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24–754 PDF 2017

THE STATUS OF THE PUERTO RICO 

ELECTRIC POWER AUTHORITY 

(PREPA) RESTRUCTURING SUPPORT AGREEMENT 

OVERSIGHT HEARING 

BEFORE THE

SUBCOMMITTEE ON INDIAN, INSULAR AND 

ALASKA NATIVE AFFAIRS 

OF THE

COMMITTEE ON NATURAL RESOURCES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

Wednesday, March 22, 2017 

Serial No. 115–3 

Printed for the use of the Committee on Natural Resources 

( 

Available via the World Wide Web: http://www.fdsys.gov 

or 

Committee address: http://naturalresources.house.gov 

(II) 

COMMITTEE ON NATURAL RESOURCES 

ROB BISHOP, UT, Chairman 

RAU ́ L M. GRIJALVA, AZ, Ranking Democratic Member 

Don Young, AK 

Chairman Emeritus 

Louie Gohmert, TX 

Vice Chairman 

Doug Lamborn, CO 

Robert J. Wittman, VA 

Tom McClintock, CA 

Stevan Pearce, NM 

Glenn Thompson, PA 

Paul A. Gosar, AZ 

Rau ́l R. Labrador, ID 

Scott R. Tipton, CO 

Doug LaMalfa, CA 

Jeff Denham, CA 

Paul Cook, CA 

Bruce Westerman, AR 

Garret Graves, LA 

Jody B. Hice, GA 

Aumua Amata Coleman Radewagen, AS 

Darin LaHood, IL 

Daniel Webster, FL 

David Rouzer, NC 

Jack Bergman, MI 

Liz Cheney, WY 

Mike Johnson, LA 

Jenniffer Gonza ́lez-Colo ́n, PR 

Grace F. Napolitano, CA 

Madeleine Z. Bordallo, GU 

Jim Costa, CA 

Gregorio Kilili Camacho Sablan, CNMI 

Niki Tsongas, MA 

Jared Huffman, CA 

Vice Ranking Member 

Alan S. Lowenthal, CA 

Donald S. Beyer, Jr., VA 

Norma J. Torres, CA 

Ruben Gallego, AZ 

Colleen Hanabusa, HI 

Nanette Diaz Barraga ́n, CA 

Darren Soto, FL 

Jimmy Panetta, CA 

A. Donald McEachin, VA 

Anthony G. Brown, MD 

Wm. Lacy Clay, MO 

Jason Knox, Chief of Staff 

Lisa Pittman, Chief Counsel 

David Watkins, Democratic Staff Director 

SUBCOMMITTEE ON INDIAN, INSULAR AND ALASKA NATIVE AFFAIRS 

DOUG LAMALFA, CA, Chairman 

NORMA J. TORRES, CA, Ranking Democratic Member 

Don Young, AK 

Jeff Denham, CA 

Paul Cook, CA 

Aumua Amata Coleman Radewagen, AS 

Darin LaHood, IL 

Jack Bergman, MI 

Jenniffer Gonza ́lez-Colo ́n, PR 

Vice Chairman 

Rob Bishop, UT, ex officio 

Madeleine Z. Bordallo, GU 

Gregorio Kilili Camacho Sablan, CNMI 

Ruben Gallego, AZ 

Darren Soto, FL 

Colleen Hanabusa, HI 

Rau ́l M. Grijalva, AZ, ex officio 

(III) 

CONTENTS 

Page 

Hearing held on Wednesday, March 22, 2017 ....................................................... 1 

Statement of Members: 

Gonza ́lez-Colo ́n, Hon. Jenniffer, a Delegate in Congress from the 

Commonwealth of Puerto Rico ..................................................................... 5 

LaMalfa, Hon. Doug, a Representative in Congress from the State of 

California ....................................................................................................... 1 

Prepared statement of ............................................................................... 2 

Torres, Hon. Norma J., a Representative in Congress from the State 

of California ................................................................................................... 3 

Prepared statement of ............................................................................... 4 

Statement of Witnesses: 

Benı ́tez Herna ́ndez, Luis, Chairman, PREPA Governing Board, San Juan, 

Puerto Rico .................................................................................................... 37 

Prepared statement of ............................................................................... 38 

Questions submitted for the record ......................................................... 42 

Bergonzi, Adam, Managing Director and Chief Risk Officer, National 

Public Finance Guarantee Corporation, Purchase, New York .................. 44 

Prepared statement of ............................................................................... 46 

Bryngelson, Rob, President and CEO, Excelerate Energy LP, The 

Woodlands, Texas ......................................................................................... 51 

Prepared statement of ............................................................................... 53 

Questions submitted for the record ......................................................... 56 

Carrio ́n, Jose ́ B., III, Chairman, Financial Oversight and Management 

Board of Puerto Rico, San Juan, Puerto Rico ............................................. 27 

Prepared statement of ............................................................................... 29 

Questions submitted for the record ......................................................... 31 

Matosantos, Ana J., Member, Financial Oversight and Management 

Board of Puerto Rico, Sacramento, California ............................................ 57 

Prepared statement of ............................................................................... 59 

Questions submitted for the record ......................................................... 61 

Rossello ́, Hon. Ricardo, Governor of Puerto Rico, San Juan, Puerto Rico, 

accompanied by Gerardo Portela-Franco, Executive Director, Puerto 

Rico Fiscal Agency and Financial Advisory Authority .............................. 7 

Prepared statement of ............................................................................... 9 

Spencer, Stephen, Managing Director, Houlihan Lokey, Minneapolis, 

Minnesota, on behalf of Franklin Advisers, Inc. and Oppenheimer 

Funds, Inc. ..................................................................................................... 63 

Prepared statement of ............................................................................... 64 

Additional Materials Submitted for the Record: 

List of documents submitted for the record retained in the Committee’s 

official files .................................................................................................... 84 

(1) 

OVERSIGHT HEARING ON THE STATUS OF 

THE PUERTO RICO ELECTRIC POWER 

AUTHORITY (PREPA) RESTRUCTURING SUPPORT AGREEMENT 

Wednesday, March 22, 2017 

U.S. House of Representatives 

Subcommittee on Indian, Insular and Alaska Native Affairs 

Committee on Natural Resources 

Washington, DC 

The Subcommittee met, pursuant to notice, at 10:07 a.m., in 

room 1324, Longworth House Office Building, Hon. Doug LaMalfa 

[Chairman of the Subcommittee] presiding. 

Present: Representatives LaMalfa, LaHood, Bergman, Gonza ́lezColo ́n, Bishop; Torres, Gallego, Soto, and Grijalva. 

Also present: Representatives Serrano and Velazquez. 

Mr. LAMALFA. Good morning. The Subcommittee on Indian, 

Insular and Alaska Native Affairs will come to order. 

The Subcommittee’s subject today, we are meeting to hear testimony on the status of the Puerto Rico Electric Power Authority 

(PREPA) Restructuring Support Agreement. 

Under Committee Rule 4(f), any oral opening statements at hearings are limited to the Chairman, the Ranking Minority Member, 

and the Vice Chair. This will allow us to hear from our witnesses 

sooner, and help Members keep to their schedules. Therefore, I ask 

unanimous consent that all other Members’ opening statements be 

made part of the hearing record if they are submitted to the 

Subcommittee Clerk by 5:00 p.m. today, or the close of the hearing, 

whichever comes first. 

No objection, so ordered. 

OK, I will now recognize myself for 5 minutes. 

STATEMENT OF HON. DOUG LAMALFA, A REPRESENTATIVE IN 

CONGRESS FROM THE STATE OF CALIFORNIA 

Mr. LAMALFA. First of all, the current PREPA debt sits at ap- proximately just under $9 billion. On July 1, a very important 

major bond payment of $455 million of combined principal and interest is due. According to figures released just yesterday by the 

Fiscal Agency and Financial Advisory Authority of Puerto Rico, 

PREPA will be completely out of cash on or around May 17, 2017. 

In light of these alarming facts, it is incumbent upon this 

Subcommittee to drive a productive conversation here today. Our 

goal will be to inquire on where things stand in the current negotiations between the new Rossello ́ administration and the various 

creditor parties who have been working on finding a resolution. 

The 3.4 million American citizens residing in Puerto Rico need 

assurance that there is a solution to this troubling issue, and that 

2 

it is coming soon. Further delay will only result in further 

complications for the island’s populace. 

For context, PREPA for decades has put politics before basic, logical standards for operating an electric utility supplying the entire 

island grid. The structure within PREPA and a total lack of regard 

for operating in an efficient and consistent manner has led to severe financial and liquidity troubles, outdated and obsolete generation facilities, and crippling debt. PREPA is unable to access the 

capital markets and has been for some time now. 

In order to get PREPA back on track and stabilize the power 

generation for the residents and the businesses of the island, serious decisions need to be made by leaders in the government of 

Puerto Rico, the Governing Board of PREPA, and the various creditor communities. The island cannot afford a delay any longer. 

We look forward to hearing today from the Governor as to what 

his administration plans to do about PREPA’s imperiled position, 

and upcoming debt payment deadlines. We will hear from the 

Oversight Board established by PROMESA on how they believe the 

pending Restructuring Support Agreement (RSA) will impact the 

island’s future recovery. We will hear from the chairman of the 

PREPA Governing Board on the long and arduous process of negotiation that the government of Puerto Rico, PREPA, and its creditors undertook over the past 2 years to get an RSA to this point. 

And we will hear from individuals who represent various positions 

of the creditor and business community. 

It is important to note that all witnesses mentioned have the 

same goals in mind: to come to an agreement on the debt resolution of PREPA and to help achieve viable energy generation for the 

island, going forward. 

I thank the witnesses for appearing today before this 

Subcommittee, and for their travel. I look forward to having a productive and meaningful conversation with them and our Members. 

[The prepared statement of Mr. LaMalfa follows:] 

PREPARED STATEMENT OF THE HON. DOUG LAMALFA, CHAIRMAN, SUBCOMMITTEE ON

INDIAN, INSULAR AND ALASKA NATIVE AFFAIRS

The current PREPA debt sits at roughly $8.9 billion. On July 1, a major bond payment of $455 million of combined principal and interest is due. According to figures 

released just yesterday morning by the Fiscal Agency and Financial Advisory 

Authority of Puerto Rico, PREPA will be completely out of cash on or around May 

17, 2017. 

In light of these alarming facts, it is incumbent upon this Subcommittee to drive 

a productive conversation here today. Our goal will be to inquire on where things 

stand in the current negotiations between the new Rossello ́ administration and the 

various creditor parties who have been working on finding a resolution. The 

3.4 million Americans residing in Puerto Rico need assurance that there is a solution to this troubling issue and that it is coming soon. Further delay will only result 

in further complications for the island’s populace. 

For context, PREPA for decades has put politics before basic, logical standards for 

operating an electric utility supplying the entire island grid. The structure within 

PREPA and total lack of regard for operating in an efficient and consistent manner 

has led to severe financial and liquidity troubles, outdated, obsolete generation 

facilities, and crippling debt. PREPA is unable to access the capital markets and has 

been for some time now. 

In order to get PREPA back on track and stabilize the power generation for the 

residents and the businesses of the island, serious decisions need to be made by 

leaders in the government of Puerto Rico, the Governing Board of PREPA and the 

various creditor communities. The island cannot afford a delay any longer. 

3 

We look forward to hearing today from the Governor as to what his administration plans to do about PREPA’s imperiled position and upcoming debt payment 

deadlines. We will hear from the Oversight Board established by PROMESA on how 

they believe the pending Restructuring Support Agreement will impact the island’s 

future recovery. We will hear from the Chairman of the PREPA Governing Board 

on the long and arduous process of negotiation that the government of Puerto Rico, 

PREPA and its creditors undertook over the past 2 years to get an RSA to this 

point. And we will hear from individuals who represent various positions of the 

creditor and business community. 

It is important to note, that all the witnesses mentioned have the same goals in 

mind, to come to an agreement on the debt resolution of PREPA and to help achieve 

viable energy generation for the island going forward. 

I thank the witnesses for appearing before the Subcommittee today and I look forward to having a productive and meaningful conversation with them and our 

Members. 

Mr. LAMALFA. At this point I would like to recognize our friend, 

the Ranking Minority Member, Mrs. Torres, for an opening statement. 

STATEMENT OF THE HON. NORMA J. TORRES, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA 

Mrs. TORRES. Thank you, Mr. Chairman. The passage of 

PROMESA was the first step to give Puerto Rico relief from their 

crippling debt. I voted in opposition to the bill because I didn’t feel 

that it did enough, and I still believe that more forms of support 

are needed. 

For the Puerto Rican economy to grow, their leadership must 

step up and make some tough decisions. Additionally, Congress 

must step up and assist the island further—in particular, with 

their healthcare costs, as well as with an additional mechanism to 

attract investment and jobs. 

For these reasons I am eager to hear from our witnesses today 

about any progress under PROMESA, and specifically about the restructuring agreement for PREPA. 

For some time now, PREPA has been in a state of crisis and unable to be a modern, world-class utility. PREPA’s problems did not 

arise overnight, but were the result of management and other strategic decisions that were too often based on political or electoral 

considerations rather than their best practices, or best business 

practices. 

In late December of 2015, PREPA reached an agreement with 

creditors holding or controlling approximately 70 percent of its 

debt. However, to date this agreement has not been finalized, and 

was recently extended to the 31st of this month. This agreement 

has not been met with universal support, and Puerto Rico’s own 

governor, who is one of our witnesses today, will explain why he 

believes the agreement should be renegotiated to get a better deal 

with PREPA’s creditors. 

I am also looking forward to hearing from members of the 

Financial Oversight and Management Board of Puerto Rico, which 

unanimously voted last week to certify Puerto Rico Governor 

Rossello ́’s fiscal plan. The Oversight Board was a key component of 

the PROMESA legislation, and one that I am most concerned with. 

As the bill was written, nothing—nothing—guaranteed that the 

board members would represent a diverse set of backgrounds or a 

4 

diverse set of expertise. I felt strongly that the Oversight Board 

reflect the diverse interests of Puerto Rico and a long-term commitment to the Commonwealth. 

This is because PROMESA gave significant power to the 

Oversight Board, and required the government of Puerto Rico to 

submit a 5-year fiscal plan to the Oversight Board. I, along with 

many of my colleagues, continue to be concerned that nothing in 

the fiscal plan will lead to economic growth, but could cause further contraction in the Puerto Rican economy. 

Thank you to the witnesses for being here today, and I look forward to hearing from you on the best approaches to provide Puerto 

Rico with the tools it needs to prevent further dramatic depletion 

of their population. 

[The prepared statement of Mrs. Torres follows:] 

PREPARED STATEMENT OF THE HON. NORMA J. TORRES, RANKING MEMBER, 

SUBCOMMITTEE ON INDIAN, INSULAR AND ALASKA NATIVE AFFAIRS

Today’s hearing is a very important one—it is the first hearing to evaluate any 

part of the Puerto Rico Oversight Management and Economic Stability Act, 

(PROMESA) since it was approved by Congress last June 30. The passage of 

PROMESA was a first step to give Puerto Rico relief from their crippling debt. However, I voted in opposition to the bill because I didn’t feel that it did enough, and 

I still believe more forms of support are needed. 

For the Puerto Rican economy to grow, Congress needs to step up and assist the 

island further, in particular with their healthcare cost as well as with an additional 

mechanism to attract investment and jobs. 

For these reasons, I am eager to hear from our witnesses today about any 

progress under PROMESA, and specifically about the restructuring agreement for 

PREPA. 

For some time now, PREPA has been in a state of crisis and unable to be a 

modern, world-class utility. PREPA’s problems did not arise overnight but were the 

result of management and other strategic decisions that were too often based on political or electoral considerations rather than best practices or business imperatives. 

In late December 2015, PREPA reached an agreement with creditors holding or 

controlling approximately 70 percent of its debt. However, to date this agreement 

has not been finalized and was recently extended to the 31st of this month. This 

agreement has not been met with universal support, and Puerto Rico’s governor— 

who is one of our witnesses today—will explain why he believes the agreement 

should be renegotiated to get a better deal with PREPA’s creditors 

I am also looking forward to hearing from members of the Financial Oversight 

and Management Board for Puerto Rico, which unanimously voted last week to certify Puerto Rico Governor Rossello ́’s fiscal plan. The Oversight Board was a key 

component of the PROMESA legislation, and one that I was most concerned with. 

As the bill was written, nothing guaranteed that board members would represent 

a diverse set of backgrounds and experiences. I felt strongly that the Oversight 

Board reflect the diverse interests of Puerto Rico and a long-term commitment to 

the Commonwealth. This is because PROMESA gave significant power to the 

Oversight Board, and required the government of Puerto Rico to submit a 5-year 

fiscal plan to the Oversight Board. 

I, along with many of my colleagues, continue to be concerned that nothing in the 

fiscal plan will lead to economic growth but could cause further contraction in the 

Puerto Rican economy. 

Thank you to our witnesses for being here, and I look forward to hearing from 

you on the best approaches to provide Puerto Rico with the tools it needs to prevent 

further dramatic depletion of their population due to lack of jobs and crippling 

austerity measures. 

Thank you, Mr. Chairman. 

Mrs. TORRES. Mr. Chairman, thank you so much, and I ask for 

unanimous consent for Representatives Velazquez and Serrano to 

join us today. 

5 

Mr. LAMALFA. With no objection, so ordered. 

The CHAIRMAN. Mr. Chairman? Mr. Serrano is here. Let’s do the 

UC to him being allowed to be here and participate fully on this 

Committee. 

Mr. LAMALFA. I am sorry? 

The CHAIRMAN. Redo the UC. Mr. Serrano is the only one here. 

Allow him to be here, and recognized to be a full member of this 

Committee and participate. 

Mrs. TORRES. Then I would ask for unanimous consent for Mr. 

Serrano to be allowed to be here. 

The CHAIRMAN. Perfect. 

Mr. LAMALFA. OK. So ordered. Thank you. 

Now I would like to recognize our Vice Chair, Miss Gonza ́lez, for 

an opening statement. 

STATEMENT OF THE HON. JENNIFFER GONZA ́ LEZ-COLO ́ N, A 

DELEGATE IN CONGRESS FROM THE COMMONWEALTH OF 

PUERTO RICO 

Miss GONZA ́LEZ-COLO ́ N. Thank you, Mr. Chairman. As Puerto 

Rico’s sole representative in this Congress, I want to thank you, 

Chairman Bishop and Chairman LaMalfa, Ranking Member 

Torres, and fellow members of this Committee for holding this 

hearing. 

For the past year-and-a-half, Congress led, for the most part by 

this Committee, the most difficult part to confront this crisis. The 

result of the territorial system that is based on economic and political inequality of its citizens, a model that denies millions of 

American citizens the most basic right in a democracy—the right 

to vote and to equal representation, and treats hundreds of thousands of Puerto Rican veterans as equal in war but not in peace. 

To that effect, the bipartisan PROMESA not only established a 

fiscal oversight board, but also created a bicameral and bipartisan 

task force of Members of Congress to make recommendations on 

the impediments to economic growth in Puerto Rico, including 

equitable access to Federal healthcare programs. 

In its final report in December, the task force identified numerous programs where Puerto Rico’s lack of equal treatment constrains the island’s economic growth potential and provided specific 

recommendations for this Congress to consider. These recommendations included providing Puerto Rico with equitable and sustainable funding under the Medicaid program, as well as addressing 

the island’s Obamacare-imposed Medicaid cliff early in calendar 

year 2017. 

Mr. Chairman, I have already introduced legislation that will implement many of these recommendations, and I urge that the task 

force report serve as a road map for this Committee, moving forward. This will provide the island with much-needed tools to complement PROMESA and restore economic growth for our people. 

Furthermore, the ongoing discussions regarding the replacement 

of Obamacare, the tax reform, and increased funding for infrastructure projects, among others, present Congress and the Trump 

administration with a golden opportunity to address decades of unequal treatment for Puerto Rico and the territories. More specifically, I request that this Committee support the ongoing efforts to 

6 

ensure that Puerto Rico and the other U.S. territories are treated 

equally in the American Health Care Act, or any other upcoming 

Obamacare replacement legislation to be considered by this 

Congress. 

I will also like for the Governor and the chairman of the 

Oversight Financial Board to comment on this issue during their 

respective turns. 

Just last week the fiscal Oversight Board created under 

PROMESA approved Governor Ricardo Rossello ́’s fiscal plan, a plan 

that his administration was able to develop in just 58 days. I consider this to be a giant step in the right direction. 

Now we are compelled to quickly shift our focus and engage in 

the good-faith negotiations that address the debt service, provide 

sufficient capital for PREPA’s infrastructure investment, and set 

power rates that will not overburden Puerto Rican families and 

businesses. 

What should be clear by now is that PROMESA objectives for 

Puerto Rico will not be achieved unless economic growth is restored 

to the island, and that securing an efficient and affordable production of electricity is critical to the island’s vitality and needed economic recovery. That is the reason we are here today in this 

hearing. 

I am optimistic that an agreement can be reached and achieved 

in the best interest of the people of Puerto Rico and our economy. 

Such an agreement could be set as a precedent for other negotiations to follow. 

The government of Puerto Rico is taking the steps to repair 

Puerto Rico’s credibility, trigger economic growth, and seek an end 

to the territorial status that is the root problem for Puerto Rico’s 

economic crisis. Through the process of the island becoming the 

51st State of the Union. Make no mistake about it. Puerto Rico’s 

territorial status is the real problem, and the problem will not go 

away by ignoring it. Failure to address it will be like treating the 

symptoms of the very sick patient instead of the underlying 

disease. 

I look forward to the testimony of our witnesses, and to hearing 

all sides in this very important discussion for the future of our beloved island. 

Thank you, Mr. Chairman. I yield back. 

Mr. LAMALFA. Thank you, Madam Vice Chair. At this point we 

will introduce our witness for the first panel. We are joined today, 

and thank you for your time and travel, by the Honorable Governor 

of Puerto Rico, Ricardo Rossello ́. 

You, of course, know the rules, 5 minutes of oral testimony. If 

you have an entire statement that you would like to have appear 

in the hearing that may be longer, you can please submit that, as 

well. 

You will see that when you light the microphone, you will get a 

green light. After 4 minutes the yellow light, and then the red light 

will be the end of our current 5-minute round for your opening 

statement. So, you will need to press the talk button on that, and 

we will be ready to go. 

Governor ROSSELLO ́. Good morning, Chairman Bishop, Chairman 

LaMalfa, Ranking Member Torres, Vice—— 

7 

Mr. LAMALFA. Hold on. I am sorry, Governor. Please hold on for 

a moment. 

I recognize our Ranking Member for a moment. 

Mrs. TORRES. I apologize, Mr. Chairman and Governor. I would 

like to request unanimous consent to allow Ms. Velazquez to sit 

and participate at the hearing today. 

Mr. LAMALFA. Seeing no objection, so ordered. 

All right, Governor. I re-recognize the witness, Governor 

Rossello ́. 

STATEMENT OF THE HON. RICARDO ROSSELLO ́ , GOVERNOR 

OF PUERTO RICO, SAN JUAN, PUERTO RICO, ACCOMPANIED 

BY GERARDO PORTELA-FRANCO, EXECUTIVE DIRECTOR, 

PUERTO RICO FISCAL AGENCY AND FINANCIAL ADVISORY 

AUTHORITY 

Governor ROSSELLO ́. Well, once again, good morning, Chairman 

Bishop, Chairman LaMalfa, Ranking Member Torres, Vice Chairman Jenniffer Gonza ́lez, and other members of the Subcommittee. 

Thank you for the opportunity to appear today before the 

Subcommittee to discuss issues related to Puerto Rico’s energy infrastructure and financial restructuring. 

I understand the Subcommittee is interested specifically in the 

ongoing restructuring of the Puerto Rico Power Authority, or 

PREPA. Before addressing the specifics of the PREPA restructuring, it is important to recognize the critical need to transform 

the energy infrastructure of the island. Puerto Rico needs a reliable, cost-effective, and efficient electrical system, as well as an 

effective program of conservation and maximization of its water resources in order to support the island’s socio-economic 

transformation. 

My vision for PREPA is one that involves a modern and resilient 

transmission and distribution system with diverse sources of fuel 

including renewables, and supported by private capital to invest in 

a new and efficient generating capacity. The goal is to be able to 

deliver reliable energy at sustainable rates to the people and businesses of Puerto Rico. That vision includes a successful restructuring of PREPA. 

I also note that in the past PREPA was frequently cited as an 

example of governmental dysfunction, where political considerations over-rode true economic goals. In that regard, it is my view 

that the restructuring of PREPA must incorporate a governance 

model that facilitates investor and consumer confidence and minimizes political interference. 

At the same time, PREPA’s governance cannot be disconnected 

from the overall energy policy of the island. In my view, the appropriate governance structure is one that takes into account the 

concerns of all stakeholders. 

Unfortunately, PREPA’s challenges, including its aging infrastructure and significant debt burden, have resulted in inefficiencies and rising costs, which have, in turn, caused Puerto Rico 

residents and businesses to endure high electricity costs. 

Today, we pay substantially more for electricity than do residents 

of the continental United States, and this in an economy where the 

median family income is approximately 33 percent of that in the 

8 

United States. The high electricity costs negatively impact both the 

ability of Puerto Rico to attract capital and to compete in the global 

economy. This situation is not sustainable for our residents or for 

our economy. 

Since I took office, my team has worked diligently to assess both 

the long-standing and fundamental operational changes facing 

PREPA, and the proposed transactions set forth in the Restructuring Support Agreement, or RSA, that was negotiated by the 

prior administration with significant creditor constituencies. While 

we recognize and appreciate the efforts of many parties put into 

the RSA, and understand that it provides a useful framework for 

discussion, my administration believes that any consensual restructuring requires modifications to the terms set forth in the RSA. 

Without providing an exhaustive list, our concerns include: (1) 

the impact of the transition charge on the Puerto Rican ratepayer; 

(2) the effect the transaction may have on the capital and liquidity 

available to PREPA to complete its operational transactions; (3) the 

failure of certain creditor groups to provide significant concessions; 

(4) the reality that the RSA does not provide for sufficient capital 

to close the transaction; and last (5) that in the current conditions, 

the RSA would not be sustainable for the bondholders. 

After the RSA was signed in December of 2015, Congress, aided 

by this Subcommittee, passed PROMESA, which was signed into 

law by the President on June 30, 2016. It is noteworthy that 

Congress specifically stated in the very last provision of PROMESA 

that it was its sense that ‘‘any durable solution for Puerto Rico’s 

fiscal and economic crisis should include permanent, pro-growth 

fiscal reforms that feature, among other elements, a free flow of 

capital . . .’’. I do share that belief. 

A critical part of PROMESA’s effectiveness stems from the creation and certification of a fiscal plan. After much work, collaboration, and thoughtful exchange, the Oversight Board certification of 

our plan on March 13 represented an important first step in moving forward with Puerto Rico’s good faith negotiations with its 

creditors and stakeholders. Our plan was validated because we had 

the opportunity to elaborate it, give it careful consideration to both 

our fiscal objectives and the best interests of the people of Puerto 

Rico. 

Efforts now turn to consensual agreements under the Title VI 

process to avert potentially costly and litigious bankruptcy-type 

proceedings under Title III. My administration fully supports and 

is pursuing these types of consensual agreements as the most productive path for Puerto Rico to emerge from its current fiscal and 

economic crisis as quickly as possible. I recognize that certain 

PREPA constituents would prefer that we simply accept the deal 

in the RSA without review or modification. But these constituents 

must recognize that PREPA’s restructuring does not exist in isolation. PREPA’s restructuring is an important component of Puerto 

Rico’s overall restructuring efforts, and central to Puerto Rico being 

able to meet its overall fiscal plan. 

As a result, any RSA or any other transaction with constituents 

must provide and allow for not only an acceptable financial restructuring, but also must lead to a transformed, rationalized, and operationally improved PREPA. Our objective here would be to offer 

9 

broad economic upside based on utility efficiencies, a sustainable, 

affordable rate structure, public-private infrastructure investment, 

and reliable energy for Puerto Rican consumers. 

I believe it would be irresponsible to simply accept the terms of 

a financial restructuring without fully understanding the path it 

provides for PREPA to improve its operations, increase its reliability, diversify, and access new capital. Our analysis of PREPA’s 

operations and the interplay with the RSA is ongoing, and we continue to focus on potential modifications to the RSA that would 

recognize the interests of the Puerto Rican ratepayer, as well as 

creditors and other constituents. 

I am committed to continuing this hard work toward meaningful 

restructuring in order to transform PREPA into a modern utility 

that will support the people of Puerto Rico and a strong and growing Puerto Rican economy. We were able to achieve what many 

thought was impossible: a fiscal plan that was comprehensive, that 

was thoughtful, and addressed fiscal and economic concerns and 

the well-being of the people of Puerto Rico. Now we aim to do the 

same with this RSA. 

Thank you again for the opportunity to discuss these issues. 

[The prepared statement of Governor Rossello ́ follows:] 

PREPARED STATEMENT OF THE HON. RICARDO ANTONIO ROSSELLO ́ NEVARES, 

GOVERNOR OF PUERTO RICO

Chairman Bishop, Chairman LaMalfa, Ranking Member Torres, Vice-Chairman 

Jenniffer Gonza ́lez and members of the Subcommittee: thank you for the opportunity to discuss issues related to Puerto Rico’s energy infrastructure and financial 

restructuring. My tenure as Governor of Puerto Rico began less than 3 months ago, 

on January 2, 2017. Despite having only been in office for a limited time, I have 

come to truly appreciate how crucial the work before this Committee and the U.S. 

Congress is to the economy of Puerto Rico and, most importantly, to the welfare of 

the citizens of Puerto Rico. 

I understand the Subcommittee is interested specifically in the ongoing restructuring of the Puerto Rico Power Authority or ‘‘PREPA.’’ Before addressing the specifics of the PREPA restructuring, it is important to recognize the critical need to 

transform the energy infrastructure in Puerto Rico. Puerto Rico needs a reliable, 

cost-effective and efficient electrical system, as well as an effective program of conservation and maximization of its water resource in order to support the island’s 

socio-economic transformation. 

ISSUES WITH PREPA

Unfortunately, Puerto Rico does not currently have an energy and water service 

system suited to its current needs. Without changes, PREPA and the other corporations that render these essential services will stagnate and be unable to grow. 

PREPA’s operations are negatively impacted by the age of its generating assets 

and the lack of capital to make the investments necessary to assure reliable service. 

PREPA’s median plant age is more than 25 years older than the U.S. industry 

average. Without significant investment, PREPA cannot meet the applicable environmental standards. The problems with PREPA’s infrastructure result in a high 

number of forced outages, poor efficiency within the system, a lack of reliability with 

the system and high costs. PREPA also owes over $9 billion to its creditors and operates under serious liquidity constraints. 

This all translates into high electric rates. Today Puerto Ricans pay substantially 

more for electricity than do residents in the continental United States, and this in 

an economy where the median family income is approximately 33 percent of that 

in the United States. The high electricity costs negatively impacts both the ability 

of Puerto Rico to attract capital and to compete in a global economy. This situation 

is not sustainable for residents or for the Puerto Rican economy. 

10 

VISION FOR THE FUTURE

My vision for PREPA is one that involves a modern and resilient transmission 

and distribution system with diverse sources of fuel including renewables and supported by private capital to invest in new and efficient generating capacity. The goal 

is to be able to deliver reliable energy at sustainable rates to the people and businesses of Puerto Rico. That vision includes a successful restructuring of PREPA. 

My specific plan for PREPA involves attracting private capital to develop new infrastructure, the use of clean fuel combined cycle technology to increase the dispatch 

of gas to the south coast, and the development of renewables and other cost-effective 

energy solutions including hydro-electric assets. We are also evaluating the viability 

of the Aguirre Gas Port. 

I also note that in the past, PREPA was frequently cited as an example of governmental dysfunction where political considerations over-rode true economic goals. In 

that regard, it is my view that the restructuring of PREPA must incorporate a 

governance model that facilitates investor and consumer confidence and minimizes 

political interference. At the same time, PREPA’s governance cannot be disconnected from the overall energy policy of the island. In my view, the appropriate governance structure is one takes into account the concerns of all stakeholders. 

THE RESTRUCTURING SUPPORT AGREEMENT

Since I took office, my team has worked diligently to assess both the longstanding and fundamental operational challenges facing PREPA and the proposed 

transaction set forth in the Restructuring Support Agreement or RSA that was negotiated by the prior administration with significant creditor constituencies. While 

we recognize and appreciate the efforts that many parties put into the RSA and understand that it provides a useful framework for discussion, my administration believes that any consensual restructuring requires modifications to the terms set 

forth in the RSA. Without providing an exhaustive list, our concerns include the impact of the transition charge on Puerto Rican ratepayers, the affect the transaction 

may have on the capital and liquidity available to PREPA to complete its operational transition, the failure of certain creditor groups to provide significant concessions, and the reality that the RSA does not provide for sufficient capital to close 

the transaction. I also note that there are material conditions beyond the control 

of the RSA parties such as the completion of the validation proceedings and the requirement of an investment grade rating that have not been achieved. 

After the RSA was signed in December of 2015, Congress, aided tremendously by 

this Subcommittee, passed PROMESA, which was signed into law by the President 

on June 30, 2016. It is noteworthy that Congress specifically stated in the very last 

provision of PROMESA that it was its sense that ‘‘any durable solution for Puerto 

Rico’s fiscal and economic crisis should include permanent, pro-growth fiscal reforms 

that feature, among other elements, a free flow of capital . . .’’. I share that belief. 

