Joseph Krist

Publisher

STADIUMS COMING BACK TO THE TROUGH

Tampa, Charlotte, Washington, D.C., Phoenix, K.C., Milwaukee, Cleveland, Pittsburgh

Phoenix – The Arizona Diamondbacks aren’t really asking but they have made it clear that they want renovations to Chase Field and that they would be happy if they received public funding assistance. The team would be willing to pay more than 75% of the Chase Field upgrade costs, it says. The total estimated cost – $500 million. The Diamondbacks’ lease with the stadium expires in 2027.

One wrinkle is the fact that a previously approved tax district could be activated by then team which would implement a 1% to 9% tax on anything sold at Chase Field.  They would rather not do that.

Jacksonville – “If Jacksonville loses an NFL team, they’re never going to get another one. Do you want to keep the NFL in Jacksonville?” – Jacksonville Jaguars president Mark Lamping. The Jags’ lease at EverBank Stadium  is scheduled to expire in 2030. The team has proposed a $2 billion renovation or replacement. They would like to have public funding cover 50% of that.

Tampa – The Devil Rays of MLB Rays and the city of St. Petersburg announced plans for a $1.2 billion, 30,000-seat stadium. Small? Yes. But the Rays are never strongly attended. Since the club’s debut in 1998, the Rays have ranked last or next-to-last in American League attendance 18 times. The plan is for a facility opening in 2028. As is the recent trend, the ballpark is expected to serve as the centerpiece of a larger, 86-acre redevelopment of St. Petersburg’s Gas Plant District. The Rays plan to pay $700 million toward the project, as well as any cost overruns, while the public sector will contribute $600 million. 

Milwaukee – Republican legislators announced a bill that would devote more than $614 million in public funding to repair and renovate the Milwaukee Brewers’ stadium. Under the proposal, the state would give the team $60.8 million next fiscal year and up to $20 million each year after that through 2045-46. The city of Milwaukee would contribute a total of $202 million, and Milwaukee County would kick in $135 million by 2050. The team would contribute about $100 million and extend its lease at American Family Field through 2050, keeping Major League Baseball in its smallest market for another 27 years.

According to a Legislative Fiscal Bureau memo attached to the legislation, baseball operations at the stadium currently generate about $19.8 million annually in state and local taxes. That figure is expected to grow to $50.7 million annually by 2050, according to the memo. Milwaukee County and the City of Milwaukee would together pay a total of $7.5 million each year, totaling around $200 million. That would be broken down into $5 million in yearly county payments and $2.5 million city payments.

Baltimore – The State of Maryland and the Orioles announced a 30-year lease extension. The current one runs out in December. The negotiations became public and contentious – ownership is not a favorite of the fans. 

Kansas City – The club is deciding between a 27-acre site in downtown Kansas City, in Jackson County, and a larger 90-acre tract in neighboring Clay County. It places the two primary stadium development templates in competition with each other. The push has been for a downtown stadium but the suburban location may offer greater overall development potential.

ELECTRIC VEHICLES AND THE UAW

Underneath of all the discussion of benefits and wages animating the strike by the UAW, the issue of electric vehicles is driving the dispute. Much of the establishment and expansion of the electric vehicle industry is occurring in right to work states in the South. It is what has put Georgia and Tennessee at the center of EV development and production. This movement towards non-union states had been offset in part by the announcement of new or retooled factories, especially in Michigan.

The strike was recently expanded at the other two automakers but Ford was spared an expansion. Now that may change as Ford announced that it was suspending construction of a battery factory in Marshall, Michigan because of concerns that the plant might not be able to make products at a competitive price. The company cited potential increased costs related to a labor settlement. Ford had said it would invest $3.5 billion to build the factory and employ 2,500 people when production begins in 2026.

At the same time, politics have also gotten in the way. The proposed Ford plant would use technology licensed from CATL, a Chinese company that is the world’s largest maker of batteries for electric cars. That has caused partisan criticism of the plant. At the same time, Tesla continues to use similar batteries in its cars. The pressure against the Chinese has led the Administration to consider regulation effectively keeping the batteries made in China out of the U.S. market.

WHERE ARE EVs OWNED?

We recently came across some research by the U.S. Office of Energy Efficiency and Renewable Energy. The office looked at registration data and used it as a proxy for sales of electric vehicles. Based on that data there were four counties in the United States with electric vehicle (EV) market penetration above 30% as of December 2022, and all were in California.

Tech oriented Santa Clara County reports a 35% rate, followed by Marin County at 34%, and then Alameda and San Mateo Counties at 32% each. Several counties outside of California also had robust EV sales, including Boulder County, Colorado (22%) and San Juan County, Washington (22%). As of the end of 2022, there were 100 counties where EV market penetration was 10% or more.

The vehicles are for now a primarily West Coast phenomenon. The wealthier counties around major American cities show the greatest adoption levels but rates in excess of 10% were not the rule.

FIRE AND PUBLIC POWER

Recently we were asked if we believe that there was a heightened risk of bankruptcy for public versus investor-owned utilities. The issue has come in the wake of litigation against PG&E in California after several fires and litigation against Hawaii Electric related to the Maui fire. Our view is that the risk, while not an immediate credit threat is a potential long-term problem. There just has not been an opportunity to test the vulnerability with a public power provider.

