Automotive

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Utilities Do More Than Provide the Juice

31 Dec, 2002

By: Kim McMurray

It may be a no-brainer to say that any auto or aerospace company – or any heavy manufacturer, for that matter – needs to involve the local electric supplier at the very beginning of the site selection process. When looking for a plant site, it’s very important to know how the local power company answers several key questions, such as:

  • Is there sufficient generating capacity to meet our plant’s substantial power needs?

  • Are there transmission and distribution facilities needed to serveour facility or, if not, can they be built?

  •  Will the new facilities be in place when we need them?

  • Will our plant have reliable service?

     

And oh yes…

  •  How big – make that little -- will my electricity bill be?

     

Considering how many jobs an auto or aerospace company can create, both directly and indirectly, and how much electricity these types of plants consume, it’s safe to assume that a utility is going to bend over backwards to work with both the prospective site selection team and other economic development allies who have joined forces to woo the interested company to their community.

There are many reasons a utility should be one of the first contacts a site selector makes. Besides providing answers to all of the above questions, utilities can be helpful in many other ways as well. Since most electric companies cover a wide service area, they are familiar with regional issues, property, buildings and local regulations. Working with local politicians, most utilities have built powerful relationships that will prove helpful when local politics become an issue for a project. Working with a utility’s economic development staff is almost like having your own site selection consultant-- for free! Few, if any, electric utilities charge a fee for their economic development services.

The Utility’s Role in Economic Development

Utilities play an important role in a state’s economic development strategy. Just as states and communities have economic development agencies, most utilities have staffs dedicated to the task of economic development. State economic development agencies rely heavily on local utility economic development departments, especially in these times ofstate budget shortfalls. Rhonda Henderson, a Market Texas business location specialist at the Texas Economic Development agency, recently spent two days in Southeast Texas visiting with Entergy Texas’s economic development group, meeting key local allies and looking at available industrial properties.

“It’s important for us to get out in the field,” Henderson said. “The local utility economic developers are our links to the communities and provide a valuable service. We can’t succeed without them.”

With large manufacturing projects such as automotive and aerospace, thisis especially true. The presence of a utility’s economic development staff is critical for the team to provide answers to a prospective company’s many questions.

Professionalism and confidentiality are top priority for local utility economic developers. “A prospect can count on local utility ED people to keep confidential information close to the vest,” says Rick Hatcher, a veteran of Entergy Texas’s economic development group.

Toyota Selects San Antonio

Texas’s latest major success story is Toyota Motor Co. which, according to reports, also considered Arkansas, Mississippi and Alabama. We find it safe to assume Toyota’s team asked all of the electric power questions mentioned earlier in addition to many more. Other than the obvious power issues, they, no doubt, had the usual questions about transportation, labor, water and sewer, rail and on and on.

Texas and San Antonio, which ultimately won the Toyota prize, took a new approach with this prospect. Governor Rick Perry was much more involved with Toyota than previous governors had been with this type of prospect. To help keep the project on track, Governor Perry designated a coordinator to marshal the resources of various state agencies. Jeff Moseley, executive director of the Texas Economic Development agency, was appointed to this position. According to agency spokesman, Patrick Shaughnessy, the concept of having the governor lead the charge, backed by a strong coordinator, was a key to the Toyota victory. The core group involved in the project consisted of 40members from utilities, state and local governments and industry.

“The Toyota model” was so successful that it will be used with future prospects of this magnitude. Meanwhile, the Texas legislature is moving toward institutionalizing the “Toyota model” by placing economic development under the governor instead of having a separate agency, as is now the case. The economic development community sees this as a positive change to help in creating jobs and economic growth within the state.

Deregulation Breeds Competition which Breeds Consumer Options

One bit of homework that a prudent site selector shouldn’t omit is to research the utility regulatory climate in all states under consideration. It’s important to note that this evolving climate varies from state to state.

