The San Juan Daily Star
Rebuttal reports filed by fiscal board, bondholders show conflicting takes on PREPA’s ability to pay
By The Star Staff
The Financial Oversight and Management Board and Puerto Rico Electric Power Authority (PREPA) bondholders got into arguments this week over PREPA’s ability to pay its debt.
The arguments occurred in rebuttal reports filed Monday and Tuesday.
Oversight board expert Glenn George, a partner at Bates White Economic Consulting, argued that the rate structure proposed by bondholder experts could put PREPA into a death spiral, and that they misunderstand the affordability constraint.
Maureen Chakraborty, managing principal at the Analysis Group, who was hired as an expert by PREPA’s bondholders, argued that PREPA can collect $13.4 billion in additional net revenues through 2058, compared with the $5.8 billion estimated by PREPA’s experts.
“The [oversight] Board miscalculates electricity consumption for its Hypothetical Residential Customer, thereby causing an error in the calculation of the ceiling on the affordable rates that could be charged to the Hypothetical Residential Customer and PREPA customers more generally,” Chakraborty said. “Holding all else equal, correcting this error increases PREPA’s Additional Net Revenues available for servicing the New Bonds from $5.68 billion to as much as $8.96 billion, a difference of $3.28 billion.”
Chakraborty argues that PREPA’s estimate is wrong because the oversight board made a $3 billion mistake in estimating electricity consumption, and a $1 billion mistake related to income projections, among other errors and omissions.
George said “an increase in utility rates inevitably leads to a loss of net electrical load due to some combination of load defection and grid defection (total loss of net load, e.g., through outmigration or “cord-cutting” such as installation of rooftop solar PV [photovoltaic systems] combined with enough battery storage to go off-grid altogether).”
“How much net load is lost and how quickly, is a function of the price elasticity of demand for electricity,” he said.
Bondholder expert Susan Tierney, a senior adviser at Analysis Group, noted that the oversight board overstated how much rate increases would decrease demand.
Thomas S. Terry, CEO of The Terry Group, who also was hired as an expert for the bondholders, argued that PREPA’s pension claim was $2.6 billion, not $4 billion as the board’s expert calculated. The discrepancy is because the oversight board’s actuary didn’t assess the reasonableness of the assumptions that underpin the pension claim.
Oversight board expert Jurgen Weiss, an academic adviser at the Brattle Group, argued meanwhile that bondholder experts misrepresent the board’s consideration of affordability. He also said the inflation-adjusted legacy charge is misguided and that the board accurately used its affordability measure.
Andrew Wolfe, an economic adviser to the oversight board, disputed bondholders’ economic growth models. In particular, he noted the pattern of migration in Puerto Rico provoked by economic downturns and the high cost of energy.
“Unlike labor confined within national borders, labor in Puerto Rico is free to move to another region where economic prospects are better,” Wolfe said. “Even in the European Union, where borders are technically open, labor mobility is hampered by cultural factors and nationality change. Not so in Puerto Rico. Among other things, there are many mainland Puerto Rican communities that can and do make migration smoother and more attractive than cross border migration within Europe.”