That changed this week. Inland Power is Washington State’s largest electric cooperative and currently serves more than 34,000 members across 13 counties in eastern Washington and northern Idaho. Founded in 1937, the co—op was established to serve primarily a farming base after the Rural Electric Administration has brought electricity to those areas. A lawsuit filed in Spokane County Superior Court says Inland Power and Light Company’s electrical equipment contacted or caused sparks to surrounding vegetation that started the Gray fire on Aug. 18.

The suit alleges the utility designed its power lines to be bare, uncovered and carry a high voltage. The suit charges that this increased the risk of fire. Wiring has been a major issue associated with prior litigation resulting from fires. A second lawsuit, filed on behalf of 44 people affected by the fire, says an outdoor light constructed by Inland Power was seen sparking near the origin of the blaze. So far, the dollar amounts do not appear unmanageable. It does shine a light on the fact that litigation risk for utilities – public or IOU – has clearly increased. The ongoing impacts of climate change and the increasing severity of natural disasters will increase the risks of litigation. The Washington Department of Natural Resources has said it could take months to determine what caused the Gray fire.

CARBON CAPTURE

Japanese manufacturer Kawasaki Heavy Industries and their partner, Japan Carbon Frontier Organization, will officially complete construction on their carbon capture testing system at the Wyoming Integrated Test Center (ITC) in Gillette on Oct. 9. The project is a solid sorbent carbon capture system, which uses physical or chemical absorption to capture carbon dioxide. The project aims to show that this technology is viable for commercial deployment to large-scale power plants.

In Wyoming, a 2020 bill that requires coal-fired plants to be retrofitted with carbon capture, utilization and sequestration technology in an attempt to prevent them from retiring early drives efforts to show the viability of the technology. The Wyoming Public Service Commission approved a carbon capture compliance surcharge for Rocky Mountain Power customers in Wyoming.

Summit Carbon Solutions announced plans to resubmit its construction permit to build a carbon pipeline through Soth Dakota. The company has announced the creation of team to convince farmers unwilling to grant easements to Summit. In addition to increased staff as residents of the area, Summit is considering changes to its proposed right of way. Both sides agree that trust between the company and the reluctant (mostly farmers) needs to be rebuilt. Summit went so far as to say it would “turn over a new leaf” which is as close as a company is going to come to saying it screwed up.

MIAMI DADE EXPRESSWAY

The long running battle between Florida state legislators and local operating authorities continues. The effort has been to create a new entity to take over the operation of the Miami-Dade Expressway and somehow be able to lower or eliminate tolls on the facility. MDX, the entity which operates five toll roads in the area was authorized in 1990. It is run by a toll board governed by a majority of members appointed by the County Commission.

The Florida Legislature passed legislation in 2019 dissolving MDX and replacing it with GMX, a board governed by most appointees of Gov. Ron DeSantis. Since then, the matter has been in the Florida courts and that process culminated in a decision against MDX. Last week, Miami-Dade commissioners advanced legislation seeking to dissolve GMX. Counsel for the County contend Miami-Dade retains under its “home rule” authority granted in the Florida Constitution. That provision prevents the Florida Legislature from passing laws only affecting Miami-Dade.

The state’s own moves in the wake of the legislation seems to support the County’s theory. The latest version of the GMX legislation that led to the recent  takeover circumvented the home-rule defense by adding a portion of Monroe County to the toll board’s authority. That portion of land happens to be located in the Big Cypress federal preserve, where the only transportation option is a gravel road. The likelihood of continued litigation grows each day.

LITIGATION

For the cash strapped U.S. Virgin Islands government, $75 million is not an insignificant amount of money. That is how much will be paid under a litigation settlement with JP Morgan Chase. JPMorgan Chase will pay $75 million to settle claims brought by the U.S. Virgin Islands relating to the bank’s dealings with deceased financier and sex offender Jeffrey Epstein. The settlement calls for the bank to pay $30 million to support charitable organizations in the U.S. Virgin Islands, $25 million to support law enforcement efforts to combat human trafficking in the territory and $20 million in attorneys’ fees.

The 2nd U.S. Circuit Court of Appeals sided with the state of Connecticut, upholding a lower court decision that said the state’s lawsuit against Exxon Mobil should be heard in state court. This is the seventh court to rule against the oil industry on this matter.

PUBLIC POWER AND EMISSIONS

An industry group recently released the results of a review of utilities and their emissions reduction goals. It focused on those utilities which have made it their goal to reduce carbon dioxide emissions by 80% by 2030. That is a more aggressive goal than is required under the Clean Power Plan Regulations developed during the Obama administration. A list of 25 utilities with such stated goals.

On that list are a total of 13 public power entities. They range from joint action agencies (JOA) to individual municipal distribution utilities and are located all across the country. JOA utilities include Southern Minnesota Municipal Power and Platte River Power Authority. The co-op on the list is in Vermont. Local utilities include those serving Austin, TX, Colorado Springs, Fort Collins, CO, Eugene, OR, Snohomish PUD, and Concord, MA. California utilities include LADWP, Pasadena, and Sacramento.

ANOTHER KIND OF CONGESTION FEE

The congestion fee plans moving towards implementation in NYC have generated much debate. Part of the process is assigning blame which focuses on things like double parking and delivery vehicles. While that debate unfolds, other jurisdictions have been testing other strategies impacting the delivery vehicle cohort.

