Privatizing Puerto Rico

Privatizing Puerto Rico

The rushed sell-off of the territory’s electrical utility is part of a larger move to gut public goods for private profit.


On July 26, Ángel Figueroa Jaramillo, the head of UTIÉR (Unión de Trabajadores de la Industria Eléctrica y Riego), Puerto Rico’s electrical and irrigation workers’ union, tweeted from one of the island’s power generation stations. From Costa Sur Unit 5, near the southern coast, he posted a video of an open porthole that allowed people to peer into a massive boiler made of decaying metal and see streaking blue and orange flames, the stuff of electric power generation.

“This is the plant that failed on January 7th, 2020,” he wrote—referring to the day a 6.4 earthquake hit southwestern Puerto Rico—“the one José Ortiz said would take a year to repair.” Ever since the quake, Ortiz, then the CEO of the government-owned Puerto Rico Electric Power Authority (PREPA), had been saying the agency did not have the capacity to get the damaged plant back up and running until then. (Ortiz stepped down from PREPA in August.) According to Ruth Santiago, a lawyer who works with renewable energy advocacy groups, Ortiz had been looking into leasing temporary electricity generation from a private company to the tune of $70 million per month. Along with UTIER, the groups that Santiago works with support Queremos Sol, a civil society proposal for a clean energy transition. By posting this video of the generator, back online less than seven months after the earthquake and at half the cost of the proposed private contract, Figueroa Jaramillo was sending a shot across the bow of privatizers like Ortiz, saying, Give us the time and the resources to repair and improve Puerto Rico’s failing infrastructure and stop with the unnecessary contracts that are draining the island of desperately needed resources.

Figueroa Jaramillo’s message—keep public goods public and give Puerto Rico a fair chance to right its economy without punishing austerity—is a popular one on the island, but it hasn’t received the same coverage as the endless parade of government scandals and this year’s fraught gubernatorial contest. Since 2016, when, in response to the island’s spiraling debt, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) was signed into law, many of its major decisions have been in the hands of the Financial Oversight and Management Board (FOMB), which many call simply “the Junta.” The FOMB is tasked with restructuring the territory’s $72 billion debt; its main tool, a brutal austerity regime. Hundreds of schools have closed, government workers’ pensions are threatened with cuts, municipalities are being defunded, and PREPA is slated to be fully privatized as part of the solution to its $9 billion debt.

The fate of PREPA, then, is deeply bound up in the fate of Puerto Rico. The territory is in an exceedingly fragile state after a succession of political and natural disasters in recent years: devastating hurricanes in 2017; a political scandal that led to massive street protests and the resignation of the governor, Ricardo Rosselló, and several of his colleagues last year; and the massive earthquake and a series of aftershocks this January that knocked out the Costa Sur power plant and caused widespread damage. Figueroa Jaramillo’s confrontational stance against the CEO of PREPA is therefore at the center of a conflict that reveals the ways multinational corporations, aided by the federal government, are using the precarious situation to extract profit through privatization. This privatization scheme, urged on by the unelected FOMB, is speeding up a dangerous deterioration of democracy on the island at a time when it can little stand yet another crisis.

“I see the Fiscal Oversight and Management Board as kind of like the epitome of the neoliberal dream to have a nonelected government body with full authority to protect corporate interests and markets, unaffected by people’s preferences, opinions, and needs,” said Ingrid Vila, the head of Cambio, an organization that promotes sustainable energy in Puerto Rico, in an interview with The Nation.

Figueroa Jaramillo and UTIER, along with other supporters of Queremos Sol, want to bring Puerto Rico and its fossil-fuel-dependent energy infrastructure into the future, but they are up against powerful forces promoting the use of natural gas. The PREPA privatization is a case in point—a push to turn the public utility into a profit-making company for a few outside interests while providing no tangible benefit for the island’s inhabitants. Under the cover of the PROMESA debt restructuring, the government has welcomed an army of high-priced consultants, tax-evading billionaires, and real estate speculators, even as the austerity measures imposed by the oversight board are resulting in a drastic decline in the quality of life for most Puerto Ricans.

So who gains from PROMESA? The major beneficiaries of the FOMB’s debt restructuring, privatization, and austerity-imposing directives are investment companies like Golden Tree Asset Management, Taconic Capital Advisors, Monarch Alternative Capital, their arrays of lawyers and lobbyists (perhaps most notably Proskauer Rose, one of the board’s principal law firms), and the management consultancy McKinsey & Company.

