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

Input on privatization of Puerto Rico power company sought

SAN JUAN – Puerto Rico’s government and Financial Management and Oversight Board on Tuesday announced they were seeking “input on the transformation” of the electrical system through “private ownership or operation” of the Puerto Rico Electric Power Authority (Prepa) assets, but that they were not ruling out other transformation alternatives.

A document released by the Private and Public Partnership Alliance Tuesday says Citigroup Global Markets Inc. and Rothschild & Co. have been retained as financial advisers in connection with a potential transformational transaction.

“All inquiries and requests should be submitted or directed to Citi and Rothschild. Under no circumstances should PREPA, the local Puerto Rican or Federal Government, the Oversight Board, or any of their affiliates be contacted directly,” the document reads.

The government is interested in selling Prepa’s power generation assets and in doing a transmission and distribution concession in which the system remains owned by the government but operated by a private investor. However, the document says the government is willing to examine other options for the public utility’s transformation.

“If alternative transformational structures are more attractive, Citi and Rothschild would be interested in exploring them, taking into account certain key objectives,” the document adds.

On Jan. 22, Gov. Ricardo Rosselló, announced his intent to privatize Prepa, which serves about 1.5 million customers on the island.

The transformation of the utility will take place in connection with Prepa’s ongoing Title III case under the Promesa law and according to legislation slated to be passed by the island’s legislature.

Loan conditions called into question during Prepa omnibus hearing

Gerardo Portela, executive director of the Fiscal Agency and Financial Advisory Authority (FAFAA) (Juan J. Rodríguez/CB)

Government officials and their advising firm Rothschild testified Thursday in U.S. District Court that they did not conduct an analysis to determine if the commonwealth could lend $1 billion to the Puerto Rico Electric Power at terms that were less favorable to the utility.

The revolving credit line was lowered from the original $1.3 billion to $1 billion by the Financial Oversight and Management Board late Wednesday.

Puerto Rico Fiscal Agency & Financial Advisory Authority head Gerardo Portela as well as Rothshild Executive Dustin Mondell admitted that they represented both Prepa and the commonwealth in the transaction despite the two entities being in opposing sides of loan. Therefore there was no “arms length” type of negotiation.

Under the terms of the deal, the commonwealth got a prime lien of Prepa revenues, meaning that it has a priority in payment over all creditors. Prepa expects to complete the restructuring of its $9 billion debt in the bankruptcy court by 2019, which means it may have to pay that loan at the time. The proposed $1 billion revolving credit line the commonwealth is slated to give Prepa a 30-year maturity, even though the utility is in the middle of a bankruptcy process, where such loans are often discharged.

Although there is a law from 2016 that requires all public corporations to pay Prepa their utility bills, Portela said he was unaware of the law and it was recently that he sent letters to some of the public corporation debtors to collect their outstanding debt. However, in letters he sent to the entities, he asked for amounts that were lowered than what Prepa documents say they owed. For instance, Portela tried to collect $920,000 from the Cardiovascular Center when the entity owes $12 million.

Strong regulatory framework needed to attract Puerto Rico power utility buyers

Portela could not answer why the commonwealth did not give the money directly to the public corporations so they could pay Prepa instead of lending $1 billion to the utility. He also could not say why the government, which has broad powers under an emergency legislation, did not issue an order so all agencies can pay amounts owed to Prepa.

Ironically, the credit revolving line contains terms that allowed it to be refinanced by another a private entity or FEMA. During testimony, it was revealed that the U.S. Treasury Department will be willing to give the island a disaster loan if its general revenue accounts fell below $800 million. The goverment’s TSA account is currently about $1.5 billion. In giving Prepa the revolving credit line, it could qualify for the disaster loan.

Meanwhile, Prepa officials insisted that unless they get the loan, the utility will have to start cutting power as early as this weekend.

Employers affected by hurricanes in Puerto Rico to be granted federal credit

Puerto Rico gov’t awards new contracts to legal, financial advisers

SAN JUAN — With the beginning of the new fiscal year July 1, the government of Puerto Rico began to either grant or renew contracts with advisers who assist it in the process of restructuring the island’s debt.

