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Tuesday, December 22, 2015

PREPA Is A One Billion Dollar A Year Criminal Enterprise


by Richard Lawless

The 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 mo-
neys. To accomplish this the utility issued up to 8 billion dollars in fraudu-
lent 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 accoun-
ting,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 recei-
ved. 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 expen-
se anyway and your customer may not have paid for it yet, but you rec-
ord 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 elec-
tricity to government agencies without collecting any payments. Revenue 
that by any standard should not be included in revenues. PREPA repeated-
ly 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 
BondsSeries 2013A in August of 2013. Each issue was for approximately 
$650,000,000. In the Offering Memorandums, PREPA claimed their unco-
llectable 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 in-
vestors 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    
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 improveme-
nts 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 is CEO of Commercial Solar Power, Inc. in Temecula, CA. The opinions 
expressed  in the preceding commentary are exclusively his own and do not represent the 
opinions of The Puerto Rico Monitor, its editors or advertisers.

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