EXHIBIT 43 

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Testimony of David Svanda

Before the

House Committee on Natural Resources

Oversight Hearing: Management Crisis at the Puerto Rico Electric 

Power Authority and Implications for Recovery

July 25, 2018

Chairman Bishop, Ranking Member Grijalva and Members of the Committee, my name is David

Svanda and I appreciate the opportunity to testify about regulatory aspects of the energy crisis 

facing Puerto Rico, and make some observations and suggestions that will help point the way to 

a more responsible, affordable and reliable power system for the U.S. citizens of Puerto Rico. 

During the past 22 years, I have served in various roles within the utility regulatory profession. 

From 1996 to 2003, I served as a Commissioner at the Michigan Public Service Commission. 

During my tenure at the PSC, I served as Chairman of the Board and President of the National 

Association of Regulatory Utility Commissioners (NARUC). I also served on NARUC’s 

executive committee and board of directors and was Chairman of NARUC’s Finance and 

Technology Committee and its Mentoring and New Member Services Committee. I was a 

member of the Emerging Issues Policy Forum Board, past president of the 15-state MidAmerican Regulatory Conference (MARC), and have served on the Keystone Energy Board and 

as trustee of the NARUC Education and Research Foundation. I was also a member of the 

Federal Communications Commission’s (FCC) Local and State Government Advisory 

Committee.

Prior to my time as a Commissioner in Michigan, I served as Director of Administrative Services 

for Michigan Governor John Engler, and as Director of the Governor’s Northern Michigan 

Office. Prior to that, I was a City Manager and have served on many national, state, regional and 

local boards.

I am presently a regulatory consultant, serving clients focused on energy, telecommunications 

and water issues at the state, regional and national levels. Since founding my regulatory and 

strategic consulting practice in 2003, I have successfully advised a broad list of clients from all 

segments of the public infrastructure sector, including numerous corporate, non-profit, financial, 

international, and association interests.

Like many Americans I sat in horror as I witnessed the devastation of Hurricane Maria as it 

moved across the Caribbean and her Category 4 winds bore down on Puerto Rico and delivered a 

devastating strike to the island’s energy, telecommunications and other critical infrastructure 

which left the island cutoff from the outside world. 

Also, this past May I spent 5 days in Puerto Rico, where I saw first hand the devastation that 

remained even eight months after Hurricane Maria. I saw impassable roads, mountains of debris 

and electrical lines literally nailed to trees. That is by no means a criticism of the hard-working 

people who were trying to restore electricity to the citizens of Puerto Rico as quickly as possible. 

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It is, however, evidence of the destruction wrought and the lack of execution on a comprehensive 

emergency response plan. In addition, it is clear there has been no independent voice requiring 

the utility to take appropriate actions to manage the utility’s assets, or a guardian of the PREPA 

emergency restoration accounts that prior to the storm were reallocated by the Puerto Rico 

Government to pay for other services.

There has been a great deal of concern expressed in Puerto Rico about the possibility of

exchanging the government-owned monopoly for a private sector monopoly. Unfortunately, this 

logic is missing a critical element – an effective, well-functioning regulator. It is understandable 

that Puerto Rico thinks ‘monopolies are bad’ since they have never seen one which is balanced 

by an appropriate regulator. 

For most utility infrastructure assets, a monopoly makes sense. The capital investment required 

to provide power to a large area and many customers is extensive. By having a monopoly, 

redundant investment can be avoided – actually, in many situations, the lack of a monopoly, and 

therefore the lack of assurance that the investor will be confident in their investment, can result 

in no one making the investment in the first place.

In general, the role of a utility regulator is to stand in the place of ‘competition’. The regulatory 

agency, over time, acquires a wealth of experience and knowledge to ensure stable, economically 

sound and efficient decision making. The regulator provides an appropriate balance between 

needs and service of the customer and the fair and predictable treatment of the utility. The 

confidence provided by the regulator to the utility is what incentivizes the long-term planning 

and significant capital investment required. This is also important to the customers as only a 

financially healthy utility is able to perform its critical function to serve the needs of their 

customers. A properly functioning regulatory agency ensures that neither the customer nor the 

utility is unduly advantaged nor harmed. 

