Joseph Krist

Publisher

PIPELINE PAUSE

“The development of Navigator CO2’s pipeline project has been challenging. Given the unpredictable nature of the regulatory and government processes involved, particularly in South Dakota and Iowa, the Company has decided to cancel its pipeline project.” And so, Navigator CO2 announced it is halting its plans for a 1,300-mile pipeline to take carbon dioxide from ethanol plants across five states to be sequestered in Illinois.

On Oct. 10, Navigator withdrew its application for a certificate of authority before the Illinois Commerce Commission, needed to allow the company to use eminent domain for the pipeline route within Illinois. Navigator had only 15% of the agreements with residents it would need to pursue the route without eminent domain. In late September, the company had officially paused its permit-seeking process in Iowa, following a permit denial in South Dakota.

Navigator first proposed to sequester carbon dioxide in Christian County, Illinois, even though Christian County passed a moratorium on such projects. Navigator’s latest application also had a spur leading to a sequestration site in Montgomery County, Illinois. 

According to DOE, Biden’s goal of a net-zero U.S. economy by 2050 will require capturing and storing 400 million to 1.8 billion million metric tons of CO2 annually through CCS and carbon removal technology such as direct air capture. DOE estimates 30,000 to 96,000 miles of pipeline could be needed to link capture sites with geologic storage. There’s only about 5,000 miles of CO2 pipeline in operation today in the United States.

One of the other major pipeline companies – Summit Carbon Solutions -has formally extended the in-service date for its unapproved carbon pipeline network from 2024 to 2026. It blamed regulatory delay. In North Dakota, the Public Service Commission has agreed to reconsider Summit’s permit request with an adjusted route. A hearing to consider whether to overrule two county ordinances that restrict pipeline placements is expected to be scheduled for no earlier than December. In South Dakota, Summit plans to adjust its route and reapply for a permit. In Iowa, Summit’s final evidentiary hearing is set to resume in November.

HONOLULU MASS TRANSIT

The Honolulu Authority for Rapid Transportation (HART) announced that the Federal Transit Administration (FTA) will begin the process to restart funding for Honolulu’s expanding rail system. The goal is to finalize a new grant agreement with the city by the end of this year. That would lead to an immediate grant of $125 million. More importantly, it would enable a process to release funds which had been earmarked for the Honolulu project.

The FTA has withheld $744 million in federal funds since 2014 as the city struggled to resolve cost overruns and a long series of construction delays. The original funding plan was established in a 2012 agreement. That plan called for the federal government to contribute $1.55 billion to help fund construction of a 20-mile elevated line originally expected to cost $5.1 billion. It was supposed to be open for business by 2020.

The city ultimately decided shorten the line by one mile and eliminate the construction of a large parking garage. It cancelled plans for two stations. Those changes to the rail project triggered a new environmental review process and required a new grant agreement with the federal government. Completion of the shortened rail line is now scheduled for spring of 2031. HART estimates the system will now cost $9.93 billion including finance charges.

It is expected that the FTA will release $125 million in federal funding once the new full funding grant agreement is finalized, and will provide an additional $250 million after HART awards a contract for construction of the rail line and stations in the city center.  The first 11 miles of the rail system opened on June 30, but ridership on the half-built system has been limited.

HEALTHCARE

Westchester County Health Care Corporation (WCHCC) operates the only tertiary and quaternary provider between New York City and Albany. WCHCC is also the majority corporate member (60%) of Bon Secours Charity Health System with hospitals in Rockland and Orange Counties, and the sole member of HealthAlliance with hospitals in Ulster and Delaware Counties. This creates a large service area with unfavorable demographics and economics.

Like many other systems, WCHCC experienced significant utilization impacts during the pandemic from which it has been slow to recover. Now those impacts have hit WCHCC’s ratings. Moody’s just lowered its rating on WCHCC debt as well as that of institutions which WCHCC guarantees to Ba1 from Baa3. Lower than expected operating performance and thin liquidity that will result in high operating and balance sheet leverage for several years was cited. Uneven state funding sources and equity contributions toward a planned capital project will further strain cash.  

CA HITS THE BRAKES ON AV

The California DMV today notified Cruise that the department is suspending Cruise’s autonomous vehicle deployment and driverless testing permits, effective immediately. The DMV has provided Cruise with the steps needed to apply to reinstate its suspended permits, which the DMV will not approve until the company has fulfilled the requirements to the department’s satisfaction. This decision does not impact the company’s permit for testing with a safety driver.

Based upon the performance of the vehicles, the Department determined the manufacturer’s vehicles are not safe for the public’s operation. It found that the manufacturer has misrepresented any information related to safety of the autonomous technology of its vehicles. The ongoing investigation centers on an incident we reported last week that killed a pedestrian. The federal government announced its own probe last week which is focused on two reports to the NHTSA and a further two incidents the regulator identified on “public websites.”

TECH HUBS

The creation of hydrogen hubs has grabbed attention as a potential source of carbon mitigation. The focus has been on developing the technology versus just economic development. This week, the Biden Administration announced a hub plan for “tech” development in fields like autonomous systems, quantum computing, biotechnology, precision medicine, clean energy advancement, semiconductor manufacturing.

The U.S. Department of Commerce’s Economic Development Administration (EDA), announced the designation of 31 Tech Hubs in regions across the country. The Tech Hubs program is “an economic development initiative designed to drive regional innovation and job creation by strengthening a region’s capacity to manufacture, commercialize, and deploy technology that will advance American competitiveness.” Each designated Tech Hub can now apply to receive between $40 million and $70 million each for implementation funding, totaling nearly $500 million.

Like many other job creation programs, it managed to achieve buy in by spreading out the projects across the country. These Tech Hubs are located across 32 states and Puerto Rico, and represent a cross-section of urban and rural regions. For Puerto Rico it could become a case of remember the future. The PRBio Tech Hub would center on biopharmaceutical and medical device manufacturing in Puerto Rico. The irony is that the project could take PR back to its Section 936 days when it was a significant pharmaceutical manufacturing center. Once the 936 tax benefits were fully phased out, the pharmaceutical industry on the island declined significantly.

Other hubs reflect some already established investments. The Intermountain-West Nuclear Energy Tech Hub centers around small modular reactors and microreactors in ID and WY. Those two states were already pursuing nuclear generation technologies.

SPORTS DEFAULT

The high yield market is watching another speculative sports related bond issue default. In May, the operators of a 320-acre destination sports facility in Mesa, AZ declared bankruptcy. Over the summer, the owners hoped to be able to sell the facility via competitive auction. Unfortunately, that never came to fruition and the pressure to sell the facility increased. The judge presiding over the Chapter 11 proceedings was pressuring the parties to get the project sold.

Now, Legacy Park will sell for $25.5 million with the buyer Burke Operating Partners to provide $19.5 million and $6 million to come from the landlord Pacific Proving LLC. A sale hearing to close the deal with the judge’s approval will be scheduled for Nov. 20 with the expectation to close by Nov. 30. Some $19.1 million will go to pay the mechanic lien claimants, who were roughly owed $30 million. 

That just leaves the little detail as to what happens to the holders of the approximately $283 million of bonds issued through the Arizona Industrial Development Authority. If this deal is approved, bondholders will get $2.2 million and 11% of equity in the buyer. It is another pelt on the wall of failed sports bond credits. And it even had literally dozens of pickleball courts. What could’ve gone wrong?

FREE TRANSIT

Free transit fares are just one of several progressive ideas being tested out when the opportunity arises. Given the impacts of the pandemic on transit ridership, these efforts are being undertaken to attract and reattract riders. The results of these efforts have varied with the programs in smaller cities being perceived more favorably. In the big cities, the testing of the concept has been more limited and the results have varied.

The Mayor of Boston is a big proponent of free fares on the T. This summer, the closure of a tunnel was accompanied by free fares on the T’s Blue Line. It was thought that a combination of free fares and the closure would provide a good test for the impact of fares. For proponents of the idea, recent results from the T experience over the summer was not especially encouraging.

The Sumner Tunnel connects Logan Airport to I-93 in Boston. It was closed on July 5 for rehabilitation. According to MBTA estimates, 40,000 cars travel through the Sumner Tunnel on a typical weekday. The MBTA estimates the riders of 3,900 cars, or nearly 10 percent of the total, shifted to public transit, while 5,500 cars just stopped coming in to Boston. The T estimates three-quarters of the cars just traveled a different route – 10,200 used the Ted Williams Tunnel, 10,400 used the Tobin Bridge, and 10,000 used other roads.

The tunnel reopened August 31. Weekday ridership dropped 3% on the Blue Line and 58% on ferries after the reopening. Fares were maintained on the Orange Line but increased service seemed to have attracted riders. Orange Line ridership weekdays was up 14% and commuter rail posted a 1% gain. We expect that such experiments will continue but we do not see fare free transit in the big cities taking hold in the near term.

LOUISIANA REJECTS A P3

The Louisiana legislature voted to reject a proposed private-public partnership that would have replaced the Calcasieu Interstate 10 Bridge. The $2.1 billion project would have relied on state and federal funding along with tolls. It was the proposed use of tolls that killed the plan. Now, the recently elected governor will have to come up with a plan to replace the bridge without tolls. The opposition to tolls is reflective of the current state of Louisiana politics.

The final vote on the plan fell mostly along party lines, with Republicans largely voting to reject the deal, and Democrats voting to approve it. The trucking industry was the main source of opposition. The plan called for tolls on vehicles across four categories: 25 cents for local cars, $2.50 for nonlocal cars, $2.55 for medium trucks and $12.50 for large trucks equipped with toll tags. Some $800 million in state and federal money for the project had been committed, with the other dollars set to come from toll collections.  