Congress through PROMESA has provided Puerto Rico the tools necessary to 

achieve the fiscal and economic reforms needed to restore Puerto Rico’s standing in 

the financial markets which will aid in its recovery. Indeed, the Oversight Board’s 

certification of Puerto Rico’s fiscal plan on March 13 represented an important first 

step in moving forward with Puerto Rico’s good faith negotiations with its creditors 

and stakeholders with the intent and desire to achieve consensual agreements 

under the Title VI process and avert a potentially costly and litigious bankruptcytype proceeding under Title III. My administration fully supports and is pursuing 

these types of consensual agreements as the most productive path to Puerto Rico 

emerging from its current fiscal and economic crisis as quickly and expeditiously as 

possible. 

With regard to PREPA specifically, the RSA remains in place at least through its 

current termination date of March 31, 2017. We intend to request an extension of 

that date from the RSA parties to allow for continued discussions at least through 

the expiration of the PROMESA stay. We are also looking forward to receiving the 

feedback of the Oversight Board on the PREPA fiscal plan so that we can proceed 

to certification of that plan. 

CONCLUSION

I recognize that certain PREPA constituents would prefer that we simply accept 

the deal in the RSA without review or modification. But, these constituents must 

recognize that PREPA’s restructuring does not exist in isolation. PREPA’s restructuring is an important component of Puerto Rico’s overall restructuring efforts and 

central to Puerto Rico being to meet its overall fiscal plan. As a result, any RSA 

or other transaction with constituents must provide and allow for not only an 

11 

acceptable financial restructuring but also must lead to a transformed, rationalized 

and operationally improved PREPA offering broad economic upside based on utility 

efficiencies, a sustainable and affordable rate structure, public-private infrastructure investment and reliable energy for Puerto Rican consumers. 

I believe it would be irresponsible to simply accept the terms of any financial restructuring without fully understanding the path it provides for PREPA to improve 

its operations, increase its reliability, diversify and access new capital. Our analysis 

of PREPA’s operations and the interplay with the RSA is ongoing and we continue 

to focus on potential modifications to the RSA that would recognize the interests of 

Puerto Rican ratepayers as well as creditors and other constituents. I am committed 

to continuing this hard work toward a meaningful restructuring in order to transform PREPA into a modern utility that will support the people of Puerto Rico and 

a strong and growing Puerto Rico economy. 

Thank you again for the opportunity to discuss these issues. 

Mr. LAMALFA. Governor, thank you for your opening testimony. 

And again, we will remind the Members that Committee Rule 3(d) 

imposes a 5-minute limit on questions for our Committee members, 

as well. 

So, the Chairman will recognize Members for any questions they 

may have. I will recognize myself first. 

Thank you again, Governor, for your presence today. 

Governor ROSSELLO ́. Thank you, Chairman. 

Mr. LAMALFA. I will launch right into it here with—yesterday’s 

news was that, Governor, your administration released a proposal 

to address the PREPA debt situation. Has this proposal been provided directly to the creditors involved, where we have had an ongoing negotiation agreement, et cetera? Have they been made fully 

aware of the provisions of the proposal? 

Governor ROSSELLO ́. As you know, there are several stakeholders 

involved in this proposal, and our team has engaged with many of 

them. Some of them, the meetings have not been able to be set up; 

but it is my understanding that we are continuing to pursue those 

meetings so that full information, a full disclosure, a conversation 

can ensue, and it is my understanding that tomorrow some of these 

negotiations will ensue, as well. 

Mr. LAMALFA. At this point they don’t have the details on the 

proposal by administration yet? 

Governor ROSSELLO ́. It is my understanding that they all do. 

Mr. LAMALFA. Pardon me? 

Governor ROSSELLO ́. All of the uninsured bondholders have it. 

Mr. LAMALFA. All right. Again, there has been some delay in the 

process. I understand that you are new to the position there, and 

I appreciate that, being sworn in and getting started. But indeed, 

with the situation, there is not a lot of extra time for the island. 

So, do you believe that it has been worth delay and the time and 

the risk to implementation of the previous plan? Is this really 

bringing confidence for those folks that you must negotiate with? 

Governor ROSSELLO ́. Well, if it is a non-sustainable plan, we feel 

that it is opportune for us to have a conversation. As you well alluded to, Chairman, I have been in office for 78 days; and it has 

been my effort to design a fiscal oversight plan for Puerto Rico that 

includes all of these components. 

As you all know, the original RSA was proposed in December 

2015. We all know that a lot of things have changed since then. 

This Committee was fundamental in pushing forward the 

12 

PROMESA Act that essentially changed the paradigm of governance in Puerto Rico. And it does affect and change the negotiations. 

So, in our view, we understand that there has been a lot of time, 

a lot of discussion previous to our administration. What I can assure you is that we are fully committed to having these discussions, these conversations, so that we can actually have a plan that 

provides affordable rates for the people of Puerto Rico and the businesses of Puerto Rico, that allows for economic growth to ensue in 

Puerto Rico that actually is sustainable—— 

Mr. LAMALFA. Pardon me, Governor, timewise here—if PREPA is 

pushed to go into litigation because it would be required to under 

PROMESA, a Title III process, do you expect that outcome would 

be better for Puerto Rico, if indeed it was mired in litigation? 

Governor ROSSELLO ́. No. As I stated in my opening statement, I 

champion and I value consensual renegotiation efforts. Now, that 

does not take a back seat to making thoughtful, careful analysis of 

the evidence that is out there. And what we are asking all of the 

bondholders and all of the stakeholders is for us to have an opportunity to evaluate, as we did the fiscal oversight plan, have some 

meaningful conversations, see what the baseline, what the reality 

of Puerto Rico is, and then come to a better agreement that allows 

for economic growth, sustainable rates in Puerto Rico, and again, 

a sustainable path forward. 

The RSA cannot be looked upon as something in isolation. It is 

not independent. As soon as the President signed into law the 

PROMESA bill on June 30, 2016, it gave the governor of Puerto 

Rico and its government the responsibility of making sure we had 

a strategy of the whole of government. And that includes PREPA. 

So, with our view, and our efforts in the fiscal plan, we cannot 

just separate PREPA from the whole of government that is involved in Puerto Rico. 

Mr. LAMALFA. OK. Well, again, recognizing there is a time 

crunch involved in coming to this, and much negotiation and goodfaith agreement has been put in place, this Committee, I think, is 

going to see much urgency in coming to this, because we are going 

to be in a problem. 

With that, I will end my time here and recognize our Ranking 

Member, Mrs. Torres, for 5 minutes. 

Mrs. TORRES. Thank you, Mr. Chairman. Governor, welcome to 

our Committee, and congratulations. 

Governor ROSSELLO ́. Thank you. 

Mrs. TORRES. I think that you have a very unique perspective, 

and a great opportunity given to you, where you don’t have to own 

the past, but you have the unique experience of having been on the 

sidelines and having seen it from a very intimate way on how your 

father governed. So, congratulations also on your efforts to address 

Puerto Rico’s debt crisis. 

Governor ROSSELLO ́. Thank you. 

Mrs. TORRES. We expect much from you. The number of young 

working-age people that are leaving the island is alarming. Every 

single day, more and more of the young people come to the mainland. They, frankly, do not see a future for themselves on the 

island. Work is scarce, and rents are very high, and certainly utilities are very high. 

13 

How are you planning to address and incorporate these young 

people’s needs into your plan for growth in Puerto Rico? 

Governor ROSSELLO ́. Right, it is a great concern for us. Thank 

you for your comments, Ranking Member. It is a great concern and 

a priority for our administration to see how we can tackle the massive exodus and diaspora that we have in Puerto Rico. 

Of course, the exodus is an effect of certain actions that have 

been taken and that are occurring in Puerto Rico: a dwindling 

economy, problems in the healthcare system, a bureaucratic educational system that does not provide access, a best access, to the 

tools for our kids, and security concerns have been the driving force 

to having most of our young professionals leave Puerto Rico. 

So, what we have done is we have not totally proposed, but we 

have taken action. Since we have taken office, we have already converted into law 16 bills, most of them that go into the direction of 

fixing the fiscal problem in Puerto Rico and addressing the economic limitations that we have. But we are also committed to seeing other drivers, and how we can fix them so that we can make 

the quality of life for the people of Puerto Rico appropriate so they 

can stay. 

We are working, for example, on a healthcare model that will reduce costs, but that will actually give more access to the people of 

Puerto Rico, that will empower the people of Puerto Rico. 

Mrs. TORRES. In your statement, sir, you also mention your plan 

for PREPA, that it involves attracting private capital for the purpose of developing new infrastructure using clean fuel, renewables, 

and other cost-effective energy solutions, such as hydro-electric 

assets. What is your outlook to make Puerto Rico less dependent 

on imported oil? 

Governor ROSSELLO ́. It is a priority. And we have stated—I have 

for the Committee—and will submit what our strategy and our 

platform are; it is a detailed strategy and platform. And we have 

the fiscal plan, as well, and they include different strategies so that 

we can push that forward. 

Specifically, we are looking forward to having Puerto Rico be at 

least 15 to 20 percent in renewables. We are looking for a transition into gas. We are looking for infrastructure that can be 

generated through the private sector in collaboration with the government, using P3 models. We have made various law changes that 

will facilitate this effort, and understanding the time it takes to 

create novel infrastructure, we really want to get going, as soon as 

possible. 

Just a couple of weeks ago—well, about a week ago—there was 

a new Director of PREPA that was installed, and he is already 

making some of the critical changes in management, and he is already establishing the public policy and the discussions with stakeholders, so that we can have that path forward toward a less 

dependant energy—oil dependency. 

Mrs. TORRES. One last thing I would like to say to you, Governor, 

is, having come from California, when I was first elected we had 

a $30 billion deficit that we have to deal with. Decisions that you 

have to make are not easy. Decisions that the government has to 

make are not easy. But I would caution that making those decisions on the backs of your public employees is not the best recipe 

14 

for restructuring your debt. So, please revisit that and think of 

your public employees as an asset to your community. 

Governor ROSSELLO ́. Well, if I may add, our fiscal plan is specifically directed to addressing that concern. We are committed to not 

only not having to have lay-offs, but also we don’t have to reduce 

the time that the employees are actually working. 

It is a commitment. What we are doing is an operational shift. 

Puerto Rico, right now, has 131 agencies. That is way too much. 

We have a plan developed so that we can, in the next 4 or 5 years, 

start reducing that to a structure that is more akin to 30 to 35 

agencies, without having to impact public employees. 

How do we do this? We have a new P3 law that will enable collaboration with the private sector. We have government as a single 

employer law that will allow us to put public employees in the 

areas where they can most serve our people. So, it is part of our 

commitment, and I take that advice to heart. 

Miss GONZA ́LEZ-COLO ́ N [presiding]. Thank you, Ranking Member 

Torres. Now I will defer to the Chairman of the Full Committee, 

Mr. Bishop, for your turn. 

The CHAIRMAN. I will go last. 

Miss GONZA ́LEZ-COLO ́ N. OK. Thank you, Mr. Chairman. Then I 

will recognize myself for my 5 minutes. Chairman, I have never expected to be presiding on this hearing, and be interviewing and 

making questions to my governor. It is quite an honor to be here 

to do that. 

Governor ROSSELLO ́. The honor is mine. 

Miss GONZA ́LEZ-COLO ́ N. I welcome Secretary of State, Luis Rivera 

Marin, and leaders from our island, legislators, and other officials. 

Governor, what provisions in the agreement give you the most 

pause here? 

Governor ROSSELLO ́. Well, there are several concerns. Of course, 

as I said, our higher-level vision is to have a sustainable path that 

can have stable rates for Puerto Rico, and that could push forward 

our economy, that it is a vision that is encompassed in our holistic 

view of the fiscal situation in Puerto Rico, and the powers that the 

PROMESA bill has dictated to our government to enact change in 

a holistic view in government. So, that is one of the elements that 

preside over all of the concerns that we are viewing. 

There are several components that we understand. Number one, 

there is a new paradigm. After the signing of the PROMESA bill 

and it turns into law, it is a different set of circumstances that 

need to be generated over here. 

Number two, our team is concerned that the impact on rates 

might not be sustainable, and that will have a negative impact 

overall in the structure of the RSA, pushing forward. 

We also see that there is a lack of concessions from certain 

creditor groups that we feel need to sit down at the table and see 

how we can get to a common-sense agreement that is actually 

sustainable. 

There has been concern over the continuing validating proceedings, as well, because—some point to the July 1 deadline, but 

the reality is, with the continuous proceedings, this agreement is 

not going to be signed before then, anyway. So, it is sort of a—it 

is not relevant to that discussion. 

15 

So, those are some of the concerns. And again, Vice Chairwoman, 

what we want to do is have the opportunity to sit down—our team 

has done so, and we are willing to do it again—and look for the 

best, most rational solution to this problem to see how all stakeholders have to participate, and that we can establish a longstanding, sustainable path for Puerto Rico growth. 

Miss GONZA ́LEZ-COLO ́ N. How much time you are looking forward 

to do those negotiations and sit and look for that plan? 

Governor ROSSELLO ́. Well, certainly it is hard to tell. But, obviously, we are all aware of the time crunch. Our team is aware of 

the limitations, of the deadlines, but we are still pursuing them aggressively. I think it is in everybody’s interest in these negotiations 

for us to have actual time to discuss what the important issues are. 

And I will give you an example. With the fiscal oversight plan 

that was certified, we asked for an extension. And now, history has 

showed that that extension was probably the difference between 

having our democratically-elected government put forth a plan that 

was certified, viable, realistic, versus having no chance at all to 

submit a plan. 

So, essentially, what we are asking is the same opportunity here. 

Let’s sit down at the table, let’s look at the opportunities, let’s see 

what is the best path forward for all of the stakeholders involved 

over here, but let’s always consider that this is an important effort, 

so that the people of Puerto Rico, the businesses of Puerto Rico, can 

enjoy sustainable rates. 

My view is the following: Let’s not go over something that is not 

very well constructed, that is probably not sustainable, and that 

will put us in these chairs again in a couple of years. Let’s do it, 

let’s fix it once, and let’s fix it right. 

Miss GONZA ́LEZ-COLO ́ N. Governor, you know that the date would 

be March 31? 

Governor ROSSELLO ́. Yes. 

Miss GONZA ́LEZ-COLO ́ N. When do you understand any agreement 

could be reached, in your own view? Months? Weeks? How many? 

How much longer? 

Governor ROSSELLO ́. If the Chair allows, I would like our 

Director of AAFAF to answer that question. 

Miss GONZA ́LEZ-COLO ́ N. I would like him to identify himself for 

the record. 

Mr. PORTELA-FRANCO. Good morning. My name is Gerardo 

Portela, Executive Director of AAFAF. We are currently negotiating 

with PREPA bondholders. We expect to resolve as quickly as possible this RSA. We are aware of the deadline, so we need to step 

to the table and talk to not only uninsured bondholders, but also 

monolines and the fuel line—PREPA. 

Miss GONZA ́LEZ-COLO ́ N. Thank you. Right now my time is 

finished, so I recognize Mr. Soto. 

Mr. SOTO. Thank you, Chairwoman. 

Governor, bien venidos, welcome. We appreciate you being here 

today. 

Governor ROSSELLO ́. Thank you. 

Mr. SOTO. As you know, I come from Central Florida. Our areas 

are strongly linked, both culturally and economically, and a lot of 

those young people we want to make sure to have opportunities in 

16 

Puerto Rico are landing in our district. And while we welcome 

them, we understand it is at the detriment of the island. So, we 

need to work together. 

PROMESA addressed the debt process, but it failed to address 

any economic stimulus. And our long-term goal, I think, is united, 

in that we need long-term economic prosperity for the island of 

Puerto Rico. And I believe we cannot get there through austerity 

alone. 

I want to applaud you, Governor, for your success in negotiating 

to avoid job cuts. That was a huge win, and an early one. 

Obviously, we remain concerned, all of us, about furloughs and 

pension cuts that I know you are continuing to negotiate. And I 

want to encourage my fellow peers on the Committee to consider 

other relief, whether it be Medicaid and Medicare parity, whether 

it be applying the earned income tax credit or the child tax credit 

to the first and second child—since it only applies to the third— 

and beyond, as well as access to SBA and Ag. loans. I think the 

solution lies in the success of the Puerto Rican people, not austerity 

alone. 

Turning to PREPA, it appears that the average kilowatt hours, 

18.88 cents in Puerto Rico, while it is an average of 12.75 cents per 

kilowatt hour across our Nation. And knowing that energy is the 

life blood of any economy, what would the economic outcome be of 

the current plan, if it was implemented, Governor? 

Governor ROSSELLO ́. Well, if it is implemented without—one of 

the critical aspects of this whole negotiation is that there needs to 

be an operational change linked to whatever the financial change 

is. We cannot just look upon making some financial changes and 

leaving our old infrastructure as is. This is one of our critical 

concerns. 

We want to establish sort of a path forward, where the financial 

renegotiation is also linked to establishing a modern infrastructure, 

collaboration with the private sector. So, those are our critical components. If we don’t embark in that view—and our team’s view is 

that it is filled with obstacles, the path forward, unless we have a 

credible and established plan to do so. 

The rates are going to go high. They are going to get higher, and 

this impacts the average citizen of Puerto Rico, but it also impacts 

growth. It impacts our industry. It will provoke more exodus of 

Puerto Ricans, and it will provoke more exodus of industry in 

Puerto Rico, which will reduce the overall rates that are being generated, the overall monies that are being generated from PREPA, 

which would make the agreement unsustainable. 

So, this is our concern. What we want to make sure is that whatever plan is established needs to have the operational component, 

so that we can modernize the infrastructure, as well. 

Mr. SOTO. Has the administration done any economic analysis to 

show what decline in domestic product you would have on the 

island per any increase, or beyond that, so that we could get an 

idea of, as this stranglehold comes down with higher energy prices, 

what is the corresponding decline in economic output for the island, 

making this even a bigger problem then? 

17 

Governor ROSSELLO ́. Right. Our new executive director just got 

into PREPA, and he is putting together the team. They are 

working fast and diligently so that we can have these assessments. 

However, it is a clear obstacle to growth. It is a clear obstacle 

to quality of life. If you cannot pay your energy bills in Puerto Rico, 

it becomes harder to have a good quality of life. And people tend 

to point to that as one of the reasons that they leave, as well. If 

you have an unsustainable and unpredictable price or rate increases in Puerto Rico, it hampers industry, it hampers confidence 

for new industries to come in Puerto Rico. 

Now, connecting that to your first statement, we have already 

taken steps in Puerto Rico so that we can make a pro-growth push. 

We have established certain models, such as the destination marketing organization for Puerto Rico, labor reform, we have a permits reform that will be enacted probably next week. We have a 

comprehensive taxing reform that we are looking at. But that is 

just part of the equation. 

There is—and I thank you for soliciting the aid of your fellow colleagues—there is another part that needs to come from Congress 

now. Different from the past, somebody would sit here and probably say, ‘‘Give me more, give me more, give me more.’’ We are 

here, as a government, showing that we are doing our part, that 

we are pushing forward an agenda, that we really want to make 

change, that we really want to focus on governance, that we want 

to reduce and take charge for that responsibility of reducing cost 

in government and pushing forward the economy. 

But that, in and of itself, will limit us. If the Congress can see 

that equal treatment, collaboration, and certain efforts be part of 

our holistic strategy, this will certainly help Puerto Rico push forward with a common-sense approach, with a committed government, and transparency efforts for its—— 

Miss GONZA ́LEZ-COLO ́ N. Thank you, Governor. Thank you, Mr. 

Soto. Now we are having Mr. LaHood from Illinois. 

Mr. LAHOOD. Thank you, Madam Chair, and thank you, 

Governor, for being here today, for your testimony. 

Last year, when we passed PROMESA and debated that in this 

Committee, and there was a lot of work and effort and commitment 

that went into that legislation, and I think a lot of us thought, because of all that, we passed that and would not be hearing from 

you, and would not be dealing with this issue coming into 2017. 

But here we are. 

And in listening to you today, Governor, and this proposed 

financing deal, maybe walk me through. If this deal fails, what are 

the short- and long-term ramifications for the island? 

Governor ROSSELLO ́. Well, of course, our aim is for this deal to 

be successful. Of course, PROMESA has some provisions that include Title III restructuring-like efforts. If a deal is not able to be 

executed, then those provisions, not only for PREPA but for other 

components of the government, would be executed. 

Now, it has been my strong view and our public policy that we 

want to engage in consensual renegotiation efforts. So, what we are 

asking is for that opportunity. Don’t ask us to rubber-stamp a deal 

that we have not had ample time to discuss, that we have not seen 

what the ramifications are, that we are concerned that it is not 

18 

even going to be sustainable for the bondholders, let alone for the 

ratepayer in Puerto Rico. Let’s sit down, see what the data is, and 

then let’s come up with a common-sense solution. 

We have done it in the past. I mean this Committee did it in the 

past, passing PROMESA, which I know was a challenge. We have 

done it a couple of weeks back, when we passed a fiscal oversight 

plan for Puerto Rico, which was a challenge, as well. I feel we can 

do the same. What I am asking is for us to have the opportunity 

for our team to sit at the same table, to talk with the available evidence, with the data, and see what the best path forward is for 

Puerto Rico and mitigate some of the concerns that we have on this 

deal. 

Mr. LAHOOD. There was a Wall Street Journal article on the 

Puerto Rico crisis—I think it was from January 23—that talked 

about some of the consequences of Puerto Rico not being able to 

renew contracts with healthcare providers without the financial relief. Can you give me a status on that? 

Governor ROSSELLO ́. Yes, it is a critical component for this effort. 

We are actually asking for Puerto Rico to have the same consideration, and I commend the Vice Chairwoman’s leadership on this effort for Puerto Rico to get an extension, as well, for the Medicaid 

and Medicare funds. And here is why. 

In order for us to have the appropriate renegotiation or negotiation tools, we need to have the funding accessible to us now. We 

are making certain efforts so that we can reduce costs in our 

healthcare system. I can let you know that we have already proposed to reduce administrative fees as part of our plan. We have 

capped our per-member per-month as a strategy for a novel plan 

that will empower the citizen and the patient to have more of an 

effect. We are financing our own efforts to detect fraud. And here 

we feel there are vast areas of opportunities. And we are 

rationalizing what the system offers, so that we do not have overages and uses. 

So, we are putting our part. We see that in the first year we can 

have $300 million in reductions in the healthcare system. And, 

with the novel plan that we are proposing, which we think would 

be a model to follow in the United States, as well, we can see an 

additional $500 million without affecting the access of health care 

to the people. 

So, what I am stating over here right now is we are putting our 

part. We have a strategy. Stakeholders, everybody in Puerto Rico, 

is sharing in part of this decision making, is sharing in part of the 

actions that are being taken. I feel that Congress really needs to 

act in the next coming weeks, particularly in the continuous resolution, so that Puerto Rico can have the space to negotiate those 

contracts. 

Mr. LAHOOD. And, Governor, in that same article that I referenced earlier, there is a statement in here that Puerto Rico 

currently owes $17 billion in sales tax bonds and another 

$13 billion in general obligation bonds. Since this January article, 

has that increased? And is that the highest obligation that Puerto 

Rico has ever had? 

Governor ROSSELLO ́. It has not increased, and I believe it is the 

highest. But it has not increased. 

19 

Mr. LAHOOD. OK. And that is the highest in the history of the 

island, correct, where it is at right now? 

Governor ROSSELLO ́. Well, if you see the path of the debt, it has 

been progressive, right? So, it has been higher. But I will defer to 

our fiscal agent to respond to that. 

Mr. PORTELA-FRANCO. Good morning. Yes, between GOs and 

COFINAs, it is around $30 billion. There have not been any 

issuances since the last one. In 2014, there was a GO issuance. So, 

it is $30 billion right now, it has not increased. 

Mr. LAHOOD. Thank you. Thank you, Chair. 

Miss GONZA ́LEZ-COLO ́ N. Thank you, Mr. LaHood. Now we 

recognize our Ranking Member, Mr. Grijalva. 

Mr. GRIJALVA. Thank you very much, Madam Chair, and 

welcome, Governor. Glad you are with us. 

Governor ROSSELLO ́. Thank you, Mr. Grijalva. 

Mr. GRIJALVA. Before he left office, your predecessor submitted 

a fiscal plan to the Oversight Board, which they rejected. They 

called it unrealistic, and particularly unrealistic in its reliance on 

Federal assistance, which they said was uncertain. And given the 

whole Medicaid discussion and debate we are having about health 

care in this country and what happens to Obamacare, I would say 

that they were pretty accurate about that uncertainty, in terms of 

not only extending the program, but the number of people that 

would be covered by that program. And I understand the reimbursement issue that has been unfair from the beginning for 

Puerto Rico. 

They initially, if I believe correctly—you could correct me, 

Governor—rejected your fiscal plan. Then, on March 13 of this 

year, they certified your amended plan. The plan, as I understand 

it, includes eliminated subsidies to municipalities and University of 

Puerto Rico and non-profit entities. It also reduces government 

spending by $300 million, which was mentioned, in health spending. And it deals with some reductions in pensions, between $2,500 

to $10,000 monthly payments, and the privatization of certain government entities and functions within Puerto Rico. 

Given all that, and the fact that, as you have indicated in your 

testimony, more needs to be done in terms of coming to a final 

agreement to lessen the pain on the citizens of this country and 

Puerto Rico, essentially to move forward, what are we talking 

about here, Governor? Are we talking about an additional period of 

time in order to continue to work on the details of a fiscal plan, 

going forward? Or is it a question of additional time now for negotiations and collaboration, as you stated? 

Or in order to reach a level—I mean you proposed so much reductions, the Oversight Board proposes another set of reductions. 

Are we looking for a middle ground between those two points? If 

I may, thank you. 

Governor ROSSELLO ́. Yes. So there are two issues over here, 

right? There is the RSA component, and then there is a fiscal oversight plan. Let me state that the board never rejected our proposal, 

they just established a letter with some of the concerns that they 

had. That allowed us to have the opportunity to sit down, our team 

to sit down and look for, to share numbers, have a discussion. 

20 

And what I can assure you is that the policy implemented in our 

plan is essentially intact, the previous version and the modified 

version. What we did make some changes to was in terms of some 

of the underlying economic projections. So, everything that we proposed—and I brought the two versions of our copy, we brought our 

proposal that has been established, it is written in English as well, 

so that you can see the policy, and we have the two versions of the 

fiscal plan, as well, so that they can be worked on. So, in terms of 

the fiscal plan, it is certified, we are working on it, we are pushing 

forward. And, we did so without having to eliminate access to 

health care. We did so with the opportunity to better our education 

system. We did so by guaranteeing that the reductions and the 

right-sizing of government did not affect our workers, and we did 

so with establishing a path for the reduction, in terms of the pensions, to be progressive so that those that have the least would not 

be affected. 

Now, what we are discussing here today is the opportunity to essentially do the same with the RSA, to sit down, to see all of the 

data, to see what the new paradigm is, and to not expect a new 

administration to rubber-stamp a deal that has several concerns, 

from our view. And, without proper discussion and looking for a 

path that will ensure a stable rate for Puerto Ricans and that will 

ensure a path of growth in the economy, we are not going to 

rubber-stamp it. 

We are, however, willing to sit down. And, of course, if we do 

have more time, that is much better. But the timelines were not 

set by our administration. The timelines were set previously. We 

are working with them. If we do get more time, I can assure you 

that our team will be working diligently to get the best solution for 

all stakeholders, but particularly to the people of Puerto Rico. 

Mr. GRIJALVA. Thank you. 

Governor ROSSELLO ́. Thank you. 

Mr. GRIJALVA. I yield back. 

Miss GONZA ́LEZ-COLO ́ N. Thank you, Mr. Grijalva. Thank you, 

Governor. Now we recognize General Bergman. 

Mr. BERGMAN. Thanks, Madam Vice Chair. 

Governor, thanks for your time today. 

Governor ROSSELLO ́. Thank you. 

Mr. BERGMAN. These are not easy times for you, I am sure. What 

is your level of concern about what is going to happen to Puerto 

Rico, as a whole, and its access to credit, as a whole, if the RSA 

is not agreed to in a timely manner? 

Governor ROSSELLO ́. Well obviously, all of these things are concerning. But the reality is that I would be more concerned if we 

signed a deal that was not good and that would put us back in the 

position in several years where we demonstrated it was 

unsustainable. 

So, I think, if we can agree to sit down, look for the various alternatives, see and make sure—I mean I know stakeholders, and particularly some stakeholders, are going to be here for the long haul. 

So, it is in their best interests, as it is in our best interest, to have 

a strategy of growth for Puerto Rico. 

And what we want to do is, we want to make sure that the RSA 

complies with that. We want to make sure that it has the best 

21 

components. We want to make sure that certain creditors make the 

necessary concessions that they need to make, and we want to 

make sure we have, again, a path for sustainable growth in Puerto 

Rico, and stable rates. 

Mr. BERGMAN. OK, thank you. Since becoming governor, have 

you had any dialogue with certain creditors? And were there any 

changes that you might have offered or they might have offered, 

but especially that you have offered that they have been supportive 

of? 

Governor ROSSELLO ́. We have established a conversation with 

our fiscal agent. They are empowered—the AAFAF is empowered 

to lead these conversations—of course in coordination and having 

talked with the fiscal Oversight Board, as well. And our Director 

of AAFAF, Mr. Portela, could probably answer that question better 

than I can. 

Mr. PORTELA-FRANCO. Good morning. We have had conversations, preliminary conversations, with different bondholder groups. 

But before then, and as I expressed when we started office, we 

needed to focus on getting a fiscal plan approved and certified. We 

did that last week after continuous 20-hour days. 

When we got that plan certified, we now have the number, that 

surplus, that we can work with, and we do not have to negotiate 

in a vacuum. Once certified, we have been in constant dialogue 

with some bondholders. And again, we want to have good-faith 

negotiations with all bondholders in a Title VI, including PREPA 

bondholders and stakeholders, as well. 

Mr. BERGMAN. Thank you. Madam Vice Chair, I yield back. 

Miss GONZA ́LEZ-COLO ́ N. Thank you, General. Now it is the turn 

of the Chairman of this Committee, Mr. Bishop. 

The CHAIRMAN. OK, thank you. And, Governor, I want to thank 

you for being here, taking the time to do it. I appreciate the way 

you have approached this position and this situation, and I appreciate that you and your administration have come up with data 

that—we have long been waiting to see that data. And you are 

doing it the appropriate way. 

I do have one sense of frustration, simply because this 

Committee cannot actually create more time. I guess if we were 

Senators we could. We could just declare 7 days to be 1 day, and 

you can get away with it. 

[Laughter.] 

The CHAIRMAN. So, the question I have, and this is going to be 

very quick because we do have another panel of experts that we 

need to have testify—just in your opinion, what do you think is the 

likelihood of that March 31 deadline being extended? We have all 

played around with that. What do you think is the likelihood of actually getting that extension? 

Governor ROSSELLO ́. Well, I mean, this deadline has been extended in the past. I think it is in everybody’s best interest to do 

so. If we feel we can find a better common-sense solution—and 

again, I am not asking you to—— 

The CHAIRMAN. You are comfortable it actually can be extended? 

Governor ROSSELLO ́. I am, and I hope it can—— 

The CHAIRMAN. What would the consequences be if it were not 

extended? 

22 

Governor ROSSELLO ́. Well, again, we are still going to be working 

within the timetable. We recognize what the deadlines are. And, as 

I stated earlier, our team is going to be meeting or is asking for 

several meetings. We must admit we have had difficulties setting 

meetings with some of the creditors. But we are asking for that so 

that we can use whatever time we have as best and as efficiently 

as we can. 

The CHAIRMAN. Thank you. I appreciate that. And once again, I 

appreciate you being up here. 

Governor ROSSELLO ́. Thank you, so much. 

The CHAIRMAN. Thank you for that. Let me yield back. We have 

two other people who are not part of our panel. I appreciate them 

being here as well. Let me give them a chance to get some questions done. I will yield back. 

Miss GONZA ́LEZ-COLO ́ N. Thank you, Mr. Chairman. Now we 

recognize Mr. Serrano. 

Mr. SERRANO. Thank you so much. Thank you, Mr. Chairman, 

for allowing us to be here today, and Madam Vice Chair. And, very 

briefly, you remind me when I was in the State Assembly and we 

could not pass a budget, we stopped the clock at midnight. And 

sometimes Friday lasted until Tuesday, and it was a very long 

Friday. 

[Laughter.] 

The CHAIRMAN. Just don’t tell them how to do that. 

[Laughter.] 

Mr. SERRANO. No, this is something they should not learn how 

to do. 

So, Governor, thank you for being here and congratulations on 

your victory, on your administration’s victory. 

When Ms. Velazquez and I voted for PROMESA, we took a lot 

of heat. That is fine. And we took it during a primary season. That 

is not fine. 

[Laughter.] 

Mr. SERRANO. But things worked out well. The criticism is still 

there. There are still some folks who think we have the ability to 

undo PROMESA. 

One of the concerns was that PROMESA was going to over-run 

Puerto Rico, that Puerto Rico would not have anything to say. This 

government would just be there as puppets, if you will. 

My question is not on factual stuff, but actually on procedure, 

and so on. What is the relationship—and please don’t say it is fine. 

We know it is fine. 

Governor ROSSELLO ́. How about it is good? 

[Laughter.] 

Mr. SERRANO. How do you interact with this other governing 

body? Because it is a unique situation. We lived through it in New 

York City in the 1970s, when I first got to the State Assembly. And 

I remember that we had two governments at the same time. 

Governor ROSSELLO ́. Yes. 

Mr. SERRANO. How do you deal with that? And how much trouble 

has it been? And you can be honest and tell us if there have been 

times when you have had to lock heads to work on something. 

