```

[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]

 
   EXPLORING ENERGY CHALLENGES AND OPPORTUNITIES FACING PUERTO RICO

=======================================================================

                           OVERSIGHT HEARING

                               before the

                       SUBCOMMITTEE ON ENERGY AND
                           MINERAL RESOURCES

                                 of the

                     COMMITTEE ON NATURAL RESOURCES
                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                               __________

                       Tuesday, January 12, 2016

                               __________

                           Serial No. 114-27

                               __________

       Printed for the use of the Committee on Natural Resources
       
       
       
       
       
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]        
       
       
       

         Available via the World Wide Web: http://www.fdsys.gov
                                   or
          Committee address: http://naturalresources.house.gov
          
          
                               _________ 

                  U.S. GOVERNMENT PUBLISHING OFFICE
                  
 98-270 PDF                 WASHINGTON : 2016       
_________________________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Publishing Office,
      Internet:bookstore.gpo.gov. Phone:toll free (866)512-1800;DC area (202)512-1800
     Fax:(202) 512-2104 Mail:Stop IDCC,Washington,DC 20402-001                          
          
          
          
          

                     COMMITTEE ON NATURAL RESOURCES

                        ROB BISHOP, UT, Chairman
            RAUL M. GRIJALVA, AZ, Ranking Democratic Member

Don Young, AK                        Grace F. Napolitano, CA
Louie Gohmert, TX                    Madeleine Z. Bordallo, GU
Doug Lamborn, CO                     Jim Costa, CA
Robert J. Wittman, VA                Gregorio Kilili Camacho Sablan, 
John Fleming, LA                         CNMI
Tom McClintock, CA                   Niki Tsongas, MA
Glenn Thompson, PA                   Pedro R. Pierluisi, PR
Cynthia M. Lummis, WY                Jared Huffman, CA
Dan Benishek, MI                     Raul Ruiz, CA
Jeff Duncan, SC                      Alan S. Lowenthal, CA
Paul A. Gosar, AZ                    Matt Cartwright, PA
Raul R. Labrador, ID                 Donald S. Beyer, Jr., VA
Doug LaMalfa, CA                     Norma J. Torres, CA
Jeff Denham, CA                      Debbie Dingell, MI
Paul Cook, CA                        Ruben Gallego, AZ
Bruce Westerman, AR                  Lois Capps, CA
Garret Graves, LA                    Jared Polis, CO
Dan Newhouse, WA                     Wm. Lacy Clay, MO
Ryan K. Zinke, MT
Jody B. Hice, GA
Aumua Amata Coleman Radewagen, AS
Thomas MacArthur, NJ
Alexander X. Mooney, WV
Cresent Hardy, NV
Darin LaHood, IL

                       Jason Knox, Chief of Staff
                      Lisa Pittman, Chief Counsel
                David Watkins, Democratic Staff Director
             Sarah Parker, Democratic Deputy Chief Counsel
                                 ------                                

              SUBCOMMITTEE ON ENERGY AND MINERAL RESOURCES

                       DOUG LAMBORN, CO, Chairman
            ALAN S. LOWENTHAL, CA, Ranking Democratic Member

Louie Gohmert, TX                    Jim Costa, CA
Robert J. Wittman, VA                Niki Tsongas, MA
John Fleming, LA                     Matt Cartwright, PA
Glenn Thompson, PA                   Donald S. Beyer, Jr., VA
Cynthia M. Lummis, WY                Ruben Gallego, AZ
Dan Benishek, MI                     Lois Capps, CA
Jeff Duncan, SC                      Jared Polis, CO
Paul A. Gosar, AZ                    Vacancy
Raul R. Labrador, ID                 Vacancy
Paul Cook, CA                        Vacancy
Garret Graves, LA                    Vacancy
Ryan K. Zinke, MT                    Vacancy
Jody B. Hice, GA                     Vacancy
Alexander X. Mooney, WV              Raul M. Grijalva, AZ, ex officio
Cresent Hardy, NV
Rob Bishop, UT, ex officio
                                 ------     
                                 
                                 

                                CONTENTS

                              ----------                              
                                                                   Page

Hearing held on Tuesday, January 12, 2016........................     1

Statement of Members:
    Grijalva, Hon. Raul M., a Representative in Congress from the 
      State of Arizona...........................................    14
        Prepared statement of....................................    15
    Lamborn, Hon. Doug, a Representative in Congress from the 
      State of Colorado..........................................     2
        Prepared statement of....................................     3
    Pierluisi, Hon. Pedro R., a Delegate in Congress from the 
      Territory of Puerto Rico...................................     4
        Prepared statement of....................................     5

Statement of Witnesses:
    Donahue, Lisa J., Managing Director, AlixPartners, New York, 
      New York; Chief Restructuring Officer, Puerto Rico Electric 
      Power Authority............................................    16
        Prepared statement of....................................    18
    Rivera-Velez, Carlos, Ph.D., PE, President, Puerto Rico 
      Manufacturers Association, San Juan, Puerto Rico...........    36
        Prepared statement of....................................    38
    Rossi, Josen, Chairman of the Board, AIREKO; Chairman, 
      Institute for a Competitive and Sustainable Economy of 
      Puerto Rico, Caguas, Puerto Rico...........................    41
        Prepared statement of....................................    42
    San Miguel, Jorge L., Chair, Environmental Law, Energy & Land 
      Use, Ferraiuoli, LLC, San Juan, Puerto Rico................    24
        Prepared statement of....................................    26
    Sanabria-Hernandez, Jaime L., Co-President and General 
      Manager for Finance and Administration, EcoElectrica, L.P., 
      Penuelas, Puerto Rico......................................    45
        Prepared statement of....................................    47

Additional Materials Submitted for the Record:
    Carbo-Lugo, Agustin F., Chairman, Puerto Rico Energy 
      Commission, January 12, 2016 Letter submitted for the 
      record.....................................................    70
    Pla-Cortes, Jaime, Executive President, Puerto Rico Hospital 
      Association, Prepared statement of.........................    68
                                     

  OVERSIGHT HEARING ON EXPLORING ENERGY CHALLENGES AND OPPORTUNITIES 
                           FACING PUERTO RICO

                              ----------                              

                       Tuesday, January 12, 2016

                     U.S. House of Representatives

              Subcommittee on Energy and Mineral Resources

                     Committee on Natural Resources

                             Washington, DC

                              ----------                              

    The subcommittee met, pursuant to notice, at 10:08 a.m., in 
room 1324, Longworth House Office Building, Hon. Doug Lamborn 
[Chairman of the Subcommittee] presiding.
    Present: Representatives Lamborn, Thompson, Lummis, 
Benishek, Labrador, Graves, Bishop; Costa, Gallego, Polis, and 
Grijalva.
    Also Present: Representatives Serrano, Gutierrez, 
Velazquez, and Pierluisi.
    Mr. Lamborn. The Subcommittee on Energy and Mineral 
Resources will come to order. The subcommittee is meeting today 
to hear testimony on exploring energy challenges and 
opportunities facing Puerto Rico.
    Under Committee Rule 4(f), any oral opening statements at 
hearings are limited to the Chairman and Ranking Member and the 
Vice Chairman and the designee of the Ranking Member. This will 
help 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.
    [No response.]
    Mr. Lamborn. Hearing no objection, so ordered.
    I also ask unanimous consent that the gentleman from Puerto 
Rico, Mr. Pierluisi; the gentlelady from New York, Ms. 
Velazquez; the gentleman from Illinois, Mr. Gutierrez; and also 
the gentleman from New York, Mr. Serrano be allowed to sit on 
the dais and participate in today's hearing. And last, should 
his schedule permit, I also ask that the gentleman from Alaska, 
Mr. Young, be allowed to sit on the dais and participate.
    [No response.]
    Mr. Lamborn. Hearing no objection, so ordered.
    Before we get started, it is important to explain that this 
hearing is not about Chapter 9 of the bankruptcy code. The 
bankruptcy code is within the jurisdiction of the House 
Judiciary Committee. This hearing and any subsequent hearings 
held by this committee will focus on other issues.
    I now recognize myself for an opening statement.

    STATEMENT OF THE HON. DOUG LAMBORN, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF COLORADO

    Mr. Lamborn. Today we are here to discuss the very 
challenging energy situation in Puerto Rico. At the forefront 
is the Puerto Rico Electric Power Authority, or PREPA, which is 
a fiscal and managerial disaster. With over $9 billion in debt 
and an increasingly uncertain future, PREPA represents one of 
the greatest challenges facing Puerto Rico.
    This crisis did not arise overnight. Rather, it has 
developed because of major issues within PREPA that were 
allowed to stagnate into the situation that we face today. One 
cannot begin to address the issues surrounding PREPA without 
first discussing the aged infrastructure that is overwhelmingly 
reliant on oil. Because of this, Puerto Ricans have 
historically paid one of the highest electrical rates within 
the United States. And, despite oil prices being the lowest 
they have been in decades, Puerto Rico residents are still 
paying on average 50 percent more for electricity than the 
United States' national average.
    However, what this statistic fails to capture is the impact 
the price of energy has on the average resident. When median 
income is accounted for, keeping an air conditioner on for 24 
hours has five times the economic impact on the average Puerto 
Rican than it does for the average citizen on the mainland. 
Thus, keeping the lights on for an extra hour or two is a 
serious decision that average residents on the island may face 
daily.
    As mentioned, PREPA currently relies on an outdated 
infrastructure of which over 80 percent of PREPA's power plants 
were constructed before 1977. Not only are these plants 
inefficient, but they are environmentally deficient and 
unreliable. In fact, PREPA recently acknowledged that 
modernizing its facilities over the next 20 years would cost 
approximately $5 billion.
    The state of energy infrastructure in Puerto Rico 
represents the sad truth that PREPA cannot make the politically 
tough decisions. Although it was granted unilateral control 
over establishing rates, PREPA has failed to update its base 
rate in 27 years. In other words, PREPA has not been recovering 
its basic operational and maintenance costs for nearly three 
decades.
    Further, PREPA's failure to collect and bill customers has 
crafted the notion that electricity is not a commodity that 
needs to be paid for, but rather is an entitlement. 
Exemplifying this is the shocking fact that PREPA has $1.75 
billion in accounts receivable as of September of 2014, of 
which over $750 million of this was owed by various entities 
within the Puerto Rican government. In fact, one-third of the 
island receives subsidized rates, paying fractional amounts or 
nothing at all.
    Finally, the management of PREPA has contributed to an 
indifferent working environment, as bureaucracy and political 
connections have stood in the place of merit and hard work. For 
instance, each new Puerto Rican administration since 2001 has 
gutted the administration of PREPA. As such, there has existed 
no path to leadership and has encouraged an environment without 
individual accountability or goals.
    Going forward, PREPA not only needs to address its 
overwhelming financial crisis, but it must also address the 
systemic issues that hamstring its ability to become an 
efficient and adaptive utility.
    For instance, increased privatization through public-
private partnerships or power purchase operating agreements 
would provide opportunities for PREPA to evolve, by putting 
electric generation in private entities not bogged down by 
political and bureaucratic concerns.
    Unfortunately, for PREPA, there is no easy solution. 
Blanket grants of debt restructuring would be irresponsible and 
would merely punt the hard decisions to future generations. The 
way forward will be politically challenging, but we owe it to 
the future not to bypass this opportunity.
    [The prepared statement of Mr. Lamborn follows:]
Prepared Statement of the Hon. Doug Lamborn, Chairman, Subcommittee on 
                      Energy and Mineral Resources
    Today, we are here to discuss the very challenging energy situation 
in Puerto Rico. At the forefront is the Puerto Rico Electric Power 
Authority, or PREPA, which is a fiscal and managerial disaster. With 
over $9 billion in debt and an increasingly uncertain future, PREPA 
represents one of the greatest problems currently facing Puerto Rico.
    This crisis did not arise overnight. Rather, it has developed 
because of major issues within PREPA that were allowed to stagnate into 
the situation that we see today.
    One cannot begin to address the issues surrounding PREPA without 
first discussing the aged infrastructure that is overwhelmingly reliant 
on oil. Because of this, Puerto Ricans have historically paid one of 
the highest electrical rates within the United States. And despite oil 
prices being the lowest they have been in decades, Puerto Rico 
residents are still paying on average 50 percent more for electricity 
than the United States' national average.
    However, what this statistic fails to capture is the impact the 
price of energy has on the average resident. When median income is 
accounted for, keeping an air conditioner on for 24 hours has five 
times the economic impact on the average Puerto Rican than it does for 
the average citizen on the mainland. Thus, keeping the lights on for an 
extra hour or two is a serious decision the average resident on the 
island must face daily.
    As mentioned, PREPA currently relies heavily on an outdated 
infrastructure of which over 80 percent of PREPA's power plants were 
constructed before 1977. Not only are these plants inefficient, but 
they are environmentally deficient and unreliable. In fact, PREPA 
recently acknowledged that modernizing its facilities over the next 20 
years would cost approximately $5 billion.
    The state of energy infrastructure in Puerto Rico represents the 
sad truth that PREPA cannot make the politically tough decisions. 
Although it was granted unilateral control over establishing rates, 
PREPA has failed to update its base rate in 27 years. In other words, 
PREPA has not been recovering its basic operational and maintenance 
costs for nearly three decades.
    Furthermore, PREPA's failure to collect and bill customers has 
crafted the notion that electricity is not a commodity that needs to be 
paid for, rather it is an entitlement. Exemplifying this is the 
shocking fact that PREPA had $1.75 billion in accounts receivable in 
September 2014, of which over $750 million of this was owed by various 
entities within the Puerto Rican government. In fact, one-third of the 
island receives subsidized rates, paying fractional amounts or nothing 
at all.
    Finally, the management of PREPA has contributed to an indifferent 
working environment, as bureaucracy and political allegiance have stood 
in the place of merit and hard work. For instance, each new Puerto 
Rican administration since 2001 has gutted the administration of PREPA. 
As such, there has existed no path to leadership, and has encouraged an 
environment without individual accountability or goals.
    Going forward, PREPA not only needs to address its overwhelming 
financial crisis, but it must also address the systemic issues that 
hamstring its ability to become an efficient and adaptive utility. For 
instance, increased privatization through Public-Private Partnerships 
or Power Purchase Operating Agreements provides opportunities for PREPA 
to evolve, by putting electric generation in private entities not 
bogged down by political and bureaucratic concerns.
    Unfortunately for PREPA there is no easy solution. Blanket grants 
of debt restructuring would be irresponsible, and would merely punt the 
hard decisions to future generations. The way forward will be 
politically challenging, but we owe it to the future not to bypass this 
opportunity.

                                 ______
                                 

    Mr. Lamborn. At this point I would like to recognize the 
Ranking Member of this subcommittee, or his designee, for an 
opening statement.
    Mr. Pierluisi. Thank you, Chairman Lamborn.
    I ask unanimous consent that my longer statement be 
included in the record.
    [No response.]
    Mr. Lamborn. I see no objection; so ordered.

    STATEMENT OF THE HON. PEDRO R. PIERLUISI, A DELEGATE IN 
           CONGRESS FROM THE TERRITORY OF PUERTO RICO

    Mr. Pierluisi. This is the sixth hearing on Puerto Rico in 
the 114th Congress. While Congress has debated this matter, the 
situation has gone from bad to worse.
    In 2015, migration from Puerto Rico to the states was the 
highest in modern history. The territory government has been 
unable to provide tax refunds, pay contractors, and make 
pension contributions. Two public entities missed payments to 
bond holders, leading to a lawsuit by two bond insurers. There 
will likely be larger defaults and more lawsuits later this 
year. I don't know which stakeholders think they will benefit 
from this situation, but I know it will not be my constituents 
or the vast majority of Puerto Rico's creditors.
    The crisis in Puerto Rico is the joint responsibility of 
the Puerto Rico government, whose policies and practices have 
often been irresponsible, and the Federal Government, whose 
policies toward Puerto Rico have clearly been inequitable. As a 
territory, Puerto Rico lacks democracy, justice, and power. 
This undignified status must be discarded. If these hearings 
are merely a forum for Congress to criticize the Puerto Rico 
government while disregarding its own contribution to the 
crisis, this is not a constructive exercise.
    My constituents are hurting and they are seeking a hand up, 
not a hand out. Congress should empower them, not reprimand 
them. Although it is not the subject of this hearing, Congress 
should enact legislation that authorizes Puerto Rico to 
restructure a meaningful portion of its debt as every state is 
authorized to do. And that provides Puerto Rico with better 
treatment under Federal programs.
    I would support the creation of a board to help the Puerto 
Rico government improve its fiscal practices, but only if 
Congress provides Puerto Rico with reasonable tools and more 
equitable treatment. Of course, the high cost of electricity 
for households and businesses in Puerto Rico hampers economic 
growth and spurs migration. So, the legislation could include 
provisions to make power more affordable in the territory.
    For example, Congress has enacted a law requiring the 
Secretary of the Interior to appoint a team of experts to 
develop an energy action plan for Puerto Rico; but Interior 
claims it does not have the funding to proceed. Congress should 
reassign responsibility for the plan to the Department of 
Energy and ensure it is swiftly prepared.
    Congress also should treat Puerto Rico equally under 
LIHEAP, which helps households pay their electric bills. I 
persuaded the Federal Government to take administrative steps 
to increase Puerto Rico's LIHEAP funding from $4 million to $50 
million a year; but state-like treatment could translate into 
$24 million a year.
    On the other hand, Federal tax credits to encourage 
households to install renewable energy technology do not 
benefit Puerto Rico. Congress should authorize the Puerto Rico 
government to offer the credits through its local tax system, 
with the Federal Government reimbursing the territory 
government for the lost revenue.
    Congress also has authorized, but never funded, two 
territory-specific grant programs to help Puerto Rico reduce 
its dependence on foreign oil and to improve its electricity 
distribution system. Congress should appropriate money for 
these programs.
    In addition, Congress should enact my legislation to 
increase the number of ships qualified to transport LNG from 
the states to Puerto Rico, and require DOE to prepare a report 
on the prospect of the territory becoming a hub for the 
distribution of American-produced energy in the Caribbean 
region.
    Meanwhile, on the Puerto Rico level, operations at PREPA 
require fundamental reform. After becoming PREPA's chief 
restructuring officer in 2014, Ms. Donahue, who is here today, 
observed that PREPA was far behind the industry in virtually 
every respect. I will ask Ms. Donahue for a progress report 
during the course of this hearing.
    PREPA must diversify its fuel supply, reducing reliance on 
petroleum and boosting use of natural gas and renewable energy. 
The private sector should have a larger role in developing 
Puerto Rico's energy system. PREPA currently purchases 
electricity generated by two private companies; additional 
public-private partnerships could benefit consumers.
    Finally, I will ask Ms. Donahue about the debt 
restructuring agreement PREPA signed with 70 percent of its 
bond holders, now pending before the Puerto Rico legislature. 
As Ms. Donahue will note, it took PREPA over 15 months to 
negotiate the agreement, because PREPA lacks access to an 
orderly debt restructuring process such as Chapter 9. The 
burden is on the government of Puerto Rico to make the case 
that this agreement is in the best interests of the American 
citizens of Puerto Rico.

    Thank you. I yield back.

    [The prepared statement of Mr. Pierluisi follows:]
Prepared Statement of the Hon. Pedro Pierluisi, a Delegate in Congress 
                   from the Territory of Puerto Rico

                              introduction

    Thank you, Chairman Lamborn. And I want to thank Congressman 
Lowenthal for giving me the opportunity to serve as Ranking Member for 
this hearing.
    Let me begin by describing the factual backdrop against which the 
Subcommittee on Energy and Mineral Resources meets today. This is the 
sixth hearing on Puerto Rico that Congress has held in the past 11 
months. Later this month, another subcommittee of the Natural Resources 
Committee is expected to hold a seventh hearing about Puerto Rico. 
During the time period in which Congress has debated this matter, but 
done nothing, the situation in the U.S. territory has gone from bad to 
worse. Since 2004, when Puerto Rico's population was at its peak, the 
territory's population has fallen by about 10 percent, from 3.82 
million to 3.47 million--and preliminary data indicate that, in 2015, 
the level of migration from Puerto Rico to the states was the highest 
in the modern era. The Puerto Rico government has been unable to pay 
hundreds of millions of dollars in tax refunds it owes to taxpayers, in 
payments it owes to private-sector companies that sold products to or 
rendered services for the government, and in contributions it is 
required to make to its various public pension funds. According to a 
November 2015 report, for every dollar the government of Puerto Rico 
owes in pension payments to retired workers (former central government 
employees, municipal government employees, employees of all but one 
public corporation, public school teachers, and judges), it only has 
4, on average, to meet those obligations. Two of the roughly 18 public 
entities in the territory that issue bonds--the Puerto Rico 
Infrastructure Financing Authority (PRIFA) and the Puerto Rico Public 
Finance Corporation (PFC)--have missed scheduled payments to 
bondholders, and those missed payments led to the filing of a lawsuit 
against the government of Puerto Rico by two providers of financial 
guaranty insurance, known as bond insurers or monolines. If the present 
course continues, it is a virtual certainty that there will be 
additional--and far larger--defaults on bonded debt in mid-2016, 
followed by more lawsuits. Apart from lawyers and consultants, it is 
unclear who will benefit from this pattern of defaults and ensuing 
litigation. Certainly not my constituents, nor the vast majority of 
Puerto Rico's individual and institutional creditors.
    Congressional hearings can serve a valuable purpose, providing the 
evidentiary basis for legislation designed to address a complex problem 
of national importance--like the situation in Puerto Rico. But hearings 
can also become a substitute for legislative action or, put 
differently, a cover for legislative inaction.
    Every objective observer recognizes that there is a genuine crisis 
in Puerto Rico, and that it is the joint responsibility of the Puerto 
Rico government, whose policies and practices have often been 
irresponsible and inept, and the Federal Government, whose policies 
toward Puerto Rico have been immoral, inequitable, and incoherent. If 
hearings such as this one lead to legislation--that is, if discussion 
culminates in deeds--then these hearings will have been worth the 
effort expended.
    However, if these hearings are merely a forum for Members of 
Congress to preach and pontificate about the Puerto Rico government's 
shortcomings, while disregarding or downplaying the Federal 
Government's own major contribution to the crisis in the U.S. 
territory, then all of these hearings will have been a colossal waste 
of time. This would be the ultimate insult to my constituents, who are 
truly hurting and who are asking only for a hand-up, not a hand-out, 
from their national government--in which they have no vote.
    On December 16, 2015, Speaker Ryan issued a public statement, 
noting that he had instructed the committees of jurisdiction in the 
House to develop a ``responsible solution'' to the crisis in Puerto 
Rico by March 31, 2016. Since then, I have spoken with Speaker Ryan, 
House Majority Leader Kevin McCarthy, House Natural Resources Committee 
Chairman Rob Bishop, and House Judiciary Committee Chairman Bob 
Goodlatte. They assured me that they are cognizant of the need for 
congressional action to tackle this crisis. I thought then--and I 
continue to think now--that these assurances were made in good faith. I 
also believe that Speaker Ryan and his fellow Republican leaders 
recognize that I am a pragmatic legislator that is open to principled 
compromise and has no agenda other than helping the American citizens I 
represent, who have received a raw deal from both their local 
government in San Juan and their national government in Washington, DC.
    As I emphasized at previous hearings, it is necessary and 
appropriate for Congress to enact a legislative package that authorizes 
Puerto Rico to restructure a reasonable portion of its roughly $70 
billion in debt, while ensuring that Puerto Rico fulfills the 
obligations to creditors enshrined in our own constitution. Creditors 
that have opposed a fair and orderly legal framework in which Puerto 
Rico can restructure some of its debt obligations are making a serious 
mistake, advocating a position that will not ultimately be in their 
self-interest. I hope they realize their error in judgment before it is 
too late. Whether they do or not, it is Congress' job to legislate in 
the broader public interest, and not to be dissuaded from legislating 
by powerful players making poor arguments.
    This legislative package should also provide Puerto Rico with more 
equitable treatment under key Federal spending programs like Medicaid 
and Medicare \1\ and Federal tax credit programs like the earned income 
tax credit and the child tax credit, because the cumulative impact of 
such disparate treatment has been devastating for quality of life in 
Puerto Rico and for the fiscal situation of the territory government, 
which has over-spent local funds and over-borrowed in the capital 
markets in order to compensate for the shortfall in Federal support. 
Given the jurisdiction of this subcommittee and the narrow scope of 
today's hearing, I want to emphasize that this legislative package 
could also include provisions aimed at ensuring that affordable and 
reliable electric power is available in Puerto Rico. I will describe a 
number of specific options later in my testimony.
---------------------------------------------------------------------------
    \1\ There has been recent progress on the Medicare front. The 
Consolidated Appropriations Act for Fiscal Year 2016 (Public Law 114-
113), enacted in December 2015, included the language of my bills to 
provide Puerto Rico hospitals with the same base payment rate as 
hospitals in the states for treating Medicare patients (H.R. 1417), and 
to make Puerto Rico hospitals eligible for the same Medicare bonus 
payments as hospitals in the states for converting to electronic health 
records (H.R. 1225). Nevertheless, Puerto Rico (and the other U.S. 
territories) continue to face numerous disparities under Medicare, and 
I have introduced legislation to eliminate or mitigate each of these 
disparities. See H.R. 2635 (Pierluisi) and S. 1961 (Schumer), Improving 
the Treatment of the U.S. Territories Under Federal Health Programs 
Act, and H.R. 4163 (Pierluisi) and S. 2342 (Nelson), the Territories 
Medicare Prescription Drug Assistance Equity Act.
---------------------------------------------------------------------------
    If provisions granting the Puerto Rico government authority to 
adjust debt and improving the treatment of the territory under certain 
Federal programs are included in the legislative package, I will not 
oppose a provision establishing a temporary and independent board that 
would ensure that the Puerto Rico government complies with sound 
budgeting standards and fiscal metrics. However, I will adamantly 
oppose any Federal oversight unless Congress provides Puerto Rico with 
the reasonable tools and the fair treatment we require and deserve. 
Such a one-sided approach would be a political stunt, not a practical 
solution to a serious problem.
                                 energy
    I now turn to the specific subject of today's hearing--energy 
challenges and opportunities in Puerto Rico.\2\
---------------------------------------------------------------------------
    \2\ See generally Puerto Rico Territory Energy Profile, U.S. Energy 
Information Administration, U.S. Department of Energy (last updated 
April 16, 2015), available at http://www.eia.gov/state/?sid=RQ.
---------------------------------------------------------------------------
    The most pressing energy-related challenge in Puerto Rico is the 
high cost of electric power. Puerto Rico is an island jurisdiction that 
produces no petroleum, natural gas or coal, and that relies heavily on 
imported fuel--mainly petroleum--to generate electricity. Based on the 
best available data, the price of electricity for residential customers 
in Puerto Rico peaked in February 2013 (when the price of crude oil was 
about $116 per barrel) at 30.6 per kilowatt hour, compared to a U.S. 
national average of 11.6 per kilowatt hour and a Florida state average 
of 11.3 per kilowatt hour. In recent years, as the price of oil has 
decreased substantially, the price of electricity paid by consumers in 
Puerto Rico has fallen as well, but remains high relative to the 
national average. For example, in November 2015 (the last month for 
which Puerto Rico data is available, when the price of crude oil was 
about $44 per barrel), the price of electricity for residential 
customers in Puerto Rico was 19.3 per kilowatt hour, compared to a 
U.S. national average of 12.7 per kilowatt hour and a Florida state 
average of 11.6 per kilowatt hour. Of course, there is no guarantee 
that the price of oil will remain this low in the future, as oil prices 
are volatile and can rise or fall depending on events occurring 
anywhere in the world.
    In Puerto Rico, the high price of electricity is compounded by the 
low ability to pay. Median household income in the U.S. territory is 
about $19,500 a year, versus about $52,000 in the states, and island 
households have to devote a significant portion of their limited 
monthly income to pay their electricity bills. This makes it harder for 
households to purchase other products and services, which serves as a 
drag on overall consumer demand, business sales, and economic activity. 
Likewise, businesses of all sizes in Puerto Rico invariably cite the 
high cost of electricity as one of the major challenges they confront. 
They emphasize that expensive electricity bills affect their ability to 
earn a profit, to expand operations, and to retain existing workers and 
hire new workers. Some larger companies in Puerto Rico have responded 
by disconnecting from the island-wide electric grid and generating 
their own electricity on-site, but this is not a feasible option for 
most businesses.
    The goal, then, must be to reduce the cost of electric power for 
the residential sector, the commercial sector, and the industrial 
sector in Puerto Rico. The argument that Puerto Rico households and 
businesses ought to pay higher electricity prices--a view I have heard 
expressed only by individuals who do not live on the island--should be 
treated with extreme skepticism. Before outlining various steps that 
can be taken at the local level and the Federal level to improve the 
energy system in Puerto Rico and to provide cost savings to consumers, 
a bit of background will help frame the discussion.
                               background
    Puerto Rico's electricity is supplied by the Puerto Rico Electric 
Power Authority, known as PREPA, a public corporation established in 
1941. PREPA has a governing board consisting of nine individuals, six 
of whom are appointed by the Governor of Puerto Rico with the advice 
and consent of the Puerto Rico Senate. Senior managers include an 
executive director, a vice-executive director, and various functional 
directors. PREPA has about 9,500 employees, including about 6,700 
unionized workers affiliated with four separate unions. PREPA has its 
own employee retirement system, a defined benefit pension plan. About 
14,000 individuals are currently receiving benefits under this plan. In 
2014, PREPA had operating revenue of about $4.7 billion. PREPA is in 
severe financial distress, and the outstanding principal amount of 
bonds that PREPA has issued exceeds $8 billion. Like nearly all bonds 
issued by public entities in Puerto Rico, PREPA bonds have been 
downgraded by the three main credit rating agencies to non-investment 
grade--or junk--status.

    PREPA owns and operates all but two of the electricity generating 
stations--power plants--in Puerto Rico. The PREPA system is composed of 
four main power plants. They are as follows:

     The ``Costa Sur'' plant in the municipality of Guayanilla, 
            located on southwest coast of Puerto Rico, which consists 
            of four units.

      --  Unit 3 and Unit 4 burn Number 6 residual fuel oil (bunker 
            fuel). Unit 3 and Unit 4 would operate on ``limited use'' 
            status in the event that the Mercury and Air Toxics 
            Standards (MATS), promulgated by the U.S. Environmental 
            Protection Agency (EPA) pursuant to the Clean Air Act, take 
            effect.

      --  Unit 5 and Unit 6 are capable of burning either bunker fuel 
            or, due to a $60 million investment made in 2012, natural 
            gas.

     The ``Aguirre'' plant in the municipality of Salinas, 
            located on the southeast coast of Puerto Rico, which 
            consists of four units.

      --  Unit 1 and Unit 2 burn bunker fuel.

      --  Combined Cycle Unit 1 and Combined Cycle Unit 2 burn Number 2 
            fuel (diesel fuel).

      --  In recent years, efforts to enable the Aguirre facility to 
            burn natural gas were commenced but not completed. Before 
            these units can burn natural gas, a means of delivering 
            natural gas to the facility must be secured. To this end, 
            Excelerate Energy--a Texas-based company--has proposed to 
            construct (1) an offshore berthing platform off the 
            southeastern coast of Puerto Rico to receive LNG from 
            ships, and (2) a 4-mile-long subsea pipeline connecting the 
            berthing platform to the Aguirre facility. In July 2015, 
            this proposal was approved by the Federal Energy Regulatory 
            Commission (FERC), but it still requires approval from 
            other Federal agencies. PREPA is seeking a loan guarantee 
            from the U.S. Department of Energy to finance up to 80 
            percent of the project cost, but DOE has been unable to 
            approve the loan guarantee application due to PREPA's 
            financial condition and the associated risk that the public 
            corporation would be unable to repay the loan.

