Joseph Krist

Publisher

NUCLEAR

Constellation Energy said announced that it plans to reopen the shuttered Three Mile Island nuclear plant No. 2 in Pennsylvania. It’s easy to forget that the second unit of the plant was able to be restarted after the 1979 accident and it operated until 2019. Economics drove that decision. Microsoft, which needs tremendous amounts of electricity for its growing fleet of data centers, has agreed to buy as much power as it can from the plant for 20 years.

Constellation plans to spend $1.6 billion to refurbish the reactor that recently closed and restart it by 2028, pending regulatory approval. It is reflective of the federal tax credits available to keep operating nuclear plants open. They are supporting the extended life of Diablo Canyon. Credits are driving the effort to restart the Palisades plant in Michigan. The combination of carbon free power and the data center driven demand spikes seen in many areas are driving the effort.

If restored, the TMI reactor would have a capacity of 835 megawatts, enough to power more than 700,000 homes. This week, The U.S. Nuclear Regulatory Commission (NRC) has received a petition for rulemaking requesting that the NRC revise its regulations to include a Commission-approved process for returning a decommissioning plant to operational status. The NRC denied a similar petition in 2021. The petition was submitted in connection with the Palisades plant.

The plant owner, Holtec International remains on track to restart operations at Palisades in October 2025. NRC expects to issue a final decision on the required licensing actions by July 31. The NRC will continue to follow existing regulations while it evaluates the petition.

MEDICAID ON THE CALIFORNIA BALLOT

California’s managed-care tax comes from a levy imposed on health plans, based on monthly numbers of both Medi-Cal and commercial insurance enrollees. The money raised is matched by the federal government, doubling the spending power. That federal money is subject to reauthorization and appropriation by Congress every three years. California has had a tax in some form since 2009. It is one of 19 states to levy similar taxes.

Now, a ballot initiative up for vote in November may throw a wrench into the current system.  Proposition 35, a November ballot initiative that would create a dedicated stream of funding to provide health care for California’s low-income residents. It would change the funding structure in that it would specifically designate the purposes for which it is being levied.

The measure would use money from a tax on managed-care health plans mainly to hike the pay of physicians, hospitals, community clinics, and other providers in Medi-Cal. So far, it all sounds good. Some have focused on the risk being created in that Proposition 35 sets specific dollar amounts through 2026, which are based on the managed-care tax approved by the federal government last year. the tax requires another federal approval starting in 2027, the year the ballot measure would make funding permanent. The initiative does not provide for revenue reductions (like the federal matching funds) but mandates revenue levels.

The real concerns arise from some of the “mechanical” aspects of the proposal. The desire to be specific in purpose has raised concerns that some currently paid under the existing structure may not qualify for the new health tax program. Instead of relying on a dedicated fund for some of these costs, they would be funded out of the State’s General Fund. That would put these costs at risk of General Fund problems in future.

That’s because the ballot measure would supersede the budget, and it leaves them out of the health tax proceeds. The ballot measure contains flexibility for small changes, it requires a three-fourths majority vote in the legislature for any major changes. The Centers for Medicaid/Medicare Services also has issues with how the State currently levies its tax and what it funds. California’s tax derives revenues mainly from Medicaid services (instead of non-Medicaid services) and uses these revenues as the state’s share of Medicaid payments.

It leads to the CMS to find that the tax is not sufficiently redistributive as is required under the rules governing the federal program. Federal rules require that the commercial health plans be reimbursed for the tax they pay on their Medi-Cal membership. Since the Medi-Cal rate is around 100 times as much as the rate on commercial membership, 99% of the revenue from the tax is on the Medi-Cal side. It is a conscious choice in an effort to keep private premiums down.

INSURANCE AND TAXIS AND UBERS

The American Transit Insurance Company provides coverage for about 74,000 for-hire vehicles in New York City, or more than 60 percent of the available cars, according to city records. Recently, the company disclosed that it is insolvent. It faces more than $700 million in losses from existing and projected claims from past accidents. Were the company to collapse altogether, thousands of taxis, Ubers, Lyfts and livery cars would be immediately taken off the road until they could find other insurance.

The situation is complicated by the fact that the company is a privately held entity with a history of financial issues including misappropriation of funds. State regulators have ordered American Transit to explore all options to obtain more funding, including a potential sale of the company. The firm submitted two remediation plans, which included rate increases and setting up a blockchain platform where policies could be bought and sold as nonfungible tokens.

If it is not purchased, the company could go into receivership with the New York Liquidation Bureau, which would use American Transit’s remaining assets or a state fund to pay off active claims. Citywide, more than 780,000 trips are taken each day in taxis, Ubers and Lyfts. The firm was established in 1972, had its first public incident with the NYS Insurance regulators over finances in 1979 and managed to still be allowed to write business. Sounds like a major regulatory failure.

