Joseph Krist

Publisher

PUERTO RICO

It is tempting to go back five years and take what we wrote about the electric system in Puerto Rico and simply cut and paste it here. The news that a new hurricane had dumped 30 inches of rain on Puerto Rico raised all of the same issues with PREPA which arose in 2017. Housing conditions remain poor, the government’s finances have still not entirely been sorted out, and the politics of the Commonwealth have not gotten much better than was the case when it filed under Title III.

Once again, the Puerto Rico Electric Power Authority (PREPA) is experiencing an island wide power failure. Roads, bridges and other infrastructure have been damaged or washed away as a result of the downpour. More than 775,000 residents also have no access to clean water. After Maria in 2017, the island’s utility regulator, the Puerto Rico Energy Bureau, approved a plan that would require 40 percent of power to come from renewables by 2025.  The island has made little progress in its effort to decentralize the power system. PREPA has been seen as a significant obstruction to progress. The private operator of the system has been resisting those efforts and has been pushing an agenda based on increased natural gas.

The timing of the storm and power failure come amidst legal efforts to resolve PREPA’s ongoing debt default. Puerto Rico Electric Power Authority bondholders asked the bankruptcy court Monday to dismiss the proceedings as a step to appointing a receiver for the authority. The move comes after a six month mediation effort conducted under the auspices of the oversight Board.

The board asked bankruptcy Judge Laura Taylor Swain to set aside several months to litigate issues in the bankruptcy. The Ad Hoc Group of PREPA Bondholders, Assured Guaranty (AGO), Syncora Guarantee, and National Public Finance Guarantee (together the “bondholders’ group”) rejected this instead asking for dismissal of the bankruptcy or a lift on the stay on litigation and the subsequent appointment of a receiver.

If the judge disagrees with that approach, the bondholders asked that the judge require the board to propose a plan of adjustment by Nov. 1 and a timetable with a plan confirmation hearing scheduled no later than May 1, 2023. Litigation is not the preferred approach but it increasingly looks like the parties cannot resolve their differences without an imposed solution. The differences are real. Bondholders believe they are entitled to PREPA’s gross revenue while the Authority sees the revenue pledge as one of net rather than gross revenues.

The storm and its destruction only serve to highlight the management and policy issues holding the island back. It is pretty clear that an electric grid composed of some centralized base load power and a large dose of renewables is what will allow Puerto Rico to move forward. The exposure to storms will not go away so the need to decentralize the grid and localize access to renewable power becomes even greater.

CARBON CAPTURE PIPELINE RISK

Opponents of carbon capture pipelines proposed for Iowa are focusing on issues associated with these facilities in other areas. They are especially interested in the issue of potential leaks or pipeline ruptures. They have seized upon the results of an investigation into an actual rupture of a carbon pipeline in Mississippi.

In 2020, a carbon pipeline near a small Mississippi village ruptured. The incident was blamed on “natural occurrences” which led to a section of pipeline breaking. That incident, in which there were delays in emergency notifications, led to the start of that investigation by the US Department of Transportation Pipeline and Hazardous Materials Safety Administration (PHMSA) to establish new measures to strengthen its safety oversight of carbon dioxide (CO₂) pipelines around the country and protect communities from dangerous pipeline failures.

The incident highlighted the many concerns that landowners have over carbon capture pipelines potentially impacting their properties. The 2020 incident was characterized by the lack of timely notification to the National Response Center to ensure the nearby communities were informed of the threat; the absence of written procedures for conducting normal operations, as well as those that would allow the operator to appropriately respond to emergencies, such as guidelines for communicating with emergency responders; and a failure to conduct routine inspections of its rights-of-way, which would have fostered a better understanding of the environmental conditions surrounding its facilities that could pose a threat to the safe operation of the pipeline.

CLIMATE CHANGE DATA REALITIES

The pressure to reduce the carbon footprint of the power generation industry has been relentless. The debate over fossil fuels has gotten so intense it is easy for some neutral, non-political points to get lost in the debate. We see one example of this phenomenon in recent data from the US Energy Information Administration (EIA) regarding natural gas.

One of the issues which confronts climate change activists is the trade-off between rapid electrification needs if we decarbonize. The shift of home and/or commercial usage of natural gas to electric will create significant increased demand for power. That power has to be generated at least at a base-load level to support a majority renewable electric grid. Right now, there is a significant mismatch between the timing of electrification and the development of a mature reliable generation and transmission infrastructure that is not fossil fuel based.

Activists who oppose fossil fuels tend to also oppose nuclear power on “environmental” grounds. They also object to hydroelectric power from dams. When the efforts to reduce coal and nuclear coincide, it should not be a surprise as to the fuel of choice for replacing those sources. Natural gas, despite seasonal pricing issues still comes out to be the financially most beneficial choice for utilities.

That has resulted in increases in natural gas usage and declines in hydroelectric generation. It is reflected in natural gas production statistics from EIA. U.S. natural gas producers are operating more drilling rigs now than at the beginning of the COVID-19 pandemic in early 2020. Before the pandemic, the number of operating rigs in the United States had generally been declining. On January 31, 2020—when the U.S. Department of Health and Human Services first declared a public health emergency related to COVID-19—it was reported that 112 natural gas rigs were operating in the United States.

The number of natural gas-directed rigs continued to fall in the first half of 2020, reaching a low of 68 rigs on July 24, 2020, the fewest in the historical data, dating back to 1987. Since then, the natural gas rig count has generally been increasing, returning to pre-pandemic levels in January 2022. On September 9, the industry reported that 166 natural gas rigs were operating in the United States, 54 more than at the outset of the pandemic in the United States.

NUCLEAR SITE STUDY

The US Department of Energy has released research that finds that about 80% of operating and recently retired coal-fired power plant sites could host an advanced nuclear power reactor, with nearly 265 GW in total potential nuclear capacity. Use of existing transmission and connection infrastructure would reduce capital cost. The research found 190 operating coal plant sites that could host nearly 200 GW of nuclear capacity and 125 recently retired plant sites that could handle about 65 GW of nuclear capacity. 

The repurposing of former coal generation sites helps to address the economic impact side of the climate change debate. Whether it be property tax revenues, sales or income tax revenues and the fees associated with residential and economic development, those revenues could continue to exist through a nuclear repurposing.

COAL REALITIES IN NEW MEXICO

Public Service Company of New Mexico, Tucson Electric Power Company, the County of Los Alamos, New Mexico and Utah Associated Municipal Power Systems are defendants in a lawsuit filed by the City of Farmington, MN. The San Juan Generating Station in the city is a huge, dirty coal generating facility which is scheduled to close on September 30. The plant and the coal mine which supplied the plant through its operating life are both scheduled for closure.

Now, the City is hoping to get the courts to issue an injunction forcing Public Service Company of New Mexico to continue to operate the plant. Ultimately the City hopes to transfer ownership of the plant and continue to operate it with carbon capture technology. It’s all about economics. The plant and the mine were substantial long-term employers. PNM has about 100 employees remaining at the plant. Approximately half of these employees will be laid off September 29^th.

The mine owner announced earlier this month that that its “underground crews have mined the last ton of coal destined for the San Juan Generating Station.” PNM said that 48 employees will stay at the plant through mid-October “for safe shutdown of the last unit and then around 10 employees will remain onsite for activities such as continued running of the switchyard, managing inventory reduction, closing down computer systems, and decommissioning.” A San Juan County ordinance requires PMN to file a demolition plan within 3 months of permanent plant closure.

The situation puts one joint action municipal power agency right in the middle of another debate over the future of electric generation. Utah Associated Municipal Power Systems finds itself being stymied in its effort to decarbonize at the same time it is pursuing a possible replacement for fossil fueled power in the form of modular nuclear reactors.

WHILE PHILADELPHIA GAS WORKS IS UNDER PRESSURE

The Philadelphia Gas Works has always been a somewhat problematic credit in that it provides an essential service to some of the City of Brotherly Love’s most economically challenged areas. This has always created a challenging environment for PGW’s ratemaking and revenue collecting process. In recent years, environmental activists have called for the utility to be shut down given the role of natural gas in climate change.

Those are more long-term issues. In the immediate future, PGW faces scrutiny and calls to refund some charges due to overly high bills related to natural gas for usage in the month of May of this year. PGW this summer refunded about $12.4 million to customers after some residential customers in June got bills in excess of $200 for May usage, including weather charges that were more than five times their monthly delivery charges.

The Pennsylvania Public Utility Commission (PUC) voted in favor of a broad ranging investigation and analysis of the changes requested by PGW to the weather normalization adjustment. That charge on the bill automatically adjusts customer bills (up or down) when the actual weather varies from “normal” temperatures. Beyond the issue of the normalization process, the PUC also is asking for a broader review of PGW’s existing rates, rules, and regulations, extending the inquiry beyond weather normalization.

It continues a process which followed an August request asking the PUC to approve a revised tariff that would cap its monthly weather adjustment to prevent the excessive charges in the future. PGW proposed limiting the weather adjustment to no more than 25% of a customer’s monthly delivery charges. None of this is credit positive. It highlights the potential for longer term pressure to shut the utility down.

RHODE ISLAND TOLLS IN COURT

A U.S. District Court Judge ordered Rhode Island officials to stop collecting truck tolls within 48 hours. The judge wrote a 91-page decision finding that the collection of tolls is unconstitutional under the dormant Commerce Clause of the United States Constitution. The judge found that the tolls discriminated against out of state truckers.  Tolls are not collected from automobiles.

Therein lies the rub. The trucking industry has used that provision as a basis for a discrimination complaint. The authorizing legislation included an explicit prohibition against tolls on automobiles. This ruling did not address the issue of revenue repayment. The state has collected $101 million in truck tolls since the first one launched in 2018. 

Changes the General Assembly made to the original 2015 tolling bill exempted all vehicles except tractor trailers – including dump trucks and box trucks. Tolls were limited to $40 per day and charged a vehicle only once in each direction at each gantry. All of those changes were found to have benefited local businesses over out-of-state operators. Rhode Island is the only state in the country with a truck-toll system like the one struck down. 

SPECIALTY COLLEGE AT RISK

New Jersey City University (NJCU) occupies a unique role in the state’s public university system. It is the only state university in Hudson County. It is also designated – like several other public institutions around the country – a Hispanic Serving Institution (HSI) for the state of New Jersey. The University’s recent history has been characterized by executive leadership turnover, as well as changes in other key administrative positions. The current management team has not yet had time to establish a track record of fully addressing the university’s significant financial challenges or implementing improved risk management practices. 

The pandemic hit the University’s prime demand base quite hard as was true for minority/immigrant communities throughout the country. This has driven demand and enrollments down. The university enrolls around 5,900 students, over 80% of whom are undergraduates, with operating revenue of approximately $162 million in fiscal 2021. The resulting pressure on an institution with historical financial difficulties has drained cash balances to a dangerously low level of some 30 days. The hope is that the University’s role in the overall university system will generate support for state assistance while the new management is able to install its own financial plan.

