I recently returned from Puerto Rico, where I was presenting a paper connected to my research in an academic conference on the island’s recovery following Hurricane Maria. I also took the opportunity to see the family.
Although things are improving since my last visit in August 2018, Puerto Rico still faces many economic problems, mostly connected with the debt crisis that preceded the 2017 hurricane season. A few days ago, the Financial Oversight and Management Board (FOMB), established by the U.S. Congress in 2016 to stabilize Puerto Rico’s finances, and Governor Ricardo Rosselló announced a new deal to restructure around $3 billion of the Puerto Rico Electric Power Authority’s (PREPA) $9 billion debt.
If this deal is approved by Judge Laura Taylor Swain and Puerto Rico’s legislature, PREPA will pay off the new bonds by levying its customers a new surcharge. Starting this summer, the electricity rate will increase by 1 cent per kilowatt hour (kWh) to 23 cents per kWh. In July 2020, the surcharge increases to 2.8 cents per kWh and over the year it will keep increasing up to 4.6 cents per kWh until the bonds are paid off.
While the deal helps PREPA reduce its debt obligations, freeing up cash to pay for other costs or to make future investments to the electrical system, the foreseen rate increases will hurt Puerto Rican consumers. Rising energy costs will also negatively affect the island’s businesses and potentially discourage future investments.
This deal got me thinking about the average price for electricity for PREPA’s residential, commercial and industrial consumers and how it compares with average rates for these consumers in the United States. The following graphs summarize these rates for the last ten years (2009-2018). All the figures have been adjusted for inflation using the Consumer Price Index for 2018 as the base rate.
What can we learn from these graphs? Here are three quick observations.
- The average price for the United States is a bit deceiving as many Americans pay higher rates for their electricity. However, it is critical to notice the stability of these prices. In Puerto Rico, fluctuations in electricity prices is an indicator of PREPA’s inability to effectively manage the production, transmission and distribution of electricity.
- Puerto Rico’s price differentials are problematic. On average, commercial customers in the U.S. territory are paying a lot more for electricity than in the mainland. The same holds true for industrial firms. This reality may explain why many businesses have not expanded their operations or reduced the prices of their goods or services.
- Future increases in these rates will burden the island’s economy, squeezing family incomes, forcing some businesses to close, or hampering the Puerto Rican government’s efforts to attract new investments.
What do you think of these figures? Do you think that the new deal to restructure part of PREPA’s debt is a wise choice?