When executives from German-based plastics processing company Poppelmann Plastics began investigating potential sites for a US factory, they evaluated communities in Georgia, Pennsylvania and Michigan, among others. A major deal breaker was that the power supply would be an unreliable, expensive or inflexible one.
“We are a plastic processing company, and electricity – both as a direct cost factor and the ramifications if it goes out – is very important,” explains Jack Shelton, director of the US-based facility. “Just a one-second blip in power would mean we would have to spend eight hours resetting the machines.”
Executives from Poppelmann Plastics were pleased to hear Carolinas service provider Duke Power’s presentation – a pitch that was part financial incentives, part reassurance and all southern charm. Duke Power offered the German company rate incentives to invest in its service area and convinced it that the utility could keep the lights on.
Besides the incentives and Duke Power’s loss data, the company provided additional information to induce the firm to locate in its service area. Mr Shelton says: “We looked at a number of communities in Ohio, Pennsylvania, Virginia and South Carolina. Duke Power was probably the most resourceful and helpful of all the providers we spoke with.”
Poppelmann, which began its search for a US site almost two-and-a-half years ago, is set to break ground on its new site this August 2005. Its investment will total about $15m over a three-year period, beginning with the construction of a 3251 square metre warehouse that can eventually expand into a 37,161 square metre facility. To make sure it has enough room to grow, Poppelmann purchased about 35 acres on its chosen site in Claremont, North Carolina.
Brave new world
The Poppelmann case illustrates the lengths to which utilities must and do go to attract investment to their service areas. Life has changed in recent years as globalisation, deregulation, industry consolidation and, more recently, alternative energy forms, have altered the competitive landscape.
The deregulation trend and users’ ability to choose their own providers has reduced the impact of traditional incentives, says Tom Bartkoski, a director of business development at World Business Chicago, specialising in international business and FDI. In the Chicago area, for instance, a firm may use one utility for delivery and contract with a supply company some distance away. Then there are those utilities that are heavily burdened with stranded costs and cannot do much in the way of direct financial assistance.
“For a lot of reasons, the use of traditional incentives has been curtailed,” says Ed McCallum, a senior principal at McCallum Sweeney Consulting, a site selection firm that helped with the Poppelmann search.
Utilities with the flexibility and financial wherewithal, however, are developing new programmes to entice investors to their respective service areas. Other providers are offering value added services that may not equal, say, a 5% reduction in its rate but can still be valuable to a company new to the neighbourhood.
“They are offering ‘in kind’ services, such as engineering assistance and energy conservation,” Mr McCallum says. “Several utilities we have been involved with are reaching out to underdeveloped communities to help them develop certified sites that are ready to be occupied.”
And, despite deregulation, many utilities still offer the traditional rate reductions of the past decades. The Sacramento Municipal Utility District (SMUD) offers a discount off its standard rate of 5% in year one, 3% in year two and 1% in year three to qualified investors. And some firms locating in Duke Power’s service area can qualify for an economic development rider that reduces the cost of electricity over a four-year period.
A membership survey recently undertaken by Utility Economic Development Association (UEDA), which represents US and international utility economic developers, found that the use of financial incentives is not only active, but also expanding.
In the survey, UEDA queried members about the impact that deregulation has had on their economic development activities. While the results suggest a chilling effect among some respondents, the majority said it had no effect at all.
When asked in what specific activities the economic development department is actively involved for recruitment and retention, the top responses listed in order of popularity were: prospect missions; trade shows; existing industry assistance; site and building information; ready sites and spec buildings; original and secondary research; prospect simulation; entrepreneurial development; brownfield redevelopment; site planning; site certification; and export development.
Certain activities, such as trawling trade shows for likely prospects or identifying cluster industries that would benefit from a particular service area, are well established. In the past two years, a number of utilities have developed new incentives to bring in business. These include new-generation loan programmes. JD Stack, programme manager for economic development at SMUD, describes how the utility loaned a Japanese client $1.2m to buy a piece of capital equipment that would help reduce its costs. “They paid it back within a year,” he reports.
David Smith, Cinergy’s manager of economic development in Ohio and Kentucky (its service area covers Ohio, Indiana and Kentucky), reports that in 2005 the utility began deploying some of its foundation, or charity, funds into grants meant to grow the local communities’ business base.
“For instance, we funded a study that would leverage state and federal dollars to install [rail] tracking to service an industrial park. There was a shortage of rail-served sites in that area and the port authority wanted to develop that particular location as a rail-served industrial park,” he says.