The University issues unsecured general obligation debt. Total outstanding debt for fiscal 2021 was $148 million. This week, Moody’s downgraded the University’s debt to Ba2 and maintained a negative outlook. The declines in enrollments and cash have driven the credit close to covenant default. If cash goes below 30 days, the University must hire a consultant to review operations.

Preliminary unaudited information for fiscal 2022 shows a significant operating deficit driving a reduction in liquidity to under 30 days cash on hand. Management has declared a financial emergency and is taking steps under its fiscal 2023 budget to adjust expenses. Returning to financial stability in the near term will prove difficult given the magnitude of the projected deficit, forecasted continued enrollment declines, an inflationary environment, and labor constraints. 

Disclaimer:  The opinions and statements expressed in[JK1]  this column is 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.

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Joseph Krist

Publisher

NEW YORK CITY

The first quarter of fiscal 2023 has not been kind to the fiscal outlook for New York City. The pace of recovery in terms of employment and presence in the office significantly lags that of the country overall. We have documented the return of the cultural and entertainment sectors of the local economy which are still generating revenues but at rates which reflect lower attendance relative to pre-pandemic levels. Now, the economy in general and inflation specifically are pressuring retail sales. It is being accompanied by sharp declines in the financial markets. That sector is in the process of considering layoffs in response to lower merger activity and trading.

In terms of the return to the office, the City’s experience with its own employees is telling. Many do not see the role played in government by behind the scenes professional career staff. Jobs like those performed by the City’s lawyers, accountants, and other specialized professionals. The jobs which have real counterparts in the private sector which are generating better pay and much more flexible working conditions including remote work. Consequently, NYC reports significant shortages in departments which have legal or enforcement activities. The top reason cited – lack of flexible work requirements. The fiscal impact is to force the City to consider higher pay for those sorts of jobs as well as better working conditions generally.

At the same time, the Adams Administration has initiated its first PEG – Program to Eliminate the Gap – to address imbalances between revenues and expenses. It is troubling development that before the end of the first quarter of the fiscal year that a PEG – this one calling for a 3% cut in all agencies – is seen as needed. It raises overall governance concerns. While PEGs are not new to NYC government, the timing makes the recent budget process appear flawed. We already know that it was a contentious process with the City Council going to court over budget cuts it made only weeks before.

NUCLEAR

We have noticed an increasing amount of comment regarding the potential for nuclear power to address climate change. Much of that comment has been about traditional large-scale plants and has been colored by the fact that plants of that scale have been under the microscope lately for reasons not entirely linked to climate. Yes, large nuclear power has once again been viewed to be economically not feasible.

It is hard to argue against that point. The reasons for cost increases are many and varied but it is also hard to put a specific price tag on the cost of inept management by investor-owned managers of these projects. The Votgle plant in Georgia is seen as the poster child for these problems. It has not helped that many of the recent delays were based in poor management and record keeping. The regulatory history for that project is littered with examples of poor work that should have been done right the first time. The management issues which plagued the Sumner plant expansion in South Carolina were what stopped that plan.

So, now proponents of carbon-free generation are hoping that many of the issues which face the nuclear industry can be addressed through scale. The key difference is that we usually associate larger scale with economic efficiencies. In the case of nuclear, economics of scale may actually refer to small modular reactors. For some municipal energy consumers, their day as a test case could be on the horizon.

On a carbon impact basis, the case for nuclear is clear. That is what makes the knee jerk reaction to the potential use of these reactors so amazing. It is as if the critics are trapped in a 1970’s time warp. It’s not like there is no experience with small reactors. What do people think powers the Navy? The Navy has a strong record of operations and safety with its submarines and aircraft carriers. The largest carriers are powered by two reactors which have a generation capability of 125 MW. That is not to say that you just take a Navy reactor and stand it up on a land-based site but there is much that can be applied to land-based modular technology.

That is why some of the opposition seems more to reflect the past rather than the future. The argument is being made that renewables (wind, solar primarily) are intermittent and that there is a need for sustainable larger scale base-load generation. Another argument opponents make is that power demand growth in the US has slowed to a pace which will allow renewables to catch up and fill the supply void.

That’s great if you believe that battery technology, scale, and cost will be available within a reasonable time frame. Renewable advocates point to improvements in battery technology and lower costs. Here the issues over scale come back to bite opponents. Batteries will require significant development of lithium supplies. The mining of lithium in the US is running into major opposition on both environmental and cultural grounds. This could be a major impediment for the expansion of electrified transit.

One argument that we find astounding is the position taken by some that the case for nuclear power is offset by flat electric consumption. Yet many of those same people are the one’s pushing harder for more rapid EV adoption, more electric appliances all of which indicate a need for more power. The debate is also colored by the fact that the move to change electric use for environmental reasons may require some environmental damage to develop lithium supplies. Could that be a greater environmental threat than nuclear?

NUCLEAR FUNDING RACE

The Civil Nuclear Credit Program (CNC) was funded at $6 billion with a purpose of helping preserve the exiting U.S. reactor fleet in operation and saving jobs as a part of the Inflation Reduction Act. Pacific Gas and Electric was the first utility to announce that it intended to apply for some of the subsidy funds included in the Inflation Reduction Act for nuclear generation facilities. That funding would be used to keep the Diablo Canyon nuclear plant generating for some five more years as we noted last week.

Now, the owner of a recently shut down nuclear generator has announced that has applied for a federal grant under the CNC program. The Palisades Nuclear Power Plant near South Haven was shut down in May of this year after a fifty year operating life. Holtec, the private entity which took over ownership with a goal of decommissioning the plant by 2041 points to the CNC as a useful subsidy. Grant money alone would not be enough to get the reactor started.

GIG WORKER SETTLEMENT

The well documented efforts by the transportation network companies (TNC) to minimize the costs of their drivers have hit another road block in the state of New Jersey. A NJ Department of Labor and Workforce Development audit had found that Uber and a subsidiary, Raiser, owed four years of back taxes because they had classified drivers in the state as contractors rather than employees. The payment covers as many as 91,000 drivers who have worked in New Jersey in one of the years covered by the settlement. 

The process was complicated by the fact that Uber followed the TNC playbook. First, disrupt. Second, do it without regard for state and local laws and practices. Third, fight tooth and nail against all efforts by government to secure legal compliance. In the end it may have paid for Uber. Initially, the state represented that it had found a tax liability of over $500 million. That was based on data derived over the refusal of requests to provide information. Once Uber did, it allowed the Department to offer a lower liability figure.

THE WHEEL STOPS ON ATLANTIC CITY

Long one of the more regularly troubled local credits, Atlantic City has experienced recent credit improvement. Now that improvement has yielded positive news for holders of the City’s debt. Moody’s Investors Service has upgraded the City of Atlantic City, NJ’s long-term issuer rating to Ba2 from Ba3. The outlook remains positive. The improved patronage of the City’s gaming establishments has allowed the City to begin recovering from the pandemic. The upgrade also comes after continued scrutiny of the City’s operations and the oversight of the State of New Jersey.

The upgrade of the long-term issuer rating to Ba2 reflects the city’s improved financial performance and liquidity. The positive outlook reflects Moody’s expectations that, despite the lingering effects of the pandemic, the rise of inflation, and the risk of recession, Atlantic City will continue making strides in improving its governance and finances. While the economic headwinds have caused issues, the negative credit consequences are offset by the improved management of city operations and the more predictable PILOT payment structure for casinos.

The outlook also incorporates the continued state oversight. Those changes along with resolution of long-standing tax disputes with the City’s major employer the casinos have relieved destabilizing pressures on the credit.

SECOND CHANCE FOR TAMPA TRANSIT

In 2018, voters in Hillsborough County, FL approved a 1% sales tax to fund various transit facilities in the County. Opponents of the tax got it overturned when the Florida Supreme Court ruled that the referendum was unconstitutional because it relied on prescribed spending allocations set forth by voters, rather than elected members of the Board of County Commissioners. Now in 2022, proponents will have another chance to get voter approval.

It’s not clear if the new referendum will pass ultimate legal muster. It has been noted that this item includes a division of the revenues among several transit agencies in the County. 45% of proceeds are earmarked for the Hillsborough Area Regional Transit Authority (HART), 54.5% for the county and its cities — including Tampa, Temple Terrace and Plant City, divided based on population — and 0.5% for the Hillsborough Transportation Planning Organization.

Further, the referendum is more specific about the uses of the funds (estimated at $320 million in year 1 of full collections) in that it specifies spending levels for each agency receiving funds. Unlike in 2018, this referendum was placed on the ballot by a vote among Hillsborough County Commissioners. Since the 2018 ballot initiative was placed before voters by voters — not the County Commission — the spending allocations were ruled unconstitutional. The hope is that the vote of the County Commissioners gets around that obstacle.

THE COST OF RESILIENCE

The State of NJ will receive $26 million in grant funding for a road project designed to mitigate flood risk. The funds will pay for a two-mile section of Route 7 between Jersey City and Belleville, which periodically floods because of its proximity to the Hackensack River. The project will raise the bed of the road by some 3.5 feet. Floodwalls and pumping equipment are part of the project.

The $26 million represents the first year of project costs for the three year project. The total cost is $82 million. The grant program is intended to get construction going while the various impacted government entities complete a funding package. The project provides a window on the realities of the costs of this sort of infrastructure issues face communities dealing with climate change. $40 million per mile will give some communities pause.

RURAL HOSPITAL PRESSURES CONTINUE

Long before the pandemic, many rural hospitals and systems found themselves in difficult financial straits. Now that demand has faded with the decline of the pandemic, it is becoming clear that the pressure on these providers continues to increase. We cite two recent examples from the rural West.

Moody’s Investors Service has downgraded Yakima Valley Memorial Hospital Association’s (WA) revenue bond rating to Ba3 from Ba1. The outlook has been revised to negative from stable at the lower rating. It cited material and recent decline in operating performance, resulting in negative operating cash flow, and a significant drop in unrestricted cash through the first two quarters of 2022. This has placed the association at risk of covenant default. The reduced cash flow has put it very close to its days in cash on hand covenants. Failure to meet the days cash on hand covenant could lead to immediate acceleration of debt.

Like almost every other hospital, Yakima faces higher employee costs as the result of labor force shortages and inflation. The status of being a sole community provider makes the situation more pressing. Moody’s notes that these factors have had a higher than typical impact on Yakima. All may not be lost. Yakima is currently in negotiations to join MultiCare Health System. That Tacoma based system does not have a substantial presence in the Yakima region so from that standpoint it could make sense.

In rural Oregon, St. Charles is a four-hospital, not-for-profit, regional healthcare system headquartered in Bend, Oregon and serving the Central Oregon region.  The population of the region is approximately 230,000. Recently, Moody’s affirmed the system’s rating at A2 but assigned a negative outlook. The factors are familiar: chronic understaffing; the heightened use of travelers and increased rates; pronounced COVID surges in this part of the country; increased length of stay due to the shortage of post-acute beds; and high inflation. 