Real estate firms that have been involved in speculation on the island for years, like Caribbean Property Group and Paulson & Co. (owned by 2008 housing crash profiteer John Paulson, with major holdings in hotel and luxury properties), also benefit from PROMESA’s push for outside investment. Local politicians and bureaucrats take advantage of the law’s mandate to shrink the government and defund municipalities. And the effort to privatize PREPA will put money in the pockets of liquefied natural gas (LNG) providers such as billionaire investor Wes Edens’s New Fortress Energy.

In some senses, this is just more of the same for Puerto Rico. The unincorporated territory, despite becoming a commonwealth in 1952 with at least nominal control over local affairs, has been deprived of the full rights and protections of the US Constitution since Spain ceded it to the United States in the 1898 Treaty of Paris. Because Puerto Rico is not a state, its more than 3 million residents have never had voting representation in Congress and cannot vote for president. But in other ways, the austerity regime that PROMESA has ushered into being is new: The seven voting members of its oversight and management board, chosen by the US president and both houses of Congress, are largely unaccountable to the island’s residents. The board has leeway to make sweeping changes to major aspects of Puerto Rico’s economy, all with the goal of restructuring the island’s debt and ensuring that payments can be fulfilled—not with improving the lives of its inhabitants.

The privatization of PREPA is a major piece of settling that debt. It is one of many government entities that are in the red. Last summer then-Governor Rosselló and many in his administration became embroiled in the so-called Telegramgate scandal, which arose from leaked messages that he and key allies—including his representative on the PROMESA board, his chief of staff, and his secretaries of state and the treasury—exchanged on the chat app Telegram. The chat logs were rife with homophobic remarks and misogynistic slurs and revealed a flippant attitude about the deaths caused by Hurricane Maria, leading to mass protests that ultimately prompted Rosselló’s resignation. But his ouster didn’t come soon enough for PREPA. A year earlier, he signed a bill that would privatize the utility by creating public-private partnerships for power transmission, distribution, and services, including billing and meter reading.

On June 22 of this year, Puerto Rico’s Public-Private Partnerships Authority announced that LUMA, a consortium between Houston-based Quanta Services and Canadian-based ATCO, two firms previously involved in the Keystone XL pipeline, would operate PREPA’s distribution and transmission systems. The contract also includes the retention of North Carolina–based Innovative Emergency Management, a company involved in the responses to Hurricanes Katrina and Sandy, apparently to manage the massive input of Federal Emergency Management Agency funds—as much as $18 billion—for repairing and renewing the authority’s systems.

The LUMA consortium was chosen over three other bidders (Duke Energy, Exelon, and PSEG Services) that were announced in January 2019 by the Puerto Rican government. After the cancellation of the disastrous Whitefish contract—the tiny Montana company was awarded $300 million to repair the island’s electrical infrastructure after Hurricane Maria, a task it was apparently unequipped to carry out—and a recent revelation that fossil fuel companies have for years been charging PREPA exorbitant fees for low-quality oil, the opaque process by which LUMA won the contract has done little to improve public faith in the future of the utility.

The awarding of the LUMA contract has drawn a sustained outcry, not least because of the veil of secrecy that obscured the full scope of the arrangement from public view. “There has been no stakeholder engagement and no public participation, to the point that the documents related to this transaction have not been available until after the transaction was concluded,” said Cambio’s Vila. In an interview with The Nation, Figueroa Jaramillo said that he became aware of LUMA’s selection only on June 12, when a local reporter asked for his reaction, and that the Puerto Rico Energy Board, an independent regulatory body, had knowledge of the agreement as early as May 18 and “had not informed the public.”

The secrecy around the contract is perhaps understandable considering what UTIER lawyer Rolando Emmanuelli Jiménez characterized as its “extremely one-sided” nature, adding that its intent is to deconstruct PREPA and permanently eliminate the public-owned utility. Renewable energy advocates call it a sweetheart deal for ATCO and Quanta, because it requires no initial investment and requires PREPA to pay $125 million a year to the consortium—far more than a properly funded PREPA, utilizing a full complement of local workers, would cost to operate. Emmanuelli Jiménez sees the LUMA agreement as nothing more than a windfall for high-salaried executives. “Six of them will earn more than $400,000 per year, two more than $600,000, and in PREPA now, the biggest wage earner is José Ortiz at $250,000. So you can see the level of wealth they’re looking for in this transaction,” he noted.

