Increasing Puerto Rico’s Electricity Rate Will Negatively Affect its Economic Recovery in the Short-Term

One of Puerto Rico’s main economic challenges is the high cost of electricity. As I noted in an early post, the island’s residents pay one of the highest electricity rates in the United States. For the past three years, the Financial Oversight and Management Board (FOMB), established by the U.S. Congress to oversee Puerto Rico’s finances and to restructure its debt, have instructed the Puerto Rico Electric Power Authority (PREPA) to set the the price to 21 cents per kilowatt/hour (kWh) by 2023. Ricardo Rossello, Puerto Rico’s pro-statehood governor who wants to privatize PREPA, promised last year that PREPA would to reduce the rate to 20 cents kWh. The Puerto Rico Manufacturers Association in an effort to increase its members’ competitiveness have lobbied the island’s government to reduce the electricity rate to 15 cents kWh.

Can PREPA deliver lower electricity rates? In the short-term, it will be unable to meet Rossello’s 20 cents kWh target. If a new deal to restructure a part of PREPA’s $9 billion 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 to 23 cents per kWh. In July 2020, the surcharge increases to 2.8 cents per kWh and over the years it will keep increasing up to 4.6 cents per kWh until the bonds are paid off.

Although many Puerto Ricans have voiced their opposition to this deal, Governor Rossello expects that the projected hikes will be balanced by his government’s reform of PREPA, which includes the privatization of its assets and the conversion of some of its power plants from oil to natural gas. While Puerto Ricans may see lower electricity rates in the future, it is clear that the price for electricity will increase in the short-term.

These rate hikes will be an extra burden on Puerto Rican families and businesses. While Puerto Rico’s residents do not pay the highest electricity rate in the United States, the island’s median household income is really low. Meaning that Puerto Ricans tend to devote higher percentage of their income to pay for electricity.

The next graph compares Puerto Rico’s median household income for 2017 with the median household income for the U.S. It is worth noting that these are the latest figures, calculated by the U.S. Census.

To put it perspective, the median American family spent 2.4% of their household income on electricity. At 29.5 cents per kWh, Hawaii’s price for residential electricity in 2017 was the highest in the United States. But, the state’s median household income was $74,493. Thus, Hawaiians were spending around 2.4% of their income on electricity.

For example, the residential electricity rate in Hawaii for 2017 was 29.5 cents per kWh. But the state’s median household income was $74,493. Thus, Hawaiians were spending 2.4% of their income on electricity.

Using this formula, we notice that Puerto Rico’s median family spends 4.2% of their income on electricity.

YearMedian Household IncomePercentage of Median Household Income Devoted to Electricity
2014$19,686.003.75%
2015$19,350.005.0%
2016$19,606.004.5%
2017$19,775.004.2%

While the amount of income devoted to electricity is lower than in 2015, the new rates hikes will reverse recent gains. The next graph already includes the proposed increase for 2019. Thus, Puerto Ricans will once again experience a steep rise on electricity costs.

While forecasting the future impact these rate hikes will have on the Puerto Rican economy is difficult, the sad reality is that at least in the short-term the rising cost of electricity 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.

Note: A version of this post can be found in my blog, The Puerto Rico Data Lab. Follow me in Twitter: @cyordan or @pr_datalab.

Comparing Average Electricity Prices in Puerto Rico and the United States, 2009-2018

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?