BEHIND THE HEADLINES
Power deal would save Yahoo! $101.2 million
Subsidy package is one of the richest ever offered by the New York Power Authority.
Published: May 21, 2009, 12:30 am
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The deal state officials are offering Yahoo! to entice it to build a data center in Western New York would provide about $810,000 in power discounts over the lifetime of the subsidy for every $50,000 job created, a Buffalo News analysis has found.
The discount would save Yahoo! an estimated $53,996 per job per year over the 15-year life of its proposed contract with the New York Power Authority. The average subsidy for companies given new power allocations in recent years is less than a quarter of that—$12,446.
The offer, which Yahoo! officials are considering, represents one of the richest subsidy packages ever offered by the Power Authority.
The Internet giant would build a $150 million server farm that would employ 125 people in exchange for deeply discounted hydropower generated at the Niagara Power Project in Lewiston. The discounts would save Yahoo! an estimated $101.2 million over the 15 years, according to News calculations that use the authority’s cost assumptions.
That works out to $809,940 per job.
“It’s exceptionly high, even for high-tech,” said Greg LeRoy, a national expert on economic development subsidy programs.
“There are a few other deals we’ve seen over the years in that neighborhood, but it’s stratospheric. It doesn’t have much company,” said LeRoy, executive director of Good Jobs First, a nonprofit research and advocacy group based in Washington, D.C.
“On a number basis,” said Power Authority President Richard Kessel, “this doesn’t look like the greatest deal in the world, but we can’t look at the numbers alone.
“Numbers matter less than jobs. We’ve just got to create jobs in Western New York,” he said.
Kessel also echoed comments made by Gov. David A. Paterson on Tuesday when he announced the state’s offer, that corralling Yahoo! could help attract other technology companies.
“It could be a magnet for other high-tech businesses,” he said.
Data centers usually don’t act as a catalyst to other high-tech development, however, said Rob Atkinson, president of the Information Technology Innovation Foundation, a technology policy think tank in Washington, D. C. “They tend to be relative stand-alone entities,” he said. “They don’t generally have a lot of spinoff.”
Server farms require a lot of electricity, and Yahoo! would save money by purchasing power from the Power Authority for less than one-quarter the market rate. This discounted hydroelectricity is coveted by energy-intensive industries, and currently about 125 companies receive power. The News estimated the discounts saved companies some $180 million in 2006.
A News investigation two years ago found the Power Authority’s discount power program is one of the richest subsidy programs in the nation. In the extreme, companies that have been shedding jobs for years are getting discounts that save them up to $150,000 per job per year. A study commissioned by the authority concluded in 2001 that the allocations have been largely ineffective in promoting job growth and helping the region attract new business.
Since The News investigation, the authority has come under pressure to leverage more economic development for its cheap power. Working with a local advisory board that includes economic development, government and utility officials, the Power Authority has made 61 allocations of discounted power since January 2006.
A News analysis of those allocations shows the authority is offering Yahoo! more generous terms than it has other businesses it has made deals with during that period.
The average discount for every job created is $12,446 per year, The News calculated. The Yahoo! deal works out to a discount of $53,996 per job per year.
No other deal comes close. The next costliest deal averaged $32,733 per job per year.
The Yahoo! deal fares better in a second comparison. On average, each kilowatt of power allocated leveraged $10,288 in private investment. The Yahoo! deal works out to $10,000 per kilowatt, just a tad lower.
The Yahoo! allocation of 15 megawatts is the second-largest made by the authority since 2006. The largest went to Globe Metals, which received 40 megawatts to reopen a plant in Niagara Falls to produce metallurgical-grade silicon and refine it for use in the manufacture of solar panels.
The Globe deal averages $26,186 per job per year. Also, tax credits granted to Globe will allow the company to avoid paying much, if not all, of its state corporate taxes in at least the short term.
State officials rationalized that deal, in part, by an agreement with Globe to set aside 25 percent of its production for sale to solar-panel manufacturers it hopes to attract to the state.
There are no such mandates to seed technology firms in the Yahoo! proposal.
Authority officials said, however, that construction of the server farm will require the development of a network of high-tech infrastructure, including fiber-optic lines, that they hope will attract other technology firms.
But sites under consideration are in rural areas—Cambria, Lockport and Pembroke— miles from urban areas looking for an influx of good-paying jobs to buttress a declining job base and combat poverty that makes Buffalo the third-poorest major city in the nation. Niagara Falls also suffers from a high poverty rate.
“High-tech is normally associated with urban places—Austin, Texas, Portland, Ore., and Silicone Valley,” said LeRoy, of Good Jobs First, which has studied subsidized job creation in the area.
He said the prospective locations of the Yahoo! facility here raise “the issue of what does this do for the parts of the region that have lost the most jobs? You want to relace jobs in the places where most of them have been lost.”
The Power Authority’s Kessel said the state did not try to influence Yahoo! on picking a specific site in Western New York, saying, “That’s a decision companies need to make themselves.”
He stressed that it’s important to try to promote business development outside of traditional manufacturing and that landing Yahoo! would result in a “huge psychological shot in the arm.”
Getting Yahoo! to set up shop here would “send a message. I don’t think you can quantify the immeasurable benefits,” Kessel said.
The Yahoo! deal was announced by Paterson just a month after the Power Authority he controls through appointees to its governing board came under sharp criticism from both Democrats and Republicans for its unwillingness to approve several other large allocations.
A News analysis of those proposed deals shows two of the three cited would have been even costlier than the Yahoo! arrangement.
A proposal, which was never formalized, to give Google 40 megawatts to build a data center in Medina would have involved discounts averaging $89,994 per job per year. Google decided in 2007 to build in North Carolina. Authority officials said Wednesday Google never provided all the information requested.
A proposal to allocate 35 megawatts to Steel Development Co. to build a recycling and manufacturing plant in the Town of Shelby in Orleans County would have worked out to $60,502 per job per year. The company abandoned its plans.
The other deal, in 2005, involved an inquiry from Wacker Chemical for 50 megawatts, which would have resulted in annual discounts averaging $28,810 per job. The authority offered Wacker 37 megawatts, all the available power at the time, but Wacker opted not to pursue the project.
jheaney@buffnews.com
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