Welcome to your weekly Title III update for April 16, 2018. Once again, not much happened in the cases. Outside matters have now taken center stage; but first, let’s talk about Court matters.

As I mentioned last week, Judge Swain held a four hour oral argument on summary judgment motions on the issue of the validity of COFINA. Although as was expected, Judge Swain took the issues under advisement, sometimes the questions a judge asks gives you a glimpse of how she is thinking. Given her questions, it is obvious Judge Swain is concerned as to the title of pledged revenues, that securitization involved tangible assets and the timing of the transfer of the SUT, both as to when it was a tax and the constitutionality of transferring future taxes. When the GO representative came to argue, the Judge raised the issue of services v. payment of public debt. Judge Swain stated that the GO position could entail the rewriting of the PR Constitution and that their position as to available resources included all taxes. That is true, but it also what the Constitutional Convention intended.

From what I could surmise from press reports, the questions by Judge Swain do not swing the pendulum one way or the other since they were mostly public policy questions, not questions of law. In any event, they are simply the questions normally posed to the parties during oral arguments. The markets, however, interpreted the hearing as very positive for COFINA and its prices went up.

In addition, Judge Swain may be trying to pressure the parties to come to some type of agreement as to COFINA. I have always thought that COFINA wants to make a deal with the Board, but any deal is subject to a challenge and possible lawsuit from GO’s. But if GO’s believed they are likely to lose, it could be the incentive they need to agree to a deal. I doubt this scenario since any deals are contingent on the amount of money offered by the Board, which was meager to start with and since November seems to have been reduced to “growth bonds.”

In addition, some of the questions posed by the Judge put in jeopardy the UCC’s hints that much of the bond debt is illegal as it was issued in violation of the debt limits of Article VI, section 2 of the PR Constitution. If Judge Swain’s question as to this issue was her decision, then the 15% limit would only apply to PR General Obligation Bond debt, which does not exceed a limit so calculated.

Also, Judge Swain could hold out her decision until after the plan of adjustment is filed by the Board. If the COFINA decision was handed down today and was favorable to bondholders, it would mean the debt must be paid and there would be no incentive to settle for less than full payment. By waiting until the plan of adjustment is filed and beyond, Judge Swain could be thinking this would force the parties to settle. Again, doubt it would happen with what the Board is offering, but you never know.

Moreover, even if the Court were to find in favor of COFINA bondholders this does not mean that she would find against GO bondholders. She could very easily say COFINA money is not available resources under Article VI of the Constitution but that GO’s have a priority over all other debt, as stated by section 8. That would definitely leave the Board and Government hung out to dry. This year and next are going to be very interesting.

Several bondholders have objected to Magistrate Judge Dein’s order as to Rule 2004 discovery. They want more documents, not less. In addition, the GO bondholders and others filed a motion to compel compliance with the Court’s February 26, 2018 Order addressing the production of Fiscal Plan Development Materials. The motion states:

“Per the Court’s Order, Movants promptly wrote to Respondents identifying the Fiscal Plan Development Materials that they believed were deemed produced pursuant to Section 2004. See Ex. C (Letter from G. Orseck to M. Bienenstock & J. Rapisardi (Feb. 27, 2018)) & Ex. D (Letter from G. Orseck to M. Dale & J. Rapisardi (Mar. 7, 2018)). Respondents refused, arguing that, because the Court had found that Movants had not shown that they needed to immediately use the Fiscal Plan Development Materials, Respondents did not need to produce them at all pursuant to Rule 2004 or the February 26 Order. See Ex. E (Letter from M. Dale & J. Rapisardi to G. Orseck (Mar. 1, 2018)) & Ex. F (Letter from M. Dale & E. McKeen to G. Orseck (Mar. 12, 2018)). Respondents insist instead that they have the unilateral right to determine, on a document-by-document basis, whether to produce any Fiscal Plan Development Materials. See Ex. F. To date, Respondents have refused to produce a single one. See id. As Respondents would have it, Movants are in precisely the same position with respect to the Fiscal Plan Development Materials that they were in before they began litigating the 2004 motion over six months ago.”

Clearly, this is not what Rule 2004 or the Court’s order require. This steadfast refusal to produce documentation on the Fiscal Plans begs the question of what, if anything, is the Board hiding. In any event, the information will become relevant or not when later in the year the plan of adjustment is filed.