Governor ROSSELLO ́. Well, certainly, I can tell you that it has 

been respectful, it has been a continuous conversation. Otherwise, 

23 

I don’t think we would have had a fiscal plan that was certified. 

So, it is a continuous process, it is a new paradigm. 

I think, even relative to the New York situation, it is a new paradigm, because New York is a city, it always has its state to back 

it. Puerto Rico is a colonial territory, and we have no other way of 

having certain empowerments, or certain impact in terms of the 

way Congress will be acting, as opposed to our non-voting delegate 

that—she is doing everything, and we are very proud of her efforts 

here in Washington. 

So, the relationship has been respectful. We have been able to 

engage in dialogue. I think that is critical. But we need to recognize what the dividing lines are. And I say this with all respect. 

The fiscal Oversight Board here is established so that, number one, 

we can meet or we can reduce or eliminate the gap between what 

the revenues and expenses are in government, and then we can 

gain access to the markets. They are not here to determine what 

the public policy for Puerto Rico is. That is my job. That is my 

government’s job. 

Up until now, I can say that we have been able to execute that 

way. This is why we are content that we were able to pass a plan 

for Puerto Rico, a fiscal plan, based on the public policy that we 

proposed. It is an ongoing relationship. I can tell you that, up until 

now, it has been respectful and we have had opportunities. And, of 

course, as in any type of relationship, we are going to have disagreements, and those are going to be clear. We have disagreements based on what the policy should be for implementing a plan. 

There was a suggestion, that in the right-sizing of government 

we have to lay off somewhere close to 45,000 people. Our approach 

was significantly different. We approached with attrition. We 

established a path forward for a new government. We reduced certain subsidies. In that sense we were able to maintain our public 

workforce, pushing forward. 

And we did the same for health care. Reducing access to health 

care was not an option for us. We want to have the people of 

Puerto Rico insured, and we want to have them have the power to 

choose how they get their services, and the same for education, the 

same for pensions. 

So, up until now, it has been respectful. And my hope is that it 

remains that way. 

Mr. SERRANO. Very briefly, you went into my second question, 

which was how did you—you said you were working on reducing 

government and so on without hurting the workers. Could you 

expand a little bit on that? Because—— 

Governor ROSSELLO ́. Of course. 

Mr. SERRANO [continuing]. That sounds like a contradiction. I 

mean usually it is firing people, you know. 

Governor ROSSELLO ́. It does. We will leave the fiscal plan for the 

members to ensue, but essentially, it stems from recognizing that 

the vast majority of expenses come from operational costs in our 

government. And it is precisely because we have a 131-agency 

structure in Puerto Rico now. That surprises many people when we 

state, because typically, in their local governments, they have a 

much more reduced operational structure. So, that is one. 

24 

Number two, we started reducing, by executive order on the 

same day I swore oath, our political appointees, we started 

reducing what the contracting paradigm was for Puerto Rico, as 

well, at least 10 percent. But we are making headways to increase 

that. 

We started putting more controls into what the expenditures 

were because what we typically had was over-budgeting and overexpenses that would then be translated into those deficits. 

So, I would say, Congressman, that we are having a responsible 

government that is actually reducing the expenses, but it is taking 

the opportunity to make a more effective government than what we 

have had in the past—131 agencies that do not communicate with 

each other that are marred with bureaucratic processes, that 

duplicitousness is not healthy for Puerto Rico. 

So, in this time of crisis, in these times of challenges, we found 

opportunities. And in certain—in our area of right-sizing 

government, it is explained in detail. 

Miss GONZA ́LEZ-COLO ́ N. Thank you. 

Mr. SERRANO. Thank you very much. Let me just close with this. 

Your biggest challenge, Mr. Governor, is that promise you made to 

get Team Rubio to Puerto Rico by tomorrow. 

[Laughter.] 

Governor ROSSELLO ́. How about if you dye your hair, I will dye 

mine? 

Mr. SERRANO. Because they all have to go back to spring training 

by tomorrow morning. 

Miss GONZA ́LEZ-COLO ́ N. Thank you, Mr. Serrano. Right now we 

will recognize Ms. Velazquez. 

Ms. VELAZQUEZ. Thank you so much. I want to thank the 

Chairman, Mr. Bishop, and the Ranking Member, Mr. Grijalva, 

and both the Subcommittee Chair and Ranking Member, and the 

gentlelady from Puerto Rico. 

I also want to commend Governor Rossello ́ for revisiting the 

original PREPA and for seeking more favorable terms for the 

people of Puerto Rico. 

I also would like to ask, Governor—you said that when we 

passed PROMESA it provides the tool for the government of Puerto 

Rico and the board to restructure the public debt, and that we 

should not treat the PREPA deal or the PREPA crisis isolated from 

the whole island fiscal crisis, that they are both intertwined. Isn’t 

it? 

Governor ROSSELLO ́. Yes. That is correct. 

Ms. VELAZQUEZ. I was born and grew up in Puerto Rico. I know 

all about politics in Puerto Rico. My question to you, Mr. Governor, 

part of the crisis of PREPA is embedded in the fact that, as an institution, it has been traditionally politicized and that, for the first 

time, finally, it is de-politicized, that there is a new board with toprate professionals, including management of top energy companies 

in the United States. 

So, is it your intention to allow for that board to continue, those 

board members to continue in their capacity? 

Governor ROSSELLO ́. It is my intention to have a conversation. 

And, of course, if they are willing, or whoever is willing to push forward our public policy, then that will be the new board. 

25 

So, this is a very important point: We can have the best or gradeA professionals, but if their public policy opposes our fiscal policy 

and our operational changes policy, then they cannot be part of 

this. 

Ms. VELAZQUEZ. OK. And I hope that when appointments are 

made, they are made based on what is best for the interests of the 

people of Puerto Rico. 

Governor ROSSELLO ́. Of course, always. I will, however, caution 

that these appointments were made in December 2016. I was already elected governor. There was no conversation with me about 

this. It was just essentially imposed. And again, everybody knew 

at this juncture that I have to present the fiscal oversight plan for 

Puerto Rico that would take the government, as a whole, in terms 

of its view. So, I think it needs to be—— 

Ms. VELAZQUEZ. Thank you, Governor. My colleague from 

California, Mrs. Torres, asked you if you intend to have a plan to 

increase the energy sector in Puerto Rico, to diversify the energy, 

the generation of energy in Puerto Rico, is it part of that plan to 

privatize some of those functions? 

Governor ROSSELLO ́. It is part of the plan to create P3s, publicprivate alliances, yes. We want to create P3s for generations. 

Puerto Rico or PREPA does not have the cash right now or the 

wherewithal to generate such structure, and we feel that it would 

be beneficial. 

In fact, we have passed into law a version that part of that margin that gets generated would go into the pension systems. One of 

the effects that will allow us to have more cash into the pension 

systems, as well, would allow us to have stable rates in Puerto 

Rico. And, of course, a stable energy system. 

Ms. VELAZQUEZ. Thank you, Mr. Governor. Governor, if 

voluntary negotiations with all 12 bondholder groups and other 

creditors of the central government are unsuccessful in producing 

a sustainable level of debt that is consistent with the certified fiscal 

plan on or before the expiration of PROMESA’s automatic stay 

against litigation on May 1, would you support the Oversight Board 

use of Title III to restructure the debt? 

Governor ROSSELLO ́. It is part of the structure that we have. But 

our aim, again, is a Title VI renegotiation effort. And I must 

stress—— 

Ms. VELAZQUEZ. I understand that. But my question is, if those 

negotiations are proven to not be successful, will you support the 

board to use one of the most powerful tools that were provided 

under this bill? 

Remember one thing: Congressman Serrano and I, we brought 

this legislation to the finish line. I can promise you that. So, we 

did it, and we voted for it, because we believe that it was the best 

tool for Puerto Rico. 

Governor ROSSELLO ́. Right. Well, everything is on the table, 

Madam, but what we understand is that it is the best solution for 

all stakeholders to seek a Title VI renegotiation effort. 

So, this is our caution, and this is our message. We are willing 

to do so, we are willing to sit down, we are willing to be rationale. 

We have already presented a plan that has been certified. It has 

26 

been validated. We can do the same with our renegotiation efforts, 

so our call to all 19 creditors is for us to—— 

Ms. VELAZQUEZ. May 1. 

Governor ROSSELLO ́. Yes. 

Ms. VELAZQUEZ. The clock is ticking. The people of Puerto Rico 

are suffering. And we need to restructure the public debt in a way 

that you have the liquidity and the capital that you need in order 

to provide services for the children, safety of the people of Puerto 

Rico. 

Thank you, Mr. Chairman. 

Governor ROSSELLO ́. Madam, I was elected on this platform, to 

renegotiate. I was elected by the people of Puerto Rico. And this 

is what they elected me to do, and I will do so. 

Mr. LAMALFA [presiding]. All right, thank you. 

Governor, again, we do thank you for your testimony. It has been 

very valuable to the Committee and for Members, for their questions. If there are additional questions for the Governor, we will 

ask you to respond to those Members, to the Committee, in writing. 

Under Committee Rule 3(o), members of the Committee must submit witness questions within 3 business days following the hearing, 

and the hearing record will be held open for 10 business days for 

these responses. 

So, Governor, I wish you the best of luck on this. Indeed, with 

the challenges you face with RSA extension just 9 days now needed, and then a large PREPA payment due by July 1, this 

Committee is very interested in the results that are needed, so that 

Puerto Rico and its people will be well served. So, best wishes to 

you on that, and we look forward to seeing good things happen. 

Thank you again for your testimony and your attendance today. 

Governor ROSSELLO ́. Thank you, Mr. Chairman. Thank you to all 

the Members. And again, I reiterate that we will be working hard. 

Our team is available to do this, and we want to fix it once, and 

we want to fix it right. 

Mr. LAMALFA. OK, thank you. Thank you, sir. You are excused. 

Now we want to introduce our second panel of witnesses here. In 

order, we will have Mr. Jose ́ Carrio ́n, III. He is Chairman of the 

Financial Oversight and Management Board of Puerto Rico—please 

take your seats as I name you. 

We also have Mr. Luis Benı ́tez, who is the Chairman of the 

PREPA Governing Board. 

And we have Mr. Stephen Spencer, who is the Managing Director 

of Houlihan Lokey, and on behalf of Franklin Advisers and 

Oppenheimer Funds. 

OK, we have next Adam Bergonzi, Managing Director and Chief 

Risk Officer of the National Public Finance Guarantee 

Corporation—just please go ahead and take your seats as we go. 

Next, we will have Rob Bryngelson, President and CEO of 

Excelerate Energy. 

And finally, we have Ms. Ana Matosantos, a member of the 

Financial Oversight and Management Board of Puerto Rico. 

So, as you are seated here, I will remind the witnesses that, 

under our Committee Rules, each of you must limit your oral statements to 5 minutes. But again, the entire statement will be 

27 

allowed to appear in the hearing record, should it be longer than 

that. 

And again, the same rules apply on the 5 minutes. The lights on 

the microphone will turn green as you start. After 4 minutes, the 

yellow light will come on. And then, when the red light comes on, 

I would ask you to please complete your statement to be timely 

here. 

OK. And you know about pressing the button when you are 

ready to go. We are going to have the entire panel give all their 

testimony before we will go to questions from our Members. So— 

OK? Yes, we will do that. So—— 

Mr. CARRIO ́ N. Shall I begin? 

Mr. LAMALFA. We will hold off a minute while everybody gets 

settled back in. 

[Pause.] 

Mr. LAMALFA. OK. If we could please finish finding our seats. 

The Chair would like to go ahead and recognize Mr. Carrio ́n for 

your testimony for 5 minutes. 

STATEMENT OF JOSE ́ B. CARRIO ́ N, III, CHAIRMAN, FINANCIAL 

OVERSIGHT AND MANAGEMENT BOARD OF PUERTO RICO, 

SAN JUAN, PUERTO RICO 

Mr. CARRIO ́ N. Thank you, Chairman LaMalfa, for your leadership 

in holding this hearing. Many thanks also to Ranking Member 

Torres, Vice Chair Gonza ́lez-Colo ́n, and, indeed, all the members of 

the Subcommittee, for their interest in this matter. 

Before addressing the subject of the Puerto Rico Electric Power 

Authority’s Restructuring Support Agreement, I would like to take 

this opportunity to tell you of the important progress the Oversight 

Board has made since its appointment last year. 

At our five public board meetings thus far, we have adopted the 

board’s bylaws and codes of ethics; identified the Puerto Rico entities, including PREPA, subject to financial oversight under 

PROMESA; assessed the fiscal plan initially proposed by the prior 

governor of Puerto Rico, and listened to testimony from a wide 

range of stakeholders. 

One of the most difficult issues the board has had to tackle in 

advancing the PROMESA agenda has been determining as accurately as possible just what the government of Puerto Rico’s revenues and expenses are. To assist in that process, we hired a group 

of advisors and key senior staff. The board and its advisors have 

worked closely with the government of Puerto Rico and its advisors, with the former governor, Alejandro Garcia Padilla, and, since 

January, with Governor Ricardo Rossello ́ Nevares. 

We have also participated in dozens of meetings with Puerto Rico 

creditor groups, resuming conversations that were commenced in 

the prior administration. On January 18, we sent Governor 

Rossello ́ a substantial letter outlining the baseline scenario for a 

fiscal plan required by PROMESA, and the kinds of savings and 

the additional revenue that would be required to achieve fiscal 

balance. 

At Governor Rossello ́’s request, we extended the stay of creditor 

enforcement efforts from February 15 to May 1, and gave the new 

28 

administration a short extension of our original deadline for certifying a fiscal plan to March 15, 2017. 

On February 28, the Governor submitted their proposed fiscal 

plan. Upon careful evaluation, we notified the Governor of certain 

deficiencies that would have to be corrected for the plan to comply 

with PROMESA. Shortly thereafter, the Governor submitted an 

amended fiscal plan, which the board certified with a couple of 

additional amendments last Monday, March 13. 

The certified fiscal plan charts a path to achieve fiscal equilibrium in 3 years, provide adequate funding for essential services, 

maintain the solvency of government pension plans, restructure the 

government’s long-term debts and obligations, and adopt the structural reforms necessary to restore economic growth and opportunity to all in Puerto Rico. 

Achieving these objectives will not be easy. The cuts are deep 

and, in some instances, unfortunately, will be painful. Over time 

the government has made commitments to its constituents, including employees, pensioners, college students, enrollees in healthcare 

programs, bondholders, and others that cannot be met based on realistic measures of tax revenue the economy can currently support. 

However we define the problem, whether in terms of budget deficits, indebtedness, unfunded pensions, or the imminent risk of simply running out of money to pay bills, Puerto Rico faces a nearly 

existential financial shortfall. 

Now, with a certified fiscal plan in place, the administration and 

the board can discuss specific restructuring proposals with creditor 

groups. We hope to secure consensual restructurings under the provision of Title VI of PROMESA before other tools such as Title III 

are utilized. Much work remains to be done, but the certification 

of a detailed fiscal plan was a major milestone, one that we trust 

will provide the foundation for real economic growth and, over 

time, restore opportunity to the people of Puerto Rico. 

But even as we pursue and accomplish PROMESA’s required objectives of fiscal equilibrium, balanced budgets, and debt restructuring, Puerto Rico will hardly come out of its economic and fiscal 

crisis unless it also manages to restore economic growth. Reversing 

the economic contraction that has afflicted Puerto Rico’s economy 

for far too many years and restoring economic growth for the island 

are at the core of the board’s position in support of the government 

of Puerto Rico’s stated intention to review the terms and negotiate 

amendments to the PREPA RSA to lower the projected increases 

in energy costs that it requires. 

The efficient production of electricity is critical to the economic 

recovery of Puerto Rico, which, in turn, has a strong correlation to 

government tax revenue growth, and would have a significant impact in the future of primary surplus available for debt service on 

Puerto Rico debt obligations. For this reason, the board supports an 

expedited PREPA RSA negotiation between the government and 

creditors that results in the lowest electric power rate possible. 

Finally, the board also supports initiatives to strengthen the 

Puerto Rico Energy Commission. We believe that the model of an 

independent commission with oversight authority over the utility is 

the right approach to providing the necessary checks and balances 

as PREPA moves forward in its transition process. 

29 

Thank you, Mr. Chairman, for your leadership. And thanks to all 

Members for your attention to this matter. 

[The prepared statement of Mr. Carrio ́n follows:] 

PREPARED STATEMENT OF JOSE ́ B. CARRIO ́ N III, CHAIRMAN, FINANCIAL OVERSIGHT

AND MANAGEMENT BOARD FOR PUERTO RICO

Good morning. My name is Jose ́ Carrio ́n. I am the Chairman of the Financial 

Oversight and Management Board for Puerto Rico. 

I would like to thank Chairman LaMalfa for his leadership in holding this 

oversight hearing on ‘‘The Status of the Puerto Rico Electric Power Authority 

Restructuring Support Agreement.’’ I would also like to recognize and thank 

Ranking Member Torres, Vice Chair Gonza ́lez-Colo ́n and, indeed, all the members 

of this Subcommittee for their interest in and attention to this matter. 

Before addressing the specific subject of this hearing, though, I would like to take 

this opportunity to apprise the Subcommittee of the important progress the Board 

has accomplished since its appointment on August 31 of last year. 

During the debates leading to the enactment last June of the bipartisan Puerto 

Rico Oversight, Management and Economic Stability Act (‘‘PROMESA’’) that created 

the Oversight Board, Puerto Rico’s devastating financial crisis was constantly in the 

news. Since then, however, there has been relatively little coverage outside of 

Puerto Rico. 

So it is fair to ask: what kind of progress has the Oversight Board made in the 

last few months? 

The short answer is ‘‘a lot.’’ 

At our five public board meetings thus far—two in Puerto Rico and three in New 

York—we have adopted the Board’s bylaws and Code of Ethics, identified a number 

of Puerto Rico entities—including the Puerto Rico Electric Power Authority 

(‘‘PREPA’’)—as subject to the financial oversight requirements of PROMESA, carefully assessed the fiscal plan initially proposed by the prior governor of Puerto Rico, 

and listened to testimony from a wide range of stakeholders. In addition to the public meetings, the Board has met constantly both in person and by phone. 

One of the most difficult issues the Oversight Board has had to tackle in advancing the PROMESA agenda has been determining as accurately as possible just what 

the government of Puerto Rico’s revenues and expenses are. This is a far more challenging task than you, as Federal lawmakers, may imagine. The Government’s most 

recent audited financial statements cover the period ending June 30, 2014. If Puerto 

Rico’s finances were straightforward, it might not be difficult to bring these numbers up to date. But the government of Puerto Rico has well over 100 different 

governmental entities, and there are 18 different issuers of debt. 

To assist in the process, we have hired a remarkable group of advisors, including 

two key senior staff officers, interim executive director Ramo ́n Ruiz-Comas and general counsel Jaime El Koury, as well as a strategic advisory firm, two economists, 

a financial advisory firm, and an accounting firm, as well as an outside law firm 

and local Puerto Rico legal counsel. The Oversight Board and its advisors have 

worked closely with the government of Puerto Rico and its advisors, first with 

former Governor Alejandro Garcı ́a Padilla and, since January, with the new administration of Governor Ricardo Rossello ́ Nevares. 

Although assessing Puerto Rico’s revenues and expenses and setting the parameters for the fiscal plan have been our primary objectives, we also have participated 

with Governor Rossello ́’s advisors in dozens of meetings with Puerto Rico’s creditor 

groups, resuming conversations that were commenced in the prior administration. 

On January 18, we sent Governor Rossello ́ a substantial letter outlining the 

‘‘baseline scenario’’ for a fiscal plan—that is, the difference between Puerto Rico’s 

revenues and expenditures, assuming that Puerto Rico does not receive any new 

funding from Congress. Our findings confirmed just how dire Puerto Rico’s financial 

crisis is. The average expected deficit is $7 billion each year over the next 10 years. 

The letter outlined the kinds of savings that would need to be made and the additional revenue that would have to be generated in order to obtain fiscal balance. 

At Governor Rossello ́’s request, during our January 28, 2017 meeting, we extended the stay on creditor enforcement efforts from February 15 to May 1, as we 

were authorized to do under PROMESA, and gave the new administration a short 

extension of our original deadline for certifying a fiscal plan to March 15, 2017. 

On February 28, the Governor and his advisors submitted their proposed fiscal 

plan. Upon careful evaluation, we notified the Governor of certain deficiencies that 

would have to be corrected in order for the plan to comply with the 14 requirements 

set forth in PROMESA. On March 8, the Board released an independent analysis 

30 

conducted by Ernst & Young to confirm the Government’s baseline projections for 

the fiscal plan and also the bridge between the last audited financial statements of 

Fiscal Year 2014 and the Fiscal Year 2017 projections. Shortly thereafter, the 

Governor submitted an amended fiscal plan which the Board certified—with a 

couple of additional amendments—last Monday, March 13. 

The certified Fiscal Plan charts a path to achieve fiscal equilibrium in 3 years, 

provide adequate funding of essential services, maintain the solvency of government 

pension plans, restructure the Government’s long-term debts and obligations, and 

adopt the structural reforms necessary to restore economic growth and opportunity 

to all in Puerto Rico. 

Achieving these objectives will not be easy. The cuts are deep and, in some 

instances, will be painful. 

Overtime, the Government has made commitments to its constituents—including 

employees, pensioners, college students, enrollees in healthcare programs, bondholders and others—that cannot be met based on a realistic measure of the tax revenues the economy can currently support. However we define the problem, whether 

in terms of budget deficits, indebtedness, unfunded pensions, or the imminent risk 

of simply running out of money to pay bills, Puerto Rico faces a nearly existential 

financial shortfall. 

In any financial crisis, there is the temptation to believe that one can emerge 

without undue sacrifice if only others would bear the costs or if the elusive economic 

turn-around finally happened. The fact is that any real solution must involve all 

parties sharing in the effort, especially if it is painful. But all should also share in 

the opportunity for a better, more secure and prosperous future. 

Now, with a certified Fiscal Plan in place, the administration and the Board can 

discuss specific restructuring proposals with creditor groups. We hope to secure consensual restructurings under the provisions of Title VI of PROMESA. This is the 

main focus of the Board in the coming weeks. We believe that discussions with creditor groups need to yield a viable restructuring path on or before May 1, when the 

PROMESA stay expires, and before other tools under PROMESA are utilized, such 

as Title III. 

Throughout the process, the Board has been strongly committed to a ‘‘once and 

done’’ approach to Puerto Rico’s financial crisis. This means establishing a set of policy changes and debt restructuring agreements that, at least in expectation, should 

put the budget and economy back on track. We believe such an approach is necessary for Puerto Rico to effectively use the tools PROMESA has provided to genuinely solve Puerto Rico’s long-standing crisis, and to put the island on the path to 

a better future. 

PROMESA was enacted to build a path to fiscal stability, economic growth, equitable restructuring of the government’s debt and restored access to capital markets. 

Make no mistake: without the bipartisan PROMESA legislation, the island would 

be facing a financial and legal chaos right now, without hope of reversing the economic decline, and the sad exodus of more Puerto Ricans seeking to build a prosperous life for their families. Without truly massive changes, though, and without 

using the tools provided under PROMESA, Puerto Rico would face continued decline 

and deprivation. The people of Puerto Rico deserve better than that, and the Board 

has pledged its efforts to work toward a better future for everyone on the island. 

We are fully aware of how much work remains to be done. But the certification 

of a detailed fiscal plan on March 13 was a major milestone, one that we trust will 

provide the foundation for real economic growth and, over time, restore opportunity 

to the people of Puerto Rico. 

As a matter of fact, the restoration of economic growth for the island is at the 

core of the Board’s position in support of the government of Puerto Rico’s stated intention to review the terms of the PREPA Restructuring Support Agreement 

(‘‘RSA’’) subject of this hearing. 

One thing that every economist and consultant has agreed on is that PROMESA’s 

objectives for Puerto Rico cannot be attained without returning to positive economic 

growth. Even as we pursue and accomplish the required objectives of fiscal equilibrium, balanced budgets and debt restructuring, Puerto Rico will hardly come out 

of its economic and fiscal crisis unless it also manages to restore economic growth. 

To that end, the Oversight Board continues to work pursuant to PROMESA on 

formulating actions Puerto Rico can take to promote economic growth, including 

commercialization and privatization. 

In that spirit, recognizing the importance of reversing the economic contraction 

that has afflicted Puerto Rico’s economy for far too many years, the Board supports 

the administration’s stated objective of negotiating amendments to the PREPA RSA 

to lower the projected increases in energy costs that it requires. 

31 

The efficient production of electricity is critical to the economic recovery of Puerto 

Rico, which in turn has a strong correlation to government tax revenue growth, and 

would have a significant impact in the future Primary Surplus Available for Debt 

Service on Puerto Rico debt obligations. 

For this reason, the Board supports an expedited PREPA RSA negotiation between the Government and creditors that results in the lowest electric power rate 

possible. 

A lower Transition Charge and a more efficient PREPA are the two components 

that could result in retail rates that are affordable for consumers and low enough 

to attract and sustain commerce and industry in Puerto Rico. 

Finally, the Oversight Board also supports initiatives to support and strengthen 

the Puerto Rico Energy Commission. Although it has a relatively short track record, 

as it was created only a couple of years ago, we believe that the model of an independent Commission with oversight authority over the utility is the right approach 

to providing the necessary checks and balances as PREPA moves forward in its 

transformation process. 

Thank you, Mr. Chairman, for your leadership. And thanks to all the Members 

for your interest in and attention to this matter. 

QUESTIONS SUBMITTED FOR THE RECORD TO JOSE ́ B. CARRIO ́ N III 

Questions Submitted by Rep. Bishop 

Question 1. If discussions with creditor groups fail to yield a viable restructuring 

path on or before May 1, what is the Board’s timeline to seek Title III restructuring? 

Answer. The Board does not have a strict timeline for starting a Title III proceeding. That being said, we are continuing with our efforts to arrive at a voluntary 

consensual agreement with the various creditor groups and are preparing for any 

eventuality should those discussions not progress to completion. 

Questions Submitted by Rep. Grijalva 

Question 1. Has the Board received the report? [Report under PROMESA Section 

208(b) setting forth tax abatement agreements granted by the Commonwealth.] 

Answer. Pursuant to Section 208(b) of PROMESA, the Secretary of the Treasury 

of the Commonwealth of Puerto Rico provided tax-related information in a report 

(with attachments) dated February 28, 2017, copies of which are attached. 

Subsequently, a representative of the Board met with the Secretary to request additional information to satisfy the requirements of Section 208(b) of PROMESA, and 

on March 30, 2017, the Board wrote to the Secretary to follow up on such request. 

A copy of the Board’s letter is attached. 

Question 2. How could a fiscal plan be agreed to that cuts Government spending 

for public services and for payment of debts so drastically that does not require any 

further contribution from companies that represent a third of the GDP and high net 

worth individuals on top of that who pay so little in tax now? 

Answer. There have been material tax increases in Puerto Rico during the last 

couple of years. Further increasing taxes on corporations and individuals risks 

higher migration rates out of Puerto Rico that could undermine an economic 

recovery of the island. 

Attachment 

32 

ATTACHMENT 

FINANCIAL OVERSIGHT AND MANAGEMENT BOARD

FOR PUERTO RICO 

SAN JUAN, PUERTO RICO

March 30, 2017 

Hon. Rau ́l Maldonado 

Secretary of the Treasury 

10 Paseo Covadonga 

San Juan, PR 00901 

Dear Secretary Maldonado: 

We are in receipt of the PROMESA Tax Incentives Report prepared by the 

Governor of Puerto Rico and the Secretary of the Treasury, delivered to the 

Oversight Board on February 28, 2017 (the ‘‘Report’’) and provided to comply with 

the obligations of Section 208(b) of the Puerto Rico Oversight, Management, and 

Economic Stability Act (‘‘PROMESA’’). 

PROMESA Section 104(a)(2) requires the Government, notwithstanding any other 

provision of law, to provide the Oversight Board with copies of all documents necessary to enable the Oversight Board to carry out its responsibilities under this Act. 

Pursuant to PROMESA Sections 104(a)(2) and 208(b), the Oversight Board requests 

prompt delivery of the documents listed in this letter. 

The Oversight Board is tasked with extensive responsibilities under PROMESA 

for the purpose of ensuring that the Government of Puerto Rico achieves fiscal responsibility and access to the capital markets. As part of the Oversight Board’s 

responsibilities, it must obtain detailed reports regarding the finances, obligations, 

cash flows and other significant fiscal information from the Government of Puerto 

Rico, so that the Oversight Board can provide its own assessments of Puerto Rico’s 

fiscal situation and propose solutions. As tax revenues are an essential part of the 

fiscal stability of Puerto Rico, information regarding the tax abatement and other 

tax relief agreements that the Government of Puerto Rico has entered is important 

to assist the Oversight Board in its duties. Under Section 208(b) of PROMESA the 

Governor is obligated to provide a report ‘‘documenting all existing discretionary tax 

abatement or similar tax relief agreements to which’’ the Government of Puerto Rico 

(or one of its instrumentalities) is a party. 

The Report does not meet the requirements of Section 208(b) of PROMESA. The 

Report itself primarily contains a summary of how various statutory and other provisions of Puerto Rico law operate to provide tax incentives, along with a series of 

exhibits listing various tax incentive provisions (as well as one exhibit listing the 

total amount of tax credits offered, in aggregate, under various categories). 

Section 208(b) of PROMESA requires the provision of more information. 

PROMESA mandates that ‘‘all existing discretionary tax abatement or similar tax 

relief agreements’’ are to be documented in the report. Further, the agreements to 

be provided include those entered into by the Government of Puerto Rico plus any 

‘‘territorial instrumentality’’—which would include political subdivisions such as municipalities. A report that principally contains mere citations of various tax incentive 

provisions, with a spreadsheet setting forth the aggregate tax credits provided under 

broadly-defined categories, is insufficient. 

To comply with Section 208(b), the Report must be supplemented by the following 

information, at the minimum: 

• A copy of every discretionary tax abatement or other tax relief agreement entered into by Puerto Rico or any instrumentality (including municipalities) of 

Puerto Rico that is currently effective and that has resulted in, or could result 

in, aggregate tax savings to the taxpayer that is a party to such agreement 

of an amount equal to or greater than $5 million, including amendments, 

modifications, or adjustments thereto—including any closing agreements that 

meet the above conditions that the Puerto Rico Treasury Department issued 

before the restrictions on the Treasury Secretary’s authority under Section 

6051.07 of the Puerto Rico Internal Revenue Code of 2011 became effective; 

• For each such agreement, a description of the material tax benefits (including 

beneficial tax rates, credits, partial or total exemptions to tax, or other adjustments applicable to such taxpayer) granted by such agreement; 

33 

• For each such agreement, a description of any and all material obligations of 

the taxpayer, Puerto Rico or the relevant instrumentality of Puerto Rico imposed by such agreement—including, without limitation, any requirements 

imposed on taxpayers with respect to investments in Puerto Rico, employment 

of residents of Puerto Rico, or the like; 

• For each such agreement, a summary of the total value of the tax benefits 

granted under such agreement to the extent calculable; and 

• For each such agreement, a summary of any other material term or provision 

of the agreement (including, without limitation, effective dates or expected 

dates of expiration, if any, for such agreement). 

Without the information specified above, the Government has failed to comply 

timely with Section 208(b) of PROMESA. To remedy such violation, the Oversight 

Board requests that the above information be provided in the form of a supplemental report by April 30, 2017. As you and Ramo ́n M. Ruiz-Comas, the Oversight 

Board’s Deputy Executive Director, discussed during a meeting this past Monday, 

March 27, 2017, we understand that the required information is not centralized in 

a single location and that this poses certain difficulties in terms of document production, but we expect that you will exert your best efforts to comply with the 

requirements of Section 208(b). To the extent, if any, the Government believes a requested document is outside the scope of PROMESA Section 208(b), the Oversight 

Board also requests the document pursuant to Section 104(a)(2) of PROMESA. 

Sincerely, 

JOSE ́ B. CARRIO ́ N III, 

Chairman. 

Attachment 

PROMESA: 

(b) REPORT ON DISCRETIONARY TAX ABATEMENT AGREEMENTS.—Within 

six months of the establishment of the Oversight Board, the Governor shall 

submit a report to the Oversight Board documenting all discretionary tax abatement or similar tax relief agreements to which the territorial government, or any 

territorial instrumentality, is a party,’’ 

INTRODUCTION OF PUERTO RICO TAX INCENTIVES 

The Government of Puerto Rico provides tax incentives or benefits to promote 

Economic Development. Tax incentives are directed to encourage specific industries 

and activities such as manufacturing, agriculture, tourism, exports, technology, 

among others that are considered key industries or activities for Puerto Rico’s economy. The tax benefits are codified in the Puerto Rico Internal Revenue Code of 

2011, as amended, (‘‘Code’’) and various tax incentives acts. Granted tax incentives 

are nondiscretionary, but must be issued according to specific requirements provided 

by law and regulations. 

In general, the tax incentives include reduced income tax rates, tax exemptions on 

dividends and profit distributions, special deductions and credits, and exemptions on 

property and local/municipal taxes. Some of these tax incentives are claimed by taxpayers in their income tax return, subject to compliance as required by law and 

regulations. 

Puerto Rico’s tax incentives require a pre-approval from one or more agencies of the 

Government of Puerto Rico and the issuance of a tax incentive certificate or a grant 

of the tax benefits, i.e. agreement between the Government of Puerto Rico and a 

taxpayer with force of contract. 

The Administration of Governor Ricardo Rossello ́ has started a comprehensive analysis of all Puerto Rico’s tax incentives acts. The purpose of said analysis is to determine the economic benefit of each incentive vis-a`-vis the Governmental expenditure. 

