Joseph Krist

Publisher

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INFLATION AND CAPITAL PROJECTS

With so much attention being focused on funding initiatives to support infrastructure maintenance and development, it has been easy to ignore another potential source of drag on development efforts – inflation. It is not a surprise that the same issues driving general inflation trends are showing up in specific impacts on capital facilities development. The most recent example comes from the State of Maine.

According to an analysis by the Associated General Contractors of America, all construction products are significantly more expensive. Paving asphalt was nearly 18 % more costly on a year over year basis in the month of June. Likewise, structural metal for bridges was up nearly 24 % and concrete products were up more than 13 %.

In Maine, the state DOT cited elevated prices in support of a decision to reject bids on paving projects in Augusta, Shapleigh, Old Town, Bangor and Byron, a bridge replacement in Old Town and traffic signals in South Portland. In total, the department rejected nearly $28 million in work. This is happening even in the face of $100 million in extra state funding for projects in the FY 2023 budget.

The impact of delays and politics on other larger capital projects is becoming clear. In California, the cost of its long delayed high speed rail project continues to spiral. That was going on long prior to the pandemic. Now, the economic impacts of the pandemic are generating less and less value for the project as it deals with the same kinds of costs that smaller states like Maine do. This lessens the impact of the appropriation in the FY 2023 state budget which will cause the release of $4.2 billion from the bond fund for the project established in 2008. That is enough only to complete the 171-mile Central Valley segment from Bakersfield to Merced.

Political issues are impacting other projects. The quarreling in Pennsylvania over tolling roads has resulted in older roads and less expansive capital development. Politics drove Gov. Chris Christie’s decision not to support the Gateway Project where each day of delay and debate (we are over 10 years now) has done nothing but add to the costs of these facilities. Inflation at current rates will damage those programs.

NYC SCHOOL ATTENDANCE AND FUNDING

The FY 2023 budget process for the City of New York saw much attention focused on the issues of the schools and public safety. Given the recent wave of violent crimes in the City, the public safety side of the debate was solved relatively easily. The police were not defunded. The debate which has generated much more intensity is the one over education funding. The approved budget did contain cuts to some items of education spending which were criticized.

The Mayor cited the need to adjust spending to the realities of enrollment. The City’s Independent Budget Office (IBO) has released data reflecting those realities. Enrollment in the city’s public schools (traditional and charter) continued to decline in the second pandemic year (2021-2022 school year). Total enrollment in 3K through 12th grade was 1,058,900 in the second pandemic year, down 3.2 % from 1,094,100 in the first pandemic year, which was 3.3 % less than the 1,131,900 students enrolled in the pre-pandemic year, or a 6.4 % decline over the two school years.

For both years, the decline was exclusively in the city’s traditional public schools, which saw enrollment drop by 8.3% over the two pandemic school years. The city’s charter schools did not experience a similar loss. Charter enrollment remained relatively flat in the second pandemic year after a 6.9 % increase in the first year. The decline in traditional public school students comes despite an expansion of the city’s 3K program—which nearly doubled in size—during the last school year.

Excluding 3K, enrollment in the city’s traditional public schools would have fallen even further—by 10.1 percent—with a bigger reduction in the second pandemic year (down 55,200 students in pre-K through 12th grade) than the first (a 44,600 decline). (Charter schools do not enroll 3K students and were not impacted by the expansion). As we go to press, efforts are underway to find ways to rededicate funds within the constraints of the approved budget to lessen the impact of reductions on classrooms and unionized staff.

CYBERSECURITY AND HOSPITALS

This week, the Justice Department announced a complaint filed in the District of Kansas to forfeit cryptocurrency paid as ransom to North Korean hackers or otherwise used to launder such ransom payments. The case involves ransoms paid by two hospitals – one in Kansas and one in Colorado. For the Justice Department, the case is a chance to tout what it sees as the advantages of rapid involvement by law enforcement. That is based on the fact that the impacted hospital (Kansas Heart Hospital in Wichita) will ultimately be receiving its money back.

