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. 

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

GAS BANS

The California Supreme Court ruled that Monterey County cannot enforce a voter-approved ban on new oil and gas wells. The state Supreme Court said the state, not the county, has the authority to regulate certain methods of oil production that would have been banned by the measure. The initiative, known as Measure Z, set out to ban fracking, as well as new oil and gas wells; and another practice known as wastewater injection.

In 2022, Central Coast’s Monterey County was the third largest oil producer in the state, producing 5.1 million barrels annually. The Los Angeles City Council voted last year to ban new oil and gas drilling. In San Benito County, which is south of the San Francisco Bay Area, residents voted to ban fracking in 2014. The Supreme Court did not issue a decision on the measure’s ban on fracking.

California enacted a law last year to ban new wells within 3,200 feet (975 meters) of homes, schools, parks and other community sites. the oil industry qualified a referendum to ask voters to overturn it in November 2024.  The California Independent Petroleum Association is behind the referendum to ask voters to overturn the law. Environmental advocates launched a campaign in the past week to put a separate measure on the ballot to try to keep the law.

In Washington State, Gas and building industry groups on Thursday asked to dismiss a lawsuit they had filed to block new Washington state building codes, which require heat pumps in new residential and commercial construction to reduce greenhouse gas emissions. The lawsuit argued the codes harm the industry groups’ business, interfere with consumer energy choice and don’t comply with federal law. The lawsuit came shortly after a federal appeals court overturned Berkeley, California’s first-in-the-nation ban on gas in new buildings for bypassing the same federal law.

In this case, the industry groups’ dismissal of the lawsuit follows a federal judge’s July denial of their request to vacate the codes. The issue could easily end up back in court as the dismissal request was since the Washington State Building Code Council’s pushback of the codes’ effective date from July to late October provided an opportunity for revisions. The Council is considering modifications of the code in light of the Berkeley decision. One important distinction has been emerging through the process of court review of the bans.

Washington used building codes to try to effect the changes it sought. Berkeley’s ban was based on the city’s use of its police powers. It is an important distinction in that opponents of these bans like to cite the existence of federal regulations which would prevent enforcement based on police powers versus codes. The law supporting federal regulation, the Energy Policy and Conservation Act, contains a statutory exemption preventing it from preempting state and local building codes.

CLIMATE COSTS AND WATER

A report by the National Centers for Environmental Information, a division of the National Oceanic and Atmospheric Administration (NOAA) finds that a total of 15 billion-dollar weather and climate disasters have been confirmed this year. This is the largest number of such events since 1980 for the January-July period. These consisted of 13 severe storm events, one winter storm and one flooding event.

This year the reporting of events has been geared towards worst ever, largest ever types of commenting. The average temperature of the contiguous U.S. in July was 75.7°F, 2.1°F above average, ranking 11th warmest in the 129-year record. July precipitation for the contiguous U.S. was 2.70 inches, 0.08 inch below average, ranking in the middle third of the historical record. None of this year’s data reflects historical peaks. For this year-to-date period, the first seven months of 2023 rank highest for disaster count, ahead of 2017 with 14 disasters. The total cost of these events exceeds $39.7 billion, and they have resulted in 113 direct and indirect fatalities.

According to the August 1 U.S. Drought Monitor report, about 28.1% of the contiguous U.S. was in drought, up about 1.2% from the beginning of July. Moderate to exceptional drought was widespread across much of the Great Plains, with moderate to extreme drought in much of the Midwest and Florida Peninsula. Moderate to severe drought was present in parts of the Northwest, Southwest, southern Mississippi Valley, Mid-Atlantic, Michigan and Puerto Rico as well as moderate drought in parts of the Northeast and Alaska.

NYC STABLE?

The reaffirmation of NYC’s general obligation rating with a stable outlook seems to fly in the face of current realities. We understand that the City benefits from the use of rolling five-year averages to determine property tax rates so that declines in valuation and property tax revenues are effectively phased in. We understand that the segregation of property tax revenues to be applied to debt service provides a level of certainty of repayment.

What we also understand is that the idea that the commercial real estate sector is healthy is not realistic. The realities of the mass transit situation in the City generate huge uncertainty. There seems to be no end to the stream of immigrants to the City or to the growth in cost estimates associated with their absorption. That was confirmed by Mayor Adams this week when he released a revised estimate of those costs – $12 billion. The city is currently housing 107,900 people in shelters, including 56,600 migrants.

The City does not know the magnitude of its problem. An influx of children into the school system likely needing extra support in language if nothing less demand resources. The system is already facing a teacher shortage. Those students will also create strains on the healthcare system likely funded through the municipal hospital system. The one known factor in solving any or all of these is increased expense requirements.

Those are uncertainties. We consider something which is uncertain to be destabilizing. We are not advocating a downgrade or getting rid of your City GO bonds. We just do not see a stable situation in the City.

CARBON CAPTURE

The North Dakota Public Service Commission denied the permit for Summit’s Midwest Carbon Express pipeline, which planned a 320-mile (515-kilometer) route through North Dakota. Summit proposed the $5.5 billion, 2,000-mile (3,219 kilometer) pipeline network to capture carbon dioxide from more than 30 ethanol plants in Iowa, Minnesota, Nebraska, North Dakota and South Dakota.

“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 regulators said in a statement. “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.”

Sangamon County, IL is the proposed home of a carbon capture storage site to be operated by Navigator CO2. The County has filed a Motion to Intervene with the Illinois Commerce Commission (ICC) in order to have a voice in the approval process. The ICC is expected to rule on the project in early 2024. 

CYBER ATTACK AND SECURITY

The White House held a “summit” to highlight the growing targeting of public schools in ransomware attacks. According to private researchers, 48 districts have been hit by ransomware attacks this year — already three more than in all of 2022. The Government Accountability Office found that more than 1.2 million students were affected in 2020 alone. Nearly one in three U.S. districts had been breached by the end of 2021.

It is a thorny issue because it deals with the issue of information related to minor children being held hostage. Medical issues, psychological information and the like make it especially hard for victims to take a firm stand. For many districts, cybersecurity is just one of many competing demands on resources. The Consortium for School Networking conducted a survey which found that 16% of districts have full-time network security staff, down from 21% last year. Half of the districts devoted 2% or less of their budget on protection.

A cyberattack has disrupted hospital computer systems across the United States, forcing emergency rooms in several states to close on August 3. The issues resulted from a hack on the systems of the management company which operates 16 hospitals across the country. In Connecticut, two facilities closed their emergency departments for hours and outpatient care was not available into the weekend. In Pennsylvania, Crozier-Chester, Moses Taylor and Delaware County Memorial hospitals saw disruptions in service. The holding company was still restoring full capability at the beginning of the week.

Just this week, the New Haven, CT school district reported that it been the victim of hackers who stole some $6 million. The hackers appear to have gained access in late May to the email account of the school system’s chief operating officer and began to monitor conversations among the school official, vendors and the city’s finance office. The F.B.I. has since recovered $3.6 million and has been able to freeze some of the remaining funds. 

Unintentionally, the mayor of New Haven may have revealed more about the mindset of public officials than he meant. “It is shocking to me that someone is so greedy that they would steal money from public school children.”  It shouldn’t be shocking that people who would hack the operations of chemotherapy units would hack a school district account.

PUERTO RICO

Puerto Rico Industrial Development Company (PRIDCO) has reached a tentative restructuring agreement with its bondholders and the Oversight Board. PRIDCO’s bonds have not paid since the passage of the Puerto Rico Oversight, Economic Stability, and Management Act in 2016. According to the terms of the deal, the current taxable bond claim of $186.3 million plus $22,411 a day of interest, minus a $30 million cash payment, is to be made the principal of new bond paid at 100%.

The new bond’s coupon would be 7% for three years and 8.75% thereafter. The weighted average interest rate of PRIDCO bonds on July 2, 2016, was 5.4%. The restructured bonds would not mature until 2053. The five CUSIPs affected by the restructuring had originally been scheduled to mature 2018 to 2028. The restructured bonds would be callable at par for the first three years, 104% for the following three years, and then for 0.5% less per year thereafter. 

The Puerto Rico Oversight Board sought and received another deadline extension for filing its debt adjustment plans. The attorneys asked Judge Swain to extend the deadline for its filing a proposed plan of adjustment to Aug. 11 from Friday and to extend the deadline for filing a joint status report with a proposed litigation schedule to Aug. 16. PREPA debt remains the last to be restructured under bankruptcy. The settlement of the PRIDCO debt is seen as creating a more favorable potential settlement of PREPA’s debt.

P3 NEWS

LAX Integrated Express Solutions, LLC (“LINXS”) finds itself in a dispute with the Los Angeles airport over purported changes in the people mover project at LAX. LINXS has stopped work on portions of the project and is contending that it can due to an inability to obtain government permits. The argument is rooted in changes adopted by the airport which the developer contends are outside the scope of the project.

LAX has declared the developer to be in default under its project agreements. Under those agreements, no LAWA Change shall constitute a breach of the Contract Documents, invalidate the Contract Documents, or release any Surety from any liability arising out of the Contract Documents or the Payment Bond or Performance Bond. Developer agrees to perform the Work, as altered or changed by any LAWA Change, as if it had been a part of the original Agreement.

It’s all about money. The developer is obviously not getting the return on its investment that it hoped for and is looking to generate additional revenue from the airport. Concession termination is one of the remedies available to LAWA if the developer default is not cured within 30 days. The date that the people mover would be placed into service which has now moved further by 109 days to Oct. 17, 2024, from June 30, 2024. The arguments are over the meaning of clauses in the project agreement and whether they put the airport in the position of having to pay more due to a change order.

Louisiana has announced a P3 for the replacement of the Calcasieu River bridge on Interstate 10. The selected consortium includes Plenary Americas US Holdings, Inc., which holds a 40% equity stake, and Sacyr Infrastructure USA LLC, and Acciona Concesiones S.L., each with a 30% stake. The project had two bidders. It will replace the nearly 70-year-old existing bridge, which has been deemed structurally deficient, and widen the interstate along a 5.5-mile corridor. The Calcasieu River project includes design and construction of a new eight-lane bridge, reconstruction and relocation of existing roads and interchanges, demolition of the existing span, implementing a tolling system and building several adjacent ramps and structures.

The concession will be backed by tolls which will range from $0.25 for local cars to $2.50 for an auto and $12.50 for a large truck for those with toll collection tags. Without tags, the rates will range from $3.75 for a car to $18.73 for a large truck. It is a $2.1 billion project. Governmental funding would include $240 million from motor vehicle sales tax fund transfers; $150 million in federal discretionary grants; $150 million in American Rescue Plan Act funds; $100 million from the state general fund, $85 million in state general obligation bonds, and $75 million from highway priority program federal funds.

HIGH SPEED RAIL

It is fashionable to believe that the private sector would be the key to the development of high-speed rail. For many, that translates to private financing for these projects. Private financing has been a selling point in the effort to generate support for the projects. In reality, the projects to date show that they may not work without government support.

The latest example of a private project transitioning to one supported by governmental financing is the Texas Central project which seeks to link Dallas and Houston. Texas Central announced this week that they are working with Amtrak to apply for federal grants to conduct “advance planning and analysis work” associated with the proposed rail line, “to further determine its viability.”

Amtrak and Texas Central have submitted applications to several federal grant programs to further the study and design work for the Dallas to Houston line including the Consolidated Rail Infrastructure Safety and Improvements (CRISI) grant program, the Corridor Identification and Development program, and the Federal-State Partnership for Intercity Passenger Rail (FSP-National) grant program.

The change in financing strategy comes after the management of Texas Central was replaced. A new CEO and a new board of directors has been put in place. The move to look for public funding is the first major strategy change to come from the new board. There remain significant issues over right of way acquisition and funding. Texas Central has given no timeline for when construction or operation will begin. 