The truckers prefer that the project be funded with much more federal funding so as to allow the bridge to remain toll free. In 2017, a bill to raise the state’s fuel tax in part to fund the bridge failed. These deals have been an especially tough sell in the South. Bridge and prison P3s in Alabama fell to political winds as has this one.

RELIGIOUS CHARTER SCHOOLS

Oklahoma’s Attorney General sued to stop a state board from establishing and funding what would be the first publicly funded religious charter school after the board ignored his warning that it would violate both the state and U.S. constitutions. The Oklahoma Statewide Virtual Charter School Board was sued after three of the board’s members signed a contract for the St. Isidore of Seville Catholic Virtual Charter School, which is sponsored by the Archdiocese of Oklahoma City.

Oklahoma’s Constitution specifically prohibits the use of public money or property from being used, directly or indirectly, for the use or benefit of any church or system of religion. Nearly 60% of Oklahoma voters rejected a proposal in 2016 to remove that language from the Constitution. Nevertheless, the school “participates in the evangelizing mission of the Church and is the privileged environment in which Christian education is carried out.”

The AG’s lawsuit also suggests that the board’s vote could put at risk more than $1 billion in federal education dollars that Oklahoma receives that require the state to comply with federal laws that prohibit a publicly funded religious school.

MEDICAID WORK RULES

Georgia remains the only state permitted to impose work requirements on Medicaid recipients. Those sorts of regulations have been challenged and overturned in the courts. Georgia’s Pathways to Coverage was conceived as the replacement program. The Georgia Department of Community Health has projected up to 100,000 people could eventually benefit from Georgia Pathways to Coverage. 

That outlook is clouded by the fact that the new health plan for low-income adults has enrolled only 1,343 people through the end of September. As has been the case in other states where work rule efforts failed it is the reliance on individuals to use computers to document work. That assumes that recipients (among the nation’s poorest) have access to a computer to submit information. Many low-income people struggle to document the required 80 hours a month of work, volunteer activity, study or vocational rehabilitation.

During the pandemic, states were not allowed to reduce their Medicaid rolls. That time period ended earlier this year and many states began a process to force those who had qualified during the pandemic to resubmit qualification data. The state launched Pathways on July 1 coincident with its review of Medicaid eligibility following the end of the COVID-19 public health emergency. In addition to imposing a work requirement, Pathways limits coverage to able-bodied adults earning up to 100% of the poverty line — $14,580 for a single person or $30,000 for a family of four.

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

AUSTIN’S COAL DILEMMA

On March 26, 2020, the Austin City Council approved an emissions-reduction plan that called for its city-owned utility to shut down its portion of the Fayette Power Project, a coal-fired power plant by the end of 2022. Since that decision, the Texas power market has endured a variety of stresses. The winter storm debacle was followed by a couple of summers of life on the edge as the state grid operator struggled to maintain adequate supplies in the face of record heat. The pressure on suppliers to maintain lower costs while supporting adequate supply was significant.

Those factors combine to support the current realities facing the City of Austin as it considers its energy plans. After the 2021 winter storm, the grid manager moved to encourage more “dispatchable” power – the kind most easily produced at natural gas and coal plants. The operator wanted more flexibility in its load management efforts. This year, ERCOT created financial incentives to encourage power generators to expand their ancillary services, a system in which power generators hold a portion of their total power generating capacity in reserve, ready to provide more to the grid when demand threatens to outpace supply.  The change also made the economics of a natural gas plant much more favorable. This was in line with the state’s politics which support natural gas.

Austin still has not closed the Fayette plant. Through the reserve system, coal plants can also get paid simply for keeping some of their capacity available if called upon. All generators have profited from higher overall prices, but because coal operators can choose when to ramp up production, they can catch the highest price peaks to maximize profits. On the summer’s warmest day, the generation from that plant generated some $11 million of operating profit. Those unanticipated “profits” are ostensibly used to reduce revenue requirements to be generated from retail ratepayers.

Austin Energy is now in the process of updating its resource, generation and climate plan for approval by the City Council in 2024. It will not be easy to stop using Fayette plant power given the fact that the facility is co-owned with another agency, The Lower Colorado River Authority. LCRA was created by the Legislature, and its board of directors are appointed by the governor. It recently reiterated its plans “to operate FPP as long as it continues to be a reliable, cost-effective source of power.” So, a move to divest itself of its share of the plant by Austin won’t shut the plant down and it may be more expensive to replace.

MICHIGAN HOSPITAL MERGER

Henry Ford Health announced Wednesday that it has signed an agreement to join with Ascension Michigan and Genesys to create a $10.5 billion health system based in Detroit with 13 acute-care hospitals, roughly 50,000 employees and more than 550 sites for regional health care. Henry Ford Health says it is a joint venture that includes no exchange of cash.  Henry Ford went out of its way to emphasize that the arrangement is “not a merger”.

The organization would remain headquartered in Detroit and carry Henry Ford Health’s name and branding. It would be governed by a board of directors with representatives from both Henry Ford Health and Ascension Michigan. At least for now, the Catholic identity of the Ascension Michigan facilities would continue. If the combination receives regulatory approval, there would still be five large-scale competitors in southeastern Michigan: Corewell Health, The Detroit Medical Center, Trinity Health, McLaren Health Care and the University of Michigan Health.

Ascension, which is based in St. Louis, reported an operating loss of $3 billion in fiscal year 2023, and is selling many of its holdings. The combination will be reviewed under new guidelines issued in July by the Justice Department and FTC which would prohibit mergers that increase concentration in highly concentrated markets or eliminate substantial competition between firms. Nine Ascension hospitals will be part of the transaction. Six Henry Ford facilities will participate.

NUCLEAR

The federal Inflation Reduction Act provides funding for the New ERA program. That program sets aside money specifically for U.S. generation and transmission cooperatives to help them decarbonize their electricity portfolios. The IRA provides some $9.7 billion to fund these efforts.

In Michigan, an electric cooperative is seeking to use the program to support investment in nuclear generation. Wolverine Power Supply Cooperative, based near Cadillac, has submitted an application to the USDA for the 9.7 billion grant and loan program. The coop hopes to obtain power from a reopened Palisades Nuclear plant. Wolverine announced a power purchase agreement with the Palisades owner, Holtec International, to buy electricity from the plant, if and when it reopens following a regulatory review. The program would provide funding for up to 25% of the coop’s costs to purchase the nuclear power.  

The Palisades plant stopped operating in May 2022. Holtec has recently submitted requests to the U.S. Nuclear Regulatory Commission to effectively halt the decommissioning process and resume operations under an operating license that expires in March 2031. According to the National Rural Electric Cooperative Association (NRECA), U.S. electric co-ops submitted requests for more than twice the amount of program funding available, representing $93 billion in new investments. Awards are expected to be announced in early 2024.

CONGESTION PRICING

One of the major objections to the imposition of congestion fees is the favorable treatment being given to vehicles operating through transportation network companies (TNC) like Uber and Lyft. It is clear that one of the major contributors to increased congestion in Manhattan is the presence of these vehicles. This has led to calls to restrict or lower the number of TNC vehicles in operation.

Given the opposition to the new fees, it would not seem to be the best time to throw some oil onto that fire. Nonetheless, that’s what Mayor Adams seems to be doing. It was announced this week that New York City’s Taxi and Limousine Commission will lift its cap on new licenses for for-hire vehicles starting this week, so long as they’re issued to fully electric cars. The change could allow companies including Uber, Lyft and the recent start-up Revel to deploy thousands more vehicles on city streets.

The excuse is that the policy will promote non-polluting vehicles. At the same time, the move will increase the number of vehicles which will cause more congestion. The policy allows drivers to rightfully note that the fee is a congestion fee not a pollution mitigation fee. It further buttressed arguments that the fee really is just a money grab rather than a well thought out transportation policy.

One leading transit analyst (a former NYC transportation commissioner) has found that people who drive personal cars into Manhattan’s central business district travel just one or two miles, while for-hire vehicles drive 20 to 40 miles every time they enter the MTA’s planned congestion zone. That makes a TNC vehicle ten times more of a congestion contributor than an individual’s vehicle.

City data shows the number of cars operated by e-hail companies grew from roughly 13,000 at the start of 2015 to more than 70,000 in 2018. Meanwhile, the number of yellow taxi medallions — which give cabbies the exclusive right to street hails in much of the city — remained capped at 13,500. The City imposed a cap on new for-hire vehicle licenses in 2018 but allowed new ones to be issued to wheelchair-accessible and electric vehicles. The TLC revoked the electric vehicle exemption in 2021. As of July, there were more than 77,000 for-hire vehicles working for e-hail companies operating in the city.

The new policy is a part of Mayor Adams’ hope to convert all taxis and for-hire vehicles in the city to electric or wheelchair-accessible vehicles by 2030. He’s hoping that by the end of 2024, 5% of the city’s for-hire vehicle trips will be in an electric or wheelchair-accessible vehicle.

AUTONOMOUS VEHICLES

The National Highway Traffic Safety Administration (NHTSA) is opening an investigation into whether General Motors’ self-driving unit Cruise is taking sufficient precautions with its autonomous robotaxis to safeguard pedestrians. It is looking into reports of incidents including Cruise autonomous vehicles “encroaching on pedestrians present in or entering roadways, including pedestrian crosswalks, in the proximity of the intended path of the vehicles.” In December, NHTSA opened a separate safety probe into the autonomous driving system in Cruise vehicles after reports of two injuries in rear-end crashes.

The announcement follows an incident in San Francisco two weeks ago in which a pedestrian was struck by a hit-and-run driver, thrown into an adjacent lane and hit a second time by a Cruise robotaxi, which was not able to stop in time. The self-driving vehicle came to a stop on top of the pedestrian, It comes as NHTSA continues an investigation in association with a February 2022 Cruise petition seeking permission to deploy up to 2,500 self-driving vehicles annually without human controls like steering wheels. 