NYC

The indictment of Mayor Eric Adams is an unprecedented event in the history of one of the market’s largest issuers. The closest period of time since the 1975 financial crisis to this is the last Koch administration. Extensive as the corruption of the “City for Sale” era was, it did not have legal consequences for the Mayor. This is truly different. Fortunately for the City’s bondholders, the mechanisms established in the wake of the experience of the late 1970’s provide security for them.

The City’s GO debt is secured and paid by property taxes. These tax proceeds are effectively in a lock box where they remain until the collections are certified at which time moneys are released to the various sinking fund accounts for the bonds. Regardless of the outcome of the Mayor’s legal entanglements, those taxes will be levied, collected and deposited in to the lock box. We are not concerned about the full and timely payment of the City’s debt. Other related debt like that issued for the Transitional Finance Authority are also secured by revenues directed into appropriate funds for the payment of debt service. From our standpoint it is ongoing trading value rather than the issue of full payment that should be the concern of bondholders.

Functionally, if the Mayor vacates office before his term ends (12/31/25) the Public Advocate becomes the Mayor. That individual would then have to call a special election for a new Mayor. It would have to be done quickly as there are restrictions in state law as to when such a vote can be held relative to the primary dates for the 2025 mayoral election. It will be a very tumultuous time for City government at a time when it will be facing crucial funding issues.

The Mayor will have to issue a Financial Plan Update in mid-November. He will likely be looking for significant financial assistance from the State. If Adams resigns, it is unclear how badly this will hobble the City’s efforts in Albany especially in light of New York State’s fiscal year and budget timing (4/1). It will also come in competition with the ever increasing demands for state funding from the MTA.

Regardless of who is Mayor, the City’s prison system is in increasing legal trouble. Federal Judge Laura Taylor Swain ordered Department of Correction leaders to meet with lawyers for prisoners to create a plan for an “outside person” who could run the system. They must discuss whether a receiver would work with or replace a commissioner; how a receiver might be appointed; his or her tenure; and qualifications for the position

Given the upheaval in City government, it is highly likely that we see a receiver appointed. We would not be surprised if the receiver actually runs Rikers in the absence of a commissioner. It’s not clear what fiscal impact would result but reform of the City’s jail system will not come cheaply. The next court date is November 12.

NEW JERSEY TRANSPORTATION

A unanimous vote by members of the New Jersey Legislature’s Joint Budget Oversight Committee approved a plan to refinance some $3.2 billion of New Jersey’s transportation-infrastructure debt secured by the Transportation Trust Fund (TTF). Under the proposed refunding transaction, the planned share of pay-as-you-go spending will increase by about $1 billion through the end of the 2029 fiscal year. Over the same period, the projected amount of new borrowing will drop, from about $8.5 billion to $7.5 billion.

The decision comes in the wake of the latest five year reauthorization of the TTF and the taxes which support it – the state gas tax, the sales tax, and contributions from state toll-road authorities. In addition, the legislature approved a registration fee on electric vehicles established as a new source of revenue for the TTF. The gas tax will continue to see regular increases in the rate to offset declining receipts.

UPDATES

Brightline West – The $3 billion federal grant supporting construction of the Brightline train between Southern California and Las Vegas has been formally awarded. Along with a $3.5 billion private activity bond allocation, half of the projected funding need is filled. It’s expected that the other half will be debt and equity funded. Serious construction is now expected to begin in early 2025. Plans are for the high-speed rail system to be built and operating before the 2028 Olympic Games in Los Angeles.

MTA – the MTA formally submitted its capital program for the next five years. It comes in the wake of the “pause” in congestion pricing this summer. The $68 billion funding estimate accompanying the plan is only half funded. Some $22 billion in federal, state and local government funding is assumed. The MTA predicts $13 billion of new debt of its own. Here’s the rub. That only accounts for half of the plan’s needs. It will be one of the dominant items of the FY 2026 state budget.

Grid Terrorism – A conspiracy to launch an attack against five Maryland electric substations led to a sentence of 18 years in a federal prison. The plan was to try to start a race war in Baltimore. Other plots have been met with harsh sentences as well. Given the relative vulnerability of these pieces of the electric infrastructure, it’s important to discourage the threat given how hard it is to secure remote stand alone facilities.

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

NYC

You know it’s reflective of something bad when the news is dropped on a Saturday evening. The latest departure from the Adams administration (City Corporation Counsel) over “personnel matters” just piles on the trouble for the Mayor. The management of three of the most important issues – police, migrants, and education – has been hampered and executed poorly.

This all comes as the commercial sector still is conducting efforts to revive in-office work. Transit remains an issue (a state problem) hindering a full return. Attendance at many entertainment and cultural venues across a wide spectrum of offerings remains lower. The restaurant industry remains stressed.

