(New throughout, adds details about lawsuit and comment fromanalyst)
By Edward Krudy
NEW YORK, Feb 24 (Reuters) - Local residents and businessessued Puerto Rico's Electric Power Authority (PREPA) in federalcourt on Tuesday, alleging fraud in the fuel oil procurementprocess that plaintiffs said resulted in island residents beingovercharged by more than $1 billion.
The lawsuit in U.S. District Court in Puerto Rico accusesPREPA, one of the largest U.S. public utilities, of takingkickbacks to accept millions of barrels of fuel oil fromsuppliers that did not meet contract requirements or federalenvironmental standards.
"As a result of this scheme, PREPA overpaid its fuelsuppliers for fuel oil and passed through the entire cost of thenon-compliant fuel oil to plaintiffs," the lawsuit alleged. Thelawsuit covers oil purchases since 2002.
The lawsuit names 20 defendants including several PREPAofficials and suppliers including Brazil's Petroleo BrasileiroSA, Dutch commodity trader Trafigura Beheer BV and Shell Trading, the trading arm of the globalenergy giant Royal Dutch Shell.
PREPA said it had not received a court summons or a copy ofthe lawsuit and could not comment on it.
The complaint alleges that PREPA and its suppliers colludedwith testing laboratories that issued certificates for compliantfuel. It alleges that in one incident in October, 2010, a tankof fuel delivered by Petrobras or Trafigura initially tested asnon-compliant, but was ultimately issued a certificate ofcompliance after a retest following intervention from officialsacting for Petrobras and Trafigura.
Petrobras and Shell did not immediately respond to a requestfor comment. Trafigura said it does not comment on legalmatters.
Allegations of corruption in PREPA's procurement processgathered pace last year. The U.S. Justice Department's whitecollar crime division is conducting an investigation launchedafter media outlets reported on a lavish retirement party thrownby oil suppliers for a former head of the PREPA's fuelpurchasing office.
PREPA is also embroiled in complex negotiations withbondholders, to restructure operations. A potential deal couldinvolve writedowns of more than $9 billion of total debtoutstanding.
"Oil suppliers have already been hesitant to absorb thecounterparty risk of engaging with PREPA on longer-run fuelcontracts, and investigations like these are unlikely to inspirenew bids into the fray," said Daniel Hanson, a WashingtonD.C.-based analyst at Height Securities.
Some PREPA bonds were lower Tuesday. Bonds maturing in 2020traded at an average price of 58.50 cents on the dollar comparedto 58.75 when they last traded on Feb. 13. (Additional reporting by a contributor in San Juan; Editing byMarguerita Choy and David Gregorio)