New York – In order for the government of Puerto Rico to terminate the contract with LUMA Energy as the company operating the transmission and distribution of electric power, the Public-Private Partnerships Authority (PPPA) must file a notice of noncompliance to begin a process that could extend at least two years, explained the former associate commissioner of the Puerto Rico Energy Bureau (PRB), Ángel Rivera de la Cruz.
AAPP must submit a notice of non-compliance to terminate contract with LUMA
The fact that the Puerto Rico Electric Power Authority (PREPA) is involved in a bankruptcy case under Title III of the PROMESA Law does not prevent the AAPP from issuing a notice of this type.
“When I talk about a notice of noncompliance, both the Bureau and the Partnership Authority are in charge of supervising and monitoring LUMA’s performance. If there is any noncompliance with the provisions, it is specifically the duty of the administrator to issue that letter of noncompliance. So LUMA, once that letter of noncompliance is issued, has about 60 days to correct what was pointed out, which could be extended for an additional 30 days. If it cannot correct that noncompliance, then other provisions of the contract could be activated. That type of notification has not happened,” explained the expert.
“Would the recurrence of blackouts be a valid argument to claim that LUMA is breaching the contract?” asked El Diario.
“There are provisions in the contract for not fulfilling some material obligation; it is already being evaluated by the relevant agencies…and that has not happened,” he replied.
“What would those material obligations be? What aspects would be considered for the Authority for Public-Private Partnerships to say that they are going to issue a notice to cancel the contract?” this newspaper asked.
“You would have to look at all the clauses in the contract…but, apart from the performance metrics, basically, providing the service in the way they said they were going to do it in the contract,” the interviewee responded.
“What I want to be clear about is that, even though we are operating under a supplementary contract, there are tools to cancel it…”, insisted the newspaper.
“Generally speaking, that is what the contract states…But, as I said, it is not that it is a breach; it is that it is an unremedied breach. Once the notice of breach is issued, LUMA has, by contract, a period of 60 days to correct any breach or demonstrate that it is moving to correct the breach,” Rivera stressed.
Rivera’s statements were made in response to questions from El Diario about the possibility that the contract could in fact be cancelled amid calls from several third sector organizations and opposition leaders to the ruling New Progressive Party (PNP) for the Authority to return to public hands.
The basic argument of these groups and politicians is that LUMA has failed to fulfill its contractual obligations by not providing reliable and efficient service to citizens three years after having assumed control of the transmission and distribution assets of PREPA. The resurgence of the call came about in the wake of massive blackouts that impacted hundreds of thousands of Puerto Ricans in various areas of the island. One of the interruptions particularly affected residents in the southern zone and left some 350,000 people without electricity.
The situation forced LUMA to transport a transformer by sea and land to the Santa Isabel substation, a process that took several days.
LUMA operates under a supplementary contract
In November 2022, the Pierluisi Administration extended the supplementary agreement under which the Luma company serves as the system operator.
The indefinite extension of the supplemental contract allows LUMA to continue managing the system until PREPA completes the debt restructuring process. During that period, the terms of the contract with LUMA will remain the same.
Once federal judge Laura Taylor Swain of the Southern District of New York confirms a plan and the Authority emerges from bankruptcy, the official 15-year contract is expected to go into effect.
Under this scenario, LUMA will be subject to performance metrics that, at the time of any breach notice, must be used as guides in the process.
“The main contract has what is known as performance metrics; I am referring to the 15-year contract. We are not yet operating under that contract. Under that contract, LUMA is subject to metrics. Within those metrics, in Annex 9, there are metrics that are known as the keys. In order to cancel the contract in relation to those performance metrics, LUMA must not meet the minimum standard in three or more of those metrics for a period of three consecutive years. Within those metrics, there are those of system reliability; there is the SAIFI (System Average Interruption Frequency Index) and the SAIDI (System Average Interruption Duration Index). Those two metrics, the Bureau awarded, when it approved the final metrics for LUMA, the highest percentage with respect to compliance, and they are part of those metrics that are monitored. If LUMA fails to meet these performance metrics in three or more years after the official contract comes into operation, then we can speak of a material breach,” added the CEO of Nu Energy Consulting Group LLC.
In this regard, Rivera pointed out that it is incorrect to think that cancelling the contract with LUMA is an expedited process.
LUMA’s exit could be extended for at least two years
The former commissioner estimated that the process to terminate the agreement could take at least two years.
“In the hypothetical case that there was a notice of noncompliance, it could not be cured and the decision was made to cancel the contract; the contract establishes that, under those terms of an early termination, a notice of at least 120 days must be sent. Let’s say that the notice of noncompliance was given; the 60 days passed; LUMA asked for an additional 30 days; the conditions to remedy the notice of noncompliance were not met, and then a notice is issued. When that notice is issued, it is a 120-day notice. After 120 days, LUMA would enter into what is known as the transition of collection or mobilization. It is not that after 120 days LUMA left and here I leave this, because there has to be a transition process for whoever the new entity that comes to operate is. That transition process will not last more than 1 year, according to the contract,” calculated Rivera, who has a master’s degree in Mathematics from the University of Massachusetts, Amherst.
LUMA would have to pay millions of dollars in penalties
Another point to consider in the discussion is that LUMA’s exit would imply the payment of millions of dollars to the company as part of the transition procedures, as well as penalties. This money would come from the electricity rates paid by the Authority’s subscribers.