STATE BUDGETS

Pennsylvania, Wisconsin, and North Carolina make for an interesting triumvirate of late state budget adopters. In Pennsylvania, the fight is over school funding. In North Carolina, votes to override line-item vetoes has delayed enactment of a two-year budget for the biennium which began on July 1. Several issues are seen as stumbling blocks and the delay is also seen as beneficial by opponents of Medicaid expansion. Massachusetts passed its budget a full month after the end of the fiscal year and it was signed into law this week, some 6 weeks after the start of the fiscal year.

MEDICAID CONTRACTION

As a part of the initial response to the pandemic, Congress ordered states to halt requirements that Medicaid enrollees renew their coverage each year, ensuring poor Americans would remain continuously insured throughout the Covid crisis. The Medicaid population swelled to a record 93 million as a result — with 1 in 4 Americans insured by the program. In anticipation of the end of the declared public health emergency this past Spring, Congress ended that protection in April.

Now the same sort of difficulties which drove opposition to work rules for Medicaid recipients – primarily rooted in paperwork and documentation issues – have arisen again. The “great Medicaid unwinding” has seen Florida remove more than 400,000 people out of Medicaid in its first three months. Texas dropped over half-a-million people in a single month. In Arkansas, more than 300,000 have lost coverage. Georgia and Nevada have among the top 10 highest disenrollment rates.

This even though the Centers for Medicare and Medicaid Services has worked with 14 states to pause terminations for some or all Medicaid recipients over compliance issues.

DREAM ON

The difficulties at New Jersey’s American Dream mall continue to impact debt service coverage. The Reserve Account was previously drawn to make debt service payments on the Wisconsin PFA Bonds on August 1, 2021 and February 1, 2022. Draws on the Reserve Account are not required to be replenished. As a result, the balance of the Reserve Account is $900.93. The semi-annual interest payment of $8,762,500, which was due to be paid on the PFA Bonds on August 1, 2023 was not paid due to insufficient funds. As of July 1st, 2023, the American Dream Project is 85% leased, which includes the self-operated space, and together with leases under negotiation, is approximately 90% leased.

HOSPITALS

On May 23, 2023, the San Benito Health Care District dba Hazel Hawkins Memorial Hospital filed a voluntary petition for relief under chapter 9 of title 11 of the United States Code. The San Benito Health Care District (District) and Hazel Hawkins Memorial Hospital (HHMH) announced that they received a Letter of Intent (LOI) from American Advanced Management (AAM) which is intended to lead to a strategic partnership. AAM currently operates 6 hospitals and numerous other medical facilities across the state.

The plan proposes AAM to “lease to own” assets of the District for several years prior to purchasing them outright. The hospitals finances have been poor as is the case with so many facilities of this size and service array and rural service area.  Located in the county seat, the 25-bed facility is the only one in town and San Benito County. That role generates support for it. The bulk of the District’s debt is tax backed but an operating facility is the county’s primary concern.

In Iowa, On August 7, 2023 (the “Petition Date”) filed voluntary petitions for relief under chapter 11 the Bankruptcy Code” in the United States Bankruptcy Court for the Northern District of Iowa (the “Bankruptcy Court”). Holders (primarily one) of the debt have accelerated the repayment of bonds issued five years ago for the hospital. The hospital said the voluntary bankruptcy will allow it to implement a plan for the University of Iowa to acquire substantially all its operating facilities and key assets. Outstanding principal totals $62.145 million as of July 31

The Iowa Board of Regents Tuesday unanimously agreed to pay $20 million for real estate and business assets in a deal under which it would not assume Mercy’s debt obligations. The bondholders had sought to put the hospital into receivership. That request was denied. It’s quite a fall for a credit which was originally rated A2 in 2011. and most recently downgraded the debt to Caa3, withdrew the rating due to the bankruptcy filing. The hospital cited local concerns over ownership by a private equity entity.

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

PUBLIC POWER AND SAN DIEGO

The Public Power Feasibility Study was commissioned by the City of San Diego. the preliminary and high-level results indicate that the City may have an opportunity to generate financial benefit, depending on the purchase price and the timeframe to realize such a result. If the City were to acquire the SDG&E electric delivery assets for approximately $2 billion, the cumulative benefit of the MEU to ratepayers might be as much as approximately $3 billion within a 10-year time frame.

This represents potential annual savings to ratepayers of approximately 13% to 14% in comparison to continued operations under SDG&E. However, if the City were to acquire the SDG&E assets for approximately $6 billion, the cumulative benefit over the 10-year period might result in a cost (or dissaving) of approximately $60 million. 

There are currently two large municipalization efforts underway in California. These are the City and County of San Francisco (CCSF), and the South San Joaquin Irrigation District (SSJID or District). The state of these efforts highlights the difficulty of the process of municipalization. In 2019, the CCSF made an offer to purchase Pacific Gas & Electric (PG&E) assets for a price of $2.5 billion, which was rejected by PG&E.

In 2021, CCSF continued its attempts to municipalize by petitioning for an independent state valuation of PG&E’s local electric assets which is currently under consideration by the California Public Utilities Commission. CCSF filed its Opening Testimony on April 10, 2023. PG&E’s Opening Testimony is due October 13, 2023, with CCSF Rebuttal due on January 8, 2024. Discovery continues in the case.

The second example is the more contentious of the two. After continued litigation and favorable court decisions for SSJID, the District made an offer to purchase local PG&E assets in 2016. After PG&E indicated that their assets were not for sale, the District filed in the San Joaquin Superior Court to begin eminent domain proceedings to acquire the assets. In 2018, the San Joaquin Superior Court dismissed SSJID’s eminent domain claim, which was then appealed by SSJID to the State of California Appellate Court and conjoined with the continuing litigation regarding the San Joaquin Local Agency Formation Commission (SJLAFCo) approval. In 2021, the Appellate Court ruled in favor of SSJID which PG&E appealed to the California Supreme Court. The Supreme Court denied PG&E’s petition for review in 2022 and the Appellate Court has subsequently returned the case to the Superior Court to begin the condemnation process.

NUCLEAR

Fourteen years and $35 billion later, Unit 3 at Plant Votgle in Georgia has finally gone into commercial service. Unit 3 enters service seven years behind schedule and Unit 4 is more than six years late. The new Vogtle units both use a large, advanced reactor design developed by Westinghouse called the AP1000. The Vogtle reactors are the first built on the platform in the U.S. The question is whether any more such reactors will be built given the difficulties with construction at Votgle.

For proponents of large scale nuclear generators, the operation is seen as confirming the decision to go big. Many of the comments made by supporters ignore the reality of the costs associated with traditional nuclear. Those costs and the incredible number of delays and cost increases have instead driven the industry to look to small scale modular reactors as the future of the industry. The efforts by the federal government to support nuclear have been focused on modular plants.

The most disappointing aspect of the project has been the inability of the industry to learn from its mistakes. Many of the delays at nuclear construction projects have to do with documentation and with sloppy work practices. Those issues plague nearly every nuclear construction project. In this case, the delays produce a cost per customer that is twice what was promised. We fail to see how the experience at Plant Votgle is supportive of a view that traditional nuclear generation is the way forward.

CFPP LLC, a wholly-owned subsidiary of Utah Associated Municipal Power Systems (UAMPS) submitted an application to the U.S. Nuclear Regulatory Commission (NRC) for a Limited Work Authorization (LWA), seeking approval to commence early construction activities for the CFPP (Carbon Free Power Project). The CFPP is proposed to be sited within the southwest region of the Idaho National Laboratory (INL) in southeast Idaho. The INL site, a U.S. Department of Energy (DOE) facility, covers an expansive area of approximately 890 square miles and is situated near Idaho Falls, Idaho.

The project is scheduled for an end-of-year 2029 commercial operation date. The license application will seek a license to construct and operate a nuclear power plant comprising six small modular reactors (SMRs) and associated common facilities.

The environment for nuclear has changed significantly since the project was undertaken. There is some serious money behind modular nuclear (public and private). The use of modular nuclear could be an answer to several problems especially those related to siting. Generation facilities at existing sites could be replaced by modular nuclear. Those sites already have access to transmission which is increasingly a hurdle to clean energy project development. Small nuclear could preserve some of the jobs associated with legacy generation and mitigate the impact on local tax bases.

BOSTON FOSSIL FUEL BAN

Boston Mayor Michelle Wu signed an executive order that prohibits city-owned buildings from being constructed or renovated in a way that allows for the use of fossil fuels. The order allows the City to move forward on fossil fuel bans while avoiding the bigger issue of opposition from the real estate development sector. municipal buildings will be constructed or renovated in a way that doesn’t allow for the use of fossil fuels like coal, oil or natural gas in heating and cooling, hot water and cooking operations. The order impacts the City’s real estate portfolio of 380 buildings with 16 and half million square feet.

The order exempts new projects that are currently in the procurement, design or construction phase. It will apply, however, to future capital projects such as the renovation of schools and construction of new police, fire and EMS stations and libraries. The private sector will be more difficult to address. The City Council approved ordinance changes proposed by Wu in April that requires new residential buildings to add wiring for future conversions to electrification and to add solar.

Under state law, Massachusetts cities and towns are not currently allowed to ban gas and oil hookups in new buildings or mandate all-electric construction. The Wu administration also plans to submit an application by the fall deadline, for acceptance into a state pilot project that will allow 10 Massachusetts cities and towns to ban gas hookups in new buildings. Boston won’t find out if it makes the cut until next March at the earliest. 

PUERTO RICO

The U.S. Department of Energy (DOE) announced up to $453.5 million from the Puerto Rico Energy Resilience Fund (PR-ERF) aimed at increasing residential rooftop solar PV and battery storage installations. Potential applicants may include private industry, non-profit organizations, energy cooperatives, educational institutions, and State and local governmental entities. 

The proposed funding is the first available through PR-ERF and totals $450 million is designed to incentivize the installation of up to 30,000–40,000 solar PV and battery storage systems for very low-income single-family households that are either:  Located in areas that have a high percentage of very low-income households and experience frequent and prolonged power outages; or With a family member with an energy-dependent disability, such as electric wheelchair users or individuals who use at-home dialysis machines.  

MARICOPA COUNTY TRANSIT TAX

The Arizona Legislature authorized Maricopa County to call a transportation tax election next year. The bill allows the county to ask its voters if they want to extend a half-cent sales tax to pay for a mix of transportation projects over the next 20 years. Of the estimated $14.9 billion projected to be raised by the tax, 40.5% would go to freeway projects, 37% to transit and 22.5% to arterial streets and intersection improvements.

Opponents have long sought to limit funding for mass transit in Phoenix especially expansion of the City’s light rail system. The power of that opposition is reflected in the agreed upon division of proceeds. The plan bars any spending on light-rail expansion, although it does allot 3.5% of transit dollars to maintain existing rail infrastructure. (The Valley’s light rail system currently runs from Mesa, through Tempe and north to Dunlap Avenue in Phoenix. An extension to south Phoenix is under construction.)

The transportation tax question is now projected to appear on the November 2024 ballot in Maricopa County. The plan will help pay for two new Valley freeways. A number of provisions aimed at reducing emissions from vehicles and other measures intended to reduce reliance on fossil fuels were deleted from the final bill.

It is worth noting that these results were reached in the midst of a record-breaking streak of days over 100 degrees in Phoenix. Remember the expansion of the highway system to the suburbs when you hear complaints about the heat in Phoenix. Maricopa County is the only one of the 15 counties that requires legislative approval to call a transportation election, as the result of 1999 legislation to address concerns raised by mass transit opponents.

CONGESTION PRICING AND ELECTRIC VEHICLES

The concept is after all called congestion pricing. It’s not called anti-pollution pricing or mass transit promoting pricing. It’s congestion pricing. Nevertheless, a group of Manhattan politicians is trying to convince the powers that be that electric cars should not be subject to congestion pricing. They make the case that “there are many goals of congestion pricing. One is congestion. One is the environment. There are other ones as well.”  

