2021_01_12_APER_Letter_to_NJ_Response_to_Chair_Natural_Reosurces.pdf - WILFREDO SANTIAGO

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January 12, 2021 BY ELECTRONIC MAIL Natalie Jaresko Executive Director Financial Oversight and Management Board for Puerto Rico On behalf of APER and its members, I commence by wishing you success in 2021, as it should translate in success for Puerto Rico as well. On the September 22, 2020 meeting held with you and your team of the Financial Oversight and Management Board (“FOMB”), and subsequent conversations with Mr. Alejandro Figueroa, APER requested and you agreed to hold another meeting with the technical teams to further discuss the premises and analytical models relied by the FOMB in its August 17th, 2020 letter to the Governing Board of the Puerto Rico Electric Power Authority (“PREPA”). As stated therein, you rejected the approval of the 16 Legacy Projects for their integration would result “in retail energy rates that are 0.5c/kWh higher than the rate projections outlined in the 2020 Certified Fiscal Plan. During the much-awaited coordination of the meeting, Congressman Raúl M. Grijalva, Chairman of the House of Representatives Natural Resources Committee, wrote to you on December 7, 2020 and requested more information on the analysis you used to reach the determination. On December 21, 2020 you submitted the FOMB’s response to the request, wherein the FOMB reiterated that the proposed contracts were inconsistent with PREPA’s Certified Fiscal Plan and were not procured competitively. And, in an exercise of discretion “while showing good faith efforts”, the FOMB authorized PREPA to develop 150MW of the proposed 593MW. After careful analysis of your response, for the record APER herein submits its position. As stated in previous occasions APER rejects the FOMB’s premises, bases and conclusions, which have demonstrably been shown to be defective and faulty. To begin, the disproportionate spotlight on the absence of a formal “market competition”, misses the fact that the 16 renegotiated non-operational Power Purchase and Operating Agreements (“PPOA”) are the remaining contracts, out of more than 67 others, that survived a decade long negotiation process with PREPA, in which the prices had materially been reduced in favor of the consumers. This is a clear example of natural selection, whereby the most resilient and persistent proponents remained in play; moreover, the extended process also evidenced the developers’ capacity to 1353 Ave. Luis Vigoreaux  PMB 787  Guaynabo, PR  00966 email: [email protected] persevere adverse processes, which should in turn reflect on their capacity to complete the projects. It should be noted that in this last round of renegotiations, two other proponents withdrew for they could not develop and operate under the 10 cent per KWh threshold required by PREPA and under the FOMB’s consent. Moreover, market competition does not always reveal the price’s floor. As the FOMB is aware, PREPA was bit by this snake when the FOMB rejected the contract extension with PUMA Energy Caribe LLC (“PUMA”) for the light distillate No. 2 diesel, in search of the lowest price the market would reveal. On August 14, 2019 PREPA issued an RFP, in accordance with the FOMB’s guidance. After the “market competition,” PREPA ended selecting the same supplier, however, at a higher cost than the originally proposed contract extension. All of this, under the guidance and approval of the FOMB. The FOMB’s second contention, that the 16 renegotiated PPOAs deviate from PREPA’s Certified Fiscal Plan, is based on projections that are obsolete and outdated. The new Integrated Resources Plan enacted by the Puerto Rico Energy Bureau (“PREB") on August 24, 2020 renders all said projections ineffective. The FOMB is aware of the latest IRP, yet insists on the projections of a fiscal plan derived form a former IRP which premises were significantly modified. The failure to revise the Fiscal Plan and the insistence to use those outdated projections as grounds to reject the remaining 443 MW, implores to question the FOMB’s mission, motives and judgement. We proceed to be more specific with regards to your responses: A. Avoidance of fines associated with not achieving renewable energy goals mandated by Puerto Rico law and not complying with federal Mercury and Air Toxic Standards (“MATS”) regulations: The FOMB’s response to this concern begins shedding light to the weaknesses of your analysis, as well as confirming that you avoided answering the question. To wit, PREPA will be fined for not achieving renewable energy goals and for not complying with MATS regulations. And contrary to your assertion, the determination to only authorize 150MW actually impact’s PREPAs ability to commence the transformation, which is the first step in avoiding the fines. Time is of the essence, and the FOMB precisely delayed and interrupted the process. As your response stated, that the FOMB determined there was significant uncertainty as to whether a significant portion of the projects would be successfully completed, 1353 Ave. Luis Vigoreaux  PMB 787  Guaynabo, PR  00966 email: [email protected] based on one single, unsupported and unproven conjecture from PREPA, then it is evident you failed to perform the proper and adequate analysis of the total circumstances and, most importantly, the developers. If the goal is to increase the generation of renewable