     The ``Palo Seco'' plant in the municipality of Catano, in 
            the San Juan metropolitan area, which consists of four 
            units.

      --  All four units burn bunker fuel.

      --  Unit 1 and Unit 2 would operate on ``limited use'' status if 
            MATS take effect.

     The ``San Juan'' plant located in the municipality of San 
            Juan, which consists of six units.

      --  Unit 5 and Unit 6 burn diesel fuel.

      --  Unit 7, Unit 8, Unit 9, and Unit 10 burn bunker fuel. Unit 7 
            and Unit 8 would operate on ``limited use'' status if MATS 
            take effect.
    In addition to the four power plants owned and operated by PREPA, 
PREPA purchases power generated by two plants owned and operated by 
private companies.

     A plant in the municipality of Penuelas, located on the 
            southwest coast of Puerto Rico, which is owned by 
            EcoElectrica, a Puerto Rico corporation. The plant has been 
            in operation since 2000. The plant burns natural gas, which 
            is imported mainly from Trinidad and Tobago, as well as 
            from Belgium, Nigeria, Norway and Spain, and is delivered 
            to Puerto Rico on foreign-flagged ships. I understand that 
            EcoElectrica's offshore import terminal--which receives LNG 
            from a ship approximately twice a month--operates at about 
            half its capacity and could accept additional LNG 
            deliveries. EcoElectrica has 80 employees. EcoElectrica has 
            entered into a power purchasing agreement with PREPA.

      --  In addition to purchasing electricity generated from natural 
            gas at EcoElectrica's plant in Penuelas, PREPA also 
            purchases natural gas from EcoElectrica for use at Unit 5 
            and Unit 6 at PREPA's own Costa Sur plant in nearby 
            Guayanilla. There is a natural gas pipeline connecting the 
            EcoElectrica facility in Penuelas and the PREPA facility in 
            Guayanilla.

     A plant in the municipality of Guayama, located on the 
            southeast coast of Puerto Rico, which is owned by AES 
            Puerto Rico, a subsidiary of the AES Corporation, based in 
            northern Virginia. The plant has been in operation since 
            2002. The plant burns coal, which is imported from Colombia 
            and delivered to Puerto Rico on foreign-flagged ships. AES 
            Puerto Rico has 110 employees. AES has entered into a power 
            purchasing agreement with PREPA.

    According to the latest statistics published by the U.S. Energy 
Information Administration within the U.S. Department of Energy, in 
2013 Puerto Rico generated 55 percent of its electricity from 
petroleum, 28 percent from natural gas, 16 percent from coal, and 1 
percent from renewable sources. In terms of renewables, Puerto Rico 
enacted legislation in 2010 that established a Renewable Energy 
Portfolio Standard, or RPS. Under the RPS, PREPA is required to obtain 
12 percent of its electricity from renewable sources by 2015 (a 
standard it failed to meet), 15 percent by 2020, and 20 percent by 
2035. Renewable sources in Puerto Rico include solar, wind and 
hydroelectric. AES Puerto Rico owns and operates the largest solar farm 
in Puerto Rico, which opened in 2012 in the municipality of Guayama. 
The electricity generated from this solar farm is sold to PREPA.
    In May 2014, the Puerto Rico government approved Law 57-2014, the 
Puerto Rico Energy Transformation and RELIEF Act. The core of Law 57 is 
the creation of an Energy Commission, composed of three commissioners 
appointed by the Governor with the advice and consent of the Puerto 
Rico Senate, to regulate PREPA and any other ``energy company'' that 
operates in Puerto Rico. Pursuant to Law 57, electricity rates 
established by PREPA, which previously had not been subject to 
meaningful review, must now be approved by the Energy Commission before 
taking effect. The intent of Law 57 is sound; how effectively the 
legislation will be implemented remains to be seen.
    In August 2014, PREPA entered into ``forbearance agreements''--
providing a grace period during which PREPA's creditors refrained from 
pursuing certain legal actions against PREPA--with fuel line lenders 
and some bondholders and bond insurers. These agreements were 
subsequently extended many times, through late 2015.\3\
---------------------------------------------------------------------------
    \3\ See http://www.bgfpr.com/investors_resources/prepa.html.
---------------------------------------------------------------------------
    In September 2014, PREPA's governing board appointed Lisa Donahue--
one of today's witnesses--as chief restructuring officer. In this role, 
Ms. Donahue is charged with crafting and implementing structural and 
operational reforms at PREPA and negotiating a consensual debt 
restructuring agreement with creditors.\4\
---------------------------------------------------------------------------
    \4\ See Lisa Donahue, Testimony Before the Committee on Energy 
Affairs and Water Resources, Puerto Rico Senate (April 14, 2015), 
available at http://www.aeepr.com/Docs/Lisa%20 
Donahue%20PR%20Senate%20Statement%204-14-15.pdf.
---------------------------------------------------------------------------
    Because Puerto Rico, unlike every state, does not have access to 
Chapter 9 of the Federal bankruptcy code, the Puerto Rico government 
did not have the option of enacting legislation to authorize PREPA (or 
other instrumentalities) to seek the adjustment of its debts in a fair 
and equitable manner under the supervision of a Federal judge. The 
Puerto Rico government could not even use the prospect of a Chapter 9 
filing by PREPA as a means to foster swift and successful negotiations 
between PREPA and its creditors. As a result of Puerto Rico's exclusion 
from Chapter 9, the territory government enacted a local law in July 
2014 that sought to authorize certain public entities in Puerto Rico--
including PREPA--to restructure their debts in the Puerto Rico court 
system. In February 2015, a Federal district court invalidated that law 
on the ground that it is preempted by Chapter 9 (even though Chapter 9 
excludes Puerto Rico) and, in July 2015, a Federal appeals court 
affirmed that decision. However, in December 2015, the U.S. Supreme 
Court granted certiorari to review the appeals court's conclusion, and 
that case will be argued and decided later this year.
    Late last year, after a process that can only be characterized as 
lengthy and laborious, PREPA--led by Ms. Donahue--reached an agreement 
with fuel line lenders and bondholders and bond insurers controlling 
about 70 percent of PREPA's bonds, called the Restructuring Support 
Agreement (RSA). Implementation of the RSA is contingent on the 
completion of a number of steps that must still be taken, including 
enactment of a bill called the PREPA Revitalization Act by the Puerto 
Rico Legislative Assembly. I have reviewed the English and Spanish 
versions of this legislation, but the text of the bill is still 
undergoing material changes.

    In testimony delivered in support of the PREPA Revitalization Act 
before the Puerto Rico Senate on November 10, 2015, Ms. Donahue stated 
as follows:

        Since entering into the Forbearance Agreements, PREPA has 
        negotiated extensively with its creditors with the ultimate 
        goal of reaching agreement on a comprehensive restructuring 
        plan that addresses both PREPA's financial and operational 
        challenges. The lack of an available legal framework within 
        which to restructure its debts has complicated and extended 
        PREPA's negotiation process. We have no ability to compel 
        anyone to agree or even participate in the process. Therefore 
        the overall solution, which must be consensual, has to be fair, 
        balanced and holistic.\5\ (emphasis added)
---------------------------------------------------------------------------
    \5\ See Lisa Donahue, Testimony in Support of PREPA Revitalization 
Act Before the Committee on Energy Affairs and Water Resources, Puerto 
Rico Senate (November 10, 2015), available at http: / / www.aeepr.com / 
Docs / PREPA %20-%20 Donahue%20 Statement%20 Testimony% 20to% 20 
Legislative%20Assembly%20-%20Nov%2010.pdf. When Ms. Donahue testified 
on November 10th, PREPA had yet to reach agreement with the three 
monolines ensuring roughly 28 percent of PREPA's debt. Since that 
testimony was delivered, PREPA has reached agreement with two of the 
monolines, Assured Guaranty Corporation and National Public Finance 
Guarantee Corporation (a subsidiary of MBIA Inc.), rolling them into 
the RSA. To date, agreement has evidently not been reached with the 
third monoline, Syncora Guarantee Inc.

    As a matter of principle, I am a strong advocate of consensual debt 
restructuring negotiations between Puerto Rico's bond-issuing public 
entities and their creditors--and I have criticized the current 
administration in San Juan for not being sufficiently proactive in 
pursuing such negotiations. As a matter of practice, I have concerns 
that consensual negotiations--if not backstopped by a legal framework 
that creates the proper incentives for the parties to reach an accord--
can drag on for an excessive period of time, result in an agreement 
that is unfair or unbalanced, and lack a suitable mechanism to bind 
``holdout'' creditors who disapprove of the terms of the deal. It bears 
emphasis that Chapter 9 is not intended to substitute for consensual 
negotiations--indeed, a debtor generally cannot obtain Chapter 9 relief 
unless it demonstrates that it sought in good faith to negotiate an 
out-of-court accord with its creditors--but rather to facilitate such 
negotiations.
    During the question-and-answer session, I will ask Ms. Donahue to 
explain in simple terms (1) why she believes that the RSA--as embodied 
in the PREPA Revitalization Act now pending before the Puerto Rico 
Legislative Assembly--meets her self-imposed test of being ``fair, 
balanced and holistic''; (2) what provisions in the agreement give her 
the most pause; (3) whether the agreement is in any tension with Law 
57, especially the provisions of Law 57 that vest the Energy Commission 
with the power to approve electricity rates; (4) the practical 
implications of the fact that creditors controlling 30 percent of 
PREPA's bonds have not signed the RSA; (5) whether the agreement will 
position PREPA financially to make necessary capital improvements to 
power plants, power lines and other energy infrastructure; and (6) what 
impact the agreement is likely to have on electricity rates for island 
households and businesses in the short, medium and long term.
    I am willing to support this agreement, but the burden of proof is 
on PREPA and its creditors to convince me that the terms of the deal 
are beneficial for the people of Puerto Rico. I will also ask the other 
witnesses on the panel for their perspective on the agreement.
           recommended policy steps at the puerto rico level
    There are four main policy steps that must be taken at the Puerto 
Rico level in order to improve the delivery of affordable and reliable 
power to households and businesses on the island.

    First, operations at PREPA must be fundamentally reformed. Ms. 
Donahue's April 2015 testimony before the Puerto Rico Senate--regarding 
the welter of deficiencies she found at PREPA--makes for sobering 
reading. As Ms. Donahue notes: ``When I arrived at PREPA [in September 
2014], it was clear to me that PREPA was far behind the industry in 
virtually every respect.'' Among the many problems she identifies are: 
power plants that are old and technologically outdated, result in a 
high rate of forced power outages, and rely on expensive and 
environmentally unfriendly fuel; strategic decisions--like whom to hire 
and what capital improvement projects to pursue--that are frequently 
based on political considerations rather than on sound business 
judgment; the absence of a comprehensive plan to ensure that PREPA's 
power plants will be able to comply with Federal environmental 
standards like MATS; a baffling rate structure that requires 
substantial revision; a lack of institutionalized procedures and 
processes; outdated information technology systems; the inability or 
unwillingness to collect payment from customers and to prevent theft of 
electricity; poor inventory control, procurement practices and customer 
service; and an unsafe working environment for employees. The situation 
that Ms. Donahue describes is totally unacceptable. PREPA can--and 
must--change the way it conducts business. I am heartened that Ms. 
Donahue has testified that improvements are in fact being made, and I 
will ask her to describe in more detail what reforms have occurred and 
what reforms still need to occur.

    Second, PREPA must diversify its fuel supply, reducing its reliance 
on petroleum (which is not used in the 50 states to generate 
electricity) and increasing its use of natural gas and renewable energy 
sources. With respect to natural gas, it must be emphasized that the 
United States became the world's largest producer of natural gas in 
2011, and the first export terminals necessary to deliver that gas to 
other jurisdictions (whether non-contiguous states like Hawaii, U.S. 
territories like Puerto Rico, or foreign nations) will come on-line 
later this year. Puerto Rico should have the option of purchasing 
natural gas from the states, rather than from foreign countries, 
because it may be able to do so more efficiently and at lower cost. 
However, there are no Jones Act-compliant tankers available to 
transport natural gas from the states to Puerto Rico, which is why I 
introduced legislation to authorize modern tankers built outside the 
United States but otherwise compliant with the Jones Act to fill this 
gap.

    Relatedly, if the Jones Act issue is addressed, I think Puerto Rico 
is well-positioned to serve as a U.S. natural gas hub for the Caribbean 
region. Specifically, a large tanker could transport natural gas from 
the states to Puerto Rico, whereupon the natural gas could be placed on 
smaller vessels for transport (so-called ``milk runs'') to other 
islands in the area. With respect to renewables, I have been 
disappointed by the lack of progress made by the current administration 
in San Juan to comply with either the letter or the spirit of the RFS. 
With strong leadership and smart planning, Puerto Rico can do a much 
better job harnessing the power of the sun, the wind, and the water. 
Parenthetically, I also believe that Puerto Rico has the potential to 
develop a biofuel industry, and (1) to use biofuels to blend with 
diesel fuel at those PREPA plants that still rely on Number 2 fuel, and 
(2) to use biofuels for transportation fuel, as is required in the U.S. 
mainland pursuant to the Renewable Fuel Standard (RFS) program.

    Third, it is absolutely clear that there must be a larger role for 
the private sector in developing Puerto Rico's energy system--whether 
it is electricity generation, transmission or distribution. One model 
is the EcoElectrica and AES model, in which PREPA enters into a 
contract to purchase power generated by a private corporation in a more 
cost-efficient manner than PREPA could generate on its own. Another 
model worth analyzing would be for a private corporation to generate 
electricity and then to deliver this electricity using PREPA's 
transmission and distribution lines (a process known as ``wheeling'').

    Fourth, PREPA must undertake a smart and serious capital 
improvement program to modernize its generation, transmission and 
distribution system. The problem, of course, is that PREPA is in severe 
financial distress, does not have access to credit markets, and will 
thus struggle to pay for new infrastructure or to upgrade existing 
infrastructure. Investors are understandably wary of entering into a 
contract with a public corporation that is financially unstable and may 
not be able to fulfill its contractual obligations. Thus, unless PREPA 
can achieve financial stability, whether as a result of the pending RSA 
or through other means, it will be difficult for PREPA to finance the 
capital improvements necessary to benefit consumers.
             recommended policy steps at the federal level
    Hopefully, one purpose of this hearing is to explore ways in which 
the Federal Government--both the executive branch and Congress--can 
help Puerto Rico improve its energy system and provide affordable 
electricity to consumers. Here, then, are seven constructive steps the 
Federal Government could take:

     Appropriate Funds for the Congressionally Authorized 
            ``Energy Action Plan'' for Puerto Rico: In December 2014, 
            Congress enacted the Fiscal Year Consolidated and Further 
            Continuing Appropriations Act (P.L. 113-235). At my 
            initiative, the law contains a provision requiring the 
            Secretary of the Interior to appoint a team of technical, 
            policy and financial experts to develop an ``energy action 
            plan'' for Puerto Rico. The plan must include 
            recommendations for how Puerto Rico can: (1) reduce its 
            reliance on foreign fuels; (2) develop and utilize U.S. 
            fuel energy sources; and (3) improve performance of energy 
            infrastructure and overall energy efficiency. To date, the 
            Secretary of the Interior has not appointed the required 
            team, claiming that the Department does not have sufficient 
            funding to prepare the plan. Congress should reassign 
            responsibility for the plan from the Department of the 
            Interior to the Department of Energy, which is better 
            suited to prepare the plan, and then ensure that the 
            Department of Energy prepares the plan without delay.

     Provide Equality for Puerto Rico Under LIHEAP: The Low 
            Income Home Energy Assistance Program (LIHEAP), which is 
            administered by the U.S. Department of Health and Human 
            Services (HHS), helps low-income households pay their 
            electricity bills. Puerto Rico has always been treated 
            unequally under LIHEAP, receiving far less funding than it 
            would if it were a state. Specifically, in the 1981 Federal 
            law that established LIHEAP, Congress directed HHS to 
            allocate each year, for the five territories to share, no 
            less than 0.10 percent and no more than 0.50 percent of the 
            total LIHEAP appropriation. According to the law, the 
            percentage annually allocated by HHS is supposed to be 
            determined on the basis of need in the territories. 
            However, from the inception of LIHEAP until Fiscal Year 
            2013, HHS provided exactly 0.135 percent for the 
            territories each year, just barely above the minimum level 
            authorized by law. I led an effort by the five territory 
            delegates to persuade HHS to increase the funding provided 
            to the territories to the maximum amount allowed under 
            law--0.50 percent--and this effort was successful. 
            Accordingly, Puerto Rico received about $15 million in both 
            Fiscal Year 2014 and Fiscal Year 2015, compared to the less 
            than $4 million that Puerto Rico received under the old 
            formula in Fiscal Year 2013. However, Puerto Rico is still 
            treated unequally under the LIHEAP statute, compared to the 
            states. Congress should amend the LIHEAP statute to provide 
            Puerto Rico with state-like treatment, which--according to 
            one estimate--would result in Puerto Rico receiving about 
            $24 million a year.

     Extend Federal Renewable Energy and Energy Efficiency Tax 
            Credits to Puerto Rico Households: Congress has enacted 
            various Federal tax credits to encourage households to 
            install renewable energy technology and energy efficiency 
            technology. For example, there are Federal tax credits for 
            households that adopt solar-electric, solar water-heating, 
            fuel cell, wind energy, and geothermal heat pump 
            technology, and Federal tax credits for households that 
            make their homes more energy efficient, such as by 
            purchasing certain appliances or installing insulation. See 
            Internal Revenue Code Sec. Sec. 25C, 25D, 45L and 45M. 
            However, because Congress has exempted Puerto Rico 
            households from paying Federal income taxes on income 
            earned in Puerto Rico, most households in the U.S. 
            territory cannot benefit from these important credits. 
            Therefore, as it has done with respect to other Federal tax 
            credits, Congress should amend current law to apply these 
            renewable energy and energy efficiency credits to Puerto 
            Rico through a ``cover-over'' mechanism. Under this 
            mechanism, the U.S. Treasury Department would authorize the 
            Puerto Rico government to offer these credits to households 
            through the local Puerto Rico tax system, and the U.S. 
            Treasury Department would make an annual grant to the 
            Puerto Rico government to compensate it for the foregone 
            tax revenue.

     Expand USDA Electricity-Cost Reduction Programs in Puerto 
            Rico: The U.S. Department of Agriculture (USDA) administers 
            multiple grant programs aimed at reducing the cost of 
            electricity, including the Rural Energy for America Program 
            (REAP) and the High Energy Cost Grant Program. Under REAP, 
            USDA provides grants up to $500,000 and loan guarantees to 
            farmers and small businesses to help them purchase and 
            install renewable energy systems or make energy efficiency 
            improvements. While multiple farmers and small business 
            owners in Puerto Rico have received grants under this 
            program, it is clear that more can be done to expand the 
            number of REAP applications from Puerto Rico, and so I urge 
            USDA to enhance its efforts to educate potential applicants 
            in the territory about the program. By contrast, the High 
            Energy Cost Grant Program has not been put to use in Puerto 
            Rico. This program was established in 2000 to provide 
            assistance to communities most challenged by high energy 
            costs. Grants may be used to improve energy generation, 
            transmission or distribution facilities serving eligible 
            communities, or to install renewable energy systems and 
            make energy efficiency improvements in eligible 
            communities. However, under current program rules, grants 
            are only available in communities with annual residential 
            energy costs exceeding 275 percent of the national average. 
            Given that under the PREPA rate structure, a single island-
            wide rate is charged to customers, Puerto Rico has not been 
            in a position to benefit from this important grant program. 
            I urge USDA and PREPA to meet so that they can review 
            whether there are ways in which this program could be 
            modified in order to assist Puerto Rico communities, given 
            the very high cost of electricity in the U.S. territory.

     Update the Existing Jones Act LNG and LPG Exemption in 
            Puerto Rico: Congress should enact my legislation, the 
            Puerto Rico Interstate Commerce Improvement Act, in order 
            to increase the number of maritime vessels authorized to 
            transport LNG and liquified petroleum gas (LPG) from ports 
            in the U.S. mainland to ports in Puerto Rico. The Jones Act 
            has three main pillars. It requires that products 
            transported between ports in the United States be carried 
            on vessels that are predominantly owned by U.S. citizens 
            and registered in the United States, built at shipyards 
            located in the United States, and operated with mostly U.S. 
            citizen crews. In 1996, Congress granted Puerto Rico a 
            narrow exemption from the Jones Act. That law authorizes 
            two categories of vessels to transport LNG or LPG from 
            ports in the U.S. mainland to ports in Puerto Rico, even 
            though those vessels do not satisfy all three pillars of 
            the Jones Act. The first category are vessels built outside 
            of the United States prior to October 1996. The second 
            category are vessels built in the United States prior to 
            October 1996, but then registered by their owners in 
            foreign countries. Under the Jones Act, once a vessel has 
            been registered outside of the United States, it cannot 
            subsequently be re-registered in the United States. 
            According to the best available statistics, only about 60 
            of the 450 or so foreign-built LNG tankers in the world 
            qualify for the 1996 exemption under category one. The 
            average age of those 60 tankers is about 30 years old, 
            while the average age of all LNG tankers in operation is 
            about 12 years old. In addition, there are only about 11 
            LNG tankers that qualify for the 1996 exemption under 
            category two, and all are at least 35 years old. My 
            legislation would update the 1996 exemption, allowing any 
            vessel built outside of the United States, not merely those 
            built before October 1996, to transport LNG and LPG from a 
            port in the U.S. mainland to a port in Puerto Rico. This 
            will benefit energy producers in the states, who will gain 
            access to an important new U.S. market. It will also 
            provide a direct benefit to consumers in Puerto Rico, who 
            will see their electricity bills decrease and their 
            environment improve.

     U.S. Department of Energy Report on the Potential for 
            Puerto Rico to Become a Transshipment Hub for U.S.-Produced 
            LNG in the Caribbean Region: Either as part of the energy 
            action plan for Puerto Rico mandated by Congress in P.L. 
            113-235 (described above), or independent of that plan, the 
            U.S. Department of Energy should prepare a report for 
            Congress and the public on the feasibility and desirability 
            of Puerto Rico becoming a transshipment hub for the 
            distribution of U.S.-produced LNG and other energy products 
            throughout the broader Caribbean region. If necessary, 
            Congress should enact legislation requiring this report.

     Sustain and Strengthen USDOE Technical Assistance to 
            Puerto Rico: In October 2014, with my support, the 
            government of Puerto Rico and the U.S. Department of Energy 
            signed a memorandum of understanding that provides a broad 
            framework under which the parties are working together to 
            shape an energy policy for Puerto Rico that is in the 
            public interest and rooted in transparency, efficiency, and 
            strong citizen participation. These efforts complement the 
            process initiated by the Puerto Rico Energy Commission 
            under Law 57 to help PREPA transform itself. USDOE--through 
            subject matter experts in its Office of Energy Efficiency 
            and Renewable Energy (EERE), Office of Fossil Energy, 
            National Energy Technology Laboratory (NETL), and Office of 
            Intergovernmental Affairs--has been periodically meeting 
            with government and private-sector stakeholders in Puerto 
            Rico to review progress, come to a consensus on a common 
            vision, and set realistically attainable energy 
            diversification goals. Specifically, the Energy Commission 
            is currently reviewing the draft Integrated Resource Plan 
            (IRP)--which PREPA contracted with Siemens to prepare--that 
            addresses generation, transmission, distribution and fuel 
            options. Stakeholders are providing input on the IRP with 
            USDOE technical assistance. I urge USDOE to sustain and 
            strengthen this technical assistance.

                                 ______
                                 

    Mr. Lamborn. I thank Mr. Pierluisi for his statement. I 
would now like to recognize the Ranking Member of the Full 
Committee, Mr. Grijalva of Arizona, for an opening statement.

  STATEMENT OF THE HON. RAUL M. GRIJALVA, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF ARIZONA

    Mr. Grijalva. Thank you very much, Mr. Chairman, for your 
courtesy. We appreciate you scheduling this hearing in response 
to Speaker Ryan's instructions to this committee to craft a 
responsible solution to Puerto Rico's budget disaster and deep 
crisis by the end of March.
    While exploring the energy challenges and opportunities 
facing Puerto Rico is a worthwhile topic, albeit somewhat 
disjointed from the fiscal reality that is going on right now 
in Puerto Rico, there is a larger issue here in Congress.
    Congress is denying Puerto Rico the ability to have an 
orderly restructuring of its unpayable debt. It is a major 
reason for the debt crisis, it is the main barrier to recovery, 
and is even one of the primary energy challenges facing Puerto 
Rico. That is what we should be discussing today.
    According to the Treasury Department, which has been 
assisting the island with its debt issues, Puerto Rico is 
insolvent. Last June, Governor Garcia Padilla announced that 
Puerto Rico could not pay its debts. His government defaulted 
on $58 million in bond principal and interest payments in 
August and again in January. The Governor has been looking 
through the cushions of his government's couch to find ways to 
maintain these bond payments. This means other bonds have had 
to go unpaid, causing some insurers of Puerto Rican bonds to 
file suit against the government. It is just the beginning of 
what is expected to be a flood of expensive, chaotic litigation 
which only a Federal debt restructuring process can prevent.
    The Puerto Rican government is robbing Peter to pay Paul. 
Some time in the next 3 to 6 months they will no longer be able 
to pay Paul or anyone else. This will profoundly deepen the 
humanitarian crisis on the island that we have been warned 
about, which is coming. We cannot allow this to happen. Our 
fellow American citizens in Puerto Rico deserve much better.
    The island continues to suffer from decades of economic 
decline and will not be able to turn things around without 
congressional action. They cannot repair their economy until 
they deal with the debt problem. They cannot provide cost-
effective energy until they raise billions of dollars to 
upgrade their old and dysfunctional power generation and 
distribution infrastructure. These billions will be impossible 
to raise or borrow until an orderly debt restructuring brings 
everyone to the table and helps them repair their credit. 
Meanwhile, Puerto Rican families are forced to suffer more and 
more from brutal budget cuts.
    Last September, my staff put out a report called, ``Profit 
at Any Cost: How Hedge Funds Win By Making Sure Puerto Rico 
Loses.'' It shows how vulture hedge funds helped cause the 
Puerto Rican debt crisis and are now standing in the way of 
resolving it. Since then, these funds have been using their 
influence in the courts and through political channels to stop 
all debt restructuring plans not on their terms. They are 
relying on their status as Puerto Rico's only remaining lender 
to push extreme cuts to basic services that will, if enacted, 
increase their profits even more.
    In the meantime, the island continues to bleed residents 
who see relocation to Florida or elsewhere on the mainland as 
their only hope for survival. By some estimation, up to 100,000 
Puerto Ricans are expected to have left the island in 2015.
    Much more pain in the name of austerity will be inflicted 
on the people of Puerto Rico if Congress continues to put the 
demands of hedge funds ahead of the needs of families. There is 
no reason they should have to pay for the risky investment 
decisions made by other people.
    I urge this committee to put the American citizens of 
Puerto Rico first and allow this island to access bankruptcy 
protection.
    Mr. Chairman, again, thank you for your courtesy. I yield 
back.
    [The prepared statement of Mr. Grijalva follows:]
 Prepared Statement of the Hon. Raul M. Grijalva, a Representative in 
                   Congress from the State of Arizona
    Mr. Chairman, we appreciate you scheduling this hearing in response 
to Speaker Ryan's instructions to this committee to craft a 
``responsible solution'' to Puerto Rico's budget disaster by the end of 
March.
    While ``Exploring the Energy Challenges and Opportunities Facing 
Puerto Rico'' is worthwhile, there's a larger issue here. Congress is 
denying Puerto Rico the ability to have an orderly restructuring of its 
unpayable debt. It's a major reason for the debt crisis. It's the main 
barrier to recovery. It's even one of the primary energy challenges 
facing Puerto Rico. That's what we should be discussing today.
    According to the Treasury Department--which has been assisting the 
island with its debt problems--Puerto Rico is insolvent. Last June, 
Governor Garcia Padilla announced that Puerto Rico could not pay its 
debts. His government defaulted on $58 million in bond principal and 
interest payments in August and again in January.
    The Governor has been looking through the cushions of his 
government's couch to find a way to maintain these bond payments. This 
means other bonds have to go unpaid, causing some insurers of Puerto 
Rican bonds to file suit against the government. It's just the 
beginning of what is expected to be a flood of expensive and chaotic 
litigation which only a Federal debt restructuring process can prevent.
    The Puerto Rican government is robbing Peter to pay Paul. Some time 
in the next 3 to 6 months they will no longer be able to pay Paul or 
anyone else. This will trigger the humanitarian crisis on the island 
that we have been warned is coming. We cannot allow that to happen. Our 
fellow American citizens in Puerto Rico deserve better.
    The island continues to suffer from a decade of economic decline 
and will not be able to turn things around without congressional 
action. They can't repair their economy until they deal with the debt 
problem. They can't provide cost-effective energy until they raise 
billions of dollars to upgrade their old and dysfunctional power 
generation and distribution infrastructure. These billions will be 
impossible to raise or borrow until an orderly debt restructuring 
brings everyone to the table and helps them repair their credit. 
Meanwhile, Puerto Rican families are forced to suffer more and more 
brutal budget cuts.
    Last September, my staff put out a report called ``Profit at any 
Cost: How Hedge Funds Win by Making Sure Puerto Rico Loses.'' It shows 
how ``vulture'' hedge funds helped caused the Puerto Rico debt crisis 
and are now standing in the way of resolving it.
    Since then, these funds have been using their influence in the 
courts and through political channels to stop all debt restructuring 
plans not on their terms. They are relying on their status as Puerto 
Rico's only remaining lender to push extreme cuts to basic services 
that will, if enacted, increase their profits even more.
    In the meantime, the island continues to bleed residents, who see 
relocation to Florida or elsewhere on the mainland as their only hope 
for survival. By some estimation, up to 100,000 Puerto Ricans are 
expected to have left the island in 2015.
    Much more pain in the name of austerity will be inflicted on the 
people of Puerto Rico if Congress continues to put the demands of hedge 
funds ahead of the needs of families. There is no reason they should 
have to pay for risky investment decisions made by other people.
    I urge this committee to put the American citizens of Puerto Rico 
first and allow the island to access bankruptcy protection.

                                 ______
                                 

    Mr. Lamborn. Thank you. I would now like to introduce our 
witnesses. I appreciate every one of you being here today and 
serving as witnesses on this panel.
    We have Ms. Lisa Donahue, Managing Director of 
AlixPartners; Mr. Jorge San Miguel, Chair of Environmental Law, 
Energy & Land Use of Ferraiuoli, LLC; Mr. Carlos Rivera-Velez, 
President of the Puerto Rico Manufacturers Association; Mr. 
Josen Rossi, Chairman of the Institute for a Competitive and 
Sustainable Economy of Puerto Rico; and Mr. Jaime Sanabria-
Hernandez, Co-President and General Manager for Finance and 
Administration of EcoElectrica, L.P. I hope I pronounced every 
one of those names and organizations correctly.
    Let me remind the witnesses that under our Committee Rules, 
they must limit their oral statements to 5 minutes; but their 
entire statement will appear in the hearing record. When you 
begin, the lights on the witness table will turn green.
