ces - present and future opportunities for beneficial prepa reform

8/20/2019 CES - Present and Future Opportunities for Beneficial PREPA Reform

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Present and Future Opportunities

for Beneficial PREPA Reforms anda New Paradigm for ElectricService for Puerto Rico

February, 2015


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Overview

Law 57 Reforms for PREPA

• Integrated Resource Planning

• Rate Case

• Open Access Reforms

PREPA Restructuring

• Securitization

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Law 57 Reforms

Law 57 is critically important PREPA reform legislation

Enacted in !"#$

Re%uires PREPA to mo&e away from fuel oil and coal forelectric generation

Created a new regulatory framewor' wit( signi)cantreforms for PREPA and a new go&ernment regulatory *ody+

t(e Puerto Rico Energy Commission ,t(e -Commission./+ too&ersee PREPA and ensure t(at t(ose reforms areimplemented in ways t(at *est ser&e t(e pu*lic interest

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Law 57 Reforms (2)Law 57 reforms s(ould *e used as intended+ to ma'e

PREPA0s ongoing operations sustaina*le+ wit( e1cientelectricity prices *ased on t(e lowest possi*le costs ofpro&iding relia*le ser&ice in an en&ironmentallyresponsi*le manner

Properly implementing Law 57 will foster a sustaina*le andcompetiti&e economy for Puerto Rico

Law 57 pro&ides for t(ree important PREPA reforms+ in t(e

form of t(ree ma2or regulatory proceedings administered*y t(e Commission3

• Integrated Resource Plan ,IRP/

• Rate Case and Retail 4ari 6esign+ including Rate 6ecoupling

• Open Access 4ransmission 4ari ,OA44+ a'a -w(eeling4


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Law 57 Reforms (3)

Integrated Resource Plan ,IRP/

• -Integrated. in t(e sense of planning for all t(e connectedelements of t(e electric generation+ transmission+ and distri*utionsystems

• 4(ere are many dierent types of generation resources3 4(ermal generation ,eg+ oil)red or gas)red/ Renewa*le generation ,eg+ wind or solar/

• 4ransmission facilities mo&e electricity at (ig( &oltages fromgenerator to distri*ution facilities

• 6istri*ution facilities mo&e electricity at low &oltages fromtransmission facilities to customer locations

• IRPs usually re8ect longterm planning+ often #"9 years PREPA (as )led a !"year IRP for t(e Commission0s appro&al

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Law 57 Reforms (4)

Rate Case and Retail 4ari 6esign+ including Rate6ecoupling

• A -rate case. is a regulatory proceeding t(at determines t(e pricesfor electricity t(at PREPA c(arges its customers

• 4(e -tari. is a document t(at e:plains t(e rates+ terms+ andconditions for PREPA0s ser&ice

• 4(e -design. of t(e tari regards features of t(e rates+ terms+ andconditions t(at are designed to moti&ate PREPA and customers to*e(a&e in ways t(at ser&e t(e pu*lic interest

• -Rate decoupling. is an option for PREPA0s rate design t(atfeatures connection c(arges t(at do not depend on t(e amount ofelectricity consumed+ as well as separate usage c(arges *ased ont(e amount of electricity consumed

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Law 57 Reforms (5)

Rate decoupling could *e an important part of PREPA0srate design

• In simple terms+ t(e connection c(arge co&ers t(e costs of t(e-wires. and t(e usage c(arge co&ers t(e costs of t(e electric

generation

• 4(is approac( lends itself to customers *eing a*le to 'eept(eir PREPA connections *ut use t(eir own generation+ suc( assolar panels

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Law 57 Reforms (6) Open Access 4ransmission 4ari and Opportunities for

Independent In&estment and Operations

• 4(e Commission will create a new OA44 for PREPA t(at willesta*lis( t(e rates+ terms+ and conditions for independentgeneration to interconnect to PREPA0s system and use t(e systemto mo&e power to t(e independent generators0 customers

• ;o&ing t(e power from one point on t(e power grid to anot(erpoint is 'nown as -w(eeling.

