Controversial Contractor Was Behind Island-Wide Blackout, as Puerto Rico Debates Full Privatization

A blackout in Puerto Rico triggered by a subcontractor highlights the pitfalls of privatization.

Ana Perez uses a solar lamp inside the bathroom of her home, after Hurricane Maria damaged the electrical grid in September 2017, in Naguabo, Puerto Rico January 26, 2018. REUTERS/Alvin Baez - RC1F8ED35970
Ana Perez uses a solar lamp inside the bathroom of her home after Hurricane Maria damaged the electrical grid in Naguabo, Puerto Rico, on Jan. 26, 2018. Photo: Alvin Baez/Reuters

The bulldozer that accidentally triggered an island-wide blackout in Puerto Rico last week was operated by D. Grimm Inc., a company that reports up to the Oklahoma-based firm Mammoth Energy Services. The same subcontractor was blamed for another blackout two weeks ago that affected 870,000 homes.

Attempting to repair a downed wire on Wednesday, a bulldozer got too close to a live, high-voltage line, triggering a chain reaction that left most of the island’s 3.4 million residents without power. D. Grimm is a subcontractor hired by Cobra Acquisitions LLC, itself a subsidiary of Mammoth.

First signed in October, Cobra’s contract is reminiscent of the one negotiated between the Puerto Rico Electric Power Authority, or PREPA, and novice Montana-based firm Whitefish Energy Holdings LLC, a $300 million agreement that generated international controversy. The utility’s contract with Cobra — a recently formed amalgamation of a handful of small mainland utility services companies — was less outrageous on its face than the Whitefish deal, and faced less scrutiny.

Unlike the Whitefish contract, it was arrived at with the blessing of the Federal Emergency Management Agency, which Mammoth claims was in the negotiating room “every step of the way” and will ultimately reimburse PREPA for payments it makes to Cobra. Over the last several months, Cobra’s initial 90-day, $200 million contract ballooned to $445 million in late January and more than doubled again to $945 million about a month later, reportedly allowing it to source construction materials itself, rather than work through third-party contractors.

While such generous contracts are an obvious boon for companies like Cobra, Freddyson Martínez, vice president of UTIER, the PREPA utility workers union, doesn’t see them as one for island residents. Wednesday’s blackout took place in the context of a concerted push from both the Puerto Rican government and the Washington-appointed Financial Oversight Management Board, or FOMB, to privatize PREPA, bringing its transmission and distribution capacity under private management and selling pieces of its generation capacity off to different bidders. With these contracts and more federal funding potentially up for grabs via privatization, Martínez predicted “there will be more Whitefishes and more Cobras — more animals of those species — lurking around trying to bite again.”

Last week’s blackout, in other words, could be a sign of things to come if the forces eager to privatize power in Puerto Rico get their way.

Why PREPA brokered contracts with Whitefish and Cobra at all after Hurricane Maria is still a mystery, since it could have simply called on mainland power providers to enter into mutual aid agreements for repair and reconstruction work. That did eventually happen, though not until after the Cobra deal had already been inked, and there was public blowback over the Whitefish debacle.

FEMA spokesperson Ron Roth told The Intercept over email that his agency “has no involvement in the procurement selection process or contract between an applicant and a contractor,” but “will reimburse eligible applicants for eligible work performed under properly procured contracts.” PREPA to date has paid Cobra $370 million for a total of $550 million in invoiced work performed, he said, and is reviewing additional invoices.

Roth also said that each extension of Cobra’s contract has been reviewed by FEMA, the Office for Procurement and Compliance, and the FOMB, which was created in 2016 by a congressional bill known as PROMESA and tasked with reining in Puerto Rico’s $74 billion in municipal debt. Yet whether FEMA will reimburse all of the $945 million Cobra contract has yet to be decided. “Reimbursement of eligible work is an ongoing and lengthy process, which includes many factors,” Roth continued. “FEMA cannot yet opine as to whether all work and costs submitted by PREPA will be eligible for reimbursement,” meaning PREPA itself — already $9 billion in debt — could be left footing some of the bill.

