Incoming PREPA CEO, majority of board resign over executive pay

Dive Brief:

Five of the seven members of the board that governs the Puerto Rico Electric Power Authority (PREPA) resigned their positions on Thursday, including the utility's newly appointed CEO, named only the day before.
The members resigned after Puerto Rico Gov. Ricardo Rosselló called on them to reduce the salary of the incoming CEO Rafael Diaz-Granados or step down. Unless a replacement is named, PREPA will be without a director on Sunday, when outgoing CEO Walter Higgins is set to resign.
The only two members remaining on the PREPA board are Rosselló appointees. The departures could give the governor more control over the utility, which is $9 billion in debt and still recovering from Hurricane Maria, which destroyed its grid last September.

Dive Insight:

The resignation of most of PREPA's board is the latest in a series of shakeups over control of the bankrupt utility, which has customers without power nearly a year after Maria.

On Wednesday, CEO Walter Higgins announced he would resign over issues with his salary, saying it was "very clear" that "politics related to my compensation made it impossible for the contract to be fulfilled."

Higgins was hired in March on a $450,000 contract, with the potential to make twice as much if he hit certain performance contracts. Prior to that, PREPA was led by interim director Justo González, who was appointed by Rosselló last November after then-CEO Ricardo Ramos resigned over a contracting controversy with Montana firm Whitefish.

The PREPA board stepped in to name one of their own to replace Higgins, former GE executive Rafael Diaz-Granados, offering him a $750,000 contract. But Rosselló took exception to the deal, tweeting on Thursday that the PREPA board members must reduce it, or resign.

The salary granted by the Governing Board of the PREPA to the new executive director is not proportional to the financial condition of PREPA, to the fiscal situation of the Government, or to the feeling of the People who are making sacrifices to raise Puerto Rico. pic.twitter.com/XW3ce29DKA
— Ricardo Rossello (@ricardorossello) July 12, 2018

The independent members of the PREPA board responded quickly, offering their resignation to the governor in a letter that decried what they say is his administration's attempt to control the utility.

"Political forces in Puerto Rico have provided a definitive statement that they want to continue with the control of PREPA," they wrote in a letter released by El Nuevo Día. "When the petty political interest is placed above the needs of the people, the process of transforming Puerto Rico's electricity sector is put in jeopardy."

Rosselló has said he wants to keep PREPA free of political influence, but the departures will give him the opportunity to exert even more control. The two remaining members of the board, Christian Sobrino and María Palou, who both worked for Rosselló's campaign and were named to their roles by him.

Rosselló and the remaining board members could also act before Sunday to name a new CEO, said Jorge Camacho, a utility consultant and former regulatory staffer who is working with PREPA on storm restoration.

"What will happen is the governor will have to appoint an executive director," said Camacho. "Someone needs to move rather quickly to identify a candidate so there is not a lapse in leadership."

Rosselló's new appointment opportunities come six months after his administration moved to reshape the island's utility regulator — a choice critics said also aimed at solidifying control over the utility. But the governor will face some constraints in naming new board members, Camacho noted.

By law, Rosselló must select three of the seven members from lists supplied by independent recruiting firms and submit them to the Puerto Rico Senate for confirmation. Three other members can be appointed by the governor without confirmation, and the final member, a consumer advocate, will be selected by a special election supervised by the Department of Consumer Affairs, which Nuevo Día reports is still in the works.

"[Rosselló] will have to follow the law. He will have to get a recruiting firm and independent board members and then will have to identify a new director who will be paid comparable to previous directors of PREPA," Camacho said. Previous PREPA directors Ramos and González made about $175,000 a year.

The federal government could also limit gubernatorial control of the utility. The fiscal management board set up by Congress to oversee Puerto Rico's finances can review any major expenditures at public agencies like PREPA, including fuel shipments to the utility's generators.

"The time to vet a contract is not after it is awarded."

Jorge Camacho

PREPA consultant

The leadership shakeup comes at a difficult time for PREPA, which is scrambling to complete power restoration from Hurricane Maria and begin strengthening its fragile grid for future weather events. Last week, 24,000 lost power on the island due to damage from Tropical Storm Beryl, whose winds did not reach hurricane strength on the island.

"PREPA should be thinking about what they should do to withstand the next weather events," Camacho said. "Even the low-impact Beryl weather event affected thousands of electric customers. It is evident that PREPA was not ready even for a category 1 hurricane."

Moving forward, the PREPA consultant said policymakers must be on the same page during the search for a new director and board members. Some of the bonus provisions in Higgins' contract, he said, were actually illegal under territory law.

"We need to make sure that the contracts are within the legal framework of Puerto Rico and that these contracts are clear before they are awarded in regard to compensation and any kind of bonuses that are offered," he said. "The time to vet a contract is not after it is awarded."