Pittsburgh has been experimenting with the idea of ‘smart loading zones”. The concept designates certain portions of on-street curb space which are painted purple. These zones charge for parking by the minute – it used a graduated payment system, which started at seven cents per minute for the first five minutes and went up to 27 cents per minute for cars that parked between 30 and 60 minutes. The idea was to make it very uneconomical for non-commercial parking.

The initial zones were located within the central business district. It was expanded to two other zones with declining rates. The fees were not universally supported especially by local merchants. This week, legislation was introduced in City Council that would revamp the fee structure. If the legislation is approved, the smart loading zones would have a 15-minute free grace period before vehicles are charged.

Vehicles that park from 16 to 30 minutes will be charged the hourly metered rate, which is $4 in Downtown, $3 in Oakland and the Strip District and $2 in Squirrel Hill and Lawrenceville. Cars parked from 31 minutes to an hour will be charged double the hourly metered rate, and vehicles parked for up to two hours would be charged three times the metered rate.

The city agency overseeing the project the Department of Mobility and Infrastructure (DOMI) cites data showing that about 55% of people who park in the smart loading zone park for less than 15 minutes. Less than 5% of smart loading zone users stay there for between one and two hours.

In a manifestation of the nudge theory, enforcement would change. Initially, the smart loading zones were enforced Monday through Saturday from 5 a.m. till 10 p.m. At the start of this year, DOMI adjusted the hours to 8 a.m. till 10 p.m. to incentivize loading at early morning off-peak times. The changes are estimated to be revenue neutral to negative. It is not designed as a revenue maximiser as so many critics of New York’s plan point to.

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

CALIFORNIA CLIMATE LITIGATION

The state of California has filed a climate lawsuit against Exxon Mobil, Shell, BP, ConocoPhillips, and Chevron, as well as the domestic oil industry’s trade association, the American Petroleum Institute in San Francisco Superior Court. Like the many other suits filed by governments across the country, the suit cites decades of misinformation, deception and denial. The state further charges that the oil companies continue to deceive the public today about the science and reality of climate change. So far, the oil companies have been unsuccessful in their efforts to move these cases out of the state courts into the federal system.

The lawsuit comes as research released this week showed that much of California experienced cooler than usual temperatures. The Golden State actually enjoyed its coolest summer since 2011. Southern California experienced below-normal temperatures, from low-pressure systems over the region throughout the summer and from the cooling effect of Hurricane Hilary.

At the same time, it is worth noting that this summer ranks as the 34th warmest summer in the past 129 years in California. Eight of the 10 warmest years have occurred in this century.

MTA

New York’s MTA has had a recent run of more favorable news. Daily ridership has finally reached the 4 million rider mark. Fares were recently increased. The plan to levy congestion fees in Manhattan is moving towards an April start. Now it has received a boost in the form of a change in the outlook for its Moody’s rating on its Transportation Revenue Bonds (TRB).

The outlook on MTA’s TRBs has been revised to positive from stable “based on the significant increase in state tax support that will offset the post-COVID ridership losses and structurally balance projected budget gaps.” A significant increase in state tax support is a major factor in the outlook revision. 

TRANSIT GOES BACK TO THE FUTURE

Many do not remember that much of the mass transit system serving the New York metropolitan area was privately owned and operated. This was especially true in the outer boroughs of the City and in the New Jersey suburbs. Over the years, many of the private lines in the City were eventually absorbed into the overall MTA bus system after they ran into financial difficulties in the 1960’s.

New Jersey commuters were served by a number of private bus lines. They were able to maintain their operations financially up until the pandemic. The lockdowns and the shift to remote work decimated demand for the private lines. Long time operators were not immune as aid to these operators was not provided as it was to public transit. The State of NJ got a wake-up call when one operator ceased operations as the result of the pandemic.

Now, demand remains depressed while costs have risen driven by employee and fuel costs. As is the case across the country, transit operator jobs go unfilled leading to service disruptions. The phenomenon has impacted all transit services. Now, some of the private operators are giving notice that they are cutting back or eliminating service.

In New Jersey, this has led to the idea of some form of state assistance being floated. The Governor has suggested that these operators be classified as “public goods operators”. This would ostensibly provide a way to enable the State to provide financial support. The Governor floated the idea that certain service currently offered through privately owned operators could be provided by a public entity with state support.

CARBON CAPTURE

Navigator CO2 Ventures announced that it is postponing some of its “right of way work in certain areas, like South Dakota and some parts of Iowa.” This follows the rejection of the company’s application to build a carbon capture pipeline by South Dakota utility regulators. The company is currently “reevaluating” its permit process in South Dakota. The proposed system was slated to connect to five ethanol plants. Navigator would lose out on tens of millions of dollars in federal tax credits if it chose to abandon its plans in South Dakota. 

One of the more interesting aspects of the pipeline debate is the politics. It would be easy to assume that Republicans in Iowa would support the pipeline. That would be based on the history of support for business and especially, the ethanol industry. It has become clear that party identification is not a driving force behind the stances taken on the pipeline.

The issue driving opinions is the use of eminent domain to obtain pipeline right of way. Two Iowa Republican legislators have recently opposed the use of eminent domain. They join a growing list of current and former political figures in Iowa to stand on the side of private property rights. It is likely that the pipelines could attract support if the developer could obtain the needed right of way through voluntary private transactions.