“PREPA will be paying the $125 million [to LUMA], so if you have a bankrupt utility that now has a deficit, how do you cover that?” asked Santiago, the lawyer supporting Queremos Sol. “Either the Puerto Rico government has to pay for it, which will mean tax increases or taking away money from another public service, or you increase rates, which is the more likely thing.” Citing a report by London Economics International based on figures from the existing restructuring support agreement of the PREPA debt plan, Santiago estimated that rates for consumers would increase to as much as 27.8 or 30 cents per kilowatt hour, “even with the investment of federal funds”—which would give Puerto Rico some of the most expensive electricity in the country. (New York’s electricity cost consumers 17.9 cents per kilowatt hour in 2019, and most states’ rates are much lower.) A report last year by Baruch College sociologist Héctor Cordero-Guzmán stressed that rate increases affect “the poor and vulnerable more as a proportion of their incomes.” According to the study, which used rate increases in PREPA’s 2019 restructuring support agreement as a guideline for LUMA pricing, “the average household in the bottom 20% of the income distribution will pay, after the fourth increase, an average of $991.25 per year in electrical charges”—a hefty bill, given that the island’s median annual household income is only $20,166, much lower than that of any state.

On top of the looming rate increases, there’s the issue of what will happen to PREPA’s 8,000 workers, more than half of whom are members of UTIER. Despite LUMA’s stated intention to hire much of the existing PREPA workforce, there is no requirement that it do so, and those who are hired will lose their seniority as PREPA workers, their collective bargaining agreement, and medical insurance for preexisting illnesses. There’s also no guarantee that LUMA will assume their pension payments, a lifeline for many of these public sector workers. A sticking point for Emmanuelli Jiménez and Santiago is the many provisions in the contract that LUMA can use to terminate the deal through its force majeure clause. To give just one likely example, if there is another major hurricane (a certainty for the region), LUMA could walk away, leaving Puerto Rico to pick up the pieces of whatever electrical provision remains.

At a hearing in late July of the House Committee on Natural Resources, Puerto Rico Public-Private Partnerships Authority executive director Fermín Fontanés, one of Rosselló’s last appointments before he was forced from office, claimed that the clause was standard and that “this [hurricanes] is what the LUMA team excels at. These are the companies that are called in to work in disasters not only in the United States but all over the globe.” Santiago was more skeptical. “Under no stretch of the imagination is it a standard clause. It’s the broadest I’ve seen,” she told The Nation. “A change of law can serve as the basis not to provide service. They have experience responding to hurricanes, and that’s why they’ll find a way out.”

Emmanuelli Jiménez and other advocates don’t see how the contract and PREPA policy conform to the law—passed with much fanfare under the Rosselló administration—that aims to convert Puerto Rico’s energy production to 100 percent renewable power by 2050. Queremos Sol, the civil society proposal that includes signatories like Vila, Santiago, Figueroa, and Arturo Massol, director of the legendary alternative energy and cultural center Casa Pueblo, has long called for solar rooftop structures and battery packs to decentralize the energy system and provide renewable, clean electricity. ”I don’t see anything in the contract that gives LUMA incentive to implement that,” Emmanuelli Jiménez said. “Right now we have 2.3 percent renewable. It will be impossible to meet the benchmark of 40 percent by 2025 because the contract for Eco-Electrica [an LNG provider] is supposed to generate 20 percent of energy until 2032.”

The Federal Emergency Management Agency recently awarded $9.6 billion toward LUMA’s grid modernization plan for PREPA, which calls for an increase in fossil fuel infrastructure for liquefied natural gas. Since mainland US fracking now produces more gas than can be used domestically, the Trump administration has pushed for increasing LNG exports. In 2019, Puerto Rico’s resident commissioner, Jenniffer González-Colón, a Trump supporter, cohosted the American LNG Summit with Florida Representative Ted Yoho, who has been calling to make its export easier. Above all else, Santiago said, the LUMA contract “perpetuates centralized generation with imported fossil fuels, especially new natural, highly explosive, methane gas infrastructure.”

