Puerto Rico’s Plan to Fix Its Power Grid Is Off to a Rocky Start

(Bloomberg Businessweek) -- Puerto Rico’s attempts to overhaul its troubled public power utility are off to a rough start.

Luma Energy LLC, the private consortium that began managing the grid for the Puerto Rico Electric Power Authority, or Prepa, on June 1, has been besieged by protests, a cyberattack, and a major fire that briefly knocked out power to 900,000 customers on the island of 3.3 million.

Improving the electrical system is key to pulling the U.S. territory out of a deep economic slump and stopping rampant population decline. Blackouts and appliance-frying voltage spikes are common, even as customers pay rates that are higher than on the U.S. mainland. Hurricane Maria in 2017 decimated the already weak grid, and this year’s Atlantic hurricane season began just as Luma took over.

Francisco Santana runs Grupo Vesan, a hydroponic farm in southern Puerto Rico that can produce 10,000 heads of lettuce a month. His operation depends on 1,000 LED lights, air-conditioned grow rooms, and a network of water pumps that make him hostage to the electrical system. Power to his farm has been unreliable for years.

“Let’s not even talk about hurricanes—it just has to rain a little bit, and we have power outages,” he says. A few years ago, he lost his entire crop when his backup generator and air-conditioning system failed amid outages and voltage spikes.

While Santana is in favor of a strengthened grid, he’s also wary of the Luma deal. Like many people on the island, he fears the contract will eventually lead to price hikes, and he’s already paying $5,000 a month for electricity. “There’s a lot of uncertainty about what’s going to happen,” he says. “All our costs are increasing, and we’re getting to the point that we can’t compete as a country.” (Luma has said it won’t initially seek a rate increase.)

Proponents of the deal, including Governor Pedro Pierluisi, say new private management—along with $10 billion in federal reconstruction funds—will help modernize the grid. They also hope it will revive a deal to restructure the utility’s $9 billion in debt and attract desperately needed businesses.

“If people feel they have the proper infrastructure to stay here, work here, create businesses here, raise their kids here, they will stay here, but if that doesn’t happen, people will continue leaving Puerto Rico, and that hurts the economy,” says Yandia Perez, executive vice president of the Puerto Rico Manufacturers Association.

From 2010 to 2020, Puerto Rico lost 11.8% of its population, more than any other U.S. jurisdiction. Its economy has shrunk by 17% since 2008.

Both the commonwealth and the power utility are in bankruptcy. Prepa’s bankruptcy began in 2017, after its unwillingness to raise rates led to infrastructure decay and forced it to borrow to cover operating expenses. Critics of the agency say its management became politicized, with key jobs going to party loyalists.

“I am looking forward to a better day in Puerto Rico in terms of the performance of our energy sector—enough,” Pierluisi said in May during a meeting of the island’s financial oversight board. “We’ve had a bankrupt public utility for too long; we’ve had an incompetent public utility for too long. I know the transformation that is under way will make a difference.”

Luma—a consortium of Canada’s Atco and Texas-based Quanta Services, working with Innovative Emergency Management—won the 15-year contract in a bid last year with promises to upgrade the grid. Prepa will continue to own its infrastructure.

The utility’s main labor union and some politicians tried to delay the changeover, and Luma has faced sporadic protests for months. On a Spanish-speaking island sensitive to the erosion of its identity, the fact that a U.S.-Canadian consortium now controls the grid is a sore spot. “We’re here to tell Luma that they shouldn’t get comfortable,” Carlos Rodriguez, the coordinator of a truckers’ union, said at a recent anti-Luma protest. “We’re not going to let them be in peace until they get out of Puerto Rico.”

On June 10, the same day that the substation fire broke out, the company’s customer web portal came under a distributed denial of service, or DDoS, attack that made it unavailable to many of its clients. Authorities are still investigating the incidents. Luma’s President and Chief Executive Officer Wayne Stensby seemed perplexed by the number of obstacles the company has encountered so soon. “This is not normal,” he said on June 11 at a press conference about the fire. “The system is very fragile, and that’s why it’s important to be prepared, but I would not expect events like this to happen very often.”

Rafael “Tatito” Hernandez, president of Puerto Rico’s House of Representatives, criticizes the Luma contract as too generous and is unhappy it was drafted behind closed doors. The agreement was only announced after the contract was signed. Many question Luma’s claim that it will save the utility $110 million by 2024.

Stensby has said Luma will find “efficiencies” through the way it dispatches and responds to outages. The company has also pledged to reduce power interruptions by 30%, the length of outages by 40%, and workplace accidents by 50%. In exchange, Luma will earn more than $1.5 billion over the life of the contract.

One of the most contentious parts of the deal is that Prepa’s public employees didn’t automatically qualify for jobs at Luma. The powerful Utier electrical workers’ union claims the arrangement violates local labor laws and urged its members not to make the switch. Luma says Prepa employees account for about half of the 2,200 workers it’s already hired.

Tomas Torres, a Prepa board member who serves as its customer representative, says it’s clear that Luma is understaffed and the contract needs to be amended to transition more Prepa employees into Luma. “They are trained, they know how to work in the system, and they have the knowledge and experience,” Torres says.

As Puerto Rico enters hurricane season, much is riding on how Luma performs. Despite beginning operations understaffed, the company says it has hired 790 linemen and field technicians and has access to 800 additional contractors—more field staff than Prepa had. But fewer than 120 of those linemen are experienced Prepa workers, Efran Paredes, the public utility’s executive director, told local legislators on June 14.

The company has $140 million in inventory and supplies—transformers, power poles, repair equipment—that will cover a two-month-long emergency, Mario Hurtado, Luma’s vice president for regulation, told Puerto Rico’s legislature on June 8. When Hurricane Maria hit in 2017, the island had supplies of just $30 million.

If Luma can’t recover from its rocky debut and improve service, pressure to amend the contract may grow. In the worst-case scenario, Puerto Rico could be back where it started, with a decrepit grid that’s vulnerable to future storms even after paying Luma millions of dollars in fees.

In the municipality of San Sebastian, in western Puerto Rico, Mayor Javier Jimenez Perez declared a state of emergency the weekend of June 5 and reactivated a volunteer electricity company as about 1,000 families spent days without power.

“That the lights go out is a constant—it has nothing to do with Luma—that’s just the way our system is,” he says. “But we’re going two, three, four days without power. Luma needs to make some changes quick, or it’s not going to last long.”
 
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