Joseph Krist

Publisher

THE MUNI MARKET

It has clearly been a somewhat difficult year for the market. The pace of recovery from the pandemic was erratic and sometimes a case of one step forward, two steps back. The Puerto Rico bankruptcy drags on while potential restructuring options become more expensive by the day. High rates and a potential recession are the last things that situation needs. Other outstanding high yield credits would likely come under pressure as rising rates and some layoffs are dampening enthusiasm for discretionary spending.

At the same time, the basic structure remains very much the same as borne out by statistics just published by SIFMA. They cover the period 2017-2021 so that includes the very strong economy period, the pandemic period, and some of a reemergence period. Nevertheless, total municipals outstanding have stayed within a narrow range of between $3.9 and $4.1 trillion. The average maturity of new issues has only recently showed a measurable decline reflecting higher rates and duration risk. The SIFMA Muni Index is back where it was in FY 17 at 3.2%. The difference is that the index has increased by some 90 basis points from year end.

TEXAS CENTRAL REPRIEVE

As we went to press last week, the Texas Supreme Court had not yet published its ruling in the Texas Central Railroad eminent domain case.  It has now ruled that Texas Central’s proposed 200-mph rail line between Dallas and Houston was entitled to take property through eminent domain provisions that were established for “interurban electric railways” in 1907. The decision rejected the position that the law did not apply to high-speed rail projects under the 1907 law. The decision theoretically allows Texas Central to revive its land acquisition process to obtain needed right of way.

The pointed out that the case had nothing to do with project approval. “The case involves the interpretation of statutes relating to eminent domain; it does not ask us to opine about whether high-speed rail between Houston and Dallas is a good idea or whether the benefits of the proposed rail service outweigh its detriments. The narrow issue presented is whether the two private entities behind the project have been statutorily granted the power of eminent domain, a power otherwise reserved to the State and its political subdivisions because of the extraordinary intrusion on private-property rights that the exercise of such authority entails. 

Texas Central Railroad relied on its view that it is a “railroad company” and an “electric railway” with eminent-domain power under Texas law. The decision was made on the basis of the status of Texas Central as an interurban electric railway. The issue of whether it is also a “railroad company” was not decided as it was not necessary after the initial decision. This would allow Texas Central to continue to acquire right of way through eminent domain if necessary.

It is not clear what the immediate implications are for the railway’s proponents. Staffing at Texas Central is minimal, funding activities have crawled to a halt, and the CEO of the railway recently left. Numerous news outlets have documented the lack of any real public comments from the railway’s sponsors.

AUSTIN ELECTRIC

In 2021, the meltdown of the Texas power grid was the major concern facing electric customers as it led to damage, increased costs, and a likely need for significant rate increases to deal with the costs of that event. That blackout generated new interest in alternative power sources especially solar among residential customers. As is the case in a number of other jurisdictions, Austin Energy finds itself in a diminished financial position looking for new revenues.

That process has begun with Austin’s proposed rate schedule. Austin Energy continues to see approximately 2.5 percent annual customer growth. It has not however, produced comparable load growth. In 2012, City Council adopted an ordinance requiring Austin Energy to review its rates and update its Cost of Service Study at least once every five years.

While City Council adjusted Austin Energy’s base electric rates in January 2017, those adjustments were based on data from a 2014 historical test year. Subsequently, Austin Energy performed a revenue adequacy review, based on Fiscal Year (FY) 2019 test year, and determined a base rate update was not required at that time. However, the revenue adequacy review showed that a base rate increase may be required before the next mandated review.

In 2022, Austin Energy conducted a new Cost of Service Study. The new study uses an adjusted test year of FY 2021 to determine the revenue requirement. The lack of significant annual load growth has moved the utility to try to recover more revenue through monthly fixed charge-based rates rather than through usage-based power sales. The Cost of Service Study demonstrates that the residential customer class is well below cost of service, by $76.5 million, while certain commercial customer classes are above cost of service. The proposed rate increases are designed to shift costs from the commercial base to the residential base.

As one could imagine, the residential customers are upset. A logical move for a residential customer could be to install solar but if the distribution utility only raises its rates for its fixed charge coverage in response, the move to solar doesn’t make economic sense. It is trend emerging across the country as legacy utilities see themselves in a less competitive position without some external cost being imposed on solar users.  It is seen in thew efforts in Florida and California to limit net metering benefits and diminish the competitive advantage of solar.

The utility’s own presentation shows why residential customers are upset. “Austin Energy’s process has been developed to balance the various objectives of the utility, including equity, affordability, cost causation, and gradualism. This process recognizes moving customers towards cost of service and funding discounts for State of Texas facilities, local school districts, and military facilities. The residential rate structure has some unsustainable weaknesses that require modification to secure the long-term financial stability of Austin Energy and ensure a workable rate design. The proposed rate design includes reducing the number and steepness of the residential tiers and increasing the customer charge.

