Governor lauds extension of LUMA supplemental agreement
By John McPhaul
LUMA Energy was not willing to start with a 15-year contract and preferred to remain under the supplemental agreement that lasts until the bankruptcy process of the Puerto Rico Electric Power Authority (PREPA) ends, because the private consortium stood to make more money under the temporary agreement, Gov. Pedro Pierluisi Urrutia acknowledged on Wednesday.
“It was the bankruptcy issue,” the governor said at a press conference. “Remember that the 15-year contract changes your compensation. There is a substantial reduction in the payment they receive. So they were not in a position to reduce the payment while the bankruptcy issue is being clarified.”
Under the supplemental agreement, an inflation adjustment clause is included that adds $120 million to LUMA’s compensation as the operator of PREPA’s transmission & distribution (T&D) system, the governor noted.
Pierluisi said LUMA executives did not accept the governor’s option that as of Dec. 1, the 15-year contract for managing the T&D system would apply.
“It changed their compensation and we would go into the system of bonuses and penalties,” he said. “For that to happen, LUMA had to waive its right under the supplementary contract not to perform services under the 15-year contract while the bankruptcy process was ongoing and was not in a position to do so. Another option that arose in the process, but that was not acceptable to me, was a term, say six months. Why is that not acceptable to me? Because there is no guarantee that, in six months, this bankruptcy process will be over.”
The other option that the governor did not accept was the one proposed by the public-interest members of the Public-Private Partnerships Authority (P3A) board, Liza Ortiz Camacho and Eduardo Ferrer Ríos, to extend the supplementary contract in order to open a transition process for LUMA Energy to cease operating.
On Tuesday afternoon, the members of the P3A board approved by a 3-2 majority vote the unchanged extension of the supplemental agreement.
Officials report extension of supplemental agreement
The governor, along with P3A Executive Director Fermín Fontanés Gómez and the P3A board chairman, Omar Marrero Díaz, reported on Wednesday the approval, by both the P3A board and the PREPA governing board, of the extension of the period of the supplemental agreement.
“It should be noted that this extension is not a new transaction creating a public-private partnership for the management of Electric Power Authority assets,” Pierluisi said at the press conference. “It is when the board of directors of the P3 Authority has before it a transaction of this nature that Law 120 of 2018, which regulates the energy transformation in Puerto Rico, requires the affirmative vote of the members of its board who represent the public interest. The extension of the supplemental agreement obliges LUMA to continue managing and improving Puerto Rico’s power transmission and distribution system until the Puerto Rico Electric Power Authority completes its debt restructuring process, which is being conducted in federal court pursuant to Title III of the PROMESA Act. The terms of the agreement and the compensation of LUMA will remain the same as at present during that period of time.”
The governor noted that PREPA’s ongoing bankruptcy process may end in two ways. First, the Title III bankruptcy court may confirm a debt adjustment plan for PREPA or reject the request for restructuring before it. If the court confirms an adjustment plan for PREPA, then all provisions of the 15-year contract between the P3A, PREPA and LUMA that was signed in mid-2020 would go into effect. At that time, the amount of payment to LUMA would change and a system of bonuses or penalties would be established based on the consortium’s performance.
Alternatively, should the federal court dismiss PREPA’s bankruptcy petition, LUMA would have to continue to provide its services under a transition plan that has already been agreed upon by the parties and approved by the Puerto Rico Energy Bureau.
“We all want to achieve the transformation of our electricity system to a modern, resilient one based on renewable energy sources,” the governor said. “We all want to speed up the reconstruction and modernization of our electricity grid so that we have reliable service. We all want both LUMA and the Electric Power Authority to improve their performance to have a more stable electric service. We all want the large-scale solar projects that are in the works to be realized so that we have enough power generation from renewable sources. We all want the government to continue encouraging the installation of solar panels and batteries at an industrial, commercial and residential level and we all want the Electric Power Authority to come out of bankruptcy, to prevent the court from appointing a trustee at the request of its bondholders and to achieve a significant cut in its debt so that the pockets of our people are not affected. We all agree on that.”
Continuing reconstruction plans and work already begun by LUMA deemed essential
Fontanés Gómez said meanwhile that “initially, the supplemental agreement was signed as a provisional measure with the purpose of granting a period of 18 months for the completion of the restructuring of PREPA’s debt.”
“To date, this process has not been completed, and it is essential to continue the reconstruction plans and works that have already begun,” he said. “That is the goal and commitment of all parties.”
Marrero Díaz noted that it is essential that LUMA remains as operator of the electric power T&D system in order to continue directing the process of restructuring PREPA’s debt under Title III, as well as to avoid severe negative results for Puerto Rico.
“For example, without LUMA, the appointment of a trustee is highly likely,” he said. “This trustee would have the power to exercise the right to request rate increases in amounts sufficient to pay PREPA’s debt in full.”
Fontanés Gómez stressed that “the reconstruction of the electric power system is on track and cannot be stopped.”
“It is an essential service that has to be transformed,” he said. “In addition, it is a fundamental pillar for the socio-economic development of the island. There is no room to look back.”
The officials reiterated that the cancellation of the contract would have severe negative economic implications for Puerto Rico, such as, for example, cancellation costs have been estimated at between $300 million and $600 million while a new P3 process is carried out.
The governor noted that even with the extension, the contract with LUMA can be canceled if it substantially fails to comply with its obligations and does not correct that breach in the time established in the contract. Likewise, the Energy Bureau has the power to establish metrics and impose fines on LUMA if its performance deviates from them or significantly compromises the reliability of the electrical system.
“From now on we all have to focus on improving our system,” Pierluisi said.
LUMA Energy President & CEO Wayne Stensby, reacting to the extension of the supplementary contract, said in a written statement that “the extension of the supplemental contract will allow the more than 3,000 men and women of LUMA to continue working to build a more reliable, resilient and clean electrical system for the 1.5 million Puerto Ricans we are privileged to serve.”
“Much remains to be done, and in 2023 we will continue to focus on kicking off hundreds of reconstruction projects across the island, which will help build a more reliable, more resilient and cleaner energy future in the months and years ahead,” he added.
Governor not concerned about political cost of defending LUMA
Pierluisi Urrutia also said Wednesday he is not worried about the political cost of defending LUMA Energy’s permanence.
“Duty is not evaded, duty is fulfilled,” he said. “And there are countless matters that are under my command and direction. This is one and it’s one where we have to improve. But there are many others in which I have to say that I am more than satisfied.”
The Popular Democratic Party was to issue a statement Wednesday afternoon on the approval of the supplemental agreement extension, but had not done so as of press time.