• 4(e OA44 could also allow independent transmission e:pansion onPREPA0s system+ w(ic( could pro&ide signi)cant costsa&ings li'eindependent generation could

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US !e"#ri" Ra#es

O&erall+ t(e


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$%#e&ra#e' Resour"e !a%%i%&

In t(e


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Ra#e ase

=ollowing well esta*lis(ed


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US !e"#ri"i#y Ra#es Current retail rates in t(e


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US *+o!esa!e !e"#ri"i#y ar-e#om.e#i#io%

Strong regulatory o&ersig(t of local utilities (ascontri*uted to t(e success of dierent retail models+ *uten(anced competition in w(olesale electric mar'ets o&ert(e same time period (as also (elped tremendously

>(olesale electricity mar'ets in&ol&e competition amonglarge electricity *uyers and sellers+ w(ere independentgeneration entry and -demand response. (a&e *eenparticularly eecti&e competiti&e catalysts

In t(e


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R/ Res#ru"#uri%& a%'Se"uri#ia#io%

In addition to t(e Law 57 reforms+ PREPA is facing*ond(older pressure to restructure its ?@ de*t t(roug(-securitization.

• Securitization allows a utility use some sort of commissionappro&ed -regulatory asset. t(at can *e pledged as collateral in a

*ond issuance• 4(e -regulatory asset. is li'ely to *e de)ned as future re&enue

from special irre&oca*le ratepayer c(arges+ suc( as -transition.c(arges

• 4(ere are t(ree ma2or elements of a utility securitization3

# State legislation aut(orizing t(e utility to )nance t(e reco&ery ofcertain costs t(roug( t(e issuance of securitization *onds

! A )nancing appro&al order issued *y t(e state utility commissionpursuant to t(e state legislation ,all of w(ic( is important for mar'et&aluations/ t(at gi&es irrevo"ab!e a..rova! of #+e "rea#io% of a%o%by.assab!e "+ar&e o% u#i!i#y "us#omers a%'

D A special purpose entity created *y t(e utility to issue t(esecuritization *onds

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16/20

R/ Res#ru"#uri%& a%'Se"uri#ia#io% (2)

Securitization can *e *ene)cial in terms of minimizing

capital costs

• Securitized de*t could carry signi)cantly lower carrying costs t(anot(er types of new capital PREPA would *e a*le to secure+ if any

• Also+ PREPA and t(e commission can draw from many


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i&ing regulatory agencies control o&er securitization (as*een t(e norm in t(e est Firginia

Importantly+ in order to *e t(e most eecti&e, #+eommissio% s+ou!' see- i%'e.e%'e%# e.er# a'vi"eo% +ow R/ a%' #+e ommissio% s+ou!' ma%a&e#+e se"uri#ia#io% .ro"ess 4(is will (elp to ensure t(at t(e resulting *onds are as well

recei&ed as possi*le on t(e *ond mar'et+ wit( an in&estmentgrade rating and good transparency to (elp wit( secondarymar'et trading

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4(e Se%uence of C(anges ;attersG

• 4(e pu*lic interest is paramount and would *e *est ser&ed *ycompleting t(e ma2or Law 57 reforms *efore PREPA ma'es anysigni)cant de*t restructuring decisions

• Only after t(e Law 57 reforms are implemented will PREPA and t(ePREC (a&e t(e necessary information for optimizing t(e signi)cant

restructuring decisions

• R/s "urre%# fo"us o% res#ru"#uri%& a+ea' of Law 57reforms (%er&y ommissio% ro"ee'i%&s o% $R, Ra#ease .!us over%a%"e a%' a%a&eme%# $m.roveme%#s) is8.u##i%& #+e "ar# before #+e +orse9 Suc( )nancial decisions

made wit(out a proper &iew of t(e future PREPA wouldunnecessarily (arm ratepayers and Puerto Rico0s economy H nowand in t(e future

=ocusing on restructuring *efore t(e Law 57 reforms cometo &iew will result in )nancial decisions t(at do not and

cannot properly account for t(e operations and &alue of areformed PREPA 18


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It is critical for t(e sa'e of Puerto Rico0s nearterm andlongterm pu*lic interest to put PREPA0s de*t restructuringin proper conte:t and to put it in t(e proper se%uence ofPREPA reforms li'e t(e following3

1 om.!e#e #+e "urre%# $R .ro"ee'i%& a# #+e

ommissio%

2 om.!e#e #+e "urre%# ra#e "ase .ro"ee'i%& a# #+eommissio%

3 ;e&i% or&a%ia#io%a! a%'


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>ues#io%s?

6a&id Sapper

dsappercesltdcom

,D#7/ 7"J$KD@

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mailto:[email protected]:[email protected]

ces - present and future opportunities for beneficial prepa reform

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