Puerto Rico Electric Power Authority’s Debt Restructuring Plan Poses Unsustainable Burden: IEEFA

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A plan by the Financial Oversight and Management Board to restructure the debt of the struggling island’s Electric Power Authority is “divorced from the history and current reality of Puerto Rico’s electrical system,” an IEEFA expert testified.


Tom Sanzillo, director of financial analysis for the research organization, said the Financial Oversight and Management Board’s (FOMB) plan to restructure more than $9 billion in debt from the Power Authority Electrica de Puerto Rico (AEE) would create an unsustainable burden for the island’s residents.

PREPA’s bankruptcy, with more than $9 billion in debt from defaulted bonds and other obligations, represents one of the largest municipal debt restructurings in the United States. The FOMB has proposed a plan that would repay $5.68 billion of bonded debt by imposing further double-digit rate hikes over the next several decades. In their April 28 testimony, PREPA bondholders argued that Puerto Rico could afford to pay $13.4 billion, more than double the amount proposed by the Oversight Board.

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Sanzillo’s testimony emphasized how far Puerto Rico currently is from having a financially sustainable electric system, even in the absence of any charges to pay off legacy debt. He pointed out that PREPA still does not have a credible balanced budget; has not met previous rate affordability targets set by the FOMB; and the network is less reliable today than it was before Hurricane Maria.

“The judge faces an untenable choice. If she approves this agreement, she will burden PREPA, its customers and the Puerto Rican economy with an unsustainable financial burden. If she rejects it, PREPA is threatened with decades of lawsuits,” he said. Sanzillo. “It would be better to postpone the decision and develop an agreement based on solutions. There are better financial solutions for PREPA, but so far the options that are being taken will not result in safe, reliable and affordable electricity that can contribute to the economic growth of Puerto Rico .”

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Sanzillo criticized both the bondholders and the Board for underestimating future fuel prices by billions of dollars in the plan; for not taking into account delays and recent government decisions that increase reliance on fossil fuels and hinder the transition to renewable energy; for not incorporating sufficient capital and operating resources into the future budget of the electrical system to comply with basic reliability standards; and for not understanding the speed with which customers are moving to rooftop solar and storage in response to grid deterioration.

“The historical difficulty of achieving a transformation to renewables and the political pressures working against it mean that there will be no chance of generating the cash surpluses needed to pay down legacy debt,” Sanzillo said. “A high-priced electricity system dependent on fossil fuels will contribute to Puerto Rico’s weak economic prospects. Depriving the system of capital and operating expenses means that basic reliability standards cannot be met, which is a sign of alarm not only for residential customers, but also for manufacturers.

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The United States District Court for the District of Puerto Rico will hold a hearing on the plan in late July.

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