PREPA is a one billion dollars per year criminal enterprise

December 21, 2015
By: Richard Lawless

aeeThe Puerto Rico Electric Power Authority (PREPA) is one of the largest government owned utilities in the world. The Politicians in Puerto Rico and Government Employees have been using the utility as a private piggy bank for almost a decade. Stealing up to one billion dollars per year in public moneys. To accomplish this the utility issued up to 8 billion dollars in fraudulent bonds and secured almost another billion dollars in short term debt.

There are a number of parts to this criminal enterprise and I will take them on one at a time in this article.

There are two types of accounting that a business can use. Cash accounting, which is when you sell and item and take payment immediately. You record the expense of the item sold and the revenue for the payment received. Pretty simple.

Larger firms, like PREPA use accrual accounting. Accrual accounting says you record the expense for the item when you receive it for sale and the income for the item when you bill for it. In accrual accounting you may not have paid for the merchandise yet but record it as an expense anyway and your customer may not have paid for it yet, but you record it as revenue. The accounting rule says if you are expecting payment within a year you record the revenue. If not, you reserve for the loss of revenue in another account. The goal is to set realistic expectations of a company’s cash in and cash outs (cash flows).

PREPA for almost a decade has been providing material amount of electricity to government agencies without collecting any payments. Revenue that by any standard should not be included in revenues. PREPA repeatedly issued offering memorandums for new bond debt where they included this phantom (non-existent) income to make the bond buyers believe they could repay for the debt.

I took a look at the PREPA bond offerings for PREPA’s Power Revenue Bonds 2012A &B issued in May of 2012 and PREPA’s Power Revenue Bonds Series 2013A in August of 2013. Each issue was for approximately $650,000,000. In the Offering Memorandums, PREPA claimed their uncollectable receivables as income leaving the investors with the misleading belief that PREPA could make the payments on the bonds. They couldn’t. PREPA in both cases secured more capital from other sources (lines of credit) and made the shortfall in revenues up by using the lines of credit.

A Ponzi Scheme is a criminal activity where a group of investors are brought in and promised attractive returns that never really exist. To keep the first investors blind to the fact they were misled, the company quickly raises more money from new investors to pay the old investors. It is a house of cards and it requires continued borrowing from PREPA to keep it going.

The question is why would a major government owned utility participate in a Ponzi Scheme? The answer is all cases is always to hide criminal activity.

PREPA powers its power plants from oil. Utilities use NO.2 Fuel Oil that is clean burning, good for the environment and good for the equipment. PREPA employees and others set up a scheme where they would have the utility pay for NO. 2 Fuel Oil but take delivery of No. 6 Fuel Oil. No 6 Fuel oil is much cheaper, heavily polluting and bad for the equipment. On average, No. 6 oil is 30% cheaper then No 2 Oil.

The utility pays the higher price for the No 2 Oil and the Oil Companies kick back the cost difference to the individuals who put this scheme together.

How big are the kickbacks, the following chart shows how much money was involved:

Actual Cost 2009 2010 2011 2012 2013
Difference of
Oil Delivered $575.9 $602.0 $687.4 $870.5 $781.08

That chart is in millions of dollars. It helps explain why PREPA officials don’t want this house of cards to collapse. It also explains why PREPA in continually under all sorts of legal orders from the EPA.

But that is not all. It is just part of the story.

Each bond offering spells out huge amounts of money for capital improvements and construction projects. Many of these projects never get completed but the money disappears. Some projects are completed very slowly. Any project that would reduce their oil purchases are outright killed. In 2014-2015 PREPA killed 15 billion dollars in solar and wind projects that would have save the utility 20% on its cost to produce electricity.

If you combine the oil kickbacks with the missing construction money you have almost a billion dollars a year in missing funds.

The good news is that the schemes have been uncovered and it is just a matter of time until the authorities put an end to this criminal enterprise.

Mr. Lawless has twenty-five years of experience in performing forensic accounting reviews. Mr. Lawless received his Bachelor of Science Degree from Pepperdine University and a Master’s in Business Administration with a focus on finance from the University of San Diego. Richard has had a long banking career as a commercial lender and has served as a senior and executive manager for major banking institutions. In these roles Mr. Lawless was responsible for billions of dollars in assets. Mr. Lawless has also served as Chairman and CEO for a number of non-banking companies some of which have been in the energy sector.

Richard Lawless
951-440-5230
lawlessr@roadrunner.com

1 comentario

  1. Ricardo Martinez dice:

    Politicians and their cronies in every administration have participated in this scam for decades. Many reviews, audits and studies have revealed this problem but everyone in government, including the administration and legislature, keep silent and the press does not publicize it enough.

    This article, and Donahue’s review of PREPA operations and administration should be widely publicized and discussed in Puerto Rico so everyone becomes aware how politicians and their cohorts have stolen millions of dollars and thereby ensured the electrical infrastructure remains inefficient and insufficient to meet Puerto Rico’s needs.

    The appropriate investigative agencies should move quickly to stop this criminal enterprise and avert the collapse of the electrical generating and distribution infrastructure in Puerto Rico.