“Hurricane Recovery Efforts in Puerto Rico and the U.S. Virgin Islands.”
Chairman Murkowski, Ranking Member Cantwell, and Members of the Committee:
My name is
1. The Commission is the Commonwealth's institutional expert on electric industry performance.
2. Using its multidisciplinary expertise, the Commission establishes performance standards and competitive pressures, while restoring investor confidence.
3. The Commission's current emphasis is to restore and transform the Island's electric industry, cost-effectively.
4. The Commission's current needs include jurisdictional certainty and sufficient resources.
I. The Commission is the Commonwealth's institutional expert on electric industry performance
For 70 years, the
"[The Commission] shall be an independent government entity in charge of regulating, overseeing, and ensuring compliance with the public policy on energy of the
"
"[T]he Commission -"shall be able to guarantee the orderly and integrated development of our electrical system, thus ensuring the reliability, efficiency, and transparency thereof, and the provision of electric power services at reasonable prices.
"shall evaluate [PREPA's plans] regarding its obligation to efficiently generate electric power, various operational issues, and the integration of renewable energy, among other mandates.
"shall oversee all types of operations, processes, and mandates pertaining to the efficiency of the energy sector of the Island.
"shall oversee [that] PREPA's debt issues are in the public interest.
"shall approve the electricity rates proposed by PREPA.
"shall require that the prices included in any power purchase agreement, wheeling rate, and interconnection charge are fair and reasonable, consistent with the public interest, and compliant with the parameters established by this Commission....
"shall [...] guarantee that PREPA meets its obligations to bondholders."
In sum, the Commission is the Island's institutional expert, and main decision-maker, on the performance of electricity markets--whether that performance is by a monopoly like PREPA or by competitive providers of generation and other electric services.
II. Using its multidisciplinary expertise, the Commission establishes performance standards and competitive pressures, while restoring investor confidence
The Commission's employees and consultants span the professional disciplines of engineering, economics, finance, accounting, management, and law. Using these disciplines, we establish principles that are then embodied in our orders.
A. Principles
The purpose is performance. When establishing standards for utility monopolies, the goal is to induce performance comparable to what effective competition would produce: reliable, innovative service at reasonable cost. When injecting competition, the goal is to attract and reward the most cost-effective entities. The Commission's task is to envision the products and services that best serve customers, then design and oversee the market structures and inducements most likely to produce that mix of products and services cost-effectively.
The key criterion is economic efficiency. A utility cost is reasonable if, and only if, the Commission determines it to be the least-cost alternative among all feasible alternatives. The Commission aims to allocate costs to cost-causers and benefits to benefit-creators. These standards induce performance that is economically efficient.
Good decision-making requires gathering the best facts. The Commission uses procedures that elicit fact-based presentations from diverse experts. We subject those presentations to detailed discovery and close questioning, all performed in public. We vary procedural formality as resources and time considerations demand.
The Commission's effectiveness depends on its independence. The Commission is an expert agency that makes decisions based on facts and logic--not political pressures or ideological beliefs.
At bottom: Facts and expertise, applied openly, bounded by statutory and constitutional principles and subject to judicial review, are the ingredients the Commission uses to induce cost-effective performance.
B. Key Commission Actions Pre-Hurricanes Irma and Maria
The foregoing principles are evident in the Commission's many orders. Four are key.
Transition Charge: In
Integrated resource plan: In
PREPA's performance: In
Rate decision: In
In the rate order's crucial Part Four, the Commission addressed the problem of PREPA's imprudent costs. The Commission explained that because PREPA is a non-profit, government-owned entity, conventional disincentives used to prevent utilities from taking on imprudent costs--namely, requiring their absorption by shareholders rather than imposing them on ratepayers--are unavailable because a non-profit company has no private shareholders. In the non-profit context, the utility will have insufficient revenues to operate unless all costs are recovered from ratepayers. Given this constraint, the only way to protect ratepayers from imprudent costs is to prevent PREPA from incurring them to begin with. The Commission therefore required PREPA to submit an annual budget before spending its money. That way, the Commission could prevent imprudent expenditures before they are incurred. (PREPA had proposed an annual "true-up" process that amounted to "We spend it, we tell you about it, you make ratepayers pay for it"--the very absence of accountability that Act 57 was enacted to fix.)
