Alejandro García Padilla

THE BALCANIZATION OF ENVIRONMENTAL POLICY

 

 

We have all seen the protests in Peñuelas and Fortaleza by a group of activists intent on stopping the deposit of coal ash in a landfill and the Courts’ rejection of challenges to the legality of said deposit, including the latest denial by the Appellate Court of a reconsideration on its ruling reversing an injunction prohibiting this activity. We have also seen populist politicians respond to those protestors by reviving Senate Bill 340 to prohibit said deposit. Given all this turmoil I would like to discuss the legal and economic ramifications of these acts.

 

Puerto Rico’s environmental policy is entrusted to the Puerto Rico Environmental Quality Board by the Legislature to put into effect said policy. This commonsense approach, however, has been put in jeopardy by some municipalities intent on putting in effect policies the EQB has rejected.

 

AES buys coal in Columbia and burns it to generate approximately 16% of the electricity sold in PR. The burning of this coal produces two types of ashes: bottom ash and fly ash. These types of ash are collectively referred to as coal combustion residuals. AES produces approximately between 200,000 to 250,000 tons a year of this ash, also called coal ash.

The Environmental Protection Agency (EPA), the federal agency entrusted by Congress to regulate these substances, considers this ash a “non-hazardous solid waste.” The Federal EPA has delegated the issuance of permits for the disposal of said non-hazardous solid waste to the Puerto Rico Environmental Quality Board (EQB), which is in accordance to the island’s environmental public policy. Several companies in PR have permits issued by the EQB based on the regulations approved by the EPA. In other words, the local EQB, as the agent of the EPA, puts in effect federal environmental policy and Puerto Rico’s public policy as to environment.

 

Peñuelas and Humacao, however, have opted to illegally bypass federal and Puerto Rico law and enacted ordinances that directly conflict with them. The municipalities have also sued several companies that use this ash in landfills as part of their permits. In one case, the Court of First Instance issued the injunction against the deposit of ash in landfills but the PR Appellate Court determined that the ordinance of the Municipality of Peñuelas had been issued in violation of due process and was invalid. Another Court of First Instance this time in Ponce determined that the ordinance was invalid since it was contrary to PR law and public policy. At the same time, another Court of First Instance issued an injunction from the deposit of the ash reasoning that the issue was before the PR Supreme Court, although plaintiff had not asked for it but rather an injunction to obstruction to the deposit of ash. Fortunately, the Appellate Court reversed this decision this November. Also, the ordinance issued by the Municipality of Humacao is being challenged in the Court of First Instance.

 

As stated before, the controversy in one of these cases is before the PR Supreme Court but it has yet to issue a certiorari. Strangely enough, although these companies have all their EQB permits; neither the agency nor the PR Government has filed amicus curiae with the Supreme Court. The reason? Both Peñuelas and Humacao are headed by powerful PPD mayors and consistent with the García Padilla’s administration’s practice of preferring politics to sound governmental policy. If you are a PPD mayor, Governor García Padilla will look the other way if you do anything wrong, irrespective of the damage to PR. Moreover, there are at least 20 PPD municipalities with landfills that are documented as polluting groundwater, soil and air but have faced no action by AGP’s EQB and the press has all but ignored their protest but thoroughly covered the Peñuelas protests. Nor is there a mention by the Governor or the press that ECL and PVL are documented as compliant with regulations and non-polluting on the community in Peñuelas.

 

This situation has profound implications for PR’s economic development. PR’s environmental public policy is put into effect by the EQB, who has issued permits pursuant to federal regulations to these companies. These municipal laws are not only preempted by federal law, but are illegal since they are in conflict with the clear PR public policy evidenced by the permits issued by the EQB. If the Supreme Court were to allow municipalities to stop the application of federal and Commonwealth policy in their demarcations will not only further delay any economic growth we may experience but will also mean the balkanization of environmental policy of the island. The mayors of Peñuelas and Humacao are shamelessly spending public money to favor some of their PPD cronies in these cases. If the Supreme Court permits this, what will prevent from other municipalities from favoring their “friends” by blocking companies with proper permits from operating in their demarcations? It is now up to the Supreme Court to stop this nefarious practice.

