[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
MANAGEMENT CRISIS AT THE PUERTO RICO ELECTRIC POWER AUTHORITY AND
IMPLICATIONS FOR RECOVERY
=======================================================================
OVERSIGHT HEARING
BEFORE THE
COMMITTEE ON NATURAL RESOURCES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
Wednesday, July 25, 2018
__________
Serial No. 115-51
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Printed for the use of the Committee on Natural Resources
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COMMITTEE ON NATURAL RESOURCES
ROB BISHOP, UT, Chairman
RAUL M. GRIJALVA, AZ, Ranking Democratic Member
Don Young, AK Grace F. Napolitano, CA
Chairman Emeritus Madeleine Z. Bordallo, GU
Louie Gohmert, TX Jim Costa, CA
Vice Chairman Gregorio Kilili Camacho Sablan,
Doug Lamborn, CO CNMI
Robert J. Wittman, VA Niki Tsongas, MA
Tom McClintock, CA Jared Huffman, CA
Stevan Pearce, NM Vice Ranking Member
Glenn Thompson, PA Alan S. Lowenthal, CA
Paul A. Gosar, AZ Donald S. Beyer, Jr., VA
Raul R. Labrador, ID Ruben Gallego, AZ
Scott R. Tipton, CO Colleen Hanabusa, HI
Doug LaMalfa, CA Nanette Diaz Barragan, CA
Jeff Denham, CA Darren Soto, FL
Paul Cook, CA A. Donald McEachin, VA
Bruce Westerman, AR Anthony G. Brown, MD
Garret Graves, LA Wm. Lacy Clay, MO
Jody B. Hice, GA Jimmy Gomez, CA
Aumua Amata Coleman Radewagen, AS Nydia M. Velazquez, NY
Daniel Webster, FL
Jack Bergman, MI
Liz Cheney, WY
Mike Johnson, LA
Jenniffer Gonzalez-Colon, PR
Greg Gianforte, MT
John R. Curtis, UT
Cody Stewart, Chief of Staff
Lisa Pittman, Chief Counsel
David Watkins, Democratic Staff Director
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CONTENTS
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Page
Hearing held on Wednesday, July 25, 2018......................... 1
Statement of Members:
Bishop, Hon. Rob, a Representative in Congress from the State
of Utah.................................................... 5
Prepared statement of.................................... 6
Gonzalez-Colon, Hon. Jenniffer, a Delegate in Congress from
the Territory of Puerto Rico............................... 9
Grijalva, Hon. Raul M., a Representative in Congress from the
State of Arizona, prepared statement of.................... 6
Soto, Hon. Darren, a Representative in Congress from the
State of Florida........................................... 9
Velazquez, Hon. Nydia M., a Representative in Congress from
the State of New York...................................... 8
Statement of Witnesses:
Bhatia, Eduardo, Minority Leader, Senate of Puerto Rico, San
Juan, Puerto Rico.......................................... 24
Prepared statement of.................................... 26
Questions submitted for the record....................... 30
Emmons, Thomas, Partner, Pegasus Capital Advisors, New York,
New York................................................... 45
Prepared statement of.................................... 47
Questions submitted for the record....................... 48
Spiotto, James, Managing Director, Chapman Strategic Advisors
LLC, Chicago, Illinois..................................... 30
Prepared statement of.................................... 32
Questions submitted for the record....................... 39
Svanda, David, Principal, Svanda Consulting, Clarksville,
Maryland................................................... 17
Prepared statement of.................................... 18
Walker, Hon. Bruce, Assistant Secretary, Office of
Electricity, Department of Energy, Washington, DC.......... 11
Prepared statement of.................................... 13
Questions submitted for the record....................... 15
Additional Materials Submitted for the Record:
List of documents submitted for the record retained in the
Committee's official files................................. 80
Nevares, Ricardo Rossello, Governor of Puerto Rico, prepared
statement.................................................. 1
OVERSIGHT HEARING ON MANAGEMENT CRISIS AT THE PUERTO RICO ELECTRIC
POWER AUTHORITY AND IMPLICATIONS FOR RECOVERY
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Wednesday, July 25, 2018
U.S. House of Representatives
Committee on Natural Resources
Washington, DC
----------
The Committee met, pursuant to notice, at 2:41 p.m., in
room 1324, Longworth House Office Building, Hon. Rob Bishop
[Chairman of the Committee] presiding.
Present: Representatives Bishop, Young, Gohmert, Lamborn,
McClintock, Thompson, Labrador, Tipton, LaMalfa, Denham,
Westerman, Graves, Radewagen, Gonzalez-Colon; Grijalva,
Napolitano, Bordallo, Sablan, Tsongas, Lowenthal, Beyer,
Gallego, Barragan, Soto, Clay, and Velazquez.
The Chairman. We welcome you all here today to our Natural
Resources Committee hearing. We call this to order.
The Committee today is meeting on what is titled,
``Management Crisis at the Puerto Rico Electric Power Authority
and Implications for Recovery.'' I want to emphasize our goal
is that last phrase, the implications for recovery.
I ask unanimous consent that Mr. DeSantis, Mr. Gutierrez,
and Mr. Serrano, if and when they show, be allowed to sit with
the Committee and participate in the hearing.
Without objection, that will be so ordered.
Under Committee Rule 4(f), any oral opening statements in
the hearing are limited to the Chairman, the Ranking Minority
Member, and the Vice Chairman. This will allow us to hear from
our witnesses sooner and help Members keep to their schedules.
I ask unanimous consent that any other Members' opening
statements be made part of the hearing record if they submit
them to the Committee Clerk by 5:00 p.m. today.
Once again, without objection, so ordered. Or without
pausing, so ordered.
I would also like to submit for the record the statement
from the Governor of Puerto Rico, who sent it last night and is
unable to attend today's hearing.
Without objection, so ordered.
[The information follows:]
Prepared Statement of the Hon. Ricardo Rossello Nevares, Governor of
Puerto Rico
Governor Ricardo Rossello Nevares of Puerto Rico submits this
written statement for the record in connection with the U.S. House of
Representatives Committee on Natural Resources oversight hearing
entitled Management Crisis at the Puerto Rico Electric Power Authority
and Implications for Recovery, scheduled for July 25, 2018. This
statement covers (1) Puerto Rico's vision and the ongoing
transformation process of the island's energy sector, (2) certain
recent events that have stabilized the management of the Puerto Rico
Electric Power Authority (``PREPA''), and (3) the proper role of the
Federal Government in facilitating the transformation and future of
PREPA and the Puerto Rico energy sector.
As the Committee is well aware, I took office during an
unprecedented fiscal and economic crisis that jeopardized the very
future of Puerto Rico. The first 18 months of my Administration brought
both expected and unexpected challenges, including two catastrophic
hurricanes that left the island without power, water or communication.
Puerto Rico's efforts to recover from the hurricanes and address our
financial issues have been, at times, complicated by the many layers of
bureaucracy that come with an oversight board and emergency management
personnel.
Despite these challenges, my Administration has worked diligently
to address the myriad issues facing Puerto Rico. The results of those
efforts are evident. For example, recent figures show an increase in
the level of employment and a reduction in the level of unemployment
for June 2018 when compared with May 2018, recent sales tax revenues
appear to exceed pre-hurricane levels and the Federal Government,
through FEMA recently signed the agreement to grant Puerto Rico access
to Community Disaster Loans.
With regard to the electric sector, we have moved aggressively to
be in a position to attract private investment for the island,
modernize the island's energy grid and create a system that is more
resilient and reliable. Through the transformation process, Puerto Rico
has the opportunity to leapfrog into energy 2.0 and to create an energy
grid that can serve as a model for the world.
I was encouraged by the recognition of our efforts in my recent
meeting with U.S. Treasury Secretary Mnuchin last week. In that
meeting, we discussed the reconstruction of Puerto Rico and the
transformation of the island's energy sector. Secretary Mnuchin
expressed his view that PREPA has a very good short-term and long-term
strategy to really transform the energy grid and that with the
necessary adjustments and injection of Federal funds, Puerto Rico can
become a success story.
puerto rico's vision for the future of the energy sector
On January 23, 2018, I announced a historic new vision for the
transformation of PREPA and the island's energy sector. The envisioned
transformation will achieve private participation in the electric
sector in Puerto Rico and assure that the electric system is modern,
reliable, resilient, sustainable and affordable to residential,
commercial and industrial consumers. The transformed electric sector
will serve as a major catalyst to sustained and long-term economic
growth and job creation. Our ``base case'' model for the contemplated
transformation transaction involves (1) private ownership and/or
operation of generation assets with a focus on a diversified fuel mix,
including clean energy sources and (2) private operation of the
transmission and distribution (``T&D'') system through a concession or
similar model, that leaves the ownership of the T&D assets in public
hands while the operation, maintenance and long-term capital
improvement plan transitions to a private operator. Since that
announcement, my Administration, in collaboration with the Financial
Oversight and Management Board for Puerto Rico (the ``Oversight
Board''), has significantly advanced the transformation process, in
compliance with the New Fiscal Plan for PREPA certified by the
Oversight Board on April 19, 2018, as it is being implemented by the
Government of Puerto Rico.
ongoing process to achieve energy sector transformation
The transformation of the island's energy sector is a complex
process that involves developing new legislative and regulatory
structures, integrated resource planning, updating the public private
partnerships framework for the transaction, coordinating and complying
with Federal disaster funding requirements, addressing legacy
obligations and resolving ongoing bankruptcy proceedings at both PREPA
and the Government of Puerto Rico. My Administration has developed and
is implementing a plan to achieve the transformation of the energy
sector taking into account all of those important and interrelated
factors. In that respect, I believe that we have made substantial
progress toward our goals and are optimistic about reaching our final
objectives.
On June 20, 2018, I signed into law the Puerto Rico Electric System
Transformation Act (the ``Transformation Act''), which was a necessary
legislative step toward the transformation of the energy sector. The
Transformation Act contemplates the solicitation of private interest in
the electric sector through the process set forth in the Puerto Rico
Public Private Partnership Act (the ``P3 Act'') and under the direction
of the Puerto Rico Public-Private Partnerships Authority. The P3 Act is
a model public private partnership statute that provided the framework
for the recent and successful development of public private
partnerships of the Luis Munoz Marin International Airport and certain
toll roads in Puerto Rico. The P3 Act provides a fair, transparent and
verifiable framework for all relevant stakeholders. It also provides
Puerto Rico with a powerful and proven tool--recognized by
international and U.S. market participants--to implement the
contemplated transformation transactions.
In addition to the passage of the Transformation Act, we recently
completed our contemplated market-sounding phase, which is a component
of the certified PREPA Fiscal Plan. The market-sounding phase solicited
preliminary information from potential market participants on the
contemplated base case, alternative structures and potential roadblocks
to achieving the transformation of our energy sector. The feedback
received from the market revealed substantial interest in participating
in the transformation of the energy sector in Puerto Rico, as
contemplated by our base case. The market-sounding phase also provided
us data and information on how to improve the transformation process in
order to achieve the best results for Puerto Rico. My Administration is
working with the Oversight Board to incorporate the feedback into our
transformation process going forward.
My Administration is also moving forward with development of the
necessary regulatory framework to: (1) support and enhance the new
vision for the island's energy sector, specifically the desired power
sector transformation, (2) provide investor confidence, and (3)
implement stable and accepted modes of regulation. Independent and
stable regulation of the electric sector is essential to the
transformation and modernization of Puerto Rico's energy sector, just
as it is on the mainland. The Transformation Act contemplates
development of that framework by early December through a process
designed to bring together the best thinking from market leaders deeply
knowledgeable in the energy regulatory space. In connection therewith,
I recently announced the Blue-Ribbon Task Force. In addition,
consultants to both my Administration and the Oversight Board are
working to address anticipated regulatory issues recognizing that our
regulatory transformation must maintain strong independent regulation
while providing assurance that Puerto Rico's regulatory structure is
consistent with broadly accepted and proven frameworks in other
jurisdictions that support the desired changes in the island's energy
sector.
Other activities necessary to facilitate the transformation are
ongoing. Those activities include the updating of a 2015 integrated
resource plan, as required by local law and standard industry practice,
to develop an updated integrated resource plan for Puerto Rico, based
on the island's new and adjusted realities resulting after the passage
of hurricane Maria. In addition, those activities include, without
limitation: (1) legal and financial preparation for the anticipated
transaction(s); (2) coordination of and compliance with Federal funding
requirements related to or impacted by transformation process; (3)
functionalization and analysis of separation of common electric
systems; (4) analysis and development of contract and transformation
structures; and (5) claims analysis and title III planning.
Another critical issue in the transformation is the resolution of
the legacy claims against PREPA. Congress designed PROMESA to give the
Government the resources and tools necessary to address its fiscal
crisis. Congress made clear that the purpose of PROMESA was to benefit
the lives of 3.5 million American citizens living in Puerto Rico by
resolving Puerto Rico's fiscal crisis and returning Puerto Rico to
economic growth. The legacy obligations against PREPA must be resolved
consistent with the intent of the statute.
prepa management and operations
Regarding PREPA management, on July 23, 2018, electrical engineer
Jose F. Ortiz began his tenure as the new Executive Director and Chief
Executive Officer of PREPA. Mr. Ortiz' credentials are unassailable and
I believe his leadership will ensure significant improvements in PREPA
operations leading into the transformation of the utility and the
sector. Mr. Ortiz is a dynamic, results-oriented executive with a
history of driving organizational cultural change. He has held critical
leadership roles within the Government of Puerto Rico under
administrations of both major political parties on the island. In my
view, he has demonstrated the capacity to put politics aside, exercise
independent judgment and put the people of Puerto Rico first. I believe
Mr. Ortiz is the right leader for PREPA at this critical time.
Mr. Eli Diaz Atienza and Mr. Ralph A. Kreil Rivera also recently
joined the PREPA Board. Mr. Diaz Atienza is the Executive Director of
the Puerto Rico Aqueduct and Sewer Authority (``PRASA'') and worked
successfully with the Federal Government on numerous projects during
his tenure with PRASA. Mr. Rivera is a professional engineer with over
30 years of experience in that field in Puerto Rico and the Caribbean
Region. Consistent with applicable legal requirements, I am also
working on an expedited process to identify and name new independent
directors. In addition, Todd Filsinger and the Filsinger Energy
Partners team continue to provide PREPA with day-to-day operational
support and support related to the transformation process.
Given that Mr. Ortiz and the new PREPA Board members have just
taken office, and the Committee hearing was announced with such short
notice, unfortunately they were unable to participate in today's
hearing. However, they will be available to engage in a productive
conversation with the Committee as soon as next week or anytime
thereafter that the Committee deems appropriate.
I understand that the recent management changes at PREPA raised
certain concerns but I assure you that those changes are not indicative
of political interference with the management or operation of PREPA.
PREPA is free to operate as its Board of Directors and executive
management determine, within its public statutory mandate. It is
important to recognize, however, that PREPA is a public corporation
that is accountable to the people of Puerto Rico. Puerto Rico's
citizens were vocal in their view that the proposed salary for PREPA's
executive director, combined with certain public comments and
expressions, were not acceptable to the people of the island. As the
duly elected representative of those citizens, it was my view that the
PREPA Governing Board should have reduced the salary and responded to
the economic concerns raised by our citizenry. Notwithstanding, our
progress toward the transformation of the energy sector has continued
unhindered despite recent developments and nothing will stop it.
role of the federal government in transformation
The Federal Government is a critical partner for Puerto Rico moving
forward. Securing CDBG-DR-2018 funding for electric system improvement
matching purposes will be key to transforming and reconstructing the
electric grid system in Puerto Rico at a cost that its citizens and its
economy can bear. We are working with the U.S. Department of Housing
and Urban Development and the Puerto Rico Housing Secretary to assure
access to and qualification for such funds so that the necessary
projects to construct a more resilient and hardened electric grid can
be achieved as soon as possible. In addition, we welcome any technical
support from the U.S. Department of Energy and other Federal agencies
of relevance in the energy sector transformation process. However,
additional legislation vastly expanding the role of the Federal
Government in this process is simply not warranted.
As described above, my Administration is working closely with the
Oversight Board in advancing the transformation process. Under the
leadership of the P3 Authority, we have made substantial progress
toward the transformation consistent with the schedule set forth in the
certified New Fiscal Plan for PREPA. Further, the Government of Puerto
Rico is providing periodic reports to the U.S. Treasury and FEMA to
ensure the visibility and transparency that helps further the overall
transformation objectives, together with the mentioned Federal
Government support. The recent management changes at PREPA have not
disrupted that progress. Our intent is to identify the right partners
for Puerto Rico within 12-18 months--an aggressive target given the
complexities of the anticipated transactions. Our collective focus must
be to support efforts that help complete the progress and avoid
measures or processes that may interrupt that progress or impose new or
additional levels of control or oversight that would simply delay or
further complicate the transformation process.
In addition, the transformation of the energy sector in Puerto Rico
is linked to the restructuring of Puerto Rico and its future economic
growth. Any new or additional Federal intervention at PREPA could
jeopardize or impair the ongoing restructuring of Puerto Rico and all
of its agencies and instrumentalities. While I wish to emphasize that
we appreciate the support from the Federal Government, the
``federalization'' of PREPA would be a mistake and Federal control of
the transformation process is unnecessary and inappropriate.
conclusion
It is my belief that critical policy choices that will impact the
future of Puerto Rico for many generations should rightly be the
decisions of the Government of Puerto Rico and residents rather than
any other stakeholder, Federal or otherwise, who may unfairly influence
the process. State governments are closest to the people and thus
significantly better equipped to address the issues and challenges at
the local level. I know the leadership of this Committee shares that
political value. Therefore, I respectfully submit that we continue
working together, collaborating and securing the necessary Federal and
Congressional support to ensure timely and effective reconstruction and
transformation objectives for our energy sector on the island.
______
The Chairman. Let me now recognize myself here for up to 5
minutes, if I could.
STATEMENT OF THE HON. ROB BISHOP, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF UTAH
The Chairman. I appreciate all of you who are here. In the
year 1941, the Cubs--my Cubbies--went 70 and 84, and for the
33rd consecutive year failed to get in the World Series. Joe
DiMaggio also set a record of 56 consecutive games in hitting,
and PREPA too was established to try to come up with affordable
electrical energy for the citizens of Puerto Rico.
Fast forward to today--the Cubs do have a World Series
trophy now; DiMaggio still has his hits; and PREPA,
unfortunately, is now something that is considered to be
bankrupt and mismanaged and politically dominated, and has all
sorts of problems that desperately need to be solved for the
sake of the citizens of Puerto Rico, the American citizens who
live down there.
We are now in another hurricane season. We are in the midst
of another political controversy with PREPA. We have now had
three CEOs in a matter of weeks, and when simple questions like
who is actually in charge of the grid cannot be answered, that
is something that needs to change, definitely.
Today, my hope, in this particular hearing, is identifying
the need of change, the problems that we have with the status
quo. We recognize the status quo is not working. But more than
that, I also hope our witnesses can lead us beyond that point
to come up with specific sets of steps that need to be taken to
solve this problem and to make sure that we are very effective.
I don't know if the Committee staff has the one print, the
one from the Governor we can put up on the board.
[Slide.]
The Chairman. Those objectives are what the Governor says
are his objectives for PREPA. I don't think there is anyone in
this room that disagrees with those objectives. The question is
not whether those objectives are appropriate or not; the
question is how do we get there from here. How do you get from
A to B?
And, I am sorry, right now you can't get from A to B. And
that is one of the things I hope this hearing comes to, in some
way.
So, contrary to what I have heard as the goals I have for
this particular hearing, we are not talking about federalizing
anything. I am not talking about selling assets to the highest
bidder. We are not talking about making Puerto Rico a fossil
fuel island. To the contrary, this is about the health, safety,
and the future of the millions of Americans who live in Puerto
Rico, and our obligation we have to these citizens to secure
their needs and a path to a better future by making sure that
electrical generation is effective and is efficient and is
getting to where it is needed.
So, twofold hope: identifying the status quo problems; more
importantly, identifying some steps that can help solve those
particular problems.
[The prepared statement of Mr. Bishop follows:]
Prepared Statement of the Hon. Rob Bishop, Chairman, Committee on
Natural Resources
Today, the Committee is meeting to discuss the ``Management Crisis
at the Puerto Rico Electric Power Authority and Implications for
Recovery.'' This is the fourth hearing this Committee has held on
Puerto Rico this Congress, and it will likely not be the last.
Now, I'd like to begin by providing a bit of a history lesson. The
year is 1941--the Cubs would go 70 and 84, finishing sixth in the
National League and marking the 33rd of a 108 year World Championship
drought. Joe DiMaggio has set a record for the most consecutive games
with a hit at 56, and, yes, the Puerto Rico Electric Power Authority
was founded with a goal of electrifying Puerto Rico in its entirety.
Fast forward to today, and the Cubs won the World Series in 2016,
DiMaggio's record still stands, and while PREPA ``substantially
completed'' its goal in 1981, it is now a bankrupt, mismanaged, and
politically dominated puppet. Although we have had a number of
conversations about the future of PREPA in this hearing room for the
past 2\1/2\ years, it is now clear many of the promises made were mere
platitudes to a future PREPA that cannot be realized by the island's
government.
I know many of my colleagues saw firsthand the devastating
consequences of last year's hurricane season, which led to the loss of
so many of our fellow Americans--many of whom would still be alive had
they had access to the reliable electric service we expect and demand
within our own states. Unfortunately, since the passage of those
hurricanes, we have not seen a revitalized PREPA--rather, all we have
seen on the island is greater infighting about the outstanding debt and
pension liabilities, a dramatic increase in politicization of the
utility, and repeated attacks on the fledging Puerto Rico Energy
Commission.
We are now in the midst of yet another hurricane season, and PREPA,
itself, is in the midst of yet another political controversy, as it
sees the appointment of its third CEO in as many weeks. When simple
questions such as ``Who is in charge of the grid?'' cannot be answered,
something needs to change.
Identifying that change is the purpose of today's hearing--indeed,
I hope we can begin to discuss possible legislative solutions that will
facilitate the transformation and reformation of PREPA into a
resilient, independent utility that will provide Puerto Ricans with
reliable and affordable energy.
This hearing is not about the complete federalization of PREPA, the
selling of assets to the highest bidder, nor the solidifying of Puerto
Rico as a fossil fuel island.
And I believe there are bipartisan solutions that will lead to a
de-politicized PREPA, a consensual and fair resolution to outstanding
pension obligations and the legacy debt, the creation of a strong and
independent regulator, and yes, eventual privatization for the utility.
Under the Property Clause of the Constitution, we in Congress have
the power to ``dispose of and make all needful Rules and Regulations''
for the territories; and with such power we have a duty to ensure our
fellow American citizens have the opportunity to thrive and fulfill the
American dream within the territories.
______
The Chairman. With that, I would like to yield back and
recognize the Ranking Member, or--well, if you want to yield,
you can do what you want to do.
Mr. Grijalva. Thank you. Thank you for your indulgence, Mr.
Chairman. I would like to yield a period of time to my esteemed
colleague, Nydia Velazquez from New York, for the opening
comment, and also, in turn, to my colleague from Florida, Mr.
Soto.
[The prepared statement of Mr. Grijalva follows:]
Prepared Statement of the Hon. Raul M. Grijalva, Ranking Member,
Committee on Natural Resources
We are here today to discuss the future of the PREPA--the embattled
Puerto Rico Electric Power Authority. I want to begin by welcoming our
witnesses. I look forward to hearing your thoughts on how best to
rebuild PREPA for the benefit of the people of Puerto Rico.
The question for today is: what is the best way to guarantee that
PREPA will be rebuilt so that it can withstand future extreme weather
and provide the people of Puerto Rico with reliable and inexpensive
power. After what they have been through this past year--they deserve
nothing less.
For the entirety of if its existence, PREPA has struggled with poor
management, graft and corruption, lack of maintenance and upkeep, and
mounting debt. Then hurricanes Irma and Maria brought the utility to
its knees last year with the largest blackout in the history of our
country.
The blackout has been far more than just an inconvenience. This
past May, Harvard's School of Public health published a study on the
number of deaths caused by Hurricane Maria in Puerto Rico. The study
found that approximately 4,645 residents are estimated to have died as
a result of the storm. Most regrettably, the study also found that
roughly 10 percent of the deaths were said to be caused by the need for
breathing equipment requiring electricity.
Recently, we have seen PREPA's leadership in turmoil following the
decision by current executive director Walter Higgins to step down
after 4 months on the job. His replacement, PREPA board member Rafael
Diaz-Granados subsequently resigned, along with four other members of
the seven-member board after the Governor criticized a $750,000 annual
salary for Diaz-Granados. Last Wednesday, the Governor named Jose
Ortiz, a former PREPA board chairman as the new CEO.
In the wake of this dysfunction, the Majority has raised the idea
of introducing legislation to ``de-politicize'' PREPA and develop a
``credible plan'' for the utility's transformation.
We look forward to the opportunity to review such proposals from
the Chairman. We are optimistic that there could be a bipartisan path
forward. However, if there continues to be an insistence on
privatization of the utility as well as persistent bashing of PREPA's
union, bipartisanship will likely not be possible.
Nevertheless, we strongly believe and would insist, that any
legislation providing for a direct Federal role in rebuilding PREPA
must include the following:
First, the interest of PREPA's creditors must not be a
primary concern.
Second, renewables must become the primary energy source
in PREPA's future power generation so that the long-term
cost of producing power will be reduced for ratepayers.
Third, any Federal takeover of PREPA must come with
sufficient funding to provide for a modern, efficient and
reliable electric grid and most importantly, must have
local support and buy-in.
And fourth, PREPA must be overseen by a strong, fully
independent regulator.
That said, I want to emphasize that it is not just the problems
surrounding PREPA that warrant our attention, but also the suffering
that continues to be faced by all of Puerto Rico--more than 10 months
after the storms. The people of Puerto Rico still need our assistance
and support, even today.
Hurricane Maria ripped apart homes on the island, brought the
economy to a screeching halt, and drastically accelerated an exodus of
young families and jobs from the island.
The island has seen dozens of closed schools, it still faces among
the highest rates of drinking water contamination in the United States,
and it is trying to recover from several years of dramatic cuts to
basic safety net programs.
Puerto Rico's healthcare system was chronically underfunded even
before the hurricane, which has contributed to the epidemic of Zika-
linked illness and mental health problems.
The recovery in Puerto Rico is not proceeding smoothly. Recent
developments--including a report that concludes that the Puerto Rico
electric grid is in even worse shape today than before the storm--make
a strong case for additional congressional action.
Even FEMA, in an after-action report released recently,
acknowledged what we already knew--that it failed to be prepared for
what nature delivered to Puerto Rico last year.
Thousands of Puerto Ricans still do not have a ceiling covering
their homes and hundreds still don't have electricity--10 months after
the storms hit.
So, while reform of PREPA is important, we must not stop there. We
must also do the oversight on the recovery spending that needs to be
done to ensure that the basic needs of American citizens on Puerto Rico
have been met.
I look forward to hearing from our witnesses.
______
STATEMENT OF THE HON. NYDIA M. VELAZQUEZ, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF NEW YORK
Ms. Velazquez. Thank you, Ranking Member Grijalva, for this
opportunity, and I want to thank you, Chairman Bishop, for
convening this hearing.
Make no mistake, I will not sit here and try to sugarcoat
the failures we have seen at PREPA. Everyone in this room knows
about Whitefish, about the resignation of PREPA's entire board,
and what has become a constantly rotating CEO job. And most of
all, we know that PREPA has one of the highest costs per
kilowatt hour in the United States without quality of service
to match.
However, these undeniable mistakes and overwhelming
challenges do not mean that the Federal Government should take
over PREPA. And I am extremely glad to hear that that is not
the intention. Today, on the 120th anniversary of the U.S.
invasion of Puerto Rico, we cannot start down yet another path
of misguided and ill-defined control.
To be sure, Puerto Rico needs our help, but it does not
need another layer of bureaucracy. To this point, I would like
to stress five principles that I believe are essential for a
strong foundation as this conversation continues.
First, any proposal must have local buy-in. The lack of
true community engagement will jeopardize any and all efforts.
Second, it is imperative that Congress provide financial
resources and technical assistance to design and build a
modern, efficient, and reliable electric grid.
Third, there must be a strong, fully independent regulator
that protects consumers from fraudulent practices and
irresponsible decisions. We have repeatedly heard how PREPA
embedded into its operational structure schemes to benefit
certain stakeholders at ratepayers' expense. That must end, and
we need full transparency, going forward.
Fourth, as Puerto Rico's distribution and generation
systems operated, the use of renewable energy must be
maximized. It will be nothing short of tragic if, as Puerto
Rico rebuilds, we continue the island's dependence on fossil
fuels that must be transported across, as President Trump said,
big water by ship and barge, rather than make use of the very
resources available on the island.
The last principle I will identify is this: under
absolutely no circumstances should this Committee cut a deal
for PREPA predators. Many of us in this room, including
Chairman Bishop, supported PROMESA, which laid out a
comprehensive process for debt restructuring. This process is
now well underway, and is close to achieving its goal. It makes
no sense to undo what is already working, just to bail out
PREPA predators.
That is what the courts are for, not the halls of Congress.
On that note, I look forward to hearing from you all today,
and I want to thank the Chairman and the Ranking Member again,
and I yield back to Mr. Grijalva.
Mr. Grijalva. I yield the remaining time to Mr. Soto. Thank
you.
STATEMENT OF THE HON. DARREN SOTO, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF FLORIDA
Mr. Soto. Thank you, Mr. Chairman and Ranking Member. We
know PREPA has fallen behind over the last couple of years,
over decades, really. An investment on the grid in reliability
and vulnerability is now the case for the entire grid. But
Hurricane Maria then was a big wake-up call. It led to the
longest blackout in U.S. history since we have had power among
any Americans.
I want to outline three goals that I think are important as
we go forward. First is resiliency, followed by renewables, and
reform.
Resiliency in making sure that we have the funding, the
investment, and the structure to invest in hardening the grid.
Second, renewables. Puerto Rico can be an experimental
workshop for solar and wind and also biofuels to help
generation on the island and help the economy.
And last, reform. To make the system look more like most
states with municipal-owned utilities, investor-owned
utilities, and rural co-ops, ensuring greater competition and
rates that are low, and investment for the long term, while
still safeguarding critical labor agreements and pensions, and
also having new providers take on a portion of the debt.
And I know that all three parties in Puerto Rico are
working together to try to push these reforms forward. Whatever
we do here today, we should make sure is in concert with those
efforts to make sure that we have a long-term, sustainable
system.