Congestion pricing advocates like to point to the experience of cities overseas to justify the fees. Well, cities that offered EV discounts on congestion tolls are moving away from them. In Singapore and Gothenburg, the charges never discounted or exempted electric cars, while in Stockholm the exemption for EVs first did not apply to any electric vehicle built after 2012, and then was eliminated entirely. Transport for London announced that it would begin phasing out its 100 percent congestion charge discount for low-emission and electric vehicles, and completely do away with the discount on December 25, 2025. 

CARBON CAPTURE

Navigator CO2 Ventures and a group of affiliates are developing the $3 billion Heartland Greenway Pipeline System that calls for 900 miles of steel pipe to be laid in 33 of Iowa’s 99 counties, from northwest Iowa to the southeast corner of the state. In mid-May, the Story IA County Board of Supervisors passed an ordinance establishing setback requirements that directly conflict with the proposed route of the pipeline and would limit the route the Iowa Utilities Board could ultimately approve.

Navigator is now suing the county in U.S. District Court, claiming the ordinance not only usurps federal and state regulatory powers over carbon dioxide pipeline construction but also superimposes Story County’s preferences for the project over other Iowa counties, the utilities board and Iowa citizens. Navigator argues that in Iowa, interstate and intercounty hazardous liquid pipelines are regulated by state regulations and by federal laws, such as the Pipeline Safety Act. In addition, the company says the federal Pipeline and Hazardous Materials Safety Administration prohibits state or local authorities from adopting safety standards applicable to such pipelines

These actions come as South Dakota opens its regulatory review of carbon pipeline applications. Navigator has offered landowners an average of $24,000 per acre in negotiations for easements to cross private land. It has also pledged the company will pay landowners “250% of crop damages” for as long as damages occur. 

Opponents claim that the 250% figure is a cap on future compensation for losses which could mean that the protection would only be for two or three years. Navigator has easements with about 30% of affected landowners. The company has not yet used eminent domain. A pipeline proposed by Summit Carbon Solutions is scheduled for a permit hearing in September.

FLOODING

One of the issues which emerged from Houston’s flood experience several years ago was the development of land for housing in what turned out to be identifiable flood plains. The maps which were used were either improperly done originally or just ignored in a city with a history of minimal zoning restrictions.

The Texas Water Code (TWC), the Texas Water Development Board (TWDB) must develop and adopt a comprehensive state flood plan every five years that incorporates the 15 regional flood plans developed and approved by each regional flood planning group (RFPG). Those plans were submitted in January of this year. The data collected by the state produced these conclusions:

More than 2.4 million Texans live in areas that have a 1% chance of flooding each year, known as the 100-year floodplain. 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.

So, move to the 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. 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.

CHICAGO COMMUTER RAIL

A U.S. appeals court has ruled Union Pacific does not have a common-carrier obligation to continue operating commuter trains for Metra, the agency which provides commuter rail service in the greater Chicagoland area.  According to May 2023 figures, the UP Northwest, North, and West lines are the second, third, and fifth most-used lines in the Metra system, accounting for just over 1 million riders that month.

The transfer will see train crews, mechanical, cleaning, ticket sales, rolling stock maintenance, and some engineering services move to Metra, while UP will continue to maintain and dispatch the three routes. Litigation commencing in 2019 made it obvious that UP wanted out of the passenger rail business. All three are former Chicago & North Western routes inherited by UP in its 1995 acquisition of the C&NW.

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

The dog days of summer are here. The weather is hot, the benches are clearing for fights over beanballs, and traffic to the shore is outrageous. All of that is offset by the fact that it’s state and county fair time. The heck with spreads and basis points. How about you guess which goat, sheep, or pig is going to win the 4H competition. It’s your chance to see cars crash into each other on purpose. And you can do it while eating something off of a stick and likely excessively fried. If you can’t find joy in funnel cakes and ice cream and fresh corn on the cob, I can’t help you. Put your cell phone down and try to win a stuffed toy!

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PENNSYLVANIA BUDGET

The Commonwealth is into week four of a standoff between the Legislature and the Governor. Education funding – especially the issue of vouchers – is at its center. Specifically, $100 million was to be allocated for school vouchers, just 0.2% of the spending plan. Republicans believe that the funding of $300 million in Democrat priorities was the basis of the agreement to fund vouchers. Pennsylvania has a hard core of constituents who support either faith based small private schools or home schooling. The result is a split legislature with one house substantially more conservative than the other and newly elected Governor.

The immediate issue is that the lack of final budget action precludes the Commonwealth from making certain aid payments to school districts and localities. It’s bit of gamesmanship that has the potential to disrupt lower levels of government and force them to borrow to cover anticipated funding shortfalls. The interim process is a bit messy as the State Treasurer decides what does and does not get paid. She has laid down a narrow range of acceptable expenses for payment.

As is almost always the case in a state budget impasse, school aid and payments to social service providers are the first entities to be impacted. The state Senate isn’t slated to reconvene until Sept. 18. It is that body which must ratify the budget.

SALT ON THE MENU?

The issue of the state and local tax deduction limitation is back on the agenda. Since the limit was passed as part of the 2017 tax cut, various efforts have been undertaken to increase or eliminate it. While the impact on decisions by individuals to stay or move from New York is individual, the change did stimulate real estate activity in some of NYC’s old-line suburbs. It has just been hard to truly quantify the impact.

Now, a new effort is underway to change the limit. A group of moderate Republicans has formed the “SALT Caucus” to press for a tax cut for residents of their largely blue states. Republican House members from those states are threatening to vote against a tax package approved in June by the House Ways and Means Committee unless a provision is added to raisethe SALT cap. The package is centered around maintaining Trump tax cuts which run out in FY 2025.

SOLAR AND AQUEDUCTS

The idea that California’s extensive aqueduct and irrigation systems and canals could provide a site for the use of solar panels has been kicking around for a decade. The discussion over the potential of deployment of solar panels over the canals had not been accompanied by any sort of objective data. That lack of evidence was seen as an obstacle for support for implementation of such an idea.

While water is abundant in the short run currently, the drought experience of the last decade has encouraged reconsideration of the idea. One municipal entity – the Turlock Irrigation District – decided to encourage a study of the issue by one of the state’s universities. The University of California, Merced did such a study which was completed in 2021. It estimated that 63 billion gallons of water could be saved by covering California’s 4,000 miles of canals with solar panels that could also generate 13 gigawatts of power. 

The study allowed the various interest groups and governmental entities to have some objective evidence to point to. This led to the formation of a public-private partnership between the State, the District, and a solar panel vendor. This resulted in Project Nexus. The Project, supported by $20 million in public funds, is turning the pilot into a three-party collaboration among the private, public and academic sectors. About 1.6 miles (2.6 kilometers) of canals between 20 and 110 feet wide will be covered with solar panels between five and 15 feet off the ground.

There are numerous potential benefits above the generation of power. The drought focused attention on the open nature of much of the aqueducts’ infrastructure. This leads to water loss through evaporation which can be mitigated by the cover from the panels. Case studies of over-canal solar photovoltaic arrays have demonstrated enhanced photovoltaic performance due to the cooler microclimate next to the canal. 

CONGESTION FEES – THE BATTLE IS ON

In a completely unsurprising move, the State of New Jersey is suing the U.S. Department of Transportation (USDOT) and the Federal Highway Administration (FHWA) over their approval of New York City’s congestion pricing plans. With the filing of the litigation, the waves of hyperbole have begun washing ashore with charges that mass transit will be subject to “irreparable harm.”  The suit calls for a more exhaustive study than the M.T.A.’s assessment saying that the authority did not do an adequate job of studying whether the tolling program would harm people in disadvantaged communities. It is an argument raised by residents of the Bronx as well so it is not just a New Jersey thing.

As controversial as it is, congestion pricing seems to be a lighter political lift than many other alternatives. Manhattan is a double-parking nightmare primarily due to commercial vehicles. Various solutions to this problem have been proposed – commercial delivery hours and commercial parking zones are two examples. Drop off/pickup zones reduce cruising by empty Uber cars.

The fact is that while congestion pricing may not be supported by commercial interests, they can price the cost into their systems. Car drivers do not have the same pull as commercial interests and so that resistance is seen as being easier to overcome. Consequently, the burden is likely to fall on individuals. This raises issues of equity at a time when the MTA is already operating low-income fare programs.

The issue has gotten to this point as the result of a lack of creativity and a failure to address many of the issues related to congestion. The DeBlasio administration caved to the presence of some 100,000 transportation network vehicles often cruising empty. A deal which accepts flat annual fee payments from delivery companies in lieu of enforcement against things like double parking makes that problem permanent. It reflects the political cowardice of the 1990’s when short-term parochial interests destroyed the usefulness of the MTA commuter tax.

It is the combination of all those factors that generates the opposition to the charges. That and the MTA’s long record of cost overruns and construction delays breed a lack of faith that the money will actually be spent on capital rather than operating expenses. The plan puts the one agency with one of the poorer reputations at the center of this fight.

EV ROLLOUT SPEEDBUMPS

The corporate world generated some sobering news about EV sales. While the infrastructure universe debates things like where to put charging equipment or how to charge for the power, the rate of production for EVs has been disappointing. While the manufacturing base is built out, especially for batteries – there is a shortfall in some batteries that is delaying production. This week’s case in point comes from GM.

In the first half of this year, G.M. built just 50,000 electric vehicles, and about 80 percent were Chevrolet Bolts that use an older battery pack made by a supplier. In the United States, G.M. sold fewer than 2,800 vehicles that used its new, modular Ultium battery packs, which are made at an Ohio factory that the company owns with LG Energy Solution. Two other Ultium factories are under construction, in Tennessee and Michigan.

G.M. was sticking with a previous forecast that it would make 400,000 electric vehicles in North America from 2022 to 2024, and it is expected to make 100,000 in the second half of this year. G.M. currently offers only a few vehicles that use Ultium batteries. They include the Cadillac Lyriq S.U.V.; the GMC Hummer a $90,0000 vehicle; and large delivery vans made by a new division called BrightDrop. This summer and fall, G.M. is supposed to add three electric Chevrolets — the Blazer and Equinox S.U.V.s and an electric Silverado pickup. 

MILEAGE FEES

With the rollout of electric vehicles proceeding, the issue of how to pay for roads without the benefit of a tax on motor fuels takes on greater urgency. The Georgia Department of Transportation is looking for 150 volunteers to take part in a federally funded pilot project that will replace gasoline and other motor fuels taxes with a tax based on the number of miles driven. 

A legislative study committee formed last year to look for ways to accommodate an expected increase in electric vehicles plying Georgia highways recommended making any future mileage-based tax the state adopts comparable to what drivers of gasoline-powered vehicles pay in fuel taxes.

The pilot project will include both GPS and non-GPS options to keep track of the miles the volunteers drive. The GPS option will determine how many miles a volunteer drives inside of Georgia compared to outside of the state, which is important for taxing purposes.

I-81 ON THE MOVE

After much legal wrangling, the project to dismantle the I-81 viaduct in Syracuse, NY is finally underway. The project is one of the first to support the dream of many urban planners to remove barriers to movement and access which resulted from a spate of 1960’s highway projects which split many communities in half. The $2.25 billion project will create a Community Grid to reconnect downtown neighborhoods severed by the I-81 viaduct’s construction. 

The Community Grid design will reconnect neighborhoods that have been separated since the viaduct’s construction. The project will upgrade a portion of Interstate 481, which would be re-designated as I-81, and construct the new Business Loop 81 along Almond Street to improve connections to downtown and other business districts.

DROUGHT CONTINUES OUTSIDE CALIFORNIA

The freakish winter weather in California has rightly captured much attention but that only serves as a diversion from the realities of water in the rest of the West. Upstream from the Colorado River Basin, low snow and rain levels in places like Montana have contributed to a deteriorating supply situation.

SKQ Dam, located up stream from a generation facility on Montana’s Flathead River, is the only hydropower dam in America owned by an Indian Nation. The level of lake water is down almost two feet below what’s considered full pool. That’s never happened during the summer months since the lake’s SKQ hydroelectric dam was built on the southwest end in the 1930s.

