Puerto Rico Electric Power Authority Under Risk of Receivership

Editor’s note: The following was first published in the March 7 – 13, 2019, issue of Caribbean Business.

The more time Puerto Rico is without an energy policy framework that can deal with the P.R. Electric Power Authority’s (Prepa) unwillingness to change, the higher the risk that Prepa will be put under receivership, said Senate Vice President Larry Seilhamer (NPP-at large).

“[If] we do not pass a bill clearly establishing what all stakeholders can expect, we run the risk of having a trustee [over the Puerto Rico Electric Power Authority]. To make matters worse, U.S. Congress is already trying to impose bills to handle Prepa,” Seilhamer said while defending P.R. Senate Bill 1121, which he authored, to establish the utility’s legal framework.

As of presstime, passage of a regulatory framework was delayed by nearly three months, from the original December 2018 deadline. It is a necessary precursor for Prepa to achieve the timely concession of its transmission and distribution systems, which was slated for the summer and then pushed to December.

As a matter of fact, the inaction of a public policy, as well as the energy utility’s mismanagement, high level of politization, pattern of noncompliance with orders of the regulator, the Puerto Rico Energy Bureau, and nonperformance of generally accepted utility practices are just some of the reasons cited by bond insurers seeking a court order to put Prepa under receivership.

In 2017, U.S. Judge Laura Taylor Swain struck down a previous receiver bid by bond insurers, only to have an appeals court remand the matter back to her in August 2018. The insurance companies, National Public Finance Guarantee Corp., Assured Guaranty Corp., Assured Guaranty Municipal Corp. and Syncora Guarantee Inc., which guarantee payments on about 27 percent of Prepa’s $8.3 billion in outstanding bonds, claim they have statutory and contractual rights to obtain a receiver after the utility began defaulting on bonds and filed for bankruptcy. They contend Prepa’s behavior is putting their collateral at risk.

“Prepa has a record of mismanaging its generation, transmission and distribution assets; its human resources; its customer service; its collection practices; its budgeting, financial controls, accounting and recordkeeping; and its procurement and contract negotiations. It does not appear that Prepa has meaningfully changed its behavior or processes in recent months,” said three experts hired by creditors in a court proceeding.

Jeff D. Makholm, managing director of National Economics Research Associates (NERA), who conducted energy studies on behalf of the World Bank as well as European and Latin America countries, said Prepa’s conduct, historically and through the present, “including in its ongoing regulatory proceeding, evidences obstructive and self-justifying behavior consistent with an enterprise strongly resisting objective scrutiny or regulatory control.”

Prepa has historically resisted the orders of its regulators. On Aug. 13, 2018, Gov. Ricardo Rosselló signed into law legislation consolidating the P.R. Energy Commission (PREC) under the umbrella of the Public Service Regulatory Board, renaming it the Puerto Rico Energy Bureau (PREB) and increasing its commissioners to five. Only one commissioner from the former PREC—Ángel R. Rivera de la Cruz—serves as a PREB commissioner.

PREB presides over three regulatory proceedings related to the determination of rates for Prepa: The prior rate case initiated by PREC in May 2015, a proceeding that deals with the implementation of such rates ordered by PREC, and the current rate case initiated by PREB in May 2018. In each of these cases, Prepa has displayed a pattern of disobedience toward the regulator. In the rate implementation case, Prepa requested numerous time extensions to the point that PREB had to issue a final warning to Prepa regarding any further delays, threatening it with fines of up to $25,000 a day.

In the current rate case, Prepa began by attempting to effectively dismiss the case, then refused to produce certain critical information, and now has proceeded to request numerous time extensions. Despite an original deadline in summer 2018 and the expiration of more than half the fiscal year, FY 2019 rates still have not been set, nor has Prepa’s revenue requirement been determined, Makholm noted.

