Puerto Rico’s Outdated Energy Infrastructure

Internal and External Circumstances and Events

Some of the internal issues that have had a cumulative and unsustainable impact on PREPA include (a) ongoing political influence in decision-making (whether related to management appointments, capital investment projects, corporate vision, or strategic innovation decisions); (b) an inability to sustainably invest in grid maintenance and modernization (whether related to capital projects or regular vegetation management); (c) highly aged, outdated, and inefficient generation assets resulting from a lack of fuel mix diversification and technology upgrades (PREPA’s generation assets average ~40 years of age compared to a national average of ~18 years, which results in reduced operational flexibility and limits from environmental regulations related to air emissions); (d) poor management of the utility’s generation plants and fuel costs (PREPA has historically overrelied on oil-based power generation with rate volatility, environmental noncompliance, and rate impacts to residential, commercial, and industrial customers); (e) a growing and unsustainable debt structure, including its pension system (PREPA has accumulated ~$9 billion in debt and over $4 billion in unfunded pension liabilities); and (f) an inability to adjust rates to cover its fluctuating and growing costs (principally based on political unwillingness to raise rates and ineffective collection from delinquent customers, particularly government entities).

As to external forces and circumstances that have impacted PREPA, one can highlight macroeconomic developments that include deterioration of Puerto Rico’s economy for over a decade with material declines in gross national product; sustained relocation of residents moving from the island to the states, leading to population decline; and a reduced customer/revenue base for PREPA.

Hearings and Fiscal Plans

Many of these gathering storm clouds captured the attention of the U.S. Congress in 2015–2016 when Puerto Rico’s government announced its insolvency and began efforts to seek protection under federal bankruptcy law (none was available to Puerto Rico at the time). One year earlier, by 2014, PREPA itself had become insolvent and had entered into certain forbearance agreements with its creditors. As the island’s growing financial crisis worsened, the U.S. Congress began a series of congressional hearings, the first of which was held in January of 2016 on the topic of “Exploring Energy Challenges and Opportunities Facing Puerto Rico.” The author of this article was invited as a witness and provided testimony on the state of PREPA and the energy sector in Puerto Rico to the Subcommittee on Energy and Mineral Resources of the House Committee on Natural Resources. The testimony provided at this congressional hearing gave Congress and the public some additional context about the island’s energy issues and challenges, root causes, and suggested next steps. Later that same year, Congress passed, and the president signed, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), establishing a financial oversight and management board (FOMB) and a process for restructuring debt to help address Puerto Rico’s growing debt crisis, including public corporations like PREPA.

Thereafter, PREPA’s multiple fiscal plans, as certified by the FOMB since 2017, have further evidenced the historical challenges and outlined the short-term fixes and the longer-term transformation initiatives and objectives that PREPA and Puerto Rico now have the opportunity to attain. E.g., Fin. Oversight & Mgmt. Bd. for P.R., 2021 Fiscal Plan for the Puerto Rico Electric Power Authority (May 27, 2021). As provided by Puerto Rico’s new energy public policy, and in related fiscal plans, the island’s electrical infrastructure is due for a comprehensive transformation whose objective is the delivery of safe, reliable, and affordable electric services to customers.

The Perfect Storm—for Positive Change

As if the foregoing context and challenges were insufficient to justify profound transformation, Mother Nature had some additional plans in mind. The island suffered the historic and dramatic impacts of Hurricanes Irma and Maria, within two weeks of each other, in September of 2017. Hurricane Maria made landfall and ripped through Puerto Rico diagonally as a high-end Category 4 hurricane, with winds of over 150 mph. The island’s entire electrical transmission and distribution infrastructure and communication systems were decimated, with some limited damage to PREPA’s generation assets. Electric service was unavailable for months. Moreover, a series of earthquakes during December 2020 and January 2021 impacted one of the utility’s largest power plants, Costa Sur, taking out two generation units of 400MW each, for 8 and 13 months, respectively. Following the earthquakes, Puerto Rico suffered the onset of the COVID-19 pandemic beginning in March 2020, with impacts on the general economy, jobs, and public health, all of which has had a direct and indirect impact on PREPA operations involving critical staff, maintenance projects, electric service revenues, and collections, among others.