Like many other dams, a license from the federal government requires the dam to release a minimum amount of water downstream for endangered species protection.  The rate of releases under the license currently exceeds the rate of replenishment. Efforts to increase available supplies from dams farther upstream were unsuccessful. A request to add more water from the Hungry Horse Reservoir upstream was denied, with the Columbia River Basin Technical Management Team (TMT) citing concerns over impacts on fish and water levels next year. 

The limits on flow through to the generation station have caused hydropower to be about 60% of what is normally generated this time of year for electricity. At the same time, in Colorado the U.S. Drought Monitor last week reported that 20% of the state is back in drought, just two weeks after its July 6 finding that the state was drought-free for the first time since 2019. The areas in question include river cities like Gunnison and Durango.

ANTI-ESG REALITIES

We come across two examples of what happens when ideologically generated legislation collides with the realities of implementation. The first example is Florida where House Bill 3 was enacted. HB-3 is designed to prevent companies like commercial banks and investment banks from doing business in the state if such companies are perceived as boycotting or otherwise discriminating against certain industries or other companies that are not aligned with their particular environmental, social and governance (ESG) or diversity, equity and inclusion (DEI) policies.

In this case, the law goes beyond a generalized state ban. It includes all state and local issuers in Florida from issuing ESG bonds. Under HB-3, ESG means simply “environmental, social, and governance” and “ESG Bonds” means bonds designated or labeled as being used to finance a project with an ESG purpose. The definition of “issuer” is defined so as to encompass all state and local bond issuers.

On June 29, the Florida Division of Bond Finance released a notice intending to clarify the impact of HB-3 on Florida issuers, rating agencies and other market participants. The notice is meant to clarify the intent of HB-3 which apparently is to prohibit the issuance of any ESG-designated or labeled bonds, whether the designation or label comes from an issuer or a third-party. Such prohibition includes paying or using a third-party verifier to certify any such designation or label. So, in the end, it’s all about labeling. Not a substantial issue. That is clear from the qualifiers in the law.

HB-3 permits financial institutions (including federal or state banks) to circumvent its anti-boycott provisions in connection with the purchase or underwriting of bonds (other than ESG Bonds) issued in Florida. does not prevent or prohibit licensed financial institutions from underwriting bonds issued within the State. The law bans Florida issuers from entering into contracts with rating agencies whose ESG scores have a direct, negative impact on the issuer’s bond ratings. Rating agencies may continue to assess the risks posed by hurricanes and other natural disasters, for example, or other risks deemed relevant to an issuer’s overall credit rating.

In the end, it may amount to much ado about nothing.

In Oklahoma, State Treasurer Todd Russ released the list of banned companies in early May. The 13 companies include BlackRock Inc., JP Morgan Chase & Co., Wells Fargo & Co., Bank of America and State Street Corp. The list came out of the Oklahoma Energy Discrimination Elimination Act, which lawmakers passed in 2022. 

The reality is that the law is already raising issues on two fronts over the cost of compliance. One is the fact that localities are finding themselves having to select a bid which is more costly for a capital project. The lack of clarification from the state as to how to balance low bid requirements versus the limits of the Act is delaying contract awards due to financing uncertainty.

At the state level, the state’s seven pension systems combined manage more than $47 billion in assets. The Oklahoma Public Employees Retirement System, or OPERS, has the largest exposure to companies on the treasurer’s restricted financial companies list. More than 60% of its assets are managed by companies on the list. 

At the same time, counties and localities cite the fact that the law as written seems to apply to only state entities. The pension systems run by Tulsa and Oklahoma counties and the systems run by Oklahoma City and Tulsa aren’t covered under the Oklahoma Energy Discrimination Elimination Act. 

PIPELINE LEGISLATION

The leadership of the House Energy and Commerce Committee has released its draft of The Pipeline Safety, Modernization, and Expansion Act of 2023. The proposed law would enable the Federal Energy Regulatory Commission (FERC) to issue any federal permit required for the construction, modification, expansion, inspection, repair or maintenance of a pipeline. It would also enable individuals to request FERC make a final decision on a permit if the federal agency tasked with permitting a pipeline fails to complete a proceeding within one year.

The next provision is where the bill wades into the weeds of local regulation. It would also prohibit a state or local jurisdiction from banning transportation of an energy source like natural gas that are sold in interstate commerce using a pipeline regulated by the federal Pipeline and Hazardous Materials Safety Administration (PHMSA).  The bill would further require PHMSA to finalize safety standards for carbon dioxide transportation pipeline facilities no later than one year from the date of enactment. It also clarifies the authority of the Environmental Protection Agency to identify areas suitable for underground sequestration of carbon dioxide.

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

EV TAX BREAKS UPHELD

The Georgia Supreme Court has declined to hear an appeal challenging the $5 billion project’s bond agreements with the state and the Joint Development Authority of Jasper, Morgan, Newton, and Walton counties (JDA). Rivian hopes to develop a $5 billion facility, expected to occupy 2,000 acres in the state, was announced in late 2021. The estimated production output the plant is 400,000 electric vehicles per year.

Construction on the site was originally set for 2022, which would have allowed operations to begin within two years, but due to a number of legal challenges, Rivian has moved the launch date back to 2026. The lawsuit before the Georgia Supreme Court claimed the state was not legally allowed to arrange the deal and challenged the validity of bonds tied to the offer.

A Michigan judge also declined to issue a preliminary injunction which would have suspend zoning ordinance changes supporting the Ford Motor Co. BlueOval Battery Park Michigan. The $3.5 billion, 2,000-acre plant will create about 2,500 jobs in the Marshall, MI area. Opponents filed a petition to call for a public vote on the matter but the city clerk deemed it insufficient.

That led the group to file the lawsuit on June 27, calling the clerk’s decision unconstitutional and arguing leaders violated the city charter when they tied an appropriation to the rezoning — which made it ineligible for a petition challenge. It asked for an injunction and for the court to order the city clerk to accept the petition.

NY TAX BREAK SCRUTINY

The Citizens Budget Commission (CBC) is a long-standing well-respected organization which analyzes the finances of New York City and State. Recently, it released the results of its analysis of economic development spending by the City and the State. The level of spending in the state has long been among the highest in the nation. The findings were not surprising but nonetheless disappointing.

CBC’s analysis of economic development spending in 2022 finds that: State economic development spending totaled nearly $4.4 billion, including $2.5 billion in foregone revenue from tax expenditures and $1.9 billion in direct spending; and local and county government spending cost $6.3 billion, including $3.1 billion in tax breaks, $2.1 billion in direct spending, and an additional $1.1 billion in foregone local sales tax revenue resulting from State sales tax exemption programs.

The cost of existing incentive programs is projected to increase by $500 million in 2023, a 22% increase from fiscal year 2022, and could increase by another $1 billion annually starting in 2024 as three new and expanded programs take effect: the expansion of the film tax credit increased the annual cap from $420 million to $700 million per year; the extension of the theatrical production increases the lifetime cap of the tax break by another $100 million to $300 million; Green CHIPS (a tax credit for the semiconductor industry) will increase expenditures as much as $500 million per year if fully utilized.

The biggest issue raised by the report is the lack of transparency which makes it very difficult to assess the effectiveness of the strategy overall and for discrete projects. This has created an environment where the State continues to expand existing incentives without evidence that they are necessary or cost-effective. In some cases, State officials have extended or expanded incentives despite independent evaluations showing that the credits are ineffective.

PA SEVERANCE TAXES

There have long been calls for Pennsylvania to adopt some form of severance taxes on the production of natural gas. The Commonwealth currently levies an “impact fee” which is levied on producers for each hole they drill. The fee has raised $2.5 billion since it was created in 2012. Many believe that use of the impact fee approach versus a severance tax has put the Commonwealth in the position of seeming to have left significant dollars on the table.

Now that debate is being revived in the Commonwealth legislature. The state House passed a resolution directing a nonpartisan committee to study severance tax structures in other major gas-producing states. The resolution directs the Legislative Budget and Finance Committee to conduct a study to compare impact fees and severance taxes in the largest natural gas producing states and examine the competitive business climate for the industry in those states.

In 2022, Pennsylvania accounted for 19% of marketed natural gas production in the United States; and Pennsylvania’s marketed natural gas production was at an annual high of 20.9 billion cubic feet per day (Bcf/d) in 2021 and averaged 20.5 Bcf/d in 2022. The amount of gas produced increased from 1,066 billion cubic feet in 2011 to an estimated 7,600 in 2022. The resulting revenue income to the Commonwealth remained essentially flat.

The study is also charged with producing estimates of how much revenue was foregone due to the failure to levy a severance tax. This was the original goal of the supporters of the study. The original resolution focused on that potential revenue loss. The finished product evolved into a study of other factors such as permitting and even climate and their impact on production. This makes the study much more complicated and dilutes the focus on the lack of severance taxes and the potential revenue loss.

URBAN RECOVERIES

Much has been made of the slow recovery of many downtown business areas across the country. There have not been too many studies to produce data to reflect those realities. A recent effort by the University of Toronto has been able to generate an index of urban core recoveries that puts some real data behind people’s estimates and impressions.

The study looked at data derived from mobile phone use an increasingly widespread method of researching mobility. They are computed by counting the number of unique mobile phones in a city’s downtown area in a specified time period, and then dividing it by the number of unique visitors during the equivalent time period in 2019. For example, the March 2023 – May 2023 time period is compared to the March 2019 – May 2019 time period.

A recovery metric greater than 100% means that for the selected inputs, the mobile device activity increased relative to the comparison period. A value less than 100% means the opposite, that the city’s downtown has not recovered to pre-COVID activity levels.

While San Francisco remains the focus of much attention on its problems with its downtown recovery, the data shows that several other big American cities are coping with slow recoveries. San Francisco was ranked last with a 36% recovery. Other cities with recovery rates at or below 50% include Seattle, Boston, Philadelphia, St. Louis, Portland.

That is not to say that recoveries in the major cities outside that group have been great. Recovery rates for many big cities remain below 60%. That group includes Chicago, Nashville, Atlanta, Denver and Houston. Los Angeles and Miami have identical recovery rates of 65%. New York has recovered at a 67% rate which is the same as San Antonio. Washington, D.C. has complained about remote policies for federal employees but the recovery rate there is actually 75%.

The survey found only four cities had reached a recovery rate of 100% or higher. The best large city recovery rate was found in Salt Lake City at 139%. El Paso showed a 107% recovery rate.

MORE PURPLE LINE DELAYS

The State of Maryland and Purple Line Transit Partners are seeking Board of Public Works approval of a modification to the Purple Line Public-Private Partnership Agreement that extends the contractual deadline for achieving Revenue Service Availability to Spring 2027. The schedule change reflects delays in completion of utility relocation activities. The project is more than 50% complete.

In addition to the extension of the project’s Revenue Service Availability deadline, the Maryland Transit Administration will provide net compensation to Purple Line Transit Partners of $148 million, including an increase of  $205 million paid during the construction period, less a $57 million reduction to payments made during the operations and maintenance period. The compensation amount reflects the additional cost of continuing construction activities during the extended period.

OH, CANADA

In November, voters in Maine will cast a ballot on a referendum question on whether to disenfranchise the state’s two largest privately-owned electric utilities to create a consumer-owned utility called Pine Tree Power. If Maine residents were to vote in favor of creating a consumer-based electricity utility, it would likely stimulate negotiation. An elected board of directors would also be formed to manage the Pine Tree Power Company.

One of those electricity companies which would be impacted by a vote in favor of the referendum is Versant Power. Here’s where things get tricky.  Versant is currently owned by Enmax after a deal valued at $1.8 billion was completed in 2020. Enmax is the electric utility serving and owned by the City of Calgary, Alberta. Yes, a publicly owned utility. That is what makes its position on the referendum a bit of a tangle. To date, it has spent some $7.5 million opposing the referendum.

