Joseph Krist

Publisher

This week marks our last issue for 2023. We will return with the January 8, 2024 issue. Have a Merry Christmas and a happy and prosperous New Year.

As we look ahead, some clear themes emerge for 2024. The end of pandemic funding from the federal government will create a much different atmosphere for the budget process. The fiscal 2025 budget season will let the market see which entities have constructed sustainable spending plans in the absence of those funds. It is already clear that some spending supported by those funds may have to be adjusted. The most obvious example is New York City. Chicago and California will also be under pressure.

Expected troubled sectors? Higher education, especially small private colleges, will continue to have problems. The combination of demographic trends and a reliance on enrollments and tuition to support credits. The smaller the niche filled by small colleges, the more vulnerable the credit is.

Senior living remains plagued by staffing issues, higher costs and uncertainties reflecting the realities of the current housing market. At many facilities, the mix of product may not reflect current demand realities after the pandemic. Some have more flexibility in terms of reconfiguring facilities to reflect those changes. Look for balance sheets with the resources to manage reconfiguration and its potential revenue impacts.

We have been down of the rural hospital sector for a long time. There is nothing out there to change our view. Now, larger systems everywhere are facing cost pressures as well. It is a subtle impact. Staff cuts have been concentrated on administration costs. Fewer people to check one in for an appointment, cuts in billing departments, longer wait times. This is going on in the face of a slower recovery of demand and utilization rates.

On the utility side, carbon capture will continue to be a dominant theme. The Biden administration clearly is looking to carbon capture as a way to placate the utility industry. The Infrastructure Investment and Jobs Act, provides $8.2 billion in advance appropriations for CCS programs over the 2022–2026 period. According to the Congressional Budget Office, 15 CCS facilities are currently operating in the U.S. Together, they have the capacity to capture 0.4 percent of the nation’s total annual CO2 emissions. The report notes an additional 121 CCS facilities are under construction or in development. If all were completed, they would increase the nation’s CCS capacity to 3 percent of current annual CO2 emissions.

DOE estimates that reaching the current administration’s plan for a net-zero emissions economy would require capturing and storing between 400 million and 1.8 billion metric tons of CO2 annually by 2050. All of this points to the importance of the regulatory process in Iowa and the Dakotas. Pipelines are so important to the carbon capture process so the proceedings are key to the survival of both fossil fueled electric generation and the ethanol industry.

Vehicles – autonomous and/or electric – are at an important inflection point. It is becoming clearer that electric vehicle adoption will not proceed at a pace predicted by advocates. The experience of Cruise in San Francisco has done much to dampen support for the vehicles. Manufacturing will continue to increase but at a slower pace. That will dampen calls for more investment in AV related road technologies. At the same time, charging infrastructure will continue to be in demand. Most of the action on the government side seems to be based in regulation with the private sector providing the actual chargers.

The big spectator sport issue will be the implementation of congestion pricing in Manhattan. One sector of the city economy we will watch is the impact of pricing on the performing arts and dining sectors. With the exception of Lincoln Center, the major performing arts venues are within the proposed congestion district. If the fees are seen as a weight on attendance and demand, support for the fees will wane. The fees will also generate enormous pressure on the MTA to perform. History does not provide a lot of confidence as decades old issues of bureaucracy, overruns, and delays continue to plague its projects.

Water will be in the spotlight as the Colorado River negotiations continue. The issues which have shaped the water market for decades are being negotiated and there are hopes that a more practical sharing of the water can be found. They take place as some large scale water transfer and delivery projects are contemplated by public and private development interests. Long distance water pipelines are being proposed which have implications for those at either end of the pipe.

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NYC BUDGET

The latest NYC Financial Plan update was released by the Mayor. It came in the midst of the uneven effort to find additional outside funding to cover the costs of asylum seekers. The City’s Independent Budget Office has taken a look at the plan and released its analysis. IBO projects that the city will end 2024 with an additional $3.6 billion in surplus above the Mayor’s Office of Management and Budget (OMB) estimate.

If the surplus prepays 2025 expenses, IBO projects a $1.8 billion shortfall next year, this is $5.3 billion lower than OMB’s ($7.1 billion). IBO’s gap projections for 2026 and 2027 ($7.2 billion and $6.6 billion, respectively), are higher than OMB’s ($6.5 billion and $6.4 billion, respectively).

