By The Star Staff
The Financial Oversight and Management Board (JCF by its Spanish initials) said this week that the fiscal plan submitted by the Puerto Rico Aqueduct and Sewer Authority (PRASA) in March violates the Puerto Rico Oversight, Management and Economic Stability Act, commonly known as PROMESA, because it fails to list measures to be taken for long-term sustainability.
The oversight board praised PRASA’s efforts since 2018 to stabilize its fiscal condition by implementing gradual rate increases across all customer segments from fiscal year (FY) 2018 to FY 2022, improving collections from government accounts, reprofiling PRASA’s federal debt in 2019, and negotiating refunding agreements for the outstanding senior and senior subordinated debt in 2020 and 2021.
“While the elimination of the structural fiscal deficit is critical, PRASA must also prioritize its longstanding operational shortcomings, including high levels of non-revenue water, which drive high operating costs and put water resource availability at risk; inaccurate metering, which limits billing capabilities; and the need for accelerating capital investments to modernize the system and increase its resiliency against severe climate conditions,” the oversight board said in a letter to the water utility this week. “If these issues remain unaddressed, they will preclude PRASA from achieving long-term operational sustainability, which is essential for Puerto Rico.”
The board gave PRASA until May 12 to incorporate the changes and present a new fiscal plan, which is the blueprint for its future operations.
The measures included in the plan focus on rate adjustments, meter replacements, electricity expense savings, physical water loss reduction and the use of federal funds to invest in PRASA’s Capital Improvement Program (CIP), but only 23% of the projected net benefits (FY 2023-FY 2028) from the measures in the proposed plan are related to operational efficiency measures. In contrast, 77% of projected benefits are derived from the remaining fiscal measures, such as rate adjustments and the maximization of federal funds.
“Assuming PRASA effectively implements all measures except the rate adjustments, which project 2% annual rate adjustments across all customer segments, PRASA would incur a deficit of approximately $320 million over the fiscal plan period (FY2024-FY2028). Therefore, it is imperative that PRASA’s revenue projections continue to incorporate a minimum of 2% and up to a maximum of 5% in rate adjustments with a cumulative rate increase cap of 30%,” the oversight board said. “Not only are these rate adjustments essential to balancing current and future budgets, but they are also critical to ensuring PRASA has enough liquidity to fund its large and ambitious CIP.”
In the proposed plan, PRASA reaffirms its commitment to reduce water loss levels. However, to date, PRASA has only been able to effectively implement the master meters initiative, which accurately measures water production. PRASA must allocate further resources to its leak detection program and other activities directed toward assessing the identified pressure zones.
The plan also fails to include measures to ensure PRASA makes a transition to drawing energy from renewable sources. Since PRASA entered the photovoltaic power purchase agreements (PPOAs) back in 2011 and 2012, it has had the benefit of electricity costs at $0.15 per kilowatt-hour (kWh) and an annual renewable energy consumption of around 10 million kWh (2% of its total annual energy consumption).
However, the oversight board said PRASA did not provide details regarding the second generation of photovoltaic projects and deferred to the 10-year master plan for any new energy project. “The Oversight Board has repeatedly recognized that PRASA is highly sensitive to fluctuations in electricity rates,” the board said. “As such, PRASA must pursue a more accelerated approach to stabilize and subsequently reduce its second largest operating cost: electricity.”
To mitigate the risks from the Puerto Rico Energy Bureau (PREB)-approved electricity rates and its reliance on the LUMA Energy/Puerto Rico Electric Power Authority/Genera PR grid, PRASA must commit to identifying feasible renewable energy projects in the 10-year master plan, and to initiating the procurement process to implement feasible renewable energy generation projects and other cost-reduction initiatives, the oversight board said.
In addition, the proposed plan also relies on Brent crude oil projections from the U.S. Energy Information Administration to develop part of the projection of electricity rates for FY 2024 and beyond, the board observed. Accordingly, crude oil projections present a slight reduction for the first years, a stabilization after 2026, and a slight increase each year thereafter.
Despite PRASA’s electricity rates benefitting from favorable market conditions in the near term, the oversight board, the authority must still make it a top priority to transition to off-grid alternatives.
“This is especially vital because the Proposed Plan projects electricity savings of $35 million over the next five fiscal years, a goal that will be difficult to reach without the off-grid alternatives,” the oversight board said in its letter. “Moreover, considering that PRASA expects to define feasible energy projects in the 10-year Master Plan and the deployment priority for such projects, PRASA must commit in the revised Proposed Plan to complete in a timely manner the preliminary guidelines for implementing alternative energy projects with a focus mainly on capital-intensive projects.”