Joseph Krist

Publisher

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NET METERING UNDER ATTACK

Most of the attention given to the subject of efforts to reduce the economic attractiveness of solar power focused on the effort by Florida’s investor-owned utilities to limit net metering payments. While attention was focused there, efforts are underway in the sun-drenched but conservative South to limit the level of payments in several states.

The Mississippi Public Service Commission is considering rules that would expand subsidies for rooftop solar.  That is a reflection of pressure from solar owners who see that Mississippi reimburses them under a net metering program which pays less than any other for solar power. That may explain why only 586 Mississippi houses have solar roof panels. Legislation is being considered in North Carolina and California which would result in much lower net metering payments to solar owners.

It isn’t all bad news for solar proponents. The Arkansas Court of Appeals upheld Arkansas “net metering” rate structure, which provides for solar energy customers to receive the full retail rate for excess energy they return to the electric grid. The decision reversed the authority of utilities to impose a “grid charge” to net metering customers. It also clarified net metering requirements in a way that made it easier to both approve small solar systems and to aggregate smaller solar systems.

The court also found that the Public Service Commission (PSC) was beyond its statutory authority in regulating solar fields generating less than 1,000 kilowatts, and in setting specific standards for arrays between 1,000 and 5,000 kilowatts.

CITIES AND SOLAR POWER

BUDGET REVISIONS

Given their status as two of the market’s significant issuers, the revisions of their budgets each Spring always draws attention. The fact that governments all over the country appear to have underestimated revenues has shifted the usual attention on budgets from one of tight spending to an atmosphere of so much money sloshing around the legislative process. The money gusher has produced some startling turnarounds in the outlooks of California and Chicago.

California is dealing with an estimated $97 billion surplus. The surplus has led to all sorts of proposals for spending the money. They include checks to help drivers offset rising gas prices. The price tag of $11.5 billion could only be acceptable in these extraordinary times. One thing that will possibly deter excessively higher spending could be the stock market. 

The current volatility and declines in the equity markets are positioned to cause problems on both sides of the state revenue equation. In the states where capital gains are significant and the highest rate income taxpayers reside, revenues could take an unexpected hit. The longer the markets perform poorly, the greater the risk. The markets had been generating above expectation investment results for state pension funds. Shortfalls in returns could require higher annually required contribution levels.

Months ago, the City of Chicago offered the fact of a potential $867 million budget gap in 2023 if a new casino would not be approved for the City. Now, the City has updated data reflecting tax season driven receipts which indicates that the gap is much smaller – some $560 million smaller than the earlier estimate. One sector cited was the real estate market which produced revenues related to real estate transactions of some $201 million of better-than-expected revenues. The City now projects a year end balance of $250 million.

FLORIDA GOVERNANCE AND DISNEY

The latest chapter in the increasingly ridiculous story of Florida Governor Ron DeSantis’ effort to punish the Disney Corporation for politically opposing him unfolded this week. It was already clear that the legislation orchestrated by the Governor was not well conceived and that little if any planning had gone into the actual execution of a process to take over the District while assuring that the District’s debt would be paid.

Investors have already figured out that Disney already pays for the debt, as well as the operating costs of the District. So, it’s clear that the move is a stunt. That’s reflected in the fact that the enactment of legislation to effect this change will not occur until after the elections in November when the Legislature and Governor are on the ballot. 

There is that little issue of the non-impairment clause that accompanies many bond issues. The one that says that the State will not take any actions which would deny bondholders any remedies which might result. It’s not clear what benefit might accrue to bondholders as the result of a cheap political stunt but once you go down this route it can quickly become a rabbit hole.

These moves are akin to efforts like the one in Texas to “punish” potential underwriters associated with institutions which have taken a position that they will no bank the fossil fuel industry. At least Texas is following through by using the new stance to exclude a significant number of potential underwriters from participating in new issue transactions.

The governance issue is that since it’s government so politics have to be involved. But when they fly in the face of logic and clearly inevitable trends, it raises questions as to the real level of commitment to investors on the part of the political establishment.

DROUGHT ALL OVER

Much of the attention focused on the ongoing drought in the American West might make one feel that it is the only region with a problem. This week, it was announced that due to low runoff into the Missouri River basin, the U.S. Army Corps of Engineers predicts power production from the six main stem dams will be about 77% of normal this year. The hydropower is supplied to Montana, North and South Dakota and parts of Minnesota, Iowa and Nebraska. The distributor of that power is the federal Western Area Power Administration (WAPA). To make up the shortfall, WAPA needs to acquire access to additional sources.

That power will be more expensive and it will lead to costs rising for customers already under pressure from higher agricultural input costs, overall inflation, and higher fuel prices. It will likely focus even more attention on transmission issues. While closed legacy generation gets the most attention, transmission project proposals are garnering significant skepticism and outright opposition from landowners over the scale and location of those pieces of infrastructure.

At the more local level of the power distribution and supply chain, the need to upgrade existing connectivity to the overall transmission grid is obvious. One of the major barriers to the use of solar power is the inability of existing lines to absorb the new power. It’s more an issue for small commercial and municipal customers but it limits the climate impact of solar development.  

