Friday, April 20, 2018
Business

Puerto Rico power authority's debt is rooted in free electricity

AGUADILLA, Puerto Rico — To understand how Puerto Rico's power authority has piled up $9 billion in debt, one need only visit this bustling city spread along a bay on the northwest coast.

Twenty years ago, it was just another town with dwindling finances and a less-than-promising future. Then, it went on a development spree, thanks to a generous — and some would say ill-considered — gift from the Puerto Rico Electric Power Authority.

Today, Aguadilla has 19 city-owned restaurants and a city-owned hotel, a water park billed as biggest in the Caribbean, a minor-league baseball stadium bathed in floodlights and a waterfront studded with dancing fountains and glimmering streetlights.

Most striking, perhaps, is the year-round ice-skating rink. Unique in a region where the winter temperature rarely drops below 70 degrees, the rink is complete with a disco ball, laser lights and pop music for after-hours revelry. Signs warn skaters not to wear shorts.

"Imagine how much it costs to have an ice-skating rink in the tropics," said Sergio Marxuach, policy director at the Center for a New Economy, a nonpartisan research group in San Juan.

And that's the catch. What most likely would be the biggest recurring expense for these attractions — electricity — costs Aguadilla nothing. It has been provided free for years by the power authority, known as PREPA.

In fact, the power authority has been giving free power to all 78 of Puerto Rico's municipalities, to many of its government-owned enterprises, even to some for-profit businesses — although not to its citizens. PREPA has done so for decades, even as it has sunk deeper and deeper in debt, borrowing billions just to stay afloat.

The free power dates from 1941, when the utility was established by the last Puerto Rico governor to be appointed by the president of the United States, Rexford Tugwell, a member of Franklin D. Roosevelt's brain trust. He contended that for electricity to benefit the people, it had to be owned by the people, and he created PREPA by nationalizing the handful of private electric companies then on the island.

Now, however, the island's government is running out of cash, facing a total debt of $72 billion and already defaulting on some bonds — and an effort is under way to limit the free electricity, which is estimated to cost the power authority hundreds of millions of dollars.

But like many financial arrangements on the island, the free electricity is so tightly woven into the fabric of society that unwinding it would have vast ramifications and, some say, only worsen the plight of the people who live here.

"If the towns don't get free energy, they're going to have to pay for it by increasing their property taxes or something, so the people will end up paying," said Eduardo Bhatia, the president of the Puerto Rico Senate. Residents of the island are already upset about a recent sales tax increase to 11 percent from 7 percent, and a property tax increase now would cause an outcry. The last assessment was in 1958.

The free electrical power is just one example of PREPA's complex and paradoxical role in the economy here. Today, Bhatia will begin hearings to determine who and what is to blame for the power authority's larger problems, especially its ancient and inefficient power plants, among the last in North America to burn oil. Culprits are expected to include PREPA's secretive purchasing managers, elected officials who wasted money on natural gas pipelines that were scrapped and an institutional hostility to wind and solar power that is hard to fathom on a breezy island where the sun shines most days.

Carlos Méndez Martínez, the mayor of Aguadilla, said the city-owned attractions had turned Aguadilla's onetime deficit into a surplus and generated profits he uses to pay down debt, improve low-income housing and offer free wheelchairs and delivered meals to shut-ins. The profits have also allowed him to keep a 17-year-old promise not to raise taxes. Last year, he even paid a "dividend" to every man, woman and child in the city — a free ticket to the water park, which otherwise costs residents $20.

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