Joseph Krist

Publisher

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ILLINOIS POWER AND THE LOOMING BATTLE OF CLIMATE CHANGE

A framework for addressing the realities of climate change and electric power generation in Illinois had begun to take shape before the Legislature failed to enact laws to support it by the scheduled May 31 adjournment date. It did remain viable and the hope was that passage would occur in special session.

The failure to get a bill passed was blamed on a lack of consensus between proponents of closing nuclear and coal generation without provisions for the economic impact on host locations. Labor vs. environmentalists or as one legislator put it “The caucus made it very clear that we don’t want to vote for something that puts us in the middle of a fight between friends.” 

The battle in Illinois is one which has repeated itself in various forms throughout the 2021 legislative season. Obviously, the utilities have been at the front of the lobbying line (to their detriment in Illinois and Ohio). those activities have led to one Speaker retirement and one Speaker expulsion. But their partner has been unions representing utility workers. The potential economic impact of generation closures has become a powerful factor slowing the move to renewable generation.

While most attention outside has focused on the nuclear subsidies, the sticking point appears to be the fate of two municipal coal generation plants. The failed legislation would have allowed the prairie States plant to operate through the life of bonds issued for its construction but some municipal power purchasers have longer term debt outstanding. As for the nukes, Exelon has threatened to shut down its Byron and Dresden nuclear plants if the state doesn’t offer more help. 

The governor’s most recent proposal would force the average residential ComEd customer an estimated 80 cents per month to subsidize those two plants facing potential closure, along with Exelon’s Braidwood plant. The three plants would receive the subsidies for five years.

PUERTO RICO

The last thing Puerto Rico needed was the explosion and fire at one of PREPA’s generating facilities. The event which occurred over the weekend left some 1 million customers without power. The fire was devastating enough but the concern has been heightened by the news that the utility had been the victim of a cyber attack. Luma Energy LLC said a distributed denial-of-service attack targeted its customer portal, Mi Luma, as well as its mobile app, shutting out customers trying to access their accounts or report outages.

The outage and cyber attack have all occurred within the first  15 days of Luma Energy taking over the operation of the system. Already unpopular with customers and employees, the effective privatization of PREPA could not have started with a worse set of circumstances. The blackout and a poor customer response are combining to support continued efforts by customers and the utility workers union to scotch the deal with Luma.

Digging below the headlines, the problems seem to be rooted in a poor call center and issues with the utility’s website and mobile app. PREPA’s Governing Board President acknowledged, however, that LUMA’S response in addressing outages has been quick in most cases, according to case complexity.

As the island deals with the physical aspects of the power system, bankruptcy proceedings continue. The latest Omnibus Hearing for the Puerto Rico bankruptcy occurred this week. The Puerto Rico Oversight Board tried to have the successor suit to a February 2015 lawsuit electric ratepayers filed against PREPA thrown out. The 2015 suit was stayed after the board put PREPA into bankruptcy in May 2017. That suit charges that fuel vendors  had conspired to provide PREPA low-quality, cheap fuel while charging prices associated with much higher quality fuel. Those costs, as is the case with most utilities were passed through to customers.

PUBLIC POWER MOVES A STEP CLOSER IN MAINE

The increasing pressure on legislators regarding climate change were a major characteristic of the current legislative sessions. Among those efforts, are those which would increase the roles of locally controlled public power agencies in the place of investor owned utilities. For the latest iteration of that process, we look to the Pine Tree State.

The Maine legislature has moved legislation forward which would allow Maine voters to vote on an initiative authorizing the creation of Pine Tree Power. If voters approve the bill, the new Pine Tree Power Company would have until 2024 to negotiate a transition with CMP and Versant Power, whose infrastructure would cost between $5 billion and $13.5 billion to buy out. It would be financed by borrowing against future revenues. The seven elected board members each would represent five of Maine’s 35 state Senate districts.

