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Privatisation of Puerto Rico’s T&D Assets: PPP process underway [free access]

January 10, 2019

The weaknesses in Puerto Rico’s electrical grid network were made obvious following the devastation caused by hurricanes Irma and Maria in September 2017, which resulted in loss of electricity to 100 per cent of its customers. It was only in August 2018 that the state electricity utility, Puerto Rico Electric Power Authority (PREPA), announced that it had restored power to all residents, more than 11 months after the hurricanes hit the island.


The hurricanes only exacerbated the existing flaws in Puerto Rico’s transmission and distribution (T&D) system. The island’s T&D network is significantly lagging in technological upgrades, aging and deteriorated, and is highly vulnerable to weather conditions. Further, PREPA offers inconsistent customer support and collections operations and has limited access to capital markets.


Acknowledging these challenges, the Puerto Rican government is undertaking recovery efforts to not only rebuild the damaged grid network but also to transform it into one that can withstand environmental and man-made disasters, manage disruptions when they inevitably occur and recover quickly. It is looking to create an upgraded grid that offers increased reliability and resiliency, reduces costs, facilitates distributed generation and allows for the economic recovery of the island.


In June 2018, a key step was taken to help achieve this transformation. The government passed legislation to privatise parts of PREPA, which currently has a USD9 billion debt and accounts for the biggest share of Puerto Rico’s USD72 billion public debt. Act 120 provides the legal framework through which PREPA services and facilities can be offered as public private partnerships (PPPs) and PREPA generation assets may be sold, transferred or assigned to PPPs.


In line, in October 2018, the Puerto Rico Public-Private Partnerships Authority and PREPA issued a request for qualifications (RfQ) seeking private investors/companies/consortiums to manage and operate the T&D system.


Currently, PREPA’s T&D system comprises 1,115 miles (1,795 km) of 230 kV and 115 kV lines, 1,376 miles (2,215 km) of 38 kV lines, 31,628 miles (50,921 km) of distribution lines, 178 transmission centres, 60 substations at 115 kV, 279 substations at 38 kV and 822 private substations. The T&D network interconnects PREPA’s power plants with major switching and load centres throughout Puerto Rico.


Under the long-term PPP contract between PREPA and the private partner, the government will retain ownership of and title to all T&D assets while the private partner will manage and operate the T&D system and assist with the procurement associated with, and the management and deployment of, federal funds received for the restoration of the T&D system. The private partner may also be required to make capital investments in the T&D system not otherwise paid for by federal disaster recovery funding. The compensation for the private partner consists of a regulated base management fee, which will be supplemented by performance payments linked to established performance standards.


The key objectives of the PPP is to help deliver low-cost electricity; increase system resiliency and reliability; achieve performance in line with mainland US utility median performance, measured via industry-standard SAIFI (System Average Interruption Frequency Index) and SAIDI (System Average Interruption Duration Index) metrics; deploy new technologies; and exercise industry best practices and operational excellence.


A PPP committee has been set up, which is authorised to negotiate the terms of the PPP contract. Meanwhile, PREPA has been vested with the authority to execute the PPP contract negotiated by the PPP committee with a private partner.


The procurement process for the selection of the private company/consortium involves three stages. Stage 1 is the RfQ process (qualification stage), which will help identify qualified respondents that are eligible to receive request for proposals (RfP). The evaluation criteria to shortlist the bidders include current or past large-scale electric utility operations and management experience; adequate financial wherewithal to fulfil the terms of the PPP contract; evidence of ability to raise financing; technical and operational capabilities such as track record of sustained customer satisfaction, experience with at least three large-scale T&D projects, each with an investment of at least USD50 million; etc.


Stage 2 is the RfP process (binding bid stage), involving a competitive procurement process, which is opened only to companies shortlisted in the RfQ stage. This stage will end with the selection of the private concessionaire to manage PREPA’s T&D network. The information on memorandum and financing model will be shared with the qualified bidders during this stage.


Stage 3 involves the implementation of the PPP contract.


The RfQ stage of the tender closed on December 5, 2018 with PREPA receiving five bids for the PPP contract. PREPA is expected to publish the notification of qualified respondents on January 16, 2019. Following this, the RfP process will begin.


Privatisation of PREPA was recommended by the US Department of Energy (DoE) in its ‘Energy Resilience Solutions for the Puerto Rico Grid’ 2018 report. In contrast to the popular belief that the government may not open the T&D sector to private participation, the PPP contract process underway shows the government’s clear intent to transform Puerto Rico’s energy network.