Joseph Krist
Publisher
RUM TAX UNCERTAINTY
The federal tax revenue collected from rum produced in Puerto Rico, the U.S. Virgin Islands, or internationally is transferred to the governments of Puerto Rico and the U.S Virgin Islands. This transfer of revenue from the United States back to the location of production is called a “cover-over.” After hurricanes Irma and Maria, Congress placed a five-year increase of the cover over from $10.50 to $13.25 in the Bipartisan Budget Act of 2018, which is the public law that gave the Virgin Islands and Puerto Rico increased funding to rebuild the territories after the storms of late 2017. That temporary increase in cover over expired in December of 2021.
That was supposed to be addressed through the build Back Better Act. When that legislation failed, the tax increase was one of many casualties resulting from that failure. this has a direct impact on the already shaky credit of the US Virgin Islands. The USVI borrows against receipts from a $13.50 per gallon tax on rum exports collected by the federal government and transferred to the territory. The risk is that the government of the Virgin Islands has budgeted as though the tax will be renewed at $13.50 and that the amounts subject to transfer from the federal government will be calculated retroactively.
Now, many tax credits and other tax provisions that have or will expire by the end of this year that need to be extended – such as low-income housing credits, pharmaceutical company credits and others. Legislation to do that will be taken up but unless it is included in that legislation, the extra $3 per gallon will not be renewed. In the interim, the U.S. Department of the Interior’s Office of Insular Affairs has announced the approval of the payment of $226,165,037 to the U.S. Virgin Islands representing 2023 estimated rum tax-cover over payments for the USVI.
THREE HEADLINES ILLUSTRATE THE DILEMNA
Amid Heat Wave, California Asks Electric Vehicle Owners to Limit Charging – Timing is everything. Just as the state was legislating the end of sales of internal combustion vehicles, the state’s electric grid operator was asking Californians to avoid charging their cars between 4 and 9 p.m. This at a time when diminished hydro resources increase dependence on carbon emitting power sources. It is against this backdrop that we view the need for green energy proponents to move to the execution phase of their plans. They need to show a practical path to carbon reductions.
Diablo Canyon legislation – Legislators voted to extend the life of Diablo Canyon and continue to generate 9% of the state’s power requirements from its two units. The two reactors were originally scheduled to close in 2024 and 2025, but the new plan extends those deadlines to 2029 and 2030. It also authorizes an agreed upon $1.4 billion loan to Pacific Gas & Electric, the utility that operates the plant. PG&E is also expected to apply for money from a new $6 billion federal program designed to keep open existing nuclear plants.
California to ban sales of new gas cars in 2035 – California been required to slash its greenhouse gas emissions 40 percent below 1990 levels by 2030. Under new legislation passed Wednesday, the state will now have to cut emissions at least 85 percent by 2045 while offsetting any remaining emissions. Under those conditions, electric cars and nuclear power are likely necessities.
JACKSON WATER
The City of Jackson, MS – the capital of the Magnolia State – has long had issues with its water and wastewater systems. The aged systems may be serving the state capital but overall, the service area reflects below average demographics. The water and sewer system serves an area of approximately 150 square miles, including the City of Jackson (Baa3 stable) and portions of Hinds, Rankin, and Madison counties. The lack of steady and at least decent service to communities like those which the systems serve, provides a prime example of the issues which drive the issues of environmental justice and equity.
The systems have been long plagued by inadequate investment in plant both for maintenance as well as improvement/expansion. It is true that the below average economics of the wide service area keep pressure on rates and that there is not a very strong capacity to support significant debt. That is reflected in the Ba2 rating assigned to the debt backed by utility revenues.
In late December Moody’s said that “The confirmation of the Ba2 rating and assignment of the stable outlook reflects our review of the unaudited financial results for fiscal 2020, which includes the benefit of the receipt of approximately $60 million in settlement monies that have allowed the water and sewer system to repay the city general fund, restore its contingency fund, and boost days cash and debt service coverage to 192 and 2 times respectively. The confirmation also incorporates the system’s ongoing challenges, which include implementation of an effective billing and collection system, management of a very large consent decree, and substantial capital needs that will continue to create narrow operating margins.