What our fellow Americans in Puerto Rico have been going through for nearly a year is 

unacceptable. By comparison, as Hurricane Irma moved north of Florida on September 11, 2017 

it left approximately 6 million Floridians (2/3 of the State) without power. Within 11 days, 

power was restored to all but 13,337 Floridians (only 1% of the population). On September 20, 

2017, Hurricane Maria made landfall on Puerto Rico. But three months later, as families 

prepared for Christmas, PREPA was unable to report on how many customers were without 

power. Instead, they reported on their peak load – only 65.4% after 3 months! In fact, in 

Feburary of this year, news reports indicated that PREPA hoped to restore power to 90 to 95% of 

residents by the end of March. If we left this many mainland U.S. citizens without power for six 

months, companies would be fined and executives could face prosecution. 

There is no doubt that Hurricane Maria was a devastating storm that would strain the resources 

of any of our 50 states. However, as those other states recovered from their natural disasters, it 

became clear that the havoc and destruction that Maria brought to Puerto Rico was different. 

The massive destruction that laid waste to Puerto Rico exposed the consequences of years of 

fiscal mismanagement, and disregard for the maintenance of the facilities. This dereliction of 

duty, and failed maintenance standards by the PREPA Board and elected officials of the island 

directly played a role in the destruction of their electric grid. By fiscally mismanaging PREPA 

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and driving the utility into Bankruptcy by acquiring more than $9.2 Billion of debt, it left the 

utility without the proper resources to maintain and operate a 21st Century grid (or even a 20th

Century grid). It is this failure of regulatory oversight and financial mismanagement that I would 

like to address today, and hopefully provide my expertise in creating a framework that will assist 

in the creation of a new entity that will be more efficient in its capabilities, resilient in sustaining 

the next natural disaster, and more consumer friendly in providing cleaner, low cost electricity to 

the island. 

Early in my professional career in city and county management, I managed critical infrastructure 

utilities and understand effective management. In my 22 years of professional regulatory 

experience of working with regulated energy and telecommunication utilities, I have never seen a 

system as “unique” as PREPA. It is an example of a long-gone era where local governments 

manipulated their utility’s operations to benefit a few, at the cost of many. In no other state does 

the utility serve as the generator, transmitter and distributor of electricity with no regulatory 

oversight. In no other state does the utility give free power to municipalities – and leave the 

citizens to pay the cost. It’s a perfect example of the fox guarding the hen house. PREPA’s 

governing board and Executive Director are all appointed by the island’s Governor, and remain 

in their roles or are replaced in accordance with the whims of each new administration. 

Similarly, the members of the Puerto Rico Energy Commission (PREC) – newly-formed as of 

2014, inexperienced and understaffed – are also Governor appointees and subject to removal and 

replacement with each new administration. 

Unfortunately, it is my understanding the plan to privatize only exacerbates this problem by 

allowing local politicians and the PREPA board - hand-picked by the Governor - to determine 

customer rates and the sale of assets. For example, the plan states PREPA assets can be 

disposed of “without having to comply with any process, requirement, approval or revision of 

PREC or any other regulatory commission.” This is a recipe for disaster and will inflict 

continuing poverty, disadvantage and substandard living conditions on the people of Puerto Rico. 

In no way do I believe anyone should suffer the tragedy and the magnitude of destruction as 

witnessed by Hurricane Maria. However, it is clear that there is a moral obligation to reset the 

management of the utility and the outdated culture of an unregulated monopoly. With this clean 

slate I would offer a few core principles that can be the foundation for an independent regulatory 

entity that can set fair and justifiable rates for all Puerto Rican consumers

I have freely used the word “independent” when describing what is needed on the island in the 

form of regulatory body. However, in the case of Puerto Rico it should be looked upon as 

depoliticizing the rate making process by removing the legislature and Governor’s interference in 

that process. Once the regulatory body has the confidence that it can exercise its responsibilities 

in a fair and professional manner it can move forward in the process of creating a robust and 

competent regulatory framework that will benefit all consumers on the island. These steps 

include: depolitization, planning and approval, cost controls, fair rates, and recovery of nonbypassable costs. 

