Negative effects of the Boston decision
Eduardo Bhatia
John Weinberg/ Goldman Sachs & Co. Visiting Professor in Public and International Affairs at Princeton University
The decision of the First Circuit of Appeals in Boston to revoke a lower court decision by Judge Laura Taylor Swain in the case of the bankruptcy of the Puerto Rico Electric Power Authority (PREPA) this week is a monumental error that will have dire consequences for Puerto Rico. This decision, which grants bondholders the right to fully recover their $8.5 billion debt, ignoring the difficult economic and social reality of the island, threatens to further destabilize the country's already precarious energy and financial system.
In 2013, we took on the task of taking an X-ray of PREPA's finances. What we found was horrifying: they had been taking out loans uncontrollably for years and there was no way to repay. They used the money for operational expenses, crazy collective bargaining labor agreements and made false representations to the markets. Even worse, when PREPA took out loans, it placed all the generation plants and the company's assets as collateral under a 1974 agreement. In other words, the bondholders could keep the company in the case of a default.
Our initial instinct was to protect PREPA as a government owned utility. The bondholders themselves brought Lisa Donahue to try to establish some order, but she did not succeed. Then, we approved the "Creole" Bankruptcy Law, which the Federal Supreme Court declared unconstitutional. Congress then passed the Promesa Law in 2016 and, even with all its colonial vestiges, we saw the light at the end of the tunnel. An adjustment plan was worked out that would give PREPA and Puerto Rico oxygen. However, the bondholders were dissatisfied and sued, but Judge Taylor Swain agreed with the Fiscal Oversight and Management Board, which wanted to protect Puerto Rico.
Now this has become complicated: the Boston Court overturned the judge.
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The decision to allow bondholders to recover their entire debt, and not only from specific accounts, but from all of PREPA's future net income, is a disproportionate burden for an entity that is already in a desperate financial situation. With frequent blackouts affecting hundreds of thousands of residents, adding the pressure of repaying a colossal debt to their operational obligations will only aggravate this crisis.
In addition, the court's interpretation of "net income" is particularly worrisome. Defining them as any income left over after subtracting reasonable and necessary operational expenses opens the door to a series of endless litigation over what constitutes a “reasonable” expense. This approach is not only impractical, but also ignores the complexity of running a failing public company, where every dollar must be carefully allocated to keep the lights on.
The decision also has broader economic implications. As the Fiscal Oversight Board pointed out, PREPA does not generate sufficient net income unless electricity tariffs are increased. This means that Puerto Rico residents, already burdened by high living costs and an inefficient energy system, could face significant increases in their electricity bills. An increase in tariffs would not only be unpopular, but could also have devastating effects on the local economy, reducing the purchasing power of consumers and negatively affecting small businesses.
Finally, the possibility of the bondholders appointing a trustee to operate PREPA under the aforementioned 1974 agreement is an extreme measure that could lead to an external administration without any understanding or interest in local needs. This would only serve to further alienate the population and increase distrust in public institutions.
In summary, the decision of the First Circuit of Appeals is not only a blow to PREPA's financial stability, but also represents a failure to understand the complexities and unique challenges of Puerto Rico. It is imperative that this decision be reconsidered and that more balanced and sustainable options be sought that do not sacrifice the well-being of Puerto Ricans on the altar of debt recovery."
Hope your travels over the land of Socrates, Plato and Aristotle have made you wiser. A ? on the PR electric co structure - maybe discussed in your Princeton class. I recall some companies split the “bad” company from operating company. The operating company would “strip” legacy issues you found when you were in the Senate (circa 2013). My assumption is that most of the bond/unfunded pension funds would qualify as legacy (amt TBD based on appeals court mentioned above). These liabilities encompass all the operating excesses approved by management. In well functioning operations, bonds would have financed new equipment to improve productivity. I assume AEE has zero assets to support bonds. I am going to make up numbers - say the kWh cost for operating is 15 cents while the legacy cost is 27 cents. Now I combine this article to your NEARSHORING article. New manufacturers coming to PR should be charged the 15 cents while everyone else pays the 27 cents. Charging 27 cents to new manufacturers will kill the deal (think medical gloves supported by Nydia Velazquez), so you charge the 15 cents. Is it fair? Yes, the population paying the 27 cents voted for politicians that allowed PREPA/AEE to go wild. Over time legacy costs are paid
Transitioning to new adventures. Mentor, leader and Facilitator
9 个月What the Puerto Rican and federal governments ought to do is to go after all the senior government officials who were fully aware what the energy company was doing and did not do anything. As a Puerto Rican, who decided to leave Puerto Rico 46 years ago, I knew that sooner or later would become bankrupt. I worked at municipal and state governments and witnessed the government corruption at all levels. What did I do, nothing because to get a job you needed someone who knows someone who could get you a job if you were an active member of the ruling.
