Joseph Krist

Publisher

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ENVIRONMENTAL – CARBON CAPTURE AND EMINENT DOMAIN

The issue of carbon capture and its need for expanded pipeline capacity is an issue for landowners in several states. The proposal for three new pipeline projects and the need for those projects to acquire right of way from private landowners has moved the issue of eminent domain to the fore. Iowa has become the epicenter for that debate.

The debate in Iowa is pitting several interests against each other. The differences are highlighted in proposed legislation before the Iowa legislature. One bill would require that commercial solar installations not be placed on land that is rated as having high suitability for farming. It would also bar installations within 1,250 feet of the nearest residence. That bill made it out of committee. Another bill would have removed a portion of Iowa Code allowing utility companies to use eminent domain to condemn agriculture land.  That did not make it out of committee.

A third bill would restrict land purchases by the Iowa Department of Natural Resources and county conservation boards. The proposal, would cap purchase prices between 65 and 80 percent of the fair market value, depending on the parcel’s potential for farming. The underlying issue is that the sponsors of the bill want to delay the move away from fossil fuels thereby preserving the market for ethanol. After all. Iowa is the nation’s largest corn producer. That’s why the bill made it out of committee.

JUST TRANSITION – WHY IT WILL BE HARD

Legislation has been introduced in the California Assembly which would create a state funded program to transition oil industry workers to jobs producing green energy in the state. It seeks to act on the concept known as Just Transition. It is easy to forget that in environmentally conscious California, about 112,000 people are employed in California in fossil fuel-based industries. That was some 0.6% of the total California workforce in 2019. Over 70% of workers in the fossil fuel sector have employer-provided health insurance, 65% receive retirement benefits and union membership levels are at 23%.

Average salary figures in this analysis include all salaries – even that of the CEO – but they still provide a comparable indicator. Fossil fuel jobs have an average overall compensation of $130,000 (including CEOs, lawyers and frontline workers,) compared to $97,000 for solar industry workers, who are the highest paid workers in California’s clean energy sector. The jobs also address one group: Of all workers, 65% have less than a Bachelor’s degree (30% have a high school degree or less, 35% have some college or an Associate degree).

The legislation does not specify a spending figure. Union research has come up with a number of $470 million annually. Their goal is to encourage steady annual reductions in production and jobs versus three specific cut years between now and 2030. They estimate that If the fossil fuel sector should close in three large episodes (for example in 2021, 2026 and 2030) with one-third of job loss each time, then in each episode, 4000 workers would voluntarily retire, 2800 workers close to retirement (age 60- 64) would be provided with a glide-path to retirement, and 12,500 would require re-employment. It would raise average costs $833 million.

The most interesting aspect of the reaction to the bill is that it has split the response from labor. The debate reflects the clash of goals as the climate change response unfolds across the country. The coalition of unions (teachers and municipal workers) which produced the research cited here is opposed by those in the industry directly (Ironworkers, electrical workers and Teamsters). Those unions want the state to provide them employment directly through state financed infrastructure projects. Traditional, big ticket stuff.

VOTGLE DELAYS AGAIN

Southern Co. has announced another delay for the startup date for Plant Vogtle’s first reactor until early 2023 and moved the date for the second one to later that year.  The cause of the delay is paperwork. critical inspection records were missing or incomplete. The volume of missing or incomplete documents is causing a delay of three to six months in the compliance approval process. Southern said. That additional time is costing $920 million.

Based on a 2018 agreement, the extension of the schedule requires the electric other participants companies to officially vote whether the project should keep going. Southern has already approved continuing. Oglethorpe Power Corp., the Municipal Electric Authority of Georgia (MEAG) and Dalton Utilities must decide by March 8. The decision facing these municipal participants is likely to depend on the shape of cost sharing going forward.

The 2018 agreement establishes financial benchmarks which determine how much of the cost of additional delays is to be retained by Southern given its role as project manager. The owners do not agree on two things: whether the monetary benchmark that would let the other developers tender a portion of their ownership share in megawatts in exchange for not paying anymore for Vogtle has been reached, and how much Covid-19-related costs played a role. As to the latter, Oglethorpe is pretty clear – “The co-owner agreement is very clear that force majeure related costs (including COVID) have no impact on [this] provision.”

THE BATTLE AGAINST RENEWABLES HAS A GAME PLAN

The folks at the American Legislative Exchange Council (ALEC) are at it again. The conservative group is known for creating “model legislation” which it provides to supportive legislators across the country. They have campaigned against government employee unions among other things. Now, ALEC is taking its playbook on the road in the fight to stymie the growth and adoption of renewable energy.

Some form of the Affordable, Reliable, and Resilient Electricity Act would require an “electric utility regulatory agency to develop rules and procedures promoting an affordable, reliable and resilient electric grid that meets peak net load and peak demand, including during extreme weather events.” How could that be bad? Well, the legislation goes on to include provisions clearly designed to impede the adoption of renewables.

“Generation resources serving the grid meet continuous operating requirements for summer and winter peaks, including extreme weather events that necessitate on-site fuel storage, dual fuel capability, or fuel supply arrangements to ensure winter performance for several days. Intermittent generation shall be required to provide firming power up to their average output level during periods of peak net load, and the cost of that firming shall be attributed to or otherwise included in the rate structure consistent with cost-causation principles.”

The intent could not be clearer. The bill is also designed to make heretofore uncompetitive fossil fueled generation more competitive by the worst of methods – artificially driving up the cost to competitors.  “Reliable” according to ALEC means that load shedding events are extremely rare and that there are no system wide power shortages or brownouts for more than a few hours once every 10 years. By that metric, the fossil fueled utility that supplies my power fails the test so that must not be the goal.

FARE ENFORCEMENT CHALLENGED IN WASHINGTON STATE

The Washington Supreme Court heard arguments in an appeal from an individual arrested on outstanding warrants discovered through the process of enforcing fare payment on Seattle’s mass transit system.  Fare enforcement is being challenged on grounds that it discriminates against the poor and people of color.

The issue of transit fares and enforcement has risen to the fore through the pandemic. The pandemic has been the basis of decisions to suspend fares, collection, and enforcement as agencies try to help cope with limits and impacts of the pandemic across the country. This litigation argues that enforcement at other than the point of payment is illegal. The system referred to is commonly used across the country requiring either purchase of a ticket (presentable on demand) or through use of one’s smart phone.

While the case will be decided under state law, the implications of a decision against fare enforcement could be far reaching. Advocates for free transit have been hoping that temporary responses to the pandemic will become permanent. Should fare enforcement be found to be illegal, transit systems will face the issue of revenue shortfalls as paying customers would likely soon join with other riders not paying the fare.  The Seattle system has lost some 50% of its patronage during the pandemic. At the same time, it is undertaking a program to address “non-destinational riders”. Predominantly homeless passengers who have mental health or drug problems.

RURAL POWER CHALLENGES

The same economics that impeded the development of the nation’s electric grid in the 20th century continue to play out as rural electric providers deal with their unique costs related to the unconcentrated nature of their customer base. As individuals increase their installation of solar panels and utilities deal with the cost of transmission and maintenance, the utilities are targeting solar power development to generate additional income even though they provide less service.

It is part of what is driving the industry response which increasingly relies on fixed charges for electric service rather than having revenues based on kilowatt hour sales. One recent example raising the ire of customers comes from rural Colorado. The Sangre de Cristo Electric Association in Colorado serves some 13,000 customers across four counties. Many of its customers are low consumers of power and are also installing solar panels. They sell the power they don’t use back into the grid under what is known as net metering.

