PREPA, LUMA challenges face Puerto Rico's new leadership

Puerto Rico's new governor and new party controlling the legislature may bring changes to its financial and economic policies, according to analysts.

The bankruptcy of the Puerto Rico Electric Power Authority has continued for more than seven years and the swearing in of Gov. Jenniffer Gonz?lez Col?n at the start of January may push negotiations forward, some analysts said.

She knocked incumbent Pedro Pierluisi out of office in a June primary before winning the general election in November.

The new governor will have a "more realistic" and a "bit less populist" approach to dealing with the PREPA debt negotiations, said Joseph Krist, publisher of Muni Credit News.

"The biggest hurdle to a resolution may be the role of LUMA," he said, referring to the private firm responsible for power transmission and distribution on Puerto Rico since 2021. "As long as they are in the picture, the mistrust they have engendered among the customer base is impossible to overcome."

Gonz?lez Col?n has limited "impact on negotiations and is in a bit of bind," said one institutional municipal bond investor, who declined to be identified. Increased electricity rates would be her biggest political liability.

However, "in order to push against the [Oversight] board, she will try to walk the line ? encouraging conclusion of the matter but without material impact on electricity prices ? very challenging."

The new governor is likely to propose using central government funds to pay off a portion of PREPA's legacy debt, said Cathy Kunkel, energy consultant at the Institute for Energy Economics and Financial Analysis.

"Gov. Gonz?lez has gone on record committed to resolving the constant power outages in Puerto Rico as key to her administration's energy policy," said Phillip Escoriaza, partner at law firm Feldesman Leifer and a property owner in Puerto Rico. "I think her administration's negotiations policy will depend on whether PREPA bondholders' demands and negotiation posture align with her administration's policy imperative."

John Mudd, an attorney in Puerto Rico, was skeptical that Gonz?lez Col?n would change the trajectory of the PREPA bankruptcy. "I think the governor will follow the board's lead," he said, adding that the Puerto Rico Oversight, Management and Economic Stability Act gives the Oversight Board control over bondholder negotiations in the PREPA case.

PREPA entered bankruptcy in the summer of 2017 with about $9 billion in debt, of which more than 90% was bond debt.

Gonz?lez Col?n has for months talked about replacing LUMA. More recently, she has called for making the island's goals for renewable energy more lenient and postponing the mandated replacement of the island's one coal-fired electrical plant until a replacement is ready.

"Given the lack of progress as to renewable energy, revising the goals is a necessity," Mudd said.

Heidie Calero, president of Puerto Rico-based H. Calero Consulting, said the governor may try to end the contracts with LUMA and private-sector electric generator Genera. However, "If you are looking for Puerto Rico's capacity to execute, you may be disappointed!"

Mudd said it was not clear if replacing LUMA, which has a 15-year contract is feasible.

"According to the contract, it would take a minimum of 210 days to complete the process and LUMA could conceivably modify in a positive way its performance, making substitution difficult. In any event, the [Oversight] board would have to authorize the cancellation of the LUMA contract and it would not even consider it without an acceptable substitute. Obtaining this substitute for LUMA will not be easy."

Gonz?lez Col?n's statements about PREPA and energy are all "posturing," said the institutional investor. "None of those objectives can be credibly pursued without the PREPA [bankruptcy] resolved."

Krist pointed to federal changes as important contributors to the island's energy future.

"One can reform the electric system and move it towards a more sustainable grid. LUMA will remain a major obstacle to that reform," he said. "The grid needs to be decentralized. Delays in renewables and replacement of the coal plant will only extend the period of uncertainty and risk which will discourage economic development. The problem is that the Trump administration is so anti-renewables that support for a more modern flexible grid just isn't there."

The local government recently announced a contract for a new 450-megawatt natural gas power plant and LUMA's plans call for 777 additional MW of new natural gas power generation, Kunkel noted.

The governor's "energy plans will keep Puerto Rico locked into price-volatile fossil fuels for the next couple of decades, which will continue to impede the electrical system's ability to balance its budget," she said.

Gonz?lez Col?n has appointed Francisco Domenech Fern?ndez to be executive director of the Fiscal Agency and Financial Management Authority, which oversees debt from the central government and its authorities.

She also nominated ?ngel Pantoja to be treasury secretary and Orlando Rivera to be director of the Office of Management and Budget.

Control of the governor's mansion wasn't the only thing Puerto Rico's voters changed in November's election.

There was substantial turnover in both the Puerto Rico Senate and House of Representatives, allowing the new governor's New Progressive Party to wrest control from the Popular Democratic Party. The NPP supports statehood for Puerto Rico and the PDP opposes it, generally supporting some version of the island's current status but without the Oversight Board.

The new Senate president is Thomas Rivera Schatz and the new speaker of the House is Carlos "Johnny" M?ndez Nu?ez.

Most analysts said the shift in the legislature probably will have little impact on the PREPA bankruptcy and the local economy.

However, Mudd said, "Control by one party of the legislature and the executive will be beneficial to the economy of Puerto Rico."

Gonz?lez Col?n "is very practiced in local politics, so the legislature will follow her," the institutional investor said. The legislature will follow her stance in the PREPA bankruptcy.

Holders of restructured Puerto Rico central government, Puerto Rico Sales Tax Finance Corp., and authority bonds are keeping track of the island's economic activity, believing this affects the revenues and taxes that pay their bonds.

The bond restructurings that closed in 2022 include contingent value instruments, which repay investors if specified revenues exceed targets.

The territory had a long history of economic decline in the first two decades of the century. The island's real gross national product declined all but one year from 2007 to 2018. Since then, it has gone up every year except for 2020.

The health of the island's economy also influences negotiations between the board and PREPA bondholders.

The most recent available Puerto Rico economic activity index figure for November indicated a decline of 1.1% from a year earlier.

Krist noted the unemployment rate had declined to 5.4%.

Intelligent Economics President Gustavo V?lez said this was the lowest rate in recorded history. However, sales are down and the economy is entering a "new normal," V?lez said.

"The labor force is steady, so this reflects some job growth and slowing of outmigration," Krist said.

Mudd said an election year economy is usually slow due to uncertainty as to who would win. "If the U.S. economy does well, we will do well."

However, Kunkel said, "Puerto Rico's economy continues to be fragile, especially given that the flow of federal funds to the island will likely be substantially reduced over the next several years. The electrical system continues to be in particularly poor financial condition, with the Energy Bureau recently opening an investigation into the system's liquidity crisis. Layering on additional charges to electric rates to pay off legacy debt would drive the electrical system even further into financial dysfunction."

Calero said Puerto Rico's economy was in "recession" and would continue in it. The recession would worsen if President Trump doesn't pay previously pledged funds for the electric system and Federal Emergency Management Agency projects," she said.

The level of federal support for the economy will be important, the investor agreed, saying the governor's connection to Trump should help.

Gonz?lez Col?n is a Republican as well as member of the New Progressive Party. She spent the last four years in Washington, D.C. as the island's resident commissioner, its non-voting representative in Congress. She has generally supported Trump when he was in office and when he was a candidate.

"If the government is able to avoid gimmicks like turning Puerto Rico into a tax haven and instead focus on developing jobs for the local population, it would be a good thing," Krist said. "That means getting PREPA settled sooner rather than later."