Nydia Velázquez and Raúl Grijalva refer Mckinsey & Co. to DOJ for possible conflicts of interest in Puerto Rico
The two senior members of Congress argue that private consultants benefit from multi-million agreements with Puerto Rico’s financial oversight board.
U.S. House Representatives Nydia Velázquez and Raúl Grijalva, two senior members of Congress closely monitoring Puerto Rico’s financial restructuring, referred McKinsey & Company to the Department of Justice on Thursday, Feb. 23, over potential conflicts of interest in Puerto Rico.
Congress's incoming probe follows the enactment of the Puerto Rico Recovery Accuracy in Disclosure Act — requiring consultants involved in Puerto Rico’s bankruptcy and energy proceedings to release statements and payments — which revealed a series of potential conflicts between the consulting giant, its clients, and the Financial and Oversight Management Board.
“Following disclosures made pursuant to PRRADA, media accounts revealed that some advisors, including O’Neill & Borges and McKinsey & Co., may have severe conflicting interests,” the letter, referred to Acting Director at the DOJ Ramona Elliot, read.
At the center of the probe are companies with millions of dollars in contracts to address energy in Puerto Rico.
McKinsey began advising FOMB in 2017 after Congress imposed drastic austerity measures to reign in Puerto Rico’s finances and developed “privatization/corporatization plans,” per the Wall Street Journal, to decentralize the energy grid, which was then publicly held by the bankrupt Puerto Rico Electric Power Authority.
Puerto Rico’s electric transmission and distribution, which suffered grave effects after Hurricane Maria, was handed over to Luma in 2021. Luma is a private consortium from Canada that has embarked on a two-year endeavor to “revitalize” the island’s rapidly-waning energy grid, though unsuccessfully.
Luma’s governance over the electric grid has been mired with steep criticism from Puerto Rican residents experiencing haphazard and unexpected blackouts, beginning in 2021 and worsening in 2022.
But despite poor performance since the takeover, Luma’s contract was indefinitely extended, and its privatization enables them to contract vendors with little to no government oversight.
For example, in August, Luma held a press conference to advise the public on an initiative to reduce the frequency of blackouts, looking to correct internal management, but Luma executive Wayne Stensby was not present.
In his place, representatives for Quanta Services, Luma’s parent company, delivered the release instead, in English, in a region that is predominantly Spanish-speaking and where Spanish is taught as the primary mode of communication.
Quanta Services, which owns half of Luma and benefits from the lucrative contract awarded to the consortium in 2022, is a McKinsey client.
“... The Wall Street Journal reported that the consulting firm McKinsey & Co., which is estimated to have earned at least $120 million in advising fees to the FOMB, also had Quanta Services among its clients,” the letter read.
Following numerous media reports — including a Bloomberg article and WSJ report — that Congress shifted its focus toward numerous companies under McKinsey’s client list that also received lucrative government contracts.
Involved in a contractual scheme are EcoElectrica LP and its parent company, Naturgy Energy Group SA, to which FOMB awarded $9 billion to supply natural gas, according to public filings cited in the letter.
Puma Energy Caribe LLC, an energy company owned by Softbank Group, won a $1.5 billion contract to “convert two publicly owned power-generation facilities in San Juan to run on natural gas.”
Genera PR, a subsidiary of New Fortress Energy, “entered into an agreement with the Puerto Rico Public Private Partnerships Authority (...) to operate 12 of PREPA’s power generating units for 10 years with a fixed annual fee if $22.5 million.”
All companies listed are McKinsey clients.
All eyes on Luma
Potential conflicts and a continuing onslaught of blackouts aren’t Luma’s first misstep.
In September, after a series of island-wide blackouts, New York Attorney General urged FEMA to evaluate Luma’s performance in the wake of unreliable service.
“Not only is the frequency of outages problematic, but the duration is also a growing concerns,” said James in a letter addressed to U.S. Department of Energy Secretary Jennifer Granholm, Federal Emergency Management Agency Administrator Deanne Criswell, and Federal Energy Regulatory Commission Chair Richard Glick.
Luma dispels any criticism over a lackluster performance.
“Since LUMA assumed responsibility for the electric grid, we’ve focused on replacing, not just repairing, the deteriorated components in the system. This approach in managing these issues exhaustively has provoked longer durations of service interruptions but will result in a more reliable and resilient service,” a Luma spokesperson told reporters in September.