WAPA’s Finances Part 2: A Case of Chronic Starvation

St. Thomas' first power plant under construction, long before the creation of the Water and Power Authority in 1964. (Undated early 20th century photo provided by the St. Thomas Historical Trust)
St. Thomas’ first power plant under construction, long before the creation of the V.I. Water and Power Authority in 1964. (Photo provided by the St. Thomas Historical Trust)

This is the seventh installment in an ongoing series on issues facing the V.I. Water and Power Authority.

WAPA is swimming in debt. Where did it come from? What can be done about it? Some in the PSC, Senate and the public feel this debt is the result of mismanagement. Is it? And how much does it matter, if we have to pay up anyway?

Drained in Two Different Directions
Testifying to the Legislature in October, WAPA Executive Director Lawrence Kupfer said its “current financial situation is best described as ‘challenged’ because, very simply, the authority is currently not collecting enough revenues to sustain its operations.”

He said “governmental customers have historically not paid their WAPA bills in a timely manner, thereby causing WAPA’s outstanding government receivables to grow as much as $30 million.”

Gov. Albert Bryan Jr.’s administration recently rectified this problem, maybe permanently.

This pattern of the V.I. government stiffing WAPA for months on end and building up $30 million or more in past due bills has recurred every year for decades. In the past, the government has sporadically allocated dribs and drabs to partially pay down different agencies’ debts. An entity that is waiting for months or years to get a quarter of its annual revenues is going to be starved for funding all the time, and WAPA has been pleading to be paid, to enable it to do basic maintenance for a long time.

In January 1999, the first month of existence for the V.I. Source, we reported on the government owing $30 million of a total of $41 million in past due WAPA bills. Just last year, the V.I. government owed WAPA $41.2 million and, coincidentally, WAPA had a $40 million fiscal shortfall.

Every year has been the same, with WAPA begging again and again for the government to pay its bills.

WAPA has also been starved for cash by under-recovery of its costs of fuel. That’s right, the hated Levelized Energy Adjustment Clause or “LEAC” fuel surcharge has often been too low, forcing WAPA to borrow, ultimately costing consumers more than if it were set correctly. Past experience suggests that simply seeing this fact in print will enrage some readers who will deny it and declare that the Source is “siding” with WAPA. After all, WAPA’s rates are excruciatingly high. So how can it be too low?

Some V.I. officials also do not believe this. Kupfer raised the problem at the Aug. 1 hearing when the PSC decided to postpone raising the base rate. PSC member Andrew Rutnik flatly disputed it there was under-recovery of fuel costs.

“No, you did collect the rates. You just didn’t use it for the correct purposes, otherwise you wouldn’t owe the vendors. I don’t think you can dance around that one,” Rutnik said.

The Water and Power Authority has used No. 2 fuel oil for much of its power generation for decades. Its price fluctuates wildly, which is why there is a fuel surcharge on WAPA bills. (Image from the St. Louis Federal Reserve)
The Water and Power Authority has used No. 2 fuel oil for much of its power generation for decades. Its price fluctuates wildly, which is why there is a fuel surcharge on WAPA bills. (Image from the St. Louis Federal Reserve)

This is incorrect. The LEAC exists only because fuel prices go up and down and rates have to adjust. If fuel prices did not jump around constantly, you could just include fuel costs in a single overall rate. But prices change daily while the LEAC changes infrequently. After the LEAC is set, whenever fuel prices go up there is an under-recovery. It is eventually made up, but WAPA has to borrow in the meantime.

This time, a delay in getting more efficient units online combined with rising fuel costs caused the under-recovery.

“In the last year we have been getting new, more efficient units ready,” Kupfer told the Source recently, referring to Wartsila units on St. Thomas and Agrekko units on St. Croix.

The Water and Power Authority has begun using propane, which also fluctuates wildly in price, requiring a separate, frequently changing fee to pay for fuel.
The V.I. Water and Power Authority has begun using propane, which also fluctuates wildly in price, requiring a separate, frequently changing fee to pay for fuel.

“The fuel savings from the Wartsila and Agrekko units have been in the LEAC since last year but they did not come online before, for various reasons, until May or June of this year,” Kupfer said. “So these really efficient units were not available to us. … Also, in April, we found ourselves in a rising price environment for fuel,” he said.

“We project one level and it winds up being much higher,” he said.

