Puerto Rico Faces Possible Court Battle Over Agency Control

(Bloomberg) -- Puerto Rico Governor Ricardo Rossello is vowing to fight a federal oversight board’s effort to take away his control of the island’s government-owned electrical utility, setting up a potential court battle between the commonwealth and the panel over the bankrupt company.

The governor is planning to appeal the federal board’s decision Wednesday to appoint Noel Zamot as chief transformation officer of the Puerto Rico Electric Power Authority, known as Prepa, which is struggling to restore service after much of the power grid was devastated by Hurricane Maria last month. Nearly 75 percent of residents are still without electricity.

The panel’s move wrests authority away from the governor and the utility’s board of directors just as it’s about to receive a massive influx of federal aid. The U.S. panel has the authority to appoint an overseer under a law enacted last year to address Puerto Rico’s debt crisis, said John Mudd, an attorney in San Juan who specializes in bankruptcy and constitutional law. The board this year placed Prepa into bankruptcy under a procedure known as a Title III.

“They have the right to go to court and do all this,” Mudd said about the board’s appointment of Zamot. “In Title III, they’re the boss.”

Rossello and the federal board have clashed before. The panel earlier this year filed suit against the governor to force him to implement furloughs. The board withdrew its case after the hurricane devastated the island on Sept. 20. Public Affairs Secretary Ramon Rosario said the administration would defend its right to oversee the island’s public agencies.

“We’ll take it to the relevant bodies to defend the authority of the elected government to manage its agencies and corporations,” Rosario told reporters Thursday in San Juan.

Prices on some Prepa bonds increased following the board’s plan to change the utility’s management, something creditors have also pushed for, arguing it would improve its operations and allow them to recover more of what they’re owed. Trades of $1 million or more of debt maturing in 2032 changed hands Thursday at an average of 31.5 cents on the dollar, up from 29 cents on Oct. 23, according to data compiled by Bloomberg.

The Rossello administration will have a hard time retaining authority over Prepa since it’s in Title III, Mudd said. The U.S. rescue law, known as Promesa, prevents the court from interfering with any political or governmental powers of the island unless the federal board agrees to it. U.S. District Court Judge Laura Taylor Swain last month mentioned the need for board approval when she denied Prepa creditors’ request to stay the bankruptcy case and appoint a receiver.

Rossello is trying to exert the remaining power that he has over bankrupt agencies, Mudd said. “The governor of course has to do what he’s doing because otherwise it wouldn’t seem like he’s relevant at all,” Mudd said. “And in certain aspects, he’s not.”

Prepa’s aging system relies on oil to produce electricity and has struggled for years to diversify its fuel source to help lower energy costs. It needed $4 billion of upgrades even before much of its infrastructure was leveled by the hurricane.

“The appointment of Noel is an essential step in achieving the goals of reliable, competitively priced electricity and attracting the private capital we need to revitalize the economy of Puerto Rico,” Natalie Jaresko, the federal board’s executive director, said in a statement Wednesday.

--With assistance from Jonathan Levin

To contact the reporter on this story: Michelle Kaske in New York at mkaske@bloomberg.net.

To contact the editors responsible for this story: Christopher Maloney at cmaloney16@bloomberg.net, William Selway

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