The vast majority of customers are residential and some 40% are second homes owners so their electricity use is lower than one might expect. If those customers install solar, the base of remaining standard use customers shrinks and revenue is impacted. So, this co-op has decided to raise fixed charges on a monthly basis from $31.83 to $46.15. At the same time, it will reduce the cost of a kilowatt hour by from 1 to 5%. The co-op also plans to commence time of day pricing to raise the cost of electricity in the hours between 5 and midnight.

It is a pretty blatant effort to suppress individual renewable energy production. The $46.15 monthly service charge ranks as the highest among the 24 large and small electrical co-ops in Colorado.  The cutoff point for determining the level of fixed charges in 590 kwh. Members who have solar panels on their homes find themselves pushing energy back onto the grid during the day, but since their use falls below 590 kilowatt hours a month, they will pay more for the power they use at night.

That’s on top of an increased fixed fee for service. Some of this reflects the longtime tension between “natives” and newcomers which have characterized life in Colorado for years. Some natives who use lower amounts of power for economic reasons will be lumped in with second home owners and see their bills actually increase. Is this good policy?

 Colorado’s 2008 net metering law that requires cooperative electric associations to credit solar-paneled homeowners with 1 kilowatt hour for every kilowatt hour they add to the grid. The legislation was designed as an incentive for homeowners considering solar panels.  In contrast, Florida’s net metering law specifies that “public utility customers who own or lease renewable generation pay the full cost of electric service and are not cross-subsidized by the public utility’s general body of ratepayers.”  

STADIUM FINANCE BACK AS AN ISSUE

A March 2020 study published in the National Tax Journal estimated that the federal government had lost $4.3 billion in revenue as a result of tax-exempt municipal bonds used for stadium construction since 2000. Now, those numbers are being cited in support of legislation to deny tax-exempt financing for stadiums. Three long time antagonists in the House have joined together to sponsor the “No Tax Subsidies for Stadiums Act”.  

The tax expenditure number pencils out to an average tax loss (or tax expenditure) of $215 million per year for the twenty-year period. The real reason for the move is in response to the ongoing investigations and scandals regarding sexual harassment at the Washington NFL franchise. It is known that the team’s unpopular owner is considering locations in the greater D.C. metropolitan area.  Many regional politicians seek to make any new stadium project as difficult to accomplish as possible. In the end, the hope is that the owner will sell the team.

It is not a major campaign issue now but the quest by the owners of the Buffalo Bills to develop a new stadium may become one. It is one of the oldest NFL stadiums at nearly 50 years old. The Bills play at the stadium under the terms of a ten-year lease to stay in Buffalo until 2023. Ownership has estimated $1.4 billion for a new stadium in Orchard Park with the majority expected to come from taxpayers.

The hope among Bills fans is that the election of Gov. Hochul to a full term will help drive a deal for the new stadium. She is after all, from Buffalo.

DROUGHT ISSUES

Lake Powell is the second-largest reservoir in the U.S. In order for the hydroelectric generation plant constructed as part of the dam to operate, the lake must maintain a water level that is at least 3525 feet above sea level. At this time last week, the lake elevation was at 3529 feet, just four feet above the critical level. Now, to address the low water condition stemming from the long term drought in the American West, a new plan will be implemented.

The states in the Colorado River drainage area agreed to the Congressionally approved 2019 Drought Contingency Plan. The agreement includes the provision that if Lake Powell is projected to possibly drop below 3,525 feet, the states upstream of the river will have a plan in place to send more water to Lake Powell. That water will likely come from three other reservoirs – Flaming Gorge on the Utah-Wyoming border, Navajo in New Mexico and Blue Mesa in Colorado. 

The process shines an even brighter light on the role of water as an economic development and survival issue in the West. Blue Mesa was significantly drawn down in 2021, and the reservoir — Colorado’s largest — hit its lowest level on record by the end of the year. The data from the U.S. Bureau of Reclamation shows that Lake Powell could pass below the critical 3525 foot level by the fall of 2022 if conditions remain historically dry. The short run impact will be on economic activity related to the reservoir. In the longer run, Blue Mesa wills serve as a real example of the competition among a wide range of water users.

The importance of hydro power is highlighted by data from the California Energy Commission. The CEC estimates that in 2020, 34.5 % of the state’s retail electricity sales were served by Renewables Portfolio Standard (RPS)-eligible sources such as solar and wind. When sources of zero-carbon energy such as large hydroelectric generation and nuclear are included, 59 % of the state’s retail electricity sales came from non-fossil fuel sources in 2020. 

That is a drop from the prior year. In 2019, over 60 percent of the state’s electricity came from renewable and zero-carbon sources. The decrease in 2020 is due to decline in hydroelectric generation caused by severe drought, as well as pandemic-related delays to new renewable energy projects. A nearly 20 percent decline in large hydroelectric generation compared to 2019 was a major driver.

In the Pacific Northwest, the Columbia River Basin contains more than one-third of U.S. hydropower capacity and generates enough electricity to power over 4 million homes. The U.S. Energy Information Administration (EIA) estimates that while some snow conditions remain below normal that 17% more electricity generation from hydropower will be available in the Pacific Northwest in 2022 compared with 2021.

EIA estimated that hydropower generation in 2021 fell by 10% in the Northwest and by 9% in the entire U.S. compared with 2020. In its February STEO, EIA forecast that U.S. hydropower plants would generate 278 million MWh of electricity in 2022, half of which would come from the Northwest. This would be an 8% increase in U.S. hydroelectric generation from 2021. Overall, EIA said it expected hydroelectricity to account for 7% of total U.S. electricity generation in 2022.

INDIAN GAMING AT THE SUPREME COURT

The Restoration Act of 1987 established a federal trust relationship with the two Texas tribes – the Tigua (the Ysleta del Sur Pueblo) and Alabama-Coushatta. The legislation included a provision barring the Tigua and Alabama-Coushatta from conducting gambling prohibited in Texas. The Tiguas own and operate the Speaking Rock Entertainment Center. Games offered include traditional bingo and electronic machines that resemble casino-style slot machines and are based on bingo principles.

The State of Texas has sought to limit the tribe’s casino operations on several occasions gaining favorable rulings from the U.S. Fifth Circuit Court. A 1994 5th Circuit Court of Appeals decision known as Ysleta I held that federal law prohibited gambling on Tigua (also known as Ysleta del Sur Pueblo) and Alabama-Coushatta land. The 5th Circuit rulings have meant that the Tigua and Alabama-Coushatta tribes of Texas are the only Indigenous people in the United States without a recognized legal right to offer gambling. For the Tiguas, the casino is the primary source of funding to the tribe and its provision of services for education, housing, and health.

The Tigua argue that the Restoration Act does not allow the state to regulate tribal bingo, the basis of the games it currently offers. The U.S. Department of Justice has reversed the position of the prior administration that supported the 5th Circuit rulings. Now, DOJ is being asked by the Court to weigh in on the matter. In the immediate term, that allows the entertainment center to continue to operate. The new Supreme Court order does not give the Justice Department a deadline for filing a brief. The step will cause the appeal process to be extended by several months.

HYPERLOOPS

While some localities consider hyperloops or some variation of them for their transit needs, the concept is slower to gain acceptance generally. The latest example comes from Texas. The North Texas Regional Transportation Council (RTC) recently revised its policy on developing a high-speed corridor to focus solely on high-speed rail, eliminating plans to build hyperloop tech into the corridor. The RTC is seeking to build a high speed connection from Dallas to Fort Worth.

