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How free electricity helped dig $9 billion hole in Puerto Rico

AGUADILLA, Puerto Rico >> To understand how Puerto Rico’s power authority has piled up $9 billion in debt, one need only visit this bustling city on the northwest coast.

Twenty years ago, it was just another town with dwindling finances. Then, it went on a development spree, thanks to a generous — some might say ill-considered — gift from the Puerto Rico Electric Power Authority.

Today, Aguadilla has 19 city-owned restaurants and a city-owned hotel, a water park billed as biggest in the Caribbean, a minor-league baseball stadium bathed in floodlights and a waterfront studded with dancing fountains and glimmering streetlights.

Most striking is the ice-skating rink. Unique in a region where the temperature rarely drops below 70 degrees, the rink is complete with a disco ball and laser lights. Signs warn skaters not to wear shorts.

“Imagine how much it costs to have an ice-skating rink in the tropics,” said Sergio Marxuach, policy director at the Center for a New Economy, a nonpartisan research group in San Juan.

And that is the catch. What most likely would be the biggest recurring expense for these attractions — electricity — costs Aguadilla nothing. It has been provided free for years by the power authority, known as PREPA.

In fact, the power authority has been giving free power to all 78 of Puerto Rico’s municipalities, to many of its government-owned enterprises, even to some for-profit businesses — although not to its citizens. It has done so for decades, even as it has sunk deeper and deeper in debt, borrowing billions just to stay afloat.

Now, however, the island’s government is running out of cash, facing a total debt of $72 billion and already defaulting on some bonds — and an effort is underway to limit the free electricity, which is estimated to cost the power authority hundreds of millions of dollars.

But like many financial arrangements on the island, the free electricity is so tightly woven into the fabric of society that unwinding it would have vast ramifications and, some say, only worsen the plight of the people who live here.

“If the towns don’t get free energy, they’re going to have to pay for it by increasing their property taxes or something, so the people will end up paying,” said Eduardo Bhatia, the president of the Puerto Rico Senate. Residents of the island are already upset about a recent sales tax increase to 11 percent, from 7 percent, and a property tax increase now would cause an outcry. The last assessment was in 1958.

The free electrical power is just one example of the power authority’s complex and paradoxical role in the economy here. On Tuesday, Bhatia will begin hearings to determine who and what is to blame for the authority’s larger problems, especially its ancient and inefficient power plants, among the last in North America to burn oil. Culprits are expected to include the authority’s secretive purchasing managers, elected officials who wasted money on natural gas pipelines that were scrapped and an institutional hostility to wind and solar power that is hard to fathom on a breezy island where the sun shines most days.

“This is the great mystery that we have to unravel in the coming months,” Bhatia said.

Meanwhile, though, the free electricity offers a window into the workings of the island’s sole power provider and demonstrates how complex the solutions to the larger debt troubles are likely to be.

“It’s symbolic of a lot of things here in Puerto Rico,” said Miguel Soto-Class, the president of the Center for a New Economy, which has been urging changes at PREPA for the last 10 years. “Every time we start to get into this, they always come back and say: ‘Well, there’s nothing we can do. We’ve got to keep the lights on.’ “

Carlos Mendez Martinez, the mayor of Aguadilla, said the city-owned attractions had turned Aguadilla’s onetime deficit into a surplus and generated profits he uses to pay down debt, improve low-income housing and offer free wheelchairs and delivered meals to shut-ins. The profits have also allowed him to keep a 17-year-old promise not to raise taxes. Last year, he even paid a “dividend” to every man, woman and child in the city — a free ticket to the water park, which otherwise costs residents $20.

These achievements have inspired voters to elect Mendez four times. Aguadilla has no term limits, and he expects to win again this year.

“I can be mayor until the day I die,” he said in a recent interview.

Mendez said it was fair to use the power authority’s free electricity for municipal development, because PREPA paid no property taxes or licensing fees for its many facilities in Aguadilla. But anticipating limits on his free power now that the authority is struggling for solvency, he recently put a solar power system on the roof of the skating rink that he hopes will eventually get it off the grid.

Aguadilla may be the most visible example, but other municipalities use PREPA’s free electricity to power air-conditioned restaurants and hotels, lighting systems for minor-league baseball games at night, lighting and sound systems for festivals, and other enterprises. Until now, the power authority’s terms gave cities no incentive to conserve. The more free power they used, the more they could receive.

“We have heard of many private entities that for years have run a private business in a building owned by a municipality, and they never paid for power,” said Agustin F. Carbo Lugo, president of the Puerto Rico Energy Commission. The commission, established in 2014, is the power authority’s first independent regulator; previously the public-owned monopoly regulated itself.

The free power dates from 1941, when the utility was established by Rexford Tugwell, a member of Franklin D. Roosevelt’s brain trust and the last American governor of Puerto Rico to be appointed by the president of the United States. He contended that for electricity to benefit the people, it had to be owned by the people, and he created PREPA by nationalizing the handful of private electric companies then on the island.

The private companies had paid local property taxes, but publicly owned PREPA did not. Free electricity was intended to make up for the lost tax revenue. The value of the free power was supposed to match the forgone taxes, and if cities took more, they were supposed to pay for it. But PREPA’s rates are driven by oil prices, which since the 1970s have lost any connection they might have had to property values, and the power authority simply stopped trying to collect what cities owed. In 2014 a consulting firm found the cities had received $420 million worth of free electricity that they should have paid for.

Nor was it just towns and cities. The consulting firm, FTI Capital Advisors, found that 288 governmental bodies on the island were delinquent in their payments to PREPA by $300 million. Among them were public schools, hospitals, low-income housing projects, a commuter train, the island’s water and sewerage system, and its highway authority, which operates traffic signals, toll plazas and highway lighting.

If the power authority were to demand immediate payment from them, it could set off a domino effect of defaults and insolvencies.

In 2012, for example, Puerto Rico’s port authority fell $60 million behind on its electric bills, and the utility threatened to cut off power to the island’s main commercial airport, in San Juan. That would have forced the airport to close, a catastrophe for an island economy that caters to tourists.

To avert a crisis, the government sold the airport to a private investment group from Mexico, and used the proceeds to make a dent in the overdue $60 million. But before long, what was left of the port authority, nine seaports and 11 small airports, started falling behind on electric bills again.

The power authority is working out a payment plan for them.

Other delinquencies have been tougher to resolve. When the power authority threatened to turn off the power in the commuter rail system’s administrative offices, rail officials scoffed, saying the authority had no legal standing to enforce its claims.

“Nobody’s happy,” Bhatia said in a recent interview in San Juan. “Nobody’s in a good position, and that’s why we have to keep working together.”

One response to “How free electricity helped dig $9 billion hole in Puerto Rico”

  1. AhiPoke says:

    This is what happens when you turn control over to a progressive/liberal. Their most basic instinct is to give things away.

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