This fuel cost shortfall is not a one-time affair. It’s chronic and long term. Since the Source began in 1999, successive generations of PSC members have, in the name of standing up for the people, consistently delayed increasing the LEAC when fuel prices go up and promptly cut it when prices go down, forcing WAPA again and again to borrow money at high interest rates to buy fuel. At times, the deferred balance has ballooned to $57 million and more in recent years. That’s almost half of WAPA’s total revenue for 2018 of $139 million.

WAPA has been complaining about this the entire time, raising the alarm that it was unable to pay vendors, forced to borrow money to buy fuel and unable to perform critical maintenance.

Click the links to see reports documenting this happening over and over again in the past two decades.

WAPA Borrows to Pay What It Owed Hovensa
Deferred Fuel Costs Hurting WAPA Maintenance
Stagnant Rate Leave WAPA at Risk of Running Ouit of Fuel, Officials Say
PSC Board Approves Compromise LEAC Increases
PSC Board Approves LEAC Decrease
PSC denies LEAC Increase

What would prevent WAPA from having to borrow money to buy fuel?

“We need a better process. If not a six month LEAC, a three month LEAC … to recover fuel costs sooner so we don’t build up these large shortfalls” Kupfer told the Source.

None of this is to say all criticism of WAPA lacks merit. At the same Aug. 1 PSC hearing, Rutnik also pointed to some past mismanagement of WAPA, such as spending $20 million a number of years ago on a generator it never used much, which seems difficult to justify. But the costs of debatable WAPA decisions are dwarfed by the vast sums it has been forced to borrow due to deferred fuel cost recovery, unpaid government bills and major repairs forced by deferred maintenance.

What about “restructuring” WAPA’s debt?
St. Thomas businessman Filippo Casinelli and others have suggested WAPA should either “privatize” or restructure its debt and not pay all of it, just as the debt-burdened Puerto Rico utility Prepa has done.

“The authority cannot apply for bankruptcy protection,” Kupfer said when asked about the possibility of restructuring.

“Prepa could because the PROMESA legislation allowed it. But Prepa had $9 billion in debt and we have $550 million. Per capita it is a lot. But it is small on the global scale out there,” Kupfer said.

“We have different population sizes and Prepa filed for bankruptcy in 2017 before the storms and they are still going through the reorganization process. So it takes years and it would have ripple effects,” Kupfer said.

Unlike stateside municipalities, the territory’s government and government-owned entities do not have access to bankruptcy protections. Puerto Rico’s protection was removed by an obscure 1984 change in federal law. The USVI apparently never had bankruptcy protections. After Puerto Rico stopped making debt service payments, Congress in 2016 enacted PROMESA – the Puerto Rico Oversight, Management and Economic Stability Act. That law created a powerful oversight board with broad authority to restructure Puerto Rico’s debt and affect the budgetary decisions of Puerto Rico’s government. It also protects Puerto Rico from chaotic forced restructuring as courts try to deal with multiple lender lawsuits. The USVI was initially included in PROMESA, but Gov. Kenneth Mapp and Delegate to Congress Stacey Plaskett both strongly opposed USVI inclusion and the territory was removed. They both worried about its impact on USVI borrowing and the potentially draconian steps an oversight board could take. The oversight board was empowered to lower the minimum wage and cut pension benefits, for example.

Puerto Rico’s oversight board has proven controversial, with some accusing it of protecting creditors at the expense of pensioners and government programs. On the other hand, its new final plan covering both Prepa and the Puerto Rico government cut Puerto Rico’s $35 billion debt by more than 60 percent.

Privatization?
Privatization advocates argue competition and the free market will make the utility more efficient and effective. Perhaps. But unless WAPA is replaced by several companies with several power plants, it’s not clear where competition or a free market would come from. A private company, meanwhile, expects to make a profit for its owners. And selling WAPA will not erase its debt, nor will it push the debt off onto someone else. Ratepayers will still pay it. As for rates after privatization: Puerto Rico’s Prepa is privatizing and its rates are slated to increase.

So is all just gloom and are Virgin Islanders doomed to pay outrageous sums for unreliable service forever? Is there light at the end of the tunnel or is that just a train coming our way?

Next: Light at the End of the Tunnel

Previous installments in this series:
Melee and Missed Opportunities: A Short History of WAPA Part I
The Power Players: A Short History of WAPA Part II
Fact and Reality Check: A Short History of WAPA Part III
After Alpine: A Short History of WAPA Part IV
Businesses Lose When WAPA Goes Down
WAPA Finances: Raise Base Rate and See Lower Total Rates Soon, or Pay More Forever

 

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