Economic Development

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.

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My Thoughts Regarding Mr. Leonard Weiser-Varon and Mr. William Kannel of Mintz Levin’s Blog Post

On March 17, 2014, Mr. Leonard Weiser-Varon and Mr. William Kannel of Mintz Levin published an entry in his blog titled “Legislative Balloon for Puerto Rico Public Corporation Insolvency Attracts Bondholder Attention”.   Although I agree with much of what is said there, a few issues need clarification.

Puerto Rico defaulting on its bond obligations is not an if, but rather a when. The island’s economy has not grown since 2006, with the exception of one quarter of .1% in 2012, clearly a case of depression rather than recession.  The idea of Puerto Rico’s default has been discussed all over the bond and business media and there seems to be a general agreement that it will happen in the next three years. Hence, a orderly process for the reorganization of Puerto Rico’s public corporations and even municipalities is a must.

Felix Salmon recently stated that “[t]he default will be messy, however, since there is no chapter of the US bankruptcy code that encompasses Puerto Rico. A lot of different court cases will be held in a passel of different jurisdictions, and a lot of lawyers will get rich. In the end, everybody is going to have to take a nasty hit—including the island’s retirees, whose pension funds are woefully underfunded.” (footnote omitted).  Given this scenario, it is in bondholders interest to have the administration of this impending default in the hands of one court with a clear statute to guide it. Moreover, Puerto Rico’s public corporations owe over $25 billion and municipalities, not yet included in the statute, owe $3.88 billion more. See, GBD presentation to investors of October 15, 2013, at page 56.   It must also be remembered that the Puerto Rico Electric Power Authority, according to its financial statements of 2013, has $791,385,000 more in liabilities than in assets. See page 8.  See also my blog entry.

The entry mentions Governor Garcia Padilla’s opposition to the proposed measure but this must be taken with boulders of salt. As it is very common, he speaks with one side of his mouth to the voters in Puerto Rico and from another to investors. His only comments in the local press were that he had not participated in its writing and that no specific plans for restructuring of corporations had been adopted. In addition, given that the next administration, coming in on January 2, 2017, will have to assume the bulk of payment of the new $3.5 billion bond emission, the measure could very well garner minority vote to override any veto by the Governor.

The entry continues with a general questioning of Puerto Rico’s power to enact a liquidation or reorganization law. Although the power to enact bankruptcy laws was delegated to Congress via the U.S. Constitution, it is nevertheless a fact that for a large part of our history it was not used. The first bankruptcy law was enacted by Congress in 1800 to 1803 when it was repealed. Later it was enacted twice and repealed twice but in 1898 it was here to stay, with several amendments and a complete overhaul in 1978. In the interim, several state laws were enacted to fill the void.

In this framework and considering that Puerto Rico’s public corporations and municipalities are explicitly excluded from Chapter 9 of the Bankruptcy Code, 11 U.S.C. § 101 (52), Puerto Rico can legislate since there is no preemption. With a doubt, however, any filing of a Puerto Rico public corporation or municipality pursuant to this law would trigger litigation but it would not take several years to resolve. Let us imagine that PREPA filed for protection of this new reorganization law. What would be the bondholder’s reaction? Rush to Federal Court to question the laws constitutionality? Very likely, but then they would be faced with several abstention doctrines, to wit, Railroad Commission v. Pullman Co., 312 U.S. 496 (1941); Burford v. Sun Oil Co., 319 U.S. 315 (1943) or Louisiana Power & Light Co. v. City of Thibodaux, 360 U.S. 25 (1959). Pullman requires the federal court to abstain when there are federal and state constitutional questions and send the case back to state court to litigate them. Unless plaintiff makes a specific reservation of federal rights via England v. Louisiana State Board of Medical Examiners, 375 U.S. 411 (1964), all claims will be litigated in state court and will be res judicata in federal court, see, Duty Free Shop Inc. v. Administración de Terrenos, 889 F.2d 1181 (1st Cir.1989). If there is such a reservation via Pullman, the plaintiff may return to federal court. Burford and Thibodaux are a bit more complicated for they involve undecided questions of state law of great public policy import. Case law is not clear if an England type reservation of rights would be possible pursuant to these abstention doctrines, see, Front Royal and Warren County Industrial Park Corporation v. Town of Front Royal, Virginia, 135 F.3d 275 (4th Cir. 1998) and Fields v. Sarasota Manatee Airport Auth., 953 F.2d 1299 (11th Cir.1992). Hence, the cases would be sent back to Puerto Rico’s courts.

Moreover, even if bondholders made a reservation of rights, the issues would be quickly decided. The Puerto Rico Supreme Court has very actively exercised its discretion to certify issues in the Courts of First Instance for quick decision. This was done in Trinidad v. ELA, 2013 TSPR 73 and Domínguez Castro et al. v. E.L.A. I, 178 D.P.R. 1 (2010), cert denied, Domínguez Castro v. Puerto Rico, 131 S. Ct. 152  (2010) Both Trinidad and Domínguez Castro were decided in a year or less on issues of the constitutionality of altering contractual obligations.

This brings us to the issue of the alteration of contractual obligations pursuant to the U.S., rather than Puerto Rico’s constitution. Federal courts, however, have been accommodating of a government’s efforts to alter its obligations. It is allowed as long as evidence of crisis and failure of other efforts is discussed in the legislation. This was affirmed by the First Circuit in the firing of over 12,000 employees due to the 2009 financial crisis, see, United Auto., Aerospace, Agr. Implement Workers of America Intern. Union v. Fortuño, 633 F.3d 37 (1st Cir. 2011). As evidenced by the dates in these cases, these controversies were decided in less than two years at the state Supreme Court level and the Circuit Court of Appeals level. Given the strictures of the U.S. Supreme Court’s certiorari practice, it is unlikely it would be granted. Also, irrespective of which court decides the case or when, the fact remains that once the reorganization filing occurs, bondholders will cease to be paid.

The entry also points out, quite correctly, that the law as it is now, does not provide for a cram down of a plan. However, the Senators who wrote the act knew that it was incomplete and were expecting input from several sources, including my own.   Mr. Weiser-Varon and Mr. Kannel’s insight will undoubtedly be examined and adopted by the Puerto Rico legislature.

¿déjà vu?

“It’s like, déjà vu all over again”   Yogi Berra

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Salen hoy imágenes del equipo económico del Gobernador con brazos en alto celebrando el que PR se endeudó aún más al son de $3,500,000,000.  Image

Se me vino a la mente una foto similar, Neville Chamberlain con el tratado que hizo con Hitler sobre la partición de Checoeslovaquia donde dijo “I bring peace in our time”.   Nuestros líderes políticos están tan enajenados de la realidad como lo estaba Chamberlain.Image

Veremos como acaba esto.