Sustainable energy advocacy group points out irregularities in selection of LUMA Energy

By The Star Staff

Tom Sanzillo, director of finance for the Institute for Energy Economics and Financial Analysis (IEEFA), an entity that promotes sustainable energy, revealed at a hearing in the island House of Representatives irregularities in the procurement process that led to the 15-year contract with LUMA Energy to operate the Puerto Rico Electric Power Authority’s (PREPA) transmission and distribution (T&D) system.

The evaluation of bids and negotiation of the LUMA Energy contract was conducted by a five-member public partnership committee that was responsible for reviewing bids and scoring them according to various technical, operational and financial criteria. The final scores were used to select the winning bidder, Sanzillo told the House Committee on Economic Development, Planning, Telecommunications, Public-Private Partnerships and Energy.

A review of the individual evaluation documents, obtained via a public information request by the non-profit organization Cambio and shared with IEEFA, showed that four of the five members of the partnership committee arrived at identical numerical scores in 37 of the 38 categories. Three of the members even made the same numerical error in adding up their scores. Several of the members noted their scores were based on recommendations by FTI Consulting Inc., an off-island consulting firm hired by the Public-Private Partnerships Authority (P3A). FTI’s study, which Cambio received after a second request for information, provided specific scores related to financial metrics that appear to have been copied directly from the FTI report onto the scoring sheets, Sanzillo said.

The scoring sheets were then tabulated by the P3A, and the tabulated scores were used by the executive director of the P3A as the basis for a recommendation to vote in favor of LUMA Energy as the winning bidder.

“In the partnership committee’s final report, it is represented that on January 11, 2020, the committee met ‘to discuss the Definitive Proposals, determine next steps, and select LUMA as the Preferred Proponent,’” Sanzillo said. “However, documentation provided by the P3 Authority (see Exhibit C) shows that this ‘meeting’ was actually a unanimous, up-or-down vote over three emails to approve LUMA as the preferred proponent, based solely on the partnership committee’s scorecards.”

“While Puerto Rico law permits consultants to advise the partnership committee and the P3 Authority, the consultant-driven process that occurred here is, in my view, a completely inappropriate way to conduct a procurement process,” the IEEFA official said. “Partnership committee members should have exercised independent judgment in the review of the bids.”

Ralph Kreil, chairman of PREPA’s governing board, was part of the partnership committee but did not do any scoring. The members who provided scores were Omar Marrero, director of the Fiscal Agency and Financial Advisory Authority; Puerto Rico Energy Bureau Chairman Edison Avilés; former PREPA Executive Director José Ortiz; and Ottmar Chávez, former head of the Central Office for Recovery, Reconstruction and Resiliency. This prompted Committee Chairman Luis Raúl Torres to say he may refer them to the island Justice Department for failing in their fiduciary duties.

Torres also announced that the House had sufficient votes to approve a resolution to delay the LUMA Energy contract for a year. The lower chamber is slated to vote today on the resolution.

LUMA Energy is a subsidiary of Quanta Energy Services and ATCO. According to federal lobbying disclosure forms, Quanta Energy Services engaged in federal lobbying from the second quarter of 2019 through the second quarter of 2020 on a subject that their disclosures simply listed as “PREPA.”

“This period of time encompasses the period in which Quanta was competing for the T&D concession contract. Quanta held no other contracts with the government of Puerto Rico during this time and, to our knowledge, there is no other PREPA-related subject in which Quanta was engaged,” Sanzillo told the committee. “Yet lobbying the federal government in relation to a competitive solicitation process is specifically prohibited by the regulations of the Public-Private Partnerships Authority and explicitly stated in the RFP [request for proposals], unless directed or permitted by the Authority. Did the P3 Authority direct or permit these activities?”

“As this committee is well aware, the chairman of the Puerto Rico Energy Bureau was one of the members of the partnership committee and also cast the deciding vote on the Bureau’s approval of the contract,” he added. “Thanks to the action of this committee, this issue is pending before the Office of Governmental Ethics and the Puerto Rico Supreme Court.”

Sanzillo noted that the LUMA co-venture between Quanta and ATCO consists of two companies with inadequate capitalization to raise private capital if federal funds fail to materialize, a possibility that is not contemplated in the contract at all. Quanta and ATCO have a combined market capitalization of $11.9 billion. The estimated investment levels needed in Puerto Rico electrical infrastructure are in the $20 billion range.

He said the LUMA Energy contract may not achieve the desired savings because it contains hidden costs. LUMA’s budget makes no provision for repaying the $894 million commonwealth loan that the federal Financial Oversight and Management Board has stated is necessary for PREPA to effectuate the transaction. LUMA’s budget, Sanzillo said, appears to be artificially constructed to meet the constraint of not raising rates, which he said may not be possible.

“That is, in order to keep its transmission & distribution system operational budget within current rates, LUMA assumes a certain level of cost savings due to efficiencies. By 2024, these ‘efficiencies’ are saving $110 million, or about 10% of LUMA’s total budget,” Sanzillo said. “LUMA provides no explanation of where these savings are to come from, other than a vague mention of ‘loss reduction.’ There is also very little consequence to LUMA if they do not achieve these savings. If LUMA fails to stay within budget, its annual incentive payment would only be reduced by about $1 million.”

LUMA’s budget makes optimistic assumptions about the costs of PREPA’s Title III bankruptcy process, which are passed on to customers in rates, the IEEFA finance director pointed out.

The budget assumes a total of $58.7 million in Title III and federal oversight board advisor costs in fiscal year 2022. This is an order of magnitude less than the oversight board’s claim in December 2020 that PREPA will have to fund $500 million in Title III exit costs, he said.

PREPA’s most recent version of its 10-Year Infrastructure Plan calls for spending $853 million in Federal Emergency Management Agency funds for new natural gas infrastructure, and $11 billion to strengthen and harden the centralized T&D system.

“It includes no money for renewable energy or storage,” Sanzillo said. “Meanwhile, LUMA has already stated its interest in subcontracting federally funded grid reconstruction work to its corporate affiliates. Will LUMA conduct bids competitively to give Puerto Rico the best price options?”

Sanzillo criticized the decision to scrap the collective bargaining agreements of the PREPA unions as a poor management decision that has set up an unnecessary conflict with PREPA’s workforce. Agreements between private grid operators and labor unions are common, he said.