The goal is to create a new legal framework for incentives with ascertainable and 

measurable impact to the economic growth of Puerto Rico. 

REPORT 

The information included in this report is limited to income tax benefits or incentives, i.e. preferential rates, deductions, exemptions and credits to income tax. This 

report does not include property or local/municipal tax incentives that are provided 

by law and the municipalities of Puerto Rico. 

34 

Exhibit A. Lists the Puerto Rico tax incentives acts. 

The Government of Puerto Rico may exercise certain level of subjectivity in the evaluation and approval of an application based on the economic development elements 

of the law and regulations. 

Exhibit B. Contains the quantity of grants of tax incentives under the most 

prominent tax incentives acts. 

Exhibit C. Includes a summary of the outstanding tax credits issued under various 

tax incentives acts, and the tax credits that are under evaluation. Please note that 

taxpayer’s credit requests through tax returns are not included in this report. 

Most of our incentive acts allow a tax credit to be sold by one taxpayer to another. 

This means that a taxpayer with a credit grant may sell the credit if it does not 

reduce the taxpayer’s taxes; This ability to sell credit grants results in the credits 

to be almost always claimed in full. 

Exhibit D. English Version of Section 6051.07 of the Code regarding Closing 

Agreements by the Secretary of Puerto Rico Treasury Department 

Under Section 6051.07 of the Code, the Secretary of the Treasury is authorized to 

enter into written closing agreements with any person regarding the tax liability 

levied by the Code for any taxable period. The Secretary is not authorized to enter 

into closing agreements to offer preferential/lower rates and/or grant tax deductions 

or credits to taxpayers not otherwise recognized by law. 

***** 

Exhibit A.—Puerto Rico Tax Incentives 

1. Act No. 73–2008 (Puerto Rico Economic Development Incentives Act) 

2. Act No. 183–2001 (PR Conservation Easement Act) 

3. Act No. 27–2011 (Film Industry Economic Incentives Act) 

4. Act No. 74–2010 (Tourism Development Incentives Act) 

5. Act No. 98–2001 (Housing Infrastructure Investment Tax Incentives Act) 

6. Act No. 77–2015 (Housing Rehabilitation for Elderly and Low Income Families 

Incentives Act) 

7. Act No. 212–2002 (Revitalization of the Urban Centers Act) 

8. Act No. 159–2011 (Solid Waste Reduction, Disposal and Treatment Facility Investment Incentives Act) 

9. Act No. 46–2000 (Capital Investment Fund Act) 

10. Act No. 178–2000 (Santurce Theater District Creation Act) 

11. Act No. 1–2011 (Internal Revenue Code of 2011) 

12. Act No. 225–1995 (Agriculture Tax Incentives Act) 

13. Act No. 20–2012 (Act to Promote the Exportation of Services) 

14. Act No. 22–2012 (Act to Promote the Transfer of Investors to Puerto Rico) 

15. Act No. 14–2017 (Medical Professional Incentives Act) 

16. Act No. 120–2014 (PyMES Employment Generation and Retention Incentives 

Act) 

17. Act No. 135–2014 (Young Entrepreneurs Incentives and Financing Act) 

18. Act No. 83–2010 (Renewable Energy Incentives Act) 

19. Act No. 168–1968 (Hospital Facilities Tax Incentives Act) 

20. Act No. 135–1945 (Public Carrier in the Passenger Air Transportation Business Incentives Act ) 

21. Act No. 148–1988 (Fine Arts Institution Tax Incentives Act) 

22. Act No. 47–1987 (Public & Private Sector New Housing Operation Co-participation Act ) 

23. Act No. 165–1996 (Low Income Elderly Rental Housing Program Act) 

24. Act No. 244–2003 (Early Life Assistance Housing Project Creation Act) 

25. Act No. 239–2004 (General Cooperative Act of 2004) 

26. Act No. 516–2004 (Integral Development of the Book Industry Incentives Act) 

27. Act No. 489–2004 (Comprehensive Development of the Special Planning Institute of Can ̃ o Martı ́n Pen ̃a) 

28. Act No. 185–2014 (Private Equity Fund Act) 

29. Act No. 52–1989 (International Banking Center Regulation Act) 

30. Act No. 7–1955 (Historical Zone Tax Incentives Act) 

31. Act No. 148–1948, (Fine Arts Institution Tax Incentives Act) 

32. Act No. 72–1962 (Puerto Rico Milk Industry Tax Incentives Act) 

33. Act No. 14–1970 (Production and Sale of Puerto Rican Literary, Artistic and 

Craftsmanship Work Act) 

35 

34. Act No. 54–1971 (Flowers and Ornamental Plant Commercial Production Tax 

Incentives Act) 

35. Act No. 124–1993 (Low-Income Housing Subsidy Program Act) 

36. Act No. 75–1995 (Rı ́o Piedras Rehabilitation Special Act) 

37. Act No. 14–1996 (The Castan ̃ er Development Special Act) 

38. Act No. 213–2000 (Low-Income Housing for handicapped and Elderly Individuals Act) 

39. Act No. 140–2001 (Low or Moderate Income Family Housing Construction or 

Rehabilitation Investment Incentives Act) 

40. Act No. 399–2004 (International Insurers and Reinsurers Act) 

41. Act No. 132–2010 (Real Estate Market Stimulus Act) 

42. Act No. 216–2011 (Transition to the Housing Impulse Program Act) 

43. Act No. 226–2011 (Program to Stimulate the Acquisition and Investment of 

Accumulated New Housing Inventory) 

44. Act No. 273–2012 (International Financial Center Incentives Act) 

45. Act No. 1–2013 (Employment Now Act) 

46. Act No. 24–2015 (Puerto Rico Talent Retention Incentives Act) 

47. Act No. 135–1997 (Tax Incentives Act of 1998) 

48. Act No. 8–1987 (Puerto Rico Tax Incentives Act of 1987) 

49. Act No. 126–1966 (Maritime Transportation Act) 

50. Act No. 78–1993 (Tourism Development Incentives Act of 1993) 

Exhibit B.—Current Tax Decrees and Exemptions 

Act No. 120–1994 & 1–2011 (Internal Revenue Code of 1994 & 2011): 15 

Act No. 225–1995 (Agriculture Tax Incentives Act): 4,207 

Act No. 7–1955 (Historical Zone Tax Incentives Act): 286 

Act No. 20–2012 (Act to Promote the Exportation of Services): 607 

Act No. 22–2012 (Act to Promote the Transfer of Investors to Puerto Rico): 971 

Act No. 73–2008 (Puerto Rico Economic Development Incentive Act): 555 

Act No. 74–2010 (Tourism Development Incentive Act): 250 

Act No. 8–1987 (Puerto Rico Tax Incentive Act): 16 

Act No. 27–2011 (Film Industry Economic Incentives Act): 121 

Act No. 78–1993 (Tourism Development Incentives Act of 1993): 359 

Act No. 75–1995 (Rı ́o Piedras Rehabilitation Special Act): 1 

Act No. 83–2010 (Green Energy Act of Puerto Rico): 72 

Act No. 126–1966 (Maritime Transportation Act): 1 

Act No. 135–1997 (Tax Incentives Act of 1998): 991 

Act No. 168–1968 (Hospital Facilities Tax Incentive Act): 111 

Act No. 52–1983 (Tourism Development Incentive Act of 1983): 13 

Act No. 273–2012 (International Financial Center Incentives Act): 21 

Exhibit C.—Tax Credits 

36 

Exhibit D.—Section 6051.07 of the Code 

Law 33207 (2011–PRIRC § 6051.07)—Closing agreements. 

(a) Authorization. The Secretary or his authorized representative is authorized to 

enter into an agreement in writing with any person relating to the liability of such 

person, or of the person or estate for whom he acts, in respect of any tax levied by 

this Code, for any taxable period. Provided that in a closing agreement the 

Secretary shall not: 

(1) accept, after June 30, 2016, future tax payments that are not owed by the 

taxpayer at the time of the executing the closing agreement; 

(2) grant or apply to a transaction covered by the closing agreement, preferential 

or lower rates than those established in this Code or in any other special law 

applicable thereof; 

(3) grant or apply deductions or tax credit that are not allowed by this Code or 

by any applicable special law; 

(4) classify as overpayment or apply as an overpayment, an amount not consisting 

of taxes previously paid; 

(5) extend statute of limitations, except as allowed by this Code; 

(6) condone interest or surcharges, except when allowed by this Code; 

(7) modify the basis nor the amount of the gain on the sale of assets, in a manner 

contrary to the provisions of this Code; 

(8) waive the requirement of filing returns, unless the return is part of and is 

included with the closing agreement; or 

(9) grant agreements on matters or issues for which he is not expressly authorized 

to exercise his discretion. 

(b) Finality. Such agreement once executed shall be final and conclusive, and 

except upon a showing of fraud or malfeasance, or misrepresentation of a material 

fact—— 

(1) The case shall not be reopened as to the matters agreed upon nor the agreement modified by any officer, employee, or agent of the Government of Puerto 

Rico, and 

(2) In any suit, action, proceeding, such agreement, or any determination, assessment, collection, payment, abatement, refund, or credit made in accordance 

therewith shall not be annulled, modified, set aside, or disregarded. 

(c) Every closing agreement shall expressly establish that the provisions regarding 

or applicable to taxable events occurring after the execution of the closing agreement shall be subject to any law amendment approved after the date of the 

execution of the referred to agreement. 

(d) Penalties. The penalties for violations of closing agreements are contained in 

section 6030 of this subtitle. 

(e) The Secretary shall establish a registry of closing agreements identifying each 

agreement per taxpayer. Each taxpayer may have access to the registry via internet 

but only to the agreements executed by him with the Treasury Department. 

Historical Notes 

In 2015, 

Act 159–2015 amended sub sec. (a) of this section to add the provision containing 

9 limitations to the Secretary’s authority. Approved and effective September 30, 

2015. 

Mr. LAMALFA. Thank you, Mr. Carrio ́n. 

Next we will recognize Mr. Benı ́tez for 5 minutes. 

37 

STATEMENT OF LUIS BENI ́TEZ HERNA ́ NDEZ, CHAIRMAN, 

PREPA GOVERNING BOARD, SAN JUAN, PUERTO RICO 

Mr. BENI ́TEZ. Thank you, Chairman LaMalfa, Ranking Member 

Torres, Commissioner Gonza ́lez, and members of this Committee. 

My name is Luis Benı ́tez, and I am the Chairman of PREPA’s 

Governing Board. PREPA produces and delivers virtually all the 

electric power consumed in Puerto Rico. Its future is central to the 

economic growth and the well-being of Puerto Rico. 

Thank you for inviting me to this discussion on PREPA’s 

progress in restructuring over the past several years. I will speak 

briefly about the challenge of PREPA to the RSA, how the RSA addressed those challenges, and the current status of the RSA. 

As I described in my written testimony, in summer 2014, PREPA 

faced a severe financial and liquidity crisis. That threatened 

PREPA’s ability to deliver electric power to Puerto Rico. To respond 

to those challenges, after many months of negotiation, PREPA and 

bondholders of 70 percent of its debt signed the RSA, the Restructuring Support Agreement. 

Importantly, the RSA requires a sharing of the burden of the 

PREPA transformation to ensure neither the ratepayer nor the 

creditors should carry the burden alone. The RSA provides PREPA 

with restructure of the debt principal, significant interest rate 

relief, and liquidity to continue this operation. Besides a financial 

restructuring, the RSA set in motion a top-bottom reform of 

PREPA, including improvement of operation, an independent government, and investment in infrastructure. 

Over the last few years, PREPA has attained great efforts to implement improvement in transactions contemplated by the RSA. 

PREPA obtained passage through the PREPA Revitalization Act of 

Puerto Rico last year, in February 2016, which, among other 

things, authorized the exchange of PREPA legacy bonds for new 

securitization bonds and creates a new independent governing 

board through extended executive search process outside the political process. 

PREPA also obtained approvals from its regulator, the Puerto 

Rico Energy Commission, to a rate increase and new securitization 

charge required to implement the RSA. Together that rate will increase by approximately $.04 per kilowatt hour. 

PREPA received Energy Commission approval of a modified 

Integrated Resource plan which permits PREPA to implement substantially all of this capital plan envisioned by the RSA. PREPA 

continues to resolve legal challenges to the PREPA Revitalization 

Act and propose securitization challenge invalidation proceeding 

before the Puerto Rico court. To date we have won summary judgment in the most significant case, and we have obtained dismissal 

in two cases. 

After Congress passed PROMESA in June 2016, PREPA immediately began intensive discussion with creditors of a potential 

change to the RSA in light of PROMESA and concern about the 

cost of electricity in Puerto Rico. The creditors, however, hesitated 

to agree to any changes because of the possibility that the incoming 

governor and his new administration would have different views 

about the RSA and PREPA’s restructuring. 

38 

Finally, in late January 2017, after several extensions of the 

RSA, PREPA and its creditors reached agreement in principle to 

modify certain terms of the RSA, subject to approval by the Puerto 

Rico Fiscal Agency and Financial Advisory Authority (AAFAF). 

Ultimately, this modification will help provide additional savings 

to PREPA and decrease by $.01 per kilowatt hour the electricity 

rate contemplated by the RSA for each of the next 5 years. In addition, these modifications will eliminate the investment grade rating 

requirement for the securitization bonds. However, the agreement, 

in principle, was not executed, because AAFAF assumed responsibility for creditor negotiations on January 27, 2017, following the 

enactment of Act 2 of 2017 by the legislature of Puerto Rico. This 

Act grants AAFAF the sole responsibility to renegotiate, restructure, and reach agreement with PREPA’s creditors since PREPA’s 

Governing Board have that leader involvement with the restructuring discussion. 

Although Puerto Rico is not currently involved in base discussion, PREPA’s Governing Board continues to support the transformation and modernization of PREPA, as contemplated by the 

RSA, in addition to governing board support, all efforts to improve 

the RSA for relief of Puerto Rico and PREPA’s consumer. 

Mr. LAMALFA. We need to wrap up, sir, thank you. 

Mr. BENI ́TEZ. We stand ready to help implement any agreement, 

and sincerely hope agreement can be reached in the near term so 

that PREPA can focus on providing infrastructure and obtaining 

third-party investment. Thank you for the opportunity to participate in this hearing on behalf of PREPA and the Governing Board. 

Thank you. 

[The prepared statement of Mr. Benı ́tez follows:] 

PREPARED STATEMENT OF PROFESSOR LUIS BENI ́TEZ HERNA ́ NDEZ, CHAIRMAN, 

GOVERNING BOARD, PUERTO RICO ELECTRIC POWER AUTHORITY

Chairman of the House Committee on Natural Resources Bishop, Subcommittee 

Chairman LaMalfa, Ranking Member Torres, Commissioner Gonza ́lez and members 

of the Subcommittee: my name is Professor Luis Benı ́tez Herna ́ndez, and I am the 

Chairman of the PREPA Governing Board. I have served in this role since 

November 2016. Prior to becoming Chairman, I served as the Vice Chair and the 

Chairman of the Finance Committee of the PREPA Governing Board since June 

2014. I am also the former President of the Puerto Rico Economists Association, the 

former Chief Economist and Director of the Economic and Social Planning Program 

of the Puerto Rico Planning Board, and the former Co-President of the Special 

Commission for the Fiscal and Tax Reform. I have served as an economics litigation 

expert witness and an adjunct professor of economics at the University of Puerto 

Rico. 

I want to thank the Subcommittee for giving PREPA the opportunity to participate in this hearing. Despite significant progress over the past few years, PREPA 

continues to face a difficult financial situation and we greatly appreciate the 

Subcommittee’s interest in our ongoing restructuring efforts. 

PREPA was created for the purpose of conserving, developing and utilizing Puerto 

Rico’s energy resources to promote the general welfare of Puerto Rico’s residents 

and to increase commerce and prosperity. PREPA produces and delivers virtually 

all of the electric power consumed in Puerto Rico. Its future is central to the economic growth and well-being of Puerto Rico. 

Since my appointment to the PREPA Governing Board, I have been a part of 

PREPA’s efforts to address the fundamental operational deficiencies and financial 

difficulties that have hindered PREPA and the people and businesses it serves. Our 

efforts to restructure PREPA led to the execution of the Restructuring Support 

Agreement (RSA) in December 2015 that is the subject matter of today’s hearing. 

39 

BACKGROUND

As the Subcommittee may recall from prior testimony before the Subcommittee 

on Energy and Mineral Resources in January 2016, PREPA has experienced financial difficulties for several years. As demand for power declined during the recession, PREPA took on considerable debt to fund its operating expenses rather than 

raise base rates. By the summer of 2014, PREPA faced a severe financial and liquidity crisis, created by a combination of recurring negative cash-flow, the ongoing recession, outdated generation facilities, substantial debt maturities and an inability 

to access the capital markets. This crisis—magnified by PREPA’s inability at that 

time to access a Federal restructuring regime—threatened PREPA’s ability to operate and imperiled PREPA’s ability to provide energy to Puerto Rico. 

PREPA’s problems did not arise overnight, or even in a few years—they developed 

and intensified over a period of decades. During this time, management and other 

strategic decisions, including rate setting, staffing and capital investment were too 

often based on political or electoral considerations rather than best practices or business imperatives. As a result of this dynamic, PREPA suffered from regular employee reassignments and had difficulty conducting rational long-term planning, 

which compounded existing challenges. 

These deep-rooted problems demanded a comprehensive solution. First, the 

PREPA Governing Board and its advisors stabilized the situation by PREPA’s 

signing of long-term forbearance agreements with creditors representing more than 

60 percent of PREPA’s debt, including its fuel line lenders. These agreements gave 

PREPA relief on $700 million of maturing debt, increased the threshold necessary 

for the exercise of bondholder remedies, provided relief from PREPA’s obligation to 

make over $600 million in annual interest and sinking fund payments, and permitted a reallocation of construction reserves to operating expenses. Second, the 

PREPA Governing Board retained financial advisors and implemented cash-flow 

forecasting and other operational controls. Last, the PREPA Governing Board and 

its advisors designed a comprehensive business and restructuring plan, based on the 

principle of burden-sharing across stakeholders, and worked closely with PREPA’s 

creditors to negotiate the RSA and subsequent amendments and supplements. 

KEY TERMS OF PREPA’S RESTRUCTURING SUPPORT AGREEMENT

In December 2015, PREPA and creditors holding or controlling approximately 70 

percent of its debt, including bondholders, fuel line credit lenders and bond insurers, 

signed the RSA to address PREPA’s fiscal and operational challenges. The RSA 

required all of PREPA’s stakeholders to contribute to its rehabilitation and transformation. It is the product of good faith negotiations by all parties, particularly considering that when it was signed, PREPA had no access to any legal mechanism like 

PROMESA to facilitate its restructuring. 

• For the uninsured bondholders, the RSA provides for a 15 percent principal 

haircut, a fixed interest rate that is lower than the current rates and a 5- 

year principal holiday. Although most of the media attention has been on the 

15 percent principal haircut, the most important financial benefit of the RSA 

is that it reduces the interest rate from approximately 5.5 percent to 

4.75 percent per annum and extends principal maturities by 5 years. In exchange, bondholders would receive securitization bonds to be issued by a new, 

bankruptcy remote entity known as the PREPA Revitalization Corporation 

that is authorized to impose and collect a non-bypassable transition charge 

to cover the costs of refinancing at a discount PREPA’s legacy bond debt. 

• PREPA’s fuel line credit lenders were given the option of converting their existing credit agreements into term loans, with a fixed interest rate of 5.75 

percent per annum, to be repaid over a period of 6 years in accordance with 

an agreed amortization schedule, or exchanging all or part of the principal 

due under the existing fuel line credit agreements for securitization bonds to 

be issued on the same terms as those issued and exchanged for the uninsured 

bonds, including the 15 percent principal haircut. 

• PREPA’s bond insurers agreed to issue approximately $460 million in surety 

insurance policies to support a significant portion of the debt service reserve 

fund requirement for the securitization bonds. 

The RSA, however, is not just about a financial restructuring. The RSA is the 

heart of PREPA’s overall strategy to transform into a modern and reliable utility. 

40 

As part of the RSA, PREPA agreed to seek reasonable rate increases, given that 

PREPA’s base rates had not been increased since 1989 and that its current rate 

structure did not fully cover its costs. At the time we executed the RSA, our financial advisors estimated that there was an 8-cent-per-kilowatt-hour gap between the 

existing base rate and the rate needed to cover PREPA’s costs including capital improvements and debt service. Consistent with the RSA, PREPA sought and obtained 

the approval from the Puerto Rico Energy Commission to implement a rate increase 

of approximately 4 cents per kilowatt hour (including both the new transition charge 

and a PREPA rate increase). 

Pursuant to the RSA, PREPA obtained more than $400 million in short term 

‘‘relending’’ financings from the creditors who had signed the RSA. Under these 

financings, RSA creditors agreed to purchase new PREPA bonds in the same 

amount they received in debt service payments from PREPA on various principal 

and interest payment dates. These relending arrangements allowed PREPA to continue making debt service payments while conserving liquidity in an uncertain time. 

Without these relending arrangements, PREPA would have run out of money. 

In addition, the RSA contemplates important operational improvements with a 

goal of increasing efficiencies, reducing costs and implementing best industry practices. PREPA had long been plagued by inadequate procedures and controls for 

managing fuel supply, inventory, and collection efforts. During this time, we worked 

with our advisors to achieve $267 million in one-time savings and $212 million in 

recurring annual operating expense savings. 

The RSA also provides a framework for the modernization of PREPA’s outdated 

and inefficient generation fleet and transmission system, which have been responsible for rising costs and decreasing reliability to customers over time. It was also 

necessary to overcome limitations on diversifying PREPA’s fuel mix, and to implement necessary safety procedures and compliance measures. 

The long-term capital plan that was developed as part of the RSA and PREPA’s 

Integrated Resource Plan calls for approximately $2.4 billion of investment in new 

infrastructure—including sustainable renewable energy initiatives—over the next 

10–15 years. Phase 1 of the investment plan calls for upgrades at the Palo Seco 

plant and construction of the Aguirre Offshore GasPort to improve fuel diversity, 

meet Federal Mercury and Air Toxics Standards (MATS), and increase system reliability. Phase 2 comprehends improvements in energy efficiency and upgrades to the 

existing the fleet through repowerings or public-private partnerships (P3). 

While PREPA presently could use the savings achieved through operational improvements and the debt restructuring to fund this capital improvement plan, our 

goal has been to provide a platform for third-party investment through a competitive bidding process. We believe there is substantial interest by the private sector 

in making new infrastructure investments as demonstrated by a successful Request 

of Expressions of Interest process we ran in Fall 2015. At that time, 31 proposals 

were received from 16 participants, which included many major market players. All 

participants expressed an interest in helping PREPA modernize its infrastructure, 

whether through P3s or other approaches. Importantly, all of the participating investors said that PREPA must fix its balance sheet before the investors would make 

any investments. 

The RSA also required the creation of an independent governing board comprised 

of non-political appointees with substantial private sector experience. Pursuant to 

the RSA and the PREPA Revitalization Act (Act 4–2016), PREPA retained an independent, internationally recognized search firm (Russell Reynolds) to identify and 

interview qualified candidates. Governor Padilla then appointed a slate of candidates from the list of nominees prepared by the search firm, and the Puerto Rico 

Senate confirmed the Governor’s appointments in December 2016. 

Implementation of the RSA has required significant effort. For example, PREPA 

obtained passage of the PREPA Revitalization Act in February 2016. Among other 

things, this law authorized the issuance of the securitization bonds in exchange for 

PREPA’s legacy bonds. In June 2016, PREPA obtained Energy Commission approval 

of the transition charge to support the securitization bonds and also obtained provisional approval of a 1.3 cents per kilowatt hour rate increase. In January 2017, 

PREPA obtained final approval of a 1.03 cents per kilowatt hour permanent rate 

increase. This rate increase has to be seen in the context of the rate saving contributions from creditors (so far in the range of approximately 5 cents per kilowatt hour) 

and the operational improvements of approximately 1.4 cents per kilowatt hour (the 

equivalent of $250 million). In addition, in the summer of 2016, PREPA received 

Energy Commission approval of a modified Integrated Resource Plan that permits 

PREPA to implement substantially all of the capital plan envisioned by the RSA, 

except for the Aguirre Offshore GasPort Project (AOGP). We continue to pursue 

41 

approval of the AOGP project, which is also included in Governor Ricardo Rossello ́

Nevares’ energy reform plan. 

In addition, PREPA has been working to resolve pending challenges to the RSA 

transactions. As part of the PREPA Revitalization Act, Puerto Rico established a 

process allowing all interested parties to challenge the PREPA Revitalization Act 

and the RSA transactions before the expiration of two statutes of repose. In total, 

seven different lawsuits were filed challenging the RSA transactions. Three of these 

lawsuits have been dismissed, leaving four remaining. PREPA won summary judgment in one of the remaining four cases, and that case is now on appeal before the 

Puerto Rico Supreme Court. The remaining three cases are administrative law 

cases, which have been consolidated into one proceeding by the courts, and we hope 

to resolve them in the next 3 or 4 months. PREPA will need to continue to vigorously defend against these lawsuits and remains confident that the courts should 

rule in PREPA’s favor. 

ENACTMENT OF PROMESA

As this Subcommittee knows, Congress passed the Puerto Rico Oversight, 

Management and Economic Stability Act (‘‘PROMESA’’) in June 2016. Following its 

passage, PREPA immediately began discussions with creditors about potential 

changes to the RSA in light of PROMESA. For example, the RSA assumed that approximately $700 million in PREPA legacy bonds would remain obligations of 

PREPA after consummation of the restructuring because we assumed that some 

creditors would not voluntarily participate in the exchange. PROMESA gave us the 

opportunity to bind all bondholders to the exchange into securitization bonds, as 

long as we met the requisite voting threshold, but we needed to adjust parts of the 

deal (particularly the size of the debt service reserve or the amount of the monoline 

surety). In addition, after executing the RSA, it became clear that the rating agencies were not in position to immediately assign an investment grade rating. At the 

same time, to make the deal work for PREPA, we needed to fix the interest rates 

at the lowest interest rate contemplated by the RSA, even without an investment 

grade rating. 

As PREPA and its advisors were thinking about ways to adjust the RSA in light 

of PROMESA, we were also hearing heightened concerns from the public, the 

Oversight Board and the Congressional Task Force on Economic Growth in Puerto 

Rico about the costs of electricity in Puerto Rico and the potential negative impact 

such costs could have on Puerto Rico’s economy. With that in mind, the current 

Governing Board instructed PREPA’s advisors to seek additional creditor concessions that maintained the key economics of the RSA but also provided rate relief 

over the next 5 years. 

As we approached an RSA automatic termination date of December 15, 2016, our 

management and advisory teams held intensive discussions with our creditors. We 

believed, and continue to believe, that maintaining the RSA was critical to PREPA’s 

future. Then, as now, if the RSA were terminated, $700 million in fuel line debt 

and more than $375 million in relending bonds would become immediately due. In 

addition, termination would trigger potential disputes with fuel suppliers and other 

counterparties who may seek to terminate contracts or otherwise reduce credit. At 

the same time, we were (and continue to be) keenly aware that many people in 

Puerto Rico are expecting improvements to the deal in light of the availability of 

the restructuring regime provided under PROMESA. 

Not surprisingly, PREPA’s creditors were hesitant to address any changes in 

December given the uncertain political situation and the possibility that the incoming Governor and his new administration would have different views about the RSA 

and PREPA’s restructuring. As a result, the creditors and PREPA agreed to extend 

the RSA until January 31, 2017 to give PREPA and its creditors more time to finalize adjustments in light of PROMESA and to allow the new administration to weigh 

in with its views. 

In the face of this deadline, in late January 2017, PREPA and its creditors 

reached an agreement in principle to modify certain terms of the RSA, subject to 

approval by the Puerto Rico Fiscal Agency and Financial Advisory Authority 

(AAFAF). Among other things, these modifications included eliminating the investment grade rating requirement on the securitization bonds and increasing the 

amount of the surety to be posted by the monoline insurers. In total, these modifications would have reduced the electricity rates contemplated by the RSA for each of 

the next 5 years by approximately 1 cent per kilowatt hour. The agreement in principle, however, was not executed because AAFAF assumed responsibility for creditor 

negotiations on January 27, 2017. 

42 

CURRENT STATUS OF RSA DISCUSSIONS

The enactment of Act 2–2017 by the Legislature of Puerto Rico in January of this 

year granted AAFAF the sole responsibility to renegotiate, restructure and reach 

agreement with PREPA’s creditors. As a result, PREPA and its Governing Board 

have not been involved with the restructuring discussions since January 27, 2017, 

when AAFAF assumed this role. Of course, PREPA’s Governing Board continues to 

support the transformation and modernization of PREPA, especially efforts to improve PREPA’s infrastructure and obtain third-party investment through P3 

projects and otherwise. In addition, PREPA’s Governing Board—whose members 

have significant experience working with distressed companies such as General 

Motors—supports ongoing efforts to improve the terms of the RSA for the benefit 

of the people and businesses of Puerto Rico. The enactment of PROMESA presents 

a once-in-a-lifetime opportunity to address PREPA’s financial situation and to obtain the best deal possible from the creditors, and Puerto Rico’s economic and fiscal 

situation demand that PREPA succeeds in doing so. We therefore stand ready to implement any agreement that is reached with the creditors to improve the terms of 

the RSA. 

I would like to thank the Subcommittee for giving me the opportunity to 

participate in this hearing on behalf of PREPA and its Governing Board. 

QUESTIONS SUBMITTED FOR THE RECORD BY REP. GRIJALVA TO MR. LUIS BENI ́TEZ, 

CHAIRMAN, PREPA GOVERNING BOARD

Question 1. PREPA has had several problems. Perhaps the biggest—and the one 

that has adversely affected Puerto Ricans and the territory’s economy the most— 

is that PREPA is two-thirds dependent upon imported oil and has inefficient power 

plants and an unreliable distribution system. This has resulted in extremely high 

power rates. 

PREPA’s plan to improve its infrastructure under the agreement is extremely 

unaggressive, with the improvements not being completed until 2030! The net result 

of the plan and the PREPA Restructuring Support Agreement would be that creditors will be paid almost all of what they were due, consumers will pay higher rates, 

and rates will not be able to be reduced through more efficient and reliable infrastructure. 

Major companies have proposed investing their own money to build much more 

efficient power plants with power purchase agreements and improve electricity distribution. The last governor did not act on this. PROMESA includes provisions to 

expedite such projects. These sorts of agreements with the private sector would put 

PREPA in a much better position to pay creditors. 

What is being done to take advantage of private sector offers and PROMESA to 

improve energy infrastructure so that substantial amounts of money can be saved 

in fuel costs, customer rates can be substantially lowered, PREPA’s financial position can be improved—including for the benefit of creditors? 

Answer. Thank you again for the opportunity to testify before the Subcommittee 

and your continued support for our efforts to revitalize PREPA and Puerto Rico. In 

response to your question, I want to assure you that PREPA is very focused on improving its infrastructure and promoting private investment. Over the past few 

years, our goal has been to transform PREPA into an efficient, world-class utility, 

which transformation requires an operational restructuring as well as a financial restructuring. At the same time, our goal has been to ensure that PREPA’s electricity 

rates are as affordable and reasonable as possible. 

Our advisors estimated that without any restructuring or rate adjustment, the 

gap between PREPA’s all-in electricity rates and costs would be more than 8 cents 

per kilowatt hour (kWh). Our goal has been to eliminate this gap through equitable 

burden sharing. Although the media and policy makers have focused on the 15 

percent principal haircut embodied in the RSA, the main savings under the RSA 

is a reduction in the interest rate (from an average of 5.5 percent to 4.75 percent) 

and a 5-year principal holiday. As I mentioned in my testimony, after the enactment 

of PROMESA, PREPA’s Governing Board negotiated additional improvements to the 

RSA which would have reduced the projected electricity rates by approximately 1 

cent per kWh each year for first 5 years following the restructuring. While as noted 

in my written testimony, the Puerto Rico Fiscal Agency and Financial Advisory 

Authority assumed full and complete responsibility to negotiate, restructure and 

reach agreement with PREPA’s creditors, the PREPA Governing Board supports the 

Rossello ́ administration’s efforts to improve the RSA even more. 

43 

You are correct that, as I noted in my testimony, for several decades PREPA did 

not operate with the level of efficiency associated with the private sector or even 

comparable units of government in other jurisdictions. In too many instances, 

PREPA’s decisions were based on political or electoral factors rather than sound 

business practice. For that reason, the RSA required PREPA to implement a new 

governance structure, with independent board members with private sector experience. In 2016, the Puerto Rico legislature passed a law (Act 4–2016) implementing 

the governance reform contemplated by the RSA. New legislation has also been proposed to allow the Governor to name new members of the PREPA board, but it has 

not passed the Puerto Rico Senate. 

PREPA has been working with its advisors to identify operational improvements 

that could provide PREPA and its ratepayers with near- and long-term benefits and 

cost savings over the long term. In 2015 and 2016, PREPA achieved $267 million 

in one-time savings and $212 million in recurring, annual operating expense savings. These savings provide important benefits for PREPA, its customers, all residents of Puerto Rico. Indeed, achieved cost savings have already reduced PREPA’s 

approved, regulated rates from what they otherwise would have been. 

