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IEEFA Puerto Rico: What the corruption scandal means for the Puerto Rico Electric Power Authority (PREPA)

July 16, 2019
Cathy Kunkel and Tom Sanzillo

San Juan mapThe Puerto Rican government has imploded spectacularly over the last two weeks. Multiple cabinet-level officials have resigned or been fired, and former cabinet officials have been arrested in an FBI corruption probe. The scandal has led to an overwhelming call for Governor Ricardo Rosselló to resign.

Two former cabinet officials, as well as several individuals associated with government contractors, have been indicted for wire fraud, conspiracy and money laundering in a series of contracting scandals. The release of an 889-page series of chat messages between Governor Rosselló and his advisors shows (in addition to inappropriate and offensive comments) sensitive government information being shared with non-government officials, partisan political work being conducted on government time, and allusions to possible corrupt activity in the contracting process for electric utility PREPA’s transmission and distribution system.

While no PREPA officials have been implicated so far, the chat messaging scandal forced the departure of one official with substantial ties to the company ̶ Christian Sobrino, who was a member of the PREPA board, as well as the governor’s representative to the Financial Oversight and Management Board (FOMB) and the executive director of the Puerto Rico Fiscal Agency and Financial Advisory Authority, which advises PREPA.

In addition, one of those arrested in the FBI probe was the managing director of accounting firm BDO Puerto Rico. In the last 2 years, BDO has accumulated $2.6 million in contracts with PREPA to provide financial consulting and auditing services. BDO audited PREPA’s FY 2016 financial statements (which were not released until December 2018). For FY 2019, PREPA contracted BDO to prepare monthly financial reports, analyze PREPA’s budgeting and accounts system, draft budget and accounting reports, and other tasks. These steps are critical to the accurate presentation of PREPA’s current financial position, which underlies the representations made to the FOMB, the bidders in PREPA’s privatization process, and to the bankruptcy court regarding PREPA’s debt restructuring.

If the FOMB, the governor, and the Puerto Rico bankruptcy judge are serious about restoring Puerto Rico’s image that has been seriously tarnished by the recent scandals, the following measures regarding PREPA need to be taken:

  • An independent review of the process for the concession of PREPA’s transmission and distribution system to determine whether any government information was inappropriately shared with one or more bidders and whether any campaign contributions have been made related to this contract, as implied by the recently released chat content.
  • An independent review of all other major PREPA contracts for power generation that have recently been signed or are in the works, including the contracts for the natural gas conversion of the San Juan power plant to the small and inexperienced firm New Fortress Energy and the recently announced contracting process for a new natural gas plant at Palo Seco.
  • An independent review of BDO’s financial audits for PREPA. Suspend the PREPA debt restructuring process until this review is completed, in order to provide an accurate picture of PREPA’s actual financial condition.
  • Immediate establishment of an Independent Private Sector Inspector General (IPSIG) at PREPA to provide on-the-ground reporting to the FOMB, legislature, U.S. Congress, and bankruptcy court to oversee PREPA’s managerial reforms and to root out waste, fraud and abuse.

This scandal provides an opportunity to finally get PREPA’s house in order, without political interference. It is a chance that should not be wasted.

Cathy Kunkel ([email protected]) is an IEEFA energy analyst.

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

Cathy Kunkel

Cathy Kunkel is an Energy Consultant at IEEFA.

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Tom Sanzillo

Tom Sanzillo is Director of Financial Analysis for IEEFA. He has produced influential studies on the oil, gas, petrochemical and coal sectors in the U.S. and internationally, including company and credit analyses, facility development, oil and gas reserves, stock and commodity market analysis, and public and private financial structures.

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