The Peril of Privatizing Puerto Rico's Power Company

The plan for the Puerto Rico Electric Power Authority (Prepa) has been contested hotly for months now, in a power struggle that started even before Hurricane Maria plunged the island into darkness for months. But the ultimate fate for the commonwealth-owned power company has always trended in one direction: privatization.

On Monday, Governor Ricardo Rosselló formalized that fate, announcing that over the next year-and-a-half, the Puerto Rican government will pursue a plan to sell the decrepit power utility, ending an effective territorial monopoly on electricity that has existed for almost 80 years, ever since President Franklin Roosevelt’s New Deal.

In translated remarks announcing the decision, Rosselló cited deep structural problems with Prepa as one of the major factors for the island’s debt crisis. “One of the great impediments that has stopped our opportunities for economic development is the deficient and obsolete system of generation and distribution of energy on our Island,” the governor said. “The Puerto Rico Electric Power Authority has become a heavy burden on our people, who are now hostage to its poor service and high cost. What we know today as the Puerto Rico Electric Power Authority does not work and cannot continue to operate like this.”

The burden that the governor mentioned is mostly related to the $9 billion debt accrued by Prepa, the largest component of the island’s fiscal and bankruptcy crisis. Over the past few decades, Prepa has been deeply connected to demographic and economic woes across Puerto Rico. As industries and people left the island en masse, the monopoly faced both a sharply decreasing revenue base and an obligation to provide power for the remaining citizens. It racked up debt even as it charged consumers more and more, and as service suffered and the island relied on an ever-more-inefficient and more environmentally corrosive fossil-fuel importation scheme, with generation in the southeast corner feeding the metropolis of San Juan in the north. By 2017, the Puerto Rican power infrastructure lagged some 30 years behind average mainland municipalities, and routine maintenance had been mostly ignored for the constituent pieces of the power grid.

Accordingly, Prepa’s woes were the central focus for the federally-appointed Financial Oversight and Management Board (FOMB) created with the 2016 PROMESA legislation intended to give Puerto Rico debt relief. That board clashed with the Puerto Rican government for control of the island’s politics and finances, but it appeared that for both sides, partial or total privatization of the power authority was the preferred course of action.

In September 2017, Hurricane Maria accelerated the timetable. The storm obliterated the feeble grid and exposed both the administrative and the structural deficiencies of Prepa. The incredible state of disrepair of the island’s power grid became an impediment to recovery, necessitating extra work by Army Corps of Engineers to replace downed equipment while also bringing it to code. Additionally, the process of rebuilding was set back by scandals involving Prepa’s contract-making process, including the $300 million deal to Montana firm Whitefish Energy for repairing power lines.That contract with the little-known two-person firm, which provided exorbitant amounts for logistics, falsely claimed approval from FEMA, and exempted all provisions from federal review, sparked widespread backlash against Prepa, leading to the ousting of its executive director Ricardo Ramos. Both the scandals and the state of Prepa’s grid have increased recovery time long past the original goals, and even now portions of the island still wait in total darkness, and have for four months.

Rosselló’s plan won’t necessarily speed up that process. But it does appear to have the endorsement of the FOMB. “We have long said that a full operational and financial transformation of PREPA — including private investment — is necessary to deliver the resilient, reliable, and cost effective power system that Puerto Rico needs for its economic recovery,” a spokesperson for the Board told me by email.

Many of Prepa’s bondholders also seemed to endorse the plan, with a major caveat. “We believe the American citizens that live in Puerto Rico would be better served by an electric utility run by a private operator with a proven track record,” said the PREPA Bondholder Group in a statement. But the group also stressed that such a plan must “[respect] property rights”—in other words, Prepa’s creditors still want their due.

The initial harmony between these three groups will be tested during what promises to be a politically fraught time. First, Rosselló plans to push for legislation to be passed in through the Legislative Assembly of Puerto Rico that would allow for the sale of Prepa. Then—in a process likely to involve plenty of oversight from the FOMB—the second phase of privatization will involve bids and proposals from companies seeking a piece of Prepa. The third phase would be implementation. Rosselló expects the process to take 18 months. Moody’s credit rating agency said the timeframe “appears quite aggressive” in a statement Tuesday.

According to John Mudd, an expert in Puerto Rican law, the process will roughly resemble the federally-assisted 2009 Chapter 11 reorganization of Chrysler, where revenue-generating pieces of the automaker were packaged off and resold to Fiat, and bondholders—including a number of pension plans—agreeing to receive a fraction of the value of the assets they had liens against. “They probably won’t sell the whole thing to one party,” Mudd told me. “They’ll probably sell pieces of it to multiple parties.” Still, there’s been no negotiation yet with bondholder groups and Rosselló still owes a big chunk of change to government employees and their pension plans, and also the large group of Prepa employees who’ve left during the crisis. “It’s questionable how much money the government will get out of it,” Mudd says.

Still, regardless of the form privatization takes, the end-result will be the functional end of a public sector that has defined life in Puerto Rico for the majority of the island’s history as a United States territory. Since its creation in 1941, Prepa has been part of the economic bedrock of the island, augmenting its public sector and providing many of the jobs that controlled some of the demographic erosion to the mainland. Even with Prepa’s mounting failures over the years, mass privatization of it and other formerly public-sector arenas on the island will further reduce the input of, and regulation by, Puerto Ricans over Puerto Rican issues, after a few years when the federal government has wielded even more power on the island and attempts by its citizens at exercising sovereignty have largely been brushed aside.

Among the most vehement opponents of privatization is Ángel Figueroa Jaramillo, president of the union of Prepa employees (Utier). “PREPA is a public good that belongs to the people and not to the politicians of the day. Energy is a human right and not a commodity,” he said in a press conference in Spanish on Tuesday. While Utier is not currently planning to strike, Figeuroa said the union will engage in an island-wide outreach and activism effort.

San Juan Mayor Carmen Yulín Cruz also expressed her opposition to the move, tweeting “the privatization of Prepa puts the economic development of the country in private hands. The authority will serve interests.”  

Although Rosselló and the FOMB have pitched privatization as a way to introduce more microgrids, move towards renewable energy, and reduce the environmental footprint of Puerto Rico’s energy grid, there’s no guarantee private companies will be able to deliver on that promise, especially with the central problems of Puerto Rican governance, infrastructure, and citizenship unmet. To wit, in the face of dysfunctional water and sewage systems and multiple violations of federal environmental rules, the island experimented with privatizing those services in the 90s, an experiment that likely made the water supply even worse and more hazardous. In his statement, Figueroa said privatization of Prepa would only make prices worse for consumers, and pointed to years of increasing prices for telephone services after that industry was privatized.

Even so, the course is set. The FOMB will certify its final fiscal plan for the island on February 23, after which both governing entities will likely officially be working hand in hand for the goal of privatization. With the major union, some environmental groups, and one of the most prominent local politicians in Puerto Rico all unified opposition to the plan, the next year will likely feature intense debate and escalating tensions between groups on the island and companies seeking a piece of Prepa. But the intensity of that tension is perhaps expected: At this moment, the future of power in Puerto Rico is tied to the future of the island itself.