Is Winter Coming for Virginia Pipeline Projects?

The building season is here, but for developers of Virginia’s two hotly-contested natural gas pipelines, activity is back in the government agencies and courthouses. The construction sites remain largely silent, delays running up the ultimate cost of the projects, including the cost of failure.

Here is my (probably flawed) attempt at a status report. And you thought Game of Thrones is a complicated plot.

Dominion Energy’s leadership told stockholders on March 25 that it is hoping to “recommence at least partial construction” on the Atlantic Coast Pipeline (ACP) in the third quarter of this year, and the Mountain Valley Pipeline is still talking about being in service by the end of this year on its website. One national rating agency expressed concerns about the ACP several weeks ago, the Richmond Times-Dispatch reported. A few days later another analyst told Forbes readers about the challenges facing both pipelines.

Just listing all of the permit challenges and lawsuits facing the Mountain Valley Pipeline (MVP) and ACP projects is difficult enough, let alone trying to describe their status. A report back in January by Rob Rains of Washington Analysis LLC, which Bacon’s Rebellion could review but not share, listed battles over seven different kinds of permits for one or both projects, three lawsuits challenging the MVP and seven challenging the ACP.

The ACP at the federal level is still working to re-acquire right of way permits needed to build on U.S. Forest Service land, permits needed to build across waterways, permits needed to build across or under the Blue Ridge Parkway and Appalachian Trail, and permission to build where it might disturb endangered species. It has state-supervised permits under the Clean Water Act for its Virginia sections. It has its main FERC permit intact but is having to defend it in federal court. It is suing Nelson County over local permit denials.

The MVP at the federal level also has its main FERC permit under legal assault, it also needs to regain permission to build across certain waterways, and it has right of way issues involving the Bureau of Land Management as well as the National Forest Service. It also now needs restored permission to cross the Appalachian Trail. It also has its Virginia-regulated Clean Water Act permits for its Virginia sections. It doesn’t seem to have problems with the Fish and Wildlife Service.

Nelson is ground zero, where the ACP (48 percent owned by Dominion Energy) plans to tunnel under the Blue Ridge Parkway. It’s the Civil War Battle of Missionary Ridge all over again, with the pipeline developer desperate to hold high ground it thought safe. The U.S. Fourth Circuit late last year remanded the National Park Service’s permit for a Blue Ridge Parkway crossing, and then in February the court opined that only an act of Congress could approve crossing the Appalachian Trail.

In the investor presentation Dominion discussed the timing of a possible Supreme Court appeal or effort in Congress over the Trail decision. An optimistic schedule would have a Supreme Court decision at least a year away. Analyst Rains is predicting the response instead will be a change in the permit process, a new joint oversight effort involving both the U.S. Forest Service and the Interior Department. That will require a rulemaking but may carry less risk than taking the question straight to Congress.

The Fourth Circuit has also vacated the U.S. Forest Service’s special use permit for the ACP to cross its lands and has stayed U.S. Fish and Wildlife Service approvals because of alleged ACP impact on four endangered species: a bee, a bat, a mussel and a crustacean. It is that endangered species problem along 100 miles of its route that the ACP hopes to solve in time to restart partial construction this year.

That restart would involve just the eastern section of the project, from its intersection with the existing Transco pipeline (near that controversial compressor station in Buckingham) down into North Carolina, along with the planned spur into the Hampton Roads region. The north and western section, connecting to the West Virginia gas fields by crossing the mountains, must await a resolution on the Parkway and Appalachian Trail. That raises the possibility that only the eastern section is built, providing additional distribution east and south from that existing trunk line.

Both MVP and ACP are also re-applying for their Corps of Engineers permits to build across various waterways, with the MVP challenging a 72-hour work limit to complete four of the larger projects. Rain’s March 29 status report has both pipelines marked with yellow for caution, but that’s better than several others around the country marked in orange or red to suggest deeper peril.

Rains does not expect either developer will get much help from a new Executive Order signed by President Donald Trump in Texas last week, described in this report from National Public Radio.

Both Virginia pipelines still hold permits from the Federal Energy Regulatory Commission (FERC) and, so far, those have survived challenges. The opponents are now pursuing appeals of those in the DC Court of Appeals, one step below the Supreme Court, with the petition challenging the ACP filed permit April 5. The petition (here) combines a host of opponents, provides a summary of all the arguments being used – environmental, environmental justice and economic – and seeks that the permit be vacated, remanded to FERC, and all eminent domain activity cease.

