A Short History of the Demise of Puerto Rico’s Electric System

A Short History of the Demise of Puerto Rico’s Electric System

Published on October 21, 2021

Sergio portrait
Policy Director

The recent outages of Puerto Rico’s electric system have generated plenty of uninformed debate. That situation prompted us to go through the archives and look up the Official Statements for PREPA’s last two bond offerings, dated April 12, 2012 (the “2012 OS’) and August 15, 2013 (the “2013 OS”), respectively. These documents contain a wealth of data and information about Puerto Rico’s electricity system.

First, we note that PREPA had already been reporting operating losses for several years in a row. According to the 2013 OS: “For each of the last four fiscal years the Authority incurred losses before contributed capital in accordance with GAAP. These losses reflect the continuation of a historical trend of net losses that have resulted in a deficit in the Authority’s consolidated net assets of $515.7 million as of June 30, 2012. This means that…the Authority’s total liabilities of $10.8 billion exceed its total assets of $10.3 billion.” (2013 OS, p. 21). In other words, PREPA was already insolvent, on a balance sheet basis, as of the end of fiscal year 2012.

Furthermore, during fiscal years 2011, 2012, and 2013, “due to liquidity constraints the Authority had a need to use lines of credit and Power Revenue Bonds to finance its operational expenses.” (2013 OS, p. 22). By diverting debt proceeds to pay for operational expenses, this practice limited the amount of funds available for financing the capital expenditures necessary for system maintenance. This affected the maintenance of the entire system, including the generation component, as “about half of the $787.5 million in capital expenditures for the five fiscal years ended June 30, 2013 for production plant was spent for such scheduled maintenance.” (2013 OS, p.38).

The combination of low liquidity; funding current spending with long-term debt; and limited access to the capital markets due to increased levels of indebtedness and debt service, resulted in a significant reduction in system maintenance expenditures from $250.6 million during fiscal year 2007 to $213.9 million during fiscal year 2013, a decrease of $36.7 million, or 14.6%. (2012 OS, p. 71 and 2013 OS, p. 58)

The lack of maintenance, in turn, affected overall system performance. Between 2007 and 2011, generation availability decreased from 84% in 2007 to 78.9% in 2011; while the forced outage rate increased from 10% to 15.8%, during the same period. (2012 OS, p. 51). Meanwhile, the reserve capacity available as a percentage of peak load was forecast to decrease from 77% in 2014 to 67% in 2018. (2013 OS, p. 40).

Such was the neglected state of Puerto Rico’s electricity system — an old, unreliable, fossil fuel-based generation fleet connected to a functional but fragile and unstable transmission and distribution grid — when PREPA and the government of Puerto Rico executed a long-term agreement for the operation and maintenance of the electric grid (the “O&M Agreement”) with LUMA, a Canadian/Texan consortium.

Under the O&M Agreement, keeping the lights on requires hand-in-glove coordination between PREPA and LUMA. PREPA is responsible for the operation and maintenance of the generation fleet, while LUMA is in charge of funding PREPA on a monthly basis and deciding which generation resources interconnect with the grid, at what time, and in which order. Given the complicated character of this relationship, the recent rolling blackouts are probably as much a function of a decrepit generation fleet and an unstable transmission and distribution grid, as of a series of coordination failures between PREPA and LUMA.

In sum, Puerto Rico’s energy woes were years in the making and are the direct result of PREPA’s mismanagement, negligence, and corruption.

However, PREPA’s indictment is not LUMA’s vindication. LUMA had a year to prepare for the takeover of the electricity grid and its performance so far has been, in the best case, deficient. Its management’s obstinate refusal to submit to any accountability processes is downright Nixonian.

Both PREPA and LUMA bear responsibility for the recent malfunctioning of Puerto Rico’s electricity system. The O&M Agreement requires good faith efforts from both companies to run the system successfully. We suspect, though, that PREPA is clinging to its old ways of doing things, while LUMA has not understood it needs to modify its standard playbook to account for an old, unstable, and unreliable electric system. It is in the best interests of both companies to change their ways, for their own benefit and the wellbeing of the Puerto Rican people.

This column was originally published in the Caribbean Business on October 21, 2021.