Joseph Krist

Publisher

AUTONOMOUS VEHICLE HICCUP

Just a week after the California Public Utilities Commission voted to allow the expansion of driverless taxi services from Cruise on the streets of San Francisco, that process has stumbled. The California Department of Motor Vehicles, the agency charged with overseeing the safety of the driverless cars, asked Cruise to halve the number of vehicles it was operating in San Francisco. 

In the first days of service, a group of some 10 Cruise vehicles wound up in a group and malfunctioning and blocking a street. Cruise blamed that problem on excessive cellular traffic generated at a concert four miles away. This week, a Cruise vehicle with a passenger, crashed into a San Francisco fire truck. The passenger was injured.

The DMV said that “it is “investigating recent concerning incidents involving Cruise vehicles in San Francisco.” The agency asked Cruise to cut the number of vehicles operating in San Francisco “until the investigation is complete and Cruise takes appropriate corrective actions to improve road safety. The DMV reserves the right, following investigation of the facts, to suspend or revoke testing and/or deployment permits if there is determined to be an unreasonable risk to public safety.” 

Cruise had 400 vehicles operating in San Francisco prior to the DMV action. It will have no more than 50 driverless cars running during the day and 150 at night while the review is underway. City officials filed an injunction asking the C.P.U.C. to temporarily halt the driverless taxi expansion. Prior to the expansion, officials documented 55 incidents where a driverless car abruptly stopped or interfered with emergency vehicles. In one case a vehicle interfered with firefighters who were battling a house fire.

This led the San Francisco City Attorney to file an administrative motion with the commission to temporarily halt the expansion. The city also plans to file a re-hearing application with the PUC.

ZONING, HOUSING AND NYC

Much of the discussion around the lack of affordable housing has focused on the role of single-family residential zoning. Those rules were often implemented for a variety of negative reasons even if they were largely supported by people happier with the status quo. It is politically fraught issue acting as a third rail in local politics.

It is becoming more apparent that New York City, especially in Manhattan, will have a mismatch between the available building stock in commercial areas and the demand for housing. Even if there are developers ready, willing and able to convert both manufacturing and office space are stymied by limits on the development of residential units in areas zoned commercial/manufacturing. If the Adams administration has its way, that will change.

The effort to convert needs approval by the City Council of legislation changing the zoning and authorizing residential space. The area proposed in midtown Manhattan – between 23rd Street and 40th Street from Fifth Avenue to Eighth Avenue – is essentially what was considered for years to be the Garment District. Much of that is former manufacturing space. A second bill would authorize conversions of office buildings into residential. The city estimates that it could result in 20,000 new units.

As is the case in so many instances, City rules and regulations are significant hurdles to redeveloping these spaces. One example – a change in rules is needed to allow buildings that were built as recently as 1990 to convert to housing; currently, only buildings built before 1977 or 1961 are eligible, depending on where they are in the city. 

This follows the failure of the State Legislature to adopt proposals put for by Gov. Hochul. Two bills which would have offered tax incentives for office conversions in exchange for the inclusion of affordable housing and would have lifted restrictions on how much floor space can go toward residential were not passed.

COLORADO RIVER

The federal government announced Lake Mead, located in the Colorado River Basin, will operate at a Tier 1 shortage next year, an improvement over the current Tier 2 shortage. Lake Powell is currently at a Tier 2 but will operate at a Tier 1 shortage in 2024. The water levels for Lake Mead are projected to reach slightly over 1,065 feet by January 2024, according to the Bureau of Reclamation. That would be an improvement of some 19 feet since October of 2022.

The increase in water has allowed the lower basin states to plan for smaller reductions in their 2024 allocations. Arizona will have to cut 512,000 acre-feet of its Colorado River water supply, equaling about 18% of the state’s yearly allotment. The Tier 2 shortage currently calls for Arizona to slash approximately 592,000 acre-feet, or 21% of its annual allotment. Nevada will have to slash 21,000 acre-feet of its Colorado River water supply in 2024, or 7% of the state’s yearly apportionment. This down from a reduction of 25,000 acre-feet required under Tier 2 conditions. The combined storage of the two reservoirs is at 36% of capacity up from 28% last year.

