Joseph Krist

Publisher

This week, the Treasurer of West Virginia announced that five banks would be prohibited from, among other things, underwrite state debt. The Treasurer and his compatriot in Utah have been leading the charge against climate change disclosure and trying to save the coal industry by fighting disclosure. They took their road show to North Dakota this week. In the end, these sorts of actions are actually just cheap stunts. It’s likely that the financial firms in question will survive quite nicely without being to bid on West Virginia debt.

There is of course, the fact that boycotts or other actions go both ways. There could easily come a time when West Virginia needs to finance a project and finds itself facing higher costs because it used politics to determine who gets the business. It is another unfortunate piece of political performance art.

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CARBON CAPTURE ECONOMICS

The segment of the power generation industry which looks to find ways to keep fossil-fueled generation alive seems to be putting much stock in carbon capture technology. It is also clear that the federal government supports carbon capture as it allows legacy generation assets to continue to operate. Science aside, it is an answer to the political hurdles which clean energy advocates face in their efforts to decarbonize.

Last week we discussed a proposal to convert a natural gas pipeline to carbon transmission in Nebraska. While much is made of the potential support to the ethanol industry which carbon capture could provide, the technology will also be looked to in an effort to allow continued operation of coal-fired generation. The proposal to convert the line has many supporters in the impacted industries. We also note that the Nebraska Public Power District (NPPD) supports the plan.

NPPD operates the Gerald Gentleman coal-fired power plant which is one of the largest emitters of carbon dioxide in the nation. NPPD notes that the plant is only 20 miles from a potential connection point to the pipeline. It estimates that a carbon capture system installed on one of two units at the Gentleman Station could extract 2 million tons of carbon dioxide in a “slow year” for energy demand, Swanson said, and as much as 4 million tons in a high-demand year.

Here is where the realities of economics enter the equation. You don’t hear as much about the economics of carbon capture. Like so many other environmental fixes which have been offered by the environmental movement, this one comes at a cost. While expressing support, the NPPD argument highlights that issue. NPPD estimates that the cost of installing the technology needed at Gerald Gentleman is upwards of $1 billion.

That cost would come as debate continues over the basic feasibility of pipeline conversion. In a December 2019 report, the National Petroleum Council said converting natural gas pipelines to carriers of CO2 was “not a practical option,” particularly over long distances. NPPD may have highlighted the biggest obstacle – cost.

The District admits that to make the investment feasible, that a private partner which could benefit from tax credits generated at a plant would likely be needed to participate. 45Q is a performance-based tax credit incentivizing carbon capture and sequestration or utilization. Much like with the production tax credit (PTC) for wind, under 45Q, qualifying power generation and industrial facilities can “generate” a tax liability offset per captured ton of carbon dioxide. The tax credits are provided for 12 years. An electric generating facility can utilize the credit if it removes at least 500,000 tons of carbon from the atmosphere during the taxable year. 

COVID, OIL, AND THE TEXAS ECONOMY

The pandemic and its impact on energy usage and energy industry employment has been clear. Recent data from the Institute for Energy Economics and Financial Analysis highlights the short-run impacts but also provides some long-term trends which may surprise some. In a time of rapidly increasing prices, many thought that a consequence would be renewed operation of idle wells if not new sites. While production has clearly increased, the impact on employment remains subdued.

Employment in the Texas oil and gas sector has rebounded since its September 2020 low. That increase in employment in the oil and gas businesses account for some 39,400 jobs. The job losses related to the pandemic were twice that number. Between September 2019 and September 2020, Texas employment for oil and gas extraction, support activities for mining, natural gas distribution, petroleum and coal products manufacturing, pipeline transportation, and gasoline stations industries laid off 21% of their collective workforce, or 76,300 jobs. If April 2022 employment of 333,900.

The data suggests that the growth in oil/gas jobs is below average relative to the overall employment base. It is an important source of jobs but when that comes up in the overall energy debate here’s something to think about. Texas, which is home to 11 percent of all U.S. energy jobs, did not create new oil and gas jobs last year—even though oil and gas prices were steadily improving throughout 2021. The data points to the fact that from 1990 to the present, the total nonfarm employment payroll in Texas grew from 7.1 million jobs to 13.3 million jobs (+87%). Over the same period, the oil/gas sector employment level increased 22%.

CRYPTO AND POWER

The recent spectacular fall in the crypto currency markets has rightly focused attention on that aspect of crypto. One of the others which gained steam as the summer approached was where and what sort of power crypto miners were planning to exploit to support their activities. It has led to the purchase of entire generation facilities which might otherwise be idled (coal plants in particular). Their role as huge consumers of power is at the center of the debates over electric generation and climate change.

Many climate activists and others are concerned that the regulatory schemes in many states may not be the best mechanism to address concerns over the environment and the needs of the overall power grid. In some areas the worry is primarily environmental. In some locales however, the presence of miners creates a highly competitive market for electric load which leads to local opposition. Unfortunately, these businesses are driven by the cost of power so they seek out low-cost providers which are often municipal utilities.

One example is the Chelan Public Utility District in Washington. The agricultural region some 2.5 hours from Seattle is powered delivered from the Bonneville Power System’s Columbia River hydro sources. This means that customers have access to relatively cheap power. At one point that was becoming a problem as requests for new connections (especially to crypto miners) amounted to capacity demand equal to that of the entire county.

So, the PUD applied what is really a common sense approach. Electric rates have always had various classes of customers who paying different rates than other users. Chelan County charges miners roughly triple what it charges residents for electricity. Douglas County PUD limits its total crypto mining load to 39 megawatts (it’s currently just under 33 megawatts) are raised for crypto miners 10% every six months. Grant County PUD has developed rates for “evolving industry” customers which increases rates if miners’ total current and requested power demand exceeds 5% of total county demand, which it has since March. 