    After 4 minutes, the yellow light comes on. Your time will 
have expired when the red light comes on. At that point, I 
would ask that you complete your statement.
    I would also like to ask the entire panel to testify before 
the Members at the dais ask any questions.
    We will now start in order, and the Chair recognizes Ms. 
Donahue to testify.

STATEMENT OF LISA J. DONAHUE, MANAGING DIRECTOR, ALIXPARTNERS, 
 NEW YORK, NEW YORK; CHIEF RESTRUCTURING OFFICER, PUERTO RICO 
                    ELECTRIC POWER AUTHORITY

    Ms. Donahue. Thank you, Chairman Lamborn, Ranking Member 
Lowenthal, Full Committee Ranking Member Grijalva, Resident 
Commissioner Pierluisi, and members of the subcommittee. My 
name is Lisa Donahue. I am the Chief Restructuring Officer of 
the Puerto Rico Electric Power Authority, or PREPA.
    PREPA produces and delivers virtually all of the 
Commonwealth's electric power. PREPA owes approximately $9 
billion to creditors. Absent a financial restructuring, it will 
run out of money in the first half of 2016. Its problems are 
the results of choices made over decades, often driven by 
political or electoral considerations rather than best 
practices or business imperatives.
    Energy costs in Puerto Rico are high, but PREPA's costs are 
not fully covered by its existing rate structure. The rate 
deficit--that is the difference between the rate charged and 
PREPA's actual costs including existing debt service--is nearly 
8 per kilowatt hour. PREPA also faces challenges because its 
infrastructure is outdated, inefficient, and does not currently 
comply with environmental regulations.
    PREPA has developed a recovery plan to transform into a 
modern utility. The recovery plan is based on an equitable 
burden-sharing approach and involves three core goals: one, 
improving operations, efficiency, and therefore, cost 
structure; two, investing in infrastructure; and three, 
achieving a sustainable capital structure.
    PREPA has focused its operational improvement efforts 
across the enterprise. Through continued focus and use of 
cross-functional teams, PREPA has achieved hundreds of millions 
of dollars in one-time and recurring savings.
    PREPA has also developed a comprehensive, long-term capital 
plan that assumes $2.4 billion in new investments. The plan 
improves fuel diversity by shifting away from fuel oil toward 
natural gas and renewables. The plan also provides for critical 
investments in the transmission and distribution system. The 
plan includes an RFP to solicit bids for third-party investment 
in its infrastructure. We are interested in attracting the most 
efficient capital and expertise to help us execute the plan.
    PREPA's leaders and employees will continue to be critical 
to ensuring that it is able to execute the plan. Governance 
reforms pending before Puerto Rico's legislative assembly will 
promote independence to ensure that the changes are 
sustainable. In parallel, PREPA is working to instill a culture 
of meritocracy and accountability. It is also focused on 
achieving a sustainable debt structure.
    We cannot expect any one constituent to carry all of the 
burden. All stakeholders should contribute and support PREPA's 
transformation. To that end, in December of 2015, PREPA reached 
a restructuring support agreement, or RSA, with creditors 
representing approximately 70 percent of its debt. The RSA 
outlines a comprehensive restructuring plan to reduce PREPA's 
debt burden while also increasing liquidity.
    These are all positive developments, but PREPA's 
transformation is far from complete. The RSA is subject to many 
contingencies.
    First, the RSA is with only a portion of our creditors. In 
order to consummate the restructuring agreement, additional 
bond holders must participate. Approximately $2.7 billion in 
bonds have not yet agreed to the restructuring, and we need $2 
billion of those bonds to be exchanged voluntarily for the deal 
to become effective.
    Second, the new securitization bonds must receive an 
investment-grade rating, which is challenging as the rating 
will depend, at least in part, on the Commonwealth's financial 
situation.
    Third, the Puerto Rico legislature must approve legislation 
acceptable to the RSA creditors to reform PREPA's governance, 
authorize the securitization bonds, and make other changes to 
facilitate the transformation.
    If it became available, an orderly restructuring regime 
under the bankruptcy code would greatly help PREPA efficiently 
implement the agreement with its creditors. It would allow the 
super-majority of supporting creditors to bind holdout 
creditors. It would improve the deal economics by ensuring 100 
percent participation, and it would provide a faster process 
with greater legal certainty under the leadership of a Federal 
judge.
    The stakes are high and the human consequences of inaction 
are real. It goes without saying that electricity is the life 
blood of the Commonwealth. If the RSA terminates or we cannot 
consummate the recovery plan, we will be back to square one. 
PREPA could run out of money. Fuel supply could dry up. The 
safety and welfare of the Commonwealth and its people would be 
endangered. For these reasons, consummating PREPA's 
restructuring is critical to the social and economic well-being 
of the Commonwealth and its people.
    Thank you for the opportunity to participate in this 
hearing. I look forward to your questions.

    [The prepared statement of Ms. Donahue follows:]
  Prepared Statement of Lisa J. Donahue, Chief Restructuring Officer, 
                  Puerto Rico Electric Power Authority

    Chairman Lamborn, Ranking Member Lowenthal, Commissioner Pierluisi 
and members of the subcommittee: My name is Lisa J. Donahue, and I am 
the Chief Restructuring Officer of the Puerto Rico Electric Power 
Authority (PREPA). I am also a Managing Director and the leader of the 
Turnaround and Restructuring Practice at AlixPartners, a global 
business and advisory firm. I am a Fellow of the American College of 
Bankruptcy, and a Director-elect for April 2016 of the American 
Bankruptcy Institute.

    Prior to my appointment as PREPA's Chief Restructuring Officer, I 
served as an executive at a number of other power and energy companies, 
including as executive vice president and chief financial officer at 
Calpine Corp., an independent power producer operating in Texas, 
California, Canada and Mexico; chief financial officer at Atlantic 
Power Corp., a power and infrastructure company publicly traded on both 
the New York and Toronto stock exchanges; and chief restructuring 
officer at SemGroup, L.P., a mid-stream oil & gas, pipeline, storage 
and commodity trading company.

    I want to thank the subcommittee for giving me the opportunity to 
participate in this hearing on behalf of PREPA. PREPA was created for 
the purpose of conserving, developing and utilizing Puerto Rico's 
energy resources to promote the general welfare of the Commonwealth's 
residents and to increase commerce and prosperity. PREPA produces and 
delivers virtually all of the electric power consumed in the 
Commonwealth. Its future is central to the subject matter of this 
hearing--and in fact the economic well-being of Puerto Rico.

    PREPA's Governing Board selected and appointed me as Chief 
Restructuring Officer (CRO) in September 2014. Since then, I have 
reported directly to the Board and worked alongside PREPA's management 
to address fundamental operational problems that have hindered PREPA 
for decades, and to help lead PREPA's financial restructuring efforts, 
particularly its discussions with creditor representatives.

                   general background and challenges

    PREPA is currently in a state of crisis, and for years has been 
unable to transform into the modern, world-class utility that Puerto 
Rico deserves. In the summer of 2014, PREPA faced a severe financial 
and liquidity crisis, created by a combination of recurring negative 
cash-flows, an ongoing recession, outdated generation facilities, 
substantial debt maturities and an inability to access the capital 
markets. This crisis threatened PREPA's ability to operate, mainly by 
threatening its ability to continue purchasing fuel to run its power 
plants and 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 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.

    Today, PREPA owes approximately $9 billion to its bondholders and 
fuel line lenders, and continues to face very serious liquidity 
constraints. Absent a financial restructuring, between now and July 1, 
2016, PREPA faces contractual obligations to pay $700 million under its 
fuel lines of credit and approximately $428 million in principal and 
interest under outstanding bonds. This is more than twice the amount of 
cash PREPA currently has on hand, and PREPA will not be able to make up 
the difference with revenue from operations during this period. As part 
of the recently announced restructuring support agreement (RSA), a 
group of PREPA creditors recognized PREPA's liquidity constraints by 
agreeing to relend to PREPA $115 million of interest paid to 
bondholders on January 4, 2016.

    Our financial situation would be much worse if our creditors had 
not agreed to forbearance agreements in August 2014 and more recently, 
the RSA. These agreements have given PREPA temporary relief from its 
obligations to creditors, including relief from its obligation to make 
more than $600 million in sinking fund payments. Absent these 
agreements, PREPA would already have run out of money.

    One contributing factor to PREPA's current financial situation is 
that its existing rate structure does not capture its operating costs 
and debt service. PREPA's base rate has not changed since 1989 despite 
increases in costs and debt service obligations. However, the all-in 
cost fluctuates based on the cost of fuel and purchased power, and 
reached highs of approximately 28 per kilowatt hour (kWh) in August 
2014. Today, the all-in cost has fallen with oil prices to 
approximately 21 per kWh, which is high in comparison to the U.S. 
mainland, and has a disproportionate impact on Puerto Rico residents 
given their income levels and other economic factors. The ``rate 
deficit'' between existing rates and the rates PREPA would need to 
charge to cover operational costs, including debt service over the next 
3 years, is approximately 7.8 per kWh.

    Closing this rate deficit is critical to PREPA's sustainability. 
But PREPA's customers cannot carry this burden alone. Even the 
creditors who are party to the RSA agree with this point. To help close 
the rate deficit, we need to implement operational reforms to improve 
efficiency, and we need concessions from our creditors.

                         ongoing reform efforts

    When our team arrived at PREPA in September 2014, we encountered a 
large and complex organization facing a range of challenges that had 
been decades in the making. Like a number of companies, including many 
that I have personally worked with in my turnaround management career, 
PREPA needed outside assistance to help restructure its operations and 
finances and create a plan to assure long-term sustainability.

Operational Improvements

    PREPA has focused its operational improvement efforts on core 
business functions to improve organizational efficiency, increase 
revenue generation and instill a culture of safety in the workplace. By 
addressing shortcomings in accounts receivable and collections, fuel 
inventory, procurement, inventory management and safety, PREPA has 
begun the process to transform into a modern utility.

    PREPA has made great strides in its accounts receivable and 
collections processes with respect to government and private customers 
alike. PREPA has directly engaged with the central Commonwealth 
government and its agencies to set appropriate Fiscal Year 2016 budgets 
and has implemented payment plans for past due government accounts. 
Given the current financial situation within the Commonwealth, these 
efforts have become even more important.

    PREPA has also analyzed data to prevent theft and other non-
technical losses, developed workforce training in its call center and 
implemented customer care and billing improvements. Taken together, 
these reforms create a platform for PREPA to work collaboratively with 
customers to reduce past due accounts and improve customer service.
    PREPA has also worked to improve fuel inventory controls. In 
September 2014, PREPA's controls were sporadic at best. PREPA did not 
consistently measure based on industry standards or test for variations 
in consumption. Additionally, PREPA lacked a uniform process to 
forecast its fuel requirements based on optimized dispatch and deliver 
power at the lowest possible cost, leading to unnecessarily high fuel 
inventory levels and limitations on PREPA's ability to negotiate better 
terms.

    Our team has worked with PREPA to implement an integrated process 
that addresses these issues. We measure and track fuel inventory and 
investigate variances point to point. We have also improved inventory 
controls and reduced inventory levels with respect to all inventory. In 
addition, we have implemented a Request for Proposal (RFP) process and 
negotiated with fuel suppliers to secure more favorable fuel purchase 
terms.

    One issue of importance to PREPA, especially as it transitions to 
burning a significantly higher percentage of natural gas, is the Jones 
Act, which increases the cost of transporting fuel from the mainland to 
Puerto Rico. The impact of the Jones Act on PREPA's operations today is 
in the range of $3 to $5 million per year, due to the required use of 
Jones Act-compliant barges to distribute fuel oil between units. Based 
on current operational assumptions, this impact could increase by 
approximately $20 to $30 million per year if the Aguirre Offshore Gas 
Port (AOGP) is constructed and PREPA elects to source liquefied natural 
gas from the mainland. Relief from the Jones Act's stringent 
requirements could allow PREPA to save these amounts over time, and 
those savings would be passed along to its customers.

    The safety of employees should be at the heart of every well-run 
utility. In the past 10 years, PREPA has had 15 fatalities and 
approximately 14,000 safety incidents. Its incident rate is 
significantly higher, in fact more than double, than that of its 
industry peers. In September 2014, we ran an RFP process and engaged 
industry leader DuPont to conduct an analysis of safety practices and 
procedures. PREPA is currently implementing the short- and long-term 
recommendations made by DuPont and tracking its performance in those 
areas. During 2015, PREPA reduced its incident rate by 15 percent, 
which represents a productive first step, but falls short of our 
ultimate goal.

    PREPA is also working to improve its organizational culture and 
instill a focus on excellence. Many of PREPA's employees have embraced 
this effort and the board and management have also committed to these 
critical changes. Work is underway to introduce carefully selected key 
performance indicators (KPIs) to heighten the visibility of key 
priorities within the organization and focus process improvements where 
they will have the greatest possible impact. PREPA's workforce and 
organizational structure is being evaluated to reduce overlapping 
roles, streamline cross-divisional work and clarify job descriptions. 
PREPA is also undertaking succession planning for key positions to 
address potential retirements and other retention pressures.

    All of these efforts have already had a significant financial 
impact, and show that PREPA can take actions to reduce costs, improve 
efficiency and apply industry standards. PREPA has achieved $150 
million in one-time cash generation savings and approximately $162 
million in recurring annual savings. As new operational initiatives are 
phased in, we expect additional one-time savings of $185 million and 
recurring annual savings of up to $280 million. These savings are 
important because they contribute to closing the rate deficit and 
because we are asking creditors and other stakeholders to contribute to 
PREPA's transformation.

Vision for a New PREPA

    We have developed a comprehensive vision for a new, modern and 
self-sustaining PREPA. This is necessary because PREPA's outdated and 
inefficient generation fleet and transmission system have been major 
causes of rising costs and decreasing reliability to customers over 
time.

    The system is under extreme stress. Generating units are old, and 
PREPA has not made the investments necessary to maintain their reliable 
service. PREPA's median plant age is 44 years, compared to a U.S. 
industry average of 18 years. Approximately 80 percent of PREPA's 
generating fleet is more than 25 years old, and PREPA's oldest thermal 
unit is 56 years old. Its heavy reliance on fuel oil creates price 
volatility for consumers and environmental compliance challenges for 
PREPA under Federal Mercury and Air Toxics Standards (MATS) and other 
regulations. PREPA's outdated transmission system makes it difficult to 
accommodate unplanned unit outages and integrate renewable generation 
sources. Overall, PREPA's outdated infrastructure is a key cause of 
high forced outage rates, poor efficiency, low reliability and high 
costs.

    We have developed a comprehensive long-term capital plan that 
assumes $2.4 billion in new investment--funded either through cash 
resources or new public-private partnership investments. Our capital 
plan is driven by PREPA's integrated resource plan (IRP), which was 
undertaken in response to local law requirements. To help develop the 
IRP, PREPA engaged Siemens Industry, Inc., an industry leader. The IRP 
was filed with the Puerto Rico Energy Commission (PREC), a newly 
established regulatory body, in July 2015 and was updated in August 
2015. PREC is currently reviewing the IRP with input from other 
stakeholders.

    Importantly, PREPA's capital plan includes the construction of the 
Aguirre Offshore Gas Port (AOGP), which will allow PREPA to receive 
natural gas directly and efficiently at the Aguirre complex, as well as 
the conversion of the Aguirre generation facility to burn natural gas. 
This transition from fuel oil to natural gas will improve fuel 
diversity and enable the Aguirre steam power generating units to comply 
with environmental regulations like MATS. Construction on AOGP has been 
delayed given certain permitting issues and PREPA's financial 
situation, but we anticipate that PREPA will be in position to commence 
construction in the second or third quarter of 2016, and to complete 
the project by late 2017 or early 2018.
    PREPA is pursuing cost-effective financing for AOGP, including 
through discussions with the U.S. Department of Energy (DOE) regarding 
a potential loan guarantee under DOE's Section 1703 program. At this 
time, PREPA understands that DOE and other potential financing partners 
are awaiting a resolution of PREPA's overall financial situation before 
committing to invest in the project.
    Other key projects in the capital plan include the construction of 
new units at PREPA's Palo Seco plant, the installation of new 
transmission and distribution equipment throughout PREPA's system, and 
the long-term repowering or replacement of generation units at Aguirre 
and Costa Sur. These investments, which will include flexible 
generation units, will improve PREPA's ability to utilize existing and 
incorporate additional renewable energy sources, which are a key 
component of PREPA's vision for efficient, sustainable energy in Puerto 
Rico. Execution of the capital plan will also help PREPA comply with 
MATS for steam power generating units and reduce reliance on fuel oil.
    These initiatives will dramatically improve the efficiency of 
PREPA's system and reduce its environmental impact. The installation of 
newer and more efficient units will reduce the volume of fuel needed to 
power Puerto Rico and minimize the price volatility that results from 
relying on fuel oil for so much of Puerto Rico's supply. In addition, 
the shift to cleaner fuel sources will yield significant benefits. 
Today, 52 percent of total electricity generation in Puerto Rico is 
powered by fuel oil and coal, with 44 percent powered by natural gas 
and only 4 percent from renewable sources. Under PREPA's capital plan 
as contemplated in the IRP, by 2030, 83 percent of total electricity 
generation will be powered by natural gas and renewable sources (with 
renewables increasing to 14 percent of the total) and only 17 percent 
will be powered by fuel oil and coal (with fuel oil driven down to 
below 1 percent).
    PREPA is focused on facilitating an increase in the usage of 
renewables as a means to further diversify energy sources in Puerto 
Rico and contribute to PREPA's environmental compliance efforts. The 
IRP forecasts renewable capacity growth from 207 MW in 2016 to 1,193 MW 
in 2030, an increase of almost 600 percent. Power produced from 
renewable sources is expected to increase by an average of 9 percent 
annually, which will reduce overall demands on PREPA's system and 
displace traditional thermal generation.
    PREPA's capital plan is comprehensive and achievable. We intend to 
fund the plan with enhanced liquidity from operational savings, 
creditor concessions and a new transparent rate structure. PREPA will 
also pursue bids from third parties to finance and build new power 
generating units through an open and competitive RFP process to ensure 
that we are attracting the most efficient capital and expertise to help 
us execute the plan.
    Another critical element of PREPA's vision for the future is 
governance reform. PREPA's leaders and employees are critical to 
ensuring that PREPA is able to execute on its capital and business 
plans. To this end, governance reforms embedded in the PREPA 
Revitalization Act that is currently pending before Puerto Rico's 
Legislative Assembly, including the appointment of an independent 
board, will promote independence in PREPA's leadership and management 
to ensure that the changes we are implementing and planning are 
sustainable. In parallel, PREPA is working to instill a culture of 
meritocracy, and as discussed above, implement concrete policies in 
line with that culture, including rewarding employees based on KPIs.
   creditor negotiations and prepa's restructuring support agreement
    In late December 2015, PREPA reached agreement with creditors 
holding or controlling approximately 70 percent of its debt, including 
bondholders, fuel line credit lenders and bond insurers, regarding a 
comprehensive restructuring plan to address its fiscal and operational 
challenges. It took PREPA over 15 months to negotiate the RSA in large 
part because PREPA lacks access to an orderly debt restructuring 
process and its accompanying ``guard rails.'' In most situations of 
extreme financial distress, the possibility that a debtor will seek 
court protection incentivizes creditors to compromise more quickly. 
Moreover, in a typical situation, a bankruptcy process permits a 
supermajority of creditors to bind all creditors--it reduces the free-
rider and holdout problem.
    After many months, we were able to reach agreement but our work is 
far from complete. The RSA remains subject to significant contingencies 
and creditor termination rights.

    The key economic terms of the RSA include the following:

    Bondholder Agreement. All holders of uninsured PREPA bonds will 
have the option to exchange their outstanding bonds for new 
securitization bonds at 85 percent of the current face amount of their 
bonds. The new securitization bonds, which under the RSA must receive 
an investment grade rating (meaning a rating of at least BBB- or Baa3), 
will be interest-only bonds for the first 5 years, with an interest 
rate that is lower than the current rate on PREPA's existing debt based 
on the RSA pricing grid. An ad hoc group of bondholders representing 
approximately 40 percent of the outstanding bonds has agreed to 
exchange all uninsured bonds held by the group for new securitization 
bonds.

    Fuel Line Agreement. PREPA's fuel line credit lenders will have two 
treatment options. The fuel line credit lenders may convert 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. This will decrease the 
annual interest rate PREPA is currently paying on its fuel line credit 
debts from 7.25 percent to 5.75 percent and extend the maturity date 
for $700 million of debt by 6 years from the consummation of the 
restructuring transactions. Alternatively, they may exchange 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.

    Bond Insurers. To finance the restructuring transactions, PREPA's 
bond insurers will issue surety insurance policies in an aggregate 
amount up to $462 million, which will support a portion of the debt 
service reserve fund for the securitization bonds.

Remaining Contingencies

    PREPA's ability to execute on the RSA is far from certain. Its 
ability to do so will require the satisfaction of many conditions, the 
occurrence of a number of events outside its control and the continued 
cooperation of a diverse creditor body over a long period of time.

    A few of the key contingencies are set forth below:

    Creditor Participation. At present, creditors representing 
approximately 30 percent of outstanding PREPA debt are not party to the 
RSA. In order to consummate the bond exchange contemplated by the RSA, 
additional bondholders (who are not parties to the RSA now) holding 
more than $2 billion in bonds (i.e., all but $700 million) must 
voluntarily choose to exchange their existing bonds for securitization 
bonds at a discount. If these holders do not choose to exchange their 
bonds, the deal will not work for PREPA, and the parties will be forced 
to return to the drawing board in hopes of developing a new, workable 
restructuring plan. The availability of a legal mechanism such as the 
Federal Bankruptcy Code would ensure 100 percent participation among 
existing bondholders because a supermajority of bondholders could bind 
holdouts. In addition, it would greatly increase the odds that PREPA 
would be able to implement its deal, particularly given its existing 
widespread support among key creditor groups.

    Securitization Bond Rating. Pursuant to the RSA, the creditors 
required that the new securitization bonds to be issued in the exchange 
offer must receive an investment grade rating from a recognized rating 
agency. While the restructuring transactions are designed to maximize 
the new securitization bonds' rating, achievement of an investment 
grade rating will likely depend at least in part on the rating 
agencies' views of the overall financial situation of Commonwealth of 
Puerto Rico and its instrumentalities. Without the legal guard rails 
that would be provided by access to a Federal court, it is difficult to 
see how 18 different issuers in the Commonwealth will resolve their 
financial distress. A disorderly, litigious, and drawn-out process will 
jeopardize our ability to execute our deal.

    Commonwealth Legislation. Under the terms of the RSA, the 
Commonwealth must enact legislation that is acceptable to the RSA 
creditors in accordance with the RSA. This legislation must include, 
among other things, a legal framework for the issuance of 
securitization bonds and certain noneconomic terms relating to such 
bonds as well as governance reforms to depoliticize PREPA, allow it to 
function like a modern utility and implement long-term operational 
savings and reforms. The legislation will also authorize and set forth 
a structure for a transparent process to allow third party investors to 
submit competitive bids to invest in PREPA's infrastructure, and is 
currently pending before Puerto Rico's Legislative Assembly.

    Securitization Bond Validation Process. The RSA requires that the 
new securitization bonds be validated by a Commonwealth court pursuant 
to a newly established process, which may itself be the subject of a 
court challenge. This is necessary because PREPA does not have access 
to a Federal bankruptcy court to confirm a debt adjustment plan for 
PREPA. The benefits of plan confirmation are therefore another way in 
which access to a Federal court process could facilitate and expedite 
PREPA's restructuring efforts. A Federal court order approving the 
validity and enforceability of the securitization bonds would also be 
helpful to the rating agency process.
                               conclusion
    PREPA and its advisors continue to work tirelessly to close the 
restructuring transactions in the RSA. Fixing PREPA's capital structure 
is but one element of PREPA's overall transformation, but doing so is a 
necessary predicate to all of the other work PREPA is doing to 
modernize Puerto Rico's generation, transmission and distribution 
capacity for the long-term benefit of its people and the Puerto Rico 
economy.

    The recent announcement of the RSA in late December 2015 shows that 
PREPA and a significant portion of its creditors can work together to 
craft a comprehensive solution. It remains unclear whether PREPA will 
be able to execute on its restructuring transactions despite the 
support of 70 percent of its creditors. In many ways, the RSA is a 
tenuous agreement, filled with process checkpoints, creditor 
termination rights and other conditions that may not be satisfied, 
despite PREPA's best efforts. Access to a restructuring regime would 
allow PREPA to implement the restructuring contemplated by the RSA, 
without so many contingencies and open issues. In fact, the RSA 
contemplates implementing the restructuring transactions by using the 
Federal Bankruptcy Code or a proceeding pursuant to Puerto Rico's local 
restructuring law, if either becomes available to PREPA.

    If PREPA cannot execute on the RSA, agreed-upon creditor 
concessions will be lost and the governance improvements, cost savings 
measures and capital projects that form the core of PREPA's recovery 
plan will not go forward. In addition, the cost of energy to the people 
and businesses of Puerto Rico--who already face a financial crisis--
would increase dramatically. This would have a tremendously adverse 
impact on the people and economy of Puerto Rico. Creditors would begin 
to take enforcement actions against PREPA, and fuel and other suppliers 
would tighten credit terms and refuse to deliver goods. PREPA could be 
forced to ration its existing fuel supply and employ rolling blackouts, 
and its ability to carry out core functions such as meeting payroll, 
and conducting critical maintenance on plants and distribution 
networks, would be in doubt.

    The stakes are high, and have real human consequences. It goes 
without saying that electricity is the lifeblood of the Commonwealth. 
Any interruption in service would severely threaten the public health, 
safety and welfare of the Commonwealth and its people and could 
jeopardize other economic development and growth initiatives the 
Commonwealth is currently pursuing. For these reasons, we believe that 
consummating PREPA's restructuring transactions is critical to 
maintaining and protecting the social and economic health and well-
being of the Commonwealth and its people.

    I would like to thank the subcommittee for giving me the 
opportunity to participate in this hearing on behalf of PREPA.

                                 ______
                                 

    Mr. Lamborn. OK, thank you.

    The Chair now recognizes Mr. San Miguel to testify.

  STATEMENT OF JORGE L. SAN MIGUEL, CHAIR, ENVIRONMENTAL LAW, 
   ENERGY & LAND USE, FERRAIUOLI, LLC, SAN JUAN, PUERTO RICO

    Mr. San Miguel. Thank you, Chairman Lamborn, Ranking Member 
Pierluisi, and members of the committee. Good morning.
    Puerto Rico's energy crisis has a solution and must be 
resolved now. Energy, after all, is the backbone of our economy 
and the basis of our future. As I will discuss, most of the 
remaining actions required are local. Yet, given the historic 
juncture, the risks involved, and our poor track record, it is 
my view that Congress should consider providing certain 
structured leadership and reform oversight.
    By way of background, PREPA has faced internal challenges 
for decades now. Its 1941 structure is outdated and unfit for 
today's economy. PREPA is a government-controlled, top-down 
structure. Its median generating plant age, for example, is 44 
years, compared to an industry average of 18. In fact, 80 
percent of such plants are over 25 years old.
    Further, PREPA electricity losses are estimated at 15 
percent, due to technical and non-technical losses, where 
industry standard is estimated at 7 percent. This alone means 
approximately $200 to $300 million a year in losses, and there 
is much more.
    There are also external challenges, like the island's 
deepening recession and migration uptick, among others. The 
result? Historically high and volatile energy prices, as well 
as inconsistent power quality, has weighed down hard and strong 
on our economy and our citizens.
    PREPA needs a new focus. It must shift attention to the 
transmission and distribution business, divorce itself from the 
energy generation component, and leverage the private sector 
expertise and capital to construct and efficiently operate new 
generation facilities. Reforms must be quick and clear to 
achieve: number one, price reductions and stability; number 
two, modernization; number three, environmental protection; and 
number four, economic development and growth.
    Transparency and credibility will be key ingredients in any 
restructuring effort. PREPA today appears to be achieving 
levels of internal transparency not seen before, though much 
more is needed. Operational efficiencies are starting to take 
hold. Yet the most important steps remain ahead of us. And, 
significantly, most of these are within Puerto Rico's control. 
Let's review three such key actions.
    First, the government of Puerto Rico must quickly approve 
the PREPA Revitalization Act, or a similar version. This bill 
was proposed by the current Administration on November 4, 2015.
    Second, we need an emergency permit reform. Permitting in 
Puerto Rico is a historic and unacceptable nightmare. Large 
infrastructure projects normally take 8 to 10 years to fully 
permit and construct. Puerto Rico does not have the luxury of 
time to modernize and reform its energy infrastructure.
    Fortunately, under Act 76 of 2000, the Emergencies Act, the 
Governor is expressly authorized to declare an emergency and 
provide for expedited permitting authority via Executive Order. 
Emergencies under this law exist if there is any event or great 
problems of deterioration in the physical infrastructure for 
the rendering of essential services to the people. Electricity 
is an essential service, and by the government's own admission, 
its infrastructure is significantly deteriorating.

    As for the third key action, Puerto Rico's Energy 
Commission must expedite the approval of a revised rate 
schedule and complete the evaluation of the integrated resource 
plan, the IRP. Given the advanced negotiations between PREPA 
and most of its creditors, the Energy Commission should take 
all necessary temporary rate adjustment measures while the 
formal application process is completed. As to the IRP, it 
should complete the approval process to enable PREPA to 
establish the footprint of its infrastructure reform and 
business plan.

    Now, regarding a Federal role--as in any other state, 
infrastructure projects will require Federal approvals. Yet 
Federal interagency action can also take considerable time. 
Congress could consider a structure, like a temporary emergency 
permitting and oversight task force or a control board, to 
dovetail with a local enhanced permitting structure. This board 
could be tasked with expediting the joint review and approval 
of permits, in addition to grants, loans, and loan guarantees 
from existing programs. It could also ensure, with 
congressional authority, that PREPA is, in fact, reformed for 
good.

    With these action items in place, PREPA will begin 
regaining needed credibility. Immediately thereafter, in 
collaboration with both local and Federal Government, as well 
as the private sector, PREPA must quickly address the power 
quality of the grid. This is affecting new manufacturing 
investment on the island and seriously threatening existing 
ones. In other words, jobs, both existing and new.

    Concurrently, and to provide the lowest possible cost of 
electricity, it must maximize operational efficiencies, quickly 
leverage private sector capital and proponents to construct new 
state-of-the-art base load generation capacity, and maximize 
the expansion and assimilation of renewable energy portfolio.

    In closing, it is clear that PREPA's structure is outmoded 
and an impediment to growth. Unleashing long-term private 
sector efficiencies and credibility is key. Puerto Rico has the 
tools to finish the job at PREPA. Together with the Federal 
Government, we must. There is no turning back or a later 
chance. It is time to move forward now. Inaction is not an 
option, and further studies less so.

    We know the way; the question is will we have the will. The 
perfect cannot be the enemy of the good. We need to stop saying 
no and begin working on yes, and that means putting special 
interests and personal pride aside for the good of our economy, 
its growth, and opportunities. Thank you very much.
    [The prepared statement of Mr. San Miguel follows:]
Prepared Statement of Jorge L. San Miguel, Esq.*, Chair, Environmental 
               Law, Energy, and Land Use, Ferraiuoli, LLC

*The views, opinions and discussions presented in this document are 
those of the author, and do not necessarily reflect the views of 
Ferraiuoli, LLC.

    Thank you for holding this hearing and the opportunity to testify 
and work constructively to address one of Puerto Rico's principal 
challenges.