Depoliticization. In a challenging environment, the regulator's key duty should be to 

appropriately balance the interests of all stakeholders. Unfortunately, this is not the case 

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in Puerto Rico. For most of PREPA’s 70-year existence it has operated as an unregulated 

monopoly overseeing its own operations, management and rates. Equally unfortunate, 

when the PREC was finally established to regulate and monitor PREPA’s operations in 

2014, it was made toothless by the territory’s legislative bodies. It is this political 

infighting that must be rooted out, if the utility can be expected to truly serve its citizen 

customers and to attract the necessary financial investments. Amazingly, the last time 

PREPA raised rates (not withstanding fuel charges) was 1989, which is part of the reason 

why they still use bunker oil, and have inefficient generation and dilapidated

infrastructure. Who would want to invest into this type of organization?

In fact, in its recent rate review order, PREC put its finger on the problems when it stated: 

“The quadrennial turnover of managers with each new political administration, the 

political pressures from elected officials to avoid necessary rate increases, the 

failure of government agencies to pay their electric bills on time, the irresponsible 

initiation and termination of expensive capital projects, the high levels of electricity 

theft, the work rules that prevent efficient use of well-paid employees, the poor 

record keeping and antiquated administrative procedure, the compensation 

schemes that keep PREPA from recruiting and retaining qualified and experienced 

personnel – all this must come to a halt, to be replaced by universal commitment to 

the good of the Commonwealth.” (Rate Review Order, pp. 23-24)

A typical utility regulator has Commissioners with various, but appropriate backgrounds. 

Most importantly, they are supported by experienced staff with decades of cumulative 

institutional knowledge in how the regulatory structure and process functions, the longterm needs of the system and how to balance the needs of both utility customers and the 

utility(s) themselves and decisions are made based on a documented public record. As 

many Congressional members might admit, particularly in the first few years of their 

tenure – having an experienced staff supporting their efforts is the difference between 

being effective or not. 

PREC was only established four years ago. The Commissioners were not experienced in 

regulating an electric utility, nor did they have staff with sufficient experience and 

background to support them. Through no fault of their own, the PREC is woefully illequipped to serve its assigned role and responsibilities. Puerto Rico, and more 

importantly, Puerto Ricans, need a regulator that can immediately serve these critical 

roles. It is possible to achieve this by leveraging regulators and staff from the mainland 

while simultaneously providing an opportunity for Puerto Rico based Commissions and 

staff to be trained and developed to take-over those responsibilities when they are ready. I 

have laid-out one potential approach to doing so at the end of this written testimony. 

Planning and Approval. Had PREPA had regulator-required disaster recovery plans in 

place, the Whitefish scandal would have been avoided, mutual assistance agreements 

would have been in place, and recovery would have begun in earnest at least a month 

sooner, and progressed in a more organized manner. A well developed disaster recovery 

plan would have ensured that PREPA had a materials management process in place to 

assist its procurement of materials and services immediately after the Hurricanes. Due to 

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lack of regulator-required planning, what took 11 days in Florida took 8 months in Puerto 

Rico.

Cost Controls. As a regulator and as President of NARUC I saw many variations of 

strong independent regulatory bodies and how they can drive efficiencies and benefits for 

customers. Nowhere does this structure work better than in the electric utility industry. 

Ratemaking is not simply an exercise in applying mechanical formulas and "crunching 

numbers" to calculate the lowest possible level of rates for the short-term. Rather, 

regulators must set policies that will operate in the long-term interest of consumers, 

utilities and ultimately the state or territory in which they are employed. Maintaining a 

financially healthy electric utility benefits customers over the long term by maintaining 

credit ratings, lowering financing costs, and providing access to the capital necessary to 

finance current and future infrastructure and environmental investments timely and 

efficiently. Ratemaking is not a zero-sum game where maintaining financially healthy 

utilities can only come at the expense of ratepayers over the long run. 

Fair Rate Setting. The regulator is the voice for the citizens on the island in this 

process. The regulator protects them from rate shocks, and ensures that the price they pay 

is as fair as possible and equitable for today’s citizens and future generations of citizens. 

Recovery of Non-Bypassable Costs. The regulator should have the authority to 

determine whether to impose non-bypassable charges on customers who elect to 

“disconnect” from the T&D system in order to socialize system benefit costs among all 

island residents. 