Under those circumstances, good government is as important as fiscally sound government is. With so much change in his management team and the whiff of criminality about City Hall, instability rules. Tuesday is always an interesting day for the Mayor. His weekly press event affectionately known as Tuesdays with Eric is reviving an old sport from the Cold War. Just like on May Days of old when you looked to see who was on Lenin’s tomb, the shift and deletions from the dais each Tuesday can be watched as well. 

FLORIDA BUDGET OUTLOOK

The Long-Range Financial Outlook (Outlook) is issued annually by the Legislative Budget Commission as required by article III, section 19(c)(1) of the Florida Constitution. The Outlook provides a longer-range picture of the state’s fiscal position that integrates expenditure projections for the major programs driving Florida’s annual budget requirements with the latest official revenue estimates. The 2024 Outlook includes projections for Fiscal Years 2025-26, 2026-27, and 2027-28.

Expenditure projections, or budget drivers, are grouped into two categories: (1) Critical Needs, which are generally mandatory increases based on estimating conferences and other essential needs; and (2) Other High Priority Needs, which are issues that have been funded in most, if not all, recent budgets. This year’s Outlook identifies 14 Critical Needs budget drivers and 28 Other High Priority Needs budget drivers, with total General Revenue needs of $7.5 billion in Fiscal Year 2025-26; $6.9 billion in Fiscal Year 2026-27; and $6.6 billion in Fiscal Year 2027-28.

The revenue and expenditures estimates included in the Outlook reflect current law requirements. The budget drivers do not include any assumptions regarding the creation of new programs or expansion of current programs. Further, the Outlook does not make any discrete adjustments for potential risks, such as major hurricanes or other natural disasters. In January 2024, the Seminole Tribe of Florida resumed revenue sharing with the State of Florida. That has generated over $300 million for the State in FY 2024.

While total revenue collections exceeded expectations since last years’ estimates by $1,085.7 million (or 2.3 percent), nearly 60 percent of the revenue gain was related to two sources: Corporate Income Tax and Earnings on Investments. There are no surprises regarding the expected expense outlook. In Fiscal Year 2024-25, Medicaid service expenditures are expected to be $33.2 billion. Total Medicaid expenditures for Fiscal Year 2025-26 are expected to be $34.7 billion, an increase of $1.5 billion. Education funding tied to enrollment growth continues to grow. Pension funding will require annual increases to meet actuarial requirements. 

The stat which interested us the most was the relatively flat growth from sales tax revenue. It is as good a current indicator as anything else as to the level and trend of economic activity. This is especially true in non-income tax states. That flat growth buttresses concerns about the level of economic activity in the State as revenue drivers like tourism show signs of weakness. The best example is diminished attendance at the Central Florida theme parks. The multiplier effect can be negative as well.

NET METERING

Another effort to promote residential solar energy has been swatted down in the courts. A North Carolina court ruled that the new net metering scheme which has been operating for nearly a year been properly vetted under state law. The State Utilities Commission had approved the changes which lower payments to residential generators without conducting their own study of the plan. The plan the regulators relied on was developed by Duke Energy.

The Court’s decision results in a less than straightforward decision. The Court agreed that “The commission erred in concluding that it was not required to perform an investigation of the costs and benefits of customer-sited generation,”. Nevertheless, the Court let the decision by the regulators to stand. Here’s where the Court confuses everyone involved.

The Court goes on to find that “however, the record reveals that the commission de facto performed such an investigation when it opened an investigation docket in response to [Duke’s] proposed revised net energy metering rates; permitted all interested parties to intervene; and accepted, compiled, and reviewed over 1,000 pages of evidence.”

The fruits of legislation in Arkansas are emerging and not everyone likes the taste. Legislation passed in 2023 limited the benefits of solar installations. The new policy created by the Legislature in 2023 is called “net energy billing,” and it will lead to far lower compensation for homes and businesses. Net energy billing will allow utility companies to decide a price for the bill credits that solar customers get now based on “avoided costs,”. That will lower payments substantially.

HIGH SPEED RAIL

The latest front in the battle to establish high speed rail as a viable transportation mode is not centered where the proposed high speed rail lines are located – Texas, California, Florida. Projects which are funded through the Inflation Reduction Act include “Buy American” provisions requiring the acquisition of equipment and rolling stock. The requirement is pitting two European manufacturers against each other – Alstom a French company and AG Siemens a German company.

Alstom has been producing equipment for Amtrak’s Acela service in upstate NY for several years. The program has been the subject of multi-year delays. There have been safety issues holding up deployment. The Siemens plant is under development in The State’s Southern Tier about one hour away. That plant is being built to comply with “Buy American” provisions of the Inflation Reduction Act.

