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).

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