The Mayor has reached a point of declining credibility even allowing for the magnitude of the issues facing his administration. The differences between the city’s estimates and the IBO estimates highlight the problem. No one argues that the City’s budget is under pressure while asylum seekers keep arriving in volume. The issue of how the response is being managed and funded is a different story.

The IBO has explained the basis for its estimates of future asylum costs and their impact on the overall budget outlook. The IBO produced three asylum seeker cost scenarios based on policies and procedures announced and data provided by the Adams administration. IBO’s analysis focuses on anticipated expenditures, not actual spend-to-date. IBO continues to estimate costs the City has and is projected to incur due to the influx of asylum-seeking individuals and families based upon three different scenarios to project total spending over 2024 and 2025 (all years are city fiscal years).

All three of IBO’s scenarios yield substantially lower spending than the November Plan which: 1) maintains daily per-household spending at very high emergency rates; 2) assumes straight linear population growth through 2024; and 3) projects a stable population in 2025. IBO noted that only days after releasing the November Plan—which included significant Program to Eliminate the Gap (PEG) reductions—the Mayor’s Office of Management and Budget (OMB) directed agencies to further reduce asylum seeker spending by 20%.

In the November plan, OMB raised its 2024 revenue forecast by $592 million to reflect stronger recent tax receipts. In the November plan, OMB raised its 2024 revenue forecast by $592 million to reflect stronger recent tax receipts. IBO also noted one of our major concerns regarding the end of pandemic aid. NYC received 13.5B in Federal Pandemic Funding, which is ending.

Some of these funds were used for programs that are on-going. In the Department of Education and DYCD, alone, IBO estimates that the Administration will need to add over $700 million in each year from 2025 through 2027 to replace this expiring federal Covid-era funding.

WHICH WAY IS THE WIND BLOWING

The last couple of weeks have generated mixed news about the outlook for wind generation. The first utility-scale wind farm in federal waters to be brought into operation began operations of the eastern Long Island coast. The project has a capacity of 130 megawatts, enough to power 70,000 homes. It was built by the same Danish firm which recently pulled out of projects off the New Jersey shore.

The offtake for the power is the Long Island Power Authority. LIPA initially approved the project in 2017. In November, New York launched a new offshore wind solicitation to help support the development of 9,000 megawatts (MW) of offshore wind by 2035, enough to power up to six million homes. The power up of South Fork accompanied Avangrid’s announcement that it completed installation of the first five turbines on its 806 MW Vineyard Wind 1 offshore wind project off Massachusetts as it prepares to deliver first power in coming weeks.

The company behind Icebreaker Wind announced the indefinite suspension of what was once set to be the first offshore wind farm built in the Great Lakes. The decision by the Lake Erie Energy Development Corporation (LEEDCo) followed the withdrawal of federal funding for the project. Icebreaker Wind was intended to be a demonstration project. It began in 2009.

About all of the different potential types of opposition to the project and its location befell this project. Permits were hard to acquire over concerns about pollution, birds, funding for opposition from coal and other legacy generation interests. And you could see it from the shore!!

HIGH SPEED RAIL BOOST

The Biden Administration will provide some $3 billion of funding to each of two high speed rail projects. The first is California’s high speed rail project which has been the subject of in terminable delays and cost overruns to $128 billion from an initial estimate of $30 billion. The DOT grant will be used to continue work along the initial Central Valley segment, including the purchase of six electric trains for testing and use. The second is the Brightline West project. The U.S. Department of Transportation will also give $3 billion to Brightline West’s planned bullet train to connect Los Angeles and Las Vegas, which has a price tag of $12 billion. The privately operated project, which had requested a $3.75 billion grant.

The grants were authorized under the 2021 Infrastructure and Investment Jobs Act’s Federal-State Partnership for Intercity Passenger Rail program. Some $36 billion in advance appropriations through 2026 were established. The program previously announced some $16 billion of grants to the Northeast Corridor. The competitive grants can be used to upgrade existing rail systems, including privately run lines.

SPORTS

Oklahoma City voters overwhelmingly approved a six-year, 1% sales tax to help fund construction of a new arena for the city’s NBA franchise, the Oklahoma City Thunder. or risk the same fate as Seattle: losing the team to another market. But some residents and experts who have studied public-private partnerships say the deal is much better for the wealthy team owners than the average resident.

