Public Power vs Privatized Power: the Debate in Puerto Rico Before and After Hurricane Maria
A study by the World Bank concluded there is no difference in the cost, quality and speed of services offered via public or private companies. So how should Puerto Rico rebuild?
(CPI)From the inside of a cargo container like the ones used to transport food overseas, the town of Sterling, Massachusetts implements the energy system of the future. The general manager of this power services company, Sean Hamilton, walks with his head protected by a white hard hat on his way to the container. He opens the door and proudly shows off some 40 battery towers. They are capable of energizing the town’s emergency management center for 12 hours uninterruptedly, in the case that an extreme weather event destroys the power grid. Between 2017 and 2018 the American Public Power Association granted the utility a distinction for keeping the highest financial, operational and safety standards, and for contributing to the prestige of public companies through his achievements and customer service.
This energy storage system is connected to a microgrid that extends for half a mile to the municipal police station. Authorities can not only coordinate the emergency management and communications efforts from there, but the population has somewhere to go to get help and to charge their cell phones if there are no power services.
“If you wanted to take something to Puerto Rico, I would take this type of equipment. The winds are not going to blow it away,” said Hamilton, referring to the destruction caused by Hurricane María in Puerto Rico’s electrical system, leaving hospitals, government agencies and homes in darkness for almost a year without electric service.
“Any private company that goes to Puerto Rico for the privatization of the electric system will look good, because there will be public funds that will be issued to repair the system. Precisely because it will be rebuilt with public funds it should be used by a public utility,” said the administrator of SMLD. He referred to the reconstruction funds that the government has requested after the hurricane, and to the new privatization policy of the Puerto Rico Electric Power Authority (PREPA), announced by Governor Ricardo Rosselló. Then, Hamilton added: “in public companies we do not have to respond to investors, but exclusively to those who pay the bill, which are the customers.”
The general manager of the Sterling Municipal Light Department (SMLD) has experience facing these emergencies in the Caribbean: he has participated in brigades to repair transmission and distribution lines in Saint Thomas, U.S. Virgin Islands, after cyclonic events. “I know what a hurricane can do.”
Sterling’s public company, which serves 3,700 customers, plays in the industry’s minor leagues when compared to PREPA, which has 1.4 million subscribers. Even so, Sterling demonstrates that it can be a government company, a model of efficiency and be prepared for emergencies. And despite the mantra that private utilities are better, a fashionable argument since before Hurricane María, there are failures in this sector, such as Energy Future Holdings company, which was the largest in the state of Texas, and in 2014 went bankrupt. To argue that private services are better than public services or vice versa is an ideological stance that has nothing to do with the reality of the energy industry. In 2018, the World Bank (WB), defender of privatization policies, published a study that contradicts such arguments. After analyzing more than 201 locations around the world, including Puerto Rico, and its power companies, it concluded that there are practically no differences between the cost, quality and speed of the services offered by the public and private models.
On Jan. 17, the Public-Private Partnerships Authority announced the companies qualified to submit proposals to manage PREPA’s transmission and distribution system: Duke Energy, of North Carolina, which provides power generation and distribution services in six states; Exelon Corporation, of Chicago, doing business throughout the entire energy industry chain in virtually all of the U.S., plus Canada; PSEG Services Corporation, the largest electricity and gas supplier in New Jersey; and a consortium comprised of security consultant IEM, of Minnesota, infrastructure services provider Quanta Services, of Texas, and electric company ATCO, of Calgary, Canada.
At first glance, it would seem contradictory that Sterling’s small electric company is an example of cutting-edge technology. Its office is a building constructed with horizontal wooden planks, crowned by an angled roof, in the same structure that at the end of the 19th century was a municipal high school.
To carry out its project, the Sterling Municipal Light Department chose the batteries from Japanese multinational company NEC, which offered the best proposal to install a system that can supply 2 megawatts, while storing 3.9 megawatts per hour. It cost $2.5 million, which were financed primarily with state and federal funds. The company decided to prepare after seeing the experience that could be caused by atmospheric phenomena in electrical systems in the northeast of the U.S., as it happened in 2012 in the states of New York and New Jersey after Hurricane Sandy.
During the annual Energy Storage Association convention, held in April 2018 in Boston, the Commissioner of the Massachusetts Department of Energy Resources, Judith Judson, highlighted SMLD as one of the poster children for a robust system. “There have been people from all over the world who have come to see this project. It is a true example of how a municipality can use storage to give the people resilience and reduce their bills.”
Actually, the public sector is the one that dominates the distribution energy systems around the planet. About 70% of the countries and regions studied by the World Bank in its report have public organizations as their most important electricity distribution companies. The remaining 30% corresponds to private companies. The latter are usually in high- and middle-income economies.
