Joseph Krist

Publisher

This week, the Treasurer of West Virginia announced that five banks would be prohibited from, among other things, underwrite state debt. The Treasurer and his compatriot in Utah have been leading the charge against climate change disclosure and trying to save the coal industry by fighting disclosure. They took their road show to North Dakota this week. In the end, these sorts of actions are actually just cheap stunts. It’s likely that the financial firms in question will survive quite nicely without being to bid on West Virginia debt.

There is of course, the fact that boycotts or other actions go both ways. There could easily come a time when West Virginia needs to finance a project and finds itself facing higher costs because it used politics to determine who gets the business. It is another unfortunate piece of political performance art.

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CARBON CAPTURE ECONOMICS

The segment of the power generation industry which looks to find ways to keep fossil-fueled generation alive seems to be putting much stock in carbon capture technology. It is also clear that the federal government supports carbon capture as it allows legacy generation assets to continue to operate. Science aside, it is an answer to the political hurdles which clean energy advocates face in their efforts to decarbonize.

Last week we discussed a proposal to convert a natural gas pipeline to carbon transmission in Nebraska. While much is made of the potential support to the ethanol industry which carbon capture could provide, the technology will also be looked to in an effort to allow continued operation of coal-fired generation. The proposal to convert the line has many supporters in the impacted industries. We also note that the Nebraska Public Power District (NPPD) supports the plan.

NPPD operates the Gerald Gentleman coal-fired power plant which is one of the largest emitters of carbon dioxide in the nation. NPPD notes that the plant is only 20 miles from a potential connection point to the pipeline. It estimates that a carbon capture system installed on one of two units at the Gentleman Station could extract 2 million tons of carbon dioxide in a “slow year” for energy demand, Swanson said, and as much as 4 million tons in a high-demand year.

Here is where the realities of economics enter the equation. You don’t hear as much about the economics of carbon capture. Like so many other environmental fixes which have been offered by the environmental movement, this one comes at a cost. While expressing support, the NPPD argument highlights that issue. NPPD estimates that the cost of installing the technology needed at Gerald Gentleman is upwards of $1 billion.

That cost would come as debate continues over the basic feasibility of pipeline conversion. In a December 2019 report, the National Petroleum Council said converting natural gas pipelines to carriers of CO2 was “not a practical option,” particularly over long distances. NPPD may have highlighted the biggest obstacle – cost.

The District admits that to make the investment feasible, that a private partner which could benefit from tax credits generated at a plant would likely be needed to participate. 45Q is a performance-based tax credit incentivizing carbon capture and sequestration or utilization. Much like with the production tax credit (PTC) for wind, under 45Q, qualifying power generation and industrial facilities can “generate” a tax liability offset per captured ton of carbon dioxide. The tax credits are provided for 12 years. An electric generating facility can utilize the credit if it removes at least 500,000 tons of carbon from the atmosphere during the taxable year. 

COVID, OIL, AND THE TEXAS ECONOMY

The pandemic and its impact on energy usage and energy industry employment has been clear. Recent data from the Institute for Energy Economics and Financial Analysis highlights the short-run impacts but also provides some long-term trends which may surprise some. In a time of rapidly increasing prices, many thought that a consequence would be renewed operation of idle wells if not new sites. While production has clearly increased, the impact on employment remains subdued.

Employment in the Texas oil and gas sector has rebounded since its September 2020 low. That increase in employment in the oil and gas businesses account for some 39,400 jobs. The job losses related to the pandemic were twice that number. Between September 2019 and September 2020, Texas employment for oil and gas extraction, support activities for mining, natural gas distribution, petroleum and coal products manufacturing, pipeline transportation, and gasoline stations industries laid off 21% of their collective workforce, or 76,300 jobs. If April 2022 employment of 333,900.

The data suggests that the growth in oil/gas jobs is below average relative to the overall employment base. It is an important source of jobs but when that comes up in the overall energy debate here’s something to think about. Texas, which is home to 11 percent of all U.S. energy jobs, did not create new oil and gas jobs last year—even though oil and gas prices were steadily improving throughout 2021. The data points to the fact that from 1990 to the present, the total nonfarm employment payroll in Texas grew from 7.1 million jobs to 13.3 million jobs (+87%). Over the same period, the oil/gas sector employment level increased 22%.

