At Puerto Rico’s Power Company, a Recipe for Toxic Air, and Debt

Abraham Ortiz has been testifying before a committee of the Puerto Rico Senate about the Fuel Procurement Office. Credit Jose Jimenez-Tirado for The New York Time

Abraham Ortiz has been testifying before a committee of the Puerto Rico Senate about the Fuel Procurement Office. Credit Jose Jimenez-Tirado for The New York Time

THE NEW YORK TIMES – As a lab director at Puerto Rico’s power authority, Abraham Ortiz uncovered what he suspected was a pattern of lawlessness in the authority’s purchasing department, a secretive place where officials controlled contracts to buy billions of dollars’ worth of oil.

For years, he reported to his superiors, the authority bought cheap, residual oil that failed to meet federal clean-air standards, and faked tests to make it look like it had passed. Ledgers were falsified too, he said, to make it appear as though the authority had actually bought the higher-grade oil, which cost more. The higher price was then passed on to consumers.

Giving some credence to Mr. Ortiz’s first complaints in the 1990s, the Environmental Protection Agency found that the oil being burned by the authority did, indeed, contain unacceptable levels of sulfur, which rained down in a toxic mix on neighborhoods near the power plants for years.

Where did the warnings get Mr. Ortiz? The utility closed his lab and sent him to work in another department, where he would not have oversight duties for the testing of oil.

Now, about 25 years later, Mr. Ortiz is being heard. A committee of the Puerto Rico Senate has been pulling back the curtain on the mysterious purchasing department, the Fuel Procurement Office. And Mr. Ortiz, now retired, has been a star witness.

“It was a scheme,” he told the senators last week, “and it went on for years.”

The questions about the oil are part of a much larger mandate the Senate has taken on — determining how the authority became mired in more than $9 billion in debt it says it cannot pay. The debt troubles could not be more pressing, as the legislature faces a deadline on Tuesday for a vote on the authority’s plan for renegotiating that debt.

While it is clear that the authority’s financial downfall is complex and multifaceted, the question of whether it bought dirty oil while billing customers for clean oil stands out as one of the most charged issues it is facing. If true, the accusations would go beyond errors in judgment and amount to a decades-long fraud.

“It is a criminal matter. Hell yes, it is a criminal matter,” said Eduardo Bhatia, the Senate president, who is overseeing the hearings. In a recent interview in Puerto Rico’s imposing capitol building, known as the Palace of Laws, he said the power authority’s longstanding mission was to bring about development and prosperity on the island, but instead it had become an anchor, pulling Puerto Rico down.

Among the unfulfilled promises the authority made, for example, was to use money from the bonds it sold to upgrade its plants and phase out oil as its fuel for generating electricity — something most power utilities in the United States did years ago. In Puerto Rico, that change has still not happened, and the Senate investigators are trying to learn whether goings-on in the Fuel Procurement Office help explain the reason.

“For more than 25 years, I’ve been auditing and evaluating this situation,” Mr. Ortiz said of his beliefs about the oil quality. “I’ve turned to many agencies that had the responsibility and duty to deal with situations like this one.” He named half a dozen of them.

“No one did anything,” he said.

Mr. Ortiz is not alone in his suspicions about the fuel, which was purchased over the years from, among others, the deeply troubled Brazilian state-owned oil company Petrobras. This month another witness, a former chairman of the utility’s board, said it was “no secret” that a few large companies were rigging the prices the utility paid for oil at purported auctions.

“You don’t have to catch people with their hands in the dough to know what a cartel is,” said that witness, Luis Aníbal Aviles. The Senate hearings are scheduled to continue into March.

Similar claims are contained in a highly detailed class-action lawsuit filed by plaintiffs in Puerto Rico who say they were harmed by the dirty oil. They are invoking the federal Racketeering Influenced and Corrupt Organizations Act, or RICO.

