Lawyer offers scenarios on fate of LUMA Energy contract
By The Star Staff
Lawyer John Mudd said the current Sept. 9 deadline for the Puerto Rico Electric Power Authority (PREPA) to finish mediation with creditors and inform the Title III bankruptcy court whether there is a debt adjustment plan will determine the fate of the LUMA Energy contract.
PREPA, which has been in bankruptcy since 2017, is currently in mediation to work on a new debt adjustment plan to restructure some $9 billion in debt. A previous debt adjustment plan was cancelled because the government objected to it.
Since the summer of 2021, LUMA Energy has been in control of PREPA’s transmission and distribution system, but last week and into the weekend protests have been mounted demanding the contract’s cancellation amid anger over the private consortium’s inability to reduce power outages or limit their duration. Because PREPA remains in bankruptcy, LUMA Energy and PREPA are working under the terms of a supplemental agreement that is slated to expire Nov. 30.
In his blog Muddlaw, the lawyer, who practices in federal court, said certain givens or conditions must have taken place for the contract to be cancelled. The Puerto Rico Public-Private Partnership Authority must have first sent a communication to LUMA under section 14.1(c) of the contract, alleging fault or that the company has not complied with the terms of the contract. Officials also must have given LUMA Energy 60 days, which can be extended another 30 days, to remedy the faults.
Mudd is also assuming that the Financial Oversight and Management Board is not going to allow the government to cancel the contract unless there is another private operator ready and willing to take control of PREPA’s transmission and distribution system.
Mudd presented three possible scenarios as to the fate of the contract.
The first scenario assumes that PREPA and its creditors reach an agreement on how to restructure PREPA’s debt.
Under the first scenario, Judge Laura Taylor Swain would establish a calendar of hearings to confirm the debt adjustment plan by December, January or February. However, the oversight board will seek to extend the Nov. 30 expiration date of the LUMA Energy supplementary contract.
The lawyer said the first scenario can be divided into two parts.
“If the adjustment plan is confirmed, in all probability the LUMA contract will be validated,” Mudd said. “If the plan of adjustment is not confirmed for any compelling reason, Bankruptcy section 930(a) indicates that the bankruptcy case is dismissed. The bondholders could then request a trustee for PREPA and if 25% or more of them request it, the Court has to grant it. In that case, LUMA will probably decide to leave.”
Under the second scenario presented by Mudd, the PREPA case mediation team and/or the oversight board and the bondholders announce to the court on Sept. 9 that there is no consensual adjustment plan.
“Here things get interesting,” the lawyer said. “The Board, the Unsecured Creditors Committee, the UTIER [Electrical Industry and Irrigation Workers Union] and the Retirement System could request litigation if the bondholders have liens on the rate. The bondholders will request that the bankruptcy be dismissed and ask for the appointment of a trustee.”
If Judge Swain decides to litigate the matter, she could take more than a year to do so with no guarantee that PREPA will win the litigation.
“Given that scenario, it is likely that LUMA will simply decide to leave,” Mudd said. “If the bankruptcy is dismissed, LUMA will likely decide to leave.”
Under a third scenario presented by Mudd, the mediation team on or before Sept. 9 seeks more time to continue the mediation.
“Judge Swain may or may not grant it,” he said. “If she does, I don’t think it will be more than 30 days and we go back to scenarios 1 and 2. If she decides not to do it, then comes scenario 2.”
“As we can see, the important date is September 9, not November 30,” he said.
Furthermore, if LUMA Energy continues to fail, which is feasible, in order to cancel the contract, there must be another private operator available to replace LUMA because the fiscal plans of both commonwealth and PREPA require the privatization of the transmission and distribution system and that will not change whether the politicians or other groups want it or not, the lawyer said.
Lawyer Rolando Emmanuelli, who represents UTIER in the bankruptcy case, said in a radio interview the contract with LUMA Energy should be cancelled because it goes against the law and is leonine, which means it benefits only LUMA Energy. He acknowledged that the oversight board must agree to the contract’s cancellation.
Nonetheless, he noted that the supplementary contract with LUMA will expire automatically on Nov. 30, which “presents a great opportunity to get rid of LUMA Energy without seeking permission from the Board and a transition period.”