A version of this commentary first appeared in the April 16, 2019 edition of the online Bacon’s Rebellion.

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Growing Corn Kills People

Jason Hill, a professor at the University of Minnesota, and a team of other scientists issued a study on April 1, 2019, which initially I thought was an April Fool’s joke. It is no joke!

According to one publication and its author, Prachi Patel, wrote on April 4, 2019 “…corn is killing us in unseen, complicated ways in addition to damaging the environment, …” The study is in Nature Sustainability. It finds that “…air pollution from corn production in the U.S. causes 4,300 premature deaths every year.”

In addition to the deaths annually in the U.S., the study estimates growing corn causes annual damages to human health of approximately $39 billion dollars. The study further finds that “…estimate[d] life-cycle greenhouse gas emissions of maize production, [creates] total climate change damages of $4.9 billion (range: $1.5-7.5 billion).”

The Abstract to Dr. Hill’s study allows that agriculture is essential in helping to feed the world’s population. But, the abstract of the study claims that agriculture is generating harmful pollution and human health effects. The study claims it uses county-level data to develop a model. The model in turn develops a life-cycle emission inventory from which Dr. Hill and his colleagues “estimate health damages” of how much air pollution is created from the production of corn. The model, not actual data, suggests the 4,300 premature deaths annually. EPA’s position is that any inhalation of particulate matter at 2.5 microns can cause death.

Others claim particulate matter at 2.5 microns does not kill anyone and that EPA’s studies are fraudulent. To put a micron in perspective, one strand of hair is about 50 microns in size. The eye can see down to about 40 microns. Diesel smoke used to be above 40 microns and is now down to 30 or less.  EPA, according to one author, admits that epidemiologic studies do not generally provide evidence of direct causation. The Dr. Hill study claims the use of fertilizers, pesticides, and fuel used in farm equipment contribute to poor air, water, pollution and climate change.

Dr. Hill is a bioproducts-biosystems engineering professor at the University of Minnesota. His team evaluated pollutants emitted from agriculture practices which help create Particulate Matter known as PM2.5. Dr. Hill’s researchers believe PM2.5 helps to cause cardiovascular and respiratory diseases, diabetes and cancer. The research team, in creating its life-cycle model, attempt to estimate the emissions coming from the burning of diesel fuel, fertilizer production, electricity use, transportation, and in-field corn production and harvesting.

The Minnesota team estimated the increases of emissions of Particulate Matter and then compared them to population exposure of county residents. One report published by Future Earth stated, “Ammonia emissions from fertilizer use account for 71% of pollution-linked deaths.”\

Dr. Hill and his team believe farmers need to change their use of fertilizer types and application methods. His team also suggests that farmers be offered incentives to evaluate other crops not requiring as much fertilizer. A number of groups are attacking the production of corn. One group promotes a movie entitled “King Corn.” It too suggests corn is killing us and of course attacks GMO corn because it is claimed 88% of corn is genetically modified. In fact, one blog claims “…corn is (slowly) killing you.”

Agriculture and corn growers need to recognize there are groups and now a prestigious university attacking corn production practices in the U.S. As usual, opposition groups start by estimating the health damages a certain product creates. In this case, Dr. Hill and his team and apparently the University of Minnesota are claiming that growing corn creates premature deaths. Some would say the attack on another agricultural product – tobacco – started the same way. The study, which evaluates health damages created by growing corn, can be purchased for $8.99. It is worth reading.

This commentary originally appeared in Farm Futures on April 11, 2019.

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Economic Impact: Time will tell how dangerous this simple curve is

Talk of recession has picked up again. The reason might sound complicated, but the principle is fairly basic.

In financial parlance, we’re talking about the inversion of the yield curve. Here’s what that means … and how it might take a bit of time to know the consequences.

The U.S. Treasury Department sells government bonds at various maturity dates — ranging from one month to 30 years — and it pays interest on that money it is borrowing. The “yield curve” simply represents the relationship between interest rates on short-term and longer-term securities.

Typically, the yield on a three-month Treasury bill is lower than on a 10-year note. That’s because there is lower uncertainty over what will happen in only three months.

For example, the holders of a 10-year note have a longer period to worry about the economy. If inflation goes from 2 to 3 percent in that decade, they will have less purchasing power when the note matures. To compensate for that risk, they demand a higher interest rate.

