Joseph Krist

Publisher

The signing of the hard infrastructure bill is as much a beginning as it is the culmination of a process. Now, state and local governments and agencies have choices to make. Some will wish the money to fund real expansions of facilities, some will devote most to rehabilitation. As we discuss, some are looking at the funding as a source of “free” money to be applied to already determined projects which can now allow governments to undertake them without raising revenues of their own.

Those decisions will determine what the ultimate result of the infusion of federal infrastructure dollars is in terms of new facilities will be.

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BROADBAND AND CARBON CAPTURE GET FEDERAL SUPPORT

Broadband and carbon capture are two clear winners in terms of the federal infrastructure legislation. The law introduces qualified broadband projects as a new category of exempt facility of private activity bonds (PABs) under federal Tax Code. Qualified broadband projects include facilities for the provision of broadband internet access to census tracts in which a majority of households lack broadband access prior to the date of issuance of qualifying bonds. Additional support stems from the fact that this new category of PABs enjoys a 75% exemption from the volume cap requirements for privately owned projects and a 100% exemption from volume cap for government-owned projects.

Qualified carbon dioxide capture facilities were included in a new category of exempt facility PABs. Qualified carbon capture facilities include key clean energy technologies such as eligible components of industrial carbon dioxide emitting facilities used to capture and process carbon dioxide, and direct air capture facilities. An eligible component is further defined by the Act as any equipment that is used to capture, treat, or store carbon dioxide produced by industrial carbon dioxide facilities or is related to the conversion of coal and gas byproduct into synthesis gas. 

We have previously discussed carbon capture and its potential for use of the municipal bond market to finance its development and expansion. This legislation is another significant step in that process.

BRIGHTLINE RETURNS

The high-speed rail line serving Florida’s east coast between Miami and West Palm Beach has resumed full service after being shut down for the pandemic. The Brightline is encouraging rides with a variety of special fares and an offer of a free first ride. That promotion will last thru the end of 2021. The resumption is one more potential object lesson in the process of recovery from the pandemic. We note that Brightline will use federal regulation for its COVID staff and passenger protocols. Brightline required all staff to be fully vaccinated prior to the reintroduction of service and staff and guests will be required to wear masks in stations and onboard all trains. 

The resumption comes as the Sunshine State’s cruise industry undertakes its slow climb back to pre-pandemic levels of demand. There will be plenty of chances to gauge demand but at least some operators are taking a cautious approach. Port Canaveral recently said at an annual update that it expects to see 779 cruise ships with the potential of a 6.6 million passenger capacity in 2022. However, the port budgets actual passenger traffic in the range of 4.1 million as ships ramp back up.

Compare those projections with the experience just before the pandemic shutdown the economy. In 2019, Port Canaveral saw 689 ships with a total passenger capacity of 5 million berth at its facilities serving a total of 4.7 million passengers. That means 2022 may see a 13% increase in ship activity and a 12.7% decrease in actual passengers compared to 2019. Some of that reflects a trend towards bigger ships. Port Canaveral is the home port to 11 ships of which 9 have passenger capacities in excess of 4,000.

A successful cruise industry is key to Brightline’s long term plans to serve Disney World. It is expected that cruising passengers would be a fertile source of potential demand.

PRIVATE TOLL SUBSIDIES

The Elizabeth Crossing tunnel project in Hampton Roads has been financed and developed as a public private partnership. In order to develop support for the project and its tolls, provisions had to be made to alleviate the impact of tolling on low income workers. A program was developed serving a small number of drivers – the Toll Relief Program.

Now that program is being expanded. Annual funding will increase six-fold in the program in 2022 to more than $3.2 million and then grow 3.5% annually. The 2022 Toll Relief Program is open to Portsmouth and Norfolk residents who earn less than $30,000 a year. The enrollment period begins December 1, 2021, and closes February 15, 2022. Toll reimbursements for the new program begin on March 1, 2022. Current participants must re-enroll to receive the 2022 Toll Reduction Program benefits. 

The funds will allow for the following changes to be implemented in 2022: provide participants with a 50 percent toll discount on up to five round-trips a week to reduce the cost of commuting to and from work; more than double the number of drivers, up to 4,300, eligible for the program; eliminate the minimum number of trips required before discounts become available; and, apply the rebate for the discount on a daily basis instead of monthly. 

The toll rate increase that was scheduled for 2021 and suspended due to the COVID-19 pandemic will now be spread out over the next three years.

TRANSIT FUNDING CONTRAST

The long-term debate over transportation funding in the Commonwealth of Pennsylvania has taken yet another turn away from a solution. Earlier this year we discussed a plan to rehabilitate nine bridges throughout the state by means of a public private partnership. (MCN 9/27) That plan would have required the establishment of tolls on those bridges which are currently free. Pushback was to be expected.

Now, the pushback has come legislatively. The State House representatives voted 125 to 74 for requiring legislative approval of specific proposals to add tolls. The bill would require PennDOT to publicly advertise toll proposals, take public comment and seek approval from both the governor and the Legislature. The tolls would be put in place from the start of construction in 2023 and could last for 30 years. The fact that the projects impact the four corners of the State meant that the tolls could have a more widespread economic impact. This did not help politically.

The other factor is the impact of the recent federal infrastructure legislation. The availability of that money eroded support legislatively as well. One has to wonder if this is one potential downside of the legislation. Many lower levels of government might look at the federal funds as a convenient excuse to avoid difficult or creative transit plans. It’s a fact of life under a federal system that the ultimate application of federal funds may disappoint or limit the total amount of funding which might be possible. The problem will not be unique to the Commonwealth.

