Joseph Krist

Publisher

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The Muni Credit News is taking the 4th of July off. The next issue will be the July 12 issue. In the meantime, enjoy the nation’s 245th birthday. __________________________________________________________________

STATES TRY TO LEAD ON INFRASTRUCTURE

It has been somewhat disheartening to see that any changes to transportation funding at the federal level will not involve gas taxes or vehicle mileage taxes. This despite a general consensus that some revenues based on usage of roads makes sense. This despite a growing receptivity to if not acceptance of the concept of mileage based fees across party lines. That reflects the consideration of new road funding measures in many state legislatures.

The Pennsylvania Transportation Revenue Options Commission is charged with providing Gov. Tom Wolf with short-term and long-term recommendations by Aug. 1 to address an ongoing funding crisis resulting from a reduction in gas tax revenue and an increased use of electric vehicles. So far, several potential sources have been identified. They include a gas tax increase but also a vehicle mileage tax.

Illinois will see its gas tax go up by one half cent per gallon. In Oregon, a 4-cent increase in the state’s 30-cent fuel tax rate took effect Jan. 1, 2018. That legislation called for additional, 2-cent increases were to follow every two years through 2024. That would produce a gas tax of  40 cents.

The move by states comes as the federal infrastructure legislation begins the long process of approval. The bipartisan negotiating group in the Senate has produced an eight-year, $1.2 trillion infrastructure investment “framework” on June 24 that includes roughly $579 billion in new funding for roads, broadband internet, electric utilities, and other “traditional” infrastructure projects.

That $579 billion in new funding includes $110 billion for roads, bridges, and other major projects, $48.5 billion for public transit, and $66 billion for passenger and freight rail. It also includes $16.3 billion for ports and waterways, $25 billion for airports, as well as $15 billion for electric vehicle infrastructure along with electrified buses and ferries.

The plan comes with a list of “payfors” to cover the cost of the plan. Here’s where the concern comes in. Early in the process, gas tax increases and the imposition of vehicle mileage taxes were taken off the table. So now the potential sources of funding do not look particularly solid. The list includes: redirecting unused unemployment insurance relief funds; repurposing unused relief funds from 2020 COVID-19 emergency relief legislation; allowing states to sell or purchase unused toll credits for infrastructure: extending expiring customs user fees; reinstating Superfund fees for chemicals; profits from 5G spectrum auctions: oil sales from the nation’s strategic petroleum reserve; public-private partnerships; private activity bonds, direct pay bonds, and asset recycling for infrastructure investment

The lack of real plans to generate new revenues to pay for such a plan is a concern. In many ways, the long list of potential funding are reminiscent of the 1980’s when tax cuts were always going to be funded from monies generated through reducing fraud, waste, and abuse in federal programs. The resulting deficits put paid to that idea.

RURAL POWER AND CLIMATE CHANGE

Tri State Generation is a cooperative of 45 members, including 42 electric distribution cooperatives and public power districts in four states that together provide power to more than a million electricity consumers across nearly 200,000 square miles of the West. It participates in or owns 7 coal units in four states and 6 oil or gas fired units in two states. This puts Tri State at the center of the climate debate.

As participating co-ops plan for the future, they face enormous pressure to reduce fossil fuel reliance and divest fossil fueled generating capacity. Tri-State last January proposed a strategy to move its members toward a cheaper, cleaner power mix by shuttering some of its coal-fired power plants and replacing the power with renewable energy resources, but members were still concerned about high prices. Seven member c0-ops are actively considering leaving Tri State.

As part of that decision making process, member co-ops need accurate pricing information in order to properly analyze the cost of withdrawal. The Federal Energy Regulatory Commission was asked to review Tri State’s pricing when the utility came under FERC regulatory processes. The utilities have complained for years that Tri State did not provide information to utilities seeking to alter their status for electric purchases.

That process yielded a decision that found that  “It is basically impossible for Tri-State’s members to make a reasoned assessment as to whether to terminate their membership in Tri-State.” Tri-State, which came under FERC jurisdiction in 2019, filed a rate schedule with the commission by which member exit fees could be calculated last April. But it has yet to give any of its members an exit price, despite members requesting such a calculation since November.

