Joseph Krist

Publisher

GOVERNANCE, FLORIDA, AND DISNEY

As we go to press, Florida Governor DeSantis is expected to sign into law legislation to effectively end the existence of the Reedy Creek Improvement District. The move is in response to Disney’s public position on what has become known as the Don’t Say Gay law in Florida. Reedy Creek is the special district created in the late 1960’s to support the development of what became Disney World. It issues debt for infrastructure development in the District and repays the debt from special assessments paid by Disney.

If Gov. Ron DeSantis signs the bill into law, the Reedy Creek special district would be dissolved effective June 1, 2023. The majority of the District is in Orange County with the remainder located within adjoining Osceola County. Dissolving the district would mean Reedy Creek employees and infrastructure would be absorbed by the counties, which would then become responsible for all municipal services as well as the debt issued by Reedy Creek.

Currently, Disney pays taxes to both counties as well as the Reedy Creek district. Florida law dictates that special districts created by the legislature can only be dissolved with a majority vote of the district’s landowners. For Reedy Creek, that’s the Walt Disney Company. It all has the makings of an extended litigation process as the counties, Disney, bondholders, and bond insurers all face uncertainty as the details of the law emerge.

The District issues debt backed by utility revenues and it issues debt payable from ad valorem taxes. The utility debt is rated in the low AA category. The ad valorem tax debt is rated A. It is not clear what the rating impact of a dissolution would be as it would be reliant on non-related county ratings.

The governance issue is pretty clear. Regardless of one’s view of the law, the Governor and the Legislature are taking governance down to the level of fourth grade class elections. Disney is the largest employer of Florida residents in the state. It is not expected that Disney would vote to end the current arrangement unless there was a financial benefit to the company. So, in the end, is the legislation just ultimately a piece of performance art?

THE NUMBERS DON’T LIE

A couple of weeks ago we discussed the issues surrounding efforts by individual electric cooperatives to move their demand to new sources of power from new providers. Those coops were customers of Tri-State Generation and Transmission. This large cooperative wholesaler is battling efforts by members to end their status as distribution customers while remaining transmission customers. Now, one of the original coops to successfully move its demand to another supplier has provided real financial benefit from leaving.

In 2016, the Kit Carson cooperative in New Mexico reached agreement on a price that would allow Kit Carson to end its power purchases from Tri-State as its wholesale supplier. Now that any debt obligations associated with the buyout are maturing this year, the lowered debt service and lower purchased power costs are reducing its revenue needs. Now, Kit Carson is projecting that in late summer or early fall, customers could see decreases of up to 20 to 25% in their monthly bills.

The circumstances are not going to be the same everywhere – after all this is the utility serving Taos. Two industrial scale solar projects are run by the coop and they employ large scale batteries for storage. It’s no surprise that support for those projects would cause problems for a still fossil based generator like Tri-State.

P3 PROGRESS

The private consortium managing Maryland’s Purple Line project has signed a $2.3 billion contract with a new construction team. The total cost of the project is now $3.4 billion, an increase of $1.46 billion from the last estimate. The initial budget was $1.9 billion. The construction contract is between the Purple Line Transit Partners (PLTP), the private concessionaire led by infrastructure investor Meridiam and the construction group led by the U.S. subsidiaries of Spanish construction firms Dragados and OHL. 

The consortium’s new financing includes a $1.76 billion low-interest federal loan, which has grown from the original $875 million loan, $643 million in private activity bonds issued to PLTP and $293 million of its own equity. To finance the increased construction costs, the state will pay back those costs with higher monthly payments — averaging about $255 million annually — over the 30-year contract term. 

MIXED SIGNALS ON NEW YORK STATE

Moody’s announced that it has upgraded New York State’s general obligation rating to Aa1. It cited “a significant increase in resources combined with agile financial management that has resulted in balanced or nearly budgets projected through the state’s five-year financial plan. Recognizing its need for a financial buffer to counter the volatility inherent in the state’s economic and revenue structure, it has channeled some of those resources into expanded reserves, reductions in certain outstanding liabilities, such as postponed pension contributions, and risk reduction, such as termination of outstanding interest rate swaps. These actions point to the role of strong governance in triggering the upgrade.”

We note that the reference to strong governance came in the same week that the newly appointed lieutenant governor had to resign after being indicted. We also note that the significant increase in resources comes from federal aid and that pandemic related financial assistance is only expected to last through fiscal 2024. The politics of the budget process which saw increased social service spending build into the budget to offset political opposition to the subsidy the state will provide for the Buffalo Bills stadium.

We also note that the economic situation, especially in the State’s economic driver New York City remains uncertain. It is increasingly apparent that New York’s central business district will not return to pre-pandemic normal. Office attendance will not be 100% and the businesses which rely on office workers will have a slower road to recovery. The recent incident on the subway will not help that. Added to that is the potential impact of the expected congestion fee which is likely to be imposed .in 2023. The outlook for the City’s economy remains uncertain so given the role of the City in the State’s economy we do not see a stable situation.

HOLD THE SALT

The legal effort to overturn the changes to the tax laws in 2017 which capped the amount of state and local taxes one could deduct from their calculation of adjusted gross income has quietly dies. The U.S. Supreme Court declined to hear an appeal from four states of a decision which upheld the limits. New York, Connecticut, Maryland and New Jersey brought a legal challenge in 2018 which argued “a deduction for all or a significant portion of state and local taxes is constitutionally required because it reflects structural principles of federalism embedded in the Constitution.”

CARBON CAPTURE ECONOMICS

In an initial filing to the Wyoming Public Service Commission, PacificCorp estimated that Adding carbon-capture systems to existing coal-fired power plants in Wyoming could cost the average residential ratepayer an additional $100 per month. The retrofit costs alone were between $400 million and over $1 billion

according to PacifiCorp.

Legislation passed in 2020 requires regulated utilities to determine how much CO2 capture can be applied to existing coal plants and still justify the costs to ratepayers.  Statutes enacted to support the goals of the legislation allow a utility to forego installing CCUS on a coal plant if it can prove to the Commission it is not viable for ratepayers. 

PacifiCorp is asking the Wyoming PSC to approve a 0.5% surcharge to all its Wyoming customers to pay for studies of the issue of carbon capture. The surcharge would initially generate some $3 million but ultimately that number is expected to grow to $15 million annually. That money would be applied to the costs of retrofitting coal plants.

CO-OP CHALLENGES FAIL

We have focused much attention on the efforts by local distribution cooperatives to buyout their requirement to purchase power from generation and transmission coops primarily from the western US distributor Tri-State Generation. While the most visible situation of its kind, the issues facing Tr-State are not unique. This has led other distribution coops to see if they can better meet their supply needs at lower costs from renewable rather than fossil fueled sources. It has also led to litigation.

The latest example is the Central Electric Power Cooperative in South Carolina. The Palmetto State has been dealing with the issues associated with the South Carolina Public Service Authority and its ill-fated participation in the Sumner Nuclear plant expansion. Those issues have created pressure for SCPSA and its partners to lower rates and increase renewables. The rate impact of Santee Cooper’s missteps continues to trickle down to retail customers.

Central is Santee Cooper’s largest customer. So, the effort by a local distribution coop to get out of its requirements to buy its power from Central was a potential issue for SCPSA.  Marlboro Electric, headquartered in Bennettsville, South Carolina has a contract with Central which expires at the end of 2058. Marlboro argued that Central’s failure to provide it with fair and equitable terms to exit the supply contract was a breach of the wholesale power contract and the wholesale cooperative’s bylaws. Marlboro Electric claimed the alleged breach allowed it to end its contractual obligations.

Unlike the situation with Tri—State, the wholesale power contract executed with Central does not have clear provisions regarding withdrawal from contract requirements.  Tri-State customers are arguing over the cost formula for withdrawal. In the South Carolina case, the judge ruled that “The WPC unambiguously requires ‘mutual agreement’ for termination prior to December 31, 2058, and the bylaws unambiguously require Marlboro to meet ‘all contractual obligations’ to Central, including coming to a ‘mutual agreement’ for early termination of the WPC, to withdraw from the cooperative.” 

The decision is a short-term positive for generation and transmission cooperatives but in the long run will just raise customer dissatisfaction. That will maintain pressure on wholesalers from their distribution customers.

PUERTO RICO LOSS IN SUPREME COURT

The US Supreme Court in an 8-1 ruling found that the decision by Congress decades ago to exclude Puerto Rico from the Supplemental Security Income (SSI) program did not violate a U.S. Constitution mandate that laws apply equally to everyone. The decision strikes a blow against efforts to increase federal support for Puerto Rican residents. The federal government estimated that a ruling in favor of providing the benefits would have had an annual cost of $2 billion.

It is estimated that some 300,00 Puerto Rican residents would qualify for the benefits. The case stemmed from efforts by recipients to continue to receive benefits in Puerto Rico which they originally qualified for as residents of the states. Congress decided not to include Puerto Rico when it enacted the SSI program in 1972. Puerto Ricans are eligible for a different government program, called Aid to the Aged, Blind and Disabled. The federal government’s central argument was that the congressional decision to exclude Puerto Rico was rational based on the fact that Puerto Ricans do not pay many federal taxes, including income tax.

LOCAL FOSSIL FUEL REGULATION

While a number of states have undertaken legislative efforts to preempt local regulation of the use of fossil fuels, one state is taking a different approach. This week, Vermont enacted legislation which authorizes the City of Burlington to impose carbon fees and “alternative compliance payments” on both commercial and residential property owners.  A charter change ballot item passed with 64 percent of votes .

The state law was needed to allow Burlington to follow through on its plan. The use of carbon taxes rather than bans provides an interesting alternative strategy for fighting the preemption phenomenon. It is less a revenue generator than it is an example of the “nudge theory” which uses regulation and financial incentives to motivate desired changes in behavior. It has already been suggested that revenues generated could be used to help less well off residents finance and fund energy upgrades to their properties.

THE PRICE OF ENVIRONMENTALISM

Legislation gas been introduced in the NYS Legislature which would prevent companies that received an approved rate plan dating back to 2021 from increasing rates for four years. Companies that have not increased rates would have their rates frozen for two years. The legislation is in response to rising utility bills which are blamed on higher natural gas prices.

What is not being said so loudly is that the closure of the Indian Point nuclear plant created a loss of some 2,000 megawatts of power which needed to be replaced while the development of hydropower resources (in Canada) takes place. The required transmission infrastructure to deliver that power has yet to be developed. Until that happens, the need to fill that power capacity gap will often be satisfied by natural gas power.

The situation is another example of a phenomenon which has plagued progressives for years. The goals of environmentalists are quite laudable and the end results are nearly always greeted with widespread support. The problem comes when the cost of all of these environmental improvements is tallied. Whether it is replacing fossil fueled or nuclear generation, burying transmission lines, or breaching hydroelectric dams, the true economic costs seem to always be underestimated.

The fact is that the closure of Indian Point was going to likely increase prices as utilities transitioned to newly developed power sources. That is a detail that closure proponents never seemed to fully deal with.  It is what leads to legislative proposals like this one which seek to insulate consumers from the choices they make.

In California, the trust which was established to fund payments to victims of wildfires sparked by equipment issues at assets owned by PG&E may be running out of money. The financial impact of wildfires on PG&E has caused the value of PG&E equity to fall. This has impacted the investment results at the Trust which had a healthy chunk of PG&E stock as the source of funding for payments. A private sector result for a private sector problem.

Now it may become a public sector problem. The Trust is trying to make the case for why the State of California should lend the Trust $1.5 billion to fund payments. The State set up the independently-run Fire Victim Trust with $6.75 billion in cash and 477 million shares of PG&E stock. The stock can be sold to fund payments. For the victims to receive the full $13.5 billion it was agreed that they were entitled to, the trust must sell its shares for about $14.15 a share. The trust’s remaining 377.7 million shares were worth about $4.6 billion based on Tuesday’s market price. That would leave the trust about $1 billion short.

Some 20% of the shares have been sold but they have been sold at $12.09 and $12.04 a share. That is more than a two-dollar shortfall relative to the required average sale price. The Fire Victim Trust has paid out nearly $3.4 billion in claims so far. The idea of the loan is that it would fund payments without forcing the sale of more PG&E stock. The hope is based on the idea that PG&E will be able to begin paying dividends on its equity shares. That is projected to occur sometime in later 2023. The hope is that the resumption of the dividend will have appositive impact on the price of the stock and enable to Trust to meet its payout requirements and repay the loan to the State.

It is a problem despite the enactment of legislation in 2019 created an insurance pool that utilities could use to finance the payment of claims from large wildfires. The pool is funded by ratepayers and company shareholders; PG&E has said it plans to file the first claim, for $150 million, to cover a portion of the damages from last year’s Dixie Fire. The AB 1054 pool is limited to wildfires that occur in 2019 or later. That means that the victims pressing for payments for pre-2019 fires find themselves ineligible for payments.

PANDEMIC FUNDS SUPPORT STATE LARGESSE

It has become clear that the high level of assistance to the states from the federal government has created a real dilemma for state budget makers. It has been interesting to see that the real difference between the red and blue states is how this unexpected windfall is used. In New York State it generated all kinds of spending increases and a new stadium for the Buffalo Bills. In the redder states – taxes were cut as pandemic aid funded expenses. Then there are some examples that do not fit the template.

In Missouri, legislation has begun to move through the process which would see the State of Missouri pay its full share of public school transportation costs for the first time in two decades. The approved FY 2023 budget would be the State’s largest ever at $46 billion. The school spending is a way to provide aid to local districts as transit funding uses a different formula than basic school aid. This increases the number of districts receiving new aid. The theory is that money not spent on transit can remain in the instructional budgets of the local schools.   

Here’s where Missouri diverges. The spending increase for schools, along with a $500 million one-time payment to the state’s pension system represent real departures from prior budget processes.

TRANSIT TEST VOTE IN TAMPA

Hillsborough County, FL commissioners voted in favor of putting an additional 1% sales tax on the November ballot.  Now, the county’s voters will need to approve the tax in order for it to be effective. If the ballot does not approve the tax, it cannot be voted on again until 2024. Voters agreed to an almost identical proposal in 2018. That vote was overturned in the courts on a technicality by opponents of the tax. The new referendum language is designed to address the technical issues.

The vote is being driven by the Infrastructure and Jobs Act. The incremental new revenue is meant to support funding which would enable the County to address federal requirements requiring matching funds. A County commissioned report estimates the county could qualify for up to $229 million in federal grant funding. Given support for the concept in 2018, a vote in favor could be expected. The timing reflects fears from tax advocates that a 2024 approval would come to late in the competition for grants. The program will exist for a maximum of five years without reauthorization and funding.

The vote becomes a test as it will provide a reasonable window into the actual level of public support for infrastructure funding. The pandemic clearly did economic damage regardless of macroeconomic data. The change in office attendance and different demands on transit will have a yet to be understood effect. It is one to keep an eye on.

POSITIVE SIGNS FOR BORDER CREDITS

The recovery from limits on cross-border travel which diminished the value and volume of freight traffic at the northern and southern US borders continues. The US Department of Transportation reports that freight shipped across the U.S. borders with Canada and Mexico by all modes of transportation was valued at $112.5 billion in February 2022, down 1.1% from January 2022 ($113.7B) but up 17.3% from February 2021 ($95.86B) and up17.2% from pre-pandemic February 2020 ($95.95B).

Freight between the U.S. and Canada totaled $56.2B in February 2022, up 18.6% from February 2021 ($47.4B). Freight between the U.S. and Mexico totaled $56.3B, up 16% from February 2021 ($48.5B). Also in February 2022, trucks moved $69.2 billion of freight, up 16.3% compared to February 2021 ($59.5B), and railways moved $15.3 billion of freight, up 19.0% from February 2021 ($12.8B).

Our other primary take from this data is the need for transit planners, especially those for all forms of ground transportation, to acknowledge the role of trucks in moving goods and materials throughout the continent. Truck Freight had a value of $69.2 billion (61.5% of all transborder freight). U.S.-Canada truck freight was valued at $29.7 billion (52.8% of all northern border freight). On the Mexican border, Truck Freight was valued at$39.5 billion (70.2% of all southern border freight). That number will show how impractical Gov. Greg Abbot’s effort at state border inspections was (if it was not just a stunt).

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 year we see the effective convergence of holidays of three major faiths – Easter, Passover, and Ramadan. With so much to celebrate, we think that we could all use some time to rest and reflect. So, the Muni Credit News will take a week off. Our next edition will be April 25.

TIS THE SEASON

This year the relative financial cushion provided by the federal government to the states has made the budget process on its own less contentious than it has in the past. That is not to say that the process is smooth just that the outstanding budget debates are about policy not revenue levels. The various state budget debates seem to be moving along the same political lines as other issues.

New York represents one perspective. The unexpectedly favorable revenue influx reflects the fact that for the first time in decades the state received more federal money than its residents paid in federal taxes. That has framed the NYS budget debate in terms of what new services could be provided. In other states, the effort is being directed towards financing tax cuts. In either case, the fact that some three quarters of governorships are up for election in 2022 is driving the debates.

The latest example is Virginia. The Republican Governor wants to double the standard deduction on personal income taxes and eliminate state and local taxes on groceries. The Democratic state senate wants to eliminate the 1.5 percent portion of the grocery tax levied by the state but leave in place a 1 percent levy that goes to localities.

NEW YORK STATE BUDGET

One week late, New York State has a fiscal 2023 budget. It is a record setter at $220 billion. One year after the sky was falling fiscally, the budget speeds up the timing of tax cuts for the middle class. It also includes another record – the largest public subsidy for a stadium. The $600 million to be applied to a new stadium for the Buffalo Bills is due to be funded with monies from the State’s settlement with the Seneca tribe and its casino operation (January 31, 2022 MCN).  

