Joseph Krist

Publisher

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THE TRANSMISSION BOTTLENECK

Researchers at the US Department of Energy’s (DOE) Lawrence Berkeley National Laboratory surveyed seven electric grid operators and 35 major utilities, which together cover 85 percent of the US power load. They found that 1,300 gigawatts of wind, solar, and energy storage projects had been proposed as of the end of 2021, enough to meet 80 percent of the White House’s goal of carbon-free electricity generation by 2030. That is the good news.

Then there is the key issue of transmission capabilities. The researchers found that only 23 percent of the renewable generation projects seeking grid connection between 2000 and 2016 have actually been built. That is a result of the failure of transmission development to keep up with generation development. DOE found that the number of newly built high-voltage transmission lines has declined from an annual average of 2,000 miles in 2012-2016 to an average of just 700 miles in 2017-2021.

This gets us to where we are today. Renewable generation expansion is outpacing transmission expansion. Transmission expansion creates real issues over land use and right of way. Iowa’s Grain Belt Express is a perfect example. The issues over transmission are potentially working in favor of offshore wind generation. Coastal utilities would not need the sort of transmission infrastructure that other utilities might to access this source of power.

TRANSIT ISSUES POST-PANDEMIC

The City of San Diego currently permits seven operators permitted for 11,050 devices. The rapid increase in the availability and use of scooters has returned certain issues associated with their use back to the fore. Many of those issues concern the use and storage of these devices outside of the street setting. Riders on sidewalks and the predilection of users to leave the scooters all over have raised concerns.

Now the City is considering a plan which would reduce the number of devices by almost 4,000. Currently, devices must be permitted every six months. Through that permitting process, the City is proposing to use the permit renewal process to achieve the reductions. The proposals under evaluation by the City Council would see companies chosen through a request for proposal process, and then be contracted by the city. Chosen companies would be required to pay an annual $20,000 fee in addition to $0.75 a day per device. The number of devices would be capped at 8,000.

The importance of a revenue stream not dependent upon farebox revenues has been reinforced. New York’s MTA debt is supported by farebox revenues and the ongoing declines in ridership attributable in part to fear of crime have caused some to be concerned about the credit long term. Other systems across the country also see ridership under pressure but given that their funding for debt service is not farebox related it is less of an issue.

Case in point – the Chicago Transit Authority (CTA). The CTA is the second largest transit system in the US and provides service within the City of Chicago and several neighboring communities. Its debt is secured by the authority’s Sales Tax Receipts Fund (STRF), to which the Regional Transportation Authority (RTA) transfers both regional sales taxes and allocations of the state’s Public Transportation Fund (PTF) matching payments. Moody’s announced that it has upgraded to A1 from A2 the rating on approximately $2.1 billion of outstanding senior lien sales tax bonds of the Chicago Transit Authority, IL.

The upgrade reflects good recovery of pledged sales tax revenues from the impacts of pandemic restrictions. The pledge of sales tax revenues reduces significantly the Authority’s exposure to ridership pressures. The upgrade accompanied the upgrade of the RTA, the holder of the senior lien on some of the taxes pledged to the CTA bonds.

The same sales tax recoveries which bolstered the CTA are also positively impacting the RTA. An additional RTA factor is an assumption that state funding will remain stable and timely given improved fiscal conditions of the State of Illinois. In past years, the authority’s receipt of state public transportation funds had been subject to months of delay as the state faced its own fiscal challenges. The state is currently making distributions in a timely manner. 

ILLINOIS

Over the last decade as the State of Illinois’ credit and its ratings steadily deteriorated. Those declines also impacted the credits of the many issuers who receive significant resources from the State like the transit agencies we mentioned. The other sector which clearly saw downgrades related to the State’s difficulties was public university credits. Now that the State’s ratings have stabilized, the positive impacts are finally reaching bonds for facilities in the state university system.

This week Moody’s reflected that in several rating actions. The upgrade “reflects continued strengthening of the State of Illinois’ (Baa1/stable) fiscal condition with positive downstream effects to the university contributing to an improving operating environment. The state’s recently enacted fiscal 2023 budget increases direct operating appropriations to the university by 5%, as well as increased monetary assistance program (MAP) funding which provides financial aid for students.

Both are favorable for the university’s operating environment, aiding greater budget predictability and supporting student affordability. Increased pension contributions by the state lessens the risk of the state shifting future pension liabilities and associated contributions to the university.”

VIRGINIA P3 OUT OF NEUTRAL

The expansion in Virginia of the 95 Express Lanes to the Fredericksburg area is scheduled to be complete late next year. Construction of the new toll lanes is now 60 percent complete. That leads to a scheduled opening in December 2023. That would represent a delay of more than a year behind the existing schedule. Work on the 10-mile extension began in 2019 and was scheduled to be complete in October. 

Work was slowed while issues over the composition of the soil along the construction route were assessed and negotiated over. Transurban, the operator of the project and its contractor recently settled a dispute over the costs and timeline of the project. In an arbitration hearing last October, the contractor successfully argued that geologic conditions in the construction zone affected their ability to keep the project on schedule. An arbitrator ruled that it was entitled to a price adjustment and more time to complete the project. 