Crypto mining now accounts for some 3.5% of load at 8 megawatts down from that 200 level. Interestingly, one of the factors cited by miners looking to move operations to friendlier fields is the ability of public vs. investor-owned utilities have to more nimbly adjust their rates and create customer classes. The recent explosive growth of crypto mining in Texas is tied in part to more “friendly” rate treatment in an investor-owned utility environment as well as the significant wind and solar resources available.

GEORGIA GOES ALL IN ON ELECTRIC VEHICLES

Under an agreement signed this week, Hyundai Motor Group will receive $1.8 billion in tax exemptions and incentives from the State of Georgia in exchange for building its first dedicated electric vehicles manufacturing plant there. The subsidy package of property and income tax exemptions, as well as other incentives in land, infrastructure and equipment purchases, is the largest-ever offered by the US state according to Hyundai.

Hyundai plans to start construction on the 300,000-unit-a-year EV and battery manufacturing plant west of Savannah, in January 2023. It will begin production in the first half of 2025. To support that facility, Hyundai will receive an income tax credit of $277 million over five years. It will get another $518 million tax deduction for construction equipment and building material purchases. State and local purchases of land and construction of roads is estimated to be an additional investment of $430 million.

The deal requires the company to return part of the incentives if the company falls below 80 percent-level of promised investment or employment. It comes as Georgia is offering some $1.5 billion of incentives to Rivian, the electric truck maker and to battery manufacturers.

SOLAR AND MUNICIPAL UTILITIES

It isn’t just the investor-owned utility cohort that finds itself in the middle of disputes over individual solar installations at residences. While the battle lines are usually drawn around the issue of net metering, there are other fees and charges that utilities can try to levy to offset declining consumption from the system. Lately, a municipal utility in New Mexico found itself in the middle of a dispute over its approach to solar installations and rates.

Farmington Electric Utility System (FEUS) is owned and operated by the City of Farmington and serves about 46,000 customers. It has been defending itself against a lawsuit filed in the United Stated District Court for New Mexico on August 16, 2019, challenging what were characterized as illegal and discriminatory charges FEUS imposed on customers with their own solar panels.

Initially, the District Court dismissed the litigation in February 2020, holding that the plaintiffs should have filed their claims in state court. However, on June 28, 2021, the Tenth Circuit Court of Appeals held that the District Court was wrong and reinstated the case in federal court. Several months later in response, FEUS suspended and eventually withdrew the solar charge, further agreeing to refund the plaintiffs from the illegal solar charge. Refunds to the eleven solar customer plaintiffs totaled nearly $20,000.

NYS SALES TAX COLLECTIONS

We have long viewed sales taxes as one of the indicators most reflective of current underlying economic trends in any state. Their monthly collections often provide real time indications of economic activity. The ongoing debate over whether or not the US economy is in recession is underway after this week’s data release from the Federal government. The latest sales tax data we see comes from the State of New York. It gives fuel to both views of the economy.

The headline number shows local government sales tax collections in New York State totaled over $5.5 billion in the second calendar quarter (April-June) of 2022, an increase of 12.2 percent, or nearly $604 million, compared to the same quarter last year. After April and May collections grew by 15.7 percent and 16.7 percent, respectively, collections for June increased by a more modest 6.5 percent. This was the first time monthly year-over-year growth dipped below double-digits since March of 2021. June’s slowdown was due, in part, to a temporary reduction in local sales taxes on gasoline in 24 counties, although it may also reflect other factors, including a return to more typical growth rates after the dips and rebounds of the COVID period.

Here’s where the data begins to show the basis for the debate. This past quarter’s strong growth was mostly seen in New York City, where collections increased by 24.9 percent, from $1.9 billion in April-June 2021 to $2.4 billion. In contrast, year-over-year growth for the counties and cities in the rest of the State, in aggregate, slowed to 2.6 percent over the same period, going from $2.7 billion to $2.8 billion. New York City’s total sales tax receipts for the second quarter were fairly strong by its own historical standards, but its double-digit growth rate also reflects relatively weak collections in the April-June period of 2021. City collections had not recovered to pre-pandemic levels as of the second quarter of last year, and wouldn’t until the fourth quarter (October-December).

SANTEE COOPER

The South Carolina Public Service Authority (Santee Cooper) continues to face rating pressure. This week, Moody’s affirmed South Carolina Public Service Authority’s (Santee Cooper) A2 rating on its revenue bonds and changed the outlook to negative from stable. The negative outlook is based on the financial constraints under which Santee Cooper must operate after legal settlements stemming from the failed Sumner nuclear plant expansion. Like so many utilities across the country, natural gas prices raised costs for Santee Cooper. Unfortunately, significantly higher purchased power and fuel costs that cannot be immediately passed onto customers under the terms of the legal settlements through 2024.

The expectation is that this will lead to less than 1 times net coverage of debt service. Santee Cooper’s board has authorized regulatory accounting treatment for a portion of the costs that could qualify as rate freeze exceptions. The exceptions mostly relate to higher fuel and purchased power replacement costs incurred by the utility due to a fire and temporary closure of a coal supplier’s mine. It seems that the utility will seek to recover these and other deferred costs after the rate freeze expires. This creates the potential for significant dispute with Central Electric Power Cooperative Inc. (Central), its largest customer. Central has already indicated its opposition to treat some of these costs as rate freeze exceptions.

Moody’s notes the availability of adequate liquidity and the potential for some expense reductions from operations. This is a ratings event not an issue with ultimate debt repayment. It does show how damaging a failed investment could be for any utility. While all of the focus may be on the failure of one project, it is the long-range ramifications of those policies that handcuff the utility now. It should be a cautionary tale for any municipal utility when it is offered ownership participations in projects based on new or emerging technology.

HOSPITALS DODGE A BULLET UNDER MANCHIN DEAL

There has been concern expressed that without significant legislation such as some form of a Build Back Better Program, that access to health insurance might be reduced. This would have hurt hospitals which serve the under and non-insured customer cohorts and was potential source of credit pressure. As it looked more and more like the worst would come to pass in terms of legislation, events have suddenly turned which effectively removes that source of credit risk.

