Joseph Krist

Publisher

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PUERTO RICO FIGHTS REALITY

The Puerto Rico legislature continue its uphill battle with the Oversight Board. The latest example is legislation under consideration which would keep pensioners safe from any cuts to pensions The P.R. House passed a bill with amendments designed to force the Oversight Board to accept zero cuts to pensions, allocate $62 million per year for municipal governments, and provide at least $500 million per year for the University of Puerto Rico for five years.

The Oversight Board’s response was predictable. The Board said the legislation proposed by the House and amended by the Senate would force it to withdraw its support for the proposed Plan of Adjustment. The Board’s view is that the legislation “endangers Puerto Rico’s ability to come out of bankruptcy and repeats the unsustainable spending practices and policies that drove Puerto Rico into bankruptcy in the first place.”

The Board did not stick to that position for very long. It said reducing the remaining modest pension cuts would increase the risk the plan is neither confirmable nor ultimately affordable, since the governor and the legislature refuse to consider a plan with pension cuts, the board said it was willing to take these risks.

It will now see if this move generates support for legislation which many creditors support which would specifically authorize debt issued to refinance existing bonds under the proposed Plan of Adjustment. The agreement on pensions should allow that authorizing legislation to proceed.  The Board could seek to move forward with a Plan of Adjustment which did not include an agreement with the municipalities.

The lack of such an agreement could be a stumbling block as the Commonwealth seeks to finance itself in a post-bankruptcy. The bond insurers expressed concern about a possible lack of authorizing legislation becoming an obstacle to a vote to affirm the Plan of Adjustment. The actions of the government, particularly the legislature, in seeking to concede as little as possible have not developed trust to support confidence in the Commonwealth’s long-term resolve to manage its fiscal affairs. The Commonwealth’s political establishment continues to take a populist approach consistently emphasizing cultural and ethnic issues in an effort to maintain an unworkable status quo. The continued reliance on statehood as the answer to so many of Puerto Rico’s problems conveys a sense of denial.

ARMY CORPS OF ENGINEERS P3

The idea arose during the Obama administration, was chosen as one of the Trump administration’s preferred infrastructure projects, and now has finally come to the municipal market. Fargo, North Dakota has experienced severe floods five times in a 100-year period. The last flood in 2011 was particularly severe. That built momentum for the development of the Fargo-Moorhead Diversion Project. The need for the project was clear but the logistics of the involvement of two states and the US Army Corps of Engineers complicated financing for the project. This created a more open attitude towards the use of less traditional approaches like a public private partnership, something that would be a first for the Corps.

The overall $2.75 billion project relies on $750 million from the federal government, $870 million from North Dakota, $86 million from Minnesota, and $1.1 billion from local tax levies. Now an authority created to access the municipal bond market for the project has successfully issued some $275 million off debt for it. That represents the portion of the share of the project borne by the two municipalities which will benefit from it. The financing is the first for a P3 for an Army Corps of Engineers project.

Initial financing came in the form of a WIFIA loan. The Authority repays its debt from proceeds of flood control and infrastructure dedicated sales tax revenues of the city of Fargo, ND and Cass County, ND. If those revenues are insufficient, debt service (principal and interest) is ultimately secured by the general obligation unlimited tax pledge of Cass County, pledged via the provisions of state statute, should the sales taxes and special assessments prove inadequate to pay debt service.

The Metro Flood Diversion Authority is managing the P3-financed piece of the overall project under a 35-year agreement with the private partners. Fargo and Cass County in North Dakota, Moorhead and Clay County in Minnesota and the Cass County Water Resource District formed the district for the project and all have a fiscal stake. The Red River Valley Alliance LLC is composed of lead contractors Spain-based Acciona (ACXIF) with a 42.5% equity stake; Israeli firm Shikun & Binui (SKBNF) with 42% equity investment; and Canada’s North American Construction Group (NOA) with a 15% equity investment. 

SUPPLY CHAIN ISSUES DELAY MORE PROJECTS

We recently highlighted a project in Maine which will likely be delayed due to difficulties in obtaining building supplies needed to comply with project specifications. It is far from the only project threatened by supply chain issues. The latest example comes from Tennessee.

