The Puerto Rico Electric Power Authority signed a nearly $1 billion power contract last week, but who will pick up the tab is an open question.
PREPA on May 26 signed a one-year, $900 million deal with Oklahoma-based Cobra Acquisitions to complete electricity restoration on the island and begin to rebuild its power grid, destroyed last September by Hurricane Maria.
The utility, however, has been mired in bankruptcy since last summer and does not have the money to pay the contract. Federal agencies, meanwhile, can't yet say if they will reimburse the utility for the work.
"The source of where this money will be coming from remains unclear," said Jorge Camacho, an IEEE consultant working with PREPA.
Emergency vs. permanent work
Since the storm in Sept. 2017, the Federal Emergency Management Agency (FEMA) has reimbursed PREPA for the costs of most restoration contracts submitted by the utility.
Some of the largest deals have included Cobra. Last October, PREPA and Cobra struck a $200 million deal for power restoration that was expanded twice, eventually amounting to a $945 million contract finalized in February of this year.
In those cases, FEMA will reimburse PREPA under President Trump’s disaster declaration for Puerto Rico, which provided full cost recovery to the utility for "debris removal" and "emergency power restoration." Though FEMA handed line work back to PREPA this month, it also extended the availability of the matching funds for 90 days.
The new Cobra contract is an expansion on the one signed in February, Camacho said, but it appears to include work that goes beyond the emergency restoration that FEMA has agreed to fund. In a release, the company said it would also perform "reconstruction services at various locations in PREPA's service area."
Some of Cobra's work will likely involve emergency efforts like completing power line restoration, Camacho said, but other efforts will focus on rebuilding damaged grid infrastructure and stockpiling materials for the beginning of the next hurricane season, less than a week away.
Any permanent grid upgrades fall under a different category in the FEMA handbook than emergency restoration or debris cleanup, and the disaster declaration only mentions the latter two as eligible for cost recovery.
FEMA in April announced that it and the Puerto Rico government had coordinated a cost sharing agreement for permanent work based on the Stafford Act, a 2013 disaster response law signed by President Obama after Hurricane Sandy.
"Using these procedures, FEMA will develop fixed-cost project estimates in collaboration with Puerto Rico and applicants," the agency said. "All projects will be funded at a 90% federal cost share and the projects must be identified and estimates agreed to within the next 18 months."
Camacho, however, said the details on how those procedures relate to work under the Cobra contract remain unclear.
"It hasn't been spelled out yet what the cost share will be on permanent work," he said.
'Our contract is with PREPA'
Without an active reimbursement plan, PREPA could be left holding the $900 million payment obligation if the federal government refuses to ante up. That would be bad news for the contractor, said former Puerto Rico Sen. Ramón Luis Nieves.
"If Cobra is expecting to get paid from PREPA they have a big problem," Neives told Utility Dive. "The contract must have some language about the problem of reimbursement because if it does not, PREPA does not have the financial capability to cover $900 million."
Officials at Cobra's parent company, however, refused to say if they received any indication that a federal agency may help PREPA pay for its work.
"I can tell you that our party to the contract is PREPA, but PREPA is being overseen by at least three different boards down there and everybody gets a say in the process," said Don Crist, director of investor relations at Mammoth Energy Services, which owns Cobra. "So saying that a government agency or two or five is involved in the process, I would say yes that is the case. I'm not going to name any specific government agencies that had a hand in it, but our contract is with PREPA."
Crist said he could not speak to whether contract negotiators were given any assurances from federal agencies that PREPA would be reimbursed, but he said the company is "very confident" it will be paid, despite knowing PREPA does not have the funds itself.
"Given the discussions we've had with all of the people we've had in Puerto Rico, whether it be federal, commonwealth or other agencies, we feel very confident we will get paid under this contract," he said.
FEMA officials said they cannot comment on whether the Cobra contract will be reimbursed, as it has not been submitted to the agency yet.
A spokesperson said FEMA “works with applicants and makes reimbursements on all eligible expenses” based on the current cost sharing agreement and "plays no role in the awarding of applicant’s contracts."
"FEMA adheres to guidelines for the procurement of contracts that applicants must follow," the agency said. "Once a Project Worksheet is submitted for reimbursement, FEMA makes sure all procurements procedures are followed and will make reimbursements on all eligible expenses, including contracts."
The agency also directed Utility Dive to PREPA, which did not respond to multiple requests for comment.
Another route to fund the Cobra contract, Camacho said, could be through $2 billion provided by the Department of Housing and Urban Development (HUD) in April for grid upgrades, particularly those that reduce the vulnerability to future disasters.
A HUD official told Utility Dive the funds in its Community Development Block Grant-Disaster Recovery Program might be used for such a purpose, but directed Utility Dive to the Office of Puerto Rico Gov. Ricardo Rosselló for further detail. The office did not respond to multiple comment requests.
"There still is a very unclear path into how some of this money can be expended," Camacho said. "This money comes with some constraints and without that information there is a chance the Cobra contract may be underfunded."
A $900M bluff?
With no clear source of funding, one potential explanation for the Cobra contract is that PREPA officials aim to force the federal government to negotiate cost sharing details for permanent grid upgrades. With hurricane season fast approaching, federal authorities may find it difficult to deny the utility funds for grid restoration and reconstruction that is already underway.
Nieves, who was a frequent critic of PREPA in the Senate, said the idea is not out of the question, but it would pose risks for the utility.
"FEMA always has the last word on whether to reimburse or not," he said. "It would be very strange in this day to think PREPA could just sign the contract without talking to FEMA. It would be very strange for it to happen this way."
This post has been updated to include comment from FEMA and information on the April 12 cost sharing announcement for permanent work.