The worry was that the subsidies available from federal funding to lessen the cost of Affordable Care Act based health insurance might not be renewed. Now, the deal announced by Senator Manchin includes three years of subsidies for Affordable Care Act premiums. Hospitals could also see some benefit from provisions allowing Medicare greater leeway in negotiating prescription drug prices.

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

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INFLATION AND CAPITAL PROJECTS

With so much attention being focused on funding initiatives to support infrastructure maintenance and development, it has been easy to ignore another potential source of drag on development efforts – inflation. It is not a surprise that the same issues driving general inflation trends are showing up in specific impacts on capital facilities development. The most recent example comes from the State of Maine.

According to an analysis by the Associated General Contractors of America, all construction products are significantly more expensive. Paving asphalt was nearly 18 % more costly on a year over year basis in the month of June. Likewise, structural metal for bridges was up nearly 24 % and concrete products were up more than 13 %.

In Maine, the state DOT cited elevated prices in support of a decision to reject bids on paving projects in Augusta, Shapleigh, Old Town, Bangor and Byron, a bridge replacement in Old Town and traffic signals in South Portland. In total, the department rejected nearly $28 million in work. This is happening even in the face of $100 million in extra state funding for projects in the FY 2023 budget.

The impact of delays and politics on other larger capital projects is becoming clear. In California, the cost of its long delayed high speed rail project continues to spiral. That was going on long prior to the pandemic. Now, the economic impacts of the pandemic are generating less and less value for the project as it deals with the same kinds of costs that smaller states like Maine do. This lessens the impact of the appropriation in the FY 2023 state budget which will cause the release of $4.2 billion from the bond fund for the project established in 2008. That is enough only to complete the 171-mile Central Valley segment from Bakersfield to Merced.

Political issues are impacting other projects. The quarreling in Pennsylvania over tolling roads has resulted in older roads and less expansive capital development. Politics drove Gov. Chris Christie’s decision not to support the Gateway Project where each day of delay and debate (we are over 10 years now) has done nothing but add to the costs of these facilities. Inflation at current rates will damage those programs.

NYC SCHOOL ATTENDANCE AND FUNDING

The FY 2023 budget process for the City of New York saw much attention focused on the issues of the schools and public safety. Given the recent wave of violent crimes in the City, the public safety side of the debate was solved relatively easily. The police were not defunded. The debate which has generated much more intensity is the one over education funding. The approved budget did contain cuts to some items of education spending which were criticized.

The Mayor cited the need to adjust spending to the realities of enrollment. The City’s Independent Budget Office (IBO) has released data reflecting those realities. Enrollment in the city’s public schools (traditional and charter) continued to decline in the second pandemic year (2021-2022 school year). Total enrollment in 3K through 12th grade was 1,058,900 in the second pandemic year, down 3.2 % from 1,094,100 in the first pandemic year, which was 3.3 % less than the 1,131,900 students enrolled in the pre-pandemic year, or a 6.4 % decline over the two school years.

For both years, the decline was exclusively in the city’s traditional public schools, which saw enrollment drop by 8.3% over the two pandemic school years. The city’s charter schools did not experience a similar loss. Charter enrollment remained relatively flat in the second pandemic year after a 6.9 % increase in the first year. The decline in traditional public school students comes despite an expansion of the city’s 3K program—which nearly doubled in size—during the last school year.

Excluding 3K, enrollment in the city’s traditional public schools would have fallen even further—by 10.1 percent—with a bigger reduction in the second pandemic year (down 55,200 students in pre-K through 12th grade) than the first (a 44,600 decline). (Charter schools do not enroll 3K students and were not impacted by the expansion). As we go to press, efforts are underway to find ways to rededicate funds within the constraints of the approved budget to lessen the impact of reductions on classrooms and unionized staff.

CYBERSECURITY AND HOSPITALS

This week, the Justice Department announced a complaint filed in the District of Kansas to forfeit cryptocurrency paid as ransom to North Korean hackers or otherwise used to launder such ransom payments. The case involves ransoms paid by two hospitals – one in Kansas and one in Colorado. For the Justice Department, the case is a chance to tout what it sees as the advantages of rapid involvement by law enforcement. That is based on the fact that the impacted hospital (Kansas Heart Hospital in Wichita) will ultimately be receiving its money back.

In May 2021, North Korean hackers used a ransomware strain to encrypt the files and servers of a medical center in the District of Kansas. After more than a week of being unable to access encrypted servers, the Kansas hospital paid approximately $100,000 in Bitcoin to regain the use of their computers and equipment. They also engaged with and cooperated with the FBI. That cooperation was credited with allowing the FBI verify an approximately $120,000 Bitcoin payment into one of the seized cryptocurrency accounts identified.  

The FBI’s investigation confirmed that a medical provider in Colorado (Parkview Medical Center in Pueblo) had just paid a ransom after being hacked by actors using the same ransomware strain. In May 2022, the FBI seized the contents of two cryptocurrency accounts that had received funds from the Kansas and Colorado health care providers. 

The recovery is obviously being publicized for its success. That is in the interest of the side of the debate in favor of early law enforcement involvement. The other side of the debate seeks to just payoff the hackers and move on. The lack of repeat attacks on many initial victims after paying seems to drive a cost/benefit decision in favor of paying. It also mitigates some of the bad publicity which results from these attacks. We will see if this engagement and cooperation becomes a trend.

CAN USED PIPELINES HELP CARBON CAPTURE?

Away from the issue of whether carbon capture at scale is feasible, the other clear hurdle to operation is the issue of pipelines. We have regularly followed the emerging political battles over the issue of eminent domain and carbon capture pipelines. While that debate unfolds over the next 12-24 months in the Dakotas, Iowa, Illinois, and Missouri, a potential alternative to the need to acquire new pipeline right of way is being sought by a Nebraska entity.