In poor countries, private companies tend to connect faster to customers who have requested new connections, the study concludes. The study highlights for example, that the Guatemalan power utility, which is private, takes about 44 days to connect customers, while the Ghana Public Electric Company takes 78. The public-sector company in Liberia has the slowest record, taking 482 days, while a public company, the United Arab Emirates, holds the record for speed, taking 10 days to make the connection. PREPA usually does it in 32.
PREPA dropped between 2017 and 2018 to 69 from 88 in the ranking that classifies the best companies offering power services. This was due in part to the fact that other companies improved their scores and to the effects of Hurricane María on the energy system, the WB told the Center for Investigative Journalism (CPI for its initials in Spanish) in written statements.
Public and private companies offer virtually the same experience regarding the amount of administrative procedures for a client to achieve that connection. According to the study, generally, the power company sector has made reforms to reduce bureaucracy, which allows the connection time to drop by 20% in the private sector and 22% in the public sector. The least bureaucratic company is once again the public one in the United Arab Emirates, in which only two steps are required for a new connection. The most bureaucratic companies are public, one in Tajikistan and that of the Bangladeshi city of Daca, as well as the private one from Romania, where you have to do more than nine procedures to get connected, according to the BM. In PREPA, there are five steps to be taken.
Regarding the cost of electricity, the WB study concluded in 2017 that commercial rates are usually 8% lower in cities that have a public company. Blackouts have little to do with which sector owns the company: there are public and private companies that often lose power.
The numbers are part of the annual “Doing Business” report, which measures the ease of doing business and that’s been questioned for using a methodology that does not take into account the particularities of each country. That study was embroiled in a scandal over statements by its former Chief Economist, Paul Romer, who said in January 2018 that the adverse figures for Chile had been manipulated against the government of former Socialist President Michelle Bachelet.
“It’s an act of faith to say that the private electricity system is better”, said Dr. Robert E. Hebner, director of the Center for Electromechanics at The University of Texas and a public energy policy scholar. “Private and public can be good and bad. It is the energy oversight entity who must do its job for both actors comply with the requirement of resiliency and good prices.”
In Puerto Rico, the duty to oversee the public and private sector is the Energy Bureau, and that entity will have to review the public-private partnership’s concession of the transmission and distribution system, according to PREPA’s privatization model being developed after Rossello announced it, to allegedly make the electrical system more efficient, reliable and modern.
In Sterling, during weekday afternoons, when residents turn on switches and appliances in their homes, the company uses the energy stored in the batteries to supply customers. That way, the entity avoids having to buy it during those peak hours from generating plants that use fossil fuels. They not only emit greenhouse gases that accelerate global warming but also sell the most expensive energy during peak hours. “Resilience is good, but we also use batteries because they help us save money,” Hamilton insisted.
The cost of electricity for residential customers in Sterling is 13 cents per kilowatt hour, almost half the average for the rest of the state of Massachusetts. SMLD has a diversified generation portfolio that is 76% free of fossil fuel emissions, and that it gets from other companies through electricity purchase agreements, including 32% of nuclear energy. In addition, all the lights that illuminate the public roads were changed to LED bulbs, which are efficient and durable, and help generate savings.
In Puerto Rico, PREPA is shifting to a public-private partnership at a time when there is a global trend in the opposite direction: to reverse privatizations. This is supported by the Transnational Institute, a think-tank based in the Netherlands, in a study that documents more than 884 cases between 2000 and 2018 in which central and regional governments around the world have taken back control of services that were in private hands. The change was due to the need to promote the skills of local professionals, provide better services, lower costs and improve financial transparency. In 41% of the cases in which governments regained control of these services were carried out precisely in the energy sector, where one factor was to expedite a faster transition to the use of renewable sources such as sun and wind.
Pacific Gas and Electric Company, one of the three largest private electric companies in California, is undergoing a bankruptcy process after its economic situation worsened after the fires that affected the state in 2017 and 2018 and after its credit ratings were degraded for the risks associated with these disasters. The city of San Francisco is evaluating acquiring the company to ensure the continuity of power services.
Like Gov. Rosselló, the Fiscal Control Board, the body appointed by the U.S. government to oversee the restructuring of Puerto Rico’s debt, and the past chairman of the U.S. House of Representatives Natural Resources Committee, Republican Rob Bishop, promote privatization as the solution to the public corporation’s problems. Even Republican senators Jeff Flake and Mike Lee exercised their political influence by “quietly” pushing for PREPA’s privatization after the hurricane, an investigation by the CPI revealed.
PREPA Will Exist Only to Manage Contracts
Why privatize then if you do not need to be private to have a good power company? the CPI asked PREPA Executive Director José Ortiz.
“It’s because of the fiscal capacity more than anything, which is not available right now to maintain the power system and be able to position it according to standards,” he said.
Among the standards identified in the public corporation’s fiscal plan are to produce clean, reliable and resilient energy, offer better services and be responsible with finances.