As is always the case with the NYS budget process, a number of policy issues were addressed. They include significant increased spending for child care – $7 billion dollar investment over four years that will help subsidize child care for families who earn up to $83,000 for a family of four. It also funds some $350 million for increased childcare salaries. It does not include a statewide ban on new natural gas hookups. A tax break for the development of “affordable” housing in NYC was not renewed or replaced. Mayoral control of the NYC school system was not extended.

The budget would also allow the licensing of three casinos in New York City. It will likely expand the operations of two existing gaming facilities on the edge of the City. A third license is thought to go to a Manhattan location. Each new license is expected to generate $500 million.

A couple of provisions highlight the fact that this is an election year in NYS. A gas tax holiday from June through the end of 2022 was included. The sale of individual alcoholic drinks to go by restaurants and bars was renewed for three years. A higher minimum wage for home care workers is effectively funded by the State which reimburses many of those costs.

We view the budget as credit neutral in the short-term. The issue is whether the long-term spending trends baked in to this budget will be sustainable in the long run. Two items of interest to New York City remain – transit funding and public housing funding. The huge capital backlogs facing those two sectors represented by the MTA and the NYC Housing Authority still face daunting funding challenges for the nearly $100 billion of capital investment needs the two agencies have identified.

Let the election process begin!!

HOSPITAL MERGER

Colorado-based SCL Health, which operates eight hospitals and dozens of clinics across three states has received an opinion from the Colorado Attorney General that its proposed merger with Intermountain Healthcare does not violate Colorado law. The resulting entity will operate under the Intermountain name. SCL has about 16,000 employees and owns four hospitals in Colorado while Intermountain has about 42,000 employees and operates 25 hospitals, along with a number of clinics, in Utah, Idaho and Nevada.

Intermountain Health comes into the deal with a AA+ rating. It is likely that the merged entity will reinforce the benefits of size and consolidation.  The biggest public concern about the merger revolves around perceived improved pricing power at the merged entity. A 2020 report by the Rand Corp. found that SCL’s hospitals charge patients 187% of Medicare prices, on average. That was below the national average of 247%. The report found that Intermountain’s prices were 271% of Medicare’s.

The attorney general’s office did not evaluate whether the merger will raise prices at SCL’s hospitals in Colorado. It did opine that the merger would not change the charitable purpose of SCL Health and it would also not cause a “material amount of hospital assets” to leave the state.

The credit implications are clouded by the fact that Neither SCL Health nor Intermountain agreed, upon completion of the Merger, to assume any liability for or otherwise guarantee the debt of the other party.

BELIEFS VS. BALANCE SHEETS

Another side of the consolidation wave in the healthcare sector is playing out in southern California. In 2013, the California Attorney General’s Office approved the affiliation of then-St. Joseph Health System (now Providence) with Hoag Memorial Hospital Presbyterian (Hoag) in Orange County. In 2020, Hoag filed a lawsuit to terminate the affiliation as it was prohibiting the provision of abortion services. The settlement will allow Hoag to become an independent entity, and as part of the agreement, Hoag has committed to expand reproductive health services in Orange County. 

Now the fiscal impact of the disaffiliation is being felt at Providence. Moody’s downgraded the Providence credit to A1. Specifically, it cited the disaffiliation. PSJH disaffiliated with Hoag effective January 31, 2022, and the result was to reduce unrestricted cash and investments by $2.9 billion (23% of PSJH’s total), reduce debt by $573 million (just 8% of PSJH’s total), and reduce operating cashflow (proforma 2021) by $303 million (43% of PSJH’s total in 2021; in 2019 and 2020 the average was more typical at 14.5%). The reduced financial position in at least the short run is the price paid for the restrictions on services resulting from religious sponsorship.

PSJH remains a strong credit with a very large revenue base of over $25 billion; leading market share in all of its markets; The loss of financial flexibility during a very difficult operating environment generally does increase the vulnerability to factors such as significant and persistent operating pressures, variable utilization, and weaker liquidity (excluding Medicare advance payments and deferred payroll tax), pressure from payers, exposure to labor unions, material competition in many markets, the reliance on temporary labor, and persistent underperformance in certain markets.

SOUTHWEST CANNABIS

On April 1, New Mexico became the latest state to implement a retail system for recreational marijuana. Anyone 21 and older can purchase up to 2 ounces (57 grams) of marijuana or comparable amounts of vapes and edibles. New Mexico is the18th state, including neighboring Arizona and Colorado as well as the entire West coast, that have legalized pot for recreational use. That means that the US side of the Mexican border from San Diego to El Paso now includes legal recreational markets.

The entrance of New Mexico now positions a fully legal market on the Texas border. Unlike many other states, local governments can’t ban cannabis businesses entirely, though they can restrict locations and hours. Local governments will receive a minority share of the state’s 12% excise tax on recreational marijuana sales, along with a share of additional sales taxes.

The emergence of the market could put Texas back in the spotlight over the issue of marijuana. The lone Star State has long been an outlier in terms of its enforcement of marijuana laws.  

EMINENT DOMAIN

We’ve commented on the issue of eminent domain as it pertains to Iowa and its role in proposed regional carbon transmission pipeline developments. Under legislation passed by the Iowa House and is in front of the Iowa Senate, the Iowa Utilities Board could not schedule a hearing before Feb. 1 in which a carbon sequestration company is requesting the right to use eminent domain for a project. The proposed moratorium would take effect as soon as the bill becomes law.  The hope is that negotiations can be concluded in the open time window the legislation would establish.

In Iowa’s immediate neighbor to its south Missouri, the proposed transmission line is dealing with the same issues. A Senate panel was scheduled this week to hear testimony on a House bill which seeks to halt the Great Basin Express power line, which would carry wind energy from Kansas across Missouri and Illinois before hooking into a power grid in Indiana that serves eastern states.

While this process is playing out the private line developers have moved ahead with land acquisition. It claims that it has now completed voluntary right-of-way acquisition on 71% of the route in Missouri and Kansas. It has filed 12 eminent domain proceedings. Grain Belt Express said it is paying landowners 110% of the market value of the land and $18,000 for every transmission structure sited on their property. Iowa’s Agriculture Secretary has said he would “much rather” see the companies strike voluntary deals with landowners and the Iowa Utilities Board should be careful in considering private property rights before granting eminent domain for land seizures.

It is a process which will continue to play out as the nation’s transmission system is realigned to reflect the realities of how and where power can be most effectively produced. There is a consensus which supports the view that significant new transmission capacity must be developed to satisfy an “all electric” world. Transmission is at the center of disputes over the pace of individual solar development, the scale of industrial solar, and siting of windmills.

POPULATION PANIC

Interim data from the U.S. Census is showing that large cities experienced significant population declines in 2021. Combined with the emerging resistance to full time office attendance, such declines can be a real concern. Given the inherent flaws in the information used to allow Census Bureau models to estimate annual population changes the data may reflect temporary realities. We know from the pandemic experience that many of the moves were not necessarily permanent. Nonetheless, things like voter registrations, tax submissions, and mail changes did serve to contribute to the decline measurement.

The other side of the coin is that as the nation and its hot spots emerge from the pandemic that certain data looks positive. Rents in places like NYC are up significantly even before all restrictions were removed. One issue is that many of the renters who left often decamped to already owned second homes. In some cases, the pandemic merely accelerated some plans to move by families.

One other aspect of the urban population decline is the impact of more restrictive immigration policies over the recent 6-10 years. The reality is that large urban centers provide a relatively “safer” environment for many immigrants – legal and illegal. We also know that the population of largely legal immigrants was intentionally undercounted under the Trump Administration. That means that the data is essentially unreliable.

What would be of more concern are the actual socio-economic characteristics of the permanent departees. We know that the lower end of the economic spectrum took the biggest illness hit in places like NY, LA, Chicago. That may account for new data showing large numbers of sustained absences from the public school systems in L.A. (250,000) and New York (375,000). That would support a guess that many poorer people left dangerous jobs (like healthcare) and moved elsewhere

BANKS, FOSSIL FUELS, AND LEGISLATION

Texas has been most prominent in using litigation and legislation in an effort to punish those who believe in a future without fossil fuels. The State and its local governments are now restricted from allowing financial institutions which will not provide financing to the fossil fuel industry from participating in things like underwriting their securities.

While that process has attracted the majority of the market’s attention, another effort to achieve a similar aim advanced in West Virginia. The legislature recently enacted a law which directs the State Treasurer to publish a list of financial institutions engaged in boycotts of energy companies; publicly post the list and submit the list to certain public officials.

It authorizes the Treasurer to exclude financial institutions on the list from the selection process for state banking contracts; to refuse to enter into a banking contract with a financial institution on the list; to require, as a term of a banking contract, an agreement by the financial institution not to engage in a boycott of energy companies; limiting liability for actions taken in compliance with the new article; and exempting the Investment Management Board from the new article.

GAS TAX POLITICS

This week, legislation which would have suspended Michigan’s 27-cent-per-gallon tax on fuel for six months was vetoed by Governor Whitmer.

Interestingly, the bill would not have suspended the tax until 2023. The nonpartisan Senate Fiscal Agency estimated that the average driver in Michigan would save about $75 over six months had the bill been signed into law based on driving habits from 2019. This tax is in addition to the retail sales tax (6%) also imposed on fuel.

The Governor supports suspension of the 6% retail sales tax on gasoline. Legislative opposition is based on a belief that the sales tax suspension would cause the amount of savings to fluctuate with the price of gas, whereas suspending the state’s gas tax would be a constant 27-cent-per-gallon savings.

An opposite tack is being taken by Virginia’s Governor. Governor Glenn Youngkin has sent legislation to the General Assembly to suspend Virginia’s gas tax for three months. The Motor Vehicle Fuels tax (26.2 cents per gallon of gasoline and 27 cents for diesel) would be suspended in May, June and July before being phased back slowly in August and September. The annual adjustment to the gas tax would also be capped at no more than two percent per year.

New research by the American Road & Transportation Builders Association found that state-level fuel tax “holidays” do not necessarily result in significantly lower diesel and gasoline retail pump prices, nor deliver “big savings” to motorists. The association examined 177 changes in state-level gasoline tax rates in 34 states between 2013 and 2021 and found that, on average, motorists received just 18 percent of an any increase or decrease in the retail price of gasoline in the two weeks after a change took effect.

TRI-STATE TRANSMISSION IN ANOTHER FIGHT

A small electric distribution co-op is at the center of a dispute with the New Mexico city it serves. Socorro is a town of some 9,000 in eastern New Mexico. It gets its electricity from the Socorro Electric Cooperative under a franchise agreement which ends in 2024. The City has long disputed Socorro Co-op’s ratemaking methods which have been the subject of a state Public Regulation Commission review. That review orders Socorro to restructure its electric rates. 

That restructuring would require Socorro to lower rates to larger commercial and industrial customers while raising rates for residential and small commercial users. This led the City Council to offer a proposal to buy out the co-op. That was rejected by the co-op. Now, the City is planning to terminate the co-op’s franchise in 2024. The City contends that it would be able to better and more cheaply serve its needs through a municipal electric distribution utility.

That determination reflects negotiations which the City says can allow it to provide power to more customers at lower cost. These savings are based on negotiations with third-party power providers who could supply wholesale electricity through such renewable resources as solar generation at nearly 50% lower cost than the co-op. Where does the Socorro Co-op get its power? Tri-State Generation and Transmission. The City points out that Socorro pays 8.5 cents per megawatt hour to Tri-State, but the City can get “greener” wholesale power for just 4.5 cents.

PORT FEES AND THE ENVIRONMENT

The Ports of Long Beach and Los Angeles find themselves in the middle of any number of contentious situations. Many of them are tied to the perceived environmental impact of the ports and of the vehicles which service them. For years the ports have been under pressure to streamline and reconfigure operations to try to reduce the pollution coming from trucks transporting freight from the ports. The latest effort began this week.

The two ports began to charge a Clean Truck Fund Rate fee on cargo using the port which is not transported on zero-emission vehicles. Cargo that is not being transported on zero-emission vehicles is subject to the tariff, which is $10 per 20-foot-equivalent unit—the standard measurement for shipped cargo—and $20 for every container that is larger than that.

The fee is charged to the companies that own the shipments. The ports expect to generate $90 million in the first 12 months from these fees. The revenues will be used to fund purchases of emission-free trucks. Natural gas-powered trucks that emit low amounts of nitrogen oxides—also known as low NOx trucks—are exempted from the fee.

Each of the ports will levy slightly different fees.  For the Port of Long Beach, exemptions will last until either Dec. 31, 2034 or Dec. 31, 2037, depending on when the vehicle was purchased and registered with the Port Drayage Truck Registry. The Port of Los Angeles will sunset its exemption on Dec. 31, 2027.

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

________________________________________________________________

NYS BUDGET

The New York State fiscal year begins on April 1 and the Legislature is supposed to have approved a budget for the Governor to sign. Nevertheless, New York State has historically adopted a flexible approach to the budget deadlines as policy disagreements have often held up final budget resolution. One might have hoped that the wave of money that has been received by the State from federal pandemic relief funding would have lowered the tension.

This however, is New York and this year several policy issues are causing the State to miss its budget deadline as we go to press. None of the particular points of contention – gambling in NYC, the Bills Stadium (see our next section), bail reform, and mayoral control of the NYC school system – raise short-term credit concerns. In most cases, the Legislature is looking to spend more than the Governor on certain issues and there are real disagreements over the price tag for them.

There are concerns that in many states, the temptation will be to fund expanded spending and services which are affordable under present conditions. The question is where the funding will come from in the long-term when federal spending is reduced. While the particular issues in the New York process are specific to the State, the unfolding process is reflective of many debates underway in many state legislators. Whether it’s tax cuts or spending, the sustainability of underlying revenue assumptions will remain a key credit factor.

BILLS STADIUM TOUCHDOWN

State Senator Sean Ryan, a Democrat from Buffalo – “Subsidies for sport stadiums are a bitter pill. Nobody is happy about doing this, but this is the best deal we could expect under the circumstances.”

The Buffalo Bills are approaching the finish line of their efforts to get a new stadium largely funded with public money. New York State announced that it had reached a deal with the Buffalo Bills to use $850 million in public funds to help the team build a $1.4 billion stadium — the largest taxpayer contribution ever for a pro football facility. The deal calls for the state to finance $600 million of the construction costs. Erie County, the location of the existing facility and the new one is expected to finance $250 million. The remainder would be financed through a $200 million loan from the N.F.L. that was approved on Monday, plus $350 million from the team’s owners.

The state would own the stadium and lease it to the Bills under a 30-year commitment from the team to play in the new stadium. The timing is fortuitous. The state is comparatively awash in money (for now) and the deal is being brought for legislative approval four days before the start of the fiscal year. That will limit scrutiny and deal making in the budget process. The state funding would have to be approved as a part of the budget.

We think that the comments of State Senator Ryan pretty much sum up the deal. There was much criticism of the redevelopment plan which came to be known as the Buffalo billion undertaken under the Cuomo administration. That program was intended to reinvigorate downtown Buffalo and redevelop its waterfront. It ended in scandal and criminal convictions.

While those issues are not expected to impact this project, the proposed expenditures would make more sense if the stadium was part of downtown Buffalo’s redevelopment. The location of these facilities in the suburbs is a throwback to the mentality of the sixties and seventies which saw many stadiums located in suburbs.

A downtown location would make the largest expenditure of public money for any NFL stadium in the country more logical. In this case, building at the existing site just looks like an out and out subsidy to the owner.

This transaction comes just as some other aging stadium projects receive more attention. In Kansas City, the ownership of the Royals of MLB is actively discussing the replacement of their current stadium at the Truman Sports Complex in MO. That project is expected to be undertaken downtown in keeping with the trend that emerged during the 1990-2010 era of stadium replacements in downtowns. “The Chiefs and the Royals are under contract until at least (January) 2031.”

Given that the Chiefs of the NFL play in 50-year-old Arrowhead Stadium, they too are looking at a replacement. Being the sole facility at the Truman Sports Complex does seem to have much attraction to Chiefs’ ownership. In their case, they have broached the idea of locating on the Kansas side of Kansas City. That could set up an interstate competition of incentives. “Kansas City has proudly hosted the Chiefs since the early 1960s. We look forward to working with the Chiefs, our state of Missouri partners, and local officials to ensure the Chiefs remain home in Kansas City and Missouri for generations to come.” – Kansas City mayor Quinton Lucas 

It is easy to forget that NY Mayor Bloomberg wanted to build a stadium ultimately to house the Jets of the NFL in Manhattan. It was only after that idea was rejected that the current stadium in the NJ Meadowlands was built with essentially private financing. That is not likely the case in KC.

SOUTHEAST POWER

South Carolina Public Service Authority (Santee Cooper) may have extracted themselves from the Sumner nuclear debacle, the bill for it continues accrue. The state-owned utility can’t increase rates until 2025 under a rate freeze approved by the General Assembly when the Sumner expansion was abandoned. Now, the recent increases in gas and coal prices have put the utility in the position of having to carry increased costs at the same time it is legally restricted from raising revenues.

Santee Cooper must now find some $100 million of expense reductions to stay within the constraints of a limited revenue base. Officials suggested taking $30 million from operating and maintenance and $70 million from capital projects. That has negative implications for both current operations and future rate increase needs.  It comes as the utility faces $130 million in increased fuel costs.