The issue comes down to whether or not the individual utilities can strike more favorable prices for renewably sourced power outside of the efforts by Tri State. The FERC order finds the G&T’s tariff and bylaws are unjust and unreasonable in that they do not give its members a clear and transparent way to determine the cost of exiting its service.

Because such a calculation relies on proprietary information, and Tri-State hasn’t provided any of its members with a calculation, those cooperatives have no way to determine what the financial impact of their exit will be. The lack of clear and transparent exit provisions has allowed Tri-State to impose substantial barriers for its utility members in evaluating whether to remain in Tri-State.”

Given the near 100% reliance on fossil fuels especially coal, it is understandable that Tri State make every effort to postpone the inevitable in terms of its generation mix. At the same time, Tri State’s apparent ability (and willingness) to withhold financial information from its membership raises some serious governance concerns.

MIAMI GOES ALL IN ON BITCOIN

Someone had to go first and it looks like the City of Miami is the leading candidate. The current mayor is a big bitcoin booster. Now he is putting out a welcome mat for bitcoin miners who are being driven out of China. The demands on the electric grid from bitcoin mining are behind the move. The Mayor is highlighting the more favorable pricing scheme for electricity in the city relative to the rest of the country, primarily as the result of nuclear power.

What miners care about most is finding the cheapest source of power out there to drive up their profit margins. The mayor is also considering a mix of other incentives, like enterprise zones specifically for crypto mining. The mayor has been trying to make bitcoin mainstream by advocating for policies that would enable city employees to be paid and residents to pay their taxes in the cryptocurrency. The city itself is considering holding it as an asset on their balance sheet. 

The plans raise a host of questions. Given the Miami’s vulnerability to climate change and sea level change, how realistic is it to attract consumers of large amounts of power. Power generation is such a major source of carbon pollution and one could argue that pushing high energy consumption businesses which don’t produce anything may not make sense. Especially when the city experiences “dry day” flooding on a regular basis.

Add to that the ongoing debate over a proposed seawall to protect the City from rising ocean levels. The initial plan got a rough reception as it included thirteen-foot-high floodwalls could line part of Miami’s waterfront including some very high priced real estate, under a proposed Army Corps of Engineers plan. The plan also comes with a $4.6 billion estimated cost. It would be designed to protect the City from coastal flooding and storm surge during tropical storms and hurricanes.  It would not address the “dry day” flooding issue.

The Corps of Engineers plan calls for storm surge gates to be installed on three waterways that open onto Biscayne Bay, a series of pumps and floodwalls along Miami’s waterfront, and one section of 36 foot high seawall in Biscayne Bay. The plan also calls for elevating and flood-proofing thousands of homes, businesses and public buildings in vulnerable neighborhoods.

The concentration on cryptocurrencies, the huge capital needs related to climate change facing Miami, and the risk of rising sea levels are all potential drags on the City’s credit. It’s not clear that crypto is the key to the City’s future.

NEW YORK STATE

It is one more step on the road to recovery for post-pandemic New York. Moody’s has affirmed the Aa2 rating on the State of New York’s general obligation (GO), personal income tax revenue and sales tax revenue bonds while revising the outlook on the ratings to positive from stable. For those with concerns about two potential sources of pressure – the MTA and a damaged commercial real estate environment – Moody’s specifically noted that the rating and outlook reflect “risks associated with the Metropolitan Transit Authority, a component unit of the state, and uncertainties regarding recovery of the office-intensive New York City metropolitan area, which is the key driver of the state’s economy.”

COAL AND PROPERTY VALUES

It is estimated that Campbell County WY produces just under 50% of the coal produced nationwide. This has made the County extremely reliant on all sectors of the fossil fuel industry for revenues for government. As production declines nationwide and efforts to curtail or eliminate fossil fuel use continue, localities fear the economic consequences of mine and power plant closures. Recent data from Campbell County, WY illustrates the point.

The County reported a  decrease in assessed valuations in 2021 versus 2020 valuations. The county’s assessed valuation — or its taxable value — for 2021 is about $3.4 billion. That is a decrease of about $850 million, or 20%, from 2020, when it was $4.24 billion. Fossil fuel properties – especially the large open pit mining operations which predominate in the county – are at the heart of the decline.