Sandra Ringelstetter Ennis, who also works with NERA, said rather than seeking to comply with PREB’s initial May 4, 2018 deadline to set new rates for FY 2019, Prepa filed a legal brief in which it argued against PREB’s order and instead proposed its own plan for the rate case. “Prepa argued that PREB’s order and rate case was incompatible with the fiscal plan and “impossible or impractical in various other respects…. Prepa further argued, among other things, that it was inconsistent with Puerto Rico and federal law, and the stated objectives of the government related to the energy sectors’ transformation. Essentially, Prepa attempted to dismiss the current rate case as soon as [PREB] instituted it,” she said.

Though the rate case was originally scheduled for completion by July 31, 2018, the end is still not in sight nearly nine months from when it commenced.

Prepa’s pattern of noncompliance with PREB is not limited to the rate proceedings. In its Integrated Resource Plan (IRP) case, Prepa also requested numerous time extensions to the point that PREB resorted to fining Prepa and stating that Prepa’s delays were harming its credibility and stakeholders, Makholm said.

Prepa did not comply with the 2016 IRP. “Relatedly, Prepa attempted to circumvent the IRP process by issuing a request for proposal [RFP] for conversion of two turbines to natural gas-burning capability without first notifying PREB—despite the fact that Prepa was required by regulatory law to do so. PREB was forced to open a special proceeding to investigate Prepa’s noncompliance in this regard,” Makholm said.

The Energy Bureau ordered Prepa to provide documentation on the RFP as well as analysis to show that the proposed conversion is the least-costly option and in the public’s best interest. PREB also stated that Prepa did not inform the Energy Bureau of its plans, did not provide the RFP “nor has Prepa offered any explanation for these actions, which do not comply with the approved IRP and the approved action plan.”

On Nov. 21, 2018, a majority of PREB nonetheless determined that Prepa could continue with the RFP process under several conditions. However, one of the five Energy Bureau commissioners, Ángel R. Rivera de la Cruz, wrote a dissenting opinion. He wrote that Prepa’s analysis of the San Juan conversion was evaluated as a single resource and “detached” from the IRP process, which “goes against these best regulatory and resource planning practices and may result in a more expensive system over the planning horizon.

Finally, in a proceeding to create a draft microgrid interconnection regulation—a critical prerequisite for Prepa’s contemplated energy sector transformation—Prepa has repeatedly refused to comply with PREB’s orders, instead submitting argumentative briefs that it was very diligently constrained by “limitations” such as “resource constraints, including loss of staff, and conflicting demands in terms of its service obligations to its customers and requirements from the Fiscal Oversight & Management Board [FOMB], the Government of Puerto Rico and the [Energy] Bureau,” Ringelstetter Ennis said.

Prepa has also fallen behind schedule on its reporting requirements to the FOMB, as documented by letters from the FOMB. Prepa is required to submit reports to the FOMB comparing its budget-to-actual revenues and expenditures for each fiscal year. These reports, which are used to identify deviations from the budget to hold government entities accountable, are due within 15 days after the last day of each quarter.

Ringelstetter Ennis also noted the high level of politicization at Prepa, not only because of its high level of trust employees but also through documents produced during litigation. An analysis of the fee applications indicates that Prepa has paid significantly, or close to $40 million, for the work of its advisers, including Ankura, Citigroup, Filsinger Energy Partners, McKinsey and Rothschild.

Despite having retained these advisers, as well as many past advisers and consultants, Prepa still struggles with nonperformance of generally accepted utility practices, as well as long-overdue initiatives that are uniformly recommended by their advisers, Ennis Ringelstetter said. The example of Filsinger Energy Partners illustrates the point. Filsinger’s initial contract with Prepa allowed for wide-ranging authority, similar to that of a CEO. Prepa’s Aug. 1 fiscal plan gave Filsinger Energy Partners responsibility for several initiatives, including the Work Plan 180 initiatives. Later, in August, a revised contract limited the scope of Filsinger’s authority, making him clearly subordinate to Prepa’s executive director. “At the same time, the status reports from the Work Plan 180 Initiatives show that several of the initiatives have been delayed due to the failure to obtain ‘management’ approval from Prepa,” she said.

