Joseph Krist
Publisher
PUERTO RICO
It is tempting to go back five years and take what we wrote about the electric system in Puerto Rico and simply cut and paste it here. The news that a new hurricane had dumped 30 inches of rain on Puerto Rico raised all of the same issues with PREPA which arose in 2017. Housing conditions remain poor, the government’s finances have still not entirely been sorted out, and the politics of the Commonwealth have not gotten much better than was the case when it filed under Title III.
Once again, the Puerto Rico Electric Power Authority (PREPA) is experiencing an island wide power failure. Roads, bridges and other infrastructure have been damaged or washed away as a result of the downpour. More than 775,000 residents also have no access to clean water. After Maria in 2017, the island’s utility regulator, the Puerto Rico Energy Bureau, approved a plan that would require 40 percent of power to come from renewables by 2025. The island has made little progress in its effort to decentralize the power system. PREPA has been seen as a significant obstruction to progress. The private operator of the system has been resisting those efforts and has been pushing an agenda based on increased natural gas.
The timing of the storm and power failure come amidst legal efforts to resolve PREPA’s ongoing debt default. Puerto Rico Electric Power Authority bondholders asked the bankruptcy court Monday to dismiss the proceedings as a step to appointing a receiver for the authority. The move comes after a six month mediation effort conducted under the auspices of the oversight Board.
The board asked bankruptcy Judge Laura Taylor Swain to set aside several months to litigate issues in the bankruptcy. The Ad Hoc Group of PREPA Bondholders, Assured Guaranty (AGO), Syncora Guarantee, and National Public Finance Guarantee (together the “bondholders’ group”) rejected this instead asking for dismissal of the bankruptcy or a lift on the stay on litigation and the subsequent appointment of a receiver.
If the judge disagrees with that approach, the bondholders asked that the judge require the board to propose a plan of adjustment by Nov. 1 and a timetable with a plan confirmation hearing scheduled no later than May 1, 2023. Litigation is not the preferred approach but it increasingly looks like the parties cannot resolve their differences without an imposed solution. The differences are real. Bondholders believe they are entitled to PREPA’s gross revenue while the Authority sees the revenue pledge as one of net rather than gross revenues.
The storm and its destruction only serve to highlight the management and policy issues holding the island back. It is pretty clear that an electric grid composed of some centralized base load power and a large dose of renewables is what will allow Puerto Rico to move forward. The exposure to storms will not go away so the need to decentralize the grid and localize access to renewable power becomes even greater.
CARBON CAPTURE PIPELINE RISK
Opponents of carbon capture pipelines proposed for Iowa are focusing on issues associated with these facilities in other areas. They are especially interested in the issue of potential leaks or pipeline ruptures. They have seized upon the results of an investigation into an actual rupture of a carbon pipeline in Mississippi.
In 2020, a carbon pipeline near a small Mississippi village ruptured. The incident was blamed on “natural occurrences” which led to a section of pipeline breaking. That incident, in which there were delays in emergency notifications, led to the start of that investigation by the US Department of Transportation Pipeline and Hazardous Materials Safety Administration (PHMSA) to establish new measures to strengthen its safety oversight of carbon dioxide (CO2) pipelines around the country and protect communities from dangerous pipeline failures.
The incident highlighted the many concerns that landowners have over carbon capture pipelines potentially impacting their properties. The 2020 incident was characterized by the lack of timely notification to the National Response Center to ensure the nearby communities were informed of the threat; the absence of written procedures for conducting normal operations, as well as those that would allow the operator to appropriately respond to emergencies, such as guidelines for communicating with emergency responders; and a failure to conduct routine inspections of its rights-of-way, which would have fostered a better understanding of the environmental conditions surrounding its facilities that could pose a threat to the safe operation of the pipeline.
CLIMATE CHANGE DATA REALITIES
The pressure to reduce the carbon footprint of the power generation industry has been relentless. The debate over fossil fuels has gotten so intense it is easy for some neutral, non-political points to get lost in the debate. We see one example of this phenomenon in recent data from the US Energy Information Administration (EIA) regarding natural gas.
