As Puerto Rico’s Privatized Power Grid Collapses, Its Owner Eyes A Bigger Payday
Andrés Gutiérrez Toro considered himself lucky. After Hurricane María destroyed Puerto Rico’s electrical system ― triggering a historic 11-month blackout across much of the island ― and left thousands dead, he lost power for only five months. Still, the situation was so brutal that he ponied up to buy a diesel generator and solar panels.
The investment paid off. The power grid never fully recovered from the 2017 storm, and it became even less reliable in June 2021, when LUMA Energy, a private company, took over electricity sales in the United States’ most populous territorial possession.
Monthly bills went up, and up and up ― seven rate hikes in total. Gutiérrez regularly paid almost $350 a month, and that was with the discount that came from producing his own solar power. Neighbors were paying upward of $500. The outages, meanwhile, got worse, averaging about three per month, lasting four hours or more each time. Gutiérrez, a family physician, opened his clinic to patients who couldn’t afford generators, so diabetics could refrigerate insulin and asthmatics could use breathing machines.
Now even that isn’t enough to contain what Gutiérrez called the “domino effect” of the latest disaster. It’s been nearly a month since Hurricane Fiona, a relatively minor Category 1 storm, once again knocked out Puerto Rico’s entire power system. And much of Cabo Rojo, the west coast beach town where Gutiérrez lives with his wife and two kids, in a single-story home in a middle-class neighborhood, remains without electricity from the power grid. It’s the longest blackout since María.
“There are a lot of sick people who are diabetic, and they don’t have electricity to do their diets, so they’re eating whatever they can afford and don’t have to use electricity to eat: fast foods, crackers, bread,” Gutiérrez, 46, said by phone last week. “So there’s a domino effect, and we’re seeing a lot of sick people come into the hospital right now because of it.”
Few living in the 50 states have encountered this kind of systemic collapse. Fiona gathered enough strength as it headed north to hit Florida as a Category 4 hurricane, yet the state restored electricity to millions within days. Americans experienced a combined eight hours of power outages throughout all of 2020, and that was by far the highest average since records began seven years earlier. Before Fiona, Gutiérrez and his neighbors might go twice as long without electricity in a single month. And even that quality of service came at a premium: Puerto Ricans pay double the average U.S. electricity rate, even though the mostly Spanish-speaking Caribbean island is poorer than the most impoverished U.S. state.
That a private company came into Puerto Rico to sell electricity at all is a consequence of the territory’s painful bankruptcy and debt restructuring, which saw Congress install a financial oversight board with veto power over virtually any major decision from its elected government.
In theory, a private firm like LUMA would want to please its customers by delivering efficient, effective services ― unlike, say, the corrupt old state-owned Puerto Rico Electric Power Authority (PREPA), which, while unable to pay its $9 billion share of the territory’s debt, doled out sketchy contracts to big-name consultants and mainland U.S. companies.
But while the $1.5 billion deal pays LUMA a fixed management fee and reimburses for everything from labor costs to employees’ entertainment, the 16-year contract enshrined few, if any, penalties for poor service. Nor did the agreement require LUMA to honor PREPA’s union contract, spurring hundreds of veteran line workers with experience maintaining Puerto Rico’s grid to retire or quit.
If LUMA was supposed to save PREPA money on electricity distribution, it’s unclear how much ― the contract did not include a cost-benefit analysis.
A review of public filings shows LUMA spent months making changes to PREPA’s reconstructive plan, a move advocates say delayed upgrades that could have curbed power outages. The company then struggled to compromise with the Federal Emergency Management Agency, which controls the historic $16 billion budget Congress allocated to rebuild Puerto Rico’s power system, over the scope of proposed projects.
Meanwhile, Quanta Services, the Texas energy firm that owns 50% of LUMA, has for months told investors it plans to increase its revenue from Puerto Rico with lucrative additional contracts working on the grid, raising questions about how LUMA’s construction priorities could benefit its parent company’s future prospects.
Even as the lights come back on in Puerto Rico, the island’s government faces mounting pressure to cancel LUMA’s contract as early as next month, when the island’s government is set to decide whether to extend the temporary agreement under which the company is operating, while PREPA negotiates a settlement with its creditors. If that temporary contract expires on Nov. 30, a months-long separation process would begin, wherein control of the grid would likely return, at least in the near term, to the state-owned utility until the government can select a new operator.
Puerto Rico Gov. Pedro Pierluisi tamped down talk of ending the contract, calling instead for LUMA chief executive Wayne Stensby’s resignation. But the territory’s House of Representatives already passed a resolution calling for its termination, protests are growing in Puerto Rico and a public petition to call LUMA’s deal off has gathered thousands of signatures in recent weeks. LUMA, meanwhile, is facing federal hearings before the U.S. House’s Natural Resources Committee and calls from New York Attorney General Letitia James for a federal investigation into the company.