Another project the utility funded was a study for an adaptive reuse of a closed Kmart store. Mr Smith says he was surprised by the demand for these grants. “We funded $100,000 worth of projects in our service area, and received over $400,000 worth of project applications.”
In the Carolinas, Duke Power has developed a unique approach to workforce training funding, according to Tony Almeida, Duke Power’s vice-president for economic development. “At the end of day, the most important cost for a company is the workforce. So last year we started a project in which we allocate funds through the community college system to provide workforce training for manufacturing industries,” he says. The utility has allocated about $2m in grants.
Niagara Mohawk, a national grid company that services upstate New York, will provide funding to push a pending project across the finish line, says Marilyn Higgins, vice president of economic development. She describes a potential project in which a developer wanted to build on a brownfield site but could not get the funding to tear down the decrepit buildings. Niagara Mohawk had a brownfield redevelopment programme that provided funds for related activities but not demolition. “So I added demolition as an eligible activity that we would fund,” she says.
It is not surprising that utilities are assigning resources to brownfield sites: utilities, like local governments and community activists, hate urban blight. Abandoned buildings are “expensive for us and unnecessary”, Ms Higgins says. “If we can spur development in older urban areas, that would save money and provide a needed shot in the arm.” She says she has seen towns renovate a building with a $50,000 utility grant and then the rest of the block followed.
Duke Power also offers a brownfield credit, or economic redevelopment credit, Mr Almeida says. It provides power at half price for the first year to companies that move into a brownfield site that has been vacant for six months and where the load being added is 500 kilowatts or greater.
Utilities will do just about anything to keep a good (that is, large) customer from leaving. Mr Stack remembers when it looked as though Campbell Soup was getting ready to move out of town. SMUD helped to organise a rescue mission of sorts among local economic development groups.
As for the utility, it built a new co-generation power plant next door to the Campbell Soup plant. “We generated power in that plant as well as steam. What we did is essentially pipe that steam to Campbell’s plant as energy. It cost them much less than what it would have cost to produce their own steam.” There was also the added benefit of Campbell being able to shut down its boilers and thus no longer having to maintain an air quality licence.
Mr Stack also says SMUD offers the services of its own team of experts for free to work with a company’s engineers to maximise the design of a new facility. “They are experts on energy efficiency and how to incorporate that into building design,” he says.
Mr McCallum advises firms to grab such offers if they come their way: “If a utility has an in-house engineering component, use it. They can figure out balance loads very well – it is the business that they are in.”
In mid-July, Niagara Mohawk’s Ms Higgens was waiting to hear from two staffers dispatched to the nanotechnology industry’s largest trade show of the year, SEMICON West 2005. “That is what we do well: cultivate new relationships,” she says. The state’s capital area is becoming known as a nanotech corridor in part due to such economic development efforts.
But as competition ratchets up in the US and around the world, utilities are becoming even more aggressive in their prospecting. Duke Power, for instance, has a business development group that works with the state on trade missions to Europe. The missions typically generate leads, but Duke Power has recently implemented a predictive modelling application to speed up the process. It can identify firms in the areas to which it is travelling that are likely to relocate. “I would say that is another unique approach we have developed,” Mr Almeida says.
As utilities continue to compete for the Popplemanns of the world, it is unlikely that this approach will remain unique to Duke Power.
UTILITIES PLAY TO THEIR STRENGTHS
A utility is rarely the sole deciding factor in an investment decision – or the most significant cost for a company. Labour typically has that distinction. Poppelmann Plastics [see main article], for all its dependency on cost effective and efficient power, was looking for more than a good rate deal. Other considerations, says Jack Shelton, director of the US-based operation, included a good logistics operation and a good living environment for employees.
“There is no amount of incentive that will lead a company into making a bad business decision,” says David Smith, Cinergy’s manager of economic development in Ohio and Kentucky. Based in Cincinnati, Cinergy’s service area covers Ohio, Indiana and Kentucky, and includes about 200 foreign-owned companies, such as L’Oreal, Siemens and Toyota. For many, Mr Smith says, the mid-west location has been a key site selection factor. “As a utility, one advantage that we market is the benefit of being in the mid-west, especially for automotive supplies and advanced manufacturing operations.”
The typical Japanese or European company, he says, will have an operation in California, a manufacturing plant in the mid-west and a financial office in New York. “Because of our location – and because we have a Delta hub in Cincinnati – executives have ‘same day out, same day in’ transportation. They can get up early, visit a supplier or customer [on the east or west coast] and be back at home by evening.”