CRYPTO AND POWER

The recent spectacular fall in the crypto currency markets has rightly focused attention on that aspect of crypto. One of the others which gained steam as the summer approached was where and what sort of power crypto miners were planning to exploit to support their activities. It has led to the purchase of entire generation facilities which might otherwise be idled (coal plants in particular). Their role as huge consumers of power is at the center of the debates over electric generation and climate change.

Many climate activists and others are concerned that the regulatory schemes in many states may not be the best mechanism to address concerns over the environment and the needs of the overall power grid. In some areas the worry is primarily environmental. In some locales however, the presence of miners creates a highly competitive market for electric load which leads to local opposition. Unfortunately, these businesses are driven by the cost of power so they seek out low-cost providers which are often municipal utilities.

One example is the Chelan Public Utility District in Washington. The agricultural region some 2.5 hours from Seattle is powered delivered from the Bonneville Power System’s Columbia River hydro sources. This means that customers have access to relatively cheap power. At one point that was becoming a problem as requests for new connections (especially to crypto miners) amounted to capacity demand equal to that of the entire county.

So, the PUD applied what is really a common sense approach. Electric rates have always had various classes of customers who paying different rates than other users. Chelan County charges miners roughly triple what it charges residents for electricity. Douglas County PUD limits its total crypto mining load to 39 megawatts (it’s currently just under 33 megawatts) are raised for crypto miners 10% every six months. Grant County PUD has developed rates for “evolving industry” customers which increases rates if miners’ total current and requested power demand exceeds 5% of total county demand, which it has since March. 

Crypto mining now accounts for some 3.5% of load at 8 megawatts down from that 200 level. Interestingly, one of the factors cited by miners looking to move operations to friendlier fields is the ability of public vs. investor-owned utilities have to more nimbly adjust their rates and create customer classes. The recent explosive growth of crypto mining in Texas is tied in part to more “friendly” rate treatment in an investor-owned utility environment as well as the significant wind and solar resources available.

GEORGIA GOES ALL IN ON ELECTRIC VEHICLES

Under an agreement signed this week, Hyundai Motor Group will receive $1.8 billion in tax exemptions and incentives from the State of Georgia in exchange for building its first dedicated electric vehicles manufacturing plant there. The subsidy package of property and income tax exemptions, as well as other incentives in land, infrastructure and equipment purchases, is the largest-ever offered by the US state according to Hyundai.

Hyundai plans to start construction on the 300,000-unit-a-year EV and battery manufacturing plant west of Savannah, in January 2023. It will begin production in the first half of 2025. To support that facility, Hyundai will receive an income tax credit of $277 million over five years. It will get another $518 million tax deduction for construction equipment and building material purchases. State and local purchases of land and construction of roads is estimated to be an additional investment of $430 million.

The deal requires the company to return part of the incentives if the company falls below 80 percent-level of promised investment or employment. It comes as Georgia is offering some $1.5 billion of incentives to Rivian, the electric truck maker and to battery manufacturers.

SOLAR AND MUNICIPAL UTILITIES

It isn’t just the investor-owned utility cohort that finds itself in the middle of disputes over individual solar installations at residences. While the battle lines are usually drawn around the issue of net metering, there are other fees and charges that utilities can try to levy to offset declining consumption from the system. Lately, a municipal utility in New Mexico found itself in the middle of a dispute over its approach to solar installations and rates.

Farmington Electric Utility System (FEUS) is owned and operated by the City of Farmington and serves about 46,000 customers. It has been defending itself against a lawsuit filed in the United Stated District Court for New Mexico on August 16, 2019, challenging what were characterized as illegal and discriminatory charges FEUS imposed on customers with their own solar panels.

Initially, the District Court dismissed the litigation in February 2020, holding that the plaintiffs should have filed their claims in state court. However, on June 28, 2021, the Tenth Circuit Court of Appeals held that the District Court was wrong and reinstated the case in federal court. Several months later in response, FEUS suspended and eventually withdrew the solar charge, further agreeing to refund the plaintiffs from the illegal solar charge. Refunds to the eleven solar customer plaintiffs totaled nearly $20,000.