“There is certainly broadscale discontent with the company, and we’ve not seen such united popular discontent since the 2019 ousting of the governor,” said Yarimar Bonilla, director of the Center for Puerto Rican Studies at Hunter College in New York City. “So, really I think it’s not a matter of if LUMA should leave but rather when and how.”
Neither LUMA nor Quanta responded to multiple emails requesting interviews and submitting written questions.
In the months after María, when millions of Puerto Ricans were vaulted back into a grueling premodern existence, solar panels offered a literal glimmer of hope as rooftop arrays turned sun-soaked Caribbean afternoons into charged phones. The cost of a 97% fossil-fueled grid was evident even before the power lines fell. The islands’ biggest coal plant sired a mountain of toxic ash, the polluting diesel drove rates up.
Not every country is well-suited to run almost entirely on renewables, but on a sunny day, rooftop solar alone could provide for Puerto Rico’s yearly residential electricity needs four times over, according to a National Renewable Energy Laboratory study. Puerto Rico passed a law in 2019 requiring a 100% renewably powered grid by 2050. From 2016 to January 2022, the number of rooftop solar systems enrolled in the island’s net-metering program grew eightfold, to 42,000, according to utility data first cited by the clean-energy trade publication Canary Media.
Nearly 8,000 of those net-metering customers came on after LUMA. But if Puerto Rico planned to rebuild its grid around renewables from the ground up, LUMA may have seemed like a curious choice. As a private venture between Houston-based Quanta and Canada’s ATCO Group, two of North America’s biggest builders of long-distance transmission lines, the implicit goal of LUMA was the resurrection of a centralized electrical grid, the very thing a superstorm easily crumpled.
LUMA had good connections. Mega consultancy McKinsey & Co., which earned at least $120 million in fees for advising Puerto Rico’s financial oversight board, counted Quanta as a client. And the oversight board was eager to see it done.
In June 2017, just a few months before María, four of the board’s then members wrote in a Wall Street Journal op-ed that “only privatization will enable PREPA to attract the investments it needs to lower costs and provide more reliable power throughout the island.” Among the many purported benefits, they wrote, would be a chance to “renegotiate labor and other contracts to operate more efficiently.”
Sure enough, LUMA voided the contract PREPA’s union negotiated, and let hundreds ― by some estimates, thousands ― of workers leave.
Delays began soon after.
For the first few months, LUMA halted work on projects PREPA had already started to “promote alignment” between the two organizations and “ensure projects being pursued represented efficient and effective use.”
Scheduled work on 10 substations, 11 generating plants and 25 transmission projects was pushed back by months.
In regulatory filings, LUMA cited understaffing and “available contractor capacities” as a prime issue causing delays. The staffing issues came into focus over the past month, when municipalities hired former PREPA line workers to repair power lines on their own. Instead of waiting for LUMA, the quiet mountain town of Aibonito restored 99% of its power with private brigades. When the mayor of Aguadilla, a city of roughly 52,000 on the island’s northwest coast, tried to do the same, LUMA threatened to withdraw its teams from the area and file a lawsuit against the municipality.
The union representing LUMA’s workers, meanwhile, blamed the company for cutting back on how much it trims trees over power lines, which brought limbs down on the lines during Fiona.
LUMA also complained that “budget constraints” were slowing it down.
As of August, FEMA had spent just $407 million on permanent infrastructure in Puerto Rico, and just over $40 million of that had gone to utility-system upgrades, according to a Government Accountability Office report in September.
In its report, the GAO said Puerto Rico’s LUMA “told us that they have had disagreements with FEMA on making repairs beyond the damages sustained during Hurricane Maria.” Specifically, the company said it disagreed with FEMA on what federal funding should cover. FEMA, for its part, told the GAO “there are nuances involved in developing a complex project and ensuring it is eligible under federal laws and regulations.”
While the neighboring U.S. Virgin Islands’ power system faces its own issues, including persistent outages, the fellow storm-ravaged American territory offers a stark contrast in the GAO data. FEMA managed to spend close to $600 million in federal aid on permanent utility infrastructure.
It’s difficult to assess whether LUMA’s disputes with federal officials over the scope of certain rebuilding projects give Quanta any advantage as it bids on future reconstruction work.
But the Texas company, whose stock price has climbed 256% since LUMA’s contract began, has from the start linked its 50% stake in the power company to the potential to win lucrative additional construction contracts down the road.
In a press release announcing LUMA’s winning bid in 2020, Quanta said it “believes there is opportunity for it to compete” for contracts that “are separate from its ownership interest in LUMA.”
