Joseph Krist

Publisher

PIGS AND ELECTRICITY

Next week, the U.S. Supreme Court hears oral arguments next week in a case about California’s Proposition 12, a law passed by Golden State voters in 2018 that requires that pork sold in California come from facilities where sows have pens that are at least large enough for the animals to turn around and stand up. In National Pork Producers Council v. California, the industry is challenging the law as being inconsistent with the dormant commerce clause, which bars state laws that hinder interstate commerce.

California is arguing that overturning the law would raise issues of states’ rights. The pork industry argues that the law has the practical impact of regulating out-of-state conduct [and] was impermissible under the dormant commerce clause. The petition effectively seeks to have the dormant commerce clause interpreted in such a way that would broaden its use. That may actually work against the pork producers. At least three of the justices are in record as being effectively against the clause.

The case has emerged as one with potential impacts on the energy sector. Laws which have the effect of regulating power suppliers in other states via state law – “extraterritoriality” – have been challenged before. The industry is concerned on a couple of levels. Clean energy advocates cite state laws and regulations governing utility operations as a major driver of renewable energy adoption. They fear that a win for the pork industry could undermine those efforts.

Some 30 states and the District of Columbia have Renewable portfolio standards (RPS) in place, according to the National Conference of State Legislatures. The Court has not had to rule on dormant commerce clause issues impacting the energy industry but at least one justice has. In 2015, Justice Neil Gorsuch ruled that Colorado’s RPS violated the dormant commerce clause because it required changes by out-of-state energy producers.

The pork producers will have to convince the Court that the law was designed to disadvantage non-California producers. The Biden administration has filed briefs in support of the pork industry. They took the position that California’s law does not directly benefit the state’s residents, as the state attorney general claims, unlike state statutes to prevent or limit environmental harm. The two are thus “not comparable.”

WINDY CITY BUDGET

Mayor Lori Lightfoot has proposed her executive budget for the City of Chicago in 2023. It has gotten attention because it deals with two politically fraught issues: taxes and pensions. The $16.4 billion budget plan does not include a property tax increase. That is a change from the last several years. Along with stable property tax rates, the mayor proposes to fund its pension system with contributions in excess of its annual actuarially required payment.

The extra payment is budgeted at $242 million. The City fully funded required contributions to all four pension funds for the first time ever in 2022. The 2023 budget would pay $2.6 billion, an increase of 15% from a year earlier. City revenues for 2023 are now expected to come in $260 million above an August projection. There is also a payment of $40 million from a casino operator which is being applied to pension funding. The pension funding would come at a time of poor investment results from equity and fixed income market performance.

The overall size of Lightfoot’s proposed 2023 budget is 1.3% smaller than the overall 2022 budget was. The mayor started from a stronger fiscal position with an anticipated estimated budget gap being lower especially relative to those in recent years. The 2022 budget gap was $733 million. The mayor was able to craft a budget with a beginning gap of $128 million.

The more solid position overall also occurs while spending for public safety is increased. Chicago’s main fund for city operations is the corporate fund. The police department’s budget would increase to $1.94 billion from $1.88 billion this year.

FEDERAL CARBON CAPTURE PROGRAM

The passage of the Inflation Reduction Act and its provisions impacting climate change has begun to manifest itself in program announcements. The latest comes from U.S. Department of Energy (DOE). DOE announced its $2.1 billion Carbon Dioxide Transportation Infrastructure Finance and Innovation (CIFIA) program. Enacted under the Infrastructure Law, CIFIA offers funding for large-capacity, shared carbon dioxide (CO2) transportation projects located in the United States.

Appropriated annually through 2026, CIFIA will support shared infrastructure projects, including pipelines, rail transport, ships and barges, and ground shipping, that connect anthropogenic sources of carbon with endpoints for its storage or utilization. The goal of the program is to provide economies of scale and help form an interconnected carbon management ecosystem that will enable commercial deployment of carbon management technologies. 

There is no doubt about the current federal view of carbon capture technology. “Carbon management technologies such as direct air capture, carbon capture from industry and power generation, carbon conversion, and CO2 transportation and storage technologies must be deployed at a large scale in the coming decades to meet the United States’ net-zero greenhouse gas goals by 2050.”