In May 2021, North Korean hackers used a ransomware strain to encrypt the files and servers of a medical center in the District of Kansas. After more than a week of being unable to access encrypted servers, the Kansas hospital paid approximately $100,000 in Bitcoin to regain the use of their computers and equipment. They also engaged with and cooperated with the FBI. That cooperation was credited with allowing the FBI verify an approximately $120,000 Bitcoin payment into one of the seized cryptocurrency accounts identified.  

The FBI’s investigation confirmed that a medical provider in Colorado (Parkview Medical Center in Pueblo) had just paid a ransom after being hacked by actors using the same ransomware strain. In May 2022, the FBI seized the contents of two cryptocurrency accounts that had received funds from the Kansas and Colorado health care providers. 

The recovery is obviously being publicized for its success. That is in the interest of the side of the debate in favor of early law enforcement involvement. The other side of the debate seeks to just payoff the hackers and move on. The lack of repeat attacks on many initial victims after paying seems to drive a cost/benefit decision in favor of paying. It also mitigates some of the bad publicity which results from these attacks. We will see if this engagement and cooperation becomes a trend.

CAN USED PIPELINES HELP CARBON CAPTURE?

Away from the issue of whether carbon capture at scale is feasible, the other clear hurdle to operation is the issue of pipelines. We have regularly followed the emerging political battles over the issue of eminent domain and carbon capture pipelines. While that debate unfolds over the next 12-24 months in the Dakotas, Iowa, Illinois, and Missouri, a potential alternative to the need to acquire new pipeline right of way is being sought by a Nebraska entity.

Tallgrass Energy, owner of two pipelines, is seeking Federal Energy Regulatory Commission permission to convert the 40-year-old Trailblazer Pipeline through southern Nebraska are seeking to abandon natural gas shipments and use it to move carbon dioxide instead. The plan would see Trailblazer ship carbon dioxide originating in Nebraska, Kansas and Colorado to a carbon sequestration site in either Nebraska or Wyoming.

Tallgrass also owns a second pipeline, the Rockies Express Pipeline (REX). It parallels Trailblazer through the Panhandle and west central Nebraska and would continue to carry natural gas including that formerly shipped on the converted pipeline. The Federal Energy Regulatory Commission (FERC) is taking public comments on the joint request from the Tallgrass operating subsidiaries to make the transition.  

ETHANOL FOLLOWS OIL FOOTPRINT TRAIL

Spend enough of your career in municipal high yield and you begin to build up a list of places associated with new technology ventures which did not quite work out. I used to see a wide variety of waste recycling and disposal projects, often driven by mandates to use what ever the end products of the plants in question were supported by. Lately, one such project which was financed in the municipal bond market is in the news for all the wrong reasons.

In this case the project is a biofuels project attached to a huge cattle feedlot operation in Mead, NE. The lot handles some 60,000 head annually in two 150-day sessions which produce significant organic waste. The project was intended to convert that manure into methane and then use the methane to fuel an ethanol plant. It is the ethanol plant which is at the center of an emerging environmental contamination issue.   

The ethanol plant began operation in 2015 and was forced to close in the summer of 2021 by the State of Nebraska. Now, the facility and a large part of the surrounding area is being examined by a menagerie of scientists to determine how much contamination from the ethanol plant has impacted the water and the farmland near the plant. The scientists come from the US Geological Survey (USGS) and the University of Nebraska. The work is being funded by the State of Nebraska.

This only one prominent example. As is the case with abandoned wells from fossil fuel drilling and fracking, another energy source designed to facilitate internal combustion is already leaving a waste related scar in its wake. It is a problem that the ethanol belt is only beginning to get a handle on.

PORT OF OAKLAND

The fact that a labor dispute is temporarily halting operations at the Port of Oakland is not a surprise. The contracts with longshoremen expired on June 30. So many people looked at that cohort of the labor force at ports on the West Coast as the likely source of any strike activity. What is a bit of a surprise is that it isn’t the dockworkers who are striking, it is independent truckers.