HYDROGEN HUBS

Hydrogen hubs are a collection of linked assets designed to work together to develop the domestic production of hydrogen. Hydrogen is currently used to make fertilizer and in various industrial processes in the petrochemical industry. The hope is that hydrogen can be produced for use as a carbon-free fuel in industries like long-haul trucking, maritime cargo shipping, and airplane travel. It is at the center of Biden Administration efforts to achieve emissions goals which could offset the negative impacts of energy transformation.

To help achieve these goals, the Inflation Reduction Act provided funding for the support of start-up facilities across the country. Using different sources of fuel to produce hydrogen, plants will provide an opportunity to evaluate the different sources of energy used to produce hydrogen and determine the actual “greenness” each technology and/or fuel results in. This week, the Administration announced the funding for seven hydrogen “hubs” across the country. Their power sources will reflect their locations.

The Appalachian Hydrogen Hub encompasses parts of West Virginia, Southeast Ohio, and southwest Pennsylvania and will use the large quantities of natural gas in the region. The Gulf State Hydrogen Hub will be centered in Houston, Texas, and will cover most of the Gulf Coast and southeast Texas. Texas has large quantities of energy to use in producing hydrogen. The hydrogen hubs that use natural gas to produce hydrogen will use carbon capture technology.

The Mid-Atlantic Hydrogen Hub spans parts of Pennsylvania, Delaware and New Jersey. The Midwest Hydrogen Hub is in Illinois, northwestern Indiana and southwestern Michigan and will produce hydrogen from, among other sources, nuclear power. The California Hydrogen Hub spans from Southern California to Northern California and encompasses three ports: Los Angeles, Long Beach and Oakland. 

The Pacific Northwest Hydrogen Hub encompasses eastern Washington, northeastern Oregon and some parts of Montana and will produce hydrogen for making fertilizer. It will likely connect with the California Hydrogen Hub. The Heartland Hydrogen Hub is hosted in Minnesota and includes a significant presence in North Dakota and South Dakota, and takes advantage of the uses the very inexpensive and abundant wind resources to make clean hydrogen. 

SPRINGFIELD, ILLINOIS MUNICIPAL UTILITY

City, Water, Light, and Power (CWLP) is owned and operated by the city of Springfield, Illinois and provides drinking water and electricity to Springfield residents. In 2021, an incident occurred at one of the City’s generation plants releasing more than 700 tons of fly ash into the environment. Subsequent investigations were impacted by CWLP’s inability to provide adequate documentation to investigators.

This led the state attorney general to file a lawsuit alleging CWLP violated the Illinois Environmental Protection Act, Illinois Pollution Control Board regulations and its Clean Air Act Permit Program permit. The lawsuit sought to prohibit CWLP from future violations of state environmental laws and regulations, as well as civil penalties. The litigation has resulted in an interim order while the lawsuit is pending which requires CWLP to conduct a thorough analysis and report to the IEPA within 30 days of the order being entered by the court. Failure to comply could lead to criminal and/or civil penalties against CWLP.

WANNA BUY A RAILROAD?

The City of Charlotte, NC has been approached by the Norfolk and Southern Railroad to consider the purchase of a stretch of railroad track owned by the company. That section of track lies in a path for a proposed rail connection (the Red Line) through Mecklenburg County to the Charlotte city center. Initial plans called for a 25-mile commuter rail line with 10 stops between Gateway Station in Uptown Charlotte to Iredell County. The idea is to provide an alternative to driving on I-77.

The track, known as the O line, is used for freight operations currently. Norfolk and Southern would be expected to continue using the tracks. It is not clear whether the ultimate transaction would involve a change of ownership or a lease arrangement. The plan will get serious consideration as it would go a long way towards enabling the Red Line.

In Cincinnati, the Norfolk and Southern is a potential buyer of rail tracks from the City. The Cincinnati and Southern Railway is the only municipally-owned railway in the U.S. It has been leased by Norfolk Southern since 1881. In 2021, that lease was extended through 2051. The city wants to sell the railway to Norfolk Southern for around $1.6 billion. It would take the proceeds of a sale and place them in a trust fund. The interest generated from the corpus of the trust is estimated to generate some $50 million annually for infrastructure investment in the City.

The City earns approximately $25 million per annum under the current arrangement. The Trust is projected to generate twice that much. The level of annual payments from the Trust to the City are not guaranteed. The plan contemplates a required minimum payment of $25.6 million per year, regardless of the investment returns. This ensures that the city won’t receive any less than it generated from the railroad prior to the sale. 

The planned ballot proposal requires that “in the unlikely case that the trust balance dips below 75% of the balance from the previous year, then a moratorium on payments to the city is required until the balance of the trust recovers to the level of the previous year before that loss.” The city is estimating a 5.5% return on its investments.

TEXAS BROADBAND

The U.S. Census Bureau reports 93.9 percent of Texas households had a computer, but only 86.9 percent had a broadband internet subscription in 2017-2021. The rate is substantially lower in the more rural areas of the state. To address the shortfall in broadband access, Texas voters will have a chance on November 7 to approve a constitutional amendment, Proposition 8.

The amendment creates a broadband infrastructure fund of $1.5 billion to expand high-speed internet availability. The fund is designed to take advantage of federal funding available through the Broadband Equity, Access, and Deployment Program to stimulate internet expansion. Texas was promised $3.3 billion, the most of any state, and Texas’ Broadband Development Office predicted it would begin accepting grant applications in 2024.

Eligible applicants would include internet service providers, political subdivisions and public-private partnerships interested in developing broadband infrastructure. Supporters have cited the benefits of the Rural Electrification Administration in the 1930’s which benefitted many rural residents. It is a comparison we have made for years. Broadband is the electrification project of the 21^st century.

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

DETROIT PROPERTY TAX EXPERIMENT

As a city with a significant amount of vacant land, Detroit has always faced difficulties in maintaining property tax revenues. Taxed according to traditional property tax valuation methods, the relationship between land and development could not have been clearer. As the City tries to continue its recovery, the abundance of underutilized land has driven moves to try to derive value from those lots commensurate with their location, size and development potential.

Under the current system, vacant land and blighted buildings are taxed at a much lower rate than land with single-family homes and other structures. The Mayor would see land and structure values taxed separately. Detroit would have the ability to increase the tax millage on land and reduce the tax millage on structures like homes and buildings. That means property taxes on land will go up while the taxes on structures like homes and buildings would go down. 

According to the Mayor, ninety-seven percent of Detroit homeowners would see a reduction in their property taxes while the remaining 3% would see no change at all. The median homeowner will save 27% on their tax bills. The average $50,000 home in Detroit will see a $450 tax cut, while a $100,000 home will see a tax cut of $900.

The goal has been to qualify an amendment question on the ballot in February, 2024. The Legislature needs to approve enabling legislation and it has been a slow-going process. If approved, the Land Value Tax Plan would be phased in over three years beginning in 2025.

MEDICAID

In August we noted concerns regarding the potential loss of Medicaid benefits by those whose removal had been halted by pandemic regulations. In the states where the opposition to expanding Medicaid under the Affordable Care Act has been the strongest, aggressive moves were made to remove thousands of patients out of the program. Florida was particularly proud of its efforts in this area. Advocates had cited the potential for these removals as a real source of concern.

The initial data indicates that those concerns were not assuaged. Just before Labor Day, federal officials notified states that there were problems with the eligibility certification process. The Centers for Medicare & Medicaid Services (CMS) worked with states on the return to regular eligibility operations following the end of the Medicaid continuous enrollment condition. In that time, it identified issues where states are out of compliance with renewal requirements.

This issue most commonly affects children in households with at least one adult enrolled in Medicaid. Medicaid and CHIP eligibility levels for children are generally higher than those for adults. While the Medicaid income eligibility limit for adults is 133% of the federal poverty level (FPL), the median Medicaid/CHIP eligibility level for children across states is 255 percent FPL. Children’s eligibility levels range from 170% of FPL to 400% of FPL with all but two states covering children at or above 200% FPL.

CMS also determined that due to incorrect systems programing or other operations, some states are requesting information or documentation for individuals for whom the state has completed a renewal and are terminating coverage for individuals if other members of the household do not provide requested verification.

CLIMATE DISCLOSURE

California Gov. Gavin Newsome signed off on the Climate Corporate Data Accountability Act, or SB-253, and the Climate-Related Financial Risk bill, or SB-261. SB-253 will require all public and private firms that operate in California — and whose annual revenues surpass $1 billion — to disclose both direct and indirect greenhouse gas emissions. If companies fail to adhere to the demands of the law, they will face fines of up to $500,000 a year.

SB-261, meanwhile, will require companies that generate more than $500 million in annual revenue to publish climate-related financial risk reports biennially, beginning in 2026. Failure to comply with SB-261 will result in administrative penalties of up to $50,000 in a reporting year.

Federal rules proposed by the U.S. Securities and Exchange Commission are not as stringent as the California rules. Those proposed rules would require publicly traded companies to disclose both direct and indirect emissions, while the California legislation includes private corporations as well. The laws do not impose any additional reporting requirements for municipal bond issuers. At least, not yet.

SCOTUS AND CLIMATE CHANGE

The U.S. Supreme Court agreed to hear an appeal from fossil fuel industry entities who are being sued by the State of Minnesota. Like so many cases filed by other jurisdictions, the suit charges that the defendants knowingly concealed evidence of the impact of their businesses on the environment. Like all of the other litigation, the case being made is that the issues at hand are federal rather than state issues.

In its last session, the Supreme Court declined to hear challenges to climate cases from Hawaii, Colorado, Rhode Island, Baltimore, Maryland, and San Mateo County, California, that were all seeking to have the cases moved to federal court. 

