The San Juan Daily Star
Experts differ vastly on what PREPA can pay to creditors
By The Star Staff
As U.S. District Court Judge Judge Laura Taylor Swain has ordered stakeholders’ lawyers to appear today in court to address the lack of meaningful engagement in the mediation process, expert opinions provided in the Puerto Rico Electric Power Authority (PREPA) bankruptcy process show the vast differences in approaches to determining the amount of debt the utility can pay to creditors.
The PREPA debt plan proposes to restructure PREPA’s debt principally through an issuance of $5.68 billion in new bonds to fund partial recoveries on creditors’ claims. PREPA owns about $8.26 billion in revenue bonds, plus some $218 million in prepetition accrued interest on such bonds. The utility also owns $700 million in fuel line loans and projects some $246 million to $4.9 billion in general unsecured claims. It also has over $3 billion in unfunded pension liabilities.
Under the proposed plan, PREPA would pay for the new bonds over a 35-year period through revenue from a legacy charge to its electric power customers. The legacy charge consists of a monthly flat fee for customers’ connection to PREPA’s power grid and volumetric charges based on energy consumption.
The Financial Oversight and Management Board determined the legacy charge by developing a view of what it deems affordable for PREPA’s customers, concluding that an affordable and sustainable legacy charge will generate only $5.68 billion in additional net revenues. The creditors, such as the Ad Hoc Group of PREPA bondholders, using their own experts, found that those calculations are wrong.
The discrepancies between the two parties are so vast that Swain admonished stakeholders for failing to negotiate through mediation and has said that confirmation “is far from a certainty.”
The discrepancies can be illustrated by some of the dozens of expert opinions.
Glenn George, an economic consultant, adviser and expert on the energy sector and one of several experts hired by the oversight board, provided an opinion on the methodology applied by the Brattle Group Inc., at the direction of the oversight board, in determining the adequacy of the legacy charge for the debt adjustment plan. He reviewed two models, the Revenue Envelope Model and Legacy Charge Model, to calculate the adequacy of the legacy charges. He identified “no material calculational errors or divergence from practices generally applied in the field of utility ratemaking.”
PREPA customers already pay very high electricity rates. As of January 2023, the average mainland U.S. ratepayer paid 15.5 cents per kilowatt-hour (kWh) for electricity, while the average cost of electricity in Puerto Rico was 24 cents per kWh.
George agreed with assertions by the oversight board that the Revenue Envelope Model defines the upper boundary of electricity affordability for residential customers in Puerto Rico as a percentage of median household income, or share of wallet, to be 6%.
He advocated using U.S. Census estimates of the median household income for Puerto Ricans, which is $21,967. This is to say that 50% of households earn more than $21,967 and 50% earn less. The inflation adjustments per the 2022 Fiscal Plan are then applied to estimate the median annual household income in Puerto Rico to be $24,000 in 2024.
“This 6% (share of wallet) affordability threshold is based in part on researchers’ understanding that housing costs should typically account for no more than 30% of household income and no more than 20% of these household costs should be allocated to energy bills. Together, these statistics indicate that household energy costs should be no greater than 6%,” George said.
Taken together, the estimated median household income in 2024 for PREPA’s residential customers and the 6% share of wallet yield a maximum monthly electricity bill of $120, he said.
The oversight board decided to propose a $21 fixed charge, presumably to allow the opportunity to apply volumetric charges. Accordingly, since the monthly fixed charge in the 2022 Fiscal Plan was $4 for this customer class, the total monthly fixed charge for residential customers would be the sum of $4 and $21, or $25.69.
George also said it would be unreasonable for PREPA to allocate the entirety of the revenue envelope for the repayment of debt. PREPA must allocate some of the revenue envelope for capital improvements.
The Revenue Envelope Model derived a set of rates for each customer class that generated a net present value of the revenue envelope of $6.383 billion. The Legacy Charge Model determines a set of legacy charge rates by customer class which will yield $4.684 billion, the portion of the Revenue Envelope that will be used to service PREPA’s outstanding debt.
“The Legacy Charge Model tailors the fixed and volumetric charges estimated in the Revenue Envelope Model in an effort to shift the burden of the Legacy Charge away from PREPA’s most vulnerable customers,” George said. “I note that the Legacy Charge Model’s slightly modified fixed charge and volumetric charge rate design still generates the Legacy Charge Revenues available for debt repayment as determined in the Revenue Envelope Model.”
Maureen Chakraborty, managing principal at Analysis Group and one of the four experts hired by PREPA’s bondholders, concluded that the oversight board’s methodology for calculating the additional net revenues PREPA could collect from customers to repay creditors is based on a number of “inaccurate and unreasonable” assumptions and calculations.
The oversight board assumes the hypothetical residential customer consumes 425 kWh of electricity monthly. But that level of consumption is unsupported by data from LUMA Energy, the private operator of PREPA’s transmission and distribution system, and the Puerto Rico Community Survey, Chakraborty said.
“Data provided by LUMA and the Puerto Rico Community Survey demonstrate that a household earning $24,000 in Puerto Rico does not actually consume 425 kWh of electricity monthly, but will instead consume 372 to 400 kWh monthly. By projecting a higher level of electricity consumption per month than consumers at the median income level ($24,000 per year) actually use, the Board overstates their current spending for electricity and thereby creates too low a ceiling on the Legacy Charge rates that would keep the monthly electricity bill of the Hypothetical Residential Consumer below $120,” she said. “This error has large implications for the calculation of Additional Net Revenues that PREPA could reasonably collect from customers to repay creditors. Correcting the consumption level of the Board’s Hypothetical Residential Customer to reflect the actual expected consumption of a household earning $24,000 results in Additional Net Revenues between $7.19 billion and $8.96 billion, an increase of $1.51 billion to $3.28 billion over the amount calculated by the Board.”
Chakraborty also observed that despite purporting to calculate rates that are affordable over a period extending 35 to 50 years into the future, the oversight board actually conducts its affordability analysis only for the first year of the legacy charge (2024) and then holds the estimated legacy charge’s fixed and volumetric rates constant for the duration of the period.
The PREPA employee retirement system, known as SREAEE by its Spanish initials, filed a study by economist José Lozada finding that the PREPA plan is not feasible, because of the macroeconomic impact of implementing the legacy charge and its effect on Puerto Rico’s economy. Lozada asserts that Puerto Rico’s economy “is not sustainable, and it has no competitiveness in the long term,” and said his study and testimony will demonstrate that the legacy charge “will cause a downward economic spiral,” as it will negatively impact consumers, production, employment, migration and commercial competitiveness.