With that, I yield back.
Mr. Grijalva. Thank you, Mr. Chairman.
The Chairman. Thank you. I would be remiss at this stage
not to allow the remainder of my time to go to Miss Colon--
Representative Gonzalez--sorry, I am getting mixed up here. I
had about 2\1/2\ minutes, if you would like to take that time.
STATEMENT OF THE HON. JENNIFFER GONZALEZ-COLON, A DELEGATE IN
CONGRESS FROM THE TERRITORY OF PUERTO RICO
Miss Gonzalez-Colon. I want to begin by thanking you,
Chairman Bishop and Ranking Member Grijalva, for having this
vitally important hearing regarding PREPA. This is not the
first time the Committee is having hearings about the power
grid on the island. But this time we need to try to solve and
prepare the resources for the island.
We already allocated more than $2 billion during the last
budget after the hurricane, but we need to provide also not
just the resources, but the technology, and the assistance in
order to provide transparency to the process that has been
taken in PREPA.
With that, I want to thank you again for your steadfast
leadership and commitment to the island recovery before,
during, and after the impact of Hurricane Maria.
Today's hearing presents a great opportunity to look
forward to the future and avoid the mistakes of the past. Today
is an opportunity to look at and ensure a solid energy future
for the people of Puerto Rico. And the need to reconsider
PREPA's future has been known for the last year, because of the
devastation of Hurricanes Irma and Maria.
All sides in Puerto Rico have agreed that an obsolete and
expensive energy system is the obstacle to economic progress on
the island. And the debate has been on how to fix it. That has
not been changed. And I think we all agree that privatization
is the only option to the future for the energy grid on the
island.
The 2017 disaster just unveiled the precarious state of our
energy grid, and all communities with the lack of power for
many months, through the lack of maintenance, are a testimony
of that. Instead, we need to focus on rebuilding a more
resilient energy grid in Puerto Rico, not just a matter of
reconstruction or patching up, but a matter of building toward
the future.
On January 22 of this year, the governor of Puerto Rico
announced the transformation of our energy system by the
creation of the public-private partnership. This is the first
time ever that Puerto Rico was actually allowed to build a
public-private partnership by law to provide a rigorous process
of transparency and flexibility to frame negotiations that
result in a financially viable electricity system with a focus
on consumer welfare and a privatization process. We need to see
that that actually happens at the end of the year.
So, this is the critical point in any process of that
transformation: transparency in the processes, and being able
to offer certainty to the investors and businesses as to what
will be the policies and the costs that they can make plans
accordingly to build Puerto Rico.
In that, I will say that we need the efforts to include
resiliency, fuel source diversification, including renewables,
and both public and private investment. I look forward to
hearing our speakers today.
Thank you, Chairman.
The Chairman. Thank you. All right. We will now introduce
our witnesses. And you are all going to have to help me with
your names.
First, Bruce Walker--actually, you don't have to help me
with that one.
[Laughter.]
The Chairman. I got through that one OK. He is the
Assistant Secretary, Office of Electricity in the Department of
Energy, here in Washington, DC.
David Svanda--Svanda?
Mr. Svanda. Svanda.
The Chairman. Svanda, who is the Principal from Svanda
Consulting, here in Clarksville, Maryland.
Eduardo Bhatia--close?
Mr. Bhatia. Close.
The Chairman. OK. Sorry. If it was German, I would have got
it.
He is a Minority Leader in the Senate of the Territory of
Puerto Rico, from San Juan.
Thank you for being with us.
Mr. Bhatia. Thank you.
The Chairman. James Spiotto?
Mr. Spiotto. Yes.
The Chairman. I got it?
Mr. Spiotto. Yes.
The Chairman. He is the Managing Director of Chapman
Strategic Advisors from Chicago, Illinois.
And Thomas Emmons, who is Partner in Pegasus Capital
Advisors in New York City.
Let me remind the witnesses that, under our Committee
Rules, this is oral testimony that is limited to 5 minutes
each. And I will be pretty Draconian on the gavel when it comes
to that.
Just so you know, the microphones in front of you are not
automatic. If you have not been here before, and I think all of
you have, the green light means that you have plenty of time
going. The yellow light means you have 1 minute left. And the
red light is when the time has expired.
However, your entire written testimony is part of the
record, and you don't need to add anything to that. That is
already there. This is just in addition to that.
With that, we will go from left to right here. We will
start with Mr. Walker. You are recognized for 5 minutes to
testify.
STATEMENT OF THE HON. BRUCE WALKER, ASSISTANT SECRETARY, OFFICE
OF ELECTRICITY, DEPARTMENT OF ENERGY, WASHINGTON, DC
Mr. Walker. Thank you. Chairman Bishop, Ranking Member
Grijalva, and distinguished members of the Committee, I
appreciate the opportunity today to discuss Puerto Rico's
electric infrastructure and the future operation of the grid.
I would like to highlight just a small portion of the work
with DOE's involvement in Puerto Rico's recovery.
A strong recovery and revitalization is important to Puerto
Rico, as well as the Nation. Maintaining and enhancing the
affordability and resiliency of the electric grid at fair and
reasonable cost will provide service and value to the region.
Yet, no single investment in energy infrastructure at any
one point in time will achieve resiliency. The energy
infrastructure of Puerto Rico must be designed, built, managed,
and maintained in such a way to withstand likely stresses,
ameliorate disruptions when they inevitably occur, recover
quickly, and incorporate lessons learned into post-event
planning and operations.
The long-term resilience and reliability of Puerto Rico's
electric grid will require capable leadership, strategic
investment, workforce development and training, a strong
culture of safety, and a well-defined regulatory oversight. To
this end, DOE continues to work in partnership with PREPA to
support Puerto Rico's recovery efforts. I will speak to three
key initiatives to help PREPA.
First, strategizing electric energy policy and regulatory
framework. The Southern States Energy Board, in association
with DOE, is working in coordination with the Governor and the
Legislature of Puerto Rico to establish a reliable, affordable,
and sustainable electric energy grid system, and to advise on
policy and regulatory framework for possible privatization
efforts.
SSEB's advisory role is explicitly described in Puerto
Rico's Act 122018, which provides the legal framework for
privatization of PREPA's functions. SSEB will collect data and
perform an analysis of the economic, financial, and insurance
impacts of PREPA's potential privatization to inform the
development of the regulatory framework models.
They will also identify components of PREPA's privatization
economics, including the generation, transmission,
distribution, rate structure, feasibility studies, and
transparency acts to balance the need of the Puerto Rican
Government with the interests of the private investment
community.
Additionally, SSEB will establish a blue-ribbon task force
and solicit input from the task force on the possible
regulatory framework models that provide Puerto Rico with a
transparent and robust regulatory regime.
Second, the DOE report on energy resiliency solution for
the Puerto Rico grid was published just recently. The report
provides recommendations to FEMA and PREPA that reflect
principles of resilience, and are intended to inform
investments in energy infrastructure in Puerto Rico.
Recommendations address near-term actions and potential long-
term actions that will require further analysis to make optimal
investment decisions.
Although some of the additional analysis necessary to
support those resilience principles is underway,
recommendations proposed in our report to improve the
performance of the system include: (1) updating and
establishing effective mutual aid agreements; (2) training and
utilization of the incident command system during emergency
response; (3) undertaking a study to determine and enforce safe
loading requirements of distribution poles carrying both
electric and telecommunication infrastructure; (4) replacement
of temporary electricity transmission towers with potential
steel monopolies; (5) finalization of microgrid installation
regulation; and (6) drafting of an updated energy assurance
plan.
Our third major initiative involves long-term modeling
support. Our efforts, working closely with PREPA, are to
develop a near real-term dynamic model that is used for
operational purposes, as well as planning. This modeling effort
will provide technical insight into the resiliency objectives,
allowing for coordination and communication of potential
solutions across stakeholder groups, and facilitate significant
investment in installation of renewable energy resources.
Several potential DOE recommendations to support grid
modeling require further analysis prior to finalization.
However, this analysis will be conducted in conjunction with
PREPA, and should include the following: regarding (1) power
flow; (2) production cost and expansion; (3) microgrids energy
storage and system segmentation; and (4) cross-sector
infrastructure into dependencies.
In conclusion, DOE is committed to working with FEMA and
other Federal agencies and the Commonwealth of Puerto Rico and
PREPA to incorporate its near- and long-term recommendations
into local infrastructure projects. Over the next several
months, DOE's primary focus will continue to work with our
partners to support and strengthen the power grid and the
critical infrastructure for the island.
Thank you, and I look forward to your questions.
[The prepared statement of Mr. Walker follows:]
Prepared Statement of Assistant Secretary Bruce J. Walker, Office of
Electricity, U.S. Department of Energy
Chairman Bishop, Ranking Member Grijalva, and distinguished members
of the Committee, I appreciate the opportunity today to discuss the
status of Puerto Rico's electric infrastructure and the future
operation of the grid.
The U.S. Department of Energy (DOE) is the lead for providing
energy-related expertise to the Federal Emergency Management Agency
(FEMA), interagency partners, and the Administration as part of DOE's
emergency response activities. DOE serves as the coordinating agency
for Emergency Support Function #12--Energy (ESF-12) under the National
Response Framework and as the Sector-Specific Agency for Energy under
Presidential Policy Directive 21. In addition, DOE is a primary agency
for the Infrastructure Systems Recovery Support Function under the
National Disaster Recovery Framework. As the lead for ESF-12, DOE is
responsible for providing information and analysis about energy
disruptions and for helping to facilitate the restoration of damaged
energy infrastructure.
doe involvement in puerto rico response and restoration
DOE'S Office of Electricity and Office of Cybersecurity, Energy
Security, and Emergency Response have led DOE and ESF-12 response and
restoration efforts for Hurricanes Irma and Maria in Puerto Rico.
Restoration efforts continue and as of July 23, approximately 99.96
percent of customers (1.47 million) are restored, according to the
Puerto Rico Electric Power Authority (PREPA), the island's electric
utility.\1\
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\1\ http://status.pr/.
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Over the course of the 2017 hurricane season, the Department
provided numerous personnel to support response and recovery efforts.
These included bilingual public information personnel to provide life
safety and life sustaining communications, subject matter experts as
part of FEMA's Incident Management Assistance Teams, technical advisors
in electrical distribution, transmission, generation, energy
efficiency, renewable energy, and related topics to advise the United
States Army Corps of Engineers, and personnel to support the National
Response Coordination Center, several Regional Response Coordination
Centers, and state emergency operations centers.
DOE continues to maintain close coordination with FEMA and Puerto
Rico. The Department has deployed responders under the National
Disaster Recovery Framework to support ongoing energy sector recovery
activities.
doe involvement in puerto rico recovery
A strong recovery and revitalization is important to the territory,
as well as the Nation. Maintaining and enhancing the affordability and
resilience of the electric grid, at fair and reasonable costs, will
provide service and value to the region. Yet, no single investment in
energy infrastructure at one point in time will achieve resilience. The
energy infrastructure of Puerto Rico must be designed, built, managed,
and maintained in such a way to withstand likely stresses, ameliorate
disruptions when they inevitably occur, recover quickly, and
incorporate lessons learned into post-event planning and operations.
This is a continual process of improvement, one involving a
reassessment and adaptation of solutions and technologies to address
changing needs.
The long-term resilience and reliability of Puerto Rico's electric
grid will require capable leadership, strategic investments, a strong
culture of safety, and well-defined regulatory oversight. While PREPA
leadership has changed over the last few weeks, and continues to be in
a state of transition, DOE will continue to work in partnership with
them to support Puerto Rico's recovery through several efforts.
Strategizing an Electric Energy Policy and Regulatory Framework
The Southern States Energy Board (SSEB), in association with DOE,
is working in coordination with the Governor and Legislature of Puerto
Rico to establish a reliable, affordable, and sustainable electric
energy grid system, and to advise on a policy and regulatory framework
for possible privatization efforts. SSEB's advisory role is explicitly
described in Puerto Rico Act 12-2018, signed into law by Gov. Rossello
on June 20, 2018, which provides a legal framework for privatization of
PREPA's functions.
SSEB will collect data and perform an analysis of the economic,
financial, and insurance impacts of PREPA's potential privatization to
inform the development of regulatory framework models. They will also
identify components of PREPA's privatization economics, e.g.,
generation, transmission, distribution; priority; rate structure;
feasibility; and transparency aspects to balance the needs of the
Puerto Rico government with interest from the private investment
community. Additionally, SSEB will establish a Blue-Ribbon Task Force
and solicit input from the Task Force on the possible regulatory
framework models that provide Puerto Rico with a transparent and robust
regulatory regime.
DOE Report on Energy Resilience Solutions for the Puerto Rico Grid
DOE has completed its Report on Energy Resilience Options and
Potential Solutions for the Puerto Rico Grid. This report provides
recommendations to FEMA and PREPA that reflect principles of resilience
and are intended to inform investments in energy infrastructure in
Puerto Rico. Recommendations address near-term actions and potential
long-term actions that will require further analysis to make optimal
investment decisions.
The interdependencies across sectors, assessment of potential
alignment, and sequencing of funding across different agency programs
that support various sector infrastructures will require significant
coordination. The report also notes where the results of analysis are
needed to articulate resilience-related, investment-grade suggestions
regarding the design and specification of the electricity system in
Puerto Rico.
Although some of the additional analysis necessary to support those
resilience principles is underway, recommendations proposed in our
report to improve the performance of the system are as follows:
1. The Governor and PREPA should immediately ensure that updated,
effective mutual aid agreements are primed to quickly
provide support during the next event.
2. To align with the objectives of the National Incident Management
System, incident command, control, and coordination should
follow the Incident Command System (ICS). All possible
parties will train in ICS and use it during a response.
3. The Puerto Rico Energy Commission (PREC) should coordinate a
joint study with the Puerto Rico Telecommunications Board
to determine and enforce safe loading requirements of
distribution poles carrying both electric and
telecommunications infrastructure.
4. Electricity transmission towers installed specifically for
temporary emergency restoration should be considered for
replacement, potentially by monopoles--many of the round
monopole structures survived the 2017 storms.
5. The PREC should finalize microgrid regulations, and establish
effective and efficient interconnection requirements and
wheeling regulations with PREPA. These regulations will
allow customers to design their systems to add reliability
and resilience to PREPA's system.
6. The Commonwealth Energy Public Policy Office, in coordination
with other appropriate Commonwealth agencies, should
consider drafting an updated Energy Assurance Plan, which
will provide for an Incident Management Team as well as
other important components. Besides preparing for the next
hurricane season, acting immediately will allow for
leveraging the presence of Federal staff in the Joint Field
Office and the Federal data collection efforts that have
been underway since September. Finally, the SSEB may be
able to facilitate peer-to-peer information sharing and
lessons learned among Puerto Rico's neighboring governments
and utilities.
Near-Term and Long-Term Grid Modeling Support
Another DOE effort is through grid modeling to support the
rebuilding of a more resilient electric power grid system in Puerto
Rico. This endeavor will develop a near real time dynamic model of the
Puerto Rico power system that will be used not only as an operational
tool, but also for planning purposes. This modeling effort will provide
technical insight into the resiliency objectives, allowing for
coordination and communication of potential solutions across
stakeholder groups. As PREPA and the Commonwealth plan financial
investments to strengthen Puerto Rico's power grid and increase
disaster resilience, DOE, FEMA, and the U.S. Department of House and
Urban Development will remain their supportive partners.
Several potential DOE recommendations to support grid modeling
require further analysis prior to finalization. However, the analysis
should be conducted, to the extent practicable, with the support and
engagement of PREPA, and is best suited as follows:
1. Power Flow--assesses power system operations, including generator
dynamics and protective relay coordination [used to
identify power system needs, evaluate technology options,
and help prioritize resilience investments, e.g.,
transmission enhancements]
2. Production Cost and Capacity Expansion--informs economic dispatch
strategies and long-term planning [used to understand how
resource investments, system costs, and load are impacted
by key policy and technology sensitivities]
3. Microgrids, Energy Storage, and System Segmentation--identifies
where clusters of generation and load provide maximum
community benefit [used to identify prepositioning of
emergency generation, local hardening of infrastructure,
and adjustment of emergency procedures]
4. Cross-Sector Infrastructure Interdependencies--characterizes
reciprocal relationships within the energy sector, e.g.,
electricity-petroleum; electricity-liquefied natural gas,
as well as cross-sector infrastructure such as
telecommunications and/or water [used to investigate supply
disruption impacts and identify mitigation approaches]
DOE is committed to working with FEMA, other Federal agencies, the
Commonwealth of Puerto Rico, and PREPA to incorporate its near and
long-term recommendations into local infrastructure projects. The end
goal is a modern and resilient energy system that can serve as the
robust engine for Puerto Rico's economic revitalization.
conclusion
I am proud of the work we are doing to address the long-term
restoration and recovery efforts in Puerto Rico and grateful for the
hard work of DOE's emergency responders during the 2017 hurricane
season. We have made progress, but there is still more to do. Over the
next several months, DOE's primary focus in Puerto Rico will continue
to be working with our partners to support the mission of strengthening
the power grid and critical infrastructure for the island.
Thank you, and I look forward to your questions.
______
Questions Submitted for the Record to Bruce Walker, Assistant
Secretary, Office of Electricity, Department of Energy
Questions Submitted by Rep. Young
Question 1. In seeking to improve the resiliency of the grid in
Puerto Rico, does DOE encourage the use of improved materials (e.g.,
composites) versus traditional wood utility structures? As you know,
P.L. 115-123, Sec. 20210(a)(1)(C) allows, specifically for Puerto Rico,
actions to mitigate vulnerabilities to future extreme weather events
and natural disasters. It is my hope that the Department is encouraging
the use of materials that lessen our vulnerabilities by improving
resiliency versus simply replacing an element that failed with the same
material.
Answer. DOE is focused on ensuring that investments made into the
Puerto Rico Electric Power Authority (PREPA) system add resiliency and
reliability. Accordingly, we continue to investigate opportunities to
improve the use of various designs and materials to identify the best
capabilities available to improve overall system resilience.
There are several recommendations related to utility structures
including discussions and recommendations on the materials used. DOE's
Energy Resilience Solutions for the Puerto Rico Grid report includes
several recommendations relative to utility poles.
In the area of electricity distribution infrastructure, there were
significant failures including many failed wood poles. The DOE team's
assessment of these failures concluded that many of the failures were
likely caused by overloading due to telecommunication system
attachments to these poles. The DOE team was uncertain of the extent to
which the telecommunication industry providers were required to conduct
structural loading assessments of these attachments.
The DOE team also surmised that there was deferred maintenance
associated with testing the integrity of the poles associated with the
distribution infrastructure. DOE recommended that PREPA follow industry
best practices for a comprehensive testing program to identify and
replace wood poles that are in need of replacement. In addition, there
should be careful consideration of cost-effective alternatives to wood
as a material for distribution poles. Specific recommendations for the
electricity distribution infrastructure relative to utility structures
include:
All replaced poles and towers should be of a design and
material to survive 150 mile-per-hour sustained winds. If
funds are available, electricity transmission towers
installed specifically for temporary emergency restoration
after Hurricanes Irma and Maria should be considered for
replacement as soon as practicable, potentially by
monopoles. Many round monopole structures rode through the
storm effectively.
The Puerto Rico Energy Commission should coordinate a
joint study with the Puerto Rico Telecommunications Board
to determine and enforce safe loading requirements of
distribution poles carrying both electric and
telecommunications infrastructure. Federal agencies can
participate as necessary and appropriate.
Consider additional legislation and regulation that may
improve reliability and resilience including, without
limitation: regulations that prescribe design and
installation standards for all transmission and
distribution towers and poles to withstand 150 mile-per-
hour wind speeds, regardless of material.
Questions Submitted by Rep. Westerman
Question 1. Does the Department have any involvement over the
letting of contracts by PREPA to contractors doing restoration or
repair work, including evaluating the contractor's qualifications to
perform the work?
Answer. No, the Department does not have any involvement over the
letting of contracts by the Puerto Rico Electric Power Authority
(PREPA) to contractors doing restoration or repair work. PREPA's
contracting process is governed by Puerto Rican law.
Question 2. Does the Department have any involvement in the
reimbursement of contractors or the distribution of Federal funds to
the government of Puerto Rico?
Answer. No, the Department does not have any involvement in the
reimbursement of contractors during the Federal Emergency Management
Agency's (FEMA's) response for emergency restoration. During the FEMA
recovery phase DOE has supported the Department of Housing and Urban
Development (HUD) with subject matter experts supporting Community
Development Block Grants Disaster Recovery assistance, but no Federal
funding has yet been disbursed through HUD.
Questions Submitted by Rep. Graves
Question 1. Mr. Walker, can you please identify all the components
(including HUD and FEMA) of disaster funds available and/or spent
(including obligated) for the restoration, near and long-term
reconstruction of the Puerto Rico power system? Also, please include
and specifically identify the $6B referenced relative to restoration
during the hearing. A response in the form of columns which show
disaster funds available and spent which identifies where they are
derived and notes any restrictions on use would be helpful.
Answer. No, I cannot identify the total amount of funds allocated
to the Puerto Rico power system. Congress allocated funds to Puerto
Rico, including loss revenue funding, emergency restoration funding,
supplemental funding with a minimum funding amount, recovery funding
from the Federal Emergency Management Agency (FEMA) for emergency
restoration and recovery (which has yet to be determined), and the
Department of Housing and Urban Development (HUD) Community Development
Block Grant Disaster Recovery funding. However, the overall amount for
the Puerto Rico power system is contingent on decisions that have yet
to be made. The Department of Energy (DOE) is ready, willing, and able
to support technical requirements necessary for recovery.
DOE defers to FEMA and HUD for information regarding their funding
of activities associated with Puerto Rico. DOE's Electricity Delivery
and Energy Reliability appropriation received $13.0 million under the
Further Additional Supplemental Appropriations for Disaster Relief
Requirements Act, 2018, which represents DOE's disaster funding
associated with Puerto Rico and the U.S. Virgin Islands. The status for
this DOE funding is shown in the table below.
[GRAPHIC] [TIFF OMITTED] T0886.001
.eps__
The Chairman. Thank you. I appreciate your testimony.
Mr. Svanda, you are next. Five minutes.
STATEMENT OF DAVID SVANDA, PRINCIPAL, SVANDA CONSULTING,
CLARKSVILLE, MARYLAND
Mr. Svanda. Chairman Bishop, Ranking Member Grijalva, and
members of the Committee, I appreciate very much the
opportunity to testify about regulatory aspects of the energy
crisis facing Puerto Rico, and make some suggestions that will
enable a more affordable, efficient, reliable power system for
the U.S. citizens of Puerto Rico.
I have served in various roles in the utility regulatory
profession, including as Chairman of the Board and President of
the National Association of Regulatory Utility Commissioners,
or NARUC, while serving as a Michigan Commissioner.
Like many Americans, I sat in horror as I witnessed the
devastation of Hurricane Maria in Puerto Rico, leaving the
lives of Puerto Ricans in shambles. I recently spent time on
the island, where I saw the destruction that remained 8 months
after the storm. I saw impassible roads, mountains of debris,
and, importantly, electrical lines literally nailed to trees.
That is not a criticism of the hard-working teams trying to
restore electricity; it is, however, evidence that there was no
comprehensive emergency response plan, and that there has been
no strong, independent agency requiring the utility to take
appropriate actions to manage their assets.
There has been widespread concern in Puerto Rico about the
possibility of exchanging the government-owned monopoly for a
private-sector monopoly. What is missing in Puerto Rico,
though, is an effective, well-functioning, independent
regulator. The solution for Puerto Rico is to create, empower,
and embrace such a regulatory agency.
For most utility infrastructure assets, a monopoly actually
makes sense. The capital investment required to provide power
to a large area and many customers is extensive. By having a
monopoly overseen by a strong regulatory commission, redundant
investment can be avoided and the monopoly made to be
responsive to the needs of the customers.
If we left mainland U.S. citizens without power for 6
months, companies would be fined and executives could face
prosecution. Such accountability was not possible in the
Commonwealth's version of a government-run monopoly. In fact,
in its recent rate review order, the Puerto Rico Electric
Commission issued a scathing indictment of the politics
pervading the institutions and culture of PREPA, and those are
included in my written statement.
PREC was only established 4 years ago, and through no fault
of its own remains woefully ill-equipped to meet its assigned
responsibilities. It is possible to achieve this by leveraging
regulators and staff from the mainland, simultaneously
providing an opportunity for Puerto Rico-based commissioners
and staff to be both trained and developed to eventually take
responsibility. NARUC routinely conducts this type of training.
Crucial reforms must be made in Puerto Rico. Foremost among
these is allowing physics, engineering, economics, fairness,
and transparency to be the drivers of decision making, rather
than politics. With the appropriate reforms in place, Puerto
Rico could expand renewable generation on the island. That is a
laudable goal. However, renewable power and other forms of
distributed generation have limitations when it comes to
meeting the immediate electricity demands of the island. I
would be glad to discuss this further during questioning.
Planning for Puerto Rico's energy future will take a multi-
disciplinary coordination and effort. Throwing Federal dollars
at the problem and into the hands of the under-regulated PREPA
will produce the same situation that has prevailed for decades.
In addition to establishing an independent and qualified
regulatory body, Congress should take action to make the island
investable. When PREPA emerges from bankruptcy, its credit
rating will likely be below investment grade. Lending
institutions will find that unacceptable and be unwilling to
participate in the financial structure. A Federal backstop in
the form of a fund guarantee or a financial vehicle will
provide the assurance that is required.
One critical perspective is that when a modern, efficient,
affordable, resilient power system is created on the island, we
must not hand the shovel back to those who dug this hole. PREPA
must be replaced. There must be a sustained and fundamental
change in culture, behavior, and results. Congress must
initiate this change.
I will short-circuit the remainder of my comments to simply
say that we have all seen how Maria and an unchecked monopoly
unleashed a perfect storm on the people of Puerto Rico. None of
us can control the forces of nature, but Congress can correct
past abuses and enable the construction of a 21st century power
system.
[The prepared statement of Mr. Svanda follows:]
Prepared Statement of David Svanda, Svanda Consulting
Chairman Bishop, Ranking Member Grijalva and members of the
Committee, my name is David Svanda and I appreciate the opportunity to
testify about regulatory aspects of the energy crisis facing Puerto
Rico, and make some observations and suggestions that will help point
the way to a more responsible, affordable and reliable power system for
the U.S. citizens of Puerto Rico.
During the past 22 years, I have served in various roles within the
utility regulatory profession. From 1996 to 2003, I served as a
Commissioner at the Michigan Public Service Commission. During my
tenure at the PSC, I served as Chairman of the Board and President of
the National Association of Regulatory Utility Commissioners (NARUC). I
also served on NARUC's executive committee and board of directors and
was Chairman of NARUC's Finance and Technology Committee and its
Mentoring and New Member Services Committee. I was a member of the
Emerging Issues Policy Forum Board, past president of the 15-state Mid-
American Regulatory Conference (MARC), and have served on the Keystone
Energy Board and as trustee of the NARUC Education and Research
Foundation. I was also a member of the Federal Communications
Commission's (FCC) Local and State Government Advisory Committee.
Prior to my time as a Commissioner in Michigan, I served as
Director of Administrative Services for Michigan Governor John Engler,
and as Director of the Governor's Northern Michigan Office. Prior to
that, I was a City Manager and have served on many national, state,
regional and local boards.
I am presently a regulatory consultant, serving clients focused on
energy, telecommunications and water issues at the state, regional and
national levels. Since founding my regulatory and strategic consulting
practice in 2003, I have successfully advised a broad list of clients
from all segments of the public infrastructure sector, including
numerous corporate, non-profit, financial, international, and
association interests.
Like many Americans I sat in horror as I witnessed the devastation
of Hurricane Maria as it moved across the Caribbean and her Category 4
winds bore down on Puerto Rico and delivered a devastating strike to
the island's energy, telecommunications and other critical
infrastructure which left the island cut off from the outside world.
Also, this past May I spent 5 days in Puerto Rico, where I saw
firsthand the devastation that remained even 8 months after Hurricane
Maria. I saw impassable roads, mountains of debris and electrical lines
literally nailed to trees. That is by no means a criticism of the
hardworking people who were trying to restore electricity to the
citizens of Puerto Rico as quickly as possible.
It is, however, evidence of the destruction wrought and the lack of
execution on a comprehensive emergency response plan. In addition, it
is clear there has been no independent voice requiring the utility to
take appropriate actions to manage the utility's assets, or a guardian
of the PREPA emergency restoration accounts that prior to the storm
were reallocated by the Puerto Rico Government to pay for other
services.
There has been a great deal of concern expressed in Puerto Rico
about the possibility of exchanging the government-owned monopoly for a
private sector monopoly. Unfortunately, this logic is missing a
critical element--an effective, well-functioning regulator. It is
understandable that Puerto Rico thinks `monopolies are bad' since they
have never seen one which is balanced by an appropriate regulator.
For most utility infrastructure assets, a monopoly makes sense. The
capital investment required to provide power to a large area and many
customers is extensive. By having a monopoly, redundant investment can
be avoided--actually, in many situations, the lack of a monopoly, and
therefore the lack of assurance that the investor will be confident in
their investment, can result in no one making the investment in the
first place.
In general, the role of a utility regulator is to stand in the
place of `competition'. The regulatory agency, over time, acquires a
wealth of experience and knowledge to ensure stable, economically sound
and efficient decision making. The regulator provides an appropriate
balance between needs and service of the customer and the fair and
predictable treatment of the utility. The confidence provided by the
regulator to the utility is what incentivizes the long-term planning
and significant capital investment required. This is also important to
the customers as only a financially healthy utility is able to perform
its critical function to serve the needs of their customers. A properly
functioning regulatory agency ensures that neither the customer nor the
utility is unduly advantaged nor harmed.
What our fellow Americans in Puerto Rico have been going through
for nearly a year is unacceptable. By comparison, as Hurricane Irma
moved north of Florida on September 11, 2017 it left approximately 6
million Floridians (2/3 of the state) without power. Within 11 days,
power was restored to all but 13,337 Floridians (only 1 percent of the
population). On September 20, 2017, Hurricane Maria made landfall on
Puerto Rico. But 3 months later, as families prepared for Christmas,
PREPA was unable to report on how many customers were without power.
Instead, they reported on their peak load--only 65.4 percent after 3
months! In fact, in February of this year, news reports indicated that
PREPA hoped to restore power to 90 to 95 percent of residents by the
end of March. If we left this many mainland U.S. citizens without power
for 6 months, companies would be fined and executives could face
prosecution.