Like Yakima, the operating environment has pressured the balance sheet and reduced cash. The system is in danger of defaulting under its loan agreements concerning required cash levels. ailing to satisfy its 1.1 times debt service coverage requirement at the end of the fiscal year, which under its direct placement agreement with JPMorgan would result in an event of technical default. 

CALIFORNIA TRANSIT ON THE BALLOT

The focus is rightly on the mid-term election for Congress as we approach the election. There are a number of jurisdictions however, where transit funding is competing for attention and votes. We will focus here on some transit ballot initiatives on ballots in California.

Voters in San Francisco will be asked to approve the renewal of a half-cent sales tax which was first approved back in 1990. The tax was authorized for thirty years. Measure L would continue the local tax for another 30 years. The tax is estimated to raise $100 million annually. The amount is projected to increase to $236 million annually by fiscal year 2052-53. If approved, the transportation authority would be authorized to issue up to $1.19 billion in bonds that would be repaid with the proceeds of the tax. A vote of two thirds of those casting ballots is required to extend the life of the tax.

Across San Francisco Bay, Measure F in the city of Alameda would increase the transient occupancy tax from 10% to 14%. The tax collected from visitors would raise about $700,000 to $900,000 annually. Tax revenue would be applied for city services that include repairing potholes and deteriorating streets. The tax would continue until ended by voters. A simple majority is needed for passage. Measure L in the city of Berkeley would authorize issuance of $650 million in general obligation bonds for projects that include street repair. Two-thirds voter support is required for passage. Measure U in the city of Oakland would authorize issuing $850 million in general obligation bonds for city services. About $290 million would be allocated for street repair. A two-thirds supermajority is required for passage.

Several Marin County communities are being asked to authorize general obligation debt which would finance among other things road upgrades in their communities. Measure G in Larkspur would increase the city’s 1% sales tax by one-quarter cent. The tax is estimated to raise about $700,000 each year and would continue until ended by voters. Measure L in Sausalito would double the city’s 0.5% sales tax to 1% for essential services that include street maintenance. The increase is projected to raise $2.8 million yearly for the next decade. Measure J in San Anselmo would double the town’s sales tax from a half-cent to one cent. Additionally, the tax would be extended by nine years.

All of the local items will require a simple majority for approval.

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

RUM TAX UNCERTAINTY

The federal tax revenue collected from rum produced in Puerto Rico, the U.S. Virgin Islands, or internationally is transferred to the governments of Puerto Rico and the U.S Virgin Islands. This transfer of revenue from the United States back to the location of production is called a “cover-over.” After hurricanes Irma and Maria, Congress placed a five-year increase of the cover over from $10.50 to $13.25 in the Bipartisan Budget Act of 2018, which is the public law that gave the Virgin Islands and Puerto Rico increased funding to rebuild the territories after the storms of late 2017. That temporary increase in cover over expired in December of 2021. 

That was supposed to be addressed through the build Back Better Act. When that legislation failed, the tax increase was one of many casualties resulting from that failure. this has a direct impact on the already shaky credit of the US Virgin Islands. The USVI borrows against receipts from a $13.50 per gallon tax on rum exports collected by the federal government and transferred to the territory. The risk is that the government of the Virgin Islands has budgeted as though the tax will be renewed at $13.50 and that the amounts subject to transfer from the federal government will be calculated retroactively.

Now, many tax credits and other tax provisions that have or will expire by the end of this year that need to be extended – such as low-income housing credits, pharmaceutical company credits and others. Legislation to do that will be taken up but unless it is included in that legislation, the extra $3 per gallon will not be renewed. In the interim, the U.S. Department of the Interior’s Office of Insular Affairs has announced the approval of the payment of $226,165,037 to the U.S. Virgin Islands representing 2023 estimated rum tax-cover over payments for the USVI.  

THREE HEADLINES ILLUSTRATE THE DILEMNA

Amid Heat Wave, California Asks Electric Vehicle Owners to Limit Charging, California to ban sales of new gas cars in 2035. Diablo Canyon legislation

Amid Heat Wave, California Asks Electric Vehicle Owners to Limit Charging – Timing is everything. Just as the state was legislating the end of sales of internal combustion vehicles, the state’s electric grid operator was asking Californians to avoid charging their cars between 4 and 9 p.m. This at a time when diminished hydro resources increase dependence on carbon emitting power sources. It is against this backdrop that we view the need for green energy proponents to move to the execution phase of their plans. They need to show a practical path to carbon reductions.

Diablo Canyon legislation – Legislators voted to extend the life of Diablo Canyon and continue to generate 9% of the state’s power requirements from its two units. The two reactors were originally scheduled to close in 2024 and 2025, but the new plan extends those deadlines to 2029 and 2030. It also authorizes an agreed upon $1.4 billion loan to Pacific Gas & Electric, the utility that operates the plant. PG&E is also expected to apply for money from a new $6 billion federal program designed to keep open existing nuclear plants.

California to ban sales of new gas cars in 2035 – California been required to slash its greenhouse gas emissions 40 percent below 1990 levels by 2030. Under new legislation passed Wednesday, the state will now have to cut emissions at least 85 percent by 2045 while offsetting any remaining emissions. Under those conditions, electric cars and nuclear power are likely necessities.

JACKSON WATER

The City of Jackson, MS – the capital of the Magnolia State – has long had issues with its water and wastewater systems. The aged systems may be serving the state capital but overall, the service area reflects below average demographics. The water and sewer system serves an area of approximately 150 square miles, including the City of Jackson (Baa3 stable) and portions of Hinds, Rankin, and Madison counties. The lack of steady and at least decent service to communities like those which the systems serve, provides a prime example of the issues which drive the issues of environmental justice and equity.

The systems have been long plagued by inadequate investment in plant both for maintenance as well as improvement/expansion. It is true that the below average economics of the wide service area keep pressure on rates and that there is not a very strong capacity to support significant debt. That is reflected in the Ba2 rating assigned to the debt backed by utility revenues.

In late December Moody’s said that “The confirmation of the Ba2 rating and assignment of the stable outlook reflects our review of the unaudited financial results for fiscal 2020, which includes the benefit of the receipt of approximately $60 million in settlement monies that have allowed the water and sewer system to repay the city general fund, restore its contingency fund, and boost days cash and debt service coverage to 192 and 2 times respectively. The confirmation also incorporates the system’s ongoing challenges, which include implementation of an effective billing and collection system, management of a very large consent decree, and substantial capital needs that will continue to create narrow operating margins.

Very early indications for fiscal 2021 suggest that these obligations have reduced cash to approximately 99 days and sum sufficient coverage. However, these figures are very preliminary and subject to additional refinement as the city closes the fiscal year. Operating revenues will be boosted by an approved 20% rate increase anticipated to take effect in March 2022 and are not factored into the otherwise balanced budget.”

IS PREEMPTION ALWAYS BAD?

We’ve talked about preemption a lot over the last couple of years. It has come up mainly around the issue of the local regulation of the use of fossil fuels and equipment which runs on them. A particular recurring target has been restrictions on the ability of localities to ban the use of natural gas in newly constructed buildings. It has been easy for some to rail on about how these laws reduce local control and impose unwanted policies on people. But what happens when the “other side” wants to impose its will?

In California, Assembly Bill 205 (“AB 205”) makes available to qualifying renewable energy, energy storage and alternative fuel power projects (and their transmission lines) a “one-stop” permitting and environmental review process at the state level. Under the new law, renewables, energy storage and alternative fuel power plant developers have the option to go directly to the CEC to obtain local, regional and state permits and approvals, rather than going to each agency individually and separately.

The California Energy Commission (“CEC”) is empowered to prepare the project’s Environmental Impact Report (“EIR”) pursuant to the California Environmental Quality Act (“CEQA”) and must complete the environmental review process and “certify” (i.e., approve) projects within 270 days of receiving a complete application. A certified project automatically qualifies as an “environmental leadership” project if the CEC finds that certain criteria are met. This designation provides significant benefits by expediting CEQA litigation—including the general standard that all legal proceedings, including appeals, be resolved within 270 days.

ETHANOL AND THE ENVIRONMENT

Ethanol is at the center of the ongoing debates over where and how to locate pipelines for the transmission of captured carbon underway in the Midwest. One of the arguments being used by carbon capture advocates is that it would enable ethanol plants to reduce their substantial carbon footprints. The positive impact on corn growers is cited as a reason to use the technology in that region.

Now in the middle of that debate, Reuters has released an analysis of the relative carbon footprints created by oil refineries and ethanol production facilities. The 2007 law, the Renewable Fuel Standard (RFS) requires individual ethanol processors to demonstrate that their fuels result in lower carbon emissions than gasoline. The Environmental Protection Agency (EPA) however, has exempted facilities built before the law was enacted.

These grandfathered plants produce more than 80% of the nation’s ethanol, according to the EPA. The agency found that the average ethanol plant generated  1,187 metric tons of carbon emissions per million gallons of fuel capacity in 2020, the latest year data is available. The average oil refinery produced 533 metric tons of carbon. A study published by the National Academy of Sciences in February, for example, estimated that ethanol produces 24% more carbon. The agency acknowledged the higher production emissions of ethanol, compared to gasoline.

Some 240 of 251 U.S. ethanol production facilities are exempted from emissions-reduction requirements. The RFS requires that the ethanol industry demonstrate that the fuel delivers a 20% reduction in carbon. exempted ethanol plant produced 1,203 tons of carbon. One of the factors driving the issue is that EPA uses statistical models developed by academics funded by the ethanol industry. Shockingly, using those data points lead to a conclusion that gasoline blended with ethanol had a low carbon footprint.

CARBON CAPTURE PIPELINES MOVE TO THE COURTS

Navigator CO2 Ventures, one of three companies that have proposed liquid carbon pipelines in Iowa, recently sued four sets of landowners to gain access to their properties to survey the land. Iowa law does say that “a pipeline company may enter upon private land for the purpose of surveying and examining the land to determine direction or depth of a pipeline by giving ten days’ written notice. The entry for land surveys … shall not be deemed a trespass and may be aided by injunction.”

In the meantime, Summit Carbon Solutions is finding that there is much opposition to its plans in South Dakota. Here is what Summit offers a landowner. Summit provides an annual payment for construction, based on 100% of crop loss in the first year, followed by 80% for the second year and 60% for the third year — all paid up-front. This is figured on income, based on each crop. And the one-time payment is 115% of the property value — not for the whole property, but just for that 50-foot-wide strip.

FLORIDA TOLL POLITICS

The continuing populist efforts on the part of Florida’s Governor to shore up support for a run for higher office are putting the state’s toll roads in the spotlight. Governor DeSantis has proposed a plan to provide toll rebates to frequent users of several of the state’s toll roads. They include Florida’s Turnpike, toll express lanes on Interstate 95, Interstate 75, and Interstate 595, along with the Sawgrass Expressway.