The announcement reflected the concerns that many have with the hyperloop concept.  The Commission’s lead planner said “hyperloop is still a developing technology with no clear path to approval, and including it in the corridor’s plans could delay development.”

PUERTO RICO

The Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) authorizes the Oversight Board to approve and amend Puerto Rico government spending independent of the legislature’s actions. Those provisions anticipated the delaying tactics and outright noncooperation on the part of the Puerto Rico Legislature. Now that the Legislature has failed to pass the necessary authorizations to balance the budget and pay debt service, the Board must act on its own.

To that end, the Board has approved a $23.5 billion General Fund budget for the current fiscal year. The budget provides some $1.09 billion of current year revenues for debt service. The payments will be used to cover debt service on general obligation capital investment bonds, capital appreciation bonds, Sales and Use Taxes Contingent Value Instruments, and rum cover tax Contingent Value Instruments. Mindful of the politics of pensions, the approved budget includes $1.42 billion to be contributed to the government’s pension trust and $1.3 billion to active and retired government employees who never received their investments in the Systema 2000 pension system.

Other categories of debt remain to be restructured. The Highway and Transportation Authority has some $6 billion of outstanding debt. The Board has recommended that tolls on the Authority’s facilities be raised. The recommended toll hikes would result in increases of 8.3% each year fiscal 2022 to fiscal 2024 and then they should increase by the inflation rate plus 1.5%. That may be a hard political lift given that tolls have not been raised since 2005. The PREPA restructuring remains incomplete. The Board is expected to submit its proposal for a Plan of Adjustment for the PREPA debt by April 15.

UPDATES

Last week, we commented on a proposed bill which would have provided financial incentives to communities willing to adopt state standards for renewables siting. The bill had support from a number of constituents. Nonetheless, the bill is advancing through the legislature without the funding provision. The issue seems to be the lack of a dedicated source of funding for the plan. The bill in its current form establishes minimum statewide standards for commercial renewable energy system siting for communities that choose to adopt them.  It makes no mention of funding.

New York’s MTA reported its highest daily patronage last week as ridership exceeded three million.

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.

Joseph Krist

Publisher

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P.R. LITIGATION

Challenges to the Plan of Adjustment in the Puerto Rico Title III proceedings have been expected and predictable. Two appeals have been made to the U.S. District Court for Puerto Rico and arguments have been submitted. One is Puerto Rico-based credit unions and the other is the Teachers Union. For arguments, the issues in the two cases have essentially been combined. The teachers and the credit unions want to have the court issue a stay against the implementation of the plan.  They are asking for time to pursue appeals in the Court of Appeals for the First Circuit. While located in Boston, this is the traditional forum for litigation involving the Commonwealth.

The predictability of litigation like this was quite strong. It was a question of which group or entity would file an appeal. In prior decisions, the presiding judge in the Title III proceedings has ruled on claims of illegal takings by the Board. The main thing this accomplishes is delay. We do not see it changing the ultimate outcome of the Title II process. The bondholder creditors and the Oversight Board had hooped to move forward with implementation of the Plan and its refinancing by March 15. This litigation will likely delay that.

In the meantime, the actions of the Puerto Rico Senate in refusing to act on legislation needed to amend the Commonwealth’s budget just reinforce the view that the political establishment still does not understand their situation. The politicians try to portray this as just the normal course of politics when it is actually just another example of why the market remains highly skeptical about the ongoing willingness to pay even its restructured debts.

It’s hard not to look at Puerto Rico as a credit and then look at the ongoing debt problems of Argentina where political will has always been the issue in its IMF debt dealings. That is not a place which Puerto Rico should aim to aspire to.

PLANT BASED BUT NOT GREEN

A study, funded in part by the National Wildlife Federation and U.S. Department of Energy, found that ethanol is likely at least 24% more carbon-intensive than gasoline due to emissions resulting from land use changes to grow corn, along with processing and combustion.  In 2005, Congress enacted legislation creating the U.S. Renewable Fuel Standard (RFS). That legislation requires the nation’s oil refiners to add some 15 billion gallons of corn-based ethanol into the nation’s gasoline annually. The policy was intended to reduce emissions, support farmers, and cut U.S. dependence on energy imports.

That law spurred the issuance of tax-exempt bonds to fund ethanol refineries. These were issued primarily in the high yield market. Those refineries competed to process local corn into ethanol. Corn cultivation grew 8.7% and expanded into 6.9 million additional acres of land between 2008 and 2016. For ESG investors, it is important to note that the study showed corn planted for ethanol increased annual nationwide fertilizer use by 3 to 8%, increased water quality degradants by 3 to 5%, and caused enough domestic land use change emissions such that the carbon intensity of corn ethanol produced under the RFS is no less than gasoline and likely at least 24% higher. 

In reality, the oil companies hate the rule and consumers appear agnostic. In terms of other negative impacts, corn prices have led to higher food prices. RFS increased corn prices by 30% and the prices of other crops by 20%. From many perspectives, the ethanol program looks like a back door subsidy to growers given the new study that shows ethanol to be a net carbon contributor.

The future of ethanol requirements is in the hands of the U.S. Environmental Protection Agency (EPA). As manager of the nation’s biofuels program, it will set the regulations to replace the current standards which expire this year. EPA plans to propose 2023 requirements in May.

HARVEY, ILLINOIS

A long saga comes to an end as the SEC asked the U.S. District Court in Illinois to approve its request to close its case against the City Of Harvey, IL. The economically challenged municipality near Chicago’s South Side has a long history of poor management. In June 2014, the SEC filed a complaint alleging that the City misused municipal bond proceeds and lacked adequate internal controls to prevent this misuse. In December 2014, the City entered into a Consent Judgment that permanently enjoined the City from future violations of the antifraud provisions of the federal securities laws. The Consent Judgment also required that the City hire an Independent Consultant and that the City implement the Independent Consultant’s recommendations.

As is often the case, the entrenched powers at City Hall did not move forward as quickly as the Court had expected.  In October 2020, the SEC filed a Motion to Enforce the Consent Judgment, asserting that the City had not fully implemented the Independent Consultant’s prior recommendations. As part of the Order granting the SEC’s Motion to Enforce the Consent Judgment, the Court ordered the City to re-hire the Independent Consultant and ordered the Independent Consultant to prepare an updated report on whether the City was in compliance with his prior recommendations after re-hiring him.

On January 4, 2022, the SEC filed an updated report from the Independent Consultant which reported that the City had implemented changes resulting in improvement of the City’s internal controls and that the City now was in substantial compliance with his prior recommendations. The SEC then moved to have the case terminated although the Consent Decree remains in effect.

NYC BUDGET

Mayor Eric Adams presented his first budget proposal for FY 23. The budget reduces the FY23 budget by $2.3 billion as proposed by Mayor DeBlasio. The plan reflects the new priorities of a new administration and a different attitude about spending. It also revives a term we had not seen since the Bloomberg administration – PEG. A Program to Eliminate the Gap (PEG) is being relied upon to lower overall spending and is also relied upon to fund programs more in line with the new Mayor’s priorities.

This budget maintains the Police Department at current levels. It also addresses the issue of the size of the City’s workforce. The DeBlasio administration’s standard response was always to increase spending and headcount. The Adams administration reduced the budgeted city headcount by 3,200 in FY22 and 7,000 in FY23 by eliminating vacancies and without laying off a single employee.

