Puerto Rico board, bondholders argue over PREPA rates

The Puerto Rico Oversight Board and bondholders of the Puerto Rico Electric Power Authority are engaged in a potentially high stakes argument over how electric rates should be set, which could profoundly impact bondholders' recovery.

The Puerto Rico Energy Bureau's long-running rate setting process heated up in the last two weeks, with the bondholders arguing rates should be set to accommodate the full payback of principal, pre-petition and post-petition interest as well as a 20% margin. But the oversight board argued the energy panel could set rates as it sees fit.

Puerto Rico Attorney John Mudd said the bondholders' submission was a "maneuver to prepare the Energy Bureau for the future." By law the bureau must take into account payment to bondholders when setting electricity rates, he noted, "but until there is a clear order from [bankruptcy] Judge [Laura Taylor] Swain as to how much payment bondholders will receive,"

As a result, Mudd doesn't expect the bureau to raise rates.

The bondholders argue that the First Circuit Court of Appeals' ruling in favor of their lien on PREPA net revenues legally requires accommodation in the rates.

It would be inappropriate and illegal for the bureau to discount PREPA's bond debt, which would happen if the rates were not set high enough, they said.

The bureau has repeatedly recognized it must consider "all costs," including debt, when setting rates, the bondholders said. Yet none of the bureau's consultants' several suggested methods of setting rates would accommodate all of the debt and one would accommodate none of it.

The bondholders estimate $12.16 billion of debt is due, including principal and pre- and post-petition interest. When a 20% margin in debt service coverage is included, rates should be set to generate $926 million a year toward debt payment.

"In determining the revenue requirement, it is not the Energy Bureau's role or mandate to handicap PREPA's costs based on speculation about the outcome of ongoing litigation," the bondholders said. "Doing so would usurp the role of the Title III [bankruptcy] court, prejudge the outcome, and amount to the bureau taking restructuring into its own hands."

The bureau factored in the possibility that transmission and distribution company LUMA and generator company Genera will get financial bonuses promised them, the bondholders said, and bond debt should also be considered.

Oversight Board Executive Director Robert Mujica, Jr., rejected the claim that PREPA's revenues should be set to cover all its debt.

"Contrary to National [Public Finance Guarantee]'s statements, the First Circuit's ruling expressly declined to opine on the bankruptcy treatment of the non-settling bondholders' claim," Mujica said. "By acknowledging the claim may be undersecured the First Circuit acknowledged the allowable portion of the claim may be less than the outstanding principal and not include unpaid interest."

Mujica said the bondholders' allowable secured claim is limited to net revenues either in existence or the present value of future net revenues and that the amount will be "quite moderate."