Joseph Krist

Publisher

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The announcement by GM that it will not sell internal combustion powered vehicles has increased the focus on electric vehicles. In combination with other automakers, this makes the adoption of electric vehicles ever more likely and sooner rather than later. The electric vehicle age will place pressure on utilities both investor owned and publicly owned to be in a position to facilitatethefull implementation of the technology. It also raises issues for state legislatures as the current system of road funding is  not compatible with widespread electric vehicle use.

So much of our focus this week is on the various issues raised by the move to EVs.

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MUNICIPAL UTILITIES AND ELECTRIC CARS

The announcement by General Motors that it will no longer sell vehicles powered by internal combustion engines by 2035 clearly establishes the future course of the industry. As revolutionary for the auto industry as the decision is, it puts the utility industry at the center of the effort to decarbonize. Between the demand for decarbonization and the looming demand burst related to electric vehicles, it is likely that substantial expansion of both the generation base and the transmission and distribution grid will challenge electric utilities. Municipal electric utilities will be no different from their investor owned counterparts.

As electric vehicles become prevalent, the need for reliability of the electric grid to be enhanced grows. The full implementation of electric vehicles will rely on the resolution of issues surrounding charging. The vehicles will alter demand patterns for electric consumption. It will impact the things like time of day pricing, the unique demands of “fast” electric vehicle chargers, and will come at the same time as the drive for renewable generation continues.

Demand charges are a component of commercial and industrial electric bills that assesses a fee based on the highest amount of energy used in any 15-minute period throughout the month. They are designed to make sure customers are paying their fair share to keep the grid ready to deliver even in times of high demand.  It is feared that fast charging for vehicles will artificially drive are a component of commercial and industrial electric bills that assesses a fee based on the highest amount of energy used in any 15-minute period throughout the month.

If demand charges are generated through the use of electric vehicle charging infrastructure, it could make electric a less economic choice. Charging infrastructure has become more of a chicken/egg issue with low initial demand making the service more costly. There are alternatives. In Virginia, fast-charger customers of Dominion Energy that have low demand can qualify for a general service rate without a demand charge.

In Connecticut, Eversource converts the demand charge into an equivalent per-kilowatt-hour rate. Southern California Edison offers time-of-use rates, which charge different rates at different times of the day, for five years, with demand charges phasing back in over the following five years. 

PUBLIC UTILITY AT THE FOREFRONT OF CHANGE

We have in the past cited the Tennessee Valley Authority as an example of how government can fill the breach when the private sector and the market do not. Whether it has been electrification, broadband, or other services public entities like the TVA and municipal utilities have successfully filled the need. Now, the TVA has another chance to put a publicly owned utility at the forefront of change.

Tennessee will have at least three manufacturers building electric vehicles by year end. Current electric vehicle ownership in the state is about 11,000, according to the TVA. It is well known that one of the major obstacles to fuller electric vehicle acceptance is range anxiety, or the fear that a vehicle will run out of charge and the driver will become stranded.

To address that concern, the TVA has announced that it will develop a network of charging stations. It is expected to include about 50 stations, primarily along interstates and U.S. and state highways. The idea is to have chargers available at least every 50 miles, “from the mountains of East Tennessee to the banks of the Mississippi,” according to the TVA. It is expected to cost about $20 million and should be built out over the next three to five years.

Funding will come from a portion of the State of Tennessee’s share of the Volkswagen settlement ($5 million) and from $15 million of TVA funding. It is expected that local utilities will actually operate the equipment. So the role of municipal utilities is clear. The TVA and the consortium Drive Electric Tennessee have a goal of 200,000 electric vehicles in Tennessee by 2028. 

ELECTRIC VEHICLES AND ROAD FUNDING

The South Dakota legislature is considering A bill that would charge an annual fee for electric car owners. The issue has been previously rejected twice when the proposal called for a $100 fee. Reflecting that history, the current bill would impose a $50 fee. The tax will go toward the state’s road maintenance fund, which is currently funded through a gas tax, at $0.30 per gallon.

In neighboring North Dakota, the legislature is considering a bill to raise the state’s gas tax by 6 cents per gallon. The amended bill also would require electric and hybrid vehicle drivers to pay a road use fee more than double the existing level.  The proposal would apply to gasoline and special fuels such as diesel,  biodiesel and compressed natural gas used in vehicles. Those fuels are taxed at 23 cents per gallon, a lower rate than in surrounding states.

In Utah, the Legislature is considering a bill which would raise the fees for electric vehicles  from $120 to $300, up 150%. Registration fees for plug-in hybrids  would quintuple from $52 to $260. Fees for hybrid electric vehicles would rise from $20 to $50, up 150%. This would make the Utah fees the nation’s highest.  Utah offers a pilot program that could allow electric and hybrid car owners a chance to pay less if they drive less, called the Road User Charge program. It charges a monthly fee per mile driven, up to an annual maximum of what the registration fee would be otherwise. If the car is driven less than that amount, he or she pays less.