This plan also increased budget reserves to a total of $6.1 billion — more than $1 billion more than the FY22 level, and the highest level achieved in city history. There is now $1 billion in the General Reserve, $1 billion in the Rainy Day Fund, $3.8 billion in the Retiree Health Benefits Trust, and $250 million in the Capital Stabilization Fund. The administration has removed $500 million in unidentified labor savings from the FY23 budget and future plan years. That may reflect the likelihood that labor negotiations will lead to higher rather than lower wages.

The new priorities of this administration are reflected by several program proposals. The budget would increase the New York City Earned Income Tax credit (to $250 million in FY23) and it would guarantee annual funding for the Fair Fares program for the transit system ($75 million in FY23) which provides fare relief to low income riders. Child care has become a much bigger issue as lower income workers were impacted by the need to go to work while school openings were in doubt.  

The budget seeks to support the expansion of child care facilities. It would use tax incentives specifically to create more childcare space with a property tax abatement for property owners who retrofit property ($25 million in FY23) and tax credits for businesses that provide free or subsidized childcare ($25 million in FY23). It also seeks to address the need for summer jobs for young people by expanding the Summer Youth Employment Program. The budget would baseline the funding for 100,000 summer jobs for city youth, including 90,000 in the SYEP ($79 million in FY23 for a total baselined investment of $236 million).

The City will still face out-year gaps of $2.7 billion in Fiscal Year 2024, $2.2 billion in Fiscal Year 2025, and $3 billion in Fiscal Year 2026. It also acknowledges the challenges ahead. This plan is submitted when the City faces an unemployment rate of 8.8 percent. While down from 20% at the peak of the first wave, it is still much higher than the state and country overall. The local economy has recoveredjust 55% of the 933,000 jobs lost at the height of the pandemic. This lags behind the state, which has recovered 63%, with the U.S. at 84%.

Return-to-office progress peaked at over 35% in early December, crashed dramatically to just over 10% by January, and still has not recovered. Office vacancy rates are at 20%, a 40-year high. Some offsetting good news is that better than expected Wall Street activity and growth in residential real estate helped fuel a $1.6 billion increase in Fiscal Year 2022 tax revenue projections over November.

MEMPHIS UTILITY BLUES

Last winter saw the Texas power grid implode and the aftermath focused attention on management and governance at municipal utilities impacted. This winter has seen a winter storm create havoc at the utility serving Memphis, TN with customers without power for over a week. Events like this focus attention on the management of a utility. Memphis is no exception.

The storm came as Memphis was in the midst of several controversial issues including a potential termination of its relationship with the Tennessee Valley Authority. The attention on management has shed light on a serious governance issue. It has been acknowledged that the three-year terms of all five members of MLGW’s governing board are long expired. Four of the five ended nearly three years ago.

The most recently appointed commissioner’s term expired more than 18 months ago. It is all legal. A commissioner can continue to legally vote on MLGW matters after their three-year term expires. The mayor said that he made a decision to not appoint or reappoint anyone to the MLGW board until officials closed the bidding process for seeking power suppliers that might replace TVA. The Mayor cites a need for “consistency” in not appointing board members.

MLGW commissioners are nominated by the mayor and confirmed by City Council. Failing to reappoint a sitting commissioner or appoint a replacement means there is no public hearing. There are also conflict of interest concerns involving one commissioner. Commissioners serve “until the expiration” of their three-year terms and “until their successors are elected and qualified,’’ which technically allows a commissioner to serve longer than three years without a reappointment. 

The TVA contract renewal is a huge decision for the utility. It has been the source of much of the concern. In the case of MLGW, it is a real issue. One board member is in a business relationship with the wife of a TVA officer. That job was created after MLGW’s board first voted to seek bids from alternative electricity suppliers some 13 months ago. While it may be legal under Tennessee law, the situation raises serious governance issues which the parties have been unwilling to address to date.

D.C. PENSION INVESTIGATION

The major pension funds servicing the bulk of government retirees from the District of Columbia all have very strong funding positions. While the funding of pensions remains a significant issue nationwide, the District has long been a positive outlier. Consequently, the funds and the Board of Directors who oversee them have not drawn much attention.

That has changed for now as it has been revealed that the US Department of Justice (DOJ) has been investigating the Board with an apparent focus on investment manager compensation. The first subpoena was issued in August, 2021 but the Board did not disclose it. The information came to light in in a whistleblower lawsuit filed in December against the Board by the agency’s general counsel.

At this point, the issue seems to be one of governance. The strong funding status of the funds does not obviate the need for strong ethical standards and oversight. All the pensioners should be worried about is whether the money is there for them.

HIGH TIDE

NOAA is the federal agency tasked with, among other things, monitoring sea level changes. The Sea Level Rise Technical Report provides the most up-to-date sea level rise projections available for all U.S. states and territories. The new report is the first in 5 years. The findings reinforce trends already apparent.

Sea level along the U.S. coastline is projected to rise, on average, 10 – 12 inches (0.25 – 0.30 meters) in the next 30 years (2020 – 2050), which will be as much as the rise measured over the last 100 years (1920 – 2020). Sea level rise will create a profound shift in coastal flooding over the next 30 years by causing tide and storm surge heights to increase and reach further inland.  

Rise in the next three decades is anticipated to be, on average: 10 – 14 inches for the East coast; 14 – 18 inches for the Gulf coast; 4 – 8 inches for the West coast; 8 – 10 inches for the Caribbean; 6 – 8 inches for the Hawaiian Islands; and 8 – 10 inches for northern Alaska.

TRI-STATE COOP RELENTS

At least one local distribution cooperative in Colorado has managed to reach an agreement with Tri-State Generation its wholesale power supplier. Over recent months, Tri-State has been in the spotlight for its efforts to bind its customers to them even though many face mandates to lower fossil fueled energy consumption. Tri State has been exceptionally dependent upon coal.

Now, one distribution coop – La Plata -has reached an agreement with Tri-State which keeps La Plata as a member but provides for the coop to be a partial requirements customer. The historic model was for all requirements contracts. La Plata’s existing contract with Tri-State allows the Durango-based cooperative to generate just 5% of its own power. Members now can choose to obtain up to 50% of their power requirements from their own direct generation or through purchases.

LaPlata will, if the contract gets final FERC approval, begin taking power from private renewable providers to satisfy 50% of La Plata’s requirements.  The partial requirements contract will save La Plata $7 million a year. It will offer an immediate 50% cut in La Plata’s carbon footprint when it begins purchases in 2024. It also supports La Plata’s goal which is to decarbonize 50% by 2030 as compared to 2018. 

As the process unfolds (a FERC hearing is scheduled for May), Tri-State has stopped raising rates and is now lowering them, 2% last year with another 2% reduction schedule for this fall. It is working with La Plata to install a 2-megawatt community solar project. That indicates that Tri-State has realized the benefits of a more flexible approach with its members.

That may not be enough for all of them. One utility with 100,000 customers wants out of its relationship with Tri-State. The FERC determination in the La Plata case will be looked closely by the six other Tri-State members who have indicated they are studying their options.

NUCLEAR

The newly enacted Bipartisan Infrastructure Law created the Civil Nuclear Credit Program (CNC), allowing owners or operators of commercial U.S. reactors to apply for certification and competitively bid on credits to help support their continued operations. Under the law, applications must prove that the reactor will close for economic reasons and demonstrate that closure will lead to a rise in air pollution. DOE must also determine that the U.S. Nuclear Regulatory Commission has reasonable assurance that the reactor will continue to operate safely. 