So the yield curve typically shows incremental increases between the three-month bill, the one-year bill … and so on, up to 30-year Treasuries.

But the curve is said to invert when the three-month yield is higher than the 10-year yield. When that happens, it indicates that investors have concern about economic growth.

For the inversion to happen, two things need to occur. One is that short-term interest rates have to rise, and the other is that long-term rates have to stay put or decline.

Here’s what has been happening lately.

The goal of the Federal Reserve Board is to bring short-term rates to a level where they don’t cause the economy to accelerate so much that inflation rises.

For two years, the Fed has been raising the federal funds rate target — the overnight rate that banks use to lend money to each other. The yield on the three-month bill rises almost in lockstep.

The Fed has raised the fed funds rate target to a range of 2.25 to 2.5 percent. That pushed the three-month yield to 2.46 percent for the week ending March 22, while the 10-year yield closed the week at 2.44 percent. (The March 29 closing yields were not quite inverted, with the three-month figure at 2.40 percent and the 10-year at 2.41 percent.)

Typically, when short-term rates rise, so do long-term rates. But this has not happened lately — because investors are concerned that economic growth will slow. That would mean lower yields in the future.

So what do investors do? They buy more long-term Treasuries now to lock in current higher yields. The increased demand for long-term notes causes the price to go up, and the yield comes down — because Treasury prices and yields move in opposite directions. When this process pushes long-term interest rates below short-term rates, it results in yield curve inversion.

Since 1956, an inverted yield curve has preceded every recession by a year and a half or so. We’ll know before long whether today’s bond investors are right this time.

A version of this commentary originally appeared in the April 7, 2019 edition of The Richmond Times-Dispatch.

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How Government Creates Poverty

Government is much better at creating poverty than at curing it.

On April 3 the General Assembly voted to end the practice of suspending driving licenses for non-payment of fines or restitution or both and ordered Department of Motor Vehicles to restore driving privileges for hundreds of thousands of Virginians. If you need to do business at a DMV office in July, when all this happens, get there early. Restoring 600,000 licenses may take a while.

The General Assembly did nothing to eliminate the underlying debts that the various individuals cannot or will not pay (and often it is will not). Nobody really asked any questions about how high the fines have become, how many additional court and processing costs have been layered on to enrich government, and whether those should be rolled back.  Some of the legislators did bring that up in debate, but it wasn’t a focus.

As with so many things in this world, this is all about the money. Follow the money. How government creates poverty and profits off it may become a theme for future stories. This one is a good start, because nothing was fixed.

For several General Assembly sessions, I represented some of the law firms who collect these debts for Virginia’s court system as contractors working on a contingency fee basis.

I was initially approached by one firm to research a small issue. During the previous session of the Assembly, in a typical undercover budget move, language was added to put yet another cost on the backs of these debtors, a 17% surcharge. If the debt had been $300, it suddenly became $351; if $1,000 this added another $170. Why? To cover the cost of collection, of course! Why 17 percent? Because that was the contingency fee being charged to the courts by the state Department of Taxation.

My father, when he was a city manager, found a joke sign which he hung in his city hall office that announced a new 6% tax to cover the cost of collecting taxes. As I explored this question for that Hampton Roads lawyer five years ago, that sign was then hanging in my office and the parallel was clear.  Government was getting greedy.

The last step in the process for these debtors, if they ignore the court’s own collection efforts and if losing their license doesn’t bring them around, is assigning the case to somebody for collection. The state wanted the debtors themselves to cover the contingency fee paid to the collectors.

My client list grew to several firms when it turned out turf wars were erupting over that collection process and the related fees.  The private law firms were competing with the state agency that collected for most court systems, the Department of Taxation, and a growing number of local city and county treasurers who were doing the collections. When the local agencies took the contract and kicked out the private firm, the contingency fee demanded and paid on the collections routinely went up. Some localities saw a way to funnel state dollars to their local bank account by jacking up the fee.

Eventually the legislature stemmed the local greed parade. It happened with (you guessed it) budget language, boilerplate which is in the annual bill to this day.  It sought to force the localities to charge no more in fees than their actual costs of doing the work. That issue is not the point of this essay, but what I learned and observed while working on it, lessons I took away.

Nobody was interested in solving the problem by reducing the fines or taking off the extra charges, including that final 17% extraction. Nobody was interested in creating a process for negotiation and settlement, like the process that exists if you have a tax debt. Many of these debtors have a problem in more than one jurisdiction, but no jurisdiction was interested in surrendering control of their claim on that person’s finances to a streamlined central process.