Although the PR Senate has unanimously passed a resolution to defund the Oversight Board, the House Speaker, Mr. Méndez, stated that he would not issue such resolution since the Governor requested he do not. As I have said before, the Resolution was nothing more than politicking given Section 107(b) of PROMESA.

The local press has repeatedly reported the Board will hold hearings on April 19-20 to certify fiscal plans, but there is no mention at the time of writing of this in its website. If there are hearings, I will try to attend or at least view it on my computer and report.

What is in the website of the Board is a Letter of Engagement for Duff & Phelps, LLC assist in independent forensic analysis in the following:

“Phase I Scope of Services would be to perform, assess, recommend and/or report to the PROMESA board or its delegates on the following:

1. (1)  Validate with a high level of certainty the completeness of the list of bank accounts in the AAFAF report of January 19, 2018 and the values of those bank accounts as of the reported date;

2. (2)  Recommend additional procedures that need to be undertaken if the completeness of the list in the AAFAF report of January 19, 2018 is determined to be insufficient;

3. (3)  For all materially sized accounts, and for a random selection of other accounts identified by the Government as restricted, identify the documented legal restrictions, e.g., federal, bond-related, local legislature, or local executive.

4. (4)  D&P to provide periodic status updates and a report and recommendation to the PROMESA board regarding the above items, which will include D&P’s estimates of time and fees to perform the agreed upon tasks, once commissioned by PROMESA.”

In other words, almost 9 months after the Board and PR exchanged emails as to the discovery of accounts with billions of dollars, a company is being hired to conduct an investigation as what, if any, limitations these accounts have. Very expeditious work by the Board. Another waste of PR taxpayer dollars by the Board for something they were already aware of.

PREPA has been in the news here and in Washington. The United States House of Representatives Committee on Energy and Commerce, Subcommittee on Oversight and Investigations held a hearing on April 11 on PREPA and its recovery efforts. One of the witnesses was Assistant Secretary Bruce J. Walker, Office of Electricity Delivery and Energy Reliability, U.S. Department of Energy. During his testimony, he stated that the DOE had spoken with Governor Rosselló and he had agreed that the Southern States Energy Board would create the policy and legal framework for the regulatory process for privatization of PREPA. Local news has reported that the contract to be paid by the DOE is for $1.3 million. This was confirmed on Friday during a radio talk show where Senator Ríos of the PNP who added that the Governor had designated Senator Seilhammer, who is an engineer, as his representative.

What is the Southern States Energy Board? According to its website:

“The Southern States Energy Board (SSEB) is a non-profit interstate compact organization created in 1960 and established under Public Laws 87-563 and 92-440. The Board’s mission is to enhance economic development and the quality of life in the South through innovations in energy and environmental policies, programs and technologies. Sixteen southern states and two territories comprise the membership of SSEB: Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, Missouri, North Carolina, Oklahoma, Puerto Rico, South Carolina, Tennessee, Texas, U.S. Virgin Islands, Virginia and West Virginia. . .

SSEB was created by state law and consented to by Congress with a broad mandate to contribute to the economic and community well-being of the southern region. The Board exercises this mandate through the creation of programs in the fields of energy and environmental policy research, development and implementation, science and technology exploration and related areas of concern. SSEB serves its members directly by providing timely assistance designed to develop effective energy and environmental policies and programs and represents its members before governmental agencies at all levels.”

Now it seems it will be in charge of designing the sale of PREPA. Stay tuned.

Mr. Walker also stated that PREPA does not have a good model for their electrical system and this impedes determining where it is a good place to put renewables and where is a bad place to put them. This model for the electrical system is being developed by the DOE and should be completed in 60 days. Does this means that PREPA is being federalized? It certainly feels that way. Moreover, you may have noticed there is no mention here, nor was there mention during Mr. Walker’s testimony, of any role of the Oversight Board in the sale of PREPA. Maybe that is why the Governor accepted the SSEB’s role in the sale of PREPA. In any event, it is VERY UNLIKELY the Board will relinquish its “control” over PREPA. Nevertheless, a model for the PREPA electrical system, the Integrated Resources Plan, required by the PR Energy Commission also will be scrapped, as well as any fiscal plan that does not include said model.  Once the fiscal plans are certified, we will be in better position to see what it will do. We know they are focused on control of all matters.

