LUMA blames PREPA mismanagement for financial woes

By THE STAR STAFF

On Monday, during the Puerto Rico Energy Bureau’s (PREB) ongoing rate case hearings, LUMA’s Chief Financial Officer, Andrew Smith, began his testimony, addressing critical issues that continue to affect Puerto Rico’s electric system recovery. His remarks focus on how PREPA’s prolonged bankruptcy and chronic underfunding have weakened the grid and severely limited efforts to improve reliability and resiliency for customers.

Smith explained that PREPA’s financial mismanagement, including its failure to replenish the Outage Event Reserve Account since 2023, has forced LUMA to divert more than $209 million from planned system improvements to cover unplanned outages and emergency response needs. This diversion of funds has resulted in the cancellation or deferral of projects intended to modernize and stabilize the transmission and distribution system. Smith emphasizes that this situation is far from normal for a utility company, where reserve accounts are typically maintained to handle unexpected events without jeopardizing planned investments.

He also highlighted the impact of PREPA’s decade-long, $10 billion unresolved bankruptcy, which has prevented access to credit and financing tools that utilities rely on to spread the cost of infrastructure investments over decades. Because PREPA cannot borrow or issue bonds, all investments in the grid must be paid upfront each year, rather than financed over ten, twenty, or thirty years as is standard practice for financially healthy utilities. This inability to access capital markets directly harms customers, as it limits the scope and pace of improvements needed to strengthen the grid.

The hearings, which began in mid-November and will continue through December, aim to determine the level of funding required to make responsible, strategic investments that will ensure long-term reliability and resiliency for Puerto Rico’s electric system. Smith underscores that after decades of financial mismanagement, the system is operating with aging equipment, deferred maintenance, and an empty emergency reserve account. He warns that many components of the transmission and distribution system are at or beyond their useful life and rely on decades-old technology, all of which negatively affect performance and reliability.

“After decades of PREPA’s financial mismanagement, the electric system is operating with aged equipment, deferred maintenance, and an empty emergency reserve account,” said Andrew Smith. “To improve reliability, resiliency, and the customer experience Puerto Rico deserves, we must address these structural challenges and invest every cent responsibly. LUMA does not profit from customer rates—every dollar goes back into operating and improving the grid.”

Smith further noted that the liquidity situation became more acute in the first quarter of fiscal year 2025 when PREPA substantially reduced monthly funding to LUMA, and those depressed levels have persisted. Despite these challenges, LUMA has continued to respond to major outage events, including Hurricane Fiona and Tropical Storm Ernesto, even though the Outage Event Reserve Account has not been replenished since November 2023 and currently holds no funds.

Smith’s testimony painted a stark picture of the consequences of PREPA’s financial instability: a grid in significant disrepair, critical components operating beyond their intended lifespan, and a lack of access to financing that forces short-term fixes instead of long-term solutions. The outcome of these hearings will be pivotal in determining whether Puerto Rico can finally begin to make the strategic investments necessary to build a reliable, resilient electric system for the future.