SALT RIVER PROJECT GOVERNANCE

While the debate goes on about what is and is not ESG investing, there continue to be clear examples of situations which should clearly raise issues with investors interested in one or more of the ESG trio. Our view is that the hardest one to find real examples of is in the governance sector. Governance, it seems, can be so broad and so subject to politics in the municipal space in particular that it is hard to find clear examples.

This isn’t about day-to-day management of an entity issuing municipal bonds. It is about the oversight and direction given by those charged with that responsibility. As politics have become more local and more heated, the potential for some activist participants to throw wrenches into the operating and management processes continues to grow. One recent example is the Salt River Project in Arizona.

SRP has been locked in a debate with environmental activists (of whom four are members of the SRP board) over the expansion of the utility’s natural gas fired generators. SRP initially wanted to expand an existing natural gas plant by placing 16 gas generators on a space at a site designed for said expansion. The plant is located in the “historically Black” municipality of Randolph.

Activists in the environmental movement were able to effectively accuse SRP of racism. The environmental justice and equity movement managed to convince state regulators not to approve the expansion at the Randolph site. So, that’s the end of the simple story? Guess again. After the proposed gas plants were rejected, the four “environmental” board members took it upon themselves to send an unsolicited letter demanding that the regulators not approve the plant.

The activists may have been acting as individuals but once an individual takes a position at a public agency, they have different issues that they may have to subsume in order to effectively carry out their responsibilities. A board member is expected to take a bit more nuanced approach especially from the inside. One has to ask how effective the move was now that the SRP Board has announced that the four members have been censured by majority vote of the board of directors.

There might be a cause to be made for opposing the plant and the environmental interests may have “won” by virtue of the fact that the utility has approved a significantly smaller natural gas project at its Copper Crossing solar plant in Florence . SRP had already purchased eight of the 16 gas turbines in anticipation of Coolidge expansion approval. And the resolution of the environmental justice and equity issues? The cities of Florence and Randolph are within a couple of miles of each other so unless the winds stop blowing…

EV HEADLINES

The old General Motors small-car assembly plant in Lordstown, Ohio became a symbol of economic politics in the 2016 election cycle. The plant had been shut down and residents were highly concerned about their economic outlook. Then candidate Trump went to Lordstown and advised residents not to sell their houses because there was a plan to rejuvenate the plant.

Six years and an administration later, the Lordstown site has returned to the production of motor vehicles. Commercial electric vehicle startup Lordstown Motors says it has slowly started production of its first model, the Endurance pickup. The Foxconn backed entity has produced its first three trucks and plans to begin a slow rollout of some 450 trucks in the first half of 2023.

The company will obviously need more capital to fund expansion but it had nearly $200 million of available assets to fund operations.

Rivian reports that it produced 7,363 vehicles at its manufacturing facility in Normal, Illinois and delivered 6,584 vehicles in the quarter ended Sept. 30. At roughly the same time, the local community college announced the construction of a facility designed to train workers for the electric vehicle industry.

LITHIUM SETBACK

There has been much attention focused on the extraction of lithium, a key component of the emerging electrified economy, through mining. The usual concerns regarding mining have been expressed. In addition, the locations of many potential sources of lithium are located on culturally significant lands in the American West including many Native American burial grounds. Those issues have led to lawsuits and delays around a prime source of lithium in Nevada.

The key role of lithium in battery development has driven extraction activities to places like the Salton Sea in California. There Berkshire Hathaway planned its facility to extract lithium from the brine in the Salton Sea. Berkshire already operates multiple power plants near the Sea where it flashes steam off brines brought from deep underground at temperatures around 700°F (371°C) to spin turbines that produce electricity. Technology for an extra processing step could be connected to one of the existing plants to extract lithium before the brine is reinjected underground. 

The State of California and the federal government both have provided grants to Berkshire for their lithium development effort. The federal grants were subject to a final negotiation process. The State grant was supposed to help during the development of the process of separating out the lithium from the brine.

The federal grant was meant to aid the development of one lithium-based product. Thirteen months after the process started, the federal grant was withdrawn in March of this year. Now issues are emerging with the lithium extraction process. The very heat which made the Salton Sea an attractive geothermal power source is apparently not compatible with the production equipment needed for the right lithium product.  