They do not include roads operated by the Miami-Dade Expressway Authority and Central Florida Expressway Authority. Those roads have been under political pressure from the Governor over his entire term. The governor is asking state lawmakers to approve an expansion of the SunPass Savings Program, which would allow any roads operated by expressway authorities — like the Dolphin Expressway and Rickenbacker Causeway in Miami-Dade County — to also be included in the package.  SunPass and E-ZPass commuters who pay a certain number of tolls each month will get a 50% discount on their tolls for the entire year.

MASS TRANSIT

The New York Metropolitan Transportation Authority has been seeing gradually better utilization as more residents are being returned to their offices. Now, the State of New York has announced that the requirement that patrons wear masks on public transit is no more. It is a sign of a return to at least a portion of normality as the summer vacation season ends and the city’s public schools reopen. Now, the focus turns towards the proposed congestion fee which is garnering significant opposition.

The closure of the MBTA’s Orange Line for a month for significant repairs to be undertaken generated mixed reviews. “Transit advocates” cited the fact that bicycle usage was up significantly. Nonetheless, the Mayor of Boston (a major proponent of free fares on the “T”) has acknowledged that the closure has not received well by many. The real test will come with the onset of colder weather and the return of the line to service.

San Francisco has announced that it hopes to have a newly constructed extension to open before year-end. The new stations extend the City’s Metro subway service. The announcement comes as the city continues to be impacted by a lower than hoped return to the office.

In late July, a significant storm impacted the greater St. Louis area resulting in much damage from the resulting floods. St. Louis Metro Transit reported nearly five miles of damaged light-rail trackbed; the total loss of one MetroLink train; and significant damage to the signal system. It will be several months before the system can fully restore MetroLink service on the Red and Blue Lines in the city of St. Louis City and in St. Louis County.” 

COAL RESUMES ITS DECLINE POST-PANDEMIC

New data from the Energy Information Administration shows that the perceived revival of coal was short-lived. The numbers for the second quarter of 2022 show that renewable energy rose to make up 24.8% of the electricity generated in the United States in the second quarter this year.  Coal-fired power plants generated 190,547 gigawatt-hours in the second quarter, down 7.1 percent from the second quarter of 2021. 

It is interesting that coal continues to decline even in the face of efforts to emphasize the base-load nature of that generation vs. renewables. Coal-fired power plants, operated at an average capacity factor of 52%. That is down from June of 2021, when there were 210 gigawatts of coal-fired power plants and their average capacity factor was 59%. Utility-scale renewable electricity sources generated 254,754 gigawatt-hours in the second quarter.

Hydropower plants generated 71,123 gigawatt-hours in the second quarter, up 7.6% from the second quarter in 2021. Those numbers do not tell the story of regional concentration of hydro resources as nearly all of the increase was in the Bonneville Power system. That growth offset declines in hydro power attributable to the drought plaguing the Colorado River hydro assets.

Natural gas remains the leading fuel for electricity, with 37.9% of the country’s total in the second quarter; ahead of renewables, which include wind, hydropower, solar, biomass and geothermal, at 24.8%; coal, 18.5%; and nuclear, 17.9%. Gas became a “go to” source of generation in the face of coal and nuclear plants being shut down.

That is why utilities continue to expand their investigation of small modular nuclear reactors. The Grant County Public Utility District in Washington will undertake a study of the potential for modular nuclear to support growing demand in its service area. It also comes as the debate over hydroelectric plants at dams generates pressure to remove some capacity. The studies so far have eliminated one proposal from Next Era energy for a reactor. A current proposal would locate a reactor at the Hanford Reservation where nuclear generation already exists.

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

The Muni Credit News will take its summer break and the next issue will be the September 12 issue.

HE’S MAKING A LIST, HE’S CHECKING IT TWICE

The Texas Comptroller Glenn Hegar has released his list of financial firms which are now prohibited from doing business with the State of Texas or its underlying municipalities. It is based on his determination that “The environmental, social and corporate governance (ESG) movement has produced an opaque and perverse system in which some financial companies no longer make decisions in the best interest of their shareholders or their clients, but instead use their financial clout to push a social and political agenda shrouded in secrecy.” 

Black Rock, BNP Paribas SA, a French international banking group; Swiss-based Credit Suisse Group AG and UBS Group AG; Danske Bank A/S, a Danish multinational banking and financial services corporation; London-based Jupiter Fund Management PLC, a fund management group; Nordea Bank ABP, a European financial services group based in Finland; Schroders PLC, a British multinational asset management company; and Swedish banks Svenska Handelsbanken AB and Swedbank AB.

The move is consistent with Governor Greg Abbott’s continuing effort to achieve his own political goals via a series of political stunts. Whether it’s shipping migrants from the Mexican border to Washington, D.C. and New York City and dumping them on the street or efforts like this against ESG investment, it is not a serious debate.  In the end, it’s what the taxpayers think that matters. We refer you to our recent discussion of the observed cost of this move (MCN 8.15.22).

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SLOW COMEBACK FROM PANDEMIC

One of the casualties of the pandemic was the live entertainment industry. In the larger cities, these activities are always major contributors to those economies. With cities like NY and SF struggling to recover prepandemic working and entertainment patterns, the revival of the arts and entertainment industries are seen as key to longer term economic strength. It was hoped that “pent-up” demand might drive a quick return to prepandemic levels.  That does not appear to be the case.

Recent press reports have cited data showing that movie theaters have yet to recover their prepandemic audiences. Domestic box office revenues so far this year are down 31.2 % compared to the same period in 2019.  There are fewer releases but the pandemic did drive substantial demand for streaming services. Major League Baseball has been drawing fewer fans than it did before the pandemic.

TRG Arts is an analytics firm which serves the arts industry. It authored a recent study of 143 performing arts organizations in North America. It found that the number of tickets sold was down by 40 % in the 2021-22 season, compared with before the pandemic, and ticket revenues were down by 31 %. 

One of the sectors that New York is counting on is the theater, especially the Broadway theaters. Fewer than half as many people saw a Broadway show during the season that recently ended than did so during the last full season before the coronavirus pandemic. The 2021-22 season was still not a full one. The recovery in demand for Broadway started slow and concerns about virus variants limited attendance as the industry gradually reopened. There were 6,860 performances seen by 6.7 million people, grossing $845 million.

Those factors impacted other pillars of the New York cultural environment. During the 2018-19 season, the last full season before the pandemic, there were 13,590 performances seen by 14.8 million people, grossing $1.8 billion. The Met Opera saw its paid attendance fall to 61 % of capacity, down from 75 % before the pandemic. 

DETROIT AREA CREDIT UPSWING

This week, Moody’s revised its ratings and outlooks on three prominent Detroit area credits: the Great Lakes Water Authority Water and Sewer Revenue bonds and Wayne County. Moody’s affirmed the A1 senior and A2 second lien ratings on the water and sewer system’s existing bonds. Moody’s also revised the authority’s outlook to positive from stable. After the current sale, the water system will have about $1.6 billion of senior lien and $700 million of second lien revenue bonds outstanding. the sewer system will have about $1.8 billion of senior lien and $800 million of second lien revenue bonds outstanding.

The outlook is positive because the authority has strong management and stable operations and its underlying service area continues improve, particularly in the City of Detroit, as well as across Wayne (A3 positive), Oakland (Aaa stable) and Macomb (Aa1 stable) counties. The good ratings news comes amid the Authority’s efforts to replace a broken water main which generated some bad publicity.

Moody’s Investors Service has upgraded to A1 from A3 the issuer rating of Wayne County, MI leading to the upgrade of the county’s general obligation limited tax (GOLT) bonds and lease rental bonds. The upgrade of the county’s issuer rating to A1 reflects the continued strengthening of operating reserves and liquidity, aided by the restructuring of retiree benefits and proactive management. Once again, the benefit of dealing with retiree costs is clear as Moody’s noted that a retiree benefit restructuring has provided a level of budgetary predictability. 

MUNI UTILITIES AND COAL

Emissions data from EPA and power plant information from the U.S. Energy Information Administration has been released which shows the ten dirtiest coal fired generating plants based on emissions of greenhouse gases. That data was used to generate a top ten list which no power producer wants to be on – the ten worst emitters in the country.

Two of those plants are owned by municipal utilities. The Prairie State coal plant in Illinois is owned by nine different municipal utility owners. It may be one of the newest coal plants in the country but it ranks as the eighth dirtiest. The plant was at the center of the debate in Illinois over how to deal with carbon emissions as the state established emissions reduction limits in an effort to phase out coal plants. Illinois passed a law last year requiring all privately owned coal plants in the state to close by 2030. The law contains a carve-out for Prairie State, which must reduce its emissions 45 percent by 2035 and achieve net-zero emissions by 2045. 

The second plant on the list is the Fayette plant in Texas. It is owned by the Lower Colorado River Authority and the City of Austin electric system. Austin has attempted to reach an agreement with LCRA to divest itself of its interests in the plant but was unable to.

Some may have thought that the U.S. Supreme Court decision in June which questioned the ability of the EPA to regulate greenhouse gases at power plants may have granted some of them a reprieve from regulatory pressure. The Inflation Reduction Act amended the Clean Air Act and defined the carbon dioxide produced by the burning of fossil fuels as an “air pollutant.” In 2007, the Supreme Court, in Massachusetts vs. E.P.A., No. 05-1120, ordered the agency to determine whether carbon dioxide fit that description. In 2009, the E.P.A. concluded that it did. By classifying carbon dioxide as a pollutant, under the terms of the IRA the EPA can limit power plant emissions. 

IRA, AMT BACK TO THE FUTURE

The corporate AMT was eliminated under the Tax Cut and Jobs Act (TCJA) in late 2017.  Now, the Inflation Reduction Act of 2022 includes a 15% minimum tax on the adjusted financial statement income for corporations with three-year average incomes of more than $1 billion. It takes effect in 2023. While a change to the status quo, the revival of a corporate AMT is actually a trip back to the future. So far, the reaction has chiefly been on the legal side.

Newer official statements are including advice that “interest on the bonds will be taken into account in computing the alternative minimum tax imposed on certain corporations under the code to the extent that such interest is included in the ‘adjusted financial statement income’ of such corporations.”

Our biggest takeaway is the continuing lack of relief in the form of issuing flexibility for municipal bond issuers. It was not unreasonable to think that the largest infrastructure legislation might have taken full use of the municipal bond markets experience and position in the finance and development of infrastructure. Whether it be the AMT, the SALT deduction, or limitations on private activity bonds, the loss of those abilities limits flexibility and increases costs.

PA. TURNPIKE RECOVERS

In late 2013, Pennsylvania enacted Act 89 as a comprehensive funding plan for the Commonwealth’s road system, especially the local roads. That plan looked to the Pennsylvania Turnpike System to use its tolling powers to provide “excess” revenues for transfers under Act 89. The result was lower ratings for the Turnpike’s existing revenue bond debt and the need to create a subordinate lien of debt to finance the increased funding demands being made on the Turnpike. It took a strong credit with a long track record and a history of relatively stable tolls and diminished it unnecessarily.