LABOR AND HEALTHCARE

Given its outsized role in the healthcare ecosystem serving the western U.S., the settlement of negotiations this week between Kaiser Permanent and its non-provider workforce are a sign of the challenges many systems face in the post-pandemic world. As we discussed last week, some 75,000 employees at Kaiser Permanente health facilities staged a three-day job action. The strike was designed to move negotiations on expired contracts.

The strategy seems to have paid off. As we go to press, Kaiser has announced an agreement with the striking workers. A proposed four-year contract would include significant wage increases. The contract would set a new minimum of $25 an hour in California for the healthcare workers. That creates a new tier of minimum wage, $5 an hour higher than the new raise approved for fast food workers. It is about $10 an hour above the state’s basic minimum. The agreement would raise the hourly rate to $23 in other states and would stagger a 21 percent increase in wages over four years in all locations. 

Along with general inflation, labor costs have been and likely will continue to be a pressure on finances. The fact that this contract covers a large multi-state employer reflects at least one sign that size and consolidation are not providing much relief from the current wave of cost pressures.

In the Midwest, it is the provider class which is moving towards organizing in the face of recent trends. Some 400 primary and urgent-care providers across more than 50 clinics operated by the Allina Health System in Minnesota and Wisconsin have voted to unionize. The group is estimated to be the largest group of unionized private-sector physicians in the United States. More than 150 nurse practitioners and physician assistants at the clinics were also eligible to vote and will be members of the a local of the Service Employees International Union.

The issues were not just compensation based. In many areas and systems, staffing levels are a huge bone of contention between providers and hospitals. Allina say that staffing was a concern before the pandemic and that staffing has never fully recovered to its prepandemic levels. Others point to relatively low pay for clinical assistants and lab personnel. These factors appear to have contributed to the staffing issues.

NUCLEAR LITIGATION SETTLEMENT

Georgia Power is moving closer to settling litigation over the cost overruns associated with the expansion of the Votgle nuclear plant. A 2018 agreement was arrived at when the parties were at odds over who would pay for the rising costs from building the new units. That agreement gave Oglethorpe Power and the new units’ other co-owners — MEAG Power and Dalton Utilities — a one-time chance to cap their liability for construction costs. The utility partners believed that once a certain cost level was breached, the agreement permitted them to effectively cap their ultimate liability.

Georgia Powert already settled similar claims with the Municipal Electric Authority of Georgia. MEAG owns a 22.7% share in the new Vogtle reactors. A lawsuit filed by Dalton Utilities, which holds a 1.6% stake in the units, is still pending. Georgia Power said that it could have to pay another $17 million to resolve that dispute.

Now, a settlement between Georgia Power and partner Oglethorpe Power has been announced. Oglethorpe Power claimed that costs had moved past the trigger point of $19.2 billion agreement established in the 2018, affording the co-op the opportunity to limit its exposure to the rising costs, in exchange for forfeiting a share of its ownership in the new units. Georgia Power argued costs hadn’t yet reached that level.

Georgia Power said it will pay Oglethorpe $308 million to cover its share of construction costs that were already incurred. Georgia Power will also pay an estimated $105 million for Oglethorpe’s portion of the costs needed to complete Vogtle’s expansion, and will cover 66% of any additional cost overruns. Oglethorpe will maintain its 30% ownership in the new Vogtle units and has agreed to dismiss its lawsuit. 

The settlement comes as Georgia Power disclosed last week that it is facing another technical setback with Vogtle’s second new reactor. The problem at Vogtle Unit 4 involves a faulty motor inside one of the reactor’s four coolant pumps, which keep temperatures at safe levels inside the reactor core. Georgia Power said the issue was discovered during start-up testing and that the entire pump will have to be replaced. That pushes the expected commercial operating date into 2024.

SAN ANTONIO ELECTRIC

The Electric Reliability Council of Texas (ERCOT) issued a notice on Oct. 2 requesting as much as 3,000 megawatts of additional capacity — enough to power 600,000 homes during periods of peak demand — for the coming months. As part of that request, ERCOT cited several shuttered coal-fired plants which could be restarted to address the need. One of those plants is owned by the San Antonio electric utility, the J.T. Neely plant. Deely represented 40% of the 2,100 megawatts of capacity that would be eligible for a special contract this winter if it could come back online, ERCOT said in its notice. 

San Antonio will not be reopening the plant. The utility cited the short amount of time before the onset of winter relative to the time frame for getting the plant back in operation. The plant has been closed for five years. Supplies that are eligible for special contracts under ERCOT’s request include plants that have been or are about to be mothballed, new gas plant projects that may be accelerated and programs that pay big power users to curtail their usage during emergency conditions. 

GUARANTEED ADMISSION

The increasing pressure faced by colleges in an environment of declining demand is generating a variety of different approaches to the problem. As the demographic trends depressing college demand continue, the competitive environment for attracting students is driving a variety of different responses. The latest is guaranteed admissions.

Virginia Commonwealth University in Richmond, Virginia, recently announced a guaranteed admission program for first-year freshman applicants who have a GPA of 3.5 or higher and are in the top 10% of their high school graduating class. Last spring, the State University of New York notified some 125,000 graduating high school students that they had been automatically accepted. Undergraduate enrollment in the U.S. peaked at about 18 million students over a decade ago. Today, there are more than 2.5 million fewer students enrolled.

Cost continues to be a huge factor. Tuition and fees plus room and board for a four-year private college averaged $53,430 in the 2022-23 school year. At four-year, in-state public colleges, it was $23,250. When you put that together with the declining view of the worth of a college education held by many for whom cost is a huge issue, the pressure on enrollments should not be a surprise.  

CHICAGO – HOPE VS. REALITY

Chicago Mayor Brandon Johnson unveiled his proposed budget for the city of Chicago for the fiscal year beginning January 1. The much-anticipated plan followed significant campaign promises from the Mayor. Many of his plans included higher taxes to fund increased spending on social services-related needs. Those plans were made before it became clear that the projected budget gap for 2024 was some $580 million. Total spending is set at $16.6 billion.

The new promises and revenue requirements have driven some tried and true tactics to balance the budget. The Mayor declared a tax increment financing surplus of about $434 million, Chicago’s highest in 15 years. By closing five TIF accounts and siphoning $100 million from the La Salle Street TIF, he’s generating roughly $100 million for the General Fund and more than twice that amount for Chicago Public Schools. The city again will refinance city bonds, generating $89.2 million and carrying over $50 million from last year’s unspent balance.

The signs of a cash-strapped city remain as the Mayor relies on some old school special moves to present a “balanced” budget. They include $41.5 million in unspecified “personnel savings”. There was no detail as to whether the savings will come from closing out vacant positions or the elimination of other jobs. At present, it is estimated that there are 1,700 police vacancies. At the same time, Johnson’s plan includes 311 new positions and an overall city workforce of 36,729, the highest in years. 

The Johnson administration is relying on “improved revenue projections” to generate $186.8 million and stronger “revenue enforcement collections” to add $35 million. The plan however, does not include any of the local tax increases — on jet fuel, hotel rooms and business employment — which the Mayor promised during the campaign. It also maintains property tax rates and eliminates the automatic escalator that increases property taxes to match the rate of inflation.

The budget does seek to address some well-established concerns. $303 million is allocated for a pension prepayment and $53 million for lead pipe replacement which has been a significant ongoing issue. There’s a “slight increase” in the police budget, to $1.74 billion, from the corporate fund. But some vacant police positions will not be filled. Nevertheless, spending on police will exceed 10% of the total budget.

WIRES VERSUS PIPES

There has been so much attention paid to the efforts of carbon pipeline builders to obtain approvals for their proposed projects that it has taken attention away from efforts to develop other energy infrastructure. One such sector is that of new electric transmission projects. One of the largest new projects is the Grain Belt Express. It is designed to move wind generated power from Kansas to Illinois through Missouri. It had received approvals from regulators in Kansas and Illinois but it was a harder process in Missouri.

The project would have traversed the whole state of Missouri but would have provided only a minor share of the power from the line within Missouri. Local Missouri utilities made an effective case that given the physical impact of the line on the state, that it made more sense to provide a more substantial share of the power travelling through the line to their customers. Now, the Missouri Public Service Commission has approved a revised plan for the line and the distribution of its power.

Previously, state utility regulators approved a line that would have brought only 500 megawatts of energy to the state. Now, five times as much electricity will be delivered to the state some 2,500 megawatts as compared to earlier plans. The project sponsor – Invenergy – must either sign voluntary deals with landowners or use its power of eminent domain to build on the property of landowners.

The fight against the use of eminent domain failed last year in the Legislature. Instead, the legislature compromised and legislated that in the event of future large transmission lines, greater compensation for landowners be provided. The laws also set a seven-year time limit for companies to build transmission lines after obtaining their easements.

As this goes to press, Invenergy said it had acquired 95% of the easements it needs in Kansas and Missouri.

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

COOL PAVEMENT

Cool Pavement is a process which coats street surfaces in an effort to reduce road temperatures. Beyond the impact on the road itself, the hope was that the effect would impact so-called urban heat islands. With environmental and social concerns intersecting, there has been a real press on municipal officials to address “environmental equity” issues. Cool Pavement is the latest iteration of the phenomenon.

The city of Phoenix, AZ began testing Cool Pavement in certain neighborhoods to combat the effects of the urban heat island.  The city has been installing more than a hundred miles of the special coating.  Now, the project has been temporarily halted, the second time that this has been required. The products and materials the department and its contractors use to pave and maintain city streets are routinely tested to ensure they meet department specifications. As a result of that testing, the Cool Pavement application schedule was recently temporarily paused as the department and its contractors work to resolve a concern about the thickness and texture of the Cool Pavement product. 