Tallgrass Energy, owner of two pipelines, is seeking Federal Energy Regulatory Commission permission to convert the 40-year-old Trailblazer Pipeline through southern Nebraska are seeking to abandon natural gas shipments and use it to move carbon dioxide instead. The plan would see Trailblazer ship carbon dioxide originating in Nebraska, Kansas and Colorado to a carbon sequestration site in either Nebraska or Wyoming.

Tallgrass also owns a second pipeline, the Rockies Express Pipeline (REX). It parallels Trailblazer through the Panhandle and west central Nebraska and would continue to carry natural gas including that formerly shipped on the converted pipeline. The Federal Energy Regulatory Commission (FERC) is taking public comments on the joint request from the Tallgrass operating subsidiaries to make the transition.  

ETHANOL FOLLOWS OIL FOOTPRINT TRAIL

Spend enough of your career in municipal high yield and you begin to build up a list of places associated with new technology ventures which did not quite work out. I used to see a wide variety of waste recycling and disposal projects, often driven by mandates to use what ever the end products of the plants in question were supported by. Lately, one such project which was financed in the municipal bond market is in the news for all the wrong reasons.

In this case the project is a biofuels project attached to a huge cattle feedlot operation in Mead, NE. The lot handles some 60,000 head annually in two 150-day sessions which produce significant organic waste. The project was intended to convert that manure into methane and then use the methane to fuel an ethanol plant. It is the ethanol plant which is at the center of an emerging environmental contamination issue.   

The ethanol plant began operation in 2015 and was forced to close in the summer of 2021 by the State of Nebraska. Now, the facility and a large part of the surrounding area is being examined by a menagerie of scientists to determine how much contamination from the ethanol plant has impacted the water and the farmland near the plant. The scientists come from the US Geological Survey (USGS) and the University of Nebraska. The work is being funded by the State of Nebraska.

This only one prominent example. As is the case with abandoned wells from fossil fuel drilling and fracking, another energy source designed to facilitate internal combustion is already leaving a waste related scar in its wake. It is a problem that the ethanol belt is only beginning to get a handle on.

PORT OF OAKLAND

The fact that a labor dispute is temporarily halting operations at the Port of Oakland is not a surprise. The contracts with longshoremen expired on June 30. So many people looked at that cohort of the labor force at ports on the West Coast as the likely source of any strike activity. What is a bit of a surprise is that it isn’t the dockworkers who are striking, it is independent truckers.

In 2019, California enacted Assembly Bill 5, a gig economy law passed in 2019 that made it harder for companies to classify workers as independent contractors instead of employees, who are entitled to minimum wage and benefits such as workers compensation, overtime and sick pay. California voters approved a ballot initiative, Proposition 22, in 2020, designed to allow those drivers to be exempt effectively from the law. A California Superior Court judge ruled that it was unconstitutional. Uber and Lyft quickly appealed and have been exempt from complying with Assembly Bill 5 while the court proceedings play out.

The real targets of the rules were the transportation network companies (Uber, Lyft, etc.). One group which finds itself subject to the law are some 70,000 truck drivers who can be classified as employees of companies that hire them instead of independent contractors. The California Trucking Association separately sued over the law, arguing the law could make it harder for independent drivers who own their own trucks and operate on their own hours to make a living by forcing them to be classified as employees.

The law has yet to be enforced in the face of ongoing litigation against it. Now that the truckers’ litigation has been resolved in favor of the law, the truckers are now striking in an effort to stimulate negotiations over changes to the law and its enforcement. The first target is the Port of Oakland. It announced a suspension of operations this week as truckers effectively blockaded the facilities. In the short run, this action in a peak shipping period will at least grab attention. It will exacerbate issues regarding idle containers which plagued all of the California ports last year.

The ports are trying to be patient. The San Pedro Bay ports of Los Angeles and Long Beach will postpone consideration of the “Container Dwell Fee” for another week, this time until July 29. Since the program was announced on Oct. 25, the two ports have seen a combined decline of 26% in aging cargo on the docks. Fee implementation has been postponed by both ports since the start of the program. The Long Beach and Los Angeles Boards of Harbor Commissioners have both extended the fee program through Oct. 26.

Under the temporary policy, ocean carriers can be charged for each import container dwelling nine days or more at the terminal. Currently, no date has been set to start the count with respect to container dwell time. The ports plan to charge ocean carriers $100 per container, increasing in $100 increments per container per day until the container leaves the terminal.

NUCLEAR, NATURAL GAS, AND NY

Name the issue and there is likely to be a real divide between upstate and downstate (NY Metro). The latest example comes in the wake of the closure of the Indian Point Nuclear Plants. The state’s independent system operator has released data covering the period after Indian Point closed. As noted by the NYISO’s independent market monitor, wholesale electric prices in New York have “generally increased as a result of the retirement of the Indian Point 2 in April 2020 and Indian Point 3 in April 2021. As eastern New York has become more reliant on natural gas-fired generation, spikes in congestion because of tight gas market conditions on cold winter days have become more frequent.”

The closures occurred during the height of the pandemic nevertheless the daily demand for electricity in New York grew by nearly 1.5% in 2021. The average wholesale price for electricity climbed from a record low average price of $25.70/ MWh in 2020 to $47.59/MWh a year later. The average monthly wholesale cost of electricity in New York’s markets from January 2021- 2022 tripled from $40.69/MWh to $137.49/MWh.

Most of New York’s renewable energy capability is located in upstate and northern New York. To bring renewable energy to market, three new transmission projects are under construction representing the single largest investment in transmission infrastructure in New York State in more than 30 years. In 2021, 89% of downstate energy came from natural gas and oil, up from 77% the previous year when both of Indian Point’s two reactors were still running. It is why many were more than disappointed when the Assembly Speaker (from Brooklyn) froze out legislation which would have enabled the NY Power Authority to participate in the needed grid development.