    The following provides some context into the Island's energy issues 
and challenges, discuss some of the root causes for such challenges, 
and some suggestions as to what is needed going forward from local 
leaders, and from Washington, DC in a supportive role. I trust this 
information will provide additional color on our situation and help 
guide and execute solutions that are well known and urgently needed.

    Puerto Rico's energy crisis has a solution and must be resolved 
now. Energy, after all, is the backbone of our economy and the basis of 
our future. As we will discuss, most of the remaining actions required 
are local. Yet, given the historic juncture, the risks involved and our 
poor track record, it is my view that Congress should consider 
providing certain structured leadership and reform oversight.

                              introduction

    The Puerto Rico Electric Power Authority (PREPA) is a public 
corporation that was created through Act 83-1941. One of its main 
objectives was:

        ``. . . the purpose of conserving, developing and utilizing, 
        and aiding in the conservation, development and utilization of 
        water and energy resources of Puerto Rico, for the purpose of 
        making available to the inhabitants of the Commonwealth, in the 
        widest economic manner, the benefits thereof, and by this means 
        to promote the general welfare and increase commerce and 
        prosperity; and the Authority is granted and shall have and may 
        exercise all rights and powers necessary or convenient to carry 
        out the aforesaid purposes, . . .'' \1\
---------------------------------------------------------------------------
    \1\ Article 6 of Act 83-1941, as amended, known as PREPA's Enabling 
Act, 22 L.P.R.A. Sec. 196. (Emphasis added).

    Unlike the mainland United States, PREPA is Puerto Rico's single, 
government-owned, electric power provider.\2\ Since its beginnings, 
PREPA essentially operated as a vertically integrated self-regulated 
monopoly.\3\ At that time Puerto Rico was predominantly rural and 
private capital was limited for infrastructure projects. Therefore, 
PREPA's monopoly may have been perceived as necessary to push Puerto 
Rico's economic growth.\4\ Yet, the historic lack of multiple electric 
power service providers (i.e., competition) has put the residential, 
commercial and industrial consumers at the mercy of one single energy 
provider in Puerto Rico.\5\ As a result, this has deprived the public 
(i.e., residential, commercial and industrial consumers) of the ability 
to choose from various providers, creating healthy market 
competition.\6\
---------------------------------------------------------------------------
    \2\ Until 1979 PREPA was known as the Puerto Rico Water Sources 
Authority (Autoridad de Fuentes Fluviales). The original name reflected 
the prevalent use of hydroelectric power at the time. http://
www.aeepr.com/Aeees/historia.asp.
    \3\ PREPA owns and operates Puerto Rico's power generation plants 
and transmission and distribution infrastructure, except for two co-
generators (i.e., Ecoelectrica L.P. and AES-Puerto Rico) and a few 
utility scale renewable energy projects that sell their energy to PREPA 
under Power Purchase Agreements (PPAs). During its first decade, PREPA 
acquired and consolidated under a single company the main generation 
and infrastructure owned by private parties. Sergio M. Marxuach, 
Restructuring the Puerto Rico Electricity Sector, Center for the New 
Economy, August 22, 2005, pages 3-5, http: / / grupocne.org / 2005 / 08 
/ 22 / restructuring-the-puerto-rico-electricity-sector/. See also, 
Statement of Motives, Act 57-2014, as amended.
    \4\ Id.
    \5\ There are consumers, however, that own and operate distributed 
generation systems. Yet, the majority are connected to the PREPA grid.
    \6\ Interestingly, PREPA's first bond issuance took place in 1945 
to enable PREPA's acquisition of the main electric power companies in 
Puerto Rico. In 1981, with the acquisition of the electric power system 
owned by the Municipality of Cayey, PREPA completed the consolidation 
of all Puerto Rico electric power systems under a single entity. See, 
http://www.aeepr.com/Aeees/historia.asp.
---------------------------------------------------------------------------
    In 1941, with prices of oil at $1.14 \7\ per barrel, it may have 
made sense to operate a self-regulated monopoly to ensure the 
construction of generation and transmission infrastructure. Today it 
does not make sense for many reasons. As a self-regulated government 
controlled monopoly, PREPA has failed. The original statutory 
infrastructure objectives have been achieved. However, the price of oil 
has changed dramatically and, more so, the variances/volatility of such 
prices.\8\ Today there is electric service throughout the Island, and 
there are new technologies, fuels and other disruptive forces that have 
impacted PREPA's original business model. The energy industry has 
evolved but PREPA's model has remained stuck. As a result, PREPA's 
structure has inflicted serious damage on our economy and the people of 
Puerto Rico. It is widely agreed that the single most important 
impediment to economic growth in Puerto Rico is the price/kWh, its 
variability, the power quality and the social cost inflicted as a 
result of environmental impacts. Without economic growth, there is no 
recovery, and without recovery, no real opportunity for the island's 
residents.
---------------------------------------------------------------------------
    \7\ https://www.eia.gov/dnav/pet/hist/
LeafHandler.ashx?n=PET&s=F000000_3&f=A.

    \8\ See, Attachment A.

    PREPA cannot pretend to obtain different results by doing the same 
thing--or essentially the same thing. That would constitute insanity as 
defined by Albert Einstein. Real and effective change at PREPA is long 
overdue. The Enactment of Act 57-2014,\9\ began to put an end to 
PREPA's self-regulated monopoly and enabled the Puerto Rico Energy 
Commission (Energy Commission) to approve, among other things, PREPA's 
energy rates. This process is in its initial stages, however, and is 
only one of the multiple measures needed to effectively address Puerto 
Rico's energy crisis.
---------------------------------------------------------------------------
    \9\ Act 57-2014, as amended, known as the Transformation and Energy 
Relief Act.

---------------------------------------------------------------------------
                      current situation and causes

    In 2015, the cost of energy per kWh in Puerto Rico averaged 
20.98.\10\ In contrast, the average energy cost in mainland United 
States for the same period was 10.47.\11\ During the last 5-year 
period, the average energy cost per kWh in the mainland was 10.06 
while in Puerto Rico it was 25.10.\12\
---------------------------------------------------------------------------
    \10\ See, Attachment B. These recent prices have been aided by the 
somewhat unexpected reduction in the price of oil in the world market. 
Prior to that, Puerto Rico was experiencing energy prices of up to 
.30c/kWh.

    \11\ See, Attachment C.

    \12\ See, Attachment D. Out of the 50 states, the only state with 
an energy cost higher than Puerto Rico's is Hawaii which averaged 33.04 
c/kWh in 2015. See, Attachment E. Hawaii's situation differs from 
Puerto Rico, among other things, in the complexity of its electric 
power grid system.

    No one denies the energy crisis. PREPA residential customers 
frequently face the decision of paying the electric bill, buying food 
and/or medicines. Commercial and industrial clients must decide between 
increasing prices and/or services or closing operations based on 
unsustainable energy costs, price fluctuations or, worse yet, the power 
quality issues inflicted by a less than optimal energy grid. The 
private business sector (i.e., industrial, commercial and small 
business) has complained for years about the variability of prices, the 
inefficiencies that affect such prices and the quality of the electric 
service provided.\13\ Puerto Rico's ability to attract new 
manufacturing investment is being affected by issues relating to power 
quality--voltage and frequency stability. Moreover, our existing 
manufacturing base is threatened by the same problem, thus putting at 
risk Puerto Rico's ability to protect and retain existing jobs.
---------------------------------------------------------------------------
    \13\ In the past, private sector representatives have complained 
about the cost, quality and reliability of PREPA's service. See, Sergio 
M. Marxuach, Restructuring the Puerto Rico Electricity Sector, Center 
for the New Economy, August 22, 2005, page 3, http://grupocne.org/2005/
08/22/restructuring-the-puerto-rico-electricity-sector/.

    It is evident that the energy crisis is not new. It has been 
diagnosed for years.\14\ What seems new(er) is the magnitude and the 
opportunity cost (economic impact) of our current challenges. The 
consequences and implication of the energy crisis have been highlighted 
more recently because it coincides with the larger issue of fiscal and 
economic dilemmas that Puerto Rico is facing. In 2010, Puerto Rico 
formally recognized the energy crisis and initiated a path to address 
it.\15\ Unfortunately, the measures taken to begin addressing the 
crisis were hindered and/or discontinued by a change in government and 
by PREPA's political, internal and operational obstacles.
---------------------------------------------------------------------------
    \14\ See, Sergio M. Marxuach, A new Look at Puerto Rico's 
Electricity Sector, Center for the New Economy, January 2009, http: / / 
grupocne.org/2009 /01 /22 /a-new-look-at-puerto-ricos-electricity-
sector-january-2009/; Sergio M. Marxuach, Restructuring the Puerto Rico 
Electricity Sector, Center for the New Economy, August 22, 2005, http:/
/grupocne.org/2005/08/22/restructuring-the-puerto-rico-electricity-
sector/; Intersectorial Committee on Environmental Compliance and 
Energy Alternatives, Report on the Necessary Measures to Comply with 
the New EPA Regulations, and the Conversion to, and Use of Natural Gas 
in, the Northern Power Plants, June 15, 2012, http: / / www.aeepr.com / 
INVESTORS / DOCS / Financial%20Information / Budgets / Report 
%20on%20the%20necessary%20measures%20to%20comply%20with%20new%20 
EPA%20regulations.pdf.

    \15\ See, Executive Order No. OE-2010-034 of July 19, 2010 (http://
estado.pr.gov/en/executive-orders/); Executive Order No. OE-2011-013 of 
April 12, 2011 (http://estado.pr.gov/en/executive-orders/); Executive 
Order No. OE-2011-047 of October 6, 2011 (http://estado.pr.gov/en/
executive-orders/); Executive Order No. OE-2012-019 of April 9, 2012 
(http://estado.pr.gov/en/executive-orders/); Executive Order No. OE-
2012-052 of October 5, 2012 (http://estado.pr.gov/en/executive-orders/
); and Executive Order No. OE-2013-038 of May 14, 2013 ( http : / / 
estado.pr.gov /en /executive-orders/).

    Puerto Rico's high energy costs and the related variability are the 
---------------------------------------------------------------------------
result of, among other things, the pervasive challenges listed below:

PREPA's Dependency on Oil

        After PREPA relegated the use of hydroelectric power, it began 
        relying heavily in the use of liquid fossil fuels.\16\
---------------------------------------------------------------------------
    \16\ See, Attachment F. Intersectorial Committee on Environmental 
Compliance and Energy Alternatives, Report on the Necessary Measures to 
Comply with the New EPA Regulations, and the Conversion to, and Use of 
Natural Gas in the Northern Power Plants, June 15, 2012, http: //
www.aeepr.com/INVESTORS /DOCS/Financial%20Information/Budgets/
Report%20on%20the%20 
necessary%20measures%20to%20comply%20with%20new%20EPA%20regulations.pdf;
 and Sergio M. Marxuach, Restructuring the Puerto Rico Electricity 
Sector, Center for the New Economy, August 22, 2005, page 3, http://
grupocne.org/2005/08/22/restructuring-the-puerto-rico-electricity-
sector/.

---------------------------------------------------------------------------
PREPA's Obsolete Infrastructure

        PREPA's generation fleet is very old and inefficient. PREPA's 
        median generating plant age is 44 years compared to an industry 
        average of 18 years.\17\
---------------------------------------------------------------------------
    \17\ See, PREPA's Transformation, A path to Sustainability, June 1, 
2015. http://www.aeepr.com/Docs/RecoveryPlan.pdf.

---------------------------------------------------------------------------
Intrusion of politics in PREPA

        Currently, the PREPA board has two seats of ex officio members 
        from the Secretary of the Department of Economic Development 
        and Commerce and the Secretary of the Department of 
        Transportation and Public Works and four members appointed by 
        the Governor with the advice and consent of the Senate. 
        Additionally, there are three members who are representatives 
        of the Public Interest (one for residential customers, one for 
        commercial customers, and one for industrial customers).\18\ 
        Management is transferred or moved at least with every 
        electoral cycle, if not more frequently. Hiring is influenced 
        in many instances not by qualifications of the candidate but by 
        political influences. Many decisions are made contemplating 
        potential political costs rather than sound business judgment 
        and practices.\19\
---------------------------------------------------------------------------
    \18\ The Board of Directors selects its Chair and Vice-Chair and 
the Executive Director. The Board of Directors has a key role in the 
company's administration since it is charged with the responsibility of 
leading the strategic management of PREPA and the delegating to the 
Executive Director and/or other PREPA officials the administrative 
duties and works of the public corporation. Section 4 of Act 83-1941, 
as amended.

    \19\ Based on information available, upon the designation of a 
Chief Restructuring Officer, AlixPartners (Lisa Donahue), measures to 
address these and other operational inefficiencies at PREPA have been 
put in place and the operational improvements are beginning to take 
root and are projected to generate annual savings of $245-$390 million 
in addition to one time savings. http://www.aeepr.com/Docs/
RecoveryPlan.pdf.
---------------------------------------------------------------------------
PREPA's Operational Inefficiencies

        For a long time PREPA has had significant operational issues, 
        including but not limited to employee performance, energy 
        theft, energy losses, lack of adequate fuel inventory controls, 
        deficient collection efforts \20\ and inadequate procurement 
        processes.\21\
---------------------------------------------------------------------------
    \20\ FTI Capital Advisors prepared a report on November 15, 2014 
regarding PREPA's Accounts Receivable and CILT Report which highlighted 
that, as of September 30, 2014, PREPA had a total of $1.75 billion in 
accounts receivable. Out of the $1.75 billion, $931,578,000 were 
uncollected payments from general clients and $757,690,000 from the 
government. See, Accounts Receivable and CILT Report of November 14, 
2014. http://www.aeepr.com/Docs/restructuracion/
PREPA%20AR%20and%20CILT%20Report%20Final.pdf. According to CRO Lisa 
Donahue, ``PREPA has made great strides in its accounts receivable and 
collections processes with respect to government and private customers 
alike. PREPA has directly engaged with Hacienda and other agencies 
regarding the setting of appropriate Fiscal Year 2016 budgets and has 
implemented payment plans for past due government accounts.'' Lisa 
Donahue Statement Testimony before House of Representatives November 
11, 2015. See, http://www.aeepr.com/Docs/Donahue 
%20Testimony%20to%20House%20of%20Reps%20-
%20Leg%20Reform%20(Final%208am).pdf.

    \21\ Lisa Donahue Statement Testimony before House of 
Representatives November 11, 2015. See, http://www.aeepr.com/Docs/
Donahue%20Testimony%20to%20House%20of%20Reps%20-%20 
Leg%20Reform%20(Final%208am).pdf.

---------------------------------------------------------------------------
PREPA's Historic Monopoly

        Having a self-regulated--government controlled--monopoly did 
        not provide any incentive for PREPA's adequate management and 
        operational efficiencies since it was allowed to pass all its 
        costs directly to the clients and had no competition.\22\
---------------------------------------------------------------------------
    \22\ See, Sergio M. Marxuach, A new Look at Puerto Rico's 
Electricity Sector, Center for the New Economy, January 2009, http: / / 
grupocne.org/2009/01/22/a-new-look-at-puerto-ricos-electricity-sector-
january-2009/. See also, Statement of Motives, Act 57-2014, as amended.

---------------------------------------------------------------------------
PREPA's Obsolete Rate Structure

        The rate structure has not contemplated and adequately captured 
        PREPA's operational costs.\23\
---------------------------------------------------------------------------
    \23\ This should be addressed in the evaluation and approval of the 
new rate to be proposed by PREPA in the application it is required to 
file with Energy Commission as per the provisions of Act 57-2014. See 
also, PREPA's Transformation, A path to Sustainability, June 1, 2015.

---------------------------------------------------------------------------
PREPA's Lack of Planning

        PREPA lacked strategic infrastructure and environmental 
        compliance planning and implementation. Priorities on 
        infrastructure planning and investments are shifted with 
        management changes that more than often coincide with electoral 
        cycles.\24\ Among other things, this lack of planning, has 
        caused compliance issues and the aging of its infrastructure to 
        coincide with the lack of funds to replace it.
---------------------------------------------------------------------------
    \24\ PREPA's deficient environmental compliance record has resulted 
in complex litigation against it by the U.S. Department of Justice, 
after the persistent intervention of community groups and the U.S. 
Environmental Protection Agency. The efforts to bring PREPA into 
compliance began in 1992. Thereafter, ``[i]n 1999, the U.S. Department 
of Justice and PREPA entered into a consent decree under which PREPA 
agreed to take certain actions to come into compliance with multiple 
environmental laws at a cost of approximately $200 million; pay a $1.5 
million penalty; implement additional projects to benefit the 
environment, costing approximately $3.5 million; and spending $1 
million to hire an environmental contractor to oversee compliance with 
the consent decree.'' In 2004, after EPA identified PREPA violations to 
the 1999 Consent Decree, the parties negotiated modifications to the 
original consent decree to bring PREPA plants into compliance with 
certain air emissions standards and added a supplemental project for 
the benefit the communities around certain PREPA generating plants. 
http://www.justice.gov/archive/opa/pr/2004/June/04_enrd_433.htm.
---------------------------------------------------------------------------
Subsidies

        PREPA has been forced by legislative provisions to provide 
        services at subsidized rates to a significant amount of 
        customers and to make certain contributions in lieu of 
        municipal taxes with municipalities.\25\
---------------------------------------------------------------------------
    \25\ See, PREPA's Transformation, A path to Sustainability, June 1, 
2015. Under the Contributions in lieu of Taxes, PREPA provides a 
municipality electric service in exchange of an exemption from 
municipal taxes. http://www.aeepr.com/Docs/RecoveryPlan.pdf.

---------------------------------------------------------------------------
Corruption

        Lack of Transparency of PREPA's internal procedures has 
        resulted in allegations of corruption in areas such as the 
        purchase of fuel.\26\
---------------------------------------------------------------------------
    \26\ See, Marrero Rolon et al v. Autoridad de Energia Electrica 
(Case No. 3:15-cv-01167) https://ecf.prd.uscourts.gov/cgi-bin/
iqquerymenu.pl?115501. The lawsuit, filed on Feb. 24, 2015 in the U.S. 
District Court for the District of Puerto Rico names 20 defendants 
(including PREPA, Vitol, Petrobras, among others) for allegedly 
receiving kickbacks and payments for colluding to raise fuel oil prices 
that were directly passed on to users of electricity, by agreeing to 
use non-complaint fuel oil and falsifying lab tests. http://
www.businesswire.com/news/home/20150224005237/en/Hagens-Berman-Puerto-
Rico-Residents-Businesses-File; PREPA v. Vitol, Inc. et al (Case No. 
3:2009cv02242). This case was filed on December 14, 2009. https://
ecf.prd.uscourts.gov/cgi-bin/iqquerymenu.pl?77028.

    The convergence of these factors throughout the past decades have 
resulted in a state run/controlled utility that, as a monopoly, has 
succeeded in becoming highly politicized, bureaucratic, inefficient, 
aged, expensive and accumulating nearly $9 billion in outstanding debt. 
This eventually added to the pressure of other external challenges, 
like the island's deepening recession and migration uptick. No less 
important is the availability today, of disruptive technologies and 
practices that affect PREPA's historic and narrow business model. All 
this, with the anticipated and foreseeable result of contracting sales 
---------------------------------------------------------------------------
and revenues.

    Public opinion on the Island today is overwhelmingly in favor of 
wholesale restructuring of this public utility.

           moving puerto rico's energy infrastructure forward

    The key to any serious restructuring effort is understanding the 
current state of affairs and its root causes, in order to design the 
path toward sustainable reform. The goal here is to implement reforms 
that take root, cannot be reversed, modified or watered down, so that 
we do not fall into the same pitfalls in years to come.

    PREPA needs a new focus. It must shift attention to the 
Transmission & Distribution business, divorce itself from the energy 
generation component, and leverage private sector expertise and capital 
to construct and efficiently operate new generation facilities. Reforms 
must be quick and clear to achieve: (i) price reductions and stability; 
(ii) modernization; (iii) environmental protection; and (iv) economic 
development and growth.

    Transparency and credibility will be key ingredients in any 
restructuring effort. PREPA today appears to be achieving levels of 
internal transparency not seen before, although much more is needed. 
Operational efficiencies are taking hold.

    In the case at hand, time is of the essence given the many other 
variables and developments of the central government, the local economy 
and the alternatives available to the public beyond the traditional 
centrally supplied electricity.
Privatization of Generation
    As many other jurisdictions have done, and particularly given the 
fiscal and operational challenges of PREPA, it must aggressively 
consider and use a privatization model. The models that seems most 
suitable to implement them are:

------------------------------------------------------------------------
            Model                Characteristics          Benefits
------------------------------------------------------------------------
 
Long-Term Concession 27
 
                               PREPA         No need for
                               retains ownership.    PREPA to have
                               Long-term     access to
                               contract for the      financing.
                               construction and      Would allow
                               management of the     PREPA to replace
                               generation of         its fleet in a
                               power.                shorter term.
                               A third       Ability for
                               party would be        the third party to
                               under better          obtain financing.
                               conditions than       Expertise
                               PREPA to obtain the   from third party.
                               necessary             Ability to
                               financing.            terminate agreement
                               The third     under certain terms
                               party would bring     and conditions.
                               its expertise.        Examples of
                               The           successful
                               contract can be       projects:
                               terminated under       -- Highway PR-22
                               certain pre-           -- Highway PR-5
                               established terms      -- Luis Munoz
                               and conditions.       Marin Intl. Airport
 
------------------------------------------------------------------------
 
Power Purchase Agreement
 (PPA)
 
                              ....................  ....................
                               Assets are    No need for
                               owned by the third    PREPA to have
                               party.                access to
                               Contract      financing.
                               for the purchase of   Would allow
                               power generated by    PREPA to replace
                               the third party.      its fleet in a
                               Ability for   shorter term.
                               the third party to    Ability for
                               obtain financing.     the party to obtain
                               Expertise     financing.
                               from third party.     Expertise
                               Ability to    from third party.
                               terminate agreement   Ability to
                               under certain terms   terminate agreement
                               and conditions.       under certain terms
                                                     and conditions
                                                     Examples of
                                                     successful PPAs:
                                                      -- EcoElectrica 28
                                                      -- AES-Puerto Rico
                                                     29
                                                      -- Pattern Santa
                                                     Isabel 30
                                                      -- Punta Lima
                                                     (GoGreen) 31
 
------------------------------------------------------------------------
27 Act 29 2009, as amended, known as the Public Partnership Act. Act 20-
  2009 establishes as public policy of the Commonwealth of Puerto Rico
  ``to favor and promote the establishment of public-private
  partnerships for the creation of priority projects, and among other
  things, to further the development and maintenance of infrastructure
  facilities, to apportion between the Commonwealth and the contractor
  the risk involved in the development, operation or maintenance of such
  projects, to improve the services rendered and the functions of the
  Government, to foster the creation of jobs, and to promote the socio-
  economic development and the competitiveness of Puerto Rico. Pursuant
  to the public policy set forth above, the . . . following projects . .
  . [can] be subject to a partnership contract:
 
. . .
 
(3) The construction, operation or maintenance of existing or new plants
  for the production of energy that use alternate fuels other than oil
  or that use renewable energy sources, such as wind, solar and oceanic-
  thermal energy, among others, as well as the transmission of energy of
  any kind . . .'' See, Act-29-2009, Section 3.
 
28 EcoElectrica, is a privately operated independent power producer and
  the only private energy generation facility in Puerto Rico that
  currently generates electric power using natural gas. The facility is
  located in southern Puerto Rico, has its own marine LNG terminal and
  has been operating successfully since the year 2000. It has a
  generation capacity of 507 MW, combined cycle unit. The natural gas
  used by EcoElectrica is imported from Trinidad and Tobago.
  EcoElectrica has storage capacity of 1,000,000 barrels of LNG, and it
  is the only facility on the island with the capability to import,
  store, regasify, and export natural gas. All of the electric power
  generated by EcoElectrica is sold to the PREPA. http://www.aeepr.com/
  Documentos/Ley57/EcoElectrica/EcoElectrica1.htm and http://
  ecoelectrica.com/.
 
29 AES Puerto Rico LP has a coal-fired co-generation plant located in
  Guayama, Puerto Rico. Since 2002, AES sells its energy to PREPA under
  a 25 year PPA. AES Corp. commenced the development of this plant in
  Puerto Rico in 1993. http://www.aeepr.com/Documentos/Ley57/AES/
  Contratos%20AES1.htm and http://www.aespuertorico.com/.
 
30 Pattern Santa Isabel is a 101 MW project located on the south coast
  of Puerto Rico. The project commenced commercial operations in 2012
  and sells its energy to PREPA under a 25 year PPOA. This was Puerto
  Rico's first commercial wind power project. http://www.aeepr.com/
  Documentos/Ley57/CONTRATOS/
  Contrato%20Pattern%20Santa%20Isabel%20LLC%202010-P00047.pdf and http://
  patternenergy.com/en/operations/facilities/santa_isabel/.
 
31 Punta Lima is a 23 MW wind farm located in the east coast of Puerto
  Rico. Punta Lima commenced commercial operation in 2013 and sells its
  energy to PREPA under a 25 year PPOA. http://www.aeepr.com/Documentos/
  Ley57/CONTRATOS/Contrato%20Punta%20Lima%20 (Go%20Green)%202010-
  AI0001.pdf and http://www.gestampren.com/en/node/2916.

Professionalization and De-politization of PREPA
    PREPA is not a for-profit entity. However, since it provides an 
essential public service to the people of Puerto Rico, it must be 
administered based on sound business judgment and practices. It is 
critical that PREPA decisions be free of political influences. The 
Authority needs to be administered and led by individuals with 
qualified management/business experience in order to ensure that 
decisions are not biased or influenced by political issues.\32\
---------------------------------------------------------------------------
    \32\ See generally, PREPA's Transformation, A path to 
Sustainability, June 1, 2015.
---------------------------------------------------------------------------
Local Permitting + Energy Crisis = Fast Track
Permitting Issues
    Permitting processes in Puerto Rico have been identified as a 
significant challenge for the Island's economic development due to the 
multiplicity of permits required and the time it takes to complete a 
permitting process.\33\ In Puerto Rico, obtaining the approvals for the 
development of a large infrastructure projects (e.g., utility scale 
energy generation) may take between 8 to 10 years, excluding potential 
litigation.\34\ Some of the permitting improvements introduced by the 
2009 permitting reforms \35\ were eliminated by amendments to the 
permit law approved by the current administration.\36\ This has been 
without doubt a step back in the advancements made to improve Puerto 
Rico's position to jumpstart economic development and improve its 
global competitiveness.
---------------------------------------------------------------------------
    \33\ Puerto Rico was classified by the World Bank Group on the Ease 
of Doing Business as 41 of 189 countries in 2014, 47 of 189 countries 
in 2015 and 57 of 189 countries in 2016. In other words, during the 
last 3 years, Puerto Rico has lost 16 positions in this classification. 
See, Doing Business Report. Retrieved from http://
www.doingbusiness.org/reports/global-reports/.
    \34\ Unlike the U.S. mainland, in Puerto Rico environmental 
activism has a selective agenda. While certain groups oppose projects 
that would replace old, polluting and noncompliant infrastructure, 
those same opponents are conveniently silent to the environmental 
impacts and pollution about maintaining the ``status quo''--that is, 
maintaining the existing/old infrastructure. Adequate and good faith 
public participation improves the discussion and evaluation of 
projects. When abused (e.g., litigation without merits), however, it 
can certainly result in a very effective delay mechanism with 
detrimental impacts on economic development and additional 
environmental and health degradation.
    \35\ The 2009 permitting reform was focused on streamlining the 
local complex permitting system that had placed Puerto Rico in a 
disadvantaged global competitiveness position. For example, as part of 
the reforms, a determination on an environmental document was deemed a 
component of the development or construction approval/permit, and as 
such it could be challenged together with the determination on the 
approval/permit. This ensured public participation while consolidating 
potential challenges to a project, to minimize the historical use of 
inefficient and delay tactics. See, Act 161-2009.
    \36\ The amendments to Act 161-2009, among other things, returned 
the challenges to environmental documents and location approvals/
permits to the pre-2009 bifurcated path. See, Act 151-2013.
---------------------------------------------------------------------------
Executive Orders--Declaration of Emergency
    The Governor of Puerto Rico can utilize existing statutory tools to 
declare an energy emergency and enable the relevant agencies to 
activate expedited permitting processes in order to jumpstart the 
replacement of PREPA's old generation fleet and improve/replace 
transmission and distribution infrastructure. In 2010, the Governor 
issued an Executive Order (EO) declaring a state of emergency in 
connection with the infrastructure of the electric power utility in 
Puerto Rico. The EO's effective date was extended on multiple occasions 
until 2012, as per the provisions of Act 76-2000, as amended (Act 76). 
Pursuant to those EOs, expedited permitting proceedings were activated 
to approve multiple projects related to the generation of energy using 
alternate sources of fuel to those traditionally used (e.g., petroleum 
derived sources). Act 76 was enacted to address certain emergencies, 
provide expedited processes for the application and granting of 
permits, endorsements, consultations and/or certifications related to 
the solution of emergencies so declared.\37\
---------------------------------------------------------------------------
    \37\ It is important to note that the provisions of Act 76 must be 
interpreted in the broadest sense possible in order to achieve the 
effective interpretation of the public policy contained therein. Also, 
the provisions of Act 76 will prevail over any general or special 
provision of law or regulation that is inconsistent therewith. See, 3 
L.P.R.A. Sections 1944 and 1945.
---------------------------------------------------------------------------
    Act 76 grants the Governor the authority to issue an EO declaring 
an emergency covered under its provisions. Under the Act, an emergency 
shall be deemed to exist if, among others, there is an event or grave 
problem of deterioration in the physical infrastructure for the 
rendering of essential services to the people.\38\ Upon the issuance of 
an EO declaring a state of emergency under Act 76, and for the duration 
of the emergency, the Governor activates: (a) an expedited permitting 
process under which certain permitting agencies \39\ can fast track 
permit applications, related to works that may provide an immediate 
solution to the situation created by the emergency, which entail the 
issuing of a permit, endorsement, consultation and/or certification, 
and approval of an environmental document; (b) the specific and non-
deferrable period during which other agencies can file their 
endorsements or opposition to permit applications; (c) the period for 
the relevant evaluation of environmental documents; and (d) the period 
for the evaluation of location consultations by the Planning Board. 
Although it establishes an expedited permitting procedure, the 
provisions of Act 76 include public notification mechanism which ensure 
public participation and establishes the remedies available to a party 
adversely affected by any resolution or order issued by any agency 
under the provisions of Act 76.
---------------------------------------------------------------------------
    \38\ Section 15 of Act 76 defines the term ``emergency'' as: ``. . 
. [a]ny serious abnormality such as a hurricane, tidal wave, 
earthquake, volcanic eruption, drought, fire, explosion, or any other 
kind of catastrophe, or any serious disruption of the public law and 
order, or an attack by enemy forces through sabotage or through the use 
of bombs, artillery or explosives of any nature, or by atonic, 
radiological, chemical, or bacteriological means, or by any other means 
that the enemy may use in any part of the territory of the Commonwealth 
of Puerto Rico, that merits the mobilization and extraordinary use of 
the damages caused of that could be caused. Likewise, the term 
``emergency'' covers any event or grave problems of deterioration in 
the physical infrastructure for the rendering of essential services to 
the people, or that endangers the life, public health, or safety of the 
population or of a sensitive ecosystem. See, 3 L.P.R.A. Section 
1931(a). (Emphasis added).