Asked about Prepa’s willingness to listen to advisers, Ed Batalla, an energy director with Navigant, one of the consulting firms, said Prepa had been reluctant to implement transformational change. “Transformation is a big change…. We have to gain their trust. We have world and global knowledge to transform systems and what we find encouraging is that we are actually being invited to their premises to sit side by side with them…. It took us a few months to get there, but now they have opened up their doors,” he said.

The monoline bond insurers also contended there is a need for a receiver to hasten the concession of the utility’s transmission and distribution systems and the sale of its assets, an event that is not expected to take place until 2020.

Prasa Seeks Control of Hydroelectric Plants




Swain’s World: Legal Workers Rolling in Bankruptcy Dough

Editor’s note: This story first appeared in the July 26 – Aug. 1 print issue of Caribbean Business.

egal fees and expenditures keep piling up in Puerto Rico’s Title III bankruptcy case, which tackles $70 billion in debt.

Judge Laura Taylor Swain last week allowed payment of a total of $19 million in legal fees and expenditures for different periods in 2017 and the early part of this year. The firms that had their compensation paid were Proskauer Rose, the law firm that represents the commonwealth, Sales Tax Financing Corp. (Cofina), the P.R. Electric Power Authority (Prepa), Highways & Transportation Authority as well as the Employees Retirement System; the O’Neill & Borges law firm that also represents the debtors; DLA Piper, which is bankruptcy counsel to the P.R. Fiscal Agency & Financial Advisory Authority (Fafaa) and the Treasury Department; Marchand ICS Group, an information agent to the Official Committee of Retired Employees and Segal Consulting, which are actuaries and consultants for the Official Committee of Retired Employees.

However, there are numerous other legal bills from more than 30 firms, with a total “in the millions,” for which Swain has yet to give the green light for payment. “At this juncture, there will be no money to pay lawyers or us,” a creditor told Caribbean Business.

The following bills were submitted this month:

