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Power Failure Region home to cheap power, high bills and huge corporate subsides

For a long time, having Niagara Falls in our backyard was a source of not only tourists, but abundant, cheap power that helped make the region an industrial powerhouse.

Those days are long gone, and it's no coincidence that in the interim, the Buffalo Niagara region lost control over its most valuable natural resource, a Buffalo News investigation has found.

The state-operated hydropower plant north of Niagara Falls generates enough low-cost electricity to power 2.5 million homes. But more than half of that power is shipped out of town -- in some cases, out of state.

Little of what remains goes to residential customers, whose rates are 50 percent higher than the national average.

Most of the power that stays here goes to industry. It's a lot of juice -- more than one-third of the plant's generating capacity.

But most of the power goes to a handful of companies that enjoy discounts that amount to some of the richest corporate subsidies in the nation, The News found.

Just two Niagara Falls chemical manufacturers -- Occidental and Olin -- get 29 percent of the low-cost industrial power earmarked for the region, although they employ only 1 percent of the workers of the 98 companies participating in the program. The discounted power last year saved Occidental and Olin an estimated $53 million, or an average of $126,155 per job.

And it doesn't stop there.

Dozens of other companies, The News found, receive subsidies considered excessive using benchmarks set by the federal government for several of its largest economic development programs.

Some of these industries have enjoyed generous subsidies for decades, thanks in part to what many say are outdated criteria that favor declining Cold War industries at the expense of new-economy enterprises.

Low-cost power recipients, in fact, read like a who's who of the local manufacturing community: Delphi, Ford, General Motors, Du Pont, Moog, Goodyear-Dunlop, General Mills, Praxair, General Mills, American Axle, Outokumpu American Brass and the International Steel Group, the remnant of Bethlehem Steel.

The discounted power saved the 98 companies that receive it an estimated $180 million last year.

"That's a very big number that raises the question of what else could the money do to create jobs?" said Greg LeRoy, executive director of Good Jobs First, one of the nation's leading experts on economic development subsidies.

The fact that subsidies are not spread evenly -- 10 corporations enjoy two-thirds of the savings -- is even more troubling to some.

"That's a sweet deal that's unfair to everyone else," LeRoy said.

Some say it's more than unfair. It's one of the stumbling blocks holding back the Buffalo Niagara region's ability to create a new economy to replace its declining industrial base.

"Low-cost power tends to preserve the old industrial base rather than attracting new high-tech industries to the region," concluded a 2001 study funded by the New York Power Authority.

The News' yearlong investigation focused on authority operations and the way power from the Niagara plant is used.

Among the News' findings:

*A handful of companies are enjoying the lion's share of the region's costliest economic development program. The discount given the 10 largest power recipients totals an estimated $119 million annually of the $180 million in energy subsides.

*Companies with smaller allocations get a better bang for the buck. Five companies getting roughly half the subsidized power employ 7 percent of the work force of participating companies. The 78 with the smallest allocations account for 52 percent of the jobs but just 19 percent of the allocation and subsidy.

*Roughly one in five companies getting low-cost power don't meet their job quotas. But the authority takes away power from fewer than a quarter of those falling short and then usually only a portion of their allocation.

*Those industries that don't enjoy low-cost power from the authority or receive some other type of discount pay nearly four times the national rate for power. A state commission last year determined that New York's industrial rates are substantially higher than neighboring states such as Ohio and Pennsylvania.

Criteria that determine who gets low-cost industrial power date to the 1950s and favor declining Cold War industries with dim job prospects at the expense of new-economy enterprises.

In short, the region is home to cheap power, high rates and huge corporate subsidies to a select few.

"Over 100 years ago, the development of electricity became the foundation of prosperity for our region. How can we have fallen so far away from that prosperity, when the same river generates more power than ever?" said Philip G. Wilcox, chairman of the political committee of Local 97, International Brotherhood of Electrical Workers, who was involved in the re-licensing process.

>Deep power discounts

The News investigation was prompted by the authority's successful effort to renew its 50-year license to operate the Niagara Power Project in Lewiston. The News interviewed more than 85 experts, as well as local and state officials, reviewed more than 6,500 pages of documents obtained under the state Freedom of Information Law and conducted statistical analyses using other records obtained under the FOI Law.

The News found that the Niagara plant is the nation's second-largest producer of hydropower, the equivalent of a huge, bottomless oil field in our backyard that produces electricity at a fraction of the cost of other fuels.

But, The News found, state law strips the Buffalo Niagara region of any inherent claim to the hydropower generated here; federal legislation diverts most of it elsewhere: About 60 percent of the electricity generated at the Niagara plant last year was transmitted out of Erie and Niagara counties.

Two blocks of power remain in the region, the larger going to industries in Niagara and Erie counties, as well as a handful in Chautauqua County. It accounted for 38 percent of what the Niagara plant generated in 2005.

A smaller block goes to three privately owned utilities -- including National Grid and New York State Electric & Gas, which operate in Erie and Niagara counties -- that receive enough power to provide about 5 percent of what it sells to residential customers.

The industrial allocations are rooted in federal and state laws that date to the 1950s, following the collapse of the major private hydropower plant in Niagara Falls that prompted the construction of the Niagara plant under the control of the Power Authority.

Companies that had been customers of the private power plants received allocations of replacement power. An additional allocation of a little more than half that size was earmarked for companies that wanted to expand their operations, which is known as expansion power.

There are a number of other criteria used to decide who gets power, the chief one being job creation or retention. Capital investment is another consideration.

"The criteria are designed for the manufacturing equation the way it was a couple of decades ago, when it was more job-intensive than investment-intensive," said Thomas A. Kucharski, president of Buffalo Niagara Enterprises, a nonprofit organization that markets and coordinates economic development services for the region.