UPDATES

The Pennsylvania Legislature passed Senate Bill 382 which would require PennDOT to publicly advertise toll proposals, take public comment, and seek approval from both the governor and the legislature. The Commonwealth could still use a P3 for transportation. It requires legislative approval for any toll backed projects. 

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

This week we highlight California’s efforts to refine its taxation of legal cannabis to improve the competitive position of the legal market. Other states are moving on the path to legalization. The evidence to support gas tax holidays is pretty thin. Municipal utilities try to navigate the opposition to natural gas. College enrollment trends raise caution flags. This week’s chart details employment in the transportation industry. We update legal issues in Pennsylvania and Hawaii.

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CA CANNABIS TAXES

Assembly Bill 195, was signed on June 30 after receiving broad bipartisan support in both houses of the state legislature. California’s cultivation tax of more than $161 per pound of cannabis flower will be eliminated completely. The bill, which marks a significant change to California’s tax structure for the legal marijuana industry, maintains the cannabis excise tax at its current rate of 15% for the next three years, after which the rate could be adjusted to replace revenue lost due to the elimination of the cultivation tax.

It also creates new tax credits for some cannabis businesses and transfers responsibility for collecting the cannabis excise tax from distributors to retailers. The changes are designed to reduce the tax burden on licensed growers and encourage more competition to the illegal market. Taxation issues around both the level of tax and the collection methods were seen as real hurdles for the legal market.

The other major issue associated with legalization is that of “social equity”. The bill seeks to address those issues through a $10,000 tax credit for social equity cannabis businesses and provisions which allow social equity retailers to keep 20% of the cannabis excise tax they collect for a period of three years. 

CANNABIS ON THE BALLOT

The move to lower tax impediments to a fully legal market in California are being followed by two efforts to legalize cannabis in Oklahoma. The first is the Oklahomans for Sensible Marijuana Laws (OSML) campaign. It hopes to have a vote after it had turned in over 164,000 signatures to the secretary of state’s office. They need 94,911 of the submissions to be valid in order to qualify the proposed statutory amendment.

The measure would allow adults 21 and older to purchase and possess up to one ounce of cannabis, grow up to six mature plants and six seedings for personal use. The current Oklahoma Medical Marijuana Authority would be responsible for regulating the program and issuing cannabis business licenses. A 15 percent excise tax would be imposed on adult-use marijuana products, with revenue going to an “Oklahoma Marijuana Revenue Trust Fund.”

The funds would first cover the cost of administrating the program and the rest would be divided between municipalities where the sales occurred (10 percent), the State Judicial Revolving Fund (10 percent), the general fund (30 percent), public education grants (30 percent) and grants for programs involved in substance misuse treatment and prevention (20 percent).

A competing group still has time to gather signatures for its petition for its campaign’s recreational legalization proposal would allow adults 21 and older to possess up to eight ounces of marijuana that they purchase from retailers, as well as whatever cannabis they yield from growing up to 12 plants for personal use.

Marijuana sales would be subject to a 15 percent excise tax, and the initiative outlines a number of programs that would receive partial revenue from those taxes. The money would first cover implementation costs and then would be divided to support water-related infrastructure, people with disabilities, substance misuse treatment, law enforcement training, cannabis research and more.

Other states in the middle of the country are likely to see ballot initiatives offered as the result of ongoing petition efforts. Arkansas voters would be asked to approve a measure to permit anyone at least 21 years of age to possess up to one ounce of cannabis. Additionally, Arkansas would grant its current medical shops permission to add adult-use sales on March 8, 2023. A lottery would also distribute 40 additional licenses for adult-use dispensaries, and municipalities would need to hold a referendum if they prefer to prohibit adult-use businesses. The measure does not include expungements of prior marijuana convictions. 

A proposed North Dakota initiative would allow those 21 years of age and older to purchase and possess a maximum of one ounce of cannabis, along with permitting adults to cultivate a maximum of three plants for personal use. Nebraska is its own story. In the Spring, lawmakers approved the cannabis legalization ballot language, clearing the procedural obstacle to begin gathering signatures. Nebraska cannabis advocates are not having problems getting the requisite total numbers of signees for their initiative. They are concerned with the requirement that those signatures “must come from a minimum of five percent of voters in at least 38 counties across the state.” 

GAS TAX HOLIDAY REALITIES

University of Pennsylvania researchers released an analysis of the impact of state-level gas tax holidays on prices facing the consumer. Maryland suspended its state tax of 36.1 cents per gallon on gasoline and 36.85 cents per gallon on diesel from March 18 to April 16 this year. Georgia suspended its state fuel taxes for 10 weeks from March 18 until May 31 including a tax of 29.1 cents per gallon on gasoline and a tax of 32.6 cents per gallon on diesel.

Connecticut suspended its state tax on gasoline of 25 cents per gallon from April 1 to June 30. New York’s gasoline tax holiday took effect on June 1 through the end of the year and suspend 16 cents per gallon of the state’s sales and excise taxes on gasoline (16.75 cents per gallon in MCTD region). Florida will not impose its 25.3 cents per gallon state gasoline tax from October 1 to October 31.

So, what did the consumer experience at the pump? The experience of the three states with completed programs is not consistent. After the gasoline tax holiday was enacted on March 18, Maryland saw a decline in gasoline prices that is statistically significant at the 5 percent level from March 19 until April 18. The decline also grew in magnitude from 12 cents the next day to a little below 30 cents from March 22 to April 16. After the gasoline tax holiday expired on April 17, gasoline prices in Maryland became higher than what they would have been if the gasoline tax holiday never occurred, although the difference was not statistically significant at the 5 percent significance level.