NYS SALES TAX COLLECTIONS

We have long viewed sales taxes as one of the indicators most reflective of current underlying economic trends in any state. Their monthly collections often provide real time indications of economic activity. The ongoing debate over whether or not the US economy is in recession is underway after this week’s data release from the Federal government. The latest sales tax data we see comes from the State of New York. It gives fuel to both views of the economy.

The headline number shows local government sales tax collections in New York State totaled over $5.5 billion in the second calendar quarter (April-June) of 2022, an increase of 12.2 percent, or nearly $604 million, compared to the same quarter last year. After April and May collections grew by 15.7 percent and 16.7 percent, respectively, collections for June increased by a more modest 6.5 percent. This was the first time monthly year-over-year growth dipped below double-digits since March of 2021. June’s slowdown was due, in part, to a temporary reduction in local sales taxes on gasoline in 24 counties, although it may also reflect other factors, including a return to more typical growth rates after the dips and rebounds of the COVID period.

Here’s where the data begins to show the basis for the debate. This past quarter’s strong growth was mostly seen in New York City, where collections increased by 24.9 percent, from $1.9 billion in April-June 2021 to $2.4 billion. In contrast, year-over-year growth for the counties and cities in the rest of the State, in aggregate, slowed to 2.6 percent over the same period, going from $2.7 billion to $2.8 billion. New York City’s total sales tax receipts for the second quarter were fairly strong by its own historical standards, but its double-digit growth rate also reflects relatively weak collections in the April-June period of 2021. City collections had not recovered to pre-pandemic levels as of the second quarter of last year, and wouldn’t until the fourth quarter (October-December).

SANTEE COOPER

The South Carolina Public Service Authority (Santee Cooper) continues to face rating pressure. This week, Moody’s affirmed South Carolina Public Service Authority’s (Santee Cooper) A2 rating on its revenue bonds and changed the outlook to negative from stable. The negative outlook is based on the financial constraints under which Santee Cooper must operate after legal settlements stemming from the failed Sumner nuclear plant expansion. Like so many utilities across the country, natural gas prices raised costs for Santee Cooper. Unfortunately, significantly higher purchased power and fuel costs that cannot be immediately passed onto customers under the terms of the legal settlements through 2024.

The expectation is that this will lead to less than 1 times net coverage of debt service. Santee Cooper’s board has authorized regulatory accounting treatment for a portion of the costs that could qualify as rate freeze exceptions. The exceptions mostly relate to higher fuel and purchased power replacement costs incurred by the utility due to a fire and temporary closure of a coal supplier’s mine. It seems that the utility will seek to recover these and other deferred costs after the rate freeze expires. This creates the potential for significant dispute with Central Electric Power Cooperative Inc. (Central), its largest customer. Central has already indicated its opposition to treat some of these costs as rate freeze exceptions.

Moody’s notes the availability of adequate liquidity and the potential for some expense reductions from operations. This is a ratings event not an issue with ultimate debt repayment. It does show how damaging a failed investment could be for any utility. While all of the focus may be on the failure of one project, it is the long-range ramifications of those policies that handcuff the utility now. It should be a cautionary tale for any municipal utility when it is offered ownership participations in projects based on new or emerging technology.

HOSPITALS DODGE A BULLET UNDER MANCHIN DEAL

There has been concern expressed that without significant legislation such as some form of a Build Back Better Program, that access to health insurance might be reduced. This would have hurt hospitals which serve the under and non-insured customer cohorts and was potential source of credit pressure. As it looked more and more like the worst would come to pass in terms of legislation, events have suddenly turned which effectively removes that source of credit risk.

The worry was that the subsidies available from federal funding to lessen the cost of Affordable Care Act based health insurance might not be renewed. Now, the deal announced by Senator Manchin includes three years of subsidies for Affordable Care Act premiums. Hospitals could also see some benefit from provisions allowing Medicare greater leeway in negotiating prescription drug prices.

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