A Foundation for Renewables

Integrating renewable resources is an important planning consideration, however, given the 

current state of the grid, providing a solid foundation of grid-scale generation and strong, reliable 

transmission and distribution will be the most effective means to cost-effectively leveraging

renewables. It will also be the quickest path to the resiliency so critical to the people and 

businesses on the Island to minimize disruption from future weather events. 

Increasing the use of renewable power is a laudable goal, and in some parts of the island it will 

play a key role in providing electricity to customers. But, renewable power, micro grids, and 

other forms of distributed generation have severe limitations when it comes to meeting the 

immediate electricity demands of the island. The first limitation being it is extremely cost 

prohibitive to most of the island’s residents where the average median income is less than 

$22,000 per year. In addition, each individual that leaves the “grid” by either utilizing roof-top 

solar or individual power sources means that other residents that can’t afford solar panels, or 

whose roof is still held together by a blue tarp does not have the flexibility to utilize these 

resources. 

Lastly, the physical size of Puerto Rico and its topography limits the potential for resource 

allocation methods that you may find in a larger geographic area, such as a Regional 

Transmission Organization (RTO) in the Midwest. The island just isn’t large enough to sustain 

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major wind farms or solar arrays which take up hundreds of acres for a minimal amount of 

generation.

A Credible Path Forward 

Unfortunately, the current privatization proposal, and recently passed territorial statute do not 

follow this accepted and time-tested formula. Their plans are an extension of the past that keep 

the territory’s government in charge of an unregulated monopoly by providing rate making 

authority, and the approval or denial process of any sales of assets and equipment. This is 

proven recipe for disaster, and will only be exacerbated by some form of massive waste of 

federal dollars that props up this state-owned monopoly. Simply throwing billions of federal 

dollars at this problem and into the hands of the under-regulated PREPA Board will only 

produce the same untenable situation that the island currently suffers. It will only perpetuate the 

bankruptcy of this failed entity, and every time there is a natural disaster the federal government 

will once again be called on to bailout PREPA and its political controllers.

For Puerto Rico to recover, and once again become the “Jewel of the Caribbean,” Congress must 

act to provide a reliable, resilient and efficient electric grid system for our fellow citizens on the 

island. It must break PREPA free from the political forces that have driven it into the ground,

and can do so by creating a strong independent board, free from the restrictions of the political 

class of San Juan. As with all mainland states, an impartial regulator will fairly and deliberately 

evaluate the generation and transmission needs of the island. While this has long been the goal 

of many on the island, it will take the firm hand of Congress to effectuate this change. Only 

through federal legislation will Puerto Rico be able to change its regulatory course, and set out 

on a new path that will bring needed investment, management expertise and technological 

advancements that can drive efficiencies and lower the cost of power for all consumers. 

An experienced, well-functioning commission could be developed in a relatively short time 

while simultaneously providing a strong training ground for incoming commissioners and staff. 

In the U.S., individual states have been creating commissions and developing utility regulatory 

agencies since 1861. Thus, there is ample knowledge and experience from these 50 laboratories 

of democracy regarding how these agencies can be organized and function. These are tried and 

tested functioning models, each with their own nuances. The lessons learned by the mainland 

states can be readily applied to create a well-functioning, independent, and sustaining regulator 

for the people of Puerto Rico.

Organizations such as NARUC can be utilized to identify human, educational and other 

resources which can be used to comprehensively empower the new regulatory agency. Such an 

agency would likely include five commissioners and capable staff which would provide for 

continuity and both breadth and depth of purview to the commission dynamic. Mainland 

organizations could also assist a Federal Administrator with establishing minimum criteria and 

qualifications for appointing Commissioners and hiring fulltime staff.

Areas of needed staff specializations include: economists, accountants, financial analysts, 

engineers, and attorneys. Building upon those areas of technical expertise, there is extensive 

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training available to help these professionals apply their skills specifically to utility regulation. 

That training is available through NARUC, EEI, and other reputable industry organizations. 