The privatization of Puerto Rico’s electrical utility has been at the heart of the FOMB’s agenda since the board’s inception, but if it succeeds, it will be traveling down well-trodden but perilous roads. In the past few decades, Puerto Rico has attempted several times to privatize its Aqueduct and Sewer Authority, creating opportunities for higher-priced private water distribution systems. It has privatized San Juan’s Luis Muñoz Marín International Airport, handing it over to the Mexican company Aerostar. The privatization of its health care system in the 1990s caused the eventual deterioration of an innovative decentralized system of local health care clinics. It has privatized the tolling system on its highways; the authority that operates the ferries between the main island and two small islands, Vieques and Culebra, which serves mostly lower-income Puerto Ricans; and even the beaches, which have long been open to all Puerto Ricans. In April, the FOMB ordered the privatization of the government-owned public television station. With schools shuttered due to Covid-19, the effort to close public schools and allow for more charter schools has stalled, and the education secretary who oversaw that effort, Julia Keleher, will face trial next year on several counts of fraud.

PROMESA has only increased the push to privatization. Many of the sources I spoke with felt that the FOMB has created a kind of dark parody of what democracy is supposed to be. “PROMESA, the law, talks about preserving essential services, but they’re not defined,” said Nicole Díaz González, who works with Ayuda Legal Puerto Rico, which assists people in danger of losing their homes in the island’s accelerating mortgage crisis. In May, Representative Raúl Grijalva of Arizona put together legislation that, among other reforms, would force the FOMB to define essential services. Days later, FOMB executive director Natalie Jaresko refused to do so, saying it would give the impression that the board should “only limit themselves to subsidize the minimum required government services.”

Vila said the LUMA contract was even worse because of PROMESA: Previous privatization deals, like the one for the San Juan airport, at least required a sizable up-front investment. LUMA’s does not. “The deals made before PROMESA, like the one for the Aqueduct and Sewer Authority, failed. They actually left us with two EPA consent decrees,” she said. “But in that case, when there was a change in administration, the government was able to cancel that contract. Since the LUMA contract is incorporated into the FOMB fiscal plan, I don’t know if a new government has the authority to cancel it unilaterally.”

Díaz and others said that in the PROMESA era, even normal legislative proposals lack a rigorous debate process, and what reaches the floor has already been affected by what legislators believe will fly in the current atmosphere. “At the beginning with the FOMB, there was an attitude of ‘Let’s see what you’re going to do, and I’ll tell you if that complies,’” said Emmanuelli Jiménez. “Now the attitude is ‘No, you have to do this, and [the FOMB is] not going to give you the budget if you don’t.’ From the onset of the pandemic until now, [the FOMB has] written more than 200 letters saying, ‘This yes, this no, this you can do, this I prohibit, I will revoke this.’”

The distortion of the democratic process is also playing out in the strange theater between the government and the board. At times the government resists it for political purposes, while the FOMB wants to shift the onus of imposing austerity onto the government so that it can act as the impartial arbiter as the government endures scandal after scandal. “I think that the Junta has served as an experiment with another form of governing, a mode of governing that is more comfortable for the local government,” said Ariadna Godreau-Aubert, the head of Ayuda Legal. “For the local government, it’s more convenient not to have to define essential services and push austerity. They hang back and say, ‘Someone else can do that.’”

But as the PREPA privatization moves forward, the FOMB is faltering. In July, FOMB chair José Carrión and member Carlos García—both suspected of conflicts of interest because of their previous involvement with, respectively, the Government Development Bank and the Puerto Rican bank Santander, which was instrumental in accumulating the $72 billion debt in the first place—announced their resignations from the board. In August a third member, José Ramón González, also previously involved with Santander, stepped down. In fact, all of the board members’ terms were up over a year ago; they have remained in place only because Trump did nothing to start the process to replace them.

In Congress, Grijalva has proposed amendments to PROMESA that would prohibit conflicts of interest among FOMB members; allow federal funding for the board, which is currently paid for by the Puerto Rican people; promote economic growth; improve access to information; provide relief from some of the unsecured public debt; and restart a comprehensive public audit of the debt. A Democratic-controlled Senate—still possible given Georgia’s two runoff elections in January—could make some of these reforms a reality.

Still, they are reforms and would not change the antidemocratic nature of the FOMB and its control of government expenditures. Economist Stephanie Kelton, the author of the best-selling book The Deficit Myth, said she is convinced that under modern monetary theory, the Federal Reserve could easily issue $100 billion to Puerto Rico and wipe out its debt—which would be much more efficient in helping to create real internal economic development. It would make sense for US voters to push their representatives to investigate this, not only for the relief it would provide to Puerto Ricans but also for the precedent it would set for the rest of the country. This spring, as state economies shuddered to a halt during the coronavirus lockdowns, Senate majority leader Mitch McConnell began muttering that states should “declare bankruptcy.” As the pandemic continues to ravage the country and many states’ debt burdens are skyrocketing, it’s not impossible to imagine Republicans trying to impose fiscal control boards on underwater states.