One opposite response is seen in Oregon where the federal legislation is not changing plans to expand and upgrade to bridges in the state. Two of them are being undertaken funded by tolls. That expansion of I-205 project in the Greater Portland metro area is estimated to cost about $700 million. By comparison, Oregon is only receiving $400 million in flexible federal funds under the legislation.

Side by side these two contrasting attitudes shine a light on the realities of many programs. The federal money is not necessarily the blank check which many think it is. Grants have conditions, other funding has requirements for funding from states as well, and some of the programs are meant to support state infrastructure revolving funds.

BRIGHTLINE RETURNS

The high-speed rail line serving Florida’s east coast between Miami and West Palm Beach has resumed full service after being shutdown for the pandemic. The Brightline has resumed with a variety of special fares and an offer of a free first ride. That promotion will last thru the end of 2021. The resumption is one more potential object lesson in the process of recovery from the pandemic. We note that Brightline will use federal regulation for its COVID staff and passenger protocols. Brightline required all staff to be fully vaccinated prior to the reintroduction of service and staff and guests will be required to wear masks in stations and onboard all trains. 

The resumption comes as the Sunshine State’s cruise industry undertakes its slow climb back to pre-pandemic levels of demand. There will be plenty of chances to gauge demand but at least some operators are taking a cautious approach. Port Canaveral recently said at an annual update that it expects to see 779 cruise ships with the potential of a 6.6 million passenger capacity in 2022. However, the port budgets actual passenger traffic in the range of 4.1 million as ships ramp back up.

Compare those projections with the experience just before the pandemic shutdown the economy. In 2019, Port Canaveral saw 689 ships with a total passenger capacity of 5 million berth at its facilities serving a total of 4.7 million passengers. That means 2022 may see a 13% increase in ship activity and a 12.7% decrease in actual passengers compared to 2019. Some of that reflects a trend towards bigger ships. Port Canaveral is the home port to 11 ships of which 9 have passenger capacities in excess of 4,000.

SALTON SEA LITHIUM DRILLING

We recently discussed the potential for the Salton Sea (MCN 7.9.21) to be a source of lithium for electric car batteries. The developer of the project (backed by investment from GM) began drilling its first lithium and geothermal power production well this month.  The geothermal portion of the plant is designed to produce steam to drive turbines. The Imperial Irrigation District, meanwhile, has agreed to buy most of the 50 megawatts of power that the plant would initially generate.

The geothermal project is the first new such project undertaken in California in 30years. It is unfolding as efforts to extract lithium from the ground is raising significant environmental concerns. Mining efforts are being challenged in the federal courts. 

ENERGY POLITICS

It has not taken long for the pressures of high gas prices to make its way into the political process. South Carolina will have a gubernatorial election in 2022 and it is already generating some controversial ideas. One candidate is now proposing to suspend the state’s gasoline taxes as an answer to high current gas prices. The SC Department of Transportation has made its case that this would be a bad idea. The proposal would suspend the tax for eight months. SCDOT estimates a $625 million revenue loss.

“The legislative process to consider – much less approve – such a measure as dedicating replacement funds to SCDOT will not take place until next year. This means that state funding would not be accessible to pay for projects and other roadworks until after July 2022 or eight months from now.  That’s eight months with no state funding to pay for new paving projects, new bridge projects, no ability to pay for day-to-day maintenance work on South Carolina’s extensive roadway network, and financially the biggest blow would be to SCDOT’s ability to provide the matching funds to draw down $1 Billion in federal infrastructure dollars. “

States will have to be careful as they navigate the infrastructure legislation. It is not simply a question of accounting for funds passing through from the federal government. Many of the funding sources are tied to maintenance of effort requirements on the part of states or are intended to serve as a source of funding to be leveraged to support other funding and financing mechanisms.

WINTER RAISES ENVIRONMENTAL QUESTIONS

The colder weather (it is supposed to have snowed as we go to press here at the mothership) has already begun to impact retail electric bills. With natural gas prices seeing explosive cost increases, those costs will pass down to retail. One example is the experience of the Maine Public Utilities Commission which opened bids for the default, standard offer electricity supply for customers served through the Canadian power supplier Versant’s utility lines. The lowest bid for forward supply next year was 89% higher than this year. Residential customers who take standard offer supply can expect bills to rise as much as $30 a month. 

In New York State, the impact of a changing energy landscape has shifted the State’s power grid from nuclear with the final shutdown of Indian Point. From an environmental perspective the replacement of that power has led to more carbon dependance not less. The power generated from the nuclear plants is being replaced largely by natural gas fired generation.

This highlights what may be a central dilemma as the power generation industry moves away from fossil fuels. Many utilities want to use natural gas as a bridge a low or no emission future. While cleaner than coal, gas clearly has its own environmental flaws and there has been much opposition to its increased use. It is the easier short-term alternative for many utilities so we expect that the natural gas debate continues.

FIRE AND UTILITIES

This summer the extraordinary wildfire season refocused attention on the role of utility equipment as a source of fire risk. That discussion always leads to Pacific Gas and Electric whose equipment and maintenance policies have led to several fires. This has raised righteous indignation about private utilities and their profit motive and the lack of maintenance spending.

This week, we saw evidence that it is not just investor-owned utilities which find themselves in PG&E’s predicament as it relates to equipment maintenance and fire. Estes Park Power and Communications, the municipally-owned electricity provider for Estes Park, CO has confirmed that one of its power lines sparked a fire burning outside the town. A preliminary investigation by the Larimer County Sheriff’s Office found the fire was likely sparked after a tree fell onto an electric distribution line amid high winds. 