Moody’s Investors Service has upgraded JEA, FL – Electric Enterprise (JEA) ratings as follows: the senior lien electric system revenue bonds to A1 from A2; subordinate lien electric system revenue bonds to A2 from A3, St. Johns River Power Park System (SJRPP) revenue bonds to A1 from A2, Bulk Power Supply System revenue bonds (Plant Scherer revenue bonds) to A1 from A2. JEA has been through a lot as it challenged the take or pay contract it entered with MEAG for a share of the expanded Votgle nuclear plant. JEA has also revamped the membership of its Board of Directors. These changes all occurred after the ill-fated attempt by some in local government to privatize the electric system.

Now a new board is seen as a credit positive factor. The litigation over the power purchase contracts has been resolved. This means that JEA’s most significant credit challenge is related to its indirect exposure to nuclear construction risk at the Plant Vogtle project through its 20-year Project J Power Purchase Agreement (PPA) with MEAG Power and the impact to the construction budget and the schedule owing to the multiple delays in construction completion which could now extend into Q-1 2023 and Q-4 2023 for Vogtle Units 3 and 4, respectively. There is some cushion in JEA’s relative rate position versus other utilities. JEA has plans to raise its rates by about 1.5% annually beginning in 2022 through 2026 to manage the increasing obligations under the Project J PPA.  

This improvement in JEA’s rating laid the groundwork for another utility upgrade. Moody’s Investors Service has upgraded Municipal Electric Authority of Georgia Plant Vogtle Units 3&4 Project J Bonds to A3 from Baa1, affecting approximately $2.10 billion of outstanding rated debt. The rating outlook has been revised to stable from positive. The settlement of the JEA litigation challenge to the PPA and the perception that JEA’s willingness to pay were no longer in question, the threat to MEAG’s credit posed by the potentially invalid PPA have been eliminated.

TRI-STATE SAGA CONTINUES

The latest shot in the ongoing battle between Tri-State Generation and Transmission Cooperative comes in the form of a study for the Federal Energy Regulatory Commission. FERC is reviewing the effort by Tri-State’s largest customer – United Power- to exit from its power purchase agreements. Those agreements call for the payment of an exit fee which is designed to cover a proportional amount of the fixed costs incurred by Tri-State.

Tri-State has been fighting efforts by its members to exit their agreements for several years. Tri-State is a primarily coal reliant utility. That and a price scheme which has produced rates higher than those of competitors have lessened support for buying power from Tri-State. As a part of the exit process, Tri-State calculates a contract termination payment, or CTP. Tri-State tallied the portion of the overall debt a cooperative is responsible for based on its revenues, plus the cost of all the electricity it would have bought between now and the end of the contract in 2050.

The distribution utilities do not contest some financial obligation to Tri-State for leaving. They do believe that Tri-State’s calculations generate fee estimates that are meant to make exit so punitive that the members will stay with Tri-State. That may change in light of the fact that the FERC study found that in the case of the largest local distribution coop which gets its power from Tri-State, the proposed exit fee of $1.6 billion was much higher than would be needed to pay off the distribution utilities share of Tri-State’s debt service requirements.

Two cooperatives — the Kit Carson Electric Cooperative, in Taos, New Mexico, and the Delta-Montrose Electric Association, in Delta — have already left. They paid exit fees. Kit Carson paid a $37 million exit fee in 2019 and DMEA paid $136.5 million in 2020.  The exit fees for both were about double their annual billings, not eight times annual billings as Tri-State is seeking from United Power. The risk to Tri-State is clear.

When S&P lowered Tri-State’s rating to BBB+ and revised its outlook to negative from stable, they were clear about the concerns the proposed withdrawals create. “We revised the outlook to negative to reflect our view that the utility faces more pronounced governance exposures following the initiation by three of Tri-State’s members of the two-year notice period for withdrawing from the utility… We believe the utility faces significant governance risks. Over more than a decade, three CEOs have struggled to placate members that are expressing dissatisfaction with the level of rates and the utility’s carbon intensity. The notices of intent to withdraw compound these risks.”

UBER CONTINUES ITS NEW COURSE

Fresh off its landmark agreement with New York City’s yellow taxis, Uber is seeking a similar arrangement in the City of San Francisco. This coming week, the San Francisco Municipal Transportation Agency will decide whether to approve a pilot program involving Uber and Flywheel, which operates an app used by hundreds of taxi drivers in San Francisco across several taxi companies to accept rides. Pending final approval by the city’s director of transportation, service could begin in early May.

The upfront cost that Uber charges customers to get a taxi through its app will not be required to be the same as a metered taxi ride.  This has raised some opposition from existing taxi drivers who will face the potential downward pressure on fares. The plan comes at a time when San Francisco has seen real declines in the number of taxis on its streets. Pre-pandemic there were some 1300. That number bottomed out at 400 during the pandemic and is now only slower recovering toa current level of 600.

We note that SF and NY also share something in common which may drive the need for these agreements. These two cities have the lowest rates of returns to the office among the largest US cities. They also are like many other large cities still dealing with pandemic-related population declines. In 2021, population declined in San Francisco by more than 6%; Boston’s Suffolk County 3%, with New York City and Washington, D.C., seeing drops of over 2%. Los Angeles County, Chicago’s Cook County, Miami-Dade County, Philadelphia, Milwaukee and Minneapolis were reduced by over 1%. That implies lower demand for these services that appears to be likely to be sustained.

VIRGIN ISLANDS

As we go to press, the US Virgin Islands was hopeful of completing the successful sale of some $920 million of securitized debt. The bonds would be secured by a pledge of Federal Excise Tax Revenues which are normally received by the USVI government. This transaction has created a sale of the USVI government’s right to these revenues to a special purpose corporation created for this purpose.

The Matching Fund Special Purpose Securitization Corporation will receive the federal excise tax collected on rum that historically supported Matching Fund Bonds. Debt secured by those funds will fund the redemption of all VI Public Finance Authority debt outstanding secured by matching fund revenues. This then creates a flow of funds which covers debt service and based on history will generate “residual” revenues which can then be applied by the USVI government to fund its pension funding requirements.

Rum taxes have financed government in the USVI since 1954 under the current arrangement so the revenue stream projected is based on a long history. All of the rum subject to the tax is sold in the U.S. minimizing the risks to distribution. The challenge was in insulating investors from ongoing financial stress for the USVI government. The asset sale structure helps to create an entity and revenue stream protected from any bankruptcy or similar action by the USVI government.

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

________________________________________________________________

WESTERN WATER

A wet December raised some hope that the long-standing drought in California might see some relief. Unfortunately, a very dry January quickly diminished that hope. Now, the drought in the West drags on. Water agencies that serve 27 million people and 750,000 acres (303,514 hectares) of farmland, have been informed that will get just 5% of what they’ve requested this year from state supplies beyond what’s needed for critical activities such as drinking and bathing. That’s down from the 15% allocation state officials had announced in January, after a wet December fueled hopes of a lessening drought. The January-March period will be the driest start to a California year at least a century. 

Lake Powell water levels dropped below 3,525 feet this week, or just 35 feet above the lowest level at which the dam can still generate hydropower. That is its lowest level since the lake filled after the federal government dammed the Colorado River at Glen Canyon in 1963. Lake Powell steadily filled with water before reaching full pool in 1980. Some 5 million customers in seven states — Arizona, Colorado, Nebraska, Nevada, New Mexico, Utah and Wyoming — buy power generated at Glen Canyon Dam.

The U.S. Bureau of Reclamation officials last summer took an unprecedented step and diverted water from reservoirs in Wyoming, New Mexico, Utah and Colorado in what they called “emergency releases” to replenish Lake Powell. In January, the agency also held back water scheduled to be released through the dam to prevent it from dipping even lower.

Even if the drought were to end and the lake could be fully refilled, the years of reduced flows have impacted storage capacity. Current storage capacity at full pool (3702.91 feet above NAVD 88) is 25,160,000 acre-feet. Compared to previously published estimates, this volume represents a 6.79 percent or 1,833,000-acre-foot decrease in storage capacity from 1963 to 2018 and a 4.00 percent or 1,049,000-acre-foot decrease from 1986 to 2018.

UBER’S NEW ARRANGEMENT

It was the stated goal of Uber to more than disrupt local transportation systems. We have written often about the issues arising from the “disruptive” playbook flaunting rules and laws followed by the transportation network companies (TNC). Prior to the pandemic, the competition against legacy transit modes (mass transit and taxis) put mass transit under enormous pressure. Once the pandemic hit, the demand for all sorts of public mass transit plummeted.

For a while, Uber was surviving essentially as a food delivery enterprise. Now with the recovery tentatively underway, oil prices have driven the costs for TNC drivers to levels which make the cruising around empty that some of those cars have to do uneconomical. While stepping away from driving might work for some drivers, the TNC business model relies on more not fewer drivers.

Now the disruption has shifted directions negatively impacting the TNC business model which relies on more not fewer fares. In NYC, Uber has announced that it has partnered with two taxi-centric tech companies to provide an app which would allow the city’s medallion taxi drivers provide rides. This marks the uniting of what were two groups with opposite interests.

The new Uber-taxi partnership in New York did not require the approval of the city’s Taxi and Limousine Commission, which oversees the taxi industry. Passengers can still wave down yellow taxis in the street or order them through two taxi apps, Curb and Arro, which offer upfront pricing like with Uber rides.

The benefit for Uber is that it integrates a competitor without directly limiting that competitor. It gives Uber more access to drivers and they do get a fee for every ride ordered through the app.

GAS TAXES

Maryland became the first state to enact an actual gas tax holiday. Maryland’s gas tax of 36 cents per gallon is now suspended for 30 days for both regular and diesel. A driver of a vehicle with a 12-gallon tank could save about $4.32 a fill-up. The legislation does not mandate that retailers reduce their prices by 36 cents. The state estimates it would lose about $94 million in revenue under the 30-day suspension.

Gov. Brian Kemp signed a law suspending Georgia’s motor fuel tax through the end of May. The measure would also abate Georgia’s taxes on aviation gasoline, liquefied petroleum gas and other fuels including compressed natural gas. Suspending collections could cost the state up to $400 million. The Governor expects to use part of the roughly $1.25 billion in leftover surplus from the last budget year.

A 2020 report from the American Road & Transportation Builders Association that analyzed 113 state gas tax changes enacted over several years found that only about one-third of the value of previous gas tax cuts or tax increases were passed on to consumers.

PANDEMIC IMPACT ON NYC SCHOOL FUNDING

The Mayor’s Preliminary 2023 Budget includes $30.7 billion in 2023 for the Department of Education (DOE), $1.3 billion less than the amount budgeted in the current year. The city’s traditional public schools experienced an unusually large decline of almost 38,000 students between the 2019-2020 and 2020-2021 school years, the largest decline in a decade, with an additional decline projected from 2020-2021 to 2021-2022. much of the enrollment loss experienced by traditional public schools last year occurred within the youngest cohort of students.

The DOE’s portion of the city’s Program to Eliminate the Gap (PEG) is $557 million of savings. The largest is a $375 million reduction in spending that stems— according to city budget documents—from a reduction in authorized headcount following enrollment declines at many schools. The savings result from a reduction in the number of city-funded positions allocated within the DOE’s general education instruction budget that are currently vacant. A portion of the headcount reduction resulting from the PEG is offset, however, by the reallocation of federal Covid relief funds from other areas of the DOE budget. Those funds will not be available after fiscal 2024.

CLIMATE, DISCLOSURE, AND THE SEC

The Securities and Exchange Commission proposed rule changes that would require registrants to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements. The required information about climate-related risks also would include disclosure of a registrant’s greenhouse gas emissions.

The proposed rule changes would require a registrant to disclose information about (1) the registrant’s governance of climate-related risks and relevant risk management processes; (2) how any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term; (3) how any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook; and (4) the impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements.

MEMPHIS AT THE CENTER OF CLIMATE DEBATE

The Tennessee Valley Authority (TVA) supplies Memphis and Shelby County with all of its electricity. Recently, TVA announced plans to replace coal fired generation with natural gas fueled plants. The decision seemed to fly in the face of the current Administration’s goal of reducing and eliminating fossil fuel fired generation. The decision comes as Memphis Light, Gas, and Water is evaluating whether to remain as customers of TVA of to pursue other options.

MGLW is not without options. MLGW has received 27 bids from the private sector on its electricity supply.  TVA has also appointed an officer to be located in Memphis to try to keep MLGW as a customer. Multiple studies, including a detailed one from an MLGW consultant, have shown the opportunity for substantial annual savings of more than $100 million if the city moves away from TVA.

Is it important to TVA? The Authority is offering funds for weatherization and the offer of purchasing MLGW’s power transmission system for about $400 million. It offers to move more than 100 employees into Memphis as part of a new regional headquarters and spend tens of millions on home weatherization and reducing energy burdens. It is estimated that some $1 billion of TVA revenues could be lost if Memphis leaves.

Memphis has also been at the center of a significant pipeline dispute. The pipeline would have connected the Valero oil refinery in south Memphis to Byhalia, Mississippi. Part of the pipeline would have passed through low-income Black neighborhoods in south Memphis, and there were fears the pipeline would contaminate the Memphis sand aquifer, where the city gets its drinking water if it leaked. Strong local opposition led to the project being abandoned by its sponsor.

Now, the Tennessee legislature is considering preemption legislation which would effectively limit local regulation and permitting of utility infrastructure. This puts Memphis at the center of issue like environmental equity and justice, climate change, and economic justice. No matter how the issues are decided, the results could have ratings impact. In August, 2020 Moody’s maintained its solid Aa2 rating on the electric system debt.

It noted that its long-term power supply contracts were a positive credit factor. “Challenges confronting the utility, however, include the below average socioeconomic profile within its service territory, uncertainty around its relationship with TVA moving forward and system reliability. That was before the issue of the TVA contract had really moved forward and before this winter’s storm which crippled the City’s transmission and distribution system for over a week. Now those concerns are real and the system’s ratings could take a hit.

PREPA RATE INCREASE

The Puerto Rico Electric Power Authority and LUMA Energy, which operates the transmission and distribution of PREPA’s electricity to the island, are currently seeking an increase of 4.265 cents per kilowatt-hour from the Puerto Rico Energy Bureau for the April through June quarter. This would amount to a 16.6% increase in rates. Gov. Pedro Pierluisi withdrew his government from PREPA deal that had been reached in May 2019 earlier this month, arguing it was too generous to bondholders and would increase rates too much.

It is not as if the spike in oil prices will make the already difficult effort to reach a settlement of the restructuring of PREPA’s debt any easier. Any such settlement will result in higher rates. It may be that the deal which the Governor rejected may be the best that could be obtained. Here is where the failure to reimagine Puerto Rico’s electric grid leaves the system vulnerable to fossil fuel price risk. The continued orientation towards a centralized generation and transmission system vs. the development of microgrids and more localized generation (primarily renewable) maintains that vulnerability.

PORTS

This week, Moody’s reaffirmed its positive outlook for the port sector. After a difficult period, attributable largely to pandemic factors, ports have begun to return to more levels of activity. Some have raised concerns about the impact of the war in Ukraine. Moody’s notes that the US and Russia have little direct waterborne trade. Russia accounted for less than 2% of all trade at US ports in 2021 as measured by value, according to the US Census Bureau.

Any impact is more likely to be seen on East Coast ports. Container trade between the US and Europe represents about 15% of total container volume for US ports.  One quarter of this trade is handled at the Port Authority of New York and New Jersey.

The cruise industry, having only recently begun to recover from the coronavirus pandemic, now faces pressure from a combination of higher fuel costs and weakened booking trends during this time of uncertainty. Bookings are strong for the second half of 2022. Cruise accounts for less than 10% of revenue for the US ports sector overall. Florida is an outlier in that regard. It is estimated that cruise ships are an important source of demand (25%-70% of revenue) for a handful ports in Florida and on the Gulf Coast.

POWER AUTHORITY DEBT FOR TRANSMISSION

Moody’s Investors Service has assigned an A2 rating to New York State Power Authority’s $569 million Green SFP Transmission Project Revenue Bonds. This is the initial financing for the two projects secured away from the NY Power Authority’s general credit. the repayment of SFP Transmission’s debt obligations derived solely from and secured by a pledge of revenue earned by the specific transmission projects’ assets.

Proceeds from the bond offering will be used to fund capital expenditures related to two transmission projects currently under construction, the Central East Energy Connect Transmission Project (CEEC) and the Smart Path Reliability Transmission Project (Smart Path).

CEEC is designed to increase electric transmission from Central to Eastern New York. It is approximately 36% complete (anticipated commercial operations in late 2023) and ownership is split between NYPA (37.5%) and an unaffiliated third-party (62.5%). The project will be managed by NYPA’s senior partner. NYPA is the sole owner of Smart Path and will manage that construction.

Smart Path involves rebuilding transmission lines that extend approximately 86 miles from the St. Lawrence Power Project’s Robert Moses Power Dam Switchyard to the Town of Croghan, Lewis County, NY and consists of 6 separate segments, 3 of which have been completed (about 64% complete) with full operation anticipated in mid-2023.

According to NYPA’s General Resolution, separately financed projects such as the ones under SFP Transmission will not receive any support from NYPA’s general credit, must be self-supported by pledged revenues, and pay for its own costs of operations. Moreover, there will be no cross default between the two entities.

MUNIS AND BIOFUEL

Cascade County, Montana is moving forward with the process of approving the issuance of $550 million of tax-exempt municipal bonds which would finance the construction of a renewable fuels refinery capable of processing renewable feedstocks into sustainable alternatives. The project would be adjacent to an existing oil refinery.