A bridge replacement project – the completion of Mack Hatcher NW Extension in Williamson County – has been delayed. The lead contractor for the project says that the delay stems from a materials supply shortage of railing on the project’s multi-use path along the roadway. The railing must be completed to ensure the safety of pedestrians and/or cyclists on the path. The company also struggled to find a subcontractor to complete specialty work to the bridge’s surface over the Harpeth River. The contractual completion date is November 30.

These situations highlight one concern that even supporters of a large federal program for infrastructure acknowledge. The current mismatch between the demand for skilled tradespeople and the supply of those workers continues to worsen. The fear is that projects will not be able to be undertaken or will have to face additional costs and extended timelines so long as the imbalance exists. The implication is that schedules and cost estimates going forward will have to be increased.

OREGON MILEAGE TAX EXPERIMENT

Oregon was the first state to begin a pilot program in support of vehicle mileage taxes. The limited test, which started with some 1200 drivers, was designed to study the impact of mileage taxes versus gas taxes and see if a VMT is a viable alternative. Several years into the test, some issues are emerging which are a bit discouraging while at the same time instructive to policy makers.

The discouraging part is the lack of participation in the program. The current enrollment is around 750 drivers and the original 1200 participants remains the program’s high water mark. Observers attribute the low participation to a lack of incentives for drivers to try the program and the amount of the fee – currently 1.8 cents per mile. The problem is that at 1.8 cents cars which get more than 20 miles per gallon pay more under the VMT than they would paying current gas taxes at the pump.

That highlights one of the major hurdles VMT proponents will have to overcome. There is a great suspicion that a VMT is merely an under the radar way to raise revenues. This issue is complicating efforts to move Pennsylvania away from fuel taxes to a VMT model. If the Oregon numbers hold up and motorists feel that they are the recipients of a tax increase, support for the VMT concept diminishes. 

Proponents admit that unless legislatively mandated, participation in the currently voluntary program will remain low. A bill which would have forced Oregonians whose vehicles get more than 30 miles per gallon into OReGO no later than July 2026 was not enacted. We expect that other states will have similar experiences if their programs are not voluntary. The politics of VMT remain very difficult.

In Pennsylvania, a commission appointed by the Governor has recommended a phase out of gas taxes and their replacement with revenues from an 8 cent per mile VMT. If drivers can’t make the numbers work in Oregon than an 8 cent per mile charge is likely less favorable for Pennsylvania drivers. The Pennsylvania plan would also increase tolls on highways, double registration fees and impose fees on packages delivered in the state.

UTILITIES AT THE CENTER OF DEVELOPMENT

The availability of power, water, and roads has always been a factor in the location of any large industrial facility. Now, as the economy moves more and more towards a renewables-based utility grid, the actual cost of power becomes more of a factor. The latest example of this phenomenon is the recently announced electric vehicle production facilities to be located in Kentucky and Tennessee.

The chairman of Ford has been explicit in explaining the role of electric costs in Ford’s decision. He said that Ford for the first time considered electricity prices in deciding on a site and that the company wants to work with states that are “giving you access to that low-energy cost.” One analysis found that the TVA offers an average industrial rate of $4.58 per kWh. This compares to DTE’s and Consumers Energy’s average rates for its largest users of $7.59 and $10.94 per kWh.

As pressure increases on industrial facilities to run on electricity instead of fossil fuels, this kind of decision process will likely repeat itself across the country. Municipal utilities will be well positioned to compete on a cost basis given their lack of a need to return profits to shareholders as well as their more favorable tax position.

SOME UTILITY UPDATES

Seven municipal utilities and the federally owned TVA are founding members of a new entity to market power more efficiently in the Southeastern U.S.  The Southeast Energy Exchange Market (SEEM) is designed to facilitate sub-hourly, bilateral trading, allowing participants to buy and sell power close to the time the energy is consumed, utilizing available unreserved transmission. That is meant to provide a more flexible environment for the absorption of increasing amounts of energy generated by sun and wind. 

