Puerto Rico Utility Sale Could be First of Many

Commentary, Crown Corporations, Ian Madsen

Power utilities from BC to Newfoundland have expanded enormously, adding copious debt to provinces. This has burdened consumers and businesses with increasingly higher power bills and will eventually lower their standards of living. With unsustainable debts, the provinces are going to be in trouble and restructuring looms for these companies.

What is happening in Puerto Rico may mirror Canada’s future.

The governor of the US territory of Puerto Rico has announced the possible sale of its power utility, Puerto Rico Electric Power Authority (Prepa) to private investors if there are any. Prepa has not recovered from a devastating hurricane, Maria, that hit in September of 2017. Nearly half of Prepa customers still have not had power reconnected.

Poor customer service is the least of Prepa’s problems. The most important is its high debt level. Much of its cash flow just pays interest to creditors. As well, the company has other serious problems: antiquated power lines, substations, transformers, and generating stations; a declining customer base; a weak economy; and high-cost oil-fired generators. Compounding this are regulations, mainland-level wages, and bad governance from politicians.

High power costs make local businesses uncompetitive, and gives households hard choices between refrigerating food, air conditioning, television, computers, or even light. These problems, of course, hasten the out-migration of the skilled and better-off.

The island’s government seems to be throwing in the towel, finally. It would like private investors to take Prepa off its hands. Yet that will not be easy. Prepa is technically insolvent, and the first claims on assets go to creditors. Puerto Ricans may have to settle for crumbs, or perhaps even pay to have Prepa privatized.

In Prepa-ration for sale, Prepa operations and finances will need to be restructured, the company will need more capital investments to modernize equipment, and lower debt to ensure that the ‘new’ firm’s finances are sustainable.

Why should this matter to Canadians?

Prepa is a sad example of what state ownership can do to a monopoly power utility even with a captive market. Yet, in Canada, we have several ‘Prepas’, but our political leaders are in denial about the potential problems. The huge debts carried by some companies are not fully repayable, so restructuring looms for some of our Crown utility companies.

Backward-looking provincial governments have consistently ignored abundant, cheap natural gas reserves, on the doorstep of SaskPower, BC Hydro, and Manitoba Hydro, and engaged in political fights that sadly ignore near-unavoidable forces such as Ottawa’s carbon tax. In addition, some provincial governments, such as Alberta, are expensively phasing out coal-fired power, and there is now a dubious ‘Climate and Green Plan’ in Manitoba.

If these Crown utilities were sold off, private investors with better management teams, and not taxpayers, would then have to face those challenges. This can work out well, as in the case of Capital Power when Edmonton sold it off. Yet, sell-offs can be devastating, at least temporarily, as with TransAlta. Fortunately, in the case of these two Alberta companies, taxpayers were not on the hook.

As Prepa’s situation shows, it may not be so easy to rationalize Crown power companies and restructure their debt so they do not financially oppress future generations. Prepa’s fate warns us how serious such damage can be, and how costly it is to delay the inevitable.