There is no doubt that Hurricane Maria was a devastating storm that
would strain the resources of any of our 50 states. However, as those
other states recovered from their natural disasters, it became clear
that the havoc and destruction that Maria brought to Puerto Rico was
different. The massive destruction that laid waste to Puerto Rico
exposed the consequences of years of fiscal mismanagement, and
disregard for the maintenance of the facilities. This dereliction of
duty, and failed maintenance standards by the PREPA Board and elected
officials of the island directly played a role in the destruction of
their electric grid. By fiscally mismanaging PREPA and driving the
utility into bankruptcy by acquiring more than $9.2 billion of debt, it
left the utility without the proper resources to maintain and operate a
21st century grid (or even a 20th century grid). It is this failure of
regulatory oversight and financial mismanagement that I would like to
address today, and hopefully provide my expertise in creating a
framework that will assist in the creation of a new entity that will be
more efficient in its capabilities, resilient in sustaining the next
natural disaster, and more consumer friendly in providing cleaner, low
cost electricity to the island.
Early in my professional career in city and county management, I
managed critical infrastructure utilities and understand effective
management. In my 22 years of professional regulatory experience of
working with regulated energy and telecommunication utilities, I have
never seen a system as ``unique'' as PREPA. It is an example of a long-
gone era where local governments manipulated their utility's operations
to benefit a few, at the cost of many. In no other state does the
utility serve as the generator, transmitter and distributor of
electricity with no regulatory oversight. In no other state does the
utility give free power to municipalities--and leave the citizens to
pay the cost. It's a perfect example of the fox guarding the hen house.
PREPA's governing board and Executive Director are all appointed by the
island's governor, and remain in their roles or are replaced in
accordance with the whims of each new administration. Similarly, the
members of the Puerto Rico Energy Commission (PREC)--newly formed as of
2014, inexperienced and understaffed--are also governor appointees and
subject to removal and replacement with each new administration.
Unfortunately, it is my understanding the plan to privatize only
exacerbates this problem by allowing local politicians and the PREPA
board--hand-picked by the Governor--to determine customer rates and the
sale of assets. For example, the plan states PREPA assets can be
disposed of ``without having to comply with any process, requirement,
approval or revision of PREC or any other regulatory commission.'' This
is a recipe for disaster and will inflict continuing poverty,
disadvantage and sub-standard living conditions on the people of Puerto
Rico.
In no way do I believe anyone should suffer the tragedy and the
magnitude of destruction as witnessed by Hurricane Maria. However, it
is clear that there is a moral obligation to reset the management of
the utility and the outdated culture of an unregulated monopoly. With
this clean slate I would offer a few core principles that can be the
foundation for an independent regulatory entity that can set fair and
justifiable rates for all Puerto Rican consumers.
I have freely used the word ``independent'' when describing what is
needed on the island in the form of regulatory body. However, in the
case of Puerto Rico it should be looked upon as de-politicizing the
rate making process by removing the legislature and Governor's
interference in that process. Once the regulatory body has the
confidence that it can exercise its responsibilities in a fair and
professional manner it can move forward in the process of creating a
robust and competent regulatory framework that will benefit all
consumers on the island. These steps include: de-politization, planning
and approval, cost controls, fair rates, and recovery of non-bypassable
costs.
De-politicization
In a challenging environment, the regulator's key duty should be to
appropriately balance the interests of all stakeholders. Unfortunately,
this is not the case in Puerto Rico. For most of PREPA's 70-year
existence it has operated as an unregulated monopoly overseeing its own
operations, management and rates. Equally unfortunate, when the PREC
was finally established to regulate and monitor PREPA's operations in
2014, it was made toothless by the territory's legislative bodies. It
is this political infighting that must be rooted out, if the utility
can be expected to truly serve its citizen customers and to attract the
necessary financial investments. Amazingly, the last time PREPA raised
rates (not withstanding fuel charges) was 1989, which is part of the
reason why they still use bunker oil, and have inefficient generation
and dilapidated infrastructure. Who would want to invest into this type
of organization?
In fact, in its recent rate review order, PREC put its finger on
the problems when it stated:
``The quadrennial turnover of managers with each new political
administration, the political pressures from elected officials
to avoid necessary rate increases, the failure of government
agencies to pay their electric bills on time, the irresponsible
initiation and termination of expensive capital projects, the
high levels of electricity theft, the work rules that prevent
efficient use of well-paid employees, the poor recordkeeping
and antiquated administrative procedure, the compensation
schemes that keep PREPA from recruiting and retaining qualified
and experienced personnel--all this must come to a halt, to be
replaced by universal commitment to the good of the
Commonwealth.'' (Rate Review Order, pp. 23--24)
A typical utility regulator has Commissioners with various, but
appropriate backgrounds. Most importantly, they are supported by
experienced staff with decades of cumulative institutional knowledge in
how the regulatory structure and process functions, the long-term needs
of the system and how to balance the needs of both utility customers
and the utility(s) themselves and decisions are made based on a
documented public record. As many congressional members might admit,
particularly in the first few years of their tenure--having an
experienced staff supporting their efforts is the difference between
being effective or not.
PREC was only established 4 years ago. The Commissioners were not
experienced in regulating an electric utility, nor did they have staff
with sufficient experience and background to support them. Through no
fault of their own, the PREC is woefully ill-equipped to serve its
assigned role and responsibilities. Puerto Rico, and more importantly,
Puerto Ricans, need a regulator that can immediately serve these
critical roles. It is possible to achieve this by leveraging regulators
and staff from the mainland while simultaneously providing an
opportunity for Puerto Rico based Commissions and staff to be trained
and developed to take over those responsibilities when they are ready.
I have laid-out one potential approach to doing so at the end of this
written testimony.
Planning and Approval
Had PREPA had regulator-required disaster recovery plans in place,
the Whitefish scandal would have been avoided, mutual assistance
agreements would have been in place, and recovery would have begun in
earnest at least a month sooner, and progressed in a more organized
manner. A well developed disaster recovery plan would have ensured that
PREPA had a materials management process in place to assist its
procurement of materials and services immediately after the Hurricanes.
Due to lack of regulator-required planning, what took 11 days in
Florida took 8 months in Puerto Rico.
Cost Controls
As a regulator and as President of NARUC I saw many variations of
strong independent regulatory bodies and how they can drive
efficiencies and benefits for customers. Nowhere does this structure
work better than in the electric utility industry. Ratemaking is not
simply an exercise in applying mechanical formulas and ``crunching
numbers'' to calculate the lowest possible level of rates for the
short-term. Rather, regulators must set policies that will operate in
the long-term interest of consumers, utilities and ultimately the state
or territory in which they are employed. Maintaining a financially
healthy electric utility benefits customers over the long term by
maintaining credit ratings, lowering financing costs, and providing
access to the capital necessary to finance current and future
infrastructure and environmental investments timely and efficiently.
Ratemaking is not a zero-sum game where maintaining financially healthy
utilities can only come at the expense of ratepayers over the long run.
Fair Rate Setting
The regulator is the voice for the citizens on the island in this
process. The regulator protects them from rate shocks, and ensures that
the price they pay is as fair as possible and equitable for today's
citizens and future generations of citizens.
Recovery of Non-Bypassable Costs
The regulator should have the authority to determine whether to
impose non-bypassable charges on customers who elect to ``disconnect''
from the T&D system in order to socialize system benefit costs among
all island residents.
a foundation for renewables
Integrating renewable resources is an important planning
consideration, however, given the current state of the grid, providing
a solid foundation of grid-scale generation and strong, reliable
transmission and distribution will be the most effective means to cost-
effectively leveraging renewables. It will also be the quickest path to
the resiliency so critical to the people and businesses on the island
to minimize disruption from future weather events.
Increasing the use of renewable power is a laudable goal, and in
some parts of the island it will play a key role in providing
electricity to customers. But, renewable power, microgrids, and other
forms of distributed generation have severe limitations when it comes
to meeting the immediate electricity demands of the island. The first
limitation being it is extremely cost prohibitive to most of the
island's residents where the average median income is less than $22,000
per year. In addition, each individual that leaves the ``grid'' by
either utilizing roof-top solar or individual power sources means that
other residents that can't afford solar panels, or whose roof is still
held together by a blue tarp does not have the flexibility to utilize
these resources.
Last, the physical size of Puerto Rico and its topography limits
the potential for resource allocation methods that you may find in a
larger geographic area, such as a Regional Transmission Organization
(RTO) in the Midwest. The island just isn't large enough to sustain
major wind farms or solar arrays which take up hundreds of acres for a
minimal amount of generation.
a credible path forward
Unfortunately, the current privatization proposal, and recently
passed territorial statute do not follow this accepted and time-tested
formula. Their plans are an extension of the past that keep the
territory's government in charge of an unregulated monopoly by
providing rate making authority, and the approval or denial process of
any sales of assets and equipment. This is proven recipe for disaster,
and will only be exacerbated by some form of massive waste of Federal
dollars that props up this state-owned monopoly. Simply throwing
billions of Federal dollars at this problem and into the hands of the
under-regulated PREPA Board will only produce the same untenable
situation that the island currently suffers. It will only perpetuate
the bankruptcy of this failed entity, and every time there is a natural
disaster the Federal Government will once again be called on to bail
out PREPA and its political controllers.
For Puerto Rico to recover, and once again become the ``Jewel of
the Caribbean,'' Congress must act to provide a reliable, resilient and
efficient electric grid system for our fellow citizens on the island.
It must break PREPA free from the political forces that have driven it
into the ground, and can do so by creating a strong independent board,
free from the restrictions of the political class of San Juan. As with
all mainland states, an impartial regulator will fairly and
deliberately evaluate the generation and transmission needs of the
island. While this has long been the goal of many on the island, it
will take the firm hand of Congress to effectuate this change. Only
through Federal legislation will Puerto Rico be able to change its
regulatory course, and set out on a new path that will bring needed
investment, management expertise and technological advancements that
can drive efficiencies and lower the cost of power for all consumers.
An experienced, well-functioning commission could be developed in a
relatively short time while simultaneously providing a strong training
ground for incoming commissioners and staff. In the United States,
individual states have been creating commissions and developing utility
regulatory agencies since 1861. Thus, there is ample knowledge and
experience from these 50 laboratories of democracy regarding how these
agencies can be organized and function. These are tried and tested
functioning models, each with their own nuances. The lessons learned by
the mainland states can be readily applied to create a well-
functioning, independent, and sustaining regulator for the people of
Puerto Rico.
Organizations such as NARUC can be utilized to identify human,
educational and other resources which can be used to comprehensively
empower the new regulatory agency. Such an agency would likely include
five commissioners and capable staff which would provide for continuity
and both breadth and depth of purview to the commission dynamic.
Mainland organizations could also assist a Federal Administrator with
establishing minimum criteria and qualifications for appointing
Commissioners and hiring full-time staff.
Areas of needed staff specializations include: economists,
accountants, financial analysts, engineers, and attorneys. Building
upon those areas of technical expertise, there is extensive training
available to help these professionals apply their skills specifically
to utility regulation. That training is available through NARUC, EEI,
and other reputable industry organizations.
To ensure the optimal effectiveness of the agency (Commissioners
and staff), it is critical to provide a sufficient budget to attract
and develop staff quickly. Commissioners and staff will need to process
large amounts of multi-disciplinary information to render solid,
credible decisions for the people of PR. The precedents established by
this initial set of Commissioners will build the foundation on which
trust and confidence in the agency will rest. It is critically
important that the foundation is as strong as in the mainland states.
The sooner such a structure can be put in place, the sooner there will
be development of institutional knowledge for future generations of
Commissioners and staff.
financial considerations
In addition to establishing an independent and qualified regulatory
body, Congress should take action to make the island ``investable.''
When PREPA emerges from its Title III bankruptcy proceeding, its
credit rating, and that of the island, will likely be below an
investment grade rating. Furthermore, if the exodus of Puerto Rico's
residents continues, there will not be a stable rate base from which to
recover the costs of service and system improvements. Until the
electric system and the service it provides to Puerto Rico improves
significantly, the rate base will likely continue to decline. Any
entity that would look to invest in Puerto Rico will require a certain
amount of financing of its investment. However, lending institutions'
willingness to extend credit at reasonable rates requires confidence
that borrowers will be able to generate revenues necessary to repay
their debt. For that reason, the Federal Government should provide some
means to assure financing institutions that the island's electricity
providers will be able to recover their costs and pay the expenses
incurred in providing service to PREPA's customers. A Federal financial
``backstop,'' in the form of a fund, guarantee or other financial
vehicle, would provide such assurance.
Simply put, there is a role the Federal Government can play--not as
a utility owner-operator, but--as a provider of financial assurance to
``backstop'' the billions of dollars of private capital that will be
required to modernize Puerto Rico's electric grid.
A time-limited financial assurance would bolster investor
confidence as the state-owned utility is unwound from its political
past while Puerto Rico also rebuilds its basic credit capacity. Such a
program would not be a loan guarantee, but could be structured as
``risk sharing'' between the Federal Government and private investors.
The objectives would be to smooth privatization and ensure regulatory
independence takes hold and population flight from the island is
staunched.
Investment and development would occur on a phased schedule over a
period of years. Properly structured, the government would never be
exposed to the full value of the private capital investment required to
rebuild the electric system, but the assurance would make Puerto Rico
investable again.
Once the regulator is in place, and investors have confidence they
will be treated fairly and impartially, Puerto Rico will begin to
regain its footing in the financial markets. Let us not forget that
Puerto Rico is still in bankruptcy and its short-term economic
situation is bleak at best. For the island to move away from ``vulture-
funds,'' and other greedy investors only looking to turn a dollar--the
Federal Government should commit a limited amount of resources to
ensure the financial viability of the island. We saw the Treasury
Department offer assistance to NYC after the September 11 terrorist
attacks, and again after super-storm Sandy savaged the East Coast.
These backstops, and having strong state regulators provided the
confidence needed for institutional investors to rebuild NYC and the
surrounding area.
a new stewardship
One critical perspective is that when a modern, efficient,
affordable, and resilient power system is stood up on Puerto Rico, we
must not hand the shovel back to those who dug this hole. PREPA must be
replaced. There must be sustained and fundamental change in culture,
behavior, and results that this entity has proven chronically incapable
of delivering.
It is time to start anew, with a privatized system wherein
electricity customers are paramount. Puerto Rican households and
businesses deserve transparent, accountable, reliable, and affordable
electric service. I believe the geography and logistics of the island
would best be served by a comprehensive power system capable of
delivering economies of scale and that a competent, apolitical,
independent regulatory authority can ensure that stakeholder interests
are protected.
In summary, the key ingredients for rebuilding the efficient,
affordable power grid of the future on Puerto Rico are:
1. An independent and experienced regulator, who will protect
consumers while overseeing the transition to affordable
baseload fuel source and modern efficient generation, and a
resilient, effective transmission and distribution system,
and
2. Due to the financial situation of the island, Federal assurance
for rate protection and investment will likely be required.
Members of the Committee, we have all seen how Maria and an
unchecked, uncontrolled monopoly unleashed a perfect storm on the
people of Puerto Rico. Going forward, none of us can control the forces
of nature, but Congress can correct the past abuses of the monopoly,
and enable the construction of a 21st century power system for a
brighter future.
Thank you for listening, I look forward to your questions.
______
The Chairman. Thank you. Sorry to short circuit you there.
Senor Bhatia--Bhatia, right?
Mr. Bhatia. Bhatia, yes.
The Chairman. Thank you. From now on I will turn to you for
every announcement.
Sir, you are recognized for 5 minutes.
STATEMENT OF EDUARDO BHATIA, MINORITY LEADER, SENATE OF PUERTO
RICO, SAN JUAN, PUERTO RICO
Mr. Bhatia. Thank you so much, Chairman Bishop, Ranking
Member Grijalva, members of the Committee. Thank you for
inviting me to testify on this important matter.
Access to energy is a life or death issue for all of us.
But Puerto Ricans died in the aftermath of Hurricane Maria due
to lack of electricity.
What brings us here today is essentially one question, just
one question: How do we use our legislative resources and
authority to create a robust, resilient, and cost-efficient
energy system in Puerto Rico?
We are not here today, and should not be here today,
discussing how to fix PREPA. If PREPA wants to exist, it should
compete on equal terms with modern, clean, cheaper providers of
energy.
The time must come for a coalition of forces to jointly do
three things.
First, privatizing PREPA without realizing the enormous
opportunity to create a new, open energy market is akin to
privatizing a payphone company in the 1990s. New technology has
replaced the need for PREPA. A well-regulated, open energy
market must be created in Puerto Rico, where innovation, cost,
structure, and choice work in favor of the consumer.
Citizens have been hostages for too long with an outdated
state-owned monopoly. They deserve to be liberated. And
Congress can help. But that liberation cannot happen if we
substitute the control of the state by a privately-owned
monopoly.
The island must be divided into manageable, independent
inter-connected microgrids. Emphasis should be placed in the
abundant sun and water that Puerto Rico has as a source of
energy. The time has come to evolve from fossil fuels into
solar and hydroelectric energy. There must be an organized
phase-in/phase-out process.
Here in the mainland United States, there are over 900
rural energy co-ops that could very well serve as a model for
the future energy system of Puerto Rico. Our co-ops on the
island are robust and very well managed.
I encourage this Committee to study a proposal to assign a
portion of the Federal funds to the green energy fund created
in Puerto Rico. The idea is to appropriate significant funding
to assist low- and moderate-income families gain access to
solar energy and storage. Let's make Puerto Rican families
prosumers--consumers and producers. That is, consumers and
producers of energy, just like Airbnb or Uber.
Second, as I mentioned earlier, that new energy market must
be well regulated. The Puerto Rico Energy Commission was
established under Act 54 in 2014. It was my bill, as a very
first nonpartisan, independent energy regulator with fiscal
autonomy from the government. And its results have been
excellent. It angers me that the Puerto Rico Fiscal Oversight
and Management Board has found the existence of this
independent regulator somewhat of a problem. Just 3 weeks ago,
the operating budget of the Puerto Rico Energy Commission was
reduced from $7 million in 2017 to $1.8 million in this new
budget, a reduction of over 70 percent of its budget.
And third, the reckless governance of PREPA and the lack of
serious leadership as we move forward has been the issue. Since
2017, PREPA has had five executive directors and two different
governing boards. Forget that PREPA is an elected utility. No
company in the world, not even the Boy Scouts, private or
public, is able to operate with efficiency while undergoing
similar frequent and erratic changes in leadership.
The current management crisis at PREPA is a direct
consequence of deviating from the energy reform process that we
initiated in 2004. For more than a year, the government failed
to appoint the chairman of the Puerto Rico Energy Commission.
That must change.
Finally, I must address possible rumors and proposals for a
possible Federal takeover of PREPA. I understand the
frustration of this Committee and other stakeholders with the
lack of proper governance at PREPA. I share it and live it
every day. However, I do not support a takeover of PREPA by the
U.S. Department of Energy.
I submit that the Department of Energy and FERC should
commit themselves to a more active role of jointly developing
specific mandates and deadlines for the transformation of
PREPA. My ask here is for Congress to work closely with the
Senate of Puerto Rico, the U.S. Department of Energy, the
Southern States Energy Board, the Rocky Mountain Institute, the
Institute of Competitiveness and Economic Sustainability, the
Puerto Rico Manufacturers Association, the College of
Engineers, and others.
In closing, I will just say that there is also a very
serious issue of democracy and self-government in this whole
process, and I hope the Committee addresses it soon. Thank you.
[The prepared statement of Mr. Bhatia follows:]
Prepared Statement of Senator Eduardo Bhatia, Minority Leader, Senate
of Puerto Rico
Chairman Bishop, members of the Committee, thank you for inviting
me to testify on this important matter. My name is Eduardo Bhatia. I am
a former president of the Senate of Puerto Rico (2013-2016), and
currently its minority leader. I have spent years addressing poverty
issues and carefully crafting, advocating and promulgating energy
policy for the people of the island.
Access to energy is a life or death issue. Hundreds of Puerto
Ricans died in the aftermath of hurricane Maria due to the lack of
access to electricity. Thousands more developed medical conditions
after drinking unsanitary water. Lack of access to reliable and
affordable energy is also a ``life or death'' issue for business and
industry.
What brings us here today is essentially one question: how do we
use our legislative resources and rulemaking authority to create a
robust, resilient and cost-efficient energy system in Puerto Rico. We
are not here today, and should not be here today, discussing how to fix
PREPA. If PREPA wants to exist it should compete on equal terms with
modern, clean, cheaper providers of energy. The time has come for a
coalition of forces to jointly do three things:
First: Privatizing PREPA without realizing the enormous opportunity
to create a new open energy market is akin to privatizing a pay phone
company in the 1990s. New technology has replaced the need for PREPA. A
well-regulated open energy market must be created in Puerto Rico where
innovation, cost structure and choice work in favor of the consumer.
Citizens have been hostages for too long of an outdated state-owned
monopoly. They deserve to be liberated. And Congress can help. That
liberation cannot happen if we substitute the control of the state by a
privately-owned monopoly. PREPA is the largest public electric utility
in the United States. Its size and centralized control over 1 million
plus customers make it an unbearable company to run when so many
mistakes can and have disrupted the energy service to everyone for days
and even months. Among public utilities in the United States, PREPA is
Number One in served customers and Number One in revenues. Also Number
One in the size of its debt.
The island must be divided into manageable, independent
yet interconnected microgrids. The establishment of
personal, cooperative, community-based and third party
microgrids, as recently allowed by the Puerto Rico Energy
Commission, must be encouraged.
Emphasis should be placed in the abundant sun and water
that Puerto Rico has as a source of energy. The time has
come to evolve from fossil fuels into solar and
hydroelectric energy. We are already working locally on a
clear schedule to phase in renewable energy and phase out
fossil fuels. I am sure the local public policy being
designed in the Puerto Rico Senate by a group of local
legislators will include such transition. Puerto Rico
should be the showcase in America --la vitrina--of
renewable energy.
Hawaii is a great model for this Committee to understand
the nuances of island challenges. The Hawaii 2045 energy
plan does exactly what I have just proposed. I encourage
you to hold a serious dialogue with Hawaii's policy makers
and stakeholders to understand their evolution.
One of Puerto Rico's economic strengths today is its
cooperatives and the power of private, yet sustainable
economic structures through a democratically controlled
enterprise. Here in the mainland United States there are
hundreds of rural energy cooperatives that could very well
serve as a model for the future energy system of Puerto
Rico. The nation's consumer-owned, not-for-profit electric
cooperatives are unique within the $391 billion U.S.
electric utility industry. More than 900 cooperatives in 47
states provide electric service to almost three-quarters of
the Nation's landmass. Co-ops serve more than 19 million
businesses, homes, schools, churches, farms, irrigation
systems and other establishments in 2,500 of 3,141 counties
in the United States. They are governed by a board of
directors elected from the membership which sets policies
and procedures that are implemented by the cooperatives'
management. A bipartisan bill filed in the Puerto Rico
Senate by Senator Larry Seilhamer and myself (S.B. 984)
will be considered soon to enable local legal recognition
for electric cooperatives.
Recent technological innovations have transformed multiple
industries in the United States and the world. Citizens are
no longer just consumers, but the new, open economy is
allowing them to be small producers. Think of taxis and
Uber; think of hotels and Airbnb; think of payphones and
new cell phone technology. Consumers have assets that can
be used to produce and obtain revenues. The new term is
PROSUMER. Well, energy innovations with photovoltaic
devices and semi-conductors are now allowing consumers to
use their rooftops as solar energy producers and/or solar
farms to produce energy at a smaller scale. Batteries for
energy storage have also evolved and are now affordable. An
interconnection of these prosumers in Puerto Rico could
very well create in the future an abundant amount of energy
without the need for large investments in massive
generators and a desire to get off the grid.
Since Congress and the Administration are and will
continue to appropriate resources for Puerto Rico's
recovery, I encourage this Committee to study a proposal to
assign a portion of those funds to the ``Green Energy
Fund'' created under Puerto Rico's Act 83-2010. The idea is
to appropriate significant funding to assist low- and
moderate-income families gain access to solar energy.
Through green energy credits, the Department of Energy
should work with Puerto Rico officials to open the market
for the innovation and participation of thousands of local
renewable energy prosumers. We have the rooftops, we have
sun: what we lack are the resources. Distributed generation
is key to transform our energy model.
Wheeling must be regulated soon by PREC. It is a key
element for the industrial sector, but it could also be
useful for the development of a distributed model for other
private generators. For years, PREPA ignored the mandate of
Act No. 73-2008 to regulate wheeling. Act 57 transferred
that responsibility to PREC. It is time to act.
Second: As I mentioned earlier that new energy market must be well-
regulated. I am the author in 2014 of the law that created the first
ever energy utility regulator in the history of Puerto Rico. Let me be
clear: many of the problems that PREPA has come from decades of
internal decisions that went unquestioned. The Puerto Rico Energy
Commission (``PREC'') was established under Act 57 as the very first
non-partisan, independent energy regulator, with fiscal autonomy from
the government. Notwithstanding its limited budget and resources, PREC
has done an amazing job as an independent regulator. In 4 years, PREC:
Approved the utility's first ever integrated resources
plan (IRP);
Presided over its first ever rate case;
Provided significant and strong oversight over PREPA,
against their will, and even challenged in the courts;
Approved a ``transition charge'' to deal responsibly with
PREPA's ``legacy'' debt;
Initiated inquiries and investigations on key operational,
performance, and financial issues at PREPA;
Enacted new net metering regulation standards;
Presided over customer disputes against PREPA and private
energy companies;
Enacted the first ever regulation on microgrids in the
United States;
Congress, under Title V of the PROMESA Act, delegated on
PREC the authority to determine if energy projects which
aspire for ``critical project'' designation are compatible
with the IRP.
I respectfully submit that PREC must be strengthened with
additional resources. Its budget must be doubled, and recent passed
legislation which appears to limit their oversight powers must be
further reviewed. Independent energy regulation is here to stay.
It angers me that the Puerto Rico Fiscal Oversight and Management
Board has found the existence of this independent regulator somewhat of
a problem. Just 3 weeks ago the Oversight Board reduced the budget of
the PREC from $7 million in 2017 to $1,836,00 in the new budget, a
reduction of over 70 percent of its budget. The most absurd part of
this decision is that the budget of PREC does not come from the
struggling state general fund on the island, but from a formula based
on the regulated entities. We designed it that way in 2014 to avoid
this problem. My ask is that this decision must be reversed. A well-
funded, robust and independent PREC is essential in the development of
the new energy market in Puerto Rico.
Third: The reckless governance of PREPA and the lack of serious
leadership as we move forward has been the issue. It is what brings us
here today.
The Puerto Rico Electric Power Authority (PREPA) was created in
1941. Its main objective was to provide access to reliable, cost
effective electricity to the people of Puerto Rico, as well as
manufacturing and retail. During its heyday, PREPA was the ``jewel of
the crown'' of all locally state owned public corporations.
While achieving its initial objectives (by providing full access to
electricity), its identity as a government-owned corporation exposed
PREPA to the negative dynamics of bureaucracy, patronage, corruption,
political intervention, and special interests in key procurement areas
such as oil purchase, legal, financial and other types of consulting
services. Both majority parties in the Island are active and organized
inside PREPA, and its employees have raised thousands of dollars for
political campaigns. PREPA's corporate culture is adamant in failing to
embrace innovation and change. Lack of transparency has characterized
PREPA's day-to-day operations and decision making. PREPA assumed, for
years, that laws and regulations on energy policy were mere
``suggestions,'' not legal mandates. For decades, PREPA accumulated an
obscene amount of political power which made effective oversight
impossible by the local legislature. Also, significant energy decisions
were taken, for decades, from the Governor's Office, using the
utility's governing board and executive directors as mere proxies.
In the summer of 2013, I summoned PREPA to an oversight hearing in
the Senate. Back then, PREPA announced what would become their last
bond issue before they became insolvent (for $673 million). To my
knowledge, the legislature had never questioned PREPA over a bond
issue. Testimony from PREPA officials convinced me that they were
lying. Right there and then, I decided that the time was ripe for
significant change and reform of the utility, as well as the energy
policy of Puerto Rico.
After significant opposition from PREPA's management, its union
leaders, the then minority party (now majority party), and even members
from my own political party, we approved what became known as Act No.
57-2014, the ``Puerto Rico Energy Transformation and Relief Act''
(``Act 57'').
Amongst other pieces of legislation to transform our energy system
and the utility itself, we also approved Act No. 4-2016, known as
PREPA's ``Revitalization Act'' (``Act 4'').
As the sponsor of Act 57, and as a champion of energy reform, I am
convinced that the years between 2014 and 2016 were the period of most
significant change in energy policy since the creation of PREPA in the
1940s. Since we are discussing the current management crisis at PREPA,
I must stress the fact that legal mandates and institutions created
during that period were designed precisely to transform PREPA's
governance. The main concept of Act 57 is that PREPA and other energy
stakeholders on the island must conduct themselves in accordance with
applicable energy policy and regulation; not by the seasonal wishes or
``public policy'' of the administration from any political party in
power.
Act 57 also created an independent energy consumer advocate
(``OIPC'', its acronym in Spanish), a proposal from the AARP, and
strengthened the state energy office of the Commonwealth.
Pursuant to Act 4, the legislature included several mandates that
go to the heart of the management crisis at PREPA, the subject of this
hearing. First, PREPA's governing board was reorganized in order to be
composed of independent, non-partisan, members, and the elected
representatives of the customers. This, to pursue the path toward
getting politics out of PREPA's decision-making processes. The
independent members of the board would be selected by the Governor from
a list of candidates prepared by an executive research firm. In fact,
the Senate confirmed those independent members to PREPA's board in
December 2016.
Second, and this is crucial: Act 4 contained a strong mandate to
prohibit all kinds of political intervention in PREPA. Inspired by the
Federal ``Hatch Act,'' Act 4 prohibits political intervention in
appointments, management decisions, contracting, and other internal
matters of the utility. It even prohibits the political and fundraising
activities of the so-called ``Energeticos'' (political organizations
which operate inside PREPA, representing both majority parties).
The process for the transformation of PREPA's governance was on its
way.
Fast forward to 2018. A year and a half after a new administration
took office in Puerto Rico, PREPA has had five (5) executive directors
and two (2) different governing boards. Forget that PREPA is an
electric utility: no company in the world, private or public, is able
to operate with efficiency while undergoing similar frequent and
erratic changes in leadership. Who's in charge?
