Nearly a week after Hurricane Maria hit, Puerto Rico faces a humanitarian emergency. Along with New York State and City, Washington is focused on getting food, water, medicine, fuel, and power to stranded residents. On that final issue—specifically, electricity—the feds likely will offer aid for long-term rebuilding aid as well as short-term recovery.
And that’s where things get tricky. No real rebuilding can take place without reliable power, but taxpayers shouldn’t bail out the creditors who lent Puerto Rico’s broken power company so much money in the first place. The island’s government-run Puerto Rico Electric Power Authority, or Prepa, is now working with the New York Power Authority and federal officials to get the lights on at hospitals and other critical locations. NYPA has sent large-scale generators, as well as engineers who can help rebuild distribution and transmission lines. The feds are providing drones, debris-removal workers, and other logistical support.
Maria would have tested even the most modernized, best-run power company, but Prepa doesn’t meet that description. Last year, Puerto Rico suffered a large-scale blackout that cut power to half the island’s residents. A major power plant caught fire, damaging two large transmission sites. Prepa’s power infrastructure is dangerously out of date, reliant on dirty and inefficient oil generators for 45 percent of its energy production, compared with a 4 percent national average. Yet Puerto Rican energy costs are high, with residents paying more for electricity than Americans in any state except Hawaii. High prices and bad service are just two reasons why Puerto Rico has been losing jobs and people for a decade.
Along with Puerto Rico itself, Prepa is bankrupt. In July, the power authority filed for insolvency under the custom-tailored bankruptcy law that President Obama signed last year. The company reported $11.4 billion in debt, including $8 billion in long-term bonds. Much of this debt is held by investors from the U.S. mainland, lured by tax-exempt investing incentives.
Investors did not examine Prepa’s finances before helping it go broke, though performing due diligence would have been easy: in 2013, the last year that it issued long-term bonds, Prepa warned investors in writing that it had lost money for four years in a row. “These losses reflect the continuation of a historical trend of net losses,” it added, noting that the amount it owed—then $10.8 billion—exceeded its assets by nearly $1 billion. “If this trend were to continue, the Authority’s ability to fund its operations and finance its capital program”—that is, investments in better power assets—“could be negatively impacted,” it warned potential lenders.
Because bondholders let Prepa stay in business for so long while deferring maintenance, the power company needed $4.7 billion in infrastructure upgrades even before Maria hit. To its credit, it had finally begun to explore how to be more efficient. Yet bondholders clung to the fiction that the company could repay much of its debt. To avert bankruptcy, bondholders had already agreed to 15 percent losses on the money Prepa owed; they also granted the company a debt-payment extension. It wasn’t enough.
After Maria’s emergency phase passes, Prepa must rebuild its permanent assets. Because the company was under-insured—it self-insured its distribution and transmission assets, with only $90 million set aside for that purpose—Washington will likely provide much of the money to do that. The feds should work with Puerto Rico to ensure that Prepa rebuilds effectively, especially through partnerships with successful power companies from the U.S. mainland.
Precedent exists for such aid—but on a limited basis. After Superstorm Sandy hit in 2012, the feds awarded the Long Island Power Authority $150 million for recovery and rebuilding. Nearly a decade earlier, after Katrina in 2005, New Orleans’s power company, Entergy New Orleans, got a $200 million grant. (The money came out of general federal-recovery grants.) Entergy New Orleans, though, had to recoup much of its more than $600 million in hurricane assistance from local ratepayers, not from federal taxpayers—and before it could do so, it filed for bankruptcy, implicitly putting creditors at risk (they were eventually repaid). New York’s Con Ed had to pass through virtually all of its own $700 million in post-Sandy costs to its customers.
The history is clear: Washington generally will help restore utility service after a historic disaster, but it will not pay for everything, and Puerto Rican ratepayers can’t be expected to absorb the entire cost of reconstruction. As a result, Prepa’s investors will have to take much bigger losses than they anticipated. Bondholders still expect to recover about half of their investments, if their recent trades are any guide, but even this projection seems optimistic. Prepa likely won’t total its financial losses from Maria for months, if not years, but its creditors could lose everything; or they might have to wait years, even decades, for even partial repayment. Congress’ long-term aid package will be complex and vulnerable to lobbying.
Prepa’s bondholders are in a tough spot, but they are better off than the company’s customers. Prepa never served its ratepayers well—and for years, bondholders enabled them to provide poor service, at high prices. Americans have a responsibility to help Puerto Rico—but they don’t have a responsibility to help those who lent unwisely to the island’s power company for decades before the storm hit.
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