The municipal connection stems from the fact that Estes Park draws its power from the Platte River Power Authority, the wholesale electricity provider also serving Fort Collins, Loveland and Longmont. Estes Park has apparently tried to deal with tree trimming. The city trimmed vegetation around the distribution line a month ago and it spent more than $900,000 on fire mitigation projects in 2020 and is on track to spend a similar amount this year. 

CREDIT REBOUNDS

S&P announced that it had revised its U.S. airport sector view to positive from stable based on improving aviation industry conditions. This improvement is reflected in the strong rebound of U.S. domestic passengers in recent months, stabilization of airline credit conditions, massive federal assistance provided to the sector, and recovery in airports’ revenue-generating capacity and rate-setting flexibility.

Laredo, TX is the third busiest port by trade in 2021, and number one busiest inland port, in the United States. Over 50% of northbound commercial trucks crossing the Texas-Mexico border come through Laredo, a market share that has been consistent for many years. This heavy bias towards commercial vehicles being such a large source of revenue allowed the World Trade Bridge to generate revenue as limits on commercial vehicle traffic were less stringent than for private passenger vehicles. Now, that the restrictions on individual cross border travel have been lifted, the outlook for revenues at the Bridge remains bright.

That has filtered into the ratings for the bonds issued to finance capital costs at the bridge. Moody’s Investors Service has upgraded the ratings on the Laredo International Toll Bridge System’s senior and subordinate lien revenue bonds, respectively, to A1 and A2 from A2 and A3. It cited consistent strong cash flow and the expected boost from increased border traffic.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Publisher

GEORGIA AND CLIMATE CHANGE

Southern Co. announced in its quarterly earnings statement that Georgia Power’s share of the third and fourth nuclear reactors at Plant Vogtle has risen to a total of $12.7 billion, an increase of $264 million. The original projection of the total project cost for all participants was$14 billion. Along with what cooperatives and municipal utilities project, the total cost of Vogtle has now reached $28.5 billion, more than double the original projection.

Southern Co. also disclosed that the other owners of Vogtle – Oglethorpe Power Corp. owns 30%; The Municipal Electric Authority of Georgia (MEAG) owns 22.7% and the city of Dalton’s municipal utility owns 1.6%. Florida’s Jacksonville Electric Authority is obligated to purchase a portion of MEAG’s capacity They contend that Georgia Power has tripped an agreement to pay a larger share of the ongoing overruns, a cost the company estimates at up to $350 million.

Another issue which involves municipal owners is Southern’s plan to reduce its coal generation by 55%.  At its peak, it operated 66 generating units of coal, producing 20,450 megawatts. It now operates 18 units producing 9,799 MW. Georgia Power plans to remove roughly 3,000 MW of coal in the state, including two of the four units at Plant Bowen and one at Plant Scherer, which is the largest coal plant in the country.

Georgia Power plans to remove roughly 3,000 MW of coal generation in the state, including two of the four units at Plant Bowen and one at Plant Scherer, which is the largest coal plant in the country. The main owners of Scherer 1 and 2 are Oglethorpe Power Corp.; the Municipal Electric Authority of Georgia; and the city of Dalton, Ga. Florida Power & Light Co. and Jacksonville, Fla.’s electric company, JEA, agreed earlier this year to shutter the unit that they jointly own at Scherer by 2022.

This makes timely operation of the expanded Votgle plant even more important.

The decision will also have an impact some 2000 miles away. Three Wyoming mines supply most of the coal burned annually by the Robert W. Scherer Power Plant. Last year, roughly 10% of the mines’ combined coal production went to Scherer. It’s just another nail in the Powder River Basin economy. The share of State severance tax revenue that comes from coal is down almost 15% from 2011.

FEDERAL ROLE IN ELECTRICITY INCREASED

The infrastructure bill includes significant changes in the role of the Federal Energy Regulatory Commission (FERC) in regulating the development of electric transmission projects. The recent election in Maine highlighted some of the issues. The long term need for long distance transmission to facilitate the delivery of power from a variety of sources has highlighted the role of the states in regulating transmission infrastructure development.

The role of states in this regulatory process is seen as a major hurdle to development of a reliable electric grid. To address this, the infrastructure legislation enhances the ability of federal regulators to permit new transmission projects, by giving authority to the Energy Department to designate national transmission corridors for clean electricity projects. This has been a problem since a 2009 federal appeals court ruling, which found that FERC lacked the authority to overturn state regulators’ rejection of power lines planned in DOE sanctioned corridors.

Under the Energy Policy Act of 2005, DOE was required to conduct a study of transmission congestion every three years and identify transmission corridors needed to address it. The new legislation provides for FERC to conduct studies more frequently and expands the criteria for projects that can qualify as “national interest electric transmission corridors.” Where projects previously needed to address transmission congestion, power lines that enhance the ability to deliver “firm or intermittent energy” will also qualify for the designation.

The National Academies of Science estimates American transmission capacity needs to grow by 60% by 2030 to put the country on track for net-zero emissions by midcentury. Researchers at Princeton University reckon that the build-out could cost some $360 billion by 2030. Here is one data point which will temper the impact of the legislation. In 2019, U.S. utilities spent $40 billion on transmission, with about half of that dedicated to new transmission investment, according to the U.S. Energy Information Administration. The infrastructure package and accompanying $1.7 trillion reconciliation bill contain about $20 billion in incentives for transmission development.

