PREC issues Restructuring Order approving the Calculation Methodology and Adjustment Mechanism proposed by PREPARC

Today the Puerto Rico Energy Commission (“PREC”) issued a Restructuring Order approving the Calculation Methodology and Adjustment Mechanism proposed by the Puerto Rico Electric Power Authority Revitalization Corporation (“PREPARC”) for the establishment of a Transition Charge, pursuant to Act 4-2016, known as the PREPA Revitalization Act. The Restructuring Order issued by the Commission is the result of a 75-day long evaluation period, during which the Commission, along with participating intervenors, were able to gain significant concessions from PREPARC in the benefit of electric service customer as a whole.

The Transition Charge is a mechanism designed to reduce costs for PREPA’s customers by allowing a group of existing PREPA bonds to be refinanced through Restructuring Bonds issued by PREPARC. The new Restructuring Bonds will reflect a 15% reduction in principal (for uninsured bonds), an average interest rate of 5.22% (compared to 5.86% for existing PREPA bonds) and a 5-year moratorium on interest payments.  In exchange, the Transition Charge provides a secure repayment mechanism which reduces uncertainty and increase market confidence in PREPA’s financial condition. This action will reduce PREPA’s capital costs—and therefore the costs that PREPA’s customers would otherwise have to bear—by approximately $867 million.

Although it will appear as a new line item on each customer’s bill, the Transition Charge does not increase any customer’s cost—beyond what the customer would pay if, once the Commission sets new rates in a rate proceeding, all of PREPA’s debt is properly reflected in its rates. Because PREPA’s current rates have not been reviewed since 1989, they do not reflect debt incurred to finance capital investments made after 1989 or provide sufficient funds to finance increasing operational costs, a situation which has contributed to PREPA’s actual financial condition.

The Transition Charge does not recover costs exceeding those that PREPA must recover from its customers; nor does it cause PREPA to incur in additional debt.  It is instead a means of assuring payment of current debt to the Participating Bondholders, in return for their agreement to accept a 15% reduction in the face value of their debt and a lower interest rate. Because PREPA is a government-owned, nonprofit utility, its debt-related costs must be recovered from its customers, unlike investor-owned utilities where a portion of its costs may be absorbed by the utility’s shareholders. 

The Transition Charge identifies a portion of the customer’s total payment (about 12% in the first year) which PREPA must treat differently from the rest of the customer’s payment.  Specifically, PREPA must separate the Transition Charge payments from the rest of its revenues, then transfer those payments to the bondholders without delay.  That is the purpose of the Transition Charge mechanism: to separate the dollars belonging to the Participating Bondholders from PREPA’s general funds, and cause those dollars to be transferred to their rightful owners.

Initially, the Transition Charge will be 3.10¢/kWh.  It will apply to the gross kWh consumption of all PREPA customers (residential, non-residential, governmental), with two exceptions: 

1. For Fixed Block Public Housing Customers (as provided by Act 22-2016), the Transition Charge will apply only to kWh consumption exceeding their applicable consumption-based block of electricity usage. 
2. For “grandfathered” net metering customers, the Transition Charge it will apply only to their “net” consumption.

These adjustments protect low-income customers, as well as those existing net-metering customers who made investments in generation based on an expectation that certain PREPA charges would apply to their net consumption only. This, along with a consumption based Transition Charge, which protects energy efficiency and consumption reduction efforts, are some of the main changes achieved by the Commission and intervenors during this proceeding. 

However, Act 4-2016 did not allow the Commission to reject the Petition merely because the Commission believed PREPA could have obtained greater savings from bondholders so as to produce a lower Transition Charge, nor did it require the Corporation to prove that the proposed Transition Charge is as low as possible, or that PREPA obtained the maximum possible savings from its bondholders.

While the Commission’s jurisdiction in this proceeding was limited, Act 57-2014 grants the Commission ample powers and discretion with regards to PREPA’s Petition for New Rates filed May 27, 2016. During said proceeding, the Commission will look for ways to adequately allocate costs among customer classes, promote efficient administrative and operational practices, prevent unnecessary expenses and address the concerns and needs of all industry participants so as to achieve a modern electrical industry in line with overall economic, social and environmental goals. 