The whole system cried out for an intelligent redesign, which is still needed. One recent reform imposed by the Supreme Court did make it far easier for debtors to get on a payment plan, something many local courts were refusing to do. That reform was never given time to work, however, before this recent decision by the General Assembly to restore the licenses without payments.

If you examine the most recent report of the State Compensation Board on the fines collection process, here, you won’t find much data about the debtors, their average amount in arrears, how far behind they are. Just how much in such “receivables” is owed to the state and locality, accumulated over years, is never included in the report.

In 1998 about 68 percent of the $281 million in fines and costs assessed by the courts were collected directly by them, leaving 32 percent for other collectors to try.  By 2018 the rate of immediate payment was down to 63% of $470 million assessed, leaving more than $170 million for others to chase and earn a contingency fee.

Government paying itself a contingency fee to collect a government debt – a fee higher than the private sector would charge – is a great way to create and preserve poverty.

Not one dollar of that liability has been set aside by the General Assembly’s actions. The liabilities will continue to pile up, with interest and with one less major collection tool available. The calculation has probably been made it is better to collect high dollars from those who can pay than to set lower fine and fee amounts. What approach would actually reduce the misbehavior being punished?  That doesn’t seem to be the goal at all.

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Richmond’s Proposed Cigarette Tax is Bad Policy

Last year, the Richmond City Council considered an 80 cent per pack increase in the cigarette tax. After several public hearings and careful consideration of the shortcomings of this proposal, the City Council voted it down. But like Jason in the series of Halloween movies, “he’s back!”

This time the increase in the cigarette tax being considered is “only” 50 cents per pack or fully $5.00 per carton. But the economic arguments against this year’s proposed tax increase are the same as last year and such those impacted the most have not changed. Those are people making lower incomes in the City of Richmond.

The Thomas Jefferson Institute for Public Policy recently published its third annual study on the impact of cigarette tax increases on local government budgets. This study again shows, as it has in the past, that projected income from cigarette taxes is rarely collected and that in most cases a tax increase produces less and less income in future years. This tax is not one that is reliable and it is clearly a tax that hits small businesses the greatest.

The counties surrounding Richmond have not changed their cigarette taxes so they will be the big winners if the City Council adds 50 cents to a pack of cigarettes. Smokers will seek out the best prices for cigarettes and those will be found a few blocks away in Henrico or Chesterfield counties. And when a smoker walks into a convenience store to buy cigarettes, he or she will also purchase other items. Studies show that small “mom and pop” grocery stores and convenience stores are hurt the most from an increase in cigarette taxes.

When we will drive blocks out of our way to save 10 cents for a gallon of gas or about $1.60 to fill up our gas tank, and we will drive three miles to save $4.00 on a shirt, what makes the City Council think that smokers won’t do the same to save $5.00 on a carton of cigarettes? And the gas stations outside of Richmond will encourage customers to come to their establishments to buy less expensive tobacco products, and in the process buy gas and other things as well.

This proposed cigarette tax is not a good budget decision and will not help build the economic base in Richmond. Indeed, it will only hurt Richmond’s economy.

And those individuals hurt most by this proposed tax increase are those in the lower income brackets. The Virginia Department of Health in its study titled, “Virginia Adult Tobacco Survey 2016-2017” shows that 53.1% of those who buy cigarettes make $30,000 a year or less. And 26.1% of adults in Virginia making less than $15,000 a year are smokers while only 10.4% of our those making more than $50,000 use cigarettes. So the City Council is considering yet another tax that will hit our lower income neighbors the most. This just isn’t right.

Cigarette sales will also be impacted by these three relatively new elements to the market place: 1) the new 21 year age limit on buying cigarettes could reduce cigarette sales by as much as 10%; 2) vaping products are becoming more popular and could impact normal cigarette sales; and finally, 3) a study that the state legislature has requested could redefine how tobacco products are taxed here in Virginia and the impact of such changes cannot be contemplated at this time. These changes in the marketplace combined with the negative experience from raising cigarette taxes by localities across the Commonwealth, this is the wrong time to impose new taxes on tobacco products.

And finally, when recent studies show that school construction in Richmond costs more than most any other area in the state, it makes more sense for the City Council and the School Board to take a look at it own operations and find the $3.1 million in savings that the proposed 50 cent tax increases is projected to bring into the city coffers. This proposed tax increase is not a good budget decision.

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