Good morning, Senator Lawrence Seilhamer Rodríguez, Chairman of the Special Committee on Energy Affairs of the Senate of Puerto Rico, members of the committee, and everyone here with us today.
We have received your letter dated August 10, 2018, inviting us to testify in these public hearings and offer our recommendations on the public energy policy and regulatory framework that we believe should govern the Electrical System of Puerto Rico before any Public-Private Alliance Contract or Sales Contract is finalized involving the Puerto Rico Electric Energy Authority’s assets in compliance with the provisions of Law 120 of June 20, 2018, known as the Law to Transform the Electrical System of Puerto Rico (“Law 120”). We appreciate the opportunity you have given us to take part in the analysis and discussion of this important public policy measure.
Hurricane Maria devastated Puerto Rico’s electrical system. After the storm, the island has essentially had to reactivate its energy system from the equivalent of what the industry calls a “black start,” which is the technical term for the process of reactivating the electrical generating system after a total blackout.
At the same time, the energy sector worldwide is rapidly changing as new technologies come online that are incompatible with the century-old paradigm of centralized generation, transmission, and distribution of energy. We should take advantage of this moment—the almost total destruction of the energy system in Puerto Rico and technological advances in the energy sector—to bring the island’s obsolete energy system into the twenty-first century. Or to put it another way, we should use this black start not to rebuild the energy system to its state on September 19, 2017, but to make an important qualitative leap forward.
If the energy sector is to make a successful transition to a new model of doing business, it will be necessary to develop a new vision for that system, amend laws and modify regulations, update the transmission and distribution grids, and promote the efficient use of energy among consumers. This is a difficult task, but fortunately there are abundant resources available for providing orientation to legislators, regulators, and energy companies.
Analysis and Recommendations
First of all, we should point out that Section 3 of Law 120 already contains a statement of public policy. It reads as follows:
Based on the legal and proprietary powers of the People of Puerto Rico and its Government over PREPA, this Legislative Assembly declares that its intention and its public policy is to implement, in a flexible and responsive way, a fair and transparent process for the establishment of Public-Private Alliances with regard to any of the public corporation’s functions, services, or facilities, and to sell its generation-related assets, placing those assets in such private hands as demonstrate a fair balance between commercial interest and a sense of social responsibility; with the operational, technological, and financial capacity to transform the electrical system into a modern one, with reasonable rates, universal access, and efficient and environmentally acceptable energy sources; with an infrastructure as resilient and as resistant as possible to the forces of atmospheric or natural phenomena; with economic and legal conditions reasonable to the People of Puerto Rico; and which provide the conditions for broad accessibility, ease, and rapidity in its direct services to customers.
All the above, as a minimum, must be taken into consideration by the Committee on Alliances as the Fundamental Interests of the People of Puerto Rico in evaluating the proponents and their offers.
This being the case, the premise of our analysis and recommendations is that the mandate established in Section 9 of Law 120, requiring the development of a Public Energy Policy and Regulatory Framework for the Electrical System of Puerto Rico (1) is subordinate to the general public policy established in Section 3, and (2) that both the Public Energy Policy and the Regulatory Framework must be consistent with the “Fundamental Interests of the People of Puerto Rico” set forth in Section 3.
Therefore, our first recommendation, in order to avoid confusion and potential conflicts between the general public policy already legislated in Section 3 of Law 120 and the specific energy public policy that is being drafted now, is that the key terms be clearly defined. Just as the first section of any complicated contract usually contains a list of definitions aimed at creating a vocabulary—and eventually a language—common to all parties, so, before proceeding with the drafting of an energy public policy for Puerto Rico, it is necessary to define such essential terms as universal access, renewable energy, distributed generation, micro-grids, resilience, environmental externalities, economic cost, social cost, competitive market, retail energy sale, wholesale energy sale, wheeling, customer choice, traditional or centralized generation, energy transmission and distribution, and so on.
The next step, once the important terms have been defined, is to draft a long-term vision that will determine and establish the objectives to be achieved through the public energy policy and the regulatory framework.
Arriving at this vision requires thinking beyond the confines of the island while taking into consideration and developing a deep understanding of the limitations and challenges faced by Puerto Rico. In addition, advanced public policies and regulations will be needed in order to implement that vision. It will be necessary to set forth the guidelines of the environmental objectives for the system and basic standards for renewable energy, energy efficiency, and handling energy demand.
That statement of the energy vision for Puerto Rico should include from three to five strategic objectives and an ambitious but realistic long-term goal based on the premise that the business model for electric-generation companies, including PREPA, traditionally known as “build and grow,” based on (1) building increasingly larger and more efficient generating plants using cheap fossil fuels, and (2) a continuous increase in the consumption of electricity, is no longer feasible due to limitations in the efficiency achievable in electrical generation, the increase in the price of fossil fuels, new environmental regulation, a reduction in the demand for electricity, and the entrance of new generation technologies using renewable sources.
 Gretchen Bakke, The Grid: The Fraying Wires Between Americans and Our Energy Future, New York: Bloomsbury, 2017, pp. 72-93.
Taking those premises as our starting point, we present, just as an example, the following possible statement of the vision of the energy system of Puerto Rico:
“By the year 2020, Puerto Rico will have an electrical system that is accessible, reliable, cost-efficient, clean, and resilient, anchored in the most advanced commercially available technology and adaptable to isolated systems like our own.”
The important thing is that the process for developing that vision be inclusive and truly participatory, and that it provides an opportunity for the largest possible number of stakeholders to present and explain their view of the strategic objectives and energy vision for the island.
