Another deal on power debt won’t help Puerto Rico’s economy

It’s been a long and winding road toward the resolution of the Puerto Rico Electric Power Authority bonded debt. It totals $9 billion, the largest single component of Puerto Rico’s overall debt of about $70 billion.

The commonwealth’s top officials, the power authority and the bondholders recognize that the power authority cannot service this debt in full while modernizing its power system — dealing with adverse economic conditions on the island and paying for environmental improvements required by the Environmental Protection Agency.

{mosads}In 2016, after two years of negotiations, Gov. Alejandro García Padilla signed into law a deal restructuring the power authority debt. The bondholders accepted a 15 percent haircut in the debt owed and a reduction of the interest rate on the debt, yielding debt service relief of at least $1.1 billion over the first five years, and at least $1.7 billion in the first ten years. Principal repayment was deferred for five years, and the bondholders accepted various conditions resulting in electricity rates of about 22 cents per kilowatt-hour (kWh), a decline from the 2015 power authority rate of 25 cents per kWh. 

A new governor, Ricardo Rosselló, assumed office in January, after having run on the premise that he understands the need for conditions that will restore creditworthiness and access to capital markets. But Rosselló is an elected official who must answer to constituencies on the island. Accordingly, he was driven to pursue a new compromise shifting more pain upon the creditors and the opposite for the Puerto Rico debtors.

So another renegotiation yielded another deal in April: The new bonds needed to refinance the (reduced) debt now are scheduled to mature in 2047 instead of 2043, they are no longer investment grade, and the bondholders agreed to an additional $1.5 billion in debt service savings in the first five years.

Once again the commonwealth government, the power authority and the bondholders have approved the revised deal.

One would think that after all this time, effort, legal and consultant fees — along with the resulting adverse effects of delay on the ability of the power authority and the commonwealth to inspire confidence in future lenders — the deal would be implemented, allowing all concerned to move forward.

And one would be wrong. 

Because congressional action became necessary to overcome political constraints in the commonwealth, a compromise last summer between Congress and the Obama administration — the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) — created an oversight board with the power to restructure the massive overall debt and to force budget and other reforms yielding fiscal discipline over the longer term. It also halted litigation over debts that had been defaulted. 

Some members of the oversight board, led by Ana J. Matosantos, now argue that even the April deal is unacceptable. Matosantos argues that the higher cost of electricity needed to service the renegotiated debt would affect businesses and potential economic growth adversely. She also notes the power authority creditors are bearing far fewer losses than creditors of other Commonwealth entities, and the sacrifices of Puerto Rican people are “far greater than anything being asked of the [power authority’s] creditors.”

Where to begin? Compare the power authority’s electricity rate under the deal with that of Hawaii: 22 cents per kWh versus 25.6 cents, respectively. In 2016, Hawaiian state gross product grew by 2.1 percent (growth for the U.S. as a whole was 1.5 percent), and per capita personal income grew 4.2 percent (the U.S.: 2.9 percent). 

The argument that high power rates in isolation are inconsistent with strong economic performance is simply incorrect. Instead, rates must be efficient, reflecting the real economic costs of delivered power, allocated across customers in proportion to the costs that they impose upon the system. Moreover, rates must allow for creditworthiness sufficient to allow access to capital markets, in particular for a system in desperate need of modernization investments. 

The power authority creditors were willing to negotiate early on, and to extend the various deadlines well over a dozen times, unlike most of the other creditors. Should the power authority creditors be penalized for that? It is not clear how Matosantos is measuring “sacrifices,” but does she believe that the power authority debt should be cut by over half? If so, how would the credit market respond to Puerto Rico debt offerings moving forward? 

Reps. Nydia M. Velázquez (D-N.Y.) and Raúl Grijalva (D-Ariz.) make the same errors in a letter to José B. Carrión III, chairman of the oversight board: Higher power costs will prevent economic growth, “the island [is] in a chokehold” because of the creditors, and further negotiations should pursue “a sustainable solution.” Really? Everyone else is blameless? Is future access to the capital market worth nothing to the commonwealth?

Moreover, a rejection of the power authority compromise is illegal. Rep. Rob Bishop (R-Utah), chairman of the House Committee on Natural Resources, noted in a recent letter to Carrión that PROMESA expressly deems any voluntary agreement executed before May 18, 2016 as conforming to its requirements.

Therefore, “the passage of PROMESA obviated the need for any substantive action of oversight of the [agreement] by the Oversight Board,” Bishop wrote. “The ongoing actions taken by the Oversight Board towards the [agreement]… are outside the scope of the Oversight Board’s powers and a violation of PROMESA.”

“Congress intended the protection and preservation of any consensually negotiated, voluntary agreements prior to the enactment of PROMESA. The PROMESA [agreement] is the only such agreement.”

That really ought to finalize matters. The oversight board has no power to force yet another renegotiation, the rationales for which are incorrect analytically in any event. And the power authority must regain access to capital markets, which the approved deal allows it to do. The time has come to move forward.

Benjamin Zycher is the John G. Searle scholar at the American Enterprise Institute. 

The views expressed by contributors are their own and are not the views of The Hill.