PRIVATE WATER

The chairman of Phillips 66 applied in 2018 to dam the South Llano River in Texas to create a private lake. The proposal calls for the construction of a seven foot high concrete dam to create a nearly five-acre lake. The plan has put the Lower Colorado River Authority in the spotlight as it is one of the agencies with regulatory authority over the river. The owner obtained a right to impound water from the Lower Colorado River Authority and a draft permit from the TCEQ. 

Opposition has come from downstream communities. They fear damage to state parks from reduced flows and note that the permit would allow the proposed dam to impound water under certain circumstances even if the South Llano River wasn’t flowing. Last year the commissioners’ court in Llano County passed a resolution opposing private dams for recreational purposes. Opposition is growing. The Texas Parks and Wildlife came out against the dam, arguing it would impact downstream flow, which could affect fish, such as the Guadalupe bass; freshwater mussels; and the public. 

OMAHA PUBLIC POWER DISTRICT

Some seven years after it shut down its 1,570 MW Fort Calhoun nuclear generating station, the Omaha Public Power District board voted 8-0 to move forward a $2 billion expansion of its generation capacity. Energy consumption by all customers — residential, commercial and industrial — is expected to increase by 70% by 2032.

Nearly 90% of the projected new demand OPPD is striving to meet is coming from industrial customers. Two-thirds of that new demand, OPPD says, is from data centers. The plan will roughly require a 10% increase in rates, which will be phased in over four years beginning in 2027. The new generation will come from a mix of solar, wind and natural gas-powered facilities.

CARBON CREDIT MARKETS

Washington State enacted the Climate Commitment Act in 2021, requiring the state’s biggest polluting businesses to reduce their emissions or purchase allowances to cover their emissions. Carbon pricing has long had champions in the movement against climate change but there have been few US examples to evaluate and compare. The Washington program recently reported results reflecting its first auction of carbon credits.

The state Department of Ecology announced the results of its special auction held last week because the previous quarterly auction in May exceeded a “trigger” price of $51.90 per allowance. Each allowance represents one metric ton of emissions from the state’s biggest greenhouse-gas polluters. In 2023, about 18.4 million carbon allowances have been sold this year, generating more than $900 million. 

Allowances were sold at two preset prices: $51.90 and $66.68. The allowances were divided equally into each price tier. Going forward, the number of allowances will annually decrease which will raise the price. Allowances sold for $56.01 per ton in the most recent quarterly auction. When the Legislature enacted the carbon cap program in 2021, the state estimated it would bring in around $220 million in 2023 and close to $500 million every year after that through 2040.

Nearly 90% of those who participated in the second quarterly auction in May were businesses required to pay for their emissions. Washington state’s greenhouse-gas emissions in 2019 reached their highest level since 2007: 102 million metric tons. It was a 7% increase from 2018, and 9% higher than 1990 levels. The Climate Commitment Act aims to reduce the state’s production of carbon dioxide, methane and related gases to 45% below 1990 levels in the next seven years, 70% below 1990 levels by 2040 and decarbonize by 2050.

ESG FIGHTS BACK

The Securities Industry and Financial Markets Association (SIFMA) filed a federal court challenge to new Missouri documentation rules for the securities industry. The new rules, effective July 30, 2023, require financial firms and professionals that incorporate any “social objective or other nonfinancial objective” into their analysis to obtain their customers’ written consent on a state-written prescribed script. 

The state-mandated scripts require financial firms and clients to acknowledge that incorporating these objectives “will result” in investments and advice “that are not solely focused on maximizing a financial return” for the client. “Social” or “nonfinancial” objectives may include multifaceted client objectives, such as tax considerations, diversification, risk tolerance, time horizon, liquidity needs, faith or values-based objectives, and local community investment objectives.

In its federal lawsuit, SIFMA asks the court to declare that Missouri, in promulgating its new rules, overstepped its boundaries in violation of both federal preemption statutes and federal constitutional requirements. SIFMA points out that the State’s plans fail to acknowledge that federal law, regulations, and applicable rules already require financial advisors to act in the best interest of their clients when providing personalized investment advice.