Chief, Strategy & Future Concepts Development Division, GS-15, DoD, U.S. Air Force, AFMC, AFIMSC - Former U.S. Army Wartime Battalion Commander, OIF 1 - Visiting Lecturer / Professor, SKEMA Business School, France & UAE
9 个月The recent decision by the First Circuit of Appeals in Boston to overturn a lower court's ruling in favor of the bondholders seeking to recover the full $8.5 billion debt from the Puerto Rico Electric Power Authority (PREPA) represents a significant legal and financial precedent with profound implications for Puerto Rico and its residents. This decision not only prioritizes the claims of bondholders over the operational needs and financial health of a critical public utility but also reflects a broader issue of fairness and the challenges of fiscal autonomy faced by the people of Puerto Rico. Unfairness to Puerto Rican Residents: 1. Increased Financial Burden: The decision to allow bondholders to claim against all future net income of PREPA places an enormous financial burden on the utility, which is already struggling with outdated infrastructure and high operational costs. This can necessitate increases in electricity rates to meet debt obligations, directly impacting Puerto Rican households and businesses by raising their cost of living and operating costs. Given the already high energy costs in Puerto Rico, further increases could have a stifling effect on economic activity and household financial stability... (more follow).
Experienced Quality Leader | Specializing in Quality Assurance & Control, Audits, Team Building, Lab Instrumentation, Asset Management | Driving Organizational Success & Delivering Results
9 个月Senador: Con todo el respeto que se merece, la decisión del Tribunal de Apelaciones del Circuito de Boston puede ser parte del hundimiento económico que podría sufrir Puerto Rico por alzas en energía eléctrica. Esas alzas afectaría, entre otras cosas, el bolsillo del herman@ puertorrique?o. Nada eso discuto. El asunto es que la autoridad siempre ha sido un lugar donde políticos, de ambos partidos, han puesto amigos y batatas políticas para sus propósitos. Acaso no recuerda los energéticos progresistas y populares. Después que se hizo el da?o, ahora pues los bonistas son los malos. Hermano, hay senadores y representantes que tienen sus puesto congelado en la autoridad, y llevan a?os en el Capitolio insular. Yo entiendo que sí se debería pagar a los bonistas, pero a su vez garantizar un servicio de excelencia para el Pueblo de Puerto Rico. Que conste, ninguna de los dos se ha logrado. Se puede llorar y pedir cacao, o se puede dise?ar un plan económico viable para que se asegure el pleno desarrollo puertorrique?o y cumplir con el que invirtió en el. Talento y creatividad tenemos,nos falta voluntad. Por último, NO culpo al estatus político,somos puertorrique?@s bajo cualquier situación metemos mano. No se dejen llevar por un artículo
President of SESA Puerto Rico | A Conductor of the Clean Energy Transition
9 个月Yep. And on top of that: Complex Post-Traumatic Stress Disorder (C-PTSD) occurs when someone is exposed to prolonged, repeated traumatic events, leading to chronic trauma that significantly impacts mental health. This concept can be applied to the collective experience in Puerto Rico today. Since Hurricane Maria in 2017, which caused the longest blackout in U.S. history, residents have faced frequent power outages. The island's electrical grid remains fragile, with bureaucratic delays and policy disagreements hindering significant improvements. Recently, another widespread blackout led to a new state of emergency declaration and activation of the National Guard. This persistent instability creates a form of collective C-PTSD among residents, who endure ongoing stress and uncertainty without a clear resolution in sight. Treatments for C-PTSD are similar to those for PTSD, including Cognitive Behavioral Therapy (CBT), Eye Movement Desensitization and Reprocessing (EMDR), and medications. However, C-PTSD treatment often emphasizes building coping skills, managing interpersonal relationships, and improving emotional regulation due to the prolonged trauma.