Very early indications for fiscal 2021 suggest that these obligations have reduced cash to approximately 99 days and sum sufficient coverage. However, these figures are very preliminary and subject to additional refinement as the city closes the fiscal year. Operating revenues will be boosted by an approved 20% rate increase anticipated to take effect in March 2022 and are not factored into the otherwise balanced budget.”
IS PREEMPTION ALWAYS BAD?
We’ve talked about preemption a lot over the last couple of years. It has come up mainly around the issue of the local regulation of the use of fossil fuels and equipment which runs on them. A particular recurring target has been restrictions on the ability of localities to ban the use of natural gas in newly constructed buildings. It has been easy for some to rail on about how these laws reduce local control and impose unwanted policies on people. But what happens when the “other side” wants to impose its will?
In California, Assembly Bill 205 (“AB 205”) makes available to qualifying renewable energy, energy storage and alternative fuel power projects (and their transmission lines) a “one-stop” permitting and environmental review process at the state level. Under the new law, renewables, energy storage and alternative fuel power plant developers have the option to go directly to the CEC to obtain local, regional and state permits and approvals, rather than going to each agency individually and separately.
The California Energy Commission (“CEC”) is empowered to prepare the project’s Environmental Impact Report (“EIR”) pursuant to the California Environmental Quality Act (“CEQA”) and must complete the environmental review process and “certify” (i.e., approve) projects within 270 days of receiving a complete application. A certified project automatically qualifies as an “environmental leadership” project if the CEC finds that certain criteria are met. This designation provides significant benefits by expediting CEQA litigation—including the general standard that all legal proceedings, including appeals, be resolved within 270 days.
ETHANOL AND THE ENVIRONMENT
Ethanol is at the center of the ongoing debates over where and how to locate pipelines for the transmission of captured carbon underway in the Midwest. One of the arguments being used by carbon capture advocates is that it would enable ethanol plants to reduce their substantial carbon footprints. The positive impact on corn growers is cited as a reason to use the technology in that region.
Now in the middle of that debate, Reuters has released an analysis of the relative carbon footprints created by oil refineries and ethanol production facilities. The 2007 law, the Renewable Fuel Standard (RFS) requires individual ethanol processors to demonstrate that their fuels result in lower carbon emissions than gasoline. The Environmental Protection Agency (EPA) however, has exempted facilities built before the law was enacted.
These grandfathered plants produce more than 80% of the nation’s ethanol, according to the EPA. The agency found that the average ethanol plant generated 1,187 metric tons of carbon emissions per million gallons of fuel capacity in 2020, the latest year data is available. The average oil refinery produced 533 metric tons of carbon. A study published by the National Academy of Sciences in February, for example, estimated that ethanol produces 24% more carbon. The agency acknowledged the higher production emissions of ethanol, compared to gasoline.
Some 240 of 251 U.S. ethanol production facilities are exempted from emissions-reduction requirements. The RFS requires that the ethanol industry demonstrate that the fuel delivers a 20% reduction in carbon. exempted ethanol plant produced 1,203 tons of carbon. One of the factors driving the issue is that EPA uses statistical models developed by academics funded by the ethanol industry. Shockingly, using those data points lead to a conclusion that gasoline blended with ethanol had a low carbon footprint.
CARBON CAPTURE PIPELINES MOVE TO THE COURTS
Navigator CO2 Ventures, one of three companies that have proposed liquid carbon pipelines in Iowa, recently sued four sets of landowners to gain access to their properties to survey the land. Iowa law does say that “a pipeline company may enter upon private land for the purpose of surveying and examining the land to determine direction or depth of a pipeline by giving ten days’ written notice. The entry for land surveys … shall not be deemed a trespass and may be aided by injunction.”
In the meantime, Summit Carbon Solutions is finding that there is much opposition to its plans in South Dakota. Here is what Summit offers a landowner. Summit provides an annual payment for construction, based on 100% of crop loss in the first year, followed by 80% for the second year and 60% for the third year — all paid up-front. This is figured on income, based on each crop. And the one-time payment is 115% of the property value — not for the whole property, but just for that 50-foot-wide strip.