After the hurricanes of 2017, while the island was still suffering from the catastrophic damage inflicted by Hurricane Maria, the government saw the opportunity to leverage radical transformation of the energy sector and outlined a vision in January 2018 describing the need for customer-centric, safe, reliable, resilient, and cost-efficient electric power service that meets environmental, regulatory, and statutory requirements. On June 20, 2018, it enacted the Puerto Rico Electric System Transformation Act (Act 120-2018), establishing the legal authority and mechanisms to enable the sale, transfer, or private operation and maintenance of PREPA’s transmission and distribution (T&D), and generation assets, services, and functions, through public-private partnerships. On April 11, 2019, the government approved the Puerto Rico Energy Policy Act (Act 17-2019). Act 17 (a) establishes a regulatory framework to attract private investment and ensure independent, professional oversight of energy market participants; and (b) specifically prohibits PREPA from continuing to operate as a vertical monopoly, mandating the breakup of T&D and generation operations and services.

As a result of this new legal and policy framework, and after a complex competitive procurement process, on June 22, 2020, the government of Puerto Rico, the Public-Private Partnerships Authority (P3A), and PREPA announced the successful selection of a private operator (LUMA Energy LLC) for PREPA’s T&D system. Similarly, a competitive procurement process to identify and select one or more private operators for PREPA’s existing generation assets was launched and is ongoing with a completion target date of 4Q 2021. This progress notwithstanding, much more transformational work remains to be done.

Pathways to Advance PREPA’s Energy Sector Transformation

Puerto Rico Energy Bureau (PREB). Until 2014, PREPA had operated as an unregulated electric utility. Act 57-2014, known as the Puerto Rico Energy Transformation and RELIEF Act, established the PREB as an independent regulatory body to oversee and facilitate implementation of the island’s energy transformation with public participation. Act 57-2014 assigned the PREB certain primary responsibilities, which include rate setting, Integrated Resource Plan (IRP) approval and compliance, protection of the interests of customers and consumers, and ensuring workforce safety. As the island transforms its energy sector, the PREB will be key to ensuring that the utility, and any private operators (including the newly selected T&D operator), make prudent investments, increase quality of service to PREPA customers, and ensure the sustainable adoption of industry trends and advancements over the long term with transparency for the public’s benefit. As such, the PREB’s regulatory oversight will directly impact the utility and all private operators and will have significant influence over Puerto Rico’s energy sector.

Puerto Rico’s 2020 Integrated Resource Plan. The PREB approved PREPA’s proposed IRP on August 24, 2020. The IRP covers a 20-year planning horizon and is revised at least every three years. It serves as a comprehensive planning tool for PREPA (or any operator of related electric services). The approved plan—identified as the Modified Action Plan—will help advance increased reliance on renewable sources of energy, principally solar photovoltaic; improved energy efficiency goals; energy (battery) storage; natural gas–fueled generation and supply infrastructure; and the retirement of existing coal and heavy fuel oil generation. The IRP also supports the reduction and stabilization of the cost of energy (currently subject to fluctuating and volatile oil markets) with the incorporation of renewable sources. As approved, the IRP also underscores the need and priority for strengthening the T&D grid, including its resilience—specifically calling for capital investment, including the establishment of MiniGrid and microgrid operations.

The T&D grid strengthening will be undertaken over the next decade with federal reconstruction funds granted by the Federal Emergency Management Agency (FEMA) in the wake of Hurricane Maria. For that purpose, PREPA prepared a 10-year Infrastructure Plan and submitted it to FEMA in December 2020 (updated in March 2021). The 10-year plan is a road map of PREPA’s infrastructure investment strategy, sequencing, expected benefits, estimated costs, and milestones, as well as an estimated schedule for projects. As PREPA now transitions T&D services to the selected private operator, grid reconstruction planning is being harmonized and coordinated with LUMA, which also prepared a proposed three-year System Remediation Plan (SRP) that it submitted to the PREB in February 2021 for review and approval. Once approved, the SRP will provide the immediate route to remediate, repair, replace, and stabilize equipment, systems, practices, and services of the T&D system as required by (a) Puerto Rico’s energy policy, (b) the operation and maintenance agreement with LUMA, and (c) applicable fiscal plans under PROMESA.

