Court strikes down challenge to Puerto Rico electric system privatization

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Puerto Rico bankruptcy Judge Laura Taylor Swain struck down a challenge to the Oversight Board’s privatization of Puerto Rico’s electrical system, granting the board’s motion to withdraw a complaint filed by the Puerto Rico Senate nearly two years ago.

Puerto Rico Senate President José Luis Dalmau Santiago and the Puerto Rico Senate filed their original complaint in the Puerto Rico Court of the First Instance in San Juan in June 2020 as the Puerto Rico Electric Power Authority entered into a Transmission and Distribution System Operation and Maintenance Agreement with the Puerto Rico Public-Private Partnerships Authority and the private consortium LUMA Energy.

The agreement was for LUMA to assume operation, maintenance, and modernization of PREPA’s transmission and distribution system starting June 1, 2021.

José Luis Dalmau Santiago

Puerto Rico Senate President José Luis Dalmau Santiago lost his legal effort to stop the privatization of PREPA’s transmission and distribution system.

“Compelling the withdrawal of the complaint is appropriate,” Swain said, because a debtor’s contract rights are among the property interests protected by section 362(a)(3) of the bankruptcy code.

Dalmau Santiago and the Senate argued the O&M Agreement had not been recorded with the Puerto Rico Digital Real Estate Registry, as was required by Puerto Rico’s real estate registration act, asking the court to declare the agreement null and void.

Swain further said, “On plaintiff’s own reading of the Registration Act, nullification [of the O&M Agreement] is at the very most one possible consequence that may (but need not) result from a recordation failure.”

Swain decided the Senate complaint was null and void and she directed Dalmau Santiago to withdraw the complaint no later than Monday.

In June 2021 the Oversight Board moved the case from the local court to Swain’s federal court. It argued that the federal court overseeing PREPA’s bankruptcy had the right to hear the case because, in Swain’s summary: “(i) the O&M Agreement is integral to PREPA’s restructuring, (ii) PREPA’s restructuring is directly threatened by the civil action, and (iii) an attempt to invalidate the O&M Agreement interferes with, and seeks to exercise control over, PREPA’s property.”

Later in June 2021, the Senate parties asked for the case to be returned to Puerto Rico court while the board filed a withdrawal motion, asking for Swain to declare the suit void.

Dalmau Santiago’s suit was “a political move by the president of the senate to appease those opposed to the LUMA contract,” said Puerto Rico Attorney John Mudd. “He can now claim that he tried but the evil board and Judge Swain stopped his effort.

In the next few weeks, the Puerto Rico legislature will decide on whether to pass the board’s requested legislation for the proposed PREPA debt deal. The Oversight Board is considering ways of completing a debt deal without legislative support.

“As to [the PREPA] bond workout, [the Puerto Rico Senate’s action] begs the question if the legislature will put up a fight as to the lock-box payment for bondholders, the PREPA retirement fund deficit, or the so-called sun tax,” Mudd said. “Will the board give in or will it ignore the legislature and proceed to the plan?”

On Monday Tom Sanzillo, director of finance at the Institute for Energy Economics and Financial Analysis, told The Bond Buyer, “I am hearing that there is not legislative support for the PREPA debt transaction.”

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