And it would likely be financed through the municipal bond market. Once again the availability of cheaper financing via tax exempt bonds will be a key determinant of the plan’s viability. It comes as the delivery and development of renewable power sources in Maine have become a contentious issue. The debate is unfolding as long term fishing interests and sea turbine generation plans have collided. A project to deliver hydropower from Quebec via a new transmission line has pitted the interests of consumers, labor, and environmentalists against each other.

While the Legislature acted, it is believed that the Governor will veto the bill. That may just be delaying the inevitable.

MUNIS FINANCE FLINT WATER SETTLEMENT

The State of Michigan is getting ready to issue some $600 million of bonds to pay for its share of a settlement covering the State’s responsibility in the Flint water crisis. The Michigan Strategic Fund will be the  issuer for the taxable limited obligation revenue bonds on behalf of  the Flint Water Advocacy Fund Project. This entity was set up by the State to manage the settlement and its funds distribution process. The Strategic Fund will issue the debt and loan the proceeds to the Project.

The monies will finance recovery awards for children and adults exposed to contaminated drinking water. The bonds will amortize over a 35 year term. repayment will come from monies appropriated annually by the State Legislature. With the market where it is on an absolute basis, it is a good time for such an issue to come to market. Michigan like so many other states has benefitted from the stimulus and that has brought Michigan positive ratings outlooks.

For credits in need of flexibility, the time may be now to access the market. Even if rates adjust upward to reflect inflation concerns,  there still remains a window for restructurings, refundings, and for items like the Michigan bonds. Judgment bonds, which these effectively are, have long been a feature of our market. In this case, some may wish additional yield to reflect the annual appropriation component of the security. In reality, we see no real likelihood that a substantial and frequent issuer like Michigan would not follow through on the appropriation requirement.

SOUTH CAROLINA PUBLIC SERVICE AUTHORITY

The South Carolina legislature has at least for now decided the fate of the state electric utility. Santee Cooper has been under the gun since the cancellation of the Sumner nuclear plant expansion. The creation of what is effectively a stranded asset saddling the rate base eroded what had been a long standing supportive relationship between utility management and the State.

It has been nearly 4 years since the project was abandoned. In the interim, the Legislature has considered maintenance of the status quo in terms of its management and ownership as well as the sale of the utility to an investor owned utility. The goal was to minimize as much as possible the rate impact on consumers from the need to fund the stranded asset.

With the failure of the effort to sell the utility in the current environment, the Legislature turned to reform of the utility’s governance and management. Legislation passed in the current session by veto proof majorities in both houses of the legislature provides for removal of nine of the ten current board members. They were part of the decision process by which Santee Cooper participated in the Sumner expansion.

The legislation provides for more active state regulation. It allows them to review the utility’s future plans to generate power and their forecasts for power, and to require public hearings and a watchdog to question utility executives about rate increases. It also restricts severance packages for any executives who lose their jobs.

There remains a significant level of support for selling Santee Cooper. The Governor supports a sale. His position – “South Carolina no longer has a need to provide, and never had the legal obligation to own, a state-owned utility, and the political process does not include the private-sector expertise nor the means necessary to effectively oversee Santee Cooper’s operations.” 

THE SUPREME COURT AND MUNIS

The U.S. Supreme Court ruled 7-2 Thursday that Republican states led by Texas lack standing to challenge the Affordable Care Act, the latest win for President Barack Obama’s signature health law in the nation’s top court. Standing provides a way for so many pieces of litigation to be handled without dealing with the underlying issue of the litigation.

It has become pretty clear that the ACA is surviving largely because the Chief Justice wants it to. Nonetheless, it is a positive for state and hospital credits that the law is being upheld. 

In climate related litigation, Oakland and San Francisco sued BP, Chevron, ConocoPhillips, Exxon Mobil and Royal Dutch Shell in 2017 alleging fossil fuels qualified as a public nuisance under California law by damaging the coastal cities through the effects of rising global temperatures. The oil companies have been responding to suits like the one in question which are typically filed in state courts.