Under pressure, Cobra has terminated its contract with D. Grimm, though neither D. Grimm, Cobra, nor PREPA — to which FEMA directed The Intercept to ask questions about the Cobra contract — returned requests for comment.

As of Thursday, power had been returned to more than 70 percent of the island, but bigger questions remain over the future of PREPA.

A Puerto Rico Electric and Power Authority brigade work in a remote off-road location to repair a downed power transmission line in Ponce, Puerto Rico on November 29, 2017. / AFP PHOTO / Ricardo ARDUENGO        (Photo credit should read RICARDO ARDUENGO/AFP/Getty Images)

A PREPA brigade works to repair a downed power transmission line in Ponce, Puerto Rico on Nov. 29, 2017.

Photo: Ricardo Arduengo/AFP/Getty Images

Since the storm, Gov. Ricardo Rosselló’s administration has attempted to facilitate a fire sale of public assets — PREPA included. As Yarimar Bonilla reported, Omar Marrero, executive director of the Puerto Rico Public-Private Partnerships Authority, made an impassioned pitch recently for abandoning the public sector to a room of potential investors in New York: “It’s time for the government to no longer tell you where we want to invest and how we’re going to modernize our infrastructure. No. It’s time to let the people, the people of the private sector, the innovation, the expertise of the private sector, tell us what projects would not only modernize our infrastructure, but also restore the investment needed.”

The day of the blackout, Puerto Rico’s Senate was conducting a public hearing on legislation that would move PREPA closer to that vision, establishing the legal framework to privatize the beleaguered electric utility. Additional legislation now being considered could essentially eliminate the Puerto Rico Energy Commission, the only body with regulatory authority over PREPA that could theoretically audit contracts like those with Whitefish and Cobra before they’re signed.

The Institute for Energy Economics and Financial Analysis, or IEEFA, released a report last week urging legislators to reject these measures. Cathy Kunkel, an energy analyst at IEEFA and one of the report’s co-authors, said privatizing PREPA would hurt, rather than help, efforts to modernize the utility and correct its longstanding issues. “It’s hard to defend PREPA’s management. One of the key problems with PREPA is that there’s been political interference in the management of that utility for decades. Contracts get used as tools for political favoritism,” she said by phone. “Ironically, the way the privatization bill is set up is that it would perpetuate the same kind of political favoritism, with contracts that would be governed by the PREPA board and the Public-Private Partnership (P3) Authority. It would be another series of bad political deals, instead of fixing the physical problems with the electrical system.”

Leaving PREPA without significant regulatory oversight means that government officials would have discretion over what contracts are handed out to which companies, not just for repairs and reconstruction, but also to operate whole parts of the grid over the long run. In eliminating the energy commission, the proposal would also throw out the existing process for developing and implementing an Integrated Resource Plan, or IRP, which lays out a timeline for transitioning the island’s grid away from costly and inefficient fossil fuels.

Rather than privatizing PREPA, the IEEFA report recommends that any proposals to transform PREPA include a transparent contracting process, the elimination of the utility’s massive debt, independent regulation, prioritizing renewable energy, including unions like UTIER in the planning process, and for an “end to political interference in the electrical system, and transparent and accountable governance.”

An additional Puerto Rico Senate hearing on PREPA legislation is scheduled for this week, by which point it’s possible that the bill will be amended to pertain only to selling management of the utility’s transmission and distribution infrastructure to a private company, leaving generation to be dealt with in a separate bill. (To note, around 30 percent of energy in Puerto Rico is already generated from privately owned sources — an AES coal plant in Guayama and a natural gas plant in Peñuelas, owned by Spanish company EcoElectrica.)

Whatever happens in Puerto Rico’s legislature, though, could take a back seat to the fiscal control board’s plans. On Wednesday, that body released its own set of fiscal plans for the island, including one specifically for PREPA and its privatization. The FOMB voted Thursday to certify that and hundreds of other pages in outlined changes, which include a five-year freeze on public sector wages and deep cuts to the University of Puerto Rico. In addition to bringing PREPA wholly under the board’s jurisdiction, the board’s proposal would also scrap the IRP and develop a new one essentially from scratch that would be “guided” by the FOMB. In contrast to the ruling New Progressive Party, the control board wants a clear regulatory framework to inspire confidence among potential investors, although it’s not clear whether that will be the PREC or some other to-be-formed body.

