Public power versus privatized power: The debate in P.R. before and after María

By Eliván Martínez Mercado | Center for Investigative Journalism

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 constructor’s hat until
reaching 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 Sterling Municipal Light Department.

He referred to the reconstruction funds the 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 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.

World Bank study
In 2018, the World Bank, 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,” she said.

At present, the public sector is the one that dominates the distribution energy systems around the planet. About 70 percent 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 percent 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 percent in the private sector and 22 percent 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 get connected, according to the
BM. In PREPA, there are five steps to be taken.

Regarding the cost of electricity, the World Bank study concluded in
2017 that commercial rates are usually 8 percent 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.

“Private, public co.’s can be good and bad”
“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 percent
free of fossil fuel emissions, and that it gets from other companies through
electricity purchase agreements, including 32 percent 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.

Bucking the trend
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 percent 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. Ricardo Rosselló, the Financial Oversight and Management Board for Puerto Rico, the body appointed by the U.S. government to oversee the
restructuring of the island’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,” he said.

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.”

P.R. plagued by failed
privatizations
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 Puerto Rico 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
polluting 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 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,” he said.

“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,” O’Neill said.

Author Eliván Martínez Mercado is an Energy Journalism Fellow at the Energy Institute, The University of Texas at Austin.

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