FLORIDA TOLL POLITICS
The continuing populist efforts on the part of Florida’s Governor to shore up support for a run for higher office are putting the state’s toll roads in the spotlight. Governor DeSantis has proposed a plan to provide toll rebates to frequent users of several of the state’s toll roads. They include Florida’s Turnpike, toll express lanes on Interstate 95, Interstate 75, and Interstate 595, along with the Sawgrass Expressway.
They do not include roads operated by the Miami-Dade Expressway Authority and Central Florida Expressway Authority. Those roads have been under political pressure from the Governor over his entire term. The governor is asking state lawmakers to approve an expansion of the SunPass Savings Program, which would allow any roads operated by expressway authorities — like the Dolphin Expressway and Rickenbacker Causeway in Miami-Dade County — to also be included in the package. SunPass and E-ZPass commuters who pay a certain number of tolls each month will get a 50% discount on their tolls for the entire year.
MASS TRANSIT
The New York Metropolitan Transportation Authority has been seeing gradually better utilization as more residents are being returned to their offices. Now, the State of New York has announced that the requirement that patrons wear masks on public transit is no more. It is a sign of a return to at least a portion of normality as the summer vacation season ends and the city’s public schools reopen. Now, the focus turns towards the proposed congestion fee which is garnering significant opposition.
The closure of the MBTA’s Orange Line for a month for significant repairs to be undertaken generated mixed reviews. “Transit advocates” cited the fact that bicycle usage was up significantly. Nonetheless, the Mayor of Boston (a major proponent of free fares on the “T”) has acknowledged that the closure has not received well by many. The real test will come with the onset of colder weather and the return of the line to service.
San Francisco has announced that it hopes to have a newly constructed extension to open before year-end. The new stations extend the City’s Metro subway service. The announcement comes as the city continues to be impacted by a lower than hoped return to the office.
In late July, a significant storm impacted the greater St. Louis area resulting in much damage from the resulting floods. St. Louis Metro Transit reported nearly five miles of damaged light-rail trackbed; the total loss of one MetroLink train; and significant damage to the signal system. It will be several months before the system can fully restore MetroLink service on the Red and Blue Lines in the city of St. Louis City and in St. Louis County.”
COAL RESUMES ITS DECLINE POST-PANDEMIC
New data from the Energy Information Administration shows that the perceived revival of coal was short-lived. The numbers for the second quarter of 2022 show that renewable energy rose to make up 24.8% of the electricity generated in the United States in the second quarter this year. Coal-fired power plants generated 190,547 gigawatt-hours in the second quarter, down 7.1 percent from the second quarter of 2021.
It is interesting that coal continues to decline even in the face of efforts to emphasize the base-load nature of that generation vs. renewables. Coal-fired power plants, operated at an average capacity factor of 52%. That is down from June of 2021, when there were 210 gigawatts of coal-fired power plants and their average capacity factor was 59%. Utility-scale renewable electricity sources generated 254,754 gigawatt-hours in the second quarter.
Hydropower plants generated 71,123 gigawatt-hours in the second quarter, up 7.6% from the second quarter in 2021. Those numbers do not tell the story of regional concentration of hydro resources as nearly all of the increase was in the Bonneville Power system. That growth offset declines in hydro power attributable to the drought plaguing the Colorado River hydro assets.
Natural gas remains the leading fuel for electricity, with 37.9% of the country’s total in the second quarter; ahead of renewables, which include wind, hydropower, solar, biomass and geothermal, at 24.8%; coal, 18.5%; and nuclear, 17.9%. Gas became a “go to” source of generation in the face of coal and nuclear plants being shut down.
That is why utilities continue to expand their investigation of small modular nuclear reactors. The Grant County Public Utility District in Washington will undertake a study of the potential for modular nuclear to support growing demand in its service area. It also comes as the debate over hydroelectric plants at dams generates pressure to remove some capacity. The studies so far have eliminated one proposal from Next Era energy for a reactor. A current proposal would locate a reactor at the Hanford Reservation where nuclear generation already exists.
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.