COLORADO RIVER

The Metropolitan Water District of Southern California, Imperial Irrigation District, Coachella Valley Water District and Palo Verde Irrigation District – proposed cutting their annual allotment of river water by 400,000-acre feet, or around 130 billion gallons. It is all part of the effort to reduce usage of Colorado River water by between 2 and 4 million gallons per year. In June, the federal government set a deadline for the states in the “lower basin” to craft an agreement to reduce their water usage. When the deadline for a new plan passed in August, the federal government announced that the river was in a Tier 2 shortage condition for the first time in its history.

The shortage declaration means Arizona, Nevada and Mexico will have to further reduce their water usage beginning in January. Of the impacted states, Arizona will face the largest additional cuts – 592,000 acre-feet – or approximately 21% of the state’s yearly allotment of river water. The number from the water agencies isn’t a final offer, and could change depending on what kind of federal money is available to the agencies under the Inflation reduction Act.

CONGESTION PRICING FACES PRESSURE

New Jersey Governor Murphy has let it be known that he has lobbied at the highest levels – with the President – about his issues with the proposed congestion pricing plan under consideration by New York City. The specific ask – that the federal government complete a full environmental impact study before the new tolls are implemented. Such a study would be welcomed not only by New Jersey commuters but also by residents of the Bronx where much truck traffic would be diverted.

Other concerns from west of the Hudson include the lack of real consultation with a significant potential source of expected revenue. It already costs $16 to cross into NYC via the three Hudson River crossings into Manhattan. Other issues include the inability of the existing mass transit infrastructure to handle extra riders. The environment is also hardened by some childish moves by legislators in both states.

Ridership on New Jersey Transit trains is estimated to have risen to 60% of prepandemic levels but the agency does not expect it to fully recover for several years. The Port Authority’s PATH trains are also carrying about 60% percent of its prepandemic passenger loads.

MORE ESG PERFORMANCE ART

The State Treasurer of Louisiana has announced the withdrawal of state funds from Blackrock. The move is another example of the sort of performance art which has characterized the debate over climate change. The Treasurer is expected to run for Governor next year and ESG investing is shaping up as a campaign issue. The Treasurer’s announcement seems to cover significant assets – Louisiana had already removed $560 million from BlackRock investments from its treasury fund and that $794 million will be divested by the end of 2022. The treasurer’s decision affects day-to-day state deposits and transactions.

Tellingly, the Treasurer’s announcement does not cover the state’s pension assets. While $1.2 billion of funds is not insignificant, the real goal of anti-ESG state financial officers is to take pension funds away from fund managers who do not toe the anti-ESG line. That probably not be enough to satisfy the anti-ESG movement which is being driven by the right-wing group, the American Legislative Exchange Council (ALEC).  ALEC has written “model legislation” it says will help states protect their pension funds from “politically driven investment strategies.”

The moves come in the midst of a significant debate over proposed SEC rules which would require reporting entities to support their claims regarding ESG in regular scheduled financial disclosures. Those plans have received howls of protest from issuers including many in the municipal bond market. Then again, most efforts to improve disclosure over the last four decades have been met by howls of protest.

The announcement came at virtually the same time as another major power generator – Duke Energy – announced a program to expand access to renewable sources of electricity in South Carolina. The program addresses a straightforward business concern. Duke cites the fact that “a majority of South Carolina’s leading employers have explicit decarbonization goals, and the carbon intensity of electricity suppliers is top-of-mind for economic development prospects too.” 

Duke’s plan would enable large-load customers to contract with either of Duke Energy’s South Carolina utilities to provide locally sourced environmental attributes, including renewable energy certificates (REC), generated from both utility-owned generation assets as well as third-party owned generation assets and could include energy-storage options. The fact that the plan is the result of customer input simply highlights the political nature of efforts to fight adaptation to climate change.

In New Jersey, a state Senate committee voted to advance a bill to force the State pension funds to divest from any investments in the fossil fuel sector. The state has an established history of divestiture reflecting politics of the day. It has laws which require requires state pension funds to divest from businesses that boycott Israel. The state has also moved to divest from gun manufacturers, the owner of Ben and Jerry’s over boycotts of Israel, and companies which has invested in South Africa. 

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