Relevant Document:
Letter
Gov. Pedro Pierluisi urged the PROMESA oversight board today to reconsider its
rejection of the administration’s
request to tap the commonwealth’s State Emergency Reserve Fund for at least $200 million to subsidize Puerto Rico Electric Power Authority, or PREPA, fuel costs in a bid to hold down electric power rates. The reconsideration request, which was made through a March 24 letter to oversight board Chairman David Skeel, comes amid a Puerto Rico Energy Bureau evaluation of the latest quarterly PREPA rate reconciliations as well as legislative efforts to limit imposition of the “
la crudita” tax to mitigate rising fuel prices.
Responding to a March 17 rejection
letter from Skeel, Pierluisi said that “we seem to agree that a cash injection into PREPA to prevent future electricity rate hikes is necessary, but disagree on the amount and source of funding.”
Addressing the oversight board’s call for the government to optimize the use of existing federal funds and programs, the governor stated the government’s position that “federal funds alone will be insufficient to fully address the current global energy crisis, even after maximizing our use of those programs.”
The governor stressed that the requested funding “is a consequence of a force majeure and not necessarily due to operational inefficiencies” at PREPA or any government policy, reiterating that the “atypical and unforeseen emergency” is caused primarily by Russia’s invasion of Ukraine and the resulting economic sanctions that have constrained global oil supply.
“These complex geo-political events are extraordinary and wholly outside the Government's control. If we can take action to prevent it, the people and economy of Puerto Rico should not be forced to suffer the negative consequences of those events,” he said, warning that the surge in the price of oil that fires PREPA’s generation plants “will require significant and abrupt rate increases” to address the emergency.
“If anything constitutes an emergency, this is it,” he said.
Emphasizing that the government is not requesting “unconditional use” of the State Emergency Reserve Fund, Pierluisi said the oversight board “has, and will continue to have, authority over the final approval” of any disbursements from the fund, including the amounts and timing for their release.
“Time is of the essence and acting now would help the Government more effectively address this energy emergency as it unfolds,” he said, adding that the government is willing to submit any necessary amendment to the commonwealth’s certified fiscal plan for the oversight board’s consideration.
During a press conference today to present recommendations for a new PREPA restructuring support agreement,
Center for a New Economy Public Policy Director Sergo Marxuach criticized the proposals to tap the emergency fund and provide a gas tax holiday as a way to hold down gas and energy prices. He said the “temporary” proposals do not “resolve the underlying problems.”
Regarding the governor’s emergency fund proposal, Marxauch said that “there is only so much you can do with $200 milllion. You really have to question if that is the best use for that money right now because we are just coming out of bankruptcy and what impact it would have on the fiscal plan.”
PREPA Rate Reconciliation Motion
The governor’s renewed call for a commonwealth subsidy for PREPA comes amid an ongoing evaluation by PREB, as the island’s energy market regulator is known, of the latest
rate reconciliation motion, which was filed by Luma Energy on behalf of PREPA on March 15. The motion includes the fuel cost adjustment, or FCA, purchased power cost adjustment, or PPCA, and fuel oil subsidy, or FOS, reconciliations for the months of December 2021 and January and February 2022 as well as the calculated FCA, PPCA and FOS factors to be applied for the quarter starting on April 1.
The motion seeks an increase of $0.04265 per kilowatt hour, representing a 16.6% hike in the basic residential rate, for the three-month period from April through June.
The motion pegs the quarter total of FCA - fuel costs and prior period adjustments - for the three-month period from December 2021 through February 2022 at nearly $638.2 million against total revenue of just under $533 million, for a revenue insufficiency of $105.6 million. “The major contributor to the reported variance in fuel expenditures for this reconciliation period was above expected fuel prices,” according to the motion.
The quarter total of PPCA was $121.7 million and revenue totaled $130.5 million, for an excess revenue of $8.8 million.
In a
March 16 resolution and order and a subsequent
hearing on the reconciliation motion held on Monday, March 21, PREB pressed PREPA and/or Luma Energy for information on a range of fronts including the cash balance in PREPA’s reserve accounts, the status of efforts to recoup certain payments to natural gas suppliers New Fortress and Naturgy, fuel inventory, and the costs associated with a continued reliance on diesel rather than natural gas for the bulk of generation in flexible units at PREPA’s San Juan and Costa Sur plants.