Under the plan, the new arena would cost at least $900 million, with Thunder owners providing 5%, or $50 million, and another $70 million coming from a previously approved sales tax currently for improvements to the current arena. The team also would agree to stay in the city for 25 years in the new arena, targeted for opening before the 2029-2030 season.

A group of more than 20 Oklahoma-based economists and finance professors recently pointed out that for the 12 new arenas and 12 new stadiums built across the U.S. since 2010, the average public expenditure was about 42% and that since 2020, three arenas have been built with no public money. It definitely goes against the current tide. Then again, arena issues led to the purchase of the Seattle Sonics and their move to – you guessed it, Oklahoma City.

In Maryland, the “agreement” between the State and the Baltimore Orioles to secure the team’s tenancy long term has run into snags. Ownership wants the deal to include provisions allowing for the development of what is state owned land by Camden Yards. Objections in the Legislature have been raised over the plan which is seen by some as a giveaway to a team which has been hard to cooperate with.

Virginia Gov. Glenn Youngkin has reached a tentative agreement with the parent company of the NBA’s Washington Wizards and NHL’s Washington Capitals to move those teams from the District of Columbia to a proposed 9 million square foot development in Alexandria, VA. The project would include not only an arena for the basketball and hockey teams but also a new Wizards practice facility, a separate performing arts center, a media studio, new hotels, a convention center, housing and shopping.

To finance the arena, Younkin will ask the Virginia General Assembly in the 2024 session to approve the creation of a Virginia Sports and Entertainment Authority. The Authority would be authorized to issue debt backed by taxes generated from the project. The project would break ground in 2025 and open in late 2028.

While that process plays out, D.C. Mayor Muriel Bowser unveiled a counterproposal aimed at keeping the teams. The legislation that Mayor Bowser submitted to the Council outlines the parameters of the agreement, including receiving the authority to enter into a lease extension to 2052 and provide financing of $500 million toward the $800 million renovation project over a period of three years beginning in 2024.

The existing Capital One Arena would remain open under the team’s plan even if they move. The question is how much can the District do to keep two big draws and tax generators within its boundaries. If the Caps and Wizards move it would represent a hat trick for the franchises in terms of having located at some point in each of Va., Md. And D.C. It would also swim against the tide of locating professional sports arenas in downtown areas.

TRANSMISSION

The U.S. Supreme Court refused a request from the State of Texas to review a decision from the U.S. District Court for the Western District of Texas which found against Texas’ “right of first refusal,” or ROFR, law that gave preference for certain utilities to build new power lines across state borders. S.B. 1938 only allowed utilities that already had an in-state presence to build new transmission lines.

This law and some one dozen in other states were enacted in the wake of a decision by the Federal Energy Regulatory Commission to approve Order 1000, requiring competitive development for public transmission providers. The case will revolve around the “dormant commerce clause”. The legal doctrine infers that the Constitution’s commerce clause bars passage of state laws that harm interstate commerce, but allows states to pass discriminatory measures when it can show it is for a “legitimate local purpose.”

Another ROFR was passed in Iowa. Recently, an Iowa judge ruled that the legislative process for passing the state’s 2020 ROFR law was unconstitutional. The decision did not reflect the substance of the statute. The Iowa Supreme Court had already blocked enforcement of the law earlier this year, labeling it “anti-competitive.”

While these cases sort themselves out, the FERC is in the process of rulemaking over proposed changes to Order 1000. In a notice of proposed rulemaking last year, the agency said it could condition the use of right of first refusal for large regional projects if the incumbent transmission provider or utility co-owns it with another party.  NextEra Energy (an out of state provider) brought Texas to court after passage of the law prevented the company from building the Hartburg-Sabine transmission project in the state. The project was later canceled due to the ongoing litigation.

CALIFORNIA ROAD FUNDING

The State’s Legislative Analyst Office (LAO) released its estimates of the impact of increasing zero emission vehicles (ZEV) on revenues derived under the State’s current taxing policies. California’s transportation system is supported by state, local, and federal sources. State sources—which historically have accounted for roughly one-third of total transportation funding, including $14.2 billion in 2023-24—consist of various fuel taxes and vehicle fees.

