Joseph Krist

Publisher

BATTERY FIRE

One of the concerns cited by opponents of the establishment of industrial battery storage facilities is the threat of fires. That fear and the inability of the industry to address concerns have stopped a variety of battery storage facilities around the country. While much attention is being focused on the California wildfires, another event in Monterey County is providing unwanted attention on the risks of battery storage.

A massive blaze that began a week ago forced the evacuation of 1,200 residents before it burned itself out. The fire at the plant, a 300-megawatt lithium storage facility, destroyed most of the building and its contents, according to county fire officials. The storage facility is a part of a natural gas-powered electricity plant operated by Vistra Energy, a Texas company. The facility also has a battery storage station owned by PG&E.

The fire raised concerns about the toxic impact of chemicals released during the fire on air, water and soil in the area of the facility. It will certainly embolden those with concerns over the siting of battery facilities. This is the largest such fire event associated with battery facilities. It will be important to conduct a thorough transparent investigation. The industry needs public support for its efforts so the circumstances need to be understood and realistic remedies must be offered.

The first bill on the subject has been offered in the CA Legislature. The Battery Energy Safety & Accountability Act, or AB 303, will remove battery energy storage facilities from the California Energy Commission’s opt-in certification program, and return the power to local communities on whether to accept new battery plants. AB 303 purports to “establish reasonable limitations on where battery energy storage facilities can be located,”. The limitations include requiring a 3,200-foot setback from sensitive places like residences, schools and hospitals.  

The California Public Utilities Commission will soon vote on establishing new standards for maintaining and operating battery energy storage facilities. In the San Diego area, the most recent fire occurred September 5 in Escondido at San Diego Gas & Electric’s 30-megawatt, 120 megawatt hours facility. That led to the temporary evacuation of about 500 nearby businesses. Last May, a fire broke out in Otay Mesa at the 250-megawatt Gateway Energy Storage facility, operated by LS Power and its subsidiary, Rev Renewables. Fire officials said the batteries kept re-igniting and it took nearly 17 days before the last fire-fighting and air monitoring crews left the facility.

WILDFIRE INSURANCE

The FAIR Plan said mid-month that it has received 3,600 claims so far and estimated that it covers 22% of the structures in the Palisades fire, representing potential exposure of more than $4 billion. Meanwhile, about 12% of the structures in the Eaton fire are covered by FAIR, representing potential exposure of more than $775 million. FAIR said actual claims following a fire have historically translated to about 31% of the total exposure in an area, on average.

FAIR also said it can access reinsurance once the first $900 million in claims are paid. Once that threshold is reached, reinsurance is fully available for the next $350 million of claims payments, subject to certain conditions. FAIR said it hasn’t yet asked California’s insurance commissioner to levy an assessment on insurers. This would be the ultimate source of funding for FAIR as is the case with other catastrophe bond programs across the country.

As the situation in Los Angeles County unfolds, the realities of individuals insurance situations become clearer. One of those involves the fact that many policies do not cover enough to “rebuild” a residence. That primarily reflects the fact that the cost of building materials has never fully come back down after the inflation of the pandemic. FAIR caps its residential policy limits at $3 million. For many insured, that would not be enough to “rebuild” in the Southern California market.

CHAOS AND CREDIT

This may be one of the more challenging budget seasons faced by state and local governments in many years. The potential economic impact of efforts to slash the number of federal employees will cause local issues. The complete chaos around the effort to withhold loans and grants one day and the restoration of those loan and grant agreements cast great uncertainty over the true availability of those monies.

In addition, it is clear that Medicaid is a prime target for cuts. The online portal through which state Medicaid departments receive federal funding stopped working. That halted the processing of claims and billing for services provided through the program. The outage naturally raised suspicions that it was intentional. Many states receive a large infusion of funds at the start of every month. 

The states received a warning that the system was taking “additional measures” that could cause delays because of “executive orders regarding potentially unallowable grant payments.” It’s a symptom of where it is believed that the current Administration wants to take Medicaid. A striped down, limited system with work requirements for all recipients seems to be where they are headed.

It isn’t just the impact on state budgets directly from Medicaid. Cutbacks and restrictions on the program would obviously impact hospital credits. Reduced reimbursements would ultimately lead to higher state funding levels to support “charity care”. This was something that the ACA specifically sought to address with success. Reimbursements on an interruptible basis for a lower level of payment will damage hospital liquidity which is a key ratings driver.

RHETORIC VERSUS REALITY

The issue of subway safety in NYC has ben front and center over the last year. One of the solutions involves increasing the number of uniformed police officers on the trains and platforms. As part of the 2025 State of the State Address, Governor Hochul announced a subway policing initiative to increase police patrols on subway platforms and trains in New York City. If passed in the State budget, every overnight subway train will have two New York Police Department (NYPD) officers onboard, along with additional officers stationed across the City’s subway platforms.

