As Puerto Rico recovers, we all need to ask how to make grids more resilient

Hurricane Fiona battered Puerto Rico, knocking out power almost five years to the day that Hurricane Maria decimated the island, and now one question looms large: Why is this happening again?

While the people of Puerto Rico struggle to get the power running again, we have to ask what we are doing to make our electrical systems more resilient and able to withstand major storms. And once we know what we can do, how do we implement this plan? And how can we fast-track this work before the next storm hits?

A key consideration with a complicated system like the electricity grid is understanding the rights and responsibilities of all stakeholders — from service providers and customers to the government. In Puerto Rico, that’s particularly difficult right now given the bankruptcy of PREPA, the government-owned utility, and the status of its contract with LUMA Energy, the Canadian-United States consortium tasked with managing the grid. This situation is likely to hamper post-recovery efforts and must be resolved quickly if Puerto Rico is to develop a resilient grid.

PREPA’s current bankruptcy proceeding seeks to address approximately $9 billion in debt. After rejecting a restructuring plan offered in 2019, PREPA and its creditors engaged in mediation to resolve the debt. But that mediation ended on Sept. 17 — days before Fiona struck — when the utility’s Oversight Board proposed that the dispute be resolved through litigation. The parties filed several emergency declarations with the court on Sept. 19, requesting an expedited process, but there remains considerable uncertainty regarding how to deal with the utility’s current debt. It is nearly impossible to raise new investment capital when new investors don’t have a clear understanding of how obligations to current investors will be met.

Mitigating some of this ongoing situation is the fact that FEMA approved nearly $9.5 billion to rebuild Puerto Rico’s power grid in 2020; while some progress has been made rebuilding the electricity system, the job is far from complete.

There are continuing questions about who might utilize that investment and how, due to the uncertainty surrounding the management of Puerto Rico’s electricity grid. In 2020, the government entered into a 15-year agreement with LUMA Energy to manage, maintain and upgrade the electricity transmission and distribution system — creating a public-private partnership to run the system, but stopping short of privatization.

The agreement calls for LUMA to receive annual payments of $70 million with additional performance incentives of $13 million. These payments are indexed to inflation and increase to $105 million and $20 million, respectively, beginning in 2024. However, finalizing the contract hinges on resolution of PREPA’s bankruptcy and LUMA can unilaterally terminate the agreement on Nov. 1 if the bankruptcy is still pending.

So while there is an agreement in place for the management of the system, the fate of the 15-year agreement is still unclear. LUMA has employed resilience strategies such as replacing power poles as part of this agreement, but storm hardening strategies such as underground power lines will take more time to implement. And many on the island are protesting the agreement.

The proposed 2019 resolution of the PREPA bankruptcy was ultimately rejected due in part to concerns over the rate increases that would follow. An unfortunate reality of the electricity business, however, is that customers ultimately pay for everything. Sometimes they pay through their electricity rates. Sometimes they pay through their taxes in the case of government-sponsored programs or subsidies. And sometimes they pay through reductions in quality of service or access to service. In the end, all the policymakers decide is how and when they pay.

In order to provide the resilience that Puerto Rico needs, policymakers first have to reduce the uncertainty of the institutional framework. The bankruptcy of PREPA must be resolved equitably so that investors and customers have information they need to make future investment decisions.

Once the bankruptcy is resolved, the management contract for the grid can be finalized along with the performance metrics for the incentive mechanism. This will clarify expectations of quality of service for customers and power generators. Once the institutional framework is clarified, utility stakeholders can begin to address long-range goals for the electricity sector and establish roadmaps for achieving those goals. A framework such as Florida’s that involves stakeholder engagement and a transparent process for considering grid resilience strategies offers valuable insights into building a sustainable system.

Theodore J. Kury is the director of energy studies for the Public Utility Research Center in the Warrington College of Business at the University of Florida.