Earlier this year the In July, Alstom filed a lawsuit against the US Department of Transportation, challenging its decision to award the contract for Brightline West’s train sets to Siemens.  Alstom contends that the new Amtrak Acela fleet it’s building at its existing Hornell, New York, facility should be considered a domestic option. The contract award came despite the fact that the Siemens plant is some two years from operating.

Siemens also took an unusual approach to its potential workforce. The company announced an advance agreement with the International Association of Machinists and Aerospace Workers to allow for union representation talks at its new Horseheads facility once there are employees to organize. 

NEW YORK WEED

The initial stages of the development of a legal cannabis market in New York State have been characterized by an understaffed regulator leading to slow approval of licenses. The delay in approvals has been cited as one of the reasons the legal weed market in NYC has been so chaotic. Enforcement has been held up by legal challenges to the State’s right to regulate sales. The effect has been to lower the available revenue stream to NYC in particular that had been expected to follow legalization.

So, what is the outlook for legal cannabis in New York State broadly but for NYC in particular. The NYC Independent Budget Office (IBO) has recently released its findings about the NYC market. Based on cannabis market growth in California, Colorado, Massachusetts, Oregon, and Washington state—all of which have seen at least five years of legal cannabis sales—IBO determined New York City may eventually see annual taxable sales between $833.6 million and $1.2 billion. A market of this scale would yield between $33 million and $47 million in annual city revenue.

If the New York State Division of Budget cannabis revenue forecasts for the coming four state fiscal years are accurate, IBO estimates that the city would receive $4 million, $20 million, $31 million, and $43 million in cannabis tax revenue in fiscal years 2024 through 2027, respectively. The New York City Office of Management & Budget estimates cannabis revenue of $38 million by fiscal year 2027, which translates to $950 million in sales that year.

New York rolled out a pretty complex system since it was trying to achieve so many different goals with its programs. How does it work? Under the MRTA, the cannabis industry is subject to three taxes: (1) a potency tax; (2) a state excise tax; and (3) a local excise tax. When cannabis product manufacturers sell to distributors, the distributors pay a potency tax based on the THC content of the products they buy. The potency tax rate depends on the form of the cannabis product: $0.03/mg THC for edibles, $0.008/mg THC for concentrates, or $0.005/mg THC for flower products.

If the manufacturer sells products directly to consumers, then the potency tax is applied at the point of retail sale. At the time of sale of cannabis product to a consumer, the retailer collects a state excise tax of 9 percent of the product’s price. A local excise tax of 4 percent is also imposed on retail sales, which is collected by the state and distributed to local governments based on where the retail dispensary is located.

The botched rollout in NYS has led to additional efforts to eradicate the illegal market especially in NYC. In February 2023, Manhattan District Attorney Bragg targeted over 400 stores for potential eviction proceedings for unlawful cannabis sales. In May 2023, Governor Hochul signed a law that increased OCM’s ability to assess civil penalties against unlicensed cannabis businesses, including fines up to $20,000 per day. In August 2023, the New York City Council passed a bill that prohibits commercial owners from knowingly leasing commercial space to unlicensed sellers of cannabis and other illicit products.

MTA

New York’s Metropolitan Transportation Authority released a proposed capital budget for the next five years. The $65 billion list of projects includes buying new subway cars, fixing century-old tunnels and installing new elevators. Half of the $65 billion has already been funded through bonds, federal grants and direct appropriations from the city and state. Congestion pricing has been “paused”.

It’s hard to know how much of the list is real given the politics of transit in NY. In the wake of the congestion pricing “pause”, the MTA has targeted certain projects for slowdowns. Access facilities for the disabled were a prominent target which may not have been the most politically astute move. Nor was the potential for delay in the northern extension to the Second Avenue subway. The authority’s chairman highlights the politics of the moment when he says that the report sought to be as “comprehensive” as possible in hopes of persuading lawmakers to increase state funding to the agency. That’s a nice way of saying wish list.

The Authority now appears to be aiming at increased state funding by trying to emphasize its role as an economic driver throughout the State. It is highlighting new rolling stock for the commuter railroads being built in the state. Those cars will be on lines which serve some of the largest sources of opposition to congestion pricing. The issue of MTA funding is likely to be at the center of the FY 26 budget process. We are only three months away from that.

CYBERSECURITY

Last month, the Port of Seattle, WA was the target of a cyber-attack. Now, the Port has gone public about the situation because it is taking a step many have supported in concept. Hackers are demanding $6 million in bitcoin from the Port which operates among other things, the Seattle-Tacoma International Airport for documents they stole during a cyberattack last month and posted on the dark web this week.

The Port of Seattle has decided not to pay. Flights were able to operate, but the attack did interfere with ticketing, check-in kiosks and baggage handling. Passengers on smaller airlines had to use paper boarding passes. The same group has targeted other municipal operations. Columbus, OH was one of their targets and data was stolen. No ransom was demanded.

