“Reducing complex reality to simple binaries is the result of mediocre thinking,” paraphrased Sergio M. Marxuach, Policy Director at the Center for a New Economy (CNE).
While outages caused by the haphazard state of the electrical grid cannot be wholly attributed to LUMA Energy’s mismanagement, in the 15 months since LUMA entered into an Operation and Maintenance Agreement, or ‘operator agreement’, with the Puerto Rico Electric Power Authority (PREPA) and the Puerto Rico Public-Private Partnerships Authority (P3 Authority), it has failed to meet key performance metrics.
In its latest policy brief and review, the Center for a New Economy, led by Sergio M. Marxuach, presented possible solutions to the current electric power situation in Puerto Rico.
Over the past 15 months, LUMA has gone over budget, has not met key performance metrics regarding the duration and frequency of outages, has not met maintenance goals in a timely manner, and has not accumulated the savings it projected it would generate from efficient management of the transmission and distribution system.
So what can the government do?
The Puerto Rico government has three options, none of which come without significant pitfalls.
Marxuach identifies the first scenario as letting the clock run out on both the operation and supplemental agreements, which could potentially occur on November 30 of this year if no prior action is taken. It is up to the government of Puerto Rico to decide whether to allow the agreements to automatically terminate.
If this were to happen, PREPA would be required to pay LUMA an Operator Termination Fee equal to the Interim Period Service Fee of $115 million in 2020 dollars, adjusted for inflation. This would trigger the start of a Back-End Transition period lasting up to 12 months during which LUMA would transfer its operations to a successor operator and PREPA would incur a Back-End Transition Fee to cover it. Unfortunately, there is no successor operator identified.
In a second potential scenario, the Puerto Rico government could seek to declare an Operator Event of Default, stating that LUMA has failed to perform a material obligation under the operation agreement. LUMA would then have 60 days to remedy the default and an additional 30 days if it is determined that they are making reasonable attempts to address the failure and that it can reasonably be fixed.
If the issue isn’t fixed within those 90 days, the P3 Authority can, with at least 120 days prior written notice, terminate the operator agreement. This option might require prior approval of the Puerto Rico Energy Bureau or the FOMB and could also be contested and brought to court. If the government of Puerto Rico successfully terminates the operator agreement, citing Operator Event of Default, it could possibly receive payment from LUMA.
As with letting the operator and supplemental agreements expire, terminating the operator agreement would also trigger a Back-End Transition Period and fee, payable by PREPA – still, there has been no entity identified to take over the operation and maintenance of Puerto Rico’s electrical grid.
The third scenario would be to put pressure on LUMA to improve its performance instead of terminating the operator agreement. The most effective way of doing this, according to the CNE, is to withhold a portion of the Intermid Period service Fee payable to LUMA. As a result of the negotiations and mediation process that this could cause, in a best case scenario, LUMA and the Puerto Rico government would end up agreeing upon a set of actions for LUMA to undertake to improve its performance.
Without a Plan B
If the operator agreement is terminated, there is no obvious candidate to take LUMA’s place. Returning management of the electrical grid to PREPA, described by Marxuach as a “criminally corrupt and extremely inefficient corporation”, would impede the island’s pursuit of having a reliable and affordable power grid.
Finding an alternative operator is challenging, given the enormous undertaking that is operating the Puerto Rico transmission and distribution system, and could take up to two years. Any reliable, interested company would most likely demand terms more favorable than those granted to LUMA. An additional worry is that a company with political connections and little else to offer could win the contract if a new operator is sought.
Thus, Marxuach recommends that the government should go with the third scenario – putting pressure on LUMA to improve its operations. It is irresponsible, in his view, to terminate the operator agreement without having a viable successor operator in place. For the time being, the CNE recommends the P3 Authority hire an independent firm of world-class engineers with no business or political connections to the island, preferably from the US or Europe, to supervise LUMA’s fulfillment of its obligations defined in the operator agreement.
Marxuach concludes that “there are no effortless solutions to Puerto Rico’s energy problems. It will take several years of steadfast hard work to rebuild the system and to decrease energy rates. There are no shortcuts, no easy answers, no straightforward ways out. The only option is to work through it. Otherwise, we face the unpleasant prospect of several more years of economic decline and the social stagnation that would entail”.