The price decline in Georgia, on the other hand, was more gradual and grew from 7 cents on March 24 to around 30 cents on May 16. Gasoline prices also declined immediately after the gasoline tax holiday went into effect in Connecticut and grew from 11 cents on April 2 to 23 cents on April 15. However, the decline shrank slowly after that to about 14 cents on May 16, even though the gasoline tax holiday would still be in place for another month and a half.

The data simply does not support the notion of an immediate price benefit just from suspension of the taxes. If it’s not doing what it is ostensibly intended to do – provide near-term price relief at the pump – then the loss of revenues to support transportation is much harder to justify.

THIS WEEK’S CHART

The unemployment rate in the U.S. transportation sector was 4.1% (not seasonally adjusted) in June 2022 according to Bureau of Labor Statistics (BLS) data recently updated on the Bureau of Transportation Statistics (BTS) Unemployment in Transportation dashboard. The June 2022 rate fell 2.1 percentage points from 6.2% in June 2021 and was just same as the pre-pandemic June level of 4.1% in June 2019. Unemployment in the transportation sector reached its highest level during the COVID-19 pandemic (15.7%) in May 2020 and July 2020.

This data accompanies data that shows that air traffic may be steadily increasing but the recovery of the airlines remains incomplete. The most recent TSA data shows that air travel remains at between 75% and 85% of pre-pandemic levels.

UPDATES

The Ninth Circuit Court of Appeals ruled to deny an appeal by fossil fuel companies to transfer climate change lawsuits to federal court. The suits were filed by the city and county of Honolulu and Maui County in 2020. Like the many other cases across the country, it accused the companies of exacerbating the effect of climate change on the islands to increase their own profits. The decision continues a streak of similar outcomes in legal challenges across the country.

In the wake of the recent Pennsylvania court decision which stymied the plans to fund bridge rehabilitation projects without tolls (MCN 7.11.22), the Legislature began to look at alternatives. This week, Gov. Tom Wolf officially signed a bill that puts more restrictions on how public-private partnerships can be established in the Commonwealth.

The bill specifically allows the state to move forward with the existing partnership so it doesn’t lose about $14.8 million in preliminary work PennDOT and the group had done over the past 18 months. The issue is not whether you use a P3 to accomplish the rehabilitation. The issue is that of tolling to generate funds. It was tried before to pay for improvements to I-80 in eastern Pa. but massive political backlash scotched that idea. The opposition to this plan is not a shock.

The Keystone State sees the issue of preemption arise again. Gov. Tom Wolf vetoed Republican-led legislation to stop municipalities from adopting building codes that prohibit natural gas hookups. The veto was framed as an issue of supporting local control and state regulatory authority.

SALT RIVER AND NATURAL GAS

The municipal power provider serving customers in greater Phoenix finds itself in the middle of the debate over natural gas as a “cleaner” generating alternative. Earlier this year, the Arizona Corporation Commission (ACC) did not approve the expansion of Salt River Project’s (SRP) natural gas fired power plant near the “environmental justice” community of Randolph.

SRP has requested that the ACC rehear Salt River Project’s (SRP) application to expand its that natural gas fired power plant.  The initial rejection was on technical grounds – the utility’s failure to show a competitive bidding process with an all-source Request for Proposal (RFP) specific to the project. 

It did not directly address the concerns about location. In June, the ACC voted 3 to 2 not to reconsider its April decision to reject SRP’s Certificate of Environmental Compatibility (CEC) to expand its Coolidge Generating Station from its current 12 gas turbines to an additional 16 for an additional 820 megawatts of power generation. The site was clearly established to accommodate an expansion so it is frustrating to SRP that it cannot move forward.

So, SRP has filed two lawsuits to revive the expansion effort. One case was filed in Maricopa County Superior Court, and a special action was filed with the Arizona Supreme Court to expedite the case which the Supreme Court declined jurisdiction. The Maricopa County case seeks to have the court reverse the ACC decision as unlawful and approve the CEC. It also asks for several precedent setting declarations including that the Commission does not have jurisdiction to evaluate a project’s effects on customer rates, may not deny a project based on environmental justice concerns.

While not regulated by the ACC the company must get its approval of a Certificate of Compatibility for power generation projects over 100k. And according to state law the ACC must consider factors like effects on wildlife, environment, noise levels historic sites and estimated costs.

COLLEGE ENROLLMENT TRENDS

Enrollment declines are worsening this spring. Total postsecondary enrollment, which includes both undergraduate and graduate students, fell a further 4.1 percent or 685,000 students in spring 2022 compared to spring 2021. This follows a 3.5 percent drop last spring, for a total two-year decline of 7.4 percent or nearly 1.3 million students since spring 2020. The declines this spring are also markedly steeper than they were last fall, when total postsecondary enrollment declined by 2.7 percent from the previous fall.

Undergraduate enrollment accounted for most of the decline, dropping 4.7 percent this spring or over 662,000 students from spring 2021. This is only slightly less than last spring’s 4.9 percent loss. As a result, the undergraduate student body is now 9.4 percent or nearly 1.4 million students smaller than before the pandemic. Undergraduate enrollment is also falling more steeply this spring than it was in fall 2021 (-4.7% vs. -3.1%). While all institutional sectors experienced varying degrees of enrollment declines, the public sector (two- and four-year colleges combined), which enrolled 71 percent of all students this spring, suffered the steepest drop, over 604,000 students.

In particular, community colleges fell by 7.8 percent (351,000 students), representing more than half of the total postsecondary enrollment losses this spring. Community colleges have now lost over 827,000 students since spring 2020.  Full-time student numbers fell by 3.8 percent (403,000 students), for a total two-year decline of 7.2 percent (787,000 students). For a second straight year, community colleges suffered double-digit declines in full-time students, amounting to nearly 11 percent (168,000 students) this year and 20.9 percent (372,000 students) for the two years since spring 2020.