    \39\ The definition of the term ``agency'' included in Act 76 
includes both central government governmental entities and 
municipalities. See, 3 L.P.R.A. Section 1931(b).
---------------------------------------------------------------------------
    This legal mechanism helped significantly in the development of 
multiple renewable projects that today are selling energy to PREPA.\40\ 
Nevertheless the emergency declaration was discontinued by the current 
administration.\41\
---------------------------------------------------------------------------
    \40\ Projects include Pattern Santa Isabel, Punta Lima, AES 
Illumina and others. Some projects which obtained approvals under the 
expedited procedure were latter affected by the internal protracted 
PREPA reviews and approvals (e.g., issuance of final Minimum Technical 
Requirements, interconnection evaluations and other PREPA technical 
evaluations). By the time PREPA completed its internal processes, the 
Authority's fiscal situation had a detrimental impact on the ability of 
project developers to obtain financing.
    \41\ See, Executive Order No. OE-2013-038 of May 14, 2013 (http://
estado.pr.gov/en/executive-orders/).
---------------------------------------------------------------------------
Federal Permitting
    Regarding a Federal Role, as in any other state, infrastructure 
projects will require Federal approvals. The typical agencies include 
the USEPA, USCOE, USDA (Rural Development), USDOE and the FERC. Yet 
(Federal) interagency action can also take considerable time to 
complete.
    Congress could consider a structure--like a temporary Emergency 
Permitting and Oversight Task Force or Control Board--to dovetail with 
a local enhanced permitting structure. This Board could be tasked with 
expediting the joint review and approval of permits, in addition to 
grants, loans and loan guarantees from existing programs. It could also 
ensure, with Congressional authority, that PREPA is in fact reformed--
for good.

  Program Considerations to Support Puerto Rico Energy Sector 
Development

  1.  Maximize the use of existing loan, loan guarantee and grant 
            programs, such as those provided by the Department of 
            Energy and the USDA Rural Utilities Service.\42\ These 
            programs are intended specifically to assist public and 
            private sector energy infrastructure expansion and 
            improvement initiatives and the fund allocations to 
            implement these assistance programs has already been 
            approved and issued.
---------------------------------------------------------------------------
    \42\ http://www.rd.usda.gov/.

---------------------------------------------------------------------------
  2.  Expedite the required NEPA Review Program by:

          a.   Prioritizing NEPA reviews associated with Puerto Rico 
        project reviews.

          b.   Streamlining the procurement process to obtain 
        additional internal/external support needed to implement these 
        review programs in a timely manner.

          c.   Coordinate local and Federal permitting review programs 
        such that, if they cannot be consolidated and conducted 
        jointly, they are at least conducted simultaneously and not 
        sequentially.
          d.   Realizing that time is of the essence in these programs, 
        streamline the Federal legal challenge process by:

                  i.   Prioritizing the review of Puerto Rico project 
                proceedings, and

                  ii.   Ensuring any opposing petitioners have true 
                standing and are pursuing legitimate concerns, not 
                simply employing delaying tactics to oppose change.

  3.  Implement the temporary Oversight Task Force/Control Board to 
            help ensure that:

          a.   Comprehensive planning is implemented to help minimize 
        the occurrence of additional unanticipated expenses.

          b.   Program implementation is achieved and not unnecessarily 
        delayed or diverted by political influence or other external 
        pressures placed on the process.

          c.   Funds are used efficiently and for the intended purpose.

Strategic Planning--Integrated Resource Plan
    The PREPA Integrated Resource Plan (IRP), currently under 
evaluation by the Energy Commission, should be the footprint and guide 
for any budget and business plans to be developed by PREPA in order to 
ensure timely and adequate availability of funds for required 
investments and to avoid falling back into the existing crisis. The IRP 
identifies the preferred strategy for satisfying PREPA's electric power 
requirements over a 20-year planning horizon (Fiscal Years 2016 to 
2035, July 1, 2015--June 30, 2035).\43\ It also provides to PREPA a 
projection of its long-term electricity needs in a reliable, flexible 
and cost effective manner under a variety of market, regulatory and 
economic conditions/scenarios.\44\ The IRP also aims to prepare PREPA 
for the achievement of compliance with the Mercury and Air Toxics 
Standards, known as MATS,\45\ and the Clean Power Plan,\46\ two sets of 
regulations for which the generation fleet is unprepared.\47\
---------------------------------------------------------------------------
    \43\ http://www.aeepr.com/Aeees/ley57.asp and http://www.aeepr.com/
Docs/Ley57/Presentacion %20IRP%20-%20AEE%2020151106.pdf.
    \44\ Note that there are a multiplicity of interveners in the IRP 
approval process before the Energy Commission. http://energia.pr.gov/
plan-integrado-de-recursos/. The participation of the interveners 
should enable and foster an ample discussion of the IRP's compliance 
with applicable requirements established in Act 57-2014.
    \45\ On June 2015, the U.S. Supreme Court, in Michigan v. EPA, 
ruled that the EPA erred by failing to consider costs when deciding 
whether it was ``appropriate and necessary'' to regulate emissions of 
mercury and other hazardous air pollutants from power plants like those 
owned by PREPA. The Court, however, did not invalidate the MATS rule, 
it simply returned the MATS rule to the lower court for it to determine 
whether the rule should be simply remanded to EPA to correct the 
deficiencies outlined by the Supreme Court or invalidate the rule 
completely. Therefore, the MATS rule is in suspense until the lower 
court makes its final determination. Notwithstanding the foregoing, 
PREPA has stated that it will continue to work to modernize its power 
system and achieve permanent, consistent compliance with the Clean Air 
Act. To comply with emission requirements set by the new Federal 
regulations, it is estimated that PREPA must burn a minimum of 80% 
natural gas. For purposes of the IRP, PREPA is considering the MATS to 
still be in effect and be applicable. See, IRP Volume IV, http://
www.aeepr.com/Docs/Ley57 / PREPA%20IRP%20Volume%20IV%20-
%20Draft%20for%20PREC%20review%20-%20%20 Air%20Quality.pdf.
    \46\ Although the Clean Power Plan is not applicable to Puerto Rico 
at the moment, it is reasonable to anticipate that its applicability 
will be extended to Puerto Rico in the future and that PREPA must take 
it into consideration when replacing its fleet in order to ensure it 
can achieve compliance with it without significant additional capital 
investments. Id.
    \47\ See, IRP Volume IV, http://www.aeepr.com/Docs/Ley57/
PREPA%20IRP%20Volume%20IV% 20-%20Draft%20for%20PREC%20review%20-
%20%20Air%20Quality.pdf; http://www.noticel.com /noticia / 165741/epa-
anticipa-incumplimiento-ambiental-de-aee-busca-reunion-con-
donahue.html; and http://www.elnuevodia.com/Interstitial/
?oasSitePage=elnuevodia.com/interstitial&oasReturn Page= http://
www.elnuevodia.com/noticias/locales/nota/aeeapagaravariasplantas-
2031648/.
---------------------------------------------------------------------------
Energy Commission--Rate Procedure
    Given the advance status of the negotiations between PREPA and its 
creditors, the Energy Commission and PREPA should, with all their 
corresponding ministerial powers, work together to initiate and 
promptly approve a new rate.\48\ The Energy Commission should move 
expeditiously, within the applicable legal framework, to evaluate 
PREPA's application for such new rate.
---------------------------------------------------------------------------
    \48\ Act 57-2014 gave the Energy Commission primary and exclusive 
jurisdiction to approve rates and charges established by PREPA and 
established an initial review process in which PREPA files a request to 
modify its rates to the Energy Commission. This review process should 
have begun on or before November 28, 2014 and be completed by May 28, 
2015, as per the provisions of Act 57-2014. On February 12, 2015, the 
Energy Commission initiated an investigation to obtain the operations 
and performance of PREPA, including technical, administrative, 
financial, accounting, and tax related information to evaluate the 
existing rates of PREPA. During the investigation, which is still 
ongoing, the Energy Commission issued data requirements from PREPA to 
which the Energy Commission has stated that PREPA has responded to the 
most part. All the information provided by PREPA is confidential and 
thus, not available to the general public. Notwithstanding the 
foregoing, on May 29, 2015, the Energy Commission initiated the first 
review preceding by issuing an order which described the procedural 
steps the Energy Commission will take to manage the rate case and 
directed PREPA to file a request for new rates consistent with the 
requirements therein and the rate filing regulation enacted on July 24, 
2015. On December 3, 2015, the Energy Commission issued an order 
stating that PREPA's rates review process would begin once PREPA files 
its formal request before the Energy Commission and the latter 
determines that the request is complete. As of December 31, 2015, PREPA 
has not filed a request for the review of its rates. On September 17, 
2015, National Public Finance Guarantee Corporation (National), 
successor in interest MBIA Insurance Corporation and the insurance 
payment of principal and interest of about $ 1.4 billion of bonds 
issued by the PREPA filed a request for a revision of PREPA's rates and 
the establishment of a temporary rate. In its request, National 
requested that the Rico Energy Commission (i) show cause requiring 
PREPA to respond to this Petition within fourteen (14) days of service; 
(ii) consolidating this proceeding for all purposes with the existing 
rate case initiated by the Energy Commission on May 29, 2015; (iii) 
requiring that the consolidated rate review proceeding be completed no 
later than four (4) months after the filing of this Petition and 
establishing appropriate interim deadlines and procedures therefore; 
and (iv) establishing a temporary increase in the base electricity rate 
of at least 4.2 per kWh over existing rates while the Energy 
Commission's rate review is pending. The Energy Commission denied the 
request on September 30, 2015. With regards to the temporary rate, the 
Energy Commission held that the request did not meet the standards and 
requirements of Regulation No. 8620 which established the procedures 
and information requirements that must be filed before the Energy 
Commission when requesting a revision of the PREPA current rates and 
did not provide sufficient evidence to support such request. Regarding 
the request that the tariff review process be completed within four (4) 
months from the filing of the request, the Energy Commission held that 
it could not responsibly establish a specific date for completion of 
the rate review process because, as established in Order No. 2015-0001-
AP-CEPR, once the request from PREPA is received by the Energy 
Commission and the latter determines that it is complete, the Energy 
Commission will establish a procedural schedule with dates for 
technical and public hearings, where all persons or entities wishing to 
participate in the process can submit a requests to intervene. The 
Energy Commission urged National to use this mechanism, as intervening 
party, in order to have active participation in the PREPA rate review 
process. http://energia.pr.gov/revision-tarifaria/.
---------------------------------------------------------------------------
    The Energy Commission should use all of its available powers to 
take the necessary temporary rate measures while the application is 
adjudicated, as per clear and express provisions of Act 57-2014.\49\ 
The Commission has a key role in the transformation of PREPA. As an 
independent regulatory entity, it needs to bring an unprecedented 
transparency and accountability to the PREPA rate setting procedure. 
The result of this rate setting process should be the establishment of 
a rate that is fair and reasonable, which in fact must take into 
consideration PREPA's costs to ensure the quality and reliability of 
the service.
---------------------------------------------------------------------------
    \49\ As per the Energy Commission's own interpretation of Act 57-
2014, as amended, under Article 6.3 thereof, the regulatory entity has 
the authority to establish emergency and/or temporary rates. See, 
Testimony of the President of the Energy Commission before the Puerto 
Rico Senate, November 10, 2015. http://www.oslpr.org/2013-2016/
ponencias/A3BBMBI3.pdf.
---------------------------------------------------------------------------
Implementation
    Given the importance of resolving the Puerto Rico energy crisis, 
the implementation of the IRP and of the solutions proposed by PREPA 
should be subject to short and mid-term oversight and supervision by a 
qualified and professional (e.g., a designation similar to the Chief 
Restructuring Officer) or Federal agency such as the Department of 
Energy.
                                closing

     The Federal Government's time and efforts, as well as that 
            of the local government, is best used by focusing on the 
            few action items that remain, in order to finalize a PREPA 
            structural and financial reform. In fact, Federal support 
            may be conditioned upon the prompt completion of such 
            actions on the part of Puerto Rico.

     The revival of the local economy is a pre-requisite for 
            long-term debt repayment. As such, an electric demand 
            elasticity trend correction is a ``sine qua non'' 
            ingredient for debt restructuring to succeed in the 
            shortest possible time.

     Talk of default and bankruptcy only distracts from the 
            realizable objectives that Puerto Rico and PREPA have 
            within reach--and may otherwise have detrimental long-term 
            effects in Puerto Rico's ability to obtain future 
            financing.

     Most of the actions required to complete a reform of the 
            utility and the energy infrastructure of the island are 
            local. The Federal Government can provide leadership, 
            structure and oversight--but Puerto Rico has the tools 
            needed to finish the job at PREPA.

     Most of the proposals demanded of, or coming from, 
            Congress do little to address the underlying structural and 
            policy issues that gave rise to our current energy crisis.

     Real legislative help for Puerto Rico should take account 
            of the bigger picture--spurring economic growth and job 
            creation. Only then will we progress toward economic 
            opportunity for residents, a lower cost of living and 
            better quality of life, with higher productivity and job 
            growth. Although most of the responsibility for better 
            energy policy lies with the local government, Congress can 
            help as generally outlined above.

                                 ______
                                 

    Mr. Lamborn. Thank you.
    The Chair now recognizes Mr. Rivera-Velez to testify.

STATEMENT OF CARLOS RIVERA-VELEZ, PH.D., PE, PRESIDENT, PUERTO 
     RICO MANUFACTURERS ASSOCIATION, SAN JUAN, PUERTO RICO

    Mr. Rivera-Velez. Good morning. My name is Carlos Rivera-
Velez, and I am here today on behalf of Puerto Rico's Private 
Sector Coalition, representing 100 percent of the private 
sector and comprised of 30 organizations. We thank you, Mr. 
Chairman and subcommittee members, for today's hearing.
    I am also the elected Chair of the Puerto Rico 
Manufacturers Association, PRMA, which is the largest trade 
association comprised of approximately 1,200 companies 
representing the manufacturing sector. Employing almost 350,000 
U.S. citizens and over 80,000 Americans stateside, 
manufacturing alone represents 50 percent of the island's GDP. 
We pay the highest wages, generate three jobs for every direct 
job, and provide over one-half of the local government's 
current tax base.
    I am also Vice President of Manufacturing and General 
Manager of Federal Life Sciences in Puerto Rico, which directly 
employs approximately 1,000 U.S. citizens.
    Recently, the PSC met with a number of your colleagues to 
recommend a five-point program toward economic development, 
highlighting energy as a top issue. Energy costs in Puerto Rico 
far outweigh similar costs on the mainland and hamper our 
ability to compete globally. We know the current MOU between 
the DOE and Puerto Rico must be renewed and restrategized now. 
We also ask the Insular Affairs Office of the Interior 
Department to be funded now to complete the work with Puerto 
Rico on modeling and implementing a competitive and sustained 
energy solution.
    Locally, we advocate for an agenda intended to transform 
the electrical system and enable sustained economic 
development, including things like debt restructuring; the 
reintegration of renewable energy sources; the modernization of 
the infrastructure; cleaner and cheaper fuel sources; and the 
full empowerment of the Independent Energy Commission 
representing consumers and industry to oversee the whole 
process of setting utility prices, among others. Dedicated and 
sound resources are needed to provide robust tools to allow the 
local commission to impact and do its job on a level playing 
field.
    My main responsibilities as an operational leader include 
ensuring expected results are met within the planned budget for 
the year, while reducing costs annually in order to ensure 
production remains competitive globally. Energy costs play a 
major role in the daily management of any operation, especially 
those that are equipment-intensive. Energy costs in Puerto Rico 
for the last 15 years have been unstable and unpredictable, 
trending upwards from 11 a kilowatt hour in 1999 all the way 
up to 30 a kilowatt hour in 2012. Today, we are almost twice 
the U.S. average, despite lower oil prices.
    To make things worse, there are proposals to increase 
energy prices even more above the current ones in order to 
facilitate restructuring and debt servicing. This amount could 
top an additional 7.8/kWh taking the worst case; resulting in 
average Puerto Rico prices for all sectors combined versus that 
of the United States to be 3.3 times 2014 prices. Anyone with a 
simple understanding of operating a business appreciates how 
devastating this change would be and its consequences to our 
economy.
    As you know, PREPA has depended on oil to power its 
electricity generators. Since the 1940s, history has taught us 
that oil prices can change drastically in a short period of 
time, and Puerto Rico is vulnerable to these price swings. 
PREPA has been very slow to evolve.
    Many local businesses and manufacturers have taken their 
own initiatives to lower costs. In the case of my facility, as 
an example, we have invested over $1 million just to convert to 
LED lighting and install more efficient equipment as part of an 
energy cost reduction strategy. Similar large operations in 
manufacturing, consumer products, and retail markets have 
actually installed their own electricity generation capacity on 
site to ensure adequate power at a lower price, like 
cogeneration with propane, large solar panel arrays, et cetera.
    Notably, PREPA has resisted the ability of these companies 
to sell back to the grid or to initiate the practice of 
``wheeling'' and sell to a neighboring facility. So, small 
businesses cut costs by turning off the air conditioner or use 
it partially, use only a portion of the lights in the showroom, 
and lay off employees. In many cases, energy costs are 
significantly higher than payroll expenses. In the end, 
consumers will face higher prices and we look elsewhere, 
reducing demand, costing jobs for U.S. citizens in Puerto Rico 
and the mainland.
    Let me illustrate the example of a manufacturing plant. 
Despite our current challenges today in Puerto Rico, we 
continue to be a manufacturing powerhouse. Every time there are 
energy cost increases, the following dynamics occur in any 
manufacturing plant in Puerto Rico: the general manager needs 
to explain the financial variances and the reasons for it; he 
or she needs to look at implementing ways to compensate for the 
cost increase, typically reverting to decisions involving 
downsizing employment, delaying or canceling new investments or 
expansions.
    Corporations defer from bringing new products to the local 
plants if they are heavy on capital equipment. Workers at all 
levels become very aware of the previous challenges in the 
working place. When combined with their own energy cost 
challenges as consumers, it contributes to a suboptimal working 
environment.
    For these and many other reasons, we believe providing a 
competitive and modern, long-term energy platform and low cost 
is key to Puerto Rico's economic recovery.
    Thank you all, and I look forward to your questions.
    [The prepared statement of Mr. Rivera-Velez follows:]
 Prepared Statement of Dr. Carlos Rivera-Velez representing the Puerto 
                     Rico Private Sector Coalition
    Good morning. My name is Carlos Rivera-Velez and I am here today on 
behalf of Puerto Rico's Private Sector Coalition (PSC).
    I would first like to thank you Mr. Chairman, Ranking Member 
Lowenthal, and the members of the subcommittee for conducting this 
hearing this morning and for this opportunity to testify. We have noted 
in previous visits our availability to collaborate and establish a 
strong partnership with you so together with the Federal and local 
administrations we foster the development of practical, effective 
solutions to the current fiscal situation and the formulation and 
implementation of medium- and long-term plans that enable a 
competitive, productive and sustained economy in Puerto Rico. I want to 
recognize that this is the first invitation in recent times that the 
Puerto Rico Private Sector Coalition as an entity has formally received 
from Congress to testify on any issue affecting Puerto Rico and I would 
like to thank you Chairman Lamborn and Congressman Lowenthal for the 
opportunity and reiterate our availability to collaborate on this and 
other challenges.
    As a proud Puerto Rican and U.S. citizen living on our island, I 
also want to thank Chairman Rob Bishop, Congressman Pierluisi, Don 
Young, and all the Members of the House Resources Committee and their 
staffs who are tirelessly working to assist our Commonwealth and your 
fellow citizens in Puerto Rico in finding realistic and practical 
solutions to the current fiscal situation.
    Our 3.5 million U.S. citizens are active participants in the 
American dream of a better life for our families. Today, Puerto Rico is 
a key part of the U.S. values and supply chain. In fact, Puerto Rico 
consumers and business purchased $20 billion in products and services 
from mainland suppliers and retailers this past year, being the largest 
buyer per capita of U.S. goods in the world.
    By way of establishing for the record my formal background, I am 
the elected Chairman of the Puerto Rico Manufacturers Association 
(PRMA), which is the largest, and one of the oldest trade associations 
in our Commonwealth, founded in 1928. The PRMA is comprised of 
approximately 1,200 companies and represents the Puerto Rican 
manufacturing sector, suppliers, and service providers, which together 
employs almost 350,000 U.S. citizens on the island and over 80,000 
Americans on the U.S. mainland. Manufacturing by itself represents 50 
percent of the island's GDP or $51B and close to 70 percent of GDP when 
all impacted aspects of the economy are taken into account. It pays the 
highest average wages, generates three jobs for every direct job, and 
generates over one-half of the local government's current tax base.
    I am also Vice President of Manufacturing and General Manager for 
Edwards Lifesciences Corp. in Puerto Rico, a global leader in 
hemodynamic monitoring medical devices, established in the island since 
1972, and directly employing approximately 1,000 U.S. citizens.
    During my progressive career of almost 30 years, I have occupied 
diverse professional and executive positions of increased 
responsibility in the island. I have worked for Digital Equipment 
Corporation (computers/electronics), Allergan Inc. (pharmaceuticals/
medical devices), Advanced Medical Optics Inc. (medical devices), 
Johnson & Johnson Company (pharmaceuticals/medical devices) and now 
Edwards Lifesciences Corp.
    I have served as an engineer, engineering manager, manufacturing 
manager, strategic planning director, engineering director, operations 
director, plant manager, general manager, and now vice president, among 
others. I have also served as president or board member of several 
business, academic, and philanthropic organizations.
    I have an engineering degree from the University of Puerto Rico; a 
master's degree in Technology and Business from the University of 
Pennsylvania; and a doctoral degree in philosophy from the Advanced 
Studies Center for Puerto Rico and the Caribbean.
    I also serve as a founding board member of the Puerto Rico Private 
Sector Coalition (PSC), which represents 100 percent of the private 
sector. Some of my fellow board members include: Dr. Jose E. Vazquez-
Barquet, President and Chairman of the Board of the Puerto Rico Chamber 
of Commerce; Ramon A. Perez Blanco, Esq CPCU, President of the 
Association of Products from Puerto Rico; Zulmarie Urrutia-Velez, CPA, 
Esq, LLM, President of the Puerto Rico Society of Certified Public 
Accountants; and Dr. Francisco Montalvo-Fiol, Coordinator of the 
Private Sector Coalition and Department Chair at the Interamerican 
University, Bayamon Campus. Together we came to Washington last 
December 2015 and are the core team of the PSC consisting of almost 30 
organizations.
    The entire private sector has come together in a united front to 
work on the issues affecting Puerto Rico, with energy one of the most 
critical ones, and we look forward to working with you and your 
colleagues prospectively. The World Economic Forum (WEF), has listed 
high energy cost and non-competitive electrical infrastructure as a 
significant challenge for the Island's economy and as a weakness in the 
WEF'S Global Competitiveness Report for the last 5 years. Business 
investment decisions have been negatively impacted by Puerto Rico's 
high energy costs.
    Last month, the PSC met with a number of your colleagues here on 
Capitol Hill and recommended a five-point program toward sustained 
economic development. At the top of our agenda was energy. As most of 
you know, energy costs in Puerto Rico far outweigh similar costs on the 
mainland and are a significant drag on our ability to compete with our 
neighbors in the Caribbean Basin or even other regions of the World. I 
will speak more about this next from an operational perspective but the 
PSC recommends at the Federal level that the current MOU between the 
Department of Energy and the Government of Puerto Rico be revitalized. 
We also ask that the Insular Affairs Office of the Department of the 
Interior is appropriated with the necessary funding to complete work 
with Puerto Rico on modeling and implementing a competitive, 
transparent, diverse, and dynamic energy solution that can become a key 
catalyst toward economic recovery and sustained development.
    At the local arena, we have been advocating for the implementation 
of the following elements intended to enable the beginning of the 
transformation of the agency and economic development: structured and 
competitive-conscious debt restructuring; assertive integration of 
renewable energy sources into the Puerto Rico Electric Power Authority 
(PREPA) infrastructure; immediate implementation of wheeling; the 
modernization of the current generation plants network and the 
incorporation of cheaper and cleaner fuel sources (i.e. LNG); the 
transparency of information and modernization of the information system 
platform; and the total empowerment and resourcing of the Energy 
Commission as an independent body representing consumers, commerce, and 
industry to oversee the whole process of developing and setting energy 
tariffs. Dedicated resources are needed to provide robust tools, 
funding, and technical expertise to the Commission which will allow the 
Commission to do its job on a level playing field.
    I want to offer some of my personal experiences as an operational 
leader managing a global company. One of my main responsibilities is to 
ensure expected results are provided within the planned budget for the 
year within a fair degree of certainty, while improving costs year over 
year in order to ensure products remain competitive in the global 
market place. Utility costs are a major component of the cost equation, 
in which energy prices come to play a major role in the daily 
management of any operation, in particular if it is relatively capital 
or equipment intensive. The same analogy applies whether you have a 
manufacturing plant or a store, at the end the customer pays for it or 
a portion of it at the risk of being surpassed by cheaper prices from 
competitors that have managed to achieve lower costs through different 
cost reduction strategies or better operating conditions, like 
operating in a place where energy is very cheap.
    Energy costs in Puerto Rico for the last 15 years have been 
unstable and unpredictable, trending upwards from 11/kWh in 1999 all 
the way to almost 30/kWh in 2012. Average U.S. prices for all sectors 
combined in October 2014 were 10.34/kWh while in Puerto Rico that 
figure was 26.70/kWh, almost 2.6 times more than in the mainland. When 
we take the same averages for October 2015, U.S. energy prices for all 
sectors combined was 10.34/kWh while in Puerto Rico we were at 19.66/
kWh, almost twice that of the United States, the improvement driven 
mainly from the dramatic drop in oil prices during 2015. To make things 
worse, there are proposals to increase energy prices even more above 
the current ones in order to facilitate PREPA's restructuring and debt 
servicing. This amount could top an additional 7.8/kWh taking the 
worst case; resulting in average Puerto Rico prices for all sectors 
combined versus that of the United States to be 3.3 times using 2014 
prices or 2.6 times using 2015 prices.\1\ Compared to Singapore, Costa 
Rica, and Dominican Republic, just to take these three competitors, and 
using 14/kWh as a fair point in the combined range at 2015 prices, 
Puerto Rico will be almost double. Anyone with a simple understanding 
of operating a business appreciates how devastating this change would 
be and its consequences to our economy.
---------------------------------------------------------------------------
    \1\ Sources: Independent Statistic & Analysis U.S. Energy 
Information Administration and Estadisticas PREPA Serie Historica 2015
---------------------------------------------------------------------------
    As you know, PREPA has depended on oil to power its electricity 
generators since the 1940s. Thankfully, today's oil prices are low but 
history has taught us that the price of oil can change drastically in a 
short period of time and Puerto Rico is vulnerable to these price 
swings. PREPA has been slow in evolving a significant amount of its 
infrastructure to LNG and renewable energy sources which have enabled 
Puerto Rico to stay competitively behind; now things are even worse as 
a result of the financial challenges at the agency (i.e. Aguirre Gas 
Port construction is halted).
    Many local businesses and manufacturers have taken their own 
initiatives to lower energy costs. In the case of the facility I 
personally oversee, we have spent over a $1 million to change our 
lighting to LED lighting and install more efficient equipment as part 
of an energy cost reduction strategy. Several large operations in 
manufacturing, consumer products, and retail markets, have actually 
installed their own electricity generation capacity on site to ensure 
adequate power at a lower price (i.e. cogeneration with propane, large 
solar panel arrays, and energy cost reduction programs). Notably, PREPA 
has resisted the ability of these companies to sell back to the grid or 
to initiate the practice of ``wheeling'' and sell to a neighboring 
facility.
    Small businesses have also become creative within their limited 
budget to attenuate energy costs: turn off the air conditioner or use 
it partially; use only a portion of the lights in the show room; place 
timers to control ON time on continuous operation electrical devices; 
lay off employees; among other mitigations. There are instances for 
many businesses in Puerto Rico where energy costs are significantly 
higher than payroll expenses.
    If we do not turn around these energy cost trends, this will be a 
disaster for consumers, commerce, and the manufacturing industry. 
Despite all of our challenges to operating in Puerto Rico, we continue 
to be a manufacturing powerhouse, as demonstrated by our GDP figures. 
Any significant increase over current energy prices, that are already 
less than competitive, will kill the manufacturing industry; local 
business and manufacturing will be forced to revise its cost structures 
once again resulting in job reductions to compensate or pass the costs 
to the consumer. In the end, local consumers will be once again hurt 
with product cost increases while global customers will look at other 
product options, reverting in lower demand for Puerto Rico made 
products, and as a consequence trigger less jobs for U.S. citizens in 
Puerto Rico and the mainland. We need to focus all our efforts in 
achieving lower competitive energy costs over a modern, diverse, 
compliant and agile infrastructure.

    Let me now offer more details from the operations perspective by 
illustrating the example of a manufacturing plant. Every time there are 
energy cost increases the following dynamics occur in any manufacturing 
plant in Puerto Rico: the general manager needs to explain the 
financial variances and the reason for it; he or she needs to look and 
implement ways to compensate for the cost increase. Typically reverting 
to:

  1.  cutting jobs or holding up on other capacity improvement projects 
            or plant expenses;

  2.  holding up capital investment geared toward new products;

  3.  holding up capacity or capabilities improvements is held in order 
            to implement energy cost reduction projects;

  4.  new annual budget for electricity is increased and challenged by 
            corporate officials by its lack of predictability and 
            uncertainty;

  5.  capital dollar pool is limited in order to provide space for 
            energy saving related projects.

    The impact means that no new energy projects could put at risk the 
plant's future in Puerto Rico; corporations desist from bringing new 
products to the local plants if they are heavy on capital equipment. 
Workers at all levels become very aware of the previous challenges at 
the working place, when combined with their own energy cost challenges 
as consumers, it contributes to a suboptimal working environment. For 
these and many other reasons, we believe providing a competitive long-
term energy platform is one of the cornerstones toward Puerto Rico's 
economic recovery.
    Other non-energy related recommendations of the PSC from the past 
December visit included parity with respect to Chapter 9 bankruptcy 
protection and Medicare/Medicaid reimbursements; establishment of a 
Federal Fiscal Oversight Board; a preferred partnership with Puerto 
Rico to promote manufacturing and the export of products and services; 
the establishment of an economic development board; ``do no harm'' with 
respect to international tax reform; and the inclusion of the private 
sector in crafting workable and effective solutions.
    With respect to this last point, the private sector pays a 
significant amount of tax revenue in Puerto Rico and is our island's 
largest employer. On that basis alone we hope that the Congress will 
follow the example demonstrated today by Chairman Lamborn and Ranking 
Member Lowenthal and this subcommittee and actively solicit the 
expertise and participation of the private sector in assisting the 
Congress, the Administration and the government of our Commonwealth in 
resolving this fiscal situation.
    In conclusion, thank you for the opportunity to testify and I would 
be pleased to respond to any questions you might have. We look forward 
to working with you in a collaborative and productive fashion.

                                 ______
                                 

    Mr. Lamborn. Thank you.
    The Chair now recognizes Mr. Rossi to testify.

STATEMENT OF JOSEN ROSSI, CHAIRMAN OF THE BOARD, AIREKO; CHAIR, 
 INSTITUTE FOR A COMPETITIVE AND SUSTAINABLE ECONOMY OF PUERTO 
                   RICO, CAGUAS, PUERTO RICO

    Mr. Rossi. Thank you, Chairman Lamborn; and thank you, 
committee members. I also want to thank you for electing to 
talk about energy challenges and opportunities facing Puerto 
Rico. In doing so, I believe you are also talking about the 
possibility to restructure Puerto Rico's economy for the good 
if we restructure the energy system, not just PREPA.