Very few people know, however, that Congressman Don Young, an old friend of the PNP, has been circulating a draft of legislation on the sale of PREPA. This bill essentially puts the sale of the generation, transmission and distribution electrical systems of Puerto Rico in the hands of the Department of the Treasury.  The Secretary must consult with PR and the Board but he makes the ultimate decisions as to the sale, including selecting the entity to which it would sell PREPA. The selected entity must operate at least one facility involved in generating, transmitting or supplying of fuel in the United States (could be an error to mean electricity). It must have the financial strength to be able to operate and proposals that include a capacity to supply fuel for electricity generation, etc., will be given preference. The process will start within 60 days of the approval of the bill, applications no later than 120 days of the approval and the selection no later than 180 days after approval of the bill. Hence, this should be very fast.

The selected entity will have a $3 billion fund to offset any revenue shortfall which is essentially a Congressional subsidy. It prohibits Contributions in Lieu of Taxes which is a subsidy to Municipalities, a drag on PREPA’s revenue.

The Federal Energy Regulatory Commission is entrusted in the Young bill with establishing, in coordination with the PR Energy Commission, the electricity rates “in exercising this authority, the Commission shall approve a tariff containing rates, charges, terms, and conditions of service that it finds to be just and reasonable and not unduly discriminatory or preferential.” (Section 5(a)(5)). The FERC is also entrusted with authorizing a gasport or pipelines. Finally, gives federal court jurisdiction of any eminent domain claim for a right of easement of over $3,000.

Again, it seems the federal government, both the Executive and the Legislative, want to federalize PREPA. It seems this bill only reinforces why the Southern States Energy Board has been engaged.

In other news, at the local level, the Institute for Energy Economics and Financial Analysis issued a report criticizing the PREPA sale bill. Some of the criticism is very valid, for example, at page 8:

“As demand declines, the fixed costs of electricity generation will be spread over fewer customers, putting upward pressure on rates.  In this situation of highly uncertain and declining electricity demand, investments in large-scale centralized generation facilities carry the additional risk of overbuilding, i.e. that the electricity demand may not materialize to support the new investment. This is why IEEFA has advocated strategically-timed retirements of existing generation facilities and the development of smaller generation facilities as needed to replace them.”

At page 9, it states that the “privatization bill provides essentially no role to the FOMB, nor does it incorporate the proposed privatization transactions into an overall debt management strategy for PREPA.” (bold in the original) The report also criticizes the bill as creating uncertainty and not removing politics from PREPA. Also, at page 12, it states:

“Recent actions taken by Governor Rosselló’s administration indicate that the governor is not serious about changing what the Puerto Rico Energy Commission identified as a core governance problem: “continuous and short-sighted political interference” without independent, professional oversight. The Rosselló administration has worked aggressively to thwart any independent oversight of PREPA.”

On the other hand, when it comes to the bondholder’s debt, the report is totally outside the scope of the possible at page 20:

Elimination of PREPA’s legacy debt. Repayment of the current debt would crowd out the necessary capital investments to rebuild and modernize the electrical system. Bondholders should pursue partial recovery of losses from insurance companies and from legal cases against bond consultants and underwriters who approved possibly fraudulent bond issuances. No funds from the sale of PREPA’s assets should be used to defease or otherwise reduce PREPA’s indebtedness.

In addition, Jose Alameda, a local economist hired by UTIER wrote a report saying that the privatization would increase residential bills by almost $1,000 a year. Clearly, given the DOE’s and likely Board’s intervention, it is unlikely to be the vehicle for the sale of PREPA. What is certain is that the federal government does not trust this administration or the Board for that matter, in the sale of PREPA. Now let’s see what the Southern States Energy Commission comes up with.

Lastly, my column last week in Caribbean Business returned to the issue of the CDL. Much like in the 1985 comedy Brewster’s Millions, Governor Rosselló can have up to $4.9 billion from the federal government, in the form of the CDL, but first he must spend hundreds of millions to empty the Commonwealth’s Treasury Single Account and meet the minimum threshold set by the U.S. Treasury of $1.1 billion.

The real question is how he’ll spend hundreds of millions without regard or control; certainly the Oversight Board won’t stop him.

Transparency here will be paramount. Spending money in the hopes of that you will get the $4.9 billion is no way to govern. So while we patiently wait to see the details of the term sheet between the U.S. Treasury and the Puerto Rican Government, we are reminded that watching Brewster’s Millions was, after all, a comedy. However, what is taking place in Puerto Rico is no comedy. Let’s see what happens.

This summary is merely what I believe are the more salient motions and decisions in the cases. I receive an average of 20 filings each day so it would be impossible to summarize everything. If you have legal interest in these cases, I urge you to hire an attorney to represent you.