However ironic, one truth is eternal: Extreme political myopia in pursuit of immediate advantages yields problems that never end. The latest manifestation of this reality comes courtesy of the Puerto Rico Electric Power Authority (PREPA) and thirteen municipalities on the island, as they attempt to squeeze millions of dollars in concessions and taxes from American taxpayers, by way of Cobra Acquisitions.
A bit of background: Cobra signed a contract with PREPA in 2017 to rebuild the island electric grid after the destruction wrought by Hurricanes Maria and Irma that year. Over the ensuing eighteen months, Cobra successfully restored grid functionality, completing the work under budget and in advance of the contractual deadlines. However, Cobra was not paid for the work for over five years. In late 2024, Cobra and PREPA settled the payment dispute for $170 million of the $359 million owed by PREPA.
And then the money grab began. The municipal jurisdictions have filed lawsuits seeking more than $70 million in construction taxes. The problem is not merely that their demands are based upon the gross amount owed under the original contract rather than the far smaller amount agreed under the settlement. Far more important: Cobra explicitly is exempt from such taxes because its contract is with a sovereign government agency (PREPA) receiving funding through a disaster recovery program from the Federal Emergency Management Agency (FEMA).
There simply is no question about this exemption from construction taxes. PREPA has been exempt from taxes (Section 22(a)) since it was created in 1941, and the same is true for its contractors:
“PREPA shall not be required to pay any municipal or Commonwealth taxes or assessments of any kind … on its activities in the operation and maintenance of any undertaking; or on the income derived from any of its undertakings or activities; or on the volume of business. Persons that enter into contracts with the Authority shall not be subject to the government tax on contracts…” (emphasis added).
Moreover, a recent legal analysis notes that Act No. 215, signed into law in September 2024, is “a legislative response to recent case law that considers as exempt third-party contractors who carry out construction works on behalf of an exempt entity.” That case law reinforced the contractor exemption from such taxes, and the enactment of Act No. 215 is an explicit acknowledgment of the prior exemption.
Consider now the perverse implications of the effort by the Puerto Rico municipalities to squeeze tens of millions of dollars from Cobra, aided by Act No. 215. Taxes are real costs, inexorably to be reflected in higher contractual dollar amounts for repairs, reconstruction, and the like. One way or another, it is the people of Puerto Rico who will bear them. The beneficiaries will be the municipal government bureaucracies and the interest groups able to obtain more spending dollars than otherwise would be the case.
The taxes therefore will engender a classic exercise in interest group rent-seeking, as political competition for the dollars will be intensified, with negative net impacts on the island economy writ large. (It can surprise no one that dollars allocated politically are less productive than those allocated by market forces.) Nor is there any reason to believe that the ultimate spending choices will be any less myopic than the taxation itself; both are obvious functions of short-term political imperatives.
Because the Puerto Rico electric grid always is threatened by hurricane activity, it is inevitable that future damage repairs will be financed in substantial part by FEMA. As the taxes drive costs upward, the costs to FEMA will be driven up as well. The upshot of the island taxation impulse is a sizable wealth transfer from federal taxpayers to the Puerto Rico municipalities, that is, the island spending interests. Precisely what is the justification for that?
Meanwhile, billions of taxpayer dollars sit at FEMA for disaster recovery efforts. PREPA has submitted its plan to the agency for the use of roughly $3.6 billion obligated to the power authority, but not yet allocated. While the funds are intended for grid modernization, the downstream consequences of the Cobra situation could see hundreds of millions of these dollars going towards municipalities’ pockets rather than recovery.
Another implication of the greater dependence on FEMA financing is a politicization of any modernization effort, in this case a demand in 2021 from seventeen members of Congress that FEMA financial support be used to create a solar-power system for the island. This is utterly perverse. The cost of solar power, including the backup generation needed to avoid service interruptions, is vastly higher (Table 1b) than that of modern conventional generation, because sunlight is intermittent and because the energy content of sunlight is unconcentrated.
Have the people of Puerto Rico not suffered enough from the decade-plus of PREPA machinations? The island electric grid is in desperate need of permanent modernization, hardening, and a shift to generators powered with liquified natural gas. By early 2016, the PREPA debt was $9 billion, but over the ensuing years all of the PREPA efforts have been directed at forcing ever-greater concessions from the bondholders. The concessions have been massive, but for the Puerto Rico politicians afflicted with extreme myopia, they are never enough.
And so PREPA cannot access the capital market for the needed modernization; who 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 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; while power consumers on the U.S. mainland lose power about two hours per year on average, the figure for Puerto Rico is 27 hours.
These are the long-term fruits of extreme myopia, of which the tax grab is a prominent example. Until that changes there will be more economic suffering for the people of Puerto Rico. The FEMA Review Council is scheduled to meet in Puerto Rico later this month. Let us hope that a sense of reality prevails.