Other orders: The Commission has approved the format for a simplified customer bill so that customers better understand the bases for their charges. n7 These efforts and others are summarized in the Appendix to this testimony.
All these activities--conducting integrated resource planning, establishing special charges to satisfy bondholder concerns, setting rates, auditing performance--are the central purposes of independent oversight of utilities, as carried out by commissions throughout the Mainland and, in fact, the world.
III. The Commission's current emphasis: Restore and transform, cost-effectively
In the last three weeks, the Commission has issued three orders that address restoration and transformation.
Investigation of collapse and solutions: Three weeks ago, the Commission opened a proceeding to assess the physical state of PREPA's system after Hurricane Marfa. n8 The proceeding will (a) identify the system's vulnerabilities that contributed to its collapse; and (b) identify short-, medium- and long-term actions, by PREPA and the Commission, that will produce an electric system that is modern, flexible, resilient, and capable of supplying electric service reliably and at just and reasonable prices.
Analysis of options for microgrids and distributed generation: PREPA's difficulties restoring service show the need to adopt and implement alternatives that allow greater resilience and faster restoration. Distributed generation technologies, such as microgrids, have the potential for restoring power to unserved areas and providing stability to recently reconnected areas. In this proceeding, the Commission will assess alternative ways to promote these technologies, increase private participation in restoration efforts, and reduce dependence on centralized generation--all with the goal of enabling us to respond to future emergencies more quickly and cost-effectively. n9
Disciplining the PREPA's contracting process: Prior Commission inquiries have produced unambiguous, concrete examples of defective contracting policies and poor project management. Correcting these defects is crucial to PREPA's ability to attract future financing, while lowering its rates so that the Commonwealth's economic development efforts can succeed. But the Commission's corrective measures have been resisted by PREPA, and challenged in court by PREPA and the Financial Oversight and Management Board (FOMB). In this new order, the Commission has established rigorous oversight measures, which include detailed expense and labor reports for each contractor, so that the Commission can prevent waste before the fact. n10
In these and other proceedings Commission will be focusing on the following areas:
PREPA's spending, cost recovery and rate-setting: Budgets, revenue requirement, rate design, and procedures for updating and reconciling those items.
PREPA's internal operations: Performance metrics, reporting procedures and enforcement methods; independent monitors to oversee restoration contracting and work; standards for restoration plans and maintenance plans; power plant efficiency standards; criteria for hiring of contractors; disaster preparation and restoration plan (for future events); and plans for workforce recruitment, development, and compensation.
PREPA's finances: Financing plans, debt restructuring, debt issuances, and approvals of Transition Charge mechanisms.
PREPA's customer relations: Bill format, customer complaint procedures, and customer education programs to produce efficient consumption under both monopoly and competitive market structures.
The Island's supply and demand resources: Reliability parameters, integrated resource plans (including the mix of renewable and non-renewable sources and "ancillary services"); near-term action plans; specifications for requests for proposals and competitive bidding procedures for power supply, energy efficiency, and demand resources; designating appropriate types of customer meters; approval of contracts for supply and demand resources and infrastructure modernization; and siting approvals.
The Island's market structure transformation: Identify strengths and weaknesses of alternative market structures (monopoly vs. competition) for various products and services; implement competition for competitive services; consider any transfer of PREPA assets or business functions to other entities; and determine the appropriate roles for distributed generation, net-metered resources, community solar, microgrids, and other venues for sale of energy by third-parties to end-use customers; along with interconnection terms, compensation, payments for transportation, locational choices, and other parameters.
IV. The Commission's needs: Jurisdictional certainty and sufficient resources
Act 57, passed in 2014, makes the Commission the Commonwealth's policy leader on our electricity future. I have explained how we intend to lead: our legal duties, our principles, our past actions, our current actions, our plans. To continue this progress, to succeed, the Commission needs two things: jurisdictional certainty and sufficient resources.