In this type of process, it is inevitable that objectives and/or visions will be presented that are logically incompatible, mutually exclusive, or that require the balancing of competing interests if those objectives are to be implemented in an effective way. The responsibility falls on you, as the duly and democratically elected representatives of the people of Puerto Rico to resolve those potential conflicts, after obtaining input from the largest possible number of stakeholders.
Third, once an agreement has been reached as to the objectives and vision that is to be implemented, the time will then have come to design public policies to enable the implementation of those objectives and vision. To continue with the example we gave earlier, the implementation of a clean and resilient energy system requires the design of public policies that foster and promote the use of generation technologies that produce little or no pollution and incentivize the use of microgrids, as well as underground lines, where that technology is cost-efficient, to improve the system’s resilience.
In terms of generation, the new energy public policy should consider the fact that large generation facilities with investment recovery cycles of more than thirty years are increasingly a thing of the past. Today, smaller, highly efficient traditional generation units broadly distributed in service areas in order to supply the base load are quickly becoming a technologically feasible and profitable alternative. Complementing that model with renewable generation solutions and storage technologies to provide reserves, other auxiliary services, and additional load at peak hours is not only efficient, but can help provide a more cost-effective service, with fewer interruptions, for all customers.
Here, it is important to point out that when we compare the cost of traditional generation alternatives with the cost of renewable energy alternatives, it is important to remember the “all-in” costs associated with traditional generation—which are not just the cost of fossil fuel but social costs as well: the cost of environmental pollution, the cost of medical treatment for asthma, other respiratory problems, eye and skin diseases, and the cost of premature deaths caused by cancer and other diseases directly or indirectly caused by emissions of pollutants.
On the transmission and distribution side, the public energy policy should foster the grid’s evolution to efficiently and reliably employ distributed generation and incorporate the use of batteries at the grid level as well as at the retail level so as to allow electricity to be stored when it is not immediately needed and thus foster and increase the value of intermittent-generation resources.
In addition, the rapid growth of the electric car market creates the potential for additional demand for electric power, presumably during off-peak hours, which could help to stabilize the demand for the base load that is projected to fall over the next few years. Electric vehicles would also function as a storage solution and could upload energy to the grid when more valuable uses emerge for that load. However, all this would entail making capital investments in non-traditional areas, given that electric vehicles would need readily available charging stations, which would, consequently, have to be widely distributed around the island.
Lastly, given the foreseeable effects of swift and imminent climate change, the grid of the twenty-first century must be sufficiently flexible to incorporate micro- and mini-grids that can be connected and disconnected from the main grid, as needed, to ensure that critical infrastructure facilities (hospitals, water pumps, telecommunications, etc.) have satisfactory backup in case of disasters, to protect isolated communities from prolonged interruptions in those services, and limit the impacts on health and the environment.
Ideally, these policies would be designed in cooperation with other agencies and offices of the government of Puerto Rico, the federal government, the non-governmental sector, and community-based organizations, such as the Puerto Rico Energy Commission, the Department of Energy, the Southern States Energy Board, the Puerto Rico Institute for Competitiveness and Sustainable Economy (ICSE), and Casa Pueblo.
Having stated and defined the public energy policy, the next step is the operationalization of that policy and the design of the regulatory framework for the energy system: rules and regulations are drafted by the administrative agencies with jurisdiction over this area, government programs are created or expanded, and budget allocations needed to implement those programs are made.
The regulation model will have to evolve away from a model based on integrated resource plans with long time horizons towards one based on more proactive supervision with respect to the efficient use of resources and more dynamic with respect to the oversight of the various actors and participants in the energy sector. This means that the regulators must implement a performance-based regulation model, define transparent parameters for accountability, and establish incentives (and sanctions) for achieving stated energy policy objectives.
It is imperative that the new rate structure be designed to: (1) send the right price signals to both generators and consumers; (2) promote energy efficiency; (3) encourage the efficient handling of the base load and peak demand; (4) encourage the transition to two-way interaction between the grid operators and customers who install distributed generation capacity; and (5) implement rates based on the time of energy use in order to foster efficiency and optimization in the use of resources. In addition, the system should promote the implementation of new energy norms for the design of buildings, facilitate financing for retrofitting existing structures in order to encourage energy conservation, and promote the use of efficient household appliances in order to stabilize residential consumption.
Finally, it should be the responsibility of every agency head with jurisdiction over this area to take all actions necessary for implementing the government programs needed for making the long-term vision and the new energy policy for Puerto Rico a reality.
In summary, the reform of Puerto Rico’s energy system must be well thought out, strategic, and follow a logical sequence, especially when PREPA is simultaneously facing the challenges in connection with rebuilding the electrical system after Hurricane Maria, restructuring its debt under Title III of PROMESA, experiencing a substantial decline in demand for its services, and entering into a process for the total or partial privatization of an electrical system that has been managed and operated as a monopoly for more than seventy years.
Once again, we appreciate the opportunity to take part in this debate, and we are at your disposal to answer any question that you or the other members of this Committee may have with respect to this important matter.
Respectfully submitted by: Sergio M. Marxuach Colón, Policy Director, Center for a New Economy
 Gretchen Bakke, The Grid: The Fraying Wires Between Americans and Our Energy Future, New York: Bloomsbury, 2017, pp. 72-93.
 See, for example, Nicholas Z. Muller, Robert Mendelsohn, and William Nordhaus, “Environmental Accounting for Pollution in the United States Economy,” American Economic Review, vol. 101, (August 2011): 1649-1675.