What is it that this municipal utility in Canada dislikes about the deal? “A government-controlled utility company is a risk Mainers can’t afford.”  So says the Enmax funded advocacy group. It’s turning into a bit of a “through the looking glass” experience. It will also highlight the role in several areas of foreign-owned transmission and distribution utilities which have acquired these systems as outlets for their own sources of power.

Those efforts have accompanied a pattern of poor service and underinvestment in the physical grid components those forms maintain. While that underinvestment continues, dividends continue to be upstreamed to foreign parents. Opponents of the operations of Enmax estimate that since Enmax’s acquisition of Versant Power in 2020, it has sent Enmax a yearly dividend which then is revenue to the City of Calgary. It is estimated that Calgary received $82 million from Enmax.

MTA FARE INCREASE

The potential imposition of congestion fees on drivers coming into Manhattan has dominated much of the discussion about the need for increased revenues at New York’s MTA. The focus on that topic has allowed the Authority to consider a fare increase even though the return to pre-pandemic utilization levels has not occurred. Now, the M.T.A.’s board voted to raise the base fare for subway and bus trips for the first time in eight years, to $2.90 from $2.75, by late August.

Weekday ridership has rebounded significantly but still hovers at about 70 percent of pre-pandemic levels. The $2.75 base fare has been in place since 2015. The most recent fare increase came in 2019, when the price of unlimited weekly and monthly MetroCards rose. The board also voted to increase tolls on bridges and tunnels next month by 6 percent for drivers paying through the E-ZPass system and by 10 percent for those who pay by mail.

The increases come after the NYS budget was adopted which granted increased state revenue to the MTA. The state’s funding package includes a $65 million payment earmarked to prevent an even larger fare increase to help make up for the one that was skipped in 2021. The additional aid also creates an environment where discounts and/or exemptions can be considered by the Commission generating toll recommendations.

MORE HOSPITAL PRESSURE

Nuvance Health (Nuvance) operates seven hospital campuses: Vassar Brothers Hospital, Putnam Hospital, Northern Dutchess, Danbury Hospital, New Milford Hospital, Norwalk Hospital, Sharon Hospital and three Medical groups in Eastern New York and Western Connecticut. It reported $2.6 billion revenue in FY 2022. Like so many other systems, it faces higher labor costs while utilization has not fully returned to pre-pandemic levels.

This puts pressure on profitability as well as liquidity. Results have been poor enough so that Moody’s anticipates that Nuvance will breach its debt service coverage covenant at the end of fiscal year 2023. Given the current trends, Moody’s downgraded Nuvance Health’s revenue bond rating to Baa3 from Baa2. The rating outlook was maintained at negative.

The outlook reflects the fact that stabilization of the system’s finances will require the success of management at addressing the cost side of the problem. That will be hard as the trends driving costs are national rather than regional or site specific. The generation of a larger “customer” base through service expansions cannot be counted on to generate short term liquidity improvement.

MICHIGAN MUNI SOLAR POWER

Michigan’s state capitol, Lansing, has announced a significant bond-financed plan to expand its generation of renewable energy. The Lansing Board of Water & Light (BWL) has been at the front of the climate debate having closed its last coal-fired generating facility. Now, the Board said it plans broad-ranging investments in solar, wind and at least one new gas-fired electric generation plant in a $750 million plan over the next 10 years. The combined increase in new capacity would be 650 MW. The utility currently can generate around 735 megawatts of electricity.

BWL board members approved rate increases for water and electric last fall, raising electricity rates 9% and water prices more than 18% over a two-year period. About half of those increases took effect Nov. 1 and the other half will take effect this fall. Currently, the utility does own some of its own solar capacity but most of its solar power is purchased. The plan is specific about proposed investment in new solar and wind assets.

The plan provides for the possibility of an additional natural gas-fired peaking plant. BWL just added to its natural gas fleet in 2022. The lack of real specificity about the development of the natural gas capacity gives the Board time to evaluate the political climate for a gas plant and whether it would still be feasible.  

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

ANOTHER PATH TO GAS BANS

The City of Cambridge, MA has become the first known city in the country to mandate non-residential buildings to reduce their greenhouse gas emissions with a net zero requirement by 2035 for large buildings (larger than 100,000 square feet) and 2050 for mid-size buildings (100,000 square feet or smaller). The City is doing this through amendments to its building codes – the Building Energy Use Disclosure Ordinance (BEUDO) – first passed in 2014.

That established code requirements for energy and water reporting from commercial properties over 25,000 square feet and residential properties over 50 units. This ordinance regulates approximately 1,100 buildings in Cambridge. It has been suggested that the use of building codes to effect changes in use for things like gas stoves is a more effective way of withstanding legal challenges. The Berkeley, CA ordinance against natural gas appliances specifically has not fared well in court to date. That litigation has led to suspension or postponement of enforcement of similar ordinances in other municipalities.

This week, Eugene OR repealed its ban on new natural gas appliances that was enacted only this past February. The City Council cited opposition to the ban and the court decision invalidating Berkeley, CA ban on natural gas hookups.

CARBON CAPTURE AND LOCAL REGULATION

Summit Carbon Solutions and an owner of an ethanol plant in Shelby County, Iowa have obtained a preliminary injunction against the County to keep it from regulating the location of proposed carbon capture pipelines. The lawsuits seek declarations that the ordinances are preempted by federal and state regulations, permanent injunctions that prevent their enforcement and attorney fees.

The ruling in the federal Southern District of Iowa, said state law does not explicitly prohibit the Shelby County ordinance in western Iowa but that such a prohibition is implied. The judge found that the ordinance’s requirements for pipeline companies to submit safety plans to the county and to notify the county when use of a pipeline is discontinued conflict with federal rules. She noted that the County would have a role in land restoration under state law and the lack of explicit reference to the County’s right to regulate is evidence that “the Legislature did not envision a role for counties in regulating the location of pipelines,”.

In two other companion lawsuits against Emmet and Story counties, motions for preliminary injunctions remain under review.  The Iowa Utilities Board is poised to start a final evidentiary hearing for Summit’s project on August 22. 

GEORGIA TRANSIT FUNDING

Georgia voters in 2020 passed a constitutional amendment requiring all revenues that the state’s dedicated trust funds collect to remain inside those programs rather than be diverted into the general budget. To implement the will of the voters, nine trust funds were created by the Legislature in 2021. One is The Transit Trust Fund which gets its dedicated revenue from a per-ride tax on ride-sharing services like Uber and Lyft.

The Transit Trust Fund Program (TTFP) is administered by GDOT and uses a population-based formula, based on 2020 Census data, to distribute state funding to Georgia’s counties with existing transit service. The first full fiscal year of results indicate that Georgia public transit systems are getting about $27 million. Half of that is split between MARTA and ATL the main transit providers in Atlanta. The rest aids smaller systems throughout the state. The awards have to be spent on new services, instead of ongoing operations.

NUCLEAR AND TAXES

Back in 2021, the Byron Nuclear Power Station in Illinois was chosen for closure. The price of its power was not competitive in its market. As the closure date approached, the Illinois Legislature passed bills providing some $700 million in operating subsidies to keep the plants open. In terms of the climate, it was a positive development given the carbon-free nature of nuclear generations. In terms of policy and politics, positive is likely in the eyes of the beholder. 

Byron Generating Station’s two nuclear reactors can produce up to 2,347 megawatts (MW) of zero-emissions energy. Byron Generating Station Unit 1 is licensed through 2044, and Unit 2 is licensed through 2046. Now that the issue of operation is out of the way for the foreseeable future, the plant’s owners – Constellation Energy – have come to an agreement over the taxation of the plant for the next five tax years. Constellation will pay more than $33 million in property taxes, over half of which will go to the host school district.

The rest will be distributed to eleven other local municipalities and districts. The plant will retain an assessed value of $500 million through the term of the agreement.

CLEAN ENERGY JOBS

Clean energy jobs include jobs in the technologies related to renewable energy; grid technologies and storage; traditional electricity transmission and distribution for electricity; nuclear energy; a subset of energy efficiency that does not involve fossil fuel burning equipment; biofuels; and plug-in hybrid, battery electric, and hydrogen fuel cell vehicles and components.

The U.S. Energy and Employment Report (USEER) is a comprehensive summary of national and state-level energy jobs, reporting by industry, technology, and region with data on unionization rates, demographics, and employer perspectives on growth and hiring.  Recently, it published its 2023 USEER. It shows that the energy workforce added almost 300,000 jobs from 2021 to 2022 (+3.8% growth), outpacing the growth rate of the overall U.S. workforce, which grew by 3.1%. Clean energy jobs increased in every state and grew 3.9% nationally.

As of 2022, the energy sector has recovered 71% of the jobs lost in 2020.3 The energy sector has added back 596,000 of the 840,000 jobs lost during the first year of the pandemic. Nuclear electric power generation employment increased by 1,358 jobs in 2022, up 2.4% from 2021, whereas it had decreased the previous year. Employment increased and decreased across different categories of fossil energy for electric power generation. Coal electric power generation jobs decreased by 6,780 from 2021 to 2022, down 9.6%, while natural gas electric power generation jobs increased by 7,311, a growth rate of 6.6%. Oil electric power generation employment increased by 2.4%, adding 279 jobs in 2022.

Where are those jobs? Energy jobs grew in all 50 states and Washington, D.C., with the largest growth in Texas, California, and Pennsylvania. Clean energy jobs grew across all 50 states and D.C. Excluding traditional transmission and distribution, California added 13,116 jobs (+3.6%), followed by Texas, which added 5,198 (+5.5%), and New York, which added 5,054 (+3.0%). When including transmission and distribution jobs, California added 13,293 (+3.2%), followed by West Virginia, which added 6,975 (+19%), and Texas, which added 5,136 (+3.5%).

ESG – EXECUTIVE ACTIONS ARE A DOUBLE-EDGED SWORD

The idea of executive action when the legislative process and/or the judiciary system do not provide the answers one wants is gaining increased currency. The SCOTUS recent decisions on student loan debt and affirmative action have increased calls for executive action. It is good to remember that the use of executive action can easily be a two-edged sword.

The ESG space is the latest source of pressure to act via executive action. Those who oppose the concept have been hard at work in the most recent legislative sessions in efforts to legislate against the use ESG. The last two years have seen a spate of such legislation enacted. Fourteen states have enacted at least one law designed to limit the use of ESG principles in making investment decisions and/or awarding business. This year there were proposed some 165 pieces of legislation in 37 states to counter ESG investment practices, according to Pleiades Strategy, a climate-focused research and advisory firm. But of those 165 proposals, only 22 anti-ESG laws in 16 states were approved this year.

That is not fast enough to satisfy ideologues holding state office. The latest example is Missouri. Missouri is one of ten states which assign the regulation of the securities industry to the State secretary of State. Missouri’s Republican secretary of state, John “Jay” Ashcroft, issued a rule on June 1 that requires broker-dealers to obtain consent from customers to purchase or sell an investment product based on social or other nonfinancial objectives, such as combating climate change. (Yes, Mr. Ashcroft is the son of the man who ran for Senate and lost to a dead man).

Republican lawmakers failed to pass a similar measure during the state’s legislative session that ended on May 12. The Secretary is now going to try to accomplish through regulation what could not be accomplished legislatively. It is the first step in a process to rely on executive or administrative orders and attorney general opinions. In Wyoming, Secretary of State Chuck Gray has proposed ESG disclosure rules for investment advisers like Missouri’s. A public comment period is expected soon.

SENIOR LIVING BLUES

We were recently asked to look at current conditions in the senior living sector of the municipal market. The sector has been experiencing increasing defaults and it stands out as one of the weakest credit sectors in the market. We see several reasons for that.

COVID – The sector clearly came under attack during the pandemic especially in 2021. COVID clearly has impacted the view of senior living on the part of consumers and families alike. So now the attractiveness of one of these facilities will be diminished for some time. That is the first demand driver.