Commission Requirements             

While Act 4-2016 limited the Commission’s ability to modify the Corporation’s petition, the Commission did endeavor to require the Corporation to provide continuous reports and other information to produce effective oversight of the Corporation’s operations and ensure adequate public scrutiny. Among them, the Commission required the Corporation to:

1. Provide, within two (2) days of its issuance, a copy of the final Resolution approved by the Corporation, redlined to show changes from the draft submitted in this proceeding.
2.  Provide, within two (2) days of its execution, a copy of the Servicer Agreement entered into by the Corporation and PREPA, redlined to show changes from the draft submitted in this proceeding.
3. If PREPA makes any advance to the Corporation, provide the Commission notice as early as feasible, along with an explanation of the reasons for the advance, the documentation evidencing the Corporation’s obligation to repay PREPA and the deadline for such repayment.   Notify the Commission when repayment has occurred.
4.  On August 15^th of each year, provide an updated stress test.  Each stress test should provide projections of the expected financial condition of PREPA (income statement, balance sheet, cash flow statements, debt service coverage ratio) under the following assumptions:  (a) the continuation of current rates and (b) a reduction of both a 5 percent and a 10 percent of total kWh sales during the next fiscal year.
5.  By August 15^th of each year, for the fiscal year ending the immediately preceding June 30, provide a full report on the fees paid to contractors relating to the Transition Charge, whether the payor is the Corporation or PREPA.  Such report shall state hourly rates, total spending in the prior calendar year and over the life of the contract, and any amendments to the contract. 
6.  Provide to the Commission, as soon as practicable after the actual terms of the Restructuring Bonds are known by the Corporation, a demonstration that the savings test of Section 35(a)(iii) of the Revitalization Act has been met.^[1]
7.  Identify those persons who will responsible for responding to such requests from the Commission to the Corporation in any investigation under Section 6.25A(j) of Act 57-2014. 
8.  Include in all contracts between the Corporation and its advisors a clause requiring their cooperation with the Commission in any investigation conducted under Section 6.25A(j) of Act 57-2014.  Confirm that such a clause has been placed into existing contracts.
9.  Fulfill the following obligations imposed by Section 6.25A of Act 57-2014:

a. Submit a report on the final terms of the bonds, and estimates of Upfront and Ongoing Financing Costs.  Section 6.25A(e)(1)(viii).

b. Submit any successor Servicing Agreement and all servicer reports. Section 6.25A(e)(1)(ix).

c. Submit any reports required by Bond Trustee.  Section 6.25A(e)(1)(x).

d. Submit the annual reports and final report required by Article 6.25A(e)(1)(xi).

e. Provide timely notice of, and data or work papers relating to, any proposed adjustment to the Transition Charge.  Section 6.25A(e)(1)(xii).

10. Provide the names and contact information for those individuals who, on behalf of the Corporation, will be responsible for responding to the Commission’s requests for information. 

For ethical reasons and to maintain the impartiality and purity of this adjudicative process, PREC’s members –President, Agustín Carbó Lugo, Esq., and its two Associate Commissioners, Ángel Rivera de la Cruz, PE and Edison Aviles-Deliz, PE, Esq., PE– will not be making any public statements, judgments or opinions other than those stated on this Press Release.  

 ###

The Puerto Rico Energy Commission (PREC) was created by Act 57, also known as: “Act for the Transformation and Energy Relief of Puerto Rico. The Commission will have the power, among other issues, to: regulate energy companies and approve and revise rates or charges charged by such companies for any matter directly or indirectly related to the rendering of electrical services; ensure prices in power purchase agreements, wheeling rates and interconnection charges are fair and reasonable; regulate wheeling of energy; revise and approve minimum technical requirements and additional technical requirements for the interconnection of distributed generators and oversee compliance with the same; and set standards for facilities or plants of generating electric companies to guarantee efficiency and reliability of electric service in accordance with industry best practices and oversee compliance with such standards.  

The Commission is integrated by a president and two associate commissioners. It is located in the World Plaza Building, Muñoz Rivera Ave. 7^th Floor, Ste. 702, Hato Rey. The Commission’s website is: www.energia.pr.gov.

Contact for the press:

Marilyn Vicens

Communications and Press Office Director

PREC

787-297-4762

mvicens@energia.pr.gov

Anel M. Alejandro

Communications and Press Officer

PREC

787-523- 6403

aalejandro@energia.pr.gov