SUPERVISION IN CONNECTICUT

As is the case in many states, Connecticut has a program of oversight and remediation of the finances of local governments.  The Nutmeg State’s vehicle for this is the Municipality Accountability Review Board (MARB). The MARB is a state board that was established in 2017 for the purpose of providing technical, financial, and other assistance and related accountability for municipalities experiencing various levels of fiscal distress. Municipalities experiencing degrees of fiscal distress and in need of technical or other assistance may be designated into one of four tiers, which is based on several factors, including fund balance, bond rating, equalized mill rate, and levels of state aid.

The City of West Haven was referred to the MARB in December 2017 following the City’s issuance of approximately $17 million of deficit bonds. Based on Connecticut General Statutes, the issuance of deficit bonds by a municipality automatically results in its designation as a Tier III municipality and its referral to the MARB. The City had accumulated a large General Fund deficit, as well as deficits in the Allingtown Fire Fund and the Sewer Fund. The negative Fund Balances were largely the result of recurring operating deficits caused in part by unsustainable budget practices.

The City has a five year plan approved in 2018 but as the board notes since then, the City has revised and updated its 5-Year Plan three times. Under its Tier III status, the City received some $16 million of state funding which is largely the basis of the City’s somewhat more stabilized fiscal position. An additional factor is the City’s record over the years of erratic fiscal management.

The Board notes that severe fiscal distress, evidenced by a large General Fund deficit, led to the creation of a State oversight board in 1992. Shortly after restoring solvency to the City, the oversight board disbanded in 1995. After a period characterized by positive reserve levels, the City fell back into a deficit position in 2005 which continued until its designation as a Tier III municipality.

There are also issues associated with the City’s annual reporting and its manipulation of filled and unfilled positions to drive desired fiscal results for reporting purposes. It has had to restate results in prior years. And now the Board notes that the City’s plan was to rely on financial assistance in the form of MRF to stabilize its Fund Balance and to bide time until previously issued pension obligation bonds were retired in FY 2022. From that point forward, the City reasoned, a significant decline in required debt service payments would allow for significant and rapid increases in General Fund Balance without any additional financial assistance from the State.

The Recommended FY 2023 Budget that was recently submitted to the MARB does not direct the reduced debt service requirements to building Fund Balance. Rather, the Recommended FY 2023 Budget redirects those funds to operations resulting in minimal funding devoted to increasing fund balance. Thus, a key component of the City’s plan for amassing General Fund Balance appears to have been abandoned. The intervention is not a surprise.

PUERTO RICO

The Puerto Rico Oversight Board reported that efforts to restructure debt issued by the Puerto Rico Highways and Transportation Authority (HTA) are moving forward. 85% of the owners and insurers of the HTA 68 bond claims and more than 67% of the owners and insurers of the HTA 98 bond claims support the plan. The hope is that a disclosure document can be made available in June in support of a Plan confirmation hearing in August. The fact that the debt of the Authority was secured not just by tolls but also by taxes made for a more complicated resolution.. The kicker was always that the tax revenues could be “clawed back” by the government for general purposes.

The resolution of the general government’s restructuring was a necessary procedural issue for the HTA restructuring. It was through the resolution of the general government process that the issues associated with the “clawback “could be addressed. Once it was established how much was available to the HTA, a division of those assets could be made. This current hearing and the procedures which will occur over the summer are a necessary mechanical element to the resolution the restructuring. 

While the HTA moves forward, the Electric Power Authority (PREPA) continues to stagger along. It is being crushed by its dependence on fossil fuels and its performance remains poor. Recent blackouts have increased opposition to PREPA’s operating structure. The orientation of the contractor running the system seems driven towards the sort of centralized large-scale generation and distribution system that has failed the island so often.

The utility is estimating losses in the current fiscal year due to the increased price of fuel. PREPA projects a total fuel expense spend in the three-month period from April 10 to July 8 of $883.5 million. That against the Puerto Rico Oversight Board budget which allocated $1.968 billion for full year fuel expense. The situation reinforces our long-held view that the island needs a much more diverse and localized energy grid.

On a third front, the federal appeals court with jurisdiction over issues involving Puerto Rico has decided that the Oversight Board overseeing Puerto Rico’s financial recovery is not entitled to sovereign immunity. The Board has been fighting media requests for information in a dispute dating back to 2017. The court said that it agreed “with the district court that, by including § 106, Congress unequivocally stated its intention that the Board could be sued for “any action . . . arising out of [PROMESA],” but only in federal court. Congress was unmistakably clear that it had contemplated remedies for constitutional violations and that injunctive or declaratory relief against the Board may be granted.

The Board can appeal or it can work out an agreement with media plaintiffs. It is hard to know if the release of the information requested would be harmful or helpful to the Board’s efforts at oversight. The Board had had to maneuver through an essentially hostile environment created by both sides of the Commonwealth’s fiscal problems. Potentially, the information could blunt or reinforce some of the many suspicions which have characterized the relationships between the Government, the citizenry, and the Oversight Board. It’s not clear who has the most to lose with an information release on the scale of that requested.

We are well-known disclosure advocates. We have never understood the resistance to disclosure on the part of governmental entities, They are public entities so their activities should be a matter of public disclosure.

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