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Judge reserves ruling on receiver for Puerto Rico electric utility

By on August 9, 2017

SAN JUAN — Federal Judge Laura Taylor Swain reserved her decision Wednesday on whether the  Puerto Rico Electric Power Authority (Prepa) should be placed under receivership and increase rates to cover all of its obligations.

The Ad Hoc Group of Prepa Bondholders, National Public Finance, Assured Guaranty Corp., Assured Guaranty Municipal Corp. and Syncora Guarantee Inc., which hold about 65 percent of the public utility’s $8.3 billion debt, had asked Judge Swain last month to lift Promesa’s stay on litigation so they could sue in court to have Prepa put into receivership.

The bondholders argue that Prepa’s trust agreement requires the utility to set its rates high enough to pay its debt. The creditors said that since the only asset the public corporation has is its revenue, adequate protection is not possible.

Gregory Horowitz, the counsel for the Prepa creditor group, argued that the Puerto Rico Energy Commission (PREC) conducted a rate case that established new ones as required by the utility’s restructuring support agreement, including $200 million to pay for capital expenditures.

He added that two days ago, an adversary proceeding was filed challenging how revenues are calculated and used by the utility, among other reliefs.

The attorney also noted that Prepa and the Financial Oversight & Management Board were conflicted because while the utility should impose rates that can cover its debt, the fiscal board wants electric bills kept lower. The board has studies suggesting that raising rates will negatively impact the economy and increase outmigration. “They are operating on behalf of others,” Horowitz said about the board.

The attorney also noted that Promesa prevents the court from appointing a receiver. “That is why we are asking to lift the stay to allow us to pursue the matter in another court,” he said.

Martin Bienenstock, a Proskauer lawyer who advises the fiscal board, said granting the bondholders a relief from the stay would be tantamount to giving up exclusive jurisdiction over Prepa and its revenues. “Are you going to relinquish jurisdiction over the revenue stream of the only electric utility on the island?” he asked.

He noted that the Prepa creditor group’s contention that the rate covenant is both an asset and an obligation is wrong because it cannot be both. The board attorney said the group wants to appoint a trustee to raise rates to increase the value of their collateral, but it has not shown that its collateral security is being diminished.

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Bienenstock also rejected claims by the Prepa creditor group that a receiver is needed because the utility is being mismanaged. Although he recognized that under Chapter 11, gross mismanagement is ground for the appointment of a receiver, that is not the case with Title III of Promesa.

He went on to explain that the law says that whenever Bankruptcy Code provisions incorporated into Title III of the federal law refer to a “trustee,” it is referring to the fiscal board.

“The fact is Congress put one oversight board in charge,” Bienenstock said. “Thank God it did because just imagine what will be going on here if we have one manager that says I don’t care about the people, let’s jack up the rates so we can pay [bondholders] as fast as we can.”

The Proskauer lawyer also noted that Prepa has new directors and a new executive director as previously agreed upon with bondholders.

Attorneys for Scotiabank and Solus Alternative Asset Management —fuel line lenders of the utility— urged the judge not to issue a ruling Tuesday. The Scotiabank lawyer said the mediation process should be given time to work, as there is a “realistic” opportunity to strike a deal.

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Prepa attorney Nancy Mitchell from Greenberg Traurig added that the utility is in full compliance with the new rates ordered by PREC and that a new rate process was slated to start in October. However, Caribbean Business recently reported that those hearings were up in the air because of a court dispute between Prepa and PREC.

The commission in January allowed Prepa to increase its basic rate by about 1 cent per kilowatt-hour starting in July, but that hike was pushed until October, after the utility requested a postponement.

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