Monday Update – June 18, 2018

Welcome to your weekly Title III update for June 18, 2018. Not much happened this week in the case or outside the case.

In the issue of the UCC’s request for discovery on the causes of the debt crises, the Board filed a report by the investigator. The report states, inter alia:

The Final Report will provide a comprehensive discussion of claims and avenues for recovery. Parties in interest or members of the public may review the Final Report and determine that they require access to documents that have been collected by the Independent Investigator. Accordingly, in advance of publishing its Final Report, the Independent Investigator will seek court approval for procedures governing the storage of, and access to, documents collected during the Investigation, all of which will be placed into a secure document depository for the future use of various stakeholders. . .

 The Independent Investigator anticipates filing a motion for approval of these proposed procedures concerning the documents on or before July 3, 2018, so that it may be heard before the end of July 2018. The filing of this motion will precede the publication of the Final Report, in part, because the motion will also seek to establish procedures for resolving any confidentiality disputes that arise in connection with the publication of the Final Report. As noted, various producing witnesses have entered into confidentiality agreements with the Independent Investigator. Although these agreements generally provide the Independent Investigator with broad discretion to disclose a witness’s confidential information if doing so is in the public interest or necessary to enable the Independent Investigator to fulfill its obligations under PROMESA, witnesses will generally be provided with advance notice of the disclosure of their confidential information, and they may elect to seek a protective order or similar relief prior to such disclosure. The document procedures will seek to funnel any such disputes to a single forum that will apply a uniform set of dispute resolution procedures.

This means that the Investigator will have the report ready by August 2018, with avenues for recovery of claims. If true, the Board would then have to evaluate the “avenues” and make a determination of whether it will pursue these “avenues.” Even without reviewing the documentation and witness testimony, I find it difficult to evaluate whether such “avenues” are promising. Hence, the Board would need to seek permission from the Court to review the documents and witnesses to make sure the “avenues” are, in fact, viable. Then and only then, would the Board be able to pursue said “avenues.”

This time frame is important as 11 U.S.C. § 546(1)(A) limits the time for the trustee – in this case the Board – to seek avoidance of transactions, etc., to 2 years from the date of the filing of the petition, which in the case of the Commonwealth, would be May 2019. Moreover, the Board may decide not to pursue a particular cause of action, but pursuant to 11 U.S.C. § 926(a):[i]f the debtor refuses to pursue a cause of action under section 544545547548549(a), or 550 of this title, then on request of a creditor, the court may appoint a trustee to pursue such cause of action.”This means even more delays, which has always been the UCC’s point in seeking to commence its investigation. This will undoubtedly come up in the June 18, 2018 hearing with Magistrate Judge Dein.

The Board is playing legal games, so if the UCC is serious about conducting an investigation, it will have to consider what additional “avenues” are available to it.

The Puerto Rico legislature finally approved the “Bill to Transform the Puerto Rico Electric System.” It is only in Spanish at this time. Although it has yet to be signed by Governor Rosselló, there is no indication he will not. The bill, however, is definitely not what we expected.

You may remember Bruce Walker, Department of Energy Undersecretary, saying his department had paid the Southern States Energy Board “in association with DOE, is working in coordination with the governor and legislature of Puerto Rico to establish a reliable, affordable, and sustainable electric energy grid system, and to develop a policy and legal framework to provide a regulatory process for possible privatization efforts.” This aspect of the sale was totally ignored by the bill, which only talks about the Southern States Energy Board and the Department of Energy helping with the evaluation of public policy on energy and a regulatory framework necessary for the transformation of PREPA. Moreover, this is contrary to what the Board told Senator Murkowski in a letter in May:

As the representative of PREPA in the Title III court proceedings, the Oversight Board leads the negotiations to restructure PREPA’s legacy obligations, such as debt and unfunded pension. The Oversight Board also plays an integral role in the process to transform PREPA into a modern electric utility that provides low-cost, reliable energy because any transaction to effectuate that transformation will have to be approved by the Title III court as part of PREPA’s plan of adjustment to emerge from Title III. The Oversight Board has retained Citigroup Global Markets, Inc. as the financial advisor, representing both the Oversight Board and the Government, on any potential transformation transactions. Among other things, Citi intends to conduct a broad market sounding exercise to gauge interest level in participating in any potential such transformation transactions that could entail a long-term concession for the transmission and distribution system and the potential sale of generation assets. This market sounding will help shape the RFQ and RFP process that will be conducted pursuant to the amended P3 legislation that is currently being debated in the Puerto Rico Legislature.

It is difficult to reconcile the bill with these statements, especially if you consider that it does not mention the role of the Oversight Board. Further, the bill puts the Public Private Authority Commission in charge of the sale. In addition, the bill requires ratification of the legislature for any sale of the generation. Moreover, the bill requires that to any extent possible, the proceeds of the sale go to the PREPA retirement system and specifies that “the system cannot be suspended by this law or by any transaction it authorizes. The Retirement System can be defined by subsequent legislation.” Unions will not be happy with this.

The bill also states that “[t]he energy public policy and the regulatory framework must be approved by the Legislative Assembly in a period that must not exceed one hundred eighty (180) days since the approval of this law.” During this period, no contract for the sale of PREPA will be finalized. The problem with this is that how can anyone agree to buy a part of PREPA if it does not know the “the energy public policy and the regulatory framework?”  Moreover, PREPA has not completed its integrated resources plan, which the new buyer has to comply with. This will delay any sale – hence the PREPA Plan of Adjustment.

One can easily see that a conflict with the Board will rise. More litigation and expenses while the Board still lords over Puerto Rico. Oh, well.

Finally, the House of Representatives approved another version of the repeal of Law 80 but the Senate president said he does not agree with its changes. Normally, this would go to a Conference Committee that would iron out any discrepancies.  However, the budget, which must be approved by June 30, is dependent on its repeal. If not, the Board will reinstate the previously approved Fiscal Plan with deep cuts on the budget including the elimination of Christmas bonuses. A total mess.

The entire Law 80 debacle has exposed a deeper flaw: the Fiscal Plan and economic assumptions associated with it can be adjusted at the whim by the Board. On one hand, you remove Law 80, and the economy will create thousands of jobs, but the surplus goes down. On the other hand, if Law 80 isn’t repealed, the budget cannot be approved without eliminating the Christmas bonus. This fuzzy math doesn’t add up.  The Board is in a pickle.  Expect creditors to raise these concerns during the Plan of Adjustment. Remember, they now have access to Mr. Wolfe’s data.

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.