In August, with hundreds of Puerto Ricans protesting outages and the Atlantic hurricane season weeks away, Quanta Chief Executive Earl “Duke” Austin Jr. told investors that was still the strategy. On an earnings call with bank analysts, he said he expected federal funding to start “coming through now on the island” and that next year could be a fruitful one for the company.
“I do think there’ll be opportunities for us in 2023 to actually perform some construction that’s outside the contract,” Austin said.
ATCO, which splits half LUMA’s earnings with Quanta, has made little mention of its Puerto Rican joint venture in quarterly earnings calls over the past year.
There’s nothing innately wrong with a company competing for federal contracts where it sees an advantage. Federal officials would be required to consider Quanta’s past performance on other jobs, including with LUMA, said Virginia Canter, the chief ethics counsel at Citizens for Responsibility and Ethics in Washington, a watchdog group.
PREPA has a long history of doling out sketchy contracts. Shortly after María, the state-run utility awarded a $300 million rebuilding deal to Whitefish Energy Holdings, a tiny Montana firm with ties to then-Interior Secretary Ryan Zinke, which months earlier had been on shaky financial ground. Following a national firestorm of criticism, PREPA canceled the contract.
Months later, PREPA gave a newly-formed subsidiary of the Oklahoma oil service firm Mammoth Energy a $200 million contract for grid work.
The utility then agreed to pay the Florida construction firm MasTec $400 per streetlight it repaired, even though the utility’s union proposed to complete the same work for $60 per light.
PREPA went on to pay former New Jersey Gov. Chris Christie (R) at least $300,000 in consulting fees and directed 84% of its contracts ― totaling $3.7 billion ― to mainland U.S. firms, a joint investigation by HuffPost and the Puerto Rican investigative reporter Bianca Graulau found in 2020.
Tom Sanzillo, a former acting comptroller of New York state, said Quanta’s plan to bid on contracts LUMA could influence represents a clear conflict of interest, particularly since LUMA’s ownw contract gives Puerto Rico few options beyond cancellation for penalizing poor service.
LUMA and its owners’ interests should be in finding the cheapest and most effective contractors for Puerto Rico, “not being in competition for them,” said Sanzillo, who now serves as the director of financial analysis at the Institute for Energy Economics and Financial Analysis, a nonprofit research group that has published studies criticizing the privatization deal.
“They should not be allowed to compete for those construction contracts, period,” Sanzillo said. “That’s clearly unethical.”
The only partial nature of the privatization gives LUMA few incentives for costly, long-term investments, he said. When governments sell public infrastructure to private companies, those become assets the firm can make money off of in the long term. LUMA, however, is only serving as a contractor to maintain and run the system.
“The only incentive they have for construction is to milk it for as much as they can to get more outside the bounds of the contract,” Sanzillo said. “There’s no financial incentive for them within the contract to act in a way as if they were an owner.”
Private companies contracted to carry out government services typically come at a high price, at least on the federal level. Contractors were paid 1.8 times more than government employees for the same work and more than two times the total compensation in the private sector for comparable services, according to a 2011 analysis of federal contracts by the Project on Government Oversight, a watchdog group.
Federal contracts to rebuild the grid are “where the big money is,” said Ruth Santiago, a prominent lawyer and public health activist who lives near Puerto Rico’s biggest coal plant.
“The LUMA contract is only for operation and maintenance. It’s not where the big money is,” Santiago said. “Quanta told its investors that it was looking forward to bidding on projects that its newly created joint venture LUMA Energy would be putting out for federal funds. Almost admitting a conflict of interest there.”
A Crisis With Roots Stretching Back Decades – Even Centuries
Dubbed “the world’s oldest colony” after more than 500 years under Spanish and then U.S. rule, Puerto Rico has long had its economic fortunes dictated by decisions made far from San Juan.
Sugar plantations, many worked by slaves, dominated the fertile, resource-rich island for centuries. Following a spate of New Deal infrastructure investments, the territory became a manufacturing hub, attracting pharmaceutical companies in particular. At one point, every little blue Viagra pill sold in North America was produced on the so-called enchanted island.
Those were the boom years, when the U.S. was determined to make Puerto Rico an example of its capitalist system’s superiority to neighboring Cuba’s communism. In 1996, however, President Bill Clinton and a Republican Congress ended the tax break that had, for decades, attracted corporations to the island. As companies departed Puerto Rico, the territory’s tax base shrunk and good jobs left. To make up the difference, the government hired more workers and borrowed more money on the bond market. Since Puerto Rico’s territorial status meant it could not legally go bankrupt and lenders assumed it to have the full backing of the U.S. Treasury, the territory became known as the “belle of the bond markets.”