There is a cost to all of this and that is where an unexpected layer of uncertainty materializes. The NYC Independent Budget Office estimates that the cost, using citywide payroll data and information reported by the Hochul administration, is between $61 million and $159 million, assuming all shifts are paid at overnight overtime rates. The Hochul administration’s $154 million projection is at the high end of the range.

The Governor proposed that New York State and New York City will split the estimated $154 million overall cost of deployment. If approved, the State would pay half ($77 million) and the City would pay the other half. New York City is expected to cover the cost of the program until the State passes their final budget and can reimburse the City. The final cost depends on the mix of officers and their ranks which has a serious impact on the total actual cost as pay rates could vary by as much as two or three times depending on the rank of the officers deployed.

IDEOLOGY AND KANSAS SCHOOL DEBT

Voters in Greeley County, KS voted to approve a $4.6 million bond issue for Greeley County public schools in 2024. The 25 year bond was meant to finance refurbishment of school facilities such as a gymnasium. That approval was overturned by the Attorney General of Kansas, the renowned ideologue Kris Kobach. He said the election didn’t comply with a state law requiring the public to have been notified of the May vote through notices on a county website.

The attorney general’s office determined the county clerk’s “non-compliance with the website notification” amounted to a failure to follow state law. Two problems: the County did not have a website at the time of the election. It relied on three months of notices in local papers, the traditional way of notifying voters. In addition, the law cited as the basis for the objections by the AG did not directly mandate that each county have a website.

Now, the legislature is considering Senate Bill 2, introduced in the 2025 legislative session for the purpose of approving passage of the school bond. That would permit the district to issue bonds to finance construction of a gymnasium, locker room and playground compliant with the federal Americans with Disabilities Act. No complaints were filed at the state or local levels about the bond election. There is along history of acceptance of bond approvals that have failed to fully comply with vote requirements in Kansas.

CHICAGO PUBLIC SCHOOLS

The Civic Federation has released its analysis of the Chicago Public Schools (CPS) FY2025 proposed budget total of $9.9 billion. The Federation says that it presents a temporary solution to a long-term structural financial problem. The plan as presented manages to close a $505 million budget deficit through a series of strategies, including operational reductions and efficiencies, without resorting to irresponsible fiscal practices like issuing debt to fund operations or depleting reserves. 

The Johnson Administration suggested that CPS borrow up to $300 million in long-term debt financing to cover the costs of the contract and the proposed pension reimbursement. The Federation rightly points out that the City’s proposal would increase CPS’ daunting debt and increase the likelihood of a credit rating downgrade, thereby increasing borrowing costs and undoing much of the fiscal progress the District has made over the past several years to get back to investment-grade status. 

Trouble also lurks ahead according to the Federation. The District projects future budget deficits throughout the next five fiscal years upwards of a half-billion dollars before accounting for additional salary and personnel costs, which signals even larger structural deficits ahead. Assuming 4% raises for teachers and principals, as well as a $175 million contribution from CPS to the City’s pension fund for municipal employees, the FY2026 deficit could increase to $933 million. 

PUBLIC POWER IN TUSCON?

The Tucson city council heard an update from a study to analyze the financial feasibility of establishing either a Tucson Public Power Utility or a Community Choice Aggregation Program (CCA). A Public Power Utility would own and operate the electric distribution system within the City and provide power supply to residents and businesses. A CCA program would only provide the power supply portion of electric service while TEP would continue to provide delivery and transmission services.

For reference, based on current TEP residential rates, for every dollar charged 30 cents covers delivery services (distribution and transmission), and 70 cents is for power supply. TEP rates have increased at a rate of 3.4% annually since 2012. More recently, however, retail rates have increased by approximately 7.6% per year since between 2020 and 2023.

The study estimates the total distribution system book value at $1.5 billion. The City would not need to purchase the entire system. Assuming a simple cost allocation based on customers and usage characteristics, the City’s share of this plant is estimated at $820 million (book value). There is also some $575 million in general plant assets. The City would be acquiring a share of those assets as well. The Public Power Utility will be deemed feasible if costs can be met through rates that are equal to or lower than forecast TEP rates.

CALIFORNIA WATER OUTLOOK

The Department of Water Resources announced that its State Water Project would likely be able to allocate 20 percent of requested supplies, up from 15 percent at the end of December and just 5 percent earlier that month. Releases from the State Water Project come from the Sacramento-San Joaquin Delta (the “Bay-Delta”). The decision comes as the President has been pushing for more water to be released to Southern California from that source.

The water began flowing after a three day maintenance period. The President claims that “the military” was sent to increase water supplies. The reality is that Los Angeles actually gets an estimated 38 percent of drinking water from the Los Angeles Aqueduct. Another 9 percent of the city’s supply came from local groundwater and 2 percent from recycled wastewater, with 51 percent supplied by the Metropolitan Water District of Southern California. Just 30 percent of Metropolitan’s water originated in the northern part of the state, while 20 percent came from the Colorado River and 50 percent from a combination of other sources.

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.