 

Finally, populist senators are pressuring the Governor to include Senate Bill 340 in the Extraordinary session. Even if unsuccessful, it has come to my attention, that PNP senators such as Larry Seilhamer are contemplating support for the bill. The EPA and EQB regulations on coal ash come after hundreds of hours of scientific study and commentary. Politicians cannot be swayed by protestors alone. PNP leaders will have to decide whether to support the rule of law and US environmental protection regulations and EQB statements that the ash is non-hazardous or join the independentistas to garner a few votes at the cost of the rule of law and economic growth of the island.

THE JULY 1st 2016 DEFAULT

 

 

Yesterday governor Alejandro García Padilla, just a day after PROMESA became law, and in cahoots with the US Treasury and President Obama, defaulted on the payment of the General Obligations bonds guaranteed by the Constitution in excess of $800 million. This was not coincidence. I have time and again mentioned that the struggle over the payment of PR’s debt is the spearhead of a greater struggle over the sanctity of these GO bonds that has great repercussions over such Democrat strongholds as Illinois, California and New York.

 

By defaulting on these GO bonds, formerly considered sacred and protected by the PR Constitution, the Governor not only violates his oath to protect and defend the Constitution, but also frightens away future holders of PR bonds. He did it under the theory that PR cannot be sued during the stay provided by PROMESA (section 405). But as usual, the governor misunderstands the stay. PR cannot be sued for collection of moneys during the stay, but it expires on February 15, 2017 and it is only extendable for 75 more days, to wit, May 2017 (section 405(d)). Also, the stay may be lifted after a notice and a hearing for cause shown (section 405(e)).

 

In addition, GO bondholders may go to Federal Court in a declaratory judgment requesting a declaration that the governor’s actions violate the Constitution, 11 U.S.C. § 903 (section used by the Federal Courts to invalidate the Recovery Act) without seeking collection of money and at the same time request the lifting of the stay. We must remember that section 405(k) of PROMESA says that “[t[his section does not discharge an obligation of the Government of Puerto Rico or release, invalidate, or impair any security interest or lien securing such obligation.” Finally, la section 405(l) states:

 

Nothing in this section shall be construed to prohibit the Government of Puerto Rico from making any payment on any Liability when such payment becomes due during the term of the stay, and to the extent the Oversight Board, in its sole discretion, determines it is feasible, the Government of Puerto Rico shall make interest payments on outstanding indebtedness when such payments become due during the length of the stay.

 

In other words, the governor’s actions are not necessarily protected by PROMESA. Let’s see what happens.

PREPA DEAL GONE WRONG

 

 

On Friday night we all went to bed thinking PREPA had obtained a new extension but woke up to the end of the Forbearance Agreement. On the one hand, PREPA says the bondholders wanted further guarantees before they lent it $115 million such as the approval of the Energy Board to the rate increase, which would take months without PS 1523 being approved. On the other hand, the bondholders blame PREPA for the break-up of negotiations.

 

What happened? What are the implications of what we know? Let’s see the history of this problem.

 

PREPA realized in June of 2014 that it would not be able to pay its bondholders in July. The Board brought the problem to the Governor and it decided to take the money to pay bondholders from reserves. This was a technical default of the 1974 PREPA Bondholders Agreement. Due to this, PREPA and its bondholders sat down to talk. On August 14, 2014, PREPA announced agreements with its creditors, the so-called “Forbearance Agreement”, which included that the company had to hire a restructuring officer that would be approved by the Forbearing Bondholders. As per the agreement, on March 2, 2015, PREPA was to deliver a business plan and the agreement was to expire on March 31. On March 30, PREPA announced a 15-day extension on the Forbearance Agreement. On April 15, it announced another 15-day extension and on April 30, 2015, one until June 4, 2015. On June 1, PREPA presented to bondholders the Recovery Plan but not to the public.