We are aware that operational improvements are only part of the solution, particularly when PREPA remains burdened by aging infrastructure and, as you note, 

an inefficient generation fleet that is overly reliant on one fuel source. PREPA’s 

Integrated Resource Plan (IRP), which was recently approved, as modified, by the 

Puerto Rico Energy Commission (PREC), identifies PREPA’s key medium to longterm goals, namely, (1) modernization of PREPA’s aging infrastructure, particularly 

its generating fleet, and improving fuel diversity, (2) improving system reliability 

and flexibility, (3) achieving environmental regulatory compliance, including compliance with Federal Mercury and Air Toxics Standards (MATS), and (4) providing the 

framework that will permit the accelerated deployment of additional renewable 

resources. PREPA’s Governing Board recognizes that access to and the intelligent 

deployment of private capital are essential to achieving these goals. 

Even prior to the passage of PROMESA, PREPA’s Governing Board had taken important steps to identify possible private sector partners. In late 2015, PREPA 

issued a request for expressions of interest (REOI) seeking to test the market for 

interest in private investment that would upgrade PREPA’s generating fleet. In response, PREPA received over 30 proposals from 16 energy market participants, including many major energy players of the kind you referred to in your inquiry. 

These submissions expressed a willingness to invest in new infrastructure projects, 

but only after PREPA first fixed its balance sheet. Although these expressions of 

interest were a welcome and positive sign for PREPA’s future, PREPA must finally 

resolve its financial crisis before it can expect any influx of private capital. 

PREPA desires to capitalize on the opportunities new investment can support, 

consistent with prudent utility practice. Our vision for PREPA includes a modern 

and resilient transmission and distribution system with diverse sources of fuel, including renewables, and supported by private capital to invest in new and efficient 

generating capacity. That being said, achieving those goals and seizing on the opportunities offered by private sector partners similarly cannot be accomplished immediately. They will take time to implement, but PREPA is not just starting that task. 

For instance, as with any utility, achieving fuel diversity requires the requisite 

infrastructure. This challenge is compounded in an island economy like Puerto Rico, 

which currently must import substantially all of its fuel and generate all of its electricity. In the IRP, PREC has authorized PREPA to continue its efforts to secure 

permits for and conduct other preliminary work, such as engineering and planning, 

on the Aguirre Offshore GasPort (AOGP) and four related fuel conversions (Aguirre 

thermal 1 and 2 and Aguirre CC 1 and 2), subject to a $15 million, going forward, 

aggregate spending limit, pending PREPA’s submission and PREC approval of further AOGP economic analyses. If finally approved, the project would increase Puerto 

Rico’s ability to import natural gas, reducing reliance on oil-fired generation. In the 

IRP, PREC also directed PREPA to pursue permitting of several dual-fuel, combined 

cycle plants, including new generation facilities and the repowering of certain existing facilities. 

Under PREPA’s capital plan, PREPA’s preferred approach to the required system 

modernization is to run a competitive process to allow private investors to submit 

bids for public-private partnerships (P3s) and then select winning bids through a 

transparent and open process. The cost to PREPA from such P3s will of course need 

to be passed through to PREPA’s customers, subject to PREC approval, but it is anticipated that the private sector will provide cost efficiencies that might not otherwise be available (efficiencies which will also inure to the benefit of PREPA’s ratepayers). In any event, the modernization projects will be phased beginning in Fiscal 

44 

Year 2018. Overall, the plan provides for $2.4 billion in capital improvements over 

10 years. 

Of course, we realize that private investment is not cost-free. The cost of this (and 

all) privately invested capital to be applied to the renewal and recovery of PREPA 

will be passed through to PREPA by these investors. PREPA will be required, upon 

PREC review and approval, to include such additional capital cost in its rates to 

be paid by PREPA’s customers, as is the case with every investor-owned and governmental electric utility operating in the United States. In addition, as noted earlier, 

the ultimate cost to PREPA of that privately invested capital will depend in very 

large measure on PREPA’s credit rating because PREPA will be the sole user of the 

assets financed with such private capital. It will be PREPA’s financial condition and 

creditworthiness and, because PREPA does not operate in a vacuum, that of the 

government of Puerto Rico, that will determine the return on investment demanded 

by such private investors (subject to negotiation). As noted above, because private 

capital will not be available to PREPA until after PREPA’s restructuring is completed, it is critical for PREPA to move forward expeditiously with its financial and 

operational restructuring. 

Again, thank you for your interest in PREPA’s transformation. 

Mr. LAMALFA. Thank you. OK. We are going to go a little out of 

order here—we are going to move to Mr. Bergonzi. 

STATEMENT OF ADAM BERGONZI, MANAGING DIRECTOR AND 

CHIEF RISK OFFICER, NATIONAL PUBLIC FINANCE 

GUARANTEE CORPORATION, PURCHASE, NEW YORK 

Mr. BERGONZI. Good morning. I am the Chief Risk Officer of the 

National Public Finance Guarantee (National), a monoline financial 

guarantee insurance company. I would like to thank Chairman 

LaMalfa and fellow members of the Subcommittee on Indian, 

Insular and Alaska Native Affairs for allowing me the opportunity 

to come and speak to you today. 

For over 40 years, National has been in the business of guaranteeing the debt of municipal issuers in the U.S. public finance 

market. Our insurance product enables municipalities to save on 

interest expense, and attracts investor confidence because they 

know that their repayment is guaranteed. National believes the restructuring contemplated today will stabilize PREPA’s finances, 

create a framework for financing long-overdue improvements to its 

electric generation infrastructure, and put PREPA, importantly, on 

a path to restored market access. 

National guarantees debt issued by cities, states, counties, airports, roads, and public utilities. We effectively lend our high credit 

ratings to the borrower, thereby reducing their debt cost. We have 

shared these savings with the borrower. 

Municipal issuers, therefore, save money when using our product. Our policies are irrevocable. We are not traders, we do not 

profit from debt restructurings, other than by limiting defaults or 

losses. We are akin to long-term, buy-and-hold investors, and we 

can only lose money in these situations. We will be invested in 

Puerto Rico for many years to come. 

National has nearly $3.6 billion exposure to Puerto Rico issuers, 

including $1.4 billion to PREPA. We are, in fact, the utility’s largest single creditor. Together with assured, the monolines represent 

approximately $2.2 billion of the $9 billion of PREPA’s debt. Since 

2015, National has labored in good faith, alongside PREPA’s institutional bondholders and Puerto Rico, to achieve a sustainable 

45 

long-term solution for PREPA. We very carefully analyzed PREPA’s 

operations and finances, and we have negotiated the restructuring 

with the following key goals in mind: 

(1) Create a stable financial platform that will provide eventual 

access to the capital markets for the utility. 

(2) De-politicize PREPA through the creation of an independent 

board. We believe this is vital to avoid the past mistakes of policy 

being driven by past administrations. 

(3) Position the utility to address significant O&M savings for 

further rate reduction. 

(4) Lower PREPA’s debt burden, and provide near-term liquidity 

for reinvestment and planning. 

(5) Assure a steady fuel supply to the utility. All of these can be 

said to serve the ultimate goal: again, of facilitating private investment over time in cheaper and more efficient generation from better fuel sources for the utility. 

The parties to the RSA include PREPA and 70 percent of its 

bondholders. We believe the restructuring achieves a fair balancing 

of interest among Puerto Rico, PREPA, its ratepayers, bondholders, 

and trade partners. 

The provisions are, really, three: (1) an exchange of uninsured 

PREPA bonds at an 85 percent of par discount into a newly-formed 

bankruptcy-remote entity. This will be backed by a special assessment collected by PREPA; (2) the fuel line lenders are repaid now 

over a 6-year period, and have reduced the interest on the fuel-line 

loans; and (3) the monolines have agreed to provide surety bonds 

of up to $462 million to fund a debt reserve fund for the 

securitization bonds. This is to, in effect, compensate for the fact 

that the utility cannot currently raise capital, nor can it currently 

expend cash on hand to raise that financing. 

Importantly, the surety supports an eventual rating of this transaction, and supports the credit and trading of the secondary market bonds for the securitization. Creditors have importantly needed 

to address significant liquidity needs for the utility during this 

period, and the RSA, through the collective action of creditors, has 

purchased $375 million of bonds on behalf of creditors for the 

utility. 

We have waived reserve requirements to release an additional 

$500 million of liquidity to PREPA, granted the use of general 

funds for capital improvements prior to debt service, and finally, 

have permitted PREPA to use cash on hand in unspent construction funds. 

The RSA debt is only 3.3 cents per kilowatt hour of an overall 

$.22. This is 15 percent and is in line with similar institutions and 

similar utilities across the country. More importantly, $.11 is for 

fuel and purchased power, and this is where we urge the real savings over time before the utility can occur. We do not believe 

PREPA is over-indebted; it is very inefficient. 

Finally, the punch list on PREPA, the RSA has been substantially negotiated, as you have heard. We do have some issues with 

implementation under PROMESA. These are positive aspects that 

might actually add value to the transaction. The RSA complies 

with all legislative and regulatory requirements, including Act 4 of 

46 

2016, and the Energy Commission’s 2016 PREPA restructuring 

order. 

PREPA is a defendant in several judicial validation proceedings 

that are challenging the RSA and brought in court to facilitate closure of that transaction, but that is going well. The first case has 

been rendered positively in front of PREPA. 

Finally, I would just say that the RSA is a pre-existing voluntary 

agreement under PREPA. Section 104, which provides for a 

streamlined process for final approval—this statute was designed 

to encourage consensual agreements like the RSA, and we think 

this could be a lost opportunity to reform the utility and provide 

a foundation for economic growth in Puerto Rico, and it may call 

into serious question whether the PROMESA board and Puerto 

Rico can foster similar consensual agreements to restore market 

access. 

I thank you for the time. 

[The prepared statement of Mr. Bergonzi follows:] 

PREPARED STATEMENT OF ADAM BERGONZI, MANAGING DIRECTOR AND CHIEF RISK

OFFICER, NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION

INTRODUCTION TO NATIONAL

National Public Finance Guarantee (‘‘National’’) is a municipal-only monoline 

insurer with over 40 years of experience in the municipal market. Through its municipal bond insurance products, National has delivered savings to municipalities 

across the United States and provided credit protection to individual investors, 

thereby facilitating the selling and purchasing of municipal bonds which are critical 

to finance essential public infrastructure projects. 

NATIONAL’S PARTNERSHIP WITH PUERTO RICO

For over 30 years, National has partnered with Puerto Rico and its bondholders 

and currently insures approximately $3.6 billion of Puerto Rico bonds issued for 

energy, transportation, higher education and general government purposes. A summary of this activity is as follows and notes where National has contributed capital 

in the form of Claims Paid and Relending Bonds over the past 2 years: 

NATIONAL AND PREPA

National insures nearly $1.4 billion of PREPA bonds—making National PREPA’s 

single-largest creditor. National has worked constructively with PREPA and the 

Puerto Rico Government toward an optimal consensual outcome for all stakeholders 

over the past 2 years. Our objective is the same as Puerto Rico’s: a sustainable, 

long-term solution. Accordingly, in December 2015, 70 percent of PREPA’s creditors, 

including National, reached a voluntary agreement known as the Restructuring 

Support Agreement or ‘‘RSA’’ that would allow PREPA to restructure its debt on 

consensual terms. 

47 

The RSA is designed to achieve the following objectives: 

a. create a stable financial platform to permit access to the capital markets; 

b. depoliticize PREPA through the creation of an independent board of directors; 

c. position PREPA to reap the benefits of operational and maintenance savings, 

thereby creating opportunities for further rate reduction; 

d. assure a steady fuel supply for the island; and 

e. achieve the necessary financial stability to encourage future private 

investment in generation, transmission, and distribution of electricity. 

OVERVIEW OF THE PREPA RSA AND CREDITOR CONTRIBUTIONS

The RSA entails the following: 

a. Exchange of uninsured PREPA Bonds at 85 percent of par into a newly 

formed bankruptcy-remote entity (‘‘SPE’’). The entity would be backed by a 

special assessment charged by PREPA (the ‘‘securitization charge’’). 

b. Fuel line lenders are repaid ∼$650 million of currently due loans over 6 

years. Interest rate on fuel line loans reduced by ∼150 basis points. 

c. Monolines to provide sureties of up to $462 million to fund a Debt Service 

Reserve Fund (‘‘DSRF’’) for the securitization bonds which would be used 

after a $65 million cash funded DSRF. 

In addition to the concessions made in the RSA, National and other creditors have 

made important contributions over the past 2 years that have allowed PREPA to 

continue operating despite its lack of access to the capital markets: 

a. Purchased $375 million of new bonds—over a third of which came from 

National. 

b. Additional bond purchase avoided payment defaults and prevented a 

contraction of fuel vendor credit terms. 

c. Waived collateral requirements (thereby releasing over $500 million in needed 

liquidity to PREPA). 

d. Permitted the use of general fund monies for capital improvements prior to 

debt service. 

e. Permitted PREPA to use cash in the construction fund, providing further 

liquidity. 

All of the above actions have enabled PREPA to operate at levels of liquidity 

necessary to serve Puerto Rico. 

BENEFITS OF THE RSA TO PREPA AND PUERTO RICO

The RSA lowers PREPA’s overall debt burden and provides near-term liquidity for 

reinvestment. According to PREPA’s petition for a Restructuring Order filed in April 

2016, the RSA leads to $1.7 billion of savings over a 10-year period. To the extent 

the RSA is enacted through a Title VI proceeding under PROMESA, the savings will 

be even greater, as uninsured bondholders (including those not currently parties to 

the RSA) would all take a principal deferral and a 15 percent principal discount. 

48 

The RSA also starts PREPA on a path to restored access to the capital markets 

and third party investment. The debt restructuring would allow PREPA to achieve 

a higher credit rating. Closing the RSA would also facilitate integration of P3 

investment in PREPA, as third party investors would be unlikely to extend credit 

or provide financing to PREPA absent a resolution of its debt restructuring. The 

SPV may also provide a go-forward financing vehicle for select capital projects. In 

sum, closing the RSA provides a bridge for PREPA to access the capital it needs 

for critical investments that will transform the utility. 

Finally, the RSA has contributed to significant business improvements at PREPA. 

The stability provided by creditor forbearance has restored trade terms with fuel 

vendors and PREPA currently has payables balances of over $350 million with 

terms of up to 60 days. The RSA also requires increased transparency and improved 

PREPA governance. Closing the RSA will allow management to shift their attention 

to critical issues facing the business, and allow PREPA to proceed with a muchneeded operational transformation to provide cheaper and more stable service to the 

island. 

RISKS OF TERMINATION OF THE RSA

If the RSA is terminated, PREPA would likely default on its over $450 million 

bond payment due July 1, 2017. This would in turn lead to bondholder litigation 

(post-expiration of stay) for receivership and the enforcement of liens for Special 

Revenue debt. Active litigation with bondholders would deter critical private investment, and delay EPA compliance and renewable integration. In addition, approximately $730 million in payments for matured fuel lines, which lenders are currently 

forbearing from exercising remedies due to RSA, would come due and current fuel 

vendor credit terms ($342 million of current payables balances) that were enabled 

by the RSA could be withdrawn—all of which could generate additional litigation 

and affect PREPA’s operations. Furthermore, a default would undermine PREPA’s 

creditworthiness and delay PREPA’s re-entry to the capital markets. 

Puerto Rico also risks losing credibility with investors—and therefore renewed access to the capital markets—if the RSA falls prey to the vagaries of local politics 

or to a change of administration. The RSA and its implementing legislation, Act 4– 

2016, recognized the importance of a nonpolitical, professional board of directors for 

PREPA as a way to insulate PREPA from political risk and guarantee a competent, 

expert-driven, and evidence-based stewardship for the utility. The RSA is the only 

fully negotiated solution that creditors and the Puerto Rico government have 

reached in the last 3 years. Abandoning it at this time bodes ill for future negotiations with creditors on PREPA and other Puerto Rico government entities. 

In the event a defensive Title III proceeding was filed, such a proceeding would 

not create stability for PREPA. Title III-related creditor litigation would still occur 

and liquidity and trade contraction could remain obstacles to PREPA’s recovery. 

Termination of the RSA would also lead to the loss of voluntary creditor concessions. PREPA’s former CRO, Lisa Donahue, has stated in testimony to the Puerto 

Rico Energy Commission, that bondholders would likely receive 100 percent recovery in litigation. In the interim, PREPA would be unable to access capital markets 

or public-private partnerships until any litigation is resolved, which could take 

[years]. This is all compared to the current RSA, which contemplates a 15 percent 

principal haircut, interest rate reduction, 5-year principal deferral, and extension of 

up to $462 million of credit by the monolines. 

Puerto Rico has benefited in the past few years from a significant decrease in electricity rates thanks in large part to historically low oil prices. PREPA chose to pass 

on all of those savings to consumers, while creditors were not being paid full debt 

service. PREPA needs to, and is statutorily and contractually obligated to, increase 

rates to account for debt service. However, it had not (until last year) increased its 

base rate since 1989, despite having expenses that exceeded revenues. The required 

increase is limited to 3.3 cents/kwh under the RSA, compared to an increase of an 

average of 4.6 cents/kwh from FY2017–FY2020 if PREPA had to pay its status quo 

projected debt service (see Exhibit A for a detailed breakdown of PREPA’s rate). 

CURRENT STATUS OF THE PREPA RSA

The PREPA RSA has received support and approval from key stakeholders. 

Approximately 70 percent of PREPA’s legacy bond creditors and all of PREPA’s 

bank creditors support the restructuring. Under Governor Padilla’s administration, 

the Puerto Rico government put in place the legislative and regulatory framework 

needed to implement the RSA. In February 2016, the Legislature enacted Act 4– 

2016, which carried out central provisions of the agreement, most notably the 

securitization structure and transition charge necessary for PREPA’s transformation 

49 

into a financially stable utility. In June 2016, PREPA’s regulator, the Energy 

Commission, approved a transition charge methodology. The Puerto Rico courts, 

meanwhile, are in the process of validating the securitization structure (see further 

below). Additionally, both the Puerto Rico Legislature and Congress expressed their 

support for the RSA by carving out PREPA from the Moratorium Act and 

PROMESA. 

PREPA is in the midst of validation proceedings, where challengers are questioning both the validity of Act 4–2016 and the validity of the Energy Commission’s 

2016 PREPA Restructuring Order (both of which must be upheld as a condition to 

the RSA). The first decision recently came out in favor of validity of Act 4 and other 

Phase I cases were voluntarily dismissed (the decision in the UTIER case is being 

appealed). The Phase II cases have been consolidated. 

In January 2017, National participated in discussions with PREPA’s advisors regarding adjustments to the RSA needed to close the restructuring under PROMESA. 

Near the end of the month, however, Governor Rossello ́ appointed AAFAF to take 

over the negotiations on behalf of PREPA, and creditors agreed to extend the RSA 

from January 31, 2017 to March 31, 2017. Since then, no one from AAFAF has 

shared any proposal with National to close the restructuring. 

OPPORTUNITIES FOR PREPA POST-RESTRUCTURING

According to PREPA’s most recent business plan, chronic underinvestment and 

inconsistent management have led PREPA’s facilities to fall significantly behind industry standards. For example, PREPA’s median plant age is 44 years (compared 

to an industry average of 18 years), and PREPA’s facilities experience significant 

forced outages (16 percent, compared to industry average of 11 percent). Once the 

restructuring has closed, PREPA will be able to pursue the investments needed to 

achieve cheaper, cleaner and more reliable energy. 

PREPA’s long-term investment program seeking compliance with environmental 

requirements totals over $4.5 billion from FY2016–FY2035 ($2.4 billion in first 10 

years). Significant projects include: 

a. AOGP ($517mm): Facility is expected to be built in 18 months (postpermitting). AOGP would improve fuel diversity, as needed to achieve environmental compliance, and would allow for construction of new units that rely 

on gas rather than diesel 

b. New Units/Fleet Upgrade ($1.7bn): Investment in new fleet would reduce 

costs and enhance system reliability (reduce outages). Average PREPA 

thermal unit is 30 percent less efficient than a new combined cycle gas unit 

c. Transmission and Distribution ($250mm): Improve distribution system 

reliability (reduce energy losses) 

d. Increasing share of Renewable Energy from 2 percent to 17 percent 

Besides achieving regulatory compliance, improved reliability and improved efficiency, these investments will create jobs in Puerto Rico and attract new third-party 

capital investment. PREPA conducted a Request for Expressions of Interest in Sept/ 

Oct 2015 for the development of new generation assets to gauge interest from third 

parties on modernization solutions for PREPA. Thirty-one proposals were received 

from 16 participants, demonstrating robust interest in P3s from the private sector. 

The closing of the debt restructuring also enables management to refocus on improving the business in several areas. In terms of receivables collection, the past 

due balance from government customers remains above $150 million, the equivalent 

of $113 per residential client. PREPA can also work to decrease energy losses. 

Energy losses not due to technical issues (primarily theft) totaled 5 percent of net 

generated energy in October 2016, according to the Donahue Handover Report. 

Total energy losses as a percentage of total power generated/sourced was 14 percent 

for PREPA in 2015, compared to U.S. municipal average of 4.6 percent, according 

to EIA data. Finally, PREPA must continue to focus on improving safety for employees. DuPont performed a safety analysis showing PREPA performs below 

‘‘fundamental’’ levels (the lowest designation) on each of the 12 metrics they 

analyzed. 

PATH FORWARD THROUGH TITLE VI

The RSA parties believe that implementation of the PREPA transaction through 

Title VI of PROMESA would be advantageous as it would, among other things, (a) 

increase the speed and certainty of process and outcome and (b) demonstrate that 

consensual deals are achievable and build momentum for the remaining issuers. 

50 

The RSA is a ‘‘pre-existing voluntary agreement’’ under PROMESA § 104(i)(3) and 

is therefore deemed to be in conformance with the section of PROMESA concerning 

certification of Pre-existing Voluntary Agreements. As such, certification and approval of the RSA is subject to a streamlined process. Once the RSA/Qualifying 

Modification is approved and binding under Title VI, the PREPA deal will ‘‘go 

effective’’ upon satisfaction by PREPA of the closing conditions under the RSA. 

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * 

Background Note on Monoline Insurers 

Monoline insurance companies insure investors against the risk of a bond defaulting—i.e., guarantee the scheduled payment of principal and interest for the duration 

of the life of a bond (often up to 30 years). Insurance on bonds is often called a 

‘‘credit wrap,’’ or simply a ‘‘wrap.’’ Monolines are akin to the issuer of a bond, and 

it is their obligation to make full principal and interest payments even if an agreement calls for investors to receive a discount to par. 

A wrapped bond has the same credit rating as the insuring monoline, which is 

generally higher than the credit rating of the issuer. The guarantee and higher credit rating allows the issuer to obtain a lower cost of financing than it may have otherwise received (with the spread in cost being shared between the monoline and the 

issuer). In addition to lowering financing costs for issuers, monolines enhance capital markets access by attracting a larger group of investors and facilitating greater 

trading/liquidity. 

Exhibit A: Breakdown of PREPA Rates 

51 

Mr. LAMALFA. All right. Thank you, Mr. Bergonzi. 

We will now recognize Mr. Bryngelson for 5 minutes. 

STATEMENT OF ROB BRYNGELSON, PRESIDENT AND CEO, 

EXCELERATE ENERGY LP, THE WOODLANDS, TEXAS 

Mr. BRYNGELSON. Thank you, Chairman LaMalfa, Ranking 

Member Torres, Vice Chairman Gonza ́lez. My name is Rob 

Bryngelson and I am the President and Chief Executive Officer of 

Excelerate Energy. I appreciate the opportunity to appear today before the Subcommittee to provide some testimony regarding 

Excelerate’s experiences cooperating with the Puerto Rico Electric 

Power Authority on the development of the Aguirre Offshore 

GasPort Project, supporting PREPA’s efforts in developing the 

Restructuring Support Agreement, and, finally, supporting 

PREPA’s continuing efforts to comply with the requirements of 

PROMESA. My more extensive written testimony has been filed 

with the Subcommittee. 

Excelerate is a Texas-based energy company, and we are engaged 

in the development of liquified natural gas transportation and regasification infrastructure. We are a provider of LNG storage and 

regasification services and an importer of LNG. The company operates a fleet of nine purpose-built floating storage and regasification 

units, or FSRUs, as they are referred to, that are capable of 

regasifying LNG on board the vessel for delivery as gaseous natural gas to downstream customers around the world. 

Our solutions are proven in over a decade of operation and, in 

many instances, our projects supply more than 20 percent of all gas 

consumed in a given country. Established in 2003, we are 

headquartered in The Woodlands, Texas, just north of Houston. We 

have operations in Argentina, Brazil, Israel, the United Arab 

Emirates, and Pakistan, with projects in Bangladesh and, hopefully, Puerto Rico slated to come on-line in 2018. 

The Aguirre Offshore GasPort Project is a critical initiative for 

PREPA. For many years, PREPA and the government of Puerto 

Rico have worked to bring an energy solution to the island that will 

minimize the environmental impacts from power generation, allow 

PREPA to be compliant with the Federal Mercury and Air Toxic 

Standards, or MATS rule, and help lower energy costs. The Aguirre 

Offshore GasPort Project is the most economical and time-efficient 

solution to meet PREPA’s urgent goals. 

In 2011, PREPA selected Excelerate for the development of a 

floating offshore LNG delivery system, incorporating Excelerate’s 

FSRU technology, a decision based on Excelerate’s industry-leading 

expertise. Excelerate proposed an offshore delivery system with a 

capital cost of approximately $266 million, which includes infrastructure construction, permitting, and development costs. Annual 

operation and maintenance expenses are estimated to be approximately $6.2 million. 

In the spirit of partnership established with PREPA, Excelerate 

has constructed the FSRU, and the vessel stands ready to support 

the project. Cost reduction, environmental enhancement, and increased efficiency are the primary drivers for bringing LNG as a 

new source of fuel to PREPA. Under the current U.S. EPA regulations, utilities must reduce air emissions from operations, requiring 

52 

PREPA to switch from heavy fuel oil to a cleaner burning fuel 

source—likely natural gas. Not only will natural gas allow PREPA 

to be compliant with the new regulations, but it is considerably 

cheaper than fuel oil and will provide substantial savings over the 

life of the project. 

The successful conversion of the Aguirre power plant will be the 

first step in upgrading PREPA’s system to provide safe, clean 

energy for citizens of Puerto Rico. 

One of the long-term benefits of the project will be improved air 

quality on the island, especially for the residents of the surrounding community of Aguirre. By switching to natural gas at the 

Aguirre power complex, an overall reduction in air emissions of 64 

percent is estimated, with greenhouse gases, specifically CO2, reduced by nearly 30 percent. This decrease is equivalent to 

eliminating more than 335,000 passenger cars from the road. 

Excelerate Energy and Siemens Engineering conducted a financial analysis of the project, and determined that PREPA would 

realize $25 million in savings per month or more in operating costs, 

once the project is in service. Over the 15-year life, nearly 

$5 billion in savings can be recognized. 

The Aguirre Offshore GasPort Project is near completion of its 

comprehensive environmental analysis, which began in 2011. 

During this review process, in conjunction with regulatory bodies, 

we completed multiple studies to evaluate site locations, interconnecting pipeline routes, and construction techniques. 

The Aguirre Offshore GasPort Project has undergone rigorous design reviews since introducing the floating concept to PREPA in 

2008. Preliminary design is being completed and reviewed by the 

FERC, the U.S. Army Corps of Engineers, and the Department of 

Transportation Office of Pipeline Safety. 

In conjunction with the design of the Aguirre Offshore GasPort 

Project, the work required to convert the Aguirre Power Plant has 

been underway cooperatively between PREPA and Excelerate, to 

ensure both projects are completed at the same time. Advanced engineering design is scheduled to begin in the second quarter of 

2017, and construction to begin in the third quarter of 2017. 

My testimony today is intended to provide information to the 

Subcommittee regarding Excelerate’s efforts to support PREPA’s 

successful restructuring, and not to discuss the mechanics of the 

RSA and other financial efforts currently underway by the Puerto 

Rico Government. 

Excelerate’s involvement with the development of the Aguirre 

Offshore GasPort Project became a critical piece of the overall restructuring of the utility. The intent and scope of this project is to 

bring about the reduction of fuel costs for the facility and, in turn, 

provide a reduction in electricity rates for ratepayers. Efforts by 

past Commonwealth administrations to facilitate recovery of the 

island’s economy resulted in direct impact to continued development of the project. 

Our position is support the passage of the RSA as quickly as 

practicable and help PREPA begin restructuring the utility. 

And I will shorten this, since I have gone to the edge of my time 

here. 

Mr. LAMALFA. Yes. 

53 

Mr. BRYNGELSON. Excelerate remains a committed partner to 

PREPA in this project, and to the government of Puerto Rico. 

Today’s hearing is obviously focused on getting PREPA’s Restructuring Support Agreement implemented as soon as possible. Again, 

we stand ready to support these efforts, and will continue to offer 

all assistance we can to PREPA and the government of Puerto 

Rico. Thank you very much. 

[The prepared statement of Mr. Bryngelson follows:] 

PREPARED STATEMENT OF ROBERT BRYNGELSON, PRESIDENT AND CHIEF EXECUTIVE

OFFICER, EXCELERATE ENERGY, LP 

Thank you Chairman LaMalfa, Ranking Member Torres and members of the 

Subcommittee. My name is Rob Bryngelson, and I am the President and CEO of 

Excelerate Energy, LP (Excelerate). I appreciate the opportunity to appear before 

the Subcommittee today to provide testimony regarding Excelerate’s experiences 

cooperating with the Puerto Rico Electric Power Authority (PREPA): (1) with the development of the Aguirre Offshore GasPort Project (AOGP); (2) supporting PREPA’s 

efforts in developing the Restructuring Support Agreement (RSA); and finally, supporting PREPA’s continuing efforts to comply with the requirements of the Puerto 

Rico Oversight, Management, and Economic Stability Act (PROMESA). 

Excelerate Energy, LP 

Excelerate is a Texas-based energy company engaged in the development of LNG 

transportation and regasification infrastructure, a provider of LNG storage and regasification services, and an importer of LNG. The company operates a fleet of nine 

purpose-built Floating Storage Regasification Units (FSRU), LNG carriers capable 

of regasifying LNG on board the vessel for delivery as gaseous natural gas to downstream customers worldwide. 

Established in 2003 and headquartered in the Woodlands, Texas, Excelerate also 

has facilities in Singapore, Dubai, Kuwait City, Buenos Aires, Israel, and Rio 

de Janeiro. 

Aguirre Offshore GasPort Project 

The AOGP Project is a critical initiative for PREPA. For many years, PREPA and 

the government of Puerto Rico have worked to bring an energy solution to the island 

that will minimize the environmental impacts from power generation, will allow 

PREPA to be compliant with the Federal Mercury and Air Toxics Standards (MATS) 

Rule, and help lower energy costs. AOGP is the most economical and time efficient 

solution to meet PREPA’s urgent goals. 

Since natural gas is one of the most environmentally-friendly and cost-competitive 

fuel sources available, PREPA recognized early on that converting its power generation from fuel oil to natural gas would provide the most immediate benefits to the 

island. PREPA initially considered conventional energy infrastructure solutions and 

sought to utilize land-based pipelines to bridge existing resources for the distribution of natural gas. Ultimately, the pipeline projects encountered considerable financial, environmental, and public opinion challenges, and were canceled. As a result, 

PREPA turned its attention to other, more advanced alternatives—specifically 

Excelerate’s floating LNG regasification terminals. 

In 2008, Excelerate introduced the concept of an offshore LNG import terminal 

to PREPA as a viable alternative solution to access natural gas. Floating regasification terminals, such as the proposed AOGP project, can be designed and constructed at a fraction of the cost of similarly sized land-based LNG import facilities. 

More importantly, floating regasification terminals require minimal infrastructure 

and land-use, thus reducing environmental impacts and long-term effects on the 

surrounding environment. 

In 2011, PREPA selected Excelerate, following a Notification of Interest and 

Request for Proposal process, as the most qualified technology provider to collaborate on the development of a floating, offshore LNG delivery system incorporating 

Excelerate’s FSRU technology—a decision based on Excelerate’s industry-leading 

experience. For the project site, PREPA selected the Central Aguirre Power Complex 

as the location for LNG importation as it is the facility with the greatest power generation capacity on the PREPA system, providing the most cost-savings and benefits 

to the surrounding environment. Excelerate proposed an offshore delivery system 

with a proposed capital cost of approximately $266 million, which includes infrastructure construction, permitting and development fees. Annual operation and 

maintenance expenses are estimated approximately $6.2 million. Excelerate has 

54 

purchased and constructed the FSRU, and the vessel stands ready to support the 

Project. 

In April 2013, Excelerate formally commenced the permitting process with the 

Federal Energy Regulatory Commission (FERC) which started its rigorous review 

under the National Environmental Policy Act. After an extensive permitting process, 

FERC published the Final Environmental Impact Statement (EIS) for the project in 

February 2015. The EIS document describes the effects of the project on the land, 

water, air, ecosystems in the project area as well as the social, cultural and economic impacts. The document also provides ways to mitigate, lessen or remove, any 

potential impacts. To ensure that the AOGP was, in fact, the appropriate solution, 

the EIS also analyzed other alternatives to supply natural gas to Aguirre. 

In July 2015, FERC issued its order authorizing the project. Both documents concluded that, as proposed, the project will have no significant impact on the environment and determined that it is the best, proposed alternative for bringing LNG to 

the island. 

PROJECT BENEFITS

Cost reduction and environmental enhancement are the primary drivers for bringing LNG as a new source of fuel to PREPA. Under the current U.S. EPA regulations, utilities must reduce air emissions from operations requiring PREPA to 

switch from heavy fuel oil to a cleaner-burning fuel source, like natural gas. Not 

only will natural gas allow PREPA to be compliant with the new regulations, but 

it is considerably cheaper than fuel oil and will provide several billions of dollars 

in fuel cost savings over the life of the project. In addition, there is an abundance 

of LNG available in the international market which will allow PREPA to take advantage of competitive pricing. The successful conversion of the Aguirre power plant 

will be the first step in upgrading PREPA’s system to provide safe, clean energy for 

the citizens of Puerto Rico. 