Proving that nuclear closures contribute to increased carbon emissions may get a lot easier. EPA data has been released for the Northeast. New York passed a law in 2019 requiring the state to eliminate carbon dioxide emissions from power plants by 2040 but over the last two years, CO2 from power plants has climbed nearly 15 %.  In the six New England states, power emissions are up 12 % over the last two years. And in Pennsylvania, emissions from electricity generation have grown 3 %.

That likely reflects the replacement of nuclear with natural gas fired generation. Nationwide, power plant emissions were down 4% between 2019 and 2021, even after accounting for a 7% increase in electricity emissions last year. Nuclear power currently provides 52% of the nation’s 100% clean electricity from the current fleet of 93 reactors.

The emissions problem is expanding the potential audience for nuclear. Some 16 states have passed some form of support for nuclear whether through direct operating subsidies, repeal of limits on nuclear projects, or authorization for small modular reactors (SMR).  After the experiences in Georgia and South Carolina, modular would appear to be the way to go for nuclear advocates.

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.

Joseph Krist

Publisher

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NOT JUST THE HOUSE WINS IN NEVADA

The Nevada Gaming Control Board announced that the state’s more than 400 largest casinos won more from players in 2021 than in any year in history. Blackjack continues to be the most popular table game in the casino. The No. 2 game is roulette. Statewide, win on all slots was up 0.25% and on tables, up 0.65%. The slot win percentage has decreased only three times in the past 25 years.

The state’s 1,958 blackjack tables won $1.13 billion from players for the calendar year. That was 75.8% more than the prior year. Roulette’s 424 units statewide generated revenues of $428 million, a 103% increase over last year. Roulette hold by the casinos was at 19.87 percent.

Slots are a whole category of their own. The most popular slot machine denomination in 2021 – the penny slot. There were 47,822 units across the state which won some $3.758 billion from players. That is a 59.7% increase over 2020. That produced a win rate for the house of 9.85% of the money put into them. The best slot for players were the nickel slots which the casinos only kept less than 6%.

That is where the state wins, Gaming tax collections are up 31.1% versus the first six months of the 2020-21 fiscal year. The first half of the 2021-22 fiscal year, through January 31, saw the state collect $570.8 million in percentage-fee collections.  For states generally, there is good news in the sports betting market. Nevada sportsbooks generated 5.46% of money wagered in 2021. The state’s books won $445.1 million from the 176 places in operation. Sports betting revenue was up 69.4% over the previous year.

NUCLEAR NORTHERN LIGHTS?

Alaska Governor Mike Dunleavy is asking the legislature to pass S.B. 177. The bill “would allow Alaskan communities to pursue the use of nuclear microreactors in Alaska by excluding local microreactor projects from the legislative designation siting requirement, exempting microreactors from the ongoing study requirement of AS 18.45.030 in recognition of the extensive research taking place both inside and outside of Alaska, and adopting the federal definition of a “microreactor.”  

Proponents are looking at two potential landing spots for micro reactors. One would be owned by Copper Valley Electric Association (CVEA) located in Glennallen, Alaska. CVEA is a cooperative utility that provides electrical and heat services to more than 3,800 business and residential customers stretching north 160 miles from Valdez to Glennallen and spanning 100 miles east to west from the Tok Cutoff highway into the northern reaches of the Matanuska Valley. CVEA is not interconnected to any other electric utility. It is that isolation that makes the concept attractive.

The other potential site would be located at Eielson Air Force Base and could be completed by 2027. There is a history of nuclear power associated with military facilities in Alaska. The SM-1A Nuclear Power Plant is located in central Alaska, approximately 6 miles south of Delta Junction on the Fort Greely Military Reservation. Fort Greely is approximately 100 miles southeast of Fairbanks and 225 miles northeast of Anchorage. The construction of the SM-1A at Fort Greely began in 1958 and was completed in 1962 with first criticality achieved on 13 March 1962. The final shutdown was performed on the SM-1A Reactor in March 1972.   

Ironically, this legislation could be enacted just as final decommissioning of the Fort Greely site begins. It is also accompanied by another bill the Governor seeks approval for which would require 80% of the Railbelt’s electricity to come from renewable sources by 2040, with penalties for electric companies that fail to meet the requirement. That would put the Alaska Energy Authority at the center of efforts to move to renewable power.

Between Homer and Fairbanks there are five interconnected utilities that distribute electricity to customers in six separate service areas in what Alaskans call the “Railbelt.” Four of those utilities also own and operate generation, and all five, plus the State of Alaska, own parts of the transmission system. The Alaska Energy Authority (AEA) owns the Bradley Lake Hydroelectric Project, the largest hydroelectric facility in the state. The proposed bill would also move forward with new hydro sources. In 2011, AEA received authorization to pursue a FERC license for the Susitna-Watana Hydroelectric Project. Financial constraints halted the project.

YOU CAN GO HOME AGAIN

For many years, the Commonwealth of Pennsylvania has run a program for oversight and assistance to municipalities in an effort to avoid defaults or Chapter 9 filings by those entities. Under Act 47 as the authorizing legislation is known, the Department of Community and Economic development provides fiscal management oversight and planning, technical assistance, and financial aid. The program has been successful in achieving those goals. Nonetheless, there has been criticism of the program reflecting the fact that some municipalities seem to never exit the program.

One such city was Scranton, the former railroading and mining center in northeastern Pennsylvania. It was designated as distressed on Jan. 10, 1992. And some 30 years later, the DCED announced the city’s status under the law was terminated on Jan. 25. The city had taken a number of steps under the oversight of the DCED to stabilize the city’s finances. It sold its sewer system in 2026 to generate monies for pension funding. One additional source of support for the city was the fact that support from the American Rescue Plan Act of $68 million could be applied to the City’s fund budget.

The city also benefitted from the resolution of litigation challenging taxes and fee increases imposed by the city. That resolution not only upheld the legality of prior collections but also allowed for their continuing collection, Late in 2021, the DCED audited the city’s finances as part of the process of determining whether the city could leave the program.

The reality is that Scranton is the 16^th city to participate in the program and strengthened and the regional tax base accessed. It came under supervision in 2004. So, the idea that cities check in but don’t check out of the program becomes more of a myth over time.

PUERTO RICO ELECTRIC

The U.S. Departments of Energy (DOE), Homeland Security (DHS), Housing and Urban Development (HUD), and the Commonwealth of Puerto Rico are moving forward on a structure for the development of a 100% renewable energy system for Puerto Rico. The announcement comes amidst continuing service issues with the current system. Reliability and cost remain basic issues for consumers. Labor unions oppose virtually any effort to move away from the current generating base.  The politics of the Commonwealth do not provide a solid environment for change.

Puerto Rico has committed to meeting its electricity needs with 100% renewable energy by 2050, along with realizing interim goals of 40% by 2025, 60% by 2040, the phaseout of coal-fired generation by 2028, and a 30% improvement in energy efficiency by 2040 as established in Puerto Rico Energy Public Policy Act (Act 17). A Memorandum of Understanding (MOU) will bind PREPA to sign contracts for at least 2 GW of renewable energy and 1 GW of energy storage projects. 

The memorandum accomplishes two things in the near term. It establishes a clear role for the expertise of DOE in the process and it kicks starts some needed fixes.  It is expected that at least 138 projects will be under construction bidding or have begun initial construction activities, including island-wide substation repairs, the replacement of thousands of streetlights across five municipalities, and the creation of an early warning system to improve dam safety.

