Power Failure update
Update (9/23/07): Making smarter use of region’s hydropower
Experts recommend sweeping changes
Think of the giant hydropower plant north of Niagara Falls as a set of jumper cables with enough juice to help restart the stalled regional economy.
Smart allocation of the low-cost power it generates could give a boost to key business sectors deemed as having the best growth prospects. The sale of even a small portion would greatly increase the pool of money targeted to promote economic development.
This electricity, after all, with a market value of more than $200 million, is sold to local industry at prices so deeply discounted that they can make or break an energy-intensive company.
“The potential of close to a quarter of a billion dollars of power a year is incredible. We’ve just been very short-sighted about the way we’ve looked at the potential,” said Sam Cole, a University at Buffalo professor who studied the impact of hydropower for the New York Power Authority.
“Given the political will, and efficient use of the power, practically every dream Western New Yorkers have for the recovery of the region could be fulfilled.”
Following up on Power Failure, an investigative report published in May, The Buffalo News queried 20 utility executives, energy consultants, economic development officials, economists, and labor and business leaders on how to best use the region’s share of hydropower.
Here’s a summary of their ideas:
• Target low-cost hydropower and the proceeds of power sales to six clusters of business activity, such as advanced manufacturing and life sciences, that planners have determined hold the most promise for economic growth in Western New York.
• Revise the criteria used to determine which companies receive low-cost power. The size of investment, pay of jobs created and spinoff effect should be primary factors.
• Sell some of the power allocated at market rate to create a pool of money to promote economic development. There’s a ready source, some 77 megawatts of power not presently assigned to local industry, that would fetch an estimated $24 million a year.
• Earmark the proceeds to clean up the region’s numerous brownfields and contaminated or otherwise unusable buildings, provide seed money to promote small-business launches, offer grants to help select businesses offset their power bills, and help make existing businesses more competitive in the global economy.
• Help the industries that would lose their low-cost power make a successful transition out of the program. Working with firms to conserve energy, improve their production processes and find other discount programs are mentioned as options.
• Put Empire State Development, an arm of the Spitzer administration, in charge of this initiative, rather than the Power Authority, as is presently the case with power-related economic development. Coordinate the initiative with with other economic development programs, such as Empire Zones, and make the effort consistent with other programs and transparent to avoid favoritism.
“It absolutely can be done,” said James Allen, executive director of the Amherst Industrial Development Agency.
Root of problem
Federal law determines how a vast majority of the hydroelectricity generated at the Niagara Power Project is allocated. Industries within 30 miles of the plant in Lewiston get one of the largest allocations, which last year amounted to 38 percent of the plant’s production.
The power is doled out the same way it’s been since the plant opened in 1961, some seven governors, nine presidents and wave after wave of business closings later. Just 10 firms get two-thirds of the discounted power and, in the process, enjoy some of the richest corporate subsides in the nation.
Two-thirds of the region’s allocation remains in the hands of companies that were customers of the privately operated Schoellkopf power plant, which collapsed into the Niagara River in 1956.
The power is treated as a corporate birthright: some of the companies have shed thousands of jobs over the years but continue to receive discounted power. In some cases, the discounts save original customers still getting power more than their entire payroll costs.
“The system is antiquated and clearly does not produce the desired results,” said Mark E. Hamister, an Amherst businessman who served on a blue-ribbon panel last year that studied the state’s use of hydropower.
The timing is ripe for a reconsideration of how hydropower is used. Most of the discounted industrial power is up for grabs over the next five years as company contracts expire with the New York Power Authority.
What’s more, there’s a growing chorus for change.
Last December, a blue-ribbon panel established by then-Gov. George E. Pataki called for the use of hydropower proceeds to establish a poll of money to fund economic development activities in Western New York.
In July, a consulting group hired by Empire State Development said economic development efforts should focus on the so-called “Innovation Economy” that uses technology and/or completes globally.
“If New York is to enjoy a long-term economic renaissance — one that benefits every region — it must look toward the Innovation Economy,” said the report by A.T. Kearney.
Target power
There was widespread agreement among the experts solicited by The News that the region’s allocation of hydropower needs to be better targeted. The region’s leading economic development organizations have identified six business activities that have the most potential to grow, and the experts said that’s where future allocations should be directed.
Those clusters include advanced manufacturing, which involves the use of technology; life sciences, including bioinformatics; backoffice financial operations, such as call centers; transportation logistics, e.g. trucking, warehouse and distribution facilities; agri-business, including food processing and bio fuels; and tourism.
Geography is also a consideration. The consensus is that low-cost power should go to companies located in developed areas in the cities and suburbs, as opposed to rural locals. The amount of urbanized land — areas with public infrastructure such as sewers and roads — has tripled the last 50 years while the region has lost population.