Missouri is the only state with such rules. One has to ask when did things like taxes, diversification and risk become non-financial considerations? If a State can dictate what may be a part of an overall financial analysis, does this interfere with a broker’s fiduciary responsibilities?

CONGESTION PRICING IN THE REAL WORLD

While there have been many hurdles on the road to congestion pricing in New York City, the biggest one was always going to be the process of establishing the level of the fee. As that process unfolds, the realities of the fee and its unpopularity among many come into sharper focus.

In a working MTA proposal, the base rate for motorists would be in effect from 6 a.m. to 8 p.m. on weekdays and 10 a.m. to 10 p.m. on weekends. Off-peak charges would be lower. Automobiles, motorcycles and commercial vans would be tolled once per day, and would be able to move in and out of the zone for the rest of the day.

The MTA also estimates that of the 1.5 million people who work in the congestion zone, about 143,000 drive. (Versus some 100,000 TNC vehicles.) Some 1,560 are low-income commuters who do not have access to public transportation. The MTA estimates a $4 congestion pricing credit for drivers who use the four tunnels into lower and Midtown Manhattan would lift the base toll from $2 to $2.50. A $14 credit for tunnel users would lift the base toll by $8 to $9.

FRACKING, JOBS AND HEALTH

Some 22 counties in Ohio, Pennsylvania, and West Virginia produce over 90% of Appalachian natural gas. The economic impact especially that of the impact on unemployment has been the subject of ongoing study by the Ohio River Valley Institute. Their work over the years has documented the underwhelming impact on jobs in Appalaichia from the natural gas industry. The latest review to come from ORVI reinforces the trend. It looks at jobs and income data from those counties across the three states as “Frackalaichia”.

In 2019, ORVI reviewed data for the period 2008-2019. The latest report examines the impact of the next two years on the trends observed. The region’s shares of the nation’s jobs, income, and population all declined, the latter by more than 10%, even as Frackalachia’s contribution to output grew by more than a third. Frackalachia’s share of jobs declined by 8%, which is worse than 2019 when the decline was only 7.6%. Its share of income declined by 10%, which is worse than 2019’s decline of 6.3%. Its share of population declined by 12.8%, which is worse than the 10.9% decline in 2019.

Since 2014 jobs have been in decline and are bouncing back more slowly than in the nation as a whole in the aftermath of the Covid epidemic. In all, a net 10,339 jobs have been lost since the start of the shale boom. The net population loss in Frackalachia since the start of the shale boom is 47,652, nearly 5% of all residents.

The US Energy Information Administration says that in 2022 will turn out to be the year in which Appalachia’s Marcellus and Utica natural gas fields reach peak production, a peak that EIA researchers believe will not be equaled again until 2045. By 2050, Appalachia’s share of US natural gas production is expected to decline from 41.9% in 2022 to 37.2%.

The three studies co-published by the Pennsylvania state government and the University of Pittsburgh found serious health effects resulting from shale gas production in the southwestern part of the commonwealth. A study on the incidence of childhood cancer found five to seven times the rates of lymphoma among children who live within one mile of a natural gas well compared to those who live no closer than five miles from such a well.

A study on birth outcomes found a correlation between low birth weight and a mother’s proximity to active wells during their production phase — when oil or gas is collected from a well, after drilling fluid has been shot deep vertically, then horizontally, underground. The data will bolster those who oppose the practice or at least would seek to more effectively tax producers.  

OPIOID SETTLEMENT

Many municipal bond market participants have wondered if the settlements of litigation brought against opioid manufacturers and distributors would result in financings similar to those backed by tobacco industry payments. Our view has been that there would not be given the smaller size of the opioid settlements. As was the case with tobacco, the biggest risk seemed to be the ability of tobacco companies to stay in business and generate revenues to make their settlement payments.

That risk was highlighted this week. Mallinckrodt Pharmaceuticals had originally agreed to pay the $1.7 billion over eight years to state and local governments, individuals and others that had sued the company for helping fuel the opioid crisis. Mallinckrodt disclosed this week that it had reached a plan to file for bankruptcy for the second time in three years. The plan would cancel a majority of the $1.25 billion that the company still owes under the original settlement agreement, in exchange for a final payment of $250 million that would be made before the company enters its second bankruptcy.