In 2019, California enacted Assembly Bill 5, a gig economy law passed in 2019 that made it harder for companies to classify workers as independent contractors instead of employees, who are entitled to minimum wage and benefits such as workers compensation, overtime and sick pay. California voters approved a ballot initiative, Proposition 22, in 2020, designed to allow those drivers to be exempt effectively from the law. A California Superior Court judge ruled that it was unconstitutional. Uber and Lyft quickly appealed and have been exempt from complying with Assembly Bill 5 while the court proceedings play out.

The real targets of the rules were the transportation network companies (Uber, Lyft, etc.). One group which finds itself subject to the law are some 70,000 truck drivers who can be classified as employees of companies that hire them instead of independent contractors. The California Trucking Association separately sued over the law, arguing the law could make it harder for independent drivers who own their own trucks and operate on their own hours to make a living by forcing them to be classified as employees.

The law has yet to be enforced in the face of ongoing litigation against it. Now that the truckers’ litigation has been resolved in favor of the law, the truckers are now striking in an effort to stimulate negotiations over changes to the law and its enforcement. The first target is the Port of Oakland. It announced a suspension of operations this week as truckers effectively blockaded the facilities. In the short run, this action in a peak shipping period will at least grab attention. It will exacerbate issues regarding idle containers which plagued all of the California ports last year.

The ports are trying to be patient. The San Pedro Bay ports of Los Angeles and Long Beach will postpone consideration of the “Container Dwell Fee” for another week, this time until July 29. Since the program was announced on Oct. 25, the two ports have seen a combined decline of 26% in aging cargo on the docks. Fee implementation has been postponed by both ports since the start of the program. The Long Beach and Los Angeles Boards of Harbor Commissioners have both extended the fee program through Oct. 26.

Under the temporary policy, ocean carriers can be charged for each import container dwelling nine days or more at the terminal. Currently, no date has been set to start the count with respect to container dwell time. The ports plan to charge ocean carriers $100 per container, increasing in $100 increments per container per day until the container leaves the terminal.

NUCLEAR, NATURAL GAS, AND NY

Name the issue and there is likely to be a real divide between upstate and downstate (NY Metro). The latest example comes in the wake of the closure of the Indian Point Nuclear Plants. The state’s independent system operator has released data covering the period after Indian Point closed. As noted by the NYISO’s independent market monitor, wholesale electric prices in New York have “generally increased as a result of the retirement of the Indian Point 2 in April 2020 and Indian Point 3 in April 2021. As eastern New York has become more reliant on natural gas-fired generation, spikes in congestion because of tight gas market conditions on cold winter days have become more frequent.”

The closures occurred during the height of the pandemic nevertheless the daily demand for electricity in New York grew by nearly 1.5% in 2021. The average wholesale price for electricity climbed from a record low average price of $25.70/ MWh in 2020 to $47.59/MWh a year later. The average monthly wholesale cost of electricity in New York’s markets from January 2021- 2022 tripled from $40.69/MWh to $137.49/MWh.

Most of New York’s renewable energy capability is located in upstate and northern New York. To bring renewable energy to market, three new transmission projects are under construction representing the single largest investment in transmission infrastructure in New York State in more than 30 years. In 2021, 89% of downstate energy came from natural gas and oil, up from 77% the previous year when both of Indian Point’s two reactors were still running. It is why many were more than disappointed when the Assembly Speaker (from Brooklyn) froze out legislation which would have enabled the NY Power Authority to participate in the needed grid development.

UPDATES

The Pennsylvania Legislature passed Senate Bill 382 which would require PennDOT to publicly advertise toll proposals, take public comment, and seek approval from both the governor and the legislature. The Commonwealth could still use a P3 for transportation. It requires legislative approval for any toll backed projects. 

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