BY ELECTRONIC MAIL

June 24, 2024

The Honorable Pedro R. Pierluisi

Governor of Puerto Rico

Re: Proposed Fiscal Year 2025 PREPA Budget – Notice of Violation

Dear Governor Pierluisi,

This letter serves as notice of violation pursuant to PROMESA Section 202(c)(1)(B) concerning
the proposed budget for the Puerto Rico Electric Power Authority (“PREPA”) for Fiscal Year 2025
submitted to the Financial Oversight and Management Board for Puerto Rico (the “Oversight
Board”) on June 13, 2024 (the “Proposed FY2025 PREPA Budget”).

I. Introduction

The Oversight Board emphasizes the importance of developing PREPA’s budgets in collaboration
with all the stakeholders, particularly in light of the need to coherently transform Puerto Rico’s
energy sector. The Proposed FY2025 PREPA Budget marks the second consecutive year in which
the Puerto Rico Energy Bureau (“PREB”), as the independent regulator, is expected to approve
PREPA’s system wide budget prior to the start of the new fiscal year. The Oversight Board
welcomes this important public and transparent process ahead of the certification of a budget that
is compliant with the PREPA Fiscal Plan.
There had been some notable improvements in service reliability metrics through Fiscal Year 2023
(“FY2023”), though recent power outages have inflicted considerable hardships on the people of
Puerto Rico, disrupting their daily lives and well-being. With the hurricane season approaching,
there is a pressing need to address and reduce these issues to ensure secure, dependable, and
efficient electricity. Enhancements to the electrical infrastructure must be the priority for FY2025
to spur welfare and economic growth.
Hon. Pierluisi
June 24, 2024
Page 2

For FY2023, LUMA had reported an average outage frequency index (SAIFI) of 6.98 annual
interruptions per customer (12-month rolling average). Over the first two years of LUMA’s service
under the Operation and Management Agreement, LUMA had significantly improved the average
frequency of outage (SAIFI) by more than 30% compared to the prior operator (PREPA’s) adjusted
baseline of 10.6.

However, through the end of FY2024, the energy grid has been plagued by more frequent
vulnerabilities, leading to a setback from recent progress and a decline in service quality, reliability
and satisfaction improvements that had been achieved over the prior two years. 1 After Hurricane
Fiona, there was also a notable deterioration to the Loss of Load Expectation (LOLE) or the risk
of annual days a year with load shed events due to insufficient generation or generation resource
inadequacy. The addition and then purchase of the FEMA emergency generators was key to
mitigating an even higher risk of load shed, 2 but much work remains to be done to shore up existing
deficiencies.

PREB recently postponed the start of a rate case order it had issued, citing the pendency of the
confirmation of the PREPA Plan of Adjustment and its ultimate contents being a key input of such
process. PREPA was recently nearing its exit from bankruptcy and approaching the end of the
Title III process. Honorable Judge Laura Taylor Swain began the confirmation hearings for
PREPA’s Plan of Adjustment on March 4, 2024, and concluded them on March 18, 2024.

On June 17, 2024 however, following the U.S. Court of Appeals for the First Circuit’s
determination establishing that the bondholders hold a non-recourse claim against PREPA secured
by a valid, perfected security interest in PREPA’s Net Revenues as defined in the Trust Agreement
of the Bond Indenture, the Oversight Board announced plans to seek a limited reopening of the
confirmation hearing record strictly limited to the value of that collateral. 3 Concluding PREPA’s
bankruptcy is key to moving forward with the transformation to provide the people and businesses
of Puerto Rico with more reliable and cleaner electricity. The Oversight Board will continue to
pursue an equitable resolution of the PREPA Title III case to that end.