Fiscal oversight boards have a long history in the United States, going back to the ones imposed on local jurisdictions in Missouri in the wake of the fiscal crises of the 1870s. They were used during the Great Depression in states like Massachusetts, Michigan, New Jersey, North Carolina, and Oregon, and the oversight board imposed on New York City in the 1970s was key to cementing the idea that government borrowing to stabilize social programs is irresponsible and detrimental to economic development. Detroit filed for Chapter 9 bankruptcy in the early 2010s (something Puerto Rico, as a territory, doesn’t have access to), putting the city at the mercy of a draconian debt restructuring regime. More recently, several states—including Connecticut, Illinois, and New Jersey—have been teetering toward fiscal collapse, while California, which closed a $54 billion deficit in June, faces a renewed threat of a $600 million deficit.

The coronavirus-induced economic crisis and the hard line the Trump administration has taken toward supplying desperately needed relief funds to localities is placing a huge swath of Americans at risk of the imposition of fiscal supervision and its attendant austerity policies.

The warm glow of Puerto Rico’s 2019 summer rebellion has dimmed a bit, and Governor Wanda Vázquez’s strict curfew to control the spread of Covid-19—the strictest in all the states and territories—has had a chilling effect on street protest, outside of some interventions by Figueroa Jaramillo’s UTIER and a Socialist Workers Movement–led attempt to shut the San Juan airport to visitors, many of whom are mainlanders who refuse to wear masks. After losing the New Progressive Party (PNP) primary to Pedro Pierluisi this year, Vázquez’s term is nearing its end, but Puerto Rico’s long-term problems remain.

Meanwhile, the Puerto Rican government is again up to its ears in scandal, with an independent investigation of Vázquez under way over her handling of supplies sent there for earthquake relief. The island had to have a second primary voting day in August because many ballots were not delivered on time, causing great embarrassment and calls for the resignation of the election commission’s president. During the summer the PNP’s María Milagros Charbonier, a member of Puerto Rico’s House of Representatives and a onetime Ethics Committee head, was arrested by the FBI for a bribe-and-kickback scheme, and in November another PNP representative, Néstor Alonso, was arrested on similar charges.

As for the governor’s office, Pierluisi—who tried to claim it after Rosselló’s departure in what amounted to an attempted coup—won the November 3 gubernatorial election by a percentage point. Pierluisi has been criticized for having been a lawyer for the FOMB as far back as 2017 while working for the firm O’Neill & Borges, which is receiving the second-largest monthly fee for legal services from the FOMB, after Proskauer Rose.

November’s elections in Puerto Rico showed a continuing erosion of the dominance of its traditionally powerful parties, even as voter participation keeps declining. The pro-commonwealth Popular Democratic Party and the pro-statehood PNP are being increasingly challenged by the Independence Party and the fledgling Movimiento Victoria Ciudadana (Citizens’ Victory Movement), which received a combined 28 percent of the vote. (A week after the election, nearly 200 boxes of uncounted votes were found, making the winners of some races still unclear.) A PNP-warped referendum on statehood, which framed the question as merely yes or no, leaving out other possible options, received 52 percent yes votes, but as long as McConnell retains control of the Senate, congressional action on the issue remains highly unlikely. Representatives Nydia Velázquez and Alexandria Ocasio-Cortez of New York have proposed a status convention to allow Puerto Ricans to debate their future, which greatly resembles the one proposed by Moviemiento Victoria Ciudadana.

With Trump’s departure from the White House imminent, Puerto Rico’s fate remains unclear. On September 18, in what was interpreted as a gambit to gain Puerto Rican votes in Florida, Trump announced the approval of $12.8 billion in aid to rebuild the electrical power system and the education system. But this “aid,” unlikely to be reassessed by Democrats in what will be an extremely difficult transition of power, is merely a fast-tracking of funds for LUMA’s takeover of PREPA, a spur to the privatization of one of Puerto Rico’s most important public services. “This commitment,” LUMA said in a statement, “is a crucial step in carrying out the transformation of the electric grid on the island.”

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