The pandemic pressured tolls and forced the System to eliminate physical toll collections as a source of cost savings. Its bigger concern was the chance that once again the Turnpike could be caught up in the ongoing debate over how to fund roads and particularly bridges. It was a major uncertainty holding the credit back and there were concerns that Act 89’s clear statement that the Turnpike’s obligations to fund state roads at the end of the most recent fiscal year would not be respected.

In connection with its upcoming bond issue, Moody’s has reached some positive conclusions about the Turnpike’s post FY 22 exposure to revenue transfer demands. It announced that it had revised its revenue bond outlook to positive from stable on its A1 rating. “The revision of the Commission’s toll revenue bond rating outlook to positive from stable reflects our view that there is increased certainty that the Commonwealth will honor Act 89 given other available sources of funds for other state transportation needs. The change in outlook to positive reflects increased certainty about the forecast deleveraging expected over the next several years as the Commission increases the amount of its capital spending funded from future excess cashflow rather than debt.

ANOTHER VIEW OF CONGESTION PRICING

As the congestion pricing debate in NYC unfolds, we are seeing different jurisdictions taking different approaches to the issue. The latest example comes from Massachusetts. Many think that congestion pricing would be useful in Boston where there are mass transit alternatives. When the legislature passed an $11 billion transportation funding package in the recent session, it included a plan to create a state commission to study “mobility pricing,” which could include both tolls and congestion pricing.

So, congestion pricing is coming soon, right? Well, the governor doesn’t think so. As is permitted under Massachusetts law, Governor Baker returned that section of the bill unsigned, citing his long-standing concerns about “equity” issues associated with congestion pricing. He raises a fair point in the debate over congestion pricing. “Workers who have the financial means to pay a congestion price are best able to adjust their commutes to avoid it, and those who don’t have the financial means to pay a congestion price are those with the least flexibility in their schedules.” 

The move comes as Massachusetts voters will be asked to approve a constitutional amendment to fund transit. The proposed constitutional amendment, if approved by voters, would set a 4% surtax on the portion of an individual’s annual income above $1 million.  That money is intended to fund education and transportation but there are no restrictions formally established to insure where those funds go.

TOLLS ARE A DIFFERENT STORY

One coast is seeing the process of establishing congestion fees unfold. At the same time, another coast is seeing tolls move in the opposite direction. The Tacoma Narrows Bridge in Washington State collects tolls for the repayment of debt issued to finance its construction. While there is still debt remaining (until 2032) the debt service requirements are lower. That drove legislation enacted in March to encourage a toll reduction.

It is being portrayed as the first toll reduction in Washington State history. The reduction goes into effect October 1, 2022. Currently drivers with Good to Go passes pay $5.25 to cross the eastbound bridge. Those who choose to pay with cash are charged $6.25, and drivers who pay by mail pay $7.25. Truck drivers in vehicles with more than two axles will see reductions of more than $1.

The irony is that the toll decrease is occurring in a state which seeks to take a leading role in addressing climate change. For us the lesson is that the road to dealing with climate change is ever longer and rockier. The pressure on tolls is leading to moves like this while at the same time limiting funding via other options (mileage fees, e.g.).

CLIMATE LITIGATION

Another effort to move lawsuits against fossil fuel entities from state to federal court has failed. A federal Third Circuit panel rejected efforts to move lawsuits filed against the fossil fuel firms from state to federal court. This is the fifth time that the companies have failed to convince federal judges that their position is valid. The State of Delaware and the city of Hoboken, NJ lawsuits were at issue in the case.

The argument that the federal government leases the companies offshore drilling rights, and that they have contributed oil to the Strategic Petroleum Reserve and have provided specialty fuels to the military has not created a federal issue for the courts. This decision is fairly clear on that. “Most federal-question cases allege violations of the Constitution, federal statutes, or federal common law. But Delaware and Hoboken allege only the torts of nuisance, trespass, negligence (including negligent failure to warn), and misrepresentation, plus consumer-fraud violations, all under state law.”

LEGAL WEED ON THE MARYLAND BALLOT…

A marijuana legalization referendum will appear on the November ballot in Maryland this November. The referendum will finish a process which began in April of this year with legislation to put the question of legalization to voters as a constitutional amendment on the ballot and a complementary measure that will lay out the implementation framework.

“Do you favor the legalization of the use of cannabis by an individual who is at least 21 years of age on or after July 1, 2023, in the State of Maryland?” The existing legislation only authorizes the vote. If voters approve, implementation would be “subject to a requirement that the General Assembly pass legislation providing for the use, distribution, possession, regulation, and taxation of cannabis within the State.”

The implementation framework would allow for the purchase and possession of up to 1.5 ounces of cannabis by adults. The legislation also would remove criminal penalties for possession of up to 2.5 ounces. Adults 21 and older would be allowed to grow up to two plants for personal use and gift cannabis without remuneration. True “legalization” would be achieved gradually. Possession of small amounts of cannabis would become a civil offense on January 1, 2023, punishable by a $100 fine for up to 1.5 ounces, or $250 for more than 1.5 ounces and up to 2.5 ounces. Legalization for up to 1.5 ounces would not take effect until July 1.

BUT MEDICAL MARIJUANA MISSES THE NEBRASKA BALLOT

Ballot initiatives are always tricky. In some states where citizens have the right of initiative or referendum, rules for getting those items on the ballot often make the process less straightforward. The latest example comes from Nebraska where medical marijuana advocates saw efforts at a ballot item to approve it fail to make it over all of the hurdles.

To get on the Nebraska ballot, an initiative petition needed nearly 87,000 signatures — or a total of 7% of registered voters — as well as 5% of registered voters in at least 38 of Nebraska’s 93 counties to put the proposals to a vote of the people. The first of these intended to protect patients and caregivers from legal jeopardy – the Patient Protections initiative – collected 77,843 valid signatures, and the 5% threshold was met in only 26 counties. The second would have legalized the possession, manufacture, distribution, delivery, and dispensing of marijuana for medical reasons and would have established a commission to regulate a state medical cannabis program.

NET METERING WARS CONTINUE

Net metering – the method by which excess residential solar power can be sold back into the grid – has been the subject of much debate as utilities seek to minimize the financial impact of residential solar on their operations. Utilities which have attempted to limit net metering include municipal utilities like Salt River Project in AZ and San Antonio, TX. On the investor-owned side, Florida utilities have been especially aggressive in their effort to reduce if not eliminate net metering.

The latest chapter in this fight is taking place in Kentucky. Kentucky legislation allows power providers to restrict their programs once they reach 1% of a company’s “single-hour peak load” — the maximum power demand a company receives. Kenergy is a rural electric cooperative serving some 57,000 customers across 14 Kentucky counties. In Kenergy’s program, the co-op offers its qualified members credits on their power bills. Kenergy has been limiting its net metering program under the law. The PSC opened an investigation into Kenergy in October 2020 on the grounds that the power provider was restricting its net metering despite being under the 1% threshold.

This month, the PSC ruled that those limits were being imposed on customers in violation of the law’s requirements. “Kenergy’s cumulative generating capacity of net metering systems has not reached 1% of its single hour peak load during a calendar year, and Kenergy must continue to offer net metering under its Net Metering tariff until the cumulative generating capacity of net metering systems reaches 1% of Kenergy’s single-hour peak load for all sales within its certified territory during a calendar year.” 

AMERICAN DREAM DEFAULT

The American Dream mall in East Rutherford, NJ is showing the impact of the long delays in its development and the pandemic’s impact on travel and retailing. The developers were late in making a PILOT payment due to the Trustee for the bonds issued by the Public Finance Authority (WI) to support the project. The payment was due on August 1. It was ultimately made on August 11. That is within the stated cure period established at issuance. The amount received equaled the required payment but interest on the payment accrued beginning August 1. Until that amount is paid or waived, the bonds are in technical default.

It repeats a pattern of late monthly payments which began in May of this year. The interest on that late payment was eventually paid. Given all the impacts on travel, in-person shopping, and the cost of transportation it should not be a surprise that the mall would be underperforming. Given the highly leveraged nature of ownership, the current environment of rising rates and continuing patronage issues at the mall, it is not a surprise that the credit remains under pressure.

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

DIABLO CANYON

Diablo Canyon provides nearly a tenth of California’s electrical power. It was scheduled to close by 2025. In a significant development, California Governor and re-election candidate Newsome proposed legislation which would direct the California Public Utilities Commission to set a new closure date of Oct. 31, 2029 for one unit, and Oct. 31, 2030, for the second on the coastal site along the Pacific. By 2026, regulators would be allowed to grant an extension, but not beyond Oct. 31, 2035.

The state would provide a $1.4 billion forgivable loan to cover the costs of relicensing by PG&E. Pacific Gas & Electric applied to the U.S. Department of Energy’s $6 billion program to preserve the operations of nuclear power plants. No visibility has been provided regarding the issues of how much will be granted, or when. The process includes significant approval requirements from federal, state and local regulatory entities. One significant “exemption” is the provision of an exemption from state regulations to allow operators to maintain operations at the plant without conducting extensive technical analysis of the environmental effects.

California was always likely to face this sort of dilemma ahead of some others. Its hydro resources are depleted by drought both in state and from the Colorado River. It has eliminated coal in state. These were all sources of consistent base load power. The last five years have shown the variability of hydro (think Oroville Dam). There is an increasing fear that the anomaly along the Colorado was the wet period and that the near quarter century drought is the base line.

The closure of significant nuclear assets has generated initial negative results in New York State in terms of the environment and the use of fossil fuel for replacement energy. The same issues have driven the debates in OH and IL (once you took the cash out of them) over whether to subsidize existing nuclear plants. Germany had been on the path to closure of its three remaining operating nukes by the end of this year. Natural gas would have been a likely replacement.

Now with the war in Ukraine limiting gas supplies, the nuclear capacity needs to be replaced. So, does it come as a shock that Germany has proposed that shuttered coal plants be reopened? the Omaha Public Power District (OPPD) in Nebraska has now moved to slow its plans to close one of the nation’s dirtier coal-fired plants from 2023 to 2026. They are best positioned at present to meet the need. Once again, the environmental movement confronts the need to compromise. Perhaps one of the outcomes of the successful compromise in the Inflation Reduction Act can cause state legislatures to try it?

COLORADO RIVER

Federal officials had previously given the seven states which “share” the waters of the Colorado River until Aug. 16 to come up with a plan to reduce demand on the river to conserve as much as a third of the river’s flows. The amount reflects the Bureau of Reclamation they believe is necessary to keep Lake Powell above the levels sufficient to generate needed power and provide water.

The Interior Department holds ultimate authority over Colorado River deliveries in the Lower Basin and, through its Bureau of Reclamation, controls key infrastructure up and down the river. This gives the federal government enormous leverage. The deadline date is not arbitrary. It roughly coincides with the review and release of data in support of allocations of water for 2023.