NUCLEAR IN THE INFRASTRUCTURE BILL

The infrastructure legislation includes federal funding for part of the costs of a proposed modular nuclear generating facility proposed for the State of Washington. The proposal is one of three currently being considered to support the technology with the others located in Idaho and Wyoming. The legislation provides enough funding to the Washington facility to cover half of its estimated construction expense.

The project in southern Idaho involving small reactors cooled by water is furthest along in development, and has struggled with delays, design changes and escalating cost projections. The developer has hoped to sell power to participants in the Utah Associated Municipal Power Systems. Originally planned for 12 individual small reactors, the project has already been scaled down to six reactors, now forecast to cost $5.1 billion. The plant is projected to begin coming online in 2029.

The reduction in scale reflects a less than enthusiastic response from potential participants. Currently, the project has secured contracts to take 22% of the its proposed 462 megawatts of power.  The plant proposed for Washington state would be at the existing Hanford reservation where there is a long history of nuclear power development.

Here’s where the municipal utilities come in. Energy Northwest, would manage the proposed reactors under an agreement announced last year. A third partner is Eastern Washington’s Grant County Public Utility District, which would own the reactors and be responsible in raising about $1 billion in financing. The plan is far from a done deal. The memory of the ill-fated Washington Power Supply System still leaves a bad taste in the mouths of many in the region.

MUNICIPAL GAS UTILITY PRESSURES

The impact of sustained increases in natural gas prices on coverages for municipal utility credits is becoming clearer. The winter billing periods are beginning and utilities across the country announcing significant increases in the cost of natural gas service to their consumers. These are showing up in bills for direct uses of residential gas (cooking, heating) as well as indirect uses as in general electric and/or combined utility rates.

The details of a gas utility’s gas procurement process are a key element of short-term risk to credit. Those who have procured gas under long-term contracts at favorable terms will be better off. Those who purchase on a shorter term or spot basis are quite vulnerable.

On the municipal front, we are beginning to rate actions. Colorado Springs Utilities has announced that it is increasing residential rates for electricity by 13.5% and natural gas by 26.8%. Combined customers who receive electric, gas, water, and sewer from CSU will see a 10.9% increase in their monthly bill. Commercial customers will see a 22.2% increase in total bills. The rate hikes are on top of those enacted after the late winter cold snap.

INTERMOUNTAIN POWER

The Intermountain Power Project (IPP) was effectively the beneficiary of increasingly restrictive siting policies in the State of California. No one has ever disputed the basis for locating the plant in Utah closer to local coal supplies. Utah didn’t need the power as evidenced by the fact that 98% of plant output is sold to California municipal utilities. The benefit to Utah was the use of Utah coal and the jobs that the plant provided.

Now that coal power is losing favor and under regulatory pressure, the rationale for the IPP is no longer valid. So, the project has undertaken an effort to convert the plant from coal generation to natural gas fueled generation. IPP plans to soon issue some $2 billion of bonds to finance the conversion. Now, with the project moving to a critical phase the Utah legislature has enacted legislation to make it harder for IPP to enter into contracts for the project.

The agency is exempt from public meeting and procurement laws and benefits from some 72 amendments to state law since 2002 to facilitate IPP operations. Now that IPA will convert the plant to natural gas by 2025 and will increasingly burn emission-free hydrogen, produced with energy from solar farms under development nearby, the agency suddenly needs to brought to heel. It is clear that the law was driven by efforts to derail the conversion from coal.

IPP is already facing continuous litigation from its host location, Millard County. Property tax issues have generally been the central point of dispute. The county spends $500,000 a year litigating against IPA and there are two lawsuits pending in Utah’s 3rd District Court. Those cases deal with IPP’s contention the plant’s value is far lower than what the Utah State Tax Commission has assessed, while the county claims it should be much higher. 

In the end, the whole situation could just be a case of the County spitting into the wind. Coal is increasingly dead unless it can be bailed out by carbon capture. At this stage of the technology, carbon capture will not be reliably on line in time to save some generation.  This legislation will not, in the end, stave off the inevitable. It does reflect the desperation of some host communities facing loss of major fixed assets and jobs.

LIPA AND SOLAR

The Long Island Power Authority is in the middle of the environmental debate as the result of plans to levy monthly fixed charges to residential customers who install solar. The proposed LIPA solar charge would amount to between $5 and $10 a month for systems installed after Jan. 1.  LIPA, which is under no state mandate to institute the so-called customer benefit charge, plans to do so Jan. 1, following a public hearing later this month and a board vote in December.

It comes in the wake of recent legislation offering tax rebates to homeowners who install rooftop solar but those rebates are only being offered to upstate residents. LIPA customers are not eligible. The issue arises with LIPA already under pressure to revise its management contracts with PSE&G for running LIPA’s electric system. The quality of LIPA responses to several weather events has led to increased complaints about service. Now, LIPA wishes to tax an alternative.

FLINT WATER SETTLEMENT

Since 2014, the City of Flint has been best known for its horrendous drinking water situation. Ever since the contamination in the water was attributed directly to the switch in water sources undertaken by emergency management, an effort to get compensation has been in process. Now, a major piece of the outstanding litigation stemming from the contamination has been settled.

The $626 million deal makes money available to Flint children who were exposed to the water, adults who can show an injury, certain business owners and anyone who paid water bills. $600 million is coming from the state of Michigan. Flint itself is paying $20 million toward the settlement. The State’s failure to properly manage the water system creates the obligation. The former Governor and a water regulator face criminal charges.

The net amount of the settlement after legal fees is yet to be determined. The initial ask is for $200 million. That is to be decided at a later hearing before everything is finalized and money can begin to flow.

