Puerto Rico’s Power Utility Is Broken, but Privatization Won’t Necessarily Fix It

January 26, 2018

Months after Hurricane Maria the lights are still not back on for all Puerto Ricans. The extensive damage caused by the storm, along with the slow pace of restoring electricity have highlighted the struggles of Puerto Rico’s Electric Power Authority (PREPA). Prior to the storm, PREPA was already dealing with old and failing infrastructure, and a debt burden of about $9 billion dollars. When the storm hit, the embattled utility was not prepared to respond to the damage.  

The Fiscal Plan released by Puerto Rico’s government does not question whether privatizing PREPA is needed, but rather presents it as the only viable option. The plan claims that by privatizing the utility, it will “transform” it into an efficient, reliable, and cost-effective energy provider. The proposed privatization process consists of a mix between selling assets, and offering concessions to private companies to run operations.

However, privatization is no panacea for fixing public utilities, and Puerto Rico’s past experience should ring alarm bells. Two failed attempts at privatizing water services resulted in the government having to retake control of the utility in even worse shape. The disastrous results of Puerto Rico Aqueducts and Sewers Authority (PRASA) contracting with private companies to manage its operations are detailed in this report by Puerto Rico’s Comptroller’s Office.

In the 90s, Puerto Rico’s water services were struggling with quality issues, as well as with their finances. As a response to PRASA’s operational issues, then Governor Pedro Rosselló (the current governor’s father) created a commission to negotiate and oversee the privatization of water services. The first contract to oversee and manage water services in Puerto Rico was entered into in 1995 with a subsidiary of the French multinational Veolia.

However, after Veolia took over, things only got worse. Service quality worsened and prices for consumers increased, along with the agency’s operational deficit. To make matters worse, Veolia was not complying with environmental regulations, prompting fines and sanctions from the US Environmental Protection Agency. PRASA was ill-equipped to oversee and enforce its contract with Veolia and for years complied with the increased payments requested by Veolia, despite the lack of tangible improvements.

The contract with Veolia ended in 2001 and was not renewed. Instead Puerto Rico sought a different private contractor to take over operations. This time, Puerto Rican officials claimed they had a “top-notch Evaluation Committee” that selected an operator that would “bring current operations to world-class standards.” PRASA entered into a 10-year, $4 billion contract with Ondeo, a subsidiary of French multinational Suez, that “this time” included clauses to assure compliance with its stated goals, while also promising to bring huge savings for the government.

Less than two years later, after numerous disputes and disagreements with Ondeo, which repeatedly requested more money than the initial agreement from PRASA, while also failing to update the system’s infrastructure, PRASA paid the company a settlement to rescind the contract. After the termination of the second contract, public management of water services was resumed.  

Somehow, this disastrous experience seems to have been quickly forgotten by the ardent proponents of privatization. When PREPA was slow to respond to the damage caused by the hurricane, privatization was aggressively pushed as the only solution to effectively rebuild the power grid. Furthermore, Puerto Rico’s plan for PREPA criticizes the agency in charge of regulating the utility, the Puerto Rico Energy Commission (PREC), and calls for creating a “reasonable regulatory process” for the future private owners. Handing over a public utility to the private sector, while calling for less regulation should be cause for concern.

While there is a clear need to reform PREPA, privatization is not necessarily the answer, as Puerto Rico’s own history shows. While agreeing to hand over a concession to a private firm might appear to save money at first, in practice things do not always work out as planned. And no matter who is in charge of PREPA, there is no doubt it needs a strong and accountable regulator to oversee it and protect consumers.

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