One of the issues which confronts climate change activists is the trade-off between rapid electrification needs if we decarbonize. The shift of home and/or commercial usage of natural gas to electric will create significant increased demand for power. That power has to be generated at least at a base-load level to support a majority renewable electric grid. Right now, there is a significant mismatch between the timing of electrification and the development of a mature reliable generation and transmission infrastructure that is not fossil fuel based.
Activists who oppose fossil fuels tend to also oppose nuclear power on “environmental” grounds. They also object to hydroelectric power from dams. When the efforts to reduce coal and nuclear coincide, it should not be a surprise as to the fuel of choice for replacing those sources. Natural gas, despite seasonal pricing issues still comes out to be the financially most beneficial choice for utilities.
That has resulted in increases in natural gas usage and declines in hydroelectric generation. It is reflected in natural gas production statistics from EIA. U.S. natural gas producers are operating more drilling rigs now than at the beginning of the COVID-19 pandemic in early 2020. Before the pandemic, the number of operating rigs in the United States had generally been declining. On January 31, 2020—when the U.S. Department of Health and Human Services first declared a public health emergency related to COVID-19—it was reported that 112 natural gas rigs were operating in the United States.
The number of natural gas-directed rigs continued to fall in the first half of 2020, reaching a low of 68 rigs on July 24, 2020, the fewest in the historical data, dating back to 1987. Since then, the natural gas rig count has generally been increasing, returning to pre-pandemic levels in January 2022. On September 9, the industry reported that 166 natural gas rigs were operating in the United States, 54 more than at the outset of the pandemic in the United States.
NUCLEAR SITE STUDY
The US Department of Energy has released research that finds that about 80% of operating and recently retired coal-fired power plant sites could host an advanced nuclear power reactor, with nearly 265 GW in total potential nuclear capacity. Use of existing transmission and connection infrastructure would reduce capital cost. The research found 190 operating coal plant sites that could host nearly 200 GW of nuclear capacity and 125 recently retired plant sites that could handle about 65 GW of nuclear capacity.
The repurposing of former coal generation sites helps to address the economic impact side of the climate change debate. Whether it be property tax revenues, sales or income tax revenues and the fees associated with residential and economic development, those revenues could continue to exist through a nuclear repurposing.
COAL REALITIES IN NEW MEXICO
Public Service Company of New Mexico, Tucson Electric Power Company, the County of Los Alamos, New Mexico and Utah Associated Municipal Power Systems are defendants in a lawsuit filed by the City of Farmington, MN. The San Juan Generating Station in the city is a huge, dirty coal generating facility which is scheduled to close on September 30. The plant and the coal mine which supplied the plant through its operating life are both scheduled for closure.
Now, the City is hoping to get the courts to issue an injunction forcing Public Service Company of New Mexico to continue to operate the plant. Ultimately the City hopes to transfer ownership of the plant and continue to operate it with carbon capture technology. It’s all about economics. The plant and the mine were substantial long-term employers. PNM has about 100 employees remaining at the plant. Approximately half of these employees will be laid off September 29th.
The mine owner announced earlier this month that that its “underground crews have mined the last ton of coal destined for the San Juan Generating Station.” PNM said that 48 employees will stay at the plant through mid-October “for safe shutdown of the last unit and then around 10 employees will remain onsite for activities such as continued running of the switchyard, managing inventory reduction, closing down computer systems, and decommissioning.” A San Juan County ordinance requires PMN to file a demolition plan within 3 months of permanent plant closure.
The situation puts one joint action municipal power agency right in the middle of another debate over the future of electric generation. Utah Associated Municipal Power Systems finds itself being stymied in its effort to decarbonize at the same time it is pursuing a possible replacement for fossil fueled power in the form of modular nuclear reactors.
