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  • Writer's pictureThe San Juan Daily Star

CNE analysis casts doubt on promised results of Genera’s entry into PR energy market

Center for a New Economy (CNE) Policy Director Sergio M. Marxuach

By The Star Staff

The Center for a New Economy (CNE) says the entry of Genera PR into the island energy market will not lead to the promised structure of competition and savings because there is a monopoly in transmission and distribution (T&D) and an oligopoly in the area of energy generation.

“The resulting structure will not yield the promised savings,” CNE Policy Director Sergio M. Marxuach said. “Consumers will only be able to buy energy from LUMA [Energy, the T&D system operator]. Any savings will not come from a competitive structure or because there is more efficiency but because of the elimination of the old power plants and their replacement with renewables.”

To understand the next steps in what the CNE hopes will be the transition to renewable energy and safeguard the interests of families and businesses in Puerto Rico, the think tank undertook the task of analyzing the 10-year Operation and Maintenance (O&M) Public-Private Partnership Agreement between the government of Puerto Rico and Genera PR.

“Energy costs in Puerto Rico are very high since we depend on old power plants that burn mostly fossil fuels, which represents 70% of operational costs. The parties to the O&M Agreement are the Puerto Rico Electric Power Authority (PREPA), which is the Owner of the Assets, the Puerto Rico Public-Private Partnerships Authority (P3A) as the Contract Administrator, and Genera PR as the Operator,” Marxuach said. “It lays out the blueprint to transition to renewable energy generation (and/or natural gas and hydrogen) which could provide a significant reduction in the cost of energy in the long term, depending on how this difficult and complex process of decommissioning fossil fuel generation while simultaneously deploying large-scale renewable generation is achieved. The 300+-page contract lays out the terms and conditions pursuant to which Genera will operate, maintain and eventually decommission certain power plants.”

Genera was hired to provide, directly or through subcontractors, four types of services: Mobilization services, operation and maintenance services, decommissioning services and demobilization services. In exchange for providing these services, the operator is entitled to receive certain compensation, subject to any applicable incentive, payments or penalties. The compensation structure has been well developed and is a significant improvement from the LUMA contract, which was deficient in this area, the CNE analysis said. The agreement also includes clear benchmarks to measure Genera’s performance, such as stronger filters to analyze transactions with affiliates and related parties, including a comprehensive policy to address organizational conflicts of interest, the requirement to engage in good faith negotiations with current PREPA employees to minimize the learning curve of the new operator, and a fixed cap on the fees that the operator can earn during the mobilization period, Marxuach said.

Marxuach added that “a novel feature (for Puerto Rico) of the Generation O&M Agreement is that it requires Genera to use ‘commercially reasonable’ efforts to ensure that local companies, or foreign companies with a significant presence in Puerto Rico, are included in the procurement process for materials and services under the agreement.

In addition, it requires Genera to use “commercially reasonable” efforts to select companies established under the Commonwealth of Puerto Rico or companies that have “a significant presence in the Commonwealth of Puerto Rico” as material subcontractors, he noted. These provisions, if implemented, have the potential to generate local economic activity and allow local firms and workers to obtain valuable experience working on a complex multi-year project, Marxuach said.

Regarding the expected savings, though, the analysis says the O&M agreement is clearly deficient. The CNE policy director said “the government of Puerto Rico has stated that it expects this agreement to generate significant savings. Yet, in the short term, the savings estimated by Genera will be insufficient to provide any savings to consumers even if the PREPA’s debt is cut approximately by 50% to $5 billion and pays 6% interest, which means consumers will need to pay $300 million annually to service the restructured debt.”

Genera estimates, as set forth in a report by FTI Consulting, that the “combined estimated savings from O&M and fuel range from $100 million to $200 million annually (including conversion savings if approved by the Puerto Rico Energy Bureau).” Under the terms of the Generation O&M Agreement those “savings would be shared 50%/50% between Genera and the consumers of Puerto Rico,” the report says.

“That would result in $50 million to $100 million per year to Puerto Rico electric system customers,” the report points out. The methodology used by Genera to calculate those expected savings is not provided in the FTI report, so it cannot be properly evaluated, Marxuach noted.

Genera insists on pointing to potential savings to be extracted from the conversion of oil-burning plants to facilities that burn natural gas. Such conversions would generate approximately 50% of total expected savings from the agreement. Given that Genera is a wholly-owned subsidiary of New Fortress Energy, a company that produces and delivers natural gas, a clear conflict of interest arises. The O&M Agreement, however, includes a fully developed policy to address organizational conflicts of interest. It remains to be seen how thoroughly that policy will be enforced and implemented, Marxuach said. In addition, the agreement does not identify who would pay for the capital expenditures necessary for such conversions, nor does it explain how expected savings will be affected once the cost of capital is taken into account.

The CTE analysis concludes that, “relative to the status quo, is the post-Genera electricity market in better shape in Puerto Rico? Probably yes, but that is an awfully low bar.”

Marxuach adds that “however, if we set a higher bar, if we ask whether this transaction will really help Puerto Rico achieve its long-standing goals of generating affordable, cleaner, and reliable electricity, then the answer is not quite as clear, for the good is indeed mingled with the ill.”

“The fact is that there is a lot of uncertainty surrounding this transaction and it is hard to avoid the unsettling feeling we are being presented with a fait-accompli on a take it or leave it basis,” Marxuach said. “Maintaining the status quo, though, is not an option. The real question is whether there is a better alternative to a negotiated agreement in this instance. The answer, when taking into account the totality of the circumstances, appears to be no.”

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