Funding for Sector Transformation. As referenced above, during September 2020, FEMA announced a historic award to help rebuild Puerto Rico’s electric system. As a part of this announcement, a proposed funding obligation of $10.7 billion was specifically earmarked for PREPA. The purpose of this funding is to repair and/or replace electrical systems—including thousands of miles of transmission and distribution lines, electrical substations, power generation systems, and office buildings—and make other grid improvements. With the new private operator of the T&D system, the responsibility of implementing and executing on most of this historic rebuild project will fall on LUMA, as PREPA’s agent, with the oversight of the PREB.

Climate Change Framework. Puerto Rico also legislated Act 33-2019, known as the Puerto Rico Climate Change Mitigation, Adaptation and Resiliency Act. The purposes of Act 33-2019 include (a) promoting a healthy environment; (b) reducing emissions and vulnerabilities; (c) transitioning to a sustainable economy with low carbon emissions, a decentralized energy system, and renewable energy; and (d) establishing the mechanisms to track greenhouse gas emissions by sectors, products, and services. Some of the initiatives expressed thereunder include displacing from the energy sector the use of fossil fuels, especially carbon, to generate electricity—while incorporating renewable or alternative energy sources. Act 33-2019 also calls for the prohibition of new permits or contracts for the establishment or continuation of carbon-based energy generation by January 1, 2028. Similarly, it calls for reducing energy consumption by public facilities.

As part of its legislative preamble, Act 33-2019 highlights that greenhouse gas emission inventories show that the energy, transportation, and solid-waste sectors are the largest emission contributors. In the case of energy, such emissions are mainly the result of fossil-based electric generation. It cites the Puerto Rico GHG Baseline Report published in September of 2015 by the Center for Climate Changes Strategies, which found that energy-related emissions exceeded 15 million metric equivalent tons of carbon dioxide in 2014, exceeding earlier projections.

On the transportation front, Puerto Rico has over 2 million cars in use. A Global Fleet report informs that with “. . . 146 vehicles per street mile and 4,300 vehicles per square mile, Puerto Rico is considered to have one of the most cars per square mile in the world. Home to 1,100 people per square mile, its population density is also among the world’s highest.” As such, there is tremendous opportunity to improve the island’s emission profile by pursuing the statutory objectives and actions prescribed by Act 33-2019, in tandem with the incorporation of renewable energy resources into the grid and the incremental adoption and use of electric vehicles and related transportation infrastructure.

Conclusion

Puerto Rico and PREPA, together with other key stakeholders, have a historic opportunity to achieve real change that propels the island’s outdated and noncompliant energy infrastructure into a modern, efficient, and environmentally compliant and sustainable system that benefits customers, residents, and the environment. Implementation risks remain throughout, but the government has determined that inaction is not an option. Critics of the transformation and privatization efforts are not scarce, and as stated by the government and in the recently certified PREPA fiscal plan, transparency and regulatory oversight will be essential.

Furthermore, as Puerto Rico rapidly pivots to integrate renewable resources, lessons learned from other jurisdictions regarding system resource balance and competing social interests (e.g., environmental/economic/reliability) are very important—and more so on an island with an isolated grid and with a government and public utility that are emerging from bankruptcy in a delicate economic environment.

Ankura is the Litigation Advisory Services Sponsor of the ABA Litigation Section. This article should be not construed as an endorsement by the ABA or ABA Entities.

The information presented herein is solely for general information purposes, does not constitute a recommendation, opinion, or assessment of any kind whatsoever, and should not be relied upon under any circumstance. The article is based on publicly available information, including public laws, regulations, FOMB certified fiscal plans that have been published as part of Puerto Rico’s public policy, the bankruptcy process under PROMESA, and/or otherwise publicly available information. It does not constitute or represent the position or opinion of Ankura Consulting Group and it is solely the work-product and views of the author based on such publicly available information for purposes of this publication.

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