Ratepayers currently pay twice the national average. Microgrids and renewables are achievable goals which will yield tangible benefits from both economic and reliability standpoints. It is something we have been advocating as the only rational response to the entire range of options and challenges confronting the island’s electric grid.

UNDERPOWERED AUTHORITY IN NY

New York State Comptroller Thomas DiNapoli released the results of an audit of the efforts of the New York Power Authority to install electric vehicle (EV) charging infrastructure throughout the state. The Charge NY program was announced in 2013 as a statewide network of up to 3,000 public and workplace charging stations to be ready in five years. It was followed in 2018 by Charge NY 2.0, a plan to install 10,000 public charging stations by the end of 2021. That same year, NYPA also announced EVolve NY, a $250 million project to put high-speed chargers at airports and along major highways. 

As of June 2021, there were 46,608 EVs registered in New York, but NYPA had installed just 277 public EV charging ports, or one for every 168 EVs registered in NY. The shortfalls are across all areas of the state. Suffolk County has 7,916 registered EVs, which is more than any other county and about 17% of the statewide total. It has three NYPA public charging stations, 1.2% of the total and just one charger for every 2,639 electric cars.

Nassau County has 5,947 registered EVs, about 13% of the statewide total, but only five NYPA public charging ports, 1.8% of the total or one port for every 1,189 electric cars. Westchester, where NYPA is based, has more NYPA public ports than any county. It has 4,844 registered EVs, about 10% of the statewide total, and 44 public ports or about 16% of the total.

Erie County has 1,898 registered EVs, about 4.1% of the statewide total, and 42 NYPA public charging ports, or one public port for every 45 vehicles (about 15% of the total). 30 counties with 6,189 EVs have no NYPA-placed public charging ports. There were only 28 high speed chargers at 18 locations as of September 2020. Not one of the EVolve NY’s Phase 1 projects, including installing 200 high speed chargers, were completed by their deadline of the end of 2019. As of March 5, 2021, NYPA had installed only 29 high speed chargers at seven locations, putting it on track to finish more than two years behind schedule.

INDIANA TRIES TO INDUCE PREEMPTION

After efforts last year in Indiana to impose state standards on localities governing the siting of commercial solar and wind generation infrastructure failed, another effort to accomplish the goal is underway. SB 411 establishes within the Indiana economic development corporation (IEDC) the commercial solar and wind energy ready communities development center (center). The center shall create and administer: a program to certify a unit as a commercial solar energy ready community; and a program to certify a unit as a wind energy ready community.

If a unit receives certification as a commercial solar energy ready community; and after the unit’s certification, a project owner submits a commercial solar project to be approved under standards that comply with the default standards; the IEDC shall authorize the unit to receive for a period of 10 years, beginning with the start date of the commercial solar project’s full commercial operation, $1 per megawatt hour of electricity generated by the commercial solar project.

The prior effort took power away from local zoning and land use boards and gave it to the state with no control over the economic benefits. That did not get a lot of support from the local government units. Now, the state would be offering a direct financial consideration to motivate adoption of the state standard.

EMINENT DOMAIN

It is a tool which has long been used throughout the nation’s history to acquire land from unwilling owners to facilitate larger development. The tool of eminent domain has been used to cover a variety of projects in locations large and small, metropolitan and rural. Lost in the debate over infrastructure of all kinds are many of the issues associated with land rights in connection with a variety of infrastructure projects.

This year, eminent domain is at the center of two projects where it may be the issue on which their success stands or falls. One is the issue of whether Texas landowners may face eminent domain over the proposed high speed rail line between Houston and Dallas. The issue is the subject of litigation in the Texas courts.

The other is the proposed network of pipelines to transit carbon captured to proposed storage facilities in North Dakota and Illinois. Three companies have together proposed 3,650 miles of new pipelines to cut across the Midwest and eventually transport 39 million tons of captured carbon annually from ethanol and fertilizer plants to the storage sites. Iowa would get the bulk of pipeline miles – more than 1,600 miles.

One pipeline developer has submitted a request to the Iowa Utilities Board (IUB) which regulates pipelines. Twenty counties in Iowa have filed objections with the IUB opposing the use of eminent domain for the pipelines, including 52% of counties along one pipeline’s proposed route and 41% of the counties along a second proposed route. If carbon capture and storage is to become a real thing, then this issue will be replayed across the country.

The company operating the second pipeline also plans to solidify its final route the rest of this year and apply for a federal permit. If successful, it expects to receive permits in the second half of 2023 and start construction in 2024.

There are currently about 5,000 miles (8,047 km) of carbon dioxide pipelines in the United States, mainly in Texas and Wyoming. It is used by industry to be pumped under oil and gas fields to increase pressure and boost production. One White House estimate says the country would need to build another 65,000 miles for the country to permanently store enough carbon to reach net zero emissions by 2050.

SOLAR AND WATER

The Turlock Irrigation District is poised to be the first water agency in the nation to see if placing solar panels above irrigation canals is a viable option for producing power while also reducing water losses.  It is scheduled to vote to accept a $20 million grant from the California Department of Water Resources to fund a demonstration project. The project would effectively cover existing open aqueducts and irrigation canals. The panels would produce power which could be tied in directly to existing transmission lines which exist along the route.

The panels would be suspended over the canals in a way that does not interfere with operation and maintenance of the water system. The project includes batteries or another means of storing daytime power from the sun for use later. University of California. Researchers said installing canal panels throughout the Central Valley could get the state halfway to its goal for climate-safe power. University of California. Researchers said installing canal panels throughout the Central Valley could get the state halfway to its goal for climate-safe power.

Another California municipal utility is considering using irrigation canals to produce power using the flow of the water. The South San Joaquin Irrigation District provides drinking and irrigation water to Manteca, Lathrop and Tracy. It operates a water treatment facility powered by a combination of solar power and purchases from PG&E. It is considering whether to replace the PG&E power with energy produced by a hydro power company.

The district would buy power from the energy company EMERGY, which would install the turbines at their cost and enter into a 20-year power purchasing agreement with the irrigation district at a rate 30% lower than buying power directly from PG&E. The power would be produced from turbines installed in a main irrigation canal. Water would be directed to a flume which would power the hydro turbines.

CLIMATE LITIGATION

A continuing trend in the climate litigation arena is the finding that lawsuits filed by municipalities against fossil fuel companies in state court should be decided in state court. The latest example comes from Colorado. The city of Boulder, along with Boulder and San Miguel counties, sued Suncor and Exxon Mobil in Boulder District Court. The issues raised are consistent with other suits across the country alleging damage and non-disclosure of risks long after awareness of the risks occurred.

As was the case with the City of Baltimore, the defendant companies sought to have the cases heard in the federal courts. The Colorado case defendants petitioned the U.S. District Court to have the case heard there. That request was turned down. This decision came in the appeal of the District Court decision. Specifically, the Municipalities allege claims of public nuisance; private nuisance; trespass; unjust enrichment; violation of the Colorado Consumer Protection Act; and civil conspiracy. They do not allege any federal claims.

The decision also directly addresses one of the main pillars supporting the argument that federal law should prevail. “By winning bids for leases to extract fossil fuels from federal land in exchange for royalty payments, Exxon is not assisting the government with essential duties or tasks. Critically, the leases do not obligate Exxon to make a product specially for the government’s use,”. The oil companies claim that being allowed to produce oil from the Continental Shelf makes it a federal issue.