“The private entity that is being sought is one that, first, has the capacity for technical development, which it has carried out in other countries. Here you have to create a lot of talent. It is not to downplay what we have, but there’s a lack of capacity and talent to implement a new metric, new ways to implement the changes and fiscal capacity to carry out changes in the system, in the software, smart meters that provide, for example, information to the user about what they are using at the moment.”
PREPA has $9 billion in debt that it cannot pay, so it filed for bankruptcy through Title III of the federal PROMESA law. The public corporation needs $12 billion, according to its fiscal plan, to invest in infrastructure. The old and inefficient transmission and distribution system has been patched up practically with the same characteristics as before Hurricanes Irma and María. The government plans to collect that money through a combination of federal funds, private investment and payments from PREPA clients, according to the fiscal plan.
At the end of the privatization process an entity that will not resemble the current PREPA will remain, according to Ortiz. “It’s going to shrink. At the end of the day, there will be an entity that will solely manage contracts. The concession of the transmission and distribution system, and perhaps some contracts for the sale of assets with all that it entails, for example, easements.”
How will that process be carried out?
“The transition will be determined by the sale of the assets. You cannot say that you are going to turn off the generation plants, sell them and redo them tomorrow. How do you provide power in the meantime? Selling the assets may take three or four years and to sell them you have to put them in shape, make an environmental analysis, you have to do the due diligence,” said the executive director of PREPA.
Who will be the owner of the poles, cables and power substations?
“The people of Puerto Rico. The concession is going to manage and maintain the infrastructure. Everything that is not electricity generation will continue to be in the hands of the state. Customer service will go to the public-private partnership concession. Whoever comes not only has to distribute but conduct collections and maintain the meters and all those kinds of things.”
What authority will the island have to maintain energy security to the extent that all power generation is directed to be in private hands?
“First you have to draft a contract for these purposes, that in case of an emergency as such, the state plays an important role in deciding when to generate and when not. The acts of force majeure can lead you to the state taking control, and that you, like it or not, will generate.”
Puerto Rico has already experienced a privatization that did not work, with the poor management of the electronic toll system on the highways, a contract held by company Gila. In September 2018, the Rosselló administration announced the cancellation of the contract in response to complaints about the service provided to drivers. In 2004, the Aqueduct and Sewer Authority had to retake the water service administration that was handled by Ondeo, a subsidiary of French multinational Suez.
Among the challenges that PREPA faces are the contracts it has with private companies that generate energy from renewable sources at prices that are above current market costs, according to a CPI investigation. PREPA also has to deal with reducing dirty coal-based generation, which a private company, AES, produces in Guayama, and is the most pollutant energy source in the island, according to the U.S. Environmental Protection Agency.
The voices advising caution in the face of privatization are joined by the Institute of Energy Economics and Financial Analysis (IEEFA), a research group based in Cleveland, Ohio. It published a report that warns about retail choice, which refers to when a group of companies sell retail energy directly to consumers. “Residential customers in several of the states that have adopted retail choice have not seen the lowest rates. Thousands of consumers have been victims of abusive and predatory marketing practices,” says the report. Between 2015 and 2017, consumers who participated in the so-called retail choice in the state of Massachusetts paid $177 million more in energy than they would have paid to use their traditional provider. These types of services are in the pipeline of the privatization process to be implemented after a P3 is created for PREPA’s transmission and distribution system and its power generation plants are sold, Ortiz confirmed to the CPI.
The Talent Leaves in Search of Better Options
Scholars such as Efraín O’Neill, an energy systems researcher at the University of Puerto Rico’s Mayagüez Campus (known as RUM for its initials in Spanish), not only recommends a system that offers electricity at low cost and is resistant to hurricanes, but that it also generates energy in a distributed way using clean local resources like the sun (through solar panels on the roofs of houses) and generates profits for the government’s coffers.
O’Neill laughed when he learned that Ortiz is of the opinion that there is a lack of local talent for the new energy system that the island needs. After all, the professor has been contributing for more than 10 years to graduating engineers specialized in power systems (that produce and distribute electricity), and the RUM is among the top universities in the United States in the number of students who graduate in that field, trained by professors with doctorates who teach and do research at the same time, he said.
“Do you know where our students are leaving to work? They go to large electric power companies like Georgia Power in Atlanta, they go to AEP Energy, which has offices in Ohio, they go to Dominion, which is in many states and has offices in Virginia. They leave because the Puerto Rico Electric Power Authority has stopped recruiting local talent in Puerto Rico,” said O’Neill. “The capacity exists.”
The lack of money to invest in infrastructure is the only reason that justifies private participation, according to O’Neill, provided that the government is a participant in the energy model. “You may have to end up with a hybrid model. To say that the private model is a magic wand that will solve everything is not totally true. If the path of privatization is inevitable, because it is believed to be the way to bring capital, then privatization must also be included for generation on the roofs of houses, industries, and communities. But if the approach is to privatize for the large power plants that now belong to PREPA, they will take their toll. If they are given energy sales guarantees for 40 years, without these plants helping us to integrate renewables, it will not benefit us.”