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Puerto Rico Development: Regulation for PREPA Rate Filing Requirements

On July 24, 2015, the Puerto Rico Energy Commission (“Commission”) adopted Regulation on Rate Filing Requirements for the Puerto Rico Electric Power Authority1 (“Regulation”). The Regulation applies to the formal applications to be filed the Puerto Rico Electric Power Authority (“PREPA”) before the Commission for the review of PREPA’s rate.

During the rate review process, the Commission must determine, among other things: (i) how much revenue PREPA needs to operate efficiently and attract capital within reasonable terms; (ii) identify which customers will be responsible for paying the different portions of the given set of rates; and (iii) the actual rates customers will pay, specifically, how their individual consumption will affect their monthly bills.

The Regulation requires PREPA to provide, among other things, the following information to justify its proposed rates: (a) the specific financial and statistical information, reports and pre-filed direct testimony that PREPA is required to include in its formal application to the Commission for the its first rate review case; and (b) the procedure to present and address any confidentiality claim that PREPA could have with regards to any information included in its formal application pursuant to this Regulation.

In addition to information routinely required to utilities in other jurisdictions of the United States, the requirements include information unique to PREPA such as detailed information related to PREPA’s plant investment, cost of capital and debt service requirements, income statements, financial statements, projections and forecasts, and the cost of service, among others. According to the Commission, that uniqueness arises from the following factors, among others: (i) because PREPA has never had an independent regulator, its current rates reflect costs that no independent body has determined are prudent and reasonable; (ii) PREPA is experiencing serious financial stress; (iii) PREPA’s bondholders have required PREPA’s Governing Board to hire a restructuring team whose decisions and recommendations will affect many aspects of PREPA’s operations and costs; and (iv) PREPA and its bondholders are in the midst of negotiations about the level and timing of PREPA’s debt obligations. The Commission understands that these factors, individually and cumulatively, will have a profound effect on PREPA’s management, operations and cost structure.

As part of the rate filing process, PREPA shall publish a public notice to, among other things: (a)inform the public that it has filed a formal application proposing new rates and (b) describe how thepublic may participate in the rate review proceeding. The Commission will publish the public notice on itswebsite and PREPA in newspapers of general circulation in Puerto Rico and on its website. Furthermore,once the Commission approves PREPA’s new rates, it will adopt another regulation for futureapplications to modify the rate approved by the Commission. See, Order No. CEPR-MI-2015-0004 of July 24, 2015.

Given the significant impact of this new regulation, we believe that this development may interest you. To further discuss or obtain additional information on how this development may impact you, please feel free to contact us at your convenience.

1 The Commission adopted the Regulation through the emergency procedure established in Act No. 170 of August 12, 1988, as amended, known as the “Uniform Administrative Procedures Act”, and authorized in Article 6.20 of Act 57-2014, as amended, known as the “Energy Transformation and RELIEF Act”. On July 27, 2015, the Commission published a notice informing the public of the 30-day commenting period on the Regulation.