To ensure the optimal effectiveness of the agency (Commissioners and staff), it is critical to 

provide a sufficient budget to attract and develop staff quickly. Commissioners and staff will 

need to process large amounts of multi-disciplinary information to render solid, credible 

decisions for the people of PR. The precedents established by this initial set of Commissioners 

will build the foundation on which trust and confidence in the agency will rest. It is critically 

important that the foundation is as strong as in the mainland states. The sooner such a structure 

can be put in-place, the sooner there will be development of institutional knowledge for future 

generations of Commissioners and staff.

Financial Considerations

In addition to establishing an independent and qualified regulatory body, Congress should take 

action to make the island “investable”. 

When PREPA emerges from its Title III bankruptcy proceeding, its credit rating, and that of the 

island, will likely be below an investment grade rating. Furthermore, if the exodus of Puerto 

Rico’s residents continues, there will not be a stable rate base from which to recover the costs of 

service and system improvements. Until the electric system and the service it provides to Puerto 

Rico improves significantly, the rate base will likely continue to decline. Any entity that would 

look to invest in Puerto Rico will require a certain amount of financing of its investment. 

However, lending institutions’ willingness to extend credit at reasonable rates requires 

confidence that borrowers will be able to generate revenues necessary to repay their debt. For 

that reason, the federal government should provide some means to assure financing institutions 

that the island’s electricity providers will be able to recover their costs and pay the expenses 

incurred in providing service to PREPA’s customers. A federal financial “backstop,” in the form 

of a fund, guarantee or other financial vehicle, would provide such assurance.

Simply put, there is a role the Federal Government can play -- not as a utility owner-operator, but 

-- as a provider of financial assurance to “backstop” the billions of dollars of private capital that 

will be required to modernize Puerto Rico’s electric grid.

A time-limited financial assurance would bolster investor confidence as the state-owned utility is 

unwound from its political past while Puerto Rico also rebuilds its basic credit capacity. Such a 

program would not be a loan guarantee, but could be structured as “risk sharing” between the 

Federal Government and private investors. The objectives would be to smooth privatization and 

ensure regulatory independence takes hold and population flight from the island is staunched.

Investment and development would occur on a phased schedule over a period of years. Properly 

structured, the Government would never be exposed to the full value of the private capital 

investment required to rebuild the electric system, but the assurance would make Puerto Rico 

investable again.

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Once the regulator is in place, and investors have confidence they will be treated fairly and 

impartially, Puerto Rico will begin to regain its footing in the financial markets. Let us not 

forget that Puerto Rico is still in bankruptcy and its short-term economic situation is bleak at 

best. For the island to move away from “vulture-funds,” and other greedy investors only looking 

to turn a dollar – the federal government should commit a limited amount of resources to ensure 

the financial viability of the island. We saw the Treasury Department offer assistance to NYC 

after the September 11th terrorist attacks, and again after super-storm Sandy savaged the East 

Coast. These backstops, and having strong state regulators provided the confidence needed for 

institutional investors to rebuild NYC and the surrounding area.

A New Stewardship

One critical perspective is that when a modern, efficient, affordable, and resilient power system 

is stood up on Puerto Rico, we must not hand the shovel back to those who dug this hole. 

PREPA must be replaced. There must be sustained and fundamental change in culture, behavior, 

and results that this entity has proven chronically incapable of delivering.

It is time to start anew, with a privatized system wherein electricity customers are 

paramount. Puerto Rican households and businesses deserve transparent, accountable, reliable, 

and affordable electric service. I believe the geography and logistics of the island would best be 

served by a comprehensive power system capable of delivering economies of scale and that 

a competent, apolitical, independent regulatory authority can ensure that stakeholder interests are 

protected.

In summary, the key ingredients for rebuilding the efficient, affordable power grid of the future 

on Puerto Rico are: 

1. An independent and experienced regulator, who will protect consumers while overseeing 

the transition to affordable baseload fuel source and modern efficient generation, and a 

resilient, effective transmission and distribution system, and

2. Due to the financial situation of the island, federal assurance for rate protection and 

investment will likely be required.

Members of the Committee, we have all seen how Maria and an unchecked, uncontrolled 

monopoly unleashed a perfect storm on the people of Puerto Rico. Going forward, none of us 

can control the forces of nature, but Congress can correct the past abuses of the monopoly, and 

enable the construction of a 21st century power system for a brighter future.

Thank you for listening, I look forward to your questions.

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