    I am Chairman of Aireko Enterprises. I was past president 
of the Puerto Rico Manufacturers Association. We battled to 
bring a regulatory framework, an independent body similar to 
what the U.S. states and U.S. citizens enjoy when they consider 
their future energy plans.
    I am happy to say that we have that kind of regulatory 
framework in Puerto Rico today, thanks to winning those battles 
politically. It was enacted in 2014 and it started working in 
2015. It seems to be disregarded currently, not just by PREPA, 
but by a lot of our political leadership, as an important tool 
to legally, morally, and politically restructure our energy 
system. PREPA should be completely subject--as well as its 
future plans, including the Integrated Resource Plan that is 
present in proceedings in our Energy Commission in Puerto 
Rico--to provide the information and be subject to the scrutiny 
of our regulatory body.
    Additionally, I propose that the Federal Government has a 
role in this. There have been promises by the White House Task 
Force on Puerto Rico to do so over the years, as it engages 
private-sector leadership in Puerto Rico. Similar to Resident 
Commissioner Pierluisi's comments, the DOI has been tasked with 
that as well, but Congress has not acted on it.
    In early 2015, the DOE started implementation of its 
playbook with an MOU with the government of Puerto Rico to 
assist technically with these improvements to our capacity 
building. Everybody in the private sector coalesced around the 
idea that the Federal Government could, through the DOE's 
technical expertise, improve our regulatory framework. Nothing 
of any substance has happened with that yet.
    In essence, I wanted to convey to the panel and the 
subcommittee today that Puerto Ricans have tools, legal tools, 
similar to proven tools that U.S. citizens use every day in the 
mainland to implement competitive, sustainable energy solutions 
through participation as I now do chairing the institute that 
presented testimony to you today to achieve a balance that will 
favor the most amount of investment in the future to resolve 
the 50 percent part of the system that is obsolete, does not 
work, or has no value to us. We should not be paying rates to 
support that. Nobody here in the states would allow it as an 
intervener in a regulatory commission to legally pass those 
costs to us.
    From there, we can plan not just a 5-year restructuring 
plan, but we can plan for a restructuring of the whole system 
that attracts private-sector capital, competitive-sector 
capital that is sustainably reviewed by an independent body, 
not just by PREPA.
    In addition, I would like to mention that ideas have been 
brought forth that I fully support, and many others in Puerto 
Rico. I just want to comment briefly on them.
    Puerto Rico should be excepted from the Jones Act 
provisions regarding natural gas maritime transports for the 
reasons mentioned here: Federal debt guarantees, DOE has 
capacity, legal capacity, or a modification to ITC tax credits 
for renewable energies in Puerto Rico given the tax situations, 
cash grants would be a better option to spur the type of 
investment that Federal and state governments here have spurred 
in new innovative distributed energy solutions. I would support 
that.
    Additionally, I would support that Federal guarantees be 
provided to new strategic natural gas storage and distribution 
infrastructure in Puerto Rico, as long as the Federal 
Government is not supporting the creation of a new monopoly on 
key fossil fuel, not just to lowering costs in Puerto Rico to 
16 a kilowatt hour, which has been the goal that we have been 
advocating in Puerto Rico Manufacturers Association every year. 
We also need to make sure we pass on natural gas to businesses 
and commerce in a competitive manner. Thank you.
    [The prepared statement of Mr. Rossi follows:]
  Prepared Statement of Josen Rossi, Chairman of the Institute for a 
           Competitive and Sustainable Economy of Puerto Rico
    In response to the invitation to the hearings of January 12, 2016 
by the Subcommittee on Energy and Mineral Resources, I am pleased to 
offer the following testimony. I am thankful to you, Ranking Member 
Alan Lowenthal, and fellow committee members beyond the invitation to 
speak, as you have chosen to focus on ``energy challenges and 
opportunities facing Puerto Rico'' and in doing so you also focus on 
the best opportunity U.S. citizens in Puerto Rico have to actively 
participate in the renewed investment and economic growth in our 
beloved island. The White House Task Force report on Puerto Rico of 
2010, the Puerto Rico Private Sector Coalition Supranational Goals 
report of 2008, the promises of our local politicians over the years, 
others testifying at these hearings and important public forums over 
the years bear witness to this generally accepted truth that a 
transparently planned and wisely supervised energy reform that 
sustainably lowers our electrical energy costs in Puerto Rico is key to 
our economic, social and environmental well-being.
    I begin by stating that in Puerto Rico it is important to first 
comment on potential conflicts of interest if you are to give or 
receive opinions on energy reform given the historical, unusual and 
very detrimental political and big-government heft of our failed 
electrical energy public monopoly. In my case as Chairman of Aireko 
Companies I could benefit short term from a shortsighted re-structuring 
resulting in higher electrical energy prices in Puerto Rico because of 
our Energy Efficiency and Renewable Energy business.
    On the other hand our general construction company, our workers and 
families can most benefit if the electrical system is reformed to 
attain the maximum amount of sustainable investments that promptly fix 
the current system's ridiculous 50 percent dependence on obsolete oil 
fired generation. Said obsolescence and present incapacity of the 
system to replace it is the primary challenge to low-cost grid access 
for competitively priced intermittent renewable energy generation that 
the Federal and most state governments solidly support.
    Given present circumstances in Puerto Rico I believe a well-
implemented electrical system reform, with a Puerto Rico Energy 
Commission (PREC) approved Integrated Resource Plan (IRP) can support, 
as they regularly do in the rest of the United States and the civilized 
world, the maximum public and private sustainable investment that 
consumers and our economy can benefit from. Additionally, the goals of 
the Institute for a Competitive and Sustainable Economy of Puerto Rico 
(ICSE-PR) which I chair as Intervener in the PREC's IRP evaluation, are 
also the goals of the broadest sectors of our specific community to: 
(1) attain the lowest sustainable base system cost; (2) actively 
support a robust implementation of our independent regulatory body, the 
PREC, per State Law 57 of 2014 and all applicable Federal laws and 
regulations; and (3) unleash the best private and public-private 
competitive solutions to replace the 50 percent of the system that no 
longer works.
    The local public sentiment and that of most experts I have heard is 
that fiscal reform must go hand in hand with structural economic 
reform. For energy reform to become structural reform the diminishing 
number of ratepayers of unpredictable local electrical bills, as well 
as the responsible investor must regain confidence in our public policy 
and institutions. I mean the type participative, open, clear rules 
regulatory institutions that can replace the obscure and broken public 
financing schemes that broke our energy system prior to 2015 when we 
enacted Law 57 and the PREC. As responsible electricity ratepayers 
Aireko, its more than 600 workers and many more in Puerto Rico can 
support the financing of a competitive electrical energy system, 
similar to other modern industrialized islands like Ireland and 
Singapore which use modern regulatory frameworks to turn their 
electrical energy into a competitive economic advantage, instead of 
profit opportunities for the few, the well-connected, or the corrupt.
    Puerto Rico is an industrialized archipelago with a 2014 GDP of 
$103.6 billion. Manufacturing directly contributes $49.3 billion (47.5 
percent) of total GDP, an unusually high component of our economy when 
compared with all states of the union. The manufacturing GDP of Puerto 
Rico is comparable on its own and even higher than the total GDP of 
many incorporated states like Hawaii's total GDP of 76.17 billion, 
Alaska's $56.64, or Vermont's $29.31 billion. Our very competent hi-
tech manufacturing and related services labor which supports 95 percent 
of our total export capacity, can only make their and Puerto Rico's 
economic future thrive if strategic energy infrastructure investment, 
including a modern regulatory capacity result in electrical energy 
costs which increase productivity and wages for all.
    As proposed by the Puerto Rico Manufacturers Association when I 
presided it in 2008, transparently planning and executing reforms that 
achieve 16.0/kWh energy solutions for our hospitals, industrial 
manufacturing and similar type base-load ratepayers that underpin a 
solid electrical system is a requisite starting point to this economic 
structural reform. I specifically mean a reform that: (1) sustainably 
lowers energy costs to that of most competitive industrial island-
states (presently an industrial intermediate rate in the range of 14/
kWh); (2) continuously increases grid access to best-cost renewable 
generation, at all scales, using our natural solar and wind resources; 
and (3) an institutional reform that eliminates shortsighted partisan 
politics and big uncompetitive participants in our energy sector.
    The type integral energy reform that Law 57 of 2014 began with the 
2015 implementation of the PREC and its legal power to act on behalf of 
the consumer, is presently challenged in our state legislature by some 
of the same shortsighted politics and a narrative of fear of facing a 
complete re-structuring of the failed public utility as a needed step 
to successfully transform the whole system for sustainable success. You 
must know our public utility has not yet fully complied with court 
ordered system information pursuant to the PREC's IRP process, and is 
still engaged in debt negotiations with bondholders that still have not 
presented for public evaluation the capacity nor the legality of 
ratepayers and our economy to further finance its failures thru rate 
increases. I certainly support our utilities efforts to fairly re-
negotiate its debt and enact improvements to its operating costs that 
may require legislative authority. But no one should again accept in 
Puerto Rico nor the Federal Government that revitalization of this 
public corporation, our electrical system, nor our economy can occur 
going back to less, rather than more independent supervision, expert 
consulting and legal power on behalf of the consumer.
    Puerto Rico's modernly regulated Telecom sector is an undisputed 
competitive tool for the betterment of a key public services 
infrastructure and thus our local economy. Since inception over 25 
years ago, the Puerto Rico Telecommunications Regulatory board has been 
staffed by Puerto Ricans, and is testament to our capacity to do 
exactly the same with the electrical system. Correctly valuing the PR 
Telephone Co as the PRTC Regulatory Board was enacted and new private 
investment flowed to further productivity and consumer choice, remains 
a stellar example of our capacity for structural economic reform. What 
our failed power monopoly is now incredibly proposing to local 
legislators and the public in its proposed ``Revitalization Act'' ?--to 
value itself, with no independent expert supervision until it 
``securitizes'' the value and converts it into ``a new long-term debt'' 
within a new corporation outside regulatory powers. The consequences of 
accepting this along with the other good portions of the proposed Act 
would be the arbitrary limiting of new private investments that could 
otherwise structurally and competitively reform energy productivity, 
harness renewable natural resources innovatively, and do it under the 
independent, modern and legal regulatory scrutiny that our PREC 
presently requires from anyone interested in doing business in our 
grid.
    In 1999 the Puerto Rico Manufacturers Association and our local 
Chamber of Commerce publicly criticized the lack of competent planning, 
procurement and regulation of our electrical energy system as costs 
started diverging from the more competitive norm of the 60s, 70s and 
early 80s. By 2000 the average energy cost for Puerto Rico was 11.96/
kWh and the national (US) average was 6.81/kWh, a 75.6 percent higher 
cost difference. From then on as other local Non-Governmental 
Organizations clamored unsuccessfully for local implementation of the 
modern independent energy regulatory structures that became the norm in 
the rest of the United States in the 80s and 90s, our local energy 
incompetency became a cause or our general economic incompetency in the 
past 15 years. During 2015 (January to October) electricity cost 100 
percent more at 20.97/kWh in Puerto Rico than the equivalent national 
(US) average same period of 10.45/kWh. If we consider the substantial 
decrease in oil cost during 2015, and our continued dependency on oil 
for over two-thirds of our generation capacity, Puerto Rico is poised 
for further economic distress as fossil fuel costs rise again in the 
future, as they did unexpectedly in 2012 when costs rose above the 30/
kWh, approximately 250 percent higher than continental United States 
and 100 percent higher than best-in-class industrialized island-states, 
unless we valiantly do something about it.
    Puerto Rico nor our economy can afford further timid, incomplete 
energy system reform without broadly understood and competitive future 
energy costs scenarios and expect to again attract growing industrial 
investment with well-paying jobs. Even the best scenarios proposed by 
our more recent public utility leadership with scant system information 
would have short term energy costs in the range of 24 to 25/kWh, in a 
very low oil cost scenario. Toward the future as oil costs went up, and 
the proposed and undefined monopoly ``Securitization Transition 
Charges'' kicked-in Puerto Rico would be vulnerable to the significant 
industrial investment and energy consumption losses of the past 15 
years and further economic distress that would grow as our energy 
competitiveness gap grew again.
    The continued focus by our failed monopoly to again propose 
unsupervised financial solutions with limited re-structuring to itself, 
and incomplete information on future energy cost scenarios, along with 
lack of understanding of some in our local political leadership 
regarding implementation of a modern regulatory framework with full 
legal power is in my opinion the immediate challenges that must be 
addressed in Puerto Rico for truly sustainable energy system reform. 
These challenges in my opinion can be overcome if the U.S. Congress and 
our local leaders present today pay attention to the unfulfilled 
promises by the Federal and to some extent local Executive branches of 
government. Unfulfilled promises by the White House Task Force 
officials that engaged with local private sector leaders, as well as 
unfulfilled expectations in the DOE implementation playbook of the 2014 
MOU with the Puerto Rico government, depict a Federal Government that 
has timidly shied away from technical assistance and other available 
efforts at capacity building of our most immediately fundamental 
infrastructure--the PREC and its expert capacity in valuing the present 
failed public utility and assessing the best IRP solutions for local 
energy competitiveness.
    Congress must be aware that growing private sector alliances of 
leading longstanding NGOs as well as new organizations like the ICSE-PR 
are currently educating the public and engaging our political leaders 
so that we keep the good of what is proposed to subject future 
procurement practices to independent scrutiny but we strike out all 
uncompetitive and non-transparent portions of the monopoly proposed 
``revitalization law.'' Most important going forward are that Congress 
influences our Executive to rapidly help strengthen the PREC regulatory 
capacity, the failed public utility disclosures of system information 
and thus the confidence of local and outside investors that similar to 
the Telecom re-structuring of long ago we will not shy away from real 
structural reform this time again in our energy sector.

    With regards to additional solutions and ideas which I support, 
beyond the focus on the emergency capacity building of our regulatory 
framework, I want to stress the following, with the understanding it is 
not a complete list:

  1.  Exempt Puerto Rico from Jones Act provisions regarding Natural 
            Gas maritime transport.

  2.  Provide Federal debt guarantees for strategic:

          a.   Infrastructure investments in natural gas transport and 
        storage as long as Puerto Rico government and the public 
        monopoly credibly commit to private business access to said 
        infrastructure at competitive natural gas prices. We do not 
        another infrastructure monopoly, this time federally aided.

          b.   Replacement of old thermal generation with new dual-fuel 
        cogeneration capacity specifically procured to provide best-
        cost access to intermittent renewable generation at all scales 
        of the system.

    My deepest thanks to you, Ranking Member Alan Lowenthal, and to 
this honorable committee for the opportunity to participate in these 
hearings. I trust you will understand that I expect the alarm and grave 
concerns that are part of this testimony are directed at a needed 
awakening from the passivity that has oftentimes accompanied Puerto 
Rico energy reform and economic reform talks in the halls of power here 
and locally. We can certainly achieve an awakening of Puerto Rico's and 
outside investor's confidence in our ability to overcome obstacles and 
responsibly take all opportunities in our energy sector reform if we 
focus on emergency regulatory framework capacity building and other 
opportunities where Federal Government can be helpful such as the 
public-private procurement process options that can be implemented in 
parallel with the needed regulatory evaluations. In the ICSE-PR and the 
growing local private sector alliances we are doing our part.

                                 ______
                                 

    Mr. Lamborn. Thank you.
    The Chair would now recognize Mr. Sanabria-Hernandez to 
testify.

  STATEMENT OF JAIME L. SANABRIA-HERNANDEZ, CO-PRESIDENT AND 
 GENERAL MANAGER FOR FINANCE AND ADMINISTRATION, ECOELECTRICA, 
                  L.P., PENUELAS, PUERTO RICO

    Mr. Sanabria-Hernandez. Mr. Chairman, Ranking Member, and 
members of the subcommittee, thank you for inviting me to 
discuss our perspective on some of the energy challenges faced 
by Puerto Rico.
    As you are aware, we submitted a more detailed testimony 
than what we will be presenting here this morning. I ask that 
you incorporate that detailed testimony as part of the record 
in today's hearing.
    I would like to start out by pointing out a few simple 
facts that underscore the urgency of our work. Electricity is 
an essential building block of the modern world. Application of 
affordable and dependable energy makes everything we do better, 
including food production, manufacturing, health care, 
transportation, heating and air conditioning, et cetera.
    In our experience, there are three important components of 
any healthy economic sector: profitable companies; satisfied 
consumers; and confident investors. Profitable companies need 
satisfied consumers. Consumers need to get a good and 
dependable product at prices they can afford. Investors need 
assurances that the company is run well and that political 
involvement is limited.
    EcoElectrica--and, as you know, I am Co-President at 
EcoElectrica--was the first independent power producer to 
supply clean, reliable, and safe energy at a competitive cost 
to the Puerto Rico Electric Power Authority under a 22-year 
Power Purchase Agreement. Our facility includes a 507-megawatt 
power plant and an LNG terminal with a regasification 
capability of 366 million cubic feet per day. The 507 megawatts 
of installed capacity represents approximately 9 percent of the 
total installed power capacity on the island, but we supply as 
much as 17 percent of all the electricity consumed in Puerto 
Rico on a daily basis.
    There are a few systemic problems in Puerto Rico's energy 
sector. First, consumers are paying more for energy than they 
should because of the unstable business environment. The system 
could attract new investment if the business environment were 
better. The financial crisis in Puerto Rico is real and has 
caused a deterioration of the overall credit environment. Our 
counterparties are experiencing some erosion of their 
creditworthiness and that has compromised the certainty of 
getting paid on time. Because we are a private business, we 
depend on getting paid.
    There is, unfortunately, a lack of certainty in the legal 
and regulatory framework. Companies, consumers, and investors 
in the energy sector in Puerto Rico all need and want PREPA to 
be successful. To achieve a more stable environment that is 
conducive to investment, we need to see improvements in the 
following elements of business.
    First, independence. We think PREPA should be operated as a 
private business and divorced from intervention from the Puerto 
Rico government and its institutions.
    Second, we need more stable leadership at PREPA. During the 
last several years, PREPA has had numerous CEOs--in one 
particular case, the person was there for no more than 3 days. 
That has its impact on how the business is run.
    Next, having certainty, confidence, and the durability of 
the legal and regulatory framework is critical. Investor 
confidence is undermined if that legal and regulatory framework 
is not structured and does not represent a confident framework 
on which to operate.
    Last, we need an improved credit environment. It might 
serve Puerto Rico's interest to institute and monitor a program 
of Federal guarantees as a means toward increased 
sustainability.
    In conclusion, in many respects Puerto Rico faces the same 
challenges as the rest of the United States. Businesses should 
be run like businesses, without bureaucracies or political 
institutions substituting their judgment for those of the 
people actually trying to operate the business.
    At the same time, while we are fixing the current system, 
we need a bridge. The financial crisis in Puerto Rico is real 
and will require some time and assistance to be resolved. We 
look forward to working with you on these issues.
    Thank you again for inviting me, and I look forward to your 
questions. Thank you.
    [The prepared statement of Mr. Sanabria-Hernandez follows:]
  Prepared Statement of Jaime Sanabria-Hernandez, General Manager for 
                Finance and Administration, EcoElectrica
    Mr. Chairman and members of the subcommittee, thank you for 
inviting me to discuss our perspective on some of the energy challenges 
faced by Puerto Rico.
    I would like to start out by pointing out a few simple facts that 
underscore the urgency of our work.
    Electricity is an essential building block of the modern world. 
Application of affordable and dependable energy makes everything we 
do--food production, manufacturing, health care, transportation, 
heating and air conditioning--better.
    Nations that have reliable and low cost electricity systems are 
better able to do things--refrigerate vaccines, grow and transport 
enough food for their citizens, treat wastewater--that improve life. 
Their citizens live longer lives and have a greater range of 
opportunities.
    In short, we are talking about something very important today.
    In our experience, there are three important components--profitable 
companies, satisfied consumers, confident investors--of any healthy 
economic sector. Profitable companies need satisfied consumers. 
Consumers need to get a good and dependable product at prices they can 
afford. Investors need assurances that the company is run well and that 
political involvement is limited.
                              ecoelectrica
    EcoElectrica was the first independent power producer to supply 
clean, reliable and safe energy at a competitive cost to the Puerto 
Rico Electric Power Authority (PREPA) under a twenty-two (22) year 
Power Purchase Agreement (PPOA). Our facility includes a 507-megawatt 
power plant and a Liquified Natural Gas (LNG) terminal with a 
regasification capability of 366 million cubic feet of gas per day that 
could be expanded if the sector is developed properly.
    The 507 megawatts represent approximately 9 percent of the total 
installed power capacity on the island, but supplies up to 17 percent 
of the total electricity consumed on a daily basis.
    The shareholders of EcoElectrica--Gas Natural Fenosa, Engie 
(formerly known as GDF Suez) and Mitsui & Co.--are among the largest 
operators of power plants and gas suppliers, throughout the world. 
These three shareholders have the combined financial resources to 
successfully support selected project development commitments made.
    The EcoElectrica tri-fuel combined cycle power plant is one of the 
cleanest and lowest-cost producers of electricity with the best 
efficiency and lowest emissions to the environment in the PREPA system.
    EcoElectrica employs eighty (80) highly skilled full time personnel 
who have worked more than 1 million hours without a lost time accident.
    The EcoElectrica LNG terminal provides the required infrastructure 
for the supply of natural gas on the island. The above ground LNG tank 
contains 160,000 cubic meters of storage capacity and is capable of 
receiving as many as sixty (60) LNG transport ships annually. The 
terminal currently provides natural gas to the EcoElectrica power plant 
and to PREPA for use at Costa Sur, PREPA's largest power plant.
    The natural gas imported into Puerto Rico by EcoElectrica, for use 
at its power plant, has been mainly sourced from the Caribbean Basin 
out of Trinidad & Tobago. Today, some of the natural gas received at 
the LNG terminal destined for use by PREPA is also sourced from the 
Middle East and Africa.
    EcoElectrica is active in social and community organizations that 
contribute toward the improvement of public policy with an emphasis on 
the energy sector, as well as charitable causes close to the community.
    EcoElectrica is proud of the support it provides to neighboring 
communities through numerous initiatives, including scholarship 
programs that have provided close to $700K in grants to university 
students commencing their first year; the continuing biological 
monitoring that cares for and protects marine life; and donations to 
build facilities for the care and custody of manatees found injured, 
among other things.
    With all that in mind, I would like to touch on a few of our 
challenges.
                               challenges
    There are a few pervasive and probably systemic problems in Puerto 
Rico's energy sector.

     Consumers are paying more for energy because the overall 
            system could attract new investment in more efficient and 
            reliable generation if it were part of a stable business 
            environment.

     Capital spending should be focused on reducing consumers' 
            overall costs. An example of this opportunity is the 
            existing LNG terminal, where untapped capacity for greater 
            use can serve to lower the cost of new infrastructure.

     The financial crisis in Puerto Rico is real and has caused 
            deterioration of the overall credit environment. Our 
            industry is going to need an improved credit environment to 
            help get financing at reasonable costs.

     Our counterparties are experiencing some erosion of their 
            creditworthiness. This shows up in variety of ways, 
            including late payments (now averaging around 30 days 
            beyond contract terms). PREPA cash-flow has deteriorated 
            over time, and those of us in the energy sector need 
            PREPA's cash position to be better managed. Without surety 
            of payment, it will be difficult for anybody to justify 
            investment in the Puerto Rican energy sector.

     The Government should not undermine the commercial value 
            of assets through the creation of government regulatory 
            bodies. An example of this is the legislatively created 
            Puerto Rico Energy Commission's Regulations that prohibit 
            the recovery of fees that are reimbursable under the PPOA 
            terms. Our counterparties' efforts to meet contractual 
            obligations should not be impeded by government actions.

     There is, unfortunately, a deficiency of certainty in the 
            legal and regulatory framework. It is pretty simple: when 
            legal and regulatory frameworks are constantly changing, 
            investor confidence is undermined.

                               solutions
    We want to see PREPA be successful. Companies, consumers, and 
investors in the energy sector in Puerto Rico all need and want PREPA 
to be successful. PREPA itself is attempting to address some of these 
challenges in their business planning process known as an Integrated 
Resources Plan.

    Along with PREPA's plan, we think that part of Puerto Rico's and 
PREPA's financial recovery will include finding and relying on 
expertise in the following areas:

     Expansion of fuel diversification efforts, specially 
            increasing the use of LNG;

     Investments in state-of-the-art modern efficient power 
            plants;

     Investments in renewable energy generation assets; and

     Professional management of power assets and/or the 
            utility.

    The elements that should characterize the future state of PREPA and 
the sector are:

    Independence. PREPA's operations have been very closely linked to 
the agenda of the Puerto Rican government. PREPA should be operated as 
a private business and divorced from intervention from the Puerto Rican 
government and its institutions. For example, it cannot continue to 
provide legislated subsidies for multiple purposes.

    Leadership. More stable and predictable leadership from people 
experienced in operating power grids is needed at PREPA. During the 
last 8 years there have been six (6) CEOs with one of them remaining at 
the position for no more than 3 days. Continuity in the roles with a 
medium to long-term vision is key to providing the stability we all 
need to succeed.

    Certainty. Confidence in the durability of the legal and regulatory 
framework is also a key element necessary to facilitate strong 
financial leadership at the utility. Leadership needs to focus on 
improving the business environment through honoring contractual 
commitments while protecting the rights and obligations of the parties.

    Credit. An improved credit environment throughout Puerto Rico will 
enable financing at reasonable costs and should also help stabilize 
PREPA's finances. Because recovering creditworthiness is a high 
priority and would take time, it might serve Puerto Rico's and PREPA's 
interests to institute--and monitor--a program of Federal guarantees as 
a means toward increased sustainability. The liquidity at PREPA 
requires special focus in the management of their cash position to 
facilitate meeting current obligations.

    Focus. Long-term fuel supply, power generation and overhaul of the 
transmission system are business issues that need immediate attention 
to help PREPA overcome its financial difficulties.

    Knowledge. Experienced private investment knowledgeable of the 
Puerto Rico energy market can serve to accelerate the implementation of 
the solutions required to overcome the financial recovery.
                               conclusion
    In many respects, Puerto Rico faces the same challenges as the rest 
of the United States. Businesses should be run like businesses, without 
bureaucracies or political institutions substituting their judgment for 
those of the people actually trying to operate the business and, in 
this case, supplying the affordable, dependable electricity on which 
Puerto Ricans rely.
    At the same time, while we are fixing the current system, we need a 
bridge. The financial crisis in Puerto Rico is real and will require 
some time and assistance to be resolved.
    EcoElectrica is a good example--and has the potential to be an 
excellent example--of how private sector approaches can provide real 
economic, environmental and social benefits to the citizens of Puerto 
Rico.
    We look forward to working with you on these issues. Thank you 
again for inviting me, and I look forward to your questions.

                                 ______
                                 

    Mr. Lamborn. Thank you. I want to thank all five of our 
witnesses for your valuable testimony and for being here today 
on this very important issue. I will start with the first set 
of questions. I would remind all of the Members that Committee 
Rule 3(d) imposes a 5-minute limit on questions. I will begin, 
then we will go with the Ranking Member, and then we will 
continue on from there.
    Ms. Donahue, could you comment--I know you have only been 
there for a year-and-a-half, but are there decisions or 
policies in place, previous decisions that have been made on 
Puerto Rico, on the island, that affect the competitiveness or 
the strength of the economy that you think should be revisited?
    Ms. Donahue. Thank you, Chairman. I think, as I mentioned 
in both my written and oral testimonies, that the PREPA issue 
was years, probably decades, in the making. And, as other 
witnesses and Resident Commissioner Pierluisi mentioned, one of 
the challenges that PREPA has which makes it virtually 
impossible to do long-term strategic planning, is with every 
change in administration the top 150 leaders in the company are 
switched out. So you are starting fresh.
    This type of business involves long-term planning and long-
term investment, which is one of the reasons why we have a 20- 
or 30-year IRP plan that we are looking at. You have to make 
critical, long-term investment decisions. The permitting 
process is long and those decisions have frequently been 
completely overturned, in some cases as much as building a 
pipeline, only to dismantle it.
    So, I do think that the structural challenges within PREPA, 
as a result of the shifting political agendas with subsequent 
administrations, make it very difficult for a long-term 
business to actually operate.
    Mr. Lamborn. Do you have any thoughts about employee 
benefits or wage loss?
    Ms. Donahue. We did do some benchmarking on the wages; we 
looked at the baseline salaries; and then, of course, we looked 
at the benefit packages and compared PREPA to public utilities 
across the United States, as well as like industries in Puerto 
Rico.
    And we found, as far as salaries were concerned, we were 
employing a very skilled labor base, so the salaries were 
fairly in line. It was on the benefit side that we felt that 
they were higher--in some cases significantly higher--than like 
utilities across the United States, and like businesses across 
Puerto Rico.
    Mr. Lamborn. Thank you.
    Mr. San Miguel, you talked about privatization of the 
generation portion, not the transmission and distribution, but 
the generation portion of PREPA. Could you elaborate on that a 
little bit? And would that be well received, do you believe, in 
Puerto Rico?
    Mr. San Miguel. Sure. Thank you, Mr. Chairman. The concept 
there is really going more to a mainland-based business model. 
We have sitting here with us the representative from 
EcoElectrica. It is one of the two main IPPs, independent power 
producers, on the island since the 1990s. Both EcoElectrica and 
the other IPP baseload operation are the two cheapest sources 
of our energy into the PREPA grid. I think that is sufficient 
exhibit as to the efficiencies with which the private sector 
operates the power generation facilities, not just on the aging 
component, on the number of employees and so forth, but it is 
clear that the private market is much more efficient in that.
    To the extent that we create the right structure through 
the IRP that Ms. Donahue has been mentioning, and that has been 
presented for finalization with the Puerto Rico Energy 
Commission, that blueprint then sets the stage and the business 
model for processes to be engaged, like RFPs for long-term 
concessions or public-private partnerships, or RFPs that allow 
the private sector to seek the most efficient capital, 
construct at the greatest speed, and then operate with the 
greatest efficiency.
    So, that is generally what I am alluding to.
    Mr. Lamborn. Are you aware that there may be investors 
waiting in the wings to make those kinds of investments, should 
the structure you are talking about be put into place?
    Mr. San Miguel. In fact, I understand there are quite a 
few. I know from personal knowledge, having been contacted by 
people who may be interested but are waiting to see if in fact 
the things I mentioned in my short version, if the Puerto Rico 
legislature approves the Revitalization Act and then the Energy 
Commission approves revised rates and the IRP, that is when the 
private sector has visibility and certainty.
    That is why I mentioned credibility as a key factor in this 
reconstruction of PREPA and our energy infrastructure to propel 
economic development. There are plenty of world-class and U.S.-
class proponents waiting to put together transactions that 
should be very favorable. My strong emphasis on the private 
sector carrying the generation component is more so because I 
think, as Ms. Donahue has explained and the IRP details, most 
of the assumptions made in the IRP are rather conservative, so 
they assume that PREPA will be carrying some or a great part of 
the capital expenditure.
    The view I am trying to push is that that should not be on 
PREPA's back. You let the private sector do that. They do it 
much more efficiently and those efficiencies are passed on to 
consumers.
    Mr. Lamborn. Thank you. I would now like to recognize the 
Ranking Member of this subcommittee, the Delegate from Puerto 
Rico, Mr. Pierluisi.
