Gov’t to terminate PREPA restructuring support agreement
By The Star Staff
The island government will terminate the Puerto Rico Electric Power Authority’s Restructuring Support Agreement of 2019 (PREPA RSA or agreement) because its implementation is neither feasible nor in the best interests of Puerto Rico, Gov. Pedro Pierluisi Urrutia announced Tuesday.
For over a year, critics of the PREPA RSA have said it will result in higher rates for customers. The debt deal, whose implementation has been paralyzed since 2020, calls for the reduction of PREPA’s legacy debt of some $9.3 billion by more than 30%, to under $6.5 billion.
The move comes after a creditor group asked the Title III court to appoint a mediator to negotiate an agreement to end PREPA’s bankruptcy that could be implemented without the need for legislation. It also comes a day after the Institute for Energy Economics and Financial Analysis (IEEFA) wrote that the proposed PREPA debt deal would undermine the use of the $12 billion in federal funds to repair the electrical grid because it would require utility customers to repay bondholders for $8.2 billion in legacy debt.
“The deal imposes a new layer of debt service in the form of a significant rate increase, starting at 2.7 cents/kWh [kilowatt-hours] and escalating to 4.6 cents/kWh over four years,” the IEEFA said. “By imposing new debt service to pay off old debt, the PREPA debt deal would cancel out any benefit from the federal funds, forgoing the opportunity to create a financially sustainable and functional electrical system. Instead of using federal funds to build a stronger power system, PREPA would in effect use the money to pay off the bondholders. This is fiscal gimmickry.”
It is unclear what impact the governor’s decision will have on PREPA’s Title III bankruptcy case. The worst-case scenario would be for U.S. District Court Judge Laura Taylor Swain, who oversees PREPA’s debt deal, to dismiss the bankruptcy case altogether. The Financial Oversight and Management Board had already said it was planning to submit the RSA for approval later this month.
The governor said the circumstances prevailing when the PREPA RSA was negotiated with PREPA’s creditors back in 2019 have changed significantly, including worldwide economic conditions, such as rising inflation and significant surges in the price of crude oil.
“I am committed to achieving PREPA’s exit from bankruptcy and support a comprehensive negotiation or mediation that ensures an efficient, cleaner and reliable electric energy system for the people of Puerto Rico, while honoring our government’s pledge to the corporation’s pensioners and resolving PREPA’s debtors’ claims fairly,” Pierluisi stated.
Under the terms of the PREPA RSA, each party has the right to terminate the agreement. Therefore, on Tuesday, at the governor’s request, the Puerto Rico Financial Advisory and Fiscal Agency Authority (AAFAF by its Spanish initials) agreed to exercise the Puerto Rico government’s right to terminate the agreement and notified the parties accordingly. The governor said the objective now is to start conversations with all stakeholders to achieve a restructuring agreement that can be implemented.
The PREPA RSA was a document that set forth a path for PREPA to restructure its bond debt to exit Title III bankruptcy under the Puerto Rico Oversight, Management and Economic Stability Act, widely known as PROMESA, but did not address PREPA’s other claims and debt. The government’s position is that there needs to be a considerable reduction in the corporation’s debt and changes to the provisions of the RSA, and that charges to private generation should not be imposed.
“The government of Puerto Rico is committed to working with the oversight board and PREPA’s creditors to negotiate a plan of adjustment for PREPA that secures PREPA’s exit from Title III bankruptcy, and conforms to the government’s public policy and objective of ensuring that the residents of Puerto Rico have reliable and affordable electric power,” AAFAF Executive Director Omar Marrero Díaz said.
Pierluisi added that to ensure that a future plan of adjustment for PREPA conforms to the government’s public policy, in the restructuring negotiations the government will focus on a series of goals. The first would be for PREPA to exit Title III bankruptcy as soon as possible; the second would be to encourage a conversion to renewable sources of energy and, in the short term, increased use of natural gas, which is cleaner and less expensive than other fuels being used by PREPA; the third would be to respect the Puerto Rico Energy Bureau’s role in setting electricity rates and overseeing compliance with the Integrated Resource Plan; the fourth would be to protect PREPA’s pensioners; and the fifth to comply with the requirements and public policy objectives established in Act 17-2019, also known as the Puerto Rico Energy Public Policy Act.
“The government looks forward to working with all of PREPA’s stakeholders to achieve these goals,” Pierluisi said.
The Solar Energy and Storage Association praised the decision, arguing that the RSA imposes taxes on customers who rely on solar energy for their energy needs.
“We commend the strong leadership of Governor Pierluisi for canceling the 2019 PREPA debt deal today, which is in line with his consistent commitment that there will be no solar taxes in Puerto Rico,” the organization said.
House Speaker Rafael Hernández Montañez and House Energy Committee Chairman Luis Raúl Torres Cruz praised the governor’s decision in a joint statement.
“Today, the governor took steps in the right direction by canceling the agreement to restructure the debt of the Electric Power Authority,” they said. “On February 27, the Delegation of the Popular Democratic Party in the House of Representatives warned of the impact that the restructuring of PREPA’s debt will have if legislative action is not carried out. We also call on all sectors of the country and elected officials to express their position on the matter.”
The legislative leaders said the House supports the call to sit down at the table to legislate a better agreement to restructure PREPA’s and avoid a rate increase.
“Our approach continues to be that all legislators from the House and Senate meet together with the Governor to draft legislation that benefits consumers,” they said. “That is, draft and approve a bill that collects the basic claims based on these five (5) precepts:
1. Renegotiate debt restructuring
2. Establish the transition to a lower-cost and cleaner fuel
3. Elimination of the Sun Tax
4. Employee and pensions protection
5. Lower the rate cost for all subscribers.”