Committee Update on London Economics International Report on PREPA
The Committee commissioned London Economics International LLC (“LEI”) to evaluate the potential impact of the restructuring support agreement (the “RSA”) between PREPA and its bondholders on non-settling creditors, and the possibility that the settlement could eventually force PREPA to commence another Title III restructuring. LEI is a global economic advisory professional service firm specializing in energy, water, and infrastructure, with a special expertise in electricity sector dynamics for island nations.
After conducting an analysis of the terms of the proposed RSA, PREPA’s fiscal plans, the dynamics of Puerto Rico’s electricity market, and PREPA’s assets, among other factors, LEI prepared their Critique of Government Parties’ Assertions that the 9019 Settlement Will Not Affect Non-settling Creditors and Will Avoid a Subsequent Title III Filing by PREPA, (the “LEI Report”), which can be accessed here.
The LEI Report recognizes that PREPA is already in a difficult financial and operational situation and concludes that the proposed RSA will likely accelerate negative outcomes for PREPA and its customers. In particular, the report observes that the transition charge contemplated by the RSA, together with other forecasted rate increases, may eventually force PREPA into an economic “death spiral”. Under the terms of the RSA, a transition charge of an initial 2.77 cents/ kWh (eventually rising to 4.55 cents/kWh) will be assessed on customers to pay for new securities to refinance PREPA’s bond debt over a period of 47 years. LEI anticipates that this increase in electricity rates will lead to an exit of customers (as they reduce consumption or turn to other sources), which in turn will force PREPA’s remaining customers to bear an increasingly large percentage of PREPA’s fixed service costs, thus creating a vicious cycle of increasing electricity rates and customer defections. The LEI Report estimates PREPA’s electricity rates will rise above 30 cents/kWh (an increase of approximately 50%) to cover the transition charge and PREPA’s total cost of services, which will result in a 70% decline in PREPA electricity consumption by 2047.