The issue in Iowa is whether a privately financed pipeline designed to serve certain specified users (primarily ethanol plants) constitutes a public benefit or use. The Iowa Constitution provides that eminent domain authority is reserved for projects that have a clear public use and public benefit. 

The process is playing out as efforts to determine the real benefit of carbon capture are being announced. The Tennessee Valley Authority is launching a study on how to reduce carbon emissions at two natural gas plants it operates in Kentucky and Mississippi. The $1.2 million study will determine the costs, technical challenges, and operational impacts of adding carbon capture technology to its entire fleet of natural gas plants. 

It comes as TVA finds itself under pressure to reduce its carbon footprint. It’s effort to replace coal with natural gas as a generation fuel have been running into opposition. The agency has a lot riding on carbon capture, in line with recent trends in federal policies.

MAINE PUBLIC POWER

Question 3 on the November ballot could lead to creation of nonprofit Pine Tree Power, a proposed public utility in Maine. It would provide for a forced buyout of Central Maine Power and Versant, which provide 97% of the state’s electricity. The initiative comes after several years of increasing customer dissatisfaction with CMP, especially. CMP was purchased by Avingrid, a subsidiary of a Spanish utility, and the public has not been pleased.

Governor Janet Mills formally has announced her opposition to the question. She doubts that service will improve and has cited a purchase cost based on the existing utilities estimates. They have put out an estimate of $13.5 billion total financing cost of a buyout. Federal Energy Regulatory Commission filings show CMP’s and Versant’s net assets were about $5.4 billion in 2022. The Maine Public Advocate’s office has said it cannot guarantee that rates would go down.

Unsurprisingly, advocates of the initiative have their own study confirming their view. Their numbers say that an average monthly saving of $30 would be realized by customers. It is important to note that the ballot question followed the passage of legislation in 2021 to achieve the same goal – Pine Tree Power. That legislation was vetoed by Governor Mills. At least she is consistent.

PORT OF L.A.

The resolution of labor issues between the International Longshore and Warehouse Union and the Pacific Maritime Association has combined with natural phenomenon to speed the recovery of traffic volumes at West Coast ports especially the Los Angeles/Long Beach port complex. The Port of Los Angeles moved 828,016 Twenty-Foot Equivalent Units (TEUs) in August, a 3% increase compared to the same period last year. It was the Port’s first monthly year-over-year increase in 13 months.

The resolution of the labor issues has coincided with a drought in the upper Midwest. The impact on the Mississippi River has been significant as water levels have become too low for many barges which would travel the river, especially those carrying grain for export through the Port of New Orleans. This has reduced the volume of cargo that can move through that route. At the same time, low water conditions at the Panama Canal have reduced volumes and slowed transit times to East Coast ports.

August 2023 loaded imports landed at 433,224 TEUs, an increase of 7% compared to the previous year. Loaded exports came in at 124,988 TEUs, an increase of 22% compared to 2022. Empty containers totaled 269,804 TEUs, a 10% year-over-year decline. Combined, August volumes were 828,016TEUs, a 3% increase compared to last August. Eight months into 2023, the Port has processed 5,649,686 TEUs, 21% less than the same period last year. 

The combined effect has been to make the West Coast ports more economically attractive. At the same time, Midwestern farmers are facing higher shipping costs and lower incomes as impacts of natural restrictions impacting trade.

CAP AND TRADE REALITIES

“Cap and Trade” policies allow polluters to purchase “offsets”. These credits come from projects around the country that follow the state’s rules, like forests that store extra carbon or dairy farms that capture methane from manure. Offset projects are supposed to deliver climate benefits that are “additional,” meaning the climate-friendly activity was unlikely to occur without the carbon payments. 

This week a study from UC Berkely may put a crimp in plans by states to employ carbon offsets. Whether it be cap and trade, funding to preserve land by states, or designation of certain things like seaweed as carbon sinks, these policies have relied on assumptions about the ability of these projects to actually offset carbon emissions. The results of the study do not help to make the case that natural carbon sinks achieve their goals.

These natural carbon sink projects are known as “improved forest management.” The idea (IFM) is that this is supposed to create healthier forests that soak up more carbon by strategies such as reducing or delaying timber harvests. Thus far, they’ve accounted for more than 80% of the offsets issued under California’s program.

The research showed that IFM projects appear to cause the storage of little extra carbon. Using satellite data regarding land use, the study compared the pattern of changes on these lands to what occurred in similar forests not enrolled for carbon payments. The results mirrored patterns found in another study in 2022. Researchers at the University of California at Irvine examined 37 IFM projects in the state’s cap-and-trade program and concluded offsets weren’t impacting the amount of carbon stored in the forests.

ESG WARS

A Biden administration rule allows employee retirement plans to consider environmental, social and governance issues in investment decisions. Unsurprisingly, the partisan effort to fight ESG at the state level was extended when 26 states challenged the rule in the federal courts. The states in the lawsuit sought in May for a summary judgment in their favor. The U.S. Labor Department then made a motion for its own summary judgment, which the judge granted on Thursday.

The ruling was made by the favorite federal judge of the anti- ESG movement. That district court has been a go to entity for many challenges to rules and regulations developed and imposed by the federal government. In this case, the ruling comes after legislation passed in Congress to achieve the goal of the litigating states in March. That bill was vetoed.