It seems that the road may be a bit cooler but that benefit is apparently not moving much beyond the curb. ASU’s researchers found that just 6 feet from the pavement, the air temperature was only .3 degrees cooler during the day and only half a degree cooler in the evening. Some studies have questioned the technology noting that it reflects more sunlight back off the road and that this could make the immediate surrounding areas actually hotter – as much as 5 degrees hotter. 

While Cool Pavement is three times more expensive, early findings show it holds up to wear better and protects the infrastructure under the road. Whether that is enough to justify the increased cost remains to be seen.

LONE STAR FLOOD RISK

Hurricane Harvey led the Texas Legislature to enact laws requiring the Texas Water Development Board to develop Texas first statewide flood plan. An initial risk assessment was released in mid-summer.  It showed that some 6 million Texans, or about 20% of the population, live in an area susceptible to flooding. More than 2.4 million Texans live in areas that have a 1% chance of flooding each year, known as the 100-year floodplain, the analysis found. Another 3.5 million people live in areas with a 0.2% chance of flooding each year, known as the 500-year floodplain. One-fifth of the state’s land — roughly 56,000 square miles — now fall within the 100-year floodplain.

The analysis identified how many buildings, homes, people, hospitals, roads and agricultural areas are in a floodplain. The San Jacinto region, which includes Harris County and Galveston, has the most people living in a floodplain: almost 2.5 million people are in a 100- or 500-year floodplain. The Lower Rio Grande region, which spans much of Texas’ southern border and includes the Rio Grande Valley, is next with about 1 million people at risk.

This will cause some concern. Sixty-three of Texas’ 254 counties had no existing flood hazard information prior to the planning effort according to the Board. As for the risk on the Texas Gulf Coast, between 2000 and 2019, rising sea levels caused the Texas coastline to retreat about 4 feet per year on average, according to a 2021 University of Texas Bureau of Economic Geology report for the Texas General Land Office.

CONGESTION PRICING

The long process of determining the appropriate level of New York City’s pending congestion fees is under way. Already, the panel appointed to determine the fee has released some potential adjustments to the fee schedule in response to obvious sources of opposition. This week, the first list of proposed adjustments and exemptions has been put up for discussion.

Before determining the base fee, the panel established that there will be “substantial” discounts for entering the congestion zone during overnight hours. Taxis, black cars, and TNC vehicles will not be charged directly rather a fee of between $1 to $2.75 would be added to the fare. Drivers would be charged just once a day even if they drive all day within the zone or enter and exit it multiple times.

CARBON CAPTURE

Navigator CO2 wants to suspend its pipeline permit process in Iowa until utility regulators in Illinois approve the project. Navigator filed a motion with the Iowa Utilities Board on Friday to cancel a scheduling conference that was set for Oct. 9, withdraw its motion to establish a procedural schedule and to pause its permit proceedings. The company plans to file an update on its project with the board by the end of March. Illinois regulators are expected to make a final decision on the project by the end of February.

In another example of the federal effort to drive carbon capture, the Bureau of Land Management is seeking public comment on a proposal to permanently store carbon dioxide in underground rock formations on public land in Carter County, MT. The BLM issued a revised policies in June 2022 allowing for the geologic sequestration of carbon dioxide on public lands. The project would store carbon dioxide in more than 100,000 acres of subsurface pore space.  

ONE TIME VERSUS RECURRING

We take no happiness from the fact that some of our previously expressed fears about government finances are coming true. The majority of those fears were based on one of the fundamental sound tenets of public finance. That is that programs with long-term time horizons must be funded with dependable recurring revenue sources. That has been true regardless of the source of the non-recurring revenues – intergovernmental aid, one-time windfalls, bond refinancings. The risk of one- time revenues has always been clear.

The latest example is from NYC where the potential impacts of 15% across the board cuts are focusing attention on the city’s finances. It is clear that the proposal is a political ploy but nonetheless the potential effect of those cuts is already driving debate. The prime area of concern is the schools. Expanding 3-K was former Mayor Bill de Blasio’s signature achievement. Unfortunately, his administration did not secure long-term funding.

Funding for disabled child education has relied on stimulus funds. The City is required to pay tuition to a private school for a child who cannot be served by the Board of Education. Students with disabilities make up a fifth of all pupils. Now, both 3K and the disabled tuition requirement rely heavily on stimulus. The City Comptroller noticed in a recent report that before this fall, school budgets were not slashed for low enrollment. If the proposed cuts to budgets are actually imposed, some 45 schools where stimulus dollars make up a significant portion of their budgets could each lose more than $630,000, on average.   

PUBLIC FACILITIES AND PROPERTY

Texas property owners flooded by Hurricane Harvey and Tropical Storm Imelda sued the Lone Star State after their land flooded for days following the storms. One group of landowners has alleged that the flooding impacting their properties was the result of a state-led highway elevation and expansion project. Ironically, the roadway was meant to serve as an evacuation route during emergencies. The plaintiffs contend it also prevented floodwaters from receding into the Gulf of Mexico.

Richard Devillier v. Texas is meant to determine whether the negative impact on property as the result of a project constitutes a taking under the Constitution. Texas, meanwhile, has fought the property owners’ claims for compensation, saying it was immune from the lawsuit, and in the case of Harvey, the challenge came too long after the 2017 storm. A 5th U.S. Circuit Court of Appeals ruling that found property owners could only sue for damages if Congress passed a law allowing it.

The case would impact general governmental projects like roads but it would also address concerns around the impacts of private utility infrastructure development on adjacent private property. It is based on a theory that the impact on a property owner of one of these projects constitutes an “inverse takings” situation. Inverse condemnation challenges can include suits against utilities operating outside their easements, or those allegedly at fault for sparking wildfires.

Four years ago, the Court ruled in a 5-4 decision to undo long-standing precedent requiring that takings claims be raised first in state court before being raised in federal court. If a plaintiff was unsuccessful in the state courts, they were barred from bringing their suit to federal court. The plaintiff property owners had first brought their challenge under the takings clauses in the United States and Texas constitutions to state court. Texas successfully shifted the case to the U.S. District Court for the Southern District of Texas, where it was consolidated with other cases into a single lawsuit including 77 property owners.

The case could have implications for projects like transmission lines for utilities or carbon capture pipelines.

LABOR ACTIONS AND MUNICIPALS

The last 40 years have seen the power of unions decline. With fewer members strikes had become more infrequent and major industries in what were highly unionized environments located in what were effectively right to work states. The idea that significant labor actions could actually impact credit was significantly diminished.

That is changing in 2023. The West Coast port credits saw pressure as prolonged negotiations with port labor drove business away amid fears of long-term impacts. Workers at UPS threatened to strike and received significant compensation improvements as their strike deadline drew near. Workers at several higher education institutions also struck. Between the lack of actual strikes and quick resolutions to others, labor negotiations have not been as impactful as they might. That could be changing.

Throughout the year, different segments of the hospitality industry have faced contentious contract negotiations and strikes. A strike in L.A. became a real political issue when Taylor Swift came to town. In the latest example, hospitality workers in Las Vegas have voted overwhelmingly to authorize a strike against major resorts along the Strip.

Contracts for an estimated 40,000 housekeepers, bartenders, cooks and food servers at MGM Resorts International, Caesars Entertainment and Wynn Resorts expired on Sept. 15, after being extended from a June deadline. Other workers remain on extended contracts that can be terminated at any time. A total of 60,000 workers could be included.

The UAW strike continues to expand and continues to highlight the challenges of the transition to electric vehicles. As it drags on, local economic interests will be impacted. Taxes based on economic activity will decline. The strikes in the entertainment industry clearly impacted the economies in the cities where these activities are concentrated like NY and LA.

The next strike threat is credit specific. Kaiser Permanente provides care for 13 million people in eight states, including California, Colorado and Washington, and the District of Columbia. This week, some 75,000 Kaiser Permanente employees undertook a three-day job action to protest the lack of a new contract. The previous contract expired on Saturday. Union leaders say this could be the largest strike by health care workers in recent U.S. history.

The strike does not include doctors or nurses but most of the technical, clinical support, and maintenance staffs are participating. Patients could experience delays in getting appointments, or elective procedures that are not considered urgent could be postponed. Like many other hospital providers, Kaiser has had to face the reality of rising costs for supplies and equipment while also accommodating the fact that the pandemic drove many employees out of the business.

It was workers in the medical field that were impacted the most during the pandemic and the people striking at Kaiser were exactly the ones who could not work remotely, had to take public transit and by and large came from groups or circumstances that placed them at greater health risk. Unsurprisingly, while dealing with inflation themselves as well, they would like to get paid too.

WATER AND GEOPOLITICS

One of the features of the debate over water in the western U.S. is the impact of agriculture on water supplies. As supplies of water have declined attention focused on how land was used in terms of how water intensive certain crops were. It is not an accident that nut growers have significantly increased their marketing efforts. In order to maintain historic water allocations, many farmers switched crops in order to maximize their yield from a gallon of water.

One of the most water intensive crops is alfalfa. A surprising amount of irrigated land in places like the Imperial Valley in CA and areas of southern Arizona is devoted to alfalfa. It is a contentious point because the alfalfa supports meat production primarily in other states while drawing down local – often groundwater -sources. It has been difficult to persuade legislators to take actions which might hurt their agriculture supporters.

One formula to address the problem is unfolding in Arizona. It has taken the confluence of water conservation advocates, domestic agriculture interests and geopolitics to create a unique situation. The State of Arizona has announced that an Arizona farm owned by a Saudi Arabian company that grows alfalfa for export is set to lose its access to state land. The farm is allowed to pump unlimited amounts of groundwater, free of charge, to irrigate its crop. 

