How Debt Is Keeping the Lights Off in Puerto Rico


Monday October 16th, 2017   •   Posted by Craig Eyermann at 6:14am PST   •  

8785529 - broken household light bulb isolated on a white background On September 20, 2017, Hurricane Maria slammed into Puerto Rico and knocked out the entire power grid of the U.S. territory.

Nearly three weeks later, about 90% of the island’s electrical grid was still without power.

In Puerto Rico, electrical power is solely provided to some 1.5 million households and businesses by the Puerto Rico Electric Power Authority (PREPA), which is a monopoly owned by the territory’s government.

That matters because the government of Puerto Rico used its ownership of the electric utility and the revenue it generates to borrow against. And because the government has borrowed far more than it can hope to ever pay back, it is very constrained in the actions it can now afford to take.

Gavin Bade of UtilityDive, an electrical utility industry trade publication, describes how those constraints are now affecting PREPA’s ability to restore electrical service to the island in the following brief (emphasis mine):

  • The Puerto Rico Electric Power Authority (PREPA) declined to ask for help from mainland electric utilities in the days after Hurricane Maria, instead turning to a small Montana-based contractor to carry out grid restoration practices.
  • Earlier this week, PREPA CEO Ricardo Ramos told E&E News that his bankrupt utility did not reach out to munis on the continental U.S. because he was unsure it could pay them back for assistance. About 90% of the island remains without power weeks after the storm hit.
  • The American Public Power Association (APPA), the trade group for U.S. munis, confirmed that mutual assistance programs were not activated, but said PREPA had already contracted with Whitefish Energy by the time the trade group convened a conference call to coordinate aid. PREPA did not respond to requests for comment.

This is a pretty direct example of what can happen when a government’s emergency reservoir of debt runs dry. A government or business that maintains a low debt burden or that has no debt would be able to easily borrow money to facilitate its recovery. They can easily draw from the emergency reservoir of debt to fund their recovery, using the revenue they will generate from doing so to replenish it.

But for Puerto Rico, whose government’s debt burden far exceeds its revenue and its ability to pay back the money it owes to its creditors, does not have that option available to it. And when they need it most, they are being forced to make decisions that leaves “many power sector observers on the mainland scratching their heads”, where they cannot afford to take the actions they would need to get up and running as soon as they otherwise could in the case of restoring electrical power to the territory.

That’s the real danger in having a debt burden that becomes excessive. When a crisis comes, you lose options that you might otherwise have had to effectively deal with it, because you’ve used up your margin of safety for borrowing.




Facebook Twitter Youtube RSS

Search


By linking to Amazon.com from this page, Independent Institute earns referral fees of 4% to 15% from whatever you buy. Bookmark the above link and you can support the Institute when you do your normal shopping!

TIR
October 2017
S M T W T F S
« Sep   Nov »
1234567
891011121314
15161718192021
22232425262728
293031