I respectfully submit that the current management crisis at PREPA
is the direct consequence of deviating from the energy reform process
initiated in 2014. First, in November 2016, the chairman of the
transition committee characterized the energy regulator as an
``obstacle'' to the ``interconnection of renewable energy, energy
diversification, and the Aguirre Gas Port project'' (a $500 million
boondoggle promoted by PREPA for years, which the PREC severely
questioned its financials for years). For more than a year, the
government failed to appoint the chairman of the PREC. Also,
legislation was filed to dismantle PREC or significantly reduce its
role as an energy regulator.
Further, legislation was enacted in early 2017 to dissolve the
short-lived governing board of PREPA, appointed in 2016, and composed
by independent directors and elected representatives of its customers.
Act 37-2017 expressly stated on its Statement of Motives that PREPA's
governing board had to be composed by members committed to implement
``the public policy dictated by the current Administration.'' Hence,
the new governing board would include, as happened before Act 4,
members from the government of Puerto Rico. This was the same PREPA
board which failed to prevent the Whitefish mess during the aftermath
of Maria; approved controversial salaries and illegal bonuses for a
former executive director; approved multi-million dollar consulting
fees (even when the utility is undergoing bankruptcy), and which
recently resigned en masse after a public controversy over its approval
of a $750,000 yearly salary for its executive director.
Governance at PREPA must be completely revamped. After a year and a
half of erratic decisions, the government of Puerto Rico must be
encouraged to reverse decisions which deviate from the mandates of Act
57 and Act 4. As stated, PREC must be strengthened, and the design of
the governing board of PREPA must return to the independent model of
Act 4. Also, I encourage this Committee to insist on PREPA doing a
full, comprehensive report, on possible violations, since 2016, to the
``Hatch Act'' provisions of Act 4, which prohibit political
intervention and political activism inside the utility. Let's drain the
swamp, and finally extract politics from PREPA's management and
decision making.
Locally we are in that process. Puerto Rico Law 120 of 2018 orders
that as we create an energy market, a new energy public policy with
specific mandates be instituted on the island. Under this bipartisan
initiative, the local Senate has 180 days to finish the process before
opening up the phase of request for proposals in an open market for
generation. My ask here is for Congress to work closely with the Senate
of Puerto Rico, with the U.S. Department of Energy, with the Southern
States Energy Board, with the Rocky Mountain Institute, with the
Institute of Competitiveness and Economic Sustainability, with the
Puerto Rico Manufacturers Association, with the College of Engineers
and Land Surveyors of the island, with university professors, with
cooperatives, with non-government organizations like Casa Pueblo, and
with a broad range of stakeholders who are now part of the ongoing
discussions.
Finally, I must address possible rumors and/or proposals for a
possible Federal takeover of PREPA. I understand the frustration of
this Committee, and other stakeholders, with the lack of proper
governance at PREPA. I share it and live it every day. However, more
than proposing a takeover of PREPA by the U.S. Department of Energy, I
submit that the DOE should commit itself to a more active role of
jointly developing specific mandates and deadlines for the
transformation of PREPA. Currently, the DOE (through an agreement with
the Southern States Energy Board), is assisting the government and
legislature of Puerto Rico in the process of drafting the new
regulatory framework under law 120 for the energy model of the
territory.
As for PREPA's $9 billion debt with bondholders, I believe that
under Articles III and VI of PROMESA, negotiations are underway. But a
Federal takeover of PREPA would also have significant effects on the
responsibility to honor the debt. Just like I have done in the past, I
am ready to be part of the conversation to find the right mechanism to
implement the appropriate agreement reached by the parties and
sanctioned by the Federal Judge.
In closing, let me add that there is also a serious issue of
democracy and self-government in this whole process. Even now, as we
speak, violations to the right of self-government of the people of
Puerto Rico are being debated in Federal court. Based on my experience
as an active advocate for energy reform, I trust that we, the people of
Puerto Rico, have the willingness to design an energy model that will
help us prosper and liberate our collective strengths.
Thank you, and I am ready to answer your questions.
______
Questions Submitted for the Record to Eduardo Bhatia, Minority Leader,
Senate of Puerto Rico
Mr. Bhatia did not submit responses to the Committee by the appropriate
deadline for inclusion in the printed record.
Questions Submitted by Rep. Westerman
Question 1. Does the Legislative Assembly of Puerto Rico have
direct oversight capabilities over PREPA? If so, what have you done to
ensure the timely rehabilitation of the electrical grid?
Question 2. Does the Legislative Assembly of Puerto Rico have any
role in overseeing PREPA's contract approval related to ongoing
restoration and rehabilitation work?
Question 3. How is the Legislative Assembly of Puerto Rico ensuring
that PREPA is using its funds appropriately and as intended?
Question 4. Are you aware of any contracts being held at PREPA's
Office of Contract Procurement and Compliance (OCPC) that if released
could expedite restoration and rehabilitation of the electric grid? If
such contracts are being withheld, will you pledge to work with us to
get PREPA to release the contracts as soon as possible so lifesaving
work can proceed?
Questions Submitted by Rep. Graves
Question 1. Senator Bhatia, during my questioning period we were
not able to fully explore one of your answers. Could you please share
with the Committee all of the U.S. utilities you started to list which
have a similar structure to PREPA? Again, I am looking for any
electrical facility where a governor can remove and reinstall the
entirety of the board of directors. In addition, where that same
governor can remove and reinstall the leadership of the regulatory
agency charged with overseeing the same electrical utility. Not the
power to remove and appoint, but has total control (similar to the
governor of Puerto Rico), to replace both the utility board of
directors and the regulatory body at any time and as many times as they
wish.
Question 2. Senator Bhatia, during questioning you alluded to the
idea that there would not be an interested party willing to take over
PREPA because it has no value. While I understand that the PREPA debt
exceeds its likely asset value, I am hoping you can explain how
something could hold no value when $6B of taxpayer funds have been
spent or obligated within the past year? In addition, isn't the
inherent value of PREPA in its customer base and potential for growth
in the event an independent and competent operator is empowered to
improve the system's reliability and resiliency?
______
The Chairman. Thank you. All right. Now, 5 minutes to Mr.
Spiotto?
Mr. Spiotto. Yes.
STATEMENT OF JAMES SPIOTTO, MANAGING DIRECTOR, CHAPMAN
STRATEGIC ADVISORS LLC, CHICAGO, ILLINOIS
Mr. Spiotto. As you know, through the good work which you
have done the past couple of years, you have formed and created
PROMESA with the Oversight Board. The whole structure and
philosophy was to encourage consensual resolution through Title
VI. There was also, as a last resort, the use of a bankruptcy-
type Title III to resolve those things that could not be
resolved consensually.
Obviously, PREPA has had its problems: the failure to
collect desperately needed receivables; the failure to maintain
sufficient rate base, and to fund the costs of operations and
critical improvements, including renewable energy; the failure
to manage and operate the electric utility with a stable
management, a team that can create a reliable and well-managed
system which the people of Puerto Rico need and desire.
It isn't that there was not a resolution that was possible.
In 2016 and 2017, there was the restructuring support agreement
which the Puerto Rico legislature passed legislation
authorizing. PREPA had agreed to, major creditors had agreed
to. The Governor, who was then newly elected, negotiated some
enhancements in April of 2017. And it was about to be
implemented and proceeded with a Title VI court approval. All
it needed was the assent of the Oversight Board. Unfortunately,
they rejected it. Gridlock, impasse followed. And because of
that, people could not reach agreement. And a year ago, PREPA
was placed into an involuntary resolution process under Title
III.
Now, obviously, the change in management people have talked
about, and that is unfortunate. Technical assistance and the
right direction is important. The Oversight Board, to the
degree they have disagreements with the Commonwealth, with the
Governor, with PREPA, with the Energy Commission, perhaps one
of the thoughts is rearranging the oversight and the
supervision, giving more of a role to the Department of Energy
or others that can provide the technical assistance and
support, and possibly point the way toward the type of
infrastructure improvements that PREPA should be proceeding
with, and which will be helpful in the future.
Now, why is it important to do this? Why is it important to
have a stable management board? Why is it important to have
emphasis on voluntary resolution? Why is it important to make
sure that the doors are open to new alternatives, including the
infrastructure revitalization under Title V of PROMESA, which
is very important?
It is because, one, bringing people together has been the
essence of every utility restructuring. Getting people on the
right page, having buy-in, as people have talked about, is
important.
Second, electricity is that vital blood that creates
economic development. It creates the type of recovery plan that
you need to revitalize the economy of Puerto Rico.
And third, and most important from the standpoint of the
future, it is important that Puerto Rico be able to have access
to the capital markets, to be able to borrow at a reasonable
cost.
PREPA, with all the good work that has been done so far,
and with the intention of everyone to stimulate a resolution
quickly, can become that example that Puerto Rico and PREPA is
the responsible borrower that can borrow at a low cost in the
future, because you are going to need it for the infrastructure
improvements and the rate path and the management business plan
that they will have. And to do that as an example will be
beneficial not only to PREPA, but also to Puerto Rico and its
other endeavors.
Why is it important to us, generally? As you know, we have
an infrastructure demand in our country: $4.5 trillion to be
spent by 2025. And that is going to require revenue bond
financing, just like PREPA will need in the future. And that
means we need to find a good solution that does not create risk
and fear in the market, but provides the assurance that we have
solutions, that people can come together and solve the problem,
so that the people of Puerto Rico will have the electrical
system and service that they need and desire.
[The prepared statement of Mr. Spiotto follows:]
Prepared Statement of James E. Spiotto \1\
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\1\ As of January 1, 2014, I retired as a Partner of Chapman and
Cutler LLP. I am a Managing Director of Chapman Strategic Advisors,
LLC, a consultancy providing educational and strategic insights to
market participants concerning finance topics of interest. The
statements expressed in this material are solely those of the author
and do not reflect the position, views or opinions of Chapman and
Cutler LLP or Chapman Strategic Advisors LLC.
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Chairman Bishop, Ranking Member Grijalva and distinguished members
of the Committee, I am honored to address you at its oversight hearing
regarding the electrical utility for Puerto Rico, the Puerto Rico Power
Authority (``PREPA''). The following remarks are based on my experience
in workouts and restructurings of corporate and municipal debt
obligations, specifically restructuring and bankruptcy involving
electric utilities including the Washington Public Power Supply System,
Pacific Gas & Electric, El Paso Electric, Tucson Electric, as well as
my prior written testimony to House and Senate Committees on Municipal
Bankruptcy and the government finance market including with respect to
Puerto Rico in 2015 and 2016.
the gathering storm and the evolution of promesa
In late 2015, this Committee was presented with the financial
problems and debt crisis the Commonwealth of Puerto Rico and its people
were suffering. The territory had over $70 billion of public debt and
pension liabilities of over $40 billion. PREPA had debt of
approximately $9 billion. Both the overall debt of Puerto Rico and the
PREPA debt were viewed as beyond their respective liquidity and the
perceived ability to pay as scheduled and created what appeared to be
an insurmountable burden to Puerto Rico and its people.
During the first part of 2016, Congress considered what needful
rules and regulations would be appropriate. At the same time, the
Commonwealth itself enacted in April 2016 the Moratorium Law (Art. No.
21-2016) purporting to suspend payment on the public debt. This caused
the expected negative reaction from debtholders and increased the
necessity for an effective mechanism for the resolution of financial
crisis. This Committee held hearings and Congress enacted the Puerto
Rico Oversight, Management and Economic Stability Act (``PROMESA''), 48
U.S.C. Sec. Sec. 2101-2241, signed into law by President Obama on June
30, 2016, which created Financial Oversight and Management Board for
Puerto Rico (the ``Oversight Board'' or ``FOMB'') for supervision and
assistance to Puerto Rico. In enacting PROMESA, Congress exercised its
power to ``make all needful rules and regulations respecting the
territory'' under the U.S. Constitution (Article IV, Sec. 3, cl. 2).
The Oversight Board was charged under PROMESA with being the
mechanism to achieve fiscal responsibility and economic and operational
recovery from the financial distress and debt burdens Puerto Rico was
suffering. PROMESA, as is evident from this Committee's Hearing, on
February 2, 2016, followed the tradition that states and the Federal
Government have chosen for providing oversight, supervision and an
effective mechanism to resolve the grave financial distress of
governments such as Puerto Rico and its related governmental entities.
The goal of all these legislative efforts is the creation of a
mechanism to encourage consensual resolution as in Title VI of PROMESA.
PROMESA is structured to foster such consensus and provide a last
resort to use a bankruptcy-like process for involuntary resolution, as
Title III of PROMESA does, to effectuate resolution of debt issues that
cannot effectively be resolved by agreement.
Unfortunately, PREPA has been the object of accusations of
politicization and changing leadership and priorities without an
efficient, focused management process and long-tenured, experienced and
skilled management. This is attributed to inappropriate political
influence in the management and operation of PREPA. These difficulties
resulted in the failure to (a) collect desperately needed customer
receivables causing liquidity problems, (b) maintain a sufficient rate
base and fund needed costs of operation, especially critical
improvements for the generation, transmission and distribution of
electric power at an acceptable level and (c) manage and operate the
electric utility with a stable management team for a reliable, well
maintained system with operating procedures to assure uninterrupted
electric power to all who desire it in Puerto Rico.
changing management policies and failure to collect receivables
desperately needed by prepa
For example, in 2012, after investing $50 million in a natural gas
pipeline, PREPA withdrew its plan for the pipeline amid a storm of
controversy, changing leadership and political debate. Further, FTI
Capital Advisors PREPA's consultant, report in late 2014 raised serious
and disturbing collection failures. Namely, of the approximately $950
million in outstanding accounts receivable for general (non-
governmental or managerial) customers, more than half were over 120
days old ($543 million out of a total of $943 million aged AR), $400
million in inactive receivables accounts for which there was no
collection activity or strategy and $420 million outstanding accounts
receivable from municipalities.
failure to maintain a sufficient rate base to pay needed improvements
and costs of operations
It has been claimed that PREPA failed to increase its rate base
(for non-fiscal expenses such as administrative, capital investment and
debt service) which resulted in years of inadequate rates to cover
PREPA costs. As was evident from the aftermath of Hurricane Maria,
PREPA's power grid and aged facilities have long needed immediate
attention to be enhanced by improved maintenance and reinvestment to
the infrastructure in order to become durable, acceptable and hopefully
hurricane proof.
The above were part of the reason why it was necessary for Congress
to enact PROMESA. However despite progress being made post-PROMESA,
there are still operational problems for PREPA and gridlock in
negotiations of a reasonable and fair resolution of the distressed debt
situation. Creditors claim that:
``Despite the progress that was made, there are still
operational problems at the utility, including numerous power
outages. PREPA suffers from: (1) poor system reliability and
availability driven by poor maintenance and operation
procedures, (2) poor levels of customer service, (3) poor level
of collections and high levels of energy theft, (4) poor worker
safety, (5) insufficient budgeting and capital planning rigor,
and (6) inefficient procurement processes. HasBrouck Decl. at
para. 9.
Far from moving to fix these problems, the new Puerto Rico
administration is making them worse by destroying PREPA's hard-
won political independence. Shortly after he took office,
Governor Rossello signed into law an act that granted the
Puerto Rico Fiscal Agency and Financial Advisory Authority
(``AAFAF'') sole authority to negotiate with public
corporations' creditors. Act 2-2017 at Sec. 6(cc). Notably, the
Governor appoints the majority of the AAFAF board members, and
there are no restrictions on his ability to remove those
members. Former President of the PREPA board Luis Benitez
testified that ``in late 2016, PREPA and its creditors reached
an agreement in principle to modify certain terms of the RSA,
subject to approval by [AAFAF] . . .. The agreement in
principle, however, was not executed because AAFAF assumed
responsibility for creditor negotiations on January 27, 2017.''
\2\
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\2\ See Motion of Ad Hoc Group of PREPA Bondholders, National
Public Finance Guarantee Corporate, Assured Guaranty Corp., Assured
Guaranty Municipal Corp., and Syncora Guarantee Inc. for Relief from
the Automatic Stay to Allow Movants to Enforce Their Statutory Rights
to Have a Receiver Appointed, In re Financial Oversight and Management
Board for Puerto Rico, as representative of The Puerto Rico Electric
Power Authority, Case No. 17 BK04780 in the United States District
Court for the District of Puerto Rico.
While there may be some debate over the level and quality of
electric service provided by PREPA, the tragic effects of Hurricane
Maria left no room for debate that there is an urgent need for
reinvesting in and significant improvement to the power grid,
generation, transmission and distribution system for the benefit of
Puerto Rico's social and economic good and the success of any financial
recovery plan.\3\
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\3\ Hurricane Maria made Puerto Rico the biggest blackout in U.S.
history with about 3.4 billion customer hours of lost electricity
service. Also, it topped recent global blackouts such as two back to
back blackouts in India in 2012 that affected hundreds of millions of
people but combined 2.5 billion lost customer hours due to a shorter
duration. Rhodium Group, ``The World's Second Largest Blackout,'' April
12, 2018, available at http://rgh.com./research/Puerto-rico-hurricane-
maria-worlds-second-largest blackout/.
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For these and other reasons, in 2018, the Governor of Puerto Rico
has recently proposed the privatization of PREPA as a means of
addressing the much-needed infrastructure improvements to the aged
electric system. However the billing and management problem of the past
are reappearing, such as in January some customers left in the dark for
months received bills for services rendered. The operational failure of
PREPA has negative social and economic effects. As service was restored
after Maria, the consequences of the prolonged power shortage continue
to be suffered by Puerto Rico and its citizens including ``increased
crime, business closures and unemployment, a healthcare crisis and
exodus to the U.S.'' were suffered by Puerto Rico.
the missed opportunity for consensual resolution by creditors and prepa
During 2016 and the first half of 2017, certain public debt
creditors and PREPA negotiated a Restructuring Support Agreement
(``RSA''). Puerto Rico's legislature passed legislation authorizing the
resolution. There was a change in governors in Puerto Rico at the
beginning of 2017, and the new governor was able to negotiate in April,
2017 (as a new participant in the process) additional enhancements to
RSA that would provide additional and much needed liquidity and further
concession to the benefit of PREPA and the people of Puerto Rico.
Further, the RSA was negotiated and structured to provide needed
improvement in management and operation and had a rate path approved by
the Puerto Rico Energy Commission on January 10, 2017. It should be
noted that this RSA appears to be in keeping with the intent and spirit
of PROMESA and would be a major step in the operational and financial
recovery of PREPA. All that was needed was for the Oversight Board to
certify the resolution for Title VI court approval. Unfortunately, in
June, 2017, the Oversight Board rejected the settlement and refused to
certify RSA for Title VI court approval.
The inability to implement RSA due to the Oversight Board's refusal
to certify it for Title VI left PREPA and its creditors without a clear
agreed path to recovery and resolution of issues. This created the
impasse between PREPA and its major creditors that prevented a
resolution and resulted in PREPA being placed under the protection of
Title III of PROMESA on July 2, 2017. (PROMESA Bankruptcy Title).
the recent and repeated changes in prepa's management have been an
obstacle to operational improvements and successful resolution of
issues
As previously noted, the changing politics and leadership of PREPA
appear to exacerbate an already difficult and distressed utility
operation. As news reports have highlighted, there have been five
leaders of PREPA over the last 17 months with drama and uncertainty of
long term plans.
The following timeline supports the claim that there have been
unfortunate changes of leadership of PREPA that have created
instability in PREPA's operations and governance:
Timeline of PREPA Governance Changes
March 2017: Gov. Rossello appoints Ricardo Ramos as executive director
of PREPA as part of strategy to ``replace the leaders of all Puerto
Rico's public corporations.''
June 26, 2017: Governor signs Act 37-2017, which allows him to appoint
three political appointees and three independent board members, all
subject to his right to remove them if they disagree with his public
policy.
June 28, 2017: Gov. Rossello appoints three new board members,
including an existing member of his administration and the treasurer of
his gubernatorial campaign.
November 13, 2017: In response to the FOMB's motion to install a
``Chief Transformation Officer'' at PREPA, the Title III Court rules
that the FOMB lacks authority to appoint a CTO.
November 17, 2017: Ricardo Ramos resigns following the slow pace of
post-hurricane power restoration and criticism of the $300 million
contract he signed with Whitefish Energy.
November 2017: Gov. Rossello appoints Justo Gonzalez as interim
executive director.
March 21, 2018: PREPA's board appoints mainland utility executive
Walter Higgins as executive director.
July 11, 2018:
Walter Higgins resigns as executive director, citing
family health issues and criticism of the contract under
which he served for a salary of $450,000 per year, with
bonus incentives.
The PREPA board of directors announces the appointment of
one of its members, Rafael Diaz-Granados, as executive
director at a salary of $750,000 per year.
July 12, 2018:
In a press release, Gov. Rossello characterizes Diaz-
Granados' proposed salary as excessive and states that if
the PREPA Board does not ``temper the salary to what I am
proposing'' then its members must resign. Diaz-Granados
withdraws as executive director the next day.
Five independent board members, including Rafael Diaz-
Granados, resign in a letter stating that ``political
forces in Puerto Rico'' who ``want to continue to control
PREPA'' had been meddling in their decisions. The board is
left without a quorum.
After the board resignations, Gov. Rossello appoints Eli
Diaz, president of the Puerto Rico Aqueduct and Sewer
Authority and Ralph Kreil, an engineer, to maintain a
quorum.
July 18, 2018: Gov. Rossello announces that Jose Ortiz, a former
chairman of PREPA's board, will serve as executive director.
This history of a revolving door for leadership, along with the
lack of operational success of PREPA, combined with the saga of the
missed opportunity at peaceful resolution through RSA raise the
question of whether there should be different oversight with a less
politically influenced leadership and management of PREPA, at least
until the resolution of debt issues, the transition to stabilize
management and an acceptable recovery plan for PREPA have been attained
and implemented.
is there a need to change prepa oversight and supervision from the
current fomb to possibly doe?
Given the purported impasse that the Oversight Board has with PREPA
and the public debtholders as evidenced by the rejection of RSA, the
question is raised how to resolve this unfortunate gridlock where no or
little progress has been made over the last year. Some have proposed
the U.S. Department of Energy (``DOE'') or a Federal entity under DOE
supervision should be considered a good candidate to be substituted for
the current Oversight Board in supervising and assisting PREPA to
resolution of its operational problems, rate issues and financial
distress. On June 20, 2018, the DOE issued its recommendation for
Puerto Rico--The Office of Electricity released its ``Energy Resilience
Solution for the Puerto Rico Grid (``DOE June 2018 Report''). This
report details DOE's vision for rebuilding a resilient energy system in
Puerto Rico. It suggested hardening infrastructure, as well as
integrating clean energy technologies such as solar and energy storage
with the island's energy portfolio. This report was intended to assist
the island's government in drafting recovery plans and guiding the use
of Federal aid. DOE appears well suited to provide the oversight,
supervision and assistance that PREPA needs and so far has been in
search for. It should be noted and recognized that Puerto Rico, its
governor and related entities and the Oversight Board have a tremendous
burden in dealing with the totality of Puerto Rico, its
instrumentalities, public corporations and its local governments with
unpredictable emergencies that demand immediate attention. One might
speculate that the burden of the diversity and complexities of these
matters is practically too heavy for one Oversight Board and
Commonwealth to navigate all at the same time. Perhaps shifting the
oversight to a Federal entity such as the DOE with some expanded powers
might assist PREPA and Puerto Rico and ease the burden and allow the
Oversight Board to focus on other items of the Puerto Rico debt
adjustment processes that demand more attention. DOE has issued its
June 2018 Report and is already working with FEMA and PREPA and is
assisting with technical advice and assistance. Further, as the acting
Chairman of Puerto Rico Energy Commission has noted on May 8, 2018 to
the U.S. Senate Committee on Energy and Natural Resources, ``The
Commission continues to face unnecessary, avoidable obstacles in
carrying out its statutory duties and has continuing disputes with the
current Oversight Board that appear to be counterproductive.''
DOE has the expertise, resources and mission to be a substitute
oversight to supervise PREPA, navigate the PROMESA process as the
Oversight Board for PREPA, and assist in evaluating appropriate rates,
selection of appropriate governance and management, and, if
appropriate, implementation of the privatization process. Further, DOE
is more than capable in assisting PREPA in using PROMESA's Title V to
expedite and implement needed regulatory permits that would allow more
efficient and reliable power projects. It could assist in necessary
steps to improve PREPA's infrastructure hardening and to hurricane
proof PREPA's electric grid and power distribution and generation
ability. Since PREPA's future and effectiveness will depend on
technical and operational issues that need to be addressed as quickly
as possible, it may be superior to the current Oversight Board to have
DOE or an entity like DOE with the expertise and resources in the
energy field to supervise, and this may eliminate the need for
education of the Oversight Board regarding any such initiatives. It
also would be a clear break from past disagreement that the Oversight
Board and even the Governor have had with PREPA and may foster a new
opportunity at rekindling resolution efforts that has been for the most
part missing over the last year or so. Further, DOE supervision and
oversight also appear to be superior to political influence and
changing management as noted above that seem to have impaired PREPA's
operation.
Accordingly, PREPA under Federal supervision and control with DOE
having oversight over PREPA and its rate making efforts may be in the
best interest of all. It frees up the current Oversight Board to deal
with the never ending list of issues to be resolved in the Puerto Rico
financial crisis and allows the Governor and Legislature to focus on
other pressing problems. At the same time, there is no loss of future
momentum because DOE through its past efforts in hurricane relief has
been educated to the obstacles and problems facing PREPA. This
supervision of power supply system has some precedent support in the
Tennessee Valley Authority (``TVA''), 16 U.S.C. Sec. 831 et seq., and
Bonneville, 16 U.S.C. Sec. 832 et seq., and Federal Energy Regulatory
Commission (``FERC'') where Federal assistance enhanced the supplying
of power for the benefit of the welfare of citizens and businesses of a
number of states.
There are at least three reasons why PREPA would benefit from DOE
supervision and oversight:
1. Provide Needed Permanent and Stable Board and Management for
PREPA. As noted above, the last 17 months have been subject
to no less than five leadership changes, and corporate
governance issues related to PREPA include executive
retention and stability of management. Even the newly
appointed CEO, Jose Ortiz, may face the challenge of having
to reverse his past policies and decisions he made.
2. Create a New Opportunity for Voluntary Resolution. Both the
Oversight Board and PREPA's current management have past
disputes and a political history that could benefit from a
change in supervision. A change could re-focus the effort
on debt resolution so that needed reforms for PREPA in
operation and administration can be addressed, such as
renewable energy, and further analysis of fuel supply
contracts, capital expenditures, proposed financing,
privatization, etc. The positive and constructive attitude
can remove the cloud of a bickering and combative
relationship between the creditors and the Oversight Board
and the Commonwealth.
3. PREPA's Change in Oversight May Open Other Doors under PROMESA.
As noted above, PROMESA was intended to provide not only
financial debt resolution and fiscal oversight but also
infrastructure revitalization under Title V. There is
provided in Title V expedited permitting for critical
projects and, given DOE expertise, resources and mission,
that may be better accomplished with DOE overseeing the
process. The current Oversight Board, the Puerto Rico
Energy Commission and Governor do not presently appear to
be on the same page. The Governor has sued the Oversight
Board over its budgetary decisions and the acting Chairman
of the Commission in his testimony to the U.S. Senate in
May 2018 appeared perplexed over the perceived lack of
cooperation.\4\
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\4\ The Acting Commissioner stated:
In addition, FOMB [the Oversight Board] claims in its documents to
support independent, strong regulation of monopoly electric services.
But its actions are undermining regulation by giving PREPA an excuse to
avoid the Commission's orders--PREPA gives as its reason that the
Commission's powers are pre-empted by the FOMB . . ..
FOMB continues its practice, which I summarized in my last
appearance, of ignoring every Commission effort to cooperate in the
adoption of a set of procedures that would allow the Commission and
FOMB to support each other's work. The most recent effort by the
Commission was the draft protocols attached to my testimony, which have
been shared with FOMB. It is a balanced document, addressing each major
area of the Commission's Act 57 authority and describing ways for the
FOMB and Commission to mesh their work in that area. FOMB has
consistently rejected our offers for cooperation. Instead FOMB argues
that it can ``substitute'' for the Commission, and has provided as much
in the certified PREPA Fiscal Plan. Congress did not grant FOMB that
authority. Written Testimony of Jose Roman Morales PE, Acting Chairman,
Puerto Rico Energy Commission, to U.S. Senate Committee, May 8, 2018,
p. 4.
In order to resolve this controversy between the current Oversight
Board and the Puerto Rico Energy Commission, Congress could transfer
oversight and supervision of PREPA to DOE to establish stable and
skilled management (thereby curing the past changing leadership and
operational difficulties) to establish an appropriate rate path,
explore privatization (as the Governor and recent legislation in Puerto
Rico have supported). DOE could select appropriate management and
oversee rate making in a prudent and fair manner that addresses past
failing to set rates for full cost of reasonable and necessary
operation and maintenance including fuel and generator costs, debt
service, capital expenditures and improvements and administrative
expenses that previously have been a problem. PREPA's perceived goal
should be to obtain the necessary guidance and financing for the
required infrastructure improvements to the electric utility system to
assure a durable power generation transmission and distribution without
interruption and capable of withstanding any future hurricane. A change
in oversight to the DOE may be just the medicine the doctor ordered. It
is within the power and province of Congress under the Territorial
Clause to the U.S. Constitution (Article IV, Sec. 3, cl. 2) to make
needful rules and regulations. The change in oversight might be that
crucial act that resets debt settlement negotiations and foster a
possible consensual resolution that is to be favored over a litigious
result.
prepa needs a permanent fix and not a band aid
Under the current Oversight Board with its disputes with the
Governor and the Puerto Rico Emergency Commission, it is doubtful PREPA
can promptly and successfully benefit from PROMESA. To date, use of
Title VI has been underutilized to virtual non-existence especially
with regard to the Oversight Board's rejection of certification in
connection with RSA, and Title III as an involuntary resolution process
has perhaps been overused to the extent that virtually everything is a
trial by combat. As any winning baseball team recognizes, a pitcher's
effectiveness cannot be assured for every day and every batter, and a
change in pitcher to suit the batter and the day may win the game.