energy, in which way limiting the first phase to 150MW out of 593MW achieves said target? What your statement reveals is that the analysis does not consider that the PPOAs incorporated a strict compliance itinerary, affording PREPA the right to terminate any PPOA which misses its benchmarks, without PREPA incurring in liability. The renegotiated PPOAs provide in its Article 16 – Termination, subparagraph 16.1 (d) that the termination date is the one “identified by PREPA in written notice following any failure by seller to achieve the Final Notice To Proceed (“FNTP”) date by the Guaranteed FNTP Date.” Causes for termination, as outlined in Article 17, are Seller’s: (i) “failure to complete and test the Interconnection Facilities by the Guaranteed Interconnection Date, as evidenced by issuance of the IF Completion Notice; and (ii) the non-occurrence of the Commercial Operation Date by the Long- Stop Date. For the record, APER is not against the subsequent procurement of renewable capacity through competition. What APER defends is the 16 Legacy Projects composed of binding agreements – approved by PREPA’s Governing Board and the PREB - between PREPA and the developers who have invested serious amounts of private capital to comply with PREPA’s ever changing demands and who paid PREPA a fee of $5 per KWac for their contracts. Greenlighting these projects is the obvious and certain path to advance the transition. As such, PREPA should prioritize the development of these projects which provide a high degree of certainty for completion, while contemporaneously publish its request for proposals to further the procurement of less certain additional renewable energy. The certainty of the legacy projects is the result of having land/site control, full or advanced permits, assigned interconnection points and full or partial engineering. The upcoming RFP will demonstrate and highlight the scarcity of both suitable and permittable land and interconnection points. Regardless, neither course of action is incompatible or exclusive to each other. B. Economic (job creation, investments, and increased tax base) and Environmental Benefits: In the defense of the Legacy Projects, APER submitted to the FOMB a presentation which first page summarized the economic impact of the development of the 16 PPOAs. In simple terms, the projects represent an immediate capital investment of 1353 Ave. Luis Vigoreaux  PMB 787  Guaynabo, PR  00966 email: [email protected] $1.171 billion dollars and $244 million dollars in wages and salaries in 8,900 or more jobs. Yet, your response to Congressman Grijalva, omits this information and relies on a superficial statement that the transition from fossil fuels to renewable energy would unlock economic and environmental benefits. This evasive response demonstrates the weakness of your contention. APER has consistently pleaded that the benefits of the economic impact of the development of the Legacy Projects surpasses the uncertain risk of possibly exceeding the retail energy cost by half a cent per kWh projected for fiscal year 2035 out of an obsolete fiscal plan. Notwithstanding, we are brilliantly avoiding paying half a cent more in 15 years while missing out now on $1.415 billion dollars. C. Savings to PREPA and PREPA Ratepayers: Consistent with PREPA’s 2020 Fiscal Plan, the FOMB reiterates that the starting price for renewable energy should be 8.0c/kWh, and that the PPOAs exceed said price by starting at 9.9c/kWh. In addition, your response includes a comparison with other projects from Hawaii and Florida, whose costs are way lower, of course, considering the significantly different circumstances. As stated in our previous communications, we identified that the 8.0c/kWh leaves out the costs for energy storage equipment needed to comply with the Minimum Technical Requirements (“MTR”) and Interconnection requirements and utilizes an extremely optimistic weighted average cost of capital (WACC) in Puerto Rico under current circumstances. The New Energy Partner’s Inc. December 23, 2019 Review of Legacy Solar PV PPOAs and Recommendations for Dispositions report provides a current analysis which validates the 10c/kWh solar plus MTR rate for Puerto Rico using the correct WACC. In addition, APER has identified various factors and premises omitted from the Siemens IRP report. The IRP model contemplated 1.3 DC/AC ratio and a 22 % capacity of generation. The new Legacy Projects operate under a 1.5 DC/AC ratio and a 25 % capacity of generation. Also missing from the 8 cent benchmark is the actual and recurring cost of post-María insurance of approximately $500,000 to $750,000 per year, equivalent to .075-1.12c/kWh. Surprisingly, as mentioned before, the 8c/kWh is based on a WACC of 8.5 %, when PREPAs Title III petition has elevated said item to at least 12.5 %. Another financial benefit of the 16 Legacy Projects not being properly accounted or considered by the FOMB are the Renewable Energy Certificates (REC) provided by them. Puerto Rico Act 82 of 2010 created and mandated PREPA to purchase RECs 1353 Ave. Luis Vigoreaux  PMB 787  Guaynabo, PR  00966 email: [email protected] from the renewable energy developers in addition to the purchase of energy per PPOA prices. The 16 Legacy Projects used to provide RECs to PREPA priced at 3.5 cents/kWh. During the latest renegotiation process PREPA disregarded the RECs and determined not to purchase them. After reaching agreement on