The California Air Resources Board is required to complete a Scoping Plan that identifies a strategy for achieving the state’s GHG reduction goals, incorporating both existing state efforts and any additional changes that will be needed across various sectors. The most recent Scoping Plan, adopted in 2022 included transitioning all new vehicle sales to ZEVs (by 2035 for light-duty vehicles and by 2040 for medium- and heavy-duty vehicles) and reducing VMT statewide. 

The LAO estimates that under the GHG reduction pathway envisioned by the Scoping Plan that compared to current levels, notable revenue declines over the next decade from the state’s gasoline excise tax ($5 billion or 64 percent), diesel excise tax ($290 million or 20 percent), and diesel sales tax ($420 million or 20 percent) over the next decade.

Under the current scheme, the California Department of Transportation’s highway maintenance and rehabilitation programs are funded primarily by state fuel taxes and therefore will face significant funding declines. The State Transit Assistance program, which is solely supported by diesel sales tax revenues, will experience funding declines of about $300 million by 2034-35, which represents about one-third of its total funding.

The transportation sector is the largest source of state GHG emissions, accounting for about 40 percent of total emissions in 2019. Transportation-related emissions mostly result from light-duty vehicles (passenger cars and smaller pickup trucks), with a smaller amount coming from medium-duty vehicles (larger pickup trucks and delivery vans) and heavy-duty vehicles (buses and long-haul trucks). The plan assumes the overall fleet of vehicles driven in the state will transition from 97 percent conventional vehicles in 2022 to 85 percent ZEVs in 2045. The plan assumes this transition will be phased in at a steady and aggressive pace, with the majority of the fleet consisting of ZEVs by 2037.

NUCLEAR

The California Public Utilities Commission voted to allow the Diablo Canyon nuclear plant to operate for an additional five years. This would extend the shutdown date through 2030 instead of closing it in 2025 as previously agreed. It can produce 9% of the state’s electricity each day. The State approval sets the stage for the federal Nuclear Regulatory Commission will consider whether to extend the plant’s operating licenses.

In August, a state judge rejected a lawsuit filed by Friends of the Earth that sought to block Pacific Gas & Electric, which operates the plant, from seeking to extend its operating life. In October, the Nuclear Regulatory Commission rejected a request from environmental groups to immediately shut down one of two reactors.

TRI-STATE GENERATION

Tri-State is a generation cooperative serving 42 local distribution coops. It’s reliance on coal as its primary generation fuel source has unsurprisingly led to unrest among the members. The desire of its customers to distribute “greener” power has led to several member withdrawals from the Tri-State system. The withdrawal process has been contentious as Tri-State does everything it can to make a withdrawal as difficult as possible.

Now, another member is taking Tri-State to court over its perceived unwillingness to negotiate terms of exit for members. La Plata Electric filed suit on Nov. 10 asking that LPEA be exempt from its obligations set out in Tri-State’s bylaws and contract, receive damages stemming from that breach of contract and receive compensation for other accrued fees and expenses. The claim, as has been the case with other proposed withdrawals, is that Tri-State acts in bad faith by refusing to come up with a cost of exit.

The negotiations have dragged on since 2019. In 2021, Tri-State gave LPEA a $449 million price tag for a full withdrawal. While these and other negotiations continued, Tri-State took steps which would enable its operations to be subject to federal rather than state oversight. This forced proposed withdrawal agreements to be reviewed and subject to FERC approval. Tri-State and several member co-ops pursuing a partial buyout continued negotiations but the FERC rejected a set of partial buyout agreement terms submitted in 2022, concluding that certain provisions were not reasonable and just.

Tri-State has recently submitted plans to close Unit 3 of a coal-fired facility in Craig by early 2028 – two years earlier than planned. The utility would also close a coal-powered unit in Springerville, Arizona by 2031 contingent upon an award of federal funding. That funding – estimated at $730 million – is highly uncertain. Tri-State hopes to create 1,250 megawatts of renewable energy creation and storage.

The plan is subject to review by the Colorado Public Utilities Commission. Tri-State expects to hear a decision on whether the resource plan is approved by mid-2024. Phase II of the plan will include more specific plans on where the green energy sources will be built. Approval of Phase II would come in mid-2025. The co-op plan relies heavily on the receipt of funding under the IRA which provides for the US Department of Agriculture to review applications in a competitive process.

There is one cost hanging over the debate. Tri-State is still under a contractual obligation to purchase nearly $136 million worth of coal between 2024 and 2041.

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.