Accordingly, DOE may be able to provide just the oversight,
technical assistance, expertise and resources that help PREPA and the
Commonwealth resolve PREPA's debt and operational issues before another
ill wind blows away good intentions and post-constructive efforts. DOE
supervision can be premised on establishing stable management, a
prudent business plan with necessary enhancements to infrastructure for
protection of the power grid for uninterrupted power service. The DOE
oversight may better provide consideration of whether there should be
the transition of PREPA operation to privatization or other form of
continued operation. The goal is to return to Puerto Rico an electric
utility worthy of its people and capable of assisting in Puerto Rico's
recovery effort and attracting business expansion and development with
assured and uninterrupted ``hurricane proof'' electric power.
Why Is This Important? First, the people of Puerto Rico as U.S.
citizens deserve an electric utility that meets their needs and desires
without fear of a strong wind changing their fate. Also, utilities are
the essence of government services and part of the health, safety and
welfare of its citizens. Electric power shines light to prevent crimes,
promote business and economic development, light homes, businesses,
schools, hospitals and virtually every facet of life. Revenue bond
financing has been the financial support for utilities and municipal
enterprises. Congress in the 1988 Amendment to the Bankruptcy Code,
Pub. L. No. 100-597 (1988) intended to assure the financial market of
protection for those who would finance needed utilities improvements
and infrastructure renovation by assuring their right to receive timely
payment even in a Chapter 9 (municipal bankruptcy proceeding). The 1988
Amendments to the U.S. Bankruptcy Code require that the benefit of
their bargain be maintained. Likewise, the failure to address PREPA's
operational and financial problems and obtain a prompt resolution can
not only generate a cloud over PREPA but also over revenue bond
financing that presently makes up about half of state and local
government financing. Accordingly, the fate of PREPA and its resolution
or lack thereof could not only adversely affect the electric utility
the people of Puerto Rico desire but also the capital market response
could have consequences for not only Puerto Rico future access to the
capital market and borrowing cost but also could affect all who use and
benefit from revenue bond financing.
In this regard it should be remembered that revenue bond financing
is the major source of infrastructure financing. Revenue bond financing
is key to needed infrastructure financing. The American Society of
Civil Engineers (``ASCE''), in its 2013 Report, estimates the cost to
maintain infrastructure at a passable level will be $3.6 trillion by
2020 or about four times the annual tax revenues for all state and
local governments. In 2009, ASCE's number for the next 5 years was $2.2
trillion. Inattention has caused the number to increase by $1.4
trillion in 5 years. ASCE's 2017 Report stated the cumulative
infrastructure funding need based on current trends extended to 2025,
is $4.59 trillion to have passable infrastructure with an estimated
funding gap of over $2 trillion. In whole or in part, revenue bond
financing will be called on to fund the $2 trillion gap. ASCE
discovered in its 2016 economic study ``Failure to Act Closing the
Infrastructure Investment Gap for America's Economic Future'' that the
failure to do necessary infrastructure improvements in the U.S.A. will
cost the country $3.9 trillion in losses suffered to the GDP by 2025,
$7 trillion in lost business sales by 2025 and $2.5 million in lost
American jobs in 2025.
Further, any negative result in the restructuring of PREPA could
have a perception of additional risk to revenue bond financing.
Perception of increased risk is what makes a form of financing cease to
be viewed in the market as strong (assured payment from a solvent
enterprise) and to be viewed as a weaker credit. Limited access to the
market and the increased cost of borrowing can result from being
perceived as a weaker credit. One of the purposes of PROMESA is to have
Puerto Rico and in this case PREPA regain market acceptance to provide
market access and help lower the cost of borrowing. This negative
perception of risk from a failure to promptly resolve PREPA's financial
and operational problems may cost Puerto Rico in access to the market
for financing or significant increase in future borrowing costs. This
negative perception could have a similar effect on some weaker state
and local governments.
Traditionally, the spread in the municipal market between strong
credits (top investment grade) and significantly weak credits (lower
non-investment grade) was 200-300 basis points.
To Puerto Rico, a state or local government, an increase in
interest costs (interest rate) of 200 basis points per year or 2
percent more interest cost a year on a 20-year bond with a bullet
maturity would be 40 percent more of the principal amount paid as
interest over 20 years. Put another way, on a billion dollar debt issue
with a 20-year maturity and a bullet payment of principal at maturity,
a 2 percent additional interest cost per annum would be a present value
at a 5 percent discount of about $250 million or 25 percent of the face
amount. That is $250 million not available to Puerto Rico, a state or
local government to pay needed infrastructure improvements, public
services, worker salaries, retiree benefits or tax relief to its
citizens.
would doe as oversight board for prepa violate puerto rico's
sovereignty?
The obvious concern of having the U.S. Department of Energy
exercise supervision and assistance to PREPA under PROMESA and support
prudent and reasonable ratemaking is whether that would be offensive to
Puerto Rico's sovereignty. First, this is apparently a no different
effect on Puerto Rico's sovereignty than the federally appointed
individuals on the current Oversight Board. Second, DOE does have
expertise, resources and interest in the PREPA resolution. Third, DOE
is already in conjunction with FEMA assisting and cooperating with
PREPA, including the DOE June 2018 Report, is knowledgeable of the
issues and has provided analysis of possible solution to PREPA's
problem. Fourth, Puerto Rico is a Territory of the United States and,
while the 1952 Constitution of Puerto Rico gave the Commonwealth of
Puerto Rico jurisdiction over its domestic affairs, there was no
surrender of Congress' power under the Territorial Clause ``to make
needful rules and regulations.'' Accordingly, after careful
consideration, the oversight by DOE of PREPA under PROMESA should not
be deemed offensive and may well be viewed a positive and constructive
turn of events by PREPA and the Commonwealth.
the time is right to consider possible changes to the oversight and
supervision of prepa
PREPA continues to suffer from past operational and financial
difficulties. These problems have continued despite the enactment and
implementation of PROMESA almost 2 years ago. Further, despite the best
intention of the drafters of PROMESA, there are the problems of
disputes and disagreements between the current Oversight Board, the
Commonwealth, the Governor and PREPA not to mention the creditors. A
promising resolution of PREPA's problems in RSA supported by major
creditors, PREPA, Puerto Rico legislative action and Energy Commission
were dashed by the current Oversight Board rejection and refusal to
certify the settlement for Title VI court approval. The resulting Title
III insolvency proceeding, commenced about a year ago for involuntary
resolution, has not produced any constructive results or helped
encourage consensual resolution. In fact, the current situation appears
to have produced grid lock and ever-changing leadership at PREPA
without further resolution of disputes between the current Oversight
Board, Puerto Rico Energy Commission, the Governor and PREPA. There
have been and there appear to be no effective restructuring efforts for
public debt (except trial by combat in the Title III court proceeding)
nor any effective funding of needed infrastructure improvements. DOE
appears to be a favored possibility for oversight, supervision and
resolution and capable of selecting stable management and considering
appropriate operations and alternatives, including privatization.
Resolution now or as soon as possible will allow a favorable perception
in the capital market to future financing of needed improvements.
Failure to in the near term to reach resolution of PREPA's issues may
deprive Puerto Rico of the durable electric power needed for a recovery
plan and economic development. The failure to reach resolution of
PREPA's issues in the near term may also disappoint the capital markets
that will adversely affect the cost of future borrowings by Puerto Rico
and possibly others. Further, failure to consider change of the
Oversight Board may challenge the ability to obtain a successful
resolution of public debt.
Accordingly, the proposal for a change in oversight and supervision
of PREPA under PROMESA is worthy of this Committee's consideration.
Congress has under the Territorial clause of the U.S. Constitution the
power ``to make needful rules and regulation'' for Puerto Rico and to
adjust oversight and supervision under PROMESA for PREPA in order to
provide Puerto Rico, PREPA and creditors with an enhanced opportunity
to find a consensual resolution. Thereby, they all may engage in
constructive efforts to provide Puerto Rico and its citizens with the
electric utility it needs and desires and demonstrate to the capital
markets Puerto Rico and PREPA are responsible and credit worthy
borrowers that should have access to the capital market to borrow at
reasonable costs for needed infrastructure improvements.
______
Questions Submitted for the Record to Mr. James Spiotto,\1\ Managing
Director of Chapman Strategic Advisors LLC
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\1\ The views expressed herein are solely those of the author and
do not reflect the position, opinion or views of Chapman and Cutler LLP
or Chapman Strategic Advisors LLC.
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Question Submitted by Rep. McClintock
Question 1. What would be the effect of repealing PROMESA and
allowing the court system and the free market to work out the claims of
creditors and the future of PREPA?
Answer. If PROMESA was repealed and traditional rights and remedies
of electric utility creditors were to be exercised against PREPA in
restructuring or resolving the defaulted public debt and other
obligations owed to creditors, the situation would be significantly
different.
Assuming, as is the case for Puerto Rico, that there is no
authorized Federal bankruptcy proceeding for Puerto Rico and PREPA
(absent that authorized by PROMESA), the financial distress of PREPA,
its lack of liquidity and default on public debt obligations create a
situation where bondholders and the bond trustee would look to
traditional remedies provided for under the Indenture \2\ and
applicable law to resolve the default. There is no doubt that defaults
exist under the Indenture (i.e., failure to comply with the rate
covenant to maintain sufficient rates (Section 502 of the Indenture),
failure to pay all public debt obligations (see e.g., Section 701 of
the Indenture) or other lawful charges that become due and payable
(Section 701 of the Indenture) and failure to appropriately maintain
the electric utility system to a level of operation and service that
would generally be viewed as good repair and sound operative condition
in an efficient and economical manner (Section 702 of Indenture). Since
there are defaults on public debt, public debt creditors have
traditional remedies under their respective documents.
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\2\ Trust Agreement between Puerto Rico Electric Power Authority
and U.S. Bank National Association as Successor Trustee Dated as of
January 1, 1974, as amended and supplemented (the ``Indenture'').
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Traditional Remedy of Utility Bondholders upon Default to Have a
Receiver Appointed, etc.
The public debt creditors of PREPA hold revenue bonds issued by
PREPA using a bond trustee. The bond trustee upon default becomes what
is referred to as a ``prudent person'' to take such action on behalf of
the bondholders as a prudent person would take under the circumstances
to protect its property and rights. The indenture sets forth certain
remedies that the bond trustee and bondholders have upon default
including the right to request a court of competent jurisdiction to
appoint a receiver, the ability to file a lawsuit for money judgment
for past due payments not made, or for specific performance to require
increased rates or to make payments or perform other obligations under
the terms of the Indenture such as to perform required and necessary
maintenance or improvements. (Section 804 of Indenture.)
Generally, public debt creditors, possibly joined by other
creditors, would request the court appoint a receiver for PREPA. The
receiver would be appointed by the court based on recommendations by
creditors or other interested parties that would suggest for receiver
persons with sufficient experience and skill in electric utility
operations and management as ultimately determined by the court in the
selection process as capable of taking appropriate action to rectify
the operational and financial distress of the utility.
Proceeding to Have a Receiver Appointed
Typically, upon default, creditors promptly institute a proceeding
to have a receiver appointed. The goal is to have a receiver appointed
promptly within 30 to 60 days of a monetary default. The receiver along
with any necessary additional staff of the receiver would quickly study
the situation, interview current management and operators, investigate
and identify the causes of financial or operational distress and report
back to the court and creditors as to the problems and proposed action
to be taken to resolve those problems. The proposed action could
include raising rates on some or all utility customers, changes in
operation and maintenance, and, if possible, a restructured payment of
past debt on a consensual basis. This second phase occurs between 30
days to 120 days or more from a default and appointment of a receiver.
Reports to the Court and Consultation with Creditors
The public debt creditors (bondholders) and other creditors (for
fuel, goods and services) may well be consulted by the receiver as to a
proposed budget and rate path going forward to ensure the ongoing
operation and maintenance of the electric utility system and necessary
improvements as well as a proposal for payment of past defaulted debt
obligations and current and ongoing debt and operation and maintenance
expenses (``Recovery Plan''). The receiver would report to the court
and creditors on a periodic basis during the first 6 months to a year
from default. The more significant the operational or financial
problems, the more time may be required to reach resolution of the
issues.
The bond trustee and bondholders may be organized, as in the case
of PREPA, into ad hoc groups (insured and uninsured bondholders groups,
bonds insurers and bond trustee). The bondholders and bond insurers
can, under the terms of the indenture direct the bond trustee to take
certain actions. The PREPA indenture provides that bondholders (or the
bond insurers) holding (25 percent) or more in principal amount of
bonds outstanding may direct the bond trustee to have a receiver
appointed (Section 804 of Indenture), and bondholders of 50 percent or
more in principal amount of bonds outstanding may direct the trustee as
to any other remedies to be taken or whether to support a Recovery Plan
of the receiver (Section 807 of Indenture).
Development of a Recovery Plan
Generally, within a year more or less from default, the receiver
(assuming one is appointed), the bondholders, bond trustee, bond
insurer and other creditors would have negotiated and agreed to a
proposed Recovery Plan for the repayment and, if appropriate,
restructuring of debt obligations along with an acceptable and feasible
rate path (rates, fee charges) sufficient to fund all restructured
debts, liabilities and operational expenses and obligations pursuant to
a recovery or business plan providing for the long-term operational
maintenance and capital improvements for the electricity system
(generation, transmission and distribution, as appropriate). This
Recovery Plan on a consensual basis would be required to be acceptable
to all creditors. If it is not acceptable to all creditors and the
receiver court does not over-rule the objections of the creditors who
do not accept the Recovery Plan, then a pre-packaged bankruptcy (if
allowed) could be instituted or an insolvency bankruptcy proceeding, if
available, could be explored to have the Recovery Plan enforced on non-
consenting holders assuming the required vote of accepting holders has
been obtained. Absent agreement of creditors or a confirmed bankruptcy
plan, the utility could be the subject of liquidation or sale of the
assets of the electrical system in whole or in part, possibly as a
receiver sale.
Recognition that a Receiver Could Be Appointed under PROMESA
Significantly, in an appeal from the Title III PREPA case to the
United States Court of Appeals for the First Circuit, the First Circuit
has just ruled that, under the PROMESA statute, the Title III court
could grant a creditor's motion to lift the automatic stay to pursue
the appointment of a receiver for PREPA. The Financial Oversight and
Management Board for Puerto Rico, etc., v. Ad Hoc Group of PREPA
Bondholders, et al., Case No. 17-2079, slip op. at 13 (1st Cir. Aug. 8,
2018).
PREPA was created as a body corporate and politic constituting a
public corporation and governmental instrumentality of Puerto Rico by
the Act No. 83 of the Legislature of Puerto Rico approved May 2, 1941,
as amended, re-enacted and supplemented (the ``Authority Act'').
Accordingly, under the Federal Bankruptcy Code, PREPA is a Governmental
Unit under 11 U.S.C. Sec. 101(27). Further, PREPA also qualifies as a
municipality under 11 U.S.C. Sec. 101(40) and (52). However, under the
Federal Bankruptcy Code, Puerto Rico is included in the definition of a
``State'' but not for purposes of defining who may be debt or under
Chapter 9 (municipal bankruptcy). Since PREPA is a Governmental Unit,
it is not a person that could file under Chapter 7 or 11 (corporate
debtors liquidation or reorganization). So, without PROMESA or further
authorization from Congress, PREPA could not file bankruptcy.
Resolution Alternatives If PROMESA Was Repealed
Accordingly, without further act of Congress, and if PROMESA were
repealed, PREPA's financial and operational distress would be subject
to one of these possible options: (1) a receivership with a successful
Recovery Plan as approved by creditors and the receivership case as
noted above, (2) a court supervised receiver sale or liquidation of
assets and operations of PREPA if a consensual Recovery Plan cannot be
agreed to or approved by the court over the objections of some
creditors, or (3) continuing creditor litigation attempting to collect
past due or accelerated debt.
This reality generally has a sobering effect on all sides.
Creditors recognize they will not continue to be paid if the utility
ceases to operate so adequate funding is necessary and PREPA recognizes
that continued operation at a reasonable cost is not possible unless
the creditors believe there is a reasonable, feasible Recovery Plan
that pays a reasonable recovery for creditors. This reality, at least
in the past, has promoted reasonable resolutions with the
acknowledgment by all that, if creditors demand too much for debt
payment too soon, it could adversely affect successful and continued
operations, and, if PREPA pays too little to creditors, it may threaten
needed consensual resolution and access to the capital markets for
needed funding of operations and capital improvements.
New RSA Proposed Resolution
It should be noted, representatives of the public debt of PREPA,
the ad hoc group of bondholders, PREPA, the Commonwealth and its
governor, Puerto Rico Energy Commission (``PREC'') and Puerto Rico
Fiscal Agency and Financial Advisory Authority (``AAFAF'') had all
reached agreement in the first half of 2017 to a financial
restructuring under the Restructuring Support Agreement of 2017
(``RSA''). Unfortunately, the Oversight Board for PROMESA (``FOMB'')
refused to certify that RSA for Title VI court approval. After the July
25, 2018 Hearing, on July 30, 2018, a new RSA was reached by the
agreement of the Commonwealth, the ad hoc group of PREPA bondholders,
AAFAF, PREPA and FOMB. This 2018 RSA is a tentative agreement on a
financial restructuring subject to working out certain details. This is
a constructive development that could be the significant step in
developing, with all parties related to PREPA, a consensual Recovery
Plant that is reasonable, fair, feasible and in the best interests of
all. This would then provide PREPA and its creditors the basis for
implementing the Recovery Plan by privatization, an ongoing
restructured PREPA, a system of microgrids or such other viable
electricity system that would provide resilient, non-interrupted
electricity as needed and desired by the people of Puerto Rico with
appropriate consideration of renewable energy and reasonable rates with
a long-term viable business plan that has the buy-in of all the major
parties.
Questions Submitted by Rep. Hice
Question 1. Is it not the case that the Puerto Rican Constitution
requires that general obligation debt must be paid before all other
expenses?
Answer. The Puerto Rico Constitution is explicit in providing
protection for the Commonwealth's Constitutional Public Debt. Section 8
of Article VI of the Constitution provides that:
In case the available resources including surplus for any
fiscal year are insufficient to meet the appropriations made
for that year, interest on the public debt and amortization
thereof shall first be paid, and other disbursements shall
thereafter be made in accordance with the order of priorities
established by law.
P.R. Const. art. VI Sec. 8 (emphasis added).
It is interesting to note that Section 8 was adopted from a
provision of the Jones Act, Pub. L. No. 64-368, 39 Stat. 951 (1917),
which governed the Commonwealth prior to the adoption of Puerto Rico's
Constitution in 1952. Section 34 of the Jones Act provided a default
prioritization of expenditures, listing ``interest on any public debt''
in the first-priority position along with the ``ordinary expenses'' of
the insular government. Id. Sec. 34. Unlike the prior provision in the
Jones Act, however, Section 8 of the Puerto Rico Constitution provides
Constitutional Public Debt \3\ first priority; Constitutional Public
Debt does not share that position with ``ordinary expenses'' of
government. Likewise, whereas the Jones Act provided only a default
prioritization of government spending that was subject to revision by
the Governor, Section 8 of the Puerto Rico Constitution does not
provide any over-ride by the Governor or the Legislative Assembly.
Accordingly, adoption of Section 8 of the Puerto Rico Constitution was
a deliberate choice to strengthen the protections afforded to
Constitutional Public Debtholders.
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\3\ ``Constitutional Public Debt'' is public debt authorized under
Puerto Rico Constitution and limited to 15 percent of the average of
the total amount of annual revenues raised under the provisions of
Commonwealth legislation and deposited into the Treasury of Puerto Rico
(P.R. Constitution Article VI Sec. 2). This does not include debts such
as COFINA bonds, or debts of public corporations (including PREPA) or
other instrumentalities of Puerto Rico.
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The Need to Provide for Funding of Essential Governmental Services
It is acknowledged that any financially distressed government, as
part of the essential purpose of government, must continue to provide
necessary services at an acceptable level to its citizens or suffer the
consequences of financial and operational meltdown of government.
Congress in 1917, in enacting the Jones Act for Puerto Rico, recognized
that need to pay for the ordinary expenses of the island government,
literally to keep the lights on, and to allow citizens to pursue their
destiny. Further, the city of Detroit from 1960 through 2013 and
Bridgeport, Connecticut in the late 1980s and early 1990s demonstrate,
if a financially distressed government raises taxes and lowers services
by a reduction in expenditures beyond that deemed acceptable by its
citizens, the result normally is loss of individual and corporate tax
payers and the resulting loss of revenue rather than the expected
increases.
Repeated annual failure to provide needed and essential
governmental services can be fatal to the recovery of a financially
distressed government, and can lead to the ``death spiral'' of the
government. The need to fund and supply required services by a
government in financial distress may make the utmost practical sense
but that does not comply with the spirit and intent of the treatment of
Puerto Rico Constitutional Debt under its 1952 Constitution as a
further refinement to the Jones Act.
Clearly, the human suffering and tragic results of a financially
challenged economy and Hurricane Maria's ill wind wiping out basic
governmental services such as water, electricity, roads, etc., would
appear to be a justification for paying current operational costs to
provide the barest of needed services. Further, the Jones Act appears
to give, historically, precedent for priority payment of island
expenses along with its public debt. However, there is the argument
over what the words ``available resources'' (``Recursos Disponibles'')
in Section 8 actually mean. Do they mean all revenues deposited in the
Treasury or all revenues that are available to be expended for public
debt services after paying for needed essential government services?
Also, there is the issue raised by the COFINA bondholders that, given
their non-constitutional public debt that has a pledge of sales and use
taxes (``SUT'') as their sole source of payment, the SUT used to pay
COFINA bonds, should not be included in ``available resources'' that
are available to pay Constitutional Public Debt when there are
insufficient revenues. The resolution of current litigation over what
``available resources'' means and whether it includes or excludes SUT
or whether ``available'' is after payment of necessary government
expenses is yet to be resolved or determined by the court.\4\
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\4\ On August 8, 2018, the Commonwealth, Oversight Board and a
group of COFINA bondholders and bond insurers announced a proposed
resolution of SUT revenues and payment to Senior holders of about 93
percent of their claims and 56.4 percent recovery for Junior holders
and an overall (average) recovery of 74.5 percent on all COFINA bonds.
The proposed resolution is subject to court approval.
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The Serious Consequences of Failing to Timely Pay Public Debt
Further, there are serious consequences for not following the
Constitutional requirements to timely pay public debt. Your question
points out the principle that the Jones Act and the 1952 Constitution
have highlighted, namely, the necessity for governments to honor their
public debt obligations because the failure to do so can adversely
affect their access to the capital market or the cost of borrowing.\5\
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\5\ Traditionally, the spread in the municipal market between the
market perception of strong credits (top investment grade) and
significantly weak credits (lower non-investment grade) was 200-300
basis points. (See e.g., approximately 200 basis point trading spread
between Detroit sewer and water with and without Chapter 9 threat and
Chicago sale tax securitization approximately 275 basis point lower
than similar Chicago maturities.)
To Puerto Rico just like any state or local government, a 200 point
per year or 2 percent more interest cost a year on a 20-year bond with
a bullet maturity would be 40 percent more of the principal amount paid
as interest over 20 years. Put another way, on a billion dollar debt
issue with a 20-year maturity and a bullet payment of principal at
maturity, a 2 percent additional interest cost per annum would be a
present value at a 5 percent discount of about $250 million or 25
percent of the face amount. That is $250 million not available to state
or local government to pay needed infrastructure improvements, public
services, worker salaries, retiree benefits or tax relief to its
citizens.
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Accordingly, the Jones Act and the 1952 Constitution of Puerto
Rico, as well as amendments thereafter, support the principle of paying
public debt in order to prevent being denied access to the capital
markets or incurring an unnecessary increase in borrowing costs. It
would be helpful to have a consensual resolution of the public debt as
well as all debt of PREPA to prevent the adverse consequence of a
hostile debt restructuring that is viewed by the capital markets (the
future source of needed financing for Puerto Rico and PREPA) as unfair,
unreasonable and contrary to establish law and principles of government
financing.
Question 2. Why has the FOMB set up a fiscal plan that currently
allocates zero dollars for debt repayment--if the purpose of all the
work we have been doing is to reduce the debt burden in order to
restore Puerto Rico's access to capital markets, can you explain why
paying down the debt seems to be the last priority?
Answer. I am not aware that FOMB expressed a reason for its fiscal
plan for Puerto Rico that does not allocate revenue to the payment of
public debt, but FOMB suggests there will be surplus funds during and
at the end of the budgeted period that could be used to pay public
debt. Perhaps FOMB was interested in demonstrating that the fiscal plan
had sufficient funds to pay anticipated costs of government services
and still have a surplus at the end of the budgeted period. From past
history of negotiations with creditors, especially public debt
creditors, it would be helpful for FOMB to explain what rights to
payment and revenues the public debt or other creditors have. Are they
secured? Do they have a pledge of revenues from which they are entitled
under the law to receive payment? Also, FOMB should explain the
treatment under any proposed recovery plan for any restructuring of the
debt and justification for any reduction in payment or impairment of a
purported secured claim or pledge of revenues. Hopefully, in
negotiation between creditors and the Commonwealth, FOMB (as FOMB is
the Commonwealth's representative in the Title III proceeding) will
provide an explanation of what can be paid under the fiscal plan to
specific creditor groups and the rational and justification for such
treatment.
FOMB and the Governor may well claim, for negotiation purposes,
that they have left the treatment of specific public debt out of their
proposed fiscal plan. Governor Rossello's fiscal plan released March
23, 2018 had a cumulative cash-flow through Fiscal Year 2023 of $5.9
billion, up from $2.85 billion in the February 12, 2018 proposed
plan.\6\ The scheduled public debt service for that period through 2023
is $20.2 billion. So, if the surplus cash-flow through 2023 was used to
pay debt service on public debt during that period, it would pay
approximately 29.4 percent of debt service during the period (on
average). Obviously, some public debtholders will argue they are
entitled to more or are secured or have a pledge of revenues dedicated
to pay their debt and those issues will need to be addressed.
---------------------------------------------------------------------------
\6\ It should be noted that the modified fiscal plan proposed by
the FOMB and certified by a 6 to 1 vote on April 19, 2018 has only
about a $3.4 billion cash-flow surplus over the 6 years. This
difference between the Governor's fiscal plan and FOMB's will need to
be explained.
---------------------------------------------------------------------------
As noted in answer to the first question above, it is important to
Puerto Rico, and its future efforts to reinvest in Puerto Rico and
rebuild its infrastructure and its economy that it be able to borrow
funds in the capital market at reasonable costs. The failure to explain
and justify the restructuring of debt as reasonable, fair and in
compliance with applicable law and principles of government finance can
be detrimental to having access to borrowing and the ability to borrow
at a reasonable cost. The best solution is a consensual resolution
where creditors understand that their treatment in the restructuring,
while not as much as they desire, is the most that can be done in order
to have a successful restructuring and recovery for Puerto Rico and its
people and is in reasonable compliance with the law and principles of
government finance.
Question 3. Why do you believe the Oversight Board (FOMB) failed to
agree to the Restructuring Support Agreement (RSA) considering this was
an explicit mandate of PROMESA? Does that not indicate that the
Oversight Board believes it is not accountable to a government or
court?
Answer. The Oversight Board (FOMB) refused to certify the RSA in
June of 2017 despite, as I mentioned in my written testimony, the
approval of the Commonwealth with legislation authorizing the RSA, and
support and agreement to RSA by the ad hoc group of PREPA bondholders,
Puerto Rico Fiscal Agency and Financial Advisory Authority (``AAFAF'')
as well as rate approval of the Puerto Rico Energy Commission
(``PREC''). The Oversight Board's refusal to certify RSA was apparently
based on a disagreement over the structure of the resolution and rate
path to be followed with the Oversight Board disagreeing with virtually
all the other parties in interest. The refusal of the Oversight Board
to certify the RSA for a Title VI court-approved hearing about a year
ago led to gridlock and polarization of positions that caused the July
2, 2017 filing of PREPA under Title III of PROMESA, the involuntary
debt resolution mechanism.
New Proposed RSA Solution
As you know, after the July 25, 2018 Hearing by the Committee, the
Oversight Board with the Commonwealth, Governor, ad hoc group of PREPA
bondholders and AAFAF reached agreement on a new RSA similar in a
number of respects to the old RSA of 2017, so now there is a possible
path forward toward consensual resolution of the PREPA financial
situation subject either to input and approval of other creditors and
court approval in the Title III proceedings and a settlement and
Recovery Plan in Title III or, possibly with regard to the PREPA and
the public debt pool of claims, a Title VI court approval. Since PREPA
has other claims to resolve, it appears the settlement will be part of
a recovery plan to be approved in the Title III action. The consensual
resolution with public debt bondholders is far better than the
contested, litigated result.
Question 4. Do you believe that the replacement of FOMB and DOE
oversight would rectify many of the problems we are dealing with? What
gives you confidence in that assessment?
Answer. The court hearing the Title III proceeding decided a motion
to dismiss the Governor's lawsuit against the Oversight Board for
failure to approve the Governor's fiscal 2019 budget and certain policy
issues. The court ruled on August 7, 2018 that PROMESA reflected a
``power-sharing'' arrangement with the Oversight Board's ability to
supervise and approve budgets with the final say being with the
Oversight Board and the general continued power of the Commonwealth to
otherwise direct the policy for the Commonwealth.\7\
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\7\ Opinion and Order Granting in Part Defendants' Motion to
Dismiss the Company, Case No. 18-080 in 17 BK 3283, Hon. Ricardo
Antonio Rossello Nevares, etc., et al. v. The Financial Oversight and
Management Board of Puerto Rico, et al., (D.C. P.R., Aug. 7, 2018) slip
op. at 27.
---------------------------------------------------------------------------
It appears that part of the difficulties between the Oversight
Board (FOMB) and the Commonwealth and creditors is a difference in
perspective. As you know, Congress in enacting PROMESA was quite
diligent in protecting the dignity and respect to be accorded the
Commonwealth and its governmental bodies and elected officials as to
government and affairs issues. PROMESA, with respect to the yearly
budget for Puerto Rico, provides for the Commonwealth through the
Governor and the legislature to propose a fiscal year budget to be
reviewed and commented on by the Oversight Board.
If the Oversight Board does not approve the proposed fiscal year
budget, then the Governor considers the comments of the Oversight Board
relating to where the Oversight Board was troubled or concerned about
the budget and the Governor and legislature should address those
concerns in a revised budget that is submitted to the Oversight Board
for its approval or modification and approval (See Sections 202(d)(1)
and (2) or 202(e)(1) and (2) of PROMESA.)
As you are aware, disputes between the Oversight Board and the
Governor have arisen and, as noted above, the Governor sued the
Oversight Board over the extent of the powers of the Oversight Board to
have the final say as to fiscal budgets and policy for Puerto Rico.