Environmental Benefits 

One of the long-term benefits of the project will be the improved air quality on 

the island, especially to the residents of the surrounding community of Aguirre. By 

switching to natural gas at the Aguirre Power Complex, an overall reduction in air 

emissions of 64 percent is estimated, with greenhouse gases, specifically CO2, reduced nearly 30 percent. This decrease is equivalent to eliminating greenhouse 

gases from more than 335,000 passenger cars. 

Additionally, the project will improve the water quality in the local area. The 

power complex is located adjacent to the Jobos Bay Estuarine Sanctuary and currently receives its fuel via cargo tankers which must traverse the environmentally 

sensitive bay to reach the plant. The AOGP terminal will be located outside the bay 

and would eliminate approximately 90 percent of the barge traffic reducing the risks 

of any inadvertent fuel spills. 

Economic Benefits 

Excelerate and Siemens Engineering conducted a financial analysis of the AOGP 

project and determined that PREPA would realize $25 million in savings per month, 

or more, in operating costs once the project is in service. Over the 15-year life of 

the project, nearly $5 billion will be saved in fuel costs. 

As PREPA converts its many power generating facilities to natural gas, the fuel 

cost savings will be substantial translating to lower energy costs for consumers. 

With lower electricity rates, industries will be encouraged to expand current operations, and industries that have left will have the incentive to return. 

Community Benefits 

It is Excelerate’s goal that the AOGP terminal will become an integral part of the 

community of Aguirre. During the construction phase of the project, local fishers 

will be employed to assist with directing local fishing traffic safely around the active 

construction area. When in operation, Excelerate will work with the local mariner 

unions to train local members to perform some duties of the FSRU crew. 

Excelerate will patronize local businesses as the primary source of supplies and 

services for the construction crews. During operations, local tugboat operators will 

be utilized to guide the large refueling tankers that will call upon the AOGP facility. 

The terminal will also procure food and other supplies for the vessel crew from local 

providers. 

55 

1Law 21, ‘‘Puerto Rico Emergency Moratorium and Financial Rehabilitation Act,’’ 6 April 

2016. 

PROJECT STATUS

Permitting 

The AOGP project is near completion of its comprehensive environmental analysis 

which began in 2011. During this review process and in conjunction with regulatory 

bodies, Excelerate completed multiple studies to evaluate site locations, interconnecting pipeline routes, and construction techniques. 

Public participation was integral in the development of this project. In addition 

to FERC’s public hearings, both Excelerate and PREPA held more than two dozen 

community meetings to ensure complete transparency throughout the entire permitting process. Excelerate worked closely with the residents in the project area to 

present the details of the project and explain the potential benefits the project would 

bring to their community. Residents had the opportunity to share their input regarding the project location, construction activities, and any possible impacts to the 

fishing community. Both Excelerate and FERC considered the community’s feedback 

during the analysis and design of the project. 

The National Marine Fisheries Service (NMFS) is currently completing its review 

of any biological impacts the project will have to the location and finalizing its mitigation requirements for the project to lessen or remove any of these potential impacts. Excelerate, NMFS, and FERC will complete these mitigation plans by April 

2017. All other permits, local and Federal, will be finalized after the consultation. 

Engineering 

The AOGP project has undergone a rigorous design effort since introducing the 

floating concept to PREPA in 2008. Preliminary design has been completed and reviewed by FERC, the U.S. Army Corps of Engineers, and the Department of 

Transportation Office of Pipeline Safety. Separate from the engineering design 

efforts for the AOGP structure and subsea pipeline, additional work has been completed to design the horizontal directional drill under the Boca del Infierno. In conjunction with the design of the AOGP project, the work required to convert the 

Aguirre power plant has been underway cooperatively with AOGP to ensure both 

projects are completed at the same time. Advanced engineering is scheduled to begin 

as early as second quarter 2017 and construction to begin in the third quarter of 

2017. 

PREPA RESTRUCTURING SUPPORT AGREEMENT

My testimony today is intended to provide information to the Subcommittee regarding Excelerate’s efforts to support PREPA’s successful restructuring, and not to 

discuss the mechanics of the RSA and other financial efforts currently underway by 

the Puerto Rico Government. Excelerate’s involvement with the development of the 

AOGP project became a critical piece to the overall restructuring of the utility. The 

intent and scope of the AOGP project was to bring about the reduction of fuel costs 

for the facility and in turn result in the eventual reduction in electricity rates for 

the ratepayers. Efforts taken by the past Commonwealth administration to facilitate 

the recovery of the island’s economy resulted in direct impacts to the continued development of the AOGP project. Law 21 1 passed by the Padilla placed a moratorium 

on the ability for creditors to seek payment for obligations incurred by government 

entities. Because the critical AOGP project was currently in active development, the 

potential that Excelerate would be prevented from seeking payment of current invoices was a serious development. If enacted, Excelerate would have to suspend activities until either the Law was repealed or specific waivers could be granted. The 

timing of this law impacted negotiations between the Restructuring Officer (RO) and 

the bondholders who were progressing to a point where some funding for the AOGP 

project could be released for continued development. However, without the ability 

to ensure payment of invoices, Excelerate would be required to suspend development 

activities. Excelerate’s position is to support the passage and implementation of the 

RSA as quickly as practicable to allow PREPA to begin the critical restructuring of 

the utility. Continued delays to RSA implementation will have detrimental impacts 

to the continued development of the AOGP project. The longer the AOGP project is 

delayed, the longer it will be until PREPA can pass the potential fuel cost savings 

to their utility ratepayers. 

56 

PROMESA

In April, 2016 Congress introduced H.R. 4900 entitled the Puerto Rico Oversight, 

Management, and Economic Stability Act (PROMESA), establishing an oversight 

board, a process for restructuring debt, and expedited procedures for approving critical infrastructure projects. In our opinion, the AOGP project was clearly a project 

that the met the criteria as a critical infrastructure project. Excelerate has had several meetings with congressional members responsible for the PROMESA, briefing 

the members on the attributes and development status of the project. Most recently 

Excelerate met with the Chairman of the Fiscal Oversight Board and the Revitalization Coordinator to present the project. The Fiscal Board will be establishing a 

Critical Project Program in April 2017, and Excelerate will present the AOGP 

project for consideration of the Fiscal Board. The AOGP project is in the final stages 

of permitting and is scheduled to commence the initial procurement phase of construction in the 3rd quarter of 2017, pending final approval of project financing. 

Approval by the Fiscal Board will have a direct positive impact on the implementation of PREPA’s RSA. 

CONCLUSION

The Aguirre Offshore GasPort project is a critical initiative for PREPA. For many 

years, PREPA and the government of Puerto Rico have worked to bring an energy 

solution to the island that will minimize the environmental impacts from power generation, will allow PREPA to be compliant with the Federal air emission rules, and 

help lower energy costs. AOGP is the most economical and time efficient solution 

to meet PREPA’s urgent goals. 

Excelerate has remained a committed, cooperating partner for PREPA and for the 

government of Puerto Rico. The purpose of the hearing today has focused on getting 

PREPA’s Restructuring Support Agreement implemented as soon as possible. 

Excelerate supports these efforts and will continue to offer assistance in any way 

need by PREPA or the Governor. 

We look forward to our continued participation in the process with our ultimate 

goal of bringing the AOGP project in-service, bring clean-burning natural gas to 

PREPA and being a part of the Governor’s efforts to revitalize the Puerto Rico economy. I thank you on behalf of Excelerate Energy for allowing me to provide this 

testimony. 

QUESTIONS SUBMITTED FOR THE RECORD BY REP. GRIJALVA TO ROB BRYNGELSON, 

PRESIDENT & CEO, EXCELERATE ENERGY, LP 

Question 1. You testified that the proposed Aguirre Offshore GasPort would cost 

$266 million to build and $6.2 million to operate and maintain. 

Caribbean Business reported December 16 that PREPA has estimated that the 

project will cost $522 million to build, $51 million a year to lease, and other costs, 

presumably operation and maintenance. http://caribbeanbusiness.com/prepa-may-betoo-deep-in-aguirre-offshore-gas-port-to-look-at-other-options/ 

How do you explain the differences between your testimony and what PREPA has 

been reported to have said? 

Answer. The Aguirre Offshore GasPort (AOGP) project comprises two general 

parts. These are: 

(i) a floating storage and regasification unit (FSRU), which is essentially a floating facility that receives LNG and converts it into vaporous natural gas, and 

(ii) an offshore jetty to which the FSRU will moor and a pipeline necessary to 

bring vaporized natural gas ashore (Fixed Infrastructure). 

Under the agreements in place with PREPA, Excelerate Energy will finance and 

own the FSRU and lease it to PREPA, while PREPA will finance and own the Fixed 

Infrastructure. 

The cost referenced in my testimony of $266 million pertains to the capital cost 

of the Fixed Infrastructure that PREPA will own and finance (also noted in the article). The operating costs of $6.2 MM per year also pertain to the Fixed Infrastructure. The $51 million per year noted in the article is for the lease of the FSRU from 

Excelerate. 

The cost of $552 is a broader cost provided by PREPA that not only encompasses 

the AOGP project itself, but also includes upgrades required to allow existing power 

generation facilities to switch to natural gas from fuel oil. 

57 

Question 2. Caribbean Business also reported that your hope is to finance your 

project with an 80 percent U.S. Energy Department loan guarantee. 

Is this correct? If so, what assurance do you have of such a guarantee? Can you 

finance the project without the guarantee? 

Answer. Under the agreements in place between Excelerate Energy and PREPA 

regarding the AOGP project, it is PREPA’s responsibility to finance and own the 

Fixed Infrastructure referenced in the previous question. As such, PREPA has been 

pursuing the U.S. Department of Energy loan guarantee, and not Excelerate 

Energy. We have no additional insight into this process or assurance that such 

guarantee will be provided. In Excelerate Energy’s view, it is critical for PREPA’s 

debt restructuring to occur in order for financing for this project to be obtained in 

any form, or for guarantees to be granted. 

Question 3. The Puerto Rico Energy Commission has prohibited PREPA from 

spending more than $15 million on the Aguirre Gas Port. 

How would the Commission explain its action on your proposed project? 

Answer. Recognizing the importance of the AOGP project, the Puerto Rico Energy 

Commission (PREC) authorized the spending of up to an additional $15 million for 

ongoing engineering, design, and permitting activities to allow the project to maintain schedule. Excelerate Energy is working closely with PREPA to proceed with 

these additional engineering and related activities. 

In its decision, PREC stated that PREPA was not authorized to commence construction of the AOGP project, and was clear that this was not a denial of the 

project. Rather, PREC requested additional information from PREPA regarding the 

project’s economic benefits to Puerto Rico. 

At this stage Excelerate Energy is completing the permitting process for the 

AOGP project. Until that process is completed and the Federal Energy Regulatory 

Commission (FERC) has provided its notice to proceed, the AOGP project is not able 

to commence construction—regardless of the position taken by PREC. 

Excelerate Energy expects to have the final authorizations to proceed to 

construction in the third quarter of this year. 

Mr. LAMALFA. All right, thank you. I appreciate it. 

We will now recognize Ms. Matosantos for 5 minutes. 

STATEMENT OF ANA J. MATOSANTOS, MEMBER, FINANCIAL 

OVERSIGHT AND MANAGEMENT BOARD OF PUERTO RICO, 

SACRAMENTO, CALIFORNIA 

Ms. MATOSANTOS. Good morning, Chairman, Ranking Member, 

and other Committee members. Thank you for the opportunity to 

address you today. I would like to start by adding my support to 

Chairman Carrio ́n’s comments regarding the important progress 

the board has made since our appointment last year. 

With a certified fiscal plan now in place, we aim to partner with 

the government of Puerto Rico to balance the budget, restructure 

long-term obligations, and take the decisive action necessary to restore economic growth and opportunity for the people of Puerto 

Rico. The fiscal plan certified by the Oversight Board is premised 

on ending the more than a decade-long economic contraction Puerto 

Rico has experienced, and on restoring economic growth. 

A transformational PREPA to provide reliable energy at a lower 

cost is critical to achieving that growth. In this context, we believe 

that the Governor’s determination to review and negotiate amendments to PREPA’s RSA is reasonable. Costly and at times unreliable energy is a major drag on Puerto Rico’s economic growth. It 

is not enough to maintain that energy costs under the RSA will 

compare favorably to energy costs in some other jurisdictions, as 

lower energy costs, rates that compare favorably to the Dominican 

Republic, to the mainland, and to others, are key to reversing the 

58 

negative economic growth trajectory that largely drove Puerto 

Rico’s budgetary crisis and threatens the well-being of the millions 

of the island’s residents. 

It is important to note that, to date, the board has not had the 

RSA before it for approval. The prior government did not present 

it for review. And Governor Rossello ́ has expressed interest in 

modifications. We stand ready to review it and have already advised Governor Rossello ́ that the board would approve an RSA 

amended to reflect the improved economic terms, including lower 

transition costs he is requesting in negotiations. 

Because the PREPA RSA was, to some extent, grandfathered by 

PROMESA, PREPA creditors do not bear under the RSA anything 

remotely comparable to the losses to be borne by creditors of other 

Commonwealth entities. Under the RSA, the uninsured PREPA 

bondholders agreed to take a 15 percent discount on their principal 

claims. The insured bondholders retained their claims to 100 

percent of their principal. 

The monoline insurers who were paid premiums in exchange for 

their promises to make all debt service payments that PREPA does 

not make will not be making any debt service payments of principal once the deal is implemented, and they have not shown us 

any interest payments they will make. Instead, they are posting 

some surety bonds that are returned to them as cash reserves are 

built up. Additionally, hundreds of millions of other debts are not 

experiencing any discounts. 

It is important to understand how other Commonwealth creditors 

are likely to fare under the recently certified fiscal plan. Between 

2009 and 2014, Puerto Rico’s annual deficit averaged $3.9 billion. 

With a deficit of this magnitude and lack of access to capital markets, this year Puerto Rico was only able to fund essential services 

by defaulting on much of its debt, delaying payments to vendors, 

and delaying the issuance of taxpayer refunds. 

Next year, Puerto Rico’s fiscal situation will worsen. Most all 

pension funding will be exhausted. Likewise, the Affordable Care 

Act funding is scheduled to begin phasing out. Puerto Rico’s annual 

deficit is projected to grow to $7 billion over the next several years, 

about 50 percent of their ongoing revenue. 

To balance the budget, the certified fiscal plan includes hundreds 

of millions of dollars in reductions to each of the following: 

healthcare programs, the University of Puerto Rico, and to public 

employment. To ensure liquidity and to generate necessary budget 

savings, the Oversight Board inserted two amendments requiring 

higher pension cuts, averaging 10 percent, to be implemented in a 

progressive manner, and, to the extent necessary, cancellation of 

the Christmas bonus for public employees and a furlough program 

of up to 4 days per month. These measures are acutely painful, but 

necessary for liquidity, achieving structural balance, funding essential services and pensions, as well as providing some funding for 

debt service. 

The fiscal plan, as certified, provides for less than 25 percent of 

contractual debt service due between now and 2026. In short, the 

sacrifices the implementation of Puerto Rico’s certified fiscal plan 

will require from the people of Puerto Rico and other CommonVerDate Mar 15 2010 10:59 May 05, 2017 Jkt 000000 PO 00000 Frm 00062 Fmt 6633 Sfmt 6602 J:\115TH CONGRESS\INDIAN, INSULAR & ALASKA NATIVE AFFAIRS\03-22-17\24754.TXT
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wealth creditors are far greater than anything being asked of 

PREPA’s creditors. 

In conclusion, the Oversight Board stands ready to review the 

PREPA RSA, and supports efforts to lower energy costs and ameliorate projected electricity rate hikes to avoid exacerbating the 

prevailing negative economic growth trend. 

Thank you—and thank you for all your interest and attention to 

this matter. 

[The prepared statement of Ms. Matosantos follows:] 

PREPARED STATEMENT OF ANA J. MATOSANTOS, MEMBER, FINANCIAL OVERSIGHT & 

MANAGEMENT BOARD FOR PUERTO RICO

Good morning. My name is Ana Matosantos. I am a member of the Financial 

Oversight and Management Board for Puerto Rico. 

Thank you, Chairman LaMalfa for your leadership in holding this oversight hearing on ‘‘The Status of the Puerto Rico Electric Power Authority Restructuring 

Support Agreement.’’ Thanks also to Ranking Member Torres, Vice Chair Gonza ́lezColo ́n and, indeed, all the members of this Subcommittee for your interest in and 

attention to this matter. 

Before addressing the specific subject of this hearing, I would like to add my voice 

in support of Chairman Carrio ́n’s statement regarding the important progress the 

Board has made since our appointment last year. 

For the last 61⁄2 months, we have worked to understand the facts on the ground, 

the options available to the government, and the implications of different approaches to addressing the financial and economic crisis facing the island. Throughout, we have sought to partner with the government of Puerto Rico and to use the 

tools made available under PROMESA to help provide a better future for the people 

of Puerto Rico, not just for today, but for our children and future generations. Our 

people love their home and they deserve to be able to build a future on it, not forced 

to move away to support their families and their dreams. 

The Board provided guidance and proposed actions on many fronts to ensure there 

is sufficient cash to fund essential services on the island, to put the budget on a 

path to structural balance, and to restore economic growth. The Rossello ́ administration incorporated the Board’s guidance, as well as its own initiatives, in a Fiscal 

Plan that the Board was able to certify in compliance with PROMESA. With that 

Fiscal Plan now in place, over the course of the next few years, we aim to partner 

with the government of Puerto Rico to balance the budget, restructure long-term 

debt obligations, and take the decisive action necessary to restore economic growth 

and opportunity for the people of Puerto Rico. 

With respect to PREPA, I would like to state at the outset that the Fiscal Plan 

that the Oversight Board certified on March 13, 2017 is entirely premised on ending 

the more than a decade-long economic decline Puerto Rico has experienced and on 

restoring economic growth by no later than Fiscal Year 2022. 

In that regard, I echo Chairman Carrio ́n’s statement that the Board’s approach 

to PREPA’s Restructuring Support Agreement (‘‘RSA’’) must focus on its potential 

impact on economic growth. 

The Governor’s determination to review and negotiate amendments to PREPA’s 

RSA is reasonable and supported by the Oversight Board’s initial review of the draft 

Fiscal Plan PREPA’s management has submitted to the Board. 

We believe that the two main goals of PREPA’s Fiscal Plan should be: (1) 

comprehensive transformation of PREPA’s business model, including the substitution of old, inefficient and unreliable transmission and distribution (T&D) and 

generation infrastructure; and (2) implementing operating efficiencies and other 

changes that can lower energy costs for the people of Puerto Rico and our 

businesses. 

The Board has done a preliminary review of the draft PREPA Fiscal Plan 

submitted to the Board on February 21, 2017 and has the following observations: 

a. The draft Fiscal Plan does not provide for the comprehensive transformation 

of PREPA necessary to lower electricity costs for the People of Puerto Rico. 

b. It does not sufficiently address the need for institutional change in processes 

and procedures, outdated systems and information technology. 

c. It does not capture enough operating expense savings. 

60 

d. It does not contain an ambitious plan to change its business model, and 

replace inefficient legacy assets with new assets, especially regarding power 

generation via Public-Private Partnerships (‘‘P3s’’) or privately sponsored 

projects. 

e. The capital expenditures plan seems to be concentrated in legacy assets and 

their maintenance. 

In our view, it is not enough to maintain that although the resultant energy cost 

under the RSA will increase, it will still compare favorably to energy costs in some 

other jurisdictions. Energy costs in Puerto Rico are high when compared to the 

mainland, to the Dominican Republic and others. Costly and at times unreliable 

energy is a major drag on Puerto Rico’s economic growth. The RSA increases the 

cost of electricity, thereby increasing the cost of living and doing business in Puerto 

Rico. That only makes it more difficult to reverse the negative economic growth trajectory that largely drove Puerto Rico’s budgetary crisis and threatens the wellbeing of the island’s residents. 

Further, in respect to the PREPA RSA, it is important to note what PROMESA 

requires the Oversight Board to do and not to do. For most consensual deals, 

PROMESA requires the Oversight Board to make three decisions. But for the 

PREPA RSA, the Board only makes two decisions. 

PROMESA section 104(i) generally requires the Oversight Board to decide 

whether a Restructuring Support Agreement is consistent with the borrower’s debt 

sustainability, and its certified fiscal plan, if it has one. But the PREPA RSA was 

entered into prior to May 18, 2016. Therefore, under PROMESA section 104(i)(3), 

the PREPA RSA is deemed to be consistent with PREPA’s debt sustainability and 

the Oversight Board has no power to say otherwise. 

PROMESA section 601(e) provides that the Oversight Board must determine 

whether to authorize an entity to invoke Title VI to implement an RSA. Because 

Title VI does not deal with the restructuring of anything other than bond debt, 

other obligations cannot be restructured in Title VI. If PREPA requires relief of 

other contractual obligations, the Oversight Board’s use of Title VI would be inadequate. The Board could approve the implementation of the PREPA RSA, as amended, in a Title III case, making it possible for PREPA to address other contractual 

obligations driving significant costs. 

Finally, PROMESA section 207 provides the Oversight Board must authorize the 

issuance of new debt, and the PREPA RSA includes issuance of new debt. 

To date, the Board has not had the RSA before it for approval as the prior government did not present it for review and now Governor Rossello ́ has expressed an interest in modifications. The Board stands ready to review the PREPA RSA upon its 

submission for the Board’s consideration. The Board has already advised the 

Governor that it would approve an RSA amended to reflect improved economic 

terms, including lower transition costs, as the Governor is requesting in negotiations. 

It is important to note that because the PREPA RSA was grandfathered to some 

extent by PROMESA, PREPA creditors do not bear under the RSA anything remotely comparable to the losses to be borne by creditors of other Commonwealth 

entities. 

To avoid overlooking the obvious, I will just mention briefly that while the uninsured PREPA bondholders agreed to take a 15 percent discount on their principal 

claims, the insured bondholders retain their claims to 100 percent of their principal. 

The monoline insurers, who were paid premiums in exchange for their promises to 

make all debt service payments that PREPA does not make, will not be making any 

debt service payments of principal once the deal is implemented and they have not 

shown us any interest payments they will make. Instead, they are posting some surety bonds that are returned to them as cash reserves are built up. Additionally, 

hundreds of millions of other debts are not experiencing any discounts. 

The sacrifices the implementation of Puerto Rico’s certified Fiscal Plan will require from the people of Puerto Rico and other Commonwealth creditors are far 

greater than anything being asked of PREPA’s creditors. 

It is important to understand how other Commonwealth creditors are likely to 

fare under the recently certified Fiscal Plan. To accomplish PROMESA’s mandate 

that Puerto Rico balance its budget, fund essential services and pensions, as well 

as work to restore access to capital markets at cost-effective rates, the Oversight 

Board worked to understand Puerto Rico’s actual financial condition and operating 

deficits. 

Between 2009 and 2014, Puerto Rico’s annual deficit averaged $3.9 billion. With 

a deficit of that magnitude and lack of access to capital markets, this year, Puerto 

Rico funded essential services by defaulting on much of its debt, delaying payments 

61 

to vendors and delaying the issuance of refunds to taxpayers. Next year, Puerto 

Rico’s fiscal situation will worsen. 

Most all pension funding will be exhausted in Fiscal Year 2018, necessitating general fund expenditures starting at $989 million per year. Likewise, Affordable 

Care Act funding from the Federal Government of $800 million per year will cease 

during Fiscal Year 2018. 

Against that background, the Oversight Board had to evaluate the prior governor’s proposed fiscal plan for the Commonwealth, and determined it contained 

many violations of the terms of PROMESA section 201(b). 

The prior governor declined to revise his proposed fiscal plan, leaving it to the 

new Governor who was not inaugurated until January 2, 2017. 

Understandably, the new Governor requested more time to propose a fiscal plan 

and the Oversight Board provided him until February 28, 2017, so that the Board 

could certify the Governor’s plan or its own plan by March 15, 2017. 

Further, an analysis of initial spending projection included in the Government’s 

Fiscal Plan conducted by Ernst & Young at the Board’s request, concluded that 

spending in Fiscal Year 2017 was potentially understated by a range between $360 

million and $810 million. 

The Board acknowledged that the Governor revised his proposed plan to accommodate the best available spending, revenue and economic projections. The revised 

plan also includes substantial increases in the depth of reductions being made to 

balance the budget including hundreds of millions of dollars in reductions to 

healthcare programs, to the University of Puerto Rico and to public employment. 

The Fiscal Plan, as certified, provides funds for less than 25 percent of contractual 

debt service due between now and 2026. 

In addition to the Governor’s changes, the Oversight Board inserted two amendments requiring (i) higher pension cuts averaging 10 percent, to be implemented in 

a progressive manner, and (ii) to the extent necessary, cancellation of the Christmas 

bonus for public employees and a public employee furlough program of up to 4 days 

per month. 

These additional measures are acutely painful, but their implementation may be 

necessary for liquidity, achieving structural balance, funding essential services and 

pensions, as well as providing some funding for debt service. 

As stated before, on March 13, 2017, the Oversight Board certified the Governor’s 

Fiscal Plan for the Commonwealth, with the two amendments I just described, and 

provided the Government until April 30, 2017 to submit its proposed budget in accordance with the certified Fiscal Plan. 

In conclusion, the Oversight Board stands ready to review the PREPA RSA upon 

its submission for the Board’s consideration. The Board supports efforts to lower 

energy costs and ameliorate projected electricity rate hikes to avoid exacerbating the 

prevailing negative economic growth trend. 

Thank you, Mr. Chairman. And thanks to all the members for your interest in 

and attention to this matter. 

QUESTIONS SUBMITTED FOR THE RECORD TO ANA J. MATOSANTOS

Questions Submitted by Rep. Bishop 

Question 1. In your testimony, you state: ‘‘under PROMESA section 104(i)(3), the 

PREPA RSA is deemed to be consistent with PREPA’s debt sustainability and the 

Oversight Board has no power to say otherwise.’’ 

Section 104(i) states: ‘‘The Oversight Board shall issue a certification to a covered 

territory or a covered territorial instrumentality if the Oversight Board determines, 

in its sole discretion, that such territory or covered territorial instrumentality, as 

applicable, has successfully reached a voluntary agreement with holders of its Bond 

Claims to restructure such Bond Claims’’ if a fiscal plan has been certified in a manner that provides for a sustainable level of debt. There are other qualifiers if the 

fiscal plan has not been approved. 

Section 104(i)(3) states: ‘‘Any voluntary agreement that the territorial government 

or any territorial instrumentality has executed before May 18, 2016, with holders 

of a majority in amount of Bond Claims . . . shall be deemed to be in conformance 

with the requirements of this subsection.’’ 

So, the plain language of the statute deems that the pre-existing voluntary agreement for PREPA meets the requirement for a certified fiscal plan that provides for 

a sustainable level of debt. Furthermore, it deems the PREPA deal as being in conformance with the certified plan, isn’t that correct? 

62 

If those criteria are met, then the statute dictates that the Board is to issue a 

certificate saying so, isn’t that correct? 

Why hasn’t the Board done so? 

Answer. As mentioned in my testimony. the RSA has not been presented to the 

Board for its review and approval as the prior administration did not submit it for 

review and the current administration sought amendments to the agreement. The 

Board remains committed to taking action on the RSA consistent with the 

PROMESA statute when an RSA is submitted to the Board. 

Question 2. In your testimony, you state: ‘‘The Board could approve the implementation of the PREPA RSA, as amended, in a Title III case, making it possible for 

PREPA to address other contractual obligations driving significant costs.’’ 

Could not the same be achieved through the Board’s approvals of the fiscal plan 

and budgets for PREPA? 

Answer. The mechanism provided by Title III to address reductions in PREPA’s 

operational costs is different in nature from the process of certifying PREPA’s fiscal 

plan and budget. Under Title III , existing contractual arrangements can be judicially modified, whereas no such option exists under the certification process. 

Question 3. In your testimony, you state: ‘‘The sacrifices the implementation of 

Puerto Rico’s certified Fiscal Plan will require from the people of Puerto Rico and 

other Commonwealth creditors are far greater than anything being asked of 

PREPA’s creditors.’’ 

Do you agree that the Commonwealth government and PREPA are two different 

entities? 

Do you agree that the circumstances leading to the accumulation of debt are 

different? 

Do you agree that the Commonwealth government and PREPA have different 

revenue streams? 

Do you agree that the Commonwealth government and PREPA have different 

securitizations, different debt obligations? 

Answer. Yes, I agree. 

Question 4. So, is it your testimony that the financial situation of the Commonwealth government should govern how the PREPA debt should be restructured, or 

should each be examined as separate entities? 

Answer. The Commonwealth and PREPA are separate entities and should be examined as such. As discussed in my testimony, the intersection between PREPA and 

the economic and demographic reality in the Commonwealth requires careful consideration as PREPA plays an important role in the economy of Puerto Rico and the 

economic and demographic reality of Puerto Rico impacts PREPA’s future. As repeatedly acknowledged in PROMESA, the energy situation of Puerto Rico is a key 

issue affecting economic development. Hence, the priority for critical projects that 

reduce the cost of energy given priority under Title V of PROMESA. 

Questions Submitted by Rep. Grijalva 

Question 1. Has the Board received the report? [Referring to the report under 

PROMESA Section 208(b) setting forth tax abatement agreements granted by the 

Commonwealth.] 

Answer. Pursuant to Section 208(b) of PROMESA, the Secretary of the Treasury 

of the Commonwealth of Puerto Rico provided tax-related information in a report 

(with attachments) dated February 28, 2017, copies of which are attached. 

Subsequently. a representative of the Board met with the Secretary to request additional information to satisfy the requirements of Section 208(b) of PROMESA, and 

on March 30, 2017, the Board wrote to the Secretary to follow up on such request. 

A copy of the Board’s letter is attached. 

Question 2. How could a fiscal plan be agreed to that cuts Government spending 

for public services and for payment of debts so drastically that does not require any 

further contribution from companies that represent a third of the GDP and high net 

worth individuals on top of that who pay so little in tax now? 

Answer. The certified Fiscal Plan includes corporate tax reform to maintain the 

current level of revenues including contributions from pharmaceutical and other 

companies. Further. it includes other measures to increase revenues by hundreds 

of millions of dollars annually, including through efforts to increase collections. The 

fiscal plan includes changes to generate an additional $1.5 billion in revenue to close 

the fiscal gap. Puerto Rico has a track record of assuming higher revenue projecVerDate Mar 15 2010 10:59 May 05, 2017 Jkt 000000 PO 00000 Frm 00066 Fmt 6633 Sfmt 6621 J:\115TH CONGRESS\INDIAN, INSULAR & ALASKA NATIVE AFFAIRS\03-22-17\24754.TXT
63 

tions and not realizing those revenues. The fiscal plan strikes a balance between 

increased revenue, deep reductions, restructuring and structural changes to encourage economic growth. 

Attachment—[Attachment can be found on page 32 with Mr. Carrio ́n’s responses.] 

Mr. LAMALFA. OK. Thank you. We appreciate your testimony. 

We will go now to Mr. Spencer for 5 minutes. 

STATEMENT OF STEPHEN SPENCER, MANAGING DIRECTOR, 

HOULIHAN LOKEY, MINNEAPOLIS, MINNESOTA, ON BEHALF 

OF FRANKLIN ADVISERS, INC. AND OPPENHEIMER FUNDS, 

INC. 

Mr. SPENCER. Chairman LaMalfa, Ranking Member Torres, Vice 

Chairman Gonza ́lez, and members of the Subcommittee, thank you 

for inviting me to testify today. I am here on behalf of Franklin 

Advisers and Oppenheimer Funds, who invested in PREPA bonds 

for more than 500,000 retail investors throughout the United 

States. 

It is important to remember who Puerto Rico’s bondholders are. 

Beyond our half-million investors, there are hundreds of thousands 

more in every state and in every congressional district, including 

over 60,000 bondholders on the island. 

For almost 3 years, I have been working to advance a consensual 

restructuring of PREPA’s debt on behalf of Franklin, Oppenheimer, 

and other bondholders. And look how much we have achieved: 

(1) Our deal offers the surest route back to the capital markets. 

It issues new, safe bonds, like bonds issued by utilities in New 

York and California that will get PREPA back into the capital markets to fund new, clean, and reliable power generation. 

(2) Our deal serves as a template for restructuring other Puerto 

Rico debts. The PREPA deal is the first and, so far, the only major 

restructuring agreement in Puerto Rico. It can be used as a model 

for successful restructuring by other government agencies such as 

Puerto Rico’s sewer water authority. 

(3) Our deal stabilizes PREPA. In July 2014, PREPA faced a crisis. It could not get credit to buy fuel, and reserves dwindled to a 

few days’ supply in peak hurricane season. To prevent disaster, 

bondholders gave PREPA hundreds of millions in bondholder reserve accounts, and literally kept the lights on. 

(4) Our deal provides cash for PREPA and savings for ratepayers. 

Since the crisis, creditors have invested hundreds of millions to 

support PREPA, and we have allowed PREPA to pass along over 

$2 billion in rate reductions from lower fuel costs. Under our deal, 

creditors will cut debt service by nearly $2 billion more. 

(5) Our deal has been approved by Puerto Rico’s legislature, 

which passed legislation to implement the deal by the Puerto Rico 

Energy Commission, which approved the deal after months of public hearings, a first in Puerto Rico, and by the Puerto Rico courts. 