Until incidents in California made electric deregulation less appealing to some, many states were moving toward giving consumers the right to choose their power supplier. For example, in a large, deregulated portion of Texas, customers can select their retail provider. City-owned electric systems and electric cooperatives now have the option of going to competition if they wish, although not many have done so. When researching the regulatory climate, it is also necessary to consider the jurisdiction of transmission lines. Some in Texas remain regulated because utilities whose transmission lines cross state boundaries are under the dual jurisdiction of Texas Public Utility Commission and the Federal Regulatory Energy Commission. The process for deregulation is more complicated for these areas under dual jurisdiction. Therefore, progress toward deregulation has been delayed.

Late in 2002, the widely known Texas economist, Dr. Ray Perryman issued a special report on electric competition within Texas. He first noted that 2002 had been a challenging year that had seen incidents such as the Enron failure, allegations regarding possible market manipulation in California and some home-grown competition problems involving billing, switching and fuel cost increases – not to mention the overall economic slowdown. Perryman concluded, “Lookingback at progress during this initial year (2002), however, leaves little doubt that opening markets to retail competition has already been a very good thing, with the promise of much greater benefitsin the future.”

Regarding growth in the competitive market, Perryman noted that Texas had the foresight to offer incentives for the development of new generating capacity. The competitionbill, SB7, encourages environmentally sound power plant additions and also allows generation units of varying sizes to be developed profitably. More that 6,000 megawatts of new capacity remained underconstruction in early 2003 despite the economic downturn. In fact, between the time that SB7 was passed in January, 1999 and August, 2002, 47 new generation plants were built in the state of Texas. Since 1995, nearly 22,000 megawatts of new capacity has gone into service. Transmission capacity also has expanded significantly since SB7 passed; some 373 miles of lines are now under construction. This growing competition offers consumers new options to make decisions that best meet their needs.

Texas, Toyota & San Antonio

In the case of Toyota in San Antonio, like other municipal power systems, San Antonio doesn’t have to go to competition unless they want to. In San Antonio’s case, electric rates are set by the CPS board of trustees, which reportsto the City Council. According to the San Antonio Express-News, the Toyota plant will receive CPS’s Super Large Power rate. That rate ranges from 3.4 to 4 cents per kilowatt-hour, based on agreementsnegotiated by the customer. The newspaper reported in February that a new rider has been approved that will provide additional discounts of 10 to 50 percent on the demand charges paid by San Antonio’slargest customers, which will include Toyota along with the area’s four military bases, two big theme parks and several large hotel resorts. The article states that the new policy could enable Toyotato save 20 to 25 percent on its monthly utility bill.

Shaughnessy, the state ED spokesman, said low power costs were an important factor as Toyota weighed its options on where to locate the new plant. In Texas’s case, the company could have found attractive electricity rates no matter what part of the state it had targeted. As Dr. Perryman’s study points out, competitive market forcesresulted in cost reductions in 2002 that exceeded the 6 percent rate cuts that were mandated in many areas of the state.

Dr. Perryman is projecting huge cost savings in the future as electric competition becomes even more embedded in the state. Perryman also notes that Texas Instruments signed an agreement covering power to 24 of its facilities and expects to save about 20 percent of electricity costs.

In the final analysis, the package put forth to Toyota by the state and city was not nearly as large as that offered by other states vying for the plant. Toyota acknowledged turning down one state’s offer of $500 million in incentives. The total offered by Texas was $133 million, which includes $15 million to build a rail spur and $27.2 million for job training and recruitment. The city offered $24 million for site purchase and preparation.

So why did Texas win out? Toyota President Fujio Cho said the decision to build in Texas actually can be traced back several years to a Dallas-area parking lot at Texas Stadium. A group of Toyota executives there for a Dallas Cowboys game drove around the parking lot and saw thousands of full-size pickup trucks.

“Our planners realized then that the American pickups were not solely commercial vehicles, but widely used by everyone for regular transportation,” he said. The result was the Toyota Tundra,which will begin rolling off the San Antonio assembly line in 2006 at a pace of 150,000 per year.

So while electric power is definitely an important consideration for a huge manufacturersuch as Toyota, it’s obvious that another kind of power – purchasing power – helped bring 2,000 jobs to San Antonio.

 

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