing ever-more concessions from the bondholders. That is why the board has negotiated and reneged on multiple agreements. And nature has exacerbated matters: Hurricanes Irma and Maria struck the island in September 2017, severely damaging the power system, and a powerful earthquake in 2020 interrupted electric power service for months.
The board’s machinations mean that improvements to the PREPA physical infrastructure cannot be financed through the capital market, in that no one in their right mind would lend to PREPA under these conditions. For PREPA and the families and working people of Puerto Rico, in need of a power system that is reliable, efficient, and capable of supporting an expansion of the island's economy and employment, the opposite has evolved. In 2014, the frequency of PREPA service interruptions was about the same as those of such comparable islands as Hawaii and Guam. By 2023, that figure was more than double those of Hawaii and Guam and almost eight times that of the U.S. as a whole. This is not because the comparable island performances have improved markedly; instead, the PREPA average service interruption duration has increased by a factor of 2.5 from 2014 through 2023.
Because modernization of the island power system cannot be financed through borrowing in the capital markets, PREPA has been forced to depend on financing from the Federal Emergency Management Agency, the implication of which is a wholly predictable politicization of such funding. Private lenders are interested in the use of reconstruction funds for improved efficiency, lower costs, greater reliability, and an expansion in economic growth and, thus, the aggregate demand for power. Those are the conditions that facilitate repayment on the terms agreed upon.
Government funding introduces the imperatives of politics, in the case of PREPA, a demand in 2021 from 17 members of Congress that FEMA financial support for the reconstruction of the Puerto Rico electricity system be used “to promote the installation of… renewable energy sources, including photovoltaic and battery energy storage systems and rooftop and onsite solar…”
This is utterly perverse. Wind and solar power are substantially more expensive than modern conventional generation because air flows and sunlight are intermittent and because the energy content of wind flows and sunlight is unconcentrated. Without massive subsidies, wind and solar power are not competitive even with oil-fired power, particularly given the cost of backup generation needed to avoid service interruptions. FEMA financing predictably has transformed a reconstruction of the island power system into a political football, the result of which is endless delay: FEMA has allocated over $16.3 billion to rebuild the power grid, of which only 30% has been obligated and 8% actually disbursed.
Again, the blame for this state of affairs belongs to the board and its endless litigation and $1.5 billion (and counting) legal and advisory expenses. PREPA has remained in bankruptcy for seven years because the board cannot bring itself to agree to a final restructuring of the PREPA debt; it is easier to blame the bondholders while continuing to litigate matters. PREPA thus cannot access the capital market and so cannot implement the investment program that, in the end, would be reimbursed with federal funds.
A group of PREPA’s bondholders has offered to settle matters by accepting 50-year bonds with no fixed principal payments and with interest costs that can be accrued if PREPA finds itself unable to pay the interest costs on the agreed schedule. The bondholders’ rights would be subordinated to PREPA employee costs and retiree pension obligations. PREPA would be provided with $2.5 billion of new financing as a start toward fixing the system, and electricity rates would be set at an affordable level and fixed for 50 years. Does the board actually believe that something better can be achieved?
Back to the people of Puerto Rico: Do they not deserve better than this endless delay? The time is long past for the board and the politicians on both the island and in the Beltway to solve this problem by coming to an agreement with the PREPA bondholders and moving forward.
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