The renewable manufacturing refinery will be processing soybean oil feedstock into renewable diesel fuels. The company estimated that construction would begin in the fall of 2021 and the project would be completed by the end of 2022. The proposed project would have a production capacity of about 15,000 barrels of biodiesel daily.

The bonds would provide project finance and would be secured under loan agreements between the issuer and Montana renewables.

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

________________________________________________________________

REGULATION

Arizona lawmakers are advancing legislation backed by utilities to shift the regulatory duty governing the regulation of the disposal of toxic ash produced by coal-fired power plants from the U.S. Environmental Protection Agency to the Arizona Department of Environmental Quality. Proponents say that the legislation would require that the state’s rules be as strict as those of the EPA. So why the change from federal to state regulation?

The state regulatory history suggests that the utilities believe that they would have an easier time with state regulators given the history of wastewater regulation in the state. Environmental advocates cite that history in opposition to this bill. The state is seen as supportive of coal fired generation. It comes as efforts continue on the part of investor-owned utilities to stifle the installation of residential solar.

The move comes at the same time that the U.S. Environmental Protection Agency is proposing a plan that would restrict smokestack emissions from power plants and other industrial sources that burden downwind areas with smog-causing pollution. This would likely burden the four remaining coal fired generating plants still operating in Arizona. The EPA proposal would affect power plants starting next year and industrial sources in 2026. The plan would cover boilers used in chemical, petroleum, coal and paper plants; cement kilns; iron and steel mills; glass manufacturers; and engines used in natural gas pipelines.

Obviously, the impact of renewed and strengthened environmental regulation will impact unevenly on a geographic basis. The newly proposed rules would apply in varying degrees to 26 states, located mainly in the East and Midwest but also hopscotching to include Wyoming, Utah, Nevada and California, none of which was covered by the last major “cross-state” pollution rule issued more than a decade ago and updated six years ago.

The folks at Inside Climate News have put together a great chart showing where the coal demand comes from to generate power.

PREPA FIGHTS THE FUTURE

When Hurricane Maria destroyed much of Puerto Rico’s electric distribution and generation system, we saw the situation as a huge opportunity. We discussed the suitability of the island to derive power from renewable generation and the view that microgrids would go a long way towards addressing the twin issues of supply and reliable distribution. That view gained traction over the next 18 months and culminated in the enactment of Act 17 in 2019.

That law requires that 100% of the territory’s electricity come from renewable sources by 2050. The legislation also sets ambitious benchmarks along the way, including 40% renewable energy by 2025 and 60% by 2040. In February, the Biden Administration and the Commonwealth reached an agreement that would provide some $12 billion in Federal recovery and grid modernization funds.

Then reality hit. The management of PREPA showed itself again to be an agent of obstruction. Just a couple of weeks after the agreement was announced PREPA’s executive director, testified that “To say that in three years there will be 40 percent of energy production in a stable, commercial manner and in compliance with all the requirements in service, I really don’t see it viable.” PREPA’s executive director, said he expects Puerto Rico to obtain one quarter of its total electricity from solar, wind and hydroelectric by 2025. The territory currently generates just 3 % of its total power from renewables, according to the U.S. Energy Information Administration.

The Puerto Rico Energy Bureau in 2020 ordered PREPA to procure contracts for at least 3.5 gigawatts of renewable energy development and 1.5 gigawatts of battery storage by 2025. PREPA is more than a year behind schedule on the procurement process. Some two-thirds of the required contracts have yet to be fulfilled. This in the face of A 2021 study by the Institute for Energy Economics and Financial Analysis which found that rooftop solar could reasonably generate 75% of all of Puerto Rico’s electricity within 15 years.

SALT RIVER PROJECT AND NATURAL GAS

The Salt River Project finds itself in the middle of yet another debate about how to best serve its continually growing service area. SRP has already gained notoriety as an opponent of net metering as it hopes to stave off the impact of rooftop solar in its sundrenched service area. Now, it finds itself in the middle of the debate over whether natural gas can be a viable bridge to renewable generation and the concept of environmental justice or equity.

SRP currently operates a 12-turbine gas fired generation facility in Pinal County, AZ. It hopes to be approved to expand the plant with the addition of some 16 new turbines. The Arizona Corporation Commission (ACC) is the regulatory body reviewing SRP’s application. The Arizona Power Plant and Transmission Line Siting Committee recommended that the ACC approve the application.

Now the project needs the final ACC approval and SRP is implying that without this expansion the utility will face reliability issues as soon as the summer of 2024. SRP says that it must have an approval by the end of this month. The host community believes that the approval process is being rushed to avoid opposition.

SRP has made it hard to believe in recent years that it is committed to lower or eliminate its use of fossil fuels. Its insistence that gas is necessary in combination with its clear efforts to hobble solar on anything other than an industrial scale place make SRP one of the more obstructionist utilities. It is something that environmental or green investors should take notice of.

MONEY FOR NOTHING

Energy Harbor will exit the fossil business through a sale or deactivation of its W.H. Sammis Power Station in Stratton, OH and its Pleasants Power Station in Willow Island, West Virginia in 2023. These plants represent 3,074 megawatts (MW) of generating capacity. Energy Harbor already closed four of the Sammis plant’s seven units in 2020. It blamed impending federal wastewater regulations for those closures.

The Sammis plant was scheduled for closure this year until the infamous HB6 bill was passed. The bill was designed to support nuclear generation. It was however, cited as a reason to keep the coal-fired plant open. Energy Harbor could use the savings from the nuclear subsidies in the bill to keep other generation on line. The nuclear bailout was repealed last year after federal authorities charged ex-Ohio House Speaker Larry Householder and five others with using $60 million in FirstEnergy bribe money to secure the passage of the HB6.

HB6 was not repealed in its entirety. Ohio residents still pay surcharges to support the Ohio plant but also one in Indiana. Now, proposed regulatory changes at the EPA may make the two plants uneconomical. In January, the U.S. Environmental Protection Agency proposed denying requests by the two plants to continue using unlined surface ponds to hold coal ash.

The irony is that a lot of many was spent and careers destroyed by the lobbying effort to get the aid for the two plants. The ex-Ohio House Speaker, along with a former Ohio Republican Party chair, will go to trial next January. Three other defendants have pleaded guilty, and one committed suicide.

OIL AND ALASKA

The recent surge in oil prices has led revenue forecasters to increase their estimates of oil-related revenues expected to be realized in the fiscal year 2023 beginning in July. The relatively low prices of oil in recent years have pressured the State’s budget, This has led to significant expenditure cuts to basic services and reduced Permanent Fund payments to residents.

Now, forecasters at the Alaska Department of Revenue have raised the state’s two-year forecast of oil revenue by $3.6 billion. In the current fiscal year, which ends June 30, state revenue is expected to be $6.95 billion, an increase of $1.2 billion from the state’s prior estimate. In Fiscal Year 2023, which starts July 1, the new forecast is for $8.33 billion, up $2.4 billion from a forecast in December. 

Last spring, the Alaska Legislature approved a $5.3 billion budget. Now it is up to the Legislature to decide how much they can rely on the revised estimate. The Revenue department estimates oil prices at $101 per barrel, an increase of $30 from December. The Legislature is moving towards an $80 per barrel figure. At $80 per barrel, the state would collect about $6.7 billion in FY23.

PREEMPTION

In 2021, St. Louis County passed an ordinance requiring new buildings to include electric vehicle charging and for charging to be installed at existing buildings in the case of renovations or changes of use. The city of St. Louis passed similar legislation early last year with more details and exemptions for some types of businesses. Brentwood, a city in St. Louis County, requires all new or renovated homes to include electrical infrastructure for charging. 

Now legislation is being offered in the Missouri legislature that would, like so many similar efforts in other states, seek to preempt local regulation. The bill would prohibit cities from passing building codes requiring businesses to install chargers unless the municipalities pay. The St. Louis law required that newly-built or renovated residential, apartment and commercial buildings be “EV Ready,” meaning that they have the necessary electrical capacity and other infrastructure to easily install an EV charger.

Parking lots with more than 50 spaces would have to provide chargers on 2% of them, and 5% of the spots would need to be EV ready. By 2025, 10% would have to be EV ready. The legislation requires that businesses with smaller parking lots have one or two spaces that are EV ready or have a charger installed depending on their size. 

NUCLEAR

The Nuclear Regulatory Commission (NRC) informed Florida Power & Light Co. (FPL) that its two Turkey Point nuclear reactors must go through a full environmental review before the agency will allow them to run for an additional 20 years. The NRC originally signed off on the extension in late 2019, using what’s known as a generic environmental study. NRC will not issue any further licenses for subsequent renewal terms until the NRC staff … has completed an adequate National Environmental Policy Act (NEPA) review for each application,” 

The reactors had to be able to quantitatively demonstrate numerous performance metrics to show that the plant’s structural and protective integrity could withstand an additional 20 years of operations. The NEPA review will evaluate impacts on the environment including the potential impact on groundwater supplies.

The Nebraska Public Power District (NPPD) and Entergy jointly announced that they would end their near two-decade operating agreement at Cooper Nuclear Station. Entergy was contracted by NPPD to help the District address operating problems at the plant. It was some 20 years ago that federal regulators had given Cooper the lowest grade a nuclear plant can have while remaining open. NPPD now owns 100% of capacity and has the sole operating responsibility.

EMINENT DOMAIN FIGHT CONTINUES

A second effort to legislate regulations on the use of eminent domain to obtain right of way for pipelines in Iowa is underway. A bill has been offered which would states that the Iowa Utilities Board shall not grant any requests for eminent domain and that a pipeline company shall not seek or exercise any eminent domain rights until March 1, 2023. The bills are designed to try to stimulate negotiations between one project sponsor and landowners.

Summit Carbon Solutions has proposed a pipeline which would cross 680 miles of Iowa land across 29 counties. There are potentially 15,000 Iowa landowners in the pipeline’s path. Negotiations have secured easements on more than 100 miles of the proposed route in Iowa, and that agreements on another 70 miles are in the final stages.

The threat of eminent domain has been cited as an obstacle to negotiations. Without the threat of its use, eminent domain becomes less valuable as leverage for the entities building the pipelines. This typically forces them to spend more than they wanted to acquire rights of way.  The case is being made that the pipeline will increase the value of corn through ethanol enough to offset any negative impacts from the pipeline. But if the ethanol is for fossil fuel applications….?

ZONING

Connecticut will take a crack at the issue of zoning and its impacts on housing, transportation, and jobs. A new zoning bill would allow denser housing development around Connecticut’s train stations, with goals of making housing more affordable and providing easier access to transportation. House Bill 5429, backed by advocacy group Desegregate Connecticut, would require towns to allow housing with at least 15 units per acre within a half mile of a passenger, commuter rail or bus rapid transit station. At least 10% of the units would have to be designated as affordable.

If enacted, the law would take effect on October 1. It would significantly streamline the approval process by allowing developers to avoid the public hearing process to build in those areas. It fast tracks the decisions process on permit applications by requiring that they must be issued within 65 days of submission. Certain types of land are exempt from the requirement, including wetlands, steep slopes and areas necessary for protecting drinking water.

A 2017 law, 8-30j, requires towns to develop affordable housing plans every five years. The first is due in July. The politics of the bill quickly became clear. Less prosperous towns like New Haven and others see support for the bill. Communities like Greenwich and Westport are seen as opposing the bill over worries about property values. It’s not a new development. It is even predictable.

BERKELEY HOUSING – NEVER MIND

It only took eleven days for the CA legislature to enact the repeal of certain provisions of the California Environmental Quality Act (CEQA) after a court decision upholding requirements that housing proposed to serve the UC Berkeley campus would have had to meet was handed down. The University announced that it would have to rescind admissions to the campus by some 2,600 because of a lack of student housing. The proposed project was designed to address that.

The California Legislature voted unanimously to change the law, sending a bill to Governor Newsom, who quickly signed it. The decision had put the University squarely in the middle of a conflict between the need to offer more places at the school to improve access with limits on their ability to develop housing for those students.

The law Newsom signed is narrowly tailored to fix the specific problem at UC Berkeley. It did however, shine a spotlight on the impacts of the use of the environmental law to halt all sorts of projects. The issues cited by the opponents of the housing project focused on things like traffic and rents rather than on traditional “environmental” concerns. There is now at least some debate over whether the scope of the CEQA could or should be narrowed.

GAS TAX HOLIDAYS

The wide range of potential solutions to the spike in gasoline prices reveals a complete lack of consistency and highlights the political nature of the proposals. Massachusetts just rejected a gas tax holiday over the threat it posed to bond covenant compliance. New York’s pending budget would suspend gas taxes from May 1, 2022 through the end of the year.

The Maryland legislature is considering altering current law that started in 2013 which mandates the increase of gas taxes annually based on inflation as measured by the Consumer Price Index. The current inflation rate is 7.48%. Republican state lawmakers are pushing legislation to repeal that provision, or at least pause it for two years. The Georgia legislature is considering a suspension of its state’s gas tax for two months.

It is a topic of short-term value. The real answer would be to replace fuel taxes with mileage-based fees and drive demand away from fossil fuels. It’s a completely political answer to a question which needs a more nuanced response.

SEC FRAUD CHARGE

The Securities and Exchange Commission charged the Crosby Independent School District (Crosby ISD) in Texas and its former Chief Financial Officer with misleading investors in the sale of $20 million of municipal bonds in order to pay its outstanding construction liabilities and fund new capital projects. The SEC also charged Crosby’s auditor with improper professional conduct in connection with the audit of the school district’s 2017 fiscal year financial statements. The complaint charges that the District failed to report $11.7 million in payroll and construction liabilities and falsely reported having $5.4 million in general fund reserves in its audited 2017 fiscal year financial statements.

The Commission charges that the District knowingly included the false and misleading financial statements in the offering documents used to raise $20 million through the sale of municipal bonds in January 2018. In August of 2018, seven months after the offering, Crosby ISD disclosed that it was experiencing significant financial issues, including that it had a negative general fund balance. The following month, ratings agencies downgraded Crosby ISD’s bonds. 

As is often the case in situations like this, Crosby ISD agreed to settle the SEC’s charges by consenting, without admitting or denying any findings, to the entry of an order finding that it violated the antifraud provisions. The CFO greed to pay a $30,000 penalty and not participate in any future municipal securities offerings. The auditor agreed to be suspended from appearing or practicing before the SEC as an accountant with the right to apply for reinstatement after 3 years. They also agreed to not serve as the engagement manager, engagement partner, or engagement quality control reviewer in connection with any audit expected to be posted in the MSRB’s Electronic Municipal Market Access system until reinstated by the SEC.

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

PUERTO RICO BEGINS THE JOURNEY BACK

Puerto Rico is poised to undertake the first debt sale as part of its ongoing debt restructuring this week. The GO deal next week poses an interesting opportunity. I look at where the old debt was held and ask myself how many of those holders will be able to buy the new bonds. Do the insurers want to go through this again? Do investors have faith in the government without some supervision? Do you believe that the politics of the Commonwealth will change on a sustained basis? Will PR be able to make the kind of timely disclosure going forward? Will as many individuals who owned PR debt as retail buyers be willing to do so again?

It’s still a distressed situation so that will effectively keep many of the old buyers out of the deal. It would be surprising to see the level of retail ownership that existed prior to the default if only because the vehicles for retail ownership (bond insurance and bond funds) will face limits on their participation.

If the sale is considered a success, it would weigh positively on the PREPA restructuring but the PREPA debt remains in its own category as opposed to tax backed debt.

As for whether I would want to invest, there is no way to go longer than 10 years. I don’t believe that the government is committed to real fiscal reform and the resistance to oversight will continue. This is a credit for speculators and hedge fund type investors. At a price, they will be there. It’s time for mom and pop to move on.

PREPA RESTRUCTURING HITS A ROADBLOCK

The Governor of Puerto Rico and AAFAF’s executive director announced that the government of Puerto Rico has exercised its rights to terminate the restructuring agreement (RSA). The Governor characterized the Commonwealth’s objective as “conversations with all stakeholders to achieve a restructuring agreement that can be implemented.” The Ad Hoc Group asked the Court to appoint a nonjudicial mediator. The group hopes to retool the RSA to be able to be implemented without legislative action by the Commonwealth. It proposed that this specific creditor group be allowed to negotiate with PREPA.

The Court denied the Ad Hoc Group’s Motion insofar as it seeks an order requiring the Oversight Board to participate in, and PREPA to provide unlimited financing for, mediation focused on the interests of a particular subset of creditors under the provision of an RSA that AAFAF has purportedly terminated. The Court noted that “the RSA termination announcement presents the risk of a major setback in progress toward readjustment of PREPA’s liabilities.” Nonetheless, the effort to restrict the group of negotiating creditors raised issues of equity.

Overhanging all of this are deadlines looming in the fourth quarter of 2022. To address those deadlines, the Court ordered that the Oversight Board shall promptly meet and confer with AAFAF, the Ad Hoc Group, and all other major stakeholders and interested parties whose collaboration it believes is necessary to construct a viable basis for a plan of adjustment, to consider whether a consensual mediation arrangement can be entered into promptly to resolve key plan-related issues.

The Oversight Board shall file, by May 2, 2022, a proposed plan of adjustment, disclosure statement, and proposed deadlines in connection with consideration of the disclosure statement, plan-related discovery, solicitation and tabulation of votes, objection period in connection with the confirmation hearing, and proposed confirmation hearing schedule for the PREPA Title III case; or a detailed term sheet for a plan of adjustment or a proposed schedule for the litigation of significant disputed issues in PREPA’s Title III case, or a declaration and memorandum of law showing cause as to why the court should not consider dismissal of PREPA’s Title III case for failure to demonstrate that a confirmable plan of adjustment can be formulated and filed within a time period consistent with the best interests of PREPA, the parties-in-interest and the people of Puerto Rico.