The oil companies believe that they will receive more favorable treatment if litigation like this is heard in federal rather than state courts. This week the Supreme Court reviewed an appeal of a Ninth Circuit decision which would keep the suits in state court. This week the Court upheld a May 2020 ruling by the Ninth Circuit rejecting the oil companies’ claim that the San Francisco and Oakland case belonged in federal court.

1070.6

That number is the level of Lake Mead this week in feet above sea level. It is the lowest level the lake has been at since it was filled. The white ring around the edges of the lake have grown to 143 feet. It serves as a symbol of the water crisis facing the western U.S. Lake Oroville in California threatened to breach the Oroville Dam in 2017. Now the lake level is becoming too low to support hydroelectric operations. The lower water levels have serious implications for some of the market’s best known credits.

The Metropolitan Water District of Southern California is an agency at the center of the western water debate. The District has obtained and delivered water from the Colorado River since the 1930s when the Hoover Dam was completed. The District maintains the Colorado river aqueduct which transits water some 242 miles to southern California. Over the last nearly 20 years, the District has managed its allotments of water which have declined as upstream demands on water from Arizona and Colorado  have reduced supplies available to the District.

Now the effects of the long term drought impacting the West are coming home to roost. Metropolitan has been experiencing lower deliveries of water since the turn of the century.

NUTMEG AND CANNABIS

The Northeast continues to move towards legal cannabis throughout all but New Hampshire. Connecticut is about to legalize recreational cannabis legislatively. The issue has been held up by equity concerns. Initial drafts of the legislation contained requirements that would have allowed those with prior marijuana convictions to get preference when applying for licenses to grow or sell legal marijuana. The bill now includes a preference for those who come from low-income communities defined by census tracts.

Connecticut residents will be allowed to purchase or possess up to 1.5 ounces of marijuana beginning July 1. The state would set up a regulatory framework and approve licenses to be ready to sell retail marijuana products by May 2022. Like NY, legalization in Connecticut required legislative action. Only six states have legislated legalization.

The politics have followed public opinion. In April, a Pew Research Center survey found 60 percent of U.S. adults say marijuana should be permissible for recreational purposes, and another 31 percent said pot should be allowed for medical purposes only. Just 8 percent said marijuana should not be legal at all.

CHICAGO PUBLIC SCHOOLS

As we go to press, legislation awaits the signature of the Governor of Illinois overhauling the governance structure of the Chicago Public Schools. Currently, the seven-member board that is fully appointed by the Mayor. The union representing the system’s teachers has long sought an elected school board. The union and prior Mayor Rahm Emmanuel had a tense relationship and the union then backed the loser in the most recent mayoral election.

Now, the legislation awaiting signature would transfer mayoral control of the Chicago Public Schools to a fully-elected school board by 2027. The move would be phased with a new 21 member board created. Initially in 2025. At that time, the board would be comprised of 10 elected members and 11 appointed by the mayor. A fully-elected board would result in 2027. 

The bill does not account for the fact that the city of Chicago provides $500 million annually to CPS. This has raised concerns on the part of many who are concerned that the City will be less willing to continue to shift resources away from its own troubled direct credit if it does not have a role of the new board. The legislation calls for the board to conduct an independent financial review of the district and City’s fiscal relationship.

Any review must consider the Chicago board’s ability to operate with the financial resources available as an independent unit of local government. The review will to go the state board of education before the first elections in 2024 and recommendations over potential legislative changes needed will go to lawmakers. 

While some details will be addressed in implementing legislation, the package as it stands now raises a number of concerns. It seems impractical to have a board reliant on the City without any role for the City in the governance of the board. The proposed legislation does not fix the problems with the Chicago schools. It does likely make it easier for the City’s teachers union to wield power. What it does not do is to address the troubled finances of CPS.

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