PRISON CLOSURES IN NEW YORK

New York officials announced plans to close six state prisons early next year. It continues a process initiated under the Cuomo administration which closed 18 prisons during his nearly 11 years in office. The closings come as the state’s prison population has dropped to 31,469, a 56 percent decline from a peak of 72,773 in 1999. The six prisons that will close are well under capacity: Taken together, they can fit up to 3,253 people, but now house just 1,420, all of whom will be transferred to other facilities before closing in March 2022.

The largest of the six prisons being closed is Downstate Correctional Facility, a maximum-security prison in Dutchess County in the Hudson Valley, which can fit up to 1,221 people, but is operating at 56 percent capacity. The smallest is the Rochester Correctional Facility, which holds up to 70 individuals. The usual criticisms of the plan come from the usual sources; corrections officer unions and local politicians. They point to the economic impact on employment on local communities. 

The plan reflects the realities of the current political climate in the state where there has been great emphasis on criminal justice reform. The budget saving is not huge for the State. Out of a $180 billion budget, the move is expected to save taxpayers $142 million. The opposition to the plan is expected and mirrors opposition to previous closings in New York and a series of prison closings in California.

IS FREE TRANSIT STUCK IN THE STATION?

Last week we referenced a proposal by the Boston Mayor-elect to eliminate fares on the MBTA’s Boston-area transit system. A one-way subway ride costs $2.40. In fiscal 2020, fares accounted for about one-third — or $694 million — of the transportation authority’s $2.08 billion in revenues. We expressed concern about the realism of the plan given the fact that it rests on assumed outside funding.

That assumption is already being put to the test. The Governor made two telling comments. “Why they should pay to give everybody in Boston a free ride does not make any sense to me.” “Somebody’s going to have to come up with a lot of money from somebody, and I do think if the city of Boston is willing to pay to give free T to the residents of the city of Boston, that’s certainly worth the conversation, I suppose.” It is one thing to offer something for free when you can provide the funding. It is another to expect others to pay for it.  

OPIOID LITIGATION

Hard on the heels of a California state judge’s decision that said that opioid manufacturers and distributors had not created a “public nuisance” for which they had a liability for damages, a second decision has been handed down reinforcing that view. The Oklahoma Supreme Court, by a 5-1 vote, rejected the state’s argument to that effect. “Oklahoma public nuisance law does not extend to the manufacturing, marketing and selling of prescription opioids.”

The Oklahoma decision echoed the California decision. Oklahoma’s 1910 public nuisance law typically referred to an abrogation of a public right like access to roads or clean water or air. The judges found fault with the state’s case, saying it failed to identify a public right under the nuisance law and had instead attempted to apply a “novel theory” to what was more likely a products liability case.

The company, the Oklahoma judges said, had no control over the distribution and use of its product once the drug left its control. Just as was the case in California noted that “Regulation of prescription opioids belongs to federal and state legislatures and their agencies.” It looks more and more like the opioid crisis will not the be the large or perpetual source of funding to state and local government which the tobacco settlement is viewed as. There is a $5 billion settlement offer on the table for the hundreds of state and local governments to settle their remaining claims.

PUERTO RICO AND SOCIAL SECURITY

Supplemental Security Income (SSI) is a long-standing program which is available to U.S. citizens in the 50 states, the District of Columbia and the Northern Mariana Islands, but not in Puerto Rico, the U.S. Virgin Islands and Guam. The program provides monthly cash payments to older, blind and disabled people who cannot support themselves. Throughout the run-up to the Title III filing by the Commonwealth of Puerto Rico, this disparity was frequently cited as an imposed disadvantage in the funding of Puerto Rico’s budget.

This week, the issue has found its way to the U.S. Supreme Court. Oral arguments were heard in a case filed on behalf of an individual. The plaintiff is a disabled man who received the benefits when he lived in New York. He continued to receive payments even after he moved to Puerto Rico in 2013. When the Social Security Administration became aware of the move, it sought repayment of the benefits paid until the “error” was discovered, eventually suing him for about $28,000.

The plaintiff is asking the Court to review decisions made in light of the acquisition of certain territories from Spain under the treaty which ended the Spanish-American War. Within that Treaty of Paris was a statement noting that Congress would determine the political status and civil rights of the natives of the island territories. In the early 1900’s, the Supreme Court was asked to review nine cases in total, eight of which related to tariff laws and seven of which involved Puerto Rico. 

At the time, Puerto Rico was a primarily agricultural economy exporting rice, sugar, coffee, and rum. To reach its conclusions that for purposes of tariffs it created “the doctrine of ‘territorial incorporation,’ according to which two types of territories exist: incorporated territory, in which the Constitution fully applies and which is destined for statehood, and unincorporated territory, in which only ‘fundamental’ constitutional guarantees apply and which is not bound for statehood.” 

Territorial incorporation has been criticized over the years but it has withstood efforts to reverse it. This case would appear to be the best hope of overturning a view based in the same time and culture that produced Supreme Court approval of separate but equal schools and public accommodations. The era which produced the Plessey v. Ferguson separate but equal doctrine produced the Insular Cases decisions. One injustice has been overturned. Could this be a vehicle to overturn another?

TRI-STATE TRANSIT DISPUTE RESOLVED

When the pandemic effectively closed down the economy, transportation took a steep hit to revenues. So, $14 billion for the region was approved by Congress in the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 and the American Rescue Plan Act. The plan to share the funding was to be the product of negotiation between NY, NJ, and CT. Those talks took a significant stumble over the issue of how much would go to the MTA and how much to New Jersey.