It is not a surprise that the resolution of PREPA’s debt issues would be the most contentious. Only when an RSA can be completed and implemented will the real impacts of a restructured entity become clear. For now, the lack of a resolution holds off the worst fears of management and the workers for at least a little while. The Legislature needs to step up and be part of the solution.

PIPELINES

The Texas Supreme Court heard arguments in a case to determine whether a company has eminent domain authority to build a pipeline across private land to carry a product other than crude petroleum. In this case the substance is polymer-grade propylene (PGP). The issues are whether the pipeline would be a public use as required by the constitution, whether the pipeline company has statutory authority to condemn the property, and finally if the property is condemned, how it should be valued.

The dispute is as much economic as anything else. This not an environmental fight. The landowners have a history of successfully selling easements. Much of the argument centered on valuation issues. That said, it may be decided on non-economic issues by the court with a decision in favor of the landowners seen as a major weapon against eminent domain.

These cases are unfolding as the Tennessee legislature is considering bills which would limit the ability of localities to regulate the location of pipelines within their boundaries.

SOLAR BACKLASH

The effort to impose what are effectively economic penalties for customers who wish to install solar panels to generate energy. The ability of solar owners to sell excess power they produce to the legacy utilities which serve their area under so-called net metering arrangements have been crucial to development in the industry. A number of utilities across the country have made varying efforts to use economic disincentives to discourage or eliminate net metering even in sun drenched states like Arizona and Florida.

Now in Florida, legislation has been passed which would limit and then eliminate net metering. The legislation requires that solar customers pay all fixed costs of having access to transmission lines and back-up energy generation as determined by the Public Service Commission. Florida businesses and homeowners will have until December 2028 to install rooftop solar and receive any financial credit for selling excess energy back to their electric utilities

Starting in 2029, the PSC will impose new rules for how much solar users will be paid when they sell excess energy back to the grid, and how many fees they are charged to stay connected to the grid. That may require additional legislation as the newly passed legislation establishes no standard to guide that decision.

MUNICIPAL UTILITY PRICES

One of the arguments in favor of municipal utilities is their cost of service-based business model rather than a model designed to generate returns for investors. The theory is that the only “profits” a municipal utility would generate would be to fund necessary operation reserves and meet debt service covenants. According to the January 2022 totals released by the Florida Municipal Electric Association, the average residential bill for 1,000 kWh for a municipal utility in the state is $120.67.

The investor-owned utilities are unsurprisingly at the top of the list. Florida Power and Light Northwest and Duke Energy have average bills approaching $200. There is one exception to the rule – Gainesville, FL Regional Utilities. GRU average bills were some $154. That makes this municipal utility the third most expensive – public or IOU. This comes in the wake of a leadership shakeup at GRU which saw the general manager lose his position and the elimination of the chief operating officer position.

P3 FUNDING

Maryland’s troubled Purple Line project was approved for a $1.7 billion Transportation Infrastructure Finance and Innovation Act (TIFIA) loan through the Build America Bureau. The project had previously been approved for a $874.6 million TIFIA loan in 2016; this loan replaces and restructures the previous loan. The funding announcement follows the settlement of contractor issues for this major P3 project. The project also received an additional $106 million in funding through the American Rescue Plan to keep the project alive through the pandemic and the resolution of the contractor issues.

U.S. Department of Transportation also announced that the Build America Bureau provided a $1.05 billion low interest loan to Capital Beltway Express, LLC to refinance an existing loan for the Capital Beltway express lanes and construction of a northern extension called the 495 NEXT Project. This P3 project will extend the existing express lanes by 2.5 miles from the Dulles Access Road to the George Washington Memorial Parkway near the state line. 

The Bipartisan Infrastructure Law, signed by President Biden in November 2021, expanded project eligibility for the TIFIA credit program and extends maturity of the loans, giving borrowers additional flexibility. 

In Pennsylvania, PennDOT announced that Bridging Pennsylvania Partners (BPP) was selected as the Apparent Best Value Proposer to administer the Major Bridge Public-Private Partnership (P3) initiative to repair or replace up to nine bridges across the state. The Major Bridge P3 Initiative is designed to raise revenue through tolling on nine bridges located on Interstate highways throughout the Commonwealth. The department and BPP will now enter into a pre-development agreement to finalize the design and packaging of the bridges to be built, financed, and maintained.

CYBER SECURITY LEGISLATION

On 1 March, the US Senate passed legislation requiring critical infrastructure owners to report relevant cyberattacks to federal agencies. The proposed legislation would require that critical infrastructure owners and operators disclose a major cybersecurity incident to the Department of Homeland Security’s Cybersecurity and Infrastructure Agency within 72 hours and any ransomware payments to Cybersecurity and Infrastructure Security Agency (CISA) within 24 hours.

The legislation comes as utilities are considered to be vulnerable to possible Russian cyber-attacks in connection with its invasion of Ukraine. There is no one particular standard which governs what a cyber-attack target is required to disclose or to whom such disclosures must be made. One goal of the legislation is to provide a standard to address the inconsistency which flows from the lack of one. The thought is that a standard will encourage more fulsome and timely disclosure of events.

DETROIT CLIMBS BACK

Moody’s Investors Service has upgraded the rating on the City of Detroit, MI’s general obligation unlimited tax (GOULT) bonds to Ba2 from Ba3. The outlook remains positive. The city has about $2 billion of debt outstanding. The upgrade and maintained outlook reflect the real progress the City has made in terms of maintaining fiscal balance. It also follows the defeat last summer of a voter initiative which would have forced the city to incur hundreds of millions of expenses without a source of revenues to fund them.

The upgrade action acknowledges the structural weaknesses in the City’s credit – weak property tax wealth, volatile revenue structure, limited revenue raising flexibility and, the city’s significant leverage from debt and pensions. Pension costs remain the one area over which the City has little control. Moody’s lays out a view of what would drive another upgrade – robust revenue growth that makes rising fixed costs easier to accommodate; strengthening of full value per capita, median family income and population trends; accumulation of additional resources in an irrevocable trust to reduce budgetary risk of rising pension costs.

FRAUD, LOSSES, AND DISCLOSURE

The Fresno Bee reported that the city of Fresno lost about $400,000 in 2020 after falling victim to an electronic phishing scam.  The fraud involved the use of fake invoices which a city employee mistook for a real one and paid it.  There were two such payments. The issue isn’t one of fiscal solvency or short-term budget stress. After all, it’s $600K out of a $1.4 billion budget.

It does raise an issue for investors concerned with governance. The prior administration had been aware of the problem but chose not to disclose it either internally or to the public.  A new mayor was informed by the press.  Here’s the rub. The City reported the fraud to federal authorities but not to its City Council or its investors. It was put in the middle of its obligations to disclose material financial information and comply with requests from law enforcement. When the case was turned over from investigators at the Fresno Police Department to the Federal Bureau of Investigations, FBI officials asked investigators from the City of Fresno to keep the information from being disclosed to the public.

Now, the information was leaked to the press anyway.  More concerning are the comments of the mayor regarding other potential municipal victims.  FBI officials told Fresno City officials that the scam targeted “several municipalities across the United States who were victims” including one that lost twice the amount as that of Fresno.

AIR INDUSTRY CONTINUES TO RECOVER

U.S. airline industry (passenger and cargo airlines combined) employment increased to 733,491 workers in January 2022, 3,411 (0.47%) more workers than in December 2021 (730,080) and 16,848 (2.25%) fewer than in pre-pandemic January 2020 (750,339). The January 2022 figure is the highest industry headcount since the start of the COVID-19 pandemic. U.S. scheduled-service passenger airlines employed 450,065 workers in January or 61% of the industry-wide total. Passenger airlines added 5,285 employees in January for a ninth consecutive month of job growth dating back to May 2021. 

The January industry-wide numbers include 625,753 full-time and 107,738 part-time workers for a total of 679,622 FTEs, an increase from December of 3,765 FTEs (0.56%). January’s total number of FTEs remains just 1.71% below pre-pandemic January 2020’s 691,457 FTEs. U.S. cargo airlines employed 253,262 FTEs in January, up 478 FTEs (0.19%) from December. U.S. cargo airlines have increased FTEs by 18,048 (7.67%) since pre-pandemic January 2020.

ENVIRONMENTAL TAX IN PORTLAND

Measure 26-201 was approved by Portland, OR voters in 2018. Voters approved the tax to create the Portland Clean Energy Fund in 2018 as an ambitious way to tackle climate change and social inequities. It created a 1 percent gross receipts tax within the city limit. The tax would apply to retailers with more than $1 billion in national sales and $500,000 in Portland-specific sales. It would also include large service-based firms, including retail banking services. Supporters estimated the tax would raise approximately $30 million a year. City officials expected revenues of $44 million to $61 million annually. Businesses said it would raise far more than that.

It turns out that the businesses were right. This week, an audit from the City of Portland showed that at the end of the last fiscal year, the tax had generated more than $185 million since its inception.  Actual revenues were $63 million in Fiscal Year 2019-20 and $116 million in Fiscal Year 2020-21. That’s great from the point of view of a “social” investor.  From a governance standpoint, the situation has raised issues. The Portland City Auditor’s Office found the program has still out not finalized methods to track, measure and report its performance, as required by the 2018 ballot measure that created it.

The program had made progress with some elements, but othe­­­rs were not yet fully implemented or needed direction from City Council. The program did not report on whether its activities by grant category were consistent with target proportions in the legislation. The presentation of the recommended grants to Council used descriptions that were a mix of funding category and grant type. 

It is a weakness of several prominent efforts to devote public funding to efforts backed by limited notions of what constitutes accountability and transparency. The Thrive NY program led by former Mayor DeBlasio’s wife faced withering criticism over its lack of accountability and transparency. It is not the first time that Portland has been satisfied with less than adequate disclosure. It has in the past made the case that better disclosure is a choice between better information or public safety. For ESG investors, this stuff should matter.

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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OPIOID SETTLEMENT

The effort to recover some of the costs of the opioid epidemic has been settled.  The nation’s three largest drug distributors and a major pharmaceutical manufacturer announced a settlement in the litigation against the companies by states and localities across the country. The total cost to the companies: $26 billion.

The settlement will require Janssen, Johnson & Johnson’s pharmaceutical division to pay $5 billion. That payment will be broken into annual payments over nine years. McKesson, Cardinal Health and AmerisourceBergen, the distributors, will pay a combined $21 billion over 18 years. The settlement requires that at least 85 percent of the payments will be dedicated to addiction treatment and prevention services.

While the settlement is the second largest multi-state settlement to be reached, it did not turn into the next tobacco deal. The settlement announcement does indicate that it was approved by at least 90 percent of those governments eligible to participate, and 46 of 49 eligible states for the distributors and 45 for Johnson & Johnson. This settlement comes as additional litigation is either settled or moves closer to settlement.

An agreement arrived at earlier this year produced a tentative settlement with Native American tribes. It will not produce a substantial windfall for any of the tribes. The 574 federally recognized tribes could receive $665 million in payouts over nine years.  There could be more money available from the ongoing Purdue Pharma bankruptcy proceedings. That litigation, focused on the Sackler family, continues. The Sacklers recently increased their dollar offer in negotiations but may plaintiffs remain unsatisfied.

Washington, Oklahoma and Alabama are not participating. Oklahoma’s Supreme Court overturned a lower court’s $465 million verdict that concluded that Johnson & Johnson’s opioid marketing created a public nuisance in the state. Other court efforts have generated a mixed bag of rulings which may lead ultimately to U.S. Supreme Court review. These three states obviously believe that they can do better even though the experience to date might indicate otherwise.

That strategy may be vindicated by the announcement that a reworked settlement between the Sackler family which owned Purdue Pharma and the states had been agreed. That settlement came in the wake of the rejection of Purdue Pharma’s bankruptcy plan in December. The District of Columbia and nine states — California, Connecticut, Delaware, Maryland, New Hampshire, Oregon, Rhode Island, Vermont and Washington had rejected that earlier plan. Mediation talks between that group of plaintiffs and the Sacklers led the family to increase its proposed share of the settlement by $1 billion.

By holding out and conducting their own negotiations, the hold out states did generate increased payout to the states. At the same time, the Sacklers will pay out the new $1 billion over 18 years versus the nine-year timeframe established in the prior rejected settlement. It is well below what many thought would be the required payout and there is a fixed timeframe for payments. The hope that opioids would become the new tobacco in terms of supporting debt issuance will not be realized.

TRANSIT FUNDING

The federal Urban Mass Transportation Act of 1964 was enacted to develop and revitalize the country’s public transportation systems.  This Act, in part, allows state and local transportation authorities to obtain federal grants.  Urban mass transportation authorities created pursuant to this section receive federal grants administered by the Federal Transit Administration.  Receipt of these federal grants requires certification from the United States Department of Labor. 

Now to ensure that public transit agencies in West Virginia are able to continue to receive federal grants, House Bill 4331 has been introduced. The bill tweaks existing state law to make clear that labor unions are recognized by these agencies. To preserve this source of federal funds for urban mass transportation authorities, only for urban mass transportation authority employees whose public authority employer is a recipient of federal funds, the term “deductions,” as used under Chapter 21, Article 5, shall include amounts for union, labor organization, or club dues or fees.

NEW JERSEY UPGRADE

New Jersey continues its journey out of the credit wilderness as it reaps the benefits of federal funding and a recovering economy. This week Moody’s said it has upgraded New Jersey’s general obligation and Garden State Preservation Trust, NJ bonds to A2 from A3, and the state’s related subject-to-appropriation bond ratings also by one notch, to A3 from Baa1 for bonds financing essential-purpose projects and to Baa1 from Baa2 for bonds financing less-essential projects. What is essential? The essential-purpose appropriation financings include bonds issued by the New Jersey Transportation Trust Fund Authority and school construction bonds issued by the state’s Economic Development Authority. Less essential debt is issued by the New Jersey Sports & Exposition Authority. 

Much agency issued debt also benefitted from the State’s upgrade. The program ratings for the state’s aid intercept enhancement programs – the New Jersey Qualified School Bond Program and the New Jersey Municipal Qualified Bond Program -were upgraded to A3 from Baa1. The Liberty State Park Project Bonds issued by the New Jersey Economic Development Authority were affirmed at Baa1. Federal Highway Reimbursement Revenue bonds (GARVEEs) issued by the New Jersey Transportation Trust Fund Authority were raised to A3 from Baa1. The ratings on the bonds issued by the South Jersey Port Corporation were affirmed at Baa1.

The vast majority of the State’s debt is paid from monies that are subject to annual appropriation. That reliance on that mechanism, rather than the use of general obligation debt, has always been seen as a strong source of support for the view that failure to appropriate would be an act of fiscal suicide on the part of the Stater. It would undue all of the benefits of better pension funding which will still be a long term drag on the State’s ratings. The reversal of the trend of inaction during the Christie administration regarding pension funding and its role in the steady declines in the State’s ratings has clearly boosted the outlook for the State.

NYC BUDGET

The NYC Independent Budget Office has released its analysis of the proposed budget for FY 2023 recently offered by Mayor Eric Adams. It is the analysis of the economy that we find most informative. It highlights the benefits as well as the costs of the City’s dependence upon Wall Street and the many associated businesses that benefit from the economic activity the FIRE sector generates for NYC.

The first example concerns wages and personal Income. The city’s recovery in terms of aggregate wages and salaries has been much more robust than its recovery in total employment. The sectors experiencing the slowest recovery, and for which IBO projects employment will not have recovered by the end of 2026, have some of the city’s lowest average wages, while the sectors that are projected to recover the most rapidly have some of the highest average wages.

The leisure and hospitality sector and retail trade sector, for example—which lost the most jobs and are projected to have the slowest expected recovery—have average annual salaries of $54,700 and $57,300 respectively. Conversely, the information and professional services sectors, which have recovered much more quickly, have some of the city’s highest average annual wages, $144,500 and $181,300, respectively.

A second example is that of real estate. After a sharp decline in 2020 in the wake of the onset of the pandemic, real estate sales in New York City rebounded strongly in 2021. The total value of taxable sales rose 81.5% to $111.3 billion compared with 2020, with residential sales up 88.7 %, and commercial sales increasing 71.2 %. Residential sales were $68.1 billion, far exceeding the previous record of $55.4 billion set in 2017. That does not mitigate longer term concerns. the future of the commercial real estate market remains uncertain.

While many observers expect an increase in the number of workers returning to the office as 2022 progresses, the total demand for office space, particularly in “non-trophy” buildings, is likely to remain soft, and the continuing shift to online shopping will weaken the market for retail space. Retail spaces may face the most uncertainty. Storefront vacancies are the most visible sign of the impact of the pandemic. The role of the individually owned small retail business in the employment of non-college graduates in large cities cannot be overstated. The recovery of these sorts of businesses will be a key to resolving issues of unemployment especially at the lower range of the pay scale.

We recently documented the Mayor’s plan to eliminate projected budget gaps through headcount management. That would represent a real reversal from the DeBlasio years. IBO estimates that nearly half of the $5.4 billion in total savings proposed in the Mayor’s Plan to Eliminate the Gap (PEG) for the current fiscal year through fiscal year 2026 are achieved through headcount reductions ($2.5 billion). Headcount reductions of between 3,500 and 6,000 are projected annually. The primary method? Most of the positions proposed for elimination are vacant.

And there are the usual tricks. The reductions occur only with vacant positions, ones that agencies have budgeted for—but do not actually have staffed. In fiscal year 2023, nearly 1,800 of the city-funded positions eliminated in the PEG at DOE are restored with federal funds, with approximately 900 vacancies eliminated in the PEG in fiscal year 2024 restored with federal funds. The expiration of federal Covid-19 relief funds occurs in 2025.

