Puerto Rico Oversight Board overrules legislature on PREPA privatization spending

BY SourceMedia | MUNICIPAL | 05/14/21 04:47 PM EDT By Robert Slavin

The Puerto Rico Oversight Board voted to overrule the territory's House of Representatives on spending for the privatization of the Puerto Rico Electric Power Authority transmission and distribution system.

On Wednesday the House voted 43 to 0 with 2 abstentions against authorizing a revision to this year?s General Fund budget allocating $750 million for the privatization.

On Thursday the board said it had used its budgetary powers in the Puerto Rico, Oversight, Management, and Economic Stability Act to overrule the House vote. On Saturday the board had sent a letter to the leadership of the Puerto Rico House of Representatives and Senate asking them to approve the funding and saying that if it did not the board would act without their approval.

The board said the monetary allocation was ?to ensure the necessary levels of working capital to operate PREPA?s electrical grid and comply with the agreement between LUMA Energy, PREPA and the P3 Authority, by which LUMA is to assume the operation and management of PREPA?s transmission and distribution system on June 1.?

The money is for an operational reserve, the board said. The operational and maintenance agreement ensures that PREPA has sufficient funds to operate and to pay vendors and fuel suppliers. Part of the money will be used towards investments in grid and reconstruction projects. Eventually, the Federal Emergency Management Agency will reimburse for these.

?PREPA?s lack of funds to maintain the system and inability to maintain adequate cash reserves are some of the reasons that exacerbated PREPA?s problems and inability to respond quickly to hurricanes Irma and Maria,? said Oversight Board Executive Director Natalie Jaresko. ?The operational reserve is a critical step toward ensuring that never happens again, especially when managed by a professional operator.?

The money will be transfered from the Puerto Rico government's cash accounts. As of April 30 the central cash account, the Treasury Single Account, had $10.4 billion.

On Friday Puerto Rico House Speaker Rafael Hern?ndez Monta?ez sent a letter to the board stating the House stance on the budget is controlling unless the board launches a lawsuit.

The board has repeatedly stated and courts have repeatedly upheld that under PROMESA the board has ultimate authority over Puerto Rico government spending.

Rep. Luis Ra?l Torres, who is president of the House committee overseeing energy, said in a written statement, ?The government of Pedro Pierluisi Urrutia and the Fiscal Oversight Board are willing to provide a life of luxury to the foreign directors of LUMA who today bill at $325 per hour and to their president who earns over $1 million. The Electric Power Authority will pay double payroll since the Fiscal Supervision Board said that it will also pay the salaries of employees who are transferred to other agencies.

?In addition, the Fiscal Oversight Board tells us that LUMA will bring efficiencies that will represent enough savings for us to pay its cost and to spare money,? Ra?l Torres said. ?But let's not fool ourselves; there is no empirical analysis that justifies this assumption. With FEMA?s billions, LUMA will renew all its equipment. That is where the real gain in efficiency lies, because we will have new equipment that is inherently more efficient. This is why we can achieve it without dismantling the public corporation.?

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.