During the hearing, PREB Associate Commissioner Ángel Rivera de la Cruz pressed PREPA for further information and questioned the notion that PREPA is facing a cash crunch.
In October 2021, the commonwealth steered
$76 million in federal pandemic relief funds to PREPA to help cover fuel costs and maintenance of the public utility’s generation plants after the filing of a $75.8 million reconciliation motion with PREB. That funding allotment prompted PREB to issue
a resolution and order determining that there would be no change in rate reconciliation factors for the remainder of 2021.
Luma Energy maintained in its latest
quarterly report to PREB that it does not expect to request a base rate increase during the current fiscal year even as operational spending continues to outpace budget projects. The base rate, which was last adjusted in 2017, is separate from quarterly rate reconciliation petitions that are required to be filed with PREB for fuel and power purchase adjustments. As grid operator, Luma is now responsible for filing the quarterly reconciliation requests for fuel and power purchase adjustments; this was previously a task undertaken by PREPA.
Fuel Tax Relief Legislation
Rising oil prices have sparked multiple legislative proposals in recent weeks calling for the suspension or elimination of fuel taxes such as the excise tax on crude oil and similar products, referred to collectively as “
la crudita.”
The oversight board has already moved to enjoin one such proposal,
Senate Joint Resolution 240, which, among other things, seeks to suspend the excise tax on gasoline and diesel oil for a period of 45 days in light of recent increases in the costs of oil and gas products. The measure was approved by the Senate this week and is pending action in the House.
In a
March 23 letter to Senate Treasury, Federal Affairs and PROMESA Oversight Board Committee Chair Juan Zaragoza, the oversight board’s general counsel, Jaime El Koury, said the board’s preliminary review of the measure pursuant to PROMESA section 204(a)(6) found that it is inconsistent with the fiscal plan and the certified budget because it would reduce commonwealth tax revenue without providing offsetting savings or alternative revenue. S.J. Res. 240 would have a negative fiscal impact of $25 million without specifying offsetting savings or alternative revenues, according to the oversight board.
“Putting aside the merits of the Bill’s purposes, any bill that has a negative fiscal impact without corresponding savings or new revenues is not revenue neutral and, therefore, inconsistent with the Fiscal Plan and in violation of PROMESA,” El Koury said.
Further, the resolution violates PROMESA section 204(c), which prohibits reprogramming without prior oversight board analysis and approval, according to El Koury, nothing that the Title III court has recognized that laws that create “a revenue deficiency in the budget that the Government would likely have to remedy through reprogramming” fall under section 204(c).
Because the measure would decrease commonwealth revenue by $25 million and provides no mechanism to offset this revenue shortfall, the measure’s economic impact will have to be resolved through reprogramming, according to the oversight board general counsel, noting that the Legislature has not requested and the oversight board has not approved any associated reprogramming.
“Passing such a law and waiting to deal with the fiscal consequences is contrary to PROMESA,” El Koury stated, adding that the Title III court has held that government may not avoid the bar on implementation of statutes calling for unauthorized reprogramming “by holding onto its cards” and waiting until a post-implementation date to request reprogramming if the law as written is likely to require reprogramming due to insufficiency of budgeted funds.
“Accordingly, the Legislature is prohibited by PROMESA § 204(c) from passing the Bill,” El Koury stated, adding that oversight board is available to meet with the Legislature to discuss how the resolution could be amended to achieve its objectives in a manner consistent with the fiscal plan and PROMESA.
At least two other fuel-tax relief measures -
Senate Bill 776 and
Senate Bill 795 - have been filed in the upper chamber in recent weeks but have not yet cleared committee to be brought to floor votes. Both target the
crudita for elimination. During a press conference at the Capitol today, Senate President José Luis Dalmau said he is calling on Treasury Secretary Francisco Parés to certify central government revenue projections to identify funds to replace the
crudita so the levy can be permanently eliminated. The Senate chief said the oversight board’s March 23 letter did not close the door on suspension of the tax.
Crudita revenue that originally flowed to cover Highways and Transportation Authority, or HTA, and Puerto Rico Infrastructure Finance Authority, or PRIFA, obligations now go to the central government.
Editor's Note: This story has been updated to reflect that the base rate was last adjusted in 2017 pursuant to an order by the PREB.