Privatize Puerto Rico’s Energy Sector to Stop the Insanity
By Joshua Sharp
EspañolThe Commonwealth of Puerto Rico is officially in default. Last week, the territory of the United States paid only US$628,000 toward a colossal $58 million bill for creditors of their Public Finance Corporation. With over $70 billion in outstanding debt, Puerto Rico faces an important fiscal hurdle in the coming months.
One leading contributor to the commonwealth’s financial and economic struggles is its Electric Power Authority. The Puerto Rico Electric Power Authority (PREPA) is the government-owned company that provides electricity to the commonwealth’s citizens. Expensive fuel, mismanagement, and a bloated budget have contributed to the staggering $9 billion debt the public corporation currently owes.
Approximately four-fifths of Puerto Rico’s power comes from petroleum — a higher-cost fuel than coal or natural gas — which is drastically different from the mainland’s 1 percent. Puerto Rico neither produces nor refines the fuel they use, so commonwealth officials must import fuel sources to provide electricity for residents.
This dependence has led to a significant problem regarding transportation. The Merchant Marine Act of 1920, better known as the Jones Act, requires that any goods transported between two domestic ports be carried by an US-built, US-flagged, and at least three-fourths US-crewed vessel. This leaves the transportation of valuable resources to just a handful of vessels with a limited number of available ports.
Further complications arise from PREPA’s outdated infrastructure. Most of the PREPA power plants are concentrated in the southern portion of the main island with a median age of 44 years. The power grid is not modernized, and it inadequately processes the petroleum fuel. The result is frequent episodes of power shortages across the commonwealth.
Furthermore, PREPA suffers weaknesses in management, partially stemming from the cyclical change in leadership following elections. Throughout its history, PREPA facilities have failed to meet regulatory requirements. In 1993, they violated EPA air, water, and storage-tank regulations. In 1997, following failure to address the problems mentioned four years earlier, PREPA was fined $1.5 million in civil penalties and forced to undergo additional environmental projects costing $4.5 million.
Then in 1999, a valve in the Palo Seco facility failed, leading to the leakage of 10,000 gallons of sulfuric acid. The facility attempted to concentrate and neutralize the acid; however, the plan failed, leading to over 270,000 gallons of sulfuric acid being leaked into the nearby wetlands. The federal government placed PREPA on two-year probation for the incident.
Mismanagement occurs in not only facility operations, but also in finance. Complicated billing and high costs have led a large portion of the population to avoid payments. In the September monthly report for 2014, PREPA had written off over 29 percent of their general accounts receivables to allow for uncollectable accounts. This is overwhelmingly higher than that of their private mainland counterparts.
A combination of poor fuel choices, weak infrastructure, and incompetent management has driven up PREPA’s budget to cost Puerto Rico 18 percent of its General Fund. Then the utility consistently finishes the year over budget, by almost $200 million over estimates in 2012.
PREPA has accumulated approximately $9 billion in debt and now is struggling to avoid defaulting. The energy cost to consumers is also almost twice that of the mainland. When comparing the cost to that of the median income of the islands and the mainland, the difference becomes more substantial.
With over $10 billion in assets, the commonwealth’s energy industry should be returned to the private sector. Competition and private investments would lead to greater innovation in alternative energies, modernization of the power grid, and better management of finances. It would also free up resources for the Puerto Rican government to address other daunting fiscal matters in their current situation.
Simply, it’s time to end PREPA.