The Case for Privatizing PREPA in Puerto Rico

**Guest contributions to the ACC Blog represent the opinions of the individual writer and not necessarily ACC as a whole.

Last year was a traumatic one for Puerto Rico, between suffering from $76 billion in bankruptcy and weathering two hurricanes. Now the 2018 hurricane season is here, and Governor Ricardo Rossello decided to privatize the island’s sole energy provider, PREPA (Puerto Rico Electric Power Authority)––a process which will likely take 18 months. The need to privatize energy in a fair and competitive manner is not only an economic argument but also a humanitarian one: a Harvard study published in late May in the New England Journal of Medicine estimates that 4,645 deaths can be attributed to the hurricane and the aftermath.

 

Lack of utility, communications, and medical services from a damaged electrical infrastructure endangers Puerto Rican residents. This year is shaping up to be just as rough, since Puerto Rico still relies on hundreds of FEMA-provided generators to power up schools, hospitals, correctional facilities, and water plants.

 

Calling PREPA dysfunctional is an understatement. As of May 2018, 16,000 homes are still without power. PREPA was working off of a grid that was 28 years older than the average electric power utility in the United States. The publicly-owned utility company suffered from high turnover, poor management, and lack of investment. Additionally, PREPA is currently over $9 billion in debt.

 

Privatization of Puerto Rico’s energy sector would raise the island’s profile as a leader in sustainable energy. Benefits include energy diversification between solar and wind, with distribution growing at a fast pace worldwide and its installed capacity expected to more than double in the next decade.

 

Relief efforts are revealing what a robust renewable energy industry could look like in Puerto Rico. Vox reports that companies like Tesla, Duracell, and German energy storage firm Sonnen sent batteries and solar supplies to Puerto Rico. Elon Musk helped to generate power for a children’s hospital in San Juan with solar panels way before PREPA’s ancient grid could address the issue.

 

Despite its promising future, privatizing a service like energy is tricky because management must balance the necessity to please stakeholders and turn a profit while providing high-quality service to customers. Critics say stakeholders will not consider Puerto Rico a good place for investment, given the poverty rate which hovers at 44.9 percent. There are other concerns that “disaster capitalists” will fly in, buy up parts of the electrical grid for cheap, make a quick profit and then leave, a pattern that Wall Street culprits orchestrated in years past which contributed to Puerto Rico’s economic crisis.

 

Under what conditions will management be more likely to act in the public’s interest? Competition between at least two private energy companies is crucial to maintaining high-quality services at lower prices. Electricity service will be transitioning from a one-way vertical monopoly to a competitive market with differentiated products and services, offered by a wide range of participants.

 

Moving away from cronyism is imperative for a more equitable and resilient energy market in Puerto Rico. A letter issued by the U.S. House Natural Resources Committee in March of this year pointed to a plethora of corruption and mismanagement allegations. PREPA officials accepted and, at times, even demanded bribes to restore power to select residences and businesses. Exotic night clubs received priority treatment in exchange for bribes in the thousands of dollars, with free entry to PREPA officials. If that weren’t outrageous enough, these officials are even accused of restoring power to their own homes ahead of critical locations such as the international airport and hospitals. The infamous Whitefish Energy deal, where an obscure Montana company was hastily awarded a no-bid contract, ended up rife with logistical challenges and empty promises primarily because it provided the PREPA contracting officer special treatment.  

 

PREPA mismanaged itself into bankruptcy, which left the public utility company with little negotiating leverage. Simply put, PREPA is the poster child of why managing a utility with a centrally planned model is a bad idea. Through privatization and honest competition, Puerto Rico could foster an environment where the undeniable advantages of a resource-rich private utility are reaped so they aren’t left in the dark again.
 

Ibis Valdés (@ValdesIbis) is a graduate of International Human Rights Law and a member of Miami Young Republicans. You can find her work on Univisión and The Washington Examiner.

Photo credits: Hector Retamal / AFP / Getty

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