CALIFORNIA WATER

A California Superior Court has issued a preliminary injunction that prevents the State Water Resources Control Board from requiring fees and reports from growers who over-pump the area’s groundwater. The heavy drawdowns of underground water by the agriculture industry are at the heart of the California water debate. The use of that water during times of drought to support water dependent crops has long been an issue. According to a State Water Board staff report, water extraction had caused so much damage to certain areas that the Tulare Lake basin sunk as much as six feet from June 2015 to April 2023.

The Board put the abusing water agencies under probation which provides for farmers who pumped 500 acre-feet or more of water each year to have had to meter and register their wells at a cost of $300 each, report their pumping activities and pay $20 for each acre-foot extracted. The judge found that the Board had exceeded its authority while offering the court’s recognition of the State Water Board’s responsibility “to consider adverse impacts groundwater extraction would have on public trust resources,” while acknowledging the need “to protect such resources where feasible.”

The dispute is likely to make its way through the California courts right on up to the California Supreme Court. This ruling is effectively a hometown local court ruling in Kings County where agriculture is the economic mainstay.

MISSISSIPPI RIVER BLUES

Water levels have been dropping in the lower Mississippi since mid-July, according to federal data, reaching nearly 8 feet below the historic average in Memphis on September 12. In October 2023, water levels reached a record-low 12 feet in Memphis. Those conditions have raised prices for companies transporting fuel and grain down the Mississippi in recent weeks, as load restrictions force barge operators to limit their hauls.

The drought is in its third year. The resulting restrictions on the loads which can be shipped on barges leads to higher costs and a much less climate friendly result from other shipping modes. According to a trade association for businesses that use the Mississippi River, a standard 15-barge load is equivalent to 1,050 semitrucks or 216 train cars. So, there is an environmental cost as well.

It has been worse as unlike the two prior years, no barges have grounded themselves this year. It’s all about reduced rural incomes in the face of increasing competition. The majority of U.S. agricultural exports rely on the Mississippi to reach the international market. More than 65% of our national agriculture products that are bound for export are moved on rivers like the Ohio and Missouri feeding the Mississippi on this inland waterway system

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

CHESTER PA BANRUPTCY

The City of Chester, PA has been in Chapter 9 bankruptcy proceedings for some two years. It has been operating under a state-appointed receiver since before the bankruptcy. Now that receiver is facing opposition over a plan to put the City’s water authority up for sale to generate funds for pension funding. The City’s pensioners comprise the largest group of creditors in the bankruptcy so their needs do matter. Pensions have also been developing a more favored creditor status in recent municipal bankruptcies.

Some three years ago, a sale of the system was contemplated and an agreement was reached in which a private entity – Aqua Pennsylvania – was the purchaser. The agreement would have generated $410 million over a period of years. That agreement was not approved by the state receiver because it would have privatized the water system. Significant rate increases were likely. Subsequently, the City filed under Chapter 9.

Now as part of the plan of adjustment proposed in bankruptcy court, the same receiver is proposing the creation of a mechanism to allow a regional water authority to purchase the assets of the Chester Water Authority. A sale would be designed to fund the purchase over a period of years under a schedule which could provide a steady stream of reliable revenue to the City.

One goal would be to bring the three water infrastructure pieces – water, sewage, stormwater under one roof. Currently, three distinct entities bill for and collect revenues for each service. Chester Water Authority supplies water to 34 municipalities in Delaware and Chester Counties. Wastewater treatment is provided throughout Delaware County. The City operates a Stormwater Management Authority. Lots of overlap and bureaucracy.

A new wrinkle is a motion by the pensioner group to drive the sale of the water assets to a private concern like Aqua Pennsylvania. The unfunded benefits for the city’s retired workers amount to about $300 million, the majority of that to police alumni. The goal would be to get a buyer to put up a significant up-front payment and agree to pay substantial annual fees. The pensioners believe that the greatest amount of money would be generated through a privatization. The receiver believes that the resulting revenue requirements from the private operator would lead to substantially higher water rates. Given the poor economics and demographics of the service area, there is limited ability to support significantly higher rates.

TRI-STATE GENERATION

Tri-State Generation and Transmission Association delivers power to 41 member cooperatives across four states, 16 of them in Colorado. It has long been a fossil fuel dependent generator with a particular reliance on coal. Over the last several years, Tri-State has been engaged in disputes with some of its member utilities over that reliance. The results have enabled some members to diversify their power sources and reduce demand for Tri-State’s coal-based power threatening the association’s finances.

Those finances look to be in line for a boost in the form of federal money designated to support the clean energy transition in rural areas. The money comes from a program called New ERA (Empowering Rural America), which was funded through the Inflation Reduction Act (IRA) passed by Congress in 2022. Tri-State and one of its large former members United Power are expected to receive $671 million and $261 million respectively. United used to get 95% of its power from Tri-State but that changed in May of this year.