VEHICLE MILEAGE TAXES

While much of the discussion currently revolves around whether the gas tax needs to be raised, the announcement by GM that it will only sell electric vehicles as of 2035 may make much of the gas tax discussion moot. The announcement comes as an unusual alignment of political interests coalesces around the issue of vehicle mileage taxes. Increased investment in electric vehicles, Democratic control of Congress, bipartisan interest, and President Joe Biden’s opposition to increasing the gas tax could jump start a push to a user-based fee.

A vehicle mileage tax goes a long way to addressing the fairness issues around VMT versus a gas tax. By adopting a universally applicable tax in place of separate fees based on whether a vehicle is an internal combustion powered one or an electric one, the issue becomes one of equity versus the current efforts to use registration fees as a way to deter interest in electric vehicles.

The logic behind the VMT is clear and that is reflected in the opposition to it. The biggest objection seems to be around issues of privacy. It is the same argument that has been raised against electronic tolling and against electronic fare collection on public transit. The reality is that electronic tolling and fare paying has been accepted. The reality is that there are plenty of technologies in use today that effectively track movements and whereabouts. The privacy issue seems to be a closing the barn door after the livestock has gotten away.

ENERGY TECHNOLOGY AND MUNICIPAL UTILITIES

The City of Longmont, CO owns its own electric distribution utility as well as a broadband utility. Recently it announced that it was going to continue a program which merges energy with technology directly. The program is called Building Energy Benchmarking . It allows the owner of a building or industrial structure to compare their building to similar building types in similar climates, so that it may be determined whether its energy use is above average, below average or on par. A participant inputs basic building data and 12 months of electric and natural gas usage information into the Environmental Protection Agency’s ENERGY STAR® Portfolio Manager to calculate a score, and submits the results to its electric provider.

It’s advertised as a source of savings for consumers of electricity. The fact is that it is also a source of longer term savings for the utility by reducing the dependence upon power generated from fossil fuel plants and larger scale technologies. By managing load, generation requirements are minimized and the ability to add renewables based generation is enhanced for the electric provider. 

In Pennsylvania, the University Area Joint Authority operates a regional sewage treatment system for several municipalities around State College. Yet it is becoming better known for a plan that would see the utility using solar power for 85% of its operating needs. It is doing that by constructing solar arrays on its own property. It also seeks to do so by using power produced at individual small scale solar arrays.

The situation highlights some of the legal obstacles slowing the move to renewables. In Pennsylvania, state rules limit the size of solar arrays. Part of the economics of solar in Pennsylvania, is the use of credits for the reduction of pollution from agricultural lands.  The cost benefits for installing solar are reduced by current state limits on the size of solar arrays.

This municipal issuer is taking a unique approach. To deal with the limitations on how much solar power generated on Authority property, the Authority has come up with a creative plan. The Authority plans for a pilot project of about 300 homes, businesses and nonprofits to install their own individual solar panels. Under the plan, UAJA will finance the up-front costs for a contractor to install the solar panels. For customers who opt in, a separate line on their UAJA bill will be for the solar panels. 

It’s another example of municipal issuers stepping into the breach when a market approach is not able to satisfy demand. We expect to see more of this as renewable power generation gains greater acceptance.

CANNABIS DEBATES CONTINUE

Idaho is one of only three states that does not allow possession of even low amounts of THC, the psychoactive chemical in marijuana. The state is landlocked pot-wise. Washington, Oregon, Montana and Nevada, while Utah allows medical marijuana. Wyoming allows CBD products containing less than 0.3 percent of THC. And Canada is legal weed territory.

Now, an Idaho state senate committee has approved a resolution to move action on a constitutional amendment seeking to prevent the legalization of marijuana and other psychoactive drugs not already legal in the state. 

South Dakota Gov. Kristi Noem (R) has issued an executive order allowing a legal challenge to the constitutionality of a November voter-approved amendment to legalize recreational marijuana in the state. Amendment A passed with 54% support in the Nov. 3 election, while a separate question on legalizing medical marijuana received nearly 70%. Opponents of the voter approved amendment are using narrow legal points to challenge and hopefully overturn the vote.  

PENNSYLVANIA BUDGET

The Governor has proposed his budget for fiscal 2022 and it looks like it will be a hard sell in the Legislature. The budget calls for an attempt to graduate income tax rates. Pennsylvania currently has a flat income tax and the Governor has long sought to increase the rate at the highest end of the income spectrum. Just as steadily, the Legislature has turned him down. Increasing the rate to 4.49% from 3.07% to raise what the Governor estimated to be $4 billion over a full-year, or about 25% more. So the Commonwealth is left with a less flexible tax structure that also makes school funding very dependent upon local property taxation.