WHILE PHILADELPHIA GAS WORKS IS UNDER PRESSURE
The Philadelphia Gas Works has always been a somewhat problematic credit in that it provides an essential service to some of the City of Brotherly Love’s most economically challenged areas. This has always created a challenging environment for PGW’s ratemaking and revenue collecting process. In recent years, environmental activists have called for the utility to be shut down given the role of natural gas in climate change.
Those are more long-term issues. In the immediate future, PGW faces scrutiny and calls to refund some charges due to overly high bills related to natural gas for usage in the month of May of this year. PGW this summer refunded about $12.4 million to customers after some residential customers in June got bills in excess of $200 for May usage, including weather charges that were more than five times their monthly delivery charges.
The Pennsylvania Public Utility Commission (PUC) voted in favor of a broad ranging investigation and analysis of the changes requested by PGW to the weather normalization adjustment. That charge on the bill automatically adjusts customer bills (up or down) when the actual weather varies from “normal” temperatures. Beyond the issue of the normalization process, the PUC also is asking for a broader review of PGW’s existing rates, rules, and regulations, extending the inquiry beyond weather normalization.
It continues a process which followed an August request asking the PUC to approve a revised tariff that would cap its monthly weather adjustment to prevent the excessive charges in the future. PGW proposed limiting the weather adjustment to no more than 25% of a customer’s monthly delivery charges. None of this is credit positive. It highlights the potential for longer term pressure to shut the utility down.
RHODE ISLAND TOLLS IN COURT
A U.S. District Court Judge ordered Rhode Island officials to stop collecting truck tolls within 48 hours. The judge wrote a 91-page decision finding that the collection of tolls is unconstitutional under the dormant Commerce Clause of the United States Constitution. The judge found that the tolls discriminated against out of state truckers. Tolls are not collected from automobiles.
Therein lies the rub. The trucking industry has used that provision as a basis for a discrimination complaint. The authorizing legislation included an explicit prohibition against tolls on automobiles. This ruling did not address the issue of revenue repayment. The state has collected $101 million in truck tolls since the first one launched in 2018.
Changes the General Assembly made to the original 2015 tolling bill exempted all vehicles except tractor trailers – including dump trucks and box trucks. Tolls were limited to $40 per day and charged a vehicle only once in each direction at each gantry. All of those changes were found to have benefited local businesses over out-of-state operators. Rhode Island is the only state in the country with a truck-toll system like the one struck down.
SPECIALTY COLLEGE AT RISK
New Jersey City University (NJCU) occupies a unique role in the state’s public university system. It is the only state university in Hudson County. It is also designated – like several other public institutions around the country – a Hispanic Serving Institution (HSI) for the state of New Jersey. The University’s recent history has been characterized by executive leadership turnover, as well as changes in other key administrative positions. The current management team has not yet had time to establish a track record of fully addressing the university’s significant financial challenges or implementing improved risk management practices.
The pandemic hit the University’s prime demand base quite hard as was true for minority/immigrant communities throughout the country. This has driven demand and enrollments down. The university enrolls around 5,900 students, over 80% of whom are undergraduates, with operating revenue of approximately $162 million in fiscal 2021. The resulting pressure on an institution with historical financial difficulties has drained cash balances to a dangerously low level of some 30 days. The hope is that the University’s role in the overall university system will generate support for state assistance while the new management is able to install its own financial plan.
The University issues unsecured general obligation debt. Total outstanding debt for fiscal 2021 was $148 million. This week, Moody’s downgraded the University’s debt to Ba2 and maintained a negative outlook. The declines in enrollments and cash have driven the credit close to covenant default. If cash goes below 30 days, the University must hire a consultant to review operations.
Preliminary unaudited information for fiscal 2022 shows a significant operating deficit driving a reduction in liquidity to under 30 days cash on hand. Management has declared a financial emergency and is taking steps under its fiscal 2023 budget to adjust expenses. Returning to financial stability in the near term will prove difficult given the magnitude of the projected deficit, forecasted continued enrollment declines, an inflationary environment, and labor constraints.
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