In other words, Delphi probably has a better shot than Google of getting the power.

About three-quarters of the industries in Western New York are on some sort of discount plan, but those receiving replacement and expansion power get the best deal, described as "some of the least-expensive electricity in the nation," in a 2001 study done for the authority by Center for Developmental Analysis, a consulting firm of seven professors from the University at Buffalo.

These companies include Occidental, Olin, Praxair, Du Pont and International Steel, which were entitled to large allocations because they were customers of the plants closed to make way for the Power Authority's plant in Lewiston. Many of these companies subsequently got allocations of replacement power.

The subsidy that companies enjoy is the difference in cost between the power they receive from the Power Authority for 1.6 cents per kilowatt-hour and the 6.6 cents per kilowatt-hour that industrial power sold for in this region last year, before delivery and other costs were factored in.

Olin gets a $24 million annual subsidy -- an estimated $150,359 per job. Occidental gets a $28.7 million subsidy -- calculated at $111,144 per job.

In other instances, particularly Delphi and General Motors, the authority awarded allocations of expansion power in the name of economic development. These allocations are much smaller. Dephi's $7.8 million represents $1,340 per job. General Motors' $7.1 million is $1,914 per job.

Occidental's employment has dropped over the past three decades to about 200 today, but the pay is pretty good, in the $40,000 to $60,000 range.

Candace Jaunzemis, Occidental's plant manager, noted the facility's current payroll, including benefits, is about $20 million a year.

The value of its discounted power is some $29 million.

Therein lies the problem.

>Ineffective subsidies

While job creation and retention are primary criteria for getting the subsidy, there's not much correlation between the size of the allocation and the number of jobs created or saved.

Five companies account for 51 percent of the allocation and subsidies but employ just 7 percent of the work force of participating companies.

On the flip side, the 78 companies with the smallest allocations -- all get less than 1 percent apiece of the total pie -- account for 52 percent of the jobs but just 19 percent of he allocation and subsidy. Many of these companies get modest subsidies -- 19 receive a discount worth less than $100,000. The average annual subsidy per job for these companies is $1,544.

LeRoy, of Good Jobs First, said some of the largest economic development programs administered by the federal government put a ceiling of $35,000 per job for the lifetime of the contract with businesses. The Niagara subsidies are probably the biggest he has come across, LeRoy said.

The annual subsidy per job exceeds $10,000 at 18 companies, including five above $30,000.

"These are very high numbers when you consider many of these deals have been on the books for decades," he said.

The study concluded that 85 percent of the subsidy "could be more effectively employed."

What's more, companies do not have to meet their job requirements to keep their power. An average of 23 companies a year didn't meet their jobs quota between 2003 and 2005, The News found. An average of only six per year had their reduction reduced.

The CENDA study found the subsidies as a whole all but wiped out the collective state and local taxes paid by participating companies. The 2001 study calculated a power subsidy of $272 million and taxes of $298 million. Industries in Niagara County fared particularly well -- subsidies totaling $112 million and taxes of $27 million.

>Outdated criteria

Few, if any companies rely on the authority's low-cost power to provide all their electricity. But it can account for a major portion for some companies and is especially important for industries that are energy-intensive.

For example, electricity can account for half to three-quarters of overhead for plants that produce chemicals and primary metals. Companies including Occidental, Olin, Praxair and International Steel fall into this category.

"We would not be competitive without hydropower," said Jaunzemis, Occidental's plant manager.

"We can stay in New York because hydropower acts as a counterweight to the higher cost of doing business," said James B. Rouse, associate director for energy policy and state affairs for Praxair.

Brian Vain, plant manager at Olin, said that a focus simply on jobs overlooks the $70 million invested in the facility over the past decade and its spin-off effect.

"We supply raw material to many other businesses in the state," he said.

There's a growing consensus, nonetheless, that the criteria to determine who gets discounted power are flawed and need to be changed for a variety of programs.

"Current eligibility criteria do not support economic development objectives, nor do they reflect the reality of global competition," said report issued in December by a commission empaneled by former Gov. George E. Pataki to study power programs geared toward promoting economic development.

The authors of the Center for Developmental Analysis study said that replacement and expansion power has not capitalized on the potential of low-cost hydropower to help the region economically and reported that economic development officials shared that conclusion.

The report concluded: "The construction and operation of the power project has done little to help the region stem its population loss or to make Western New York attractive to new business."

e-mail: jheaney@buffnews.com

***

Editor's Note Western New York is losing more than just population. Most of the low-cost electricity generated at the huge state-controlled hydropower plant north of Niagara Falls is exported out of town. Over the next three days, The Buffalo News explores how and why the byproduct of our natural resource is being squandered.

*Today:

Where the power goes

Most hydropower remaining here goes to a handful of companies that enjoy millions in discounts regardless of the economic benefit. Residential customers, meanwhile, pay rates 50 percent higher than the national average.

*MONDAY:

Where the money goes

The Niagara plant cleared $331 million the past two years, but little of it remains here. The power authority uses it to underwrite a gold-plated bureaucracy and programs that primarily benefit downstate interests.

TUESDAY:

Lost opportunity

The community's leadership mishandled a oncein-a-lifetime opportunity to capitalize on the Niagara plant's potential to help the region. Plus the financial and environmental cost of hosting the facility.

BUFFALONEWS.COM/POWERFAILURE

Graphics: Timeline on history of Niagara hydropower

Documents: Complete listings of key databases

Blog: Post your comments on "Power Failure" blog

Audio: Interview with subsidy expert Greg LeRoy

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