Muni Credit News July 3, 2023

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 10th 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 100th 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.

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