This year the budget process will no doubt be influenced by the increasingly poisonous politics of the Legislature. In 2022, the Governor is term limited and the remaining Republican senator Pat Toomey has announced his retirement from the Senate. The aftermath of the Presidential election and Pennsylvania’s center stage presence in the effort to overturn the election will likely bleed over into the budget process. We would be surprised to see support for the Governor’s proposed tax increase.

The question is whether the State will return to the past and a long history of contentious budget battles and delayed budgets. The intransigence on the part of anti-tax legislators has left the Commonwealth facing real pressures to fund the schools without any real prospect of generating additional resources for education. The Commonwealth has already made significant cuts to the state higher education system including reduced course offerings and headcount reductions. There still remains substantial opposition to severance taxes on natural gas which could address the revenue concerns.  

PANDEMIC CASUALTIES – HOTEL/CONFERENCE CREDITS

One of the more prominent cases in which revenues for debt service were reliant on an annual appropriation and the required appropriation did not happen has been in the Village of Lombard, IL. The village sold debt for a hotel/ conference center in the Chicago suburb in 2005. A decline in demand for such facilities after the 2008 financial crisis doomed the hotel to underperformance. In the event of inadequate revenues from the facility, the Village committed to make up any shortfalls subject to annual appropriation.

When the project experienced a shortfall in revenues for debt service, the Village declined to appropriate funds for debt service (as was their right). This led ultimately to a Chapter 11 bankruptcy filing and a refinancing of the old debt through the Wisconsin Public Finance Authority. Now with the hotel limited by lock downs and operating restrictions, the facility does not have revenue for debt service. So, a payment default now has occurred.

It is a clue when a project cannot find issuer support within its own jurisdiction. The Wisconsin Public Finance Authority has participated in other out of state financings when it was clear that there was little local appetite for the risk. So we are not surprised when one of the Authority’s deals has problems. The real question is how will the pandemic permanently alter the demand for business based events. This economic environment is far different than was the case in the recovery from 2008. It is unclear how much of the shift to remote work will be permanent.

PUERTO RICO BENEFITS FROM NEW ADMINISTRATION

The Biden Administration is releasing $1. 3 billion in aid allocated by Congress to help the U.S island territory protect itself against future climate disasters.  It is also taking steps to remove restrictions on an additional $5 billion which can be applied to housing infrastructure. Those restrictions were policy decisions by the prior administration.

So far, Puerto Rico has only received $18 billion of the $43 billion Congress committed to the rebuilding on the island. There have been concerns cited about how the money will ultimately used which were the basis of decisions not to release the funds. As has always been the case, there will be concerns about efficiency and transparency whenever such a large amount of federal funding is injected at once.

In the end, it is another example of how the historic resistance to timely and full reporting about its finances hurts the Commonwealth. The concerns are, at the core, legitimate over a long period of time. It has not been a partisan issue. The disclosure was universally inadequate regardless of which party was in power. It served as a convenient excuse for those who simply did not want to support the Commonwealth’s residents. Nonetheless, it is a self inflicted wound.

COAL

“There is not a regulated coal plant in this country that is economic today, full period and stop.” That is from the CEO of NextEra Energy. Coal-fired power is unprofitable everywhere in the country because of competition from less expensive sources like wind, solar and natural gas. The national average capacity factor for coal plants dropped below 50 percent last year for the first time on record in 2019.

Alliant Energy of Wisconsin announced what it called “the end of an era” with a plan to close the Columbia Energy Center, with a capacity of about 1,100 megawatts, in 2025. The point of all of this is that it is no longer a political issue. The decline of coal is market based yet there are efforts being made by legislatures to intervene in markets.

The Indiana legislature is considering legislation to keep coal plants open. North Dakota is looking at legislation to tax wind energy production and use that money to subsidize coal generation. A bill introduced in Wyoming’s Legislature would also tax solar energy in an effort to make it less economic.  The $1 per megawatt tax would not apply to small-scale energy producers, like homeowners but would apply to commercial scale solar generation.

ACA REVIVAL

The Biden Administration has announced a three month extension of the enrollment period for health insurance under the ACA. The special enrollment period will run from 15 February through 15 May and open the federal exchange to those who have either lost or are unable to obtain health insurance through their employment. This has taken on extra significance in light of pandemic induced limits on employment. It also relieves pressure on healthcare providers. Insured patients are more likely to get more regular and less expensive care versus the uninsured who access the system through the emergency room.

Patients who lost health insurance during the pandemic generally shifted to Medicaid or uninsured/self-pay status. Uninsured and self-pay patients are also associated with higher levels of bad debt. The impact on hospital revenues and margins will be positive. It will also be positive for states and counties which will likely face lower levels of Medicaid enrollment. States have already been looking for ways to reduce their Medicaid costs so anything that reduces that burden is good.

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