Present and Future Opportunities

for Beneficial PREPA Reforms and

a New Paradigm for Electric
Service for Puerto Rico
February, 2015

Overview
Law 57 Reforms for PREPA

Integrated Resource Planning

Rate Case

Open Access Reforms

PREPA Restructuring

Securitization

Law 57 Reforms
Law 57 is critically important PREPA reform legislation.
Enacted in 2014
Requires PREPA to move away from fuel oil and coal for
electric generation
Created a new regulatory framework with significant
reforms for PREPA and a new government regulatory body,
the Puerto Rico Energy Commission (the Commission), to
oversee PREPA and ensure that those reforms are
implemented in ways that best serve the public interest

Law 57 Reforms (2)

Law 57 reforms should be used as intended, to make
PREPAs ongoing operations sustainable, with efficient
electricity prices based on the lowest possible costs of
providing reliable service in an environmentally
responsible manner.
Properly implementing Law 57 will foster a sustainable and
competitive economy for Puerto Rico.
Law 57 provides for three important PREPA reforms, in the
form of three major regulatory proceedings administered
by the Commission:
Integrated Resource Plan (IRP)
Rate Case and Retail Tariff Design, including Rate Decoupling
Open Access Transmission Tariff (OATT, a.k.a. wheeling

Law 57 Reforms (3)

Integrated Resource Plan (IRP)

Integrated in the sense of planning for all the connected

elements of the electric generation, transmission, and distribution
systems.

There are many different types of generation resources:

Thermal generation (e.g., oil-fired or gas-fired)
Renewable generation (e.g., wind or solar).

Transmission facilities move electricity at high voltages from

generator to distribution facilities.

Distribution facilities move electricity at low voltages from

transmission facilities to customer locations.

IRPs usually reflect long-term planning, often 10+ years.

PREPA has filed a 20-year IRP for the Commissions approval.

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Law 57 Reforms (4)

Rate Case and Retail Tariff Design, including Rate
Decoupling
A rate case is a regulatory proceeding that determines the prices
for electricity that PREPA charges its customers.
The tariff is a document that explains the rates, terms, and
conditions for PREPAs service.
The design of the tariff regards features of the rates, terms, and
conditions that are designed to motivate PREPA and customers to
behave in ways that serve the public interest.
Rate decoupling is an option for PREPAs rate design that
features connection charges that do not depend on the amount of
electricity consumed, as well as separate usage charges based on
the amount of electricity consumed.

Law 57 Reforms (5)

Rate decoupling could be an important part of PREPAs
rate design.

In simple terms, the connection charge covers the costs of the

wires and the usage charge covers the costs of the electric
generation.

This approach lends itself to customers being able to keep

their PREPA connections but use their own generation, such as
solar panels.

Law 57 Reforms (6)

Open Access Transmission Tariff and Opportunities for
Independent Investment and Operations
The Commission will create a new OATT for PREPA that will
establish the rates, terms, and conditions for independent
generation to interconnect to PREPAs system and use the system
to move power to the independent generators customers.
Moving the power from one point on the power grid to another
point is known as wheeling.
The OATT could also allow independent transmission expansion on
PREPAs system, which could provide significant cost-savings like
independent generation could.
Ultimately, an independent system operator (ISO) or regional
transmission organization (RTO) could be created to operate
PREPAs grid in a non-discriminatory manner so that competition
among suppliers and price-sensitive customer market activity can
be harnessed to truly maximize the societal benefits of open
access.
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Law 57 Reforms (7)

If done properly, each of the Law 57 reform efforts hold the
promise of benefitting Puerto Rico by ensuring the lowest
possible electric rates that will foster a sustainable and
competitive economy.
Puerto Rico can learn from best practices that have been
developed in the US and elsewhere.
If it continues to be necessary for the Commission to push
PREPA to abide by Law 57, then there are also lots of
examples of good regulatory practices from the US for
each of those types of reforms.

US Electric Rates
Overall, the US has been able to keep rates at stable,
competitive levels.

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Integrated Resource Planning

In the US, state regulators and regulated utilities, as well
as non-profit municipal and cooperative utilities (some of
which are regulated at the State level), in the US use
variations of generally accepted IRP principles and
processes.
An IRP is crucial for prudent and effective utility operations when
access to capital is limited.

An IRP provides a blueprint for a utilitys forward

operations, including investment (or divestiture) needs.
For an integrated utility like PREPA that operates generation,
transmission, and distribution facilities, an IRP takes into account
the interrelated needs of each of those elements of the integrated
utility system (or grid).

