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Think tank: Best option for gov’t is to make the LUMA contract work


Sergio M. Marxuach, policy director at the Center for a New Economy

By The Star Staff


A Center for a New Economy (CNE) evaluation advises the island government to make the contract with LUMA Energy, the private operator of the Puerto Rico Electric Power Authority’s (PREPA) transmission and distribution (T&D) system, work instead of ending it.


CNE Policy Director Sergio M. Marxuach, in the September issue of CNE Review, said that while allowing the supplementary contract with LUMA Energy to expire on Nov. 30 is the easiest solution, it might have negative consequences.


The report includes a policy brief and an editorial that analyzes the public-private partnership between the government and LUMA Energy, focusing primarily on the current situation and offering solutions for how the government can best protect the interests of the Puerto Rican people. In the publication, Marxuach details the current energy situation and explains why LUMA does not measure up to expectations.


“So far LUMA has incurred budget overruns; has failed to meet key performance metrics regarding the duration and frequency of outages; is behind schedule in meeting certain maintenance goals (for example, controlling vegetation growth around important lines); and has shown little evidence that it is achieving the savings it represented it would generate from a more efficient management of the transmission and distribution system,” the report says. “It is up to the government of Puerto Rico, then, to defend the interests of the Puerto Rican people.”


Regarding the price of electricity, the CNE policy director notes that PREPA’s generation fleet is outdated except for a handful of units that were retrofitted to burn natural gas.


“It still relies mostly on oil and diesel fuel for electricity generation. According to PREPA’s unaudited financial information, from July 2021-May 2022, approximately 73% of PREPA’s expenditures correspond to the purchase of fuel and power,” Marxuach said. “This means that Puerto Rico is at the mercy of oil and natural gas markets, which have been affected recently by the unexpectedly rapid economic recovery from the COVID-19 pandemic, the strong post-pandemic shift toward the consumption of manufactured goods instead of services, other constraints on energy supply, and the invasion of Ukraine by Russia. This is the reason why CNE emphasizes the need to start rolling out large-scale renewable energy projects.”


The CNE Review includes three possible scenarios for ending the LUMA Energy contract, but Marxuach concludes that the easiest course of action would be not to seek the extension of the interim operation period that ends on Nov. 30. That is because the Supplemental Agreement currently in effect provides for the automatic termination of both agreements, the Operation and Maintenance (O&M) Agreement as well as the Supplemental Agreement, on that date, unless the government of Puerto Rico seeks to extend its effectiveness.


However, Marxuach cautions that each proposed solution carries some consequences that must be analyzed beforehand to avoid mistakes or make a difficult situation even worse. If the contract is left to expire on Nov. 30, the automatic termination of the agreements would trigger the occurrence of several events.


First, PREPA would be required to pay LUMA a termination fee of $115 million in 2020 dollars, adjusted for inflation, which is not currently budgeted, he said.


Second, the termination of both agreements would trigger the clock on a transition period, which could last up to 12 months and during which LUMA would wind up its operations and transfer them to a successor operator. PREPA would be responsible for paying a fee to cover the cost of LUMA’s operations during this period, he said.


“The problem with this and any other termination scenario is that it appears there are no candidates to be a successor operator in the event of termination,” Marxuach said. “That is, there appears to be no Plan B. Who will then be in charge of Puerto Rico’s transmission and distribution system?”


Marxuach also notes that the government must consider the possible impact of terminating the O&M Agreement on the disbursement of Federal Emergency Management Agency (FEMA) and Community Development Block Grant Disaster Recovery (CDBG-DR) funds to reconstruct the grid.


“The likely scenario is that both agencies would adopt a wait-and-see attitude with respect to such disbursement as legal and operational wrinkles are worked out,” the economist said. “This means that the reconstruction of the grid would take even longer than the currently projected 10 years.”


Therefore, Marxuach says, the best-case scenario may be to make the contract between PREPA and LUMA work. First, however, the government must also examine why LUMA cannot meet performance objectives.


The analysis states that in the future, the Public-Private Partnership Authority should hire an independent world-class firm of engineers, with no business or political connections to Puerto Rico, to relentlessly and unwaveringly supervise LUMA’s performance of its obligations under its agreement.


“There are no effortless solutions to Puerto Rico’s energy problems,” Marxuach said. “It will take several years of steadfast hard work to rebuild the system and decrease energy rates. There are no shortcuts, no easy answers, and no straightforward ways out. The only option is to work through it. Otherwise, we face the unpleasant prospect of several more years of economic decline and the social stagnation that would entail.”


Meanwhile, Gov. Pedro Pierluisi Urrutia said Tuesday that LUMA Energy will remain as PREPA’s T&D system operator because the “basis contract,” or 15-year contract, will go into effect after Nov. 30.

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