REGULATORY ROUNDUP

The week saw a variety of actions by municipal governments in the regulation of buildings and energy. Bellingham, WA joined the cities of Seattle and Shoreline in regulating the use of electrification to limit carbon emissions. Bellingham voted to require all new commercial construction and future residential buildings more than three stories tall to heat water and rooms with electricity. Natural gas for cooking would still be permitted. New buildings must be “solar ready” with enough roof space for future installation of solar panels. 

In CA, legislation is being reconsidered which would have slashed the value of net metering payments to residential customers with solar power. W VA enacted legislation which repealed limits on the siting of nuclear power generation in the state. Senate Bill 61 passed the Ohio Senate by a vote of 32 to 1 last month.  It would limit all but “reasonable restrictions” on solar installations by homeowner associations.

The big battle is underway in Florida. Legislation favored by large utilities to require future rooftop solar panel customers to pay higher rates passed its first vote hurdle in committee. Under current law, solar panel owners can pass excess energy generated by the panels back to the utilities at the retail rate the utilities charge other customers. The bill (HB 741) would require a cheaper wholesale price be charged to the utilities. 

Sponsors had to make some concessions as the committee amended the bill to increase the time current owners of solar panels are grandfathered in and exempted from the rate change from 10 years to 20 years. Homeowners with working solar panels as of Jan. 1, 2023 would qualify for the exemption.

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.

Joseph Krist

Publisher

We are troubled this week by the initial signs coming out of Puerto Rico in the wake of the acceptance of the Plan of Adjustment in Puerto Rico’s Title III proceedings. An all too familiar mantra is already being quietly recited – no oversight, no disclosure, no accountability but yes, lots of cash please. All that market participants asks for is a level of oversight that many mainland U.S. cities and counties have experienced since the 1970’s in exchange for being funded out of insolvency. Until that changes, the chances for real lasting economic and fiscal success remain much lower than they need to be.

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SOCAL GAS DEBATE

There are several municipalities which find themselves in the center of the debate over the use of natural gas to produce electricity as the result of their ownership of the local electric utility. The latest example is the City of Glendale, CA. The City is a significant participant in a number of power supply agreements providing revenues to back the bonds issued by joint action agencies (JOA). Like many others, Glendale’s municipal utility gains access to the benefits of scale resulting from large baseload generators through JOA membership. Glendale also owns its own generating assets to provide peaking power at times of high demand.

In 2019, the Glendale City Council postponed a final decision on investing in natural-gas-fired generators to replace the city’s aging gas plant. Now the plants are three years older and still need improvement. The utility released a final environmental impact report last week recommending one of two preferred paths for the city to take. One option would to spend $260 million on five new gas engines. Modern gas turbines are relatively less polluting than the ones in place now. The second option would see the city refurbish several existing gas turbines to comply with air-pollution rules, at a cost of $201 million. The City Council is expected to vote on those possibilities on Feb. 8.

Glendale is also expanding non-fossil fueled generation. It plans to install a 75-megawatt, 300-megawatt-hour battery system at the site of an existing plant.

BACK TO THE FUTURE IN N.J.

In many areas, the use of human toll collectors is a blast from the past. A variety of electronic devices have been developed and installed on roads all over the country. In many ways, the technology is considered to be accepted. Even privacy concerns have not stopped its expansion. The latest holdout to begin the move to All Electronic Tolling (AET) is New Jersey.

The South Jersey Transportation Authority is soliciting bids for a vendor to design, develop, install, test, operate and maintain a “fully functional, turnkey all-electronic toll system” for the Atlantic City Expressway. The current schedule calls for a contract to be awarded as early July of this year. The anticipation is that an all-electronic tolling could be operational on the Expressway by spring 2025.

The solicitation makes clear that the system being sought could be extended to the New Jersey Turnpike Authority, which runs the Turnpike and Garden State Parkway. The vast majority of drivers on New Jersey’s toll roads are EZ-Pass customers. How big a majority? Try 85% on the Expressway, 89% on the Turnpike and 88% on the Parkway.

The data would seem to indicate that privacy-based opposition to mileage taxes or fees only extends so far. The reality is that electronic license reading technology is already widely used for a variety of reasons which are likely more invasive of privacy. Unless you go out of your way to avoid it (it’s hard to do) and you turn off your cell phone, you are already dealing with it.

NUCLEAR BOOST IN WEST VIRGINIA

The West Virginia legislature passed a bill to repeal state codes which restrict the use of nuclear power. Existing law states that “the use of nuclear fuels and nuclear power poses an undue hazard to the health, safety and welfare of the people of the State of West Virginia…and the purpose of this article to ban the construction of any nuclear power plant, nuclear factory or nuclear electric power generating plant until such time as the proponents of any such facility can adequately demonstrate that a functional and effective national facility, which safely, successfully and permanently disposes of radioactive wastes, has been developed.

The purpose of this article was to ban the construction of any nuclear power plant, nuclear factory or nuclear electric power generating plant until such time as the proponents of any such facility can adequately demonstrate that a functional and effective national facility, which safely, successfully and permanently disposes of radioactive wastes, has been developed.

SOLAR POWER

For a long time, Arizona was thought to be a perfect place for widespread adoption of solar power. This was especially true for rooftop solar. The only problem seemed to be the complete lack of support on the part of legacy electric generation utilities. There are moves underway in several states to modify the rules which require power companies to take “excess” power and to reflect that in rates. Without such a process (net metering), solar power is less attractive economically.

One of the major players in the efforts to slow solar in Arizona has been the municipal utility, the Salt River Project. Salt River effectively designed a rate structure that was seen as penalizing customers who installed rooftop solar.

Customers sued SRP claiming it was violating federal antitrust laws through its activities. The customers were appealing a trial court ruling in favor of SRP. In a unanimous decision, a three-judge panel of the 9th Circuit Court of Appeals rejected SRP’s contention that its restrictive rates were protected under federal law.

The judges ruled that there is sufficient evidence that can show the price structure was designed to deter the competitive threat of solar energy systems and force consumers to exclusively purchase electricity from SRP. This one case where the effective self-regulation of municipal utilities worked against SRP. Because they make their own rates without state regulation or approval required, SRP could not lean on the argument that the state through its regulators had approved its conduct.

The decision throws the case back to the original trial judge. There a ruling will be made as to the extent of the utility’s conduct and the damages to SRP customers.  The dispute has been going on since 2014 when SRP adopted a new pricing plan which says that solar customers who still need to be hooked up to the utility for times when solar is not available can be charged up to 65% more than prior plans. Yet at the same time rates for non-solar customers went up about 3.9%.

WHILE THE DEBATE CONTINUES

The decision comes in the midst of robust debates over how to support rooftop solar in two big states. Efforts are underway in California and Florida to reduce the impact of net metering requirements. In California, the Public Utilities Commission has proposed significant changes to net metering which would reduce the economic benefit to solar power owners.

Currently, net metering requires utilities to credit customer bills for “excess” power at full retail rates for solar exported to the grid. The plan would also levy monthly fees on customers who install solar power. The utilities are trying to present the issue as one of economic justice claiming that poorer customers are subsidizing solar. That argument is belied by data from Lawrence Berkeley National Laboratory which shows that households earning less than $50,000 a year made up 13 percent of solar adopters in 2019, and those earning less than $100,000 a year made up 42 percent.