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Rate Case
Following well established US regulatory practices, the
Commission should conduct the rate case after it has
approved PREPAs IRP.

The rate case should take into account the same (or updated)
information from the IRP so that the Commission can build the
proper rate design to best fit the approved IRP.

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US Electricity Rates
Current retail rates in the US reflect various regional
challenges with cost containment, and will likely continue
to fluctuate somewhat according to utility investment
cycles.

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US Wholesale Electricity Market

Competition

Strong regulatory oversight of local utilities has

contributed to the success of different retail models, but
enhanced competition in wholesale electric markets over
the same time period has also helped tremendously.
Wholesale electricity markets involve competition among
large electricity buyers and sellers, where independent
generation entry and demand response have been
particularly effective competitive catalysts.
In the US, wholesale electricity markets became
centralized and administered by regional transmission
organizations (RTOs, which are primarily federally
controlled) and independent system operators (ISOs,
which have more state control).
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PREPA Restructuring and

Securitization
In addition to the Law 57 reforms, PREPA is facing
bondholder pressure to restructure its $9B debt through
securitization.

Securitization allows a utility use some sort of commissionapproved regulatory asset that can be pledged as collateral in a
bond issuance.
The regulatory asset is likely to be defined as future revenue
from special irrevocable ratepayer charges, such as transition
charges.
There are three major elements of a utility securitization:
1. State legislation authorizing the utility to finance the recovery of
certain costs through the issuance of securitization bonds;
2. A financing approval order issued by the state utility commission
pursuant to the state legislation (all of which is important for market
valuations) that gives irrevocable approval of the creation of a
nonbypassable charge on utility customers; and
3. A special purpose entity created by the utility to issue the
securitization bonds.

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PREPA Restructuring and

Securitization
(2)
Securitization can
be beneficial in terms of minimizing
capital costs.
Securitized debt could carry significantly lower carrying costs than
other types of new capital PREPA would be able to secure, if any.
Also, PREPA and the commission can draw from many US examples
of best practices:

But securitization is not a panacea and can cause future

problems.
By relying on securitization financing now, future PREPA investors
may take the view that the irrevocability of the securitization
charge (which is often needed for investment-grade bond ratings)
will make it difficult for PREPA to raise other rates in the
future if needed to cover unexpected costs, for example.

Based on all the different (competing) interests that come

into play with securitizations, the Commission should
be given the authority to properly balance
bondholder and ratepayer interests while
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PREPA Restructuring and

Securitization (3)
Giving regulatory agencies control over securitization has
been the norm in the US for over a decade.

Florida
Maryland
Pennsylvania
Texas
West Virginia

Importantly, in order to be the most effective, the

Commission should seek independent expert advice
on how PREPA and the Commission should manage
the securitization process.
This will help to ensure that the resulting bonds are as well
received as possible on the bond market, with an investmentgrade rating and good transparency to help with secondary
market trading.

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PREPA Restructuring and

Securitization (4)

The Sequence of Changes Matters!

The public interest is paramount and would be best served by

completing the major Law 57 reforms before PREPA makes any
significant debt restructuring decisions.
Only after the Law 57 reforms are implemented will PREPA and the
PREC have the necessary information for optimizing the significant
restructuring decisions.
PREPAs current focus on restructuring ahead of Law 57
reforms (Energy Commission Proceedings on: IRP, Rate
Case; plus Governance and Management Improvements) is
putting the cart before the horse. Such financial decisions
made without a proper view of the future PREPA would
unnecessarily harm ratepayers and Puerto Ricos economy now
and in the future.

Focusing on restructuring before the Law 57 reforms come

to view will result in financial decisions that do not and
cannot properly account for the operations and value of a
reformed PREPA.
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PREPA Restructuring and

Securitization (5)

It is critical for the sake of Puerto Ricos near-term and

long-term public interest to put PREPAs debt restructuring
in proper context and to put it in the proper sequence of
PREPA reforms like the following:
1. Complete the current IRP proceeding at the
Commission
2. Complete the current rate case proceeding at the
Commission
3. Begin organizational and financial restructuring
based on the Commission IRP and rate case
decisions
4. Consider the need for securitization based on
PREPAs needs after factoring in the implications of
the IRP, rate case, and restructuring plan
Note: The above recommended sequence of PREPA reform activities 19

Questions?
David Sapper
dsapper@ces-ltd.com
(317) 708-4639

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