The ultimate cost of the needed mitigation required to deal with the soil challenges will increase the original cost of $565 million by about $100 million. Transurban is financing the project including the increased costs.

NATURAL GAS

Central Electric Power Cooperative, Inc. is the largest customer of the South Carolina Public Service Authority (Santee Cooper). Central, through its member co-ops serves about 1/3 of the Palmetto State’s population. That puts it at the center of the problems facing Santee Cooper especially those

related to the ill-fated Sumner nuclear expansion. That has raised the ire of co-op customers regarding the future course of their utility.

Now that discontent has been manifested in the decision by Central on behalf of its member distribution co-ops to oppose efforts by Santee Cooper to replace coal-fired generation with natural gas-fired generation. Central is supporting efforts to expand the renewable resources available for clean power generation. In 2021, Santee Cooper contracted for its share of 425 megawatts (MW) of new utility-scale solar power that will be added to the utility system in 2023. Central Electric Power Cooperative has finalized contracts with the same developers for the remaining share.

In Connecticut, the state has decided to end a program which provided cost incentives for homeowners to switch to natural gas. The program began in 2013 and was originally scheduled to be in place for ten years. The spike in natural gas prices and the growing sentiment that natural gas is not as clean as advertised led state regulators to conclude that the incentive program “no longer furthers the state’s overall climate and energy goals …. (and) is no longer in the best interest of ratepayers.” Connecticut’s Public Utilities Regulatory Authority has given the state’s three natural gas utility companies 90 days to end the conversion incentives.

SOLAR SPRING

Solar electricity generation has been a hot topic of legislative debate. Most of the argument is over the issue of net metering whereby a homeowner still on a distribution line from a utility generates power from their solar panels and then distributes any excess power back to the utility. The total monthly usage is calculated and the homeowner is billed for the amount of power used net of the solar power generated by the customer. The payment due is effectively a number net of the value of the solar power distributed to the utility.

The arguments to date have been based on differing views of how the value of a kilowatt hour generated by solar is established. It is becoming a significant political issue. Legislation in Florida which would have significantly reduced the value of solar power for net metering was vetoed by the Governor. Legislative efforts seek to both limit the period of time during which the more favorable net metering rates would impact a customer’s bill for solar generation. North Carolina regulators are considering Duke’s plan to add a $10 monthly charge for customers who install solar panels and to reduce what they get paid for excess electricity sent to the grid. 

TEXAS AND SYMBOLIC LEGISLATION

Much ado has been made over an effort by the State of Texas to “punish” financial firms which will not bank the fossil fuel industry. The State hopes to develop a list of offending firms and prohibit their participation in transactions such as bond issues from the State. The State is particularly focused on institutions which have made public pledges not to invest or run mutual funds which state that they will not invest in fossil fuels.

The State’s actions got a lot of attention but a closer reading indicates how merely symbolic they are. Companies that want to work with Texas can still avoid investing in fossil fuels as long as they are doing so for strictly financial, rather than ethical or environmental reasons. The ridiculousness of such a stance is clear. While a given institution may decide that fossil fuel investment is bad business, is it not reasonable to assume that the environmental and political factors behind the demand for ESG investments are what make it bad business.

A recent report by NPR cited comments from the state treasurer of West Virginia on the issue. They show the contortions that these state’s go through to create symbolic efforts. “(If) they’re saying we, as a financial institution, will not lend money to coal, for instance. That is a blanket statement that is a problem for the state of West Virginia.” “If they’re making a business decision somebody comes in for a loan for a coal company, and they decide that it’s a big credit risk, and they don’t want to do it, then that’s fine.” Why do they think it’s a credit risk?

It was also pointed out that for firms managing and investing money who have a strong ESG orientation, being put on the Texas list of ineligible firms might actually be a beneficial marketing tool. Back in the day, a theatrical production which had been “banned in Boston” often benefitted from that as it drove curiosity and ticket sales. This isn’t much different.

VIRGIN ISLANDS

This week Moody’s commented on the credit of the US Virgin Islands in light of the recent bond sale which sought to shore up the territory’s funding for its pension system. Some observers hoped that the outstanding Caa3 rating on the territory’s debt might be raised as a result of the refinancing. Those investors will be disappointed as the rating agency maintained the rating at its current level.

In maintaining the rating Moody’s noted that “Whether the government’s
statutory contributions plus dedicated matching fund revenues will be
sufficient to maintain the retirement system’s solvency will depend not
only on the performance of matching fund revenues, but also on the
retirement system’s investment returns.” Moody’s is rightfully concerned about investment performance. We have seen other pension funding deals fail to deliver their expected benefits when markets turn unfavorable. Ask New Jersey about that.

We agree that more is needed to produce real credit improvement. The move to refinance the retirement system is clearly a positive relative to no action. Nevertheless, the underlying economic problems continue and the infrastructure problems especially at the water and power authority continue to be a drag on economic improvement. Moody’s was right to hold the rating until more sustainable trends can be established especially in light of the redirection of rum tax revenues away from general revenues.

The USVI remains exposed to oil-related risks which have helped to destabilize the power system. It obviously is exposed to hurricane risk. So, it remains a highly speculative credit.

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