PREPA: Is Federalization now on the table?
Updated: Jul 27, 2018
Thomas King, President and Founding Director
Borincana Foundation Inc.
July 15, 2018
It has been an interesting week on the island of Puerto Rico.
Wednesday morning we learned that Walter Higgins will be resigning from his post as CEO of PREPA - post that he only took up in March. The reason given was that he needed to spend more time with an ailing family member but that he would continue to support the transformation of the bankrupt utility by taking up a position on the board.
In truth, it had more to do with objections to his employment contract which had a base of $450,000 and bonuses that could take the contract to $900,000. The sheer size of the contract did not sit well with the bulk of Puerto Ricans who have a hard time understanding why a bankrupt state and a bankrupt utility should be paying so much money for a new CEO. Unbelievably, neither the Board nor the Governor’s office seemed to feel it was necessary to provide an explanation to them. Pressure on Congress lead to a review of the bonus procedures in Higgins’ contract and these were attacked in the Puerto Rican Congress as being outside of appropriate legal procedure and therefore invalid. On this account, they may have been correct, but from a commercial standpoint his contract was not unreasonable given actual comparables and that his job in stabilizing and transforming a bankrupt and broken utility is akin to “catching a falling knife.“
Higgins’ replacement was to be an existing independent board member Rafael Diaz-Granados. To avoid the problems with a bonus structure, the board settled his salary at a simple $750,000 per year for one year. Hardly unreasonable under the circumstances but totally tone deaf. The governor and Congress reacted strongly with the Governor insisting that the salary be lowered immediately or the Board should resign. Thus, citing political interference, on Thursday five of the seven members of the Board resigned. Only the two appointed by the governor remained. On Friday the Governor appointed two new members to reach a quorum.
I happened to be in Washington DC last week in support of initiatives important to the Fundación Borincana and I can tell you the rumor mill started turning right away. Enough was enough. Surely it was time to federalize PREPA and end this dysfunction. Is it? I am certainly not privy to most of the “inside baseball” going on but enough credible people think it is a real possibility so I cannot ignore it.
Will PREPA finally be federalized? Maybe. Events over the past week have certainly moved the needle in that direction, but there is still no clear momentum behind it and much thought is still needed. If Congress federalizes PREPA they “own” it warts and all and are responsible for the outcomes good or bad. Puerto Ricans routinely condemn PREPA as a corrupt and failing utility. BUT….It is THEIR corrupt and failing utility. Many will see federalization as another colonialist power play to further subjugate the island with a new handpicked “foreign” owner. Misguided as that may be, Boricua have little reason to trust the federal system. The point to take away here is a federalization is unlikely to be seen as a “rescue” to the people on the island.
Why would anyone want to federalize PREPA? Well, despite inheriting massive debts, a bloated and demoralized workforce, chronically underfunded pensions, and a decrepit, storm-ravaged infrastructure, there is the larger problem of the $70 Billion plus in liabilities of the Commonwealth. Virtually all modern social, economic, and political systems rely first and foremost on a robust and stable infrastructure. Establishing one is a prerequisite for the island’s recovery, without it businesses will continue to defect and the economy will enter a downward spiral. Federalizing PREPA would clear the decks to address its chronic problems, impose a deal with creditors, formulate a workable integrated resource plan, make a real start on system repair, and position the company for privatization.
Should it be federalized? I do not think I have enough perspective to offer a definitive opinion on this question – at least not yet. A looming prospect of federalization would just sow more confusion - a quick yes or no or even a “we are watching the situation closely but taking no action at this time” would allow a resumption of “normal” economic activity. The plain truth is that the longer the stand-off continues the longer the dysfunction lasts and the more it hurts the island’s economy and its people. The good news is that for all the truly important transformative activity that is going on and will go on, very little of it in my opinion relies on PREPA being Public, Private, Federal, Striped, or Polka-Dotted. This is not to dismiss what becomes of PREPA as irrelevant, far from it. What it signifies, however, is that the people, businesses, municipalities, and even the Commonwealth government are not waiting around for PREPA, the Federal Government, and the Commonwealth Government to get their $#!t together!
If PREPA is federalized what else should we be thinking about? For one thing, federalizing PREPA does not mean the federal government gets to set the rules. Regulation is the responsibility of the Commonwealth. Before the storms it might be fair to say that regulation was “accommodative” but post Maria the interests of PREPA and the Commonwealth have continued to diverge. If PREPA were to be federalized, as a result of the antipathy felt for the new owner Puerto Rico might finally get the independent regulator it needs and deserves. For another thing, all of the recovery money provided to HUD that is earmarked for reconstruction and regeneration of energy infrastructure cannot by law go to a federal entity. Presumably, the vast majority of roughly $2 Billion would have gone to PREPA. Where will it go now? I have a few ideas.