The MTA’s average weekday subway and bus ridership remains down between 30% and 50%. New Jersey Transit’s ridership on rail, buses and light rail was is down between 30% and 40%. Now, the three states have agreed on how to divide the federal pandemic aid to mass transit. New York will receive about $10.8 billion, New Jersey will get about $2.6 billion and Connecticut will receive about $474 million, under the agreement.

The additional cash is credit positive for the MTA and New Jersey Transit credits.

ST. LOUIS FOOTBALL CASE MOVING FORWARD

There have been a number of developments in the litigation filed by the City of St. Louis against the NFL and the owner of the now Los Angeles Rams. The litigation stems from the move of the St. Louis Rams to Los Angeles after the 2016 season. As the case has plodded through the pre-trial process, the NFL had resisted most offers of a settlement. Once it was clear that the case could go to trial and that the pre-trial process including depositions would get underway, the motivation for a settlement grew.

The potential for depositions is something the NFL would like to avoid at all costs. Questioning under oath about the processes and actions undertaken to facilitate the franchise move are not in the best interests of the league to have analyzed. So, it is not a surprise that there are reports of a $100 million offer from the Rams’ owner to settle and that the City declined. It is not clear as to what stage of the negotiations are at so it is difficult to assess how much is at stake for the parties. Clearly, the City could use the budget windfall which would result from a better offer.

All 32 teams — and their owners at the time the lawsuit was filed — are defendants in the case.  The machinations have been intense leading to additional settlement pressure. Five owners (including the Rams) have been deposed and four of the non-Ram owners have been fined by the court for failing to turn over financial documents in a timely manner.  

The trial is scheduled to start on January 10.  The league needs to avoid a trial to prevent former owners from testifying. One has already stated in the press that St. Louis’ stadium proposal to replace the Edward Jones Dome, where the Rams had played from 1995 to 2015, met league guidelines to keep the franchise in St. Louis. 

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Publisher

In between songs in the Broadway show “American Utopia”, the legendary musician David Byrne takes a few minutes to discuss voting, its importance, and low participation rates. He very effectively uses light to illuminate the small segment of the audience which 20% accounts for. The point was that in a democracy the ballot box is one of the most effective tools one has and that, if left unused, it was hard to blame the system for much.

That comes to mind when you realize that Mayor-elect Eric Adams of New York was elected this week with a less than 1in 4 turnout rate. He won the nomination with 28% of the vote cast out of 948,000 in June. So, in an era where serious policy questions found their way to the ballot – voting rights, transit, climate policy – there is no way to discern what the public might want or support as well as what is a realistic policy ask which municipal bond investors can make. It leads to Inaction and inaction now is not a realistic option. 

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MUNICIPALS GET THE SHORT END OF THE STICK

The battle between the “progressive” wing of the Democratic party against the more moderate has created one major casualty – the municipal bond market. There were four main asks made by the market – direct pay bonds, increased private activity issuance, the SALT deduction and tax-exempt refunding. None of these were included in the most recent ”framework” being circulated. Municipal bond provisions were characterized by Progressives as a subsidy for the rich. The focus on the tax benefits created for municipal bond investors diverted attention away from the realities of the market.

With rates low on a historical basis, it is easy to minimize the cost to issuers and states and municipalities from being unable to use these tools. It is more difficult to point to the costs of not having these tools available in that low-rate environment. Nonetheless it is disappointing to see that the sector which will be counted on greatly to execute many of the infrastructure projects associated with progressive causes are not being given the flexibility to do so on a cost-effective basis.

Municipal bonds face some real hurdles. There is no core of legislators on which the market can rely for expertise and support. The task faced by lobbyists for the industry is made more difficult by the fact that there is not a strong group of legislators forming a caucus to support municipal bonds.

AUSTIN BACKSLIDES ON CLIMATE

It is hailed as a progressive outlier in Texas but the City of Austin finds itself in a less progressive situation at its city-owned electric system. This week, Austin Energy announced that it will not retire its stake in the Fayette coal power plant next year. Closing Austin’s portion of the plant by 2022 was an important step to achieving carbon-reduction goals outlined in Austin Energy’s Resource, Generation and Climate Protection Plan to 2030. It was considered a key component in support of the City’s announced goal of net zero emissions by 2040.

Austin Energy said it was unable to reach an agreement on the closure with the Lower Colorado River Authority, which co-owns the plant. Five years ago, Austin’s share of the Fayette coal plant was found to be responsible for “80 percent of the utility’s greenhouse gas emissions and 28 percent of all Austin’s greenhouse gas emissions.” The utility already plans to retire a natural gas fired plant (DP2) in March, 2022 as a part of that plan. It is an older, less efficient steam unit, it costs more to operate than newer units. The plant requires more natural gas per megawatt hour of power it produces than newer, more efficient units. DP2 is at least 30 percent less efficient than newer combined cycle gas plants.

So where does this leave Austin’s power generation profile? As of November 1, the sources were solar at 52.5%; natural gas at 19.5%; coal at 14.5%; nuclear at 10.9%; and biomass at 2.5%. That leaves Austin one-third dependent on fossil fueled plants for its power. That creates a serious hurdle for the City to overcome as it seeks to meet its stated energy policy goals. For now, the utility is focused on operating a wood fueled biomass plant in east Texas.

The wood-fired plant was under a “seasonal mothball” status, meaning it was made available to run only during the higher energy demand summer months. Improved operations and current market conditions make the biomass plant more economical to run year-round. The wood waste fuel that powers the plant is delivered directly to Nacogdoches and stored onsite with a 10-day supply.