Interest Rates – Then there is the impact of inflation/higher interest rates. The stickiness being observed in the housing market generally is both a supply issue as well as an access to capital issue. Now that younger people are effectively priced out of housing ownership, the model of selling granny’s house to pay the entrance fee doesn’t work as well. If trends against traditional zoning laws continue, the attractiveness of turning the garage into an accessible living space for a senior will only increase.

Refinance Restrictions – The days of multiple refundings to adjust debt service schedules as problems arise is diminished. Only able to refund once and only on a current basis, a borrower has a much more limited menu of options to deal with cash shortfalls. This will show up in more defaults but supported by the willingness of lenders to hold back on covenant enforcement.

Inflation – Just like hospitals, they have gotten creamed by higher costs for supplies, utilities, and labor. Labor is especially hard to find so by definition becomes more costly.

Size matters – While hospitals face many of the same issues, the larger established facilities in that sector had more resources and larger revenue bases to rely on to tide them through. Those that were smaller did not do so well. Many of the senior living credits are site specific so the flexibility which one might hope to find is limited by the relatively smaller resource base supporting those credits.

GAINESVILLE UTILITIES TAKEOVER AND GOVERNANCE

A non-profit and a group of citizens has filed a lawsuit in the Florida courts challenging the State’s takeover of the local utilities authority in Gainesville. (MCN 7.10.23) The move by Governor DeSantis to politicize the operations of GRU should raise issues for investors who care about governance issues. The first issue reflects the fact that while the authority will be a unit of Gainesville city government, the City Commission will not control or direct it.

The plaintiffs in the litigation are actually suing on the basis of free speech grounds. The law says the authority “shall consider only pecuniary factors and utility industry best practices standards, which do not include consideration of the furtherance of social, political or ideological interests.” The plaintiffs note that members of the public in the past have petitioned the City Commission on issues such as “rates and services for low-income people and social issues such as environmental safety, racial fairness in infrastructure and living wages for GRU (Gainesville Regional Utilities) employees.”

The plaintiffs contend that the new ‘law eliminates plaintiffs’ and others’ rights to petition the board for redress of grievances pertaining to social, political, environmental, and ideological issues that are inherent in the operation of a utility system,” the lawsuit said. “Even if the authority allowed plaintiffs or others to address them with respect to ‘social, political, or ideological interests,’ the authority is legally prohibited from taking any action in response.”

CYBERSECURITY

A federal grand jury has indicted an individual, charging him with intentionally causing damage to a protected computer after he allegedly accessed the computer network for the Discovery Bay Water Treatment Facility, located in the Town of Discovery Bay, Calif., and intentionally uninstalled the main operational and monitoring system for the water treatment plant and then turned off the servers running those systems. The individual was an employee of a private company which operates the plant.

It was a serious breach. It is alleged that the individual installed software on his own personal computer and on his employers private internal network that allowed him to gain remote access to Discovery Bay’s Water Treatment facility computer network. Then, in January of 2021, after the individual had resigned from the private operator, he allegedly accessed the facility’s computer system remotely and transmitted a command to uninstall software that was the main hub of the facility’s computer network and that protected the entire water treatment system, including water pressure, filtration, and chemical levels.

MUNI BONDS FOR SOLAR

The Sandoval County, New Mexico Commission approved a resolution that would issue $275 million in Industrial Revenue Bonds that would go to building an 1,100-acre solar farm. The bonds would be paid from revenues derived under a Payment In Lieu of Taxes agreement from the owner. The power is expected to be sold to existing and projected data centers supporting companies like Intel and Facebook.

The use of PILOT payments continues to facilitate a wide range of development including sports facilities and projects like this. The County has issued PILOT debt before so it is a tested concept. The PILOTs will be divided by the County and the five school districts located in it. The five school districts receive a total of 38% and Sandoval County receives 62% of the PILOT payment. Rio Rancho would get 22.64% of the PILOT payments. Cuba would get 7.27%, Jemez Valley 4.64%, Bernalillo 3.20% and Corrales would get 0.11%.

SPORTS FACILITIES AND REALITY

This week, two situations involving sports facilities in New York and Oakland highlight the complicated relationship that cities have with sports teams. Over the years we have seen a variety of responses which serve to undermine the position of those who believe that subsidies for facilities for professional sports teams a bad investment. The two situations serve to highlight the idea that actions speak louder than words.

This week, the New York City Independent Budget Office (IBO) released an analysis of the cost/benefit of a tax exemption granted to the owners of Madison Square Garden (MSG). Madison Square Garden is the city’s oldest operating professional sports arena and the only major league sports facility located in Manhattan, sitting directly above Penn Station, the busiest transit hub in North America.

The MSG arena opened at its current location in 1968 and hosts two professional teams—the New York Knicks and the New York Rangers. As a private property, the arena paid property taxes until the 1982 New York State Legislature exempted MSG indefinitely.  Local Law 18 passed by the City Council in 2017, turned to IBO to issue periodic evaluations of the city’s economic development tax expenditure programs. The new report finds that since the property tax exemption took effect, MSG has been exempted from paying more than $946.7 million in property taxes, as measured in 2023 dollars.

IBO concludes that it is unlikely that the property tax exemption for MSG is the determining factor for the Knicks and Rangers maintaining their location in New York City. Potential relocation options for the Knicks and Rangers are limited by current market saturation within the leagues and the economic benefits of MSG’s current location (which affect ticket and broadcasting revenues for the stadium) are strong.

The first arena special permit was issued in 1963 for a term of 50 years, expiring in 2013. The City Council chose to renew the permit in 2013 but restricted it to a length of 10 years, leading to the current expiration in July 2023. One might expect a tough negotiation with MSG especially given the efforts to renovate and expand Penn Station. The City Planning Commission has proposed letting MSG have its permit renewed if the Garden cooperates with renovations to Penn Station. Those plans would replace a theater in one part of MSG. Now, the City Council may balk at the agreement but there seems to be no real threat to the Garden operating at its current location.

In Oakland, the City is making a last-ditch effort to prevent the Oakland A’s from moving to Las Vegas. The proposal comes after the A’s entered into a deal with Bally’s Corp. to build a stadium on part of the Tropicana Las Vegas resort site and received approval from the Nevada Legislature for about $380 million in public funding. Now after years of fighting the notion of subsidies for the City’s last remaining pro sports franchises, a proposal has been made.

The city said it secured more than $425 million in funding to cover offsite infrastructure costs, $65 million more than the A’s requested. The team would pay for onsite infrastructure and development, but the city would reimburse about $500 million of that cost through the creation of an infrastructure financing district.

The irony is that the City’s proposal would locate the stadium where the A’s wanted in the Howard Terminal industrial site. The new Mayor who took office in January is pursuing a different path than that of her predecessor. The depth of support for any public funding from the City has always been an issue. The combined expenditure of nearly $1 billion by the City runs against the mantra of scarce resources for public services being gobbled up by a for profit entity that has been put out there for many years.

So, one has to ask oneself exactly which view actually has currency – public funding or no public funding?

NEW YORK CITY HOUSING AUTHORITY

NYCHA has been in the news for its state of disrepair and overwhelming need for capital. A lack of federal funding support has not helped but the quality of management at the Authority has been a sore point for some time. The Authority’s chief executive is in turmoil. Multiple administrations have found funding needed repairs in amounts anywhere close enough to cover what was an estimated $41 billion capital need to properly maintain the existing stock have not materialized.

We say was because the Authority released a new estimate for the cost of funding repairs to NYCHA’s buildings. The new estimate released this week puts the price tag at $78 billion. NYCHA officials estimate that $60 billion relates to things that will need replacement in the next five years — including boilers and heating systems. The new estimate is the first developed while NYCHA operates under a federal monitor.

Eighteen months into the Adams administration, the Mayor’s plan to privatize management of the Authority creeps along. This would facilitate the provision of public housing through the private sector. Politically, the plan has many opponents including residents who would see their housing demolished to facilitate new housing. It is an idea first hatched in the Bloomberg administration and it did not get far under Mayor DeBlasio.

The sheer scale of NYCHA’s portfolio makes it matter. NYCHA’s developments are home to more than 330,000 people, disbursed through 2,100 buildings. Rents for public housing residents tend to be capped at 30 percent of their income, and the average rent is less than $560 per month. NYCHA estimates that 40% of the families living in NYCHA homes have at least one person who is working. Nearly 275,000 families were on the waiting list for a NYCHA apartment this year.

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

MEDICAID WORKRULE REDUX

Georgia has been one of the original holdouts against the expansion of Medicaid eligibility from the enactment of the ACA. This in spite of the fact that some 90% of the cost would be funded by the federal government. Previous efforts by states to impose work requirements on Medicaid recipients have been overturned in the federal courts. The Biden administration did not appeal, allowing the program to take effect. Now, one of the states which tried the tactic is trying again.

Beginning on July 1, Georgia’s Pathways to Coverage program will become the state’s mechanism for judging eligibility for Medicaid. The plan was approved very late in the Trump administration. Georgia was already known for having one of the strictest Medicaid requirements in the country. It will only cover parents earning up to about 30 percent of the federal poverty line (an annual income of no more than $8,000 for a family of three).

The changes in effect on July 1 will partially expand Medicaid coverage to people with incomes up to the federal poverty level: less than $25,000 per year for a family of three. Applicants will need to prove they already meet the 80-hour monthly work requirement in order to apply, and there is no grace period. The rules apply to new applicants. Existing recipients in Georgia are covered under the state’s traditional fee-for-service Medicaid program.

If the work requirements are not met, the state will not remove anyone for failing to comply. (When the federal courts blocked the previous program in 2019, it was estimated that some 18,000 people lost insurance in the first seven months of enforcement.) The state will instead move them from the private insurance used for Arkansas’s expansion to the traditional fee-for-service Medicaid program, which is less generous.

GAINESVILLE REGIONAL UTILITIES

Governor DeSantis signed a law creating a new board to take over the operations of the Gainesville Regional Utilities. GRU serves some 93,000 customers in the city of Gainesville and surrounding areas. Throughout its history, it has been governed by the City Commission, which appoints a general manager to handle the day-to-day operations. Recently, suburban customers of GRU who cannot vote in local Gainesville elections have been complaining about rates and the location of generation facilities.

Those complaints generated the legislation which was enacted this week. The bill takes away the city commission’s control of GRU and gives ultimate authority to an unpaid five-member board appointed by the governor. The board would have the ability to hire and fire GRU’s general manager. That sets up a legal conflict as the city’s charter still says that the role is a “charter officer” position that answers to the City Commission.

Now that a new board will be appointed by the Governor, it is believed that GRU is the next municipal utility in Florida which has been targeted for sale to a for-profit utility like Florida Power and Light. Gainesville voters soundly rejected appointing an independent authority to govern GRU in 2018.

The increasingly partisan approach to the state’s municipal utilities has already led to one colossal failure to privatize the Jacksonville Electric Authority. The moves to privatize JEA led to the indictment of JEA’s chief executive officer and finance chief, who were accused of trying to extract millions out of the city-owned utility before selling it off to a private operator. That process led to federal investigations amid charges of corruption. CEO Aaron Zahn and CFO Ryan Wannemacher are due for trial in October.

A citizen-led nonprofit group, Gainesville Residents United, has said it will file a federal lawsuit in the coming days in response to the bill. No surprise there. In June the city commission authorized the spending of $250,000 from the GRU utility system reserves fund for outside counsel to provide legal advice in connection with analyzing and potentially litigating the impact of the bill on the city. The move to take over GRU is a primarily political act.

ROAD FUNDING

While the debate over how to fund roads – gas taxes or mileage fees – continues, the immediate needs of transportation agencies cannot be ignored. That led to the enactment of a variety of gas tax increases across the country. It also led three states to impose new taxes on the use of charging stations. Here’s where the changes took effect on July 1.