The municipal utilities in Texas like Austin and San Antonio have been moving in the direction of financing the costs of the transition to clean energy on the backs of residential customers. These utilities seem to be more concerned with the costs of large industrial and commercial customers than they are with residential rates.

ENERGY EMPLOYMENT

The U.S. Department of Energy (DOE) released the 2022 U.S. Energy and Employment Report (USEER) this week. The 2022 USEER, originally launched in 2016, covers five major energy industries: electric power generation; motor vehicles; energy efficiency; transmission, distribution, and storage; and fuels. The findings show that all industries, except for fuels, experienced net-positive job growth in 2021.  

In 2021, U.S. energy sector jobs grew 4.0% over 2020 while overall U.S. employment, which climbed 2.8% in the same time period. The energy sector added more than 300,000 jobs, increasing from 7.5 million total energy jobs in 2020 to more than 7.8 million in 2021. From 2015 to 2019, the annual growth rate for energy employment in the United States was 3%—double the 1.5% job growth in the U.S. economy. In 2020, the energy sector was deeply impacted by the COVID-19 pandemic and subsequent economic fallout. The energy sector lost nearly 840,000 jobs. Last year’s United States Energy and Employment Report (USEER) showed that, by the end of 2020, the energy sector was beginning to rebound, adding back 560,000 jobs.

Jobs in carbon-reducing motor vehicles and component parts technologies grew a collective 25%, led by 23,577 new jobs in hybrid electric vehicles (19.7% growth) and 21,961 jobs in electric vehicles (26.2% growth). In fact, jobs in electric vehicles, plug-in hybrid vehicles, and hybrid vehicles were among the only subcategories of any type of energy jobs that rose in numbers from 2019 to 2021 and that did not decrease from 2019 to 2020. In 2021, the fuels technology group declined by 29,271 jobs (-3.1%). Fossil fuel jobs accounted for most of the fuel jobs lost. Petroleum—both onshore and offshore—led losses, shedding 31,593 jobs (-6.4%). Coal fuel jobs declined by the greatest percentage, losing 7,125 jobs and decreasing by 11.8%. Fuel extraction jobs overall decreased by 12%. Biofuels, including renewable diesel fuels, biodiesel fuels, and waste fuels, grew by 6.7%, adding 1,180 jobs.

All transmission, distribution, and storage (TDS) technologies experienced employment growth in 2021 with an increase of 21,460 jobs. Smart grids outpaced virtually all other technologies in the TDS technology group in growth rate, increasing 4.9%. Traditional transmission and distribution added the most jobs (13,088) and grew 1.4%. Batteries, for both grid storage and electric vehicles, added 2,949 jobs (4.4%). Electric power generation jobs grew 2.9%, adding 24,006 jobs in 2021, slightly faster than U.S. jobs overall.

In total, there were an estimated 857,579 electric power generation jobs in the United States in 2021. Solar had the largest gains, both in terms of new jobs (17,212) and percent growth (5.4%). In 2020, the solar industry lost 28,718 jobs. Wind energy jobs, including land-based and offshore wind, sustained modest growth in terms of new jobs (3,347) and percent growth (2.9%), continuing a trend of steady growth over the last few years.

The geography of the energy transition is also interesting especially given the politics of energy in some states. Michigan added most new energy jobs (35,500) in 2021, followed by Texas (30,900) and California (29,400). West Virginia and Pennsylvania fared best nationally for percent growth in transmission, distribution, and storage, with the fastest growth occurring in West Virginia (29%) and Pennsylvania (14%). Electric power generation technologies grew fastest in the Midwest, with the highest percent growth in Nebraska (32%), Minnesota (18%), and Iowa (16%).

The top two states with the highest percent growth in fuels jobs were North Dakota (21%) and Montana (8%). Percent growth in motor vehicles jobs was spread across many states, led by Texas (20%), Tennessee (19%), and Indiana (18%). Oklahoma and New Mexico were among the top states for percentage growth among all five energy categories. Oklahoma had the third highest per capita growth nationally for transmission, distribution, and storage (11%) as well as energy efficiency (5.3%). New Mexico was first for energy efficiency (7.0%) and third for fuels (5.4%).

CALIFORNIA BUDGET AND INFLATION

One of the concerns that some had about the amount of money made quickly available to the states was that it might create a trough of money to be used fairly indiscriminately to send money to constituents. The sheer number of state gubernatorial and legislative elections occurring this year only enhanced those concerns. Now we see that some of those concerns may indeed by valid.