AUTONOMOUS VEHICLES

So far much if not all of the focus on the debate over the utilization of current state of the art autonomous vehicles has been on San Francisco. The approval by a state agency over the objections of city agencies put many more of these vehicles on the streets of San Francisco. It quickly resulted in a partial reduction of the number of permitted vehicles after operating problems became apparent. It was preemption at work.

While that experiment continues, it seems that another tech center isn’t sure how its autonomous vehicle test is working out. There have been numerous incidents in Austin, TX observed and documented reflecting many of the same issues which plagued the vehicles in San Francisco. Cruise is the operator of the fleets in both of the cities.

The City of Austin finds itself in a similar situation as do regulators in S.F. The ability of the city to regulate in this area is limited under state law. The City would need an act of the State Legislature authorizing it to regulate AV use on public roads. It’s a form of passive preemption.

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

IT BEGINS

While there was no way to anticipate the scale and timing of the asylum problem in New York City, it was not so outlandish to wonder when the reliance on style from the Adams administration would catch up with the City. That time appears to be now. While it is fair to point out the unprecedented scale of the asylum problem, it has not been helped by the City’s response. Coupled with poor relationships with the State legislature and the Congressional delegation, the Mayor’s reliance on a small circle of advisors has left it unable to cope with the problem.

The Mayor’s announcement of 15% across the board cuts to departmental expenditures is clearly a piece of theater. By proposing such a number, the Mayor is relying on creating a sense of despair and even panic over city service levels to drive support for increased federal and state aid. By creating a specter of reduced police, fire, ambulance, and school services the City hopes to effectively shame Congress and the State into supplying funding for the City’s asylum problem.

The asylum problem has done one thing to help the Mayor by effectively obscuring problems related to his management style. Attention has been diverted by the upheaval in the top ranks of Police and Fire Departments, the lack of a head of the City’s housing authority, and the ongoing likelihood of federal supervision of the City’s prison system. The school system faces overcrowding from asylum children. Safety on the transit system remains a concern.

The lagging return to the office continues to weigh on the City. While the tourist trade continues to recover, not all of the businesses which might be expected to benefit have. There continue to be layoffs at cultural and entertainment venues and the hospitality industry experiences uneven results. Those businesses which rely on residents rather than tourists are having a harder time. Healthcare providers continue to be under pressure as the result of uneven utilization.

This all supports a view that the outlook for the City’s credit over the next 12-24 months is at best, uncertain. So long as additional funding help is lacking, the outlook can only be negative. At the same time, the Mayor’s rhetoric is not helpful. He has in many ways put himself on an island in terms of the politics of the situation. It is important to remember that the right to shelter requirements impact the city. The rest of the state is not under any such order. It is the City that declared sanctuary city status not the State.

MASS TRANSIT

The continuing impact of remote work on the San Francisco economy continues to manifest itself. Now that is has become clear that the impact has become more permanent, some agencies are deciding to alter their operations to the new realities. One of the best examples is changes in operations at BART. Weekday ridership is only about 40% of what it was before COVID-19, according to BART. Weekend ridership is only about 65%.

This week BART implemented service changes to reflect new usage patterns. The reduction is use by workers heading downtown to offices and the businesses which serve them has generated new demand patterns. This week, BART announced changes designed to smooth out the availability of trains throughout the day as opposed to traditional rush hours. The changes will involve shorter trains running more frequently. This will address issues like over 20-minute wait times.

The result will be more frequent service designed around the idea that the status quo is a much more likely reality. It will reduce reliance on commuters and orient towards movement within the City.

The Chicago Transit Authority has announced that the Biden administration pledged $1.95 billion to help fund the extension of the CTA’s Red Line from 95th Street to the city’s southern border near 130th Street. Like the full Second Avenue extension in New York, this CTA extension was originally promised in the early 1970’s. The federal funds would cover half of the projected project costs. The remainder is planned to be funded from revenues collected in a Transit Tax Increment Financing District.

The District would collect taxes based on the incremental increase in property taxes generated. The new tax-increment financing district is Chicago’s second Transit Tax Increment Financing District. The first Transit TIF was created in 2017 to fund the reconstruction of the Red, Purple and Brown lines on the North Side with little controversy. 

CARBON CAPTURE

The South Dakota Public Utilities Commission decided to rule in favor of a staff attorney’s motion to deny Summit Carbon Solutions’ permit application for their $5.5 billion Midwest Carbon Express pipeline. The attorney requested an order from commissioners at the end of last week to deny Summit Carbon’s permit on the grounds the company’s carbon dioxide pipeline currently does not comply with “all applicable laws and rules” under South Dakota Codified Law.

The Commission made it clear to Summit.  “Without … preemption, you’ve made crystal clear in your profiled testimony that various county ordinances make this an impossible project at this time.” Summit Carbon will have to reapply for a permit if it intends to build its pipeline in South Dakota. This means that Summit is faced with essentially restarting their application process at square-one and further pushing back the earliest day they could receive a permit.

Summit Carbon filed its own motion to withdraw its prior request for an order to preempt local county ordinances adopted by Brown, McPherson, Minnehaha and Spink counties. Summit initially intended to argue setback ordinances were superseded by federal regulations with smaller buffer zones.

CALIFORNIA AND AUTONOMOUS VEHICLES

The autonomous vehicle industry faces another test in California. As we go to press, the Governor is deciding whether to sign into law AB 316. The law requires a trained human safety operator to be present any time a self-driving, heavy-duty vehicle operates on public roads in the state. The California Department of Motor Vehicles, the agency tasked with providing testing and deployment permits for AVs in the state, currently has a ban on AVs weighing more than 10,001 pounds in the state.

