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IEEFA Puerto Rico: Why PREPA receivership is a worthy proposal

October 19, 2018
Tom Sanzillo

A group of bondholders and insurers are asking the judge overseeing the bankruptcy of the Puerto Rico Electric Power Authority (PREPA) to appoint a receiver to manage the dysfunctional agency. Their motion, filed earlier this month in Judge Laura Swain’s federal bankruptcy court, represents a significant change of position on the part of some of PREPA’s largest creditors and also could offer a way out of the political impasse in which PREPA is currently mired.

PREPA bondholders had previously requested the appointment of a receiver for the purpose of increasing electricity rates to pay bondholders; this motion was rejected by Judge Swain. The new motion explicitly does not seek a rate increase nor demand that the creditors exert control over energy planning, budgets or the receiver. Instead, the goal is simply “to install sound and prudent management.” In making this proposal, the creditors temporarily subordinate — not waive — their right to get paid back. This display of enlightened self-interest by the creditors is practical. Given PREPA’s dysfunction, it is unlikely that having a receiver simply raise rates would improve the agency’s operations or result in any money going to creditors.

The filing paints a devastating picture of internal mismanagement at PREPA, even naming names that a prosecutor may find interesting. After detailing the agency’s history of mismanagement, the filing quickly moves to discussing the actions taken by the administration of Governor Ricardo Rosselló, who took office in 2017. The upshot: Governor Rosselló has made things worse. In his short tenure, the governor has undermined prior reforms to shield PREPA’s governance from political interference by replacing multiple executive directors and governing boards with political cronies, including Jose Ortiz, the current director. The motion also alleges that one of Rosselló’s closest advisors lobbied for the notorious Whitefish contract for the rebuilding of the grid after the hurricanes.

The receivership appointment could be a worthy proposal if it begins to align the interests of investors with the needs of the electricity system for professional energy planning, workforce development, customer relations, prudent fiscal management and respect for oversight.
This potentially good solution creates a real challenge for the court. If the court appoints a receiver, it would be acting at the behest of the creditors, a group whose motivation thus far has only been collecting its money. While the source of the motion may be suspect, it is necessitated by the obvious failure of the governor. The proposal for a receiver should have come from a joint recommendation of the governor, the Financial Oversight and Management Board (FOMB), PREPA’s board, the Puerto Rico Energy Bureau and Congress. Such an alignment among stakeholders would have assured a constructive partnership to improve the system and balance the budget. The governor’s failure to show leadership by forging a working strategy, a failure with tragic consequences for the people, leaves a void that now falls to the court to fill.

A first step for the court would be to clearly define the scope of the receiver around these four areas:

  • Establish a certified energy plan based on professional standards and approved by a strong regulator;
  • Build upon but amend the certified financial plan so that it brings recurring revenues in alignment with recurring expenses. This requires reducing reliance on fossil fuels to save money, investing in renewable energy, and making significant operational reforms;
  • Establish professional standards for the retention and attraction of the workforce, honoring labor commitments while working to bring reform;
  • And create an environment that values ethics. The receiver would need to rid PREPA of wasteful political interference at the board and staff level, with explicit hiring and firing power and a mandate to refer suspected criminal activity to the proper authorities.

The selection of an appropriate receiver is critical. The court could rely upon the network of Independent Private Sector Inspector Generals (IPSIGs) that has formed for the explicit purpose of assisting organizations to identify and implement efficiencies and to promote ethical standards. The network is designed in part to act as a clearinghouse for those with demonstrated independence and reputational and professional excellence. The exact structure of the IPSIG’s scope and responsibilities could be developed through a transparent process facilitated by the court as it prepares a final response to the creditor filing.

In the end, the creditors are saying that they have tried the oversight board, utility regulation and direct control of PREPA by the governor, but have found no solution in sight. Why not try professional management?

Tom Sanzillo is IEEFA’s director of finance. He can be reached at [email protected]. This column first appeared today in The Bond Buyer.


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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. He also examines such areas as community and shareholder activism, institutional investment, public subsidies and Puerto Rico’s energy economics.

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