The Puerto Rico Electric Power Authority wasn't destined to fall $8.6 billion in debt, putting it on the cusp of the biggest default in U.S. municipal bond history. Reaching this point required a unique combination of bad decisions and poor execution. ‎A decades-long failure to wean itself from the use of expensive fuel oil has left the government-run utility with electric rates among the highest in the U.S. The result: On an island where about half the people live below the U.S. poverty line, the agency loses a sixth of its energy to theft and, at one point last year, was owed about $1.75 billion in unpaid customer bills.

While Prepa, as it's known, has tried to escape its oil dependency, its efforts—including the failure of an experimental nuclear plant and two unsuccessful tries at building natural gas pipelines—have largely fallen flat, leaving the agency struggling to survive.

"Prepa has become a dinosaur," said Pedro Nieves-Miranda, special counsel for Puerto Rican law firm Fiddler, Gonzalez & Rodriguez PSC and the former chairman of a task force that studied the authority in 2012. "If you can think of an inefficiency at a utility, you'll find it there."