The bill passed in anticipation of an end to that ban. It requires the DMV to provide evidence of safety to policymakers. By January 1, 2029, or five years after testing begins (whichever is later), the DMV will need to submit a report to the state to evaluate the performance of AV technology and its impact on public safety and employment in the trucking sector. After approval, the DMV will have to wait another year before issuing permits. 

The bill passed both houses of the Legislature by overwhelming margins which could override a veto. Nonetheless, the tech industry will press the Governor hard on this issue. He is seen as more sympathetic to the tech industry.

ROAD TAXES

Georgia Gov. Brian Kemp signed an executive order suspending taxes on gasoline and diesel fuel, declaring a legal emergency over higher prices. The suspension of the taxes, at 31.2 cents per gallon of gasoline and 35 cents per gallon of diesel fuel, began on September 13 and lasts through Oct. 12. The state had suspended the taxes from March of 2022 through the end of that year.

It is estimated that the State gave up some $1.7 billion of fuel revenues during that suspension. This puts the estimated loss from the latest suspension at $170 million for the month. Under state law, Kemp can keep suspending taxes as long as state lawmakers ratify the action when they next meet. The 2022 suspension was originally passed by lawmakers, with Kemp extending it seven times

South of the Border, legislation has been filed for consideration in 2024 by the Florida legislature to establish new fees for electric car registrations. The legislation would impose a yearly registration fee of $200 on electric vehicles that would be in addition to regular registration fees. The cost would go up to $250 starting in 2029. An annual fee of $50 a year would be imposed on plug-in hybrids. A similar bill made it out of the State Senate in 2023 but did not make it through the House.

BRIGHTLINE

The operators of Florida’s high speed train line announced that Brightline will launch service from Orlando International Airport on Friday, September 22.  The system will now provide service extending from Orlando all the way through to Miami.

For the month ended July 31, 2023, service between West Palm Beach and Miami carried 156,478 passengers and generated total revenue of $4.3 million. Ticket revenue in July 2023 increased 49% compared to July 2022 to $2.8 million, with ridership up 40%. For the year-to-date period, compared to the same period last year, ridership was up 71%, ticket revenue was up 89% and total revenue was up 122%. For the year-to-date period through July 2023, we carried 1,112,598 passengers and generated total revenue of $34.5 million.

POWER TERRORISM

Utilities reported 60 incidents they characterized as physical threats or attacks on major grid infrastructure, in addition to two cyberattacks. Nine of this year’s attacks led to power disruptions. No single agency keeps a complete record of all such incidents. That makes it likely that 60 is not the real number but only a portion. And that is for larger scale equipment.

Nearly half of the 4,493 attacks from 2020 to 2022 targeted substations, making them the most frequent targets for perpetrators over that period. Those result in what are considered minor incidents which tends to limit the distribution of knowledge about them which could prove helpful to other providers. It is said that federal level regulators concentrate on “big” incidents and this results in incomplete reporting.

This complicates the efforts to hold perpetrators accountable. In an unusual case in Washington State, two men plead guilty to having damaged four power substations on Dec. 25, 2022.  Both face up to 20 years in prison. Another 2022 incident in North Carolina was prominent for its impact and duration of the resulting blackout for 45,000. In that case, law enforcement admits that it is having difficulty finding suspects.

It is a tough risk for the utilities to manage given the large number of facilities and often remote locations in which they need to be located. Typically, cyclone fencing is the only obstacle.

TRANSIT SUBSIDIES

We have been tough on the City of New York and its heavily subsidized passenger ferry system. Riders on the ferries pay the normal fare one would pay for the bus or subway. The reality is that each ride actually costs the City some $12. All this while the MTA struggles to return to historic patronage levels on its bus and subway system.

It turns out that New York was not alone. The Los Angeles Metropolitan Transportation Authority is evaluating whether to extend the life of its Metro Micro program. The program started as an experiment in on-demand service. Metro’s program was launched in 2020 after federal dollars became available to experiment with on-demand service. It began in eight zones near 14 fully or partially eliminated bus routes. It uses vans which can carry eight passengers and was intended for trips within a 30 square mile area. 

Here is the issue with the program. Users pay $1 for the service. In spite of its low price, only about 2,000 riders board Metro Micro vans on an average weekday compared to 877,000 bus and rail passengers — numbers which are still below pre-pandemic levels. This then drives a truly unfavorable cost/revenue situation. Metro estimates that each ride requires a subsidy of some $43 per ride.

The primary customer base seems to be lower income working class folks especially females. The issue of safety relative to the regular Metro system is cited as a primary reason although the low fare is clearly aimed at the current passenger base. The MTA will have to figure out a balance between the politics supporting the service and the realities of a $20 million annual subsidy benefitting a small number of people.

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

CALIFORNIA

Moody’s announced that it has revised its outlook on the state’s general obligation bond rating to negative. The negative outlook reflects a weakened and uncertain revenue environment in California that raises the possibility of extended pressure on the state’s budget. The state’s enacted fiscal 2024 budget scaled back or delayed certain non-recurring spending in an effort to retain budget reserves.