The law firm O’Melveny & Myers—which leads the administration of Gov. Ricardo Rosselló’s legal counsel—formally obtained its first contract. It amounts to $18 million and runs until June 30, 2018. The island’s Fiscal Agency & Financial Advisory Authority (Fafaa) signed the agreement on behalf of the government.

Meanwhile, the commonwealth’s lead financial and restructuring advisers, Rothschild, extended its relationship with the administration with a $15.7 million contract through next summer. The international firm obtained its first contract on March 3, for $6.4 million. It had expired June 30 with the end of the fiscal year.

O’Melveny’s lawyers will charge for hours worked, according to the rate schedule included in the contract. The document, a copy of which was obtained by Caribbean Business, reveals that the firm’s attorneys who assist the government bill $865 to $1,350 an hour.

O’Melveny and Rothschild lead the legal and financial consulting, respectively, for the administration on everything related to the government debt’s restructuring. (Juan J. Rodríguez / CB)

A few months ago, O’Melveny took over the Rosselló administration’s legal counsel reins, which were first held by Dentons. The latter had been announced at the beginning of the administration as its lead legal counsel, but ceased to be so shortly thereafter due to differences between the government and the firm, sources said.

The government would not renew Dentons’ contract and it is unknown how much money the administration finally paid the law firm under the two contracts it obtained during the first six months of this year and which totaled $6 million.

Meanwhile, law firm Greenberg Traurig will continue to assist the Puerto Rico Aqueduct & Sewer Authority ($3 million) and Fafaa ($1.75 million). Both contracts will be valid until June 2018. The Miami-based firm also provides services to the Puerto Rico Electric Power Authority (Prepa), under a $6 million contract that runs until next summer.

On June 16—days before the island’s financial control board began a bankruptcy process for Prepa under Title III of the federal Promesa law—Greenberg obtained a $1 million contract until the end of that month. Several of its attorneys have already requested to intervene in Prepa’s bankruptcy process in representation of the power utility.

What’s more, for $1.7 million and until next summer, the GDB granted another contract to Cleary Gottlieb, lead counsel for the administration of former Gov. Alejandro García Padilla. When asked by Caribbean Business a few months ago about the decision to keep Cleary, GDB President Christian Sobrino said it was due to a legacy matter, but offered no additional details.

Another firm expected that renewed its relationship with the government is Ankura, a law firm that advises the GDB, Fafaa and other commonwealth entities. For this fiscal year, the restructuring advisory firm already obtained an $8 million contract with Prepa, to advise the utility on its fiscal plan and restructuring efforts.

Prior to that, for a total $775,000, the firm was awarded on May 30 with a one-month contract with Fafaa. It had previously obtained a $1.6 million contract with the GDB. Both of these arrangements expired on June 30, although both Fafaa and the GDB are expected to retain Ankura’s services, sources said.

Working for the firm from Puerto Rico are two ex officials under former Gov. Luis Fortuño’s administration: former GDB President Juan Carlos Batlle and Jorge San Miguel, who served as Fortuño’s adviser and head of platform in 2008 and 2012.

Local law firm Pietrantoni, Méndez & Álvarez (PMA) also obtained contracts with the government. For $750,000, the firm with headquarters in Hato Rey’s Milla de Oro will offer services to the Government Development Bank (GDB). It will do so as well for Fafaa, for $600,000. Both contracts are in effect until June 2018.

Cancio, Nadal, Rivera & Díaz, another local law firm, will provide services to Prepa under a $2.2 million contract in effect until summer 2018.

Other consulting contracts under Fafaa for the new fiscal year include V2A ($600,000), Bluhaus Capital ($540,000), DLA Piper ($700,000) and Devtech Systems ($450,000). The latter also worked during the former administration in the development of economic models and analyses.

Lastly, Fafaa also registered a contract with Public Safety Director Héctor Pesquera, who will earn $250,000 this fiscal year.

The combined sum of contracts granted by Fafaa to date is roughly $40 million, or slightly less than half of the entity’s budget this fiscal year.