The utility purchased the biomass-fueled power plant in 2019. The largest biomass plant in the country, Nacogdoches began commercial operation in 2012 under a 20-year power purchase agreement with Austin Energy. Purchasing the plant saved the utility approximately $275 million in additional costs over the remaining term of the agreement.

OPIOD LITIGATION

In 2014, the California counties of Santa Clara, Los Angeles and Orange along with the city of Oakland, filed litigation against four manufacturers of opioids seeking monetary damages for the costs incurred in fighting the opioid epidemic.  The central question at issue in the litigation was whether the companies were liable for creating “a public nuisance” under California law. It has taken a long time for the case to reach the trial stage but it did and now the initial result is in.

The suit was tried in Orange County State Superior Court in a bench trial. The judge has now ruled that the companies did not have liability. The ruling covered a number of potential factors. The core finding is that “any adverse downstream consequences flowing from medically appropriate prescriptions cannot constitute an actionable public nuisance.” The fact that the manufacturers may have employed questionable marketing tactics in its dealings with potential prescribers, the prescription requirement effectively protects the companies from liability.

The decision could impact other opioid litigation involving California. Johnson and Johnson had made a national settlement offer after its initially lost a liability case in Oklahoma with a $465 million liability. California had delayed participation in a national settlement pending this case among other court actions.

CLEAN ENERGY CONNECT

“Do you want to ban the construction of high-impact electric transmission lines in the Upper Kennebec Region and to require the Legislature to approve all other such projects anywhere in Maine, both retroactively to 2020, and to require the Legislature, retroactively to 2014, to approve by a two-thirds vote such projects using public land?” The most expensive ballot referendum campaign in Maine history was also the second most expensive political campaign overall in Maine history mercifully came to an end.

The vote to stop construction on the New England Clean Energy Connect project was not close with 60% of the vote in favor of the question. It is fair to point out that the vote may have been as much about the project sponsor Avingrid as it was about anything else. Avingrid is the subsidiary of a Spanish company that has been acquiring investor-owned power companies in the U.S. for several years. Their long game has been to establish an offtake network for renewable power generation.

In the meantime, Avingrid has developed a reputation for poor service and underinvestment in its infrastructure. (Full disclosure – I am an Avingrid customer in New York State. Why ratepayers in Maine hate Avingrid is no surprise to me.) That reputation is helping to put Avingrid’s plan to acquire Public Service of New Mexico in doubt. It is likely that the Maine vote is more reflective of Avingrid’s horrible image in Maine than it is a statement against renewable power.

One other factor impacting the vote negatively was the fact that the power would mostly be sold in Massachusetts. While the cost of the project would ultimately be borne by the buyers of the power, the environmental impact of the line was an issue for Maine residents.

ELECTIONS AND POLICY

Much emphasis has been put on who won the elections across the country with lots of attention paid to gender and ethnicity in regard to who won and lost. From our vantage point, we are more interested in what the policy implications of some of those victories will be.  While each race had its own set of local concerns that drove issues and campaigns, a few themes emerged fairly consistently across the board.

Buffalo showed that the electorate does not embrace socialism. In this case, the incumbent mayor had to mount a write-in campaign after losing the primary to an avowed socialist. It’s not that socialism has never had its day in the U.S. It’s just hard to reconcile that hard red nature of somewhere like North Dakota today with its history some 110 years ago as a laboratory for socialist thinking. For now, it does not seem to be a viable policy option.

Seattle and Minneapolis showed that the electorate is not in favor of defunding the police and mass decriminalization. While those two cities were probably the most prominent example of anti-police sentiment, the reality is that a recent crime spike did lead people to opt for the status quo. Voters in Minneapolis made two statements this week when they reelected the incumbent mayor and voted down a ballot item which called for eliminating the Minneapolis Police Department and replacing it with a Department of Public Safety.

The vote came after a fiscal 2022 budget process that produced maintenance of and increases to police budgets. The votes reflected concerns over the level of violence associated with protests. Minneapolis, along with Seattle and Chicago becomes the third major city to undergo significant civil unrest followed by major increases in violent crime.

Virginia Beach voters approved significant capital financing for resilience projects. Residents approved a referendum  that will allow the city to issue up to $567 million in bonds to cover the cost of accelerating a flood protection program designed to deal with stormwater and sea level rise problems.  A total of 21 projects were offered by the city to fund through a three-phase bond issuance program.

The projects were specifically identified in the referendum ranging from the conversion of a city-owned golf course into a park with stormwater storage to extensive storm drain improvements and road elevation to the construction of flood barriers.  The City effectively made the case that bonds would allow the projects to be completed in about half the time it would have taken to finance the projects without bonds.

Road and bridge infrastructure saw lots of support. Increased or extended sales taxes were approved in Fulton Co. (Atlanta) and five other Georgia counties; bonds were approved for the State of Maine; four of five Texas county bond issues passed; localities in Washington, Virginia, Ohio, and Colorado passed as well. All were primarily for traditional transit infrastructure.

A constitutional amendment guaranteeing clean air, water, and a clean environment (no specifics) passed in New York State. Our view on this amendment was covered in the 11/1 MCN.

Voters in Columbus OH by an 85% majority rejected Issue 7 which would have set aside $87 million of the city’s general fund to “promote and fund” programs for “clean energy education and training,” “energy conservation and energy efficiency initiatives” and others. The originators of the ballot referendum petition supporting the plan have been unwilling or unable to give specific answers as to where the money would go, who would administer it and how they came up with the $87 million price tag.

