Puerto Rico residents sue power authority, allege fraud

(New (KOSDAQ: 160550.KQ - news) throughout, adds details about lawsuit and comment from analyst)

By Edward Krudy

NEW YORK, Feb 24 (Reuters) - Local residents and businesses sued Puerto Rico's Electric Power Authority (PREPA) in federal court on Tuesday, alleging fraud in the fuel oil procurement process that plaintiffs said resulted in island residents being overcharged by more than $1 billion.

The lawsuit in U.S. District Court in Puerto Rico accuses PREPA, one of the largest U.S. public utilities, of taking kickbacks to accept millions of barrels of fuel oil from suppliers that did not meet contract requirements or federal environmental standards.

"As a result of this scheme, PREPA overpaid its fuel suppliers for fuel oil and passed through the entire cost of the non-compliant fuel oil to plaintiffs," the lawsuit alleged. The lawsuit covers oil purchases since 2002.

The lawsuit names 20 defendants including several PREPA officials and suppliers including Brazil's Petroleo Brasileiro SA, Dutch commodity trader Trafigura Beheer BV and Shell Trading, the trading arm of the global energy giant Royal Dutch Shell (Xetra: R6C1.DE - news) .

PREPA said it had not received a court summons or a copy of the lawsuit and could not comment on it.

The complaint alleges that PREPA and its suppliers colluded with testing laboratories that issued certificates for compliant fuel. It alleges that in one incident in October, 2010, a tank of fuel delivered by Petrobras or Trafigura initially tested as non-compliant, but was ultimately issued a certificate of compliance after a retest following intervention from officials acting for Petrobras and Trafigura.

Petrobras and Shell (LSE: RDSB.L - news) did not immediately respond to a request for comment. Trafigura said it does not comment on legal matters.

Allegations of corruption in PREPA's procurement process gathered pace last year. The U.S. Justice Department's white collar crime division is conducting an investigation launched after media outlets reported on a lavish retirement party thrown by oil suppliers for a former head of the PREPA's fuel purchasing office.

PREPA is also embroiled in complex negotiations with bondholders, to restructure operations. A potential deal could involve writedowns of more than $9 billion of total debt outstanding.

"Oil suppliers have already been hesitant to absorb the counterparty risk of engaging with PREPA on longer-run fuel contracts, and investigations like these are unlikely to inspire new bids into the fray," said Daniel Hanson, a Washington D.C.-based analyst at Height Securities.

Some PREPA bonds were lower Tuesday. Bonds maturing in 2020 traded at an average price of 58.50 cents on the dollar compared to 58.75 when they last traded on Feb. 13. (Additional reporting by a contributor in San Juan; Editing by Marguerita Choy and David Gregorio)