This litigation is obviously not the best evidence of the relationship
of cooperative assistance and supervision that PROMESA envisioned for
the Commonwealth, Governor and Oversight Board to have. As mentioned,
on August 7, 2018, Judge Swain entered an Order setting forth the
balance of power to make the final decision on budgets between the
Oversight Board and the Governor and the Commonwealth. The result
recognized what PROMESA provided--proposal by the Governor, review and
either approval or disapproval by the Oversight Board of the proposed
fiscal year budget with comments as to what should be done for
obtaining approval, and the Governor then can make the change he
believes appropriate and resubmit the fiscal year budget to the
Oversight Board for fiscal oversight approval and, if necessary,
modification in order to be approved. These active and litigated
disputes in process are not constructive for anyone. Obviously, Puerto
Rico's concerns and issues must be considered along with the
supervision concerns of the Oversight Board. The differing perspectives
have unfortunately created a less than desired atmosphere with the
members of the Oversight Board being named as Defendants in their
official capacities in the lawsuit.
The insertion of DOE as the oversight and supervisor of PREPA would
be necessary if this general disagreement and litigious environment
were major obstacles for constructive consensual and effective
resolution of issues. Given the preliminary approval of the Oversight
Board to the new RSA of July 30, 2018, there may not be the major
obstacles to resolution of differences between PREPA (Commonwealth and
Governor) and the Oversight Board. If for some reason this hopeful
resolution should fail to win all necessary approvals and the Oversight
Board and PREPA (Commonwealth and Governor) are back to the gridlock
and difficulties of a year or even a month ago, then the DOE
replacement may make practical sense. DOE obviously has the skill,
resources, and experience to provide technical assistance and guidance
on the most appropriate Recovery Plan for PREPA as well as
consideration of microgrids, privatization, increased competition or
other alternative being discussed. Further, given DOE's report of June
2018, noted in my written testimony, and its work with FEMA on Puerto
Rico relating to current electricity system problems, DOE has valuable
experience and insights that should be shared to the degree they have
not.
As also noted in my written testimony, DOE's experience in
Tennessee Valley Authority (``TVA''), 16 U.S.C. Sec. 831 et seq.,
Bonneville, 16 U.S.C. Sec. 832 et seq. and Federal Energy Regulatory
Commission (``FERC'') are examples of where Federal assistance enhanced
the supplying of power for the benefit and welfare of citizens and
businesses in a number of states. DOE's past efforts and experience,
including with Puerto Rico and FEMA, provide a reasonable basis that
DOE's oversight and supervision of PREPA would be beneficial to all. It
may also be a supplement to the current Oversight Board as an
alternative to complete change of the oversight function.
______
The Chairman. Thank you.
Mr. Emmons, you are also recognized for 5 minutes.
STATEMENT OF THOMAS EMMONS, PARTNER, PEGASUS CAPITAL ADVISORS,
NEW YORK, NEW YORK
Mr. Emmons. Thank you. Chairman Bishop, Ranking Member
Grijalva, members of the Committee, thank you for having me
here today.
My name is Thomas Emmons. I am a partner in the private
credit group at Pegasus Capital Advisors. Pegasus is an asset
management firm that provides growth capital to middle-market
companies in the sustainability and wellness sectors. My focus
at Pegasus is debt finance for renewable energy projects.
I am here today because of my experience financing
renewable energy projects. Specifically, I have been involved
in financing more than $20 billion in renewable energy projects
in the United States in the past decade. I have more than 25
years' experience in raising financing for hundreds of projects
around the globe, including Asia and Latin America.
I highlight that experience in order to emphasize to you
that, based upon my experience and in my opinion, PREPA is in
no condition to be an acceptable offtaker of power in any
energy project financed by the private sector.
Earlier this year, Pegasus was mandated to arrange the
capital requirements of the $305 million Montalva Solar Project
in Puerto Rico, which will be built and operated by Greenbriar
Capital.
In the world of project financing, particularly energy and
natural resource financing, the whole financing package
revolves around the offtaker. An offtake agreement is an
agreement between a producer of a resource, such as electricity
from solar, and a buyer of a resource. And the buyer of the
resource is the offtaker. Essentially, the producers, who are
investing in the production of a resource, need to know that
the offtaker will be able to pay for the resource or product if
and when it is delivered.
In the case of investing in Puerto Rico's energy
infrastructure, the offtaker has to be PREPA. In my opinion,
PREPA is currently unacceptable in its current financial
condition to be the cornerstone for a project in Puerto Rico.
In a financing package, the offtaker is the source of
financial strength for the project. Without a strong offtaker,
the project is not financeable. This is very black and white in
the renewable energy project finance world.
A common measure of financial strength is the credit rating
assigned to it by Moody's or other nationally recognized credit
rating agencies. Credit ratings are a critical component of any
energy project financing package. For example, the vast
majority of utilities in the United States have an investment
grade credit rating of between BBB and AA.
But Moody's has been downgrading PREPA since 2012, and its
current credit rating is Ca, or equivalent to CC, making PREPA
a completely non-viable partner from a financing standpoint.
So, to raise financing for a project supported by a power
purchase agreement with PREPA, PREPA must be creditworthy, and
it is not.
The ultimate objective may be for PREPA to be privatized,
or for its debt to be restructured so that it returns to a
strong and stable financial condition. However, the process to
achieve either of these outcomes is long, difficult, and
uncertain. But Puerto Rico needs to attract investment into its
power system immediately, particularly renewable energy
projects, which create jobs and move Puerto Rico toward a clean
energy future.
Therefore, in order to immediately remove the roadblock to
renewable energy investments created by PREPA's weak credit
standing, I suggest that Congress pass a law or otherwise
direct a Federal entity, which will have a strong credit
rating, to guarantee the performance of PREPA under its
renewable energy power purchase agreements. This payment
performance guarantee will give investors assurance that PREPA
will pay for the clean power from wind and solar projects if
and only if such wind or solar project delivers power to PREPA
as required under the power purchase agreement.
This is not a financial guarantee and it is not a guarantee
of PREPA's debt. Moreover, the Federal Government may never
have to make any payment under this guarantee if PREPA
continues to pay its power bills. But, in my opinion, it would
immediately restore PREPA to the status of an acceptable power
offtaker. As a result, private sector lenders and investors
would invest in wind and solar projects in Puerto Rico, in
parallel with the longer-term work of getting PREPA back on its
own feet, financially.
Thank you.
[The prepared statement of Mr. Emmons follows:]
Prepared Statement of Thomas Emmons, Partner, Private Credit, Pegasus
Capital Advisors LP
introduction
Chairman Bishop, Ranking Member Grijalva, and members of the
Committee, thank you for having me here today. My name is Thomas
Emmons. I'm a partner in the Private Credit group at Pegasus Capital
Advisors. Pegasus is an asset management firm that focuses on providing
growth capital to middle-market companies focused on the sustainability
and wellness sectors. My focus at Pegasus is debt finance for renewable
energy projects.
I am here today because of my experience financing renewable energy
projects. Specifically, I have been involved in financing more than $20
billion in renewable energy projects in the United States in the past
decade. And, I have more than 25 years of experience raising financing
for hundreds of projects around the globe, including in Asia and Latin
America.
prepa credit issues
I highlight that experience in order to emphasize to you that,
based on my experience, in my opinion, PREPA is in no condition to be
an acceptable offtaker of power in any energy project financed by the
private sector.
Earlier this year, Pegasus was mandated to arrange the capital
requirements of the $305 million Montalva Solar Project in Puerto Rico,
which will be built and operated by Greenbriar Capital.
In the world of project financing--particularly energy and natural
resource financing--the whole financing package revolves around the
offtaker. An offtake agreement is an agreement between a producer of a
resource (such as electricity from solar) and a buyer of a resource,
and the buyer of the resource is the offtaker. Essentially, the
producers, who are investing in the production of a resource, need to
know that the offtaker will be able to pay for the resource or product
if and when it is delivered.
In the case of investing in Puerto Rico's energy infrastructure,
the offtaker is PREPA. In my opinion, PREPA is currently unacceptable
in its current financial condition to be the cornerstone for a project
in Puerto Rico.
In a financing package, the offtaker is the source of financial
strength for the project. Without a strong offtaker, the project is not
financeable. This is very black and white in the renewable energy
project finance world.
A commonplace measure of financial strength is the credit rating
assigned to it by Moody's, or other nationally recognized credit rating
agencies. Credit ratings are a critical component of any energy project
financing package. For example, the vast majority of utilities in the
United States have an investment grade credit rating between BBB and
AA.
But Moody's has been downgrading PREPA since 2012, and its current
credit rating of Ca makes PREPA a completely non-viable partner from a
financing standpoint.
To raise financing for a project supported by a power purchase
agreement with PREPA, PREPA must be creditworthy, and it is not. No one
in the world of renewable energy project financing would be able to
raise financing for a project with PREPA in its current state.
conclusion
The ultimate objective may be for PREPA to be privatized, or for
its debt to be restructured, so that it returns to a strong and stable
financial condition. However, the process to achieve either of these
outcomes is long, difficult, and uncertain. But Puerto Rico needs to
attract investment into its power system immediately, particularly
renewable energy projects, which will create jobs and move Puerto Rico
toward a clean energy future. Therefore, in order to immediately remove
the roadblock to renewable energy investments created by PREPA's
current weak credit standing, I suggest that Congress pass a law or
otherwise direct a Federal entity, which will have a strong credit
rating, to guarantee the performance of PREPA under its renewable
energy power purchase agreements. This payment performance guarantee
will give investors assurance that PREPA will pay for the clean power
from wind and solar projects if and only if such wind or solar project
delivers power to PREPA as required by the PPA. This is not a financial
guarantee and will not be a guarantee of PREPA's debt. Moreover, the
Federal Government may never have to make any payment under this
guarantee, if PREPA pays its bills. But, in my opinion, it would
immediately restore PREPA to the status of an acceptable power
offtaker, and as a result, private sector lenders and investors would
invest in wind and solar projects in Puerto Rico, in parallel with the
longer term work of getting PREPA back on its own feet financially.
I thank you for your time and am happy to take any questions.
______
Question Submitted for the Record by Rep. McClintock to Thomas Emmons,
Partner of Pegasus Capital Advisors
Question 1. According to the Institute for Energy Research (IER),
the levelized cost of electricity generation per megawatt hour for
conventional combined gas is $67.10 and $65.60 for advanced combined
gas. Whereas, it is $86.60 for wind and $144.30 for photovoltaic solar.
The IER further warns that:
``Because our electrical system must respond to consumer demand
instantaneously, non-dispatchable power is in essence
superfluous to our needs. The requirement that dispatchable
power back-up non-dispatchable power to make sure electricity
is there when needed is not a luxury, but a necessity. The more
that non-dispatchable power is used, the more the electrical
system requires investments in dispatchable generation forms to
back up its increased use. Government policies that promote the
use of non-dispatchable power are equivalent to requiring
consumers to buy and care for two vehicles: one that works when
you need it and another that works when it feels like it. The
hidden costs of non-dispatchable power are substantial and
should not be overlooked as part of the public policy
discussion.''
Why are PREPA's goals at odds with the findings of this research?
Answer. Thank you for the opportunity to answer this important
question. As a 30-year senior executive of the power and renewable
energy finance sector, my goal is to facilitate the most financially
efficient real time solutions in the energy marketplace. Although I am
now exclusively devoted to financing renewable energy projects, for
several decades I financed companies and projects in oil and gas
production, and in gas- and coal-fired power generation.
The IER report you quote refers to a 2013 EIA report using 2011
data to estimate costs for power plants entering service in 2018. I
believe it would be more instructive to rely on current data from the
specific relevant marketplace (Puerto Rico) where proposed facilities
are to be located. Moreover, Puerto Rico's energy situation is unique,
as an island relying 100 percent on imported fuel, and with specific
weather conditions which support wind and solar power. In this regard,
the most current information can be found from the Federal Oversight
and Management Board statistics printed this week on the following
link: https://www.elnuevodia.com/english/english/nota/
therecipeforprepacomestolight-2439251/.
The article states: ``Although the fiscal plan reviewed and
certified by the Oversight Board contemplates cuts of more than $1.5
billion over a 5-year period, customers of the Electric Power Authority
(PREPA) should expect higher rates in the coming years, which could
fluctuate between 28 and 30 cents per kilowatt-hour (c/kwh).'' It
further states: ``The objective of the Board is to reduce the cost of
electricity to 20 c/kwh. But this would happen, says the plan, after
2023, once PREPA is privatized.''
My testimony to the Congressional Committee was to provide a real-
time lower-cost solution that can be implemented immediately and with
no expected tangible cost to the Federal Government, but yet offer
billions of dollars to the U.S. Citizens of the Commonwealth by way of
job stimulation, increased tax revenues, energy savings of almost 50
percent, and as a key side benefit, a perpetual, non-polluting energy
source.
Puerto Rico is much similar to Hawaii, where the cost of a
renewable energy facility is much greater than on the mainland due to
increased costs to withstand Class V hurricanes, expensive yearly
insurance, higher local construction costs, and expensive land leases
and acquisition cost. This, however, is greatly offset in both Hawaii
and Puerto Rico, by fossil fuel costs that are close to, or in excess
of, 30 cents per kwh equivalent.
Solar and natural gas work hand in hand but even with natural gas
being the best power source to provide back-up generation to solar
energy, it is unlikely that additional LNG facilities will be built
within the next 5 to 7 years, and if they are, it is further highly
unlikely that these plants will produce at the low rates as indicated
in the IER report, because factors such as high costs of liquefaction,
new delivery infrastructure, new plant construction, higher insurance
rates, local inefficiencies, and local politics will likely impede the
hoped-for reduction of costs of firm generation forecast for the next 5
years.
The Siemens study concludes that there are adequate PREPA
generating resources to back up an initial tranche of renewable
generation, and that 580 MW could be handled ``economically'' by the
existing generation fleet. My client's project, to be located in the
southeast of Puerto Rico, provides power at half the cost of fossil
fuel plants, is sheltered from the hurricane pathways, provides power
to the 25 percent of the population that lives on the south of the
Island, has the highest solar insolation on the Island, and is located
close to high voltage generation and adjacent to high voltage
transmission lines which adds stability to the grid. There were clear
reasons why most generation facilities were located on the south of the
Island. For all these reasons, PREPA's goals of not having enough solar
energy generation is at clear odds with the expensive regional cost of
energy generation on the Island, for now and for the foreseeable
future.
______
The Chairman. Thank you for your time, and I thank the
entire panel for your testimony. We will now turn to the
Members for questions. I remind them that under Committee Rule
3(d), the time is limited to 5 minutes, for total questions as
well as answers.
So, for you, if the Member only gives you 10 seconds to
answer, you still have 10 seconds to answer. I will apologize
for that in advance, but we will see what happens.
I will ask my questions later on some time in the middle of
this panel. Let me turn first to Mr. Gohmert, the Vice
Chairman, if he has questions.
Mr. Gohmert. Thank you, Mr. Chairman, and I appreciate the
witnesses being here.
Mr. Walker, in your testimony you stated the long-term
resilience and reliability of Puerto Rico's electric grid will
require capable leadership, strategic investments, a strong
culture of safety, and well-defined regulatory oversight. These
don't sound like characteristics that are currently existing
when it comes to getting Puerto Rico's electricity going.
One of the questions you were asked at the Senate hearing
in May is who is in charge. I would like to ask each of the
witnesses today, who is in charge of the Puerto Rico grid?
Mr. Walker, you first.
Mr. Walker. PREPA is in charge of PREPA's utility grid in
Puerto Rico.
Mr. Gohmert. So, in your opinion, no individual is in
charge?
Mr. Walker. My understanding is they just appointed a new
CEO, Jose Ortiz, before him, Walt Higgins. So, the CEO of PREPA
is the person that is in charge of working in conjunction with
their existing board.
Mr. Gohmert. OK. Mr. Svanda?
Mr. Svanda. From my perspective, I guess I would say that
no one is in charge. I think the deplorable circumstances that
we have all paid witness to over the last months would
demonstrate that no one is in charge.
No one is assuring that there are emergency plans in place.
No one is saying you must operate this system in accordance
with modern accounting standards, modern engineering standards,
modern reliability standards, or modern cyber security
standards. And no one is paying attention. No one is keeping
their eye on the ball and assuring that the citizens of Puerto
Rico are getting reasonable service from the utility.
Mr. Gohmert. Thank you.
Mr. Bhatia?
Mr. Bhatia. Yes. I would say it is a combination of three.
PREPA, of course, but now we have an energy commission. We have
a regulator that we didn't have before. And finally, I would
say that there is a very robust and direct effort by the Senate
of Puerto Rico, under the leadership--it is a bipartisan effort
to try to create in the next 180 days the new laws and
regulations that will regulate the energy sector in Puerto
Rico. And we are working on that, and happy to share, and be a
part of that.
Mr. Gohmert. So, while Puerto Ricans are doing without
energy, so many of them, you think it will take 180 days to put
laws and rules in place which will then be able to afford
Puerto Ricans a chance to get their electricity back?
Mr. Bhatia. We are doing it, basically. And if we get it
done in 180 days, it will be almost a miracle after waiting 70
years----
Mr. Gohmert. I am sorry, I was having trouble hearing.
Mr. Bhatia. It would be a miracle, getting it done. And I
hope we get it done. We are working with the Department of
Energy, the Southern States Energy Board, and we are working
with a whole bunch of stakeholders. I hope it is before 180
days, but we have a mandate by the Puerto Rico legislature, and
a law to make it within a 180-day period.
So, we hope it is before that, of course. But our effort to
create a new law, a new policy for the----
Mr. Gohmert. Do you have electricity while you are working
for this 180 days?
Mr. Bhatia. We have electricity. Right now, as of this
morning, only about, I would say----
Mr. Gohmert. People that are working on the 180-day plan,
they will have electricity, right?
Mr. Bhatia. Right now, I would say less than 500 families
in Puerto Rico have no electricity, so it is not like we are on
a blackout right now.
Mr. Gohmert. Mr. Spiotto, before my time is up, what do you
think? Who is in charge?
Mr. Spiotto. I don't think there is any stable management.
I think there has been a revolving door which prevents
developing a business plan and a rate path and a procedure to
operate on the operating level.
Mr. Gohmert. OK, thank you. And Mr. Emmons?
Mr. Emmons. Structurally, it appears that PREPA, regulated
by PREC, is in charge. But obviously, it is not working and is
in need of an overhaul.
Mr. Gohmert. OK, thank you. It doesn't sound like the
combined wisdom of our witnesses indicates that it is really in
the hands of capable folks.
I was given information that seems to indicate that MasTec
was given $500 million authorization when, for 2 months, they
were not even on the island, that there were others that were
on the island, ready to go to work. It is just amazing.
My time is expiring, but people are needing help, and it
doesn't look like the money is getting where it needs to go. I
yield back.
The Chairman. Thank you.
Mr. Grijalva.
Mr. Grijalva. Thank you, Mr. Chairman.
Mr. Minority Leader, a couple of quick questions. Do you
believe that, without some other means to effect consensual
resolution, PREPA's debt, as has been discussed, that PROMESA's
Title III bankruptcy case will hinder PREPA's transformation
into a functional, integrated, with a large portfolio of
sources utility?
Mr. Bhatia. Well, it could be, sir. It could be. It is both
Title III and Title VI.
They are trying to do a negotiation under the terms of
Title VI, but Title III really has forced the parties finally
to sit down. I was part of the process for the last 3 years,
and it was an up-and-down, it was a roller coaster.
I think the fact that we have PROMESA, in terms of Title
III, is helping the process.
Mr. Grijalva. And one of the other witnesses testified that
the Puerto Rico Energy Commission is too weak to inform PREPA.
Would you care to respond.
Mr. Bhatia. Well, it was my bill that created the PREC.
However, unfortunately, the current governor decided to sign a
bill which weakened the Puerto Rico Energy Commission.
I think part of what we have to do is make it again what it
was, a very robust regulator that really had teeth. And I think
that can be done easily. We can fix that, because it was built
that way on my 2014 regulation, Act 57 of Puerto Rico.
Mr. Grijalva. One other question. I think the consideration
and then discussion about the transformation of PREPA.
The community-led integrated resource plan, the knowledge
of experts and retired PREPA employees, and the process of
making recommendations on the next steps for PREPA, this buy-in
by the Puerto Rican people into this transformation, I believe,
is essential. But discussions of a takeover or privatization,
how does that balance, if at all, with the idea of this level
of involvement?
Mr. Bhatia. Well, I would say, sir, the idea of
federalization is not very popular right now down there. But I
would say that privatization comes to the point where--what is
the option? I mean, this is a bankrupt company that needs a lot
of money, billions of dollars of investment to upgrade its
technology, so there is no choice at this point. It is not a
philosophical issue, I think it is more the plumbing. We need
resources and we need investment. And that is the way it should
be.
Mr. Grijalva. Thank you.
Mr. Bhatia. Thank you.
Mr. Grijalva. I have one question for the Secretary, would
legislation to have the Federal Government manage or control
PREPA be practical without the support of the Puerto Rican
people?
Mr. Walker. Absolutely not.
Mr. Grijalva. And we just talked a little bit about
privatization. You have to fix the plumbing first----
Mr. Walker. Privatization, as set forth by the law that
Governor Rossello signed on June 20, outlines a two-step
component, at least if you boil it down.
One is the sale of generation to private hands, and then a
concession agreement with regard to the transmission and
distribution system wherein, potentially, you would have an
outside company, whether it be another utility or a private
engineering firm actually run the day-to-day T&D business. That
model is not dissimilar to what was done in the Long Island
Power Authority in New York for many, many years and, in fact,
looks remarkably similar to that.
Mr. Grijalva. OK. I yield back, Mr. Chairman.
The Chairman. Thank you.
Mr. Young.
Mr. Young. Thank you, Mr. Chairman.
Mr. Walker, if the Department of Energy was tasked with the
privatization of PREPA, how long do you estimate it would need
to be managed by the Department before it would become private?
Mr. Walker. I think that is a challenging question, having
not done any due diligence. We have, obviously, a significant
understanding on how to run utilities from having four of our
own public marketing administrations. But those were set up for
a very different reason, and they are all financially viable.
They exist for the purpose of transporting our federally owned
hydropower and distributing it throughout the United States,
over 2 million square miles.
This is a different type of entity. Notwithstanding the
debt component, the privatization would be something that we
would work with industry if we were tasked with doing so. It is
not really within the scope of what DOE's mission is, from a
national security agency focusing on the energy sector.
However, we do have significant relations within our
electricity subsector coordinating council with all of the
electric sectors throughout the United States.
So, to put a time period on it, without having done the due
diligence, I think would be challenging because there are other
components that are significant in this----
Mr. Young. Let me, I only have so much time. I am just
suggesting respectfully it should not take that long. And there
are other models that have already been done. I am going to
suggest the Department--we are going to privatize this unit. It
has been a failure, and the Puerto Rican people deserve better,
and they are not going to get it through a government-run
energy unit.
Yes, everybody is smoking pot, and if it is legal in
Alaska, you're going to do it. I am just saying that is not
going to happen. So, I am suggesting to you, within the
Department, start thinking about that now. Set out a plan how
quickly it can be done. Because 10 years, 5 years, what you are
talking about, that is too damn long. We are going to do it
quicker.
Mr. Emmons, in your written testimony you highlighted that
PREPA is not creditworthy, and that is a known fact. And, in
fact, it encumbers energy investment and modernization. And Mr.
Svanda mentioned creating a financial backstop to make PREPA
investable. Do you have any thoughts on that idea?
Mr. Emmons. Well, my suggestion was for a temporary shoring
up of PREPA's credit, such that immediately, sooner than
waiting for a full privatization, private-sector capital would
be able to come in to build projects that relied upon PREPA's
power purchase agreements, which are now not reliable, because
it itself is not creditworthy, but to, in the interim, shore up
PREPA's credit so that these projects can begin construction
sooner than later.
Mr. Young. Well, one of the challenges, I think is, who
would want to invest in this, unless there is a backup? I can't
see it quite frankly. Do you think it could be done?
Mr. Emmons. I think it can be done. An example of a
situation like this----
Mr. Young. Without a backup you think it could be done?
Mr. Emmons. Oh, without a backup? Without a backup would
projects be built with PREPA's power purchase agreements? No.
Mr. Young. OK. Mr. Chairman, I think the biggest challenge
we have here is to look at the past, the present, and where we
are going to be in the future. You know my feeling on Puerto
Rico and statehood, et cetera. And the biggest drawback they
have is that debt and a energy system that doesn't match any
other system within the United States. If you want to be a
state, you should actually have the same structure as other
states have, as far as regulation and investment, because this
is not going to happen. You cannot rebuild this territory with
the system that is in place right now.
And I don't know whether you can do this or not. I have
about 42 seconds. I was going to yield the rest of it to
Jenniffer, but she is not here. I do thank you for having this
hearing. Thank you.
The Chairman. Mrs. Napolitano.
Mrs. Napolitano. Thank you, Mr. Chairman.
Mr. Bhatia, under Federal private ownership, do you believe
Puerto Rico Electric Power Authority, PREPA, would be able to
withstand another major hurricane?
In talking to the Army Corps of Engineers a couple months
back, they told me they were rebuilding to old standards. Would
that be enough to withstand the hurricanes?
Mr. Bhatia. No, not at all, Congresswoman. I think it is a
big mistake to rebuild based on the old standards. And I think
that is why there are two different issues, privatizing for
investment, but opening it up for competition.
And I think what we should be doing is creating for the
first time--and it is a novel idea--an energy market in Puerto
Rico.
That is what needs to be done.
Mrs. Napolitano. Solar power.
Mr. Bhatia. Yes, with solar power. And again, I will
probably insist on California--we are following California, we
are following Hawaii. Hawaii's 2045 idea is basically to phase
out thermoelectric energy, fossil fuels, and phase in solar
energy. That is exactly the model that Puerto Rico should
follow.
Mrs. Napolitano. With climate change, I would agree.
I yield my time to Nydia Velazquez and Mr. Soto.
[No response.]
Mrs. Napolitano. Nydia? Soto?
Mr. Soto. Thank you so much. So, we passed reform already,
right?
Mr. Bhatia. Yes.
Mr. Soto. OK.
Mr. Bhatia. Well, several reforms, but more are needed,
yes. If you are asking me.
Mr. Soto. Yes. Sorry, Mr. Leader, I apologize. I should
have said that.
Would municipalities be able to potentially provide power
under those?
Mr. Bhatia. Yes. I think that is exactly what we are
working on. We are working on a new regulation that will allow
microgrids. Instead of having one monopoly throughout Puerto
Rico, breaking it up.
And we have very serious companies that have suggested and
consultants who have told us how to do it. But we want to allow
the citizens to participate. I would also say co-ops. We have a
very robust----
Mr. Soto. And I am getting to that.
Mr. Bhatia. OK.
Mr. Soto. In Florida, as you know, we have municipalities.
We have IOUs, investor-owned utilities. We have rural co-ops,
like you mentioned. All of those entities would be eligible
under the existing reform that you already passed, right?
Mr. Bhatia. Yes.
Mr. Soto. And how long do you think we will get into Step
2, where we see a lot of movement with this stuff, based upon
your legislative experience?
Mr. Bhatia. We are working very closely with the Southern
States Energy Board, and we are putting a package together of
what we call the new public policy. That should be in place for
the next 30 years.
Department of Energy is providing a lot of assistance, and
we thank them----
Mr. Soto. Do you think we will see it in the next couple
months?
Mr. Bhatia. Yes, we should. Within the next 3 months, I
think we can report back to Congress saying that we have
accomplished our mission. We have been working really hard,
non-stop.
Mr. Soto. Thank you.
Secretary Walker, does that appear to be a timeline you are
seeing, as well?
Mr. Walker. Again, through the SSEB, as the Speaker noted,
we are working to ensure that they have a good energy
regulatory framework structure placed together. So, that
timeline is in line with what we are hearing from SSEB.
Mr. Soto. So, they are moving along?
Mr. Walker. Yes.
Mr. Soto. And then for renewables, the current reform,
Leader Bhatia, does promote renewables like you are advocating
for. Does there need to be further reform?
Mr. Bhatia. Well, what we are advocating is not to allow
renewables, but to mandate renewables, which is being more
aggressive. And we are almost there. We are almost there.
Mr. Soto. Forgive me, sorry. Are there bills moving through
the Senate right now to help do that?
Mr. Bhatia. We have a multi-sector task force led by the
Southern States Energy Board, and our hope is this will be done
within the next 2 or 3 months. But the idea is to have a
specific mandate, just like Hawaii.
Again, if we look at Hawaii's legislation, we want to
follow their legislation.
Mr. Soto. Thank you, Leader.
Mr. Svanda, I want to talk a little bit about resiliency
now. Do you think, if we had this competition in there, IOUs,
municipalities, rural co-ops, that would stimulate more
investment, again, and keep rates pretty stable?
Mr. Svanda. Well, it would take a long time to get there.
Mr. Soto. How long, do you think? Years? Decades?
Mr. Svanda. It will take years, in that if you look at the
regional transmission organizations that operate in this
country and operate economic markets and do dispatch of various
bidders into a market system, it is a very complex system. It
requires control and it requires monitoring and access to----
Mr. Soto. Thank you, Mr. Svanda. My time is limited. Last
question for Secretary Walker.
I know there has been a push by Army Corps to remove some
of the current generators on the island that are temporary but
are needed during hurricane season. Do you think it is a good
idea to keep them there, at least until after hurricane season?
The Chairman. Just say yes.
[Laughter.]
Mr. Walker. We will work with FEMA.
The Chairman. All right.
Mr. Lamborn.
Mr. Lamborn. Thank you, Mr. Chairman. Thank you for having
this hearing.
Mr. Walker, I would like to start by asking you a question.
How long were you there in Puerto Rico, personally, during and
after the hurricanes last year?
Mr. Walker. Two weeks.
Mr. Lamborn. And you have spent time personally on the
island, and you feel like you are familiar with the situation?
Mr. Walker. I am familiar with it, with the generation
transmission distribution system, yes.
Mr. Lamborn. OK. So, when it comes to PREPA, did you ever
observe any fraud, waste, or abuse at PREPA, including the
mismanagement of critically needed resources?
Mr. Walker. No. Again, I was not there in a capacity of
running PREPA. I was there working with FEMA as a DOE subject
matter expert in order to get the system up and running.
Mr. Lamborn. What about the warehouse where things are
stored?