The situation is complicated by the fact that a more complete and accurate picture of the state’s revenue collections will likely not be available until October given the weather-related shift in the income tax filing deadline. The delayed receipt of revenue leaves the state with less certainty around fiscal 2024 budgeted revenues and a narrowed window in which to respond to revenue collections that fall short of present assumptions.

Given the negative outlook and the underlying challenges associated with a highly volatile revenue structure, Moody’s is unlikely to upgrade the state’s ratings in the coming year or two. Revising the outlook back to stable would follow greater certainty around revenue performance and the state’s capacity to balance near-term budget gaps without substantial use of reserves.

The Aa2 rating on the general obligation bonds is the same as the state’s issuer rating due to the broad pledge on the bonds, despite a constitutional priority of funding education. California’s Aa2 issuer rating balances the state’s massive economic base and presently healthy budget reserves and liquidity against a highly volatile revenue structure and limited operating flexibility relative to most states. The rating also incorporates above average leverage and fixed costs.

NEW YORK CITY

New York has not seen an outlook change on its Moody’s rating yet but that may change. Just a few weeks after awarding a stable outlook reflecting improved retiree healthcare funding, Moody’s is citing issues with the City’s potential retiree healthcare funding needs as being credit negative. These were cited along with the ongoing asylum seeker crisis as negative factors facing the credit.

We have made the case that the outlook for the City’s credit is negative already. The full impacts of the City’s labor negotiations along with the demands of the asylum seeker problem introduce serious uncertainty into the credit. The ongoing effort to revive the central business district continues to be slow going. Now, a chaotic opening to the school year faces a possible strike of bus drivers. The contract with a private vendor to manage facilities for migrants was rejected by the City Comptroller over compliance issues.

TEXAS WATER

In 2023, the 88th Texas Legislature passed Senate Bill (SB) 28 and Senate Joint Resolution (SJR) 75 providing for the creation of the Texas Water Fund. In addition, SB 30 authorized a onetime, $1 billion supplemental appropriation of general revenue to the Texas Water Fund, contingent on enactment of SB 28 and approval of SJR 75 by voters. Upon approval of the supporting constitutional amendment (Proposition 6) on November 7, 2023, the Texas Water Fund would be a special fund created in the state treasury outside the general revenue fund to be administered by the TWDB.

The Texas Water Fund is not able to transfer funds to the Economically Distressed Areas Program, the Flood Infrastructure Fund, or the Agricultural Water Conservation Fund. It will not be a new program at the TWDB and cannot offer loans and/or grants directly. Rather, it would enable the TWDB to allocate funding to existing financial assistance programs and the newly created New Water Supply Fund for Texas.

PREEMPTION

In July, the City of Houston, joined by San Antonio and El Paso, filed suit against the State of Texas, arguing that new law seeking to limit the ability of cities to regulate several areas of business activity was overly broad and violated the provisions of the State Constitution that give cities the power to make their own rules. A Texas district court judge ruled that the state law was unconstitutional. House Bill 2127, was set to go into effect on September 1.

The law would have prevented cities from enacting ordinances including those affecting labor, agriculture and natural resources, and was expected to nullify existing laws on everything from sanitation rules to the regulation of puppy mills. The law gained national attention because it would have tossed out ordinances in Austin and Dallas requiring periodic rest breaks for construction workers in the middle of the worst heat wave of the summer.

LABOR

The International Longshore and Warehouse Union and the Pacific Maritime Association announced agreement on a six-year contract with its workers. The agreement ends over a year of uncertainty about the availability of the port to shippers. This led some to reroute freight to East Coast ports which have been expanding their capacity to serve larger vessels. Seven months into 2023, the Port has processed 4,821,670 TEUs, about 24% less than the same period last year.

Members of the International Longshore and Warehouse Union (ILWU) voted 75% in favor of approving the new 6-year agreement that will expire on July 1, 2028. The Port of Los Angeles moved 684,291 Twenty-Foot Equivalent Units (TEUs) in July as cargo shipments declined compared to last year’s record month. July 2023 loaded imports landed at 364,208 TEUs, down 25% compared to the previous year.

Loaded exports came in at 110,372 TEUs, an increase of 6% compared to last year. With the need for empty containers in Asia slowing, just 209,710 empty TEUs were processed, a 39% year-over-year decline. Combined, July volumes were 684,291 TEUs, a 27% year-over-year decline.

CARBON CAPTURE IN SOUTH DAKOTA

The state Public Utilities Commission faced three choices this week about the future of carbon dioxide pipelines in South Dakota. The first was whether to grant Navigator a permit to have a branch of its proposed pipeline go through five counties — Lincoln, Turner, Minnehaha, Moody and Brookings — and collect CO2 from ethanol production facilities at Aurora, Chancellor and Hudson.

The second was whether the state commission should override local ordinances in Minnehaha and Moody counties. Those counties’ commissions adopted the ordinances this year, after Navigator had proposed its route. Navigator wants the ordinances overruled. The third was what additional conditions, if any, Navigator should face if a permit is granted.

The answer came when the Commission rejected the company’s application. It cited a failure by the company to adequately disclose carbon dioxide plume modeling, and a failure to provide timely notices to some of the landowners along the proposed route. Navigator has the opportunity to reapply with the issues narrowed to those criteria upon which the permit was denied. 