The alfalfa is shipped to Saudi Arabia for use in its domestic dairy industry. Arizona is moving to immediately terminate one lease held by the farm owner and will not renew three other leases that are set to expire in February. Ironically, Saudi Arabia banned growing alfalfa and other green fodder crops within its own borders in 2018 in a bid to relieve pressure on the kingdom’s water resources.

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

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.

Joseph Krist

Publisher

AUTONOMOUS VEHICLE HICCUP

Just a week after the California Public Utilities Commission voted to allow the expansion of driverless taxi services from Cruise on the streets of San Francisco, that process has stumbled. The California Department of Motor Vehicles, the agency charged with overseeing the safety of the driverless cars, asked Cruise to halve the number of vehicles it was operating in San Francisco. 

In the first days of service, a group of some 10 Cruise vehicles wound up in a group and malfunctioning and blocking a street. Cruise blamed that problem on excessive cellular traffic generated at a concert four miles away. This week, a Cruise vehicle with a passenger, crashed into a San Francisco fire truck. The passenger was injured.

The DMV said that “it is “investigating recent concerning incidents involving Cruise vehicles in San Francisco.” The agency asked Cruise to cut the number of vehicles operating in San Francisco “until the investigation is complete and Cruise takes appropriate corrective actions to improve road safety. The DMV reserves the right, following investigation of the facts, to suspend or revoke testing and/or deployment permits if there is determined to be an unreasonable risk to public safety.” 

Cruise had 400 vehicles operating in San Francisco prior to the DMV action. It will have no more than 50 driverless cars running during the day and 150 at night while the review is underway. City officials filed an injunction asking the C.P.U.C. to temporarily halt the driverless taxi expansion. Prior to the expansion, officials documented 55 incidents where a driverless car abruptly stopped or interfered with emergency vehicles. In one case a vehicle interfered with firefighters who were battling a house fire.

This led the San Francisco City Attorney to file an administrative motion with the commission to temporarily halt the expansion. The city also plans to file a re-hearing application with the PUC.

ZONING, HOUSING AND NYC

Much of the discussion around the lack of affordable housing has focused on the role of single-family residential zoning. Those rules were often implemented for a variety of negative reasons even if they were largely supported by people happier with the status quo. It is politically fraught issue acting as a third rail in local politics.

It is becoming more apparent that New York City, especially in Manhattan, will have a mismatch between the available building stock in commercial areas and the demand for housing. Even if there are developers ready, willing and able to convert both manufacturing and office space are stymied by limits on the development of residential units in areas zoned commercial/manufacturing. If the Adams administration has its way, that will change.

The effort to convert needs approval by the City Council of legislation changing the zoning and authorizing residential space. The area proposed in midtown Manhattan – between 23rd Street and 40th Street from Fifth Avenue to Eighth Avenue – is essentially what was considered for years to be the Garment District. Much of that is former manufacturing space. A second bill would authorize conversions of office buildings into residential. The city estimates that it could result in 20,000 new units.

As is the case in so many instances, City rules and regulations are significant hurdles to redeveloping these spaces. One example – a change in rules is needed to allow buildings that were built as recently as 1990 to convert to housing; currently, only buildings built before 1977 or 1961 are eligible, depending on where they are in the city. 

This follows the failure of the State Legislature to adopt proposals put for by Gov. Hochul. Two bills which would have offered tax incentives for office conversions in exchange for the inclusion of affordable housing and would have lifted restrictions on how much floor space can go toward residential were not passed.

COLORADO RIVER

The federal government announced Lake Mead, located in the Colorado River Basin, will operate at a Tier 1 shortage next year, an improvement over the current Tier 2 shortage. Lake Powell is currently at a Tier 2 but will operate at a Tier 1 shortage in 2024. The water levels for Lake Mead are projected to reach slightly over 1,065 feet by January 2024, according to the Bureau of Reclamation. That would be an improvement of some 19 feet since October of 2022.

The increase in water has allowed the lower basin states to plan for smaller reductions in their 2024 allocations. Arizona will have to cut 512,000 acre-feet of its Colorado River water supply, equaling about 18% of the state’s yearly allotment. The Tier 2 shortage currently calls for Arizona to slash approximately 592,000 acre-feet, or 21% of its annual allotment. Nevada will have to slash 21,000 acre-feet of its Colorado River water supply in 2024, or 7% of the state’s yearly apportionment. This down from a reduction of 25,000 acre-feet required under Tier 2 conditions. The combined storage of the two reservoirs is at 36% of capacity up from 28% last year.

PRIVATE WATER

The chairman of Phillips 66 applied in 2018 to dam the South Llano River in Texas to create a private lake. The proposal calls for the construction of a seven foot high concrete dam to create a nearly five-acre lake. The plan has put the Lower Colorado River Authority in the spotlight as it is one of the agencies with regulatory authority over the river. The owner obtained a right to impound water from the Lower Colorado River Authority and a draft permit from the TCEQ. 

Opposition has come from downstream communities. They fear damage to state parks from reduced flows and note that the permit would allow the proposed dam to impound water under certain circumstances even if the South Llano River wasn’t flowing. Last year the commissioners’ court in Llano County passed a resolution opposing private dams for recreational purposes. Opposition is growing. The Texas Parks and Wildlife came out against the dam, arguing it would impact downstream flow, which could affect fish, such as the Guadalupe bass; freshwater mussels; and the public. 

OMAHA PUBLIC POWER DISTRICT

Some seven years after it shut down its 1,570 MW Fort Calhoun nuclear generating station, the Omaha Public Power District board voted 8-0 to move forward a $2 billion expansion of its generation capacity. Energy consumption by all customers — residential, commercial and industrial — is expected to increase by 70% by 2032.

Nearly 90% of the projected new demand OPPD is striving to meet is coming from industrial customers. Two-thirds of that new demand, OPPD says, is from data centers. The plan will roughly require a 10% increase in rates, which will be phased in over four years beginning in 2027. The new generation will come from a mix of solar, wind and natural gas-powered facilities.

CARBON CREDIT MARKETS

Washington State enacted the Climate Commitment Act in 2021, requiring the state’s biggest polluting businesses to reduce their emissions or purchase allowances to cover their emissions. Carbon pricing has long had champions in the movement against climate change but there have been few US examples to evaluate and compare. The Washington program recently reported results reflecting its first auction of carbon credits.

The state Department of Ecology announced the results of its special auction held last week because the previous quarterly auction in May exceeded a “trigger” price of $51.90 per allowance. Each allowance represents one metric ton of emissions from the state’s biggest greenhouse-gas polluters. In 2023, about 18.4 million carbon allowances have been sold this year, generating more than $900 million. 

Allowances were sold at two preset prices: $51.90 and $66.68. The allowances were divided equally into each price tier. Going forward, the number of allowances will annually decrease which will raise the price. Allowances sold for $56.01 per ton in the most recent quarterly auction. When the Legislature enacted the carbon cap program in 2021, the state estimated it would bring in around $220 million in 2023 and close to $500 million every year after that through 2040.

Nearly 90% of those who participated in the second quarterly auction in May were businesses required to pay for their emissions. Washington state’s greenhouse-gas emissions in 2019 reached their highest level since 2007: 102 million metric tons. It was a 7% increase from 2018, and 9% higher than 1990 levels. The Climate Commitment Act aims to reduce the state’s production of carbon dioxide, methane and related gases to 45% below 1990 levels in the next seven years, 70% below 1990 levels by 2040 and decarbonize by 2050.

ESG FIGHTS BACK

The Securities Industry and Financial Markets Association (SIFMA) filed a federal court challenge to new Missouri documentation rules for the securities industry. The new rules, effective July 30, 2023, require financial firms and professionals that incorporate any “social objective or other nonfinancial objective” into their analysis to obtain their customers’ written consent on a state-written prescribed script. 

The state-mandated scripts require financial firms and clients to acknowledge that incorporating these objectives “will result” in investments and advice “that are not solely focused on maximizing a financial return” for the client. “Social” or “nonfinancial” objectives may include multifaceted client objectives, such as tax considerations, diversification, risk tolerance, time horizon, liquidity needs, faith or values-based objectives, and local community investment objectives.

In its federal lawsuit, SIFMA asks the court to declare that Missouri, in promulgating its new rules, overstepped its boundaries in violation of both federal preemption statutes and federal constitutional requirements. SIFMA points out that the State’s plans fail to acknowledge that federal law, regulations, and applicable rules already require financial advisors to act in the best interest of their clients when providing personalized investment advice.

Missouri is the only state with such rules. One has to ask when did things like taxes, diversification and risk become non-financial considerations? If a State can dictate what may be a part of an overall financial analysis, does this interfere with a broker’s fiduciary responsibilities?

CONGESTION PRICING IN THE REAL WORLD

While there have been many hurdles on the road to congestion pricing in New York City, the biggest one was always going to be the process of establishing the level of the fee. As that process unfolds, the realities of the fee and its unpopularity among many come into sharper focus.

In a working MTA proposal, the base rate for motorists would be in effect from 6 a.m. to 8 p.m. on weekdays and 10 a.m. to 10 p.m. on weekends. Off-peak charges would be lower. Automobiles, motorcycles and commercial vans would be tolled once per day, and would be able to move in and out of the zone for the rest of the day.

The MTA also estimates that of the 1.5 million people who work in the congestion zone, about 143,000 drive. (Versus some 100,000 TNC vehicles.) Some 1,560 are low-income commuters who do not have access to public transportation. The MTA estimates a $4 congestion pricing credit for drivers who use the four tunnels into lower and Midtown Manhattan would lift the base toll from $2 to $2.50. A $14 credit for tunnel users would lift the base toll by $8 to $9.