Finally, when Congress passed PROMESA, they included provisions that encourage pre-existing voluntary arrangements and 

agreements like the PREPA deal. Congress gave Puerto Rico a tool 

to restructure; we are simply trying to use it. Despite these 

64 

accomplishments, critics of the PREPA deal have directed 

misguiding or misleading attacks against it. 

For example, they say the deal raises rates. False. To quote the 

Puerto Rico Energy Commission, ‘‘Restructured debt costs are far 

lower than they would be without restructuring.’’ 

PREPA’s post-deal rates are significantly lower than comparable 

island utilities. Critics say, ‘‘Debt should be cut further.’’ False. No 

other public utility monopoly has ever cut its debt service. PREPA 

is the first. Bondholders have given enough to avoid litigation that 

we would eventually win. 

Critics say the deal does not restructure PREPA operations. 

False and misleading. Only PREPA can restructure operations. We 

agreed to reduce debt service to support PREPA’s efforts to do so. 

They say the deal does not support renewable energy. False. The 

deal provides nearly $2 billion of debt service savings for PREPA 

to invest in new generation, including renewables. 

They say the deal does not support private generation or publicprivate partnerships. False again. The deal does not stop P3 deals, 

it gets them going by avoiding years of litigation. 

Finally, they say the PREPA deal is not executable. False. 

PREPA’s fiscal plan provides a detailed description of the executable creditor agreement. The plan also shows that, without a deal, 

PREPA faces either a liquidity crisis or a large, immediate rate 

hike. 

We find ourselves in a strange position. The government, including the Energy Commission and PREPA, itself a government agency, has approved the deal, but the new administration will not 

commit to close it. The Governor wants to jam us into pay-nothing 

bonds for 7 years. 

Changing a fully baked deal is wrong. It is reckless, and it is unnecessary. With creditor support, PREPA has actually improved 

over the last few years. Rates are dramatically lower today than 

they were in 2014. Completing the deal keeps PREPA on a path 

to better operation with lower rates benefiting all Puerto Ricans. 

We have extended our agreement 15 times. The last extension 

expires in 9 days—9 days, Mr. Chairman. The new administration 

must commit to close this deal now. Without it, their public disclosure yesterday indicates PREPA will soon run out of cash. Failure 

to close our deal helps no one. Failure hurts Puerto Rico’s restructuring negotiations. It hurts municipal borrowers in places as disparate as the U.S. Virgin Islands, Illinois, and Guam. And it hurts 

the people of Puerto Rico. 

Members of the Committee, thank you for your legislative oversight on this important matter. I look forward to your questions. 

[The prepared statement of Mr. Spencer follows:] 

PREPARED STATEMENT OF STEPHEN J. SPENCER, MANAGING DIRECTOR, FINANCIAL

RESTRUCTURING GROUP, HOULIHAN LOKEY

INTRODUCTION

Chairman LaMalfa, Ranking Member Torres, Resident Commissioner Gonza ́lez, 

and members of the Subcommittee, thank you for inviting me to testify today regarding the Puerto Rico Electrical Power Authority (‘‘PREPA’’) and its Restructuring 

Support Agreement (‘‘RSA’’)—the ‘‘PREPA Transaction.’’ 

My name is Stephen J. Spencer. I am testifying on behalf of certain funds managed by Franklin Advisers Inc. (‘‘Franklin’’) and OppenheimerFunds, Inc. 

65 

1For the PREPA negotiations, I advise both Franklin and Oppenheimer, along with the 

investment interests of five separate asset investors. 2See PREPA’s draft Fiscal Plan at pages 73–75. Fiscal Plan, Commonwealth of Puerto Rico, 

Puerto Rico Elec. Power Auth., at 73–75 (Feb. 2017) [hereinafter ‘‘PREPA’s Fiscal Plan’’], 

available at http://caribbeanbusiness.com/wp-content/uploads/2017/02/PREPA-Fiscal-Plan.pdf. 

(‘‘Oppenheimer’’) in connection with their investment in $1.7 billion in bonds issued 

by PREPA.1

Franklin and Oppenheimer are Puerto Rico’s largest bondholders and have been 

among Puerto Rico’s largest investors, providing capital to finance critical infrastructure, such as roads, bridges and hospitals for more than 30 years. Over half 

a million individual retail investors across the United States invested in Puerto Rico 

bonds through Franklin and Oppenheimer. Untold thousands have invested through 

other funds, and at least another 340,000 individuals have invested directly in 

Puerto Rico bonds. 

The PREPA Transaction is backed by holders or insurers of about 70 percent of 

all of PREPA’s financial debt. 

Bondholders agreed to a 15 percent principal haircut, a 5-year holiday on principal payments, and a reduced interest rate—cutting debt service by billions of 

dollars over the next decade. The PREPA Transaction would be implemented 

through a proceeding under Title VI of PROMESA. 

The PREPA Transaction works because the new bonds would be ‘‘securitized’’— 

that is, the new bonds will not be paid out of PREPA’s cash-flow, but by a separate 

charge. 

Under the PREPA Transaction, total electrical rates paid by Puerto Ricans will 

be 25 percent below what Puerto Rican law otherwise requires. 

The PREPA Transaction does more than simply refinance PREPA’s debt and restore access to capital markets—the first and last goal of PROMESA. The deal also 

puts PREPA on the path to fiscal responsibility—another goal of PROMESA. The 

deal also permits public-private partnerships and facilitates necessary capital investment—another goal of PROMESA. 

This deal is a crucial step in PREPA’s journey from crisis to financial health— 

a journey from poor maintenance to capital improvement—a journey from Puerto 

Rico’s reliance on diesel fuel to a more diversified energy base that includes cleaner 

natural gas. 

After 14 months of negotiation, my clients signed the PREPA Transaction in 

November 2015. The PREPA Transaction was authorized by Puerto Rico’s legislature in February 2016, its implementation was approved by Puerto Rico’s Energy 

Commission in the summer of 2016, and its constitutionality was recently upheld 

by a decision in a local Puerto Rican court. 

In 2016, Congress wrote provisions into PROMESA to help certain voluntary, 

‘‘pre-existing’’ agreements, like the PREPA Transaction, that were entered into 

shortly before the passage of PROMESA. As a result, the PREPA Transaction is the 

only deal exempt from Oversight Board review and is ready to be finalized under 

PROMESA Title VI. 

My clients even agreed to additional concessions in January 2017. To be clear, the 

January 2017 deal is the deal inked in November 2015; the only changes are concessions by creditors, not by PREPA or Puerto Rico.2 The deal is executable. 

Failure to close this deal would have ramifications far beyond PREPA. 

Failure to close a deal negotiated over 2 years would call into question Puerto 

Rico’s good faith in negotiating other restructurings—of great concern to Franklin 

and Oppenheimer, who hold over $6 billion of other Puerto Rico bonds. 

Failure would damage, if not destroy, Puerto Rico’s ability to use securitization 

as a tool to restructure other entities such as the Puerto Rico Aqueduct and Sewer 

Authority, which is looking to use the PREPA Transaction as a model. 

Failure would have ramifications beyond Puerto Rico. It will negatively impact 

other challenged government entities as diverse as the U.S. Virgin Islands, Guam, 

the city of Chicago, and the state of Illinois. 

Finally, failure to close this deal would be bad for the people of Puerto Rico. The 

deal puts PREPA on a sound financial footing, but without it, PREPA is approaching imminent default and a liquidity crisis that could turn off the lights with the 

next operational hiccup or major storm. 

We have extended our Restructuring Support Agreement 16 times; the last 

extension expires 9 days from this hearing, on March 31. PROMESA’s stay expires 

May 1. 

66 

3Puerto Rico Elec. Power Auth. Organic Act of May 12, 1941, Act No. 83–1941, § 6A(c), as 

amended. 4PREPA Revitalization Act: Hearing Before the Puerto Rico S. Comm. on Energy Affairs and 

Water Resources, 17th Legis. Assemb., 2 (P.R. Nov. 10, 2015) (testimony of Lisa Donahue, Chief 

Restructuring Officer of PREPA). 5 Changes in the price of natural gas and purchased power also affect the fuel charge, but 

to a far lesser degree. 6See generally Accounts Receivable and CILT Report, FTI Capital Advisors, LLC, 16–17, 29– 

30 (Nov. 15, 2014) [hereinafter FTI Report], available at http://www.aeepr.com/Docs/ 

restructuracion/PREPA%20AR%20and%20CILT%20Report%20Final.pdf. 7DERA was later struck down by the federal courts as pre-empted by Section 903 of the 

Bankruptcy Code. Puerto Rico v. Franklin California Tax Free Trust, 136 S. Ct. 1938 (2016). 8DERA specifically excluded most major municipal issuers of debt in Puerto Rico, other than 

PREPA, PRASA, and PRHTA. Governor Alejandro Garcı ́a-Padilla Presents Bill for Debt Enforcement and Recovery of Public Corporations, Commonwealth of Puerto Rico, Government Development Bank for Puerto Rico, 2 (June 25, 2014), available at http://www.gdb-pur.com/documents/ 

06-25-14-PressRelease-RecoveryAct-Final.pdf. 

PREPA AND PREPA DEBT

PREPA is a public corporation that generates most of—and delivers all of—the 

electric power consumed in Puerto Rico. PREPA sets and collects rates for its services to customers. Since 2014, PREPA’s rates have been subject to review by the 

Energy Commission. 

Puerto Rican law specifically requires that the Energy Commission approve a rate 

that is sufficient to cover all debt service on PREPA’s bonds.3

PREPA has issued approximately $8.3 billion of outstanding revenue bonds to the 

public. The bonds are secured by PREPA’s net revenues from its electric generation 

and distribution system, as well as reserve accounts held by the trustee. Approximately 30 percent of PREPA’s outstanding debt is insured by three separate 

monoline insurance companies. 

PREPA also owes approximately $700 million in expired lines of credit that were 

used to purchase fuel for its generation. 

LIQUIDITY CRISIS AND CREDITOR ORGANIZATION

PREPA has faced severe internal and external challenges. In the words of its 

former chief restructuring officer, Lisa Donahue of AlixPartners, PREPA had ‘‘a lack 

of institutionalized processes and procedures, outdated systems and information 

technology and frequent changes of employee positions and responsibilities with 

each electoral cycle every four years.’’ 4

PREPA started experiencing liquidity difficulty due, in part, to its existing rate 

structure, which charges a fixed ‘‘base’’ rate for non-fuel expenses, like administrative costs and debt service, and a floating rate for fuel costs, which fluctuates with 

the price of oil.5

PREPA’s base rate had not changed from 1989 to 2015, even as its costs rose 

significantly. 

PREPA’s cash flow further suffered from a serious failure in collections: it persistently allowed individual customers, other public corporations, government agencies, 

and municipalities to avoid paying their bills.6

On June 28, 2014, the government of Puerto Rico enacted Act 71–2014, entitled 

the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (‘‘DERA’’).7

Governor Alejandro Garcı ́a-Padilla and the Puerto Rico Legislative Assembly intended for DERA to provide Puerto Rico with its own insolvency regime for certain 

large government-owned businesses, including PREPA.8

DERA signaled a dramatic escalation of political and financial risk for creditors. 

PREPA suffered a liquidity crisis as major vendors, including the utility’s critical 

fuel suppliers, refused to ship their products to the Company on standard trade 

credit terms. Over the following weeks, the situation at PREPA rapidly deteriorated. 

By the end of July 2014, PREPA’s fuel reserves fell to a level where the Company 

was left with only a few days of fuel supply. PREPA’s resources were dangerously 

depleted, and brownouts were on the horizon as the island approached the peak of 

hurricane season. At the same time, mostly as a result of surging oil prices, 

PREPA’s all-in rates for consumers rose to a high of approximately 28 cents per 

kilowatt-hour (‘‘kWh’’). 

To resolve the liquidity crisis and avert the potential for much wider chaos stemming from disruptions in Puerto Rico’s power supply, PREPA’s major creditors entered into around-the-clock negotiations with the island’s advisors on a potential 

forbearance agreement. 

67 

9PREPA Reaches Agreements with Creditors, Commonwealth of Puerto Rico, Government 

Development Bank for Puerto Rico (Aug. 14, 2014), available at http://www.gdbpr.com/ 

documents/PREPA_Aug14Forbearance_PressRelease_081414_FINAL.pdf. The original 

Forbearance Agreement can be found at: http://www.gdbpr.com/documents/ 

BondholderForbearanceAgreementEXECUTED.pdf. 10For more information on the rates of comparable island electric utilities, PREPA’s historical 

rate, and the rate that PREPA’s customers are projected to pay after the PREPA Transaction, 

see attached Annex A, which was prepared by Houlihan Lokey. 11Monthly Report to the Governing Board: June 2015, Commonwealth of Puerto Rico, Puerto 

Rico Elec. Power Auth., at 4 (June 2015), available at http://www.aeepr.com/INVESTORS/DOCS/ 

Financial%20Information/Monthly%20Reports/2015/June%202015.pdf (listing a total fuel adjustment surcharge for all customer classes of $2,633,256,000 in fiscal year 2013–2014 and 

$2,129,834,000 in fiscal year 2014–2015); Monthly Report to the Governing Board: June 2016, 

Commonwealth of Puerto Rico, Puerto Rico Elec. Power Auth., at 4 (June 2016), available at 

http: // www.aeepr.com/INVESTORS/DOCS/Financial%20Information/Monthly%20Reports/2016/ 

June%202016.pdf (listing a total fuel adjustment surcharge for all customer classes of 

$1,365,977,000 in fiscal year 2015–2016); Monthly Report to the Governing Board: November 

2016, Commonwealth of Puerto Rico, Puerto Rico Elec. Power Auth., at 4 (November 2016), 

available at http://www.aeepr.com/INVESTORS/DOCS/Financial%20Information/Monthly%20 

Reports/2016/November%202016.pdf (listing a total fuel adjustment surcharge for all customer 

classes of $592,656,000 in fiscal year-to-date as of November 2016); Monthly Report to the 

Governing Board: November 2014, Puerto Rico Elec. Power Auth., at 4 (November 2014), available at http://www.aeepr.com/INVESTORS/DOCS/Financial%20Information/Monthly%20Reports/ 

2014/November%202014.pdf (listing a total fuel adjustment surcharge for all customer classes 

of $1,113,188,000 in fiscal year-to-date as of November 2014). 

The major parties to the negotiations included PREPA; the Government Development Bank (‘‘GDB’’), Puerto Rico’s fiscal agent; an ad hoc group of PREPA bondholders, including Franklin and Oppenheimer, holding over 35 percent of PREPA 

bonds (the ‘‘Ad Hoc Group’’); its monoline insurers; and parties involved in the fuel 

lines. 

FORBEARANCE AGREEMENT AND BUSINESS STABILIZATION

During several weeks in the summer of 2014, PREPA, Puerto Rico (acting through 

its fiscal agent GDB), and PREPA’s major creditors worked to hammer out a compromise. Negotiations resulted in an extended forbearance and consent agreement 

(the ‘‘Forbearance Agreement’’), which allowed PREPA to avoid the threat of imminent default. 

In return, PREPA agreed to hire a chief restructuring officer and to develop a 

comprehensive 5-year business plan. The objective of the business plan was for 

PREPA to make detailed financial projections and to identify important operational 

and structural reforms to be implemented. 

The original Forbearance Agreement was executed on August 14, 2014 and was 

extended 13 times.9 As part of the Forbearance Agreement, creditors extended liquidity to PREPA to help PREPA stabilize its business. They did so by allowing 

PREPA to make payments of debt service from reserve accounts instead of from 

cash from PREPA’s general fund, suspending PREPA’s obligations to transfer revenues to accounts controlled by the Trustee, and voluntarily agreeing to postpone 

some of their upcoming principal and interest payments. 

OPERATING PRESSURES ON PREPA EASE

PREPA achieved further stability through favorable developments affecting its operations and financial performance and through reforms implemented by its chief 

restructuring officer. 

PREPA and other island-based electric utilities face challenges that mainland 

utilities do not. They include an absence of naturally occurring local fuel sources, 

which means they must rely on imported fuel, primarily fuel oil. Importing gas requires a high-pressure liquefied state, which is much more expensive than gaseous 

state pipeline deliveries on the mainland. An island utility needs more generating 

capacity and more individual generating units than a mainland utility does, since 

a mainland utility can draw from neighboring networks in order to provide reliable 

service during maintenance or outages.10 These challenges result in higher rates for 

island utilities than for mainland utilities. 

Despite these factors, a sustained drop in the price of oil since 2014 allowed 

PREPA to pass along significant electricity cost savings to customers, including a 

savings of more than $0.5 billion in Fiscal Year 2015, an incremental $1.3 billion 

of savings in Fiscal Year 2016, and another incremental $0.5 billion of savings in 

the first 4 months of Fiscal Year 2017.11

68 

12Puerto Rico Elec. Power Auth. Operational Transformation: Hearing Before the Puerto Rico 

S. Comm. on Energy Affairs and Water Resources, 17th Legis. Assemb., 7 (Oct. 4, 2016) 

(testimony of Lisa Donahue, Chief Restructuring Officer of PREPA). 13 AlixPartners’ Hand-Over Strategy to the Governing Board, Commonwealth of Puerto Rico, 

Puerto Rico Elec. Power Auth. (Feb. 1, 2017), available at http://www.aeepr.com/jg/docs/ 

PREPA_Exit%20Strategy%2002-01-2017%20final.pdf. 14Puerto Rico Elec. Power Auth. Operational Transformation: Hearing Before the Puerto Rico 

S. Comm. on Energy Affairs and Water Resources, 17th Legis. Assemb., 5–13 (Oct. 4, 2016) 

(testimony of Lisa Donahue, Chief Restructuring Officer of PREPA). 15PREPA’s Fiscal Plan at 11. 16PREPA Reaches Agreement with Ad Hoc Bondholder Group, Commonwealth of Puerto Rico, 

Puerto Rico Elec. Power Auth. (Sept. 2, 2015), available at http://www.aeepr.com/aeepr2009/ 

noticiasread.asp?r=DLGZEKPRAG. 17 Assured Guaranty and PREPA Enter Restructuring Support Agreement, Assured Guaranty 

Ltd. Investor Relations and Corporate Communications (Dec. 24, 2015), available at http:// 

www.businesswire.com/news/home/20151223005779/en. 18PREPA Reaches Agreement with Its Creditors, Commonwealth of Puerto Rico, Puerto Rico 

Elec. Power Auth. (June 30, 2016), available at http://www.aeepr.com/aeepr2009/noticias 

read.asp?r=UUOHMSWEVE. 19 In addition to serving as PREPARC’s servicer, PREPA will continue its usual functions, 

including energy generation and distribution and assessing and collecting rates related to the 

same. 20See Annex A. 

PREPA’s financial situation also improved as a result of reforms PREPA’s chief 

restructuring officer and management implemented, which have yielded significant 

benefits to PREPA and its customers. Over the past 2 years, PREPA revamped its 

fuel inventory and fuel procurement procedures, creating a one-time benefit of $36 

million and a recurring annual benefit of $23 million.12 PREPA also developed new 

ways to combat electricity theft, generating additional revenue of $70 million per 

year.13 PREPA improved operational efficiency in other ways by reforming its capital maintenance practices, reducing labor costs through attrition, and improving its 

billing and collection procedures.14 These and other initiatives together generated 

$271 million in one-time cash savings and $254 million in recurring annual savings 

for PREPA.15

NEGOTIATING THE PREPA TRANSACTION

Building on the Forbearance Agreement, PREPA and its financial creditors began 

the task of negotiating a comprehensive debt adjustment agreement, which culminated in a series of agreements with the Ad Hoc Group,16 the fuel line lenders, 

and two of its monoline insurers 17 in late 2015, and finally with the last of its insurers in June of 2016.18 These agreements were memorialized in greater detail in 

a comprehensive Restructuring Support Agreement (the ‘‘RSA’’). 

Economic Components of the PREPA Transaction 

The RSA contemplates the creation of a new, special purpose, bankruptcy-remote 

public corporation called the PREPA Revitalization Corporation (‘‘PREPARC’’) 

through the enactment of new legislation. (The necessary Puerto Rican legislation 

passed in February 2016 and is discussed more fully below.) That new legislation 

grants PREPARC the authority to levy a mandatory, non-bypassable securitization 

charge (a ‘‘transition charge’’) on customers’ electric bills. The transition charge is 

collected by PREPA but does not belong to PREPA.19 PREPARC will issue new 

securitization bonds secured by the transition charge. PREPARC has no operations 

and will have an independent board. 

This securitization structure is based on widely used public utility ‘‘stranded cost’’ 

securitizations, which have been used in New York, California, Louisiana, and 

several other states. 

The transition charge is based on historical energy usage and will have a quarterly ‘‘true-up’’ to adjust the transition charge upwards or downwards to ensure, on 

the one hand, that the charge always covers debt service and, on the other, that 

customers are not charged more than is required for debt service. The transition 

charge and true-up mechanism were approved by Puerto Rico’s public utility commission (the ‘‘Energy Commission’’), as discussed below. At current oil prices, the 

transition charge plus the PREPA charges to customers for electricity are less than 

historical electricity costs and the rates at other comparable island utilities.20

69 

21The full terms of the exchange offer can be found in the RSA at Annex D and Schedule 

I–B thereto. See PREPA Public Disclosure, Electronic Municipal Market Access, Municipal 

Securities Rulemaking Board, Exhibit A (June 30, 2016), available at http://emma.msrb.org/ 

ES1020690.pdf. 22PREPA’s third monoline insurer, Syncora Guarantee Inc. (‘‘Syncora’’), agreed to a variety 

of different treatments of the PREPA bonds that it insures or owns. The full terms of Syncora’s 

treatment can be found in the RSA at Annex D and at Schedule II–A thereto. See PREPA Public 

Disclosure, Electronic Municipal Market Access, Municipal Securities Rulemaking Board, 

Exhibit A (June 30, 2016), available at http://emma.msrb.org/ES1020690.pdf. 23The full terms of their treatment can be found in the RSA at Annex D and Schedule II 

thereto. See PREPA Public Disclosure, Electronic Municipal Market Access, Municipal Securities 

Rulemaking Board, Exhibit A (Mar. 15, 2016), available at http://emma.msrb.org/ES1000543.pdf. 24See Attachment 3.03 of the PREPARC Verified Petition for Restructuring Order. In re: 

Puerto Rico Electric Power Authority Revitalization Corporation Verified Petition for Restructuring Order, No. CEPR–AP–2016–0001, Petition for Restructuring Order, Attachment 3.03 

(April 7, 2016), available at http://energia.pr.gov/wp-content/uploads/2016/04/TransitionCharge2.pdf. 25 Charles R. Babcock, Alleged Puerto Rican Bribery Money Will Be Returned, Wash. Post 

(Dec. 9, 1980), https://www.washingtonpost.com/archive/politics/1980/12/09/alleged-puerto-ricanbribery-money-will-be-returned/a46e8a90-09df-454c-84fc-a9e9b45bb0d3. 26Section 4(a) of Act No. 83 of May 2, 1941, as amended through Act 57–2014 (22 L.P.R.A. 

§ 194(a)), states that six of the nine PREPA Board members are appointed by the Governor. 

Continued 

The major components of the transformation of PREPA’s debt under the PREPA 

Transaction are: 

• Uninsured PREPA Bonds. Uninsured bondholders will exchange existing uninsured PREPA bonds for new PREPARC securitization bonds. In exchange 

for the protections the securitization offers, bondholders will accept an 

exchange ratio of 85 percent of the par value of the original bonds: 

that is, bondholders would voluntarily take a 15 percent haircut in 

the principal amount of their bonds. The new securitization bonds 

would have a 5-year principal moratorium and a reduced interest 

rate.21

• Monolines. Two of the monoline insurers 22 will receive the benefit of 

securitization bonds issued by PREPARC, referred to as ‘‘mirror bonds,’’ that 

will economically defease the existing insured PREPA bonds. These insured 

bonds will be paid out of the transition charge, rather than out of PREPA’s 

revenues. In exchange, these monolines will provide surety bonds to fund a 

portion of the debt service reserve funds.23 Those reserve funds will help the 

securitization bonds achieve higher ratings and correspondingly lower interest 

rates, provide further stability for bondholders, and reduce PREPARC’s need 

for cash reserves to cover potential shortfalls in bond payments. 

The PREPA Transaction produces substantial savings on debt service by reducing 

outstanding principal of uninsured PREPA bonds by 15 percent, lowering the interest rate, and offering a 5-year moratorium on principal payments. Under the terms 

of the PREPA Transaction, total debt service is reduced by approximately 

$1.1 billion in the first 5 years and $1.7 billion in the first decade.24

The passage of PROMESA in 2016 generated additional savings for PREPA. It 

meant that PREPA could use Title VI of PROMESA—which was drafted to accommodate voluntary, ‘‘pre-existing’’ agreements such as the PREPA Transaction—to 

apply the deal it reached with the Ad Hoc Group to all uninsured bondholders, not 

just those bondholders who were part of the RSA. 

Without the PREPA Transaction, PREPA’s rates would go up substantially from 

where they are today and where they would be after the PREPA Transaction is completed in order to pay the full 100 percent of debt service at existing interest rates, 

as required by Puerto Rican law. 

Noneconomic Components of the PREPA Transaction 

The RSA also contains several key noneconomic components. These include improvements related to (i) operations, (ii) governance, (iii) collections and billing processes, (iv) statutorily mandated subsidies, including a contribution in lieu of taxes 

(‘‘CILT’’), (v) a new rate structure and approval by the Energy Commission of a new 

PREPA rate, and (vi) a capital investment plan, including Energy Commission 

approval of a new integrated resources plan and moving forward with public-private 

partnerships. 

PREPA has a documented history of political interference compromising its 

decision making.25 The top 200 PREPA administrative positions, as well as—until 

recently—the majority of the board of directors, are political appointees.26 The large 

70 

PREPA’s 200 top managers are also politically appointed and change with every administration, 

according to the testimony of PREPA’s chief restructuring officer: ‘‘[I]t’s the top two hundred 

(200) people in that organization that switch out every four (4) years; so you’ve got no continuity 

for long-term strategic or financial planning.’’ Puerto Rico Electric Power Authority Business 

Plan and Recovery Plan: Hearing Before the Puerto Rico S. Comm. on Energy Affairs and Water 

Resources, 17th Legis. Assemb., 84 (Apr. 14, 2015) (testimony of Lisa Donahue, Chief 

Restructuring Officer of PREPA). 27See generally Amended Complaint, Marrero Rolon v. Autoridad de Energia Electrica

a/k/a P.R. Elec. Power Auth., No. 15–cv–1167, Docket No. 367 (D.P.R. Aug. 5, 2016). 28The FTI Report showed that PREPA had $151.5 million of receivables 120+ days old. See 

FTI Report, at 16. 29For further reading on benefits of securitization financing, see Chris Mauro, U.S. Municipal 

Focus: Municipal Securitization—A New Financing Trend in the Municipal Market?, RBC 

Capital Markets (Nov. 6, 2014), available at https://www.rbccm.com/municipalfinance/file826934.pdf. 30Pre-Sale Report: Entergy New Orleans Storm Recovery Funding I, L.L.C., Moody’s Investor 

Service (July 13, 2015). The exception is one issuer that was rated AA by Moody’s. 31 In re: Pet. for Approval of Transition Order Filed by the PREPA Revitalization Corp., No. 

CEPR–AP–2015–0002, Restructuring Order (June 21, 2016), available at http://energia.pr.gov/ 

wp-content/uploads/2016/06/21-junio-2016-Restructuring-Order-English-1.pdf. 

number of patronage positions at PREPA ensures that politics and political connections heavily influence corporate decision making and can stymie necessary reforms 

to PREPA. 

Politics has also played a central role in PREPA’s historical mismanagement, from 

procurement scandals for key goods and services such as fuel oil, to basic mismanagement like PREPA’s failure to collect over $150 million for energy consumed 

by other government agencies.27,28

The RSA allows PREPA to use debt service relief from the PREPA Transaction 

to support PREPA’s operational restructuring initiatives through modernization of 

PREPA’s aging power generation platform and other contractual, structural and 

managerial reforms. Modernization will also give PREPA flexibility to integrate alternative energy sources. 

The RSA also helps PREPA provide for necessary capital expenditures, as 

required under PROMESA. PREPA now has the opportunity to invest in highly efficient conventional generation assets, natural gas generation assets, and renewable 

generation assets of its choosing, which could add greater diversity and stability to 

power price and supply. Going forward, Puerto Rico will benefit from more stable, 

lower cost power generation—but the PREPA Transaction is a key predicate. Without it, PREPA will not have sufficient funding to commit to these investment initiatives without a far greater increase in electric rates resulting from higher interest 

costs. Disputes with creditors, including litigation over creditor rights, could deter 

private capital commitments the Governor has stated he intends to seek. 

The PREPA Transaction will also allow PREPA to fulfill one of the critical goals 

of PROMESA: regaining access to the capital markets. The issuance of new 

securitization bonds under the PREPA Transaction will mark Puerto Rico’s first 

major new issuance of long-term financing since the passage of DERA locked it out 

of the capital markets. Securitization financing is a well understood structuring 

technique with an excellent track record of helping other utilities to service legacy 

debt obligations at lower cost.29 All but one of the major securitizations from 2006– 

2014 were rated AAA, according to a 2015 Moody’s report on the universe of utility 

securitizations.30 By executing the PREPA Transaction, PREPA and the island will 

be taking a major step toward reducing the political risk that has prevented Puerto 

Rico from issuing any new debt financing and will be compliant with one of the fundamental elements of PROMESA: restoring Puerto Rico’s access to the capital markets on reasonable terms. The structure and regulatory approval process for the new 

securitization bonds is something that Puerto Rico can emulate in other new bond 

issues. 

Finally, the PREPA Transaction is being executed within the legal and regulatory 

framework established by Puerto Rico’s executive and legislative branches and can 

and should be executed pursuant to Title VI of PROMESA. 

ENERGY COMMISSION APPROVAL

As part of a full and transparent process, the Energy Commission reviewed 

PREPARC’s petition seeking approval of the securitization mechanism for the proposed bond exchange under the PREPA Transaction. After extensive public hearings, the Energy Commission approved the transition charge in a voluminous report 

that found that the petition complied with all the requirements of Puerto Rican 

law.31

71 

32 In re: Puerto Rico Electric Power Authority Rate Review. CEPR–AP–2015–0001, Final 

Resolution and Order (Jan. 10, 2017), available at http://energia.pr.gov/wp-content/uploads/2017/ 

01/10-enero-2017-Restructuring-Order-English-1.pdf. 33PREPA’s Fiscal Plan at 41. 34Puerto Rico Oversight, Management and Economic Security Act of 2016, Pub. L. No. 114– 

187, § 405(d)(1)(B). 35Donahue Warns of Dire Consequences if PREPA Deal Collapses, Reorg Research (Dec. 1, 

2016), available at http://platform.reorg-research.com/app#company/1869/intel/view/28192. 

On January 10, 2017, the Energy Commission approved PREPA’s rate case. The 

Energy Commission ruling confirms that ‘‘[t]he restructured debt costs will be recovered in a separate charge which is lower than the costs would be without restructuring.’’ 32 PREPA’s Fiscal Plan illustrates that the PREPA Transaction eliminates 

what would otherwise be an immediate rate hike of approximately 25 percent to 

close a substantial status quo rate deficit.33

THE PREPA REVITALIZATION ACT AND VALIDATION PROCEEDINGS

The PREPA Transaction required the passage of new legislation in order to successfully transform PREPA. This included provisions that would allow for operational reform, enable the securitization structure to reduce PREPA’s debt load, and 

set forth the process by which the Energy Commission reviews the PREPARC transition charge and the PREPA rate. The portions of the legislation dealing with the 

securitization structure are modeled on structures that allow entities to recover 

similar ‘‘stranded cost’’ charges from utility customers in other states, such as the 

restructuring charge assessed on Long Island Power Authority customers in 

New York. 

On November 4, 2015, members of the Puerto Rico Senate introduced legislation 

that would later become the PREPA Revitalization Act. Over the course of several 

months, legislative committees held hearings on the proposed legislation and received testimony from parties with different views on the PREPA Transaction. 

House legislators seeking to refine the legislation crafted and obtained passage of 

amendments to the bill. The legislation as amended was then debated on the Floor 

of both legislative chambers, passed by both chambers, and signed into law as the 

PREPA Revitalization Act on February 16, 2016. 

The PREPA Revitalization Act contemplates the initiation of lawsuits by interested parties to challenge and, by a court order finding in favor of the securitization 

structure, the validation of the transactions contemplated under the RSA. Such 

validation proceedings are frequently used in municipal financing, including in the 

public utility context, in many U.S. states. 

A critical component of the PREPA Transaction is the delivery of certain legal 

opinions as a condition to the issuance of the securitization bonds. The delivery of 

those legal opinions is dependent on the successful and expeditious completion of 

the validation proceedings. 

The past few months have seen positive developments in the validation proceedings. In one of the cases, a Puerto Rico court upheld the PREPA Revitalization 

Act; this decision is now on appeal in the Supreme Court. Another group of cases 

challenging the Energy Commission’s decision have been consolidated and will be 

briefed over the next few months. The remaining cases have been dismissed. 

CHALLENGES AHEAD

Almost 3 years into the PREPA restructuring process, numerous important accomplishments and the majority of requisite steps to complete the deal have already 

been achieved. 

Years have been spent putting the PREPA Transaction into action. But the 

PREPA Transaction is now in jeopardy. 