In Iowa, the other major carbon pipeline developer Summit Carbon Systems has represented to the state that if it cannot get its permit approved for the North Dakota section, that it will not build its proposed pipeline. Summit has asked for reconsideration of its proposed pipeline in North Dakota.  the North Dakota Public Service Commission said the evidence it considered did not show “the project will produce minimum adverse impacts upon the welfare of the citizens of North Dakota.” 

TRI-STATE GENERATION

We are getting to see what happens when a service provider is unable or unwilling to satisfy the demands of its customers. Tri-State is a wholesale power supply cooperative serving 45 members, including 42 electric distribution cooperative and public power district members in four states. Its primarily fossil fuel-based generation fleet is causing members to reconsider their power supply sources. Three of its members are leaving the Tri-State system oner the next two years.

Now, with less demand from its members, Tri-State finds itself in the position of having more capacity than it needs. To address this imbalance, Tri-State released a request for offers from third parties to purchase power from April 1, 2024, through Dec. 31, 2027. The request for offers is focused on power purchase agreements, and products offered include tolling agreements, block sales of energy, and dispatchable capacity.

“Tri-State will not consider offers to purchase its generating resources.” In the meantime, Tri-State had to cut rates in 2021 and 2022 to stem the customer losses. And they didn’t succeed. The experience does provide a teachable moment to other wholesale generators looking to cling on to their legacy assets.

HIGH SPEED RAIL

The U.S. does not have high-speed rail under definitions set by the International Union of Railways, a professional association representing the rail industry. The group defines high-speed rail as trains that travel faster than 155 mph on special tracks. The definition includes trains that run on standard tracks, if trains can cruise faster than 125 mph in most segments.

Many European and Asian countries operate high-speed trains around 200 mph on special tracks designed for faster speeds and closed to slower rail cars.

None of the nation’s rail lines are built for trains to run 200 mph. Amtrak’s Northeast Corridor — the busiest intercity U.S. passenger route is filled with hurdles to true high-speed service. They include sharp curves, bottlenecks, decaying tunnels, bridges and overhead power lines that slow down trains.

The corridor needs billions of dollars for basic improvements and to accommodate high-speed service.  The $1.2 trillion infrastructure bill enacted in 2021 has $102 billion for rail, but none of the money is set aside for high-speed rail. Currently, only 32 miles of tracks on the Northeast Corridor can handle speeds up to 160 mph. Amtrak plans to make an additional 100 miles of tracks capable of handling bullet trains in the next 12 years. The expansion would enable bullet trains to hit 160 mph in roughly 30 percent of the rail route by 2035.

In 2021, Congress increased federal funding for rail improvements and repairs to $102 billion through the Infrastructure Investment and Jobs Act. But the act, which authorizes funding for five years, provides only about a quarter of the money Amtrak needs for track improvements in the next 15 years. None of that money was earmarked for high-speed rail. The overall funding environment is hostile. 

PENSIONS PRESSURING DALLAS

Pension funding requirements and unfunded liabilities have been a continuing factor pressuring the ratings of the City of Dallas, TX. The need for better funding has lowered ratings before. In 2005, the City resorted to issuing pension obligation bonds to bolster funding of its two main pension funds. Now after some 18 years, the City has stated that it is considering issuing pension obligation bonds again.

Dallas still has $95.315 million of debt outstanding from the first POB issuance. It is considering a par amount of $400 million for a new sale. It is an easy band-aid but the real issue is how the City can incorporate increases in funding so as to remove pensions as a negative credit factor. POBs should never be a substitute for long-term funding actions.

In this case, the idea is being floated as interest rates are at a cyclical high. A final report on whether Dallas has a plan to fully fund pensions within 30 years must be issued by The Texas Pension Review Board in December 2024 ahead of the 2025 state legislative session. The state could mandate changes in funding requirements for these local pension funds.

Pensions are the central issue which could influence the rating presently. The economy is strong and the budget outside of the pension issue seems to be under control. The City needs to address the funding concerns quickly.

NEW HAMPSHIRE ELECTRIC

Three Granite State utilities – Eversource, Unitil, and Liberty Utilities – jointly testified in support of the existing net metering rate structure governing residential solar. Current rules were established as the result of 2016 legislation. The prior system gave participants credits equal to the price utilities charge customers for electricity. This same law also required the state to conduct studies on the impact and effectiveness of net metering and make changes to the regulations if the findings warranted.

What were some of the findings? “New Hampshire’s net metering policy — which is among the most balanced in New England — has been effective in encouraging the growth of [solar] resources in our state, and there is no evidence that the current compensation level is creating unjust cost shifts,” – Eversource on behalf of the utilities.

The environment contrasts with that in other states. North Carolina’s public utility authorities have approved a utility plan to reduce payments to net metering customers. And earlier this year, California cut rates by about 75% for new net metering customers, with utilities pushing for even more cost-cutting concessions. This follows an effort in 2022 to slash rates in Florida which was successfully vetoed by Gov. DeSantis.

On another front, New Hampshire stepped forward with a new fee for electric vehicles. Beginning September 1, fully electric vehicles must pay an extra $100 during annual registration and plug-in hybrids an extra $50. Traditional hybrid vehicles, which cannot be plugged in, do not face a surcharge. According to the New Hampshire Department of Safety, the average state driver covers 12,000 miles per year and averages 25 miles per gallon. With a state gas tax of 24 cents per gallon, that’s a payment of $115 a year in gasoline taxes.

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.