The Preliminary Budget includes a budgeted full-time headcount for fiscal year 2022 of 306,291, a level similar to what it was prior to the onset of the pandemic. In fiscal year 2026, the final year of the Adams Administration’s current financial plan, full-time budgeted headcount drops below 298,000. This would be the lowest budgeted headcount since calendar year 2017.

REGULATION

In North Dakota, the Board of University and School Lands, better known as the Land Board, has been appealing to the North Dakota Supreme Court in a case with issues surrounding royalties from the development of state-owned minerals.  Those issues include deductions oil and gas companies removed from royalties to account for transportation and processing costs. The Land Board has for several years sought to collect those deductions following a favorable Supreme Court ruling in 2019 in a case involving oil producer.

House Bill 1080 was enacted last year. The law limited the length of time for which the state in the future could seek to collect unpaid royalties at seven years. That created a cutoff date of August 2013 that would apply to the money the state is seeking to recover from dozens of companies. Now, the Board has decided not to pursue collections from prior to that date. The Department of Trust Lands has estimated the state is owed $69 million in royalties from production before that date. 

NO TOLLS ON THE OHIO

Kentucky and Ohio plan to seek $2 billion in federal funds to help pay for the overhaul of the Brent Spence Bridge corridor near Cincinnati without using tolls. The money would come from the federal infrastructure bill that Congress passed last year which includes $17.5 billion in national grants for large projects like this project. It would retrofit the Brent Spence Bridge, which carries Interstates 71 and 75 between Covington, Kentucky, and Cincinnati, a nearby companion bridge, and work on approach roads on both sides of the Ohio River.

Unlike another major bridge project – the Ohio River Bridges Project, the Kentucky-Indiana bridges built in Louisville – this one will not use tolls. That would clash with the stated intent of the USDOT to encourage the role of user fees, aka tolls. The Kentucky General Assembly banned tolls on interstate crossings between Kentucky and Ohio in 2016. This will clash with the stated goals of encouraging public/private partnerships in the finance and execution of large transit infrastructure projects.

DETROIT

Michigan law requires that the City of Detroit to hold independent revenue conferences in September and February each fiscal year to set the total amount available to be budgeted for the next four years.  The latest forecast predicts a faster recovery for Detroit than the State overall. Resident employment will recover to pre-pandemic levels by the end of 2022. Meanwhile, jobs at establishments within the city boundaries will recover by early 2023. The City’s economy continues to grow through 2026 with blue-collar jobs leading the way. 

Recurring City revenues are forecasted to exceed pre-pandemic levels in the current fiscal year ending June 30, primarily due to stronger income tax collections and the implementation of internet gaming and sports betting last year. The City presented FY2022 General Fund recurring revenues projected at $1.087 billion for the current fiscal year ending June 30, up $23.8 million (2.2%) from the previous estimate in September 2021. General Fund recurring revenues for FY2023, which begins July 1, are now forecasted at $1.147 billion, an increase of $60 million (5.5%) over the revised FY2022 estimates. General Fund revenue forecasts for FY2024 through FY2026 show continued, but modest, revenue growth of around 2% per year on average.  

AIRPORTS

The data is on regarding airport volumes in 2021.  The volume of flights operated in 2021 (6.2 million), although more than 2020, was 78.1% of the volume of flights operated in pre-pandemic 2019 (7.9 million). In 2021, the 10 marketing carriers reported 6.3 million scheduled flights, 78.0% of the 8.1 million scheduled in 2019.  In December 2021, the 10 marketing network carriers reported 580,238 scheduled domestic flights, 13,773 (2.4 %) of which were canceled. In pre-pandemic December 2019, the same airlines reported 679,941 scheduled domestic flights.

At the same time, the industry is applying heavy pressure in light of the new guidance issued by the Centers for Disease Control and Prevention that relaxes many COVID-era policies – including indoor mask wearing. The U.S. Travel Association, the American Hotel and Lodging Association, Airlines for America and the U.S. Chamber of Commerce are appealing to the White House Coronavirus Response Coordinator to replace pandemic-era travel advisories, requirements and restrictions with endemic-focused policies.  

BEIGE BOOK

The Federal Reserve issued its latest view of the economy as the nation moves towards treating COVID 19 as an endemic rather than a pandemic. Several themes were consistent across all regions. Transportation costs (fuel), labor shortages, higher costs, and higher wages were noted across the board. Steady increases in prices are supported by demand. As retail activity increases and inflation remains high, the resulting rise in prices will contribute to higher sales tax revenues.

For NYC, the Fed reported that New York City’s residential rental market has picked up steam in recent weeks, as vacancy rates have continued to edge down and rents have accelerated. Rents have fully rebounded across much of the city. Commercial real estate markets were mixed but, on balance, slightly stronger. Office markets were mostly steady, with both office availability rates and market rents essentially flat throughout most of the District.

ELECTRIFICATION REALITIES

The effort to promote electrification of homes has run into some of the realities of the costs of electrification. Residents who lost homes in the Marshall Fire already faced issues in terms of costs and insurance to replace their lost homes. Many were confronted with the reality that replacing their homes and complying with new electrification requirements left many of the 1,000 impacted homeowners facing costs well in excess of the replacement values included in their homeowner’s policies.

One of the two communities most affected by the fire was Louisville in Boulder County. The Louisville City Council voted this week to direct city staff members to draw up potential changes in its building codes in the wake of the Marshall Fire for future vote. The changes would roll back building codes to the 2018 codes in place well before the fire for those whose homes were lost in the blaze, possible with a three-year time limit. In that process, the city gathered estimates of the costs of meeting the updated codes over what was in place prior to October with the 2018 codes. It found the extra cost for the construction of an average 2,800 square foot home was about $20,000.

The situation focuses attention on the cost of “green” building. As is the case with so many environmental issues, proponents often underestimate the cost to individuals of environmental regulation. It is one thing to require corporations to incur the extra costs, it is proving to be another to get support for imposing costs on individuals.

BERKELEY HOUSING DISPUTE AND COLLEGE ADMISSIONS

After the impacts of the pandemic on the demand for public universities unsurprisingly increased demand, it raised demand for housing as well. To address such increased demand at the University of California, UC proposed construction of additional residential facilities adjacent to its campus in Berkeley. This would have facilitated a student population of 45,000.

Now a local group with a long history of opposing university expansion of its physical plant has stymied the plans in court. The California Environmental Quality Act requires state and local agencies to study the environmental impact of construction projects before approving them. The group has obtained rulings in a suit under the CEQA which say that the existing environmental study is inadequate. UC recently asked for a stay of the initial lower court rulings on the matter while it is under appeal. The request was denied.

The real problem? UC Berkeley plans to begin mailing admissions offers on March 23. The university has said that it would limit those offers to 15,900 applicants if a stay was denied, down from its original allotment of 21,000 admissions offers for the next academic year. It occurs just as California has dedicated funding to expand enrollment by 5,000 full-time students at University of California schools and 10,000 full-time students at the California State University System.  

Pending legislation would exempt certain campus housing developments from the California Environmental Quality Act.  The shortage of housing in California especially “affordable” housing can be blamed on many factors. It is disappointing for advocates of smarter less impactful housing development to be stymied by opposition from the areas which would benefit the most. The university will try to reduce the number of new students it turns away, through encouragement of online enrollment and for some incoming students to delay enrollment until January 2023. California residents and transfer students from within the California Community College system will be prioritized for fall in-person undergraduate enrollment.

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

________________________________________________________________

ENVIRONMENTAL – CARBON CAPTURE AND EMINENT DOMAIN

The issue of carbon capture and its need for expanded pipeline capacity is an issue for landowners in several states. The proposal for three new pipeline projects and the need for those projects to acquire right of way from private landowners has moved the issue of eminent domain to the fore. Iowa has become the epicenter for that debate.

The debate in Iowa is pitting several interests against each other. The differences are highlighted in proposed legislation before the Iowa legislature. One bill would require that commercial solar installations not be placed on land that is rated as having high suitability for farming. It would also bar installations within 1,250 feet of the nearest residence. That bill made it out of committee. Another bill would have removed a portion of Iowa Code allowing utility companies to use eminent domain to condemn agriculture land.  That did not make it out of committee.

A third bill would restrict land purchases by the Iowa Department of Natural Resources and county conservation boards. The proposal, would cap purchase prices between 65 and 80 percent of the fair market value, depending on the parcel’s potential for farming. The underlying issue is that the sponsors of the bill want to delay the move away from fossil fuels thereby preserving the market for ethanol. After all. Iowa is the nation’s largest corn producer. That’s why the bill made it out of committee.

JUST TRANSITION – WHY IT WILL BE HARD

Legislation has been introduced in the California Assembly which would create a state funded program to transition oil industry workers to jobs producing green energy in the state. It seeks to act on the concept known as Just Transition. It is easy to forget that in environmentally conscious California, about 112,000 people are employed in California in fossil fuel-based industries. That was some 0.6% of the total California workforce in 2019. Over 70% of workers in the fossil fuel sector have employer-provided health insurance, 65% receive retirement benefits and union membership levels are at 23%.

Average salary figures in this analysis include all salaries – even that of the CEO – but they still provide a comparable indicator. Fossil fuel jobs have an average overall compensation of $130,000 (including CEOs, lawyers and frontline workers,) compared to $97,000 for solar industry workers, who are the highest paid workers in California’s clean energy sector. The jobs also address one group: Of all workers, 65% have less than a Bachelor’s degree (30% have a high school degree or less, 35% have some college or an Associate degree).

The legislation does not specify a spending figure. Union research has come up with a number of $470 million annually. Their goal is to encourage steady annual reductions in production and jobs versus three specific cut years between now and 2030. They estimate that If the fossil fuel sector should close in three large episodes (for example in 2021, 2026 and 2030) with one-third of job loss each time, then in each episode, 4000 workers would voluntarily retire, 2800 workers close to retirement (age 60- 64) would be provided with a glide-path to retirement, and 12,500 would require re-employment. It would raise average costs $833 million.

The most interesting aspect of the reaction to the bill is that it has split the response from labor. The debate reflects the clash of goals as the climate change response unfolds across the country. The coalition of unions (teachers and municipal workers) which produced the research cited here is opposed by those in the industry directly (Ironworkers, electrical workers and Teamsters). Those unions want the state to provide them employment directly through state financed infrastructure projects. Traditional, big ticket stuff.

VOTGLE DELAYS AGAIN

Southern Co. has announced another delay for the startup date for Plant Vogtle’s first reactor until early 2023 and moved the date for the second one to later that year.  The cause of the delay is paperwork. critical inspection records were missing or incomplete. The volume of missing or incomplete documents is causing a delay of three to six months in the compliance approval process. Southern said. That additional time is costing $920 million.

Based on a 2018 agreement, the extension of the schedule requires the electric other participants companies to officially vote whether the project should keep going. Southern has already approved continuing. Oglethorpe Power Corp., the Municipal Electric Authority of Georgia (MEAG) and Dalton Utilities must decide by March 8. The decision facing these municipal participants is likely to depend on the shape of cost sharing going forward.

The 2018 agreement establishes financial benchmarks which determine how much of the cost of additional delays is to be retained by Southern given its role as project manager. The owners do not agree on two things: whether the monetary benchmark that would let the other developers tender a portion of their ownership share in megawatts in exchange for not paying anymore for Vogtle has been reached, and how much Covid-19-related costs played a role. As to the latter, Oglethorpe is pretty clear – “The co-owner agreement is very clear that force majeure related costs (including COVID) have no impact on [this] provision.”

THE BATTLE AGAINST RENEWABLES HAS A GAME PLAN

The folks at the American Legislative Exchange Council (ALEC) are at it again. The conservative group is known for creating “model legislation” which it provides to supportive legislators across the country. They have campaigned against government employee unions among other things. Now, ALEC is taking its playbook on the road in the fight to stymie the growth and adoption of renewable energy.

Some form of the Affordable, Reliable, and Resilient Electricity Act would require an “electric utility regulatory agency to develop rules and procedures promoting an affordable, reliable and resilient electric grid that meets peak net load and peak demand, including during extreme weather events.” How could that be bad? Well, the legislation goes on to include provisions clearly designed to impede the adoption of renewables.

“Generation resources serving the grid meet continuous operating requirements for summer and winter peaks, including extreme weather events that necessitate on-site fuel storage, dual fuel capability, or fuel supply arrangements to ensure winter performance for several days. Intermittent generation shall be required to provide firming power up to their average output level during periods of peak net load, and the cost of that firming shall be attributed to or otherwise included in the rate structure consistent with cost-causation principles.”

The intent could not be clearer. The bill is also designed to make heretofore uncompetitive fossil fueled generation more competitive by the worst of methods – artificially driving up the cost to competitors.  “Reliable” according to ALEC means that load shedding events are extremely rare and that there are no system wide power shortages or brownouts for more than a few hours once every 10 years. By that metric, the fossil fueled utility that supplies my power fails the test so that must not be the goal.

FARE ENFORCEMENT CHALLENGED IN WASHINGTON STATE

The Washington Supreme Court heard arguments in an appeal from an individual arrested on outstanding warrants discovered through the process of enforcing fare payment on Seattle’s mass transit system.  Fare enforcement is being challenged on grounds that it discriminates against the poor and people of color.

The issue of transit fares and enforcement has risen to the fore through the pandemic. The pandemic has been the basis of decisions to suspend fares, collection, and enforcement as agencies try to help cope with limits and impacts of the pandemic across the country. This litigation argues that enforcement at other than the point of payment is illegal. The system referred to is commonly used across the country requiring either purchase of a ticket (presentable on demand) or through use of one’s smart phone.

While the case will be decided under state law, the implications of a decision against fare enforcement could be far reaching. Advocates for free transit have been hoping that temporary responses to the pandemic will become permanent. Should fare enforcement be found to be illegal, transit systems will face the issue of revenue shortfalls as paying customers would likely soon join with other riders not paying the fare.  The Seattle system has lost some 50% of its patronage during the pandemic. At the same time, it is undertaking a program to address “non-destinational riders”. Predominantly homeless passengers who have mental health or drug problems.

RURAL POWER CHALLENGES

The same economics that impeded the development of the nation’s electric grid in the 20th century continue to play out as rural electric providers deal with their unique costs related to the unconcentrated nature of their customer base. As individuals increase their installation of solar panels and utilities deal with the cost of transmission and maintenance, the utilities are targeting solar power development to generate additional income even though they provide less service.

It is part of what is driving the industry response which increasingly relies on fixed charges for electric service rather than having revenues based on kilowatt hour sales. One recent example raising the ire of customers comes from rural Colorado. The Sangre de Cristo Electric Association in Colorado serves some 13,000 customers across four counties. Many of its customers are low consumers of power and are also installing solar panels. They sell the power they don’t use back into the grid under what is known as net metering.

The vast majority of customers are residential and some 40% are second homes owners so their electricity use is lower than one might expect. If those customers install solar, the base of remaining standard use customers shrinks and revenue is impacted. So, this co-op has decided to raise fixed charges on a monthly basis from $31.83 to $46.15. At the same time, it will reduce the cost of a kilowatt hour by from 1 to 5%. The co-op also plans to commence time of day pricing to raise the cost of electricity in the hours between 5 and midnight.

It is a pretty blatant effort to suppress individual renewable energy production. The $46.15 monthly service charge ranks as the highest among the 24 large and small electrical co-ops in Colorado.  The cutoff point for determining the level of fixed charges in 590 kwh. Members who have solar panels on their homes find themselves pushing energy back onto the grid during the day, but since their use falls below 590 kilowatt hours a month, they will pay more for the power they use at night.

That’s on top of an increased fixed fee for service. Some of this reflects the longtime tension between “natives” and newcomers which have characterized life in Colorado for years. Some natives who use lower amounts of power for economic reasons will be lumped in with second home owners and see their bills actually increase. Is this good policy?

 Colorado’s 2008 net metering law that requires cooperative electric associations to credit solar-paneled homeowners with 1 kilowatt hour for every kilowatt hour they add to the grid. The legislation was designed as an incentive for homeowners considering solar panels.  In contrast, Florida’s net metering law specifies that “public utility customers who own or lease renewable generation pay the full cost of electric service and are not cross-subsidized by the public utility’s general body of ratepayers.”  

STADIUM FINANCE BACK AS AN ISSUE

A March 2020 study published in the National Tax Journal estimated that the federal government had lost $4.3 billion in revenue as a result of tax-exempt municipal bonds used for stadium construction since 2000. Now, those numbers are being cited in support of legislation to deny tax-exempt financing for stadiums. Three long time antagonists in the House have joined together to sponsor the “No Tax Subsidies for Stadiums Act”.  

The tax expenditure number pencils out to an average tax loss (or tax expenditure) of $215 million per year for the twenty-year period. The real reason for the move is in response to the ongoing investigations and scandals regarding sexual harassment at the Washington NFL franchise. It is known that the team’s unpopular owner is considering locations in the greater D.C. metropolitan area.  Many regional politicians seek to make any new stadium project as difficult to accomplish as possible. In the end, the hope is that the owner will sell the team.

It is not a major campaign issue now but the quest by the owners of the Buffalo Bills to develop a new stadium may become one. It is one of the oldest NFL stadiums at nearly 50 years old. The Bills play at the stadium under the terms of a ten-year lease to stay in Buffalo until 2023. Ownership has estimated $1.4 billion for a new stadium in Orchard Park with the majority expected to come from taxpayers.

