Conditions for LUMA Energy’s takeover of PREPA’s T&D have not yet been met

By The Star Staff

The Puerto Rico Energy Bureau’s (PREB) calendar for evaluating LUMA Energy’s proposed performance-based metrics will take it past the scheduled June 1 takeover of the Puerto Rico Electric Power Authority’s (PREPA) transmission and distribution (T&D) system, a situation that could potentially stop the management contract from going into effect.

With under 50 days left before LUMA Energy is slated to officially start managing PREPA’s T&D, the PREB, which is the island’s energy sector regulator, as of Sunday had yet to give the green light to LUMA Energy’s proposed budget for the first three years of the management contract.

The performance metrics and the budget are two of some 20 conditions that must first be met before LUMA Energy can officially be handed over the management of PREPA’s T&D, including customer service and billing.

Those conditions are listed in Section 4.5 of a supplementary agreement whose terms will regulate the management and operations of PREPA for some 18 months because the power utility remains in bankruptcy under Title III of the Puerto Rico Oversight, Management and Economic Stability Act, commonly known as PROMESA. Besides the exit of the bankruptcy process, the only conditions waived under the supplementary agreement are a tax opinion and reliance letter stating that the interest on PREPA’s bonds is excluded from gross income for federal income tax purposes.

The rest of the conditions need a waiver from the contract’s administrator, the Public-Private Partnerships Authority, for the contract to go into effect.

The agreement states that if the conditions are not satisfied or waived by the administrator on or before the date that is three months following the target service commencement date, which is June 1, LUMA Energy will have to pay PREPA $769,231 per week for each week the start contract is delayed up to a maximum of $40 million.

LUMA Energy President Wayne Stensby has insisted that the company will take over PREPA T&D on June 1 but could not say which conditions have already been met for the takeover.

The PREB issued a schedule last Thursday for evaluating LUMA Energy’s request submitted on Feb. 25 for approval of performance baselines and metrics. However, the calendar establishes an April 30 deadline for the filing of petitions to intervene, a discovery process slated to start in May and end in June, hearings in July and an Aug. 13 deadline for final briefs.

Under the supplementary contract, PREPA will pay LUMA Energy up to $115 million in fixed fees, a dollar amount that does not include reimbursable expenses or the incentive compensation LUMA Energy will receive if it achieves or exceeds the performance metrics.

The performance metrics entail achieving a high level of customer satisfaction, operating a safe and reliable electrical grid and meeting the approved budget.

A review by the STAR found that while LUMA Energy has promised to expedite the resolution of power outages, one of the problems affecting customers on a regular basis, the private manager has also called for a deferment on metrics related to power outages due to the poor quality of the data.

Meanwhile, the PREB requested changes to LUMA Energy’s proposed budget submitted on Feb. 24. LUMA Energy submitted the changes last Tuesday.

Under the revised budget the base rate revenue requirement is $1.289 billion, which does not include $1.2 million in subsidies.

The budget establishes an expenditures limit of $1.18 billion for fiscal year (FY) 2022, $1.11 billion for FY 2023 and $1 billion for FY 2024. The expenditures are based on PREPA’s projected sales, which will go from 15 million kilowatts per hour to 14.1 million kilowatts per hour over the three-year period. Efficiencies or savings are projected to come into play in FY 2023 and are expected to reach $59 million, then go up to $110 million in FY 2024.

The budget does not set aside funds for debt payments, which under a proposed debt deal negotiated in 2019 would allow PREPA to reduce its debt service payments by about $3 billion over the next decade.

The Institute for Energy Economics and Financial Analysis (IEEFA) noted that LUMA Energy is not off to a good start because it now expects to be 11% over its contractual operating budget for the yearlong front-end transition process that ends June 1.

According to the IEEFA, the three-year budget that the company submitted to the PREB isn’t looking great either, claiming only that unspecified efficiencies will help it meet its public promise to not raise rates. By 2024, those efficiencies are projected to save $110 million.

LUMA, however, provides no explanation of how the savings will be made, other than a vague reference to loss reductions. There is also very little consequence for LUMA if it does not achieve the savings.

“In addition to its vague efficiencies, LUMA’s budget is unrealistic,” the IEEFA said. “It fails to account for the repayment of an $894 million loan from the Commonwealth of Puerto Rico to PREPA that the Financial Oversight and Management Board has stated will be needed to cover expenses for the first few months of the contract.”

The Center for a New Economy is slated to testify today in the island House of Representatives as part of a legislative investigation into the LUMA Energy contract.

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