Coal, oil and gas together made up $2,465,592,453, or 72.7% of the total. Those are taxed at 100% of their value, while residential properties are taxed at 9.5%. In 2020, those three made up $3.29 billion, or 77.6% of the total. The year before, their total was $3.53 billion, or 79%. It has been seventeen years since valuations have been this low.

In southwestern Virginia’s coal belt, Wise County is experiencing significant revenue pressures. Declining production has negatively impacted the County’s receipts from severance taxes. In 2010, Wise County planned for $4.4 million in severance revenue. By 2015, the annual severance tax collection had dropped to $1.25 million. In 2018 and 2019, only $700,000 in tax was collected each year. In 2020, overall severance tax collection had dropped to $588,750.

That leaves the County scrambling to maintain its rods which it needs for the surviving mining operations. The hitch is that these heavy trucks produce a higher than average level of wear and tear on the roads but the numbers show you why that’s a problem. State law sets various priorities for spending coal severance revenue: economic development through the Virginia Coalfield Development Authority, allocations for water projects in the region, gravel funds for localities, special road project requests from counties. After those allocations are set each year, the remainder gets allocated for secondary road maintenance.

It’s illustrative of the problems facing communities dependent upon extractive industries. The big fear for local government is the loss of tax revenue from reduced values and then the economic impact in general. These numbers from Wyoming are a good example of the economic hurdles to be overcome in the road to a carbon free environment.

NUCLEAR STAKES IN ILLINOIS

With the fate of legislative action on a plan to reform the state’s electric generation industry still up in the air, the operator of the nuclear generators in Byron, IL are proceeding with the regulatory process for closing them in the fall. The ongoing standoff over the bill reflects many of the issues we see in the Wyoming story. Here the economic issues stem from the impact on payrolls and employment as much as the direct impact on property values.

The Byron plants employ some 725 people. Utility jobs are the second highest average paying jobs in the County at over $70,000 a year. That is well above the local, state, and national median. So the source of fear for employees is obvious. The plants produce a payroll of some $50-55 million. Using a conservative multiplier factor, that represents a substantial overall economic impact. In its the plants home county, Exelon (plant owner and operator) is the largest property taxpayer by a factor of four over the next largest.  

CLIMATE AND MASSACHUSETTS

The latest decision in one of the many pieces of litigation filed by states and cities against the fossil fuel industry followed an emerging pattern. A plaintiff sues in state court and the defendant company moves to have the case moved to what it perceives as a friendlier venue. recently, the City of Baltimore successfully argued before the U.S. Supreme Court that a state court was the proper venue for its case.

Now, a Massachusetts state judge has rejected Exxon Mobil Corp’s  bid to dismiss a lawsuit by state Attorney General Maura Healey accusing the oil company of misleading consumers and investors about its role in climate change. The court determined that Exxon failed to show that the October 2019 lawsuit was meant to silence its views on climate change, including those Healey and her constituents might dispute.

Exxon’s recent experience has yielded different results depending on the jurisdiction. In December 2019, a New York state judge dismissed a lawsuit by that state’s Attorney General Letitia James accusing Exxon of defrauding investors by hiding the true cost of climate change regulation.

In the meantime, the Bay State’s largest municipal utility agency, the Massachusetts Municipal Wholesale Electric Company, finds itself in the middle of the climate debate. MMWEC has proposed a 55 MW peaking generating facility. The rub is that it is intended to run on oil or gas.

The debate over the climate benefits of natural gas is unfolding throughout the country. MMWEC is trying to fend off opposition by emphasizing the peaking nature of the plant. MMWEC says that the facility will only run about 239 hours per year and produce fewer emissions than 94 percent of similar resources in the region. Opponents want no fossil fueled generation while MMWEC insists their goal is to ultimately convert the plant to hydrogen fueling.

MMWEC does admit that such a conversion would be a long way down the road. Proponents cite the “unreliability” of renewable power and refer to the California and Texas  experiences with grid failures in support of the plant.