Whatever is decided it will have to occur within the framework of existing legal agreements. Under Western water law, users with the oldest water rights are entitled to their full allotment of water before newer, junior users get a drop. Since farmers led the settlement of the West, a significant volume of senior water rights are held by agriculture, which uses roughly three-quarters of the Colorado River’ water. Cities typically hold junior, lower-priority rights.

Technically, water deliveries for cities and tribes in Arizona are first on the list to be cut back. Here is where geography becomes a real factor. Arizona, California, and Nevada are downstream from Lake Powell. If less water gets through than those states are at risk. The other Upper Basin states of Wyoming, Colorado, Utah and New Mexico sit upstream of Lake Powell. That gives those states direct control over these water resources.

At the same time, under the terms of a 1963Supreme Court decision, the Interior Department has the right to define what is — and isn’t — a “beneficial use” of water.  Western Democrats secured inclusion of $4 billion for the Colorado River in the Inflation Reduction Act. It would allow the Bureau of Reclamation to pay users to voluntarily forgo water use or to restore ecosystems affected by drought.

The deadline did not result in a new plan from the states, so now the lower basin states and Mexico are going to be cut back. Arizona will have to reduce its Colorado consumption by nearly 600,000 acre feet, or 21 percent of its annual allocation. Nevada’s total reductions are now 25,000 acre feet, or about 8 percent of its allocation. Mexico’s cuts total 104,000 acre feet, 7 percent of its allotted supply.

The cuts come with the release of the Bureau of Reclamation’s August 2022 24 Month Study. The 24-Month Study projects Lake Powell’s Jan. 1, 2023, water surface elevation to be 3,521.84 feet – 178 feet below full pool (3,700 feet) and 32 feet above minimum power pool (3,490 feet). The three states and Mexico will be impacted by actions at Lake Mead which will operate in its first-ever Level 2a Shortage Condition in calendar year 2023.

Depending on future snowpack and runoff, a range of actions will be needed to stabilize elevations at Lake Powell and Lake Mead over the next four years (2023-2026). The analysis shows, depending on Lake Powell’s inflow, that the additional water or conservation needed ranges from 600,000 acre-feet to 4.2 maf annually.

TRANSIT ON THE BALLOT

Voters in four counties in Georgia will be asked to approve new taxes to be dedicated to transportation. The state created the tax option (Transportation Local Option Sales Tax) six years ago for purposes that include roads, bridges, public transit, and seaports. It adds 1% to existing sales tax rates, excludes gas and motor fuels, and must be renewed every five years. According to the Georgia Department of Revenue, 102 of the state’s 159 counties have enacted the transportation sales tax.

Chatham County consists of eight municipalities including the city of Savannah. The tax is estimated to raise $143 million for the city of Savannah. Countywide, the 1% tax is estimated to raise $420 million over five years. The metro Atlanta Forsyth County would see the money be distributed among the county and the city of Cumming under a predetermined formula to address approved project lists. Most of the new tax revenue – 69% – would stay with the county which now collects a 7% sales tax.

Habersham County now collects a 7% sales tax. A prior effort to secure voter approval for this same tax in 2018 was defeated by a 54-46% margin.  The tax is estimated to generate $44 million over five years. The bulk of the revenue – $33.4 million – would go to the northeast Georgia county. The remainder would go to the county’s five cities. Oconee County voters failed to approve a ballot item to increase its existing 7% sales tax for transit. Nevertheless, proponents in the county that borders the city of Athens are trying again this year.

IDEOLOGY IN PENNSYLVANIA

Republican lawmakers in Pennsylvania are attempting to block the passage of proposed emissions regulations, which must be written into state law by Dec. 16 to meet a federal deadline that, if not met, threatens $500 million in highway funding. This amidst a continuing debate over how to generate and apply state revenues to Pennsylvania’s road system. The Legislature has 30 calendar days or 10 session days — whichever is longer — to vote on the regulations.

The regulation would require unconventional oil and gas sites, like fracking wells and natural gas processing plants, to adopt technologies that would limit emissions of volatile organic compounds (VOCs). This because when combined with nitrous oxides (also emitted by oil and gas sites) in the presence of sunlight, form ground-level ozone, a respiratory irritant is increased.

Sources affected by this final-form rulemaking include natural gas-driven continuous bleed pneumatic controllers, natural gas-driven diaphragm pumps, reciprocating compressors, centrifugal compressors, fugitive emissions components and storage vessels installed at unconventional well sites, gathering and boosting stations and natural gas processing plants, as well as storage vessels in the natural gas transmission and storage segment.

Pennsylvania currently has no state regulations on VOC and methane emissions from oil and gas sources. The PA Department of Environmental Protection (DEP) estimates that the unconventional oil and gas industry is currently responsible for some 5,648 tons of VOC emissions and more than 100,000 tons of methane emissions per year. The effort to delay or prevent legislation against the fracking industry has been an ongoing theme in the Legislature.

NORTH DAKOTA CANNABIS

For years, hemp was a viable cash crop. In World War II, hemp growers were encouraged to produce more to support the naval war effort. North Dakota was a major producer. That did not do anything to drive support for cannabis production or possession. Now, with the tide finally flowing in favor of cannabis decriminalization, the state’s voters will be asked to consider its legalization.

The Secretary of State of North Dakota has certified a ballot measure to legalize recreational marijuana. If enacted, the measure will permit adults 21 and older to possess up to one ounce of cannabis. It will also establish a regulatory system for registered cannabis businesses, run by the Department of Health and Human Services or another agency designated by the Legislature.

Regulators would have until October 1, 2023 to develop rules related to security, advertising, labeling, packaging and testing standards. The industry would be limited to 18 state-approved dispensaries and seven manufacturing facilities. 

BRIGHTLINE

It has not been a credit issue to date but the Brightline, a privately owned high-speed passenger line, has the worst fatality rate among the nation’s more than 800 railroads. Federal Railroad Administration data is reported to show 68 people und something that is the product of past practices along the right of way which includes significant stretches with unimpeded access, long established walking shortcuts, and hundreds of unsignalled grade crossings.

Who has the responsibility for addressing the capital need for fencing and signals? Are they the railroad’s job?  The state or local road agency’s job? That has delayed efforts to attempt to lessen the risks. A $25-million dollar grant from the U.S. Department of Transportation will allow the Florida Department of Transportation to fund 33 miles of pedestrian protection features. They will be constructed at 328 roadway-railroad grade crossings along the Florida East Coast Corridor from Miami-Dade, through Broward, Palm Beach, Martin, St. Lucie, and Brevard Counties.

AUTONOMOUS VEHICLES

The climate bill enacted this week puts much emphasis on electrification of both individual and mass transit vehicles. This has reduced the focus on autonomous vehicles which were seen as a driver of capital investment in anticipation of their full adoption. Tesla’s “autonomous” vehicle software has come under criticism. The most useful testing of AV technology has been on smaller scale Mass transit uses. That is what makes the findings of an analysis by an AV proponent – US Ignite – so interesting.

US Ignite is a nonprofit whose mission is advancing the use and development of urban technology. The U.S. Army Engineer Research and Development Center (ERDC) provided funding for a two-year pilot of an AV shuttle at Fort Carson in Colorado. The Fort Carson project operated from September 2020 until March 2021. The service operated on a 3.1-mile fixed route. Clearly it was a small scale effort. A total of 204 people rode the autonomous shuttle.

The findings indicate some problems in the short-term. “For safety reasons, the current generation of automated passenger shuttles operate at average speeds of 12-15mph, with some vehicles reaching a maximum of 25 mph. These slow speeds make driving on standard roadways challenging for AVs and other road users as it can create road congestion and cause frustration among other drivers on the road.

Speed limitations make it clear that AV shuttle offerings should be a “last-mile” solution – where the destination is beyond a comfortable walk but too close to justify taking a personal car. Speed limitations make it clear that AV shuttle comfortable walk but too close to justify taking a personal car.”

It is a sign to advocates that adoption will be a much longer term process. We are already seeing issues of reliability and availability in terms of electric vehicle charging infrastructure. That well before full rollout of charging infrastructure.

CONGESTION PRICING MOMENTUM SLOWS IN SF

The San Francisco County Transportation Authority has been researching potential congestion pricing plans for downtown SF. That continued even after the city was at the center of the pandemic. SF along with NY have been the two cities which have had the slowest return of workers to offices in the aftermath. Many commentators have paired the cities in terms of the return to office. Now, with New York trying to move ahead with its congestion pricing plan we see a divergence between planners in the two cities.

Downtown SF remains less crowded as the tech industries have been slower to return to office settings. Before the pandemic, San Francisco was studying a plan to charge drivers entering a downtown zone $6.50 — with discounts based on income. Those plans all assumed a return to pre-pandemic levels of traffic but they have not materialized. Now, The Authority has announced a “pause” in its efforts to establish these charges.

The latest plan called for implementing congestion pricing in two downtown zones — one including the Financial District, Chinatown, the Tenderloin and South of Market. The other zone would be larger, including North Beach, Russian Hill, Fisherman’s Wharf and Marina Bay.

The plan proposed electronically charging drivers entering the zone   between 6 a.m. and 9 a.m. and 3:30 p.m. and 6:30 p.m. a toll of $6.50 with a discounted cost of $4.33 for moderate-income people, $2.17 for low-income people and no charge for those with very low incomes. Drivers with disabilities would pay $3.25. Drivers for ride-hailing service like Uber and Lyft would pay the full charge for each ride. Residents of the zones would not be exempt.

The reality is that it would take five years before the plan would be implemented as it would require extensive planning, state legislation, installation of electronic toll collection equipment and alterations to some city streets. As for now, the companies are still in the process of establishing new hybrid work attendance requirements. Congestion remains a memory.

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

ESG BOYCOTTS – WHAT THE DATA TELLS US

We’ve been following the efforts of some conservative State Treasurers to support a boycott of banks and other financial institutions which are seen as hostile to the fossil fuel industry. There have been several issues over the years like municipal disclosure. A question always asked by issuers is how many basis points will it cost me not to comply. It has not been easy to answer. In the case of the State Treasurer boycotts we do have some data which helps to answer a similar question. How much does the bank boycott add to my financing costs and the burden on taxpayers? An analysis by two researchers one with the University of Pennsylvania and one with the Board of Governor of the Federal Reserve has an answer.

Here is what they had to say. The state of Texas enacted laws in 2021 that prohibit municipalities from contracting with banks that have certain ESG policies. This led to the exit of five of the largest municipal bond underwriters from the state. We find that municipal bond issuers with previous reliance on the exiting underwriters are more likely to negotiate pricing and incur higher borrowing costs after the implementation of the laws. Among remaining competitive sales, issuers face significantly fewer bidding underwriters and higher bid variance, consistent with a decline in underwriter competition. Additionally, underpricing increases among issuers most reliant on the targeted banks and bonds are placed through a larger number of smaller trades.