The Oversight Board extended PROMESA’s stay from February 15 to May 1 by 

certifying that an additional 75 days were needed ‘‘to seek to complete a voluntary 

process under title VI of this Act,’’ 34 but as of this date neither PREPA nor AAFAF 

have delivered a proposed ‘‘modification’’ under Title VI or commenced a ‘‘voluntary 

process under Title VI.’’ 

The RSA is currently set to expire on March 31—just 9 days after this hearing. 

The current administration has refused to commit to the terms of the PREPA 

Transaction—even though PREPA’s former chief restructuring officer warned that 

bondholders would likely recover 100 percent of claims on their revenue bonds in 

litigation.35

The consequences for rejecting the PREPA Transaction could be dire. At the very 

least, it will delay needed capital investment to upgrade the depreciated and inefficient generation infrastructure absent a significant increase in electric rates. More 

72 

troubling, an expiration of the RSA in 9 days could precipitate another collapse in 

trade credit, draining PREPA of potentially hundreds of millions in liquidity virtually overnight. Unlike the 2014 liquidity crisis, PREPA has already spent cash in 

bondholder reserve accounts, leaving the company with no potentially available cash 

resources to purchase fuel, creating a very real possibility of rolling brownouts or 

outright service disruption as Puerto Rico enters its seasonal highpoint in electricity 

demand. 

And finally, Puerto Rico has to communicate to the Federal Government, national 

and international markets that it can abide by its laws, its contracts, and the goodfaith negotiations it enters with its bondholders; that there is certainty in doing 

business on the island regardless of which political party is controlling the government. That is the way Puerto Rico will dig itself out of its fiscal crisis and return 

to a path of economic prosperity, which we all as American citizens want to see. 

Annex A 

Mr. LAMALFA. Thank you, Mr. Spencer. I thank all the witnesses 

for your testimony. 

I remind members of the Committee that Rule 3(d) does impose 

a 5-minute limit on questions, and I am going to be tougher on that 

5-minute limit here now. 

I will go ahead and recognize myself for the first 5 minutes. Let’s 

move, please, to Mr. Carrio ́n. OK. 

Earlier in your testimony, you stated, ‘‘We believe the discussions 

with creditor groups need to yield a viable restructuring path on 

or before May 1, when the PROMESA stay expires, and before 

other tools under PROMESA are utilized, such as Title III.’’ 

So, would you define for the Committee the viable restructuring 

path? What do you mean by that? 

Mr. CARRIO ́ N. Right. Well, as you know—and I think the 

Governor touched on—the certified plan was just last week. And 

that, in essence, makes the process a little clearer, and it was 

73 

essential that that be done before we can commence a viable 

restructuring conversation. Prior to that we were essentially listening, gathering information, and we hope to move forward with the 

government quickly in the coming days. 

I can tell you that, from conversations with our attorneys, we are 

looking to put forward a mediation proposal before the general obligation bondholders and COFINA, and certain term sheets for other 

bondholders relatively soon. As I have stated in the past, we are 

in alignment with the government, we are all about Title VI and 

moving forward on these issues. 

And we understand that Title III is there, but it is not our intent. It is only there as a last resort if we are not able to come to 

a consensual agreement. And if we are close to a consensual agreement, we would not be averse to forbearance with creditors, as 

well, if we were close. 

Mr. LAMALFA. Let me follow up on that, then. Do you mean that 

the consensual negotiation must be fully complete in order to, in 

your words, yield a viable restructuring path—so does it need to be 

fully completed in order to get to that path? 

Mr. CARRIO ́ N. No, Mr. Chairman. We have not had a conversation specifically about any particular creditor class, but we do not 

close the door to a forbearance agreement if we were close, but not 

there in time for the stay to end. 

Mr. LAMALFA. OK, thank you. 

Mr. Spencer, with looking at Puerto Rico, we will have to sit 

down with many different creditor groups and classes to begin 

negotiating on many forms of debt that make up the rest of the $70 

billion on the island outside of PREPA’s $9 billion. 

How important is it that the creditor community have an open 

dialogue that is maintained with the full government of Puerto 

Rico, as well as the Oversight Board of PROMESA? 

Mr. SPENCER. I think it is incredibly important. My clients in 

PREPA are also the largest investors in other Puerto Rico debt obligations—GO, COFINA, and other Puerto Rican debt issues. This 

deal sets the tone. This is why I think it is so important that we 

are focused on PREPA today, because it affects the broader restructuring negotiations that Puerto Rico intends to conduct. 

We are very concerned about what is happening in PREPA. We 

are very concerned about the possibility that that deal falling apart 

could negatively impact Puerto Rico’s broader debt restructuring 

and negotiations—— 

Mr. LAMALFA. Ripple through that. 

Mr. SPENCER. Yes. 

Mr. LAMALFA. Let me ask if Mr. Bergonzi would like to touch on 

that same question, too, please. 

Mr. BERGONZI. Thank you. The dialogue is exceptionally important. I am just struck with the testimony I have heard today. 

Again, as the largest creditor of PREPA, we have had no positive 

engagement from this administration. We extended the RSA, along 

with the group represented by Mr. Spencer, in an effort to give the 

Governor time to get up to speed on the transaction, fully understanding that we have been living with it for over 2 years and he 

was going to have questions. So, I object to the term ‘‘rubber 

stamping.’’ No one has asked him to do that. 

74 

But we have had zero outreach. In fact, until the plan that 

Rothchilds had put forward was blown out yesterday to all the public, we had not seen anything or heard anything about any asks on 

the part of the Governor as to how to improve this transaction—— 

Mr. LAMALFA. So, after 78 days you are feeling a little frustrated 

with that, then? 

Mr. BERGONZI. Well, and 8 days from the expiry of the 

Restructuring Support Agreement. 

Mr. LAMALFA. Yes. 

Mr. BERGONZI. Yes. It is quite frustrating. 

Mr. LAMALFA. What do you think the probability is of coming to 

an agreement on the RSA before March 31? 

Mr. BERGONZI. Look, we have been constructive throughout this 

process. Our goal, as you have heard, is to get this deal done. We 

are, of course, eager to hear dialogue that is a little bit more on 

the terms of executing the RSA we have, rather than pitching a 

whole new transaction. But we would be all ears, and we are, at 

this point, quite concerned that we have not had that engagement. 

Mr. LAMALFA. All right—— 

Mr. SPENCER. Chairman, if I could offer one thing? 

Mr. LAMALFA. Certainly. I am going to—— 

Mr. SPENCER. Yes, relevant to the question asked. 

Mr. LAMALFA [continuing]. Break my own rule here, but—— 

Mr. SPENCER. This is the first time I have met Mr. Carrio ́n, the 

first time I have met Ms. Matosantos, the first time I have heard 

the Governor speak about the terms of a deal that we have been 

trying to advance for 3 years. 

Mr. LAMALFA. OK, thank you. All right. Let me now turn it over 

to our Ranking Member, Mrs. Torres, for 5 minutes. 

Mrs. TORRES. Thank you, Mr. Chairman. 

Mr. Herna ́ndez, is it true—it is true, I should say—that PREPA 

officials acted recklessly with regard to their management of 

PREPA’s indebtedness, as did Puerto Rico’s elected officials. But 

doesn’t the recent audit by the Puerto Rican Commission on Debt 

make it clear that PREPA’s financial advisors, its engineers, lawyers, accountants, insurance companies, and perhaps bondholders 

bear some responsibility for PREPA’s current, out-of-control debt 

practices? 

And what legal steps, if any, have been taken to address these 

bad actors? And shouldn’t there be an apportioning of liabilities in 

a kind of global settlement, rather than placing all of the responsibility on PREPA’s failings on the ratepayers? 

If you can be brief, sir. 

Mr. BENI ́TEZ. Yes. PREPA doesn’t work with that, we are 

working to operate the company. 

Mrs. TORRES. I understand that. But the company’s lawyers and 

all of its advisors failed the company. And that is my question to 

you. Has PREPA, have they taken any actions toward these bad 

actors that led you where you are now? 

Mr. BENI ́TEZ. No, ma’am. 

Mrs. TORRES. OK, thank you. 

Mr. Spencer, I could not agree more with you when you said that 

this deal sets the tone. And when you say that the Governor and 

75 

none of these folks have reached out to you, weren’t their meetings 

public, sir, so you could have attended any of them? 

Mr. SPENCER. We did. There were very many creditors in attendance, and it was hard to talk about the specifics of the PREPA 

agreement. 

Mrs. TORRES. OK. Do you find it unusual that the Governor and 

PROMESA board has found that the Commonwealth has the ability to pay 25 percent of currently outstanding debt, but you are 

here today, sir, asking that PREPA’s ratepayers pay 89 percent of 

the existing debt? Eighty-nine percent. 

Mr. SPENCER. So, a couple of things. One, I disagree with the 

conclusions of the fiscal plan regarding the debt capacity of the 

Commonwealth—of Puerto Rico, excuse me. And we have not had 

a chance to do what we do in advising creditors in these restructuring negotiations and understand their underlying assumptions. 

We simply have not had any diligence. 

With respect to the figure that you cite, again, I don’t know 

where that comes from. We are providing a $.15 haircut on my 

client’s debts. 

Mrs. TORRES. Simple subtraction, right, 100 minus 15? 

Mr. SPENCER. One hundred minus fifteen, so an $.85 

recovery—— 

Mrs. TORRES. To the ratepayers? 

Mr. SPENCER [continuing]. On the face amount—— 

Mrs. TORRES. To the ratepayers? 

Mr. SPENCER. No, on the face amount of the bonds. We are exchanging bonds at $.85 a par, and we are offering a lower interest 

rate on the exchange debt. 

Mrs. TORRES. Can you expand on your concerns that you have 

not been able to have some real-time conversations with the board, 

or with the Governor and the current administration? 

Mr. SPENCER. It is a great concern, and I will address it in two 

areas. 

One, with respect to PREPA, it is fair to say that staffers of the 

Governor were briefed when he was a candidate for governor, when 

he was the Governor-Elect; and we have been trying to, as the governor, continue our dialogue with him to educate them on any 

areas of the deal that we have struck that they do not understand. 

But also, it is important to recognize that the Puerto Rico 

Electric Utility Commission issued an order approving our deal in 

an exhaustive public review process with thousands of pages of accompanying documentation. So, I don’t understand where the confusion is on the part of the Governor. 

Mrs. TORRES. That was on the previous administration, correct? 

And have you seen the public document that the Governor shared 

with us here today? 

Mr. SPENCER. I have not. 

Mrs. TORRES. Prior to today? 

Mr. SPENCER. I have not seen the public document that he 

shared today. I don’t know which one you are referring to. 

Mrs. TORRES. Sorry, my time has expired. I yield back. 

Mr. LAMALFA. Thank you. Now we will yield to our Vice Chair, 

Miss Gonza ́lez, for 5 minutes. 

76 

Miss GONZA ́LEZ-COLO ́ N. Thank you, Mr. Chairman. I would like 

to address the question to Mr. Bergonzi and Mr. Bryngelson. And 

I would like both of you to just answer directly the question. 

Is the value of the total of the bonds, both of you, like, 

$2.1 billion? Yes or no? 

Please, my time is limited, so yes or no. 

Mr. BERGONZI. Sorry, I don’t understand the question. Are you 

asking what our exposure is? 

Miss GONZA ́LEZ-COLO ́ N. Yes, what is the total value of the bonds 

both of you have—— 

Mr. BERGONZI. In PREPA or more widely? 

Miss GONZA ́LEZ-COLO ́ N. No, in PREPA. 

Mr. BERGONZI. In PREPA is about $1.4 billion. 

Miss GONZA ́LEZ-COLO ́ N. OK. 

Mr. BRYNGELSON. Sorry, we are an energy developer. 

Miss GONZA ́LEZ-COLO ́ N. OK. 

Mr. BRYNGELSON. We are not on the bond side of things, so we 

have no bond exposure. 

Miss GONZA ́LEZ-COLO ́ N. Perfect, $1.4 billion, so the $2.1 billion 

that is public is not an official number? 

Mr. BERGONZI. I think what you may be referring to is the 

amount of bonds that we, together with Assured, another monoline 

insurer, wrapped for PREPA. That is—— 

Miss GONZA ́LEZ-COLO ́ N. Exactly, so it is going to be $2.1—— 

Mr. BERGONZI. I think—I have $2.2, but yes, I would have to 

check. 

Miss GONZA ́LEZ-COLO ́ N. If you took the same $.15 haircut, how 

much money will be if you are taking the same haircut, same as 

the creditors are taking? You will be $320 million, more or less? 

Mr. BERGONZI. Well, we pay over time, so you would have to— 

as the bonds would come due, I suppose we would pay 15 percent— 

we would get 15 percent less than full recovery. 

Miss GONZA ́LEZ-COLO ́ N. Again, if you took the same $.15 haircut, 

it would be like $320 million, more or less? 

Mr. BERGONZI. I think less. 

Miss GONZA ́LEZ-COLO ́ N. OK, less. For $440 million debt service 

contribution, how much are you charging for this surety? 

Mr. BERGONZI. That has not been negotiated yet, I do not believe. 

Miss GONZA ́LEZ-COLO ́ N. Are you required to reserve any money 

against that amount? 

Mr. BERGONZI. Yes, we have to reserve capital when we put 

these risks up. 

Miss GONZA ́LEZ-COLO ́ N. How much, 5 percent? 

Mr. BERGONZI. I would have to check. It is a percentage of—it 

is dedicated by rating agency requirements. To maintain our ratings we have to put an appropriate amount of capital up every time 

we write a new policy. 

Miss GONZA ́LEZ-COLO ́ N. Publicly, it has been said it is 5 percent. 

So, can we say that it is, more or less, that amount? 

Mr. BERGONZI. I don’t know where that amount came from. I 

would rather check and get back to the Committee. 

Miss GONZA ́LEZ-COLO ́ N. I have a question for Mr. Spencer. You 

have been saying that—the argument that the deal will raise the 

77 

rates is misleading, and that it isn’t true that the rates will be increasing. Why is that? 

Mr. SPENCER. Don’t take my word for it. Take the Puerto Rico 

Utility Commission’s word for it. They state that restructured debt 

costs are lower than they would be without restructuring. 

They also state that, because PREPA is a non-government-owned 

utility, or a non-profit government-owned utility, debt costs must 

be recovered from customers. 

So, to the rate issue, I think it is clear from the Energy 

Commission. 

Miss GONZA ́LEZ-COLO ́ N. Yes, but what the Energy Commission 

said is one thing, what the deal says is another thing. The deal 

says there will be an increase to pay the debt and to pay the 

service. So, that is the question I am asking to you. 

Mr. SPENCER. But this is the Energy Commission’s ruling on the 

deal, which states that restructured debt costs are lower than they 

would be if the restructuring were not put into effect. 

Miss GONZA ́LEZ-COLO ́ N. I will defer to you in your expertise besides the Puerto Rico Energy Commission. Do you understand that 

this deal will not increase in any way the rate of the kilowatt hour 

on the island? 

Mr. SPENCER. Rates are lower under this deal than they would 

be without it—— 

Miss GONZA ́LEZ-COLO ́ N. No, that is not the question. The 

question is there is going to be a high rate by this deal, yes or no? 

Mr. SPENCER. There will not be a higher rate by this deal. As the 

EC states, this deal will lower the cost of debt service. 

Miss GONZA ́LEZ-COLO ́ N. But it will higher the rate. 

Mr. SPENCER. There is confusion over this issue. Again, I would 

direct you to look at the exhaustive report from the Energy 

Commission on this particular issue. 

Miss GONZA ́LEZ-COLO ́ N. Thank you. I yield back. Mr. Chairman, 

I have different questions for the rest of the members of the 

Committee, so I will use the rules of the Committee and I will file 

those questions to the Committee in the next 2 days. 

Mr. LAMALFA. OK. I will now recognize Mr. Soto for 5 minutes. 

Mr. SOTO. Thank you, Mr. Chairman. As we understood from the 

Governor’s testimony, energy is going to be the life blood of the 

Puerto Rican economy, and it is going to be so critical that we resolve this energy negotiation. And as our notes and our research 

have indicated, PREPA is not included in PROMESA. 

So, my first question—please make your answers brief—to both 

Mr. Carrio ́n and Ms. Matosantos is does the PROMESA board have 

any authority in this negotiation? Briefly, a yes or no would be 

helpful. 

Mr. CARRIO ́ N. Yes, we do have authority. There are two issues. 

The RSA is the issuance of additional debt, or new debt, and so the 

board has to pass judgment on that. And then the other element 

I think Ana can touch on. 

Ms. MATOSANTOS. The second element is Title VI. If it is going 

through—for approval through a Title VI process, that would also 

come to the board. So, there is one element that it is exempt from, 

but those other two remain. 

Mr. SOTO. So, it is for prospective debt, but not past debt. 

78 

In your opinions—and this is, again, to Mr. Carrio ́n and Ms. 

Matosantos—are PREPA creditors at an advantage over 

PROMESA-related creditors, currently, as it stands? 

Mr. CARRIO ́ N. In my opinion, yes. 

Ms. MATOSANTOS. Yes. Terms are more favorable here than on 

the fiscal. 

Mr. SOTO. My next question is, could a new PREPA deal throw 

any PROMESA deal that you are working on off balance and make 

it harder to have a balanced PROMESA deal? Same two. 

Mr. CARRIO ́ N. I would not like to speculate on that. We are looking at each separately. I have utmost sympathy, I must say, for the 

creditors, not just of PREPA, but for the entire creditors of Puerto 

Rico. At the end of the day, they are trying to recoup, and their 

only issue was they lent us money. And I understand where they 

are coming from. 

Having said that, we look at each individual situation 

individually. 

Mr. SOTO. Ms. Matosantos? 

Ms. MATOSANTOS. I think the inter-relationship between PREPA 

cost and economic growth has been talked about. And the assumption around economic growth is critical to the surpluses that are 

assumed in the fiscal plan being available. There is a big interrelationship between lower-energy costs, economic growth, and having the capacity to be able to fund essential services and fund debt 

service. So, there is definitely that linkage. 

In terms of the RSA, a critical issue to consider is—the RSA basically changes the structure of the debt to a more secured debt. Is 

the 15 percent a level that makes sense, in terms of the reduction, 

in light of the change in the instrument? 

Mr. SOTO. Mr. Chairman, this is just a comment for the Committee. With the $455 million July payment and a deal ending 

at the end of the month, if the parties are not able to come to 

agreement we should, as a Committee, consider whether to amend 

PROMESA to include PREPA negotiations, should the island not 

be able to negotiate on favorable terms that they can agree with 

to avoid rate hikes. Otherwise, we could see all these other creditors in PROMESA and the people, most importantly, under this 

deal still suffer under some of these exceptions like PREPA. 

I know you put this hearing together with the potential in examining that today, and I, for one, am concerned, if they are not able 

to reach a deal, that we should examine a potential amendment. 

And I would yield back the rest of my time. 

Mr. LAMALFA. All right. Thank you, Mr. Soto. We will yield to 

Mr. LaHood for 5 minutes. 

Mr. LAHOOD. Thank you, Mr. Chairman, and thank the 

witnesses for being here today. 

Chairman Carrio ́n, when we passed PROMESA here there was 

a section there—section 201(b) made it clear that lawful priorities 

and liens set forth in the Puerto Rico constitution and related laws 

would be respected. And Puerto Rico’s constitution states that 

when available resources are insufficient, constitutional debt shall 

be paid first. 

When this plan was certified by the Oversight Board, it treats 

constitutional debt as a last expense. I guess what I am wondering 

79 

is, how can the Oversight Board certify this plan if it violates 

section 201(b) of PROMESA? 

Mr. CARRIO ́ N. Well, we felt that the plan is PROMESAcompliant, and we were assured that it is. 

If you are referring to—if this is a question, Congressman, 

related to the GO or the COFINA situation, that issue is being litigated, and we hope to have those folks together and have mediation so that we can resolve that issue, moving forward. 

Mr. LAHOOD. Do you believe it violates the Puerto Rico 

constitution? 

Mr. CARRIO ́ N. No, I didn’t say that. I am not an attorney, so I 

would defer to my attorneys with regards to that particular issue. 

We have not taken a position, the board has not taken a position 

on the GO, COFINA issue. Whenever we have intervened, it is to 

protect the stay and the people of Puerto Rico. But we have not 

taken a position as to the GO or the COFINA situation. 

Mr. LAHOOD. Do you have concerns about that provision in 

PROMESA and the potential ramifications for the board on that? 

Mr. CARRIO ́ N. No, I do not. 

Mr. LAHOOD. Let me ask you, Mr. Chairman, when the 

Oversight Board and its advisors—well, let me ask you, did the 

board and your advisors perform a quantitative study to assess the 

potential impact the 77 percent haircut could have on financing 

and on the municipal market in Puerto Rico? 

Mr. CARRIO ́ N. Ana, would you help me out with that? 

Ms. MATOSANTOS. We considered all the different elements of 

PROMESA and considered the impact of this, as well as the impact 

on funding essential services, on pension benefits, and on other elements of not restructuring debt in the manner allowed under 

PROMESA. 

Mr. LAHOOD. Yes. And what was your conclusion with that, or 

what did the study specifically tell you? 

Ms. MATOSANTOS. Our conclusion is that the plan is PROMESAcompliant, that it requires significant sacrifice from a wide range 

of stakeholders, including creditors, but that it is a plan that moves 

toward structural balance and that meets the PROMESA requirements. 

Mr. LAHOOD. And what about the concern about access to 

finance, or to the municipal market? 

Ms. MATOSANTOS. Access to municipal markets would be something that would be achieved in the long term under this. The priority is first to restructure the debt to a sustainable level and to 

fully utilize the tools under the PROMESA Act to be able to balance the budget, restore economic growth, and fund essential 

services, pensions, debt, and other obligations. 

Mr. CARRIO ́ N. And it was also an integral part of the 

conversation. 

Mr. LAHOOD. Give me your level of confidence when you think 

about individual investors, the vast majority of municipal market 

investors, on their willingness to continue to invest in Puerto Rico 

after this kind of haircut. 

Mr. CARRIO ́ N. Well, it is a very difficult situation, I concur. And 

I understand how problematic it is; but, as Ana stated, and as the 

fiscal plan demonstrates, we are asking for material sacrifices from 

80 

all stakeholders, including our people. And we are in a difficult situation and we are in a tough spot, but we think that there is 

shared pain for everybody. 

Mr. LAHOOD. Mr. Spencer, in your statement you say that a failure to close the PREPA deal will ‘‘negatively impact other challenged government entities as diverse as the U.S. Virgin Islands, 

Guam, the city of Chicago, and the state of Illinois.’’ Can you elaborate on how the failure to close this deal will affect Illinois? 

Mr. SPENCER. I advised the largest creditor in the city of 

Detroit’s bankruptcy. We saw, after that plan was revealed, a negative impact in terms of a widening of spreads on Chicago bonds. 

The PREPA deal alone will be the single largest municipal restructuring deal, ever. If it goes badly, it will have an impact on municipal issuers at the lower end of the credit spectrum in municipal 

capital markets. 

Mr. LAHOOD. Thank you. 

Mr. LAMALFA. All right, thank you. We will do another quick second round of panel questions. For Mr. Bryngelson here, I wanted 

to just touch on one issue with the offshore gasport there, which 

you laid out would have great potential for cost savings, as well as 

reliability for the fuel supply and generation. 

If an agreement cannot be reached between the government of 

Puerto Rico, PREPA, and the creditor community—the offshore gas 

project, what kind of jeopardy will that be in? Either in the short 

term or even completely at all? What do you see happening there? 

Mr. BRYNGELSON. Well, we need PREPA to be able to move forward with that. The way the project is separated is it is a partnership between Excelerate and PREPA, where we provide the vessel. 

We have invested about $275, $280 million in that vessel. And 

PREPA would build the fixed infrastructure. Without the ability to 

move forward as a result of the restructuring process, the fixed infrastructure cannot be built and the project cannot come to fruition. 

So, it has a short-term impact if something does not happen in 

the next several months here. We start to delay the project at least 

day for day. And ultimately, there will be a point where the project 

eventually does have to fall off, because there is only a certain 

amount of time that we can hold an asset that costly open for a 

project. 

Mr. LAMALFA. So, reiterate what you think that would mean for 

the electricity ratepayers on the island. 

Mr. BRYNGELSON. Well, it does not accomplish three of the things 

that are core tenets of what everybody is saying. 

First is energy cost reduction. There would not be, through the 

diversification of natural gas, that same level of energy cost reduction. There is no other project out there that, within the next 5 

years, because of the permitting process required, can bring 

natural gas as a fuel source. And that spills over, as well, to air 

emissions, the fines under the MATS rules that EPA will charge. 

Also, the efficiency aspects of it. With the natural gas there is 

greater efficiency in power production. It also attracts IPPs who 

have a known source of fuel to be able to put in that generation, 

upgrade the system, bring more reliability to the system. 

And, from the partnership perspective, I think it impacts the 

ability to attract partners to do these public-private partnerships, 

81 

because we have been in this with PREPA off and on for 9 years 

under agreement since 2014, and working in the permitting process 

since 2011. So, I think it has a big detrimental impact on being 

able to bring more projects in on top of the other issues I discussed. 

Mr. LAMALFA. So, if there was success on this agreement, it sort 

of becomes successful, and soon, do you think this would be like a 

green light for more additional infrastructure similar to this, or 

other ones that will be modernized—— 

Mr. BRYNGELSON. Absolutely, I do. 

Mr. LAMALFA. Is it a pretty big positive green light for that? 

Mr. BRYNGELSON. It is, because it does provide that fuel source 

for more power generation, but also shows that private projects can 

be done. 

Mr. LAMALFA. Yes. OK. I thank you, and I will yield to recognize 

our Ranking Member, Mrs. Torres, for 5 minutes. 

Mrs. TORRES. Thank you, Mr. Chairman. 

Ms. Matosantos, welcome, and thank you for being with us today. 

As a Californian who has been through huge budget deficit, I respect your opinions on the issue at hand. 

In proposing legislation to address Puerto Rico’s debt crisis, the 

Obama administration and fellow House Members called on 

Congress to reform Puerto Rico’s Medicaid program. The goal is to 

raise the standard of care and prevent Medicaid unstable financing 

from intensifying Puerto Rico’s financial crisis. 

There are still critical issues facing Puerto Rico’s healthcare system, and the upcoming expiration of the ACA funding and limits 

imposed by the CAP Medicaid financing structure could greatly 

limit the island’s economic recovery. Could you please explain to us 

why this is an important issue that needs to be addressed as part 

of the island’s overall debt restructuring plan? 

Ms. MATOSANTOS. I would be happy to. Puerto Rico’s Medicaid 

funding is substantially below that funding available for other 

states. It receives a block grant that is in the neighborhood of $400 

million. We take into consideration Medicaid and the State 

Children’s Health Insurance Program. 

Under the ACA, it receives temporary funding at a higher level. 

The reduction of that ACA funding will increase the deficit by $1 

billion next year, and it rises in the future. A sustainable solution 

on Medicaid that provides parity for Puerto Rico would be material 

not only for the healthcare system and for the services that Puerto 

Rico is in a position to provide, but also for available resources for 

a variety of priorities, including the potential surpluses available 

for debt reductions in a whole host of different areas. 

So, it is very material. It is $1 billion in the coming year, and 

it grows substantially in the future. 

Mrs. TORRES. The Governor spoke to a plan that was created by 

his administration. Have you had an opportunity to look at that— 

and if, as he claimed, there would be more opportunities to insure 

more Puerto Ricans? 

Ms. MATOSANTOS. The Governor’s plan for the program reflected 

in the fiscal plan looks at making reductions to live within available resources. It reduces overall spending by about $750 million 

and growing into the future. 

82 

It does so through a variety of measures, including different— 

basically a cap on the amount spent per beneficiary to drive less 

utilization and to drive other savings. It also potentially looks at 

elimination of some benefits similar to what you are familiar with 

in California’s actions. 

It basically protects eligibility, but it makes a whole host of reductions in other areas to be able to protect access, but to generate 

the necessary savings in light of the fiscal situation. 

Mrs. TORRES. Is it assuming current ACA benefits, or is it 

assuming the newly proposed healthcare plan? 

Ms. MATOSANTOS. Puerto Rico’s Medicaid program already 

provides less services than what is generally required on the mainland. It does not provide long-term care. It would be looking at additional benefit reductions in what are called the optional benefit 

categories, things like dental, things like vision, and some other 

benefits—but the program that is provided today is already narrower than what Medicaid covers on the mainland. 

Mrs. TORRES. So that, in addition to encouraging people not to 

seek medical care? 

Ms. MATOSANTOS. Looking at reducing costs to the extent possible, protecting the number of enrollees, but, yes, making due with 

substantial reduction. 

Mrs. TORRES. Thank you. Mr. Chairman, I yield back. 

Mr. LAMALFA. Thank you. Last we will go to our Vice Chair. 

Miss GONZA ́LEZ-COLO ́ N. Thank you, Mr. Chairman. 

One thing. The Governor just said here that he was willing to sit 

and negotiate with good faith terms with all the stakeholders here. 

And I heard the creditors and the insurers, they know what the 

government offers. And, as a matter of fact, some government officials told me that each and every one of you last week, and even 

before that, some of them got some pushbacks from the insurers 

area. 

So, my question will be is there any space to sit again with the 

government and have a common-sense dialogue to reach an agreement with common-sense terms with the Governor’s proposition 

and your own positions on the table? Can we have that meeting? 

All of you. 

Mr. BERGONZI. I would only take issue with you saying ‘‘again.’’ 

That would imply that there were previous efforts. Yes, but we 

would like to talk. As long as we respect that this is a prenegotiated transaction, and that such changes are more at the 

margins—— 

Miss GONZA ́LEZ-COLO ́ N. Yes—— 

Mr. BERGONZI [continuing]. I think we could have a constructive 

discussion. But if we are going to retrade the deal, as was released 

yesterday, that leaves us in a very awkward position. 

Miss GONZA ́LEZ-COLO ́ N. Again, I will say it ‘‘again.’’ Are you willing to sit with the new administration—remember, there is a new 

administration in place. We are asking a governor who has been 

in place just 75 days—— 

Mr. BERGONZI. And has not contacted us. 

Miss GONZA ́LEZ-COLO ́ N [continuing]. To approve—fine. 

Mr. BERGONZI. Not fine. 

Miss GONZA ́LEZ-COLO ́ N. The government of—— 

83 

Mr. BERGONZI. No, it is not fine. 

Miss GONZA ́LEZ-COLO ́ N. Sorry, sir, I am having my turn. The government administration told me that they reached you last week, 

and even before. They get pushbacks from your staff. That is OK. 

My question now is, are you available to have that meeting? 

Mr. BERGONZI. Absolutely. 

Miss GONZA ́LEZ-COLO ́ N. Yes or no? 

Mr. BERGONZI. Yes, absolutely. 

Miss GONZA ́LEZ-COLO ́ N. Perfect. Can we have the same meeting 

with the creditors? 

Mr. SPENCER. Vice Chairman Gonza ́lez, we would be happy to sit 

with the Governor and discuss how to get this deal done. 

[Speaking foreign language.] 

Miss GONZA ́LEZ-COLO ́ N. Thank you. Other questions I have here, 

and these will be for the Oversight Board. And I would love to have 

Ms. Matosantos and the Chairman of the Board to help me on this. 

Are you involved in any way in this deal or in this agreement? 

Yes or no. 

Mr. CARRIO ́ N. Are you referring to the RSA, the previous—— 

Miss GONZA ́LEZ-COLO ́ N. Yes. 

Mr. CARRIO ́ N. Well, we support the Governor’s position as presented to us 2 weeks ago, and we support the RSA with certain improvements that he stated he was interested in negotiating. After 

that takes place, then we will pass judgment on that, based on 

what we asked of him. But we agreed that the way to go was what 

he was proposing. 

Miss GONZA ́LEZ-COLO ́ N. So, you will be able to join the effort to— 

the insurance, the creditors, and all the stakeholders here, again, 

just to assure something is achieved—— 

Mr. CARRIO ́ N. Sure. 

Miss GONZA ́LEZ-COLO ́ N [continuing]. In the best terms for the 

people of Puerto Rico, and everything involved. 

Mr. CARRIO ́ N. That has always been our intent, of course. 

Miss GONZA ́LEZ-COLO ́ N. Question to Mr. Spencer. Are you open 

to amend that RSA? 

Mr. SPENCER. We have an executable deal. I would agree with 

what Mr. Bergonzi said, that—are we willing to talk about ways 

to execute the deal? If those are the concerns of the Governor, we 

are willing to sit with the Governor and his team—— 

Miss GONZA ́LEZ-COLO ́ N. Fair enough. 

Mr. SPENCER [continuing]. To figure out how to get it—— 

Miss GONZA ́LEZ-COLO ́ N. Fair enough. I will yield back. Thank 

you. 

Mr. LAMALFA. All right. Thank you. I am going to thank the witnesses for their testimony, once again, and all the members of our 

Committee. 

Again, if the Members have additional questions, witnesses can 

respond to those in writing. Under Committee Rule 3(o), members 

of the Committee, again, must submit these witness questions 

within 3 business days following today’s hearing, and the hearing 

record will be held open for 10 business days for those responses. 

So, if there is no further business, without objection, the 

Committee stands adjourned. 

[Whereupon, at 12:40 p.m., the Subcommittee was adjourned.] 

84 

[LIST OF DOCUMENTS SUBMITTED FOR THE RECORD RETAINED IN THE

COMMITTEE’S OFFICIAL FILES]

— The Government of Puerto Rico’s Fiscal Plan, by the Puerto 

Rico Fiscal Agency and Financial Advisory Authority. 

February 28, 2017 

— Puerto Rico’s Government Reform Program: A New Path 

Forward, by the Government of Puerto Rico. October 13, 2016 

Æ