II. Fiscal Year 2025 Energy System Budgets

Due to PREB’s postponement of the rate case, the FY2025 PREPA budget for the energy system
is expected to continue to be constrained by the base rate currently in place through the 2017 Rate
Order, 4 which was enacted at a time when PREPA’s sales were higher and prior to an over 25%
national inflation cycle. FY2025 will be a critical year for Puerto Rico’s energy system

1
See Quarterly Report on System Data for January through March 2024 (Apr. 22, 2024), (showing that SAIDI (T&D)
12-month rolling average increased from 1,218 minutes in June 2023 to 1,414.05 minutes in March 2024, and SAIFI
(T&D) 12-month rolling average increased from 6.98 interruptions in June 2023 to 8.03 interruptions in March 2024.
2
See LUMA, Puerto Rico Electrical System Resource Adequacy Analysis (Dec. 11, 2023), https://energia.pr.gov/wp-
content/uploads/sites/7/2023/12/20231211-Motion-to-Submit-Corrected-Exhibit-1-to-Motion-to-Submit-LUMAs-
2024-Resouce-Adequacy-Study-Filed-on-November-14-2023.pdf.
3
FOMB Media Release on June 17, 2024 – “Oversight Board Files Motion Related to PREPA Plan of Adjustment.”
4
Resolution and Order, Case No. CEPR-AP-2015-0001 (P.R. Energy Comm’n May 31, 2017),
https://energia.pr.gov/wp-content/uploads/sites/7/2017/06/Resolution-and-Order-Ruling-on-PREPAs-Notice-CEPR-
AP-2015-0001.pdf.
Hon. Pierluisi
June 24, 2024
Page 3

transformation. Establishing a compliant budget that provides sufficient revenue and is reflective
of the system’s critical needs will enable investments in critical areas and planned initiatives aimed
at improving service for ratepayers.
Until base rates are adjusted, it is imperative that PREPA’s budget does not reflect a deficit and
strictly adheres to the budget approved by PREB and certified by the Oversight Board. The
Proposed FY2025 PREPA Budget is not compliant with PROMESA as it reflects a joint aggregate
deficit of approximately $59.2 million, driven by GenCo, HydroCo and HoldCo’s proposed
expenditures exceeding the determined allocation for the Public Private Partnerships Authority
(“P3A”), despite it including an incremental funding of approximately $74.7 million identified by
P3A, which is funded outside base revenues. This financial imbalance must be resolved to ensure
fiscal responsibility to ensure critical works continue and PREPA remains sustainable.
Also notably, in the Proposed FY2025 PREPA Budget, PREPA did not include critical
components of the system, specifically the GridCo (T&D) and GenCo (Generation) sections of the
budget. PREPA must submit a revised proposed FY2025 PREPA Budget (the “Revised Proposed
PREPA Budget”) that contains the latest consolidated budgets to the Oversight Board, including
GridCo and GenCo’s proposed budgets. In the meantime, and for the purpose of expediency, we
will consider GridCo’s and GenCo’s annual budget filings with PREB as the proposed budgets for
certification by the Oversight Board until the Revised Proposed FY2025 PREPA Budget is
received.
Aligning the budget with PREB’s guidelines and orders is essential to avoiding further deficits and
ensuring that PREPA can meet its operational needs without compromising its financial stability.
As reflected in PREB’s stipulations set forth on June 25, 2023, PREB mandated PREPA to align
staffing levels and labor expenses with legacy PREPA’s revised operational scope. Despite
HoldCo and HydroCo continuing to transition into their new structure, progress has not been
demonstrated as stated by PREB in its Resolution and Order (“R&O”) issued on May 17, 2024. 5
For instance, the Proposed FY2025 PREPA Budget indicates a pending request to increase staffing
in the FY2025 budget to address HoldCo and HydroCo personnel needs, highlighting the need for
ongoing adjustments required to ensure operational efficiency and cost-effectiveness. The
restructuring process must incorporate a strategic rightsizing of HoldCo and HydroCo as well as
the subsidiary companies to ensure that their future structure and staffing align with core functions
and adhere to industry benchmarks. Other similar questions and requests have been made for the
GridCo and GenCo budgets.
Moreover, PREB issued an R&O on June 12, 2024, which included an extensive request for
information (“RFI”) directed at the system operators, LUMA and Genera, as well as PREPA. 6 The
R&O was intended to gather the information required for the Technical Conference held on June
21, 2024 and to inform PREB in determining the energy system’s needs and priorities. The

5
NEPR-MI-2021-0004 PREB R&O: document (pr.gov).
6
Resolution and Order (“June 12 Order”), Case No. NEPR-MI-2021-0004 (P.R. Pub. Serv. Reg. Bd. June 12, 2024),
https://energia.pr.gov/wp-content/uploads/sites/7/2024/06/20240612-MI20210004-Resolution-and-Order.pdf.
Hon. Pierluisi
June 24, 2024
Page 4

