PREPA federalization draft bill floating in Congress

26 July 2018
Congressional lawmakers have circulated more than 20 pages of detailed legislative language to have the Department of Energy (DOE) take over the embattled Puerto Rico Electric Power Authority (PREPA), according to documents seen by Debtwire Municipals.
 
Still in rough draft form, a bill tentatively titled the “Puerto Rico Energy Stabilization and Hurricane Resiliency Act of 2018” delineates specific steps to have the federal government—via the DOE—take over PREPA, impose a temporary administrator to supersede Puerto Rico’s Energy Commission ratemaking power, establish a corporation to issue restructuring bonds, and create special investment assurance accounts as part of the utility’s ongoing privatization process.
 
Through the creation of the “Puerto Rico Energy Transformation Administration (PRETA),” a separate and distinct organization within the DOE, the federal government would exercise autonomy and control over the entire electric power system in Puerto Rico pursuant to Article IV, Section 3 of the US Constitution.
 
As its main goals, the draft bill aims to create a workable system to temporarily manage PREPA during and after its restructuring pursuant to Title III of the Puerto Rico Oversight, Management, and Economic Stability Act and to transform PREPA into a reliable, cost-effective utility that is less dependent on oil for its electric power generation.
 
The bill also seeks to resolve the utility’s Title III bankruptcy proceeding to remove the barrier to new private capital investment, and establish electricity rates sufficient to cover the costs of operation and allow a professional private operator to manage, operate, and maintain PREPA.
 
“That language is old and we’re not considering it anymore,” Kristina Baum, communications director of the US House Natural Resources Committee, told Debtwire Municipals.
 
“This is language that was floated to the committee prior to our hearing… and though we may have commented on such language, in no way are we committed to these concepts, nor are they indicative of the committee’s position” Baum said.
 
“Chairman [Rob] Bishop [R] made it very clear yesterday [25 July] that federalization is not the answer,” she added.
 
Bishop made his comments hours prior to a much-awaited Natural Resources Committee oversight hearing yesterday titled "Management Crisis at the Puerto Rico Electric Power Authority and Implications for Recovery." 
 
Consensus on privatization, but not federalization
 
While the hearing missed its key witness, Governor Ricardo Rossello, the five witnesses in attendance were supportive of privatizing PREPA, though not all immediately embraced the idea of federalizing the bankrupt utility company.
 
“Given yesterday was an oversight hearing, we are gathering ideas from the parties and members you heard yesterday,” said Baum. “There is no draft yet.”
 
Yet many of the ideas raised during yesterday’s hearing comprise the lion’s share of the draft bill seen by Debtwire Municipals.
 
More specifically, the bill describes the establishment of the “PREPA Transformation Corporation,” a special-purpose public corporation that would hold revenues from a special restructuring charge in trust for holders of PREPA’s outstanding bonds and bank loans; hold a legacy pension charge for payment of PREPA's pension obligations; and issue restructuring bonds for PREPA’s Title III prepetition bonds and fuel line claims.
 
That portion of the bill is very close to the testimony of James Spiotto, managing director at Chapman Strategic Advisors, who yesterday said that once under DOE oversight, PREPA should seek consensual creditor agreements similar to those espoused in the discarded restructuring support agreement.
 
Another section of the bill would have the US Treasury Secretary establish the “Puerto Rico Electricity Investment Assurance Program” to assure approved revenues of the winning bidder for PREPA’s transmission and distribution system.
The program may provide up to USD 3bn of federal financial assurance to make up for any revenue shortfalls.
 
Similar ideas comprised the testimonies of David Svanda, a principal at Svanda Consulting, and Thomas Emmons, a partner at Pegasus Capital Advisor, who recommended yesterday that the federal government provide certain financial guarantees to incentivize private-sector investment in PREPA.
 
Svanda also suggested having the federal government impose its own energy commission, arguing that Puerto Rico’s four-year-old Energy Commission (PREC) is too young and inexperienced.
 
Incidentally, the draft bill calls on the administrator of the above-referenced PRETA to supersede PREC’s ratemaking power. The PREC and any successor would have no jurisdiction or power to review any rate set, or other action taken, by PRETA’s administrator, according to the draft bill.
 
The final portion of the bill calls on the Federal Energy Regulatory Commission to authorize the siting and construction of onshore or near-shore liquefied natural gas facilities, issue all corresponding certificates, and approve tariffs for transportation of natural gas by pipelines.
 
by Javier Balmaceda in Washington DC