But by the mid-2010s, the bond debt had grown to $74 billion, and a $49 billion gap opened between how much money the government had for public workers’ pensions and how much it needed to find. The debt, meanwhile, fell into the hands of the Wall Street equivalent of loan sharks, who buy distressed debt on the cheap and invest money into a relentless legal pursuit of payments. Puerto Rico’s economy was on the verge of ruin.
In 2016, Congress passed a law effectively allowing Puerto Rico to go bankrupt and installing the all-powerful financial oversight board, which locals nicknamed “la junta,” a title often used for the kinds of military dictatorships the U.S. propped up across Latin America during the Cold War. Hundreds of schools closed, craterous potholes opened in major highways and retirees faced pension cuts. Yet the power grid, much of which had been built half a century earlier, remained hooked on expensive and heavily polluting sources of electricity, such as coal and diesel. It was no match for María’s 175 mile per hour winds.
“Quanta told its investors that it was looking forward to bidding on projects that its newly created joint venture LUMA Energy would be putting out for federal funds. Almost admitting a conflict of interest there.”
– Ruth Santiago, lawyer and public health advocate
Several big consortiums placed bids for PREPA’s privatization, including one led by Royal Dutch Shell in hopes of making Puerto Rico a hub for liquefied natural gas imports. Luma won in 2020 and began operation in June 2021.
Less than six months after LUMA took over, however, the company failed to turn over documents to local lawmakers, prompting a judge to issue an arrest warrant for CEO Wayne Stensby. The executive avoided arrest, and LUMA said it submitted all the required paperwork. Among the documents were invoices showing Stensby taking a $1.1 million salary.
In April, the same month lawmakers approved a resolution calling for the cancellation of LUMA’s contract, four chain-restaurant corporations (Wendco of Puerto Rico, Restaurant Operators, MultiSystem Restaurant and Apple Caribe, which together represent Wendy’s, Olive Garden, LongHorn Steakhouse, Applebee’s, Red Lobster and Sizzler) sued LUMA for $310 million in damages they say voltage fluctuations caused to their kitchen equipment.
LUMA insisted it was making progress, telling The Associated Press in August that it had reduced power outages by 30% this year compared with last year and had repaired 3,800 electric posts, replaced 10,000 streetlights and begun 209 post-hurricane projects with federal funding.
Data from Puerto Rico’s Energy Bureau told a different story. From January to August, the duration of monthly blackouts increased to an average of 21 hours, with no improvement in the frequency of interruptions, according to the regulatory agency’s report.
President Joe Biden visited the island after Fiona and indicated that the Department of Energy would take a bigger role in shaping how the grid is rebuilt.
But the power grid is hardly the territory’s only crisis. Housing prices have shot up across the island as wealthy investors with plenty of money for diesel generators buy up property in a bid to take advantage of Puerto Rico’s tax haven laws, which allow rich newcomers to avoid both federal and local income taxes. And developers have repeatedly tried to stake claims to public beaches. Despite being a direct violation of Puerto Rico’s constitutional guarantee of beach access, it has taken massive, sustained protests to halt construction projects on beaches that should have raised red flags just by the obvious risk sea-level rise and storms pose amid worsening global warming.
To some, the gentrification wave offers a glimpse of a dark future if Puerto Rico becomes the 51st U.S. state, one where, as in Hawaii, natives are impoverished and politically sidelined while English-speaking transplants and vacationers enjoy luxuries. To others, it shows why statehood, which would at least give Puerto Rico voting power in Congress, will remain out of reach: There’s too much money to be made in a place where the U.S. Constitution does not fully apply. And if Puerto Ricans voted in some future plebiscite for the sort of quasi-independence that former U.S. territories in the Pacific, such as Palau and Micronesia, enjoy, the new country would represent itself at the United Nations but would likely receive far fewer federal resources and face thorny questions about citizenship.
Gutiérrez thinks statehood would still be the best option, but he’s tired of waiting for history to turn for his children to feel safety and stability. The last few years have been repeated trials of what Puerto Ricans sometimes call “la brega” ― the struggle. The family survived María. They made it through a series of disastrous earthquakes that began in 2019. Now they’re in the midst of the post-Fiona mess.
The money to buy solar panels and a generator that costs more than $800 to fuel with diesel offers only nominal reprieve. The schools have no air conditioning. The water systems won’t run because the well pumps lack power. And the internet service providers, unless they have generators, don’t work.
“We’re trying to survive right here,” Gutiérrez said. “But I’ve been thinking about moving away from Puerto Rico, planning to go to the states and have a proper life with my kids. They don’t need to suffer more.”