Oversight Board is closely monitoring these proceedings to inform its budget certification
determination as well.
PREPA, LUMA and Genera are expected to submit a compliant budget to the Oversight Board
that adheres to the FY2025 annual budget determinations made by PREB, which establish the
energy system’s priorities and the allocation of the limited resources available to tend to those
needs. If an R&O making such determinations is pending on June 26, 2024, the date when PREPA
is now required to submit the Revised Proposed FY2025 PREPA Budget, PREPA and the
operators are expected to submit a budget that adheres to the allocation caps established in the P3A
budget allocation. 7
While the expectation is that the Oversight Board will support a determination made by PREB
prior to the FY2025 PREPA Budget certification date, the P3A budget allocation pursuant to the
2017 Rate Order will serve as a backup default in absence of such determination.
III. Energy System Needs and Future Budgets
A compliant FY2025 PREPA Budget reflecting PREPA’s full funding needs to operate and make
investments is critical, but it is also important to highlight the constraints imposed by the 2017
Rate Order. While the continued use of the 2017 Rate Order provides a necessary framework for
fiscal discipline, it risks restricting the ability to adapt financially to the evolving and unavoidable
demands of Puerto Rico’s electric power system.
Specifically, the 2017 Rate Order may restrict PREPA and its operators’ capacity to adequately
fund essential upgrades and ongoing maintenance of the energy infrastructure (outside of the
available federal funds which are mainly allocated for capital projects), including improvements
that would enhance service reliability, reduce outage frequency and duration, and foster a transition
to a more sustainable and resilient energy grid. In order to provide long-term benefits to ratepayers
and support Puerto Rico’s broader energy objectives, it is essential that the rate structure enables
the funding needed for vital operations, ongoing necessary maintenance expenses, capital
improvements, and that provides sufficient liquidity and proper funding of the accounts established
under the Operations and Maintenance agreements with the private operators.
LUMA and PREB have recognized this need, particularly when PREB referenced in its June 12,
2024 RFI that LUMA noted in its budget filing that “current base rates are inadequate to support
growth, maintenance and repair, and modernization required to effectively transform the electric
system and that it is hindered because it continues to operate in a financially constrained
environment.” 8 Moreover, while GenCo and Legacy PREPA (HoldCo and HydroCo) have
indicated that no rate case is required, their proposed budget amounts have exceeded their P3A
determined allocation levels.
While this should not detract from completing the FY2025 PREPA Budget process within the
established 2017 Rate Order framework, particularly given the time limitation prior to the start of
the fiscal year, all of the energy sector stakeholders should take a hard look at the challenges the
7
LUMA, Annual Budgets Fiscal Year 2025, at 52 (May 24, 2024), https://energia.pr.gov/wp-
content/uploads/sites/7/2024/05/20240525-MI20210004-Motion-FY2025-TD-GenCo-and-System.pdf.
8
June 12 Order at 3.
Hon. Pierluisi
June 24, 2024
Page 5

current 2017 Rate Order brings and take any affirmative action needed following the approval and
certification of the FY2025 PREPA Budget, to adjust it accordingly as soon as possible –
particularly in light of any delays the conclusion of the Title III proceeding may experience.
Pursuant to PROMESA Section 202(c)(2), the Governor must submit the Revised Proposed
FY2025 PREPA Budget addressing and incorporating each of the items identified herein, along
with all necessary supporting materials, no later than June 26, 2024 at 11:59 pm AST. If the
Governor fails to submit a revised proposed budget that the Oversight Board determines is a
compliant budget, the Oversight Board shall develop and submit its own FY2025 PREPA Budget
to the Governor on June 28, 2024, and such budget, pursuant to PROMESA Sections 202(c)(2)
and 202(e)(4), shall be deemed to be approved by the Governor and be in full force and effect
beginning July 1, 2024.
We look forward to continuing working with you for the benefit of the people of Puerto Rico.
Sincerely,

Robert F. Mujica, Jr.

Executive Director

CC: Hon. Omar J. Marrero Díaz

Mr. Josué A. Colón Ortiz
PREPA Governing Board
Mr. Fermín Fontanés Gómez
Mr. Juan Saca
Mr. Brannen McElmurray
Mr. Edison Avilés Deliz