The federal money will be used by Tri-State to support the retirement of 1,100 megawatts of coal-fired generation. It shut down one coal plant in New Mexico in 2019 and has plans to close the three coal-burning units it operates at the Craig Generating Station from 2025 to 2027. It had originally planned to close Springerville 3, a coal plant in Arizona, in 2040, but the promise of the federal funding has given Tri-State the comfort to pay off undepreciated debt in the plant and move up its retirement to 2031. 

United Power just became its own generator and supplier this past May after it withdrew from Tri-State. The federal money will support the development and/or acquisition of nearly 500 MW of renewable power. Like Tri-State, Western was held back by its non-profit status. Tax credits available to IOUs were not for the cooperatives. The IRA provided for this program to offset the inability of cooperatives to benefit from tax credits.

A total of 16 cooperatives have applied for funding for the program. They are located throughout the country. Projects in the application process would shut down coal generation and replace it with renewables, acquire new renewable generation and support the restart of the Palisades Nuclear plant in Michigan. There is tremendous pressure to finalize all of these applications given the uncertainty of the upcoming elections.

SUMMIT CARBON

The ongoing effort by Summit Carbon Systems to get approvals for its planned carbon pipeline hit another hurdle in the South Dakota courts. The South Dakota Supreme Court ruled that Summit has not yet proven it should be allowed to take private land for public use through eminent domain. Summit needs to show that it is acting as a common carrier under South Dakota law.

The Court ruled Summit had not yet proven to lower courts that it’s “holding itself out to the general public as transporting a commodity for hire. It is thus premature to conclude that SCS is a common carrier, especially where the record before us suggests that CO2 is being shipped and sequestered underground with no apparent productive use.

The issue of common carrier status is at the heart of dispute between the company and landowners. The South Dakota legislature passed laws in 2023 that provide additional financial and legal protections for affected local governments and landowners while retaining the ability of pipeline companies to seek a state permit. The case is now returned to the lower state courts where Summit’s arguments in favor of eminent domain will be made.

The South Dakota court activities are being accompanied by growing legislative pressure in Iowa to provide protection from eminent domain. The issue of eminent domain for the Summit pipeline was a real issue in Iowa politics. The Iowa House has twice approved limits on eminent domain but they have been stymied in the Iowa Senate.

Now, a group of nearly 40 Iowa lawmakers comprising the Republican Legislative Intervenors for Justice announced their plan to sue in federal and state courts requesting them to rule that the Iowa Utilities Commission acted illegally and unconstitutionally in its approval of the Iowa portion of Summit’s proposed pipeline.

BUSY TIMES FOR JUDGE SWAIN

Presiding over the bankruptcy of a major governmental entity while overseeing litigation seeking the appointment of a federal receiver for the NYC jail system would be a daunting task for any jurist. Both of these cases have been going on for months with multiple efforts to settle them having been unsuccessful. As it works out, both of these cases may have reached tipping points. They have significance for not just the two issuers – NYC and PR – but for the municipal market as a whole.

Decisions on these two cases will be made by the same judge, Laura Taylor Swain.  She has encouraged efforts at settlement throughout and it has been frustrating to see both of them drag on for as long as they have. The decisions she makes will have significant financial impacts as well. In New York, a hearing is scheduled for Sept. 25 in which the Legal Aid Society attorneys – who represent people incarcerated at Rikers Island – will have an opportunity to argue the New York City Department of Correction should be held in contempt for failing to follow court orders to bring down jail violence. 

All of this has occurred in spite of oversight from a federal monitor.

Swain lifted a contempt order against the city and the Department of Correction on Feb. 27, saying the department has followed her directive to bolster cooperation and communication with the federal monitor. This month’s hearing will allow evidence of the judge’s prior rulings and will seek the appointment of a receiver to actually operate the facilities.

At essentially the same time, Swain extended for an additional 30 days the litigation stay through Oct. 8 which has been in effect as PREPA and its bond creditors continue to try to work out their issues. The mediation team appointed by Judge Swain to oversee the debt-restructuring negotiations requested the additional time.

A NEW RISK TO ASSESS

Over the years, various natural disaster types take their turns on center stage. When they do, they create new risks to assess which do not always have great sources of data to rely upon for their analysis. This year, landslides have been occurring frequently. In the face of warming temperatures, certain areas have become less anchored and as storms occur the resulting impacts create greater landslide frequency.

In March, a landslide closed a 40 mile stretch of Highway 1 near Big Sur. In June, a landslide wiped out part of one of the main routes into Grand Teton National Park. More local events are threatening communities along coastal California with collapse into the sea. The combination of visible locations and their impact on a more well heeled demographic have elevated attention. Until now, there has not been a lot of data for analysis of the risk of these events.