The public power entities in the group are Associated Electric Cooperative, Dalton Utilities, MEAG Power, N.C. Municipal Power Agency No. 1, NCEMC, Oglethorpe Power Corp., Santee Cooper, and TVA. The founding members represent nearly 20 entities in parts of 11 states with more than 160,000 MWs (summer capacity; winter capacity is nearly 180,000 MWs) across two time zones.

A new Montana law empowering the state attorney general to order power plant repairs and imposing fines of $100,000 a day against noncompliant Colstrip owners was stayed in federal court.  The law attempts to prevent the majority owners of the coal-fired power plant from winding down maintenance as they prepare to exit in 2025. The pressure on the plants comes from the fact that they are 70% owned by Washington and Oregon utilities. Those states have strict mandates requiring utilities to reduce their fossil fuel exposure.

The fully political nature of the law was underlined in the court decision. “The PNW owners have presented evidence, uncontroverted by the state and other defendants, that the purpose of SB 266 is to protect Colstrip Units 3 and 4 from ‘out-of-state corporations’ and ‘woke overzealous regulators in Washington state,’ as evidenced by the Governor’s signing statement and transcript of SB 266 hearings.’’  The judge also noted that the State of Montana did not offer any arguments against the plaintiffs.

The wind power industry is benefitting from tail winds in the regulatory space. Vineyard Wind, the large project planned for the New England coast, has announced a “first-in-the-nation partnership” with 20 municipal electric systems in Massachusetts which would purchase some of the project’s output.  Massachusetts enacted a new law this year which would apply the state’s Renewable Portfolio Standard, which governs the increasing amount of clean energy that utilities must purchase each year, to municipal light plants (MLPs) for the first time. The 41 MLPs in Massachusetts must get 50% of their power from “non-carbon emitting” sources by 2030 and achieve net-zero emissions by 2050 under the new law.

TIDE COMES IN FOR PORTS

They were on the front line of entities impacted by pandemic induced limits on travel and demand but now ports are at the center of the effort to reinvigorate the nation’s clogged supply lines. The high demand issues facing ports have been in the news lately and they are getting more scrutiny in the wake of the oil spill of the California coast. The need for ships to anchor while they wait for capacity to open up at the Ports of Long Beach and Los Angeles has been cited as the possible cause of the pipeline rupture causing the spill.

Now, the ports are going to shift to 24 hour a day operation in an effort to eliminate the current backlogs at the West Coast ports. Long Beach and L.A. have long been the nation’s busiest ports and so now they will bear the brunt of the supply chain effort. The plan not only moves goods to market but also opens the revenue spigot wider as increased volume is processed more smoothly. There will likely be some additional costs associated with the increased activity but these will likely be more than offset by volume driven revenue flows.

CARBON CAPTURE STRUGGLES

Earlier this year we discussed the potential for the municipal bond market to be targeted to finance the development of carbon capture projects in the fossil fuel industry’s effort to save itself.  We expressed concern that these projects could not obtain private financing and that this would lead developers to the market they always turn to for its low financing costs – the municipal bond market.

One project that received federal support from the Trump Administration was Project Tundra in North Dakota. This $1 billion project is being undertaken in support of the 692-MW Milton R. Young coal-fired power plant. The plant is owned by the Minnkota Power Cooperative. The project has lost its lead engineering partner which left the project in 1Q 2021. Minnkota has also acknowledged that its efforts to obtain “private financing” for the project is lagging.

Financing is being complicated by the limits on the ability of potential financiers to invest in projects designed to support the use of coal. Those policy limits overcome the fact that investors in Project Tundra could reap $50 in tax credits for each ton of carbon that is captured and sequestered underground near the plant, a figure that could be higher in the future if Congress boosts the credit.  Project Tundra received $43 million in initial DOE grants under former President Donald Trump. The electric co-op said earlier this year it is seeking a $700 million DOE loan guarantee and expects to tap into a new $250 million state loan program designed specifically for Project Tundra that was signed into law in May.

Cooperatives are finding themselves increasingly under pressure as they are some of the largest participants in large base load coal generation plants across the country. They need to diversify their generation bases and accelerate the move to renewables. The early signs for carbon capture, at least financially, are not good. The carbon capture effort seems to be following a path blazed by any number of environmentally sound but financially unfeasible technologies which have run through the municipal market. Caution is appropriate.

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