California – The gas tax rises from 53.9 cents to 57.9 cents per gallon. The per-gallon tax on diesel goes from 33 cents to 34.5 cents; on Oct. 1 it will rise again to 50 cents.

Colorado – The existing gas tax includes fuel fees that increase July 1. The fee for a gallon of gas rises by 1 cent; the fee for diesel goes up by 2 cents.

Illinois – The gas tax goes up from 42.3 cents to 45.4 cents per gallon. The tax on diesel rises from 49.8 cents to 52.9 cents per gallon.

Indiana – The gas tax increases from 33 cents to 34 cents per gallon.

Iowa – The per-gallon tax on ethanol and ethanol-gas blends will rise from 24 cents to 24.5 cents per gallon. For higher-grade biodiesel, however, the tax will decrease from 30.1 cents to 29.8 cents per gallon.

Kentucky – The tax on gasoline increases from 26.6 cents to 28.7 cents per gallon.

Maryland – The gas tax goes from 42.7 cents to 47 cents per gallon; for diesel, the tax rises from 43.45 cents to 47.75 cents per gallon.

Missouri – The gas tax increases from 22 cents to 24.5 cents per gallon.

Virginia – The gas tax increases from 28 cents to 29.8 cents per gallon; the tax on diesel goes from 28.9 cents to 30.8 cents per gallon.

Iowa, Montana, and Utah included new electric vehicle taxes.

Iowa – At public and commercial charging stations, there is a new tax of 2.6 cents per kilowatt hour.

Montana – An electric current tax of 3 cents per kilowatt hour takes effect at new vehicle charging stations (those opened after July 1, 2023).

Utah – There is a new 12.5% tax at electric vehicle charging stations but the gas tax rate falls from 36.4 cents to 34.5 cents per gallon.

NUCLEAR RESTART FUNDING

The effort to restart the Palisades nuclear generating plant in Michigan received a boost from the State of Michigan. The budget for the FY beginning on October 1 was passed by the Michigan legislature. It includes some $150 million designated for a portion of the cost of restarting the privately owned plant.  Palisades owner Holtec is about $300 million short of what it needs to get the plant operating again. It’s also seeking funds from the U.S. Department of Energy loan office to get Palisades back online.

GATEWAY TUNNEL

The federal government will give $6.88 billion, the most ever awarded to a mass-transit project, for the construction of a second rail tunnel under the Hudson River to New York City. The Gateway Tunnel would relieve strain on the over a century old existing tunnel serving railroads into New York. It has been the subject of debate and has been slowed down by politics. Chris Christie refused to fund New Jersey’s share of the proposed tunnel.

The existing tunnels have been steadily deteriorating since Hurricane Sandy flooded them with salt water in 2012. The federal money will allow the project to formally begin the process of selecting contractors. The estimated $16 billion project is planned for completion in 2035. Amtrak, which owns the tunnels, plans to shut those tracks for repairs, one at a time, once the new tunnel is in use.

CARBON CAPTURE

The efforts by Summit Carbon Solutions to obtain approvals for its proposed pipeline for captured carbon have been controversial. Most of the opposition has been fueled by the potential use of eminent domain to obtain right of way for the pipeline. Those efforts are being litigated in the courts. Now, the effort is taking on a more aggressive turn.

In North Dakota, two counties have passed ordinances governing the establishment and operation of pipelines like the one proposed by Summit. Summit submitted paperwork in June asking the North Dakota PSC to declare the two county ordinances “superceded and preempted” by state and federal law. “Those ordinances, which contain setbacks and other safety-related measures, would frustrate if not outright halt investment in North Dakota’s carbon capture, utilization, and storage industry,” according to Summit.

What do the ordinances say? One of the county ordinances states that a hazardous liquids pipeline cannot be constructed within 10 miles of an electric power generating facility, an electric transmission line, an electric transmission substation, a public drinking water treatment plant, a public wastewater treatment plant or the extraterritorial line of an incorporated city.

Other limits would not allow the pipeline to be built within 4 miles of a church, school, nursing home, long-term care facility or hospital; within 2 miles of a public park, recreation area, occupied structure or animal feeding facility; and within 1 mile of a confined feeding facility or the ordinary high-water mark of the Missouri River. The challenge to a designated agency’s ability to regulate land use is a bold move with potential ramifications beyond those of the pipeline itself.

In South Dakota, the house passed with a two-thirds vote, HB 1133 which would have limited the ability of companies doing carbon sequestration to use eminent domain. The debate there focused on whether sequestered carbon was a commodity in the same way natural gas and electricity are treated for regulatory purposes. The answer will drive the definitions of how to treat captured carbon and then whether the project constitutes public use. The Senate, with its 31-4 Republican majority would not take up the bill.

Summit faces additional review in Iowa where the same property issues have been at the fore of pipeline opponents. They have applied for an extension of existing permits supporting a proposed 31-mile addition to a carbon dioxide pipeline. Summit has said it wants a decision on its first permit by the end of the year. A final evidentiary hearing, which initially was expected to start in October, will instead get underway in August. Summit filed its eminent domain list with the Iowa Utilities Board that shows it has not obtained voluntary land easements for 1,036 parcels. That represents about 30% of the route.

WISCONSIN BUDGET

Governor Tony Evans used his constitutional veto power to reduce an income tax cut included in the budget passed by the state’s Republican-controlled legislature. The veto reduces the total revenue loss to the state from $3.5 billion to $175 million. It eliminated tax cuts for the highest two income brackets entirely. The process using “partial vetoes” or what are line-item vetoes reflect the highly partisan environment which has grown in Wisconsin over the last 15-20 years.

The process can produce some interesting results and this biennium is no exception. The partisan divide is clear with the legislative budget cutting taxes for all income levels vs. the Governor’s plan; the Legislature cut funding for DEI at the University of Wisconsin and the Governor restored all 188 positions in his plan. The Governor’s plan includes provisions designed to provide in future biennia and effectively in perpetuity, school districts with additive per pupil revenue adjustments of $325 every year.

The State’s localities benefit from the budget. 2023 Wisconsin Act 12 created a funding structure that provides a $275 million boost to state aid to localities by funding the supplemental county and municipal aid program. This includes a $68 million increase in aid for counties and a $207 million increase in aid for municipalities in fiscal year 2024-25, representing a 36 percent increase over current county and municipal aid entitlements. The legislation provides additional aid to counties and municipalities in fiscal year 2025-26 and beyond by linking both current and supplemental county and municipal aid to the growth rate in the state sales tax.

SAN FRANCISCO

Moody’s Investors Service has revised the outlook on the City and County of San Francisco, CA’s long-term ratings to negative from stable. Concurrently, Moody’s affirmed the Aaa ratings on the city’s issuer rating and on approximately $2.6 billion in outstanding general obligation (GO) bonds. The revision of the outlook to negative primarily reflects the various near term financial and economic headwinds facing San Francisco. 

The city expects draws on reserves in fiscal 2023 and across budget years 2024 and 2025. Prolonged weakness in the city’s commercial real estate market, stubbornly slow to rebound office worker attendance, and low downtown utilization continue to weigh on the broad economic vitality of San Francisco’s core business, retail, and tourism districts. 

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

PUERTO RICO GRID

The Army Corps of Engineers issued a notice that it is seeking a contractor to fix existing power plants, electric transformers and cables and build new natural gas- and oil-fired generating units in Puerto Rico. The work has been authorized by the Federal Emergency Management Agency and will be funded by disaster relief money approved by the Biden administration after Hurricane Fiona last year.

The Army Corps of Engineers plans to spend up to $5 billion on fossil fuel power plants and infrastructure repairs. Many (including ourselves) see this a troubling long-term development. The investment will be in fossil-fueled generation. The Corps cited the need for a short-term fix to the island’s power problems. To accommodate a shorter timeline, the Corps is seeking “land-based turbine-style generators” that can run on natural gas or diesel oil.

The argument is that the island needs new baseload generation quickly. To address environmental concerns, “FEMA funds the mission-assignment for Army Corps of Engineers to assist with temporary emergency power restoration related to Fiona recovery efforts. Questions regarding long-term power generation should be directed to the Government of Puerto Rico.” At the same time, the contracts are constructed in such a way that the proposed generation could easily become part of the long-term electric grid.

The plan is raising questions about inconsistent federal policy responses. The Corps is taking the view that traditional base load generation is the answer. In January,  a report issued by DOE’s national laboratories and FEMA said that the build-out of rooftop solar and storage could make the territory’s power system more resilient.

In February, the Department of Energy announced it was allocating $1 billion to an energy resilience fund to deploy more solar and storage projects and support other clean energy and grid modernization initiatives. Now, the challenge is to come up with a coherent long-term plan to address not only total power supply but the move to more resilient renewables-based generation.

NEW YORK’S BUSY WEEK

Several significant issues saw movement with real potential implications for state and city revenues. The first involves the approval by the Federal government of the plan to impose congestion pricing in Manhattan. Final approval was granted by the Federal Highway Administration. A local panel appointed by the Metropolitan Transportation Authority can now decide on final toll rates, including any discounts, exemptions and other allowances. It will be quite a battle. It is likely that litigation could arise either from the State of New Jersey or in response to environmental concerns in the Bronx due to increased truck traffic due to the charges.

As we go to press, the NYC Council is still working through budget approval for the FY beginning July 1. A number of issues have complicated this year’s process with housing moving to the fore as the deadline nears. The budget has also been complicated by the flood of asylum seekers into the City which has been a driver of the expense side of the budget. As we approach the end of the process, it looks like the housing issue (in terms of the budget) has been settled so timely budget enactment is expected.

The State finds itself in a dispute with the Seneca Nation in its negotiations to renew the compact between the State and the Nation which governs the Nation’s gaming activities. The Nation currently operates under one of the more unfavorable compacts which the Nation seeks to adjust. The risk in these negotiations is that it could interfere with the distribution of monies to host cities like Niagara Falls which have come to rely on these revenues in the budget and also as a source of employment.

CALIFORNIA BUDGET GOES TO THE LAST MINUTE

The California legislature has reached an agreement on the fiscal 2024 budget. The process this year reflected the realities of significant revenue shortfalls and the difficult winter season across the State. The competition for limited funding put a number of categories under pressure and created a contentious debate. The finished product reflected significant compromises.

One item with credit implications was the state of the major public transit agencies around the state. The final agreement reverses the governor’s call to cut $2 billion to public transit after a substantial lobbying effort by urban transit agencies and Democratic lawmakers in San Francisco and Los Angeles. The deal includes a total of $5.1 billion for transit over four years. Anticipating the potential for cuts in the future, Democratic lawmakers introduced a separate plan to increase tolls on seven state-owned bridges in the Bay Area by $1.50 to generate about $180 million annually from 2024 through 2028.

The Governor and the Legislature agreed to renew a tax on managed healthcare organizations, known as the MCO tax, to fund Medi-Cal at a time when the state is expanding the pool of eligibility. The tax is expected to generate $19.4 billion in state revenue from 2023 through 2027.  As is often the case, a controversial policy item holds up completion. This year, two issues were intertwined.

The first was amending the California Environmental Quality Act to provide for more limited review of proposed projects. The second was how those changes would impact the Sacramento-San Joaquin River Delta tunnel project designed to move water to Southern California. It has encountered significant opposition and support for the budget became tied to that opposition. In return for giving up the project (for now), the Governor is getting his proposed CEQA changes.

TEXAS GIVES ERCOT IMMUNITY

The winter storm which wreaked havoc on the Texas electric grid continues to be the subject of litigation as local utility purchasers sought to recover some of their financial losses related to the storm. Throughout the ensuing period, ERCOT – a private entity which operates the dispatch of power in the state’s closed transmission system on behalf of the state – has been insisting that it has sovereign immunity against litigation such as that brought by the individual utilities.

The debate over the issue has been litigated in the Texas state court system throughout the last two years. The State Supreme Court has already issued decisions which overturned certain Public Utility Commission decisions regarding the validity of charges incurred during the storm. The next decision to be made regarded the ability of ERCOT to be sued.

