IEEFA Puerto Rico: Court examiner finds PREPA bond deal fees are out of control

The debt restructuring agreement reached between the Puerto Rico Electric Power Authority (PREPA) and its creditors, which is currently pending before a bankruptcy judge, will force utility customers to pay “largely unspecified, apparently unlimited, and wholly unchecked professional fees and expenses.” That is the finding of an independent fee examiner hired by the bankruptcy court in a motion filed at the beginning of September.

Not only does the debt Restructuring Support Agreement (RSA) put ratepayers on the hook for the fees of legal and technical consultants used by PREPA in negotiating the deal, but utility customers will also be paying the legal and professional fees of all the other parties to the deal as well, namely PREPA’s bondholders and insurance companies. The agreement does not specify what those fees are, nor does it place any upper limit on them. Government parties to the RSA alone have already incurred more than $530 million in professional fees in the bankruptcy case.

As we have noted previously, imposing these costs on PREPA customers will obviously drive the initial rate increase higher than the 2.8 cents/kWh specified in the deal, which will result in excessively high electric bills that will harm Puerto Rico’s already weak economy.

This particular provision of the RSA needs to be challenged in court. It binds PREPA to paying its creditors’ fees regardless of whether or not the bankruptcy judge approves the RSA. The fee examiner points out that the RSA “lacks any reference to the legal authority for the significant professional fee payments it promises.”

Despite having previously noted the “exorbitant and tragic” amount of professional fees incurred in various Puerto Rico bankruptcy proceedings, the Financial Oversight and Management Board (FOMB) continues to support the PREPA debt deal.

The previous debt restructuring agreement negotiated between PREPA and its creditors (and rejected by the FOMB in 2017) met with similar criticism from the Puerto Rico Energy Bureau. The Bureau noted PREPA’s lack of competitive bidding in selecting consultants and the fact that  advisors were responsible for determining the reasonableness of their own fees – a set-up that the Bureau feared would expose ratepayers to “fees without limit.”

A key difference, however, is that the previous deal only forced PREPA’s customers to pay the Authority’s own advisors. Under the terms of the new RSA, ratepayers will have to cover the legal and professional fees – without limit ‒ for the bondholders and insurance companies as well.

That the government of Puerto Rico would ever sign off on such a deal underscores, once again, that there is an over-reliance on outside consultants who are performing core functions without public accountability. Indeed, after the departure of former Puerto Rico Fiscal Agency and Financial Advisory Authority (AAFAF) director Christian Sobrino this past summer, there is no government employee with sufficient understanding of the RSA negotiations to testify in the court that the deal is in the public interest. The testimony on behalf of AAFAF is now being provided by an outside financial advisor with Ankura Consulting, i.e. one of the firms benefitting from this unbalanced fee structure.

When all parties to the RSA are relying on high-priced legal and technical consultants, it is no surprise that the real winners are the consultants themselves, not the people of the Commonwealth.

The bankruptcy judge should exercise oversight and reject a deal that saddles Puerto Ricans with “unchecked and undisclosed professional fees” to the tune of hundreds of millions, if not billions of dollars. And, moving forward, the judge should impose an Independent Private Sector Inspector General (IPSIG) at PREPA to reform management and exercise real oversight over consultants and advisors.

Tom Sanzillo ([email protected]) is IEEFA’s director of finance.

Spanish translation: Examinador de la corte encuentra que las tarifas del acuerdo de bonos AEE están fuera de control

Related items:

IEEFA letter to Puerto Rico’s Legislative Assembly: Secure more viable PREPA debt deal

IEEFA report: Puerto Rico Electric Power Authority debt deal weak and plagued by scandal

IEEFA Puerto Rico: PREPA keeps relying on expensive consultants