The hope among Bills fans is that the election of Gov. Hochul to a full term will help drive a deal for the new stadium. She is after all, from Buffalo.

DROUGHT ISSUES

Lake Powell is the second-largest reservoir in the U.S. In order for the hydroelectric generation plant constructed as part of the dam to operate, the lake must maintain a water level that is at least 3525 feet above sea level. At this time last week, the lake elevation was at 3529 feet, just four feet above the critical level. Now, to address the low water condition stemming from the long term drought in the American West, a new plan will be implemented.

The states in the Colorado River drainage area agreed to the Congressionally approved 2019 Drought Contingency Plan. The agreement includes the provision that if Lake Powell is projected to possibly drop below 3,525 feet, the states upstream of the river will have a plan in place to send more water to Lake Powell. That water will likely come from three other reservoirs – Flaming Gorge on the Utah-Wyoming border, Navajo in New Mexico and Blue Mesa in Colorado. 

The process shines an even brighter light on the role of water as an economic development and survival issue in the West. Blue Mesa was significantly drawn down in 2021, and the reservoir — Colorado’s largest — hit its lowest level on record by the end of the year. The data from the U.S. Bureau of Reclamation shows that Lake Powell could pass below the critical 3525 foot level by the fall of 2022 if conditions remain historically dry. The short run impact will be on economic activity related to the reservoir. In the longer run, Blue Mesa wills serve as a real example of the competition among a wide range of water users.

The importance of hydro power is highlighted by data from the California Energy Commission. The CEC estimates that in 2020, 34.5 % of the state’s retail electricity sales were served by Renewables Portfolio Standard (RPS)-eligible sources such as solar and wind. When sources of zero-carbon energy such as large hydroelectric generation and nuclear are included, 59 % of the state’s retail electricity sales came from non-fossil fuel sources in 2020. 

That is a drop from the prior year. In 2019, over 60 percent of the state’s electricity came from renewable and zero-carbon sources. The decrease in 2020 is due to decline in hydroelectric generation caused by severe drought, as well as pandemic-related delays to new renewable energy projects. A nearly 20 percent decline in large hydroelectric generation compared to 2019 was a major driver.

In the Pacific Northwest, the Columbia River Basin contains more than one-third of U.S. hydropower capacity and generates enough electricity to power over 4 million homes. The U.S. Energy Information Administration (EIA) estimates that while some snow conditions remain below normal that 17% more electricity generation from hydropower will be available in the Pacific Northwest in 2022 compared with 2021.

EIA estimated that hydropower generation in 2021 fell by 10% in the Northwest and by 9% in the entire U.S. compared with 2020. In its February STEO, EIA forecast that U.S. hydropower plants would generate 278 million MWh of electricity in 2022, half of which would come from the Northwest. This would be an 8% increase in U.S. hydroelectric generation from 2021. Overall, EIA said it expected hydroelectricity to account for 7% of total U.S. electricity generation in 2022.

INDIAN GAMING AT THE SUPREME COURT

The Restoration Act of 1987 established a federal trust relationship with the two Texas tribes – the Tigua (the Ysleta del Sur Pueblo) and Alabama-Coushatta. The legislation included a provision barring the Tigua and Alabama-Coushatta from conducting gambling prohibited in Texas. The Tiguas own and operate the Speaking Rock Entertainment Center. Games offered include traditional bingo and electronic machines that resemble casino-style slot machines and are based on bingo principles.

The State of Texas has sought to limit the tribe’s casino operations on several occasions gaining favorable rulings from the U.S. Fifth Circuit Court. A 1994 5th Circuit Court of Appeals decision known as Ysleta I held that federal law prohibited gambling on Tigua (also known as Ysleta del Sur Pueblo) and Alabama-Coushatta land. The 5th Circuit rulings have meant that the Tigua and Alabama-Coushatta tribes of Texas are the only Indigenous people in the United States without a recognized legal right to offer gambling. For the Tiguas, the casino is the primary source of funding to the tribe and its provision of services for education, housing, and health.

The Tigua argue that the Restoration Act does not allow the state to regulate tribal bingo, the basis of the games it currently offers. The U.S. Department of Justice has reversed the position of the prior administration that supported the 5th Circuit rulings. Now, DOJ is being asked by the Court to weigh in on the matter. In the immediate term, that allows the entertainment center to continue to operate. The new Supreme Court order does not give the Justice Department a deadline for filing a brief. The step will cause the appeal process to be extended by several months.

HYPERLOOPS

While some localities consider hyperloops or some variation of them for their transit needs, the concept is slower to gain acceptance generally. The latest example comes from Texas. The North Texas Regional Transportation Council (RTC) recently revised its policy on developing a high-speed corridor to focus solely on high-speed rail, eliminating plans to build hyperloop tech into the corridor. The RTC is seeking to build a high speed connection from Dallas to Fort Worth.

The announcement reflected the concerns that many have with the hyperloop concept.  The Commission’s lead planner said “hyperloop is still a developing technology with no clear path to approval, and including it in the corridor’s plans could delay development.”

PUERTO RICO

The Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) authorizes the Oversight Board to approve and amend Puerto Rico government spending independent of the legislature’s actions. Those provisions anticipated the delaying tactics and outright noncooperation on the part of the Puerto Rico Legislature. Now that the Legislature has failed to pass the necessary authorizations to balance the budget and pay debt service, the Board must act on its own.

To that end, the Board has approved a $23.5 billion General Fund budget for the current fiscal year. The budget provides some $1.09 billion of current year revenues for debt service. The payments will be used to cover debt service on general obligation capital investment bonds, capital appreciation bonds, Sales and Use Taxes Contingent Value Instruments, and rum cover tax Contingent Value Instruments. Mindful of the politics of pensions, the approved budget includes $1.42 billion to be contributed to the government’s pension trust and $1.3 billion to active and retired government employees who never received their investments in the Systema 2000 pension system.

Other categories of debt remain to be restructured. The Highway and Transportation Authority has some $6 billion of outstanding debt. The Board has recommended that tolls on the Authority’s facilities be raised. The recommended toll hikes would result in increases of 8.3% each year fiscal 2022 to fiscal 2024 and then they should increase by the inflation rate plus 1.5%. That may be a hard political lift given that tolls have not been raised since 2005. The PREPA restructuring remains incomplete. The Board is expected to submit its proposal for a Plan of Adjustment for the PREPA debt by April 15.

UPDATES

Last week, we commented on a proposed bill which would have provided financial incentives to communities willing to adopt state standards for renewables siting. The bill had support from a number of constituents. Nonetheless, the bill is advancing through the legislature without the funding provision. The issue seems to be the lack of a dedicated source of funding for the plan. The bill in its current form establishes minimum statewide standards for commercial renewable energy system siting for communities that choose to adopt them.  It makes no mention of funding.

New York’s MTA reported its highest daily patronage last week as ridership exceeded three million.

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

________________________________________________________________

P.R. LITIGATION

Challenges to the Plan of Adjustment in the Puerto Rico Title III proceedings have been expected and predictable. Two appeals have been made to the U.S. District Court for Puerto Rico and arguments have been submitted. One is Puerto Rico-based credit unions and the other is the Teachers Union. For arguments, the issues in the two cases have essentially been combined. The teachers and the credit unions want to have the court issue a stay against the implementation of the plan.  They are asking for time to pursue appeals in the Court of Appeals for the First Circuit. While located in Boston, this is the traditional forum for litigation involving the Commonwealth.

The predictability of litigation like this was quite strong. It was a question of which group or entity would file an appeal. In prior decisions, the presiding judge in the Title III proceedings has ruled on claims of illegal takings by the Board. The main thing this accomplishes is delay. We do not see it changing the ultimate outcome of the Title II process. The bondholder creditors and the Oversight Board had hooped to move forward with implementation of the Plan and its refinancing by March 15. This litigation will likely delay that.

In the meantime, the actions of the Puerto Rico Senate in refusing to act on legislation needed to amend the Commonwealth’s budget just reinforce the view that the political establishment still does not understand their situation. The politicians try to portray this as just the normal course of politics when it is actually just another example of why the market remains highly skeptical about the ongoing willingness to pay even its restructured debts.

It’s hard not to look at Puerto Rico as a credit and then look at the ongoing debt problems of Argentina where political will has always been the issue in its IMF debt dealings. That is not a place which Puerto Rico should aim to aspire to.

PLANT BASED BUT NOT GREEN

A study, funded in part by the National Wildlife Federation and U.S. Department of Energy, found that ethanol is likely at least 24% more carbon-intensive than gasoline due to emissions resulting from land use changes to grow corn, along with processing and combustion.  In 2005, Congress enacted legislation creating the U.S. Renewable Fuel Standard (RFS). That legislation requires the nation’s oil refiners to add some 15 billion gallons of corn-based ethanol into the nation’s gasoline annually. The policy was intended to reduce emissions, support farmers, and cut U.S. dependence on energy imports.

That law spurred the issuance of tax-exempt bonds to fund ethanol refineries. These were issued primarily in the high yield market. Those refineries competed to process local corn into ethanol. Corn cultivation grew 8.7% and expanded into 6.9 million additional acres of land between 2008 and 2016. For ESG investors, it is important to note that the study showed corn planted for ethanol increased annual nationwide fertilizer use by 3 to 8%, increased water quality degradants by 3 to 5%, and caused enough domestic land use change emissions such that the carbon intensity of corn ethanol produced under the RFS is no less than gasoline and likely at least 24% higher. 

In reality, the oil companies hate the rule and consumers appear agnostic. In terms of other negative impacts, corn prices have led to higher food prices. RFS increased corn prices by 30% and the prices of other crops by 20%. From many perspectives, the ethanol program looks like a back door subsidy to growers given the new study that shows ethanol to be a net carbon contributor.

The future of ethanol requirements is in the hands of the U.S. Environmental Protection Agency (EPA). As manager of the nation’s biofuels program, it will set the regulations to replace the current standards which expire this year. EPA plans to propose 2023 requirements in May.

HARVEY, ILLINOIS

A long saga comes to an end as the SEC asked the U.S. District Court in Illinois to approve its request to close its case against the City Of Harvey, IL. The economically challenged municipality near Chicago’s South Side has a long history of poor management. In June 2014, the SEC filed a complaint alleging that the City misused municipal bond proceeds and lacked adequate internal controls to prevent this misuse. In December 2014, the City entered into a Consent Judgment that permanently enjoined the City from future violations of the antifraud provisions of the federal securities laws. The Consent Judgment also required that the City hire an Independent Consultant and that the City implement the Independent Consultant’s recommendations.

As is often the case, the entrenched powers at City Hall did not move forward as quickly as the Court had expected.  In October 2020, the SEC filed a Motion to Enforce the Consent Judgment, asserting that the City had not fully implemented the Independent Consultant’s prior recommendations. As part of the Order granting the SEC’s Motion to Enforce the Consent Judgment, the Court ordered the City to re-hire the Independent Consultant and ordered the Independent Consultant to prepare an updated report on whether the City was in compliance with his prior recommendations after re-hiring him.

On January 4, 2022, the SEC filed an updated report from the Independent Consultant which reported that the City had implemented changes resulting in improvement of the City’s internal controls and that the City now was in substantial compliance with his prior recommendations. The SEC then moved to have the case terminated although the Consent Decree remains in effect.

NYC BUDGET

Mayor Eric Adams presented his first budget proposal for FY 23. The budget reduces the FY23 budget by $2.3 billion as proposed by Mayor DeBlasio. The plan reflects the new priorities of a new administration and a different attitude about spending. It also revives a term we had not seen since the Bloomberg administration – PEG. A Program to Eliminate the Gap (PEG) is being relied upon to lower overall spending and is also relied upon to fund programs more in line with the new Mayor’s priorities.

This budget maintains the Police Department at current levels. It also addresses the issue of the size of the City’s workforce. The DeBlasio administration’s standard response was always to increase spending and headcount. The Adams administration reduced the budgeted city headcount by 3,200 in FY22 and 7,000 in FY23 by eliminating vacancies and without laying off a single employee.

This plan also increased budget reserves to a total of $6.1 billion — more than $1 billion more than the FY22 level, and the highest level achieved in city history. There is now $1 billion in the General Reserve, $1 billion in the Rainy Day Fund, $3.8 billion in the Retiree Health Benefits Trust, and $250 million in the Capital Stabilization Fund. The administration has removed $500 million in unidentified labor savings from the FY23 budget and future plan years. That may reflect the likelihood that labor negotiations will lead to higher rather than lower wages.

The new priorities of this administration are reflected by several program proposals. The budget would increase the New York City Earned Income Tax credit (to $250 million in FY23) and it would guarantee annual funding for the Fair Fares program for the transit system ($75 million in FY23) which provides fare relief to low income riders. Child care has become a much bigger issue as lower income workers were impacted by the need to go to work while school openings were in doubt.  

The budget seeks to support the expansion of child care facilities. It would use tax incentives specifically to create more childcare space with a property tax abatement for property owners who retrofit property ($25 million in FY23) and tax credits for businesses that provide free or subsidized childcare ($25 million in FY23). It also seeks to address the need for summer jobs for young people by expanding the Summer Youth Employment Program. The budget would baseline the funding for 100,000 summer jobs for city youth, including 90,000 in the SYEP ($79 million in FY23 for a total baselined investment of $236 million).

The City will still face out-year gaps of $2.7 billion in Fiscal Year 2024, $2.2 billion in Fiscal Year 2025, and $3 billion in Fiscal Year 2026. It also acknowledges the challenges ahead. This plan is submitted when the City faces an unemployment rate of 8.8 percent. While down from 20% at the peak of the first wave, it is still much higher than the state and country overall. The local economy has recoveredjust 55% of the 933,000 jobs lost at the height of the pandemic. This lags behind the state, which has recovered 63%, with the U.S. at 84%.

Return-to-office progress peaked at over 35% in early December, crashed dramatically to just over 10% by January, and still has not recovered. Office vacancy rates are at 20%, a 40-year high. Some offsetting good news is that better than expected Wall Street activity and growth in residential real estate helped fuel a $1.6 billion increase in Fiscal Year 2022 tax revenue projections over November.

MEMPHIS UTILITY BLUES

Last winter saw the Texas power grid implode and the aftermath focused attention on management and governance at municipal utilities impacted. This winter has seen a winter storm create havoc at the utility serving Memphis, TN with customers without power for over a week. Events like this focus attention on the management of a utility. Memphis is no exception.

The storm came as Memphis was in the midst of several controversial issues including a potential termination of its relationship with the Tennessee Valley Authority. The attention on management has shed light on a serious governance issue. It has been acknowledged that the three-year terms of all five members of MLGW’s governing board are long expired. Four of the five ended nearly three years ago.

The most recently appointed commissioner’s term expired more than 18 months ago. It is all legal. A commissioner can continue to legally vote on MLGW matters after their three-year term expires. The mayor said that he made a decision to not appoint or reappoint anyone to the MLGW board until officials closed the bidding process for seeking power suppliers that might replace TVA. The Mayor cites a need for “consistency” in not appointing board members.

MLGW commissioners are nominated by the mayor and confirmed by City Council. Failing to reappoint a sitting commissioner or appoint a replacement means there is no public hearing. There are also conflict of interest concerns involving one commissioner. Commissioners serve “until the expiration” of their three-year terms and “until their successors are elected and qualified,’’ which technically allows a commissioner to serve longer than three years without a reappointment. 

The TVA contract renewal is a huge decision for the utility. It has been the source of much of the concern. In the case of MLGW, it is a real issue. One board member is in a business relationship with the wife of a TVA officer. That job was created after MLGW’s board first voted to seek bids from alternative electricity suppliers some 13 months ago. While it may be legal under Tennessee law, the situation raises serious governance issues which the parties have been unwilling to address to date.

D.C. PENSION INVESTIGATION

The major pension funds servicing the bulk of government retirees from the District of Columbia all have very strong funding positions. While the funding of pensions remains a significant issue nationwide, the District has long been a positive outlier. Consequently, the funds and the Board of Directors who oversee them have not drawn much attention.

That has changed for now as it has been revealed that the US Department of Justice (DOJ) has been investigating the Board with an apparent focus on investment manager compensation. The first subpoena was issued in August, 2021 but the Board did not disclose it. The information came to light in in a whistleblower lawsuit filed in December against the Board by the agency’s general counsel.

At this point, the issue seems to be one of governance. The strong funding status of the funds does not obviate the need for strong ethical standards and oversight. All the pensioners should be worried about is whether the money is there for them.

HIGH TIDE

NOAA is the federal agency tasked with, among other things, monitoring sea level changes. The Sea Level Rise Technical Report provides the most up-to-date sea level rise projections available for all U.S. states and territories. The new report is the first in 5 years. The findings reinforce trends already apparent.

Sea level along the U.S. coastline is projected to rise, on average, 10 – 12 inches (0.25 – 0.30 meters) in the next 30 years (2020 – 2050), which will be as much as the rise measured over the last 100 years (1920 – 2020). Sea level rise will create a profound shift in coastal flooding over the next 30 years by causing tide and storm surge heights to increase and reach further inland.  

Rise in the next three decades is anticipated to be, on average: 10 – 14 inches for the East coast; 14 – 18 inches for the Gulf coast; 4 – 8 inches for the West coast; 8 – 10 inches for the Caribbean; 6 – 8 inches for the Hawaiian Islands; and 8 – 10 inches for northern Alaska.

TRI-STATE COOP RELENTS

At least one local distribution cooperative in Colorado has managed to reach an agreement with Tri-State Generation its wholesale power supplier. Over recent months, Tri-State has been in the spotlight for its efforts to bind its customers to them even though many face mandates to lower fossil fueled energy consumption. Tri State has been exceptionally dependent upon coal.