The US Geological Survey (USGS) has just released a new interactive map of potential risk from landslides. According to its data, 44% of the country is at risk from landslides. Some of the data will not be shocking. Mountainous areas are at more risk. Given the geological recency of the western ranges, those mountainous areas seem to be at the most risk. Conversely, there aren’t many landslides where the land is flat. And yes, Puerto Rico seems to be at the most risk in terms of the percentage of its land which is vulnerable.

TRAFFIC REALITIES

A combination of the congestion pricing argument in New York, a return to more normal travel post-pandemic, and the consumer preference for larger vehicles have brought debates over road use to a new level. The basic premise is that Americans are barreling around the highways and byways and being involved in lethal crashes at unprecedented levels. It makes the whole debate around transportation that much harder as the arguments don’t seem to reflect what is happening.

The National Highway Safety Board (NTSB) said an estimated 18,720 people died in motor vehicle traffic crashes over the first half of 2024, a decrease of about 3.2 percent as compared to 19,330 fatalities in the first half of 2023. NHTSA also estimated fatalities decreased in 31 states and Puerto Rico, remained unchanged in one state, and increased in 18 states and the District of Columbia.  

Preliminary data reported by the Federal Highway Administration indicates vehicle miles traveled or VMT in the first half of 2024 increased by about 13.1 billion miles, or roughly 0.8 percent more compared to the same time period in 2023. More miles driven combined with fewer traffic deaths resulted in a fatality rate of 1.17 fatalities per 100 million VMT, down from the rate of 1.21 fatalities per 100 million VMT in the first half of 2023.

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

TWO CITIES UNDER PRESSURE

Well summer is essentially over. School is back. The big winter sports are underway. It all comes with a sense of refreshment and that it’s time to get back to the normal rhythms of life return. It comes with a renewed sense of focus. In that spirit, we see two significant municipal credits facing significant issues which present risk.  

Chicago runs its finances on a calendar year basis, so big decisions are looming over the next couple of months. The Mayor is under immense pressure to balance the 2025 budget. The latest estimates see a $982.4 million shortfall for FY 2025 along with a new projection of a $223 million budget gap at the end of the current year. The Mayor is in a bind as the realities of the City’s budget become clear. The City can’t cut its way out of the problem. So that goes to property tax increases which would be politically fraught. The whole process will pose great political risks for the Mayor and if he is further weakened by the process, it will weigh negatively on the City’s credit.

Then there is New York City. If you’ve spent your life observing NYC politics, nothing about this week’s raids on multiple members of the Adams administration is a shock. It is breathtaking that the homes of the schools chancellor and the Police commissioner were raided on the first day of school. New York is being run by a close circle of individuals with long term ties to the Mayor who have long been the object of concern. They represent a 20^th century version of machine politics in a world where that no longer works.

Given the individuals involved, there are real concerns about the Mayor’s ability to run the City. He is also 15 months out from his own reelection bid and he will be challenged. His need to raise money for that (what is the source of his current troubles) and the many challenges facing the City already compete for the Mayor’s attention. The City Council seems to be based on opposition to the Mayor and any real limits on spending. 

In that environment, we reiterate our view that the City’s credit not stable and that the outlook in the near term is negative.

ELECTRIC VEHICLES

If you read enough of the hype some 8 or 10 years ago about electric and autonomous vehicles and believed it, you would be very disappointed today. Whether you are a dealer, buyer or producer, the demand has just not been there in line with estimates. The demand situation has begun to manifest itself in the form of some major decisions by the automakers regarding their production lineups. Those have implications not just for the firm’s stakeholders’ but the places counting on new or expanded manufacturing related to electrics.

General Motors and Samsung SDI announced an agreement operate a new factory in New Carlisle, Indiana to make electric vehicle batteries. The plant will open but production would not start until 2027. The plant had been expected to start making cells in 2026. The $3.5 billion plant is being built on a 680-acre site and is expected to employ 1,600 workers. It will make nickel-rich prismatic batteries that store more energy than other chemistries.

Georgia has been holding its breath over the outlook for the development of new production facilities for electric vehicles and batteries. The Army Corps of Engineers said it plans to reassess its environmental permit for Hyundai’s $7.6 billion electric vehicle plant in Georgia. It said that state and local government did not reveal water requirements for the plant eventually expected to employ 8,000 workers. The proposed water withdrawals are being challenged.

As that story unfolds, Hyundai announced that it was going to reorient the plant to increase the share of hybrid rather than fully electric vehicles. Hybrids have been emerging as a more popular short-term choice for climate minded buyers. Weaker than expected EV demand growth is leading some U.S. battery manufacturers and suppliers to delay or cancel planned capacity investments. One supplier delayed operations at a planned South Carolina facility from later this year until late 2025, while another suspended a planned Arizona facility and canceled a planned Michigan plant.

