Officials in Puerto Rico are returning to the drawing board after scrapping a deal that would have cut some of the national debt of the island’s bankrupt energy company.
Puerto Rico has a new opportunity to effectively restructure its utility company’s debt to incentivize its transition to renewable energy, a goal supported by both local and federal policy.
Some experts had criticized the original debt restructuring agreement, saying it failed to materially reduce the utility’s debt burden while preventing the U.S. Territory’s transition to renewable energy — and contributed to a spike in utility bills for Puerto Ricans, who are already paying nearly twice as much US mainland customers for unreliable power.
Despite the criticism, rising inflation and soaring oil prices motivated Governor Pedro Pierluisi to cancel the deal and renegotiate an agreement.
The Puerto Rico Electric Power Authority, or PREPA, the island’s energy company, had about $9 billion in debt, the largest of any US public company, when it filed for bankruptcy in 2017.
While the Puerto Rico government officially ended bankruptcy two weeks ago, debt restructuring proceedings for PREPA and for Puerto Rico’s Highways and Transportation Authority remain unresolved.
The federal financial regulator, which manages Puerto Rico’s finances, is entering a mediation process with bondholders and others who own the energy company’s debt for a possible further settlement.
US District Judge Laura Taylor Swain of southern New York, who has been leading Puerto Rico’s bankruptcy-like trial since May 2017, set a deadline of May 2 to do so. If no agreement is reached, the restructuring would have to be decided in court, which could take years.
Ahead of the mediation process, the Center for a New Economy, a Puerto Rico-based bipartisan think tank, issued a set of recommendations to ensure a workable agreement is reached.
Recommendations include minimizing increases in energy prices and providing a way out of PREPA’s financial distress by reducing debt by at least 44 percent. The previous agreement would have reduced debt by nearly 33 percent.
Sergio Marxuach, a policy director at the Center for a New Economy, told reporters at a roundtable last week that the federal financial regulator is not legally required to provide evidence that the restructured company — in this case, PREPA — will remain solvent.
The body was created in 2016 during the Obama administration when Congress passed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) to create a mechanism for Puerto Rico to restructure its debt in federal court — following US laws The area had been arbitrarily excluded from the federal bankruptcy code.
“However, Promesa requires an analysis that shows that the implementation of the plan is feasible,” Marxuach said in Spanish. “Whatever happens with this process, we have to make sure that our energy supplier is a financially solvent company.”
Focus on renewable energies
Against this uncertain backdrop, Puerto Rico is beginning a transition, supported by federal and local policies, to ensure it can produce 100 percent renewable electricity by 2050.
Less than 4 percent of Puerto Rico’s electricity generation comes from renewable sources.
The lack of investment in the power grid dates back nearly a decade, when limited access to capital and long-term debt funding of ongoing expenses led to low maintenance of an aging power grid, degrading the overall performance of the power system and hampering its transition to clean energy . The deterioration was exacerbated by Hurricane Maria, which devastated the power grid and triggered the world’s second-longest blackout.
The board last Thursday approved 18 renewable energy projects as part of efforts to begin the island’s clean energy transition.
The projects are part of the first phase of the transition, which began in February 2021 after the board directed PREPA to procure 3,700 megawatts of renewable energy. The 18 projects meet about a quarter of this goal.
If the projects are successful, 23 percent of all energy produced in Puerto Rico will come from renewable sources.
That’s a far cry from what local lawmakers have agreed on, however.
A 2019 law establishing Puerto Rico’s new public energy policy after Hurricane Maria says that by 2025, 40 percent of the island’s energy must come from renewable sources.
If Puerto Rico is to meet the goal, the government must procure twice the megawatts of renewable energy it is buying now, said Alejandro Figueroa, director of infrastructure for the board. He will lead the pending debt restructuring mediation process following the resignation of Natalie Jaresko, the executive director of Puerto Rico’s Financial Regulator, effective Friday.
If the mediation process is successful, it will likely be complete before the U.S. Department of Energy conducts a Federal Emergency Management Agency-funded community-driven study called PR100 to evaluate pathways for Puerto Rico to achieve 100 percent renewable energy by 2050.
The final results of the PR100 study are expected to be available in two years.
“The Right Way Forward”
The Biden administration has already pledged $12 billion in federal aid to modernize Puerto Rico’s energy sector. Three federal agencies — the Departments of Energy, Homeland Security and Housing and Urban Development — signed an agreement last month to ensure the investment results in a more resilient and sustainable grid consistent with President Joe Biden’s climate resilience goals as well as Puerto Rico’s public energy policy.
Antonio Medina, a member of the federal tax board, celebrated the approval of the new renewable energy projects at a public hearing on Friday, saying, “It’s the right path for Puerto Rico to move away from other types of generation that aren’t efficient .”
“However, we cannot break away from our past,” Medina said, noting that PREPA still owes $9 billion to unsecured creditors, bondholders and people who lent their money when it had no credit. “We also owe retirees $4 billion. The pension plan at PREPA is clearly underfunded. We also have a responsibility to them.”
Medina promised that the board would do its best to reach an agreement that carefully balances everyone’s interests.
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