FRACKING, JOBS AND HEALTH

Some 22 counties in Ohio, Pennsylvania, and West Virginia produce over 90% of Appalachian natural gas. The economic impact especially that of the impact on unemployment has been the subject of ongoing study by the Ohio River Valley Institute. Their work over the years has documented the underwhelming impact on jobs in Appalaichia from the natural gas industry. The latest review to come from ORVI reinforces the trend. It looks at jobs and income data from those counties across the three states as “Frackalaichia”.

In 2019, ORVI reviewed data for the period 2008-2019. The latest report examines the impact of the next two years on the trends observed. The region’s shares of the nation’s jobs, income, and population all declined, the latter by more than 10%, even as Frackalachia’s contribution to output grew by more than a third. Frackalachia’s share of jobs declined by 8%, which is worse than 2019 when the decline was only 7.6%. Its share of income declined by 10%, which is worse than 2019’s decline of 6.3%. Its share of population declined by 12.8%, which is worse than the 10.9% decline in 2019.

Since 2014 jobs have been in decline and are bouncing back more slowly than in the nation as a whole in the aftermath of the Covid epidemic. In all, a net 10,339 jobs have been lost since the start of the shale boom. The net population loss in Frackalachia since the start of the shale boom is 47,652, nearly 5% of all residents.

The US Energy Information Administration says that in 2022 will turn out to be the year in which Appalachia’s Marcellus and Utica natural gas fields reach peak production, a peak that EIA researchers believe will not be equaled again until 2045. By 2050, Appalachia’s share of US natural gas production is expected to decline from 41.9% in 2022 to 37.2%.

The three studies co-published by the Pennsylvania state government and the University of Pittsburgh found serious health effects resulting from shale gas production in the southwestern part of the commonwealth. A study on the incidence of childhood cancer found five to seven times the rates of lymphoma among children who live within one mile of a natural gas well compared to those who live no closer than five miles from such a well.

A study on birth outcomes found a correlation between low birth weight and a mother’s proximity to active wells during their production phase — when oil or gas is collected from a well, after drilling fluid has been shot deep vertically, then horizontally, underground. The data will bolster those who oppose the practice or at least would seek to more effectively tax producers.  

OPIOID SETTLEMENT

Many municipal bond market participants have wondered if the settlements of litigation brought against opioid manufacturers and distributors would result in financings similar to those backed by tobacco industry payments. Our view has been that there would not be given the smaller size of the opioid settlements. As was the case with tobacco, the biggest risk seemed to be the ability of tobacco companies to stay in business and generate revenues to make their settlement payments.

That risk was highlighted this week. Mallinckrodt Pharmaceuticals had originally agreed to pay the $1.7 billion over eight years to state and local governments, individuals and others that had sued the company for helping fuel the opioid crisis. Mallinckrodt disclosed this week that it had reached a plan to file for bankruptcy for the second time in three years. The plan would cancel a majority of the $1.25 billion that the company still owes under the original settlement agreement, in exchange for a final payment of $250 million that would be made before the company enters its second bankruptcy.

The original settlement plan, finalized last year as Mallinckrodt exited its first bankruptcy, protected the company and its former executives from future liability related to its opioid sales. Mallinckrodt last year made its only payment, of $450 million, under the original settlement agreement. The company is late on a second payment, which was due in June.

TRANSMISSION

In Illinois, the Grain Belt Express Transmission Line, cannot move forward under an order issued Aug. 18 by the 5th District Appellate Court. The  order stays “any implementation” of a March 8 order from the Illinois Commerce Commission granting the project a Certificate of Public Convenience and Necessity until the court rules on the project’s constitutionality. The Illinois Farm Bureau and landowner groups and other plaintiffs argued the 2021 state law allowing GBE to apply for and obtain ICC approval for the project violates the special legislation, equal protection and separation of powers clauses of the Illinois Constitution. 

Under the stay, GBE does not have the right to survey land that may be included in the project and landowners impacted by the project can decline to negotiate easements. The project was originally approved in 2015. The IFB has been a long-time opponent and has previously succeeded in challenges to the approval. In 2018 a state appellate court ruled the ICC lacked authority to grant a nonpublic utility company a certificate of public convenience and necessity under the expedited review process of the Illinois Public Utilities Act.

In response, in 2021 the Illinois General Assembly passed legislation allowing GBE to apply for and obtain approval of its project from the ICC. The ICC approved noting that special provisions under the law required it to find that the project is for the public use and promotes public convenience and necessity. This puts the ultimate outcome in the hands of the courts.  

HOSPITAL BILLING

Allina Health owns and operates nine hospitals and jointly owns and operates one other hospital, offering a full array of tertiary and quaternary services in Minnesota and western Wisconsin. Its flagship tertiary and quaternary facility is Abbott Northwestern Hospital. Like many systems it saw diminished financial results in the 2020-2022 time period.

In an effort to strengthen its revenues, Alliana enacted strict policies which limited care to patients with medical debt. Allina’s hospitals treated anyone in emergency rooms. For care outside of the ER setting (including follow ups) Allina began to deny care for indebted patients, including children with $4,500 or more in outstanding bills. In today’s healthcare environment, that is not a huge figure for an individual to be carrying as they work out disputes with insurers and others.

Given the economic impact of the pandemic, the likelihood of individuals facing excessive debt and limited work opportunities made it likely that many would be burdened with medical debt. Some health systems took aggressive legal stands against patients and some took the denial of care approach. Both of these tactics created significant negative publicity for these systems.

Now Allina has rescinded its policy. One might hope that the public hue and cry might have been a motivator. The reality is likely tied to a recent announcement by the State Attorney General that an investigation of Allina’s practice of withholding care from patients with debt was about to commence. According to a Johns Hopkins survey, In 2020, Allina spent less than half of 1 percent of its expenses on charity care, well below the nationwide average of about 2 percent for nonprofit hospitals.

After the Attorney General’s announcement, Allina decided that there were “opportunities to engage our clinical teams and technology differently to provide financial assistance resources for patients who need this support.” Allina had its A1 bond rating reaffirmed by Moody’s in April of this year.

HOSPITAL DOWNGRADE

Catholic Medical Center is a 330-bed acute care hospital in Manchester, NH offering tertiary services and specializing in cardiac care. As a stand alone facility, it was likely to be under financial pressure. Operating losses are largely driven by the heavy reliance of contract labor, elevated wages and inflationary cost pressures. These have negatively impacted cash flow at the hospital, a key ratings factor.

Persistent operating cash flow losses have resulted in a reduction of liquidity and narrowed headroom to the cash to debt covenant on its bank debt. The questionable outlook for covenant compliance is not consistent with an investment grade rating. That was reflected by Moody’s Investors Service announcement that it has downgraded Catholic Medical Center’s (CMC) (NH) revenue bond rating to Ba1 from Baa3. The outlook is negative. 

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

CARBON CAPTURE

The North Dakota Public Service Commission denied a siting permit for the Midwest Carbon Express CO2 Pipeline Project. Summit Carbon Solutions filed an application in Oct. 2022 to construct approximately 320 miles of carbon dioxide pipeline in North Dakota. The proposed route of the pipeline would cross through parts of Burleigh, Cass, Dickey, Emmons, Logan, McIntosh, Morton, Oliver, Richland and Sargent Counties. The CO2 would then be injected into pore space for permanent sequestration.

The Commission felt that Summit has not taken steps to address outstanding legitimate impacts and concerns expressed by landowners or demonstrated why a reroute is not feasible. The Commission also requested additional information on a number of issues that came up during the hearings. Summit either did not adequately address these requests or did not tender a witness to answer the questions.

One important caveat pertains to one of the key issues driving efforts against the pipeline – the use of eminent domain. “The issues of eminent domain, safety compliance with the U.S. Department of Transportation Pipeline and Hazardous Materials Safety Administration (PHMSA) construction and operation, and permanent sequestration and storage of CO2 were outside the jurisdiction and consideration of the Commission.”

It looks more and more likely that the ultimate decision on eminent domain will be made outside of the regulatory or legislative process. It is part of the trend of difficult issues effectively being passed off to courts by legislatures unable to legislate on the topic.

AUTONOMOUS VEHICLES

The California Public Utilities Commission recently showed that preemption is not just the province of one political party or philosophy. The PUC has approved the use of autonomous vehicles on the streets of San Francisco to carry paying passengers. The proposal generated strong responses. As the debate unfolded, there were numerous examples of these vehicles having difficulties navigating a variety of obstacles and situations. There have been numerous incidents of delayed response by police and fire due to roads blocked by AVs in downtown SF.

It certainly appears that if left up to the City, that permission would not have been granted. The tech industry has focused its lobbying efforts on state level players after less than favorable experiences under local control. The state was seen as being more amenable to supporting the tech companies. In the meantime, on the first day of expanded operations, a group of the cars malfunctioned together blocking other traffic. Exactly what the City was concerned about.

It may be another step forward on the path to widespread adoption but these vehicles still face significant challenges. Neither the desert southwest or the City of San Francisco provide comprehensive testing grounds. There are still obstacles to be overcome especially outside of the urban environment or in winter weather. Snow has been a notorious troublemaker for the technology these vehicles rely upon.

MANAGED RETREAT

Manville, NJ is a working-class community which has suffered from three major flooding events in a little over two decades, dating back to Hurricane Floyd in 1999. The most recent was from Hurricane Ida some two years ago. Unlike more visible locations along the Jersey shore, Manville is inland along the Raritan River. Many impacted homeowners decided to rebuild but in many cases the cost of rebuilding exceeded their available insurance. In those cases, the residents hoped that there might be federal funds from one of three sources which would have allowed those homeowners to complete repairs.