One event that has implications for the South is the successful unionization of an EV production facility at Spring Hill, TN. The region has not been easy on efforts to accomplish that. Elections have had varying results at manufacturing sites. This facility is a joint GM/LG venture which is expected to produce the Ultium. The Ultium is an electric vehicle battery and motor architecture developed by General Motors which would serve as the base platform of vehicles from the GMC electric Hummer and Cadillac Lyriq, as well as joint projects with Honda like the new electric Acura.

COAL LITIGATION

The Prairie States coal generation plant in Washington County, IL has been regularly cited as one of the largest single sources of carbon. It is one of if not the largest emitter in Illinois. The project’s two units produce a combined 1600 MW of electricity. The output of the plant is distributed through a group of primarily municipal electric utilities in Illinois in three neighboring states. As awareness about emissions has grown, the plant has come under increasing pressure.

The Sierra Club has sued the plant’s operating entity alleging the plant has been operating and emitting harmful air pollutants without necessary permits required by the federal Clean Air Act.The plant owners hoped to dismiss the lawsuit filed in the U.S. District Court in the Southern District of Illinois.Instead, the federal magistrate ruled that the allegations are sufficient to move forward with the case. She further noted that this effectively accepts the allegation that the plant has been operating for a decade without a permit “and that the state and federal governments have simply ignored the facility’s existence.”

That is astounding. At the same time the magistrate “further acknowledges that the ultimate relief sought by [the Sierra Club] — halting the operations of a power source for millions of people — is an extraordinary request, by any standard.” Legislation passed in 2021, requires Prairie State and other publicly owned plants to become 100% carbon free by 2045. 

The principal municipal utility exposure is that of the Illinois Municipal Energy Agency. It owns 15% of the plant or some 240 MW of capacity. That would also be its share of the financial risk of the plant’s operation. Last year’s climate legislation in Illinois tried to build in some protections for the project and its bondholders. Coal plants which are investor owned would be forced to shut down in 2030 while municipal utility owned Prairie States would be allowed to operate until 2045 or just after the majority of debt from the project is retired.

CARBON CAPTURE

The Iowa Utilities Commission has issued a construction permit for Summit Carbon Solutions’ proposed hazardous liquid pipeline across Iowa. The commission also required the company to secure and maintain a $100 million insurance policy, and agree to compensate landowners for any damages that result from the pipeline’s construction. Construction cannot commence without further approvals from other states.

The commission issued the permit without modifying the previously imposed conditions Summit Carbon must meet in order to begin construction – the most significant of which is that the project must be approved by regulators in North Dakota and South Dakota. Summit says it has signed voluntary easement agreements with 75% of the Iowa route’s landowners. The Iowa Utilities Commission has stated that Summit will be able to use eminent domain in Iowa to force the sale of land from property owners who are opposed to the use of the property for the project.

In Wyoming, a plan to develop one of the world’s largest direct air carbon dioxide capture and storage projects in the southwestern part of the state has been “paused”. The facility was designed to be powered by electricity from a modular nuclear reactor – the 345-megawatt Natrium nuclear reactor being built in Kemmerer, Wyoming, by the billionaire Bill Gates-backed TerraPower LLC. It turns out that the generation capacity of the reactor could only meet one-third of the capture facilities’ needs.

The capture facility makes little sense if it cannot be powered by clean energy. That is what is apparently driving the decision to pause and relocate. The company building the capture facility cited the uneconomic cost of power for the plant and cited a specific culprit – data centers and crypto miners. They are an increasing concern in many areas of the country. They often try to keep old fossil fuel plants running by buying them for themselves and they drive demand and price pressures facing utilities and their other customers.

COWBOY SURPRISE

The Wyoming Supreme Court ruled that the Wyoming Public Service Commission erred when it approved a request by High Plains Power to shift from an annual to a monthly compensation scheme with customers who intermittently contribute their excess solar-generated electricity back to the utility. The court rejected High Plains Power’s plan to compensate solar users for their excess power at a monthly wholesale rate rather than the higher retail rate.

It would have been a blow to solar development if the ruling had gutted net metering provisions. This year, net metering has been under attack in state legislatures as legacy power providers challenge the potential negative revenue and profit impacts on them from rooftop solar. In Wyoming, basic net-metering laws apply to residential and small business customers with 25-kilowatt or smaller solar arrays.

According to state statute, qualifying residential and small business net-metering customers must be credited for the excess power they generate, but don’t use, and supply back into the system. The statute was effectively reaffirmed through this decision. The compensation method struck down by the Wyoming Supreme Court allowed High Plains Power to bypass month-to-month kilowatt-hour credits at the retail rate and instead compensate customers each month at the wholesale rate. That resulted in a major reduction in overall compensation to net-metering customers.

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.