That decision came this week in a case brought by San Antonio’s municipal electric system (CPS). Following Winter Storm Uri, some wholesale market participants defaulted on their payment obligations to ERCOT. CPS alleges that ERCOT unlawfully short-paid CPS to offset those losses. It sued ERCOT for breach of contract and various other claims.

The Court concluded that ERCOT is a “governmental unit” entitled to an interlocutory appeal and the Court held that ERCOT is entitled to sovereign immunity. Specifically, the Court held that ERCOT is an “arm of the State” because, pursuant to the Utility Code, ERCOT operates under the direct control and oversight of the PUC, it performs the governmental function of utilities regulation, and it possesses the power to adopt and enforce rules.

The decision was made by a narrow majority. Four justices agreed that ERCOT is a governmental unit and that the PUC has exclusive jurisdiction, but they would have held that ERCOT is not entitled to sovereign immunity.

MORE ON ELECTRIC VEHICLES

BlueOval SK, which will supply batteries for electric Ford and Lincoln cars and trucks is a joint venture between Ford and SK, a battery maker. It intends to build its own batteries at plants in Tennessee and Kentucky. Both states are providing subsidies and incentives but the biggest boost is coming from the federal government.

The Department of Energy has announced loans for the three battery plants the venture is building. This produces a total of $9.2 billion of support for the plants which are expected to create 7,500 jobs. Of note, the two Kentucky plants are expected to employ more people than Kentucky’s coal industry. BlueOval SK will pay the same interest as the federal government pays to borrow.

In Georgia, the state’s 10^th new manufacturing facility to supply electric vehicle production was announced.

At the same time so much progress on EV production has been made, there have been bumps in the road. Lordstown Motors filed for Chapter 11 bankruptcy protection. The pickup truck producer was seen as a potential savior of the former GM production facility which had closed. The plant was at the center of President Trump’s efforts to point to an improved auto industry. The outlook for the plant’s production has always been cloudy with issues surrounding financing holding back production.

The plant was also hurt by one of President Trump’s favorite companies, Foxconn. Foxconn also agreed to handle the manufacturing of Lordstown’s Endurance electric pick-ups at the site, and to make further investments provided certain milestones were met. The parties have been arguing since the beginning of the year. For those who have watched Foxconn operate in the US, the failure to follow through on agreements and promises has become Foxconn’s MO. As of December, Lordstown Motors had 260 full-time employees versus the 1,600 employed there by GM.

ALTERNATIVE TRANSIT

The issue of electric scooters and bicycles was initially about their availability and that of protected lanes where they could be used. They have become increasingly ubiquitous in big cities and have become the lifeblood of the food delivery industry. They are also an increasingly popular vehicle for low-income riders. One problem has emerged which threatens the use of these vehicles.

To keep costs down for buyers, many of the scooters and e bikes are powered by imported (from China) batteries. They are manufactured under less than exacting standards and have an annoying tendency to catch fire. Initially, these have been fairly isolated instances but recently the role of batteries in some devastating fires has been highlighted.

Many of these vehicles are stored indoors, often in residences. This week, the City of New York recorded the 100^th fire this year that is attributable to e bike and scooter batteries. The latest resulted in four fatalities. It has been a continuing problem especially if vehicles are stored in residences. Regulation is expected. NYC has tried a program whereby owners of electric bikes and scooters can effectively trade in their existing battery for one which has been UL approved.

Many of the fires have occurred when vehicles are being charged indoors. Because of the attraction of scooters for lower income users, concerns have emerged about their safety in public housing projects. NYC has announced a plan to use $25 million in federal funds to set up 173 e-bike charging stations at 53 NYCHA sites. As of last week, 13 New Yorkers had been killed and an additional 71 injured in such blazes so far this year.

The issue is complicated by the fact that the dominant source of batteries for these vehicles is China. Nearly all of the fires have been attributed to foreign batteries which are not made to US standards.

As this situation unfolds, beginning this week Connecticut residents looking to get out of their cars and onto two battery-assisted wheels, will soon be able to apply for up to $1,500 in state-subsidized vouchers to help cover the costs of purchasing a new electric bicycle. The state’s program offers a $500 voucher to all Connecticut residents aged 18 years and up. It offers an additional $1,000 incentive to those who also reside in Environmental Justice communities or distressed municipalities, including New Haven.

Residents who participate in certain income-qualifying programs such as Medicaid or Head Start, or who have an income less than 300 percent of the federal poverty level, which currently translates to $90,000 for a family of four, can also apply for the extra $1,000.

NEW GENERATION TRENDS

The Federal Energy Regulatory Commission (FERC) released first quarter 0f 2023 data covering trends in new generation deployment. The news will disappoint the more hard core environmentalist as a fossil fuel remains the energy source of choice for new projects.

In 1Q 2023, 217 new and expanded generation plants added 10,162 MW of capacity. The fuel source of choice was natural gas with 44% of new capacity being gas fired. Solar continues to expand its share of new development with 3,400 MW or 33% of new generation. Wind contributed some 19% of new generation.

The most noteworthy item is that 2023 1Q new wind production represents a decline of some 60% from levels of new wind deployment in the comparable 2022 period. We note that this coincides with a period of increased opposition to proposed wind power sites. This is true for both land -based as well as offshore wind generation. FERC also updated total installed capacity data. Natural gas (44.13%), coal (16.89) and wind (11.55%) are the three primary sources of generation. Nuclear follows at 8.8%.

That follows another delay at the site of new nuclear capacity. Georgia Power has announced yet another delay for the in-service date for the first of the two nuclear generating plants under construction at the Plant Vogtle site. Testing has been underway in support of a planned June in-service date but a leak was discovered in the generating equipment at Unit 3. The expected repairs will cause the scheduled in-service date to slip for at least a month. The required testing of the units is 95% complete. Late last month, the reactor reached 100% power for the first time.

COLORADO RIVER LITIGATION

The Navajo Tribe has lived along the Colorado River for millennia. The 1868 treaty establishing the Navajo Reservation reserved necessary water to accomplish the purpose of the Navajo Reservation but did not require the United States to take affirmative steps to provide infrastructure to deliver water for the Tribe. As the years passed and the Colorado River’s water has become a scarce resource, the Tribe has looked to the federal government to develop and fund infrastructure to deliver water throughout the 17 million acre reservation.

After years of inaction and in the face of the impact of climate change, the Tribe sued the government to compel the development of water infrastructure on the reservation. The Tribe asserts a breach-of-trust claim based on its view that the 1868 treaty imposed a duty on the United States to take affirmative steps to secure water for the Navajos.

To maintain such a claim, the Tribe must have established, among other things, that the text of a treaty, statute, or regulation imposed certain duties on the United States. Last week, the Supreme Court delivered a 5-4 decision which found that there was no requirement that the federal government provide the infrastructure.

The case turned on the absence of specific language – the Court found that the 1868 treaty contains no language imposing a duty on the United States to take affirmative steps to secure water for the Tribe. Notably, the 1868 treaty did impose a number of specific duties on the United States, but the treaty said nothing about any affirmative duty for the United States to secure water.

SALT RIVER GAS EXPANSION

Arizona’s Salt River Project has been at the center of a dispute over environmental equity issues. SRP owns and operates a gas-powered generating plant in Coolidge, AZ. The site was clearly designed to accommodate expansion beyond the initial plant. Nevertheless, when SRP sought to double the size of its plant, residents of nearby Randolph, AZ intervened in the approval process.

Founded about 100 years ago to accommodate primarily Black agricultural workers mostly from Oklahoma, the town is considered a historically Black community. This issue gave rise to pressure to locate the planned generators to another location. The state regulators faced not only local but organized national pressure and decided to stop the expansion.

Now, SRP has announced an agreement with state regulators reflecting those concerns while allowing for expansion. The expansion will be for only twelve units versus the originally proposed 16. SRP also agreed to give Randolph more than $23 million to pave dirt roads, paying for scholarships and building a new community center. Critics and opponents see the deal as a bribe for allowing the expansion.

Others would see this outcome as similar to so many other development deals where concessions are made and impact fees funded. In this case, there was going to still be an operating natural gas generator there even without expansion. At the time of the first disapproval, we noted that the air quality issues originally cited by opponents would remain. This deal does nothing to address those air issues.

HOSPITAL CREDITS REMAIN UNDER PRESSURE

Palomar Health is the largest public health care district in the State of California, with over $900 million of revenues reported for fiscal 2022, and generating over 23,000 admissions. The district operates acute care facilities in the towns of Escondido and Poway, and captures 44.5% of the market share within the district. This week, the pressures facing the industry in general have placed pressure on the District’s credit.

Operating performance, through March 31, 2023 has moderated due to increased labor expense and a delay in the consolidation and expansion of NICU beds at PMC Escondido, as well as a delay in the reconversion of a number of beds to medical. Hospitals everywhere are facing issues of reconfiguration and consolidation in the aftermath of the pandemic. In spite of the support the system receives in the form of tax revenues, cash has declined and debt secured by operating rather than tax revenues is high.

The system has not been immune to the industry-wide trend of higher labor costs. Added to the operating trends, the system’s cash balances are low and it has minimal flexibility to meet its debt coverage covenants. This produced a negative outlook from Moody’s for its Aa2 rating.

OAKLAND ONE STEP CLOSER TO LAS VEGAS

The Nevada Legislature approved a financing plan for the Oakland A’s proposed $1.5 billion stadium on the Las Vegas Strip. The plan calls for $380 million in public funding, including $180 million in transferable tax credits and $120 million in county bonds to be paid off through a special tax district that includes the planned stadium site.

The next step for the A’s is to garner the approval of the owners of MLB’s teams. Should that be achieved, the A’s could wind up playing in temporary sites until the proposed ballpark is completed for the 2027 season. The team would be the third major league franchise to locate in Las Vegas. The NHL’s Vegas Golden Nights have been a success on and off the ice including winning this year’s Stanley Cup.

NET METERING IN UTAH

The Utah Supreme Court has ruled against a request that net metering rates in Utah be based on a variety of environmental factors not currently considered as part of the ratemaking process. A solar advocacy group had challenged an order issued by the Public Service Commission that allows an annual expiration of unused solar credits and does not calculate anything other than the utility’s actual “avoided costs” net metering provides.

The advocates hoped to force the PSC to have public health and climate included in the calculation for solar reimbursement. The suit also challenged the annual calculation of the rate. The Court found that there is sufficient evidence to back the Public Service Commission’s order that grants the utility company its ability to invoke an annual expiration date on solar credits. 

The Court also found that the commission had made final its decision on expiration of credits and export credit rates undergoing an annual review. Under Utah law, a final decision is subject to judicial review. 

SMALL COLLEGE CREDITS CONTINUE TO WEAKEN

The pressures on smaller niche college credit continue. The issues of competition for students in the face of unfavorable demographics and costs continues to generate downgrades and negative outlooks.

Simmons University is a private, nonsectarian liberal arts university with an all-women’s undergraduate college and coeducational graduate programs. Located in Boston’s historic Fenway district, Simmons currently serves around 5,700 FTE students and generates about $177 million of operating revenue (fiscal 2022). The outlook on its Baa2 Moody’s rating was lowered to negative.

Biola University is a private, not-for-profit nondenominational Christian university located in La Mirada, California. It was originally established as the Bible Institute of Los Angeles. Today it offers baccalaureate, masters and doctoral programs across 9 academic units. For fall 2022, the university had total FTE enrollment of 4,651 about 72% of whom are undergraduate. The outlook on its Baa1 Moody’s rating was lowered to negative.

Illinois Wesleyan University is a small, private undergraduate liberal arts college located in the City of Bloomington, IL. The university’s fall 2022 full-time equivalent enrollment totaled 1,521 across its college of liberal arts, college of fine arts and school of nursing. The university generated $67.5 million in operating revenue in fiscal 2022. Moody’s downgraded its rating to Baa3.

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.