Mr. Walker. The facility owned by PREPA?
Mr. Lamborn. Were things always conducted properly there,
or was there ever any mismanagement?
Mr. Walker. The warehouse I believe you are referring to is
Warehouse 5, where there were transmission assets stored at
that facility.
Mr. Lamborn. And? Did you ever observe anything
inappropriate?
Mr. Walker. I wasn't involved with that warehouse. I think
you may be referencing a news article that came out with Army
Corps that I was not participating in.
Mr. Lamborn. Mr. Svanda or Emmons or Spiotto, how would you
characterize the existence of lack of existence of
mismanagement at PREPA?
Mr. Svanda. Based, again, on my reading of news articles
and things like that, it was horrendous. The article that was
referenced--I don't have to be probably as cautious in my
response--if the news article was accurate, it is an
abomination for the people of Puerto Rico to have the materials
that are required to repair a system that is depriving them of
power hidden away and requiring folks to force their way to
gain access to them.
If that news reporting is accurate, there is no excuse for
it.
Mr. Lamborn. And any one of you--Mr. Bhatia, yourself, can
you comment on those news reports?
Mr. Bhatia. Well, I can tell you, I have no doubt there has
been fraud, corruption, and waste in PREPA. And there is no
question about it. And I conducted a thorough investigation on
the purchase practices at PREPA, and we found over 600
instances in which the purchasing of oil was not done properly.
They were paying for premium oil when they were getting sub-
standard oil.
So, we are talking of corruption of billions of dollars
over the course of the last 10 years.
Mr. Lamborn. I will just cut to the chase here. Given this
climate of corruption and mismanagement, is PREPA even
salvageable? Should we even spend another day trying to salvage
it, rather than starting all over?
Mr. Bhatia. Well, if you are asking me, I will tell you
that that is why I am advocating for something different. I am
saying let's stop this monopoly, let's open up the market. Let
the market forces compete and make sure that efficiency is
plugged in to the whole electric system in Puerto Rico.
And I think that the idea of this Committee trying to fix
PREPA--good luck.
[Laughter.]
Mr. Lamborn. How about privatizing?
Mr. Bhatia. Privatizing what? Because PREPA owns a lot of
very old technology. It is like we are privatizing the payphone
company, you know? You may privatize a payphone company, but
people have turned to cell phones. I mean who uses a payphone
any more? Who puts a coin there? Nobody.
So, I would say the analogy would be to open up the market,
allow this new generation of millennials and others, other
engineers to develop their own technology and create a whole
new market in Puerto Rico for energy. I think that can happen.
And with solar energy and new batteries that are affordable, I
think we can create a new, robust system on the island of
renewable energy.
Mr. Lamborn. Any comments from anyone else?
Mr. Spiotto. From other restructurings of utilities, the
first step is to get stable management in there, oversight, and
supervision to make sure there is no bleeding. You stop the
bleeding first. You share the pain, you develop a business plan
that has credibility in the markets.
Mr. Lamborn. Thank you.
Mr. Svanda. I would add that just getting the existing
system up and running so that the citizenry can be served with
power is more critical than moving to a new market structure.
That market structure will take time to evolve to, so we need
to assure that there is reliable service, first.
Mr. Lamborn. OK. Thank you all for being here.
Mr. Chairman, this is so important. I do wish that the
Governor had been able to attend. Thank you, and I yield back.
The Chairman. Ms. Bordallo.
Ms. Bordallo. Thank you, Mr. Chairman, and thank you for
calling this hearing. This is a very important issue. It needed
attention. And it is an issue that the Puerto Rican people have
put up with for, did you say 70 years?
Mr. Bhatia. Yes.
Ms. Bordallo. Well, that is a long time. I am from a sister
territory. I live in Guam. And I have lived in the tropics
almost all of my life. I can tell you that affordable, reliable
electricity for air conditioning and everyday needs is
absolutely a necessity. Many people don't understand, because
they have it all year round.
And like all U.S. territories, Puerto Rico remains heavily
reliant on costly imports of fossil fuels. Is that correct?
Mr. Bhatia. Yes.
Ms. Bordallo. For electricity generation often imported
from abroad, just like Guam.
Mr. Bhatia. Right.
Ms. Bordallo. The cost of electricity for Puerto Rico
residents is nearly twice the national average, while at the
same time their GDP per capita and median household income are
just half that of the mainland United States.
Last month, we held a Subcommittee hearing on my draft bill
to authorize wind energy development in Federal waters off the
coast of U.S. territories, including Puerto Rico. So, I am
confident that there is bipartisan support among the Committee
for offshore wind, which would improve self-reliance and lower
electricity costs in the territories.
I do have a question for you, Senator Bhatia.
Mr. Bhatia. Yes.
Ms. Bordallo. I liked your comments today. And thank you
for representing the residents of Puerto Rico, our fellow
Americans.
The system needs, as you said, overhauling. There is no
question about it, whether you go to privatization, or
whatever. And it should not be a monopoly.
Mr. Bhatia. It should not.
Ms. Bordallo. I grant you that. You have been very
patient--70 long years.
Mr. Bhatia. But can I clarify something, Congresswoman?
Ms. Bordallo. Surely.
Mr. Bhatia. Seventy years. But for the first 40 years or 45
years, our Puerto Rico Electric Power Authority, PREPA, was the
jewel of the crown. They did a great job penetrating the
mountains and taking electricity to a lot of poor people. So, I
would say the first 75 percent of those 70 years they did an
excellent job, and it was really a showcase of how a utility
should work.
Ms. Bordallo. That is right.
Mr. Bhatia. It has been since the late 1970s and 1980s
where things have deteriorated for PREPA.
Ms. Bordallo. We have a good power system on Guam. For a
while there we had blackouts every other day, but now it is
good, and I appreciate that.
Mr. Bhatia. Thank you.
Ms. Bordallo. Why did you change?
Mr. Bhatia. Well, I think it had to do with a lot of the
competition from the fossil fuels. They abandoned hydroelectric
power. And after a while it became a huge government
bureaucracy, and the bureaucracy took over. I mean, this should
be a model for public policy schools, as to how a great, great
publicly-owned company became an obsolete bureaucracy.
Ms. Bordallo. That is right. All right, what does Puerto
Rico need most from the Federal Government to improve the
reliability of your electric grid? What is the first step that
we should be looking at, in your opinion?
Mr. Bhatia. I think we should have goals in place, and I
think we should have a mandate. And I think if the U.S.
Government is, in fact, helping Puerto Rico financially, it
should not take over PREPA.
What it should do is create mandates with deadlines, saying
the government will help finance certain things, and then we
can make the list. I think Congresswoman Velazquez said some of
the issues at the beginning. And others have a list. The
Governor has a very good list. So, if we can follow the list
with a specific mandate and a deadline, I think that the
Federal Government could help speed up the process for Puerto
Rico.
Ms. Bordallo. That is right, and place it as a priority.
Mr. Bhatia. And place it as a priority, right.
Ms. Bordallo. My next question is for Assistant Secretary
Walker. I have about a minute left.
What financial or technical assistance did the U.S.
Department of Energy prepare to provide the power authority as
Puerto Rico seeks to modernize their plants? Mr. Walker?
Mr. Walker. We have actually been working extensively with
PREPA, establishing, as I noted during my oral testimony, a
model that enables the actual system to be replicated and load
flows to be developed, as a result of that. That technical
expertise has been utilized by and developed by six of our
national labs, as well as our engineering staff here at
headquarters.
That model enables the identification of the best
investments that can be made, perhaps on the generation side,
where it will economically drive down the cost, due to the
locational capabilities of that.
Ms. Bordallo. All right, thank you. My time is up, but I
thank you.
And thank you, Mr. Chairman. This is a very good hearing. I
yield back.
The Chairman. Mr. Thompson.
Mr. Thompson. Thank you, Chairman, for the hearing. Thanks,
members of the panel.
Assistant Secretary Walker, thank you for joining us today.
Nearly a year ago, a year after last year's disastrous
hurricanes, Puerto Rico's energy grid, as we have heard, is
still incomplete. And PREPA has been fraught, it appears, with
infighting and has been unable to effectively restore power to
the island.
Can you discuss additional challenges that are affecting
Puerto Rico's energy grid?
Mr. Walker. Sure. Fundamentally, there are some design
issues that have resulted due to lack of maintenance. So, one
of the biggest flaws in the system, which is part of the reason
we built the model, is a lack of generation in the northern
corridor near San Juan. Seventy percent of the load exists in
the San Juan area, but the majority of the generation is in the
southern tier. That creates some basic physics problems that
need to be overcome.
As the model will identify as we go forward, we need to put
generation in the north, near the low pocket, which is a
traditional generation transmission distribution design. That
will also provide opportunities to introduce new types of
generation, whether it is a combination of renewables or things
like liquid natural gas that will have the opportunity to drive
down the cost per kilowatt hour significantly, and thereby also
improve the economic vitality of the entire island.
Mr. Thompson. As we continue to discuss potential solutions
to Puerto Rico's energy crisis, many proposals are being
considered, and these include privatizing PREPA, creating a
stronger regulatory framework, among others, kind of a followup
to what you had mentioned about looking at the issue that we
have with power generation being concentrated in the northern
corridor, or the end of the island.
I assume you would agree with this: Do you think pairing
these proposals with innovative solutions such as microgrids
will have the ability to reliably restore power to Puerto Rico
in a sustainable way?
Mr. Walker. Absolutely. We have identified and worked
extensively with PREPA, as well as PRIDCO, which is the Puerto
Rico Industrial Development Corporation, for the locational
capabilities of microgrids. We have had teams of people down
from the national labs who have significant expertise in
developing and designing and operating microgrids. There is
opportunity on the island, it is part of the recommendations
that we identified, it is the utilization of microgrids, as
well as the integration of other renewable resources.
Mr. Thompson. One of my colleagues previously asked the
question, who is in charge? I think I heard five different
answers, or a lot of variations of responses. And given those
responses, it would hardly be fair to characterize the
leadership of PREPA currently as capable.
Leader Bhatia, without a legislative response to the
question of who is in charge, will Puerto Rico be able to
overcome its political infighting and succinctly answer that?
As a followup, how can we have confidence, given your testimony
reflecting the reversal of actions that you undertook as Senate
Majority Leader, that when change comes again, a new regime
that is government, no matter where we are at, the only thing
we know that won't change is eventually things do change, in
terms of the people that come into office. How do we have
confidence that when that happens in 2 or 6 years, that they
too will not reverse any progresses made by the current
administration?
Mr. Bhatia. I think that part of what we have to do is make
sure that we have a clear mandate. It could be a state or a
Federal mandate. And make sure that whatever investments we
make, we make it very public, and create that new--which is
what we are trying to do with the Department of Energy. We are
trying to create the next 70 years or the next 50 years of a
regulatory system that would have specific mandates with
specific dates.
And if we can accomplish that, I think we are going to be
in the process. Again, I bring the analogy of Hawaii, because
Hawaii was going through the same problem, and they were able
to fix it, once they created a 25-year plan with specific
mandates.
Mr. Thompson. Mr. Spiotto, from a market perspective, how
unhelpful is the political uncertainty surrounding PREPA's
future to returning PREPA to the capital markets?
Mr. Spiotto. The capital markets like certitude. They don't
like unrest. That means risk. Risk means more cost or no
access.
Mr. Thompson. Very good. Thank you, Mr. Chairman. I yield
back.
The Chairman. Thank you.
Mr. Beyer.
Mr. Beyer. Mr. Walker, I was fascinated, listening to the
many different perspectives and trying to sort them out. Mr.
Svanda is arguing for a strong regulator in a monopolistic
environment; Leader Bhatia, with a new open energy market, with
innovation, cost containment, and choice for the consumer; Mr.
Spiotto arguing for DOE supervisor, stable board, voluntary
resolution, changes in oversight; and then Mr. Emmons talking
about the hopelessness of the debt situation, that with the Ca
credit rating, who is going to want to be interested in it, and
how do you somehow restructure all this debt to make them
creditworthy.
How, as the Representative of the Administration, the
executive branch, do you put these together?
Mr. Walker. Well, it is pretty simple. It is similar to
what I told my team on the Office of Electricity. Simply, we
need to get back to basics. And with this case, what we have is
a utility that, by virtue of many varying factors, very complex
issues, has fundamentally gone awry.
However, if you take all the things that have been said
here, Number one, I think, and the Administration believes, it
is important for there to be a strong oversight from a
regulatory body, much like we would have at a traditional state
public service commission in the United States.
Second, there is the opportunity to evolve the markets, but
we have to get back to the basic component of getting a utility
up and running from a very traditional generation transmission
and distribution perspective. There are very basic things that
need to be done at this utility, as is evidenced and put forth
in our recommendations from the Department of Energy. Those
things have to be done first.
So, getting the T&D system up and running, fixing and
getting the generation in the right locations to drive down the
cost of electricity for the economic vitality of the island is
fundamental. That has to be done in conjunction with and allow
that company to grow, while growing a public service commission
that can have oversight.
Mr. Beyer. Great.
Mr. Walker. Once that is stabilized, then you can get into
all of the other things that everybody talks about through
modernization, whether it is a very significant marketplace, as
the Speaker notes, or whether it is a significant move to
increase the penetration of renewables----
Mr. Beyer. Let me move on. Mr. Leader, the notes show that
it has assets of $9.4 billion, liabilities of $11.4 billion.
You are $2 billion upside down, with the obvious terrible
credit rating. How do you possibly get out of that situation?
Mr. Bhatia. That is why it is in bankruptcy. That is
exactly what PROMESA brought about. The good part of PROMESA is
the bankruptcy, the ability to look into the restructuring of
Puerto Rico's debt. And I think that PREPA went wild between
2009 and 2012, borrowing about $5 billion in 4 years. And they
were borrowing to keep the rates down, which I think is the
crime here. They were borrowing to subsidize, not to invest.
After $9 billion debt, they did not restructure or improve
their infrastructure. So, we have this old--our generating
plants look like the cars in Cuba. I mean these are 1960s
plants.
Mr. Beyer. There are some occasional nice cars in Cuba,
too.
[Laughter.]
Mr. Beyer. I yield the balance of my time to Mr. Soto.
Mr. Soto. Thank you, Congressman Beyer. I am glad you
brought up the phone company, because I was amazed by the
history that Puerto Rico actually had its own phone company,
too.
Mr. Bhatia. Yes.
Mr. Soto. And I think no one here wants a Federal takeover,
and I am certainly opposed to one. But I do think the common
thread, no matter who is on this panel, is to have steady,
transparent progress in the breaking up of PREPA and keeping us
posted on how it is happening. I am really glad we have some
dates on the record of 3 months or so before we see some major
changes. But we don't have to reinvent the wheel. Most states
have a quasi-government system with IOUs, munis, and rural co-
ops.
But I think the last two concerns are just to make sure
that, as we are doing that, we need to protect labor agreements
that are in place, and pensions that are in place, and making
sure that those who take on this are taking on a portion of the
debt. But I believe that bringing Puerto Rico in line with
where the states have been with their systems and using a more
traditional model, much like getting rid of the government
phone company was very helpful to the island, as well, and then
just keeping us posted.
[Pause.]
The Chairman. Are you yielding back?
Mr. Beyer. Yes, sir.
Mr. Soto. And I yield back.
The Chairman. Mr. Labrador.
Mr. Labrador. Thank you, Mr. Chairman, and thank all the
witnesses for attending today.
Having been born and raised in Puerto Rico, I want to see
affordable, reliable, and sustainable energy available to the
whole island. I have a sister who lives in Ponce, I have a lot
of family who lives in San Juan and Bayamon, and so they are
all over the island, and I am concerned about the whole island.
And the situation of Puerto Rico's electrical grid is really
sad and is in desperate need of improvement.
Senator Bhatia, can you explain a little bit about what the
Puerto Rico Energy Commission is? You sort of alluded to it,
but you didn't really explain what you did with your
legislation.
Mr. Bhatia. Basically, the Puerto Rico Energy Commission
looked at the 50 states of the Union and several countries in
the world and basically copied the best practices and created a
regulator. We have a regulator established in 2014, the
commissioners were appointed in early 2015. They have been in
place for a little over 2\1/2\ years, and they have done a
great job.
Part of my extended testimony has a long list of how they
looked at a number of issues. In fact, they have just put out
the first-ever regulation of microgrids in the United States.
And the problem is, in the last 18 months, the current
administration has tried to weaken the energy commission, and
there have been letters from Members of Congress and others
saying we have to strengthen the energy commission, not weaken
it.
Mr. Labrador. Would you say right now the PREC is an
independent regulator?
Mr. Bhatia. I would say it is an independent regulator, or
struggling to be independent. But I would call it an
independent regulator, and we should all universally make sure
that it remains independent.
Mr. Labrador. I was a little bit confused by your
testimony. You keep saying that we want to mandate renewables,
and that that would be your solution to the island. Have you
met Mr. Emmons to your left?
Mr. Bhatia. Yes.
Mr. Labrador. They have been trying for a long time to get
renewable projects in Puerto Rico and they have been rejected
again and again and again. I am trying to understand how that
is possible.
I don't want mandates. I am a person, as you can imagine, I
come from the right side of the aisle, I am not a big fan of
mandates. Yet, when I hear the solution to Puerto Rico is
having renewables, and I know that a company is trying to do
renewable projects and they keep getting rejected, I am having
a kind of a disconnect here.
Mr. Bhatia. Well, that is exactly right. You have it right,
Congressman. The idea is that we have been rejecting solar
energy and renewables precisely because there is a PREPA that
completely refuses to allow renewable energy. We have had
legislation on the books for the last 10 years. And we have not
been able to fulfill any of the goals of that legislation.
So, what I am saying is part of the public policy, other
than the open market----
Mr. Labrador. So, just to be clear, your legislation would
allow renewables. It is PREPA that is rejecting it?
Mr. Bhatia. No, right, yes, exactly, exactly.
Mr. Labrador. Yes.
Mr. Bhatia. I am all for renewables. I am all for solar
energy. And again, I think Puerto Rico should move in that
direction. But there are also other considerations, other than
cost: environmental considerations, other issues that, as a
public policy, coming from an island that has abundant
resources. For us, it would be great to use the sun, which is
what we have.
Mr. Labrador. That is right. A little bit of it, right?
Mr. Bhatia. Yes, we have a little bit of it, right.
Mr. Labrador. Yes.
Mr. Bhatia. So, if we can replace fossil fuels with the
sun, now that the costs have come down dramatically, I think it
would be a good, not only energy policy, but a good economic
policy for Puerto Rico.
Mr. Labrador. I agree with that. But what I am having some
struggles with is the mandate aspect of it.
Mr. Emmons, can you speak to what you see as some of the
impediments to doing these projects on the island, and what
sort of maybe mandates we could do to make sure that it works?
Mr. Emmons. The impediments, from my understanding, from
what I hear, have been mostly PREPA failing to perform under
its obligations under the power purchase agreements. It is not
only signing the contract and agreeing to buy the power when
the project is built, but it is also cooperating with the
project developer in reviewing and approving interconnection
and other things which relate to the siting and interconnection
and construction of the project.
And that is what, from my understanding, PREPA has been
dragging its feet on, and presumably because they are not
really desiring to incorporate renewables into the power
system.
Mr. Labrador. Senator Bhatia, if the PREC was working as an
independent body, do you think we could solve this problem?
Mr. Bhatia. Yes, and it is solving it. And I think there
have been many lawsuits by PREPA. PREPA is, for the very first
time, seeing--this is like a wild horse being told you cannot
do this any more. And finally, we are tying up PREPA to tell
them, look, you have to follow certain procedures before you
actually do what you are doing.
So, yes, if we strengthen the energy commission, and we
learn from any other utility commissions, we can have progress.
Mr. Labrador. Thank you.
The Chairman. That was my fault, I was napping.
Mr. Soto.
Mr. Soto. Just to reiterate, we need resiliency,
renewables, and reform. With that, I yield back, Mr. Chairman.
The Chairman. Thank you for covering up for my nap.
Mr. McClintock.
Mr. McClintock. Mr. Emmons, you are an expert on financing.
Obviously, PROMESA has not lived up to any of its promises.
What would have happened if we had just left things well-enough
alone, had the creditors and the courts intervene? I assume
that PREPA would have been divided and sold off to, presumably,
a competent operator.
Mr. Emmons. Well, I am a financier of projects. That
question actually seems better directed to Mr. Spiotto, who
deals with restructurings and bankruptcies.
Mr. McClintock. Well, let me ask Mr. Spiotto, then. What
would have likely happened if we just left well enough alone,
let the system work as it has on so many other badly run
enterprises, public and private?
Mr. Spiotto. Generally, what happens, you have a receiver
appointed, the creditors go in, have the right under the
documents, the receiver is someone with stature to manage it,
provide stable management during the restructuring process. And
also to build credibility. They come up with a business plan,
with a rate path. They get the utility commission to approve
it. And they restructure it and they come back out.
Either they sell the utility to another party, or they wind
up restructuring, putting in new management, and it is a
reorganized entity.
Mr. McClintock. But we didn't do that. We bumbled into the
middle of it, came up with this jerry-rigged system, and it
hasn't worked, and now we are 3 years down the road.
Mr. Spiotto. The capacity for growth and change is needed,
yes.
Mr. McClintock. And perhaps the simple process of bringing
in competent managers through the marketplace was a better
route to take, but we didn't take it, and now we are sadder,
but hopefully wiser.
Mr. Walker, we are hearing a lot about renewables,
presumably wind and solar. Those are the most expensive ways of
generating electricity that we have available to us. In a
system that is impoverished and in desperate need of simple
generation, particularly on an island favored by trade winds,
why aren't we pursuing much less expensive and much more
reliable conventional electricity generation?
Mr. Walker. Well, I think, first off, your assertion that
it is the most expensive generation would assume that perhaps
you were sitting in Arizona, paying 1.6 cents per kilowatt.
However, when you are sitting in the middle of Puerto Rico
paying $.20-plus per kilowatt, some of the cost-effectiveness
of wind and solar actually become economical.
So, again, we have been working with Puerto Rico, with
models that we use at our national labs, which are the most
sophisticated in the world, that take into account things like
marketplace drivers and, actually, cost of energy.
So, recognizing that Puerto Rico relies on bunker fuel, for
the most part, for their energy and/or coal, hitting below
those price points is not that hard. There are strategic uses
and economic uses for both of those----
Mr. McClintock. But why aren't we making a simple
economic--and I don't have a dog in that fight. My sense of it
is whatever is the cheapest way to produce electricity is the
best way to proceed. What is the cheapest way to produce
electricity in this market, and why are we making a political
decision and not an economic decision?
Mr. Walker. First of all, I think that answer depends on
where you are and what your fuel resources are. I think we are
neglecting some of the real challenges that exist in Puerto
Rico, which is, when it costs $1 million a mile----
Mr. McClintock. But you are not giving me a straight
answer. What is the cheapest----
Mr. Walker [continuing]. To run a transmission line,
bringing and using solar power on top of a mountain, it is
cheaper----
Mr. McClintock. But why does it cost $1 million a mile to
build a transmission line in Puerto Rico?
Mr. Walker. Actually, about $1 million a mile is a standard
U.S. dollar amount.
Mr. McClintock. OK. Then my point is, why aren't we looking
at it strictly in terms of economics, not in terms of
politically favored sources of energy?
Mr. Walker. I guess I am not really sure where you are
going. When you go to Puerto Rico and you look at some of the
geography, where you have mountain-top distribution systems,
the cost of running the distribution system up the mountain-top
via traditional means is uneconomical compared to being able to
utilize things like wind and solar, by placing the generation
exactly where the load is.
Mr. McClintock. Senator Bhatia, I think you made a very
good point that a competitive market is the best friend of the
consumer, far better than any kind of politically dominated
regulator agency. Would you expand on that in the few seconds
we have left here?
Mr. Bhatia. Yes, I would say it is, but it is within the
energy system, the energy structure, the energy industry.
Creating a competitive market is not something that happens
overnight. It is a question of making sure that if you have
affordable energy you can then move into that market. I would
be happy to talk to you more about it.
The Chairman. Thank you. This time I have awakened.
Ms. Velazquez.
Ms. Velazquez. Thank you, Mr. Chairman.
Mr. Spiotto, in your testimony you suggest the Department
of Energy has the expertise, resources, and mission to oversee
PREPA. You also indicate that this oversight should not be
deemed as offensive, vis a vis Puerto Rico's sovereignty. Are
you here referring to federalization of PREPA?
Mr. Spiotto. No, I am talking about providing the technical
advice and supervision. Part of the disconnect here, there were
resolutions, but disagreements with the current oversight,
which have good people on it, but they are not energy people.
And I think what they really need is a path forward that works.
Ms. Velazquez. Yes, OK, thank you. If that is your
position, it is something that I really support for the role
that the Department of Energy should play in the transformation
of PREPA in Puerto Rico.
You have not discussed within the administration the
federalization of PREPA?
Mr. Walker. Are you asking if we have discussed the
federalization?
Ms. Velazquez. Yes.
Mr. Walker. We have talked about lots of different
solutions of how to solve the problem in Puerto Rico. And I
guess I am a little dismayed because we keep dancing around the
issue and nobody wants to talk about it.
But the fact of the matter is there are some things that we
can do that can help solve the problem without federalizing
this and putting the burden on the rest of the taxpayers across
the United States.
Number one, let's have a backbone and pull away the board
appointments away from the Governor.
Number two, let's take all the commissioners from the PREC
and pull them away from the Governor. Let's face it, we are
dealing with a municipal entity that is politically driven.
Solve the politics and take it away from the politicians.
Ms. Velazquez. I agree with you that we need to de-
politicize that process. But, from there, to federalize PREPA
is a long haul. And the reason why I am bringing it up, despite
the fact that the Chairman made it clear that he was not
discussing federalization here, but since it has been widely
discussed in the press in Puerto Rico, I just wanted for you to
be on record to say that that is not the intention.
Mr. Walker. I will say it clearer, then. We don't want to
federalize PREPA.
Ms. Velazquez. Very good. And Mr. Bhatia, I have been
visited by some CEOs who have said that private financing will
not be attracted to Puerto Rico or to PREPA unless there is a
federalization of PREPA. So, my question, Mr. Bhatia, is
federalization even allowed under the territorial clause of the
United States?
Mr. Bhatia. That is an 800-pound gorilla. Let me move into
the territorial clause of the United States, briefly, as a
lawyer.
Most people talk about the territorial clause and they
don't know what it is. Article IV, Section 3 of the
Constitution says something which I think is shameful for the
United States. It says that Congress shall have power to
dispose of and make all needful rules and regulations
respecting the territory or other property.
I would like to say, given this opportunity, that Puerto
Rico is not property, and Puerto Ricans are not property of
anyone. That goes back to the 18th century. That is perhaps a
mentality of slavery. And I would really consider the fact that
a lot of Puerto Ricans are just offended by this whole concept
of the power of Congress of Puerto Rico on this territorial
clause concept of being a property. We are not property of
anyone, and I think that is important to notice.
Ms. Velazquez. Thank you.
Mr. Emmons, a recent report highlighted that between 2002
to 2017 PREPA paid over $27 billion for fuel deliveries alone,
and low-quality fuel, at that. Can you highlight the benefits
of shifting from a fossil fuel dependent grade to one that
maximizes the use of renewable energy in Puerto Rico?
Mr. Emmons. Thank you. That is a very easy argument to make
on many fronts.
For one thing, it is cleaner. All of this fuel that has
been imported into Puerto Rico was burned, and therefore
created pollution.
Second, the cost of renewable energy depends on the
location, of course. But as an island, Puerto Rico supports
very low-cost renewable energy, particularly wind energy. The
island environment is very much like offshore wind, and
offshore wind is higher quality than onshore wind. But onshore
wind in Puerto Rico is more like offshore wind. So, the wind
resource in Puerto Rico is excellent.
And in the last 5 years, speaking of solar now, the cost of
solar has come down 90 percent from what it was then. And it
was even more expensive 5 years before that. So, in Puerto
Rico, solar power is cheaper than imported fossil fuels. All
the fossil fuels, obviously, have to be transported to Puerto
Rico, whereas the wind and solar are locally sourced.
Therefore, it is cheaper and cleaner.
Ms. Velazquez. Thank you.
Thank you, Mr. Chairman.
The Chairman. Thank you.
Mr. LaMalfa.
Mr. LaMalfa. Mr. Chairman, I am sure nobody on this panel
thinks that Puerto Rico is a property, or the people are. That
is a little outrageous. It is a territory, the--Article IV said
``or properties.'' So, we need to distinguish between that.
But let's get right down to this thing. I would like to see
the island prosper and do well. I had a chance to visit. And
that doesn't make me an expert by any means, but there is a lot
of great potential down there, and for the fine people of that
island.
So, what do you need to be successful to invest there, to
thrive? Low-cost electricity would be a big cornerstone of
doing that. What I saw on my visit was a bunch of shut-down,
60-year-old generators that are using diesel or fossil, bunker
fuel, or something like that, that are not efficient. The Army
Corps had in place some temporary generators they were using,
if I remember correctly, about one-third or maybe one-fourth
the amount of fuel to generate the amount of electricity that
was being used out of those 60-year-old machines.
So, an improvement right there, with a temporary machine,
but what if we thought ahead of this a little farther? We have
abundant natural gas that we export, and we are seeking to
export more across the Atlantic and other areas to share with
Europe and others. The island is much closer than those areas.
If it is economical for Europe to import, why would it not be
economical for Puerto Rico to do so? Build the type of plants
we need on opposite ends of the island, where strategically it
makes sense, large plants.
I wonder, Senator or Mr. Walker. How many acres do they
have available to cover the island with subsidized solar panels
that need to be replaced every 15, 20 years--and who knows how
they hold up when a hurricane gets underneath them--how many
acres do we have to come up with that?
When I was on tour there I saw a lot of area that was
either a flood plain or environmental set-asides or with what
agriculture they have there. How many acres do you want to
cover up on an island with that? Or cover with windmills that
are low yield per windmill, very expensive per windmill?
I don't see the yield for a power grid that wouldn't be
subject to storms, cloudy days, and damage from hurricanes.
Those alternatives just seem terrible to me, compared to large-
scale plants that could be on-line at all times with a fuel
source that is reliable, and you can turn it on at a switch,
and much more cost effective per unit.
Would you two please touch on that for me?
Mr. Bhatia. Yes, let me make two points. One, if we had
enough solar panels on 50 percent of our homes, that would be
enough. That would be enough energy generated with 50 percent
of our households having just panels on their rooftops. Of
course, we have a lot more land that can be used, and we have
solar farms. So, the acreage is not a problem.