HIGH SPEED RAIL SLOWS DOWN

The Brightline West high speed rail line between Las Vegas, Nev., and Victorville, Calif., will wait until 2022 to attempt a private activity bonds. The consortium behind the project blames the impact of the pandemic on the delay. Brightline was awarded $200 million in private activity bonds in Nevada and $600 million in California in 2020 and a sale was attempted in November 2020. It postponed the sale because of market conditions.

This is the second delay in the project’s timetable. Originally, the bonds would have allowed construction to begin in 4Q 2020. The project then announced a 2Q 2021 start date and has now delayed the start until after a successful bond sale.

On the East Coast, high speed rail hit a speed bump when the City of Baltimore advised that it was opposed to a proposed maglev train project to connect the city with Washington, D.C. The city recommended a “No Build Alternative” for the proposed project in a May 14 letter to the Federal Railroad Administration in response to the project’s draft environmental impact statement.  The City cited equity and environmental issues.

The train is designed to shorten the trip between Baltimore and Washington to 15 minutes. Eventually, the hope is to expand to New York, creating an hour-long trip between the nation’s capital and its most populated city.

JEA

The last few years have been tumultuous ones for the Jacksonville Electric Authority. Litigation challenging power purchase agreements for output from the expanded Plant Votgle nuclear facility were seen by some as a weakening of commitment to timely payment of debt. An effort to privatize the Authority was undertaken only to crash and burn over issues of conflicts of interest and the potential enrichment of JEA management. It produced a federal investigation.

Now those issues which weighed heavily on its ratings appear to be behind JEA and we have a full year of operations under the pandemic to evaluate. Moody’s recently did an announced a positive outlook for JEA’s A2 rating. It cited  the approval during 2019 of a settlement agreement by the JEA Board, the City of Jacksonville and the Board of Municipal Electric Authority of Georgia (MEAG Power) . “The settlement agreement is credit positive as it effectively eliminates the significant credit negative overhang which called into question JEA’s willingness to abide by the take-or-pay “hell or high water” terms governing the Project J PPA with MEAG Power.”

The issue of the privatization attempt is seen as driving the positive steps taken to address some of JEA’s governance related challenges. “The positive outlook primarily reflects the elimination of litigation risk following the fully executed settlement and the likelihood that JEA’s fundamentally sound financial profile can prevail to balance JEA’s several remaining credit challenges. Some of these challenges include further progress on governance owing to large scale senior management level transitions and a complete changeover at the board level.”

TEXAS POWER FALLOUT CONTINUES

Another report is out casting doubt on the industry narrative that the late February Texas power crisis was the result of too much reliance on renewables. A study published in Energy Research and Social Science points to a more likely source. Their review shows that “Texas failed to sufficiently winterize its electricity and gas systems after 2011, and the feedback between failures in the two systems made the situation worse. At its depth, gas production declined by nearly 50%, which lowered pressure in the pipelines, making it harder for power plants fueled by natural gas to operate. 

Texas gets most of its electricity from natural gas (46% in 2020), with smaller shares provided by wind and coal (23 and 18% respectively), followed by nuclear (11%), solar (2%), and marginal contributions from hydroelectric and biomass, according to data from the grid manager ERCOT. The impacts of the cold on the natural gas infrastructure make that dependence a concern.

The most prominent municipal credit caught in the middle of the situation is the City of San Antonio electric system. CPS is in the midst of litigation in an effort to reduce the financial impact on its customers and rate base as the result of the massive spike in gas prices. Now, the utility’s legal team has resigned over policy differences with the utility CEO and the outside legal team hired to review legal options.

The dispute appears to be over tactics and strategy issues connected with the litigation. Recently, upper management was restructured at the utility. The changes led to a new management team. When those changes were announced, we had concerns about the potential implications for CPS’ role in dealing with electricity supply in the face of climate change.

We wonder how the utility can develop an effective plan to deal with climate change and grid reliability when its new Chief Power, Sustainability, & Business Development Officer (CPSBDO) is on the board of the American Gas Association. That would seem to create at best a bad look given the controversial nature of the role of natural gas in the climate change debate. Exactly how objective can a board member of an industry’s leading advocacy group?

If you are an ESG investor, the situation has to raise some serious governance issues.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.