PREPA intensifies challenge of LUMA contract as head of energy regulator is accused of conflicts
By The Star Staff
Puerto Rico Electric Power Authority (PREPA) workers and retirees held a car caravan Sunday to protest the privatization of PREPA’s transmission and distribution system as a House of Representatives committee filed an ethical complaint against Puerto Rico Energy Bureau (PREB) Chairman Edison Avilés over the certification of LUMA Energy as the private operator of PREPA’s transmission and distribution (T&D) system, billing and customer services.
Sunday’s caravan was one of several actions to be staged by PREPA’s workers union, the Electrical Industry and Irrigation Workers Union (UTIER), to raise awareness about the risks of privatization. LUMA is expected to take full control of PREPA’s T&D on June 1 despite efforts by UTIER members to stop the process on different fronts, including the courts. UTIER President Ángel Figueroa Jaramillo resigned his position as trustee of PREPA’s pension system to dedicate all his energy to stopping the privatization.
The Puerto Rico Bar Association urged the government to nullify the “leonine” contract between PREPA and LUMA Energy, arguing that it violates workers’ rights. Gov. Pedro Pierluisi Urrutia and the federal Financial Oversight and Management Board, however, have come out in support of the contract.
As part of the contract, bankrupt PREPA will pay LUMA a fixed annual compensation that will start at $70 million the first year, then increase to $90 million in the second year, and to $100 million the third year. In the fourth year and for the remainder of the 15-year agreement, the annual payment to the operator will be $105 million, but if the operator meets certain metrics and yields certain savings, payments could reach $125 million per year.
PREPA is also reimbursing LUMA for all variable expenses such as lodging of executives.
LUMA also has access to $10.7 billion in Federal Emergency Management Agency funds earmarked to rebuild the utility.
The contract allows LUMA to keep as owner all the repairs and capital projects associated with PREPA T&D facilities, to seek rate hikes and to ignore the workers’ collective bargaining agreement. The contract also exempts LUMA from some 15 local laws regulating the use of public funds, which critics say will complicate efforts to obtain information on what the company is doing.
The contract is in the front-end transition phase, which calls for PREPA to pay LUMA -- a consortium created by Quanta Services, ATCO and EIM -- $5 million a month plus all variable expenses. It has already invoiced $88.8 million.
On Feb. 16, and after losing in the U.S. District Court, UTIER and the retirees’ union asked the U.S. First Circuit Court of Appeals to revive its challenge to a court order granting priority status to the payments by the bankrupt PREPA to LUMA to facilitate transfer of T&D functions to the private operator, saying a lower court erred in its reading of the federal law governing the bankruptcy process for Puerto Rico and its instrumentalities.
UTIER and the Sistema de Retiro de los Empleados de la Autoridad de Energía Eléctrica argue that the fees have sunk PREPA into a $132 million deficit and necessitated a $894 million loan from the commonwealth to fund services that directly benefit LUMA’s business objectives on the island, according to the brief.
The priority status bestowed on the fees further elevates payments to the company above PREPA’s existing obligations to pensioners, employees, bondholders and unsecured creditors under the utility’s Title III bankruptcy proceedings, the unions argue.
As part of the contract, PREPA’s role will be diminished as it will remain only as owner of the T&D but without any say. PREPA will continue to manage the power plants, a role that it will lose once they are sold. As a condition with LUMA, PREPA must be reorganized into GenCO and GridCo. LUMA will be known as LUMA Energy ServCo. Eventually, PREPA is slated to disappear as a corporation.
The contract with LUMA Energy was certified by PREPA’s governing board despite not having any participation in its drafting and without having read it. Tomás Torres, the consumer representative to the board, voted against it.
The PREB validated the contract in a process that did not include any public hearings. A report made by the House Economic Development, Planning, Telecommunications, Private Public Partnerships and Energy Committee voted to refer Avilés to the Government Ethics Office because he participated in the public-private partnership committee that chose LUMA Energy as the private operator of PREPA’s T&D, billing and customer services. He not only negotiated the proposal, but also participated in the PREB’s approval of the contract.
The House report also expressed concern that while the law says PREPA workers were not going to lose their jobs in the privatization, the contract does not require LUMA to hire the workers.
Members of the House committee questioned Avilés’ dual participation in the process. Avilés acknowledged that the PREB received drafts of the contract and other documents and commented on them. Committee Chairman Luis Raúl Torres said Avilés should have abstained from voting because participating in the selection put him in contact with evidence and colored his judgment on whether LUMA Energy, which was incorporated a few months before its selection, was the ideal candidate.
Avilés’ vote in favor of certifying the contract was needed because without it, there would have been no quorum at the PREB since one of the members, Ángel Rivera, voted against it.
Puerto Rico Bar Association President Daisy Calcaño said the contract creates a private monopoly and violates Act 120 of 2018, which guarantees acquired rights of voters. She noted that under the contract LUMA could cancel the contract after a hurricane or a major event.
LUMA Energy, as previously acknowledged by Public-Private Partnership Authority (P3A) Director Fermín Fontanés, will have a say on PREPA’s debt adjustment plan. The firm not only has priority in the payment of the debt but also will have a say because it needs to have funding in order to operate.
LUMA Energy President Wayne Stensby said on Feb. 21 that LUMA will not only take over the utility on June 1, but was going to submit to the PREB a system remediation plan that will focus on addressing areas that are below standard. LUMA has found that PREPA’s recordable incidents are considerably higher than average, that its customer service score is 50% lower than average, and the frequency of power outages is also exceptionally high.
As part of the system remediation, LUMA has planned for $4 billion in initiatives and $11 billion in total improvement programs. There will be no rate increases for three years as the budget currently covers all activities for the first three years of operation, Stensby said.
Following the June 1 takeover, Stensby said the public can expect improved street lighting, improvement in call center responsiveness, and walkdowns and inspections of areas experiencing a sizable number of outages.
Regarding the hiring of workers, Stensby said it will be up to the employees to work with LUMA or not.
Former UTIER President Ricardo Santos disputed Stensby’s claims about no rate hikes. He said that while LUMA will not raise rates as part of its operations, it could raise them due to fluctuations in oil prices or the loss of clients.
“As the process of discrediting PREPA continues and the utility loses clients and the industrial clients find ways to generate their own energy, it will increase rates,” he said.
The LUMA contract also encourages the use of natural gas, thwarting the island’s goal of achieving 100 percent renewable energy by 2050 by allowing LUMA to file changes with the PREB to the island’s integrated resource plan.
It’s possible the consortium could run into financial problems. Rebuilding the island grid is estimated to cost more than $20 billion, but two of the consortium companies, Quanta and ATCO, have a combined market capitalization of only $12 billion.
There is little accountability for the parties in the agreement. The biggest part of LUMA’s fee for running the grid will be paid whether the job is done well or not. The three oversight agencies are seen as handicapped – the P3A isn’t qualified to administer the electrical system, the PREB doesn’t have the resources to supervise LUMA, and the federal oversight board is an unreliable fiscal monitor, critics said.