“In this transition process, LUMA must be paid all the costs it incurs to operate the system, in addition to the costs incurred with its personnel who are still working. In addition to covering all these costs, it must be paid what is known as the ‘termination fee’ or the penalty for terminating the contract, which corresponds to a full year of operations; it must be paid approximately $120 million dollars and adjusted for inflation. That would be what LUMA would have to be paid simply to terminate the contract,” said the graduate of the Naval Nuclear Energy School in South Carolina.
Rivera said it is speculative to talk about the probability that the island’s government will cancel the agreement with LUMA, and that everything will depend on the public policy adopted by the new government administration that is elected in the general elections on November 5.
“It all depends on what is established as public policy. In general terms, certain things have to align for that to happen. The process that I described to you would apply to any of these instances that you are mentioning to me. I cannot speak about probability because it would be completely speculative,” he said.
Pierluisi, who will officially step down as governor this year, has indicated that he will not make any changes to the island’s energy organization.
Committee of experts proposed to return to public model
The proposal supported by activists who oppose the privatization of public services and leaders of parties such as the Puerto Rican Independence Party (PIP) is that the electrical system should return to the public model.
For example, Senator María de Lourdes Santiago and Representative Denis Márquez, both from the PIP, recently presented a concurrent resolution to create the “Special Committee for the Recovery of the Energy System of the People of Puerto Rico.” This group would be composed of 10 people or experts in key areas such as public administration and economics and law, in addition to community and labor leaders.
The committee’s goal will be to design a plan to carry out a transition within a year that will result in a new public corporation responsible for the generation, transmission and distribution of energy.
Regarding this type of initiative, Rivera said that, as long as there is no impairment of the contractual relationship, a public entity could manage the AEE. In that case, the scope of action of the Legislature in Puerto Rico is broad, he noted.
“That would be a reformulation of what Law 120 was at the time; I want to return to public hands for all purposes and we are going to do it this way. If that is the public policy to be implemented, then it is implemented in accordance with the current clauses of the contract. The contract cannot be modified by law. If at that time it is decided that the public policy is to return to public hands, then the terms and penalties of the contract remain in force, and it is simply making that transition to the public model based on the provisions of the contract,” he insisted.
Law 120 of 2018 facilitated the privatization of AEE through contracts with LUMA and Genera PR, which has been in charge of generating electricity since last summer.
The law authorized the Authority to sell assets related to generation and to transfer or delegate any of its operations, functions or services. The statute authorized the AEE together with the Authority for Public-Private Partnerships to carry out the processes.
LUMA’s performance
Rivera did not want to elaborate on LUMA’s performance in these three years.
However, he said that the situation faced by the Canadian consortium will not be resolved in a couple of years.
“With regard to performance, the initial years that I monitored, LUMA came with the full intention of providing a quality and excellent service, which was what they had presented. Unfortunately, they have found a system, and I am not excusing them, I am simply stating the facts, that was extremely fragile; a system that was not stable; and it is a system that for the past 15 to 20 years has not been given the attention in terms of maintenance, repair and replacement of components that it is supposed to be given. So that is a cumulative and we are basically experiencing the consequences of that lack of maintenance,” he said.
“Our system is made up of about 6,000 miles of transmission; about 33,000 miles of transmission system and about 600 substations. In other words, we are talking about an extremely large, complex system that requires attention in practically all areas; and, well, 20 years of poor maintenance cannot be resolved in three years,” he added.
According to Rivera, LUMA’s first three years in charge were supposed to be about bringing the system up to basic industry standards. estuary.
“But LUMA knew what it was getting into because when an agreement of this type is made, they have to know what is happening…”, El Diario stated.
“I am not excusing them. I am saying that I believe that the expectations that were created when LUMA arrived were not realistic in relation to the actual state of the system. Yes, they had a year of evaluation and did due diligence before entering into the contract; they were in that year of transition and evaluation between 2020 and 2021…and they developed certain plans, including what is known as the System Remediation Plan, which was a three- to five-year plan, which was not to put the system into a modern one, but to bring the system to the basic standards of the industry. We have to take into consideration that that was one of the first plans,” he argued.
According to Rivera, whoever takes over the operation of the electrical system will face the same challenges.
“This is not a LUMA issue; this is a matter for whoever is going to be operating the system. Whoever comes to operate the system is going to have exactly the same challenges; they are going to have the same system. Basically, it is not a LUMA issue…”, he said.
“It’s been three years, exactly; we’re not talking about a couple of months. And LUMA already had a prior inspection period, as you say, to see how the situation was; that is, under what point can it be justified, for example, that in one month, there are two, three massive blackouts, which put many Puerto Ricans at risk? In other words, it’s not just a perception, it’s that people are suffering from the blackouts,” El Diario questioned.
“I live on the island, and I am subject to the instability of the system, and yes, it is a reality. If we look specifically at the (blackouts) of last month, they were mostly due to components that failed in the transmission and distribution system; specifically, the substation. But, to put it in perspective, the June 12 Santa Isabel transformer that they had to bring in a new one, the transformer’s useful life had doubled. In other words, it had not only exceeded its useful life, but double what it had been designed for,” he explained.
The expert does not foresee that Puerto Ricans will stop experiencing blackouts, despite the pressure for LUMA to speed up tasks such as clearing.
“When I talk about adjusting expectations, I mean that unfortunately we are going to continue along these lines, regardless of who comes to operate the system; we are going to continue in this way for the next three or five years until a certain stability is provided to the system based on investments that have to be made. I am not minimizing the pain of the people or what we are going through. What I am saying is that, regardless of who comes to work with the system… they will find themselves in the same situation,” he insisted.
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