Judge Swain certifies constitutional challenges to PROMESA
By The Star Staff
The judge overseeing the Puerto Rico Electric Power Authority’s (PREPA) bankruptcy to restructure some $10 billion in debt certified on Wednesday challenges to the constitutionality of the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA), which created a bankruptcy process for Puerto Rico and the Financial Oversight and Management Board to oversee local finances.
Monoline insurers Assured Guaranty Corp. and Assured Guaranty Municipal Corp., as reported by the STAR in a June 14 story, provided notice to the court and the attorney general of the United States of their objection to PREPA’s debt plan. They said their objection calls into question the constitutionality of PROMESA on the grounds that it violates the uniformity requirement of the U.S. Constitution’s Bankruptcy Clause.
In her order certifying the challenges to the U.S. attorney general on Wednesday, U.S. District Judge Laura Taylor Swain said objections have also been filed by Isla del Rio Inc. and Manuel González Joy arguing that the proposed debt plan violates the Fifth Amendment to the Constitution of the United States by failing to pay just compensation for the taking of property.
They would be among several challenges to PROMESA to date, including a case involving the appointment of Financial Oversight and Management Board members, which the Supreme Court has dismissed.
The challenge by Assured stems from the fact that bankruptcy rules must be uniform for all states. Congress enacted PROMESA, a bankruptcy law that applies only to Puerto Rico.
Assured Guaranty has said its only remaining non-paying Puerto Rico exposure is PREPA. While the entity says it prefers to resolve PREPA’s debt restructuring consensually and remains open to doing so, “the PREPA bonds have robust creditor protections, and we’ll continue defending our rights in court as necessary.”
Bondholders are insisting on getting their entire $8 billion bond claims paid in full, but the oversight board wants to reduce the payout significantly.
Although it is subject to change, the PREPA debt plan proposes to restructure PREPA’s debt principally through issuance of $5.68 billion of new bonds to fund partial recoveries on creditors’ claims. PREPA owns about $8.26 billion in revenue bonds, plus some $218 million in prepetition accrued interest on such bonds. The utility also owns $700 million in fuel line loans and projects roughly $246 million to $4.9 billion in general unsecured claims. It also has over $3 billion in unfunded pension liabilities.
Under the proposed plan, PREPA will pay for the new bonds over 35 years through revenues from a “legacy charge” to PREPA’s customers.
The legacy charge for certain customers not currently benefiting from subsidized electricity rates is about $19 a month that would be added to the utility bill. The legacy charge, which will be used to pay bondholders, would exclude qualifying low-income residential customers from a connection fee and kilowatt-hour (kWh) charge for up to 500 kWh per month. For non-subsidized residential customers, the proposed PREPA legacy charge would be: a flat $13 per month connection fee; and 75 cents per kWh for up to 500 kWh per month of electricity provided by PREPA, and 3 cents per kWh for electricity above 500 kWh per month.
For commercial, industrial, and government customers, the PREPA legacy proposed charge would entail: a connection fee of between $16.25 for small business customers, $20 per month for smaller industrial companies, and $1,800 per month for large businesses proportional to their current rate.