The Board stirs winds of privatization (horizontal-x3)
As first item on the agenda, the fiscal authority approved the plan for the eventual liquidation of the Government Development Bank (GDB). (Jose Delgado Robles)

New York - After laying the foundations for filing debt restructuring petitions before any courts, the Oversight Board in charge of Puerto Rico’s public finances yesterday ordered the Puerto Rico Electric Power Authority (PREPA) to speed up the revision of its rates and consider privatizing its entire power generation system.  The mandate by the Board that prevails over the Island’s elected government was issued at a meeting held in New York that also included measures for the revaluation of rates or privatization proposals in the agenda for the Aqueduct and Sewer Authority (AAA, by its Spanish acronym) and that of Highways and Transportation (HTA).

As first item on the agenda, the fiscal authority approved the plan for the eventual liquidation of the Government Development Bank (GDB), the government’s former fiscal agent.

With regard to the PREPA, the Federal Board’s recipe may overturn the debt restructuring agreement (RSA, by its Spanish acronym) that was just approved yesterday, it was reported in writing last night by the government of Ricardo Rosselló and the Ad Hoc group of bondholders that represent nearly two-thirds of the public corporation’s creditors.

After the meeting in New York, it was reported that Puerto Rico’s Fiscal Agency and Financial Advisory Authority (FAFAA) reached an agreement, on behalf of the PREPA, with the Ad Hoc group of creditors of the PREPA, the lenders of the lines of credit for fuel, the debt insurance companies and the Government Development Bank.

“The agreement is a supplement of the Restructuring Support Agreement (RSA)” and “includes the terms of the principal agreement,” it was explained.

“Based on a review and analysis of the proposed fiscal plan, the electricity prices compared with those of competing jurisdictions, and the best projections available, the Board deems that the PREPA’s fiscal plan should be amended in order to include changes that are attainable, credible, and necessary for providing electric power at an average of 21 cents per kilowatt in 2023,” states the resolution approved by the seven members of the Federal Board, presented in New York by the authority’s executive director, Natalie Jaresko.

Without including almost half of the so-called “transition fee” of 3.1 cents that has been pending approval for a year at the Energy Commission, the executive director of PREPA, Ricardo Ramos, calculated that the current cost of electricity is about 23 cents per kilowatt, “depending on the type of client.”

But the RSA contemplates a rate increase as of the fifth year.

“Maintaining a fixed rate is itself a feat,” warned Ramos, stating that, as since the resolution provides that the new plan be filed in a term of 45 days, any goal set will depend on the fluctuation of fuel prices.

The plan that is focused on reducing electricity costs should be in the Board’s hands within 45 days.

The fiscal entity also ordered the PREPA to submit a plan that will enable having a rate review within 60 days, in consultation with the Energy Commission.  The plan should be submitted to the Board in 30 days, before being submitted to the Commission.

The amendments to the PREPA’s plan adopted by the seven members of the Board also call for an agenda for creating public-private alliances (PPA) or a full privatization of the power generation system, the PREPA gem that the private sector so wants.  In that sense, they proposed PPAs to finance improvements in the transmission network.

PREPA’s executive director held that the corporation’s public debt, which is about $9 billion, is “untenable,” and gave some details about the agreement reached with the Ad Hoc group of creditors and which has been criticized for only seeking a reduction of 15% of the principal of the debt of unsecured bondholders.  In total, the balance of the debt is reduced by $850 million, Ramos said, together with the executive director of the Fiscal Agency and Financial Advisory Authority, Gerardo Portela.

At yesterday’s meeting, which was held at the Alexander Hamilton Building in New York, the Board changed the Aqueduct and Sewer Authority’s fiscal plan – acknowledging for the first time that it suggests cutting 35% of the outstanding principal of the debt– ordering that it submit a five-year rate review in 30 days, to become effective next January.

As with other fiscal plans disclosed yesterday, and with no convincing explanation, the Board has preferred to keep the agenda for the restructuring of public corporations secret.

In turn, the Governor’s representative before the tax authority, Elías Sánchez, said that the tax burden should be considered before approving an increase in the rates of the AAA.

However, José Ramón González, member of the Board and former president of the GDB, held that the AAA “has to include continued rate increases in its plan,” to prevent the increases from suddenly being too high. According to González, compared to other public corporations, the AAA “has the possibility of being back on its feet in a short time.”

According to AAA’s executive director, Elí Díaz, the public company’s fiscal plan projects a tax deficit of $3.5 billion in 10 years and includes a claim for creditors to condone 35% of the debt.

Although Díaz did not mention it in his presentation, the fiscal plan refers to a 4.5% in the rate for residential water and 7% in business.

It further contemplates imposing a $15 charge for disconnecting the water services, a $2 charge for paper invoices, and a reduction of 156 jobs by 2022.

Highways

The Board ordered that the Highway Authority submit a new plan in 30 days showing the sustainability of each of its assets, both its highway system and the mass transportation system and the Urban Train. The recommendations may be focused on taking Highways out of the daily management in many of its operations.

In fact, it recommended that a new corporation be in charge of operating the Urban Train and to also examine the possibility of privatizing the system that moves about 8.2 million passengers each year.  The Board in turn ordered to monetize the toll credits to increase income and set a new structure in selecting the Governing Board to avoid the influence of political parties.

For the time being, the Board did not consider the fiscal plans for the Public Corporation for the Supervision and Insurance of Cooperatives (COSSEC, by its acronym in Spanish) and the University of Puerto Rico (UPR, by its Spanish acronym).  Regarding the UPR, the president of the Board, José Carrión III, stated that they expect to receive that plan –which has given rise to serious disputes for proposing a reduction of close to $500 million in ten years– within a term of 30 to 45 days.


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