Overall, our estimates imply Texas entities will pay an additional $303–$532 million in interest on the $32 billion in borrowing during the first eight months following the Texas laws. That extra cost comes from the fact that issuers with significant reliance on the targeted banks opt into negotiations to soften the large volatility and higher borrowing costs which the study observed among competitive sales. Nevertheless, borrowing costs still increase by approximately 10 basis points for issuers with an additional standard deviation of reliance on the targeted banks. Borrowing costs increase by up to 45 basis points for issuers that had previously raised the majority of bond financing through the exiting underwriters.

It comes down to a question of how much is too much to pay for what will ultimately be a failed policy based on ideology. Are the states and financial officers enforcing these laws doing the best they can for their ultimate client the taxpayer? Is it the place of financial officials to act in other than a fiduciary interest for their client the taxpayers? We always caution against policies clearly rooted in ideological grounds. That applies to the entire ideological spectrum of ideas.

MAINTENANCE AND MASS TRANSIT

Two of the nation‘s major subway systems are under pressure to address safety issues. The Orange Line is one of the MBTA’s busiest routes, averaging about 101,000 trips each day. Now the “T” will have to find another way to move those passengers for a month beginning August 18.  Last week, the federal government ordered MBTA to conduct a “stand-down” and require workers to attend safety briefings before being allowed to return to work in maintenance yards and shops. The “T” has faced three “runaway” train incidents since May.  projects include track replacement, upgraded signal systems and station improvements. The agency will also complete track maintenance required by directives from the Federal Transit Administration.

The Washington Metro system has been working all year on addressing serious maintenance and safety issues associated with a substantial portion of its rolling stock. The system has faced reduced demand not just from the pandemic but from service reliability issues which had plagued WMATA over the last couple of years. Just this week, a new chief operating officer begins his efforts to end a train shortage and get Metrorail back to full service.

NYC CONGESTION PRICING

New York’s Metropolitan Transportation Authority (MTA) has released a preliminary schedule of charges to be levied under its congestion pricing plan. The proposal makes clear what many allege. The plan is clearly designed as a money grab more than it is a plan to reduce congestion or improve the environment.

The MTA released seven different scenarios for the tolling plan, with peak-period toll rates to enter the “Central Business District” below 60th Street of anywhere from $9 to $23, depending on the version implemented. In virtually all configurations of the plan, “peak” would run from 6 a.m. to 8 p.m. on weekdays and 10 a.m. to 10 p.m. on weekends. That clearly is designed to impact those coming into the City for Broadway shows, other cultural events, and sports events.

The CBD Tolling Alternative, TBTA would toll vehicles entering or remaining in the Manhattan CBD via a cashless tolling system. The toll would apply to all registered vehicles (i.e., those with license plates) with the exception of qualifying vehicles transporting persons with disabilities and qualifying authorized emergency vehicles. Passenger vehicles would be tolled no more than once a day. Vehicles that “remain” in the Manhattan CBD are vehicles that are detected when leaving, but were not detected entering in the same day. Given that they were detected leaving, they must have driven through the Manhattan CBD to get to the detection point, and therefore “remained” in it during a portion of the day. These vehicles would be charged that day for remaining in the Manhattan CBD.

The MTA’s assessment is required by the federal government in order to implement congestion pricing, because some of the roads are part of the National Highway System and receive federal funding. There will be six public hearings about the congestion pricing options. One component which caused potential opposition has to do with the treatment of commuters from New Jersey. This iteration of the plan would call for the entire amount of the tolls on the bridge and tunnels leading into Manhattan from New Jersey collected by the Port Authority to be credited against the congestion fee.  

The debate which will follow will be robust. There are many ways to address congestion which the city has not tried. Designated pick-up/drop off areas for Uber and other vehicles have been tried in Washington, D.C. Much congestion in the city stems from double-parked delivery vehicles. Those vehicles collect tickets but those fees are waived under an agreement reached by the DeBlasio administration. Philadelphia established areas on city streets for delivery vehicles to park. Such a plan would reduce the barriers which trucks create for smooth traffic flow.

When you see how the city has not tried alternatives, it makes it clear that this is not an environmental issue but a revenue raising issue. That is why the fee once imposed, isn’t going anywhere even if every vehicle is a non-polluting electric vehicle. Has the city made parking more expensive? The MTA analysis seems to be skewed towards the congestion pricing model. The analysis presents nine alternatives. Four would meet the goal of reducing congestion. Only one of those alternatives also would raise money for the MTA – no surprise, it’s congestion pricing.

Then there is the whole issue of how to deal with vehicles entering from New Jersey. Significant political opposition comes from the Governor of New Jersey. It matters because he can hold up actions by the Port Authority and the Gateway Tunnel project needs a cooperative relationship between the Governors. The dispute has generated the phenomenon of “crossing credits”. That’s what we call discounts proposed to reflect the $16 toll cars pay to enter the city under the Hudson River.

Parts of the plan seem to have been conjured up in a vacuum. One idea explored was to encourage remote work to reduce car traffic. And that makes sense if you are trying to convince drivers to subsidize people who are simultaneously being encouraged not to drive or use mass transit thus generating no revenue. The plan has already been flagged as being negative for environmental justice issues. Every congestion pricing scenario will result in more truck traffic on the Cross-Bronx Expressway and RFK Bridge. That will not reduce pollution in those areas.

In the case of the New Jersey side of the equation, more commuters use mass transit than use their cars to enter Manhattan. Other sources of concern exist as well. Some of the scenarios offered consider offering discounts for all tunnel commuters but not all bridge commuters, something that could drive traffic to already overwhelmed bottlenecks, like the Holland Tunnel.

WHEN ARPA FUNDS CURRENT EXPENSES

There is a significant legal battle unfolding in the NYS courts over cuts to the NYC education budget. In June, the City Council enacted a budget that included reduced spending on the public school system. The budget reflected the estimated loss of some 120,000 students with much of that loss attributable to the impacts of the pandemic. As is the case in many districts across the country, much outside aid to local school systems is tied in some major way to enrollments. The usual formula includes a reliance on the data point of average daily attendance.

The Adams administration crafted a budget that reflected attendance trends and current realities. It resulted in what is considered a cut of $200,000,000 in FY 2023. Here is where ARPA money fits in. These same attendance trends had been established during the DeBlasio administration but the choice then was to use ARPA money to support school budgets. Now that use of funds from a finite short-term source to cover a long-term expense is becoming a problem.

The situation also puts a spotlight on the teachers’ unions. It was only 3 or 4 years ago that images of thousands of teachers and students clamoring for better pay were generating favorable responses and support. Now a combination of factors has rapidly turned that supportive atmosphere around. Much of this has to do with teacher resistance to in-person versus on-line learning. It highlighted the child care role that schools serve for those parents who work. The teachers were seen as putting their interests above those of the children of many who were considered essential workers during the pandemic.

Nevertheless, the teacher’s union took the city to court and challenged the education appropriations even though they had been enacted through the normal budget process. The teachers feared layoffs. The initial decision in the litigation called for the city to restore the cuts to the education budget. Upon appeal, that order was reversed. It is likely that an appeal of that ruling will be undertaken by the teachers’ union to the state’s highest court.

We find the efforts by the teachers’ union in this case to be troublesome. Any budget process at any level of government is ultimately a political act. To have the courts intervene at this level of budget making is a concern. We do not think that budget making is sacrosanct in any way but in this case the court is being asked to override a decision undertaken through a public process by duly elected representatives. Outside of the large urban school districts in NY, school budgets are the closest thing you get to true democracy. Would the union take the view that a court should overrule a legally conducted budget election because the residents did not think that teachers should be getting a raise?

SHOW ME CANNABIS

Voters in Missouri will be asked to approve amending the Missouri Constitution to remove bans on possessing, consuming, delivering, manufacturing and selling marijuana for personal use by adults over the age of 21. The ballot petition calls for a proposed registration card for personal cultivation of marijuana as well as provisions to allow people with nonviolent marijuana-related offenses to petition to have their records expunged. A 6 percent tax on the retail price of marijuana would be imposed.

Medical marijuana has been legal in Missouri since 2020 when 65% of voters approved it. The sponsors behind the petition estimated that legalization would generate some $40 million annually to the State. The approval of the ballot item occurred as once again the Senate will be asked to consider the Cannabis Administration and Opportunity Act.

Two provisions to note are that the law would transfers federal jurisdiction over cannabis from the Drug Enforcement Agency to the Food and Drug Administration (FDA) and the Alcohol and Tobacco Tax and Trade Bureau (TTB) within the Treasury Department, and implements a regulatory regime similar to alcohol and tobacco, while recognizing the unique nature of cannabis products.  It hopes to eliminates the tax code’s restriction on cannabis businesses claiming deductions for businesses expenses, and implements an excise tax on cannabis products. The goal is to allow the industry to be a fully banked business.

UPDATES

The Port of Oakland filed a complaint for injunctive relief on July 25 with the Superior Court of California in Alameda County.  A temporary restraining order was granted on Tuesday, Aug. 2. In addition, a hearing on the motion for a preliminary injunction is scheduled for Aug. 29. Members of the California Trucking Association and the Owner-Operator Independent Drivers Association had blocked access to the Port in late July to protest new state employment laws.

The Jacksonville Electric Authority (JEA) is letting their customers know that retail rates could be as much as 45% higher by 2032. The projected 4.5% annual need cites the fact that “the biggest driver of our longer-term need for rate increases is driven by the combination of capital projects, Plant Vogtle, primarily.” JEA has already increased its base rate by three percent last year.

The National Indian Gaming Commission announced figures this week which showed that revenues nationwide totaled $39 billion in 2021. The onset of COVID-19 in the spring of 2020, every tribe shut down their gaming facilities.  The result was a decline of nearly 20 percent in gross gaming revenue. Once facilities began to reopen, revenues picked up and steadily increased. According to the fiscal year 2021 figures, gross gaming revenue at tribal casinos increased by 40.2 percent from the year prior. Compared to pre-pandemic levels, they increased by 12.9 percent.

On August 1, 2022, Chief Justice John Roberts granted energy companies’ application for an extension of time within which to file a petition for writ of certiorari for review of the Fourth Circuit’s decision affirming the remand order in Baltimore’s climate change lawsuit against the companies. The deadline for filing a petition for writ of certiorari is now October 14, 2022. This comes as the parties in a similar suit from Boulder, Colorado are in the midst of arguing a procedural issue in front of the Supreme Court. The industry continues to make every effort to get these claims shifted to the federal courts which have fairly consistently kept the cases in state court. This is one of them.

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

KENTUCKY

Daddy, won’t you take me back to Muhlenberg County

Down by the Green River where paradise lay?

Well, I’m sorry my son but you’re too late in asking,

Mr. Peabody’s coal train done hauled it away.

And much of what was left was washed away in this week’s flooding in eastern Kentucky. Much of the focus on environmental justice and social equity, especially in terms of the electric utility industry, centers around the location of generating facilities.  The lack of infrastructure before as well as after is staggering. If you have been in those hollows in KY, W VA, VA, OH, the difficulties with providing and maintaining basic infrastructure are apparent. So too, is the poverty that is the largest growing crop in these places. The barriers to overcoming these issues grow every day.