The issue was not whether Columbus voters want clean energy. The issue was over who sponsored the plan and who would control the funding.

BOSTON

Boston voters took a different path and elected a strongly progressive candidate as mayor. The results will provide an opportunity for a major American city to consider a number of progressive causes. The new mayor favors rent control and free transportation. It is not clear whether the City would need state legislative approval especially in the case of the MBTA which is a state agency. The mayor-elect made clear that she hopes to apply Green New Deal concepts to the city. It will be a good opportunity to see how viable the progressive agenda is when it comes time to execute on the idea.

The ”local Green New Deal” advocated by the mayor-elect includes achieving 100 percent renewable electricity by 2030 and carbon neutrality by 2040, repairing and retrofitting buildings to reduce emissions, growing a “green work force” to maintain the city’s new climate-friendly infrastructure, planting more trees and greenery to eradicate heat islands, and divesting from not just fossil fuel companies but also private prisons and gun manufacturers. 

The end of transit fares is a key component of the plan. The plan counts on increased state and federal funding for the loss of revenue from and an end to fares on MBTA facilities. That funding would come from an increase in state gas taxes. That creates one inconsistency right away – gas taxes to fund mass transit to eliminate cars?  At a time when the consensus is that gas taxes are an outmoded and inefficient way to fund transportation?

ILLINOIS UPGRADES

Two of the State of Illinois’ revenue backed issuers got good ratings news this week from Moody’s. The Illinois Toll Road received an upgrade to Aa3 from A1. The rating reflects the gradual and steady resurgence in traffic volumes as the limitations of the pandemic are diminished. Authority revenues declined sharply to a trough in April, with monthly traffic 51.3% down and monthly toll revenues 39.1% down compared to April 2019. As the pandemic slowed, results at the toll roads began a sustained and steady recovery to current levels, with September 2021 traffic approximately 3% below September 2019 traffic levels.

Commercial traffic has shown much more resiliency than passenger traffic, with fiscal year 2020 commercial traffic down only 1.5% from the prior fiscal year 2019, and commercial traffic in the first nine months of 2021 approximately 6% above the first nine months of 2019.

Moody’s affirmed the Chicago (City of) IL O’Hare Airport Enterprise’s A2 rating on $986 million senior lien revenue bonds and A2 rating on $395 million passenger facility charge (PFC) revenue bonds. The enterprise has $8.6 billion of senior revenue bonds and $395 million of PFC bonds outstanding. The outlook was revised to stable from negative. The airport’s recovery from the pandemic has slightly trailed the national average, which is normal for airports with high exposure to slower-to-recover international traffic. As we go to press, the pandemic restrictions on foreign travel to the U.S. will be relaxed so that credit impediment will be out of the way.

FEES UNLOCK THE PORTS

In an effort to break the accumulation of containers clogging the country’s major ports, the port operators are turning to charging for the storage of containers awaiting shipment. This past Monday, the ports of Los Angeles and Long Beach began to impose a new congestion surcharge on container cargo. The two ports handle one-third of US container trade. The growing accumulation of containers awaiting transfer to trucks and trains inhibits the ports from accepting any more containers. This also inhibits the revenues during those delays in offloading by limiting volume.

According to Moody’s, the inventory of containers at marine terminals was 40% above pre-pandemic levels and the length of time a container typically waited was 100% above pre-pandemic levels. The number of container ships at anchor increased to 73 in the fourth week of October. That is a huge increase since some 15 ships were at anchor at the end of June. The problem is reinforced by the fact that more ships were waiting longer as days at anchor increased to 12 from five over the same period. Shortages of warehouses, trucks and the chassis used to remove import containers from terminals means terminals cannot clear storage fast enough to accommodate new inbound cargo.

The surcharge will be set at $100 per container per day, and will increase by $100 per day throughout the penalty period. Effectively, the $100 daily escalation makes one container incurring four days of penalties equivalent to 10 containers incurring one day of penalty. Compare that to what both ports currently earn for container throughput – roughly $75 for Los Angeles and $65 for Long Beach per 40-foot container in fiscal year 2021 The move will increase revenue not only through the separate fee but also by accelerating the movement of containers through the ports thereby increasing basic port revenues.

CLIMATE

The State of California currently plans an end to oil production in the state by 2045.  One major municipality – Long Beach – has announced plans to accomplish its climate goals involving oil and gas production by 2035. In fiscal year 2020, revenue from oil production funded $18.9 million of the city’s budget. Some $3 million of that is from a barrel tax for funding specific to the police and fire departments. By 2035, the city expects the oil fields to cease production and in between now and then, the city will fund the abandonment of oil fields.

The plan is to use revenues from remaining oil fields to fund the cost of the gradual closure of oil production wells. This has sparked dismay from environmentalists even though the potential costs including those associated with the transition away from production has been estimated by city staff at between $81 and $146 million. 

Its largest employer may be a Chevron oil refinery but the City of Richmond, CA continues its efforts to take a forward approach to climate change. That economic aspect makes it interesting to see that the Richmond City Council could vote next month on a proposed ordinance that closes a loophole in the city’s natural gas ban, which applies to new structures and major renovations. Gas-powered appliances and fireplaces are now exempt from the ban but would not be under proposal, which would leave electricity as the city’s primary power source.

The city would join some 50 others in California which have enacted similar restrictions. This places California as an outlier in that many states have enacted preemption legislation to prevent their municipalities from following suit in their states. Unsurprisingly, the real estate and construction industries are pushing back hard against the proposal.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.