A. Jurisdictional certainty
The Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) has several provisions recognizing the Commission's centrality to
At the same time, a problem has ariSen. PROMESA section 4 says: "The provisions of this Act shall prevail over any general or specific provisions of territory law, State law, or regulation that is inconsistent with this Act." We appreciate the purpose underlying this sentence: The FOMB, charged with "providing] a method for a covered territory to achieve fiscal responsibility and access to the capital markets" (Section 101(a)), must be able to achieve its purpose without obstacles. The problem is in the practical application of this principle. The Commission is the Commonwealth's electricity expert. Its powers and obligations are expansive. It was here before the FOMB arrived and will be here after the FOMB departs. In addressing PREPA's performance and in transforming
Earlier in this testimony, I described how the Commission will discipline PREPA's expenditures (so as to prevent careless service engagements, as recently experienced) by reviewing its budgets in advance of spending. PREPA has opposed this requirement. Surprisingly, its opposition was supported by the FOMB in a submission made to the federal court with jurisdiction over the Commonwealth's debt situation. You may also be aware that FOMB has asked the federal court to approve its appointment of a Chief Transformation Officer to run PREPA. We have asked the federal court to avoid inadvertently finding that such an appointment preempts the Commission's authority. We also asked the court to direct the lawyers for FOMB and the Commission to create protocols that preserve each entity's strengths, so that conflict and litigation can be avoided. While the FOMB's legal staff has expressed willingness to communicate with the Commission, little effort has been made on their part to achieve meaningful coordination which leads to productive results. We remain hopeful that future actions will yield concrete results.
The Commission recognizes the overlap between its budget review requirements-- necessitated by the Commission's statutory obligation to protect ratepayers from imprudent costs and make rates that are just and reasonable--and the FOMB's need to review and approve budgets. There are ready ways to coordinate these two entities' efforts so that each strengthens the other while avoiding duplication of effort. The Commission's and FOMB's purposes aim for the same results: financial solvency, attraction of capital, operational discipline, prudent expenditures, and responsive customer service. The Commission therefore has notified FOMB's representatives of this need, prepared a detailed work plan for producing coordination solutions, and assumes that FOMB will reciprocate productively. I also assume that such coordination is the wish of this Committee.
B. Sufficient resources
The Commission's annual resources are currently limited to the statutory level of
Conclusion
In this testimony, I have sought to explain the Commission's obligations and plans for restoring our electric service and transforming our electric industry. The need for an independent entity, free of politics and focused on merits, with the single-minded goal of bringing cost-effectiveness and competitive rigor to the Commonwealth's most important infrastructural industry, could never be greater.
Chairman Murkowski, Ranking Member Cantwell and Members of the Committee, thank you for this opportunity to testify. I look forward to your questions.
n1 Puerto Rico Energy and Transformation RELIEF Act, Act 57-2014, 22 L.P.R.A. [Sec.]
n2 Restructuring Order, Case No. CEPR-AP-2016-0001,
n3 The Transition Charge was tied to the then-existing Restructuring Support Agreement (RSA). The FOMB initiation of the Title III proceeding under PROMESA resulted in the RSA not being extended.
n4 Final Resolution and Order on the First Integrated Resource Plan of the
n5 Notice of Investigation to Identify Opportunities to Improve Performance of the
n6 Final Resolution and Order, Case No. CEPR-AP-2015-0001,
n7 Final Resolution and Order, Case No. CEPR-AP-2016-0002. Available at: http://energia.pr.gov/wp-content/uploads/2017/11/Final-Resolution-and-Order-CEPR-AP-2016-0002.pdf.
n8 Resolution, Case No. CEPR-IN-2017-0002,
n9 See Case No. CEPR-IN-2017-0002. Available at: http://energia.pr.gov/expedientes/?docket=cepr-in-2017-0002.
n10 Id. Available at: http://energia.pr.gov/expedientes/?docket=cepr-in-2017-0002.
Read this original document at: https://www.energy.senate.gov/public/index.cfm/files/serve?File_id=957EF5C7-ABDE-4E45-892B-D9F675B8E217
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