Part-time enrollment across all sectors fell by 4.5 percent (282,000 students), resulting in a cumulative loss of 7.7 percent (501,000 students) since spring 2020. At private non-profit four-year institutions, part-time student enrollment dropped this spring (-4.1%), reversing last year’s gains (+2.8%). The privates, especially the smaller liberal arts schools, remain vulnerable to demographic trends and the economy.

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

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EPA, THE SUPREME COURT, AND THE POWER FUTURE

Given the week of decisions from the U.S. Supreme Court, many wonder where the Court’s course leads to in terms of the ability to manage certain issues on a national aggregate basis or if it is the role of the State’s to regulate and oversee energy developers and providers. If one can get beyond the emotion and rhetoric, the issue over power plant regulation is not a surprise.

The Court’s decision in this case, as well as in other cases, is based on a view that even some of the thorniest issues facing our body politic are better addressed legislatively. It is true that there have been significant strides made in society as the result of Supreme Court decisions. Those same decisions remain argued and, in some cases contested to this day. Many of the challenges to some of these cases would likely not arise if legislatures (especially at the federal level) enacted sufficiently clear laws.

It’s obvious that this legislative inaction creates lots of opportunities for mischief on all sides of issues. At the same time, attempts at legislative actions in some states have created more than mischief with House Speakers in two legislatures having been brought down as the result of corruption linked to energy related issues. The issue of how much homeowners should be able to save if they install solar generation has been a significant issue in Florida and California.

All the attention on the EPA decision diverts attention away from the precarious state of the transmission grid. In areas with very high temperatures, the utilities are concerned about their ability to meet demand. This is driving discussions like those in CA which we documented last week. It is behind the drive to build new high voltage transmission across Missouri. And obviously, carbon capture is designed to avoid more stringent generation rules.

Utilities, especially those associated with the production and generation of electric power, have a long history of dealing with the regulatory structures of each of the states which they serve. On the downside, the resulting fragmentation of regulatory practices from state to state raises the issue of inconsistent regulation. A West Virginia coal plant serving customers in Virginia or Kentucky could see three different regulatory determinations regarding the same asset. In the end, the environmental impact isn’t directly mitigated. The revenue club is only so effective in changing behavior.

It should serve as a reminder of how much power resides in the regulatory infrastructure of stage and local government. The power is being exercised as you read this: zoning laws for and against solar and wind installations; the development and management of net-metering schemes for solar, state and local air and water quality regulations, state and local franchise oversight and, public service commissions and their equivalents None of these types of oversight are stopped.

SEC, SUPREME COURT, CLIMATE DISCLOSURE

We have documented the nature of the opposition to proposed disclosure standards put forth by the Securities and Exchange Commission (SEC) regarding climate change (MCN 6.27.22). Now, some of those opponents are asking if the ruling against the EPA and its efforts to regulate power plant emissions provides a basis for stopping the SEC from promulgating and enforcing disclosure standards.

Opponents of disclosure seek to use the same theory, the “major questions” doctrine, to say that the SEC cannot mandate disclosure rules not specifically included in authorizing legislation for the Commission. Disclosure supporters point to the fact that the West Virginia case involved EPA using a somewhat specific statutory authority to engage in an emerging type of regulatory effort, while the SEC has based its proposal in its basic mission from Congress: providing investors with the information they need to make smart financial decisions.

Over the last decade, it has become clear that the growing investor base motivated by ESG concerns still needs some objective standards to measure the compliance of individual investments with investment mandates related to climate change. The market has already established that climate related disclosure is necessary. The debate is over how to quantify data and how to use that data in the investment process.

In the municipal space, the information may not be as granular as some might think will be required by the SEC but issuers have been increasing their disclosure. The issue now is one of standardization. What sort of information is needed and how can that information be applied? The SEC is not trying to make environmental policy with these rules. They are taking a traditional role of financial market regulation – making sure that information provided to investors is not fraudulent. It is a response to market input not an agenda driven move.

CALIFORNIA INITIATIVE

Another front in California’s climate war was established this week when the  “Clean Cars and Clean Air Act”  ballot initiative was approved for the November ballot. The initiative seeks to increase funding available from the state to help mitigate the impact of transportation on the State’s environment.  The measure would raise the corporation tax for those earning more than $20 million in profits in California. These taxpayers would pay an additional tax of 2.45 percent on their California profits above $20 million. This tax increase would end the earliest of: (1) January 1, 2043 or (2) beginning January 1, 2030, the January 1 following three consecutive calendar years in which statewide greenhouse gas emissions have been reduced by 80 percent below 1990 levels.

The additional revenue generated from the increased corporation taxes would be deposited in a new fund called the Clean Cars and Clean Air Trust Fund (CCCATF). Forty-five percent of revenue would be allocated to the CA Air Resources Board (CARB) for programs to promote the purchase and use of zero emission vehicles (ZEV), as well as other mobility options intended to reduce GHG emissions and air pollution. For at least the initial five years of the programs, at least two-thirds of the overall funding must be targeted to programs that support the deployment of passenger ZEVs. half of the overall funding for ZEV incentives and mobility go to programs that primarily benefit residents who live in   near low-income and disadvantaged communities. 

Thirty-five percent would be allocated to the CA Energy Commission (CEC) for programs to increase the availability of ZEV infrastructure. During the first five years of the program, the measure requires that at least half of the ZEV infrastructure funding be targeted specifically to multifamily dwelling charging stations (20 percent), single-family charging stations (10 percent), fast fueling infrastructure for passenger vehicles (10 percent), and medium- and heavy-duty fueling infrastructure (10 percent). at least half of the total ZEV infrastructure funding be dedicated to projects that benefit residents in or near low-income and disadvantaged communities.