Now, some 79 homeowners are facing the new realities of climate change and increased flooding. In New Jersey, flooding has created pressure on limited federal resources and several state agencies agreed not to spend it on for repairs or elevations in areas where homes are very likely to flood again. Instead, the state is dedicating some $49 million on a buyout program.

The state offers homeowners market-rate prices for their properties to relocate while the structures are demolished so the area can better absorb future flood waters. For those who do not wish to relocate, they are effectively on their own.  The areas of Manville that were designated at high risk of future flooding and are now ineligible for federal aid for home repairs encompass about 500 residential structures, or 17% of the residential building stock. 

More than 174 homeowners have requested buyouts in Manville, with 58 of those applications made after Ida. Some $10 million from the Federal Emergency Management Agency will be used to buy 31 other properties throughout the borough. The state is also waiting on approval for another federal grant to buy 20 additional Manville homes.

NYC BACK TO THE FUTURE

The congestion pricing debate in NY continues on as the state conducts its process of establishing the price and how many exemptions would be granted. In the interim, additional proposals to address the issue of congestion continue to surface. We are intrigued by the news this week that the NYC Department of Transportation wants to test out the use of “cargo boxes” – pedal and electrical assisted small vehicles to try to address the issue of trucks and deliveries of online purchases.

We are amused in a way because – I’m showing my age here- this brilliant new idea is not new at all. For years, pedal driven vehicles were used to ferry goods between businesses and facilities. They were a mainstay of the grocery industry in Manhattan. Why they went out of style isn’t clear but they never went away. One has to wonder if all of the solutions proposed for transportation are just too complicated to make them practically and financially viable.

The plan would use vehicles with “freight” areas four feet wide. The size is cited as a safety factor by making it easier to use in traffic. That raises a question of whether the total number of vehicles will actually decline and reduce congestion. If the human powered rickshaws around Central Park are any indicator, the will just slow things down. The boxes would seem to be too large to use bike lanes. The older pedal driven versions could be accommodated within a typical bike lane.

CLEAN ENERGY AND JOBS – BEYOND THE HYPE

A recent working paper from the National Bureau of Economic Research reviewed the impact of the clean energy industry on jobs and workers. Clean energy advocates have painted a picture of seamless transitions from carbon-based to non-carbon-based industries and processes. There has not been enough solid information to provide a basis for assessing those claims. The paper does shed some light on the subject.

The researchers found that “the vast majority of workers in carbon-intensive jobs have not historically found work in green jobs. In 2021, 0.7 percent of workers who transitioned out of a dirty job transitioned into a green job. Conversely, the vast majority of workers obtaining green jobs do not come from carbon-intensive industries, but from a wide range of other industries and occupations. Approximately a quarter (26.7 percent) of green jobs appear to be taken by first-time job-holders, and over 20,000 workers are observed entering green jobs from overseas.

On average, approximately 20 percent of transitions out of dirty jobs are into other dirty jobs, including transitions within and out of local labor markets. The sector to which dirty workers are most likely to transition is manufacturing, which accounts for over 25 percent of all transitions out of dirty jobs.

So, it looks like the transition to the green economy will be a lot more twisted and a slower trip than advocates would lead one to believe. It is not surprising that efforts are being made to find ways to adapt the carbon economy to the realities of moving large numbers of people to work in new industries. The disruption in the local workforce can be offset by repurposing legacy electric infrastructure. It is part of the attraction of carbon sequestration and removal.

It is also part of why the Energy Department announced it is awarding up to $1.2 billion to two projects to directly remove carbon dioxide from the air.  One will be built in Calcasieu Parish, Louisiana. The second is planned for Kleberg County, Texas. Each claim it will capture up to one million metric tons of carbon dioxide per year initially. The Texas project said it will scale up to remove 30 million metric tons per year once fully operational. 

Louisiana and Texas are two of the states cited in the NBER paper which have the highest number of dirty-to-dirty moves. It is no surprise to see these two states welcome the projects.

ESG AND REALITY

When the NHL awarded a franchise to Seattle, Amazon was an early supporter and executed a naming rights agreement for the refurbished Key Arena. That deal named the facility the Climate Pledge Arena, designed to signify Amazon’s commitment to carbon free operations. The goal was to produce zero waste, source food locally and eliminate all single-use plastics by 2024.

It had all of the gimmicks – using reclaimed rainwater in its ice system, powered entirely with renewable electricity, some of which to be produced by on-site solar panels. All operations and events at the arena will also use compostable containers, with a minimum of 95 per cent of all waste diverted from landfills.

So far, the facility has been a hit with fans. As far as imaging and optics for Amazon are concerned, the name game has not necessarily panned out in terms of Amazon’s virtue signaling. The Science Based Targets initiative, a United Nations-backed entity that validates net-zero plans, has removed Amazon from its list of companies taking action on climate goals after the company failed to implement its commitment to set a credible target for reducing carbon emissions.

The week also saw S&P take a big step back from its effort to incorporate ESG factors into its ratings. They have been under enormous pressure from coordinated efforts by conservative politicians to stop providing ESG scores. From their perspective, ESG factors are political not financial. We disagree. Nonetheless, The situation highlights the difficulty there has been in the effort to come up with quantitative ESG metrics.

In reality, ESG has yet to be universally defined. Like efforts in previous sectors, the focus on development of a score has been a slow process. The “black box” nature of the analytics has made it hard to explain. The lack of agreed upon metrics does not support the process.

MOUNT SINAI DOWNGRADE

When the pandemic emerged and continued with its high concentration of cases in New York, there were real concerns about the potential impact on hospital financial results. The initial concerns were immediate in nature, driven by overwhelming COVID-based demand. While those factors were overcome without ratings impact, the trailing factors which have emerged from the pandemic are what is driving credit now.

Moody’s Investors Service has downgraded Mount Sinai Hospital’s (NY) rating to Baa1 from A3. The downgrade to Baa1 from A3 reflects Moody’s expectations that Mount Sinai Hospital’s (MSH) and Mount Sinai Hospitals Group’s (“the system”) operating performance and liquidity will be below historical averages for several years. The flagship institution of the Mount Sinai system is expected to be able to generate revenue to support some of the weaker facilities in the system.

Diminished results reflect rising labor and supply costs. On the positive side, the health system’s high acuity services continue to generate demand, which will support volume growth. Mount Sinai is considered a leading research institution and its medical school generates significant commercialization opportunities as well as substantial fundraising at the closely affiliated Icahn School of Medicine at Mount Sinai (ISMMS). It is anticipated that these funds will benefit the entire enterprise.   

In the end, the impact on liquidity drove the move. Even with federal assistance, the balance sheet shows about 4 months of cash on hand. Until the hospital can improve its liquidity there will be no driver of ratings improvement. That will require some moderation in costs as well as improvement in utilization levels. That is another left over from the pandemic.

NATIVE AMERICAN INFRASTRUCTURE

The U.S. Interior Department announced a program which will be funded through the Inflation Reduction Act to connect Native American homes to the electric grid. The program will be funded by an initial $72.5 million allocation. In all, $150 million is being invested to support the plan.

In 2022, the U.S. Energy Department’s Office of Indian Energy issued a report citing that nearly 17,000 tribal homes were without electricity, with most being in southwestern states and in Alaska. According to the Bureau of Indian Affairs, 1 in 5 homes on the Navajo Nation and more than one-third of homes on the neighboring Hopi reservation are without electricity.

It exacerbates the impact of this year’s SCOTUS ruling which said that the federal government was not required to provide water infrastructure to deliver Colorado River water entitlements to the Navajo reservation. The Navajo reservation’s northern border is the Colorado River. The means to install pipelines from the river to the reservation have been hard to come by. The same applies to electricity, especially in the Southwest.

ELECTRIC VEHICLE FEES

Beginning September 1, owners of electric vehicles in Texas will face increased registration fees. EV owners will now have to pay $200 to register their vehicles. Unsurprisingly, EV owners are howling about how they are being punished by such a fee. Opponents of the fees cite studies which purport to show that a $100 fee more closely approximates the amount of lost taxes.

How did we get here? Legislation enacted in 2019 required the Texas Department of Motor Vehicles, in coordination with other specified state agencies, to organize a study on imposing fees on alternatively fueled vehicles (AFVs). The Public Utility Commission of Texas, the Texas Department of Transportation, the Texas Department of Public Safety, and the Texas Commission on Environmental Quality participated in the study.

The analysis estimates that for every conventional vehicle a consumer replaces with a hybrid approximately $80 per year less in state gasoline taxes will be collected. This is about an 80% decline per year per vehicle. That number increases to a 100% decline if the consumer replaces the conventional vehicle with a fully electric one which would represent approximately a $100 reduction in state gasoline tax collections per year per vehicle, and similarly a $95 reduction in federal gasoline tax collections per year per vehicle.

That’s how the $200 number was generated. Texas now joins 29 other states which levy a registration fee specific to AFVs. Almost all levy a flat fee due at the time of vehicle registration. The average amount levied was approximately $120 a year. The arguments against these fees ignore the tax benefits associated with buying an EV. So, you get a subsidized purchase price and you don’t pay gas taxes to operate on roads you don’t pay for. Whether they like it or not, EV buyers tend to be a much higher income cohort given the relatively high price tag on electric vehicles. The resistance to fees just enhances the view that EV ownership is the province of elitists who don’t want to pay for the decisions they make.

Tennessee undertook a study through the University of Tennessee as well. That study showed that the average combustion engine vehicle pays $274 per year in gas tax. The Tennessee Transportation Modernization Act is the basis for charging fees. The law authorizes increase with the first round of increases seen when electric vehicle drivers go to renew their tags in 2024. The legislation raises the cost to register and renew tags for electric vehicles from $100 to $200 from 2024 to 2025. Then, it increases them to $274 by 2026. 

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