    Mr. Pierluisi. Thank you, Chairman. I should say Ranking 
Member for a day.
    [Laughter.]
    Mr. Pierluisi. But I am enjoying it. I would say, for 
starters, that there is ample consensus in Puerto Rico, believe 
it or not, that we need more private capital in the energy 
sector. Even if you poll it, people want to see more companies 
like EcoElectrica and AES--who is not here, represented--doing 
business in Puerto Rico. They want to see more renewable 
projects like the one has, it is a wind project in the south of 
Puerto Rico.
    The challenge is how you attract that capital to Puerto 
Rico. These days it is very tough. What is happening is that 
Ms. Donahue spent 15 months negotiating a debt restructuring 
deal with the major creditors of PREPA and managed to get a 
deal from 70 percent of the creditors. The challenge now is how 
do we enforce it on all, or at least attract all others to be 
part of this deal?
    I have to raise the fact that we did not have Chapter 9 
when you started. We still do not have it, and some really do 
not like Chapter 9 because it is bankruptcy and so on. But bear 
in mind that when you have Chapter 9, one of the benefits of it 
is that a Federal bankruptcy judge can enforce the plan on all 
the creditors, all stakeholders. You would not have the issue 
that you still have today. So, I raise that and I would like 
you to comment further as soon as I finish.
    The second issue I am going to raise, which has been 
mentioned before here by several of the witnesses, is that we 
now have in Puerto Rico an Energy Commission, and that is 
important. I should acknowledge the presence of the President 
of the Senate of Puerto Rico, Eduardo Bhatia, who had a lead 
role in making that happen. It is important to have an Energy 
Commission, because you need to regulate PREPA. PREPA is pretty 
much like a monopoly.
    So, one concern I am raising, Ms. Donahue, and I want you 
to deal with it, is that I hear that this deal might not be 
respecting all the powers of the Energy Commission. I want to 
make sure that the Energy Commission will be approving any rate 
increase--and I don't want any, by the way, because it affects 
the economic development of Puerto Rico--or any other charge. I 
want the Energy Commission to oversee your restructuring 
proposal.
    Could you comment on both of these angles--the fact that it 
is hard to attract capital when you are not financially stable, 
which is PREPA's case, and second, the Energy Commission.
    Ms. Donahue. Thank you, Commissioner. On the private 
capital, if I can expand on Mr. San Miguel's comments, we did 
run a request for expression of interest proposal. We went out 
and we got enormous interest, both in PREPA and also in the 
greater Puerto Rico. But, I will say that one caveat from all 
of the participants is a stable and fixed PREPA as a 
counterparty.
    The people that participated, the people that submitted 
proposals, were real. They were real financial players, real 
operational players. We are intending to use the results of 
that request for expression of interest to help us hone the 
RFP, to test the market, and see the likelihood of actually 
getting private capital and getting it into PREPA.
    As I mentioned in my written and oral testimonies, we want 
the best capital for the people of Puerto Rico and we want the 
fastest capital. The only way we are going to determine the 
likelihood and really be able to analyze if it makes any sense 
is to go out for a proposal. So that is point one.
    Point two, as far as the Energy Commission--I have enormous 
respect for the Energy Commission. We have had several formal 
meetings and informal meetings, and we worked in parallel with 
them on the CILT Regulation that came out in the fall. What the 
proposed PREPA Revitalization Act contemplated was not going 
around the Energy Commission. The only piece to that Act is we 
did contemplate accelerating their approval process.
    We were never contemplating that they would not have full 
approval over the rate case that will be filed upon ultimate 
acceptance of the regulation. We had only contemplated changing 
a 6-month approval process to a 3-month approval process. Part 
of the reason for that is because of the very real possibility 
that PREPA will run out of cash in the summer, and because it 
was relying on the heavily negotiated contributions from the 
creditors that involved de-leveraging, as well as liquidity, as 
a means to bridge that rate gap that I had talked about.
    So, the Commission is an important element to PREPA and to 
the people of Puerto Rico and we are intending to continue 
working constructively with those folks.
    Mr. Pierluisi. Thank you.
    Mr. Lamborn. The Chair now recognizes the representative 
from the great state of Wyoming, Mrs. Lummis.
    Mrs. Lummis. Thank you, Mr. Chairman. This is my first 
introduction to this subject, so please bear with me and be 
kind of creative here. While I have never been to Puerto Rico 
and I do not speak Spanish, I was my state's treasurer and I 
worked on energy issues a lot. So, this subject really piques 
my interest. I want to brainstorm with you a bit, please bear 
with me.
    Let's assume that a Chapter 9 bankruptcy authorization 
would occur. If it did, presumably, based on what I have heard, 
it would take very specific milestones as conditions precedent 
to this Congress allowing Chapter 9 to be entered. So, I want 
to ask my questions based on that assumption. Let's assume we 
are going to authorize bankruptcy, but certain conditions would 
have to be met before it could ever be entered.
    Now, some of the things that I have heard--if you thought 
that was the scenario that Congress was interested in 
considering, I want to know what some of those steps should be. 
And I want some of you to tell me what DOI and DOE have started 
with regard to assisting with improvements. So, somebody be 
thinking about that question.
    I want to know what kind of milestones, specific 
milestones, we would have to enact prior--as conditions 
precedent to authorizing a bankruptcy; how we can separate the 
Puerto Rican Congress from interference with PREPA; how we can 
work toward privatizing, so to speak, PREPA; how DOE 
specifically is discussing debt guarantees or modifications to 
tax credits.
    I know that is a mouthful, but that is only the beginning 
for me. But since I have blown through half of my time, just 
please have at it.
    Mr. Rossi. If I was a bankruptcy judge--and I am not a 
lawyer, and I have never been in bankruptcy court, but a lot of 
people have been talking about it in Puerto Rico for PREPA, 
particularly, given the dire situation everybody understands--I 
would start by saying, going forward, if this is going to be a 
viable business, under what regulatory framework?
    Mrs. Lummis. Yes.
    Mr. Rossi. I would say the strongest----
    Mrs. Lummis. Can I interrupt you? What does the Energy 
Commission do now? Does it function like a public service 
commission?
    Mr. Rossi. It battles in court to get PREPA to hand over 
documentation.
    Mrs. Lummis. Oh, man.
    [Laughter.]
    Mr. Rossi. It asks interveners for help in framing the 
correct questions regarding the Integrated Resource Plan that 
would be key to private capital coming in, because they 
understand that the ratepayers will be able to finance the 
burden. Eventually, it is going to be on the backs of the 
ratepayers. Those are the people financing the electrical 
system anywhere in the world.
    I think it is key that you have the strongest regulatory 
body, because that is where those decisions are made.
    Mrs. Lummis. May I ask Mr. San Miguel to weigh in on this 
huge array of questions I have asked?
    Mr. San Miguel. Sure, thank you. A couple of thoughts. I 
mean the specter of Chapter 9, let me say--and certainly my 
short and long version into the committee did not touch on that 
subject, as I did not believe it was part of the jurisdiction 
or subject matter to be evaluated, but now that it is on the 
floor, so to speak, and even going to the response that Mr. 
Rossi provides--I would say that, for example, on the PREPA 
scenario I would not grant any kind of potential specter or 
access to Chapter 9 if they do not do the things I have 
outlined.
    The three steps I have outlined are all within Puerto 
Rico's control; they can happen tomorrow. And I would not come 
beg, as an American citizen, from the Congress unless I have 
done everything I can and then I need more. Under that 
scenario, I would then go ahead and plead for additional 
support with the credibility and the track record that I have 
done what I can, some may remain and I need some assistance to 
finish the job.
    Having said that, on the Chapter 9 issue, I think I feel 
very strongly and I differ a bit from Congressman Pierluisi, 
who I trust tremendously and have known for over 25 years. On 
the Chapter 9 issue, as a person who believes in our right to 
statehood, I cannot think of it unless we resolve the political 
relations issue with Puerto Rico.
    Mrs. Lummis. Yes, yes.
    Mr. San Miguel. For that we have H.R. 727, which he has, I 
think, very properly sponsored.
    But I cannot, as a jurisdiction, ask for more stateside 
rights without the responsibilities. And principally--and 
certainly Congressman Pierluisi aside, because he also believes 
in the statehood cause--the principal proponents of this from 
Puerto Rico are people who do not wish to become a state. They 
want the goodies of the state, but none of the 
responsibilities. Fundamentally, I have an issue with that.
    Now, from a credibility perspective, you were asking what 
should the Congress do as precondition. You know, the first 
precondition is credibility. We are running now into the third 
fiscal year with no financial audited statements. S&P came out 
in early January with their own assessment. Our local think 
tank, the Center for the New Economy, came out publicly in 
December with that. How can you grant someone the right to go 
bankrupt if they have not shown you the numbers?
    Mrs. Lummis. Yes, and I thank you. My time has expired, but 
this is fascinating. Mr. Chairman, I yield back.
    Mr. Lamborn. Thank you. The Chair now recognizes the 
Ranking Member of the Full Committee, Mr. Grijalva.
    Mr. Grijalva. Thank you very much, Mr. Chairman. Ms. 
Donahue, I have some quick questions.
    Would it be easier to raise money to upgrade Puerto Rico's 
aging energy infrastructure that has been talked about here 
with or without Chapter 9?
    Ms. Donahue. Well, with Chapter 9, presumably we would be 
able to get super-priority financing. So, potentially, that 
could be used as a bridge.
    Mr. Grijalva. Would----
    Ms. Donahue. If I can just expand quickly, though, what we 
are talking about as part of our plan is trying to fund it just 
to correct what Mr. Rossi said. Part of the plan is funded by 
the concessions from the creditors. Part of the upgrade in the 
system is funded by that. I just want to make sure that people 
are clear on that.
    Mr. Grijalva. Thank you. Would ratepayers have lower bills 
with or without Chapter 9?
    Ms. Donahue. I don't know the answer to that.
    Mr. Grijalva. OK. Would manufacturers and other businesses 
be more likely to invest in Puerto Rico with or without Chapter 
9?
    Ms. Donahue. I can't answer that, but what I can say is--
and this goes a bit toward your earlier question--with Chapter 
9, at least as it relates to PREPA, I would use it as a 
mechanism to facilitate the deal that we have on the table. The 
deal that we have negotiated with the creditors is good with a 
Chapter 9, without a Chapter 9. It is fair, it is equitable.
    So, where a Chapter 9 would make sense for PREPA is to 
facilitate the deal very quickly. It would pull in the holdouts 
to the extent that there are holdouts, so we do not have an 
Argentina problem. It would allow us to very quickly move on to 
the next phase, and the milestones are outlined in the 
restructuring support agreement. It involves an RFP, it 
involves acceptable legislation. It involves----
    Mr. Grijalva. That wouldn't be begging at that point? You 
mentioned, Ms. Donahue, in your testimony that the 
restructuring support agreement does not include the 30 percent 
PREPA debt. If PREPA had access to Chapter 9, wouldn't any 
restructuring include 100 percent of that debt and, therefore, 
mean a bigger savings down the road for ratepayers?
    Ms. Donahue. Yes, it would.
    Mr. Grijalva. One concern I have about the restructuring 
support agreement that you have reached with some of PREPA's 
creditors is that ratepayers will be left with a lot of the 
debt, while the hedge funds who paid pennies on the dollar for 
the debt are guaranteed 85 percent on the dollar under this 
pending agreement. Wouldn't you get a better deal for Puerto 
Rican families and PREPA under Chapter 9 than through the RSA, 
given those numbers?
    Ms. Donahue. It is not clear to me that the economics of 
the deal would change in a Chapter 9. The PREPA bonds are 
arguably special revenue bonds, which is why I have mentioned 
that I think the deal that we have constructed, independent of 
the secondary market considerations, is a fair deal. It gets 
PREPA de-leveraging, as well as liquidity relief in the form of 
5 year's interest-only payment.
    So, I am not sure that a Chapter 9 would get a better 
economic deal. It would get a more efficient deal. But as far 
as the 85 percent, 5-year interest-only, I am not convinced of 
that, no.
    Mr. Grijalva. The last question--I notice that, at least in 
the RSA and the restructuring for PREPA, the heavy reliance on 
natural gases to replace one fossil fuel. In that plan, was 
there a look at renewables as part of the portfolio that would 
be provided, i.e., you know, Hawaii, 20 percent of the island 
is renewable; Virgin Islands, 20 percent solar powered during 
peak periods; even Texas, 20 percent wind power.
    So my point being, in setting up a portfolio, aren't we 
begging the question that we are removing one reliance on one 
fossil fuel, replacing a reliance almost entirely on natural 
gas, without a portfolio that is ample enough to accommodate 
renewables?
    Ms. Donahue. The IRP and the PREPA transformation plan does 
rely on fuel diversification and, as part of that, does 
integrate renewables into the system over time----
    Mr. Grijalva. What percentage of that in the RTA would you 
say is a renewable part of the----
    Ms. Donahue. Well, we are going from 200 megawatts of 
commercial grade up to approximately 1,200 by the end of the 
IRP.
    One of the challenges that a system like PREPA has is, as 
we mentioned, the age of the fleet.
    Mr. Grijalva. OK.
    Ms. Donahue. With the older fleet we have very inflexible 
units. In order to make sure that we have system reliability, 
we have to carefully integrate and make sure that the systems, 
when we get newer units that can power up and down, we can 
integrate faster.
    Mr. Lamborn. Thank you. The Chair now recognizes Mr. 
Thompson for questions.
    Mr. Thompson. Thank you, Chairman. Thank you to the 
witnesses for being here. I want to talk about or ask 
questions, get some clarifications on the Aguirre facility and 
the conversion to LNG. I am from Pennsylvania and we have had 
our own economic issues, but one of the things that has been 
really a godsend for us has been the use of natural gas. 
Specifically, one of those has been looking at, actually, the 
construction of even new power plants, using that resource.
    So, I wanted to just get a clarification, in terms of what 
was the situation in Puerto Rico. In 2012, a report by Alvarez 
and Marshall that was presented before the Government 
Development Bank of Puerto Rico suggests the future of PREPA 
depends upon converting to natural gas for power generation.
    The findings are furthered in the Integrated Resources Plan 
that was released by PREPA earlier this year, and indeed, PREPA 
premises much of its future compliance with environmental 
regulations, including mercury or toxin standards on the 
development of the Aguirre facility, which PREPA concludes will 
provide 900 megawatts of compliant, clean liquid natural gas 
power.
    Ms. Donahue, what is the current status of the Aguirre 
facility?
    Ms. Donahue. The Aguirre gas port--our environmental impact 
study is complete. We are now dealing with comments from the 
Corps of Engineers that came right before the Christmas 
holidays. And working with our partners, we are hoping to 
continue to move that along. Our expectation is to begin 
construction some time in 2016, second to third quarter, 
depending on the permitting issues, and have it COD by the end 
of 2017 or into early 2018.
    Mr. Thompson. Thank you. In reading the IRP, it appears 
that much of the future of PREPA is dependent on the approval 
and the construction of that facility.
    Ms. Donahue, what would PREPA do if that facility fails to 
come on-line?
    Ms. Donahue. Well, as you know, it is a big piece of our 
IRP and, therefore, also getting to EPA compliance on mass 
regulations. However, what we have looked at, because we do 
need a fallback plan--I have an oil and gas expert as part of 
my team who has been working with the EcoElectrica folks to 
understand the permits, the expansion, et cetera, because, as 
Mr. Sanabria-Hernandez just testified, they have a natural gas 
terminal and they have gasification.
    So, we have looked at that, we have looked at the timing of 
the permits. That would, of course, require a pipeline to move 
it beyond EcoElectrica. That is a fallback that we have been 
considering, but we are moving forward with the Aguirre gas 
plant right now.
    Mr. Thompson. Good. Mr. San Miguel, if this facility is not 
constructed, what opportunities in the private sector exist to 
expand electric generation on the island as both 
environmentally compliant and financially feasible?
    Mr. San Miguel. The first thought on your premise of if the 
offshore gas plant does not occur was you have to really 
accelerate any RFP process on the generation side.
    I think EcoElectrica is obviously a natural Plan B, so to 
speak, although I am a strong believer in, you know, we cannot 
create another mini-monopoly. Competition is healthy. I like 
Jaime Sanabria-Hernandez very much; he has done a very good job 
over the years. But I would really press the pedal to the metal 
to make sure that we had competing power generation sources and 
capital that, in competing, makes it more efficient, more cost 
effective, and less expensive for the customers.
    Mr. Thompson. Thank you. Mr. Sanabria-Hernandez, could the 
EcoElectrica facility be expanded to accommodate an increased 
LNG intake? And if so, by how much and how much potential 
megawatts could be produced, based on that increased intake?
    Mr. Sanabria-Hernandez. The existing LNG facility, 
EcoElectrica, in terms of capacity, could expand by 50 percent, 
as we speak today, subject to authorization from FERC. It is 
our estimate that authorization would take a year to work with 
the permits and get FERC comfortable to authorize it; and that 
expansion does not require any construction at all.
    In addition to that, EcoElectrica has the facility ready 
for development and construction of a second LNG tank. That 
second LNG tank could expand by 100 percent the existing 
EcoElectrica capacity, should it get the initial 50 percent 
expanded. We can go from approximately 24 to 26 standard 
cargoes of LNG, of 119,000 cubic meters each to almost three 
times that, up to 60 cargoes a year.
    That means we would be able to power not only additional 
power, such as EcoElectrica and Costa Sur, which together they 
both represent about 1,300 megawatts. We could power an 
additional, let's say, 500 megawatts with the 50 percent 
increase, up to 1,800, and double that capacity with an 
additional second tank.
    The only thing with the second tank is it is another 
process of its own. It will take probably close to 5 years to 
initiate all the permitting, go through FERC, then after FERC 
the financing and constructing of the tank. It will take about 
5 years.
    Mr. Thompson. Thank you. Thank you, Chairman.
    Mr. Lamborn. Thank you. The Chair now recognizes a member 
of this subcommittee, Mr. Polis, from the great state of 
Colorado.
    Mr. Polis. Thank you, Mr. Chairman from Colorado, as well. 
I appreciate that.
    Before I jump into my questions, I want to briefly mention 
how peripheral many of the topics in today's hearings are, in 
light of the crippling debt crisis facing Puerto Rico. Puerto 
Rico holds over $70 billion in public debt that, without access 
to Chapter 9 and an opportunity to restructure their debt, is 
effectively unpayable.
    While we are discussing energy development, an issue that 
is important in its own right, I do not see how it is even 
possible to de-link PREPA's financial challenges from Chapter 
9, which I think has to be dealt with, in terms of how Puerto 
Rico can emerge from this crisis, not just with regard to 
energy policy within Puerto Rico.
    Ms. Donahue, your written testimony notes how fragile the 
restructuring support agreement is for PREPA. Can you expand on 
how important it is for additional PREPA creditors to join the 
agreement, and how necessary it is for PREPA to have access to 
Chapter 9 bankruptcy?
    Ms. Donahue. Yes. The restructuring support agreement 
requires that after the exchange only $700 million of debt of 
the current existing bonds remain outstanding. So that means, 
of the $2.7 billion of debt that is currently not part of the 
restructuring support agreement, $2 billion of it must 
voluntarily exchange. If they do not, then we cannot consummate 
the deal.
    Mr. Polis. What happens if the outstanding creditors, which 
are about 30 percent of the debt, are not party to the 
restructuring support agreement?
    Ms. Donahue. The deal cannot be consummated unless we get 
$2 billion of them to agree. The deal consummates--$700 million 
cannot participate, but the other $2 billion must.
    Mr. Polis. And without debt relief, PREPA is projected to 
run out of cash in June of this year, so in about 5 months, and 
default on its debt obligations. What are the short- and long-
term impacts of a default, both to PREPA, its customers, and to 
Puerto Rico?
    Ms. Donahue. Well, I think that PREPA faced it in July of 
2014, which was the inflection point to getting a CRO and 
actually getting the negotiation point. There was an issue 
where the main fuel supplier at the time, Petrobras, refused to 
ship without cash in advance. So, if there are no suppliers 
that will be willing to supply fuel, then that would mean that 
they will not be able to generate power, and that would also 
mean that we would be in a situation where there would have to 
be blackouts and major, major conservation.
    It would be, in my opinion, a disaster if PREPA were to run 
out of cash, and not have the ability to----
    Mr. Polis. And these are both residential blackouts, as 
well as businesses that would lose power?
    Ms. Donahue. It would be blackouts across the island, yes.
    Mr. Polis. Yes, which in terms of maintaining 
competitiveness and jobs and the tax base, that would evaporate 
very quickly if there was not a reliable power source.
    One thing that I notice in the background is that, unlike 
most areas in the mainland, Puerto Rico uses quite a bit of 
fuel oil with regard to power generation. I would like to ask 
whoever's area of expertise this is, the impact of the 
reduction of oil prices from about $90 a barrel down to $30 a 
barrel, how much does that lead to cost reduction of 
electricity on the island of Puerto Rico?
    Ms. Donahue. It has been a significant factor. The 
initiatives that the team has implemented have resulted in 
approximately 1. The difference between the high point, in 
August of 2014, it was about 28, 29, it is now closer to 17 or 
18.
    Mr. Polis. I also saw that Puerto Rico has a renewable 
portfolio standard of 12 percent by 2015 and 15 percent by 
2020. To put that in contrast to the state that Mr. Lamborn and 
I hail from, we have a 30 percent renewable energy portfolio 
standard by 2020, roughly twice that of Puerto Rico.
    Ms. Donahue, would you be able to address how higher 
renewable portfolio standards can lead to more predictable 
electricity pricing over time and make the economy less subject 
to spikes in oil prices?
    Ms. Donahue. I think it would allow the fuel 
diversification that we talked about. You would have less 
reliance; but, until there is stored power, solar still remains 
intermittent. So, you still would need the reserve power. 
Unlike the great state of Colorado, we do not have the ability 
to shed load. We are a closed system.
    It is that much more important that we have the reserve 
power and the backup power to make sure that when the sun does 
not shine, that the power and the system can still reliably 
provide. That is part of the reason why our standards are 
lower, because of the older systems. Once we have newer systems 
that can power up and power down much faster, we can integrate 
much faster.
    Mr. Polis. I thank the Chairman for the time, and hope that 
we can soon continue our committee's work with the issues 
surrounding Chapter 9. I yield back.
    Mr. Lamborn. Well, we would, except that is outside the 
jurisdiction of our committee.
    The Chair now recognizes the gentleman from Idaho, Mr. 
Labrador.
    Mr. Labrador. Thank you, Mr. Chairman; and I want to thank 
each and every one of you for being here today.
    Before I begin my questioning, I really want to make an 
important point, something that I am very concerned about, that 
nothing said in this hearing, nothing said by the leadership of 
this conference or this Congress, should in any way be 
interpreted as encouraging the government of Puerto Rico or 
PREPA to delay addressing their own fiscal situations. I think 
that is really, really important.
    I, and other Members of Congress, will not support Federal 
legislative action on this issue if those responsible for the 
debt do not act in good faith to work to come up with their own 
viable solutions. You do not need Congress to help you be 
responsible. There are a lot of things that you can do to 
become responsible. Significant reforms must be made and 
serious negotiations with creditors should be undertaken and 
finalized, including the restructuring agreement that PREPA 
reached with its creditors in December.
    Ms. Donahue, thank you for being here today. If the Puerto 
Rican legislature fails to pass both the operational and 
securitization portions of the legislation by January 22, what 
happens?
    Ms. Donahue. Two things happen--the restructuring support 
agreements will no longer be valid, and we have negotiated with 
our creditors that they will lend back to us $115 million that 
we paid in January to help us bridge our liquidity crisis that 
they will not be required to do that, as well.
    Mr. Labrador. Thank you. Briefly, could you describe the 
additional provisions that you are seeking the legislature to 
approve?
    Ms. Donahue. We are looking for an ability to actually 
implement a meritocracy--meaning key performance indicators and 
bonuses based on performance. We are looking for the ability 
for PREPA to run an RFP process that would go out and 
understand the appetite of private capital. We are looking for 
the securitization, the ability for rate restructure, which we 
would then go to the Energy Commission for approval on. Those 
are the main components----
    Mr. Labrador. OK, it is not a test. I was just trying to 
get a----
    [Laughter.]
    Ms. Donahue. You had me a little nervous.
    Mr. Labrador. All right. There has been talk about the need 
to bifurcate this legislation. Would that work? Why, or why 
not?
    Ms. Donahue. At the Puerto Rican level?
    Mr. Labrador. Yes.
    Ms. Donahue. I believe it won't work, and I believe the 
reason why it won't work--and when you say ``bifurcate,'' I am 
assuming you mean take the securitization and all the other----
    Mr. Labrador. Correct.
    Ms. Donahue. The PREPA transformation is important, in that 
it deals with operational issues, culture issues, and financial 
issues. They are all intertwined. I think if we bifurcate and 
only focus on the securitization, that would only deal with one 
element of all of the issues that are happening in PREPA. We 
need to be able to really depoliticize, instill a cultural 
meritocracy, get the savings that are embedded in other 
elements of the legislation. I think it is important that the 
legislation, the elements of it, are together.
    Mr. Labrador. So, we need to make hard choices is what you 
are saying, correct?
    Ms. Donahue. Yes.
    Mr. Labrador. Mr. San Miguel, Jorge, good to see you. As 
someone living on the island and having worked with PREPA in 
the past to negotiate power purchase operating agreements, are 
these legislative fixes necessary, and would they help PREPA 
operate in the future?
    Mr. San Miguel. And your reference is to the Revitalization 
Act?
    Mr. Labrador. Correct.
    Mr. San Miguel. As I mentioned in my earlier testimony, 
Congressman, I do not think it is a perfect piece, but it is a 
move way ahead of where PREPA has been. So, I urge that, yes, 
it be approved with the amendments that should properly be made 
without discouraging the creditor group that has already been 
agreeable to the revitalization draft that we have in front of 
the legislature.
    I think it is important that all of this revolves around 
the fact of whether Puerto Rico truly wants to reform PREPA. I 
believe it is a separate issue from Chapter 9, and that is why 
I would----
    Mr. Labrador. I do too, by the way.
    Mr. San Miguel [continuing]. Like not to touch that, 
because I think that Ms. Donahue and the team, the CRO team at 
PREPA, has done a tremendous job. Fifteen months is a bit 
misleading, in my opinion from the outside. Ms. Donahue was 
brought in, and she has not just done debt restructuring work, 
she has done structural reform work, and has been, I think, 
assigned additional duties.
    What she found there was not as easy as was originally 
designed or thought. And 15 months under that scenario I don't 
think is that bad. Any scenario under other legal structures or 
pathways would have taken probably that much for this size of 
debt and complexity within Puerto Rico.
    Mr. Labrador. Real quick, Ms. Donahue, I am really 
concerned about PREPA's history of not collecting from 
municipal accounts, and that PREPA has not pursued collection 
for severely past due accounts. What are we doing now and what 
else needs to be done? Is there something legislatively, or is 
it just that PREPA needs to do its job better?
    Ms. Donahue. I think the legislative component has already 
been passed with Act 57--that happened 2 years ago--that 
outlined measures and limits to each of the different 
municipalities. Then, further to that, the Energy Commission 
came out in the fall with regulation that further strengthened 
the for-profit elements of municipalities and carved them out 
of the CILT, and also strengthened the ability above the limits 
that PREPA has the ability to collect the cash.
    As far as collections from governments and other customers, 
my team has been working tirelessly with the folks on the 
ground, where we have restructured that whole organization, 
reconciled accounts, and have set up multiple payment plans. 
And the cash balances that were quoted earlier have been 
significantly reduced.
    Mr. Labrador. Thank you very much. I yield back.
    Mr. Thompson [presiding]. The gentleman's time has expired. 
The Chair now recognizes Mr. Serrano for 5 minutes.
    Mr. Serrano. Thank you, Mr. Chairman. And thank you to both 
the committee and the subcommittee for allowing myself and Ms. 
Velazquez to participate. While we are not members of this 
committee, we were both born in Puerto Rico, and Puerto Rico is 
never far from our hearts, our legislative thoughts, or our 
thoughts in general. So I thank you.
    Ms. Donahue, I have a question that concerns me a lot. A 
recent AP report indicated that PREPA was about to cut off 
electricity to several hospitals in Puerto Rico. Ms. Velazquez 
has been saying that this is becoming not a fiscal crisis but a 
humanitarian crisis. I believe--and I may be wrong, and maybe 
you can help me--that in New York you are not allowed to shut 
off heat, purposely, of senior citizens, for instance, in 
winter time, their lights and so on. So, how does PREPA get 
away with cutting off electricity to hospitals? And doesn't 
that just make things worse, from a fiscal crisis to a 
humanitarian crisis, and a health issue?
    And, speaking of health issues, please forgive my throat.
    [Laughter.]
    Ms. Donahue. That is OK. Let me just clarify. PREPA did not 
actually cut off the power. They posted a notice in the paper, 
as required by law, that if they did not pay, they would be 
entitled to cut off power. And what ended up happening is they 
paid.
    Mr. Serrano. They paid?
    Ms. Donahue. Yes.
    Mr. Serrano. So this issue, then, is gone?
    Ms. Donahue. The issue is gone.
    Mr. Serrano. Are there any laws in Puerto Rico at this 
time--and probably a question if we had the President of the 
Senate on the panel, but we don't--that prohibit groups like 
yours or agencies like yours from cutting off power without 
some sort of negotiating or preventing it totally?
    Ms. Donahue. I am not an expert on all Puerto Rican laws, I 
am sorry. But what I will say is--again, in this particular 
instance--there were many efforts to negotiate. To the extent 
that we were intending to ever cut off power, we followed the 
procedure where we are required to notice. And as I said, once 
we filed the procedure, we were able to get paid.
    As far as what other requirements there are, I would have 
to defer that to my colleagues who were actually in the 
collection group.
    Mr. Serrano. OK. We would like to know that. And I think, 
with all due respect, the committee may want to know that.
    Last on this part, are there other hospitals, medical 
institutions, or any schools that are in arrears right now?
    Ms. Donahue. The Department of Education is definitely in 
arrears. I am going to have to get back to you on the specifics 
of individual accounts, but I am aware that we are trying to 
work out a payment plan with the Department of Education, as 
well.
    Mr. Serrano. OK. For anyone on the panel who wishes to 
answer this--and it is a question we ask ourselves here all the 
time--many would say why, during a fiscal crisis, have a 
hearing on the energy issue in Puerto Rico. What is, briefly, 
the relationship between energy issues, the economy, and the 
fiscal crisis right now? Anyone who really wants to----
    Mr. San Miguel. Thank you, Congressman. One of the things I 
mentioned in my short piece was the power quality issue. 
Generally speaking, energy and electricity are the backbone of 
our society, our island, our homes, and our businesses.
    One little item on power quality that has to do with 
voltage and sustainability of that voltage, for example, is 
affecting our capacity to attract new manufacturing investment 
and it is threatening existing manufacturing. There are, for 
example, 10 manufacturing entities on the island that currently 
generate almost a third of the revenues, tax collections for 
the government of Puerto Rico. If we do not take care of that 
sort of infrastructure ailment, we threaten not just a 
hospital, we threaten thousands of jobs and 33 percent or 30 
percent of our general revenues right now.
    There are huge elements behind the importance and 
significance of this energy infrastructure crisis that we are 
so near and close to finalizing with the RSA--approval by the 
legislature, quick action by the Energy Commission, and then 
letting the CRO and the PREPA team go on to the securitization 
and the rest of the issues that must be taken care of.