MICHIGAN AND MILEAGE TAXES

Transportation issues were always cited in discussions of Gov. Gretchen Whitmer’s election. “Fix the Damn Roads” became a well-known motto. Nevertheless, Michigan has gone through four years of trying different ways to tax fuel and to avoid a rate increase. The formula that dictates how Michigan fuel tax and vehicle registration fee revenue is divided between state trunkline roads, county roads, and city and village roads was established more than 70 years ago. With the state economy riding in part on substantial investment and employment in the development and manufacture of electric cars, this makes the formula out of date.

The state gasoline tax was increased from $0.15 per gallon to $0.19 per gallon in 1997. The gas tax remained unchanged until it was increased to $0.26 per gallon in 2017. The tax was also not subject indexation to reflect inflation, which steadily grew. To address that issue, legislation provided for indexation of gasoline as well as diesel fuel taxes beginning this year.

So, it seems that everyone agrees that whatever powers the vehicles that ride on them, roads will continue to be a significant expense in need of modern funding support. It is no surprise that the latest entity to share that view – Mackinac Center for Public Policy in Michigan – calls for a mileage-based fee. The reasons are not new and there is wide agreement on them.  Technology in cars is accepted and people are realizing that privacy is a scare commodity in today’s surveillance/smart phone world thereby weaking that hurdle towards deployment.

GATEWAY TUNNEL

The governors of New York and New Jersey agreed to split evenly their share of the $14 billion first phase of the Gateway Tunnel project. Before the federal government could agree to pay half or more of the cost, the two states had to come to an understanding about splitting the local share. The agreement is not the first for a split of the local share of the project. A 2015 agreement allowed federal consideration of a funding request to move forward. President Trump refused to give Gateway the approvals and funding it needed during his four years in office.

Away from President Trump, Governor Chris Christie was one of the primary obstacles to funding for the project. The 2015 agreement was the second that then Governor Christie walked away from after his decision not to fund under a 2010 agreement. This new formal agreement, covers “Phase 1” of Gateway, which includes the over century old Portal North Bridge and the Hudson tunnels. They agreed that the states would evenly split the local share of the costs of those parts of the project.

COURT HITS BRAKES ON P3

Proposals to implement tolling on a variety of bridges and highways in the Commonwealth of Pennsylvania have been floated over the years only to go down in flames in the face of significant opposition. This despite the fact that transportation funding has been a political football in the legislature on a nearly annual basis. The debate has continued even in the face of declining revenue sources and an increasing need to rehabilitate the state’s road infrastructure.

One plan was for the Commonwealth through its transportation agency (PennDOT) to undertake a public-private partnership to repair a number of bridges throughout the Commonwealth. The plan would have been funded through the collection of tolls on the bridge facilities to be rehabilitated. This would be a significant change from the current lack of charges for users of the bridges.

It was no surprise when opponents of the tolling plan sued to have it halted. Several local jurisdictions claimed that PennDOT failed to follow steps required by law to approve a P3 on transportation infrastructure, including providing local residents insufficient opportunity to weigh in on the tolling plan itself before it was approved by Pennsylvania Public-Private Transportation Partnership Board. The plaintiffs also claimed that the 2012 law establishing the board was itself a violation of the state’s constitution, because it represented an unlawful delegation of taxation authority that was reserved to the state legislature.

A preliminary injunction against the plan was issued in May and a permanent injunction was issued last week. The injunction applies to all projects under the Major Bridge P3 Initiative and PennDOT is prohibited from carrying out any activities related to the projects.  The plaintiffs also claimed that the 2012 law establishing the board was itself a violation of the state’s constitution, because it represented an unlawful delegation of taxation authority that was reserved to the state legislature. That question was not resolved as the injunction was based primarily on the procedural issues raised.

DE BLASIO FERRIES LEAVE A REVENUE WAKE

From the very beginning in 2016, the DeBlasio Administration’s plan to run ferry service from the Bronx and Queens to midtown Manhattan was viewed skeptically. Over time, the ferries came to be viewed as an unnecessarily subsidized service which only served to provide higher income passengers an alternative to traditional public transit. That alternative came at a price to users which only reflected about 20% of the cost. The rest was subsidized by the City.

The New York City Economic Development Corporation (EDC or the Corporation) entered into an Operating Agreement with a private entity to operate the NYC Ferry system beginning in 2016. EDC’s audited financial statements show that the net losses of the ferry operations for Fiscal Years 2017, 2018, 2019, 2020, and 2021 were $30 million, $44 million, $53 million, $53 million, and $33 million, respectively.

Now, the City Controller has released the results of an audit which cast the ferry operation in an even more negative light. This audit found that EDC did not disclose over $224 million in expenditures as ferry-related in its audited financial statements and that EDC understated the City’s subsidy (per ride) for the ferry operations by $2.08, $2.10, $3.98 and $4.29 for Fiscal Years 2018, 2019, 2020, and 2021, respectively. You see, the Mayor wanted ferry riders to pay no more than they would on the subway.

The ferry system has become a poster child for bad management as well as unacceptable financial disclosure practices. The audit highlighted several disclosure problems. Primary among them was some $224 million of expenses related to the ferries which were not reported. Most disturbing was the EDC response to the audit that refuses to use the recommended reporting procedures in future financial statements. Unaudited data along the lines requested will instead be put on a general website.

It tends to support the argument that the ferry service is a failure and that funds applied to subsidies could probably used to benefit a much larger transit user base.

STADIUM FUNDING

We came across a report from the Sycamore Institute, a public policy organization in Tennessee. It has generated some research about stadium financings in the wake of some $2 billion of spending approved by the Tennessee legislature to support the development of several new stadium facilities to benefit private sports franchises, especially NFL franchise. Our focus is not so much on the total dollars as it is on the percentage of these projects financed by the team owners.

The graph helps to highlight what drives opposition to and disappointment in the deal which NY State came up with for a new stadium for the Buffalo Bills. Out of eight stadiums opened since 2008, two of them were financed entirely with private funding. Out of the remaining six, only the stadium in Indianapolis was financed with a larger percentage of public money than will be the case in Buffalo or Nashville.

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.