In several red states, the money effectively funded income tax cuts. In other states, particularly some of the bigger ones, the money has been used to simply transfer money to residents. In New York, homeowners are in the midst of receiving checks from the State regardless of income, tax status, or anything else. Yes, the Governor is hopeful of being elected to a full term as Governor for the first time.

In California, the Governor (also up for reelection) has proposed a number of ways to get cash in the hands of potential voters. The budget framework agreement announced by Governor Gavin Newsome for the State includes giving 23 million Californians direct payments of as much as $1,050. The payments would be issued via direct deposit refunds or debit cards. The agreement suspends the state’s diesel sales tax for 12 months, starting on Oct. 1. The diesel sales tax is currently 23 cents per gallon.

The Governor originally offered payments to offset the rising cost of gasoline. That plan called for California vehicle owners to receive $400 per vehicle registered in their names, up to two vehicles per person, and millions in grants to make public transit free for three months, pause a part of the diesel sales tax rate for a year, and pause the inflationary adjustment to gas and diesel excise tax rates.

How much will eligible residents receive? Joint filers who make less than $150,000 and have at least one child will receive the maximum amount of $1,050. Single filers who make under $75,000 would receive $350; those making between $75,000 and $125,000 would get $250; those making between $125,000 and $250,000 will see a $200 payment. Joint filers who make less than $150,000 will receive $700; while those making between $150,000 and $250,000 will see a $500 payment. Joint filers making up to $500,000 get a payment of $400.

The budget will also require some technical amendments especially in the energy sector. One of those pieces of legislation deals with a plan to establish a “Strategic Reserve” of electric generation sources. The plan allows power from fossil fueled generation to be used when we face potential shortfall during extreme climate-change driven events (e.g. heatwaves, wildfire disruptions to transmission).

The budget specifies what types of energy generation is eligible: Extension of existing generating facilities planned for retirement.  Note that Diablo Canyon cannot be extended with the current appropriations or authorities in the current budget. This requires further legislative action. Note that the Strategic Reserve in itself does not authorize extension of expiring assets, including retiring once through cooling plans.

Any extensions will be subject to authorization by regulatory entities or in the case of Diablo Canyon, subsequent legislation and review and approval by state, local and federal regulatory entities. ○ New emergency and temporary power generators of five megawatts or more.  The program is prohibited from operating diesel generators after July 31, 2023. The program does not provide for retrofit of backup diesel generators.

Here’s the controversial part. For Summer 2022, the budget bill exempts several statutes and permitting requirements, and the trailer bill allows the Department of Water Resources to enter into contracts without undertaking CEQA review. The budget specifies a loading order by requiring the Department of Water Resources (DWR) to prioritize feasible, cost-effective zero-emission resources over feasible, cost-effective fossil fuel resources; clearly states that the Strategic Reserve is a “last on, first off” resource to provide grid support only in emergency conditions.

DELIVERY FEES AND TRANSIT

Various methods of deriving revenues from changes in driving habits especially as they relate to commercial activity have been considered in the face of climate change and a shift to online shopping. Firms like Amazon have been targeted but proposals for fees to be charged to those using the home delivery services have not generally been supported by customers. Now, legislation in Colorado will test that dynamic.

Beginning July 1, Colorado customers will notice a range of extra charges on their receipts for goods delivered to their homes. They include a Retail delivery fee: 27 cents charged on orders, including those made online, for goods and most other items subject to the sales tax, including restaurant food; ride-hailing fee: 30 cents per ride on services including Uber and Lyft, or 15 cents for rides in zero-emission vehicles: Bridge and tunnel impact fee: 2 cents per gallon on diesel fuel purchases, rising to 8 cents by mid-2028; and Car rental fee: An existing $2 per day fee for car rentals up to 30 days will be indexed to inflation; it will newly apply to car-share rentals lasting at least 24 hours.

Electric vehicle registration fees will increase as the existing $50 registration fee for plug-in electric vehicles will be pegged to inflation, and additional annual EV fees will be phased in, starting at $3 for plug-in hybrids and $4 for full EVs. Those new fees will increase over the next decade to $27 for hybrids and $96 for full EVs.

Unsurprisingly, the fees are the subject of legal action. Given that they represent revenues to replace or increase tax sourced revenues, some see the scheme as an effort to get around Colorado’s Taxpayer’s Bill of Rights (TABOR).  That requires voter approval of many proposed tax increases. Voter approved Proposition 117 in 2020 which requires asking voters to approve fees if they’ll generate revenue above a certain threshold. Lawmakers attempted to work within its confines but litigation challenging that will be heard in the Fall. 

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