The original settlement plan, finalized last year as Mallinckrodt exited its first bankruptcy, protected the company and its former executives from future liability related to its opioid sales. Mallinckrodt last year made its only payment, of $450 million, under the original settlement agreement. The company is late on a second payment, which was due in June.

TRANSMISSION

In Illinois, the Grain Belt Express Transmission Line, cannot move forward under an order issued Aug. 18 by the 5th District Appellate Court. The  order stays “any implementation” of a March 8 order from the Illinois Commerce Commission granting the project a Certificate of Public Convenience and Necessity until the court rules on the project’s constitutionality. The Illinois Farm Bureau and landowner groups and other plaintiffs argued the 2021 state law allowing GBE to apply for and obtain ICC approval for the project violates the special legislation, equal protection and separation of powers clauses of the Illinois Constitution. 

Under the stay, GBE does not have the right to survey land that may be included in the project and landowners impacted by the project can decline to negotiate easements. The project was originally approved in 2015. The IFB has been a long-time opponent and has previously succeeded in challenges to the approval. In 2018 a state appellate court ruled the ICC lacked authority to grant a nonpublic utility company a certificate of public convenience and necessity under the expedited review process of the Illinois Public Utilities Act.

In response, in 2021 the Illinois General Assembly passed legislation allowing GBE to apply for and obtain approval of its project from the ICC. The ICC approved noting that special provisions under the law required it to find that the project is for the public use and promotes public convenience and necessity. This puts the ultimate outcome in the hands of the courts.  

HOSPITAL BILLING

Allina Health owns and operates nine hospitals and jointly owns and operates one other hospital, offering a full array of tertiary and quaternary services in Minnesota and western Wisconsin. Its flagship tertiary and quaternary facility is Abbott Northwestern Hospital. Like many systems it saw diminished financial results in the 2020-2022 time period.

In an effort to strengthen its revenues, Alliana enacted strict policies which limited care to patients with medical debt. Allina’s hospitals treated anyone in emergency rooms. For care outside of the ER setting (including follow ups) Allina began to deny care for indebted patients, including children with $4,500 or more in outstanding bills. In today’s healthcare environment, that is not a huge figure for an individual to be carrying as they work out disputes with insurers and others.

Given the economic impact of the pandemic, the likelihood of individuals facing excessive debt and limited work opportunities made it likely that many would be burdened with medical debt. Some health systems took aggressive legal stands against patients and some took the denial of care approach. Both of these tactics created significant negative publicity for these systems.

Now Allina has rescinded its policy. One might hope that the public hue and cry might have been a motivator. The reality is likely tied to a recent announcement by the State Attorney General that an investigation of Allina’s practice of withholding care from patients with debt was about to commence. According to a Johns Hopkins survey, In 2020, Allina spent less than half of 1 percent of its expenses on charity care, well below the nationwide average of about 2 percent for nonprofit hospitals.

After the Attorney General’s announcement, Allina decided that there were “opportunities to engage our clinical teams and technology differently to provide financial assistance resources for patients who need this support.” Allina had its A1 bond rating reaffirmed by Moody’s in April of this year.

HOSPITAL DOWNGRADE

Catholic Medical Center is a 330-bed acute care hospital in Manchester, NH offering tertiary services and specializing in cardiac care. As a stand alone facility, it was likely to be under financial pressure. Operating losses are largely driven by the heavy reliance of contract labor, elevated wages and inflationary cost pressures. These have negatively impacted cash flow at the hospital, a key ratings factor.

Persistent operating cash flow losses have resulted in a reduction of liquidity and narrowed headroom to the cash to debt covenant on its bank debt. The questionable outlook for covenant compliance is not consistent with an investment grade rating. That was reflected by Moody’s Investors Service announcement that it has downgraded Catholic Medical Center’s (CMC) (NH) revenue bond rating to Ba1 from Baa3. The outlook is negative. 

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