  1. Munger, Tolles & Olson LLP, attorneys for the Financial Oversight & Management Board for Puerto Rico, are seeking $787,714.54 and $3,397.75 for the period from February to May of this year.
  2. Andrew Wolfe, an adviser to the Oversight Board, is seeking payment of $100,000 and $13,157.16 in expenses for the period of February to May 2018.
  3. Pension Trustee Advisors Inc., which also provides services to the Oversight Board, is seeking $29,596 in expenses for work performed from February to May 2018.
  4. Phoenix Management Services LLC, which does work for the Mediation Team negotiating the debt and was hired in 2017, is seeking compensation of $411,000 from February 2018 to June 2018.
  5. Filsinger Energy Partners Inc., which advises Prepa, is seeking $5 million in expenses and $333,000 in fees for work performed between February 2018 and May 2018. Of this amount, $1,641,360.20 is for fees incurred for work performed by Filsinger Energy Partners professionals outside of Puerto Rico and $3,430,756.60 is for fees incurred for work performed by Filsinger Energy Partners professionals in Puerto Rico.
  6. Luskin, Stern & Eisler LLP billed $125,587.00 in expenses and compensation for work as counsel to the Oversight Board from February to May of this year.
  7. Ernst & Young LLP, which provides professional services to the Oversight Board, sought $1.1 million for work performed from February to April of this year.
  8. Jenner & Block LLP, which works for the Official Committee of Retired Employees, sought $1.9 million in compensation and $71,900 in expenses for work done between February and May of this year.
  9. Marchand ICS Group, which works for the Official Committee of Retired Employees, is seeking payment for the period between Feb. 1 through May 31, 2018 of about $82,519.00 in interim expense reimbursement and another $9,558.11 in fees.
  10. Segal Consulting, which also provides services to the Official Committee of Retired Employees, for the period of Feb. 1 through May 31, 2018, totaling $268,316.
  11. Bennazar, García & Milián CSP, which also helps out in the Title III case, is seeking $21,979.16 from February to May of this year.
  12. Bettina M. Whyte, in her capacity as the Cofina Agent in the Cofina-Commonwealth dispute, is seeking reimbursement for professional services rendered for $448,730.00 and expenses in connection with such services for $18,649.09, for the period of Feb. 1 through May 31, 2018.
  13. Willkie, Farr & Gallagher LLP, counsel to Bettina M. Whyte, the Cofina Agent, seeks interim compensation for professional services rendered in the amount of $4,634,348.09 and necessary expenses incurred in connection with such services for $957,142.80 for the period of Feb. 1 through May 31, 2018.
  14. Klee, Tuchin, Bogdanoff & Stern LLC, special municipal bankruptcy counsel to Bettina M. Whyte, the Cofina Agent, submitted a bill for $869,739.50 and reimbursement for actual and necessary expenses of $27,854.77, for the period Feb. 1 through May 31, 2018 (the Interim Period).
  15. FTI Consulting has requested payment for $1,877,000 in compensation and $18,368.45 in fees from February to May of this year. The firm says it is still owed $1,748,181.90 for professional fees and $12,710.42 for actual and necessary expenses, for a total of $1,796,892.32. The firm says the government erroneously applied a 29 percent withholding tax.
  16. Nilda M. Navarro Cabrer, a local counsel to Bettina M. Whyte, the Cofina Agent, is seeking $103,025.00 and reimbursement for actual and necessary expenses from February to May of this year.
  17. Greenberg Traurig LLP, counsel for Prepa and Fafaa billed $4,536,263.70 and reimbursement of actual and necessary expenses for $129,139.80 for the period of February to May 2018.
  18. O’Neill & Borges LLC, which provides services to the Oversight Board, is seeking a total of $511,739.32 and $16,759 in expenses for the period of Feb. 1 through May 31, 2018.
  19. Rothschild Inc., authorized to Provide Professional Services to Fafaa, billed for the period of April 1 through May 31, 2018 about $2,020,000.00.
  20. Ankura Consulting Group LLC sought $2 million from Feb. 1 through May 31, 2018 and $128,127 in expenses.
  21. Kroma Advertising sought $60,000 as communications adviser to the Official Committee of Unsecured Creditors from February to April of this year.
  22. Casillas, Santiago & Torres LLC, authorized to Provide Professional Services to the Official Committee of Unsecured Creditors, billed $294,120.50 in compensation and $12,052.09 from February to May of this year.
  23. Zolfo Cooper LLC, which provided services to the Official Committee of Unsecured Creditors from Feb. 1 through May 31, 2018, is seeking $3.1 million and $19,000 in related expenses.
  24. Paul Hastings LLP, which provides services to the Official Committee of Unsecured Creditors, is seeking $8,676,112.75 and $6,940,890.202 because it also does work as agent of the commonwealth in the Cofina-General Obligations (GO) bonds dispute.
  25. DLA Piper (Puerto Rico) LLC, which provides services to the Oversight Board and Fafaa, charged for worked done between February and May of this year for more than $900,000.
  26. Proskauer Rose LLP filed several bills for $98,765.94; $118,646 and $1,259,824.35 for the period between February and May 2018, for work done for several debtors. It also filed a bill for $3.2 million for work done for Prepa and a summary bill totaling $5 million for work done in the Title III case. A fee examiner’s report that analyzed bills from 2017 and from October 2017 to January of 2018 had concerns about the firm’s billing because it found potential overlap between the work of counsel for the board and counsel for Fafaa among other problems.
  27. O’Melveny & Myers, which provides services to Fafaa, sought $837,000 in compensation for work between February and May of this year. It also filed another bill for $194,579.33 and $155,651.42, and one for $6 million for work done for the Oversight Board.
  28. McKinsey & Co., which provided work to the Oversight Board, is seeking about $7,237,000.00 for the period of Feb. 1 through May 31, 2018.
  29. Marini, Pietrantoni, Muñiz LLC filed several bills for legal work done in the Title III case for the period between March and May for $3,286. The bills were for $10,631.70; $38,402.10; and $203,956.65.

[Editorial] Ricky Don’t Lose That Number