And in terms of the Constitution, I just wanted to clarify,
because you made a point, that it says respecting the territory
or other--``other,'' and I underscore the word ``other''--
property. Again, I just bring up the fact that this was
language from the 18th century, and we are using----
Mr. LaMalfa. Why don't we underscore the word ``or.''
Mr. Bhatia. No, it says ``or other.''
Mr. LaMalfa. Or.
Mr. Bhatia. No, the Constitution says ``or other.'' And
that means if you are ``or other,'' you are also property. It
says ``territories or other property of the United States.''
And what I am suggesting, sir, with all due respect, is that we
should not see--it is shameful--and I am a U.S. citizen. It is
shameful to actually treat Puerto Rico as property of anyone.
And I think citizens of Puerto Rico, we should legislate
for Puerto Rico outside that whole concept of having the
territorial clause. I know it may be the subject of a different
hearing, but I think we owe respect to our fellow citizens down
in Puerto Rico, and we are not giving them that respect, given
the nature of the fiscal board----
Mr. LaMalfa. When you come in here arguing, that is really
not helping your case. I have a great respect for the people of
Puerto Rico, and I want to see them prosper. Making that
argument does not help other Americans to your cause.
Mr. Bhatia. I would just finish by saying if you had an
oversight board, when you do the budget of the United States,
if you had an oversight board come in from Russia or somewhere
else, or whatever it is, giving you and telling you what your
budget should be, even though you approved one budget for the
people of the United States, like I did 3 weeks ago, and having
an oversight board basically saying, ``That budget will not go
through, we will tell you what your budget is.'' I think that
is shameful for the United States.
What happened to government of the people and by the
people? What happened to democratic values? And that is why I
think this whole territorial issue should be addressed at some
point.
The Chairman. Thank you, Senator.
Mr. Bhatia. Thank you.
The Chairman. Look, I am from Utah. I understand what it is
like for the Federal Government to control other property.
[Laughter.]
Mr. Bhatia. Well, then, help us.
The Chairman. Mr. Gallego.
Mr. Gallego. Senator, good to see you again.
Mr. Bhatia. Good to see you.
Mr. Gallego. It has been great working with you in the
past, and the National Hispanic Conference of State
Legislators.
Mr. Bhatia. Thank you. Likewise.
Mr. Gallego. Let's just refocus back on the actual
substance and technical feasibility, in terms of renewables
being able to supply the energy production that Puerto Rico
needs, not just for, obviously, the consumer side, which is
generation for that is fairly stable, but also, you still need
to have a vigorous manufacturing environment in Puerto Rico to
employ people, as well as to actually, obviously, generate
wealth and income.
One of my concerns in terms of energy production and
generation is that you have a, like Representative Soto just
said, fully resilient energy source.
In your opinion, renewables, whether they are mandated or
not--I think, in terms of the economics, as Mr. Walker has,
that renewables actually end up being economically more
feasible than traditional carbon-based energy. In terms of
renewables, Number one, with solar panels being as vast and big
as you are going to need them to actually cover the whole
island--not literally cover the whole island, but produce
enough energy for the island--would they be able to be
resilient against the hurricane season that comes every year?
Mr. Bhatia. Yes. I would say from the research I have done,
I think there are ways of making them resilient. There are ways
of actually having a hurricane covering your rooftop PV and
photovoltaic process, and having energy 24 hours later or 10
hours later.
So, instead of waiting 6 months, like we did, which was a
travesty, you could have solar energy right away. In fact, we
are installing many solar centers right now in Puerto Rico to
community centers to make sure that what happened in 2017 does
not happen again.
Mr. Gallego. When you say you are installing solar in
community centers, you are talking hospitals, emergency
clinics, community centers, schools, first responders?
Mr. Bhatia. Right, and----
Mr. Gallego. So, that way they are resilient against a
shutdown that occurs, for example, that----
Mr. Bhatia. Exactly, exactly.
Mr. Gallego. OK. And then, in terms of generation for mass
manufacturing, you can't use, from my very limited experience,
rooftop solar would not be able to be sufficient enough to do
that. So, are you thinking about trough technology, or what
kind of solar or renewable energy are you thinking about that
would be able to sustain the baseloads you need for
manufacturing?
Mr. Bhatia. I am making a case for solar energy, but I have
to say it has to be a portfolio that will include oil, that
would include gas.
Mr. Gallego. Understood, yes, a mixture.
Mr. Bhatia. So, I think we have to be redundant in terms of
our energy. But there are many companies down on the island
that are already building. They don't want to go through being
hostages of PREPA any more.
Mr. Gallego. Right.
Mr. Bhatia. So, people are actually getting off the grid,
which will create another financing crisis. If people get off
the grid, who is going to pay the debt of PREPA. That is
another issue that has to be addressed.
But the fact is many companies are installing solar panels,
and they are getting off the grid. And that is happening day in
and day out right now.
Mr. Gallego. So, in your opinion, then, a mandate, you are
advocating a mandate----
Mr. Bhatia. Yes.
Mr. Gallego [continuing]. In order to basically force the
hand of PREPA to actually go ahead and put the investment into
solar or to renewables.
Mr. Bhatia. Not just PREPA, but to encourage citizens and
to encourage microgrids. And again, my aim is that we should
stop seeing PREPA as the only and sole provider of energy. I
think we could have a lot of independent providers, and I think
we could have independent microgrids supporting----
Mr. Gallego. So, like, microgrids, but distributed solar
for small communities----
Mr. Bhatia. Exactly, exactly.
Mr. Gallego [continuing]. That are further away from the
main lines there.
Mr. Bhatia. And again, my analogy--excuse me for making
this analogy--has to do with hotels and Airbnb. People can be
producers for the first time. You don't have to go to the
hotel. People can actually have a spare room or a spare roof
and produce their own energy. I think that is what 21st century
energy is all about.
Mr. Gallego. And my last question, if we go to a
privatization strategy for PREPA, what do you think that would
have, in terms of the direction that we would take, in terms of
renewable generation on the island?
Mr. Bhatia. I think we would have to work out a schedule
with experts and engineers and people who are looking forward.
We are working very closely with the Rocky Mountain Institute
in Colorado. We are looking again at the Hawaii example. And we
are realizing that we have to have a mixed portfolio. Nobody is
here saying that it should be 100 percent solar. It should be a
robust combination with redundant energy, except for nuclear.
We don't want nuclear in Puerto Rico.
The Chairman. Thank you.
Mr. Gallego. Thank you, sir, and I yield back my time.
The Chairman. Mr. Westerman.
Mr. Westerman. Thank you, Mr. Chairman. I want to go back
to the conversation a little bit earlier between Ms. Velazquez
and Mr. Walker. I believe you both agreed that PREPA didn't
need to be politicized, that that is the best thing for PREPA,
if we keep the politics out of it.
And Senator Bhatia, you testified about your work. I think
you actually said Act 54 of 2014, but I think in your written
testimony it is Act 57 of 2014. I don't think you were talking
about November being Adoption Month, you were talking----
Mr. Bhatia. It is Act 57, yes.
Mr. Westerman. All right. And then Act 4 of 2016. Can you
explain to the Committee what these two pieces of legislation
were intended to accomplish, and why they were so necessary?
Mr. Bhatia. Yes. Act 57 is a major overhaul of the energy
system of Puerto Rico. I was the author of the bill. And
basically, what it does, it looks into, Number one, creating a
regulator. And that was sort of the main piece, and the main
part of this.
But then it also created for the first time a component of
efficiency, basically to force PREPA to change its outdated
equipment. So, it creates a heat rate--I don't want to go into
all of the engineering technicalities, but it is a very robust
bill that mandates PREPA to do certain things, in terms of
efficiency.
You have a 2018 hybrid car and you have a 1965 Chevy. Which
is going to be more efficient? It is the 2018 hybrid car.
Mr. Westerman. Act 57 was to do that, and Act 4----
Mr. Bhatia. Act 4 basically de-politicizes. The whole idea
is to de-politicize the board. And it created a mechanism under
law, where the Governor could no longer appoint, as board
members, his wishes. He had to basically wait for a head hunter
throughout the United States to give him names, give him or her
names of people who are not part of the political system of
Puerto Rico. So, it was an effort to de-politicize the----
Mr. Westerman. But PREPA is 70 years old. Why did it take
so long to enact these laws? Because, obviously, the people of
Puerto Rico knew that these changes were needed. What was the
delay in getting these laws----
Mr. Bhatia. Congressman, I wish I had an answer. I would
say that the first time I had been in the majority, or I was in
the majority in the Senate of Puerto Rico, and I was the
President of the Senate between 2013 and 2016, I spent all the
energy I could trying to fix what had been broken for years.
Mr. Westerman. And your objective was to make it non-
political with professional individuals that understood
electricity.
Mr. Bhatia. Yes, and by the way, we also adopted a Hatch
Act. Part of Law 4 2016 is the Puerto Rican equivalent of the
Hatch Act, to prohibit employees of PREPA from participating in
political events. And we wanted that, and that has been
weakened, as well.
Mr. Westerman. Can you explain how the actions of the
current administration helped or frustrated the intentions of
those----
Mr. Bhatia. Well, what happened was, in 2017--you mean the
independence of the board?
Mr. Westerman. Right.
Mr. Bhatia. In 2017, unfortunately, the Governor appointed
as head of the PREPA board a chairman of his finance committee
of the election. So, again, he re-politicized. Unfortunately, I
would say, with all due respect to the Governor, he re-
politicized PREPA. He started bringing in the elements of
politics, which basically killed PREPA over the course of the
last 30 years. And I think it is very, very unfortunate. I
fought tooth and nail with that.
Mr. Westerman. What about Puerto Rico House Bill 1408,
which has already been approved by both chambers of Puerto
Rico's legislature and is awaiting review by the Governor?
And the independent Consumer Protection Office said that
the bill in question significantly weakens consumer
participation and representation in this important process, and
has the potential to perpetuate the very same patterns of
conduct that have led to the present crisis regarding the
vulnerability of Puerto Rico's power crisis.
Mr. Bhatia. Yes, and I hope we will fix that. Part of what
we are doing now with law 120, which was approved in June, is
basically to fix all of that language.
There are many signals coming from different sides. And I
trust this is a bipartisan Committee. You should meet also
Senator Larry Seilhamer, who is a Puerto Rican Senator, and he
is working on trying to fix 1408 and other suggestions that
have been made to weaken the energy commission. I don't think
we should----
Mr. Westerman. Mr. Svanda, in your professional opinion,
how would you characterize the Puerto Rico Energy Commission,
given Mr. Bhatia's statements?
Mr. Svanda. Well, I guess I would fundamentally disagree. I
think the intentions were correct, I think the words of the
statute that he worked so valiantly to get enacted were
correct. But it didn't end the political activities that
occurred.
So, in my opinion, the commission has not been effective,
the mission has----
The Chairman. You can have a shorter opinion, I am sorry.
Mr. Graves.
Mr. Graves. Thank you, Mr. Chairman, so many questions, so
many loose ends here.
Mr. Walker, how much money have you spent on restoration in
Puerto Rico?
Mr. Walker. How much money did FEMA spend?
Mr. Graves. Yes, FEMA.
Mr. Walker. We are in the process, when you add the
different components, including----
Mr. Graves. Ballpark, ballpark.
Mr. Walker. About $6 billion.
Mr. Graves. About $6 billion.
Mr. Walker. Billion, that is correct.
Mr. Graves. OK, $6 billion. I have been there before, I
have been there since the hurricane--do you believe that the
distribution system is in better shape now than it was before
the hurricane?
Mr. Walker. Well, it is simply in better shape because we
have put new equipment on the system where there was old,
replaced equipment.
Mr. Graves. Right.
Mr. Walker. But the fundamental design has not changed.
Mr. Graves. OK, so better equipment, $6 billion. We have
recently announced----
Mr. Walker. To be clear, some of that $6 billion is yet to
be spent. But it is allocated out to some of the work that was
noted earlier.
Mr. Graves. Sure. Thank you for the clarification.
So, we have $6 billion in investments. Based on the
condition of some of the electrical distribution system I saw
before the hurricane, I think that we certainly have a better
investment now than we had before.
What would you call the status of some of the generation
equipment in Puerto Rico?
Mr. Walker. I think generation is probably the single
greatest investment that can be made in Puerto Rico,
particularly in the northern San Juan area, where the load
pocket is. Seventy percent of your load is there, and very
little of your generation is there. You have some fundamental
physics problems in that you create losses on your transmission
system, which then create inefficiencies, from an economic
standpoint, and drive the cost up.
Mr. Graves. And you are making investments there, though.
Mr. Walker. We have not made investments in generation,
because that is part of what would be developed and submitted
to take advantage of some of the $2 billion HUD funding, or
some of the Stafford Act 428 funding that would be authorized.
Mr. Graves. Which totals, as I recall, just the HUD
funding, I believe it is $18 billion, which is about twice
Puerto Rico's annual budget.
Mr. Walker. The way it was allocated by Congress was it was
at least $2 billion dedicated to Puerto Rico.
Mr. Graves. Right. But the entire, what is known as CDBGDR
dollars, Community Development Block Grant----
Mr. Walker. That was actually $28 billion that you
authorized.
Mr. Graves. It was $28 billion? I thought----
Mr. Walker. About $28 billion. They asked for $12 billion,
you authorized $28 billion.
Mr. Graves. I was thinking we had--well, OK. All right. I
was thinking we had announced $18 billion, but we will take
either one.
My point is that when you are talking about multiple times
the annual budget of the entire island, I really struggle with
us dumping--and dumping is not the right word--investing,
because I was an advocate for recovery dollars for Puerto Rico,
but making that type of an investment in Puerto Rico, and not
changing the conditions or ultimately changing the trajectory
of where things were before, when the island was completely
insolvent, as we have heard in this Committee.
Virtually every Federal program has some strings attached.
You have to meet certain criteria, meet certain guidelines,
comply with eligibility requirements, and things like that. I
don't understand how we are going to come in and make these
massive investments, yet we are not going to yield any type of
governance changes.
Mr. Svanda, what other place in the United States has a
government-owned utility with a government regulator? I don't
understand this. I don't understand.
Mr. Svanda. It is not in the Puerto Rico model.
Mr. Graves. I don't understand that. You are a government-
owned utility with a government regulator.
Mr. Svanda. That is----
Mr. Bhatia. Can I----
Mr. Graves. Please, please.
Mr. Bhatia. There are plenty throughout the United States
government regulators--let's take Long Island. Long Island
Power Authority is owned by the state of New York, and now it
is regulated by the regulator owned by the state. And
throughout, if you look at the public utilities throughout the
United States, Congressman, there are plenty of examples of
public utilities being regulated by state-owned or state-
controlled or state utility companies.
Mr. Graves. And, Senator, my guess would be that would be
in a place where you have multiple utilities, though. PREPA is
the sole utility----
Mr. Bhatia. Not so, not so. With all due respect, it is not
the only place where you have a--I mean there are other
places----
Mr. Graves. I am running out of time, so I am going to
reclaim my time. But if you could submit to me those examples.
I would love to see them.
Mr. Bhatia. Yes, I will. I am not in favor of this monopoly
thing----
Mr. Graves. Right, right, so----
Mr. Bhatia [continuing]. So, I will provide information,
but I am not in favor----
Mr. Graves. If I ran a government, I don't know why I would
have a redundant system of something I owned, and also have an
oversight board that is government, as well. You can control
it.
Look, bottom line is we have to move to a privatization
scenario. This current trajectory, having a utility that is
over $10 billion in debt, while we are sitting here investing
$6 billion, we are sitting here investing tens of billions of
additional dollars in the Puerto Rican economy for recovering,
and making it not just recover, but making it stronger, making
it better, we have to have the appropriate reforms to go along
with it.
It seems like in some cases people are asking for their
cake and wanting to eat it, as well.
The Chairman. Thank you.
Miss Gonzalez.
Miss Gonzalez-Colon. Thank you, Chairman, and thank all the
Members, and the people that are here for many hours.
First of all, Mr. Chairman, may I introduce for the record
a statement from Greenbriar Capital Corp. This is a letter for
the Committee. These are some examples of people that are
investing on the island in renewables, among other things, or
solar power. And a letter from the Senate President of Puerto
Rico, Thomas Rivera Schatz. Both of them to be for the record.
And I will begin with some questions for Mr. Walker.
We both traveled with the people of the Department of
Energy in some of the CODELs. We went to Puerto Rico. And I
know some people of your agency went to the Energy and Commerce
hearings and Homeland Security hearings. And we allocated those
$2 billion.
The first thing I want to know is, when that money is going
to be out there, when the island is going to receive the money,
and where the money is going to be invested. I think the people
of Puerto Rico want to know that. Because one thing is actually
finding the money, getting that money approved, but when are we
going to see some kind of improvement in the plans, some kind
of improvement in the power grid of the island?
Because one thing is patching up, and we saw that during
the last 9 months. And I am grateful for all the linemen, all
the people from PREPA that were there during all this year,
working long hours, 7 days a week, all the personnel there, and
the people who came in the different brigades, the people from
FEMA and the people from Army Corps of Engineers. But we need
to focus now on what is going on.
And we are right now in the hurricane season. And we are
praying every day that there is no hurricane coming up to
Puerto Rico, because we know that even a small storm, a
tropical storm, may have a huge impact in different areas.
So, if you can give us a time frame of what we can do, as
Congress, to speed up that kind of----
Mr. Walker. Sure. Congress allocated the money through HUD,
and that requires HUD to go through a formal process wherein
they have to put a guidance document together that will then be
put on the Federal Register for the requisite period of time,
as set forth by statute.
Once that is completed, there is application made by PREPA
and the Puerto Rican Government to actually receive those funds
for very specific projects. I would note that there is also the
Stafford Act 428 funding, but heretofore PREPA nor the Puerto
Rican Government have actually submitted a plan that would
enable any money to be allocated under the 428 process.
Miss Gonzalez-Colon. I know that, because I managed to
include the amendments for the limitations that were there, to
get the cap out in order to get the 100 percent Federal funding
to most of those areas. And we worked together with the HUD
Department in many of those actions. Now I will get to Mr.
Emmons.
You were talking in your written statement about how the
product sponsor needs to know that the offtaker, in this case
PREPA, will be able to pay for the electricity when it is
delivered. And one way to measure the financial strength of an
offtaker is by looking at its credit rating.
And we all know about the credit rating of PREPA. The
question will be if the credit rating of PREPA were to improve,
will that be sufficient to facilitate the flow of private
capital to Puerto Rico in order to facilitate the process of
using the private-public partnerships that are proposed in the
recent law approved by Governor Rossello, and actually, Senator
Bhatia voted in favor of.
I do believe in privatization of the electric power
authority of the island. We need to move forward. We can't
continue to live in an old structure that is not functioning
during this era. So, can you answer that?
Mr. Emmons. Yes. The credit rating improvement of PREPA is
necessary, but not wholly sufficient. There needs to be a
stable, long-term regulatory environment, a de-politicized
regulatory environment, as well as the improvement of the
credit rating. Improvement of the credit rating will reflect
the financial standing, as well as the overall regulatory
environment.
Miss Gonzalez-Colon. Thank you.
The Chairman. Thank you.
Mrs. Radewagen.
Mrs. Radewagen. Thank you, Mr. Chairman and Ranking Member,
for holding this hearing. I want to thank the witnesses for
taking all that time to appear today. I have no questions. I
would just simply like to yield back my time to Miss Gonzalez-
Colon.
Miss Gonzalez-Colon. Thank you, Amata, for letting me use
that time. I really appreciate that.
Mr. Emmons, if we do not improve the rating of and the
credit of PREPA, how--I mean a lot of people are talking about
federalization. And I do believe that the Department of Energy
does not want to take PREPA to manage it. I do believe that. I
do believe that we can work together in order to provide
assistance, the tools, the technology. I do know that there are
more than $40 million in different grants and technologies that
are available in the Department of Energy that could be granted
and used in Puerto Rico as a model to invest.
But in order to do that, and in order to find more Federal
funds, we need to set what are going to be the standards, where
the money is going to be invested. Where is the transparency in
the process? How is the public-private investment going to be
there?
And in the past, I was there, I was the state
representative--we provided a local law to provide for solar
panels to be installed. And as a matter of fact, once they
began to establish those kinds of factories on the island, and
began to connect to the power grid, PREPA dragged their feet,
just to not allow those people to connect to the system. And
what happened? You had a lot of companies like Amgen investing
$50 million to have their own generator to get power on the
island.
And I am just saying that name, but we had a lot of those
private companies doing that because electricity on the island
is so expensive. So, people are thinking where is my money
getting more return, investing in Puerto Rico, manufacturing in
Puerto Rico, or manufacturing in any other state?
In order to keep costs low, we need to reduce our kilowatt
hour. So, again, how can we use, or the Federal Government, the
Department of Energy, provide the tools to not just regulate,
but guide. What should be the one, two, three, four guidelines
to provide that kind of assistance?
Mr. Emmons. Well, in my testimony I mentioned an
intermediate fix for opening up the gates to private-sector
capital. My fellow panelists today have talked a lot about
money coming into Puerto Rico, and talked about privatization
and competition. And that is the main thing that I think is
needed in Puerto Rico to improve the system.
In my testimony, I talked about an intermediate fix in
order to accelerate the development and construction of
renewable energy projects to be done in parallel, while the
Congress figures out what the long-term privatization solution
is for the Commonwealth.
Miss Gonzalez-Colon. One of the things that creates the
most public unease in any electricity reorganization in Puerto
Rico is the people will have to pay for a rate increase to
guarantee any profitability. How do we assure the people that
this will not happen?
If we can ensure that in a process between the investors
group and the Federal agencies, Mr. Walker and Emmons, do you
have any comments on that?
Mr. Emmons. I am sorry, would you repeat the question,
Congresswoman?
Miss Gonzalez-Colon. Can we assure that the people will not
need to pay for any rate increase in order to have any kind of
electricity reorganization on the island?
Mr. Emmons. I am sorry, the people will not be responsible
for what?
Miss Gonzalez-Colon. A rate increase.
Mr. Emmons. Oh, a rate increase.
Miss Gonzalez-Colon. Electricity rate increase.
Mr. Emmons. Oh, I am sorry. As we said before, the cost of
local renewable energy is actually lower than the cost of
private fossil fuels. And that is one of the ways to avoid rate
increases.
The Chairman. OK, thank you. Before I ask my questions, I
am going to ask unanimous consent to put an article in the
record that basically says the system was crappy before the
hurricanes hit.
Mr. Graves, do you want to do a unanimous consent request,
as well?
Mr. Graves. I do, Mr. Chairman. I would like to submit for
the record an April 10, 2018 press release by HUD, indicating
that the $28 billion in Federal funds for CDBGDR was for all
nine disaster states, as well as Puerto Rico and the Virgin
Islands. Puerto Rico's allocation was $18 million. As stated, I
believe that as a result of the late bill, I think it was
December 2017, Puerto Rico also got $1.5 billion.
Number two, I just want to clarify for the record. I
believe that the Long Island utility is not controlled by the
state. There is separation between the regulator and the actual
utility. Whereas, in the case of Puerto Rico, you have the same
entity controlling both the utility and the regulator.
The Chairman. All right. Somehow we will get that in the
record, then.
Mr. Graves. I was almost articulate.
The Chairman. I also have a letter from the Puerto Rican
Manufacturers Association for the record.
And you already put yours in the record, right?
Mr. Grijalva. The President of the Puerto Rican Senate also
submitted a letter.
The Chairman. OK. So, you are not out of the woods yet.
Let me try to summarize this as best I can. And I want you
all to answer the question when I get done on what is the
difference between the word ``strong'' and ``independent''? Is
there a difference between those two, especially as you are
dealing with oversight for the PREPA board? I will give you the
5 minutes to think about what your answer is going to be for
that one.
So, let me see if I have this straight--so far we have a
PREPA commission to do oversight. That used to be three
members, it is now five. Who appointed those other two members?
Mr. Bhatia. They have not been appointed, sir. They are----
The Chairman. But they will be appointed by the Governor.
Mr. Bhatia. Yes, there were three----
The Chairman. OK, so four out of the five will be appointed
by the Governor?
Mr. Bhatia. Yes. Five out of five.
The Chairman. OK, five out of five appointed by the
Governor.
Then, as you said, there is also the PREPA board that does
the actual--it is not the oversight, it is the board itself.
And that has seven members?
Mr. Bhatia. Yes, but that is a----
The Chairman. And all of those are appointed by the
Governor?
Mr. Bhatia. Yes, based on a----
The Chairman. Now, if we are talking about some kind of
independent concept, a professional, non-politicized, Mr.
Svanda, how does Congress help facilitate an independent
commission?
Mr. Svanda. I think, for starters, Congress needs to enact
legislation that provides for a very fast transition from what
exists today with guidelines for how the new independent body
will be structured, and how the new appointments will be made
and to divorce that from the political structure.
The Chairman. We are not talking about making mandates on
how they actually do their job, it is simply the process of how
you get those oversight commissions in line. And that would be
very much consistent with what the other states do. I think
there was testimony in May in the Senate. Senator Kean went on
basically the same line and the same kind of argument that went
there.
In your testimony also, and this is one of the other
questions and problems I have with the Senator--you said that
both majority parties on the island are active and organized
inside PREPA, and its employees have raised thousands of
dollars for political campaigns. And then you also add PREPA
has accumulated an obscene amount of political power which made
effective oversight impossible. And then you quoted the
problems that PREPA has come from decades of internal decisions
that went unquestioned.
Is that accurate, as far as what was in your written
testimony?
Mr. Bhatia. It is accurate, and that is why I had to act
the last term and basically confront that. And by reason or by
force, but I had to confront that, and I created a mechanism, a
Hatch Act. I created a Hatch Act for Puerto Rico to get rid of
that.
The Chairman. OK, and we will see if we can help facilitate
that going forward in the future, as well.
Mr. Walker, the Governor sent a letter to us that said,
``Our hurricane recovery has been complicated by the layers of
bureaucracy imposed on us by Congress and the Federal
agencies.'' Does that seem to you to be like an accurate
account of the restoration of power, the efforts that were done
by FEMA and the Army Corps and DOE?
Mr. Walker. No, absolutely not. I think it was compounded
right from the onset by the fact that there was a failure to
call for mutual aid that took until October 31.
The Chairman. And I think what we are seeing, and you have
all been saying this, this is not a new phenomenon that is done
with the electrical grid, the electrical oversight. This has
been going on for a whole lot of years. And you can't blame one
governor, you can't blame one administration, you can't blame
one territorial legislature. This has been an ongoing problem
that we need to try to some way break this time.
Mr. Emmons, let me ask you very, very quickly. You have had
25 years of financing and raising financing in Asia and Latin
America. How come it has been so difficult to do it in Puerto
Rico? And I am sorry, I have 1 minute. You have 20 seconds to
answer that one.
Mr. Emmons. Well, I think it is easy in that there isn't
the regulatory oversight. The framework of the success of the
business in the mainland is the public utility commissions,
basically, as the watchdogs of the people.
The Chairman. Mr. Spiotto, I am going to give you the last
30-second question. I will do this very quickly. In your
written testimony, you wrote that Puerto Rico does not have the
state backup like Detroit had with the state of Michigan. And
therefore, if there is a negative perception of risk because of
the failure to resolve Puerto Rico's debt, it may cost Puerto
Rico in access to marketing for financing in the future. Is
that accurate?
Mr. Spiotto. Yes.
The Chairman. That was a faster answer than I was
expecting.
[Laughter.]
The Chairman. With that, I think this has been remarkable.
Actually, I have one last question. Mr. Walker, are you
telling me you were never at Warehouse 5?
Mr. Walker. I was in the Palo Seco Transmission Yard.
The Chairman. OK.
Mr. Walker. The warehouse is on a separate piece of
property contiguous to----
The Chairman. OK, OK. That is good enough.
[Laughter.]
The Chairman. Look, I appreciate you all being here. I
appreciate this testimony. And I think you are all driving at
one particular point, that we need to have a re-organization--I
mean it is essential for Puerto Rico, for the citizens there,
that they do have a good and reliable source of energy, however
you want to do it, and it needs to be non-politicized, however
we need to do that. And if you don't get that right, then the
rest of the restoration just is not going to happen, and the
next hurricane comes up here again.
And I appreciate you also mentioning, both of you talked
about how it is the unique process of the island, and I think
Jenniffer could also say this, that the generation capacity is
on the south side, and the consumption is up in the north side,
and you have to transmit those over high mountains, unless you
do something totally unique and totally different in the way
you deal with that particular situation. So, thank you for
doing that.
Members who are no longer here, except for two of you, may
have additional questions. Under our Committee Rules, they can
submit those questions within 3 business days, and we will
forward those questions to you, asking for your response. Then
we are going to ask for a 10-day response period for any
additional questions that may be there.
If there is no other business, thank you for your patience.
Thank you all for being here. This Committee is adjourned.
[Whereupon, at 4:57 p.m., the Committee was adjourned.]
[LIST OF DOCUMENTS SUBMITTED FOR THE RECORD RETAINED IN THE COMMITTEE'S
OFFICIAL FILES]
Rep. Bishop Submissions
-- Letter dated July 23, 2018 from Mr. Bront Bird, CEO and
President of Foreman Electric Service Company,
concerning the interest and need in energy
development on the island.
-- Statement for the Record by Mr. Rodrigo Masses,
President, Puerto Rico Manufacturers Association,
concerning procedures with FEMA, PREPA, and other
localities with transparency.
-- Los Angeles Times, September 28, 2017, ``Puerto Rico's
debt-plagued power grid was on life support long
before hurricanes wiped it out,'' by Ruben Vives
and Molly Hennessy-Fiske.
Rep. Graves Submission
-- Article from The Intercept concerning debt repayment on
Puerto Rico and stakes in its revitalization.
Rep. Gonzalez-Colon Submissions
-- Letter dated July 25, 2018 from the Hon. Thomas Rivera
Schatz and Larry Seilhmaer Rodriguez in support of
well-executed privatization that can improve
service and infrastructure.
-- Letter dated July 13, 2018 from Greenbriar Capital
Corp, PBJL Energy Corporation concerning ``Claim
Against Puerto Rico Planning Board Determination
Montalva Solar Farm Inconsistent With Land Use
Plans.''
Rep. Grijalva Submission
-- Letter dated July 25, 2018 from the Hon. Thomas Rivera
Schatz and Larry Seilhmaer Rodriguez in support of
well-executed privatization that can improve
service and infrastructure.
[all]