Big Oil Traders Accused of Cheating Puerto Rico’s Power Utility

(Bloomberg) -- In one of many scandals that plague Puerto Rico, four of the world’s largest oil suppliers are accused of cheating the island’s electric utility out of more than $1 billion.

A class-action lawsuit alleges Vitol SA, Trafigura AG, the U.S. trading arm of Royal Dutch Shell Plc and Brazilian producer Petrobras conspired to sell substandard oil at inflated prices to the now-bankrupt power authority, known as Prepa. Four years after it was filed, the suit faces a pivotal hearing Wednesday in a San Juan courtroom.

Plaintiffs say it’s their best shot at restitution for what they call a scheme that paved the way for catastrophe when Hurricane Maria tore through the electrical grid in 2017, plunging the island into darkness for months. They’re seeking at least $3 billion in damages.

“It’s the largest corruption scandal in the history of Puerto Rico,’’ said Senator Eduardo Bhatia, who served on a commission that investigated the utility’s fuel purchases in 2016. “The layers of oversight were so thin, we didn’t have anybody regulating them.’’

Prepa’s Role

Prepa lies squarely at the heart of the economic woes that have hung over the commonwealth for a decade. The biggest U.S. public utility, with 1.5 million customers, charges some of the highest electric rates in the country. Yet it’s stuck with aging generating stations that suffer outages at about 12 times the frequency of utilities on the U.S. mainland.

Big Oil Traders Accused of Cheating Puerto Rico’s Power Utility

For the world’s biggest commodities trading firms, the case threatens to open another front in a growing list of corruption allegations. In December, Brazilian prosecutors charged intermediaries linked to Vitol, Trafigura and Glencore Plc of arranging more than $31 million in bribes to win oil contracts from state-controlled Petroleo Brasileiro SA. The U.S. Justice Department has joined the investigation, according to Brazilian authorities.

Representatives for Petrobras, Trafigura and the Shell (U.S.) Trading Co. declined to comment. A spokeswoman for Vitol, the world’s largest independent oil trader, said the allegations “are untrue and unfounded. There is no evidence of any wrongdoing on Vitol’s part."

The Puerto Rico Electric Power Authority, also named in the suit, didn’t respond to messages seeking comment.

‘Baseless Conjecture’

In legal filings, the companies dismiss the allegations as vague and unproven. The suit is full of “baseless conjecture’’ and “completely lacking in specificity,’’ Vitol said in its motion to dismiss. Trafigura said it was a victim of “guilt by association’’ and that it hadn’t sold fuel to the authority, only to intermediaries.

The companies paid undisclosed commissions and kickbacks, provided expensive gifts and threw lavish parties to win contracts, the suit said. They delivered “millions of barrels’’ of fuel that violated both environmental and quality standards, according to the suit. Suppliers and authority officials allegedly worked with local laboratories to fake compliance tests, it said.

In addition to the oil companies, the lawsuit also names the former chief and deputy head of Prepa’s fuel-procurement office and three laboratories.

“These were big and important contracts for the oil companies,’’ said Elizabeth Fegan, a partner with Seattle-based Hagens Berman Sobol Shapiro LLP who represents the plaintiffs.

Uphill Battle

The plaintiffs face an uphill battle. Puerto Rico has asked an appeals court to overturn the class-action certification, which would make the case more difficult to pursue. The commonwealth has also urged U.S. District Court Judge Laura Taylor Swain, who is overseeing the island’s bankruptcy, to keep the suit on hold, arguing it would complicate efforts to reorganize Prepa.

In bankruptcy, winning permission to press a lawsuit while a company is reorganizing can be difficult, in part because plaintiffs must show they have a good reason to go forward while other cases remain stuck. Judges typically halt lawsuits so the bankrupt company can restructure without distractions.

In the third-biggest municipal failure in U.S. history, Prepa fell into bankruptcy with $9 billion of debt in July 2017. Two months later, Maria barreled through.

In a December 2016 report, a special commission of Puerto Rico’s Senate accused Prepa’s purchasing office of granting “monopolistic power to the same suppliers to arbitrarily establish the price of the fuel.’’

Two prior audits by the commonwealth’s Comptroller’s Office, meanwhile, cited irregularities in fuel testing.

“The money they were borrowing, the $9 billion, was used to make up for all of these irregularities and inefficiencies that grew out of this purchasing scheme,’’ Bhatia, the senator, said, “as opposed to investing in a stronger grid, or on newer technologies.’’

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