The suit names a host of officials, oil suppliers and testing labs as defendants. It estimates that since 2002, Puerto Ricans have paid more than $1 billion too much for their electricity, because they were supporting a scheme of “undisclosed kickbacks or commissions,” run out of the Fuel Procurement Office. It seeks reimbursement plus triple damages.

While not addressing the complaint in any detail, the authority has asked the court to dismiss the lawsuit, saying the plaintiffs have not shown that a racketeering conspiracy even existed, much less harmed them. Lawyers for the many other defendants have done the same.

Arturo Díaz-Angueira, a lawyer for the power authority, called the Senate investigation politically motivated and said the assertions made no sense.

“I would be willing to bet my house that this didn’t happen — that there was no corruption,” he said.

Mr. Díaz-Angueira said the utility had effective systems in place to make sure the oil it burned complied with all federal clean-air standards. Regulators made unannounced inspections to check, he said, and have not found anything wrong.

“This was instigated by a disgruntled employee, named Abraham Ortiz,” he said.

He added that it was particularly troubling that the Senate had decided to hold its hearings now, when the power authority was in talks with its creditors to restructure its $9 billion debt.

“The message being sent to the other side of the ocean is that you’re dealing with crooks here, and that’s terrible,” Mr. Díaz-Angueira said. If the negotiations break down there could be major defaults, and blackouts, this spring and summer.

Senator Bhatia said he had become interested in the utility’s affairs several years ago, when he noticed it had borrowed hundreds of millions of dollars for construction projects that had not been built.

“It’s the most outrageous thing,” he said. “They were borrowing money to meet the payroll. They were borrowing money to run the company. It’s a recipe for having a huge debt, having inefficient equipment, and then going bankrupt.”

Mr. Ortiz did not touch on the utility’s finances in his testimony, but offered a wealth of detail on how it received, stored and tested oil. Hour after hour, under oath, he told of documents doctored by the hundreds with Liquid Paper. He told of lab technicians who recalibrated their equipment to get desired test results. He described off-the-books “rebates” paid to suppliers that were not entitled to the money. He took the senators through an audit report page by page, pointing out each line where he said the findings had been watered down.

 

He recalled the cat-and-mouse games he played with allies in the utility who put him onto audit teams before the Fuel Procurement Office could find out and block him. During one highly contentious field audit in 2012, he said, a man from the Fuel Procurement Office chased him down in a parking lot, screaming.

“He stuck his finger in my face,” Mr. Ortiz said. “He told me the trouble I was making was the source of all the authority’s problems with oil.”

In fact, the authority’s problems with oil had started decades earlier, when residents of Cataño, an industrial community near San Juan, fed up with dirty air and frequent illnesses, waylaid the head of the E.P.A. at a Caribbean conference and persuaded him to do a study. The researchers found that Puerto Rico’s power authority was by far the biggest polluter in its E.P.A. region (which includes New York and New Jersey), spewing an estimated 100 million pounds of sulfur dioxide mist over Cataño and other communities in the shadow of its smokestacks.

The federal regulators found that the authority was burning something known as “sludge,” the oil that is left after more desirable distillates are removed from crude oil. Sludge is filthy to burn in any case, but in Puerto Rico it was worse because the power authority in those days had no emissions controls on its smokestacks.

The E.P.A. brought its findings to the Justice Department and several years of litigation followed. In 1999, the authority came under a federal consent decree, requiring it to limit emissions of sulfur and other hazardous substances. The decree was amended in 2004. Much of the skewed testing that Mr. Ortiz described in his testimony involved what he said were efforts to skirt those limits during and after the litigation, and to continue buying and burning sludge.

“I can’t tell you the reason,” Mr. Ortiz said in his testimony. “I can only tell you that it happened, that it was bad, and that it has had horrible consequences for the authority.”

Correction: February 15, 2016
An earlier version of this article misstated, in one instance, the amount of the Puerto Rico power authority’s debt. It is $9 billion, not $9 million.

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