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LUMA contract gets temporary extension to distribute Puerto Rico electricity

Puerto Rico government agencies and authorities completed their approval of extending LUMA Energy’s operation of the island’s electrical transmission and distribution system Wednesday.

LUMA took over the system in June 2021 based on a short-term supplementary agreement that was supposed to be replaced by a 15-year Operating and Maintenance agreement on Thursday. However, that agreement assumed the Puerto Rico Electric Power Authority debt restructuring would have been completed, which has yet to happen.

LUMA and the government have agreed to extend the terms of the supplementary agreement for the time being as a result.

While PREPA has been in bankruptcy since mid-2017, the Puerto Rico Oversight Board has not been able to settle on a restructuring agreement with the bondholders and other stakeholders. To hasten the process of achieving a plan of adjustment, in late September Judge Laura Taylor Swain ordered the board to submit a plan of adjustment with multiple options, dependent on the outcome of litigation, by the end of Thursday.

There have been many demonstrations against LUMA Energy in Puerto Rico, like this one in June 2021.

Bloomberg News

LUMA’s new agreement with Puerto Rico’s government will elapse when one of two things happens. If the U.S. District Court for Puerto Rico approves a PREPA plan of adjustment, then the current agreement will be replaced by the O&M agreement. If the court dismisses PREPA’s bankruptcy without approving a plan of adjustment, then LUMA will render its services in accordance with a transition plan that has been agreed to by the parties.

The boards of the Office of Public Administration and of the power authority approved the LUMA contract extension. The Puerto Rico Oversight Board said the extension was consistent with PREPA’s fiscal plan. Gov. Pedro Pierluisi also expressed support for the extension.

However, many people in Puerto Rico have been unhappy with the electrical system’s continued unreliability and have blamed LUMA. Many of them and many local politicians have sought the cancellation of LUMA’s contract.

“At first, the supplementary agreement was signed as a provisional measure with the purpose of granting a period of 18 months to complete the restructuring of PREPA’s debt,” said Fermín Fontanés Gómez, executive director of Puerto Rico’s Authority for Public-Private Partnerships, on Wednesday. “As of today, this process has not been completed, and it is essential to continue the plans and reconstruction works that have already begun.”

President of the Office of Public Administration Board of Directors Omar Marrero said if the contract with LUMA was cancelled, there would have been severe negative results. “For example, without LUMA, the appointment of a receiver [would be] highly probable. This trustee would have the power to exercise the right to request rate increases in amounts sufficient to pay PREPA’s debt in full.”

Cancellation of the LUMA contract would have cost from $300 million to $600 million, Fontanés Gómez and Marrero said, and would have had other negative outcomes.

Despite the contract extension, LUMA can have the contract cancelled if it breaches its obligations and does not correct the breaches within set periods of time, Pierluisi said. Furthermore, the Puerto Rico Energy Bureau can establish numerical goals and impose fines on LUMA if it does not meet them.

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