Recovery will be highly difficult at best. The lack of a real economy, limited physical access (true before the flooding), and a lack of insurance will all be difficult to overcome. It is estimated that only 5% of the homes flooded and/or destroyed had flood insurance coverage. At some point, what sounds like a lot of money (nearly all federal) will be pointed to as a marker of a recovery effort. The reality is that those federal programs don’t often provide the one commodity that disaster professionals all point to as a primary mover of short-term recovery and that is cash.

THE INFLATION REDUCTION ACT

An agreement was announced which should pave the way for a climate bill. The agreement includes 10-year extensions of existing credits for wind and solar, as well as provisions for heat pumps, rooftop solar and standalone energy storage, like batteries. the extension and expansion of a host of renewable energy tax incentives and for next-generation technologies, including clean hydrogen and advanced nuclear. EV incentives a $7,500 rebate for new vehicles and a $4,500 tax credit for used ones. Only people who make $150,000 a year or less (or $300,000 for joint filers) are eligible for the new car credit and those who earn a maximum of $75,000 (or $150,000 for joint filers) for used cars. 

The bill extends credits to hydrogen-fueled cars. It also expands a tax credit for companies that capture and bury carbon dioxide from natural gas power plants or other industrial facilities. It would also provide tax breaks to keep existing nuclear plants running and make permanent a federal trust fund to support coal miners with black lung disease. While much of that benefit will indeed go to West Virginia, health providers and governments in states like PA, VA, OH, and IL would all benefit from that funding. America’s Power, an industry trade group, said “Our preliminary estimates indicate that West Virginia would be one of the states with the largest number of coal retirements due to the wind and solar tax credits,”.

We view this legislation as establishing a political blueprint for what a legislatively realistic approach to climate change might look like. Support for carbon capture is clear. The continuing support for electric transportation on a bipartisan basis will drive demand for electricity. We see signs that nuclear is gaining support. The continuing inability (unwillingness) of managers at nuclear construction projects to meet budgets and schedules while ensuring quality work is the real impediment.

The hope is that some of those issues would be addressed through the development of small scale or modular reactors. The Nuclear Regulatory Commission (NRC) has indicated it will certify a small modular reactor (SMR) design planned to be developed in Idaho. The NRC on July 29 directed staff to issue a final rule that certifies the standard SMR design, for which NuScale submitted an application in December 2016. 

Only one NuScale project is under active development in the U.S. That has a municipal utility – Utah Associated Municipal Power Systems (UAMPS) – leading the effort to develop the 462-MWe Carbon-Free Power Project at an Idaho National Laboratory (INL) site in Idaho Falls, Idaho. While also a NuScale project it has a different design. UAMPS has so far signed up 27 of its 50-member pool—mainly in Utah, Idaho, Nevada, and New Mexico—as participants in CFPP.

CALIFORNIA ELECTRIC VEHICLE WEALTH TAX

Prop 30 would raise income taxes on people earning more than $2 million a year to fund zero-emission vehicle purchases and infrastructure. Half the money for incentives would go to people in lower-income communities and a share of the money for infrastructure would be used to install charging stations at apartment buildings. A portion would also be used to fund wildfire prevention efforts.

A 2020 order from Gov. Newsome requires all new vehicles sold in the state to be zero-emission by 2035. A related law compels ride-hailing companies like Lyft and Uber to mostly abolish internal combustion engines from their fleets by 2030.  So, now they are looking for additional subsidies for their businesses in the form of assistance for buying EVs. It’s important enough to Lyft to have spent $15 million to support the plan.

CARBON CAPTURE ECONOMICS

Last week we highlighted efforts by the municipal utility serving Farmington, NM to limit residential solar generation development. This week, the same utility was the subject of another analysis regarding renewable vs. fossil fuel-based energy. Farmington is the location of the huge coal-fired San Juan Generating Station. The plant has been slated for closure. Farmington has been seeking ways to keep the plant operating and maintain the jobs and tax base it offers. It has partnered with a private entity as it seeks to use carbon capture to keep the plant operating.

The plan is based on estimates by the sponsors that some 95% of the plants carbon footprint could be captured at the plant making it a viable generating option. Those estimates find them selves being questioned by the Institute for Energy Economics and Financial Analysis (IEEFA). The Institute is known for its lack of support for capture on economic viability grounds. In the case of the Farmington plant, specific issues have been raised in the study.

IEEFA’s analysis produced data which led them to conclude that even if the proposed project captures 90% of the CO2 produced by San Juan, the combined CO2-equivalent (CO2e) capture rate for both the mine and the plant would be only 68%. In this scenario, the project would continue to emit almost 3 million tons of CO2 annually. If only 75% of the CO2 produced by San Juan was captured, the effective capture rate for both the mine and the plant would be 57%. If only 65% of the CO2 produced by San Juan, the effective capture rate for both the mine and the plant would be 49%. 

The study comes as the U.S. Department of Energy (DOE) has issued a notice of intent to fund six carbon capture demonstration projects. Two are to be located at new or existing coal-fired generators, two at new or existing gas-fired facilities, and two at new or existing industrial facilities not proposed for electric generation. Funding is included in the pending climate legislation. It had better be, as even the entity vying to keep San Juan generating admits that there is little investor interest in its carbon capture project.

The study also highlights the issue of methane. While so much effort is applied to the development of carbon capture to deal with that problem, methane has taken its place as an issue with many believing that methane reduction could produce more significant climate benefits in a shorter time period than is the case with carbon capture. A recent study by the International Energy Agency (IEA) concluded that actual methane emissions from oil, gas and coal are 70% higher than reported in official data.

The major difficulty facing potential investors in carbon capture is one that the municipal high-yield market has seen many emerging technology projects which have never been operated at scale. Medium density fiberboard, rice stalk recycling, paper de-inking are just a few the sectors involved. The hope is that will change in the energy sector. We think that carbon capture could be a good test.

PUERTO RICO ANSWERS ITS OWN QUESTION

There are many responses one could have when Puerto Rico complains about oversight and its finances. When it wonders why investors and outside observers seek to obtain as much information as they can, when they ask for extended oversight, and tighter covenants. When it wonders why so many are suspicious of who and who isn’t appointed to run important functions. This week presented another answer to that question, courtesy of the Commonwealth itself.

The former governor of Puerto Rico, Wanda Vázquez, was arrested by the F.B.I. on charges of accepting bribes while in office from a campaign donor, and naming a regulatory official of his choosing in exchange for donations. The donor offered Ms. Vázquez a $300,000 campaign donation in return for replacing the island’s then top banking regulator.  It is charged that she took it but it was a bad investment as she lost in a primary.

The irony is that this failed investment was attempted to be reprised with the winning candidate. The same donor tried offering a bribe to the winner — the current governor, Pedro R. Pierluisi — but the person representing Mr. Pierluisi was actually working undercover for the F.B.I.  That comes after it came to light that he president and treasurer of a political action committee that raised money for Mr. Pierluisi’s campaign pleaded guilty in May in a scheme to hide the origins of “dark money,”.

This is why an oversight board is a necessity. 

PORTS AND CONTAINERS

The continuing backlogs at ports around the country are well known. With a peak shipping season underway, the clogged supply chain at all levels is refocusing attention on an issue that faced ports last year. Imbalances between exports and imports as well as shortages of truckers have created large numbers of empty containers which take up significant space at ports without generating revenue. It is in the ports’ interests to clear out the backlog.

The primary approach is to levy storage fees to motivate shippers to move the containers. In Los Angeles, such fees were proposed last year for the Ports of Los Angeles and Long Beach and the threat of them was sufficient to address the issue. Since the program was announced on Oct. 25, the two ports have seen a combined decline of 26% in aging cargo on the docks. As backlogs increased this year, the Ports of Los Angeles and Long Beach announced that they were considering actually collecting the fess beginning this month. The ports plan to charge ocean carriers $100 per container, increasing in $100 increments per container per day until the container leaves the terminal. The plan to impose the fees this month has been delayed to see if shippers can improve the backlog situation.

The Port of New York and New Jersey has announced that it intends to implement a new quarterly “container imbalance fee” for ocean carriers. Under this new container management fee, which will be assessed on a quarterly basis, ocean carriers’ total outgoing container volume must equal or exceed 110 percent of their incoming container volume during the same period, or they will be assessed a fee of $100 per container for failing to hit this benchmark. Incoming and outgoing containers include both loaded and empty containers, excluding rail volume.

WAS NYC WRONG ABOUT AMAZON?

When Amazon was looking for a tax incentive deal to support the development of a 25,000-employee campus, the deal had many critics. After Amazon decided ultimately locate in Arlington, VA. Supporters of the massive tax abatements and other incentives pointed to that move supported by tax concessions to call the failure to lure Amazon a mistake. It was part of a whole move by cities to put so much development hope in the location of tech company office facilities.

Now there is evidence that it might not have been the worst thing for the City given recent employment trends in the tech space. Twitter recently told employees that one office in San Francisco would close; plans for a new office in Oakland, California, would be abandoned; and the future of seven locations was being carefully considered as part of a cost-cutting measure. Five other offices globally would definitely be downsized. 

Other companies are following suit. Yelp announced it was moving to being fully remote, and closing 450,000 square feet of office space across the United States. Netflix said it plans to sublease around 180,000 square feet of property in California. Salesforce put up half of its San Francisco trophy tower block for sublease in mid-July. US Bureau of Labor Statistics data tells some of the story. Those numbers show that 27% of American workers in “computer and mathematical occupations” worked remotely at some point in the last four weeks. 

San Francisco estimates one in three workers who used to be in the city have now gone remote. The office vacancy rate in San Francisco stood at 22% at the end of the first quarter of 2022. In Dallas, where other tech companies have created outposts, more than one in four office spaces are vacant.

UPDATES

San Diego has become the latest jurisdiction to ban natural gas in new construction. The City Council approved the City’s Climate Action Plan.

Georgia Power has received approval to begin fuel loading at Unit 3 at Plant Votgle. The pending climate bill also provides a 10-year production tax credit for nuclear energy producers. The goal is to allow some existing nuclear generation to remain economical for operators. Existing facilities could receive a $15 per megawatt-hour credit. The credit gradually declines as power prices rise above $25 per megawatt-hour.

Carbon capture plans are continuing to generate opposition. Landowners in eight counties in South Dakota have now filed lawsuits against Summit Carbon Solutions and its well documented efforts to build a pipeline to ship carbon to North Dakota. The suits seek to challenge laws which provide that companies have a right to access land for survey work without consent, so long as there is a permit open with the South Dakota Public Utilities Commission, they give 30 days’ written notice to the landowner and they make a payment to the landowner in the event of any damages. 

The landowners cite an article in the state constitution which provides that private land cannot be taken or damaged without just compensation and another which provides that corporations that take private property must pay compensation before any damage to the property is done. The filings also cite an article in the state constitution that says landowners have a constitutional right to have just compensation determined by a jury and paid prior to entry on the land.

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, 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.

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