THAT DIDN’T TAKE LONG

On January 22, three California assembly persons introduced Assembly Bill 1400 which would create a centralized state-run financing system known as CalCare, a plan that legislative analysts estimated could cost between $314 billion and $391 billion a year. It came in the wake of a proposal by the Governor to extend MediCal to all adults who meet the income limits.

The funding method for the single payer proposal was  CA ACA11 (21R), which would have increased taxes on businesses and high earners. ACA 11 also would need a two-thirds vote in each house as well as voter approval. The bill faced a Jan 31 procedural deadline and sponsors admitted that the votes are not there.

MEAG

The Municipal Electric Authority of Georgia (MEAG) is a participant in multiple large-scale generation projects with Georgia Power.  As a participant, MEAG does not have a final say about which units to operate or close. That is Georgia Power’s call. Among those generation assets are substantial base load generation plants fueled by coal.  In 2021, coal comprised 9% of MEAG’s delivered energy, up from 2% the prior year as an increase in natural gas prices made coal more economical.

Now the Southern Company – Georgia Power’s parent – has submitted its next resource proposal to state regulators. They must approve the plans. In its submission, GP pledged to close a total of 12 coal units by 2028 – representing a loss of 3,500 megawatts, which the utility plans to offset with 2,356 megawatts in natural gas.  Those units include two in which MEAG maintains ownership shares.

The next coal plant scheduled to be retired is Plant Wansley later in 2022.  MEAG has a 15.1% ownership (269 MW) in Units 1&2.  It also owns shares in Plant Scherer with 30.2% ownership in Units 1&2 (489 MW). Some 500 MW of power to replace those losses will be available upon completion of the expansion of nuclear generation which is currently scheduled to become operational in 2022 and 2023.

One potential risk to ownership in these plants is the liability associated with the disposal of coal ash. The U.S. Environmental Protection Agency announced plans in January to crack down on dangerous coal ash waste sites, including the enforcement of an Obama-era rule designed to limit the chances of coal ash toxins leaking into groundwater or waterways. Georgia Power is seeking permits to install a cover over coal ash ponds at five plants, leaving the toxic waste where it sits in unlined pits and submerged at varying depths in the groundwater.

VIRGIN ISLANDS REBOOT

The last few years have focused so much attention on the effort to restructure Puerto Rico’s debt that it is easy to overlook the other perennially troubled U.S. Virgin Islands credit. The underfunding of pensions and long-term operating and financial strains have put the electric utility serving the islands on the edge of bankruptcy and held down the general credit of the government.

Now the Virgin Islands is looking to refinance some $800 million of debt. The debt in question is known as matching fund debt in that it is payable from taxes on the production of rum by the federal government which are then redistributed back to the Virgin Islands to repay debt issued against them. Moody’s rates the existing matching fund bonds Caa2 and Caa3.

The proposed deal would call for debt to be issued with a final maturity of 2039 by a special purpose entity which would sell the bonds and apply matching fund revenues sold by the government to the corporation to repayment of the bonds. The 2039 maturity coincides with the remaining term of the existing agreements between the government and the rum producers which generate the revenues.

The goal is to stabilize the island’s pension system which is woefully underfunded. Government actuarial consultants say the system has $5.8 billion in net unfunded pension liability. The government’s actuary estimates that the transaction would assure the pension system would not run out of assets in the next 30 years. A variety of assumptions underly the transaction including a 6% investment discount rate and maintenance of current levels of rum production.

The proposed transaction provides an excellent opportunity for the market to exert its influence and insist on full and timely financial reporting. Simply restructuring debt without improving some of the conditions which created the need for the restructuring does nothing for the long-term creditworthiness of the USVI. Without it, the U.S. Virgin Islands could be the next Puerto Rico.

ILLINOIS BUDGET

Governor Pritzker has outlined his budget proposal for the State of Illinois for FY 2023. The Governor proposed a $45.4 billion general funds budget for the upcoming fiscal year. The proposed budget is a 3.4% reduction in comparison to the current year. The lower spending is accompanied by proposals for a one-year freeze of the 39.2 cents per gallon motor fuel tax, lifting the 1% sales tax on groceries and a property tax rebate of up to $300 equal to the property tax credit available on income taxes. 

Pension funding was addressed. The state has made its required minimum contributions during the Pritzker administration and the budget proposed continues that. The Governor then proposes an additional contribution above the minimum for fiscal 2023 of some $500 million. The proposal would reflect this would be the first time since 1994 that the state would reduce the pension debt by more than the minimum requirement. 

FOOD DRINK AND RECREATIONAL TAXES

There are numerous credits backed in one way or another by revenues generated from the sale of food and drink. The businesses which generate those revenues directly or indirectly were among the hardest hit during the pandemic. Now, we see evidence of the magnitude of the impact on those businesses and by extension the revenues foregone through the lack of economic activity.

We came across some interesting data from CivMetrics. They recently published data on restaurant booking data. At various points in the pandemic, the review of data from Open Table, the online booking service has been used to pinpoint turns in the perceptions of the pandemic and the removal or reimposition of limits due to the pandemic. The data shows that there is a long way to go for recovery.

The surveys cover bookings in the same week of 2022 versus 2019. Of the 40 large cities in the dataset, only four cities’ bookings are actually up. They are in Florida or Arizona. The increases are in the single digits except for Fort Lauderdale. The real story is the lingering damage to the industry in the largest cities. Philadelphia sees bookings down over 70%. New York remains 66% lower with cities like San Francisco and Seattle still experiencing declines of over 70%. Chicago bookings are down 65%.

FEDERAL FUNDS SUPPORT CREDIT IMPROVEMENT

One of the fiscal problem children in New York State has been the City of Long Beach. The city has a history of poor financial management and performance. It also found itself facing a significant liability from a property tax challenge. That litigation gave rise to an initial award amount from the City to the taxpayer of some $150 million. The city was under enormous pressure to stave off a downgrade to less than investment grade.

Now, the City’s fortunes have improved somewhat. The original property tax award has been lowered by half. The $75 million is still substantial but more manageable. The plan is to issue debt to fund the $75 million (judgment bonds are a tried-and-true method) award. This happens in a period where the City’s unaudited figures for fiscal 2021 show significant improvement in the city’s reserves and liquidity.

Put it all together and it provides a basis for Moody’s to improve the outlook for the City’s general obligation bond rating of Baa3 to positive from negative. A combination of current results improvement and the property tax settlement are the basis for the move.

The long-term fiscal issues which hammered Illinois’ credit bled down to credits dependent upon the fiscal support and condition of the state to maintain their own ratings. Ratings for some units of the state’s university system were under particular stress. Moody’s Investors Service has revised Northern Illinois University’s outlook to positive from stable. It is still a Ba2 non-investment grade credit but fiscal 2021 operations were nearly balanced, with a small deficit to potentially balanced operations projected for fiscal 2022 and beyond. 

Northern Illinois University is a multi-campus public university centered on its main campus in the City of DeKalb, IL Three satellite campuses that primarily serve graduate students. The university has a broad array of undergraduate and graduate academic programs, including concentrations in education, business, engineering, health and human science, law, and visual and performing arts. Fall 2021 total full-time equivalent student enrollment was 13,153.

Running against some trends, NIU has seen five years of enrollment growth. Last year, the growth was in the double digits. It still remains dependent on the state for approximately 40% of its revenue and that limits the available ceiling for rating improvement. The near-term fiscal improvement by the State still limited by the significant liabilities it faces going forward. The ability of NIU to maintain positive results awaits the impact of the loss of non-recurring federal pandemic support.

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