    Now, just a footnote. Chapter 9--no judge under Chapter 9 
is going to approve the Revitalization Act. They are not going 
to approve the rates, they are not going to approve the IRP, 
and they are not going to help with securitization. In fact, 
Chapter 9 specter could actually lower the possibilities of 
getting a positive credit rating on a securitization structure.
    So, we are very close, without having this dark cloud near 
us. I think de-linking this from Chapter 9 is critical. We are 
very close to getting a PREPA transaction done. With respect to 
the holdouts--I am not privy to the detail of the transaction, 
but if the offer made onto the RSA is above their current 
trading price, which is pretty low, it is likely those holdouts 
will come in. And if they do not come in, the deal does not 
necessarily fall through. Existing creditors could step in for 
part of that debt.
    I think we need to be very cautious and not introduce into 
a very advanced negotiating stage something that could be very 
unsettling and that does not resolve my Revitalization Act 
approval, my energy rate revisions, and my IRP completion.
    Mr. Rivera-Velez. I would also like to add, if you allow 
me, being the representative of the manufacturing sector and 
the private sector, energy is one of the main components of the 
equation called operation costs. An example today in the local 
news, Procter and Gamble, after 30 years, is closing their 
facility and they are going to eliminate 130 jobs. One of the 
reasons stated in the communication was operational cost 
challenges. You will never hear energy, energy, energy; but 
when you talk to colleagues, you know that energy is a very 
important component.
    One of the main issues that we have been fighting for the 
last 15 years is this trend going up, up, up, and the 
uncertainty that the whole situation brings--holding 
investments in the manufacturing facilities typically are 
geared toward improving capacity, bringing new products in. In 
reality, when you look at the whole scenario, everybody is 
waiting to see what happens. In reality--now, and not 
tomorrow--again, cheaper energy costs--when I compare, let's 
say when I look at Singapore, Costa Rica, and the Dominican 
Republic, and then I look at Puerto Rico at twice those rates--
I cannot compete even inside the manufacturing networks that we 
already have. So, it is a little bit of a challenge.
    And last, I want to say that it is important that whatever 
we talk about here, sustained economic development is key. 
Whatever we do in energy is in a sustained way; and we, the 
private sector, want to work with you doing that. Because, you 
know what? If not, in 5 or 10 years we will be here talking 
about the same issue again.
    Mr. Thompson. Yes, thank you, Mr. Rivera-Velez.
    Mr. Rivera-Velez. Thank you, Mr. Chairman.
    Mr. Thompson. I now recognize the gentleman from Michigan, 
Dr. Benishek, for 5 minutes.
    Dr. Benishek. Thank you, Mr. Chairman. I thank you all for 
being here this morning.
    Apparently, PREPA's power generation is a combination of 
PREPA-owned generation, as well as contracted power generation. 
What is your opinion as to whether that combination should be 
changed? Ms. Donahue?
    Ms. Donahue. I think that, for sure, the EcoElectrica 
facilities and the AES facilities, as other witnesses have 
testified, are more efficient and cheaper energy providers than 
the outdated PREPA systems. One of the things that we are 
looking at is the possibility of going out for an RFP to 
determine the best way to get the most reliable, cheapest form 
of capital and source of power onto the island. So, we are 
looking at that, yes.
    Dr. Benishek. All right. Mr. Sanabria-Hernandez, do you 
have an opinion there?
    Mr. Sanabria-Hernandez. Well, I believe and I said it in my 
testimony, that PREPA should look at privatizing its 
operations, either through actual privatization or through 
private management of the utility. The generation piece, 
obviously, would be more competitive; and it would contribute 
more in terms of lower cost to Puerto Rico if it were 
completely privatized to compete, one way or the other.
    Dr. Benishek. Thank you. Apparently, an Alvarez and Marsal 
presentation on June 11, 2012, suggested that the future for 
PREPA depends on converting to natural gas for power 
generation. But there is very little natural gas 
infrastructure. They say that there should be either LNG or a 
pipeline, but neither one of these things has happened.
    Can new gas infrastructure be achieved? What is the 
solution there? Ms. Donahue, do you have an answer?
    Ms. Donahue. Yes. The Aguirre gas port is the project that 
is currently under consideration. It has gone through most of 
the permitting process. We still have some questions with the 
Army Corps of Engineers, and we are hoping to resolve that 
shortly so that we can finalize the permitting process, begin 
construction, and have the Aguirre natural gas port on-line by 
the end of 2017 or beginning of 2018.
    Dr. Benishek. Mr. Sanabria-Hernandez, do you have any 
comments?
    Mr. Sanabria-Hernandez. We mentioned a little while ago 
there is capability of expanding, in EcoElectrica's case, the 
existing LNG terminal. So, that is an option that PREPA has. 
Obviously, they have the IRP in process and it is to their best 
interest to do the most effective and efficient development for 
PREPA.
    But the options are there to increase the intake of LNG 
into the island and to maximize its use in power generation.
    Dr. Benishek. All right, thank you. This really emphasizes 
the importance of energy in our economy--and to me, Puerto Rico 
is sort of a microcosm of our entire country. We are subject to 
increased energy costs because we have standards that we want 
to have a clean environment. Other places around the world do 
not have those standards, and they are outcompeting us for 
industry because we are not taking a strong stance on our 
international partners on making sure we have a clean planet 
and, really, excessively harming our industry here.
    So, Mr. Rivera-Velez, I really appreciate your testimony as 
to the struggles of the manufacturing sector and your comments 
about your competition in the area, and for encouraging us to 
find solutions so that we are not uncompetitively challenged by 
our partners and our neighbors. Thank you, I yield back.
    Mr. Thompson. The gentleman yields back. I am pleased to 
recognize Ms. Velazquez for 5 minutes.
    Ms. Velazquez. Thank you, Mr. Chairman. I too want to thank 
the committee for allowing Congressman Serrano and myself to be 
here. As you know, we were born in Puerto Rico, and we have 
almost 5 million Puerto Ricans in the mainland who really care 
deeply about what is going on in Puerto Rico.
    I also believe that PREPA, the monopoly, has to come to an 
end. We need to diversify the energy sector in Puerto Rico. 
But, I do agree with my colleague, Mr. Labrador, in saying that 
Puerto Rico has to take responsibility.
    I also will say that Congress has to take responsibility. 
It was Congress who gave Puerto Rico bankruptcy protection from 
1933 to 1984. When the law was reformed, Puerto Rico was 
excluded. When you check the Congressional Record, there is no 
reason whatsoever why Puerto Rico was excluded. So that is one.
    What about Medicare and Medicaid parity for American 
citizens who gladly, when they are called to go to war and to 
participate in every single conflict, show up. So Puerto 
Ricans, American citizens in Puerto Rico, deserve to have the 
same parity that we enjoy here in the mainland.
    Also is the lack of uniformity when it comes to the 
territories. When you look at the Virgin Islands and the Jones 
Act, when you look at how much reimbursement they get compared 
to Medicaid and Medicare for Puerto Rico, there is a lack of 
uniformity. Then we provided tax incentives that were taken 
away to promote economic development in Puerto Rico, and we did 
not replace that with anything.
    But here we are dealing with a fiscal crisis. Ms. Donahue, 
your testimony and your response to my colleague, 
Representative Polis, notes how fragile the RSA is. It requires 
that holders of more than $2 billion in bonds still come to the 
table. It requires that the new bonds receive an investment-
grade rating. Given that the island's economy is deteriorating 
rapidly and the creditor holdouts persist, how likely do you 
believe it is for the RSA to be executed?
    Ms. Donahue. Thank you. I like to be an optimist. I would 
like to say that the RSA will be executed, because all of us, 
not just the PREPA team, but the creditors and their advisors 
as well, worked very hard on coming up with a fair and balanced 
solution.
    I do think that getting the 2 billion holders, some are 
retail holders, not all of them are hedge funds, some of them 
are original issuers, as well, so they are at 100 percent--will 
be a challenge. I think another challenge is the requirement 
for the investment-grade rating. That, of course, is needed to 
get the interest rate savings as part of the deal.
    And we cannot look at PREPA as a microcosm. It cannot be 
looked at stand-alone, because so many of its customers are the 
government, and also its customers are the manufacturing base 
in Puerto Rico. So I do think, at least in part, the investment 
grade rating will depend on what is happening in the macro-
commonwealth.
    Ms. Velazquez. Let's assume as a point of discussion, if 
these conditions are not met, the RSA falls apart. It would 
fall apart.
    Ms. Donahue. It would fall apart. We would certainly have 
to be back at the table with our creditors.
    Ms. Velazquez. OK. So, we recognize how tenuous the RSA is. 
But many are suggesting that things--RSA is in place, PREPA is 
in the clear. But, when you look at--from the New York Times 
article to Bloomberg, all the papers--they just look at this as 
Puerto Rico is coming up and we are going to have a real 
solution.
    The whole discussion is to demonstrate that without Chapter 
9 it is going to be an uphill battle. Don't you think so?
    Ms. Donahue. As I mentioned, I think that for PREPA, we 
would use Chapter 9 as part of a pre-packaged deal. We have the 
agreement with our creditors. We would use it to more 
efficiently accomplish and facilitate the restructuring that is 
on the table.
    I do not think you can say that PREPA is completely done. I 
think the RSA, although again, is highly negotiated, highly 
structured, good faith, good intentioned, there are 
contingencies that must be met. If they are not met, we will be 
back at the table.
    Ms. Velazquez. And you are going to have thousands and 
thousands of Puerto Ricans leaving the island, coming here, to 
the mainland.
    Mr. Chairman, I think that it is the responsibility--and I 
know someone raised the issue that this is not the committee of 
jurisdiction when it comes to bankruptcy. Well, the 
Administration sent a proposal here with four pillars, and one 
of them is territorial bankruptcy. That will fall under the 
jurisdiction of this committee.
    We need to do something. I hope that, collectively, we seek 
for a legislative solution that will provide the kind of peace 
to the people in Puerto Rico, the choice and options for Puerto 
Ricans to deal with their own destiny, and for people to be 
able to make the choice to stay in Puerto Rico without being 
forced out of the island to come to the mainland.
    Thank you. I yield back.
    Mr. Thompson. The gentlelady's time has expired. The Chair 
now recognizes the distinguished Chairman of the Full Natural 
Resources Committee, Mr. Bishop, for 5 minutes.
    Mr. Bishop. Thank you. Let me ask a couple of questions 
here, quickly, and I am going to stay within 5 minutes.
    Ms. Donahue, if I could ask you, in your testimony you 
summarize basically that PREPA needs financial restructuring, 
operational improvements, Federal permits for an LNG facility, 
energy loan guarantees, government reforms, and the legislative 
assembly to approve the RSA. I am assuming that all of these 
are critical to remain a viable entity. But how many of these 
are in PREPA's control?
    Ms. Donahue. The operational efficiencies are in PREPA's 
control, and we are executing on those.
    Mr. Bishop. The rest are simply out of----
    Ms. Donahue. The rest are----
    Mr. Bishop. You need some assistance to do that.
    Ms. Donahue. That is--I wanted to think through it, but 
that is correct.
    Mr. Bishop. Does PREPA have the so-called trust employees? 
And what are trust employees?
    Ms. Donahue. PREPA does have trust employees. PREPA has 
approximately 170 trust employees; and the trust employees are 
what they sound like, they are trusted people that are put in 
with the administrative changes.
    Mr. Bishop. All right. Mr. Sanabria-Hernandez--I hope I am 
coming close on your name--EcoElectrica originally entered into 
a 22-year contract with PREPA. How many years do you have left 
on that contract?
    Mr. Sanabria-Hernandez. Six years.
    Mr. Bishop. In your testimony you noted, ``Without surety 
of payment, it will be difficult for anybody to justify 
investment in the Puerto Rican energy sector.'' How does that 
statement actually relate to EcoElectrica?
    Mr. Sanabria-Hernandez. EcoElectrica--and what we want to 
do is present the facts as they exist today--EcoElectrica, for 
the last 8 years, has been collecting from PREPA on a past-due 
basis. Our receivables are not current. PREPA is not paying on 
a current basis. But as soon as Ms. Donahue stepped in as chief 
restructuring officer, we were able to sit and negotiate a 
scheme for payment. And she has been meeting that for the last 
year-and-a-half. We have been able to continue to operate and 
our investors are content with the environment right now, as it 
stands.
    But that does not take away the matter that our 
receivables, in terms of past due are, on average, around 30 
days over the contract terms. And the contract terms itself 
were 40-some days after the close of the month. So, receivables 
are collected on a 77-calendar-day basis----
    Mr. Bishop. OK.
    Mr. Sanabria-Hernandez [continuing]. Or above that.
    Mr. Bishop. I've got it. Then how do you envision Puerto 
Rico recovering its creditworthiness? And you have, like, 1 
minute to do that. I am sorry.
    Mr. Sanabria-Hernandez. There are many steps Puerto Rico 
needs to take. First of all, to realize that it needs to meet 
all its commitments. Contractual commitments are signed because 
you intend to meet them. From that perspective, you need to 
ingrain and install that framework of mind now.
    The way we envision that we may proceed would be if there 
were some type of assistance or aid, be it in the form of 
guarantees, be it in the form of other types of assistance that 
can help EcoElectrica and any future investor feel confident.
    Mr. Bishop. Would those guarantees then give what you 
said--deficiency of certainty in legal and a regulatory 
framework, would those guarantees be part of that process?
    Mr. Sanabria-Hernandez. That would be part of the process. 
But also, the legislature in Puerto Rico needs to realize that 
they cannot focus on undermining--if that is the right word--
the contractual relations that exist whenever legislation is 
enacted.
    Mr. Bishop. So, you need legislative assistance at the same 
time.
    Let me yield 1 minute to Mr. Labrador, if I could.
    Mr. Labrador. Thank you, Mr. Chairman.
    Just quickly, I completely agree with Ms. Velazquez, that 
there are a lot of things that we could do. But I agree with 
Mr. San Miguel, and I think he said it better than anybody 
else, that in order to get the goodies of statehood, you also 
need to have the responsibilities of a state. And that only 
comes through becoming a state.
    Really quickly, though--I think something you and I can 
agree on--I think, if I heard you correctly, Ms. Donahue, can 
you respond to the issue of the Jones Act? I think in your 
testimony you state that current impact on the Jones Act on 
PREPA's operations is in the range of $3 to $5 million per 
year, and that this may increase to $20 to $30 million per 
year. Can you address how reform of the Jones Act would 
actually help PREPA, and help the people of Puerto Rico?
    Ms. Donahue. Yes. The Jones Act, as you know, requires 
American flagged vessels, American-built vessels, and American-
crewed vessels. Because at the moment our sources are not 
uniquely mainland to get number six and number two to run our 
units--it is minimal--when the Aguirre gas port becomes 
operational, and we enter into long-term LNG contracts, one of 
the ways we have been able to save money is by index hedging, 
different indexes and buying from different parts of the world.
    If we do not have the ability or if we source from the 
United States, that will be increased approximately $20 to $30 
million based on usage. So, that would save money and then 
would ultimately save the ratepayer, as well.
    Mr. Labrador. Mr. Rossi, can you address that issue, as 
well. Do you agree with that?
    Mr. Rossi. I think it is important that we have better 
infrastructure to get LNG, natural gas, into Puerto Rico, and 
that it be structured in a way that is available to small 
business and to industrial.
    [Sound system issues at the end]
    [Whereupon, at 12:04 p.m., the subcommittee was adjourned.]

            [ADDITIONAL MATERIALS SUBMITTED FOR THE RECORD]

  Prepared Statement of Jaime Pla-Cortes representing the Puerto Rico 
                          Hospital Association
    Chairman Lamborn, Ranking Member Lowenthal and members of the 
subcommittee, thank you for the opportunity to provide this Statement 
for the Record on behalf of the Puerto Rico Hospital Association. Our 
organization represents the 69 hospitals serving approximately 3.5 
million U.S. citizens residing in the U.S. Territory of Puerto Rico; a 
population larger than 20 states. Notably, we are particularly proud 
that not only was our organization founded in 1942 but we are the home 
of the America's oldest continuously operated hospital: El Hospital La 
Concepcion of San German, founded in 1524.
    We appreciate the interest of the Natural Resources Committee in 
the energy challenges and opportunities facing Puerto Rico; as well as 
the current state of Puerto Rico's economy. Unfortunately, our island's 
high energy costs, weak economy, high level of poverty, record 
unemployment and troubled government finances are contributing to the 
challenges we face in managing a health care system designed to provide 
the best quality care for the U.S. citizens we serve each and every 
day.
    Energy is a major cost for Puerto Rico's hospitals. Today's health 
care and its technologies are energy intensive. Electricity used to 
power our medical equipment, lighting and cooling systems generates 
costs representing up to 5 percent of a typical operating budget; a 
proportionally higher cost than Mainland hospital budgets.
    Unfortunately, Puerto Rico's dependence on using old fashioned 
technologies and inefficient oil burning generators has kept our 
electricity costs sky-high. In fact, our electricity rates are two to 
three times the U.S. average and if they go higher it could further 
cripple our health care system. Today's costs are subject to change 
drastically should oil prices climb back to the record highs of recent 
years.
    Energy costs in Puerto Rico for the last 15 years have been 
unstable and unpredictable, trending upwards from 11/kWh in 1999 all 
the way to almost 30/kWh in 2012. Today we are almost twice that of 
the U.S. average even with recently lower oil prices. To make things 
worse, there are proposals to increase energy prices even more above 
the current rates in order to facilitate PREPA's restructuring and debt 
servicing; resulting in average Puerto Rico prices for all sectors 
combined versus that of the United States to be 3.3 times 2014 prices. 
Anyone with a simple understanding of operating a business appreciates 
how devastating this change in electricity costs would be and its 
consequences to our health care system and overall economy. Our 
hospitals will be pushed further into their own financial crisis due to 
inadequate reimbursements and high operating costs due to energy.
    As you consider solutions to Puerto Rico's energy challenges, we 
encourage you to keep a basic goal in mind of lower electricity rates 
as high rates have hampered the ability of our economy to grow. We also 
encourage you to review existing grant and tax incentive programs to 
ensure that they are applicable in Puerto Rico and available to health 
care providers such as hospitals.
    Frankly, we face an even larger challenge as we work to deliver 
quality health care. Our Medicaid funding is capped and our treatment 
under Medicare has been significantly less than that received by 
identical stateside hospitals. However, we are expected to deliver the 
same level of quality care for our citizens and visitors as that 
provided by our sister stateside institutions.
    The government of Puerto Rico is behind in its Medicaid 
reimbursements to the tune of at least $200 million today. Since 43 
percent of our local population is living in poverty, every one of our 
member hospitals serves Medicaid patients. This combined with our 
lesser Medicare reimbursement levels has put an incredible strain on 
the operations of every hospital. We also note that 40 percent of our 
island's population is Medicare eligible.
    We recently surveyed our member hospitals and found that over the 
past 12 months almost every institution has been forced to scale back 
operations in some way due to the government of Puerto Rico's delayed 
Medicaid payments. This reduction in services has resulted in employee 
cutbacks and reduced hours impacting thousands of employees, with many 
hospitals reducing beds, closing floors and eliminating specialized 
services as well as an additional delay in payment of bills and 
payroll. One hospital has already closed its doors after the local 
government owned electrical utility cut off its electricity service due 
to late payment of bills. PREPA has since threatened three other 
hospitals as well with an electricity cutoff.
    The facts show that Puerto Rico's hospital system is in a crisis 
due to the combination of the government's delay in reimbursing its 
medical providers and the secondary treatment our hospitals receive 
under Medicaid and Medicare. We are struggling to maintain our staff 
and see many of our experienced doctors and other health professionals 
recruited away with offers of better compensation by stateside 
hospitals. Overall, Puerto Rico has experienced a net reduction in 
population of 10 percent over the past 10 years; essentially, 500,000 
of our better educated young people and their families have left our 
island and moved to the mainland in search of a better quality of life.
    You've noted in your opening statements as well as through comments 
by individual Members during this hearing that you wish to focus on 
solutions that can be enacted under the House Natural Resource 
Committee's jurisdiction; particularly energy and a potential financial 
oversight authority to preside over a debt restructuring process. We 
urge solutions that actually result in lower electricity rates and wish 
to work with you toward that goal.
    We also note that there are many areas in health care where the 
disparity in treatment can be identified; my intent with this statement 
is to draw your additional attention to the leading priority initiative 
where Congress can make a difference in the short term. In fact, this 
initiative addresses a fairness issue resulting from disparate 
treatment of Puerto Rico hospitals. This is our immediate priority.
                    fix the impending medicaid cliff
Background
    Medicaid, the health program for low-income individuals, is funded 
in part by the Federal Government and in part by the state or territory 
government. In the states, Federal funding for Medicaid is open-ended, 
with the Federal contribution-known as an FMAP-ranging from 50 percent 
for the wealthiest states to 83 percent for the poorest states. By 
contrast, the amount of funding that the Federal Government provides to 
support the Medicaid program in each territory is capped.
    Puerto Rico has a population of 3.5 million U.S. citizens residing 
within the Territory. Unfortunately, she also has the Nation's highest 
poverty level of 46 percent of the population. Due to the high level of 
poverty, every health care provider serves the Medicaid population.
    Through 2009, Puerto Rico's cap was only $260.4 million a year and 
the FMAP was just 50 percent. In 2010, Congress enacted the Patient 
Protection and Affordable Care Act (ACA). Rather than simply removing 
the cap, the bill provided $6.4 billion in additional Medicaid funding 
for Puerto Rico. This funding can be drawn down by the territory 
between the fourth quarter of Fiscal Year 2011 and the end of Fiscal 
Year 2019.
    As a result, Puerto Rico now receives $1.1 to $1.3 billion a year 
in combined Federal Medicaid funding. This is a major improvement but 
still far less than Puerto Rico would receive if it were a state. 
Oregon, which has roughly the same number of people as Puerto Rico with 
a much lower poverty level, receives $5 billion a year.
Here's The Problem
    Notably, this extra funding expires at the end of the Fiscal Year 
2019. This has been called the Medicaid funding cliff. The Puerto Rico 
government has less than $3.5 billion of its $6.4 billion allocation in 
funding remaining, and could deplete this funding in 2018 or even 2017. 
If this funding is not replenished, Puerto Rico will go back to 
receiving less than $400 million a year. This will have a devastating 
impact on local health care providers including Puerto Rico's 
hospitals, doctors and health centers. The government of Puerto Rico is 
already behind by over $250 million in Medicaid reimbursements to 
health providers. The impending situation for our health care system is 
dire.
Potential Solutions
    H.R. 2635 and S. 1961, offered by Congressman Pierluisi and Senator 
Schumer would provide the territories with state-like treatment under 
Medicaid within well-defined parameters. Each territory's Medicaid 
program could cover individuals whose family income is equal to or less 
than 100 percent of the Federal poverty level, with the Federal 
Government providing state-like funding for that purpose. In essence, 
as long as a territory government covers individuals whose household 
income is within these limits, the Federal Government would fund the 
territory's Medicaid program as if it were a state Medicaid program. 
That means that the annual funding cap would be eliminated. Each 
territory would receive an FMAP based on its per capita income. 
However, the limiting principle is that if a territory wants to cover 
individuals earning above 100 percent of the Federal poverty level, it 
will generally be required to use territory dollars, not Federal 
dollars.
    At a minimum, Congress should address the impending cliff and 
ensure a floor in Federal Medicaid funds are provided for the 
foreseeable future equal to the current level provided currently 
through the Affordable Care Act. While working toward an eventual 
lifting of the cap, Congress can prevent the ``cliff'' from occurring 
as early as April, 2017, as part of the package now being assembled. 
Failure to provide stable funding could bring about the collapse of our 
entire health care system.
Next Steps
    Speaker Ryan has stated that he is committed to meaningful 
resolution of the fiscal and economic challenges facing Puerto Rico. 
These issues involve more than just the Chapter 9 Bankruptcy issue and 
some form of Federal financial oversight of the government and its debt 
restructuring. We urge inclusion of meaningful initiatives to bring 
energy costs down to a much lower level of rate in combination with 
changes in unfair treatment of Puerto Rico's health care providers 
under Medicaid. We must not allow the ``cliff' from devastating our 
health care system which serves 3.5 million U.S. citizens.
    Again, we appreciate the opportunity to submit our statement to the 
record for this hearing and look forward to working with each of you to 
bring about meaningful change which solve our challenges and create an 
opportunity for a better future for Puerto Rico.

                                 ______
                                 

                 Comision De Energia De Puerto Rico
                                      Hato Rey, Puerto Rico

                                                   January 12, 2016

Hon. Doug Lamborn, Chairman,
House Subcommittee on Energy and Mineral Resources
1333 Longworth House Office Building,
Washington, DC 20515.

    Dear Chairman:

    The Puerto Rico Energy Commission (``Commission'', ``Energy 
Commission'', ``PREC'') is the government agency tasked with the 
regulation and supervision of the electric power industry in the 
Commonwealth of Puerto Rico and the enforcement of its energy public 
policy. It is a specialized and independent regulatory body created on 
May 27, 2014, by virtue of Act 57-2014, as amended, known as the Puerto 
Rico Energy Transformation and RELIEF Act.
    As Puerto Rico's electric power industry regulator, one of the 
Commission's key functions is regulating the Puerto Rico Electric Power 
Authority (``PREPA''), the Commonwealth's only electric utility. PREPA, 
a government-owned corporation, is by far the largest and most 
important player in Puerto Rico's electric power industry, with a 
dominant role in the Island's electric generation activities, as well 
as its sole provider of electricity transmission and distribution 
services. The following is a brief description of the Commission's 
duties, functions, and the current challenges it faces, with particular 
regard to the future of PREPA and electric generation in Puerto Rico.
    The Commission's broad mission is to achieve a reliable, efficient, 
and accountable electric system, capable of providing electric service 
to all citizens at just and reasonable prices. In order to accomplish 
this task, the Commonwealth Legislature delegated broad regulatory and 
adjudicative powers as well as specific duties to the Commission, 
including for example, the adoption of standards and guidelines 
necessary for highly efficient electric power generation; to assess, 
approve, and ensure compliance with the resource and operational plans 
presented by PREPA and other electric service companies, in order to 
ensure the orderly development of Puerto Rico's electric system; and to 
review, set and approve the rates and charges proposed by PREPA and 
other electric service companies for their services on the Island.
    Likewise, the Commission has the power to certify all electric 
service companies that intend to offer their services in Puerto Rico, 
as well as the power to rule in cases and controversies arising by 
virtue of the laws and regulations related to the electric power 
industry and service. The Commission has ample power to carry out the 
necessary investigations to fulfill its duties and responsibilities, 
and to ensure the utmost adherence with the laws and regulations that 
govern the electric power industry in Puerto Rico.
    It is therefore evident that the Commission has a significant task 
to carry out, with multiple responsibilities, the performance of which 
is of vital importance for Puerto Rico. One of the challenges facing 
the Commission in this task has been the necessary work of creating a 
new organizational structure, requiring crucial groundwork during the 
Commission's first months of operation as a newly created entity. This 
work included adopting the Commission's first regulations, issuing its 
first orders in compliance with its regulatory functions, the 
initiation of the necessary investigations for these functions, and the 
timely and continuous public disclosure of its activities, in order to 
ensure the utmost accountability and transparency.
    The Commission's substantive work has focused primarily on the 
following major projects: (1) the adoption of the regulation, and the 
assessment and approval of PREPA's first Integrated Resource Plan 
(``IRP''); (2) the adoption of the regulation on the contribution in 
lieu of taxes (``CILT'') from PREPA to the municipalities; (3) the 
adoption of the regulation on information disclosure criteria, the 
certification requirements and procedures, and annual fees, applying to 
electric service companies operating--and intending to operate--in 
Puerto Rico; and (4) the initiation of the first adjudicatory procedure 
to review PREPA's rates (``rate case''), which is the first formal rate 
review in over twenty-six years.
    The first of these projects, the IRP, has dominated the 
Commission's agenda in the last several months. Pursuant to the 
Commission's regulations and resulting from a detailed planning 
process, the IRP will consider all the reasonable resources to satisfy 
the demand for electricity services during a twenty year planning 
period, taking into account both supply- and demand-side electric power 
resources. In broad terms, the IRP will include an assessment of the 
planning environment, a careful and detailed study of a range of future 
load forecasts, present generation resources, present demand-side 
resources, current investments in electricity conservation 
technologies, existing transmission and distribution facilities, and 
the relevant forecast and scenario analyses in support of PREPA's 
selected plan, upon which the Commission shall issue a ruling. This 
adjudicative process, in which key stakeholders from both industry and 
civil society take part, is currently ongoing.
    Another key project taken up by the Commission is the establishment 
of a new regulatory scheme for the CILT. The contribution in lieu of 
taxes represents a significant part of PREPA's operating costs. It is 
also a vital component of Puerto Rico's electric power service at the 
municipal government level. Within a rigorous public participation 
process that lasted several months, on October 16, 2015, the Commission 
finalized and enacted the set of rules governing the specific 
mechanisms, criteria, and procedures by which PREPA shall compensate 
Puerto Rico's 78 municipalities, pursuant to the provisions of Section 
22 of Act No. 83, as amended by Act 57-2014.
    Furthermore, the procedures and criteria related to operational 
plans, annual fees and the certification of electric service companies, 
has required the Commission to engage in an ongoing rulemaking process. 
This includes addressing the concerns of industry participants, which 
the Commission shall take into consideration in the formulation of a 
forthcoming amendment to its original regulation on this matter, 
enacted in July 2015. The information requirements for electric service 
companies, the criteria by which they will be evaluated for 
certification, and the filings necessary for the assessment of their 
regulatory fees, are all sensitive matters in which the Commission's 
role is essential in order for the Commonwealth's energy policy, 
industry's valid concerns, and the public interest, to be 
satisfactorily addressed.
    Lastly, another major project the Commission has engaged in during 
its brief period of operational existence is the undertaking of PREPA's 
first rate case by an independent ratemaking authority. This process, 
for which the Commission began to formally prepare in February 2015 by 
initiating an investigation into PREPA's financial and rate structure, 
and ordering PREPA an extensive information request, is perhaps the 
most sensitive at this juncture, given the public awareness of PREPA's 
financial problems and its ongoing negotiations with its creditors. It 
is especially important to note that PREPA has not yet presented its 
rate proposal to the Commission, even though the Commission has duly 
prepared the groundwork for this procedure, adopting a regulation on 
filing requirements specifically for this first rate case, as well as 
several orders pursuant to it. This process has also included a 
petition by one of PREPA's monoline insurers to initiate a rate case 
before the Commission, demanding the adoption of a temporary rate 
increase, which the Commission rejected in its subsequent resolution 
based on lack of information and failure to follow the Commission's 
established procedure. The petitioner challenged the Commission's 
ruling before the Puerto Rico Court of Appels. The Commission has 
maintained its work plan in this process and expects PREPA to file its 
rate proposal within the first quarter of 2016.
    As mentioned, this brief summary of the Commission's present work 
puts into perspective the challenges that this young regulatory entity 
faces going forward. The Commission welcomes the insight from all 
points of view with regard to the issues discussed above, as well as 
any suggestions as to what could be further done to ensure that its 
regulatory work translates into a strong electric power sector that 
brings forth the greatest possible benefit for the people of Puerto 
Rico.
    We wish to thank the House Committee on Natural Resources for this 
opportunity to provide useful insight into our work and our role in 
shaping Puerto Rico's energy outlook. Once again, we remain at the 
disposition of this Committee and of this House of Representatives in 
order to share ideas and proposals that, in unity of purpose, serve the 
best interests of the Commonwealth of Puerto Rico and its citizens.

            Cordially,

                                     Agustin F. Carbo-Lugo,
                           Chairman, Puerto Rico Energy Commission.
```