By The Star Staff
Gov. Pedro Pierluisi Urrutia has until Dec. 1 to submit a revised fiscal year (FY) 2024 budget proposal for the Puerto Rico Electric Power Authority (PREPA) to the Financial Oversight and Management Board.
The new proposal must address certain issues referenced in a notice of violation issued by the oversight board for an earlier version of the FY24 budget for the commonwealth’s utility, a Nov. 22 letter stated.
The 13-page letter sent by the oversight board’s executive director, Robert Mujica, to Pierluisi said it serves as a notice of violation concerning the proposed FY24 amended budget for PREPA submitted to the board on Nov. 7. The intended purposes of amending PREPA’s FY24 certified budget are: to identify an interim solution to PREPA’s unfunded pension system, and to recognize the changes made by the Puerto Rico Energy Bureau (PREB) as a result of its reconsideration of the budgets it determined for PREPA, LUMA Energy and Genera PR.
“There is now a third purpose for amending PREPA’s budget: a potential increase to PREPA’s HoldCo & HydroCo’s FY24 certified budget,” the letter notes. “This third purpose has arisen following PREPA’s motion with PREB requesting an increase to its budget, consistent with the proposed amended budget.”
PREPA has requested an increase to the current allocation for the HoldCo and HydroCo budgets while pointing to the use of alternate funding sources outside of rates to enable such an increase. Among the funding sources listed by PREPA are: FEMA (Federal Emergency Management Agency) reimbursements; “bad debt recoveries” (i.e., recoveries of settlements between PREPA and certain instrumentalities over legacy unpaid receivables); and insurance settlements. The oversight board said it supports PREPA’s efforts to identify and obtain these funding sources.
“It should be noted that the PREPA FY24 certified budget already includes a cash funding bridge to fill the FY24 budget gap,” the letter said. “Therefore, PREPA’s request raises concerns that current revenues may be insufficient to adequately fund the utility’s (including GenCo, GridCo, HoldCo and HydroCo) operations and maintenance requirements.”
As such, while PREPA may raise certain costs that are not currently reflected in its budget, that does not mean that all requests it has presented are necessary, justified, supported in the record, and essential, the oversight board noted. Determinations of budgets are based on demonstrated need and reasonableness of the costs proposed to satisfy that need and not on the amount of funds on hand, the board added.
“Most one-time funds received in the first two categories mentioned in PREPA’s request (FEMA reimbursements and bad debt recoveries) have been committed to other priorities over the coming months and are thus largely unavailable for PREPA’s other purposes,” the oversight board said. “This makes it essential for PREPA to finalize its proposed insurance settlements and to identify and certify the amount of money it will receive from these sources. As we understand it, the majority of the settlement amounts for Hurricane Maria recoveries have already been paid to PREPA over the years.”
Moreover, PREPA must identify the amount of the new money that will be considered unrestricted and how its use will affect its cash flows, the board said. PREPA’s cash flow reports are occasionally of concern given how low cash levels can go, due to the lagging nature of quarterly rider reconciliations, requests for reimbursements, and occasionally due to collections, it said.
Use of one-time cash inflows (that are not necessary for liquidity) should generally be prudently tied to one-time expenses or, on an exceptional basis, as a bridge during a transition period, the oversight board pointed out.
“That bridge, however, must lead to solid ground,” the board said. “In this instance such solid ground is either a recurring funding source or a reduction in expenses, on which the entity can continue to firmly walk on thereafter. Therefore, any recurring expenses funded through one-time cash inflows should only be done temporarily and shortly thereafter receive a recurring funding source or be eliminated entirely. Otherwise, the entity runs the risk of operational deficits in the mid to long term.”