energy rates, PREPA retracted and requested that RECs be included as part of the re-negotiated prices.. Reviewing the recent submission from PREPA of its Motion in Compliance with Order Submitting Final Procurement Plan and Associated Request for Proposal for future renewable energy projects, PREPA is now stating that they will pay for and trade RECs. The 16 Legacy Projects will provide REC’s to PREPA, which they can use or monetize without consideration to the 16 PPOAs. A fair analysis of the 16 Legacy Projects should consider the value of said RECs as a “reduction” in the actual renegotiated prices for a correct market value comparison. This important factor was not considered in the FOMB evaluation. Finally, the IRP approved by the Puerto Rico Energy Bureau eliminates the proposed new Palo Seco combined cycle power plant, planned to start operations in 2025, which was one of the main cost reduction measures on PREPA’s 2020 CFP. The IRP shows its electricity price between 9.6 c/kWh (operating on unavailable natural gas at the Palo Seco site) and 13.8 c/kWh (operating on diesel currently available at the site). This leaves the 16 Legacy Projects as the least cost (9.9 c/kWh) measure able to start operations before 2025. With respect to the comparison with prices in other states, it is safe to assume, that none of those other states have comparable circumstances to Puerto Rico, and therefore, at best the reference is misleading. D. Litigation Costs In your response to this matter, much emphasis has been placed on the encouragement for market competition, which somehow you conclude that it minimizes the risk of litigation. Surprisingly, you add that it also reduces the likelihood of arbitrary supplier selection, which would provide reasonable grounds for litigation. This superficial response would possibly apply to an “all-being equal” scenario that certainly is not PREPA's case with the 16 Legacy Projects. In fact, your “good faith” exercise of discretion allowing only 150MW out of the 593MW - on grounds that have been demonstrably unfounded - will result precisely in an arbitrary supplier selection and obvious litigation against PREPA for bad-faith breach of contract. The Legacy Projects consist of 16 binding PPOAs, most of which were executed before December 2012. As you are aware, PREPA charged an initial fee of $5.00 per 1353 Ave. Luis Vigoreaux  PMB 787  Guaynabo, PR  00966 email: [email protected] KWac, which translates to $100,000 for a 20MW project. Thereafter, each developer invested their own private resources to prepare the projects for the approval of PREPA. In general terms, developers secured the land, engaged various professionals for the corresponding design, permits and financial proposal. In what ordinarily would take a year and a half to complete the process and PREPA issue the FNTP, the 16 Legacy Projects have extended to 8 years or more. Unequivocally, the abusively prolonged extension is attributable exclusively to PREPA, and now the FOMB. During these 8 years, PREPA’s continued demands to alter or upgrade technical requirements and/or contract terms, under the representation that the projects would be greenlit, forced developers to invest even more time, money and effort. Worst still is that in the last round of renegotiations, with the FOMB’s encouragement and consent, PREPA set the 10c/kWh threshold, to which the majority of the developers abided since it had the FOMB’s “stamp of approval”. PREPA’s submission to the FOMBs demands, evidenced when it moved the PREB to withdraw its approvals of the 16 projects, and selecting two projects amounting to 150 MW, is proof of an undue and unwarranted intromission by the FOMB on Puerto Rico’s energy public policy. Without a doubt, this determination exceeds the Contract Review Policy under section 204(b)2 of PROMESA. Furthermore, your determination is directly delaying the commencement of 16 projects, which contradicts your self-serving statement of not wanting to delay or impede the development of renewable energy on the behest of transparency. Had it not been for your determination, at least 9 of the 16 projects would have already started construction; the other 7 would have commenced before June 2021. And now, purportedly 14 of those 16 Legacy Projects have solid grounds to claim against PREPA for their arbitrary rejection, and the direct losses of all monies invested during the past 8 years as the result of the implementation of your course of action to reject the PPOAs on the unfounded bases, which we have repeatedly pointed out. The omission of this simple assessment from your response is extremely revealing. Again, APER requests from you, to reconsider your determination, and allow the 593 MW projects to move forward. This, in no way will impede PREPA from procuring the additional MWs required by Puerto Rico statutes. 1353 Ave. Luis Vigoreaux  PMB 787  Guaynabo, PR  00966 email: [email protected] Sincerely, Julian Herencia Executive Director APER CC: Congressman Raul M. Grijalva, Chairman House of Representatives Natural Resources Committee Congressman Jose E. Serrano Congressman Darren Soto Congresswoman Jennifer Gonzalez-Colón Ms. Margarita Varela-Rosa, Committee’s Office of Insular Affairs Hon. Pedro Pierluisi, Governor of Puerto Rico Mr. Ralph Kreil, Chairman Governing Board Puerto Rico Electric Power Authority 1353 Ave. Luis Vigoreaux  PMB 787  Guaynabo, PR  00966 email: [email protected]