Now, one distribution coop – La Plata -has reached an agreement with Tri-State which keeps La Plata as a member but provides for the coop to be a partial requirements customer. The historic model was for all requirements contracts. La Plata’s existing contract with Tri-State allows the Durango-based cooperative to generate just 5% of its own power. Members now can choose to obtain up to 50% of their power requirements from their own direct generation or through purchases.

LaPlata will, if the contract gets final FERC approval, begin taking power from private renewable providers to satisfy 50% of La Plata’s requirements.  The partial requirements contract will save La Plata $7 million a year. It will offer an immediate 50% cut in La Plata’s carbon footprint when it begins purchases in 2024. It also supports La Plata’s goal which is to decarbonize 50% by 2030 as compared to 2018. 

As the process unfolds (a FERC hearing is scheduled for May), Tri-State has stopped raising rates and is now lowering them, 2% last year with another 2% reduction schedule for this fall. It is working with La Plata to install a 2-megawatt community solar project. That indicates that Tri-State has realized the benefits of a more flexible approach with its members.

That may not be enough for all of them. One utility with 100,000 customers wants out of its relationship with Tri-State. The FERC determination in the La Plata case will be looked closely by the six other Tri-State members who have indicated they are studying their options.

NUCLEAR

The newly enacted Bipartisan Infrastructure Law created the Civil Nuclear Credit Program (CNC), allowing owners or operators of commercial U.S. reactors to apply for certification and competitively bid on credits to help support their continued operations. Under the law, applications must prove that the reactor will close for economic reasons and demonstrate that closure will lead to a rise in air pollution. DOE must also determine that the U.S. Nuclear Regulatory Commission has reasonable assurance that the reactor will continue to operate safely. 

Proving that nuclear closures contribute to increased carbon emissions may get a lot easier. EPA data has been released for the Northeast. New York passed a law in 2019 requiring the state to eliminate carbon dioxide emissions from power plants by 2040 but over the last two years, CO2 from power plants has climbed nearly 15 %.  In the six New England states, power emissions are up 12 % over the last two years. And in Pennsylvania, emissions from electricity generation have grown 3 %.

That likely reflects the replacement of nuclear with natural gas fired generation. Nationwide, power plant emissions were down 4% between 2019 and 2021, even after accounting for a 7% increase in electricity emissions last year. Nuclear power currently provides 52% of the nation’s 100% clean electricity from the current fleet of 93 reactors.

The emissions problem is expanding the potential audience for nuclear. Some 16 states have passed some form of support for nuclear whether through direct operating subsidies, repeal of limits on nuclear projects, or authorization for small modular reactors (SMR).  After the experiences in Georgia and South Carolina, modular would appear to be the way to go for nuclear advocates.

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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NOT JUST THE HOUSE WINS IN NEVADA

The Nevada Gaming Control Board announced that the state’s more than 400 largest casinos won more from players in 2021 than in any year in history. Blackjack continues to be the most popular table game in the casino. The No. 2 game is roulette. Statewide, win on all slots was up 0.25% and on tables, up 0.65%. The slot win percentage has decreased only three times in the past 25 years.

The state’s 1,958 blackjack tables won $1.13 billion from players for the calendar year. That was 75.8% more than the prior year. Roulette’s 424 units statewide generated revenues of $428 million, a 103% increase over last year. Roulette hold by the casinos was at 19.87 percent.

Slots are a whole category of their own. The most popular slot machine denomination in 2021 – the penny slot. There were 47,822 units across the state which won some $3.758 billion from players. That is a 59.7% increase over 2020. That produced a win rate for the house of 9.85% of the money put into them. The best slot for players were the nickel slots which the casinos only kept less than 6%.

That is where the state wins, Gaming tax collections are up 31.1% versus the first six months of the 2020-21 fiscal year. The first half of the 2021-22 fiscal year, through January 31, saw the state collect $570.8 million in percentage-fee collections.  For states generally, there is good news in the sports betting market. Nevada sportsbooks generated 5.46% of money wagered in 2021. The state’s books won $445.1 million from the 176 places in operation. Sports betting revenue was up 69.4% over the previous year.

NUCLEAR NORTHERN LIGHTS?

Alaska Governor Mike Dunleavy is asking the legislature to pass S.B. 177. The bill “would allow Alaskan communities to pursue the use of nuclear microreactors in Alaska by excluding local microreactor projects from the legislative designation siting requirement, exempting microreactors from the ongoing study requirement of AS 18.45.030 in recognition of the extensive research taking place both inside and outside of Alaska, and adopting the federal definition of a “microreactor.”  

Proponents are looking at two potential landing spots for micro reactors. One would be owned by Copper Valley Electric Association (CVEA) located in Glennallen, Alaska. CVEA is a cooperative utility that provides electrical and heat services to more than 3,800 business and residential customers stretching north 160 miles from Valdez to Glennallen and spanning 100 miles east to west from the Tok Cutoff highway into the northern reaches of the Matanuska Valley. CVEA is not interconnected to any other electric utility. It is that isolation that makes the concept attractive.

The other potential site would be located at Eielson Air Force Base and could be completed by 2027. There is a history of nuclear power associated with military facilities in Alaska. The SM-1A Nuclear Power Plant is located in central Alaska, approximately 6 miles south of Delta Junction on the Fort Greely Military Reservation. Fort Greely is approximately 100 miles southeast of Fairbanks and 225 miles northeast of Anchorage. The construction of the SM-1A at Fort Greely began in 1958 and was completed in 1962 with first criticality achieved on 13 March 1962. The final shutdown was performed on the SM-1A Reactor in March 1972.   

Ironically, this legislation could be enacted just as final decommissioning of the Fort Greely site begins. It is also accompanied by another bill the Governor seeks approval for which would require 80% of the Railbelt’s electricity to come from renewable sources by 2040, with penalties for electric companies that fail to meet the requirement. That would put the Alaska Energy Authority at the center of efforts to move to renewable power.

Between Homer and Fairbanks there are five interconnected utilities that distribute electricity to customers in six separate service areas in what Alaskans call the “Railbelt.” Four of those utilities also own and operate generation, and all five, plus the State of Alaska, own parts of the transmission system. The Alaska Energy Authority (AEA) owns the Bradley Lake Hydroelectric Project, the largest hydroelectric facility in the state. The proposed bill would also move forward with new hydro sources. In 2011, AEA received authorization to pursue a FERC license for the Susitna-Watana Hydroelectric Project. Financial constraints halted the project.

YOU CAN GO HOME AGAIN

For many years, the Commonwealth of Pennsylvania has run a program for oversight and assistance to municipalities in an effort to avoid defaults or Chapter 9 filings by those entities. Under Act 47 as the authorizing legislation is known, the Department of Community and Economic development provides fiscal management oversight and planning, technical assistance, and financial aid. The program has been successful in achieving those goals. Nonetheless, there has been criticism of the program reflecting the fact that some municipalities seem to never exit the program.

One such city was Scranton, the former railroading and mining center in northeastern Pennsylvania. It was designated as distressed on Jan. 10, 1992. And some 30 years later, the DCED announced the city’s status under the law was terminated on Jan. 25. The city had taken a number of steps under the oversight of the DCED to stabilize the city’s finances. It sold its sewer system in 2026 to generate monies for pension funding. One additional source of support for the city was the fact that support from the American Rescue Plan Act of $68 million could be applied to the City’s fund budget.

The city also benefitted from the resolution of litigation challenging taxes and fee increases imposed by the city. That resolution not only upheld the legality of prior collections but also allowed for their continuing collection, Late in 2021, the DCED audited the city’s finances as part of the process of determining whether the city could leave the program.

The reality is that Scranton is the 16^th city to participate in the program and strengthened and the regional tax base accessed. It came under supervision in 2004. So, the idea that cities check in but don’t check out of the program becomes more of a myth over time.

PUERTO RICO ELECTRIC

The U.S. Departments of Energy (DOE), Homeland Security (DHS), Housing and Urban Development (HUD), and the Commonwealth of Puerto Rico are moving forward on a structure for the development of a 100% renewable energy system for Puerto Rico. The announcement comes amidst continuing service issues with the current system. Reliability and cost remain basic issues for consumers. Labor unions oppose virtually any effort to move away from the current generating base.  The politics of the Commonwealth do not provide a solid environment for change.

Puerto Rico has committed to meeting its electricity needs with 100% renewable energy by 2050, along with realizing interim goals of 40% by 2025, 60% by 2040, the phaseout of coal-fired generation by 2028, and a 30% improvement in energy efficiency by 2040 as established in Puerto Rico Energy Public Policy Act (Act 17). A Memorandum of Understanding (MOU) will bind PREPA to sign contracts for at least 2 GW of renewable energy and 1 GW of energy storage projects. 

The memorandum accomplishes two things in the near term. It establishes a clear role for the expertise of DOE in the process and it kicks starts some needed fixes.  It is expected that at least 138 projects will be under construction bidding or have begun initial construction activities, including island-wide substation repairs, the replacement of thousands of streetlights across five municipalities, and the creation of an early warning system to improve dam safety.

Ratepayers currently pay twice the national average. Microgrids and renewables are achievable goals which will yield tangible benefits from both economic and reliability standpoints. It is something we have been advocating as the only rational response to the entire range of options and challenges confronting the island’s electric grid.

UNDERPOWERED AUTHORITY IN NY

New York State Comptroller Thomas DiNapoli released the results of an audit of the efforts of the New York Power Authority to install electric vehicle (EV) charging infrastructure throughout the state. The Charge NY program was announced in 2013 as a statewide network of up to 3,000 public and workplace charging stations to be ready in five years. It was followed in 2018 by Charge NY 2.0, a plan to install 10,000 public charging stations by the end of 2021. That same year, NYPA also announced EVolve NY, a $250 million project to put high-speed chargers at airports and along major highways. 

As of June 2021, there were 46,608 EVs registered in New York, but NYPA had installed just 277 public EV charging ports, or one for every 168 EVs registered in NY. The shortfalls are across all areas of the state. Suffolk County has 7,916 registered EVs, which is more than any other county and about 17% of the statewide total. It has three NYPA public charging stations, 1.2% of the total and just one charger for every 2,639 electric cars.

Nassau County has 5,947 registered EVs, about 13% of the statewide total, but only five NYPA public charging ports, 1.8% of the total or one port for every 1,189 electric cars. Westchester, where NYPA is based, has more NYPA public ports than any county. It has 4,844 registered EVs, about 10% of the statewide total, and 44 public ports or about 16% of the total.

Erie County has 1,898 registered EVs, about 4.1% of the statewide total, and 42 NYPA public charging ports, or one public port for every 45 vehicles (about 15% of the total). 30 counties with 6,189 EVs have no NYPA-placed public charging ports. There were only 28 high speed chargers at 18 locations as of September 2020. Not one of the EVolve NY’s Phase 1 projects, including installing 200 high speed chargers, were completed by their deadline of the end of 2019. As of March 5, 2021, NYPA had installed only 29 high speed chargers at seven locations, putting it on track to finish more than two years behind schedule.

INDIANA TRIES TO INDUCE PREEMPTION

After efforts last year in Indiana to impose state standards on localities governing the siting of commercial solar and wind generation infrastructure failed, another effort to accomplish the goal is underway. SB 411 establishes within the Indiana economic development corporation (IEDC) the commercial solar and wind energy ready communities development center (center). The center shall create and administer: a program to certify a unit as a commercial solar energy ready community; and a program to certify a unit as a wind energy ready community.

If a unit receives certification as a commercial solar energy ready community; and after the unit’s certification, a project owner submits a commercial solar project to be approved under standards that comply with the default standards; the IEDC shall authorize the unit to receive for a period of 10 years, beginning with the start date of the commercial solar project’s full commercial operation, $1 per megawatt hour of electricity generated by the commercial solar project.

The prior effort took power away from local zoning and land use boards and gave it to the state with no control over the economic benefits. That did not get a lot of support from the local government units. Now, the state would be offering a direct financial consideration to motivate adoption of the state standard.

EMINENT DOMAIN

It is a tool which has long been used throughout the nation’s history to acquire land from unwilling owners to facilitate larger development. The tool of eminent domain has been used to cover a variety of projects in locations large and small, metropolitan and rural. Lost in the debate over infrastructure of all kinds are many of the issues associated with land rights in connection with a variety of infrastructure projects.

This year, eminent domain is at the center of two projects where it may be the issue on which their success stands or falls. One is the issue of whether Texas landowners may face eminent domain over the proposed high speed rail line between Houston and Dallas. The issue is the subject of litigation in the Texas courts.

The other is the proposed network of pipelines to transit carbon captured to proposed storage facilities in North Dakota and Illinois. Three companies have together proposed 3,650 miles of new pipelines to cut across the Midwest and eventually transport 39 million tons of captured carbon annually from ethanol and fertilizer plants to the storage sites. Iowa would get the bulk of pipeline miles – more than 1,600 miles.

One pipeline developer has submitted a request to the Iowa Utilities Board (IUB) which regulates pipelines. Twenty counties in Iowa have filed objections with the IUB opposing the use of eminent domain for the pipelines, including 52% of counties along one pipeline’s proposed route and 41% of the counties along a second proposed route. If carbon capture and storage is to become a real thing, then this issue will be replayed across the country.

The company operating the second pipeline also plans to solidify its final route the rest of this year and apply for a federal permit. If successful, it expects to receive permits in the second half of 2023 and start construction in 2024.

There are currently about 5,000 miles (8,047 km) of carbon dioxide pipelines in the United States, mainly in Texas and Wyoming. It is used by industry to be pumped under oil and gas fields to increase pressure and boost production. One White House estimate says the country would need to build another 65,000 miles for the country to permanently store enough carbon to reach net zero emissions by 2050.

SOLAR AND WATER

The Turlock Irrigation District is poised to be the first water agency in the nation to see if placing solar panels above irrigation canals is a viable option for producing power while also reducing water losses.  It is scheduled to vote to accept a $20 million grant from the California Department of Water Resources to fund a demonstration project. The project would effectively cover existing open aqueducts and irrigation canals. The panels would produce power which could be tied in directly to existing transmission lines which exist along the route.

The panels would be suspended over the canals in a way that does not interfere with operation and maintenance of the water system. The project includes batteries or another means of storing daytime power from the sun for use later. University of California. Researchers said installing canal panels throughout the Central Valley could get the state halfway to its goal for climate-safe power. University of California. Researchers said installing canal panels throughout the Central Valley could get the state halfway to its goal for climate-safe power.

Another California municipal utility is considering using irrigation canals to produce power using the flow of the water. The South San Joaquin Irrigation District provides drinking and irrigation water to Manteca, Lathrop and Tracy. It operates a water treatment facility powered by a combination of solar power and purchases from PG&E. It is considering whether to replace the PG&E power with energy produced by a hydro power company.

The district would buy power from the energy company EMERGY, which would install the turbines at their cost and enter into a 20-year power purchasing agreement with the irrigation district at a rate 30% lower than buying power directly from PG&E. The power would be produced from turbines installed in a main irrigation canal. Water would be directed to a flume which would power the hydro turbines.

CLIMATE LITIGATION

A continuing trend in the climate litigation arena is the finding that lawsuits filed by municipalities against fossil fuel companies in state court should be decided in state court. The latest example comes from Colorado. The city of Boulder, along with Boulder and San Miguel counties, sued Suncor and Exxon Mobil in Boulder District Court. The issues raised are consistent with other suits across the country alleging damage and non-disclosure of risks long after awareness of the risks occurred.

As was the case with the City of Baltimore, the defendant companies sought to have the cases heard in the federal courts. The Colorado case defendants petitioned the U.S. District Court to have the case heard there. That request was turned down. This decision came in the appeal of the District Court decision. Specifically, the Municipalities allege claims of public nuisance; private nuisance; trespass; unjust enrichment; violation of the Colorado Consumer Protection Act; and civil conspiracy. They do not allege any federal claims.

The decision also directly addresses one of the main pillars supporting the argument that federal law should prevail. “By winning bids for leases to extract fossil fuels from federal land in exchange for royalty payments, Exxon is not assisting the government with essential duties or tasks. Critically, the leases do not obligate Exxon to make a product specially for the government’s use,”. The oil companies claim that being allowed to produce oil from the Continental Shelf makes it a federal issue.

REGULATORY ROUNDUP

The week saw a variety of actions by municipal governments in the regulation of buildings and energy. Bellingham, WA joined the cities of Seattle and Shoreline in regulating the use of electrification to limit carbon emissions. Bellingham voted to require all new commercial construction and future residential buildings more than three stories tall to heat water and rooms with electricity. Natural gas for cooking would still be permitted. New buildings must be “solar ready” with enough roof space for future installation of solar panels. 

In CA, legislation is being reconsidered which would have slashed the value of net metering payments to residential customers with solar power. W VA enacted legislation which repealed limits on the siting of nuclear power generation in the state. Senate Bill 61 passed the Ohio Senate by a vote of 32 to 1 last month.  It would limit all but “reasonable restrictions” on solar installations by homeowner associations.

The big battle is underway in Florida. Legislation favored by large utilities to require future rooftop solar panel customers to pay higher rates passed its first vote hurdle in committee. Under current law, solar panel owners can pass excess energy generated by the panels back to the utilities at the retail rate the utilities charge other customers. The bill (HB 741) would require a cheaper wholesale price be charged to the utilities. 

Sponsors had to make some concessions as the committee amended the bill to increase the time current owners of solar panels are grandfathered in and exempted from the rate change from 10 years to 20 years. Homeowners with working solar panels as of Jan. 1, 2023 would qualify for the exemption.

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.