“Western New York has so much existing infrastructure that is underutilized,” said Elsenbeck, of National Grid. “Roads, utilities, sewer and so on that previously served area industries could be put back to use if there was a concerted effort to clean-up and market brownfields.”
Revise criteria
The experts said the eligibility criteria should be overhauled.
“The economy of this region has changed, so we all need to change the manner in which we think about improving it,” said Elsenbeck, of National Grid.
The size of the capital investment is regarded as the most important factor.
Other key components of the revised criteria would include:
• Quality of jobs created or preserved — the higher the pay, the better .
• Share of goods and services purchased locally and products exported outside the region — again, the higher, the better
• Degree to which electricity is a major cost of operation.
In short, energy-intensive companies in the targeted clusters requiring a lot of capital that buy locally, sell globally and pay good wages. All the better if they want to set up shop on a former brownfield or are owned by a woman or racial minority.
Raise money
The region’s allocation of industrial hydropower is 695 megawatts, but 12 percent is
not assigned to industry. Most of that unused power, 77 megawatts, is sold by the Power Authority and used to pay for a program that primarily benefits interests outside the region.
The consensus among the experts: that money should flow back to Western New York, given that federal law designates that the power is used to benefit the region
Many experts said a portion of the region’s share of power should be sold on the open market to raise cash to help pay for economic development activity.
“You can create a really good job in New York State for $50,000. You can create a job that will get people out of poverty for less than $5,000,” said Cole, a professor of urban and regional planning who has consulted for a number of utilities and energy-intensive industries here and abroad.
That works out to 4,200 good-paying jobs a year if the entire allocation of 695 megawatts was sold at today’s energy prices. And more jobs if lesser-paying positions were targeted. To put that 4,200 in context, the region has lost about 9,000 jobs in the past seven years. Officials have taken heart in a gain of some 2,000 jobs over the past year.
Not that Cole is suggesting a complete monetization of the power, but to underscore the potential the power has.
“It’s reasonable to ask the question,” Cole said, “What if the monetary value of the lowcost power could be transformed into development assistance for our region?”
Several experts suggested the proceeds be spent primarily in four ways:
• Clean up brownfields and buildings in need of environmental remediation of asbestos and the like. There are about 55 brownfields, some of them several hundred acres apiece, in Erie and Niagara counties. A clean-up effort would provide a stable of shovel-ready sites while also cleaning up dozens of toxic eyesores.
• Establish a pool of capital used to make grants of $50,000 to $250,000 to promote small business. The pool would be part of a concerted international effort to attract entrepreneurs to Western New York.
• Provide funding to established companies to help them improve their products, processes and business models to make them more competitive in the global economy.
• Provide grants or loans to targeted businesses to help reduce costs.
The money would be targeted to the same business activity and geographic area as lowcost power.
Help the losers
There were sharp differences among the experts when it came to existing power customers. Economic development officials in Niagara County said existing customers should continue to receive low-cost electricity regardless of how well they match up with new criteria.
“Those companies are investing big capital in their facilities and continue to employ thousands of people with good family-supporting jobs,” said Samuel M. Ferraro, executive director of the Niagara County Economic Development Agency.
Most officials, however, said that current recipients should be subject to revised criteria. While no one wanted to say it for the record, there is a widespread opinion that many of the present allocations are being squandered.
Companies that would lose part or all of their low-cost power would be given several years to make the transition, which could include assistance in becoming more energy efficient or placement in another discount program, albeit it more costly than present.
The bottom line, most experts said, is that the power is too important to keep allocating it the same old way.
“If organized and applied correctly, hydropower can have much of the same extraordinary impact on the Western New York economy at the beginning of the 21st century that it had at the end of the 19th century,” said Andrew J. Rudnick, president of the Buffalo Niagara Partnership, the region’s leading business organization.
Who manages
The Power Authority presently manages the power element of economic development projects it is involved with, a responsibility experts say is misplaced. “Hydropower as an economic development tool should be applied consistently with all the other economic development tools. And the way that works is an economic development agency, not a technical agency like the Power Authority, coordinating all that,” Rudnick said.
A reformed Empire State Development Corp. “provides us the best option,” he said. A statewide blue-ribbon panel that studied economic development programs administered by the Power Authority recommended such a move late last year.
The state agency would work in collaboration with local economic development agencies.
Allen, of the Amherst IDA, said now is the time to reform the way hydropower is used in the region.
“The timing is just perfect because we know what we’ve been doing hasn’t been working,” he said.
Added Hamister: “It is time for bold and meaningful change. Will our elected leaders so act?”
Monday: WNY can be a player in the green economy.
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