 

On June 5, PREPA announced another extension to the Forbearance Agreement until June 18, 2015. On June 18, another extension was announced until June 30, 2015. On July 1, 2015, an extension was announced until September 15. On September 2, 2015, PREPA announces agreement with 35% of its bondholders. On September 21, an extension was announced until October 1, 2015, which was again extended to October 15, which was again extended on October 23 until October 30. It was extended again until November 3. On November 3, the Restructuring Support Agreement (RSA) is announced and on November 10, 2015, Ms. Lisa Donahue testified before the PR Senate Energy Commission on behalf of the PREPA Revitalization Act, which implements parts of the RSA. The RSA states RSA that PREPA must make a rate review request from the PR Energy Board no later than December 21 and that the Legislature must approve the bill no later than November 20 2015. It also states that the rate increase must be in place on or before March 1, 2016 pages 31-32 of the RSA.

Since the bill, PS 1523, had been filed on November 4 and had 159 pages, the legislators, with good reason demurred. Subsequently, everyone assumed Governor García Padilla would call for an extraordinary but he refused. The RSA was extended to December 17 and then December 23 and finally to January 22. On December 23, PREPA announced an agreement with the monolines and now had 70% of bondholders on line with the RSA.

Continuing with these events, Ms. Donahue told the US Congress on January 11, 2016 that PREPA could not get a better deal in Chapter 9 or that its rates would go down under that regime starting at 1.07 minutes Moreover, she said PREPA would run out of money to pay for fuel and that there would be blackouts.  See also Ms. Donahue’s testimony at 1.19 minutes.

What does all this mean? Why has a deal with 70% of bondholders on board, vital to PREPA gone down the tubes? We don’t know yet but there are various possibilities. I have always believed PS 1523 did not have the votes to be approved in the House where a group of six leftists legislators could with three votes block any legislation. Also, the PR Legislature wanted to change the bill substantially. Obviously, this is not what bondholders wanted to hear.

Today, Governor García Padilla made a press release emphasizing the need for the PREPA bill to be approved, but he forgets he did not call for an extraordinary session to discuss the law in December, wasting precious time. In addition, he said, “Our legislature has requested more time to bring to the table other options, other proposals.” After 18 months of negotiations, it is surprising and irresponsible for the legislature to require time to bring about “other options, other proposals.” Good or bad, Ms. Donahue is the person designated by PREPA to do the negotiations, which were approved by the PREPA Governing Board. To change things now would mean months of negotiations and the distinct possibility that bondholders would not accept them.

The more we read of this press release, the more it is obvious that the Governor does not have control of his Legislature. Also, although the Governor acknowledges the need for the agreement due to the difficult situation with PRASA and the Government’s debt, he arrogantly says at the end of the press release “I warn creditors, at the same time, it is not time for pressure games. I accept reasons, not pressures.”

It almost seems that the Governor, PREPA and their advisors have decided to scuttle the agreement in order to push Congress for a Chapter 9. It was clear that this agreement belittled the need for PR to have access to bankruptcy. By playing the blame game, PR could be hoping to move a reluctant Congress. The problem with that is that now creditors can claim that PREPA did not negotiate in good faith, a requirement of Chapter 9, see, 11 U.S.C. § 109(c). Bondholders accepted haircuts, offered to provide money, granted several extensions to continue negotiating, all to naught. In any event, this situation will make the eligibility issue a mayor battle if Chapter 9 was authorized for PR.

Question is, what now? Bondholders could decide to buckle and accept PREPA’s refusal and continue negotiating a deal until July when the company must pay over $400 million in bonds as well as over $700 million to banks for fuel purchase. On the other hand, bondholders could get tough and file on Monday a request in federal court for the appointment of a receiver to run PREPA and get paid. Or they could do both. Who wins? The lawyers involved in the litigation. Let’s see what happens.