The U.S. Commonwealth of Puerto Rico has been in a financial crisis since the Great Recession. While the recession on the mainland was dealt with in time, the recession hit the island and exposed years of financial mismanagement and started an economic spiral. While U.S. territories and states cannot officially declare bankruptcy, the Commonwealth was nearing such a high debt that defaulting was became a real possibility. In 2014 Standard’s and Poor downgraded Puerto Rican bonds to junk status, and in 2015 Governor García Padilla declared the debt unpayable. In response, Congress passed the bipartisan act PROMESA in 2016 which set up a direct federal control commission to manage and reform the finances of the Commonwealth. That Federal Oversight Board is now entering its sixth year, and one cannot help but marvel at the perfect storm of horrendous events which have crippled the island. Reliance on federal tax breaks, utility monopolies, government corruption and natural disasters have created a spiral of poverty and debt which continues to curse the Commonwealth. While hope remains that the federal control board can work a miracle as they did with a similar commission in Washington D.C., a $72 billion budget deficit and $55 billion owed in pensions are steep peaks to climb.
One area of particular concern are the unique government monopolies of the islands utilities companies. Unlike most U.S. states where multiple private and public companies produce and provide utilities, the Commonwealth has only one public company for each of its services. The Puerto Rico Electric Power Authority (PREPA) was one such company. This genuine government monopoly over the electricity of the Commonwealth lead to unique mismanagement that we here on the mainland would be wise to avoid.
Part of the story of Puerto Rico’s financial woes lies in its electric grid. In 1941 under the governorship of Rexford Tugwell, an appointee of President Franklin Roosevelt, Puerto Rico passed Law No. 83. The law set up the Authority of the Fluvial Sources, the first publicly owned company in Puerto Rico tasked with managing electric services. The Authority would eventually gain control of all power grids on the island by 1981 and be renamed to the Puerto Rico Electric Power Authority. PREPA would maintain a total monopoly on the power grid until it was dissolved in May of 2021.
As with most public projects, the goal of PREPA was to give cheap electricity to much of the island. Like the Tennessee Valley Authority on the mainland, the hope was to publicly provide low-cost electricity to help improve the overall economy of the area. In fact, for municipalities this meant free electricity from the Commonwealth government. Citizens however were still required to pay for their lights. The free electricity to cities happened to be a resounding, and some might say frivolous, success. Municipalities started to build government owned restaurants, hotels, sports arenas, and even an ice-rink for the town of Auguadilla.
Unfortunately, Puerto Rican politics and government have been neglected and mismanaged for many years. For example, the Department of Education managed to make $80 million in payments over 13 years to teachers who had resigned, retired, or were deceased. Regrettably, this long-term government mismanagement spilled over into the government run corporation. PREPA was known for at-best opaque business dealings, and stubbornly refused for years to transitions its outdated petroleum fueled plants to more modern forms.
PREPA also had a poor system for collecting payments. Once the economic crisis hit, PREPA found itself trying to squeeze already bankrupt companies and citizens for years of fees previous generations of PREPA agents had failed to collect to the tune of $420 million. The Puerto Rico Port Authority was forced to sell San Juan Airport to a private partnership when PREPA demanded a backlog of $60 million. When the large customers of PREPA couldn’t pay, and the government was running out of money to fund the mismanaged company, PREPA effectively declared bankruptcy in 2017. The company founded on the idea of low rates for citizens and free electric for cities now charged some of the highest rates in the United States to a population where 45% live below the poverty line. With a towering $9 billion debt, the government run corporation could no longer afford to keep the lights on for anyone.
While the bankruptcy of PREPA was only one problem of many, it is one we as observers can easily avoid. When the island created a government-run monopoly for the utilities industry, they brought in all of the benefits and weaknesses of such a structure.
Supposedly the benefits were to be cheap electricity and, for the citizens of Aguadilla, hockey. However, the lack of profit incentive and direct control by the government brough negative attributes which are difficult to overcome. In the private utilities industry and in all for-profit companies, the motivation of money is a steady constant. Even robber barons need to pay their own salaries. When a corrupt private company is given the option between keeping expensive and outdated petroleum plants open, or switching to cheaper nuclear or hydro-electric options, even the greediest of stooges will choose the later to fill their own pockets with savings. Private companies also lack the problem of chronic bill-collection failure, as such receives a quick diagnosis of empty paychecks. This is not so for government owned corporations who can always fall back on tax-payer dollars when mailing the bills seems too hard to manage.
To clarify, the system Puerto Rico created for themselves is much different than what many of us experience on the mainland. For example, in some states such as Ohio, many private and public companies run the grid in various parts of the state. American Electric Power, Ohio Edison and AES Corporation are just a handful of the companies who provide Ohio residents with electricity. Sure, they can be greedy and corrupt, a Google search for “House Bill 6” or “Speaker Householder” will provide anyone with a couple of hours of Ohio drama. But at the very least the government can check that excessive greed. House Bill 6 was eventually repealed, and Householder was expelled from the chamber and arrested by the FBI.
This too is different from municipalities or states who publicly distribute their electricity. For some areas, the government might totally govern the distribution of electricity, but its production is left up to a private company that must compete for a public contract. There at least some competition is maintained to avoid the disasters of a monopoly. Even in areas on the mainland where the government has total control, they could contract out another municipality or private company to assist in running their gird in a disaster scenario. Puerto Rico instead had a genuine monopoly, with the government both producing and providing all electrical services, and due to them being far from the mainland, had no other companies to lean on for backup.
In summary, when social services and governments are separate entities, a compromised government doesn’t automatically mean a compromised social service and vice versa. To be fair, something as intertwined as public utilities is bound to have some overlap, but the two are separate enough to keep the people in the companies from completely being the cronies of the capital city. Multiple electric companies also mean more baskets for your eggs. If one company drops its basket because of mismanagement, at the least you still have the other.
As with all socialized systems, the idea is a nice one. Unfortunately, human history proves this a fantasy, and Puerto Rico is a good example. The publicly owned PREPA inevitably gained the same traits as the government it was subject to. When that government went down, so did the grid. By creating one single utility company for the entire island, Puerto Rico effectively placed all their eggs in one basket, and it proceeded to drop.
When we hear promises on the mainland of one national system for this social service or the other, we would be wise to remember our Federal Government is not immune to the same mismanagement and malfunction our fellow Americans in Puerto Rico have been subject to. The $100 billion in potentially mismanaged funds during the COVID-19 pandemic should convince anyone that the Federal government is not an airtight operation. If we on the mainland place all of our social eggs in the basket of the Federal government, we too might end up with a bunch of shells.