“The regulator will approve the FOMB-guided IRP,” the board’s plan for PREPA states, “but any budget / debt service implied by the current rate case will be superseded by the FOMB-approved budget.”

While both are interested in privatizing PREPA, the relationship between the board and Rosselló has grown increasingly tense over the last several weeks, with Rosselló balking at implementing further cuts to pensions and labor protections. The board is under fire from Washington, too, which may help explain the rapid-fire vote on Thursday.

The House Natural Resources Committee has urged the fiscal control board to be more aggressive in taking on Rosselló. Referring to PROMESA, an aide to the committee told Caribbean Business that the board should “push the law to its limits,” adding, “I think that is actually the only way we are going to have a resolution of what the oversight board is really capable of.”

Committee Chair Rob Bishop, R-Utah, who’s been a vocal proponent of expanding natural gas infrastructure on the island, sternly chided the board for not driving structural reforms ahead more aggressively or working more closely with the island’s creditors. “Federal funding has and will continue to help in the recovery process, but structural reforms and the elimination of redundancy must also occur. … [A] good start would be to determine what constitutes ‘essential public services,’ clearly defining where governmental cuts should occur,” Bishop threatened in a late March letter. “Going forward, any certified Fiscal Plan should reflect the Oversight Board as the sole representatives of debtors involved in Title III cases,” a reference to the bankruptcy-like proceeding outlined by PROMESA. “[A]ny attempt by the Commonwealth to circumvent this uniformity of representation should be met with appropriate budget reductions.”  

Rosselló called the letter “dictatorial” in a 6,000-word response.

Martínez sees Wednesday’s accident as indicative of the kinds of risk that comes with contracting utility work out to firms that may or may not have much experience in the field. The way the blackout happened also signals larger issues with the way that Puerto Rico gets its power. As Martínez explained, the bulldozer mishap set off protection systems that shut off the two biggest power plants in the southern part of the island, Aguirre and Costa Sur, which together provide about 70 percent of Puerto Rico’s energy. This then overcharged plants in the north, in Palo Seco and San Juan. “It just happened that the four biggest plants that run most of the system went out, leading to a complete blackout,” he told The Intercept. Having power generation so centralized means that even small screw-ups like Wednesday’s can have tremendous consequences. And that the island is almost entirely dependent on oil and coal for its power also means that power is inordinately expensive, given that it needs to be shipped in from the mainland.

As Naomi Klein has noted, decentralized, renewable energy systems were among the most durable through Hurricane Maria, and there’s been an uptick in interest on the island after the storm to build out capacity for cleaner, more resilient forms of electricity. The Puerto Rico Energy Commission even developed the country’s first comprehensive set of regulations for micro-grids, localized energy systems that can operate independent of the grid. With privatization looming, the fate of those rules — and Puerto Rico’s energy system broadly — hangs in the balance.

UTIER has been largely locked out of high-level debates over PREPA’s transformation, but has shown up in force to the legislature’s recent public hearings on the matter. During Wednesday’s session before the Puerto Rican Senate, Martínez said one senator reasoned that the blackout was an example of why the utility should be privatized. “We explained to him that he was incorrect,” he said. “That was an example of how private companies will work in PREPA, and how the private system already is working in PREPA.” The vast majority of contracts handed out by PREPA and the federal government post-Maria went to private companies. “We can surely say that the restoration of power in Puerto Rico was privatized. And close to seven months after Maria, we still have hundreds of thousands of people without power,” Martínez added. The hearings, he said, “made clear to us that there are a lot more questions than answers about what they’re trying to do.”

Hurricane season is just over a month away.

Top photo: Ana Perez uses a solar lamp inside the bathroom of her home after Hurricane Maria damaged the electrical grid in Naguabo, Puerto Rico, on Jan. 26, 2018.

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